ITEM 1. BUSINESS.
GENERAL
CMS Energy
CMS Energy, incorporated in Michigan in 1987, is the parent holding company of Consumers and Enterprises. Consumers, a combination electric and gas utility company serving all of Michigan's Lower Peninsula, is the largest subsidiary of CMS Energy. Consumers' customer base includes a mix of residential, commercial and diversified industrial customers, the largest segment of which is the automotive industry. Enterprises is engaged in several non-utility energy-related businesses including: oil and gas exploration and production; development and operation of independent power production facilities; marketing gas to utility, commercial and industrial customers; and transmission, storage and processing of natural gas. CMS Energy is exempt from registration under PUHCA, see Item 3. LEGAL PROCEEDINGS.
CMS Energy had consolidated operating revenue in 1995 of $3.9 billion which was derived approximately 59 percent from its electric utility operations, approximately 31 percent from its gas utility operations, approximately 5 percent from gas transmission, storage and marketing, approximately 3 percent from oil and gas exploration and production activities and approximately 2 percent from independent power production and other non-utility activities. Consumers' consolidated operations in the electric and gas utility businesses account for the major share of CMS Energy's total assets, revenue and income. The unconsolidated share of non-utility electric generation and gas transmission and storage revenue for 1995 was $523 million.
Consumers
Consumers was incorporated in Michigan in 1968 and is the successor to a corporation of the same name which was organized in Maine in 1910 and which did business in Michigan from 1915 to 1968.
Consumers is a public utility serving gas or electricity to almost 6 million of Michigan's 9.5 million residents in all 68 counties in Michigan's Lower Peninsula. Industries in Consumers' service area include automotive, metal, chemical, food and wood products and a diversified group of other industries. Consumers had consolidated operating revenue in 1995 of $3.5 billion which was derived approximately 65 percent from its electric business, approximately 34 percent from its gas business and approximately 1 percent from its nonutility business. Consumers' rates and certain other aspects of its business are subject to the jurisdiction of the MPSC and FERC.
BUSINESS SEGMENTS
CMS Energy and Consumers Financial Information
For information with respect to operating revenue, net operating income, assets and liabilities attributable to all of CMS Energy's business segments, refer to its Consolidated Financial Statements and Notes to Consolidated Financial Statements for the year ended December 31, 1995, in Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
For information with respect to the operating revenue, net operating income, assets and liabilities attributable only to Consumers' business segments, refer to its Consolidated Financial Statements and Notes to Consolidated Financial Statements for the year ended December 31, 1995, in Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
CMS Energy and Consumers Principal Operations
CMS Energy conducts its principal operations through the following five business segments: electric utility operations; gas utility operations; oil and gas exploration and production operations; independent power production; and gas marketing, transmission, storage and processing. Consumers conducts CMS Energy's regulated electric and gas utility operations.
Consumers Electric Utility Operations
Consumers generates, purchases, transmits and distributes electricity and renders electric service in 62 of the 68 counties in the Lower Peninsula of Michigan. Principal cities served include Battle Creek, Flint, Grand Rapids, Jackson, Kalamazoo, Muskegon, Saginaw and Wyoming. Consumers had approximately 1.6 million electric customers at December 31, 1995. Total electric sales in 1995 were a record 35.5 billion kWh, a 3 percent increase from the 1994 levels which included a 4.2 percent increase in system sales to Consumers' ultimate customers. Electric operating revenue in 1995 was $2.3 billion, an increase of 4 percent from 1994. A peak demand of 7,158 MW was achieved in August 1995, representing an increase of 10.1 percent from the peak achieved in 1994, predominantly as a result of improved industrial sales. Consumers' reserve margin was approximately 3 percent in 1995 and 14.6 percent in 1994, and 8 percent in 1995 and 15 percent in 1994, based on actual and weather adjusted peaks, respectively.
Including Ludington, in which Consumers has a 51 percent ownership and capacity entitlement, Consumers owns and operates 28 electric generating plants with an aggregate net demonstrated capability available to Consumers in 1995 under summer conditions, of 6,256 MW. In 1995, Consumers purchased approximately 1,485 MW of net capacity from independent power producers and cogenerators, the most significant being the MCV Facility, which amounted to approximately 22 percent of Consumers' total system requirements. 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. Substantially all properties of the subsidiaries of CMS Generation that own interests in operating plants are subject to liens of creditors of the respective subsidiaries. Properties of certain CMS Gas Transmission subsidiaries are also subject to liens of creditors of the respective subsidiaries.
CONSUMERS ELECTRIC UTILITY PROPERTIES
Consumers' electric generating system consists of five fossil-fueled plants, two nuclear plants, one pumped storage hydroelectric facility, seven gas combustion turbine plants and 13 hydroelectric plants.
Consumers' electric transmission and distribution lines owned and in service are as follows:
Structure Sub-Surface (Miles) (Miles)
Transmission 345,000 volt 1,137 - 138,000 volt 3,265 4 120,000 volt 20 - 46,000 volt 4,095 9 23,000 volt 30 7 ------ ----- Total transmission 8,547 20
Distribution (2,400-24,900 volt) 51,341 5,276 ------ ----- Total transmission and distribution 59,888 5,296 ====== =====
Consumers owns substations having an aggregate transformer capacity of 37,847,720 kilovoltamperes.
CONSUMERS GAS UTILITY PROPERTIES
Consumers' gas distribution and transmission system consists of 21,690 miles of distribution mains and 1,078 miles of transmission lines throughout the Lower Peninsula of Michigan. Consumers owns and operates six compressor stations with a total of 130,170 installed horsepower.
Consumers' gas storage fields, listed below, have an aggregate certified storage capacity of 242.2 bcf:
Total Certified Field Name Location Storage Capacity (bcf)
Overisel Allegan and Ottawa Counties 64.0 Salem Allegan and Ottawa Counties 35.0 Ira St Clair County 7.5 Lenox Macomb County 3.5 Ray Macomb County 66.0 Northville Oakland, Washtenaw and Wayne Counties 25.8 Puttygut St Clair County 16.6 Four Corners St Clair County 3.8 Swan Creek St Clair County .6 Hessen St Clair County 18.0 Lyon - 34 Oakland County 1.4
Michigan Gas Storage owns and operates two compressor stations with a total of 46,600 installed horsepower. Its transmission system consists of 548 miles of pipelines within the Lower Peninsula of Michigan.
Michigan Gas Storage's gas storage fields, listed below, have an aggregate certified storage capacity of 117 bcf:
Total Certified Field Name Location Storage Capacity (bcf)
Winterfield Osceola and Clare Counties 75.0 Cranberry Lake Clare and Missaukee Counties 30.0 Riverside Missaukee County 12.0
Consumers' gas properties also include the Marysville gas reforming plant, located in Marysville, Michigan. Huron and PanCanadian Petroleum Company are partners in a partnership to use the expanded capacity of the underground caverns at the Marysville plant for commercial storage of liquid hydrocarbons. In addition, Consumers and PanCanadian Petroleum Company are partners in a partnership to use certain hydrocarbon fractionation facilities at the plant.
CMS ENERGY OIL AND GAS EXPLORATION AND PRODUCTION PROPERTIES
Net oil and gas production by CMS NOMECO for the years 1993 through 1995 is shown in the following table.
Thousands of barrels of oil and millions of cubic feet of gas, except for reserves
1995 1994 1993
Oil and condensate (a) 4,267 2,025 1,716 Natural gas (a) 26,348 20,546 18,487 Plant products (a) 226 193 186 Average daily production (b) Oil 16.1 7.1 5.6 Gas 84.9 69.3 62.3
Reserves to annual production ratio Oil (MMbbls) 14.9 26.1 19.1 Gas (bcf) 10.8 11.3 10.9
(a) Revenue interest to CMS NOMECO (b) CMS NOMECO working interest (includes CMS NOMECO's share of royalties)
The following table shows CMS NOMECO's estimated proved reserves of oil and gas for the years 1993 through 1995.
The following table shows CMS NOMECO's undeveloped net acres of oil and gas leasehold interests at December 31.
Net Acres 1995 1994
Michigan 143,243 85,372 Louisiana (a) 17,408 30,418 North Dakota 15,586 5,099 Texas (a) 11,458 7,823 Indiana 7,014 2,518 Ohio 4,494 2,201 Other states 4,335 1,908 --------- --------- Total Domestic 203,538 135,339 --------- --------- Yemen 401,897 401,897 Venezuela 230,175 234,002 Equatorial Guinea 113,947 47,330 Tunisia 67,891 - Ecuador 66,430 69,160 Colombia 42,571 85,217 Congo 17,981 - Papua New Guinea - 63,220 New Zealand - 602 --------- --------- Total International 940,892 901,428 --------- --------- Total 1,144,430 1,036,767 ========= =========
(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 field offices at various locations in Michigan's Lower Peninsula. Of these, two General Office buildings and eleven field offices are leased. Also owned are miscellaneous parcels of real estate not now used in utility operations.
CMS ENERGY OTHER PROPERTIES
The following table shows CMS Generation's interests in independent power plants at December 31, 1995.
Location Ownership Capacity Interest (%) (MW) Wood Fueled Chateaugay, New York 50.0 20 Grayling Township, Michigan 50.0 39 Imperial Valley, California 48.0 15 Lyonsdale, New York 50.0 19 New Bern, North Carolina 50.0 45 Stratton, Maine 30.0 40 Susanville, California 50.0 36
Fossil Fueled Cebu Island, Philippines (two plants) 32.5 135 Filer City, Michigan 50.0 60 Lakewood, New Jersey 45.0 236 Little Falls, New York 50.0 4 Mendoza Province, Argentina 51.0 422 Oklahoma City, Oklahoma 8.8 110 Solvay, New York 37.5 80
Tire Fueled Sterling, Connecticut 50.0 31
Hydro Generation Benton, Maine 50.0 4 Canton, New York 50.0 8 Copenhagen, New York 50.0 3 Corinth, New York 12.5 58 Limay River, Argentina (two plants) 17.2 1,320 Little Falls, New York 1.0 13 Lyons Falls, New York 50.0 3 Petersburg, Virginia 55.5 3 Port Leyden, New York 12.5 6
Wind Generation Altamont Pass, California 22.7 30 Montezuma, California 8.5 72
During the year, CMS Generation sold substantially all of its 18.6 percent interest in a consortium which owns an 88 percent interest in a 650 MW fossil-fueled plant in San Nicolas, Argentina; and its 50 percent interest in a 5 MW hydroelectric power plant in Bath, New York.
CMS Gas Transmission owns a 75 percent interest in a general partnership which owns and operates a 25-mile, 16-inch natural gas transmission pipeline in Jackson and Ingham Counties, Michigan; owns a 24 percent limited partnership interest in the Saginaw Bay Area Limited Partnership which owns 125 miles of 10-inch and 16-inch natural gas transmission pipeline in north-central Michigan; owns a 44 percent limited partnership interest in a partnership that owns certain pipelines of 20 and 12 miles interconnected to the Saginaw Bay Area Limited Partnership facilities; owns natural gas treating plants in Otsego County, Michigan; owns 41 miles of gas transmission pipeline in Otsego and Montmorency Counties, Michigan; and owns a 25 percent general partnership interest in TGN, which owns and operates 2,600 miles of pipelines that provide natural gas transmission service to the northern and central parts of Argentina.
In late 1995, CMS Gas Transmission completed construction and commenced operations of the Bluewater Pipeline, a 3.1 mile pipeline from an interconnection with Consumers natural gas transmission system to an interconnection with an existing pipeline at the St. Clair River, south of Port Huron, Michigan.
CMS Gas Transmission is currently developing 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.
In January 1996, CMS Gas Transmission acquired Petal Gas Storage Company, a natural gas storage facility located in Forrest County, Mississippi. The salt dome storage cavern provides up to 3.2 bcf per day of ten day storage service and has the capability of being refilled in 20 days.
Through an ownership interest in Nitrotec Corporation, a proprietary gas technology company acquired in January 1996, CMS Gas Transmission currently has two helium recovery plants under construction in Kansas. One helium recovery plant was placed in service in October 1995.
CMS Energy, through certain subsidiaries, owns a 50 percent interest in Bay Harbor Limited Liability Company, a resort development in Emmet County, Michigan, owns 6,000 acres of undeveloped land in Benzie and Manistee Counties, Michigan, and owns 53 acres of undeveloped land in Muskegon County, Michigan.
CONSUMERS CAPITAL EXPENDITURES
Capital expenditures during 1995 for Consumers and its subsidiaries totaled $445 million for capital additions and $9 million for DSM programs. These capital additions include $33 million for environmental protection additions and $31 million for capital leases of nuclear fuel and other assets. Of the $445 million, $320 million was incurred for electric utility additions and $125 million for gas utility additions. The electric and gas utility additions include an attributed portion of capital expenditures common to both businesses.
In 1996, capital expenditures are estimated to be $428 million for capital additions and $7 million for DSM programs. These capital addition estimates include $39 million related to environmental protection additions and $44 million related to capital leases of nuclear fuel and other assets. Of the $428 million, $304 million will be incurred for electric utility additions and $124 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 1995 for CMS Energy and its subsidiaries totaled $1.0 billion for capital additions and $9 million for DSM programs. These capital additions include $33 million for environmental protection additions and $31 million for capital leases of nuclear fuel and other assets. Of the $1.0 billion, $445 million was incurred by Consumers as discussed above. The remaining $599 million in capital additions include $168 million for oil and gas exploration and development, $239 million for independent power production, $178 million for natural gas transmission, storage and marketing and $14 million for other capital expenditures.
In 1996, capital expenditures are estimated to be $849 million for capital additions and $7 million for DSM programs. This capital addition estimate includes $39 million related to environmental protection additions and $44 million related to capital leases of nuclear fuel and other assets. Of the $849 million, $428 million will be incurred by Consumers as discussed above. The remaining $421 million in capital additions will be incurred as follows: $120 million for oil and gas exploration and development, $189 million for independent power production, and $112 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 finally 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. In Step 3B, 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, 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. In separate decisions, the Court of Appeals has affirmed the MPSC determinations in Step 3A and Step 3B. ABATE, the Attorney General and Consumers filed applications for leave to appeal the Court of Appeals decision in Step 3B with the Michigan Supreme Court. In October 1995, the Michigan Supreme Court denied all applications for leave to appeal the Court of Appeals' decision relating to the Step 3B order. In May 1995, ABATE filed an application with the Michigan Supreme Court for leave to appeal the Court of Appeals' affirmation of the MPSC's determinations in Step 3A.
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 percent. 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 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 PROCEEDINGS
In November 1994, Consumers filed a request with the MPSC which could have increased 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 325 MW of MCV Facility contract capacity above 915 MW. The request included a proposed increase in Consumers' authorized rate of return on equity to 13 percent from the current 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. The filing addressed 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 Facility contract capacity above 915 MW for jurisdictional electric customers and offer discounted jurisdictional tariffs. Consumers had also requested that the MPSC eliminate the rate subsidization of residential rates in a two-step adjustment. In addition, Consumers proposed to eliminate all DSM expenditures after April 1995 and further requested MPSC approval to recover costs associated with the proposed settlement of the proceedings concerning the operation of Ludington. During this case, the MPSC issued an order stating that the remaining 325 MW of MCV Facility capacity will be considered only as part of a competitive capacity solicitation, and not as part of the electric rate case. In November 1995, the MPSC granted Consumers' petition for rehearing of this order, and the issue is pending in the settlement discussed below.
In September 1995, Consumers and the MPSC staff reached a proposed settlement agreement that, if approved by the MPSC, would resolve several outstanding regulatory issues currently before the MPSC in three separate proceedings, one of which was the 1994 electric rate case. In mid- September, the MPSC issued an order creating a consolidated proceeding to consider the proposed settlement agreement. Hearings on the proposed settlement agreement are continuing. Approval of the proposed settlement agreement could: provide for cost recovery of the remaining 325 MW of contract capacity from the MCV Facility; result in recovery of Consumers' regulatory assets related to power purchase agreements which have been terminated; introduce provisions for incentive ratemaking; resolve the pending special competitive services and depreciation rate cases; implement a limited direct access program under which it would be possible for Consumers to deliver power from qualified third party power suppliers to qualified retail customers; enable Consumers to negotiate rates for certain large industrial customers; and accelerate recovery of nuclear plant investment. The MPSC issued a partial order in the electric rate case, as described below, and under the current schedule, the MPSC should decide the remaining issues by mid-1996. Consumers cannot predict whether the entire settlement will be approved by the MPSC.
On February 5, 1996, the MPSC issued a partial final order in the electric rate case. In that order, the MPSC authorized Consumers to increase its electric retail rates and charges by approximately $46 million; authorized a return on common equity of 12.25 percent; reduced the subsidization of residential customers by industrial and large commercial customers taking service at primary voltage in a two-step process, which will increase residential rates by 3.9 percent for services rendered on and after February 6, 1996 and increase residential rates by another 3.9 percent for services rendered on and after December 1, 1996; and approved the Ludington settlement and the recovery of costs related to the Ludington settlement.
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 Facility contract capacity above the level currently authorized by the MPSC to respond to customers' alternative energy options. Some of the intervenors in this proceeding filed motions to dismiss this case contesting the MPSC's jurisdiction to authorize the type of rates proposed. In May 1995, the MPSC issued an order stating that it has legal authority to approve a range of rates under which Consumers could negotiate prices with customers that have competitive energy alternatives. All parties have filed briefs and reply briefs in this proceeding. See 1994 Electric Rate Proceedings, for information concerning a proposed settlement agreement relating to this case, including treatment of the remaining 325 MW of MCV Facility contract capacity addressed in this case.
1994 GAS RATE CASE FILING
Consumers filed a general gas rate case in December 1994. Consumers' final position in this case requested an increase in its gas rates of $6.7 million annually and a 12.25 percent return on equity. Consumers' request incorporated, among other things, cost increases, including costs for postretirement benefits and costs related to the investigation and remediation of Consumers' former manufactured gas plant sites.
The MPSC issued a final order in this case in March 1996. In this order the MPSC reduced Consumers' general gas rates by $11.7 million annually, based on a return on common equity of 11.6 percent. Consumers was authorized to recover the gas utility portion of its postretirement benefit costs over a period of 16 years. The order also authorized Consumers to defer environmental cleanup costs relating to its former manufactured gas plant sites for amortization over a ten-year period beginning with the year following incurrence. Rate recognition of amortization expense will not begin until after a prudence review in a general rate case. The prudence review will include consideration of Consumers' attempts to minimize it's exposure and obtain reimbursement from third parties. In this rate order, the MPSC authorized Consumers current recovery of approximately $1 million a year, based upon an historical five-year average of such environmental clean up expenses. Carrying costs will be earned on balances included in rate base at the authorized pre-tax rate of return.
MCV - RELATED PROCEEDINGS
In March 1993, the MPSC approved, with modifications, a contested settlement agreement among Consumers, the MPSC staff and 10 independent cogenerators which resolved certain regulatory issues and allowed Consumers to recover from electric customers a substantial portion of the cost of 915 MW of contract capacity from the MCV Facility. After their requests for rehearing were denied by the MPSC, ABATE and the Attorney General appealed the orders approving the settlement to the Court of Appeals. Briefs have been filed and oral argument held before the Court of Appeals where the appeals await decision. In the meantime, the MPSC has been implementing the settlement in PSCR plan and reconciliation cases for 1993, 1994 and subsequent years. However, various parties dissatisfied with such implementation, including Consumers, have appealed the MPSC orders in these cases. In February 1996, the Court of Appeals affirmed the MPSC's order in the 1993 PSCR plan case which implemented the Settlement Order based upon projected data for 1993. Consumers had not appealed that implementation order, but ABATE had. The other appeals remain pending before the Court of Appeals at various stages of the appellate process.
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.
In June 1995, the SEC released a staff report that recommended legislative options to Congress: 1) repeal PUHCA and strengthen the ability of the FERC and state regulators to obtain books and records, conduct audits and review affiliate transactions; 2) repeal PUHCA, without condition; or 3) amend PUHCA to give the SEC broader exemptive authority. The SEC staff supported option 1 because it would achieve the benefits of unconditional repeal, while preserving the ability of states to protect consumers. In October 1995, a bill was introduced in the U. S. Senate to transfer oversight of public utility holding companies from the SEC to FERC.
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. The definitive settlement documents were thereafter filed with the appropriate Michigan Courts and State and federal agencies. On January 23, 1996, the FERC approved the settlement agreement. On February 5, 1996, the MPSC approved the settlement agreement and the recovery of costs associated with the settlement agreement. The settlement allows for the continued operation of the plant through the end of its FERC license and requires 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. It requires Consumers to develop and improve recreational areas and convey undeveloped land to the State of Michigan and the Great Lakes Fishery Trust (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 settlement resolves two lawsuits filed by the Attorney General in 1986 and 1987 on behalf of the State of Michigan in the Circuit Court of Ingham County which sought 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.
STRAY VOLTAGE LAWSUITS
Consumers has a number of lawsuits relating to so-called stray voltage, which results when small electrical currents present in grounded electric systems are diverted from their intended path. Claimants contend that stray voltage affects farm animal behavior, reducing the productivity of their livestock operations. Investigation by Consumers of prior stray voltage complaints disclosed that many factors, including improper wiring and malfunctioning of on-farm equipment can lead to the stray voltage phenomenon. Consumers maintains a policy of investigating all customer calls regarding stray voltage and working with customers to address their concerns including, when necessary, modifying the configuration of the customer's hook-up to Consumers' system. 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. 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 and plaintiffs have now addressed both issues in their briefs filed with the Court of Appeals. 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. On February 14, 1996, Consumers had 33 separate stray voltage cases pending for trial, down from 83 pending at year-end 1994.
RETAIL WHEELING PROCEEDINGS
In April 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 June 1995, the MPSC issued an order that set rates and charges for retail delivery service under the experiment. In September 1995, the MPSC denied Consumers' and ABATE's petitions for rehearing of this order. Consumers, ABATE and Dow have filed claims of appeal of the MPSC's order with the Court of Appeals, joining Detroit Edison and the Attorney General who had previously appealed. The Court of Appeals subsequently consolidated the appellate cases of these parties.
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 percent to 65 percent. 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, 1996, the amount of firm transmission service currently subject to the tariff is 29 MW. For discussion of a notice of rulemaking by the FERC relating to changes in the wholesale electric industry, see Item 1. BUSINESS. CONSUMERS AND CMS ENERGY COMPETITION - Electric Competition.
HIGHLAND TOWNSHIP FRANCHISE PROCEEDING
MichCon obtained a revocable franchise in 1956 to provide natural gas service to Highland Township, Michigan. In 1962, Consumers secured an irrevocable 30 year franchise to provide natural gas service to Highland Township. Neither franchise was exclusive. Although MichCon's franchise for service in Highland Township expired in 1986 and was not renewed, MichCon continued service to customers in Highland Township. Consumers secured a revocable renewal franchise for Highland Township in 1992.
Thereafter, in 1992, Consumers filed suit to enjoin MichCon from expanding its gas service to new customers in Highland Township. The Circuit Court of Oakland County, Michigan denied MichCon's motion for summary disposition and granted Consumers' petition for an injunction. MichCon subsequently transferred its remaining rights and interest in Highland Township to Consumers, ceased doing business there and appealed the Circuit Court decision with the Court of Appeals. In August 1995, the Court of Appeals refused to decide the issue addressed by the Circuit Court (namely whether MichCon, as a holdover utility without any franchise, could continue to lawfully do business in a township) because the Court of Appeals concluded that Consumers' 1992 revocable renewal franchise was invalid since it was not confirmed by a vote of the Highland Township electorate as the Court determined was required by the Public Utility Franchise Act. Prior to this decision, the commonly held interpretation of the Public Utility Franchise Act was that a vote of the electorate was only required for irrevocable franchises, not revocable franchises such as that held by Consumers in this case. The Michigan Court of Appeals reversed the Circuit Court decision and remanded the case to the Circuit Court for entry of summary disposition in MichCon's favor - - - even though the only franchise MichCon had ever possessed was revocable, and thus under the Court of Appeals' decision, invalid. Although the Court of Appeals specifically stated in its opinion that continuing to provide utility service without a valid franchise was not necessarily unlawful, Consumers currently has over 800 revocable franchises which could be affected should the Court of Appeals order remain in place. Consumers' motion for reconsideration and for a stay of the Court of Appeals' decision was denied. In December 1995, Consumers filed an application with the Michigan Supreme Court for leave to appeal the Court of Appeals' decision.
INTRASTATE GAS SUPPLIER CONTRACT PRICING DISPUTE
On October 25, 1995, the MPSC issued an opinion and order in a proceeding that had been initiated by Consumers regarding a gas contract pricing dispute under three gas supply contracts. The MPSC found that a pricing mechanism like the one at issue, that operates within definite ceiling and floor prices, is a definite pricing provision within the meaning of the state statutes and was properly implemented to reduce gas prices without the prior approval of the MPSC. The producers subsequently filed a claim of appeal of the MPSC order with the Court of Appeals.
Prior to the issuance of the MPSC's order, the intrastate gas producers involved in this MPSC proceeding filed a complaint against Consumers in Kent County Circuit Court alleging breach of contract. On Consumers' motion, the court dismissed the lawsuit. The gas suppliers subsequently filed a petition for rehearing with the court where the matter is still pending.
MPSC CASE NO U-10029 - INTRASTATE GAS SUPPLY
On February 8, 1993, the MPSC issued an order granting Consumers' request to lower the price to be paid to one of its intrastate gas suppliers, North Michigan, who then filed an appeal with the Court of Appeals. In June 1995, the Court of Appeals affirmed the MPSC's decision and North Michigan's motion for reconsideration was denied in August 1995. In September 1995, North Michigan filed an application with the Michigan Supreme Court for leave to appeal the Court of Appeals' order.
Collateral suits claiming relief based on a theory of breach of contract, among other things, were filed by the producers in the Grand Traverse County Circuit Court and in the Clinton County Circuit Court, which was subsequently transferred to Jackson County Circuit Court. The dismissals of the Grand Traverse County Circuit Court suit and the Jackson County Circuit Court suit have been appealed by the producers to the Court of Appeals.
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 1995 for CMS Energy.
CONSUMERS
None in the fourth quarter of 1995 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 29, 1996 was 89,167.
Consumers
Consumers' common stock is privately held by its parent, CMS Energy, and does not trade in the public market. In May 1995, Consumers paid $70 million in cash dividends 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 51 Management's Discussion and Analysis 53 Consolidated Statements of Income 64 Consolidated Statements of Cash Flows 65 Consolidated Balance Sheets 66 Consolidated Statements of Preferred Stock 68 Consolidated Statements of Common Stockholders' Equity 69 Notes to Consolidated Financial Statements 70 Report of Independent Public Accountants 94 Quarterly Financial and Common Stock Information 95
Consumers Page
Selected Financial Information 98 Management's Discussion and Analysis 99 Consolidated Statements of Income 108 Consolidated Statements of Cash Flows 109 Consolidated Balance Sheets 110 Consolidated Statements of Long-Term Debt 112 Consolidated Statements of Preferred Stock 113 Consolidated Statements of Common Stockholder's Equity 114 Notes to Consolidated Financial Statements 115 Report of Independent Public Accountants 136 Quarterly Financial Information 137
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CMS Energy Corporation
1995 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 segment of which is the automotive industry. Enterprises is engaged in several domestic and international energy-related businesses, including oil and gas exploration and production, development and operation of independent power production facilities, electric and gas marketing services to utility, commercial and industrial customers, and storage and transmission of natural gas.
Consolidated Earnings
Consolidated net income for 1995 totaled $204 million comprised of $201 million of net income attributable to CMS Energy Common Stock or $2.27 per share compared to net income of $179 million or $2.09 per share in 1994 and net income of $155 million or $1.90 per share in 1993. Net income attributable to Class G Common Stock totaled $3 million or $.38 per share in 1995. The improved net income for 1995 reflects increased utility electric sales and utility gas deliveries, increased electric utility revenue as a result of the May 1994 rate increase, reversal of losses previously recorded for gas utility contingencies (see Note 4), improved operating results from Consumers' interest in the MCV Facility, and the continuing growth of the international businesses. For further information, see the Electric and Gas Utility Results of Operations sections and the individual international results of operations sections. The increased 1994 net income over the 1993 period reflects a significant increase in utility electric sales, the impact of the 1994 electric rate increase, recognition of incentive revenue related to DSM programs, the favorable resolution of a previously recorded gas cost contingency, and the growth of international businesses.
Cash Position, Financing and Investing
CMS Energy's primary ongoing source of operating cash is dividends from its subsidiaries. In 1995, CMS Energy received a $70 million dividend from Consumers compared to $176 million in 1994. This decrease represents Consumers temporarily suspending its common dividends to CMS Energy in lieu of CMS Energy making a direct equity infusion of cash into Consumers. In 1996, Consumers plans to resume common stock dividend payments to CMS Energy.
CMS Energy's consolidated cash from operations is derived mainly from Consumers' sale and transportation of natural gas, its generation, transmission, and sale of electricity and CMS NOMECO's sale of oil and natural gas. Consolidated cash from operations during 1995 increased $70 million from the 1994 level primarily from higher sales of electricity and gas, lower gas inventories, timing of cash payments related to its utility operations, CMS NOMECO's increased sale of oil and natural gas and the growth of the international businesses partially offset by Consumers' higher power purchases from the MCV Partnership. CMS Energy primarily uses this operating cash to expand its international businesses, maintain its electric and gas utility systems, retire portions of its long-term securities and pay dividends.
Financing Activities: Net cash provided by financing activities in 1995 increased $163 million from 1994, primarily reflecting the issuance of Class G Common Stock and increased long-term debt. Net cash provided by financing activities in 1994 increased by $214 million primarily reflecting the issuance of Consumers preferred stock.
In January 1994, CMS Energy filed a shelf-registration statement with the SEC for the issuance and sale of up to $250 million of GTNs. As of December 31, 1995, CMS Energy had issued approximately $221 million of GTNs with a weighted average interest rate of 7.7 percent.
In the third quarter 1995, CMS Energy received net proceeds of approximately $123 million from the issuance of 7.52 million shares of Class G Common Stock at a price to the public of $17.75 per share, initially representing 23.50 percent of the common stockholder's equity value attributed to the Consumers Gas Group. All of the proceeds from this sale will fund the capital programs and be used for general corporate purposes of CMS Energy. Initially, such proceeds were used to repay a portion of CMS Energy's indebtedness under the Credit Facility, none of which was attributable to the Consumers Gas Group. In 1995, CMS Energy issued approximately $90 million of CMS Energy Common Stock in conjunction with the acquisitions of Terra and Walter.
In January 1995, CMS Generation entered into a one-year $118 million bridge credit facility for the acquisition of HYDRA-CO of which approximately $109 million remained outstanding as of December 31, 1995. In January 1996, CMS Generation refinanced the bridge credit facility into a $110 million, five-year term loan.
During 1995, CMS Energy paid $80 million in cash dividends to holders of CMS Energy Common Stock compared to $67 million in 1994. The $13 million increase reflects an annual increase of $.12 per share to $.96 per share, commencing third quarter 1995. CMS Energy also paid $4 million in cash dividends to holders of Class G Common Stock. Dividends on preferred stock increased to $28 million in 1995, reflecting Consumers' issuance of additional preferred stock in 1994.
In October 1995, CMS NOMECO filed a registration statement with the SEC for an initial public offering of not more than 20 percent of CMS NOMECO common stock. CMS Energy will continue to evaluate market conditions for a possible future offering of CMS NOMECO common stock.
In November 1995, CMS Energy amended the terms of its $400 million Unsecured Credit Facility, increased the amount to $450 million and extended the termination date to June 30, 1998. CMS Energy also entered into a $125 million, seven-year Term Loan Agreement. As of December 31, 1995, $118 million and $125 million remains outstanding for the Unsecured Credit Facility and Term Loan Agreement, respectively.
Investing Activities: Net cash used in investing activities in 1995 increased $307 million from 1994, primarily reflecting the acquisitions of TGN and HYDRA-CO. Capital expenditures, including assets placed under capital lease (see Note 17), deferred DSM costs, investment in international subsidiaries and common stock issued for acquisitions totaled $1,053 million in 1995 as compared to $672 million in 1994 and $768 in 1993. Capital expenditures for 1995 include approximately $200 million for acquisitions which commenced in 1994 but did not close until 1995. CMS Energy's expenditures for its utility, independent power production, oil and gas exploration and production, and gas transmission and marketing business segments were $454 million, $239 million, $168 million and $178 million, respectively.
Financing and Investing Outlook: CMS Energy estimates that capital expenditures, including new lease commitments, and investments in partnerships and unconsolidated subsidiaries, will total approximately $2.4 billion over the next three years.
In Millions Years Ended December 31 1996 1997 1998 - ----------------------- ---- ---- ---- Electric utility $311 $285 $295 Gas utility 124 110 105 Oil and gas exploration and production 120 135 150 Independent power production 189 175 150 Natural gas transmission, storage and marketing 112 70 50 ---- ---- ---- $856 $775 $750 ===== ===== ===== CMS Energy is required to redeem or retire approximately $1,266 million of long-term debt over the three-year period ending December 1998. Cash provided by operating activities is expected to satisfy a substantial portion of these capital expenditures and debt retirements. In January 1996, Consumers issued and sold 4 million shares of Trust Originated Preferred Securities with net proceeds totaling $96 million (see Note 8). CMS Energy will continue to evaluate the capital markets in 1996 as a source of financing its subsidiaries' investing activities and required debt retirements.
Consumers has several available, unsecured, committed lines of credit totaling $145 million and a $425 million working capital facility. Consumers has FERC authorization to issue or guarantee up to $900 million in short-term debt through December 31, 1996. Consumers uses short-term borrowings to finance working capital and gas in storage, and to pay for capital expenditures between long-term financings. Consumers has an agreement permitting the sales of certain accounts receivable for up to $500 million. At December 31, 1995 and 1994, receivables sold totaled $295 million and $275 million, respectively.
Electric Utility Results of Operations
Pretax Operating Income Change Compared to Prior Year
In Millions 1995/1994 1994/1993 --------- --------- Sales $ 59 $ 33 Rate increase and other regulatory issues 9 38 O&M, general taxes and depreciation (38) (25) ---- ---- Total change $ 30 $ 46 ==== ====
Electric Sales: Total electric sales in 1995 were a record 35.5 billion kWh, a 3.0 percent increase from the 1994 level as a result of economic growth and warmer summer temperatures. The increase in total electric sales included a 4.2 percent increase in sales to Consumers' ultimate customers, with fairly consistent increases in the residential, commercial, and industrial sectors. The increase was partially offset by a decrease in certain sales to other utilities.
Total electric sales in 1994 were 34.5 billion kWh, a 5.2 percent increase from the 1993 level, which included a 4.2 percent increase in system sales to Consumers' ultimate customers.
Power Costs: Power costs for 1995 totaled $970 million, a $20 million increase from the corresponding 1994 period, primarily reflecting increased purchased power costs due to higher sales levels. Power costs for 1994 totaled $950 million, a $42 million increase as compared to 1993 which reflects increased kWh production at Consumers' generating plants and greater power purchases from outside sources to meet increased sales demand.
Operating Expenses: Electric operation and maintenance expense for 1995 compared to 1994 increased $13 million, which included $9 million of additional postretirement benefit costs and increased expenditures to improve electric system reliability. Electric depreciation for 1995 compared to 1994 increased $15 million, reflecting additional property and equipment. Electric general taxes increased $11 million in 1995 compared to 1994, reflecting millage rate increases and additional capital investments in property and equipment.
Electric Utility Issues
Power Purchases from the MCV Partnership: Consumers' annual obligation to purchase contract capacity from the MCV Partnership increased 108 MW in 1995 to 1,240 MW. In 1993, the MPSC issued the Settlement Order that have allowed Consumers to recover substantially all payments for 915 MW of contract capacity purchased from the MCV Partnership. ABATE and the Attorney General have appealed the Settlement Order to the Court of Appeals. The market for the remaining 325 MW of contract capacity was assessed at the end of 1992. This assessment, along with the Settlement Order, resulted in Consumers recognizing a loss for the present value of the estimated future underrecoveries of power purchases from the MCV Partnership. Additional losses may occur if actual future experience materially differs from the 1992 estimates. As anticipated in 1992, Consumers continues to experience cash underrecoveries associated with the Settlement Order. These after-tax cash underrecoveries totaled $90 million, $61 million and $59 million in 1995, 1994 and 1993, respectively. Estimated future after-tax cash underrecoveries, and possible losses for 1996 and the next four years are shown in the table below.
After-tax, In Millions 1996 1997 1998 1999 2000 ---- ---- ---- ---- ----
Estimated cash underrecoveries $56 $55 $ 8 $ 9 $ 7
Possible additional under- recoveries and losses (a) $20 $22 $72 $72 $74
(a) If unable to sell any capacity above the MPSC's 1993 authorized level.
In September 1995, Consumers and the MPSC staff reached a proposed settlement agreement that would potentially resolve several issues in three pending proceedings, including cost recovery for the 325 MW of MCV Facility capacity above the MPSC's currently authorized level. For further information regarding the settlement, see Note 4.
In 1994 and 1995, Consumers terminated power purchase agreements with the developers of a proposed 65 MW coal-fired cogeneration facility and a proposed 44 MW wood and chipped-tire plant. To replace this capacity, 109 MW of less expensive contract capacity from the MCV Facility which Consumers is currently not authorized to recover from retail customers would be used. For further information, see Note 4.
Electric Rate Proceedings: Consumers filed a request with the MPSC in late 1994 to increase its retail electric rates. In early 1996, the MPSC granted Consumers authority to increase its annual electric retail rates by $46 million. This partial final order did not address cost recovery related to the 325 MW of MCV Facility contract capacity above 915 MW. The MPSC stated that this matter would be addressed in connection with its consideration of the proposed settlement agreement discussed below.
In September 1995, Consumers and the MPSC staff reached a proposed settlement agreement that, if approved by the MPSC, would resolve several outstanding regulatory issues. One of these issues, Consumers' electric rate case, was addressed, in part, by the order discussed above. If fully adopted, the settlement agreement would resolve Consumers' depreciation and special competitive service cases (discussed below) and cost recovery of 325 MW of uncommitted MCV Facility capacity. Consumers expects a final order in the spring of 1996. For more information regarding the electric rate order and the settlement, see Note 4.
In 1995, Consumers filed a request with the MPSC, seeking approval to increase its traditional depreciation expense by $21 million and reallocate certain portions of its utility plant from production to transmission, resulting in a $28 million decrease. If both aspects of the request are approved, the net result would be a decrease in electric depreciation expense of $7 million for ratemaking purposes. The MPSC staff's filing in this case did not support Consumers' requested increase in depreciation expense, but instead proposed a decrease of $24 million. The MPSC staff also did not support the reallocation of plant investment as proposed by Consumers but suggested several alternatives which could partially address this issue. In September 1995, the ALJ issued a proposal for decision that essentially supported the MPSC staff's position regarding depreciation expense and recommended that the MPSC reject both Consumers' and the MPSC staff's positions regarding the reallocation of Consumers' depreciation reserve and plant investment. This case is currently part of the proposed settlement discussed above.
Special Rates: Consumers currently has a request before the MPSC that, if approved, would allow Consumers a certain level of rate-pricing flexibility to respond to customers' alternative energy options. This request has been consolidated into the settlement proceeding discussed above.
Electric Conservation Efforts: In June 1995, the MPSC issued an order that authorized Consumers to discontinue future DSM program expenditures and cease all new programs. For further information, see Note 4.
Electric Environmental Matters: The 1990 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.
The Michigan Natural Resources and Environmental Protection Act (formerly the Michigan Environmental Response Act) was substantially amended in June 1995. The Michigan law bears similarities to the federal Superfund law. The purpose of the 1995 amendments was generally to encourage development of industrial sites and to remove liability from some parties who were not responsible for activities causing contamination. Consumers expects that it will ultimately incur costs at a number of sites. Consumers believes costs incurred for both investigation and required remedial actions are properly recoverable in rates.
Consumers is a so-called "potentially responsible party" at several sites being administered under Superfund. Along with Consumers, there are numerous credit-worthy, potentially responsible parties with substantial assets cooperating with respect to the individual sites. Based on current information, management believes it is unlikely that Consumers' liability at any of the known Superfund sites, individually or in total, will have a material adverse effect on its financial position, liquidity or results of operations. For further information regarding electric environmental matters, see Note 14.
Electric Outlook
Competition: Consumers currently expects approximately 2 percent average annual growth in electric system sales over the next five years.
Consumers continues to be affected by the developing competitive market for electricity. The primary sources of competition include: the installation of cogeneration or other self-generation facilities by Consumers' larger industrial customers; the formation of municipal utilities which would displace retail service by Consumers to an entire community; and competition from neighboring utilities which offer flexible rate arrangements designed to encourage movement to their respective service areas. Consumers continues to work toward retaining its current retail service customers.
In an effort to meet the challenge of competition, Consumers has signed long-term sales contracts with some of its largest industrial customers, including its largest customer, General Motors Corporation. Under the General Motors contract, Consumers will serve certain facilities at least five years and other facilities at least 10 years in exchange for competitively discounted electric rates. Certain facilities will have the option of taking retail wheeling service (if available) after the first three years of the contract. The MPSC approved this contract in 1995.
As part of an order issued in early 1996, the MPSC significantly reduced the rate subsidization of residential customers by industrial and large commercial customers. In addition to offering electric rates that are competitive with other energy providers, Consumers is pursuing other strategies to retain its "at-risk" customers. These strategies include: minimizing outages for each customer, promptly responding to customer inquiries, and providing consulting services to help customers use energy efficiently.
In 1994, the MPSC approved a framework for a five-year experimental retail wheeling program for Consumers and Detroit Edison. Under the experiment, up to 60 MW of Consumers' additional load requirements could be met by retail wheeling. The program becomes effective upon Consumers' next solicitation for capacity. In June 1995, the MPSC issued an order that set rates and charges for retail delivery service under the experiment. Consumers, ABATE and Dow filed claims of appeal of the MPSC's retail wheeling orders. The Court of Appeals subsequently consolidated these appeals with those previously filed by Detroit Edison and the Attorney General. Consumers does not expect this short-term experiment to have a material impact on its financial position, liquidity or results of operations.
In March 1995, the FERC issued a NOPR and a supplemental NOPR that propose changes in the wholesale electric industry. Among the most significant proposals is a requirement that utilities provide open access to the domestic interstate transmission grid. The FERC's final rules are expected to be announced in the spring of 1996. Consumers is unable to predict the terms of these rules. However, management believes that Consumers is well-positioned to conform to open access as it has been voluntarily providing this transmission service since 1992.
The Governor of the State of Michigan has proposed that the MPSC review the existing statutory and regulatory framework governing Michigan utilities in light of increasing competition in the utility industry and recommend appropriate revisions. At this time, no proceedings have been initiated at the MPSC on this matter and no new legislation has been introduced.
Changes in the competitive environment facing regulated utilities may eventually lead to the discontinuance of SFAS 71, which allows the deferral of certain costs and the recording of regulatory assets. Management has evaluated Consumers' current regulatory position and believes it continues to support the recognition of Consumers' $779 million of electric-related regulatory assets. If changes in the industry were to lead to Consumers discontinuing the application of SFAS 71, for all or part of its business, Consumers may be required to write-off the portion of any regulatory asset for which no regulatory assurance of recovery continued to exist. Consumers does not believe that there is any current evidence that supports the write-off of any of its electric- related regulatory assets. For further information regarding SFAS 71 and Consumers' regulatory assets, see Notes 2 and 19.
Nuclear Matters: In July 1995, the NRC issued its Systematic Assessment of Licensee Performance report for Palisades. The report recognized improved performance at the plant, specifically in the areas of Engineering and Plant Operations. In the report, the NRC noted areas which continue to require management's attention, but also recognized the development and implementation of plans for corrective action designed to address previously identified weak areas. The report noted that performance in the areas of Maintenance and Plant Support was good and remained unchanged.
Consumers' on-site storage pool for spent nuclear fuel at Palisades is at capacity. Consequently, Consumers is using NRC-approved dry casks, which are steel and concrete vaults, for temporary on-site storage. In 1996, Consumers plans to unload and replace one of the casks where a minor flaw has been detected. For further information, see Note 15.
The Low-Level Radioactive Waste Policy Act encourages the respective states, individually or in cooperation with each other, to be responsible for the disposal of low-level radioactive waste. Currently, a low-level waste site does not exist in Michigan and Consumers has been storing low- level waste at its nuclear plant sites. Consumers began shipping its low- level waste to a site in South Carolina during 1995 and plans to have all its currently stored low-level waste removed from the plant sites by the end of 1996.
Consumers is required to make certain calculations and report to the NRC about the continuing ability of the Palisades reactor vessel to withstand postulated "pressurized thermal shock" events during its remaining license life. Analysis of recent data from testing of similar materials indicates that the Palisades reactor vessel can be safely operated through late 1999. Consumers is developing plans to anneal the reactor vessel in 1998 at an estimated cost of $20 million to $30 million. This repair would allow for operation of the plant to the end of its license life in the year 2007. Consumers cannot predict whether the studies being conducted as a part of the development plans will support a future decision to anneal.
At the SEC staff's request, the FASB is reviewing the accounting for closure and removal costs for long-lived assets, including decommissioning. The current electric utility industry accounting practices of recording the cost of removal as a component of depreciation could be changed. The FASB's tentative decision includes recognition of the cost of closure and removal obligation as a liability based on discounted future cash flows with the offset recorded as part of the cost of the plant asset.
Stray Voltage: Consumers has experienced a number of lawsuits relating to the effect of so-called stray voltage on certain livestock. At December 31, 1995, Consumers had 30 separate stray voltage lawsuits awaiting trial court action, down from 83 lawsuits at December 31, 1994. CMS Energy believes that the resolution of these lawsuits will not have a material impact on its financial position or results of operations.
Gas Utility Results of Operations
Pretax Operating Income Change Compared to Prior Year
In Millions 1995/1994 1994/1993 --------- --------- Sales $ 12 $ (3) Regulatory recovery of gas cost 19 10 O&M, general taxes and depreciation (15) (19) ---- ---- Total change $ 16 $(12) ==== ====
Gas Deliveries: Gas sales in 1995 totaled 254 bcf, a 5.2 percent increase from 1994 levels, and total system deliveries, excluding transport to the MCV Facility, increased 6.5 percent from 1994. On a weather-adjusted basis, total system deliveries increased 4.1 percent, reflecting significant growth. In 1994, total system deliveries, excluding transport to the MCV Facility, were 314 bcf, a slight decrease from 1993 deliveries.
Cost of Gas Sold: The cost of gas sold for 1995 increased $9 million from the 1994 level, as a result of increased deliveries. The increased costs reflect the reversal of a $23 million gas supplier loss contingency.
Operating Expenses: Gas operation and maintenance expense increased $12 million, reflecting an $8 million gas inventory loss. Gas depreciation for 1995 compared to 1994 increased $7 million, reflecting additional capital investment in property and equipment.
Gas Utility Issues
Gas Rates: In December 1994, Consumers filed a request with the MPSC to increase Consumers' annual gas rates. The requested increase totaling $7 million reflected increased expenditures, including those associated with postretirement benefits, and a 12.25 percent return on equity. The MPSC staff recommended a $13 million rate decrease. In November 1995, the ALJ issued a proposal for decision that essentially adopted the MPSC staff's position. In early 1996, the MPSC issued a final order in this case, decreasing Consumers' annual gas rates by $11.7 million. For further information regarding this case, see Note 4.
Consumers entered into a special natural gas transportation contract with one of its transportation customers in response to the customer's proposal to by-pass Consumers' system in favor of a competitive alternative. The contract provides for discounted gas transportation rates in an effort to induce the customer to remain on Consumers' system. In February 1995, the MPSC approved the contract but stated that the revenue shortfall created by the difference between the contract's discounted rate and the floor price of one of Consumers' MPSC authorized gas transportation rates must be borne by Consumers' shareholders. In March 1995, Consumers filed an appeal with the Court of Appeals claiming that the MPSC decision denies Consumers the opportunity to earn its authorized rate of return and is therefore unconstitutional.
GCR Matters: In October 1995, the MPSC issued an order regarding a $44 million (excluding any interest) gas supply contract pricing dispute between Consumers and certain intrastate producers. The order stated that Consumers was not obligated to seek prior approval of market-based pricing provisions that were implemented under the contracts in question. The producers subsequently filed a claim of appeal of the MPSC order with the Court of Appeals. Consumers believes the MPSC order supports its position that the producers' theories are without merit and intends to vigorously oppose any claims they may raise but cannot predict the outcome of this issue.
Gas Environmental Matters: Consumers expects that it will ultimately incur investigation and remedial action costs at a number of sites, including some that formerly housed manufactured gas plant facilities. Data available to Consumers and its continued internal review of these former manufactured gas plant sites have resulted in an estimate for all costs related to investigation and remedial action of between $48 million and $112 million. These estimates are based on undiscounted 1995 costs. At December 31, 1995, Consumers has accrued a liability for $48 million and has established a regulatory asset for approximately the same amount. Any significant change in assumptions such as remediation technique, nature and extent of contamination and regulatory requirements, could impact the estimate of remedial action costs for the sites.
Consumers requested recovery and deferral of certain investigation and remedial action costs in its gas rate case filed in December 1994. Consumers believes that remedial action costs are recoverable in rates and is continuing discussions with certain insurance companies regarding coverage for some or all of the costs which may be incurred for these sites. For further information, see Note 14.
Gas Outlook
Consumers currently anticipates gas deliveries to grow approximately 2 percent per year (excluding transportation to the MCV Facility and off- system deliveries) over the next five years, primarily due to a steadily growing customer base. Additionally, Consumers has several strategies which will support increased load requirements in the future. These strategies include increased efforts to promote natural gas to both current and potential customers that are using other fuels for space and water heating. The emerging use of natural gas vehicles also provides Consumers with sales growth opportunities. In addition, as air quality standards continue to become more stringent, management believes that greater opportunities exist for converting industrial boiler load and other processes to natural gas. Consumers also plans additional capital expenditures to construct new gas mains that are expected to expand Consumers' system.
In 1995, Consumers purchased approximately 80 percent of its required gas supply under long-term contracts, and the balance on the spot market. Consumers estimates that approximately 35 percent of its gas purchases will be under long-term contracts in future years as current contracts expire. Consumers also has transmission contracts totaling approximately 90 percent of its supply requirements. The expiration dates of the transmission contracts range from 1997 to 2004.
In 1995, the Low Income Home Energy Assistance Program provided approximately $71 million in heating assistance to about 400,000 Michigan households, with approximately 18 percent of funds going to Consumers' customers. In late 1995, federal legislative approval provided Michigan residents with approximately $60 million of funding for 1996. Consumers cannot predict what level of funding will be approved for 1997.
In January 1996, the MPSC issued a Notice of legislative-type hearings to be held in 1996, to assess whether it is appropriate to allow all natural gas customers access to gas transportation service. The MPSC notice designated all eight local distribution companies whose rates are regulated by the MPSC as parties to this proceeding.
Under SFAS 71, Consumers is allowed to defer certain costs to the future and record regulatory assets, based on the recoverability of those costs through the MPSC's approval. Consumers has evaluated its $276 million of regulatory assets (see Note 19) related to its gas business, and believes that sufficient regulatory assurance exists to provide for the recovery of these deferred costs.
Oil and Gas Exploration and Production
Pretax Operating Income: 1995 pretax operating income increased $22 million from 1994, primarily due to higher sales volumes and oil sales prices, income attributable to the acquisitions of Walter and Terra and increased gains from the assignment of gas supply contracts, partially offset by lower average market prices for gas. 1994 pretax operating income increased $5 million from 1993, reflecting higher gas sales volumes, lower international write-offs, and the gain from the disposition of a gas supply contract, partially offset by lower average market prices for oil and gas.
Capital Expenditures: In February 1995, CMS NOMECO closed on the acquisition of Walter for approximately $49 million, consisting of approximately $27 million of CMS Energy Common Stock and $22 million in both cash and assumed debt. The Walter acquisition added proved reserves of approximately 20 million barrels of oil.
In August 1995, CMS NOMECO acquired Terra with approximately $63 million of CMS Energy Common Stock. The Terra acquisition added approximately 96 bcf of proved gas reserves.
Other capital expenditures for 1995 approximated $84 million, primarily for development of existing oil and gas reserves.
Independent Power Production
Pretax Operating Income: 1995 pretax operating income increased $25 million, primarily reflecting higher capacity sales by the MCV Partnership, as well as additional equity earnings by CMS Generation subsidiaries primarily due to the HYDRA-CO acquisition. 1994 pretax operating income increased $16 million from 1993, primarily reflecting additional electric generating capacity.
Capital Expenditures: In January 1995, CMS Generation completed its acquisition of HYDRA-CO for $153 million, net of $54 million cash. CMS Generation acquired 224 MW of net generating capacity and also assumed shared construction management responsibility for a 60 MW diesel-fueled plant under construction in Jamaica, scheduled to go into service in the fourth quarter of 1996.
Other capital expenditures for 1995 totaled approximately $86 million related to expanding ownership in existing facilities and investments in new facilities.
Natural Gas Transmission, Storage and Marketing
Pretax Operating Income: 1995 pretax operating income increased $5 million over 1994, reflecting growth from new pipeline investments and the continued growth of existing projects and gas marketed to end-users. 1994 pretax operating income increased $2 million over 1993, reflecting earnings growth from gas pipeline and storage projects and gas marketed to end-users. In 1995, 101 bcf of natural gas was marketed compared to 66 bcf and 60 bcf in 1994 and 1993, respectively.
Capital Expenditures: In July 1995, CMS Gas Transmission acquired a 25 percent ownership interest in TGN for $136 million. TGN, which had 1995 revenues of approximately $150 million, owns and operates 2,600 miles of pipelines that provide natural gas transmission service to the northern and central parts of Argentina, with almost one bcf per day of existing pipeline capacity.
CMS Gas Transmission, through an ownership interest in Nitrotec Corporation, a proprietary gas technology company acquired in January 1996, currently has two helium recovery plants under construction, with the first plant scheduled to be in service in the first quarter of 1996. The total estimated cost for these two plants, located in Kansas, is $8.2 million. One helium recovery plant was placed in service in October 1995. Nitrotec Corporation has also started construction on a $5.2 million nitrogen rejection facility in Texas.
In January 1996, CMS Gas Transmission signed a letter of intent to transfer its 50 percent ownership interest to its partner, MHP Corporation, in the Moss Bluff Gas Storage System, a salt cavern storage facility on the Gulf Coast of Texas and MHP Corporation will transfer its 50 percent ownership interest to CMS Gas Transmission in the Grand Lacs Limited Partnership, a marketing center for natural gas. CMS Gas Transmission will also receive approximately $26 million.
In January 1996, CMS Gas Transmission acquired Petal Gas Storage Company, a natural gas storage facility located in Forrest County, Mississippi. The salt dome storage cavern provides up to 3.2 bcf per day of 10-day storage service and has the capability of being refilled in 20 days.
Other capital expenditures in 1995 totaled approximately $42 million for acquisitions, expansion of existing facilities and construction of new facilities.
Other
New Accounting Standard: In 1995, the FASB issued SFAS 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, which is effective for 1996. CMS Energy does not expect the application of this statement to have a material impact on its financial position, liquidity or results of operations. For further information, see Note 2.
CMS Energy Corporation Notes to Consolidated Financial Statements
1: Corporate Structure
CMS Energy is the parent holding company of Consumers and Enterprises. Consumers, a combination electric and gas utility company serving the Lower Peninsula of Michigan, is the principal subsidiary of CMS Energy. Consumers' customer base includes a mix of residential, commercial and diversified industrial customers, the largest segment of which is the automotive industry. Enterprises is engaged in several domestic and international energy-related businesses, including oil and gas exploration and production, development and operation of independent power production facilities, electric and gas marketing services to utility, commercial and industrial customers, and storage and transmission of natural gas.
2: Summary of Significant Accounting Policies and Other Matters
Basis of Presentation: The consolidated financial statements include CMS Energy, Consumers and Enterprises and their wholly owned subsidiaries. The financial statements are prepared in conformity with generally accepted accounting principles and include the use of management's estimates. CMS Energy uses the equity method of accounting for investments in companies and partnerships where it has more than a 20 percent but less than a majority ownership interest and includes these results in operating income. For the years ended December 31, 1995, 1994 and 1993, undistributed equity earnings were $53 million, $25 million and $9 million, respectively.
Accretion Income and Expense: In 1991, the MPSC ordered that Consumers could recover a portion of its abandoned Midland investment over a 10-year period, but did not allow Consumers to earn a return on that amount. Consumers reduced the recoverable investment to the present value of the future recoveries. During the recovery period, the unrecovered asset is adjusted to its present value. This adjustment is reflected as accretion income. Conversely, Consumers recorded a loss in 1992 for the present value of its estimated future underrecoveries of power costs resulting from purchases from the MCV Partnership (see Note 3), and now recognizes accretion expense annually to reflect the time value of money on the recorded loss.
Gas Inventory: Consumers uses the weighted average cost method for valuing working gas inventory. Cushion gas, which is gas stored to maintain reservoir pressure for recovery of working gas, is recorded in the appropriate gas utility plant account. Consumers stores gas inventory in its underground storage facilities.
Maintenance, Depreciation and Depletion: Property repairs and minor property replacements are charged to maintenance expense. Depreciable property retired or sold plus cost of removal (net of salvage credits) is charged to accumulated depreciation. Consumers bases depreciation provisions for utility plant on straight-line and units-of-production rates approved by the MPSC. The composite depreciation rate for electric utility property was 3.5 percent for 1995, 3.5 percent for 1994 and 3.4 percent for 1993. The composite rate for gas utility plant was 4.3 percent for 1995, 4.2 percent for 1994 and 4.4 percent for 1993. The composite rate for Consumers' other plant and property was 4.9 percent for 1995 and 4.7 percent for 1994 and 1993.
CMS NOMECO, a wholly owned subsidiary of Enterprises, follows the full-cost method of accounting and, accordingly, capitalizes its exploration and development costs, including the cost of non-productive drilling and surrendered acreage, on a country-by-country basis. The capitalized costs in each cost center are being amortized on an overall units-of-production method based on total estimated proved oil and gas reserves. Other depreciable property of CMS Energy and its subsidiaries is amortized over its estimated useful life.
New Accounting Standard: During 1995, the Financial Accounting Standards Board issued SFAS 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. This statement, which is effective for 1996 financial statements, requires that an asset be reviewed for impairment whenever events indicate that its carrying amount may not be recoverable. The statement also requires that a loss be recognized whenever a portion of an asset's cost is excluded from a rate- regulated company's rate base. CMS Energy does not expect the application of this statement to have a material impact on its financial position or results of operations.
Nuclear Fuel Cost: Consumers amortizes nuclear fuel cost to fuel expense based on the quantity of heat produced for electric generation. Interest on leased nuclear fuel is expensed as incurred. Under federal law, the DOE is responsible for permanent disposal of spent nuclear fuel at costs to be paid by affected utilities. However, in 1994, the DOE asserted that it does not have a legal obligation to accept spent nuclear fuel without an operational repository. In 1995, federal legislation was introduced to clarify the DOE's obligation to accept spent nuclear fuel and direct the DOE to establish an integrated spent fuel management system that includes designing and constructing an interim storage facility in Nevada. For fuel used after April 6, 1983, Consumers charges disposal costs to nuclear fuel expense, recovers them through electric rates and remits to the DOE quarterly. Consumers elected to defer payment for disposal of spent nuclear fuel burned before April 7, 1983, until the spent fuel is delivered to the DOE, which was originally scheduled to occur in 1998. At December 31, 1995, Consumers has recorded a liability to the DOE of $100 million, including interest. Consumers recovered through electric rates the amount of this liability, excluding a portion of interest.
Nuclear Plant Decommissioning: Consumers collects approximately $45 million annually from its electric customers to decommission its two nuclear plants. On March 1, 1995, Consumers filed updated decommissioning information with the MPSC which estimated decommissioning costs for Big Rock and Palisades to be $303 million and $524 million (in 1995 dollars), respectively. The estimated decommissioning costs increased from previous estimates principally due to the unavailability of low- and high-level radioactive waste disposal facilities. Amounts collected from electric retail customers and deposited in trusts (including trust earnings) are credited to accumulated depreciation. To meet NRC decommissioning requirements, Consumers prepared site-specific decommissioning cost estimates for Big Rock and Palisades, assuming that each plant site will eventually be restored to conform with the adjacent landscape, and that all contaminated equipment will be disassembled and disposed of in a licensed burial facility. After the plants are retired, Consumers plans to maintain the facilities in protective storage until radioactive waste disposal facilities are available. As a result, the majority of decommissioning costs will be incurred several years after each plant's NRC operating license expires. When Big Rock's and Palisades' NRC licenses expire in 2000 and 2007, respectively, the trust funds are estimated to have accumulated to $257 million and $686 million, respectively. It is estimated that at the time the plants are fully decommissioned (in the years 2030 for Big Rock and 2046 for Palisades), the trust funds will have provided $1 billion for Big Rock and $2.1 billion for Palisades including trust earnings over this decommissioning period. Based on this plan, Consumers believes that the current decommissioning surcharge will be sufficient to provide for decommissioning of its nuclear plants. At December 31, 1995, Consumers had an investment in nuclear decommissioning trust funds of $304 million.
Reclassifications: CMS Energy has reclassified certain prior year amounts for comparative purposes. These reclassifications did not affect the net income for the years presented.
Related-Party Transactions: In 1995, 1994 and 1993, Consumers purchased $53 million, $48 million and $52 million, respectively, of electric generating capacity and energy from affiliates of Enterprises. Affiliates of CMS Energy sold, stored and transported natural gas and provided other services to the MCV Partnership totaling approximately $26 million, $22 million and $27 million for 1995, 1994 and 1993, respectively. For additional discussion of related-party transactions with the MCV Partnership and the FMLP, see Notes 3 and 20. Other related-party transactions are immaterial.
Revenue and Fuel Costs: Consumers accrues revenue for electricity and gas used by its customers but not billed at the end of an accounting period. Consumers accrues or reduces revenue for any underrecovery or overrecovery of electric power supply costs and natural gas costs by establishing a corresponding asset or liability until it bills or refunds these differences to customers following an MPSC order.
Utility Regulation: Consumers accounts for the effects of regulation under SFAS 71, Accounting for the Effects of Certain Types of Regulation. As a result, the actions of regulators affect when revenues, expenses, assets and liabilities are recognized.
Other: For significant accounting policies regarding income taxes, see Note 5; for pensions and other postretirement benefits, see Note 12; and for cash equivalents, see Note 17.
3: The Midland Cogeneration Venture
The MCV Partnership, which leases and operates the MCV Facility, contracted to sell electricity to Consumers for a 35-year period beginning in 1990 and to supply electricity and steam to The Dow Chemical Company. Consumers, through its subsidiaries, holds the following assets related to the MCV Partnership and MCV Facility: 1) CMS Midland owns a 49 percent general partnership interest in the MCV Partnership; and 2) CMS Holdings holds through the FMLP a 35 percent lessor interest in the MCV Facility.
Power Purchases from the MCV Partnership: Consumers' annual obligation for purchase of contract capacity from the MCV Partnership under a 35-year PPA increased 108 MW to its maximum amount of 1,240 MW in 1995. In 1993, the MPSC issued the Settlement Order that has allowed Consumers to recover substantially all of the payments for its ongoing purchase of 915 MW of contract capacity. ABATE and the Attorney General have appealed the Settlement Order to the Court of Appeals. Under the Settlement Order, capacity and energy purchases from the MCV Partnership above the 915 MW level can be utilized to satisfy customers' power needs but the MPSC will determine the levels of recovery from retail customers at a later date. The Settlement Order also provides Consumers the right to remarket to third parties the remaining contract capacity. The MCV Partnership did not object to the Settlement Order.
The PPA provides that Consumers is to pay the MCV Partnership a minimum levelized average capacity charge of 3.77 cents per kWh, a fixed energy charge and a variable energy charge which is based primarily on Consumers' average cost of coal consumed. The Settlement Order permits Consumers to recover capacity charges averaging 3.62 cents per kWh for 915 MW of capacity, the fixed energy charge and the prescribed energy charges associated with the scheduled deliveries within certain hourly availability limits, whether or not those deliveries are scheduled on an economic basis. For all energy delivered on an economic basis above the availability limits to 915 MW, Consumers has been allowed to recover 1/2 cent per kWh capacity payment in addition to the variable energy charge.
In 1992, Consumers recognized a loss for the present value of the estimated future underrecoveries of power costs under the PPA as a result of the Settlement Order. This loss was based, in part, on management's assessment of the future availability of the MCV Facility, and the effect of the future power market on the amount, timing and price at which various increments of the capacity, above the MPSC authorized level, could be resold. Additional losses may occur if actual future experience materially differs from the 1992 estimates. As anticipated in 1992, Consumers continues to experience cash underrecoveries associated with the Settlement Order. If Consumers is unable to sell any capacity above the 1993 MPSC-authorized level, future additional after-tax losses and after- tax cash underrecoveries would be incurred. Consumers' estimates of its future after-tax cash underrecoveries, and possible losses for 1996 and the next four years are shown in the table below.
After-tax, In Millions 1996 1997 1998 1999 2000 ---- ---- ---- ---- ----
Estimated cash underrecoveries $56 $55 $ 8 $ 9 $ 7
Possible additional under- recoveries and losses (a) $20 $22 $72 $72 $74
(a) If unable to sell any capacity above the MPSC's 1993 authorized level.
In September 1995, Consumers and the MPSC staff reached a proposed settlement agreement that would potentially resolve several issues in three pending proceedings, including cost recovery for the 325 MW of MCV Facility capacity above the MPSC's currently authorized level. For further information regarding this proposed settlement, see Note 4.
At December 31, 1995 and 1994, the after-tax present value of the Settlement Order liability totaled $202 million and $272 million, respectively. The reduction in the liability since December 31, 1994, reflects after-tax cash underrecoveries of $90 million, partially offset by after-tax accretion expense of $20 million. The undiscounted after-tax amount associated with the liability totaled $607 million at December 31, 1995.
In 1994 and 1995, Consumers paid $44 million to terminate power purchase agreements with the developers of two proposed independent power projects totaling 109 MW. As part of the proposed settlement reached with the MPSC staff (see Note 4), Consumers is seeking MPSC approval to utilize less- expensive contract capacity from the MCV Facility which Consumers is currently not authorized to recover from retail customers. Cost recovery for this contract capacity would start in late 1996. Even if Consumers is not allowed to substitute MCV Facility capacity for the capacity to be provided under the terminated agreements, Consumers believes that the MPSC would approve recovery of the buyout costs due to the significant customer savings resulting from the terminated power purchase agreements. As a result, Consumers has recorded a regulatory asset of $44 million.
PSCR Matters Related to Power Purchases from the MCV Partnership: As part of the 1993 and 1994 plan case orders, the MPSC confirmed the recovery of certain costs related to power purchases from the MCV Partnership. ABATE or the Attorney General has appealed these plan case orders to the Court of Appeals.
As part of its decision in the 1993 PSCR reconciliation case issued February 23, 1995, the MPSC disallowed a portion of the costs related to purchases from the MCV Partnership, and instead assumed recovery of those costs from wholesale customers and reduced recovery from retail customers. Consumers believes this is contrary to the terms of the Settlement Order and has appealed the February 23 order on this issue.
4: Rate Matters
Electric Rate Proceedings: In late 1994, Consumers filed a request with the MPSC to increase its retail electric rates. The request included provisions for ratemaking treatment of expected sales losses to competition and the treatment of the 325 MW of MCV Facility contract capacity above 915 MW. Consumers also requested that the MPSC eliminate subsidization of residential rates in a two-step adjustment.
Early in 1996, the MPSC issued a partial final order in this case, granting Consumers a $46 million annual increase in its electric retail rates. This order authorized a 12.25 percent return on equity as compared to the previously approved 11.75 percent, approved recovery of certain costs associated with a proposed settlement related to the Ludington plant (see Note 14), and significantly reduced (in a two-step adjustment) the subsidization of residential customers by industrial and large commercial customers. As a result, residential customers were allocated approximately $31 million of the $46 million increase.
This order did not address cost recovery related to the 325 MW of MCV Facility contract capacity above 915 MW. The MPSC stated that this matter would be addressed in connection with its consideration of the proposed settlement agreement discussed below.
Consumers also has a separate request before the MPSC to offer competitive special rates to certain large qualifying customers. In addition, Consumers filed a request with the MPSC, seeking to adjust its depreciation rates and to reallocate certain portions of its electric production plant to transmission accounts. If approved, this would result in a net decrease in depreciation expense of $7 million for ratemaking purposes. For further information regarding these requests, see the Electric Rate Proceedings and Special Rates discussions in the Management's Discussion and Analysis.
In September 1995, Consumers and the MPSC staff reached a proposed settlement agreement that, if approved by the MPSC, would resolve several outstanding regulatory issues currently before the MPSC in separate proceedings. Some of these issues were preliminarily addressed in early 1996 when the MPSC issued an order in Consumers' electric rate case (see above). If fully adopted, the settlement agreement would: provide for cost recovery of the 325 MW of uncommitted MCV Facility capacity; implement provisions for incentive ratemaking; resolve the special competitive services and depreciation rate cases; implement a limited direct access program; and accelerate recovery of nuclear plant investment. Consumers expects a final order in the spring of 1996.
Electric DSM: In June 1995, the MPSC authorized Consumers to discontinue future DSM program expenditures and cease all new programs. Consumers is deferring and amortizing past program costs ($68 million at December 31, 1995) over the period these costs are being recovered from customers in accordance with an MPSC accounting order.
Gas Rates: As part of an agreement approved by the MPSC, Consumers filed a gas rate case in December 1994. The request, among other things, incorporated cost increases, including costs for postretirement benefits and costs related to Consumers' former manufactured gas plant sites and proposed a 12.25 percent rate of return on equity, instead of the current 13.25 percent. Consumers had requested a $7 million increase in its annual gas rates. The MPSC staff recommended a $13 million rate decrease, which included a lower rate base, a lower return on common equity, a revised capital structure and a lower operating cost forecast than Consumers had projected. In November 1995, the ALJ issued a proposal for decision that essentially adopted the MPSC staff's position. In early 1996, the MPSC issued a final order in this case, decreasing Consumers' annual gas rates by $11.7 million and authorized an 11.6 percent return on equity.
GCR Matters: In 1993, the MPSC issued a ruling favorable to Consumers regarding a gas pricing disagreement between Consumers and certain intrastate producers. In 1995, management concluded that the intrastate producers' pending appeals of the MPSC order would not be successful and accordingly reversed $23 million (pretax) of a previously accrued loss. The MPSC ruling was affirmed by the Court of Appeals in June 1995. The producers have petitioned the Michigan Supreme Court for review.
In October 1995, the MPSC issued an order regarding a $44 million (excluding any interest) gas supply contract pricing dispute between Consumers and certain intrastate producers. The order stated that Consumers was not obligated to seek prior approval of market-based pricing provisions that were implemented under the contracts in question. The producers subsequently filed a claim of appeal of the MPSC order with the Court of Appeals. Consumers believes the MPSC order supports its position that the producers' theories are without merit and intends to vigorously oppose any claims they may raise but cannot predict the outcome of this issue.
Estimated losses for certain contingencies discussed in this note have been accrued. Resolution of these contingencies is not expected to have a material impact on CMS Energy's or Consumers' financial position or results of operations.
5: Income Taxes
CMS Energy and its subsidiaries (including Consumers) file a consolidated federal income tax return. Income taxes are generally allocated based on each subsidiary's separate taxable income. CMS Energy and Consumers practice full deferred tax accounting for temporary differences.
CMS Energy uses 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 1995 1994 1993 - ----------------------- ---- ---- ----
Current federal income taxes $ 43 $ 36 $ 19 Deferred income taxes 85 66 67 Deferred income taxes - tax rate change - - (1) Deferred ITC, net (10) (10) (10) ---- ---- ---- $118 $ 92 $ 75 ==== ==== ====
Operating $130 $103 $ 81 Other (12) (11) (6) ---- ---- ---- $118 $ 92 $ 75 ==== ==== ====
The principal components of CMS Energy's deferred tax assets (liabilities) recognized in the balance sheet are as follows:
In Millions December 31 1995 1994
Property $ (603) $ (601) Unconsolidated investments (266) (246) Postretirement benefits (Note 12) (173) (177) Abandoned Midland project (46) (51) Employee benefit obligations (includes postretirement benefits of $175 and $174) (Note 12) 204 203 Power purchases - settlement (Note 3) 112 146 AMT carryforward 161 154 ITC carryforward (expires 2005) 23 37 Other (28) (13) ------- ------- $ (616) $ (548) ======= =======
Gross deferred tax liabilities $(1,698) $(1,659) Gross deferred tax assets 1,082 1,111 ------- ------- $ (616) $ (548) ======= =======
The actual income tax expense differs from the amount computed by applying the statutory federal tax rate to income before income taxes as follows:
In Millions Years Ended December 31 1995 1994 1993 - ----------------------- ----- ----- -----
Net income before preferred dividends $232 $203 $166 Income tax expense 118 92 75 ----- ----- -----
350 295 241 Statutory federal income tax rate x 35% x 35% x 35% ----- ----- -----
Expected income tax expense 123 103 84 Increase (decrease) in taxes from: Capitalized overheads previously flowed through 5 5 5 Differences in book and tax depreciation not previously deferred 6 7 5 ITC amortization (10) (10) (10) Nonconventional Fuel Tax Credit (13) (8) (6) Other, net 7 (5) (3) ----- ----- ----- $118 $ 92 $ 75 ===== ===== =====
6: Short-Term Financings
Consumers has FERC authorization to issue or guarantee up to $900 million of short-term debt through December 31, 1996. Consumers has an unsecured $425 million facility and unsecured, committed lines of credit aggregating $145 million that are used to finance seasonal working capital requirements. At December 31, 1995, $238 million and $103 million were outstanding under these facilities at weighted average interest rates of 6.4 percent and 6.9 percent, respectively. Consumers has an established $500 million trade receivables purchase and sale program. At December 31, 1995 and 1994, receivables sold under the agreement totaled $295 million and $275 million, respectively. Accounts receivable and accrued revenue in the Consolidated Balance Sheets have been reduced to reflect receivables sold.
7: Long-Term Debt
At December 31, 1995 and 1994, long term debt consists of the following:
(a) Represents the weighted average interest rate during 1995.
The scheduled maturities of long-term debt and improvement fund obligations are as follows: $161 million in 1996, $325 million in 1997, $803 million in 1998, $716 million in 1999 and $10 million in 2000.
CMS Energy
In January 1994, CMS Energy filed a shelf-registration statement with the SEC permitting the issuance and sale of up to $250 million of GTNs. The GTNs are offered from time to time on terms determined at the time of sale.
In 1994, CMS Energy refinanced its $220 million Secured Revolving Credit Facility dated November 30, 1992 with the Unsecured Credit Facility and extended the termination date to June 30, 1997. In November 1995, CMS Energy amended the terms of its $400 million Unsecured Credit Facility, increased the amount to $450 million and extended the termination date to June 30, 1998. CMS Energy also entered into a $125 million, seven-year Term Loan Agreement dated November 21, 1995.
Consumers
First Mortgage Bonds: Consumers secures its first mortgage bonds by a mortgage and lien on substantially all of its property. Consumers' ability to issue and sell securities is restricted by certain provisions in its First Mortgage Bond Indenture, its Articles and the need for regulatory approvals in compliance with appropriate federal law.
Long-Term Bank Debt: During 1994, Consumers entered into a $400 million unsecured, variable rate, five-year term loan and subsequently used the proceeds to refinance certain long-term bank debt. In 1993, Consumers entered into an interest rate swap agreement, exchanging variable-rate interest for fixed-rate interest on $250 million of its long-term bank debt. The swap agreement hedges the variable rate exposure associated with Consumers' long-term bank debt. The swap agreement began to decrease in February 1995 and will terminate by May 1996. At December 31, 1995, the amount of the swap totaled $94 million at 5.4 percent. The swap agreement had the effect of decreasing the weighted average interest rate to 6.3 percent from 6.6 percent for the 12-month period ended December 31, 1995.
Other: Consumers' long-term PCRBs are secured by irrevocable letters of credit or first mortgage bonds.
CMS NOMECO
CMS NOMECO's existing Revolving Line of Credit, which converts to term loans maturing from November 1996 through November 1999, was increased from $110 million at December 31, 1994 to $140 million at December 31, 1995.
Senior serial notes amounting to $28 million, with a weighted average interest rate of 9.40 percent, were repaid in full on August 10, 1995. In connection with this early extinguishment of debt, CMS NOMECO incurred a $1.5 million prepayment premium. The notes were retired with available proceeds from the bank credit line.
CMS Generation
In January 1995, CMS Generation, entered into a one-year $118 million bridge credit facility for the acquisition of HYDRA-CO Enterprises, Inc. of which approximately $109 million remained outstanding as of December 31, 1995. In January, 1996, CMS Generation refinanced this bridge facility with a $110 million, five-year term loan.
8: Capitalization
CMS Energy
Capital Stock: During 1995, CMS Energy amended its Articles of Incorporation and authorized a new class of common stock of CMS Energy, designated Class G Common Stock, which reflects the separate performance of Consumers Gas Group. The pre-existing CMS Energy Common Stock continues to be outstanding and reflects the performance of all of the businesses of CMS Energy and its subsidiaries, including the business of the Consumers Gas Group, except for the interest in the Consumers Gas Group attributable to the outstanding shares of the Class G Common Stock. The filing of the restated Articles of Incorporation with the Michigan Department of Commerce increased the number of authorized shares of capital stock from 255 million shares to 320 million shares, consisting of 250 million shares of CMS Energy Common Stock, par value $.01 per share, 60 million shares of Class G Common Stock, no par value, and 10 million shares of Preferred Stock, par value $.01 per share.
CMS Energy filed a shelf-registration statement with the SEC on February 15, 1995 covering the issuance of up to $200 million of securities encompassing Common Stock, Preferred Stock of CMS Energy or of a special purpose affiliate of CMS Energy, and/or unsecured debt of CMS Energy. CMS Energy continually evaluates the capital markets and may offer such securities from time to time, at terms to be determined at or prior to the time of the sale. In the third quarter 1995, CMS Energy received net proceeds of approximately $123 million from the issuance of 7.52 million shares of Class G Common Stock at a price to the public of $17.75 per share, initially representing 23.50 percent of the common stockholder's equity value attributed to the Consumers Gas Group. All of the proceeds will fund the capital programs and be used for general corporate purposes of CMS Energy. Initially, such proceeds were used to repay a portion of CMS Energy's indebtedness under the Credit Facility, none of which is attributable to the Consumers Gas Group. The issuance of additional shares, during 1995, increased the common stockholder's equity value attributable to the Consumers Gas Group represented by the outstanding shares of Class G Common Stock, to 23.73 percent as of December 31, 1995.
Other: Under its most restrictive borrowing arrangement at December 31, 1995, none of CMS Energy's net income was restricted for payment of common dividends.
Consumers
Capital Stock: During 1995, the MPSC issued an order authorizing Consumers to issue and sell up to $300 million of intermediate and/or long-term debt and $100 million of preferred stock or subordinate debentures. In January 1996, 4 million shares of 8.36 percent Trust Originated Preferred Securities were issued and sold through a business trust wholly owned by Consumers. The trust was formed for the sole purpose of issuing preferred securities and the only asset of the trust is $103 million of 8.36 percent unsecured subordinated deferrable interest notes issued by Consumers. The obligations of Consumers with respect to the preferred securities under the notes that mature in 2015, the indenture under which the notes will be issued, Consumers' guarantee of the preferred securities and the Declaration of Trust, taken together, constitute a full and unconditional guarantee by Consumers of the trust's obligations under the Trust Originated Preferred Securities. Net proceeds from the sale totaled $96 million.
Other: Under the provisions of its Articles at December 31, 1995, Consumers had $197 million of unrestricted retained earnings available to pay common dividends.
CMS NOMECO
In February 1995, CMS Energy acquired Walter, a Houston-based independent oil company, for approximately $49 million, consisting of approximately $27 million of CMS Energy Common Stock and $22 million in cash and assumed debt. Walter was merged with a wholly owned subsidiary of CMS NOMECO.
In August 1995, CMS Energy acquired 100 percent of the common stock of Terra, a gas exploration company, located in Traverse City, Michigan for approximately $63 million. Terra has become a wholly owned subsidiary of CMS NOMECO.
In October 1995, CMS NOMECO filed a registration statement with the SEC for an initial public offering of not more than 20 percent of CMS NOMECO common stock. CMS Energy will continue to evaluate market conditions for a possible future offering of CMS NOMECO common stock.
9: Earnings Per Share and Dividends
Earnings per share attributable to Common Stock, for the year ended December 31, 1995 reflect the performance of the Consumers Gas Group since initial issuance of Class G Common Stock during the third quarter of 1995. The Class G Common Stock participates in earnings and dividends from the issue date. The allocation of earnings (loss) attributable to each class of common stock and the related amounts per share are computed by considering the weighted average number of shares outstanding.
Earnings (loss) attributable to outstanding Class G Common Stock are equal to Consumers Gas Group net income (loss) multiplied by a fraction, the numerator is the weighted average number of Outstanding Shares during the period and the denominator represents the weighted average number of Outstanding Shares and Retained Interest Shares during the period. The earnings attributable to Class G Common Stock on a per share basis, for the year ended December 31, 1995, are based on 23.45 percent of the income of the Consumers Gas Group since the initial issuance.
Earnings per share for Class G Common Stock are omitted from the statements of income for the years ended December 31, 1994 and 1993, since the Class G Common Stock was not part of the equity structure of CMS Energy. For purpose of analysis, following are pro forma data for the years ended December 31, 1995 and 1994 which give effect to the issuance and sale of 7.52 million shares of Class G Common Stock (representing 23.50 percent of the equity attributable to the Consumers Gas Group) on January 1, 1994.
In Millions, Except Per Share Amounts Pro Forma Pro Forma Years Ended December 31, 1995 1994 - ------------------------ ----- -----
Net Income $ 204 $ 179
Net Income attributable to CMS Energy Common Stock $ 189 $ 167
Net Income attributable to outstanding Class G Common Stock $ 15 $ 12
Average shares outstanding: CMS Energy Common Stock 88.810 85.888 Class G Common Stock 7.536 7.520
Earnings per share attributable to CMS Energy Common Stock $2.14 $1.94
Earnings per share attributable to outstanding Class G Common Stock $1.93 $1.66
Holders of Class G Common Stock have no direct rights in the equity or assets of the Consumers Gas Group, but rather have rights in the equity and assets of CMS Energy as a whole. In the sole discretion of the Board of Directors, dividends may be paid exclusively to the holders of Class G Common Stock, exclusively to the holders of CMS Energy Common Stock, or to the holders of both classes in equal or unequal amounts. The Board of Directors has stated its intention to declare and pay dividends on the CMS Energy Common Stock based primarily on the earnings and financial condition of CMS Energy. Dividends on the Class G Common Stock are paid at the discretion of the Board of Directors based primarily upon the earnings and financial condition of the Consumers Gas Group, and to a lesser extent, CMS Energy as a whole. It is the Board of Directors' current intention that the declaration or payment of dividends with respect to the Class G Common Stock will not be reduced, suspended or eliminated as a result of factors arising out of or relating to the electric utility business or the international businesses of CMS Energy unless such factors also require, in the Board of Directors' sole discretion, the omission of the declaration or reduction in payment of dividends on both the CMS Energy Common Stock and the Class G Common Stock.
The Board of Directors declared a dividend on CMS Energy Common Stock of $.21 per share for the first and second quarters and $.24 per share for the third and fourth quarters of 1995. A dividend on Class G Common Stock of $.28 per share was declared by the Board of Directors for the third and fourth quarters of 1995.
10: Financial Instruments
The carrying amounts of cash, short-term investments and current liabilities approximate their fair values due to their short-term nature. The estimated fair values of long-term investments are based on quoted market prices or, in the absence of specific market prices, on quoted market prices of similar investments or other valuation techniques. The carrying amounts of all long-term investments in financial instruments approximate fair value.
The carrying amount of long-term debt was $2.9 billion and $2.7 billion at December 31, 1995 and 1994, respectively, and the fair value was $3.0 billion and $2.6 billion on those dates. Although the current fair value of the long-term debt may differ from the current carrying amount, settlement of the reported debt is generally not expected until maturity.
The fair values of CMS Energy's off-balance-sheet financial instruments are based on the amounts estimated to terminate or settle the instruments. At December 31, 1995, the fair value of CMS Energy's interest rate swap agreements was $16 million, representing the amount that CMS Energy would pay to terminate the agreements. At December 31, 1994, CMS Energy would have received $5 million to terminate the agreements. Guarantees and letters of credit were $148 million and $123 million at December 31, 1995 and 1994, respectively.
In 1994, CMS Energy adopted SFAS 115, Accounting for Certain Investments in Debt and Equity Securities, which did not materially impact CMS Energy's financial position or results of operations.
11: Executive Incentive Compensation
Under CMS Energy's Performance Incentive Stock Plan, restricted shares of common stock of CMS Energy, stock options and stock appreciation rights may be granted to key employees based on their contributions to the successful management of CMS Energy and its subsidiaries. During 1995, shareholders approved amendments to the CMS Energy Performance Incentive Stock Plan. The amendments authorized awards under the plan consisting of any class of common stock of CMS Energy and established performance based business criteria for certain plan awards. The amendments also increased the number of shares reserved for award to not more than 3 percent of each class of CMS Energy common stock outstanding on January 1 each year, less the number of shares of restricted common stock awarded and of common stock subject to options granted under the plan during the immediately preceding four calendar years. Any forfeitures are subject to award under the plan. At December 31, 1995, awards of up to 1,174,388 shares of CMS Energy Common Stock and 211,634 shares of Class G Common Stock may be issued.
Restricted shares of common stock are outstanding shares with full voting and dividend rights. Shares of restricted common stock cannot be distributed until they are vested and the performance objectives are met. Further, the restricted stock is subject to forfeiture if employment terminates before vesting. If key employees exceed performance objectives, the plan will allow additional awards. Restricted shares vest fully if control of CMS Energy changes, as defined by the plan. At December 31, 1995, 475,447 shares of the 517,447 restricted shares outstanding are subject to performance objectives.
Consumers' Executive Stock Option and Stock Appreciation Rights Plan, an earlier plan approved by shareholders, expired in September 1995.
Under both plans, for stock options and stock appreciation rights, the exercise price on each grant date equaled the closing market price on the grant date. Options are exercisable upon grant and expire up to 10 years and one month from date of grant. The status of the restricted stock granted under the Performance Incentive Stock Plan and options granted under both plans follows.
Restricted Stock Options ------------ ---------------- Number Number Price CMS Energy Common Stock of Shares of Shares per Share - ----------------------- ---------- ---------- --------- Outstanding at January 1, 1993 323,266 1,435,091 $7.13 - $34.25 Granted 132,000 249,000 $25.13 - $26.25 Exercised or Issued (54,938) (152,125) $ 7.13 - $21.13 Canceled (84,141) (33,000) $20.50 - $33.88 ------- ------- --------------
Outstanding at December 31, 1993 316,187 1,498,966 $ 7.13 - $34.25 Granted 133,500 273,000 $21.25 - $22.38 Exercised or Issued (39,361) (158,300) $7.13 - $22.00 Canceled (79,970) (123,000) $26.25 - $33.88 ------- ------- --------------
Outstanding at December 31, 1994 330,356 1,490,666 $ 7.13 - $34.25 Granted 253,337 304,000 $23.25 - $34.25 Exercised or Issued (43,939) (147,666) $7.13 - $22.00 Canceled (22,307) (55,000) $20.50 - $34.25 ------- ------- --------------
Outstanding at December 31, 1995 517,447 1,592,000 $13.00 - $34.25 ======= ========== ============== During 1995, 6,924 restricted shares and 10,000 options of Class G Common Stock were granted at a price of $17.88.
12: Retirement Benefits
Postretirement Benefit Plans Other Than Pensions: CMS Energy and its subsidiaries adopted SFAS 106, Employers' Accounting for Postretirement Benefits Other than Pensions, effective as of the beginning of 1992 and Consumers recorded a liability of $466 million for the accumulated transition obligation and a corresponding regulatory asset for anticipated recovery in utility rates (see Note 19). CMS Energy's international subsidiaries expensed their accumulated transition obligation liability. The amount of such transition obligation is not material to the presentation of the consolidated financial statements or significant to CMS Energy's total transition obligation. Both the MPSC and FERC have generally allowed recovery of SFAS 106 costs. In May 1994, the MPSC authorized recovery of the electric utility portion of these costs over 18 years. During 1995, the FERC granted Consumers a waiver of a three-year filing requirement for cost recovery with respect to its wholesale electric business, which at December 31, 1995, had recorded a regulatory asset and liability of $7 million. In early 1996, the MPSC approved recovery of the gas utility portion of these costs over 16 years. CMS Energy funds the benefits using external Voluntary Employee Beneficiary Associations, a legal entity, established under guidelines of the Internal Revenue Code, through which the company can provide certain benefits for its employees or retirees. Funding of the health care benefits coincides with Consumers' recovery in rates. A portion of the life insurance benefits have previously been funded.
Retiree health care costs at December 31, 1995, are based on the assumption that costs would increase 9.5 percent in 1996, then decrease gradually to 6 percent in 2004 and thereafter. The health care cost trend rate assumption significantly affects the amounts reported. For example, a 1 percentage point increase in each year's estimated health care cost assumption would increase the accumulated postretirement benefit obligation as of December 31, 1995 by $80 million and the aggregate of the service and interest cost components of net periodic postretirement benefit costs for 1995 by $9 million.
Years Ended December 31 1995 1994 1993 - ----------------------- ----- ----- -----
Weighted average discount rate 7.50% 8.00% 7.25% Expected long-term rate of return on plan assets 7.00% 7.00% 8.50%
Net postretirement benefit costs for the health care benefits and life insurance benefits consisted of: In Millions Years Ended December 31 1995 1994 1993 - ----------------------- ---- ---- ---- Service cost $ 11 $ 13 $ 13 Interest cost 40 41 38 Actual return on assets (4) - - Net amortization and deferral 1 - - ---- ---- ----
Net postretirement benefit costs $ 48 $ 54 $ 51 ==== ==== ====
The funded status of the postretirement benefit plans is reconciled with the liability recorded at December 31 as follows:
In Millions 1995 1994 ---- ---- Actuarial present value of estimated benefits Retirees $ 331 $ 338 Eligible for retirement 46 44 Active (upon retirement) 200 170 ------ ------ Accumulated postretirement benefit obligation 577 552 Plan assets (primarily stocks, bonds and money market investments) at fair value 78 36 ------ ------ Accumulated postretirement benefit obligation in excess of plan assets (499) (516) Unrecognized net loss from experience different than assumed 1 4 ------ ------ Recorded liability $ (498) $ (512) ====== ======
CMS Energy's postretirement health care plan is partially funded; the accumulated postretirement benefit obligation for that plan is $562 million and $536 million at December 31, 1995 and 1994, respectively.
SERP: Certain management employees qualify to participate in the SERP. SERP benefits, which are based on an employee's years of service and earnings as defined in the SERP, are paid from a trust established and funded in 1988. Because the SERP is not a qualified plan under the Internal Revenue Code, earnings of the trust are taxable and trust assets are included in consolidated assets. At December 31, 1995 and 1994, trust assets at cost (which approximates market) were $28 million and $19 million, respectively, and were classified as other non-current assets.
Defined Benefit Pension Plan: A trusteed, non-contributory, defined benefit Pension Plan covers substantially all employees. The benefits are based on an employee's years of accredited service and earnings, as defined in the plan, during an employee's five highest years of earnings. Because the plan was fully funded, no contributions were made in 1993 and 1994. A contribution of $9 million was made in 1995.
Years Ended December 31 1995 1994 1993 - ----------------------- ----- ----- ----- Discount rate 7.50% 8.00% 7.25% Rate of compensation increase 4.50% 4.50% 4.50% Expected long-term rate of return on assets 9.25% 9.25% 8.75%
Net Pension Plan and SERP costs consisted of:
In Millions Years Ended December 31 1995 1994 1993 - ----------------------- ----- ----- -----
Service cost $ 23 $ 24 $ 19 Interest cost 56 51 50 Actual return on plan assets (168) 21 (92) Net amortization and deferral 103 (85) 34 ------ ------ ------ Net periodic pension cost $ 14 $ 11 $ 11 ====== ====== ======
The funded status of the Pension Plan and SERP reconciled to the pension liability recorded at December 31 was:
In Millions Pension Plan SERP 1995 1994 1995 1994 - --------------------------------------------------------------------------- Actuarial present value of estimated benefits Vested $496 $421 $ 20 $ 17 Non-vested 74 61 1 - ---- ---- ---- ---- Accumulated benefit obligation 570 482 21 17 Provision for future pay increases 183 154 13 11 ---- ---- ---- ---- Projected benefit obligation 753 636 34 28 Plan assets (primarily stocks and bonds, including $104 in 1995 and $79 in 1994 in common stock of CMS Energy) at fair value 779 637 - - ---- ---- ---- ---- Projected benefit obligation less than (in excess of) plan assets 26 1 (34) (28) Unrecognized net (gain) loss from experience different than assumed (69) (35) 7 5 Unrecognized prior service cost 43 40 2 2 Unrecognized net transition (asset) obligation (32) (39) - 1 ----- ----- ----- ----- Recorded liability $(32) $(33) $(25) $(20) ===== ===== ===== =====
Beginning January 1, 1986, the amortization period for the Pension Plan's unrecognized net transition asset is 16 years and 11 years for the SERP's unrecognized net transition obligation. Prior service costs are amortized on a straight-line basis over the average remaining service period of active employees.
13: Leases
CMS Energy, Consumers, and Enterprises lease various assets, including vehicles, rail cars, aircraft, construction equipment, computer equipment, nuclear fuel and buildings. Consumers' nuclear fuel capital leasing arrangement is scheduled to expire in November 1997 and provides for additional one-year extensions upon mutual agreement by the parties. Upon termination of the lease, the lessor would be entitled to a cash payment equal to its remaining investment, which was $65 million as of December 31, 1995. Consumers is responsible for payment of taxes, maintenance, operating costs, and insurance.
Minimum rental commitments under CMS Energy's non-cancelable leases at December 31, 1995, were:
In Millions Capital Operating Leases Leases
1996 $ 55 $ 7 1997 56 7 1998 17 6 1999 14 4 2000 13 3 2001 and thereafter 24 18 ----- ----- Total minimum lease payments 179 $45 Less imputed interest 27 ===== -----
Present value of net minimum lease payments 152 Less current portion 46 ----- Non-current portion $106 =====
Consumers recovers these charges from customers and accordingly charges payments for its capital and operating leases to operating expense. Operating lease charges, including charges to clearing and other accounts as of December 31, 1995, 1994 and 1993, were $11 million, $10 million and $10 million, respectively.
Capital lease expenses for the years ended December 31, 1995, 1994 and 1993 were $46 million, $43 million and $34 million, respectively. Included in these amounts for the years ended 1995, 1994 and 1993 are nuclear fuel lease expenses of $25 million, $21 million and $13 million, respectively.
14: Commitments, Contingencies and Other
Ludington Pumped Storage Plant: Early in 1996, the FERC and MPSC approved the recovery of costs associated with a settlement designed to resolve all legal issues related to fish mortality at Ludington. Consumers, Detroit Edison, the Attorney General, the DNR and certain other parties agreed to the terms of the settlement in 1994. Approval of the settlement requires Consumers to transfer certain land to the State of Michigan and the Great Lakes Fishery Trust, make certain recreational improvements, and incur future annual payments of approximately $1 million (over 24 years) to improve fishery resources. The settlement resolves two lawsuits filed by the Attorney General in 1986 and 1987 on behalf of the State of Michigan.
Environmental Matters: Consumers is a so-called "Potentially Responsible Party" at several sites being administered under Superfund. Superfund liability is joint and several and along with Consumers, there are numerous credit-worthy, potentially responsible parties with substantial assets cooperating with respect to the individual sites. Based upon past negotiations, Consumers estimates its total liability for the significant sites will average less than 4 percent of the estimated total site remediation costs, and such liability is expected to be less than $9 million. At December 31, 1995, Consumers has accrued a liability for its estimated losses.
The Michigan Natural Resources and Environmental Protection Act (formerly the Michigan Environmental Response Act) was substantially amended in June 1995. The Michigan law bears similarities to the federal Superfund law. The purpose of the 1995 amendments was generally to encourage development of industrial sites and to remove liability from some parties who were not responsible for activities causing contamination. Consumers expects that it will ultimately incur investigation and remedial action costs at a number of sites, including some of the 23 sites that formerly housed manufactured gas plant facilities, even those in which it has a partial or no current ownership interest.
Consumers has prepared plans for remedial investigation/feasibility studies for several of these sites. Three of the four plans submitted by Consumers have been approved by the DNR or the Michigan Department of Environmental Quality (a new department succeeding to some of the former jurisdiction of the DNR). The findings for the first remedial investigation indicate that the expenditures for remedial action at this site are likely to be minimal. However, Consumers does not believe that a single site is representative of all of the sites. Data available to Consumers and its continued internal review have resulted in an estimate for all costs related to investigation and remedial action for all 23 sites of between $48 million and $112 million. These estimates are based on undiscounted 1995 costs. At December 31, 1995, Consumers has accrued a liability of $48 million and has established a regulatory asset for approximately the same amount. Any significant change in assumptions such as remediation technique, nature and extent of contamination and legal and regulatory requirements, could impact the estimate of remedial action costs for the sites.
Consumers requested recovery and deferral of certain investigation and remedial action costs in its gas rate case filed in 1994. In early 1996, the MPSC issued an order in this case which authorized Consumers to defer costs and amortize them over 10 years. The amount of authorized annual recovery totaled $1 million. Consumers is continuing discussions with certain insurance companies regarding coverage for some or all of the costs which may be incurred for these sites.
The Clean Air Act contains provisions that limit emissions of sulfur dioxide and nitrogen oxides and require emissions monitoring. Consumers' coal-fueled electric generating units burn low-sulfur coal and are presently operating at or near the sulfur dioxide emission limits which will be effective in the year 2000. The Clean Air Act's provisions required Consumers to make capital expenditures totaling $25 million to install equipment at certain generating units. Consumers estimates capital expenditures for in-process and possible modifications at other coal-fired units to be an additional $50 million by the year 2000. Final acid rain program nitrogen oxide regulations specifying the limits applicable to the other coal-fired units are expected to be issued in 1996. Management believes that Consumers' annual operating costs will not be materially affected.
Capital Expenditures: CMS Energy estimates capital expenditures, including investments in unconsolidated subsidiaries and new lease commitments, of $856 million for 1996, $775 million for 1997 and $750 million for 1998.
Commitments for Coal and Gas Supplies: Consumers has entered into coal supply contracts with various suppliers for its coal-fired generating stations. These contracts have expiration dates that range from 1997 to 2004. Consumers contracts for approximately 60 - 70 percent of its annual coal requirements which in 1995 totaled $233 million (72 percent was under long-term contracts). Consumers supplements its long-term contracts with spot-market purchases to fulfill its coal needs.
Consumers has entered into gas supply contracts with various suppliers for its natural gas business. These contracts have expiration dates that range from 1996 to 2003. In 1995, Consumers' gas requirements totaled $694 million (80 percent was under long-term contracts). In the future, Consumers expects that approximately 35 percent of its annual gas requirements will be under long-term contracts. Consumers supplements its long-term contracts with spot-market purchases to fulfill its gas needs.
Other: As of December 31, 1995, CMS Energy and Enterprises have guaranteed up to $62 million in contingent obligations of unconsolidated affiliates of Enterprises' subsidiaries.
CMS NOMECO periodically enters into oil and gas price hedging arrangements to mitigate its exposure to price fluctuations on the sale of crude oil and natural gas. These arrangements limit potential gains/losses from any future decrease/increase in the spot prices. As of December 31, 1994, CMS NOMECO was party to gas price collar contracts on 7.3 bcf of gas for the delivery months of January through December 1995 at prices ranging from $2.05 to $2.35 per MMBtu. As of December 31, 1995, CMS NOMECO also has contracts on 7.4 bcf of gas for the delivery months of January through May 1996 at prices ranging from $1.89 to $2.18 per MMBtu. These hedging arrangements are accounted for as hedges; accordingly, any changes in market value and gains or losses from settlements are deferred and recognized at such time as the hedged transaction is completed. As of December 31, 1994 and December 31, 1995, the fair values of these hedge arrangements were not materially different than the book value.
CMS NOMECO also has one arrangement which is used to fix the prices that CMS NOMECO will pay to supply gas for the years 2001 - 2006 by purchasing the economic equivalent of 10,000 MMBtu per day at a fixed, escalated price starting at $2.82 per MMBtu in 2001. The settlement periods are each a one-year period ending December 31, 2001 through 2006 on 3.65 MMBtu. If the "floating price," essentially the then current Gulf Coast spot price, for a period is higher than the "fixed price," the seller pays CMS NOMECO the difference, and vice versa. If a party's exposure at any time exceeds $2 million, that party is required to obtain a letter of credit in favor of the other party for the excess over $2 million and up to $10 million. At December 31, 1995, a letter of credit was not required.
Consumers has experienced a number of lawsuits filed against it relating to so-called stray voltage. Claimants contend that stray voltage results when small electrical currents present in grounded electrical systems are diverted from their intended path. Consumers maintains a policy of investigating all customer calls regarding stray voltage and working with customers to address their concerns including, when necessary, modifying the grounding of the customer's service. At December 31, 1995, Consumers had 30 separate stray voltage lawsuits awaiting trial court action, down from 83 lawsuits at December 31, 1994.
In addition to the matters disclosed in these notes, Consumers and certain other subsidiaries of CMS Energy are parties to certain lawsuits and administrative proceedings before various courts and governmental agencies, arising from the ordinary course of business involving personal injury and property damage, contractual matters, environmental issues, federal and state taxes, rates, licensing and other matters.
Estimated losses for certain contingencies discussed in this note have been accrued. Resolution of these contingencies is not expected to have a material impact on CMS Energy's financial position or results of operations.
15: Nuclear Matters
In 1993, the NRC approved the design of the spent fuel dry storage casks now being used by Consumers at Palisades. In order to address concerns raised subsequent to the initial cask loading, Consumers and the NRC each analyzed the effects of seismic and other natural hazards on the support pad on which the casks are placed, and confirmed that the pad location is acceptable to support the casks. As of December 31, 1995, Consumers had loaded 13 dry storage casks with spent nuclear fuel at Palisades.
In 1996, Consumers plans to unload and replace one of the loaded casks. In a review of the cask manufacturer's quality assurance program, Consumers detected indications of minor flaws in welds in the steel liner of one of the loaded casks. Although the cask continues to safely store spent fuel and there is no requirement for its replacement, Consumers has nevertheless decided to remove the spent fuel and insert it in another cask. Consumers has examined radiographs for all of its casks and has found all other welds acceptable. Certain parties, including the Attorney General, have petitioned the NRC to suspend Consumers' general license to store spent fuel, claiming that Consumers' cask unloading procedure does not satisfy NRC regulations. The NRC staff is reviewing the petitions.
The Low-Level Radioactive Waste Policy Act encourages the respective states, individually or in cooperation with each other, to be responsible for the disposal of low-level radioactive waste. Currently, a low-level waste site does not exist in Michigan and Consumers has been storing low- level waste at its nuclear plant sites. Consumers began shipping its low- level waste to a site in South Carolina during 1995 and plans to have all its currently stored low-level waste removed from the plant sites by the end of 1996.
Consumers maintains insurance coverage against property damage, debris removal, personal injury liability and other risks that are present at its nuclear generating facilities. This insurance includes coverage for replacement power costs for the major portion of prolonged accidental outages for 12 months after a 21 week exclusion with reduced coverage to approximately 80 percent for two additional years. If certain loss events occur at its own or other nuclear plants similarly insured, Consumers could be required to pay maximum assessments of: $30 million in any one year to 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.
Under its NML and NEIL policies, Consumers may be entitled to cash distributions following the discontinued operation of its nuclear facilities. The amount of any distribution would be determined by NML and NEIL and would be based, in part, on their overall underwriting experience.
As an NRC licensee, Consumers is required to make certain calculations and report to the NRC about the continuing ability of the Palisades reactor vessel to withstand postulated "pressurized thermal shock" events during its remaining license life, in light of the embrittlement of reactor vessel materials over time due to operation in a radioactive environment. Analysis of recent data from testing of similar materials indicates that the Palisades reactor vessel can be safely operated through late 1999. In April 1995, Consumers received a Safety Evaluation Report from the NRC concurring with this evaluation and requesting submittal of an action plan to provide for operation of the plant beyond 1999. Consumers is developing plans to anneal the reactor vessel in 1998 at an estimated cost of $20 million to $30 million. This repair would allow for operation of the plant to the end of its license life in the year 2007. Consumers cannot predict whether the studies being conducted as part of the development plans will support a future decision to anneal.
16: Jointly Owned Utility Facilities
Consumers is responsible for providing its share of financing for the jointly owned facilities. The following table indicates the extent of Consumers' investment in jointly owned utility facilities:
In Millions December 31 1995 1994 - ----------- ----- ----- Net investment Ludington - 51% $116 $119 Campbell Unit 3 - 93.3% 332 337 Transmission lines - various 33 31
Accumulated depreciation Ludington $ 81 $ 76 Campbell Unit 3 238 224 Transmission lines 14 11
17: Supplemental Cash Flow Information
For purposes of the Statement of Cash Flows, all highly liquid investments with an original maturity of three months or less are considered cash equivalents. Other cash flow activities and non-cash investing and financing activities for the years ended December 31 were:
In Millions 1995 1994 1993 ----- ----- ----- Cash transactions Interest paid (net of amounts capitalized) $207 $162 $193 Income taxes paid (net of refunds) 34 36 32
Non-cash transactions Nuclear fuel placed under capital lease $ 26 $ 21 $ 28 Other assets placed under capital leases 5 15 30 Common Stock issued to acquire companies 90 - - Assumption of debt 20 - - Capital leases refinanced 21 - 42
Changes in other assets and liabilities as shown on the Consolidated Statements of Cash Flows at December 31 are described below:
In Millions 1995 1994 1993 ----- ----- -----
Sale of receivables, net $ 20 $(10) $ 60 Accounts receivable (80) (15) 22 Accrued revenue (24) 20 (48) Inventories 43 (4) (32) Accounts payable 112 26 (31) Accrued refunds (3) (3) (49) Other current assets and liabilities, net 30 4 (4) Non-current deferred amounts, net (9) (6) (6) ----- ----- ----- $ 89 $ 12 $(88) ===== ===== =====
18: Reportable Segments
CMS Energy operates principally in the following five business segments: electric utility, gas utility, oil and gas exploration and production, independent power production, and natural gas transmission, storage and marketing.
The Consolidated Statements of Income show operating revenue and pretax operating income by business segment. Other segment information follows:
In Millions Years Ended December 31 1995 1994 1993 - ----------------------- ----- ----- ----- Depreciation, depletion and amortization Electric utility $ 272 $ 257 $ 241 Gas utility 83 76 73 Oil and gas exploration and production 52 41 45 Independent power production 4 2 2 Natural gas transmission, storage and marketing 3 2 1 Other 2 1 2 ------- ------- ------- $ 416 $ 379 $ 364 ======= ======= =======
Identifiable assets Electric utility (a) $4,522 $4,364 $4,100 Gas utility (a) 1,690 1,673 1,628 Oil and gas exploration and production 660 469 398 Independent power production 840 536 488 Natural gas transmission, storage and marketing 303 109 75 Other 128 227 275 ------- ------- ------- $8,143 $7,378 $6,964 ======= ======= =======
Capital expenditures (b) Electric utility $ 328 $ 358 $ 403 Gas utility 126 134 158 Oil and gas exploration and production (c) 168 115 83 Independent power production 239 29 110 Natural gas transmission, storage and marketing 178 31 14 Other 14 5 - ------ ------ ------ $1,053 $ 672 $ 768 ====== ====== ======
(a) Amounts include an attributed portion of Consumers' other common assets to both the electric and gas utility businesses.
(b) Includes capital leases for nuclear fuel and other assets and electric DSM costs (see Statement of Cash Flows). Amounts also include an attributed portion of Consumers' capital expenditures for plant and equipment common to both the electric and gas utility businesses.
(c) Includes common stock issued for acquisitions.
19: Effects of the Ratemaking Process
The following regulatory assets (liabilities) which include both current and non-current amounts, are reflected in the Consolidated Balance Sheets. These assets represent probable future revenue to Consumers associated with certain incurred costs as these costs are recovered through the ratemaking process.
In Millions December 31 1995 1994 - ------------ ----- ----- Postretirement benefits (Note 12) $ 487 $ 503 Income taxes (Note 5) 176 189 Abandoned Midland project 131 147 DSM - deferred costs (Note 4) 68 71 Trunkline settlement 55 85 Manufactured gas plant sites (Note 14) 47 47 Power purchase contracts (Note 3) 44 30 Uranium enrichment facility 25 25 Other 22 31 ------ ------
Total regulatory assets $1,055 $1,128 ====== ======
Income taxes (Note 5) $ (220) $ (205) DSM - deferred revenue (25) (21) Other (1) - ------ ------
Total regulatory liabilities $ (246) $ (226) ====== ======
At December 31, 1995, approximately $778 million of Consumers' regulatory assets are being recovered through rates being charged to customers over periods of up to 17 years. Consumers anticipates MPSC approval for recovery of the remaining amounts.
20: Summarized Financial Information of Significant Related Energy Supplier
Under the PPA with the MCV Partnership discussed in Note 3, Consumers' 1995 obligation to purchase electric capacity from the MCV Partnership was approximately 16 percent of Consumers' owned and contracted capacity. Summarized financial information of the MCV Partnership follows:
Statements of Income In Millions Years Ended December 31 1995 1994 1993 - ----------------------- ----- ----- -----
Operating revenue (a) $ 618 $ 579 $ 548 Operating expenses 386 378 362 ------ ------ ------
Operating income 232 201 186 Other expense, net 171 183 189 ------ ------ ------ Net income (loss) $ 61 $ 18 $ (3) ====== ====== ====== Balance Sheets In Millions December 31 1995 1994 - ------------ ---- ----
Assets Current assets (b) $ 263 $ 206 Property, plant and equipment, net 1,948 2,012 Other assets 156 154 ------ ------ $2,367 $2,372 ====== ======
Liabilities and Partners' Equity Current liabilities $ 225 $ 218 Long-term debt and other non-current liabilities (c) 2,008 2,081 Partners' equity (d) 134 73 ------ ------ $2,367 $2,372 ====== ======
(a) Revenue from Consumers totaled $571 million, $534 million and $505 million for 1995, 1994 and 1993, respectively.
(b) At December 31, 1995 and 1994, $48 million was receivable from Consumers.
(c) FMLP is the sole beneficiary of an owner trust that is the lessor in a long-term direct finance lease with the lessee, MCV Partnership. CMS Holdings holds a 46.4 percent ownership interest in FMLP. At December 31, 1995 and 1994, lease obligations of $1.6 billion and $1.7 billion, respectively, were owed to the owner trust. CMS Holdings' share of the interest and principal portion for the 1995 lease payments was $66 million and $23 million, respectively, and for the 1994 lease payments was $68 million and $14 million, respectively. The lease payments service $1.1 billion and $1.2 billion in non-recourse debt outstanding as of December 31, 1995 and 1994, respectively, of the owner-trust. FMLP's debt is secured by the MCV Partnership's lease obligations, assets, and operating revenues. For 1995 and 1994, the owner-trust made debt payments (including interest) of $192 million and $175 million, respectively.
(d) CMS Midland's recorded investment in the MCV Partnership includes capitalized interest, which is being amortized to expense over the life of its investment in the MCV Partnership.
ARTHUR ANDERSEN LLP
Report of Independent Public Accountants
To CMS Energy Corporation:
We have audited the accompanying consolidated balance sheets and consolidated statements of preferred stock of CMS ENERGY CORPORATION (a Michigan corporation) and subsidiaries as of December 31, 1995 and 1994, and the related consolidated statements of income, common stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1995. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of CMS Energy Corporation and subsidiaries as of December 31, 1995 and 1994, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1995 in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Detroit, Michigan, January 26, 1996.
Consumers Power Company
1995 Financial Statements
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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 segment of which is the automotive industry.
Consolidated Earnings
Consolidated net income after dividends on preferred stock totaled $227 million in 1995, compared to net income of $202 million and $187 million in 1994 and 1993, respectively. The improved net income for 1995 reflects increased electric sales and gas deliveries, increased electric revenue as a result of the May 1994 rate increase, reversal of losses previously recorded for gas contingencies (see Note 4), and improved operating results from Consumers' interest in the MCV Facility. For further information, see the Electric and Gas Utility Results of Operations sections. The increased 1994 net income over the 1993 period reflects a significant increase in electric sales, the impact of the 1994 electric rate increase, recognition of incentive revenue related to DSM programs, and the favorable resolution of a previously recorded gas cost contingency.
Cash Position, Financing and Investing
Cash from operations is derived from the sale and transportation of natural gas and the generation, transmission, and sale of electricity. Cash from operations during 1995 increased $44 million from the 1994 level primarily from higher sales of electricity and gas, lower gas inventories and timing of cash payments related to its operations partially offset by higher power purchases from the MCV Partnership. Consumers primarily uses this operating cash to maintain its electric and gas systems and retire portions of its long-term debt and pay dividends.
Financing Activities: Net cash used in financing activities in 1995 increased $76 million from 1994, reflecting no new stock or debt issuances during 1995. This change also reflects a $100 million equity investment from CMS Energy during 1994. During 1995, Consumers declared $70 million in common stock dividends. This represents a decrease from 1994 as Consumers temporarily suspended its common dividends in lieu of CMS Energy making a direct equity infusion of cash into Consumers. In 1996, Consumers plans to resume common stock dividend payments to CMS Energy. Dividends on preferred stock increased to $28 million in 1995, reflecting the issuance of additional preferred stock in 1994.
Investing Activities: Net cash used in investing activities in 1995 decreased $9 million from 1994, primarily reflecting decreased capital expenditures. Capital expenditures, including assets placed under capital lease (see Note 15) and deferred DSM costs, totaled $454 million in 1995 as compared to $492 million in 1994 and $561 million in 1993. These amounts primarily represent capital investments in Consumers' electric and gas utility business units.
Financing and Investing Outlook: Consumers estimates that capital expenditures, including 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 1996 1997 1998 ----- ----- ----- Consumers Construction $389 $368 $340 Nuclear fuel lease 34 5 41 Capital leases other than nuclear fuel 10 19 16 Michigan Gas Storage 2 3 3 ----- ----- ----- $435 $395 $400 ===== ===== =====
Consumers is required to redeem or retire $726 million of long-term debt over the three-year period ending December 1998. Cash provided by operating activities is expected to satisfy a substantial portion of these capital expenditures and debt retirements. Additionally, Consumers will continue to evaluate the capital markets as a source of financing its investing activities and required debt retirements.
Consumers has several available, unsecured, committed lines of credit totaling $145 million and a $425 million working capital facility. Consumers has FERC authorization to issue or guarantee up to $900 million in short-term debt through December 31, 1996. Consumers uses short-term borrowings to finance working capital and gas in storage, and to pay for capital expenditures between long-term financings. Consumers has an agreement permitting the sales of certain accounts receivable for up to $500 million. At December 31, 1995 and 1994, receivables sold totaled $295 million and $275 million, respectively.
At December 31, 1995, Consumers' capital structure consisted of approximately 36 percent common equity, 8 percent preferred stock, and 56 percent long- and short-term debt (including capital leases and notes payable). Consumers is continuing its efforts to improve the percentages of common and preferred equity on its balance sheet. In January 1996, Consumers issued and sold, through a business trust, 4 million shares of Trust Originated Preferred Securities with net proceeds totaling $96 million (see Note 7). Consumers also expects to improve the equity portion of its capital structure through accumulated earnings and controlled capital expenditures.
Electric Utility Results of Operations
Electric Pretax Operating Income: During 1995, electric pretax operating income increased $30 million compared to 1994, reflecting significantly higher electric kWh sales (see Electric Sales section) and the impact of the May 1994 electric rate increase, which included the recovery of higher postretirement benefit costs. The increase was partially offset by higher depreciation, general taxes, and electric operation expenses during 1995, which included $9 million of additional postretirement benefit costs, along with the impact of $11 million of DSM incentive revenue during 1994.
The 1994 increase of $46 million over the 1993 level reflects increased electric sales, partially offset by higher depreciation and electric operation expenses. Other factors contributing to the 1994 increase were the impact of the May 1994 electric rate increase and the recognition of 1994 DSM incentive revenue.
In Millions Impact on Pretax Operating Income Change Compared to Prior Year
1995/1994 1994/1993 --------- --------- Sales $59 $ 33 Rate increase and other regulatory issues 9 38 O&M, general taxes and depreciation (38) (25) ----- ----- Total change $30 $46 ===== =====
Electric Sales: Total electric sales in 1995 were a record 35.5 billion kWh, a 3.0 percent increase from the 1994 level as a result of economic growth and warmer summer temperatures. The increase in total electric sales included a 4.2 percent increase in sales to Consumers' ultimate customers, with fairly consistent increases in the residential, commercial, and industrial sectors. The increase was partially offset by a decrease in certain sales to other utilities.
Total electric sales in 1994 were 34.5 billion kWh, a 5.2 percent increase from the 1993 level, which included a 4.2 percent increase in system sales to Consumers' ultimate customers.
Power Costs: Power costs for 1995 totaled $970 million, a $20 million increase from the corresponding 1994 period, primarily reflecting increased purchased power costs due to higher sales levels. Power costs for 1994 totaled $950 million, a $42 million increase as compared to 1993 which reflects increased kWh production at Consumers' generating plants and greater power purchases from outside sources to meet increased sales demand.
Operating Expenses: Electric operation and maintenance expense for 1995 compared to 1994 increased $13 million, which included $9 million of additional postretirement benefit costs and increased expenditures to improve electric system reliability. Electric depreciation for 1995 compared to 1994 increased $15 million, reflecting additional property and equipment. Electric general taxes increased $11 million in 1995 compared to 1994, reflecting millage rate increases and additional capital investments in property and equipment.
Electric Utility Issues
Power Purchases from the MCV Partnership: Consumers' annual obligation to purchase contract capacity from the MCV Partnership increased 108 MW in 1995 to 1,240 MW. In 1993, the MPSC issued the Settlement Order that has allowed Consumers to recover substantially all payments for 915 MW of contract capacity purchased from the MCV Partnership. ABATE and the Attorney General have appealed the Settlement Order to the Court of Appeals. The market for the remaining 325 MW of contract capacity was assessed at the end of 1992. This assessment, along with the Settlement Order, resulted in Consumers recognizing a loss for the present value of the estimated future underrecoveries of power purchases from the MCV Partnership. Additional losses may occur if actual future experience materially differs from the 1992 estimates. As anticipated in 1992, Consumers continues to experience cash underrecoveries associated with the Settlement Order. These after-tax cash underrecoveries totaled $90 million, $61 million and $59 million in 1995, 1994 and 1993, respectively. Estimated future after-tax cash underrecoveries, and possible losses for 1996 and the next four years are shown in the table below.
After-tax, In Millions 1996 1997 1998 1999 2000 ---- ---- ---- ---- ---- Estimated cash underrecoveries $56 $55 $ 8 $ 9 $ 7
Possible additional underrecoveries and losses (a) 20 22 72 72 74
(a) If unable to sell any capacity above the MPSC's 1993 authorized level.
In September 1995, Consumers and the MPSC staff reached a proposed settlement agreement that would potentially resolve several issues in three pending proceedings, including cost recovery for the 325 MW of MCV Facility capacity above the MPSC's currently authorized level. For further information regarding the settlement, see Note 4.
In 1994 and 1995, Consumers terminated power purchase agreements with the developers of a proposed 65 MW coal-fired cogeneration facility and a proposed 44 MW wood and chipped-tire plant. To replace this capacity, 109 MW of less expensive contract capacity from the MCV Facility which Consumers is currently not authorized to recover from retail customers would be used. For further information, see Note 3.
Electric Rate Proceedings: Consumers filed a request with the MPSC in late 1994 to increase its retail electric rates. In early 1996, the MPSC granted Consumers authority to increase its annual electric retail rates by $46 million. This partial final order did not address cost recovery related to the 325 MW of MCV Facility contract capacity above 915 MW. The MPSC stated that this matter would be addressed in connection with its consideration of the proposed settlement agreement discussed below.
In September 1995, Consumers and the MPSC staff reached a proposed settlement agreement that, if approved by the MPSC, would resolve several outstanding regulatory issues. One of these issues, Consumers' electric rate case, was addressed, in part, by the order discussed above. If fully adopted, the settlement agreement would resolve Consumers' depreciation and special competitive service cases (discussed below) and cost recovery of 325 MW of uncommitted MCV Facility capacity. Consumers expects a final order in the spring of 1996. For more information regarding the electric rate order and the settlement, see Note 4.
In 1995, Consumers filed a request with the MPSC, seeking approval to increase its traditional depreciation expense by $21 million and reallocate certain portions of its utility plant from production to transmission, resulting in a $28 million decrease. If both aspects of the request are approved, the net result would be a decrease in electric depreciation expense of $7 million for ratemaking purposes. The MPSC staff's filing in this case did not support Consumers' requested increase in depreciation expense, but instead proposed a decrease of $24 million. The MPSC staff also did not support the reallocation of plant investment as proposed by Consumers but suggested several alternatives which could partially address this issue. In September 1995, the ALJ issued a proposal for decision that essentially supported the MPSC staff's position regarding depreciation expense and recommended that the MPSC reject both Consumers' and the MPSC staff's positions regarding the reallocation of Consumers' depreciation reserve and plant investment. This case is currently part of the proposed settlement discussed above.
Special Rates: Consumers currently has a request before the MPSC that, if approved, would allow Consumers a certain level of rate-pricing flexibility to respond to customers' alternative energy options. This request has been consolidated into the settlement proceeding discussed above.
Electric Conservation Efforts: In June 1995, the MPSC issued an order that authorized Consumers to discontinue future DSM program expenditures and cease all new programs. For further information, see Note 4.
Electric Capital Expenditures: Consumers estimates capital expenditures, including new lease commitments, related to its electric utility operations of $311 million for 1996, $285 million for 1997 and $295 million for 1998. 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.
The Michigan Natural Resources and Environmental Protection Act (formerly the Michigan Environmental Response Act) was substantially amended in June 1995. The Michigan law bears similarities to the federal Superfund law. The purpose of the 1995 amendments was generally to encourage development of industrial sites and to remove liability from some parties who were not responsible for activities causing contamination. Consumers expects that it will ultimately incur costs at a number of sites. Consumers believes costs incurred for both investigation and required remedial actions are properly recoverable in rates.
Consumers is a so-called "potentially responsible party" at several sites being administered under Superfund. Along with Consumers, there are numerous credit-worthy, potentially responsible parties with substantial assets cooperating with respect to the individual sites. Based on current information, management believes it is unlikely that Consumers' liability at any of the known Superfund sites, individually or in total, will have a material adverse effect on its financial position, liquidity or results of operations. For further information regarding electric environmental matters, see Note 12.
Electric Outlook
Competition: Consumers currently expects approximately 2 percent average annual growth in electric system sales over the next five years.
Consumers continues to be affected by the developing competitive market for electricity. The primary sources of competition include: the installation of cogeneration or other self-generation facilities by Consumers' larger industrial customers; the formation of municipal utilities which would displace retail service by Consumers to an entire community; and competition from neighboring utilities which offer flexible rate arrangements designed to encourage movement to their respective service areas. Consumers continues to work toward retaining its current retail service customers.
In an effort to meet the challenge of competition, Consumers has signed long-term sales contracts with some of its largest industrial customers, including its largest customer, General Motors Corporation. Under the General Motors contract, Consumers will serve certain facilities at least five years and other facilities at least 10 years in exchange for competitively discounted electric rates. Certain facilities will have the option of taking retail wheeling service (if available) after the first three years of the contract. The MPSC approved this contract in 1995.
As part of an order issued in early 1996, the MPSC significantly reduced the rate subsidization of residential customers by industrial and large commercial customers. In addition to offering electric rates that are competitive with other energy providers, Consumers is pursuing other strategies to retain its "at-risk" customers. These strategies include: minimizing outages for each customer, promptly responding to customer inquiries, and providing consulting services to help customers use energy efficiently.
In 1994, the MPSC approved a framework for a five-year experimental retail wheeling program for Consumers and Detroit Edison. Under the experiment, up to 60 MW of Consumers' additional load requirements could be met by retail wheeling. The program becomes effective upon Consumers' next solicitation for capacity. In June 1995, the MPSC issued an order that set rates and charges for retail delivery service under the experiment. Consumers, ABATE and The Dow Chemical Company filed claims of appeal of the MPSC's retail wheeling orders. The Court of Appeals subsequently consolidated these appeals with those previously filed by Detroit Edison and the Attorney General. Consumers does not expect this short-term experiment to have a material impact on its financial position, liquidity or results of operations.
In March 1995, the FERC issued a NOPR and a supplemental NOPR that propose changes in the wholesale electric industry. Among the most significant proposals is a requirement that utilities provide open access to the domestic interstate transmission grid. The FERC's final rules are expected to be announced in the spring of 1996. Consumers is unable to predict the terms of these rules. However, management believes that Consumers is well-positioned to conform to open access as it has been voluntarily providing this transmission service since 1992.
The Governor of the State of Michigan has proposed that the MPSC review the existing statutory and regulatory framework governing Michigan utilities in light of increasing competition in the utility industry and recommend appropriate revisions. At this time, no proceedings have been initiated at the MPSC on this matter and no new legislation has been introduced.
Changes in the competitive environment facing regulated utilities may eventually lead to the discontinuance of SFAS 71, which allows the deferral of certain costs and the recording of regulatory assets. Management has evaluated Consumers' current regulatory position and believes it continues to support the recognition of Consumers' $779 million of electric-related regulatory assets. If changes in the industry were to lead to Consumers discontinuing the application of SFAS 71, for all or part of its business, Consumers may be required to write-off the portion of any regulatory asset for which no regulatory assurance of recovery continued to exist. Consumers does not believe that there is any current evidence that supports the write-off of any of its electric- related regulatory assets. For further information regarding SFAS 71 and Consumers' regulatory assets, see Notes 2 and 18.
Nuclear Matters: In July 1995, the NRC issued its Systematic Assessment of Licensee Performance report for Palisades. The report recognized improved performance at the plant, specifically in the areas of Engineering and Plant Operations. In the report, the NRC noted areas which continue to require management's attention, but also recognized the development and implementation of plans for corrective action designed to address previously identified weak areas. The report noted that performance in the areas of Maintenance and Plant Support was good and remained unchanged.
Consumers' on-site storage pool for spent nuclear fuel at Palisades is at capacity. Consequently, Consumers is using NRC-approved dry casks, which are steel and concrete vaults, for temporary on-site storage. In 1996, Consumers plans to unload and replace one of the casks where a minor flaw has been detected. For further information, see Note 13.
The Low-Level Radioactive Waste Policy Act encourages the respective states, individually or in cooperation with each other, to be responsible for the disposal of low-level radioactive waste. Currently, a low-level waste site does not exist in Michigan and Consumers has been storing low- level waste at its nuclear plant sites. Consumers began shipping its low- level waste to a site in South Carolina during 1995 and plans to have all its currently stored low-level waste removed from the plant sites by the end of 1996.
Consumers is required to make certain calculations and report to the NRC about the continuing ability of the Palisades reactor vessel to withstand postulated "pressurized thermal shock" events during its remaining license life. Analysis of recent data from testing of similar materials indicates that the Palisades reactor vessel can be safely operated through late 1999. Consumers is developing plans to anneal the reactor vessel in 1998 at an estimated cost of $20 million to $30 million. This repair would allow for operation of the plant to the end of its license life in the year 2007. Consumers cannot predict whether the studies being conducted as a part of the development plans will support a future decision to anneal.
At the SEC staff's request, the FASB is reviewing the accounting for closure and removal costs for long-lived assets, including decommissioning. The current electric utility industry accounting practices of recording the cost of removal as a component of depreciation could be changed. The FASB's tentative decision includes recognition of the cost of closure and removal obligation as a liability based on discounted future cash flows with the offset recorded as part of the cost of the plant asset.
Stray Voltage: Consumers has experienced a number of lawsuits relating to the effect of so-called stray voltage on certain livestock. At December 31, 1995, Consumers had 30 separate stray voltage lawsuits awaiting trial court action, down from 83 lawsuits at December 31, 1994. Consumers believes that the resolution of these lawsuits will not have a material impact on its financial position or results of operations.
Gas Utility Results of Operations
Gas Pretax Operating Income: For 1995, gas pretax operating income increased $16 million compared to 1994, reflecting higher gas deliveries (see Gas Deliveries section), and the reversal of losses previously recorded for gas contingencies (see Note 4). Partially offsetting this increase were higher depreciation and gas operation expenses. For 1994, gas pretax operating income decreased $11 million compared to 1993, reflecting slightly lower gas sales and higher depreciation and gas operation and maintenance expenses, partially offset by the favorable resolution of a previously recorded gas cost contingency.
In Millions Impact on Pretax Operating Income
Change Compared to Prior Year 1995/1994 1994/1993 --------- --------- Sales $12 $(3) Regulatory recovery of gas cost 19 10 O&M, general taxes and depreciation (15) (18) ----- ----- Total change $16 $(11) ===== =====
Gas Deliveries: Gas sales in 1995 totaled 254 bcf, a 5.2 percent increase from 1994 levels, and total system deliveries, excluding transport to the MCV Facility, increased 6.5 percent from 1994. On a weather-adjusted basis, total system deliveries increased 4.1 percent, reflecting significant growth. In 1994, total system deliveries, excluding transport to the MCV Facility, were 314 bcf, a slight decrease from 1993 deliveries.
Cost of Gas Sold: The cost of gas sold for 1995 increased $9 million from the 1994 level, as a result of increased deliveries. The increased costs reflect the reversal of a $23 million gas supplier loss contingency.
Operating Expenses: Gas operation and maintenance expense increased $12 million, reflecting an $8 million gas inventory loss. Gas depreciation for 1995 compared to 1994 increased $7 million, reflecting additional capital investment in property and equipment.
Gas Utility Issues
Gas Rates: In December 1994, Consumers filed a request with the MPSC to increase Consumers' annual gas rates. The requested increase totaling $7 million reflected increased expenditures, including those associated with postretirement benefits, and a 12.25 percent return on equity. The MPSC staff recommended a $13 million rate decrease. In November 1995, the ALJ issued a proposal for decision that essentially adopted the MPSC staff's position. In early 1996, the MPSC issued a final order in this case, decreasing Consumers' annual gas rates by $11.7 million. For further information regarding this case, see Note 4.
Consumers entered into a special natural gas transportation contract with one of its transportation customers in response to the customer's proposal to by-pass Consumers' system in favor of a competitive alternative. The contract provides for discounted gas transportation rates in an effort to induce the customer to remain on Consumers' system. In February 1995, the MPSC approved the contract but stated that the revenue shortfall created by the difference between the contract's discounted rate and the floor price of one of Consumers' MPSC authorized gas transportation rates must be borne by Consumers' shareholders. In March 1995, Consumers filed an appeal with the Court of Appeals claiming that the MPSC decision denies Consumers the opportunity to earn its authorized rate of return and is therefore unconstitutional.
GCR Matters: In October 1995, the MPSC issued an order regarding a $44 million (excluding any interest) gas supply contract pricing dispute between Consumers and certain intrastate producers. The order stated that Consumers was not obligated to seek prior approval of market-based pricing provisions that were implemented under the contracts in question. The producers subsequently filed a claim of appeal of the MPSC order with the Court of Appeals. Consumers believes the MPSC order supports its position that the producers' theories are without merit and intends to vigorously oppose any claims they may raise but cannot predict the outcome of this issue.
Gas Capital Expenditures: Consumers estimates capital expenditures, including new lease commitments, related to its gas utility operations of $124 million for 1996, $110 million for 1997 and $105 million for 1998. 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: Consumers expects that it will ultimately incur investigation and remedial action costs at a number of sites, including some that formerly housed manufactured gas plant facilities. Data available to Consumers and its continued internal review of these former manufactured gas plant sites have resulted in an estimate for all costs related to investigation and remedial action of between $48 million and $112 million. These estimates are based on undiscounted 1995 costs. At December 31, 1995, Consumers has accrued a liability for $48 million and has established a regulatory asset for approximately the same amount. Any significant change in assumptions such as remediation technique, nature and extent of contamination and regulatory requirements, could impact the estimate of remedial action costs for the sites.
Consumers requested recovery and deferral of certain investigation and remedial action costs in its gas rate case filed in December 1994. Consumers believes that remedial action costs are recoverable in rates and is continuing discussions with certain insurance companies regarding coverage for some or all of the costs which may be incurred for these sites. For further information, see Note 12.
Gas Outlook
Consumers currently anticipates gas deliveries to grow approximately 2 percent per year (excluding transportation to the MCV Facility and off- system deliveries) over the next five years, primarily due to a steadily growing customer base. Additionally, Consumers has several strategies which will support increased load requirements in the future. These strategies include increased efforts to promote natural gas to both current and potential customers that are using other fuels for space and water heating. The emerging use of natural gas vehicles also provides Consumers with sales growth opportunities. In addition, as air quality standards continue to become more stringent, management believes that greater opportunities exist for converting industrial boiler load and other processes to natural gas. Consumers also plans additional capital expenditures to construct new gas mains that are expected to expand Consumers' system.
In 1995, Consumers purchased approximately 80 percent of its required gas supply under long-term contracts, and the balance on the spot market. Consumers estimates that approximately 35 percent of its gas purchases will be under long-term contracts in future years as current contracts expire. Consumers also has transmission contracts totaling approximately 90 percent of its supply requirements. The expiration dates of the transmission contracts range from 1997 to 2004.
In 1995, the Low Income Home Energy Assistance Program provided approximately $71 million in heating assistance to about 400,000 Michigan households, with approximately 18 percent of funds going to Consumers' customers. In late 1995, federal legislative approval provided Michigan residents with approximately $60 million of funding for 1996. Consumers cannot predict what level of funding will be approved for 1997.
In January 1996, the MPSC issued a Notice of legislative-type hearings to be held in 1996, to assess whether it is appropriate to allow all natural gas customers access to gas transportation service. The MPSC notice designated all eight local distribution companies whose rates are regulated by the MPSC as parties to this proceeding.
Under SFAS 71, Consumers is allowed to defer certain costs to the future and record regulatory assets, based on the recoverability of those costs through the MPSC's approval. Consumers has evaluated its $276 million of regulatory assets (see Note 18) related to its gas business, and believes that sufficient regulatory assurance exists to provide for the recovery of these deferred costs.
Other
New Accounting Standard: In 1995, the FASB issued SFAS 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, which is effective for 1996. Consumers does not expect the application of this statement to have a material impact on its financial position, liquidity or results of operations. For further information, see Note 2.
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 segment of which is the automotive industry.
2: Summary of Significant Accounting Policies and Other Matters
Basis of Presentation: The consolidated financial statements include Consumers and its wholly owned subsidiaries. The financial statements are prepared in conformity with generally accepted accounting principles and include the use of management's estimates. Consumers uses the equity method of accounting for investments in its companies and partnerships where it has more than a 20 percent but less than a majority ownership interest.
Accretion Income and Expense: In 1991, the MPSC ordered that Consumers could recover a portion of its abandoned Midland investment over a 10-year period, but did not allow Consumers to earn a return on that amount. Consumers reduced the recoverable investment to the present value of the future recoveries. During the recovery period, the unrecovered asset is adjusted to its present value. This adjustment is reflected as accretion income. Conversely, Consumers recorded a loss in 1992 for the present value of its estimated future underrecoveries of power costs resulting from purchases from the MCV Partnership (see Note 3), and now recognizes accretion expense annually to reflect the time value of money on the recorded loss.
Gas Inventory: Consumers uses the weighted average cost method for valuing working gas inventory. Cushion gas, which is gas stored to maintain reservoir pressure for recovery of working gas, is recorded in the appropriate gas utility plant account. Consumers stores gas inventory in its underground storage facilities.
Maintenance, Depreciation and Depletion: Property repairs and minor property replacements are charged to maintenance expense. Depreciable property retired or sold plus cost of removal (net of salvage credits) is charged to accumulated depreciation. Consumers bases depreciation provisions for utility plant on straight-line and units-of-production rates approved by the MPSC. The composite depreciation rate for electric utility property was 3.5 percent for 1995, 3.5 percent for 1994 and 3.4 percent for 1993. The composite rate for gas utility plant was 4.3 percent for 1995, 4.2 percent for 1994 and 4.4 percent for 1993. The composite rate for other plant and property was 4.9 percent for 1995 and 4.7 percent for 1994 and 1993.
New Accounting Standard: During 1995, the FASB issued SFAS 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. This statement, which is effective for 1996 financial statements, requires that an asset be reviewed for impairment whenever events indicate that its carrying amount may not be recoverable. The statement also requires that a loss be recognized whenever a portion of an asset's cost is excluded from a rate-regulated company's rate base. Consumers does not expect the application of this statement to have a material impact on its financial position or results of operations.
Nuclear Fuel Cost: Consumers amortizes nuclear fuel cost to fuel expense based on the quantity of heat produced for electric generation. Interest on leased nuclear fuel is expensed as incurred. Under federal law, the DOE is responsible for permanent disposal of spent nuclear fuel at costs to be paid by affected utilities. However, in 1994, the DOE asserted that it does not have a legal obligation to accept spent nuclear fuel without an operational repository. In 1995, federal legislation was introduced to clarify the DOE's obligation to accept spent nuclear fuel and direct the DOE to establish an integrated spent fuel management system that includes designing and constructing an interim storage facility in Nevada. For fuel used after April 6, 1983, Consumers charges disposal costs to nuclear fuel expense, recovers them through electric rates and remits to the DOE quarterly. Consumers elected to defer payment for disposal of spent nuclear fuel burned before April 7, 1983, until the spent fuel is delivered to the DOE, which was originally scheduled to occur in 1998. At December 31, 1995, Consumers has recorded a liability to the DOE of $100 million, including interest. Consumers recovered through electric rates the amount of this liability, excluding a portion of interest.
Nuclear Plant Decommissioning: Consumers collects approximately $45 million annually from its electric customers to decommission its two nuclear plants. On March 1, 1995, Consumers filed updated decommissioning information with the MPSC which estimated decommissioning costs for Big Rock and Palisades to be $303 million and $524 million (in 1995 dollars), respectively. The estimated decommissioning costs increased from previous estimates principally due to the unavailability of low- and high-level radioactive waste disposal facilities. Amounts collected from electric retail customers and deposited in trusts (including trust earnings) are credited to accumulated depreciation. To meet NRC decommissioning requirements, Consumers prepared site-specific decommissioning cost estimates for Big Rock and Palisades, assuming that each plant site will eventually be restored to conform with the adjacent landscape, and that all contaminated equipment will be disassembled and disposed of in a licensed burial facility. After the plants are retired, Consumers plans to maintain the facilities in protective storage until radioactive waste disposal facilities are available. As a result, the majority of decommissioning costs will be incurred several years after each plant's NRC operating license expires. When Big Rock's and Palisades' NRC licenses expire in 2000 and 2007, respectively, the trust funds are estimated to have accumulated $257 million and $686 million, respectively. It is estimated that at the time the plants are fully decommissioned (in the years 2030 for Big Rock and 2046 for Palisades), the trust funds will have provided $1 billion for Big Rock and $2.1 billion for Palisades including trust earnings over this decommissioning period. Based on this plan, Consumers believes that the current decommissioning surcharge will be sufficient to provide for decommissioning of its nuclear plants. At December 31, 1995, Consumers had an investment in nuclear decommissioning trust funds of $304 million.
Reclassifications: Consumers has reclassified certain prior year amounts for comparative purposes. These reclassifications did not affect net income for the years presented.
Revenue and Fuel Costs: Consumers accrues revenue for electricity and gas used by its customers but not billed at the end of an accounting period. Consumers accrues or reduces revenue for any underrecovery or overrecovery of electric power supply costs and natural gas costs by establishing a corresponding asset or liability until it bills or refunds these differences to customers following an MPSC order.
Utility Regulation: Consumers accounts for the effects of regulation under SFAS 71, Accounting for the Effects of Certain Types of Regulation. As a result, the actions of regulators affect when revenues, expenses, assets and liabilities are recognized.
Other: For significant accounting policies regarding income taxes, see Note 5; for pensions and other postretirement benefits, see Note 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. Consumers, through its subsidiaries, holds the following assets related to the MCV Partnership and MCV Facility: 1) CMS Midland owns a 49 percent general partnership interest in the MCV Partnership; and 2) CMS Holdings holds through the FMLP a 35 percent lessor interest in the MCV Facility.
Power Purchases from the MCV Partnership: Consumers' annual obligation for purchase of contract capacity from the MCV Partnership under the PPA increased 108 MW to its maximum amount of 1,240 MW in 1995. In 1993, the MPSC issued the Settlement Order that has allowed Consumers to recover substantially all of the payments for its ongoing purchase of 915 MW of contract capacity. ABATE and the Attorney General have appealed the Settlement Order to the Court of Appeals. Under the Settlement Order, capacity and energy purchases from the MCV Partnership above the 915 MW level can be utilized to satisfy customers' power needs but the MPSC will determine the levels of recovery from retail customers at a later date. The Settlement Order also provides Consumers the right to remarket to third parties the remaining contract capacity. The MCV Partnership did not object to the Settlement Order.
The PPA provides that Consumers is to pay the MCV Partnership a minimum levelized average capacity charge of 3.77 cents per kWh, a fixed energy charge and a variable energy charge which is based primarily on Consumers' average cost of coal consumed. The Settlement Order permits Consumers to recover capacity charges averaging 3.62 cents per kWh for 915 MW of capacity, the fixed energy charge and the prescribed energy charges associated with the scheduled deliveries within certain hourly availability limits, whether or not those deliveries are scheduled on an economic basis. For all energy delivered on an economic basis above the availability limits to 915 MW, Consumers has been allowed to recover 1/2 cent per kWh capacity payment in addition to the variable energy charge.
In 1992, Consumers recognized a loss for the present value of the estimated future underrecoveries of power costs under the PPA as a result of the Settlement Order. This loss was based, in part, on management's assessment of the future availability of the MCV Facility, and the effect of the future power market on the amount, timing and price at which various increments of the capacity, above the MPSC authorized level, could be resold. Additional losses may occur if actual future experience materially differs from the 1992 estimates. As anticipated in 1992, Consumers continues to experience cash underrecoveries associated with the Settlement Order. If Consumers is unable to sell any capacity above the 1993 MPSC-authorized level, future additional after-tax losses and after- tax cash underrecoveries would be incurred. Consumers' estimates of its future after-tax cash underrecoveries, and possible losses for 1996 and the next four years are shown in the table below.
After-tax, In Millions 1996 1997 1998 1999 2000 ---- ---- ---- ---- ---- Estimated cash underrecoveries $56 $55 $ 8 $ 9 $ 7
Possible additional underrecoveries and losses (a) 20 22 72 72 74
(a) If unable to sell any capacity above the MPSC's 1993 authorized level.
In September 1995, Consumers and the MPSC staff reached a proposed settlement agreement that would potentially resolve several issues in three pending proceedings, including cost recovery for the 325 MW of MCV Facility capacity above the MPSC's currently authorized level. For further information regarding this proposed settlement, see Note 4.
At December 31, 1995 and 1994, the after-tax present value of the Settlement Order liability totaled $202 million and $272 million, respectively. The reduction in the liability since December 31, 1994, reflects after-tax cash underrecoveries of $90 million, partially offset by after-tax accretion expense of $20 million. The undiscounted after-tax amount associated with the liability totaled $607 million at December 31, 1995.
In 1994 and 1995, Consumers paid $44 million to terminate power purchase agreements with the developers of two proposed independent power projects totaling 109 MW. As part of the proposed settlement reached with the MPSC staff (see Note 4), Consumers is seeking MPSC approval to utilize less- expensive contract capacity from the MCV Facility which Consumers is currently not authorized to recover from retail customers. Cost recovery for this contract capacity would start in late 1996. Even if Consumers is not allowed to substitute MCV Facility capacity for the capacity to be provided under the terminated agreements, Consumers believes that the MPSC would approve recovery of the buyout costs due to the significant customer savings resulting from the terminated power purchase agreements. As a result, Consumers has recorded a regulatory asset of $44 million.
PSCR Matters Related to Power Purchases from the MCV Partnership: As part of the 1993 and 1994 plan case orders, the MPSC confirmed the recovery of certain costs related to power purchases from the MCV Partnership. ABATE or the Attorney General has appealed these plan case orders to the Court of Appeals.
As part of its decision in the 1993 PSCR reconciliation case issued February 23, 1995, the MPSC disallowed a portion of the costs related to purchases from the MCV Partnership, and instead assumed recovery of those costs from wholesale customers and reduced recovery from retail customers. Consumers believes this is contrary to the terms of the Settlement Order and has appealed the February 23 order on this issue.
4: Rate Matters
Electric Rate Proceedings: In late 1994, Consumers filed a request with the MPSC to increase its retail electric rates. The request included provisions for ratemaking treatment of expected sales losses to competition and the treatment of the 325 MW of MCV Facility contract capacity above 915 MW. Consumers also requested that the MPSC eliminate subsidization of residential rates in a two-step adjustment.
Early in 1996, the MPSC issued a partial final order in this case, granting Consumers a $46 million annual increase in its electric retail rates. This order authorized a 12.25 percent return on equity as compared to the previously approved 11.75 percent, approved recovery of certain costs associated with a proposed settlement related to the Ludington plant (see Note 12), and significantly reduced (in a two-step adjustment) the subsidization of residential customers by industrial and large commercial customers. As a result, residential customers were allocated approximately $31 million of the $46 million increase.
This order did not address cost recovery related to the 325 MW of MCV Facility contract capacity above 915 MW. The MPSC stated that this matter would be addressed in connection with its consideration of the proposed settlement agreement discussed below.
Consumers also has a separate request before the MPSC to offer competitive special rates to certain large qualifying customers. In addition, Consumers filed a request with the MPSC, seeking to adjust its depreciation rates and to reallocate certain portions of its electric production plant to transmission accounts. If approved, this would result in a net decrease in depreciation expense of $7 million for ratemaking purposes. For further information regarding these requests, see the Electric Rate Proceedings and Special Rates discussions in the Management's Discussion and Analysis.
In September 1995, Consumers and the MPSC staff reached a proposed settlement agreement that, if approved by the MPSC, would resolve several outstanding regulatory issues currently before the MPSC in separate proceedings. Some of these issues were preliminarily addressed in early 1996 when the MPSC issued an order in Consumers' electric rate case (see above). If fully adopted, the settlement agreement would: provide for cost recovery of the 325 MW of uncommitted MCV Facility capacity; implement provisions for incentive ratemaking; resolve the special competitive services and depreciation rate cases; implement a limited direct access program; and accelerate recovery of nuclear plant investment. Consumers expects a final order in the spring of 1996.
Electric DSM: In June 1995, the MPSC authorized Consumers to discontinue future DSM program expenditures and cease all new programs. Consumers is deferring and amortizing past program costs ($68 million at December 31, 1995) over the period these costs are being recovered from customers in accordance with an MPSC accounting order.
Gas Rates: As part of an agreement approved by the MPSC, Consumers filed a gas rate case in December 1994. The request, among other things, incorporated cost increases, including costs for postretirement benefits and costs related to Consumers' former manufactured gas plant sites and proposed a 12.25 percent rate of return on equity, instead of the current 13.25 percent. Consumers had requested a $7 million increase in its annual gas rates. The MPSC staff recommended a $13 million rate decrease, which included a lower rate base, a lower return on common equity, a revised capital structure and a lower operating cost forecast than Consumers had projected. In November 1995, the ALJ issued a proposal for decision that essentially adopted the MPSC staff's position. In early 1996, the MPSC issued a final order in this case, decreasing Consumers' annual gas rates by $11.7 million and authorizing an 11.6 percent return on equity.
GCR Matters: In 1993, the MPSC issued a ruling favorable to Consumers regarding a gas pricing disagreement between Consumers and certain intrastate producers. In 1995, management concluded that the intrastate producers' pending appeals of the MPSC order would not be successful and accordingly reversed $23 million (pretax) of a previously accrued loss. The MPSC ruling was affirmed by the Court of Appeals in June 1995. The producers have petitioned the Michigan Supreme Court for review.
In October 1995, the MPSC issued an order regarding a $44 million (excluding any interest) gas supply contract pricing dispute between Consumers and certain intrastate producers. The order stated that Consumers was not obligated to seek prior approval of market-based pricing provisions that were implemented under the contracts in question. The producers subsequently filed a claim of appeal of the MPSC order with the Court of Appeals. Consumers believes the MPSC order supports its position that the producers' theories are without merit and intends to vigorously oppose any claims they may raise but cannot predict the outcome of this issue.
Estimated losses for certain contingencies discussed in this note have been accrued. Resolution of these contingencies is not expected to have a material impact on Consumers' financial position or results of operations.
5: Income Taxes
Consumers and its subsidiaries file a consolidated federal income tax return with CMS Energy. Income taxes are generally allocated based on each company's separate taxable income. Consumers does not have an accrued federal income tax benefit from CMS Energy for 1995, but had a $33 million benefit as of December 31, 1994. Consumers practices full deferred tax accounting for all temporary differences as authorized by the MPSC.
Consumers uses ITC to reduce current income taxes payable and defers and amortizes ITC over the life of the related property. Any AMT paid generally becomes a tax credit that can be carried forward indefinitely to reduce regular tax liabilities in future periods when regular taxes paid exceed the tax calculated for AMT.
The significant components of income tax expense (benefit) consisted of:
In Millions Years Ended December 31 1995 1994 1993 - ----------------------- ----- ----- ----- Current federal income taxes $ 76 $ 51 $ 41 Deferred income taxes 67 67 61 Deferred income taxes - tax rate change - - (2) Deferred ITC, net (10) (10) (9) ----- ----- ----- $ 133 $ 108 $ 91 ===== ===== =====
Operating $ 145 $ 120 $ 105 Other (12) (12) (14) ----- ----- ----- $ 133 $ 108 $ 91 ===== ===== =====
The principal components of Consumers' deferred tax assets (liabilities) recognized in the balance sheet are as follows:
In Millions December 31 1995 1994 ------- ------- Property $ (539) $ (535) Unconsolidated investments (245) (236) Postretirement benefits (Note 10) (173) (177) Abandoned Midland project (46) (51) Employee benefit obligations (includes postretirement benefits of $173 and $172) (Note 10) 200 200 Power purchases - settlement (Note 3) 112 146 AMT carryforward 94 89 ITC carryforward (expires 2005) 23 37 Other (5) (6) ------- ------- $ (579) $ (533) ======= =======
Gross deferred tax liabilities $(1,388) $(1,388) Gross deferred tax assets 809 855 ------- ------- $ (579) $ (533) ======= =======
The actual income tax expense differs from the amount computed by applying the statutory federal tax rate to income before income taxes as follows:
In Millions Years Ended December 31 1995 1994 1993 ----- ----- ----- Net income $ 255 $ 226 $ 198 Income tax expense 133 108 91 ----- ----- ----- 388 334 289 Statutory federal income tax rate x 35% x 35% x 35% ----- ----- ----- Expected income tax expense 136 117 101 Increase (decrease) in taxes from: Capitalized overheads previously flowed through 5 5 5 Differences in book and tax depreciation not previously deferred 6 7 6 ITC amortization (10) (10) (10) Affiliated companies' dividends (6) (6) (6) Other, net 2 (5) (5) ----- ----- ----- $ 133 $ 108 $ 91 ===== ===== =====
6: Short-Term Financings
Consumers has FERC authorization to issue or guarantee up to $900 million of short-term debt through December 31, 1996. Consumers has an unsecured $425 million facility and unsecured, committed lines of credit aggregating $145 million that are used to finance seasonal working capital requirements. At December 31, 1995, $238 million and $103 million were outstanding under these facilities at weighted average interest rates of 6.4 percent and 6.9 percent, respectively. Consumers has an established $500 million trade receivables purchase and sale program. At December 31, 1995 and 1994, receivables sold under the agreement totaled $295 million and $275 million, respectively. Accounts receivable and accrued revenue in the Consolidated Balance Sheets have been reduced to reflect receivables sold.
7: Capitalization
Capital Stock: During 1995, the MPSC issued an order authorizing Consumers to issue and sell up to $300 million of intermediate and/or long-term debt and $100 million of preferred stock or subordinate debentures. In January 1996, 4 million shares of 8.36 percent Trust Originated Preferred Securities were issued and sold through a business trust wholly-owned by Consumers. The trust was formed for the sole purpose of issuing preferred securities and the only asset of the trust is $103 million of 8.36 percent unsecured subordinated deferrable interest notes issued by Consumers. The obligations of Consumers with respect to the preferred securities under the notes that mature in 2015, the indenture under which the notes will be issued, Consumers' guarantee of the preferred securities and the Declaration of Trust, taken together, constitute a full and unconditional guarantee by Consumers of the trust's obligations under the Trust Originated Preferred Securities. Net proceeds from the sale totaled $96 million.
First Mortgage Bonds: Consumers secures its first mortgage bonds by a mortgage and lien on substantially all of its property. Consumers' ability to issue and sell securities is restricted by certain provisions in its First Mortgage Bond Indenture, its Articles and the need for regulatory approvals in compliance with appropriate federal law.
Long-Term Bank Debt: During 1994, Consumers entered into a $400 million unsecured, variable rate, five-year term loan and subsequently used the proceeds to refinance certain long-term bank debt. At December 31, 1995, the loan carried a weighted average interest rate of 6.2 percent. In 1993, Consumers entered into an interest rate swap agreement, exchanging variable-rate interest for fixed-rate interest on $250 million of its long-term bank debt. The swap agreement hedges the variable rate exposure associated with Consumers' long-term bank debt. The swap agreement began to decrease in February 1995 and will terminate by May 1996. At December 31, 1995, the amount of the swap totaled $94 million at 5.4 percent. The swap agreement had the effect of decreasing the weighted average interest rate to 6.3 percent from 6.6 percent for the 12-month period ended December 31, 1995.
Other: Consumers has a total of $131 million of long-term pollution control revenue bonds outstanding (secured by irrevocable letters of credit or first mortgage bonds) with a weighted average interest rate of 5.9 percent as of December 31, 1995.
Under the provisions of its Articles at December 31, 1995, Consumers had $197 million of unrestricted retained earnings available to pay common dividends.
8: Financial Instruments
The carrying amounts of cash, short-term investments and current liabilities approximate their fair values due to their short-term nature. The estimated fair values of long-term investments are based on quoted market prices or, in the absence of specific market prices, on quoted market prices of similar investments or other valuation techniques. The carrying amounts of all long-term investments, except as shown below, approximate fair value.
(a) Consumers classifies its unrealized gains and losses on nuclear decommissioning investments in accumulated depreciation.
The carrying amount of long-term debt was $1.9 billion and $2.0 billion at December 31, 1995 and 1994, respectively, and the fair value, as calculated by debt-pricing specialists, was $1.9 billion on those dates. Although the current fair value of the long-term debt may differ from the current carrying amount, settlement of the reported debt is generally not expected until maturity. For held-to-maturity securities, see Note 17.
9: Executive Incentive Compensation
Consumers participates in CMS Energy's Performance Incentive Stock Plan. Under the plan, restricted shares of common stock of CMS Energy, stock options and stock appreciation rights may be granted to key employees based on their contributions to the successful management of CMS Energy and its subsidiaries. During 1995, shareholders approved amendments to the CMS Energy Performance Incentive Stock Plan. The amendments authorized awards under the plan consisting of any class of common stock of CMS Energy and established performance-based business criteria for certain plan awards. The amendments also increased the number of shares reserved for award to not more than 3 percent of each class of CMS Energy'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, 1995, awards of up to 1,174,388 shares of CMS Energy Common Stock and 211,634 shares of Class G Common Stock may be issued.
Restricted shares of common stock are outstanding shares with full voting and dividend rights. Shares of restricted common stock cannot be distributed until they are vested and the performance objectives are met. Further, the restricted stock is subject to forfeiture if employment terminates before vesting. If key employees exceed performance objectives, the plan will allow additional awards. Restricted shares vest fully if control of CMS Energy changes, as defined by the plan. At December 31, 1995, 249,053 shares of the 269,053 restricted shares outstanding are subject to performance objectives.
Consumers' Executive Stock Option and Stock Appreciation Rights Plan, an earlier plan approved by shareholders, expired in September 1995.
Under both plans, for stock options and stock appreciation rights, the exercise price on each grant date equaled the closing market price on the grant date. Options are exercisable upon grant and expire up to 10 years and one month from date of grant. The status of the restricted stock granted to Consumers' key employees under the Performance Incentive Stock Plan and options granted under both plans follows.
Restricted Stock Options ---------- --------------- Number Number Price CMS Energy Common Stock of Shares of Shares per Share --------- --------- --------------- Outstanding at January 1, 1993 206,863 922,108 $ 7.13 - $34.25 Granted 83,775 142,550 $26.25 - $26.25 Exercised or Issued (33,325) (112,625) $ 7.13 - $21.13 Canceled (57,188) (33,000) $20.50 - $33.88 -------- -------- --------------- Outstanding at December 31, 1993 200,125 919,033 $ 7.13 - $34.25 Granted 72,250 145,500 $22.00 - $22.00 Exercised or Issued (22,510) (138,650) $ 7.13 - $22.00 Canceled (60,087) (123,000) $26.25 - $33.88 -------- -------- --------------- Outstanding at December 31, 1994 189,778 802,883 $ 7.13 - $34.25 Granted 123,615 147,200 $24.75 - $34.25 Exercised or Issued (27,533) (93,333) $ 7.13 - $22.00 Canceled (16,807) (51,000) $20.50 - $34.25 -------- -------- --------------- Outstanding at December 31, 1995 269,053 805,750 $13.00 - $34.25 ======== ======== ===============
During 1995, 6,924 restricted shares and 10,000 options of Class G Common Stock were granted at a price of $17.88.
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. In May 1994, the MPSC authorized recovery of the electric utility portion of these costs over 18 years. During 1995, the FERC granted Consumers a waiver of a three-year filing requirement for cost recovery with respect to its wholesale electric business, which at December 31, 1995, had recorded a regulatory asset and liability of $7 million. In early 1996, the MPSC approved recovery of the gas utility portion of these costs over 16 years. 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, 1995, are based on the assumption that costs would increase 9.5 percent in 1996, then decrease gradually to 6 percent in 2004 and thereafter. The health care cost trend rate assumption significantly affects the amounts reported. For example, a 1 percentage point increase in each year's estimated health care cost assumption would increase the accumulated postretirement benefit obligation as of December 31, 1995 by $79 million and the aggregate of the service and interest cost components of net periodic postretirement benefit costs for 1995 by $8 million.
Years Ended December 31 1995 1994 1993 ----- ----- ----- Weighted average discount rate 7.50% 8.00% 7.25% Expected long-term rate of return on plan assets 7.00% 7.00% 8.50%
Net postretirement benefit costs for the health care benefits and life insurance benefits consisted of:
In Millions Years Ended December 31 1995 1994 1993 ----- ----- ----- Service cost $ 11 $ 13 $ 13 Interest cost 39 40 38 Actual return on assets (4) - - Net amortization and deferral 1 - - ----- ----- ----- Net postretirement benefit costs $ 47 $ 53 $ 51 ===== ===== =====
The funded status of the postretirement benefit plans is reconciled with the liability recorded at December 31 as follows:
In Millions 1995 1994 ------ ------ Actuarial present value of estimated benefits Retirees $ 329 $ 336 Eligible for retirement 45 43 Active (upon retirement) 195 166 ------ ------ Accumulated postretirement benefit obligation 569 545 Plan assets (primarily stocks, bonds and money market investments) at fair value 76 35 ------ ----- Accumulated postretirement benefit obligation in excess of plan assets (493) (510) Unrecognized net (gain) loss from experience different than assumed (1) 2 ------ ------ Recorded liability $ (494) $ (508) ====== ======
Consumers' postretirement health care plan is partially funded; the accumulated postretirement benefit obligation for that plan is $554 million and $530 million at December 31, 1995 and 1994, respectively.
Supplemental Executive Retirement Plan: Certain management employees qualify to participate in the SERP. SERP benefits, which are based on an employee's years of service and earnings as defined in the SERP, are paid from a trust established and funded in 1988. Because the SERP is not a qualified plan under the Internal Revenue Code, earnings of the trust are taxable and trust assets are included in consolidated assets. At December 31, 1995 and 1994, trust assets at cost (which approximates market) were $19 million and $14 million, respectively, and were classified as other noncurrent assets.
Defined Benefit Pension Plan: A trusteed, non-contributory, defined benefit Pension Plan covers substantially all employees. The benefits are based on an employee's years of accredited service and earnings, as defined in the plan, during an employee's five highest years of earnings. Because the plan was fully funded, no contributions were made in 1993 and 1994. A contribution of $9 million was made in 1995. Amounts presented below for the Pension Plan include minor amounts for employees of CMS Energy and non-utility affiliates which were not distinguishable from the plan's total assets.
Years Ended December 31 1995 1994 1993 ----- ----- ----- Discount rate 7.50% 8.00% 7.25% Rate of compensation increase 4.50% 4.50% 4.50% Expected long-term rate of return on assets 9.25% 9.25% 8.75%
Net Pension Plan and SERP costs consisted of:
In Millions Years Ended December 31 1995 1994 1993 ----- ----- ----- Service cost $ 22 $ 23 $ 19 Interest cost 54 50 49 Actual return on plan assets (168) 21 (92) Net amortization and deferral 103 (85) 34 ----- ----- ----- Net periodic pension cost $ 11 $ 9 $ 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 ------------ ------------ 1995 1994 1995 1994 ----- ----- ----- ----- Actuarial present value of estimated benefits Vested $ 496 $ 421 $ 12 $ 13 Non-vested 74 61 - - ----- ----- ----- ----- Accumulated benefit obligation 570 482 12 13 Provision for future pay increases 183 154 7 6 ----- ----- ----- ----- Projected benefit obligation 753 636 19 19 Plan assets (primarily stocks and bonds, including $104 in 1995 and $79 in 1994 in common stock of CMS Energy) at fair value 779 637 - - ----- ----- ----- ----- Projected benefit obligation less than (in excess of) plan assets 26 1 (19) (19) Unrecognized net (gain) loss from experience different than assumed (69) (35) 2 3 Unrecognized prior service cost 43 40 1 1 Unrecognized net transition (asset) obligation (32) (39) - 1 ----- ----- ----- ----- Recorded liability $ (32) $ (33) $ (16) $ (14) ===== ===== ===== =====
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, rail cars, aircraft, construction equipment, computer equipment, nuclear fuel and buildings. Consumers' nuclear fuel capital leasing arrangement is scheduled to expire in November 1997 and provides for additional one-year extensions upon mutual agreement by the parties. Upon termination of the lease, the lessor would be entitled to a cash payment equal to its remaining investment, which was $65 million as of December 31, 1995. Consumers is responsible for payment of taxes, maintenance, operating costs, and insurance.
Minimum rental commitments under Consumers' non-cancelable leases at December 31, 1995, were:
In Millions Capital Operating Leases Leases
1996 $ 53 $ 3 1997 55 3 1998 16 2 1999 14 2 2000 12 2 2001 and thereafter 24 17 ----- ----- Total minimum lease payments 174 $ 29 Less imputed interest 25 ===== ----- Present value of net minimum lease payments 149 Less current portion 45 ----- Non-current portion $ 104 =====
Consumers recovers these charges from customers and accordingly charges payments for its capital and operating leases to operating expense. Operating lease charges, including charges to clearing and other accounts as of December 31, 1995, 1994 and 1993, were $7 million, 8 million and $8 million, respectively.
Capital lease expenses for the years ended December 31, 1995, 1994 and 1993 were $45 million, $40 million and $32 million, respectively. Included in these amounts for the years ended 1995, 1994 and 1993, are nuclear fuel lease expenses of $25 million, $21 million and $13 million, respectively.
12: Commitments and Contingencies
Ludington Pumped Storage Plant: Early in 1996, the FERC and MPSC approved the recovery of costs associated with a settlement designed to resolve all legal issues related to fish mortality at Ludington. Consumers, Detroit Edison, the Attorney General, the DNR and certain other parties agreed to the terms of the settlement in 1994. Approval of the settlement requires Consumers to transfer certain land to the State of Michigan and the Great Lakes Fishery Trust, make certain recreational improvements, and incur future annual payments of approximately $1 million (over 24 years) to improve fishery resources. The settlement resolves two lawsuits filed by the Attorney General in 1986 and 1987 on behalf of the State of Michigan.
Environmental Matters: Consumers is a so-called "potentially responsible party" at several sites being administered under Superfund. Superfund liability is joint and several and along with Consumers, there are numerous credit-worthy, potentially responsible parties with substantial assets cooperating with respect to the individual sites. Based upon past negotiations, Consumers estimates its total liability for the significant sites will average less than 4 percent of the estimated total site remediation costs, and such liability is expected to be less than $9 million. At December 31, 1995, Consumers has accrued a liability for its estimated losses.
The Michigan Natural Resources and Environmental Protection Act (formerly the Michigan Environmental Response Act) was substantially amended in June 1995. The Michigan law bears similarities to the federal Superfund law. The purpose of the 1995 amendments was generally to encourage development of industrial sites and to remove liability from some parties who were not responsible for activities causing contamination. Consumers expects that it will ultimately incur investigation and remedial action costs at a number of sites, including some of the 23 sites that formerly housed manufactured gas plant facilities, even those in which it has a partial or no current ownership interest.
Consumers has prepared plans for remedial investigation/feasibility studies for several of these sites. Three of the four plans submitted by Consumers have been approved by the DNR or the Michigan Department of Environmental Quality (a new department succeeding to some of the former jurisdiction of the DNR). The findings for the first remedial investigation indicate that the expenditures for remedial action at this site are likely to be minimal. However, Consumers does not believe that a single site is representative of all of the sites. Data available to Consumers and its continued internal review have resulted in an estimate for all costs related to investigation and remedial action for all 23 sites of between $48 million and $112 million. These estimates are based on undiscounted 1995 costs. At December 31, 1995, Consumers has accrued a liability of $48 million and has established a regulatory asset for approximately the same amount. Any significant change in assumptions such as remediation technique, nature and extent of contamination and legal and regulatory requirements, could impact the estimate of remedial action costs for the sites.
Consumers requested recovery and deferral of certain investigation and remedial action costs in its gas rate case filed in 1994. In early 1996, the MPSC issued an order in this case which authorized Consumers to defer costs and amortize them over 10 years. The amount of authorized annual recovery totaled $1 million. Consumers is continuing discussions with certain insurance companies regarding coverage for some or all of the costs which may be incurred for these sites.
The federal Clean Air Act contains provisions that limit emissions of sulfur dioxide and nitrogen oxides and require emissions monitoring. Consumers' coal-fueled electric generating units burn low-sulfur coal and are presently operating at or near the sulfur dioxide emission limits which will be effective in the year 2000. The Clean Air Act's provisions required Consumers to make capital expenditures totaling $25 million to install equipment at certain generating units. Consumers estimates capital expenditures for in-process and possible modifications at other coal-fired units to be an additional $50 million by the year 2000. Final acid rain program nitrogen oxide regulations specifying the limits applicable to the other coal-fired units are expected to be issued in 1996. Management believes that Consumers' annual operating costs will not be materially affected.
Capital Expenditures: Consumers estimates capital expenditures, including new lease commitments, of $435 million for 1996, $395 million for 1997 and $400 million for 1998.
Commitments for Coal and Gas Supplies: Consumers has entered into coal supply contracts with various suppliers for its coal-fired generating stations. These contracts have expiration dates that range from 1997 to 2004. Consumers contracts for approximately 60 - 70 percent of its annual coal requirements which in 1995 totaled $233 million (72 percent was under long-term contracts). Consumers supplements its long-term contracts with spot-market purchases to fulfill its coal needs.
Consumers has entered into gas supply contracts with various suppliers for its natural gas business. These contracts have expiration dates that range from 1996 to 2003. In 1995, Consumers' gas requirements totaled $694 million (80 percent was under long-term contracts). In the future, Consumers expects that approximately 35 percent of its annual gas requirements will be under long-term contracts as current contracts expire. Consumers supplements its long-term contracts with spot-market purchases to fulfill its gas needs.
Other: Consumers has experienced a number of lawsuits filed against it relating to so-called stray voltage. Claimants contend that stray voltage results when small electrical currents present in grounded electrical systems are diverted from their intended path. Consumers maintains a policy of investigating all customer calls regarding stray voltage and working with customers to address their concerns including, when necessary, modifying the grounding of the customer's service. At December 31, 1995, Consumers had 30 separate stray voltage lawsuits awaiting trial court action, down from 83 lawsuits at December 31, 1994.
In addition to the matters disclosed in these notes, Consumers and certain 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.
Estimated losses for certain contingencies discussed in this note have been accrued. Resolution of these contingencies is not expected to have a material impact on Consumers' financial position or results of operations.
13: Nuclear Matters
In 1993, the NRC approved the design of the spent fuel dry storage casks now being used by Consumers at Palisades. In order to address concerns raised subsequent to the initial cask loading, Consumers and the NRC each analyzed the effects of seismic and other natural hazards on the support pad on which the casks are placed, and confirmed that the pad location is acceptable to support the casks. As of December 31, 1995, Consumers had loaded 13 dry storage casks with spent nuclear fuel at Palisades.
In 1996, Consumers plans to unload and replace one of the loaded casks. In a review of the cask manufacturer's quality assurance program, Consumers detected indications of minor flaws in welds in the steel liner of one of the loaded casks. Although the cask continues to safely store spent fuel and there is no requirement for its replacement, Consumers has nevertheless decided to remove the spent fuel and insert it in another cask. Consumers has examined radiographs for all of its casks and has found all other welds acceptable. Certain parties, including the Attorney General, have petitioned the NRC to suspend Consumers' general license to store spent fuel, claiming that Consumers' cask unloading procedure does not satisfy NRC regulations. The NRC staff is reviewing the petitions.
The Low-Level Radioactive Waste Policy Act encourages the respective states, individually or in cooperation with each other, to be responsible for the disposal of low-level radioactive waste. Currently, a low-level waste site does not exist in Michigan and Consumers has been storing low- level waste at its nuclear plant sites. Consumers began shipping its low- level waste to a site in South Carolina during 1995 and plans to have all its currently stored low-level waste removed from the plant sites by the end of 1996.
Consumers maintains insurance coverage against property damage, debris removal, personal injury liability and other risks that are present at its nuclear generating facilities. This insurance includes coverage for replacement power costs for the major portion of prolonged accidental outages for 12 months after a 21 week exclusion with reduced coverage to approximately 80 percent for two additional years. If certain loss events occur at its own or other nuclear plants similarly insured, Consumers could be required to pay maximum assessments of: $30 million in any one year to 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.
Under its NML and NEIL policies, Consumers may be entitled to cash distributions following the discontinued operation of its nuclear facilities. The amount of any distribution would be determined by NML and NEIL and would be based, in part, on their overall underwriting experience.
As an NRC licensee, Consumers is required to make certain calculations and report to the NRC about the continuing ability of the Palisades reactor vessel to withstand postulated "pressurized thermal shock" events during its remaining license life, in light of the embrittlement of reactor vessel materials over time due to operation in a radioactive environment. Analysis of recent data from testing of similar materials indicates that the Palisades reactor vessel can be safely operated through late 1999. In April 1995, Consumers received a Safety Evaluation Report from the NRC concurring with this evaluation and requesting submittal of an action plan to provide for operation of the plant beyond 1999. Consumers is developing plans to anneal the reactor vessel in 1998 at an estimated cost of $20 million to $30 million. This repair would allow for operation of the plant to the end of its license life in the year 2007. Consumers cannot predict whether the studies being conducted as part of the development plans will support a future decision to anneal.
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 1995 1994 ----- ----- Net investment Ludington - 51% $116 $119 Campbell Unit 3 - 93.3% 332 337 Transmission lines - various 33 31
Accumulated depreciation Ludington $ 81 $ 76 Campbell Unit 3 238 224 Transmission lines 14 11
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 1995 1994 1993 ----- ----- ----- Cash transactions Interest paid (net of amounts capitalized) $158 $147 $177 Income taxes paid (net of refunds) 43 34 90
Non-cash transactions Nuclear fuel placed under capital lease $ 26 $ 21 $ 28 Other assets placed under capital leases 5 15 30 Capital leases refinanced 21 - 42
Changes in other assets and liabilities as shown on the Consolidated Statements of Cash Flows at December 31 are described below:
In Millions 1995 1994 1993 ----- ----- ----- Sale of receivables, net $ 20 $ (10) $ 60 Accounts receivable (55) (4) 19 Accrued revenue 1 24 (48) Inventories 54 (5) (32) Accounts payable 48 19 (25) Accrued refunds (4) (3) (48) Other current assets and liabilities, net 28 12 (45) Non-current deferred amounts, net (8) (9) (7) ------ ------ ------ $ 84 $ 24 $(126) ====== ====== ======
16: Reportable Segments
The Consolidated Statements of Income show operating revenue and pretax operating income by segments. These amounts include earnings from investments accounted for by the equity method of $38 million, $16 million and $6 million for 1995, 1994 and 1993, respectively. Other segment information follows:
In Millions Years Ended December 31 1995 1994 1993 ------ ------ ------ Depreciation, depletion and amortization Electric $ 272 $ 257 $ 241 Gas 83 76 73 Other 2 2 2 ------ ------ ------ $ 357 $ 335 $ 316 ====== ====== ======
Identifiable assets Electric (a) $ 4,522 $ 4,364 $ 4,100 Gas (a) 1,690 1,673 1,628 Other 742 772 823 ------ ------ ------ $ 6,954 $ 6,809 $ 6,551 ======= ====== ======
Capital expenditures (b) Electric $ 328 $ 358 $ 403 Gas 126 134 158 ------ ------ ------ $ 454 $ 492 $ 561 ====== ====== ======
(a) Amounts include an attributed portion of Consumers' other common assets to both the electric and gas utility businesses.
(b) Includes capital leases for nuclear fuel and other assets and electric DSM costs (see Statement of Cash Flows). Amounts also include an attributed portion of Consumers' capital expenditures for plant and equipment common to both the electric and gas utility businesses.
17: Related-Party Transactions
Consumers has an investment of $250 million in 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 $88 million (see Note 8) at December 31, 1995. As a result of these two investments, Consumers received dividends on affiliates' common and preferred stock totaling $17 million in 1995 and 1994 and $16 million in 1993. CMS Midland, a wholly owned subsidiary of Consumers, holds a $10 million 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 Oil & Gas Co. The amounts of purchases for the years ended 1995, 1994 and 1993 were $19 million, $1 million and $3 million, respectively. In 1995, 1994 and 1993, Consumers purchased $53 million, $48 million and $52 million, respectively, of electric generating capacity and energy from affiliates of Enterprises. Consumers and its subsidiaries sold, stored and transported natural gas and provided other services to the MCV Partnership totaling approximately $13 million for 1995, $13 million for 1994 and $14 million for 1993. 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 1995 1994 ------ ------ Postretirement benefits (Note 10) $ 487 $ 503 Income taxes (Note 5) 176 189 Abandoned Midland project 131 147 DSM - deferred costs (Note 4) 68 71 Trunkline settlement 55 85 Manufactured gas plant sites (Note 12) 47 47 Power purchase contracts (Note 3) 44 30 Uranium enrichment facility 25 25 Other 22 31 ------ ------ Total regulatory assets $1,055 $1,128 ====== ======
Income taxes (Note 5) $ (220) $ (205) DSM - deferred revenue (25) (21) Other (1) - ------ ------ Total regulatory liabilities $ (246) $ (226) ====== ======
At December 31, 1995, approximately $778 million of Consumers' regulatory assets are being recovered through rates being charged to customers over periods of up to 17 years. Consumers anticipates MPSC approval for recovery of the remaining amounts.
19: Summarized Financial Information of Significant Related Energy Supplier
Under the PPA with the MCV Partnership discussed in Note 3, Consumers' 1995 obligation to purchase electric capacity from the MCV Partnership was approximately 16 percent of Consumers' owned and contracted capacity. Summarized financial information of the MCV Partnership follows:
Statements of Income In Millions Years Ended December 31 1995 1994 1993 ----- ----- ----- Operating revenue (a) $ 618 $ 579 $ 548 Operating expenses 386 378 362 ----- ----- ----- Operating income 232 201 186 Other expense, net 171 183 189 ----- ----- ----- Net income (loss) $ 61 $ 18 $ (3) ===== ===== =====
Balance Sheets In Millions December 31 1995 1994
Assets Current assets (b) $ 263 $ 206 Property, plant and equipment, net 1,948 2,012 Other assets 156 154 ------ ------ $2,367 $2,372 ====== ======
Liabilities and Partners' Equity Current liabilities $ 225 $ 218 Long-term debt and other non-current liabilities (c) 2,008 2,081 Partners' equity (d) 134 73 ------ ------
$2,367 $2,372 ====== ====== (a) Revenue from Consumers totaled $571 million, $534 million and $505 million for 1995, 1994 and 1993, respectively.
(b) At December 31, 1995 and 1994, $48 million was receivable from Consumers.
(c) FMLP is the sole beneficiary of an owner trust that is the lessor in a long-term direct finance lease with the lessee, MCV Partnership. CMS Holdings holds a 46.4 percent ownership interest in FMLP. At December 31, 1995 and 1994, lease obligations of $1.6 billion and $1.7 billion, respectively, were owed to the owner trust. CMS Holdings' share of the interest and principal portion for the 1995 lease payments was $66 million and $23 million, respectively, and for the 1994 lease payments was $68 million and $14 million, respectively. The lease payments service $1.1 billion and $1.2 billion in non-recourse debt outstanding as of December 31, 1995 and 1994, respectively, of the owner-trust. FMLP's debt is secured by the MCV Partnership's lease obligations, assets, and operating revenues. For 1995 and 1994, the owner-trust made debt payments (including interest) of $192 million and $175 million, respectively.
(d) CMS Midland's recorded investment in the MCV Partnership includes capitalized interest, which is being amortized to expense over the life of its investment in the MCV Partnership.
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, 1995 and 1994, 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, 1995. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based upon our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the 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, 1995 and 1994, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1995 in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Detroit, Michigan, January 26, 1996.
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 January 10, 1995, February 2, 1995, September 11, 1995 and February 23, 1996 covering matters reported pursuant to Item 5. Other Events.
Consumers
Current Reports dated January 10, 1995, February 2, 1995, September 11, 1995 and January 18, 1996 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) - Restated Articles of Incorporation of CMS Energy Corporation. (Designated in CMS Energy Corporation's Form S-4 dated June 6, 1995, File No. 33-60007, as Exhibit (3)(i).)
(3)(b) (CMS ONLY) - Copy of the By-Laws of CMS Energy Corporation (Designated in CMS Energy Corporation's Form 10-K for the year ended December 31, 1994, File No. 1-9513, as Exhibit 3(b).)
(3)(c) - Restated Articles of Incorporation of Consumers Power Company. (Designated in Consumers Power Company's Form 10-K for the year ended December 31, 1994, File No. 1-5611, as Exhibit 3(c).)
(3)(d) - Copy of By-Laws of Consumers Power Company. (Designated in Consumers Power Company's Form 10-K for the year ended December 31, 1994, File No. 1-5611, as Exhibit 3(d).)
(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) 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) - Indenture dated as of January 1, 1996 between Consumers Power Company and The Bank of New York, as Trustee.
First Supplemental Indenture dated as of January 18, 1996 between Consumers Power Company and The Bank of New York, as Trustee.
(4)(c) (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)(d) (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 November 21, 1995, among CMS Energy Corporation, the Banks, the Co-Agents, the Documentation Agent, the Operational Agent and the Co- Managers, all as defined therein, and the Exhibits thereto. (Designated in CMS Energy's Form S-4 Registration Statement filed January 12, 1996, File No. 33-60007, as Exhibit 4(ii).)
(10)(b) (CMS ONLY) - Term Loan Agreement dated as of November 21, 1995, among CMS Energy Corporation, the Banks, the Co-Agents, the Documentation Agent, the Operational Agent and the Co- Managers, all as defined therein, and the Exhibits thereto. (Designated in CMS Energy's Form S-4 Registration Statement filed January 12, 1996, File No. 33-60007, as Exhibit 4(ii)(A).)
(10)(c) - 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)(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) (CMS ONLY) - Employment Agreement dated January 12, 1996 between CMS Energy Corporation and Rodger A. Kershner.
(10)(k) - 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)(l) - CMS Energy Corporation's Performance Incentive Stock Plan effective as of December 1, 1989. (Designated in CMS Energy Corporation's Form S-8 Registration Statement filed August 4, 1995, File No. 33-61595, as Exhibit (4)(d).)
(10)(m) - 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)(n) - CMS Energy Corporation and Consumers Power Company Annual Executive Incentive Compensation Plan effective January 1, 1986, as amended January 1995.
(10)(o) - 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)(p) - 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)(q) - 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)(r) - 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)(s) - 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)(t) - 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)(u) - 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)(v) - 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)(w) - 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)(x) - 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)(y) - 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)(z) - 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)(aa) - 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)(bb) - 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)(cc) - 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
(99) - CMS Energy: Consumers Gas Group Financials
** 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 1995, 1994 and 1993: CMS Energy Corporation 147 Consumers Power Company 148
Report of Independent Public Accountants CMS Energy Corporation 149 Consumers Power Company 150
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 1995 Annual Report to shareholders incorporated by reference in this Form 10-K, and have issued our report thereon dated January 26, 1996. Our audit was made for the purpose of forming an opinion on those basic consolidated financial statements taken as a whole. The schedule listed in Item 14(a) is the responsibility of the Company's management and is presented for the purpose of complying with the Securities and Exchange Commission's rules and is not part of the basic consolidated financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic consolidated financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic consolidated financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Detroit, Michigan, January 26, 1996.
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 1995 Annual Report to shareholders incorporated by reference in this Form 10-K, and have issued our report thereon dated January 26, 1996. Our audit was made for the purpose of forming an opinion on those basic consolidated financial statements taken as a whole. The schedule listed in Item 14(a) is the responsibility of the Company's management and is presented for the purpose of complying with the Securities and Exchange Commission's rules and is not part of the basic consolidated financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic consolidated financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic consolidated financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Detroit, Michigan, January 26, 1996.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, CMS Energy Corporation has duly caused this Annual Report to be signed on its behalf by the undersigned, thereunto duly authorized, on the 14th day of March 1996.
CMS ENERGY CORPORATION
By William T. McCormick, Jr. --------------------------- William T. McCormick, Jr. Chairman of the Board and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report has been signed below by the following persons on behalf of CMS Energy Corporation and in the capacities and on the 14th day of March 1996.
Signature Title
(i) Principal executive officer: Chairman of the Board, Chief Executive Officer William T. McCormick, Jr. and Director --------------------------- William T. McCormick, Jr.
(ii) Principal financial officer: Senior Vice President, Chief Financial Officer A M Wright and Treasurer --------------------------- Alan M. Wright
(iii) Controller or principal accounting officer:
Senior Vice President, Controller P. D. Hopper and Chief Accounting Officer --------------------------- Preston D. Hopper
(iv) A majority of the Directors including those named above:
James J. Duderstadt* Director --------------------------- James J. Duderstadt
K R Flaherty* Director --------------------------- Kathleen R. Flaherty
Victor J. Fryling* Director --------------------------- Victor J. Fryling
Earl D. Holton* Director --------------------------- Earl D. Holton
Lois A. Lund* Director --------------------------- Lois A. Lund
Frank H. Merlotti* Director --------------------------- Frank H. Merlotti
Michael G. Morris* Director --------------------------- Michael G. Morris
W. U. Parfet* Director --------------------------- William U. Parfet
Percy A. Pierre* Director --------------------------- Percy A. Pierre
K. Whipple* Director --------------------------- Kenneth Whipple
John B. Yasinsky* Director --------------------------- John B. Yasinsky
* By Thomas A. McNish --------------------------- Thomas A. McNish, Attorney-in-Fact
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 14th day of March 1996.
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 14th day of March 1996.
Signature Title
(i) Principal executive officer: President, Chief Executive Officer Michael G. Morris and Director --------------------------- Michael G. Morris
(ii) Principal financial officer:
Senior Vice President and A M Wright Chief Financial Officer --------------------------- Alan M. Wright
(iii) Controller or principal accounting officer:
Vice President and Dennis DaPra Controller --------------------------- Dennis DaPra
(iv) A majority of the Directors including those named above:
James J. Duderstadt* Director --------------------------- James J. Duderstadt
K R Flaherty* Director --------------------------- Kathleen R. Flaherty
Victor J. Fryling* Director --------------------------- Victor J. Fryling
Earl D. Holton* Director --------------------------- Earl D. Holton
Lois A. Lund* Director --------------------------- Lois A. Lund
William T. McCormick, Jr.* Director --------------------------- William T. McCormick, Jr.
Frank H. Merlotti* Director --------------------------- Frank H. Merlotti
W. U. Parfet* Director --------------------------- William U. Parfet
Percy A. Pierre* Director --------------------------- Percy A. Pierre
K. Whipple* Director --------------------------- Kenneth Whipple
John B. Yasinsky* Director --------------------------- John B. Yasinsky
*By Thomas A. McNish --------------------------- Thomas A. McNish, Attorney-in-Fact
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 January 10, 1995, February 2, 1995, September 11, 1995 and February 23, 1996 covering matters reported pursuant to Item 5. Other Events.
Consumers
Current Reports dated January 10, 1995, February 2, 1995, September 11, 1995 and January 18, 1996 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) - Restated Articles of Incorporation of CMS Energy Corporation. (Designated in CMS Energy Corporation's Form S-4 dated June 6, 1995, File No. 33-60007, as Exhibit (3)(i).)
(3)(b) (CMS ONLY) - Copy of the By-Laws of CMS Energy Corporation (Designated in CMS Energy Corporation's Form 10-K for the year ended December 31, 1994, File No. 1-9513, as Exhibit 3(b).)
(3)(c) - Restated Articles of Incorporation of Consumers Power Company. (Designated in Consumers Power Company's Form 10-K for the year ended December 31, 1994, File No. 1-5611, as Exhibit 3(c).)
(3)(d) - Copy of By-Laws of Consumers Power Company. (Designated in Consumers Power Company's Form 10-K for the year ended December 31, 1994, File No. 1-5611, as Exhibit 3(d).)
(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) 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) - Indenture dated as of January 1, 1996 between Consumers Power Company and The Bank of New York, as Trustee.
First Supplemental Indenture dated as of January 18, 1996 between Consumers Power Company and The Bank of New York, as Trustee.
(4)(c) (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)(d) (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 November 21, 1995, among CMS Energy Corporation, the Banks, the Co-Agents, the Documentation Agent, the Operational Agent and the Co- Managers, all as defined therein, and the Exhibits thereto. (Designated in CMS Energy's Form S-4 Registration Statement filed January 12, 1996, File No. 33-60007, as Exhibit 4(ii).)
(10)(b) (CMS ONLY) - Term Loan Agreement dated as of November 21, 1995, among CMS Energy Corporation, the Banks, the Co-Agents, the Documentation Agent, the Operational Agent and the Co- Managers, all as defined therein, and the Exhibits thereto. (Designated in CMS Energy's Form S-4 Registration Statement filed January 12, 1996, File No. 33-60007, as Exhibit 4(ii)(A).)
(10)(c) - 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)(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) (CMS ONLY) - Employment Agreement dated January 12, 1996 between CMS Energy Corporation and Rodger A. Kershner.
(10)(k) - 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)(l) - CMS Energy Corporation's Performance Incentive Stock Plan effective as of December 1, 1989. (Designated in CMS Energy Corporation's Form S-8 Registration Statement filed August 4, 1995, File No. 33-61595, as Exhibit (4)(d).)
(10)(m) - 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)(n) - CMS Energy Corporation and Consumers Power Company Annual Executive Incentive Compensation Plan effective January 1, 1986, as amended January 1995.
(10)(o) - 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)(p) - 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)(q) - 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)(r) - 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)(s) - 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)(t) - 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)(u) - 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)(v) - 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)(w) - 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)(x) - 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)(y) - 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)(z) - 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)(aa) - 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)(bb) - 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)(cc) - 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
(99) - CMS Energy: Consumers Gas Group Financials
** 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 1995, 1994 and 1993: CMS Energy Corporation 147 Consumers Power Company 148
Report of Independent Public Accountants CMS Energy Corporation 149 Consumers Power Company 150
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 1995 Annual Report to shareholders incorporated by reference in this Form 10-K, and have issued our report thereon dated January 26, 1996. Our audit was made for the purpose of forming an opinion on those basic consolidated financial statements taken as a whole. The schedule listed in Item 14(a) is the responsibility of the Company's management and is presented for the purpose of complying with the Securities and Exchange Commission's rules and is not part of the basic consolidated financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic consolidated financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic consolidated financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Detroit, Michigan, January 26, 1996.
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 1995 Annual Report to shareholders incorporated by reference in this Form 10-K, and have issued our report thereon dated January 26, 1996. Our audit was made for the purpose of forming an opinion on those basic consolidated financial statements taken as a whole. The schedule listed in Item 14(a) is the responsibility of the Company's management and is presented for the purpose of complying with the Securities and Exchange Commission's rules and is not part of the basic consolidated financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic consolidated financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic consolidated financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Detroit, Michigan, January 26, 1996.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, CMS Energy Corporation has duly caused this Annual Report to be signed on its behalf by the undersigned, thereunto duly authorized, on the 14th day of March 1996.
CMS ENERGY CORPORATION
By William T. McCormick, Jr. --------------------------- William T. McCormick, Jr. Chairman of the Board and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report has been signed below by the following persons on behalf of CMS Energy Corporation and in the capacities and on the 14th day of March 1996.
Signature Title
(i) Principal executive officer: Chairman of the Board, Chief Executive Officer William T. McCormick, Jr. and Director --------------------------- William T. McCormick, Jr.
(ii) Principal financial officer: Senior Vice President, Chief Financial Officer A M Wright and Treasurer --------------------------- Alan M. Wright
(iii) Controller or principal accounting officer:
Senior Vice President, Controller P. D. Hopper and Chief Accounting Officer --------------------------- Preston D. Hopper
(iv) A majority of the Directors including those named above:
James J. Duderstadt* Director --------------------------- James J. Duderstadt
K R Flaherty* Director --------------------------- Kathleen R. Flaherty
Victor J. Fryling* Director --------------------------- Victor J. Fryling
Earl D. Holton* Director --------------------------- Earl D. Holton
Lois A. Lund* Director --------------------------- Lois A. Lund
Frank H. Merlotti* Director --------------------------- Frank H. Merlotti
Michael G. Morris* Director --------------------------- Michael G. Morris
W. U. Parfet* Director --------------------------- William U. Parfet
Percy A. Pierre* Director --------------------------- Percy A. Pierre
K. Whipple* Director --------------------------- Kenneth Whipple
John B. Yasinsky* Director --------------------------- John B. Yasinsky
* By Thomas A. McNish --------------------------- Thomas A. McNish, Attorney-in-Fact
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 14th day of March 1996.
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 14th day of March 1996.
Signature Title
(i) Principal executive officer: President, Chief Executive Officer Michael G. Morris and Director --------------------------- Michael G. Morris
(ii) Principal financial officer:
Senior Vice President and A M Wright Chief Financial Officer --------------------------- Alan M. Wright
(iii) Controller or principal accounting officer:
Vice President and Dennis DaPra Controller --------------------------- Dennis DaPra
(iv) A majority of the Directors including those named above:
James J. Duderstadt* Director --------------------------- James J. Duderstadt
K R Flaherty* Director --------------------------- Kathleen R. Flaherty
Victor J. Fryling* Director --------------------------- Victor J. Fryling
Earl D. Holton* Director --------------------------- Earl D. Holton
Lois A. Lund* Director --------------------------- Lois A. Lund
William T. McCormick, Jr.* Director --------------------------- William T. McCormick, Jr.
Frank H. Merlotti* Director --------------------------- Frank H. Merlotti
W. U. Parfet* Director --------------------------- William U. Parfet
Percy A. Pierre* Director --------------------------- Percy A. Pierre
K. Whipple* Director --------------------------- Kenneth Whipple
John B. Yasinsky* Director --------------------------- John B. Yasinsky
*By Thomas A. McNish --------------------------- Thomas A. McNish, Attorney-in-Fact