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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1994
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to
Commission Registrant; State of Incorporation; IRS Employer
File Number Address; and Telephone Number Identification No.
----------- ----------------------------------- ------------------
1-9513 CMS ENERGY CORPORATION 38-2726431
(A Michigan Corporation)
Fairlane Plaza South, Suite 1100
330 Town Center Drive
Dearborn, Michigan 48126
(313)436-9261
1-5611 CONSUMERS POWER COMPANY 38-0442310
(A Michigan Corporation)
212 West Michigan Avenue
Jackson, Michigan 49201
(517)788-1030
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange
Registrant Title of Class on Which Registered
------------ ---------------------------- -----------------------
CMS Energy Common Stock, $.01 par value New York Stock Exchange
Corporation
Consumers Listed on inside cover
Power Company
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the Registrants (1) have filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that
the Registrants were required to file such reports), and (2) have been
subject to such filing requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrants' knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
Consumers Power Company securities registered pursuant to Section 12(b) of
the Act:
FIRST MORTGAGE BONDS:
5-7/8% Series due 1996
6-7/8% Series due 1998
6-5/8% Series due 1998
7-1/2% Series due 2001
7-1/2% Series due 2002
PREFERRED STOCK - Cumulative
No par:
$2.08 Series
$100 par value:
$4.16 Series $7.68 Series
$4.50 Series $7.72 Series
$7.45 Series $7.76 Series
All securities listed above are registered on the New York Stock Exchange.
The aggregate market value of the voting stock of CMS Energy Corporation
held by non-affiliates, was $2,101,736,952 based on the closing sale price
of $24 per share for the 87,572,373 common shares, $.01 par value,
outstanding on February 28, 1995. CMS Energy held all 84,108,789
outstanding common shares, $10 par value, of Consumers Power Company, and
the market value of the voting preferred stock of Consumers, held by non-
affiliates, was $320,480,726 based on the closing sale price shown below.
Aggregate market value of Consumers' voting stock held by non-affiliates.
Transaction
Number Shares ------------------------
Type of Stock Outstanding Price/Share Date Market Value
- ------------- -------------- ----------- ------- ------------
(2/28/95)
Preferred:
$2.08 8,000,000 $24-1/4 2/28/95 $194,000,000
4.16 68,451 50 2/21/95 3,422,550
4.50 373,148 51-1/4 2/28/95 19,123,835
7.45 379,549 89-1/2 2/27/95 33,969,636
7.68 207,565 86-1/2 2/28/95 17,954,372
7.72 289,642 86-1/2 2/23/95 25,054,033
7.76 308,072 87-1/2 2/28/95 26,956,300
--------- ------------
Total 9,626,427 $320,480,726
========= ============
Documents incorporated by reference:
The Registrants' proxy statements relating to the 1995 annual meetings of
shareholders to be held May 26, 1995, are incorporated by reference in
Part III, except for the organization and compensation committee report
contained therein.
CMS ENERGY CORPORATION
and
CONSUMERS POWER COMPANY
ANNUAL REPORTS ON FORM 10-K
TO THE SECURITIES AND EXCHANGE COMMISSION
FOR THE YEAR ENDED DECEMBER 31, 1994
This combined Form 10-K is separately filed by CMS Energy Corporation and
Consumers Power Company. Information contained herein relating to each
individual registrant is filed by such registrant on its own behalf.
Accordingly, except for its subsidiaries, Consumers Power Company makes no
representation as to information relating to any other companies
affiliated with CMS Energy Corporation.
TABLE OF CONTENTS
Page
PART I
Item 1. Business. . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Item 2. Properties. . . . . . . . . . . . . . . . . . . . . . . . . . 28
Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . 36
Item 4. Submission of Matters to a Vote of Security Holders . . . . . 41
PART II
Item 5. Market for CMS Energy's and Consumers' Common Equity
and Related Stockholder Matters . . . . . . . . . . . . . 42
Item 6. Selected Financial Data . . . . . . . . . . . . . . . . . . . 42
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . . 42
Item 8. Financial Statements and Supplementary Data . . . . . . . . . 43
Item 9. Changes in and Disagreements With Accountants on
Accounting and Financial Disclosure . . . . . . . . . . .135
PART III
Item 10. Directors and Executive Officers of CMS Energy
and Consumers . . . . . . . . . . . . . . . . . . . . . .135
Item 11. Executive Compensation. . . . . . . . . . . . . . . . . . . .135
Item 12. Security Ownership of Certain Beneficial Owners
and Management. . . . . . . . . . . . . . . . . . . . . .135
Item 13. Certain Relationships and Related Transactions. . . . . . . .135
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K . . . . . . . . . . . . . . . . . . . . . . .135
4
GLOSSARY
Certain terms used in the text and financial statements are defined below.
ABATE . . . . . . . . . . . . . . Association of Businesses Advocating
Tariff Equity
ALJ . . . . . . . . . . . . . . . Administrative Law Judge
AMT . . . . . . . . . . . . . . . Alternative minimum tax
Articles. . . . . . . . . . . . . Articles of Incorporation
Attorney General. . . . . . . . . The Michigan Attorney General
bcf . . . . . . . . . . . . . . . Billion cubic feet
Big Rock. . . . . . . . . . . . . Big Rock Point nuclear plant, owned
by Consumers
Btu . . . . . . . . . . . . . . . British thermal unit
CERCLA. . . . . . . . . . . . . . Comprehensive Environmental Response
Compensation and Liability Act
Clean Air Act . . . . . . . . . . Federal Clean Air Act as amended on
November 15, 1990
CMS Energy. . . . . . . . . . . . CMS Energy Corporation
CMS Gas Marketing . . . . . . . . CMS Gas Marketing Company, a
subsidiary of Enterprises
CMS Gas Transmission. . . . . . . CMS Gas Transmission and Storage
Company, a subsidiary of Enterprises
CMS Generation. . . . . . . . . . CMS Generation Co., a subsidiary of
Enterprises
CMS Holdings. . . . . . . . . . . CMS Midland Holdings Company, a
subsidiary of Consumers
CMS Midland . . . . . . . . . . . CMS Midland Inc., a subsidiary of
Consumers
CMS NOMECO. . . . . . . . . . . . CMS NOMECO Oil & Gas Co., a
subsidiary of Enterprises
Consumers . . . . . . . . . . . . Consumers Power Company, a subsidiary
of CMS Energy
Court of Appeals. . . . . . . . . Michigan Court of Appeals
Detroit Edison. . . . . . . . . . The Detroit Edison Company
DNR . . . . . . . . . . . . . . . Michigan Department of Natural
Resources
DOE . . . . . . . . . . . . . . . U. S. Department of Energy
Dow . . . . . . . . . . . . . . . The Dow Chemical Company
DSM . . . . . . . . . . . . . . . Demand-side management
EMF . . . . . . . . . . . . . . . Electric and magnetic fields
Energy Act. . . . . . . . . . . . Energy Policy Act of 1992
Enterprises . . . . . . . . . . . CMS Enterprises Company, a subsidiary
of CMS Energy
Environmental Response Act. . . . Michigan Envirionmental Response Act
EPA . . . . . . . . . . . . . . . Environmental Protection Agency
FASB. . . . . . . . . . . . . . . Financial Accounting Standards Board
FERC. . . . . . . . . . . . . . . Federal Energy Regulatory Commission
FMLP. . . . . . . . . . . . . . . First Midland Limited Partnership
GCR . . . . . . . . . . . . . . . Gas cost recovery
GPSLP . . . . . . . . . . . . . . Genesee Power Station Limited
Partnership
GTN's . . . . . . . . . . . . . . $250 million CMS Energy General Term
Notes, Series A
Huron . . . . . . . . . . . . . . Huron Hydrocarbons, Inc., a
subsidiary of Consumers
HYDRA-CO. . . . . . . . . . . . . Independent power production
subsidiary of Niagara Mohawk Power
Corporation
Indentures. . . . . . . . . . . . Indenture pursuant to which the Notes
are issued, including the First
Supplemental Indenture and Second
Supplemental Indenture
ITC . . . . . . . . . . . . . . . Investment tax credit
kWh . . . . . . . . . . . . . . . Kilowatt-hour
Ludington . . . . . . . . . . . . Ludington pumped storage plant,
jointly owned by Consumers and
Detroit Edison
mcf . . . . . . . . . . . . . . . Thousand cubic feet
MCV . . . . . . . . . . . . . . . Midland Cogeneration Venture
MCV Bonds . . . . . . . . . . . . Collectively, senior secured lease
obligation bonds and subordinated
secured lease obligation bonds issued
in connection with the leveraged-
lease financing of the MCV Facility,
and tax-exempt PCRBs
MCV Facility. . . . . . . . . . . A natural gas-fueled, combined cycle
cogeneration facility operated by the
MCV Partnership
MCV Partnership . . . . . . . . . Midland Cogeneration Venture Limited
Partnership
MGL . . . . . . . . . . . . . . . Midland Group, Ltd., a former
subsidiary of Consumers
MichCon . . . . . . . . . . . . . Michigan Consolidated Gas Company
Michigan Gas Storage. . . . . . . Michigan Gas Storage Company, a
subsidiary of Consumers
MMbbls. . . . . . . . . . . . . . Million barrels
MMBtu . . . . . . . . . . . . . . Million British thermal unit
MMcf/d. . . . . . . . . . . . . . Million cubic feet per day
MMCG. . . . . . . . . . . . . . . Michigan Municipal Cooperative Group
MOAPA . . . . . . . . . . . . . . MOAPA Energy Limited Partnership, a
wholly owned affiliate of CMS
Generation
MPSC. . . . . . . . . . . . . . . Michigan Public Service Commission
MW. . . . . . . . . . . . . . . . Megawatts
MWRC. . . . . . . . . . . . . . . Michigan Waste Resources Commission
Natural Gas Act . . . . . . . . . Federal Natural Gas Act
NEIL. . . . . . . . . . . . . . . Nuclear Electric Insurance Ltd.
NEPA. . . . . . . . . . . . . . . National Environmental Response Act
NML . . . . . . . . . . . . . . . Nuclear Mutual Ltd.
Notes . . . . . . . . . . . . . . Collectively,
Series A Notes. . . . . . . . . Series A Senior Deferred Coupon
Notes of CMS Energy due
October 1, 1997
Series B Notes. . . . . . . . . Series B Senior Deferred Coupon
Notes of CMS Energy due
October 1, 1999
NOx . . . . . . . . . . . . . . . Nitrogen oxide
NPDES . . . . . . . . . . . . . . National Pollutant Discharge
Elimination System
NRC . . . . . . . . . . . . . . . Nuclear Regulatory Commission
O&M . . . . . . . . . . . . . . . Other operation and maintenance
expense
Order 636 . . . . . . . . . . . . Orders affecting interstate gas
pipelines, including Order 636A and
636B issued by the FERC in 1992,
known also as the Restructuring Rule
Owner Participants. . . . . . . . Lessors of the MCV Facility
Palisades . . . . . . . . . . . . Palisades nuclear plant, owned by
Consumers
Panhandle . . . . . . . . . . . . Panhandle Eastern Pipeline Company
PCB . . . . . . . . . . . . . . . Polychlorinated biphenyls
PCRB. . . . . . . . . . . . . . . Pollution control revenue bond
Pension Plan. . . . . . . . . . . The trusteed, non-contributory,
defined benefit pension plan of
Consumers and CMS Energy
PFD . . . . . . . . . . . . . . . Proposal for Decision
PPA . . . . . . . . . . . . . . . The Power Purchase Agreement between
Consumers and the MCV Partnership
with a 35-year term commencing in
March 1990
ppm . . . . . . . . . . . . . . . Parts per million
PSCR. . . . . . . . . . . . . . . Power supply cost recovery
PUHCA . . . . . . . . . . . . . . Public Utility Holding Company Act of
1935
PURPA . . . . . . . . . . . . . . Public Utility Regulatory Policies
Act of 1978
Qualifying Facility . . . . . . . A facility that produces electricity
or steam and electricity and meets
the ownership and technical
requirements of PURPA. Electric
utilities are required to purchase
the electric capacity and energy made
available by a Qualifying Facility at
the purchasing utility's avoided
cost.
Revised Settlement Proposal . . . The request for approval of a
settlement proposal to resolve MCV
cost recovery issues, PURPA issues
and court remand as filed with the
MPSC on July 7, 1992 and amended on
September 8, 1992
SEC . . . . . . . . . . . . . . . Securities and Exchange Commission
SERP. . . . . . . . . . . . . . . Supplemental Executive Retirement
Plan
Settlement Order. . . . . . . . . MPSC Order issued March 31, 1993 in
MPSC Case Nos. U-10127, U-8871 and
others, and the rehearing order
issued May 26, 1993
SFAS. . . . . . . . . . . . . . . Statement of Financial Accounting
Standards
Superfund . . . . . . . . . . . . Comprehensive Environmental Response,
Compensation and Liability Act
Trunkline . . . . . . . . . . . . Trunkline Gas Company
Union . . . . . . . . . . . . . . Utility Workers of America, AFL-CIO
Unsecured Credit Facility . . . . $400 million unsecured revolving
credit and letter of credit facility
dated as of July 29, 1994
UST . . . . . . . . . . . . . . . Underground storage tanks
Voluntary Employee Beneficiary
Association . . . . . . . . . . A legal entity, established under
guidelines of the Internal Revenue
Code, through which the company can
provide certain benefits for its
employees or retirees
Walter. . . . . . . . . . . . . . Walter International, Inc., a Texas
corporation
7
PART I
ITEM 1. BUSINESS.
GENERAL
CMS Energy
CMS Energy, incorporated in Michigan in 1987, is the parent holding
company of Consumers and Enterprises. Consumers, a combination electric
and gas utility company serving the Lower Peninsula of Michigan, is the
largest subsidiary of CMS Energy. Consumers' customer base includes a mix
of residential, commercial and diversified industrial customers, the
largest of which is the automotive industry. Enterprises is engaged in
several non-utility energy-related businesses including: oil and gas
exploration and production; development and operation of independent power
production facilities; gas marketing services to end-users; 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 1994 of $3.62 billion
which was derived approximately 61 percent from its electric utility
operations, approximately 36 percent from its gas utility operations,
approximately 2 percent from oil and gas exploration and production
activities and approximately 1 percent from independent power production,
gas marketing and other non-utility activities. Consumers' consolidated
operations in the electric and gas businesses account for the major share
of CMS Energy's total assets, revenue and income. CMS Energy's share of
unconsolidated non-utility electric generation and gas transmission
revenue for 1994 was $392 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 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 1994 of $3.4 billion which was derived approximately 65 percent from
its electric business and approximately 35 percent from its gas business.
Consumers' retail 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, 1994, in
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA, which is incorporated
herein by reference.
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, 1994, in
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA, which is incorporated
herein by reference.
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 electric and gas utility operations.
Consumers' electric and gas businesses are regulated utility operations.
On January 1, 1995, Consumers was internally reorganized into separate
electric utility and gas utility strategic business units. The
restructuring, while not affecting Consumers' consolidated financial
statements or corporate legal form, is designed to sharpen management
focus, improve efficiency and accountability in both business segments and
better position Consumers for growth in the gas market and to meet
increased competition in the electric power market. Management believes
that the strategic business unit structure will allow each unit to focus
more on its own profitability and growth potential, and will, in the long
term, result in more competitive businesses.
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 1.5 million electric customers at December 31, 1994. Total
electric sales in 1994 were a record 34.5 billion kWh, a 5.2 percent
increase from 1993 levels which includes a 4.2 percent increase in system
sales to Consumers' ultimate customers. Electric operating revenue in
1994 was $2.189 billion, an increase of 5.4 percent from 1993. A peak
demand of 6,502 MW was achieved in June 1994, representing an increase of
4.4 percent from the peak achieved in 1993, predominantly as a result of
improved industrial sales. Consumers' reserve margin was approximately
15 percent in 1994 and 21 percent in 1993, based on weather adjusted
peaks.
Including the Ludington pumped storage facility, 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, as of 1994 for summer conditions, of
6,299 MW. In 1994, Consumers purchased approximately 1375 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 (including a reserve
margin of approximately 19 percent). See Item 2. PROPERTIES. CONSUMERS
ELECTRIC UTILITY PROPERTIES.
Consumers' electric generating plants are interconnected by a transmission
system which is itself interconnected at a number of locations with
transmission facilities of unaffiliated systems, including those of other
utilities in Michigan and Indiana. These interconnections permit a
sharing of the reserve capacity of the systems. This allows mutual
assistance during emergencies and substantially reduces investment in
utility plant facilities.
Consumers' customer base includes a mix of residential, commercial, and
diversified industrial customers, the most significant of which is the
automotive industry. However, Consumers' electric operations are not
dependent upon a single customer, or a few customers, and the loss of any
one or more of such customers would not have a material adverse effect on
its financial condition. Consumers' electric operations are seasonal to
the extent the weather pattern may have an effect on revenues. Peak
demands for 1994 were 5,526 MW in the winter and 6,502 MW in the summer.
For sales by customer class, see Item 1. BUSINESS. CONSUMERS CONSOLIDATED
REVENUE AND SALES BY BUSINESS SEGMENT.
MCV Cost Recovery Issues: The MCV Partnership was formed in January 1987
by subsidiaries of Consumers and Dow to convert a portion of Consumers'
abandoned Midland Nuclear Plant into a natural gas-fueled, combined cycle
cogeneration facility. The MCV Facility has been certified as a
Qualifying Facility under PURPA. Consumers' current interests in the MCV
Partnership and the MCV Facility are discussed more fully in Note 3 of the
Notes to Consumers Consolidated Financial Statements.
In 1987, Consumers signed a PPA with the MCV Partnership for the purchase
of up to 1,240 megawatts of capacity for a 35-year period beginning with
the MCV Facility's commercial operation in March 1990. Consumers' cost
recovery from its electric customers for the amount of capacity purchased
by Consumers from the MCV Partnership, the price paid by Consumers for
that capacity and associated energy, and the method of rate recovery for
those purchases had been at issue before the MPSC and the Michigan
appellate courts since Consumers' first attempt to recover those costs in
its annual power supply cost recovery proceedings. Because the MPSC
consistently denied Consumers full recovery of the costs it incurred for
its purchases from the MCV Partnership, Consumers incurred significant
ongoing annual losses. On March 31, 1993, the MPSC issued an Opinion and
Order on a Revised Settlement Proposal, which had been submitted by
Consumers, CMS Energy, the MPSC Staff, and ten qualifying facility
developers, approving it with certain modifications. The Settlement Order
allows Consumers to schedule deliveries of energy from the
MCV Partnership's facility whenever it is available up to specified hourly
availability caps. Consumers can recover an average 3.62 cents per kWh
capacity charge and the prescribed energy charges associated with the
scheduled deliveries within the availability caps, whether or not those
deliveries had been scheduled on an economic basis. The applicable
availability caps are divided into on-peak and off-peak hours. For the
period beginning January 1, 1993 through December 31, 1997, there is no
cap applicable on Consumers' recovery for its purchase of capacity made
available during on-peak hours while recovery for the purchase of capacity
made available during off-peak hours is capped in 1993 at 80 percent of
the 915 MW, 82 percent in 1994 and 1995, and 84 percent in 1996 and 1997.
Beginning in 1998 and continuing thereafter both the on and off peak
recovery will be capped at 88.7 percent of the 915 MW of capacity
authorized for recovery under the Settlement Order. With Consumers'
acceptance of the Settlement Order, the uncertainties surrounding
Consumers' cost recoveries related to its purchases from the MCV
Partnership were resolved to a sufficient degree that Consumers effected a
quasi-reorganization as of December 31, 1992, in which Consumers'
accumulated deficit of $574 million was eliminated against other paid-in
capital. Following this quasi-reorganization, Consumers resumed paying
dividends in 1993. This action was approved by Consumers' Board of
Directors and did not require shareholder approval.
In conjunction with its ongoing underrecovery of MCV costs and the
recovery ultimately authorized in the Settlement Order, Consumers sought
under the PPA to cease payment to the MCV Partnership of certain of costs
Consumers was not recovering from its customers. The MCV Partnership
disagreed with Consumers' interpretation of the PPA and Consumers and the
MCV Partnership engaged in arbitration to determine whether Consumers was
entitled to reduce the fixed energy charges payable to the
MCV Partnership. In January 1995, the arbitrator ruled in favor of
Consumers' interpretation of the PPA and in February 1995 entered his
final order. For further discussion of this arbitration proceeding and
other legal proceedings involving Consumers, the MCV Partnership and the
lessors of the MCV facility see Item 3. LEGAL PROCEEDINGS.
Fuel: Consumers has five generating plants which utilize coal as a fuel
source and which constitute 77 percent of its baseload capacity. These
plants combined to produce a total of 17,401 million kWhs in 1994
requiring approximately 7.2 million tons of coal. Consumers has long-term
contracts covering 60 to 70 percent of its coal requirements for 1995.
Consumers' coal requirements not under long-term contract must be supplied
through short-term agreements or spot purchases. Consumers' coal
inventory as of December 31, 1994 amounted to approximately 44 days'
supply.
Consumers currently owns and operates two nuclear power plants, Palisades,
near South Haven, Michigan and Big Rock Point, near Charlevoix, Michigan.
In 1994, the combined net generation of these plants was 4,904 million
kWhs, which constitutes approximately 22 percent of Consumers' baseload
capacity. Consumers has contracted for all of its nuclear fuel for 1995
and 30 percent for 1996. Consumers currently has two contracts for
uranium concentrates which have quantity flexibility sufficient to cover
up to approximately 60 percent of its requirements. The larger of these
two contracts runs through 1996, with options to extend the term through
1997. Consumers intends to purchase the balance of its 1996 and 1997
concentrate requirements in the spot market. Consumers has contracts for
nuclear fuel services, including conversion to and enrichment of uranium
hexafluoride and fabrication of nuclear fuel assemblies. The conversion
contract remains in effect until June 1996. Consumers intends to solicit
competitive bid packages in 1995 to procure additional conversion services
for the period 1996 through 1999. The enrichment contract covers
100 percent of the requirements until 1996, then 70 percent until 2000.
The fabrication contracts remain in effect for the next three Palisades
reloads and through the end of the operating license for Big Rock Point in
2000. These contracts are with major private industrial suppliers of
nuclear fuel and related services and with the U.S. government.
Karn Unit 4, a 638 MW oil fired electric generating unit located in
Essexville, Michigan, was modified to burn natural gas in 1993. This unit
has the capability to generate electricity using oil or natural gas or a
combination of both. The unit's maximum capability using natural gas is
375 MW. When using natural gas, full load can be achieved by over-firing
with oil.
As shown below, Consumers generates electricity principally from coal and
nuclear fuel.
Power Generated
(Millions of kWhs)
1994 1993 1992 1991 1990
------ ------ ------ ------ ------
Coal 17,401 16,520 17,024 16,500 16,427
Nuclear 4,904 3,938 5,093 5,340 3,406
Oil (a) 322 238 206 194 287
Gas (a) 91 110 12 16 8
Hydro 481 489 490 518 478
Net Pumped
Storage (b) (414) (394) (393) (406) (354)
------- ------- ------- ------- -------
Total Net
Generation 22,785 20,901 22,432 22,162 20,252
======= ======= ======= ======= =======
(a) 1994 and 1993 reflect the conversion of Karn Unit 4 to a dual
fuel capability enabling the unit to burn natural gas or oil or a
combination of both, having previously only burned oil.
(b) Represents Consumers' share of net generation from the Ludington
pumped storage plant. This facility pumps water into a storage pond using
electricity generated during off-peak hours, in order to later generate
electricity during peak demand hours.
The cost of all fuels consumed, shown below, fluctuates with the mix of
fuel burned.
Fuel Consumed
(Cost Per Million Btu)
1994 1993 1992 1991 1990
----- ----- ----- ----- -----
Coal $1.57 $1.60 $1.62 $1.61 $1.65
Oil 2.96 2.90 2.73 2.96 3.25
Gas (a) 2.81 3.13 4.73 4.58 6.11
Nuclear .46 .40 .38(b) .62 .67
All Fuels (c) 1.34 1.39 1.33 1.36 1.50
(a) Beginning in 1993, includes combustion turbines and Karn 4.
(b) An increase in operating cycles from twelve to eighteen months
beginning in 1992 resulted in a significant reduction in nuclear fuel
costs.
(c) Weighted average fuel costs.
Under the Nuclear Waste Policy Act of 1982, the federal government is
responsible for the permanent disposal of spent nuclear fuel and high-
level radioactive waste beginning not later than 1998. To date, the DOE
has been unable to arrange for storage facilities to meet this obligation.
In May 1994, the DOE solicited comments on its "preliminary view" that the
DOE does not have a statutory obligation to accept spent nuclear fuel in
1998 absent an operational repository. The DOE has begun exploring
possible options to offset a portion of the costs associated with
continued on-site storage after 1998. Consumers' on-site storage pool at
Palisades is at capacity and it is likely that the DOE will fail to accept
delivery of spent nuclear fuel by the contractually established dates,
which for Big Rock and Palisades are 1999 and 2000, respectively.
In 1993, the NRC approved the design of the spent fuel dry storage casks
now being used by Consumers at Palisades. Subsequently, the Attorney
General and certain other parties attempted to block Consumers use of the
storage casks, alleging that the NRC had failed to comply adequately with
the procedural requirements of the Atomic Energy Act and the NEPA. In
January 1995, the U.S. Sixth Circuit Court of Appeals rejected these
allegations and upheld the NRC's rulemaking action. The court found that
the NRC's environmental assessment satisfied NEPA requirements, and that a
site-specific environmental analysis concerning the use and operation of
the storage casks at Palisades was not required. As of February 1995,
Consumers had loaded nine dry storage casks with spent nuclear fuel and
expects to load four additional casks prior to Palisades 1995 refueling.
For a discussion relating to the NRC approval of the casks and Consumers'
use of the casks, see Note 13 of the Notes to Consolidated Financial
Statements and Item 3. LEGAL PROCEEDINGS. which are incorporated by
reference herein.
The Big Rock Point plant has the capacity to accommodate normal spent fuel
discharge through the end of its operating license in 2000, with a full-
core discharge reserve through 1996.
Consumers Gas Utility Operations
Consumers purchases, transports, stores and distributes gas and renders
gas service to approximately 1.4 million customers in 45 of the 68
counties in Michigan's Lower Peninsula. Principal cities served include
Bay City, Flint, Jackson, Kalamazoo, Lansing, Pontiac and Saginaw, as well
as the suburban Detroit area. It owns gas transmission and distribution
mains and other gas lines, compressor stations and facilities, storage
rights, wells and gathering facilities in several fields in Michigan.
Consumers and its wholly owned subsidiary, Michigan Gas Storage, store gas
during the warmer months of the year for use in the colder months when
demand is higher. Consumers' gas operations are not dependent upon a
single customer, or a few customers, and the loss of any one of such
customers would not have a material adverse effect on its financial
condition. See Item 2. PROPERTIES.
Consumers' gas operations are seasonal to the extent that peak demand
occurs in winter due to colder temperatures. Consumers' consolidated gas
operating revenue was $1.151 billion in 1994, a decrease of .8 percent
from 1993. The all-time record 24 hour send-out of natural gas for
Consumers was 3,100,000 mcf on January 19, 1994, which Consumers considers
to be the peak-day transportation and distribution capacity of the system.
Deliveries of gas by Consumers, and from other sellers, to ultimate
customers including the MCV Partnership totaled 409 bcf in 1994. See
Item 1. BUSINESS. CONSUMERS CONSOLIDATED REVENUE AND SALES BY BUSINESS
SEGMENT.
Consumers Gas Supply: In 1994, Consumers purchased approximately
83 percent of its required gas supply under long term contracts.
Trunkline, Consumers' primary gas supplier, supplied 35 percent of the
overall requirement. Of Consumers' remaining gas supply requirements
purchased under long term contract, 14 percent came from Michigan
producers and 35 percent from various other producers and non-affiliated
marketing companies in the United States and Canada. The remaining
17 percent of Consumers' 1994 gas supply requirements were met by
purchases on the spot market.
Consumers' supply contract with Trunkline, which obligated Trunkline to
supply 325 thousand mcf per day to Consumers, expired on November 1, 1994.
This obligation has been replaced with three two-year contracts and four
one-year contracts with independent producers at fixed prices for an
aggregate of 255 thousand mcf per day. Consumers expects to obtain the
balance of its gas supply requirements in the spot market.
Consumers' firm transportation agreements are with Trunkline, Panhandle,
ANR Pipeline Company and Great Lakes Gas Transmission Company. These
agreements are utilized by Consumers to transport its required gas
supplies to market and to replenish its storage fields. In total,
Consumers' firm transportation arrangements will carry almost 90 percent
of Consumers' total gas supply requirements.
Consumers' portfolio of firm transportation from pipelines is as follows:
Volume (dekatherms/day) Expiration
------ ----------------
Trunkline 41,400 February 1997
336,375 October 2002
Panhandle 40,000 March 2000
25,000 March 2000
ANR Pipeline Company 40,000 October 1999
10,000 December 2001
6,000 December 2002
24,900 October 2003
58,765 October 2003
Great Lakes Gas
Transmission Company 84,000 March 2004
The balance of Consumers' required gas supply is transported on
interruptible contracts. The amount of interruptible capacity and the
utilization thereof is primarily a function of the price for such service
and the availability and price of the spot supplies to be purchased and
transported. Consumers' utilization of interruptible transportation is
generally in off-peak summer months.
CMS Energy Oil and Gas Exploration and Production
CMS NOMECO, a wholly owned subsidiary of Enterprises, is an oil and
natural gas producer with activities in Michigan and 12 other states, the
Gulf of Mexico, Australia, Colombia, Ecuador, Equatorial Guinea, New
Zealand, Papua New Guinea, Venezuela and Yemen. In 1994, it produced
approximately 2.2 MMbbls of oil, condensate and plant products and
approximately 20.5 bcf of gas compared to 1.9 MMbbls and 18.5 bcf in 1993.
During 1994 CMS NOMECO participated with a working interest in drilling
wells as follows:
Type of Number of Number of Success
Well Wells Successful Wells Ratio
---------- ---------- ----------------- ------------
Gross Net Gross Net Gross Net
Exploratory 15 5.04 7 2.42 47% 48%
Development 21 2.99 19 2.83 90% 95%
-- ---- -- ----
Total 36 8.03 26 5.25 72% 65%
== ==== == ====
The numbers do not include CMS NOMECO's participation in Devonian Antrim
Shale gas wells in Michigan, where CMS NOMECO drilled 12 wells during 1994
with a 92 percent success rate.
CMS NOMECO has a 14 percent working interest in a consortium which is
conducting oil development and production operations in Block 16 and the
adjoining Tivacuno Block of the Oriente Basin of Ecuador. Production
commenced from the Tivacuno field in May 1994, the Bogi-Caprion field in
June, followed by the Amo field in December. By year end all three fields
were producing at a pipeline-curtailed rate of 33,000 barrels per day
compared to total production capacity of 43,000 barrels per day. Further,
the Ministry of Energy and Mines in Ecuador has recently informed the
consortium members that the Ministry will seek to renegotiate the Risk
Service Contract and other contracts governing the project. CMS NOMECO
cannot predict the outcome of these negotiations. Ecuador currently
represents approximately one-fifth of the total of CMS NOMECO's proven oil
and gas reserves on an equivalent barrel basis.
In June 1994, CMS NOMECO acquired from Sun Company, Inc. a working
interest in the Espinal block in Colombia, South America, which is
operated by LASMO Oil (Colombia) Limited. The block, which includes
250,000 acres, is currently producing 8,500 barrels of oil per day.
CMS NOMECO estimates the block to contain at least 75 million barrels of
proven oil reserves of which CMS NOMECO's share of production is
14.7 percent.
In December 1994, a consortium in which CMS NOMECO is a 29 percent
participant entered into an agreement with Maraven, S.A., a unit of the
Venezuelan state oil company, to develop the Colon block in the Maracaibo
basin of southwest Venezuela. The development program involves reworking,
re-equipping and re-entering wells, and drilling new wells to optimize
production from existing proved reserves. Total production from this
block is expected to approximate 30,000 barrels per day by 1997.
In February 1995, CMS NOMECO acquired Walter for approximately $46
million, consisting of approximately $28 million of CMS Energy common
stock and $18 million in both cash and assumed debt. CMS NOMECO's
acquisition of Walter will add net production of 5,500 barrels per day in
1995 and proven reserves of 20 million barrels of oil. See Item 2.
PROPERTIES. CMS ENERGY OIL AND GAS EXPLORATION AND PRODUCTION PROPERTIES.
CMS Energy Independent Power Production
CMS Generation, a wholly owned subsidiary of Enterprises, invests in,
develops, converts, constructs, operates and acquires non-utility power
generation projects both domestically and internationally. As of January
1995, CMS Generation had ownership interests in 3467 MW (gross) operating
capacity in twenty-nine operating power projects in Michigan, California,
Connecticut, New York, Maine, New Jersey, Oklahoma, North Carolina,
Argentina and the Philippines. These power projects are fueled by natural
gas, biomass, coal, diesel, hydro, tires and wind.
In March 1994, GPSLP, an unconsolidated affiliate of CMS Generation,
obtained financing for the Genesee Power Station. CMS Generation has a
50 percent ownership interest in GPSLP. In April 1994, construction began
on the 35 MW waste wood-fueled power plant near Flint, Michigan.
Completion of the project is scheduled for Spring 1996.
In June 1994, CMS Generation acquired a 41 percent ownership interest in
the Centrales Termicas Mendoza electric generating plant in western
Argentina's Mendoza Province. CMS Generation is the lead developer and
will become the plant operator. With major retrofitting and maintenance,
this facility has the potential to produce 422 MW of generating capacity
fueled by oil and natural gas. CMS Generation's operation of the plant
commenced in November 1994.
In July 1994, CMS Generation acquired a 32.5 percent ownership interest in
Toledo Power Company, which owns two operating power plants totaling 135
MW of generating capacity on Cebu Island in the Philippines.
CMS Generation is the operator of the 93 MW coal- and oil- fueled Sangi
plant and the 42 MW oil-fueled Carmen plant.
In January 1995, CMS Generation acquired Niagara Mohawk Power
Corporation's independent power subsidiary, HYDRA-CO Enterprises, Inc.
CMS Generation assumed ownership in seven major electric generating
facilities and a number of smaller plants totaling 795 MW of gross
capacity and 250 MW of net ownership. CMS Generation will manage and
operate eight plants previously managed by HYDRA-CO. The plants are
fueled by coal, natural gas, waste wood and water (hydro). CMS Generation
also assumed management responsibility for a 60-megawatt diesel-fueled
plant currently under construction in Jamaica. The plant is scheduled to
go into service in the third quarter of 1996.
CMS Energy Gas Transmission and Storage and CMS Gas Marketing
CMS Gas Marketing, a wholly owned subsidiary of Enterprises, was formed in
1987 to independently acquire and provide natural gas to markets
throughout the Great Lakes, Midwest and Middle South regions of the United
States. CMS Gas Marketing currently serves over 500 customers in 18
states with sales of 60 bcf in 1994. Customers include industrial
facilities, schools, hospitals, electric utilities and local gas
distribution companies.
CMS Gas Transmission, a wholly owned subsidiary of Enterprises which
commenced operations in 1989, owns, develops and manages natural gas
transmission, processing and storage projects.
In the first quarter of 1994, CMS Gas Transmission acquired a 50 percent
ownership interest in Moss Bluff Gas Storage Systems, a high deliver-
ability salt cavern storage facility on the Gulf Coast of Texas for
$18 million.
In April 1994, CMS Gas Transmission entered into an agreement in principle
with certain partners to develop a North American natural gas market
center, the Grands Lacs Market Center. The Grands Lacs Market Center,
located in southeastern Michigan, will provide natural gas storage
services, peaking storage, wheeling, parking and other related natural gas
services. In a related project, in February 1995, CMS Gas Transmission
filed an application with the MPSC for permission to construct a pipeline
which will link Grands Lacs with pipeline systems in Ontario, Canada.
This new interconnection between the U.S. and Canada will allow up to 100
MMcf/d of gas to be transported between the countries.
16
CMS ENERGY CONSOLIDATED REVENUE AND SALES BY BUSINESS SEGMENT
Revenue For Years Ended December 31 In Millions
1994 1993 1992
------- ------- -------
Electric Utility Operations
Residential $ 756 $ 718 $ 644
Commercial 646 620 561
Industrial 672 635 551
Other 80 75 80
------- ------- -------
Total System Sales 2,154 2,048 1,836
Intersystem Sales 35 29 27
------- ------- -------
Total 2,189 2,077 1,863
------- ------- -------
Gas Utility Operations
Residential 791 803 781
Commercial 230 232 226
Industrial 57 55 55
Other 19 14 16
Transportation 54 56 48
------- ------- -------
Total 1,151 1,160 1,126
------- ------- -------
Oil and Gas Exploration and
Production Operations 85 77 70
------- ------- -------
Independent Power Production (a) 45 21 (8)
------- ------- -------
Gas Transmission and Marketing Operations
Marketing 129 130 82
Transmission 16 12 7
------- ------- -------
145 142 89
------- ------- -------
Other Operations 4 5 6
------- ------- -------
Total $3,619 $3,482 $3,146
======= ======= =======
(a) Does not include CMS Energy's share of unconsolidated independent
power production revenues of $385 in 1994, $334 in 1993 and $284 in 1992.
Sales For Years Ended December 31
1994 1993 1992
------- ------- -------
Electric Utility Sales
(Millions of kWhs)
Residential 10,222 10,066 9,733
Commercial 9,174 8,909 8,652
Industrial 12,321 11,541 10,831
Other 1,285 1,142 1,292
------- ------- -------
Total System Sales 33,002 31,658 30,508
Intersystem Sales 1,460 1,106 1,093
------- ------- -------
Total 34,462 32,764 31,601
======= ======= =======
Gas Utility Sales and Deliveries (bcf)
Residential 171 175 167
Commercial 55 56 54
Industrial 14 14 13
Transportation 169 166 150
------- ------- -------
Total 409 411 384
======= ======= =======
Oil & Gas Exploration and Production
Sales (net equiv. MMbbls) 5.5 4.3 3.7
17
CONSUMERS CONSOLIDATED REVENUE AND SALES BY BUSINESS SEGMENT
Revenue For Years Ended December 31 In Millions
1994 1993 1992
------- ------- -------
Electric Operations
Residential $ 756 $ 718 $ 644
Commercial 646 620 561
Industrial 672 635 551
Other 80 75 80
------- ------- -------
Total System Sales 2,154 2,048 1,836
Intersystem Sales 35 29 27
------- ------- -------
Total 2,189 2,077 1,863
======= ======= =======
Gas Operations
Residential 791 803 781
Commercial 230 232 226
Industrial 57 55 55
Other 19 14 16
Transportation 54 56 48
------- ------- -------
Total 1,151 1,160 1,126
------- ------- -------
Other Operations 16 6 (11)
------- ------- -------
Total $3,356 $3,243 $2,978
======= ======= =======
Sales For Years Ended December 31
1994 1993 1992
------- ------- -------
Electric Sales (Millions of kWhs)
Residential 10,222 10,066 9,733
Commercial 9,174 8,909 8,652
Industrial 12,321 11,541 10,831
Other 1,285 1,142 1,292
------- ------- -------
Total System Sales 33,002 31,658 30,508
Intersystem Sales 1,460 1,106 1,093
------- ------- -------
Total 34,462 32,764 31,601
======= ======= =======
Gas Sales and Deliveries (bcf)
Residential 171 175 167
Commercial 55 56 54
Industrial 14 14 13
Transportation 169 166 150
------- ------- -------
Total 409 411 384
======= ======= =======
CMS ENERGY AND CONSUMERS REGULATION
CMS Energy, Consumers and their subsidiaries are subject to regulation by
various federal, state, local and foreign governmental agencies, including
those specifically described below.
Michigan Public Service Commission
Consumers is subject to the jurisdiction of the MPSC, which regulates
public utilities in Michigan with respect to retail utility rates,
accounting, services, certain facilities, the issuance of securities and
various other matters. For information about Consumers' significant
pending MPSC matters, see Item 3. LEGAL PROCEEDINGS. The MPSC also has or
will have rate jurisdiction over several limited partnerships in which
CMS Gas Transmission has ownership interests. These partnerships own or
will own and operate intrastate gas transmission pipelines.
Nuclear Regulatory Commission
Under the Atomic Energy Act of 1954, as amended, and the Energy
Reorganization Act of 1974, Consumers is subject to the jurisdiction of
the NRC with respect to the design, construction and operation of its
nuclear power plants. Consumers is also subject to NRC jurisdiction with
respect to certain other uses of nuclear material. In June 1994, the NRC
completed a diagnostic evaluation of Palisades. While this inspection
found certain performance deficiencies at Palisades, the NRC did not place
Palisades on either the troubled plant or declining performance list. The
diagnostic evaluation inspection and other matters relating to Palisades
are more fully described in Note 13 to Consumers' Consolidated Financial
Statements.
Federal Energy Regulatory Commission
FERC has rate jurisdiction over nine independent power projects in which
CMS Generation has an ownership interest which are Qualifying Facilities
under PURPA. FERC also has jurisdiction over Consumers' subsidiary,
Michigan Gas Storage, as a natural gas company within the meaning of the
Natural Gas Act. The FERC jurisdiction relates, among other things, to
the acquisition, operation and disposal of assets and facilities and to
service provided and rates charged by Michigan Gas Storage. Under certain
circumstances, the FERC also has the power to modify gas tariffs of
interstate pipeline companies. Certain aspects of Consumers' gas business
are also subject to regulation by the FERC including a blanket
transportation tariff pursuant to which Consumers can transport gas in
interstate commerce.
In 1992, the FERC issued Order 636 which required interstate pipelines to
unbundle sales services from transportation services and adopted various
mechanisms by which pipelines may recover transition costs arising from
the restructuring of their services. Consumers had historically been a
significant purchaser of gas from an interstate pipeline (Trunkline) and
is a major transportation customer of a number of pipelines, including
Trunkline. Through a settlement approved by the FERC and MPSC, Consumers
will be allowed recovery of transition costs incurred in connection with
the Trunkline restructuring. Consumers does not believe that Order 636
will have a significant impact on its financial position or results of
operations.
Certain aspects of Consumers' electric operations are also subject to
regulation by the FERC, including compliance with the FERC's accounting
rules and other regulations applicable to "public utilities" and
"licensees", the transmission of electric energy in interstate commerce
and the rates and charges for the sale of electric energy at wholesale,
certain mergers, the sale of certain facilities, the construction,
operation and maintenance of hydroelectric projects and the issuance of
certain securities, as provided by the Federal Power Act.
In July 1994, the FERC approved new 40-year licenses for 11 of Consumers'
hydroelectric plants, confirming planned environmental expenditures. In
issuing the licenses, the FERC approved, with modifications, a settlement
agreement signed by Consumers, the Attorney General, the DNR and other
state and federal officials. The agreement requires Consumers to make
payments and investments which could total $30 million over the license
periods for such things as environmental safeguards and fishery habitat
improvements. For information about various lawsuits involving the
Ludington plant, see Item 3. LEGAL PROCEEDINGS.
Consumers has an effective open-access interconnection service schedule on
file with the FERC for wholesale wheeling transactions and another
wheeling tariff pending before the FERC. For further information about
the open-access transmission tariffs, see Item 3. LEGAL PROCEEDINGS.
CONSUMERS AND CMS ENERGY INSURANCE
Consumers is insured by NML, which provides insurance coverage against
property damage to members' nuclear generating facilities. Consumers
maintains $500 million of primary property damage insurance from NML at
each of its operating nuclear plants, Big Rock Point and Palisades,
covering all risks of physical loss, subject to certain exclusions and
deductibles. Consumers is also insured by NEIL and obtains excess
property damage insurance in the amount of $1.952 billion for Palisades.
These nuclear property insurance policies cover decontamination, debris
removal and direct property loss. The NEIL excess property damage
policies for Palisades would also cover much of the cost arising from a
premature decommissioning due to accidents which were not already funded
and part of the remaining book value of the plant. For any loss over $100
million, stabilization and decontamination expenses must be satisfied
before other claims proceeds are received from the insurers. Under all
these policies, Consumers retains the risk of loss to the extent the loss
is within the policy deductibles ($1 million for Palisades and $250,000
for Big Rock Point) or policy exclusions or if the loss exceeds the
combined property damage policy limits ($2.452 billion for Palisades and
$500 million for Big Rock Point) at either location. Because NML and NEIL
are mutual insurance companies, Consumers would be subject to assessments
under the NML and NEIL excess property damage policies which could total
approximately $30 million in any one policy year in the event of covered
losses at its own or any other member's nuclear facility. Consumers has
also procured NEIL I coverage which would partially cover the cost of
replacement power during certain prolonged accidental outages of the Big
Rock Point or Palisades units. Such cost would not be covered by the
insurance during the first 21 weeks of any outage, but the major portion
of such cost would be covered during the next 12 months of the outage,
followed by a reduced level of coverage for a period up to two additional
years. Consumers would be subject to a maximum assessment under the
replacement power insurance of approximately $3 million in any one policy
year in the event of covered losses at its own or any other member's
nuclear facility or facilities.
Consumers maintains nuclear liability insurance and other forms of
financial protection (including an agreement of government indemnity under
the Price-Anderson Act, applicable to the Big Rock Point plant) for
injuries and off-site property damage due to the nuclear hazard at such
facilities. Such insurance and financial protection covers Consumers up
to the aggregate limits of liability established by the Price-Anderson
Act, which are presently $544.4 million for Big Rock Point and
approximately $8.9 billion for Palisades. Part of such financial
protection consists of a mandatory industry-wide program under which
owners of nuclear generating facilities could be assessed in the event of
a nuclear incident at any of such facilities. Consumers would be subject
to a maximum assessment of $75.5 million per occurrence (adjusted for
inflation plus a 5 percent surcharge if claims and legal costs exceed the
financial protection limit) in the event of a nuclear incident at certain
nuclear facilities, limited to a maximum installment payment of $10
million per occurrence in any year. Consumers also maintains insurance
under a master worker program that covers tort claims for bodily injury
caused by a nuclear hazard to workers who began their nuclear related
employment after January 1, 1988. The policies contain a $200 million
nuclear industry aggregate limit and could subject Consumers to a maximum
assessment of up to $6.4 million in the event of claims thereunder.
Property insurance is also maintained on CMS Energy's and Consumers' non-
nuclear facilities and operations. Conventional (non-nuclear) property
insurance is maintained on buildings, equipment, boilers, machinery and
gas stored underground. The applicable policies insure the full
replacement value of all major operating locations. However, the
insurance policies are subject to standard terms, conditions, exclusions
and coverage limits similar to those of other companies with similar
facilities and operations. Consumers maintains deductibles ranging from
$500,000 to $1,000,000 on plant and facility losses. Certain CMS Energy
projects are specifically insured with lower deductibles. Consumers
insures its overhead electric transmission and distribution system for a
$25 million maximum loss limit subject to a $7.5 million deductible.
CMS Energy's and Consumers' non-nuclear public liability insurance
policies provide a $125 million policy limit, with a $500,000 deductible.
Other policies include $125 million of excess workers' compensation
insurance, subject to the $500,000 deductible; $125 million of fiduciary
and employee benefit liability insurance, subject to the $500,000
deductible; $10 million of crime insurance coverage subject to a $100,000
deductible; $50 million (offshore) and $20 million (onshore) of oil and
gas well blow-out insurance subject to a $500,000 deductible; and $225
million of aircraft insurance for corporate aircraft. Certain CMS Energy
non-utility projects maintain special insurance with lower deductibles.
CMS Energy and Consumers are not insured with regard to certain risks,
most notably for flood or earthquake damage to its underground gas and
electrical equipment, because it believes that these properties are not
subject to large earthquake and flood risks. Consumers has also not
obtained insurance for flood and earthquake property damage at its nuclear
plants because it believes that the protective systems built into these
plants and the low probability of an event of this type at the locations
of these plants makes such insurance unnecessary. In addition, Consumers'
insurance coverages do not extend to certain environmental clean-up costs,
such as claims for air pollution, some past PCB contamination and for some
long-term storage or disposal of pollutants. See CONSUMERS AND CMS ENERGY
ENVIRONMENTAL COMPLIANCE section below.
Insurance policy terms, limits and conditions are subject to change during
the year as policies are renewed; however, CMS Energy and Consumers
believe that they and their subsidiaries are adequately insured for the
various risk exposures incident to their respective businesses.
CONSUMERS AND CMS ENERGY ENVIRONMENTAL COMPLIANCE
Consumers and CMS Energy and their subsidiaries are subject to regulation
with regard to environmental quality, including air and water quality,
zoning and other matters, by various federal, state and local authorities.
Management believes that the responsible administration of its energy
resources includes reasonable programs for the protection and enhancement
of the environment.
Consumers has installed modern stack emission controls and monitoring
systems at its electric generating plants, converted electric generating
units to burn cleaner fuels, worked with others to use bottom ash as final
cover for ash disposal areas in place of topsoil and as a base for asphalt
in road shoulders, worked with local, state and national organizations to
enhance certain of Consumers' lands for the benefit of wildlife, provided
recreational access to its lands, worked with universities and other
institutions on projects to propagate threatened or endangered species,
and made financial contributions to a variety of environmental enhancement
projects.
Capital expenditures by Consumers for environmental protection additions
were approximately $47 million in 1994 and are estimated to be
approximately $40 million in 1995.
Air use permits are required under federal and state law for certain of
Consumers' and CMS Generation's affiliates' sources of air emissions.
These laws require that certain affected facilities control their sources'
air emissions. Permits for Consumers' affected steam electric generating
facilities and other affected sources of air emissions have been issued by
the Michigan Air Pollution Control Commission pursuant to a delegation of
authority from the EPA under the federal Clean Air Act and Michigan Air
Pollution Act, as amended. Consumers believes that it is in substantial
compliance with all air use permits.
Included in the 1990 amendments to the federal Clean Air Act are
provisions that limit emissions of sulfur dioxide and NOx and require
enhanced emissions monitoring. All of Consumers' coal-fueled electric
generating units burn low-sulfur coal and are presently operating at or
near the sulfur dioxide emission limits which will be effective in 2000.
Beginning in 1995, certain coal-fueled generating units will receive
emissions allowances (all of Consumers' coal units will receive allowances
beginning in 2000). Based on projected emissions from these units,
Consumers expects to have excess allowances which may be sold or saved for
future use.
The Clean Air Act's provisions have also required Consumers to make
capital expenditures totaling $15 million for installation of continuous
emission monitoring systems at affected units, and $10 million to install
a low NOx burner system at one coal-fired unit. Consumers estimates
capital expenditures for in- process and possible NOx control
modifications at other coal-fired units to be an additional $50 million by
year 2000. Under the current regulatory framework, NOx controls to be
installed at the other coal-fired units are not expected earlier than
1996. Management believes that Consumers' annual operating costs will not
be materially affected.
The relative costs of compliance with the Clean Air Act by Consumers
should be less than that experienced by other utilities that have not been
previously subject to stringent air quality restrictions. CMS Energy
believes that CMS Generation's projects are in substantial compliance with
the 1990 amendments.
Consumers is a so-called "Potentially Responsible Party" at several sites
being administered under Superfund. Although Superfund liability is joint
and several, along with Consumers, there are numerous credit-worthy,
potentially responsible parties with substantial assets cooperating with
respect to the individual sites. Based upon past negotiations, Consumers
estimates its total liability will average less than 4 percent of the
estimated total site remediation costs, and such liability will probably
not exceed $6 million. At December 31, 1994, Consumers has accrued a
liability for its estimated losses. Consumers believes that it is
unlikely that its liability at any of the known Superfund sites,
individually or in total, will have a material adverse effect on its
financial position or results of operations.
In 1990, the State of Michigan passed amendments to its Environmental
Response Act. Effective July 1991, this law established a state program
similar to the federal CERCLA, though broader in scope. Under this law,
Consumers expects it will ultimately incur costs at a number of sites,
including several of the 23 sites that formerly housed manufactured gas
plant facilities at one time operated by Consumers, even those in which it
has a partial or no current ownership interest. Parties other than
Consumers with current or former ownership interests will also be
considered liable for site investigations and remedial actions. There is
limited knowledge of manufactured gas plant contamination at these sites
at this time. However, Consumers is continuing to monitor this issue.
For further information about manufactured gas plants, see Item 7.
CONSUMERS' MANAGEMENT'S DISCUSSION AND ANALYSIS., which is incorporated
herein by reference.
Consumers has engaged in an aggressive testing and removal program for
USTs. Since 1985, Consumers and its subsidiaries have reduced the number
of regulated UST systems from approximately 256 to 52. At 106 of the
sites from which UST systems were removed, there had been hydrocarbon
releases, either from tank system leaks or from spillage on the surface
during transfer of contents to or from the tanks. Consumers' response
activities have resulted in DNR concurrence in closure of 65 of those
releases. The remaining releases are at various stages of cleanup
completion. It is estimated that about $5 million remains to be spent to
complete these response activities. The Michigan Underground Storage Tank
Financial Assurance Act provides a fund to help pay for the cost of
response activities associated with leaking USTs. To qualify for these
funds, an owner or operator must be in compliance with UST regulations. A
substantial portion of future costs for UST response activities at the
release sites and a portion of the costs already incurred may be eligible
for reimbursement from this fund. Through February 1995, Consumers was
reimbursed approximately $2.4 million by this state fund.
Like most electric utilities, Consumers has PCB in some of its electrical
equipment. Although it has been unlawful to manufacture or sell PCB or
PCB contaminated equipment since the 1970's, its continued use in
preexisting electrical equipment is lawful. Consumers has engaged in a
number of programs to reduce the risk of exposure to the environment from
possible PCB spills. These included such actions as removing PCB
capacitors outside of substations, draining large transformers and
refilling them with non-PCB mineral oil, removing PCB equipment which was
found to pose a risk to food supplies or animal feed, and other such
programs. Consumers still has a substantial number of PCB capacitors in
substations. It has approximately 459,000 untested distribution
transformers. By regulation, unless the PCB level is known, transformers
are presumed to be PCB-contaminated. There may also be PCB in certain
other types of equipment. Based upon results of sampling in 1981, it is
thought that about 1 percent of the pole-top transformers had over 500 ppm
of PCB, and about 12 percent had from 50 to 500 ppm. Those percentages
should decline over time with the retirement of older equipment and its
replacement with non-PCB equipment. From time to time there are
accidental releases from such equipment. Consumers typically spends less
than $1 million per year for all cleanup and disposal of debris and
equipment from PCB releases.
NPDES and ground water discharge permits authorize the discharge of
certain waste waters from Consumers' facilities and pipeline construction
projects pursuant to state water quality standards and federal effluent
limitation guidelines. Authorizations for discharges from all of
Consumers' major operating steam electric generating facilities and for
certain discharges from Consumers' other facilities, including the
Ludington pumped storage plant and pipeline construction projects, have
been issued by the State of Michigan pursuant to a delegation of authority
from the EPA under the Federal Water Pollution Control Act of 1972, as
amended. Consumers believes that it is in substantial compliance with the
NPDES permits.
The possibility that exposure to EMFs emanating from power lines and other
electric sources may result in adverse health effects has been a subject
of increased public, governmental and media attention. The scientific
studies and reviews have shown that information is currently insufficient
to determine whether a cause-and-effect relationship exists between EMF
and certain health risks. Currently, there is no Michigan or federal
regulation of transmission lines with regard to EMF.
CONSUMERS AND CMS ENERGY COMPETITION
Electric Competition
The electric utility operations of Consumers are regulated at the
wholesale and retail level. The wholesale utility operations of Consumers
are regulated by the FERC while the retail utility operations are
regulated by the MPSC. Competitors in the electric utility operations of
Consumers must also be similarly regulated or specifically exempted from
such regulation. CMS Energy's non-utility electric generation businesses
are exempt from most state and many federal regulations regarding electric
generation and compete in the non-utility power market with other non-
utility energy companies that have similar exemptions.
The electric utility industry has experienced retail load competition in
recent years from cogeneration and self-generation as discussed below.
The electric utility industry is now also experiencing increased
competition in the wholesale power markets. The factors driving this
trend include the enactment of PURPA, the enactment of the Energy Act and
increased transmission access. These initiatives provide both
opportunities for Consumers in competing for new customers and potential
risks because of alternative energy supplies available to existing
customers. CMS Energy is similarly faced with expanded opportunities and
competition for customers in the non-utility electric generation market.
PURPA created a special type of independent power producer that, providing
the requirements of qualifying facility status are met and the utility's
requirements and the power offered by the qualifying facility are
equivalent, are entitled by statute to have their production purchased by
a utility. Under PURPA, qualifying facilities are generally exempt from
the federal and state regulation imposed on electric utilities.
Similarly, the Energy Act was designed, among other things, to foster
competition in the wholesale market by facilitating the ownership and
operation of generating facilities by "exempt wholesale generators" (which
may include independent power producers as well as affiliates of electric
utilities) and authorizing the FERC under certain conditions to order
utilities which own transmission facilities to provide wholesale
transmission services to or for other utilities and other entities
generating electric energy for sale or resale. In addition, the Energy
Act exempts independent power producers from much of the regulation
imposed on electric utilities. One effect of the exemption from
regulation has been to encourage investment in wholesale power production
facilities which will compete with utilities to provide generation to meet
future system demand and provide competition for CMS Energy in the non-
utility electric generation market both domestically and internationally.
Some of Consumers' larger industrial customers are exploring the
possibility of constructing and operating their own on-site generating
facilities. Consumers is actively working with these customers to develop
rate and service alternatives that are competitive with self-generation
options. Under the retail rates authorized by the MPSC, Consumers'
industrial and commercial customer rates are currently structured such
that rates paid by residential customers are kept at levels lower than
they would otherwise be through subsidization by the industrial and
commercial customers. However, in a May 1994 order granting Consumers a
$58 million annual increase in its retail electric rates, the MPSC reduced
the level of subsidization of residential customers by commercial and
industrial customers. Residential customers were allocated $40 million
(70 percent) of the rate increase. In November 1994, Consumers filed a
request with the MPSC which could increase its retail electric rates in a
range from $104 million to $140 million. Consumers has requested that the
MPSC eliminate the remainder of cross-subsidization of residential rates
in a two-step adjustment to take place over a two year period.
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, if approved, would allow Consumers a certain level of rate-pricing
flexibility and allow the use of the MCV contract capacity above the level
currently authorized for recovery by the MPSC, to respond to customers'
alternative energy options.
In addition, a number of municipalities distribute electricity within
their corporate limits and some of these generate all or a portion of
their requirements. These municipalities and various rural electric
cooperative corporations serve a growing number of retail customers in the
same or adjacent areas served by Consumers. In one case, a community
currently served by Consumers is considering the formation of a new
municipal utility which could displace retail service by Consumers.
In April 1994, the MPSC approved a framework for a five-year experimental
retail wheeling program for Consumers and Detroit Edison. Under the
experiment, up to 60 MW of Consumers' additional load requirements could
be met by retail wheeling. The program becomes effective upon Consumers'
next solicitation for capacity. In February 1994, the ALJ issued a PFD
which, among other things, found that retail wheeling is likely to create
additional stranded investment costs which could be considered costs of
transition from a regulated environment to an unregulated environment and
that retail wheeling participants should bear their proportionate share of
these costs. A ruling on the rate design is expected from the MPSC by
mid-1995. In the short term, Consumers does not expect this experimental
program to have a material impact on its financial position or results of
operations.
Consumers has on file with the FERC an open-access transmission tariff
which enables any electric utility (defined in such tariff to include
independent power producers) to use Consumers' integrated transmission
system for the transmission of capacity and energy produced and sold by
such electric utility or by third parties. Other similar open-access
transmission tariffs have been made effective by the FERC for several
large utility companies or systems and more open-access transmission
tariffs are anticipated. These developments produce increased marketing
opportunities for utility systems such as Consumers' and expose Consumers'
system to loss of wholesale load or reduced revenues due to possible
displacement of Consumers' wholesale transactions by alternative suppliers
with access to Consumers' primary areas of service. Because wholesale
transactions by Consumers generated less than 2 percent of Consumers' 1994
revenue from electric operations, Consumers does not believe that this
potential loss is significant.
Gas Competition
Competition with respect to Consumers' gas operations has a longstanding
history, as gas has traditionally competed with other fuels such as coal
and oil. The passage of the Natural Gas Policy Act of 1978 resulted in
gas supplies no longer being curtailed, with competition subsequently
arising among alternative suppliers of gas. Consumers responded to these
developments by offering gas transportation and storage services to
customers that chose to acquire their gas supplies from some other
supplier. Because Consumers' earnings from its gas operations are not
primarily dependent on gas purchased and resold to its customers, but
rather on owning and operating its gas distribution, storage and
transportation facilities, Consumers has not suffered any significant
losses as a result of such competition, nor does it believe that such
losses are likely.
CMS Energy's non-utility interstate and intrastate gas operations face
competition from other gas transportation companies for new opportunities.
The marketing segment faces strong competition for business in all its
markets.
EMPLOYEES
CMS Energy
As of February 28, 1995, CMS Energy and its subsidiaries had 10,043 full-
time employees and 275 part-time employees for a total of 10,318
employees.
Consumers
As of February 28, 1995, Consumers and its subsidiaries had 9,326 full-
time employees and 251 part-time employees for a total of 9,577 employees.
This total includes 4,175 full-time operating, maintenance and
construction employees of Consumers who are represented by the Union. A
collective bargaining agreement was negotiated between Consumers and the
Union which became effective on June 1, 1992 and, by its terms, will
continue in full force and effect until June 1, 1995.
25
EXECUTIVE OFFICERS
As of February 28, 1995
CMS Energy
Name Age Position Period
---- --- -------- ------
William T. McCormick, Jr. 50 Chairman of the Board and
Chief Executive Officer
of CMS Energy 1987-Present
Chairman of the Board of
Consumers 1992-Present
Chairman of the Board and
Chief Executive Officer
of Enterprises 1988-Present
Chairman of the Board and
Chief Executive Officer
of Consumers 1985-1992
S. Kinnie Smith, Jr. 64 Vice Chairman of the Board
and General Counsel of
CMS Energy 1992-Present
Vice Chairman of the Board of
Consumers 1988-Present
Vice Chairman of the Board of
Enterprises 1989-Present
President and General Counsel
of CMS Energy 1988-1992
Victor J. Fryling 47 President of CMS Energy 1992-Present
Vice Chairman of the Board of
Consumers 1992-Present
President of Enterprises 1993-Present
President and Chief Financial
Officer of Enterprises 1992-1993
Executive Vice President and
Chief Financial Officer of
CMS Energy and Consumers 1988-1992
John W. Clark 50 Senior Vice President of
CMS Energy 1987-Present
Senior Vice President of
Consumers 1985-Present
Alan M. Wright 49 Senior Vice President, Chief
Financial Officer and
Treasurer of CMS Energy 1994-Present
Senior Vice President and
Chief Financial Officer
of Consumers 1993-Present
Senior Vice President and
Chief Financial Officer and
Treasurer of Enterprises 1994-Present
Senior Vice President and
Chief Financial Officer of
CMS Energy 1992-1994
Senior Vice President and
Chief Financial Officer
of Enterprises 1993-1994
Senior Vice President, Chief
Financial Officer and
Treasurer of Consumers 1992-1993
Vice President and Treasurer
of Consumers 1991-1992
Vice President - Finance of
Entergy Corporation 1989-1991
Vice President - Finance of
Entergy Services 1987-1991
Preston D. Hopper* 44 Vice President, Controller and
Chief Accounting Officer of
CMS Energy 1992-Present
Vice President and Controller
of Enterprises 1992-Present
Vice President and Controller
of CMS Energy 1991-1992
Vice President and Controller
of ANR Pipeline Co. 1983-1991
Michael G. Morris* 48 President and Chief Executive
Officer of Consumers 1994-Present
Executive Vice President and
Chief Operating Officer of
Consumers 1992-1994
Executive Vice President of
Consumers 1988-1992
David A. Mikelonis* 46 Senior Vice President and
General Counsel of Consumers 1988-Present
* In May 1993 the Board of Directors designated the Senior Officers of
CMS Energy, its Controller, the President of Enterprises, the President of
Consumers and the General Counsel of Consumers as Executive Officers of
CMS Energy for purposes of the Securities Exchange Act of 1934.
The present term of office of each of the officers extends to the first
meeting of CMS Energy's Board of Directors after the next annual election
of Directors (scheduled to be held May 26, 1995).
There are no family relationships among executive officers and directors
of CMS Energy.
Consumers
Name Age Position Period
---- --- -------- ------
William T. McCormick, Jr. 50 See the information under
CMS Energy's Officers Section
above, incorporated herein by
reference.
S. Kinnie Smith, Jr. 64 See the information under
CMS Energy's Officers Section
above, incorporated herein by
reference.
Victor J. Fryling 47 See the information under
CMS Energy's Officers Section
above, incorporated herein by
reference.
Michael G. Morris 48 See the information under
CMS Energy's Officers Section
above, incorporated herein by
reference.
John W. Clark 50 See the information under
CMS Energy's Officers Section
above, incorporated herein by
reference.
Paul A. Elbert 45 Executive Vice President and
Chief Operating Officer -
Gas of Consumers 1994-Present
Senior Vice President of
Consumers 1991-1994
Vice President of Consumers 1988-1991
David A. Mikelonis 46 See the information under
CMS Energy's Officers Section
above, incorporated herein by
reference.
Alan M. Wright 49 See the information under
CMS Energy's Officers Section
above, incorporated herein by
reference.
David W. Joos 41 Executive Vice President and
Chief Operating Officer -
Electric of Consumers 1994-Present
Senior Vice President of
Consumers 1994-1994
Vice President of Consumers 1990-1994
Dennis DaPra** 52 Vice President and Controller
of Consumers 1991-Present
Director of Financial and
Regulatory Reporting of
Consumers 1984-1991
** In May 1993, Consumers' Board of Directors designated the Senior
Officers of Consumers and its Controller as Executive Officers of
Consumers for purposes of the Securities Exchange Act of 1934.
The present term of office of each of the officers extends to the first
meeting of Consumers' Board of Directors after the next annual election of
Directors (scheduled to be held May 26, 1995).
There are no family relationships among executive officers and directors
of Consumers.
28
ITEM 2. PROPERTIES.
CHARACTER OF OWNERSHIP
The principal properties of CMS Energy and its subsidiaries are owned in
fee, except that most electric lines and gas mains are located, pursuant
to easements and other rights, in public roads or on land owned by others.
The statements under this item as to ownership of properties are made
without regard to tax and assessment liens, judgments, easements, rights
of way, contracts, reservations, exceptions, conditions, immaterial liens
and encumbrances, and other outstanding rights. None of these outstanding
rights impairs the usefulness of such properties.
Substantially all of Consumers' properties are subject to the lien of its
First Mortgage Bond Indenture.
CONSUMERS ELECTRIC UTILITY PROPERTIES
Consumers' electric generating system consists of five fossil-fueled
plants, two nuclear plants, one pumped storage hydroelectric facility,
seven gas combustion turbine plants and 13 hydroelectric plants.
29
1994 Summer Net 1994 Net
Demonstrated Generation
Name and Location Size and Year Capability (Thousands
(Michigan) Entering Service (Kilowatts) of kWhs)
Coal Generation
J H Campbell - West Olive 3 Units, 1962-1980 1,346,100 (a) 8,270,828
D E Karn - Essexville 2 Units, 1959-1961 515,000 3,153,851
B C Cobb - Muskegon 2 Units, 1956-1957 296,000 1,974,550
J R Whiting - Erie 3 Units, 1952-1953 310,000 2,099,716
J C Weadock - Essexville 2 Units, 1955-1958 310,000 1,901,989
--------- -----------
Total 2,777,100 17,400,934
--------- -----------
Oil/Gas Generation
D E Karn - Essexville 2 Units, 1975-1977 1,276,000 398,423
--------- -----------
Ludington Pumped Storage 6 Units, 1973 954,700 (b) (413,644) (c)
--------- -----------
Nuclear Generation
Palisades - South Haven 1 Unit, 1971 755,000 4,495,232
Big Rock Point -
Charlevoix 1 Unit, 1962 67,000 408,488
--------- -----------
Total 822,000 4,903,720
--------- -----------
Gas/Oil Combustion Turbine
Generation 7 Plants, 1966-1971 395,300 14,490
--------- -----------
Hydro Generation 13 Plants,1907-1949 73,800 480,846
--------- -----------
Total Owned Generation 6,298,900 22,784,769
===========
Plus Purchased and Inter-
change Power Capacity 1,107,000 (d)
---------
Total 7,405,900
=========
(a) Represents Consumers' share of the capacity of the Campbell Plant Unit 3, net of 6.69 percent (ownership
interests of the Michigan Public Power Agency and Wolverine Power Supply Cooperative, Inc.).
(b) Represents Consumers' share of the capacity of the Ludington pumped storage plant. Consumers and Detroit
Edison have 51 percent and 49 percent undivided ownership, respectively, in the plant, and the capacity of the
plant is shared accordingly.
(c) Represents Consumers' share of net pumped storage generation. This facility electrically pumps water during
off-peak hours for storage to later generate electricity during peak-demand hours.
(d) Includes 915 MW jurisdictional and does not include 217 MW non-jurisdictional purchased power capacity from the
MCV Facility.Consumers' electric transmission and distribution lines owned and in service are as follows:
/TABLE
30
Structure Sub-Surface
(Miles) (Miles)
Transmission
345,000 volt 1,137 -
138,000 volt 3,251 4
120,000 volt 19 -
46,000 volt 4,080 9
23,000 volt 30 7
------ -----
Total transmission 8,517 20
Distribution
(2,400-24,900 volt) 50,853 4,991
------ -----
Total transmission and
distribution 59,370 5,011
====== =====
Consumers owns substations having an aggregate transformer capacity of
37,766,530 kilovoltamperes.
CONSUMERS GAS UTILITY PROPERTIES
Consumers' gas distribution and transmission system consists of
21,197 miles of distribution mains and 1,076 miles of transmission lines
throughout the Lower Peninsula of Michigan. Consumers owns and operates
five compressor stations with a total of 116,070 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 Novacor Hydrocarbons,
Inc. were partners in a partnership to use certain hydrocarbon
fractionation facilities at the plant. In December 1994, PanCanadian
Petroleum Company purchased Novacor Hydrocarbons' interest in the
fractionation partnership.
CMS ENERGY OIL AND GAS EXPLORATION AND PRODUCTION PROPERTIES
CMS NOMECO has carried on a domestic oil and gas exploration program since
1967. In 1976, CMS NOMECO entered its first venture outside the United
States.
Net oil and gas production by CMS NOMECO for the years 1992 through 1994
is shown in the following table.
Thousands of barrels of oil and millions
of cubic feet of gas, except for reserves
1994 1993 1992
Natural gas (a) 20,546 18,487 17,578
Oil and condensate (a) 2,025 1,716 1,417
Plant products (a) 193 186 291
Average daily production (b)
Oil 7.1 5.6 4.9
Gas 69.3 62.3 59.2
Reserves to annual production ratio
Oil (MMbbls) 26.1 19.1 22.6
Gas (bcf) 11.3 10.9 11.8
(a) Revenue interest to CMS NOMECO
(b) CMS NOMECO working interest (includes CMS NOMECO's share of royalties)
32
The following table shows CMS NOMECO's estimated proven reserves of oil and gas for the years 1992 through 1994.
Total Worldwide United States International
Oil Gas Oil Gas Oil Gas
(MMbbls) (bcf) (MMbbls) (bcf) (MMbbls) (bcf)
Proven Developed and
Undeveloped Reserves(a)
December 31, 1991 28.5 191.2 5.3 187.1 23.2 4.1
Revisions and other changes 0.8 (20.4) 0.2 (20.1) 0.6 (0.3)
Extensions and discoveries 7.4 45.4 0.1 44.7 7.3 0.7
Purchases of reserves 1.0 9.9 0.2 6.8 0.8 3.1
Production (1.6) (17.6) (1.1) (17.4) (0.5) (0.2)
----- ------ ----- ------ ----- -----
December 31, 1992 36.1 208.5 4.7 201.1 31.4 7.4
Revisions and other changes 0.4 7.2 (0.4) 7.1 0.8 0.1
Extensions and discoveries 0.1 2.9 0.1 2.9 - -
Purchases of reserves - 1.7 - 1.7 - -
Production (1.9) (18.5) (1.0) (18.2) (0.9) (0.3)
----- ------ ----- ------ ----- -----
December 31, 1993 34.7 201.8 3.4 194.6 31.3 7.2
Revisions and other changes (1.3) (9.7) (0.3) (9.4) (1.0) (0.3)
Extensions and discoveries 0.4 50.2 0.4 50.2 - -
Acquisitions of reserves 20.2 9.4 - 9.4 20.2 -
Production (2.1) (20.5) (0.8) (20.3) (1.3) (0.2)
----- ------ ----- ------ ----- -----
December 31, 1994 51.9 231.2 2.7 224.5 49.2 6.7
===== ====== ===== ====== ===== =====
Proven Developed Reserves
December 31, 1991 25.9 188.0 5.1 183.9 20.8 4.1
December 31, 1992 31.7 205.0 4.5 198.8 27.2 6.2
December 31, 1993 31.2 200.0 3.3 193.4 27.9 6.6
December 31, 1994 37.4 211.7 2.5 205.9 34.9 5.8
Equity Interest in Proven
Reserves of Pecten Yemen
December 31, 1993 1.5 - - - 1.5 -
December 31, 1994 2.9 - - - 2.9 -
(a) In mid-1994, CMS NOMECO negotiated an agreement to acquire Walter, a Texas Corporation. Because of the need to
obtain governmental approvals, the transaction did not close until early 1995. Had the Walter acquisition been
recorded in 1994, proven oil reserves would have been 20 million barrels higher.
The following table shows CMS NOMECO's undeveloped net acres of oil and
gas leasehold interests at December 31.
Net Acres
1994 1993
Michigan 85,372 77,672
Louisiana (a) 30,418 37,295
Texas (a) 7,823 8,083
North Dakota 5,099 5,635
Indiana 2,518 5,034
Ohio 2,201 1,055
Other states 1,908 1,129
--------- -------
Total domestic 135,339 135,903
--------- -------
Yemen 401,897 120,563
Venezuela 234,002 -
Colombia 85,217 -
Ecuador 69,160 69,160
Papua New Guinea 63,220 96,825
Equatorial Guinea 47,330 83,334
New Zealand 602 602
Thailand - 188,000
--------- -------
Total international 901,428 558,484
--------- -------
Total 1,036,767 694,387
========= =======
(a) Includes offshore acreage.
CONSUMERS OTHER PROPERTIES
CMS Midland owns a 49 percent interest in the MCV Partnership which was
formed to construct and operate the MCV Facility. The MCV Facility has
been sold to five owner trusts and leased back to the MCV Partnership.
CMS Holdings is a limited partner in the FMLP, which is a beneficiary of
one of these trusts. CMS Holdings' indirect beneficial interest in the
MCV Facility is 35 percent.
Consumers owns fee title to 1,140 acres of land in the City and Township
of Midland, Midland County, Michigan, occupied by the MCV Facility. The
land is leased to the owners of the MCV Facility by five separate leases,
each leasing an undivided interest and in the aggregate totaling 100
percent, for an initial term ending December 31, 2035 with possible
renewal terms to June 15, 2090.
Consumers owns or leases three principal General Office buildings in
Jackson, Michigan and 55 Regional and other field offices at various
locations in Michigan's Lower Peninsula. Of these, two of the General
Office buildings and eleven of the Regional and other field offices are
leased. Also owned are miscellaneous parcels of real estate not now used
in utility operations.
CMS ENERGY OTHER PROPERTIES
Various subsidiaries of CMS Generation own interests in independent power
plants, including a 50 percent partnership interest in a 36 MW woodwaste-
fueled power plant near Susanville, California; a 50 percent partnership
interest in a 60 MW coal and woodwaste-fueled power plant in Filer City,
Michigan; a 50 percent partnership interest in a 39 MW woodwaste-fueled
power plant in Grayling Township, Michigan; a 50 percent interest in a 31
MW tire burning power plant near Sterling, Connecticut; a 50 percent
interest in a 19 MW woodwaste-fueled power plant in Lyons Falls, New York;
a 50 percent ownership interest in a 20 MW woodwaste-fueled power plant
near Chateaugay, New York; an 18.6 percent interest in a consortium which
owns an 88 percent interest in a 650 MW fossil-fueled plant in San
Nicolas, Argentina; an 80 percent interest in a consortium which owns a 51
percent interest in 422 MW of oil and natural gas fuel plants in the
Mendoza province, Argentina; a 25 percent interest in a consortium which
owns a 59 percent interest in two hydroelectric power plants, with a total
of 1,320 MW of capacity, on the Limay River in western Argentina; and a
32.5 percent interest in 135 MW of oil and coal fueled plants on Cebu
Island, in the Philippines.
In October 1994, CMS Generation signed a stock purchase agreement with
Niagara Mohawk Power Corporation to acquire its independent subsidiary,
HYDRA-CO. In January 1995, CMS Generation assumed ownership in seven
major electric generating plants, a number of smaller plants and a plant
under construction totaling 795 MW of gross capacity and 250 MW of net
ownership. The plants are fueled by coal, natural gas, wastewood, wind
and water (hydro). The operating plants are located in California, Maine,
New Jersey, New York, Oklahoma and North Carolina.
CMS Gas Transmission owns a 75 percent interest in a general partnership
which owns and operates a 25-mile, 16-inch natural gas transmission
pipeline in Jackson and Ingham Counties, Michigan; owns a 24 percent
limited partnership interest in the Saginaw Bay Area Limited Partnership
which owns 125 miles of 10-inch and 16-inch natural gas transmission
pipeline in north-central Michigan; owns a 44 percent limited partnership
interest in a partnership that owns certain pipelines of 20 and 12 miles
interconnected to the Saginaw Bay Area Limited Partnership facilities;
owns 100 percent interest in a natural gas treating plant in Otsego
County, Michigan; owns 100 percent interest in 41 miles of gas
transmission pipeline in Otsego and Montmorency Counties, Michigan; and
owns a 50 percent general partnership interest in the Moss Bluff Gas
Storage Systems, a high deliverability salt cavern storage facility on the
Gulf Coast of Texas.
CMS Gas Transmission is currently developing, with other partners, the
Grands Lacs Market Center. Located in southeastern Michigan, this site
was selected as a North American natural gas market center which will
provide natural gas storage services, peaking storage, wheeling, parking
and other related natural gas services to both buyers and sellers.
CMS Energy, through certain subsidiaries, owns a 50 percent interest in
Bay Harbor Limited Liability Company, a resort development in Emmet
County, Michigan, owns approximately 6,000 acres of undeveloped land in
Benzie and Manistee Counties, Michigan, and owns approximately 53 acres of
undeveloped land in Muskegon County, Michigan.
CONSUMERS CAPITAL EXPENDITURES
Capital expenditures during 1994 for Consumers and its subsidiaries
totaled $483 million for capital additions and $9 million for demand-side
management programs. These capital additions include approximately
$47 million for environmental protection additions and $36 million for
capital leases of nuclear fuel and other assets. Of the $483 million,
$349 million was incurred for electric utility additions and $134 million
for gas utility additions. The electric and gas utility additions include
an attributed portion of capital expenditures common to both businesses.
In 1995, capital expenditures are estimated to be $437 million for capital
additions and $15 million for demand-side management programs. These
capital addition estimates include approximately $40 million related to
environmental protection additions and $44 million related to capital
leases of nuclear fuel and other assets. Of the $437 million,
$310 million will be incurred for electric utility additions and $127
million for gas utility additions. The estimated electric and gas utility
additions include an attributed portion of anticipated capital
expenditures common to both businesses.
CMS ENERGY CAPITAL EXPENDITURES
Capital expenditures during 1994 for CMS Energy and its subsidiaries
totaled $664 million for capital additions and $9 million for demand-side
management programs. These capital additions include approximately $47
million for environmental protection additions and $36 million for capital
leases of nuclear fuel and other assets. Of the $664 million,
$483 million was incurred by Consumers as discussed above. The remaining
$181 million in capital additions include $115 million for oil and gas
exploration and development, $30 million for independent power production,
$31 million for natural gas transmission, storage and marketing and $5
million for other capital expenditures, primarily the Bay Harbor resort
development in northern Michigan.
In 1995, capital expenditures are estimated to be $924 million for capital
additions and $15 million for demand-side management programs. This
capital addition estimate includes approximately $40 million related to
environmental protection additions and $44 million related to capital
leases of nuclear fuel and other assets. Of the $924 million,
$437 million will be incurred by Consumers as discussed above. The
remaining $487 million in capital additions will be incurred as follows:
$132 million for oil and gas exploration and development (including the
Walter acquisition), $255 million for independent power production
(including the HYDRA-CO acquisition), and $100 million for natural gas
transmission, storage and marketing.
36
ITEM 3. LEGAL PROCEEDINGS.
Consumers and some of its subsidiaries and affiliates are parties to
certain routine lawsuits and administrative proceedings incidental to
their businesses involving, for example, claims for personal injury and
property damage, contractual matters, income taxes, and rates and
licensing. Reference is made to the Notes to the Consolidated Financial
Statements included herein for additional information regarding various
pending administrative and judicial proceedings involving rate, operating
and environmental matters.
The Attorney General, ABATE, and the MPSC Staff typically intervene in
MPSC proceedings concerning Consumers. Unless otherwise noted below,
these parties have intervened in such proceedings. For many years, almost
every significant MPSC order affecting Consumers has been appealed.
Appeals from such MPSC orders are pending in the Michigan Court of Appeals
and the Michigan Supreme Court. Consumers is vigorously pursuing these
matters. Under Michigan civil procedure, parties may file a claim of
appeal with the Michigan Court of Appeals which serves as a notice of
appeal. The grounds on which the appeal is being made are not set forth
until a later date when the parties file their briefs.
RATE CASE PROCEEDINGS
Appeal of MPSC Orders Related to the Abandoned Midland Nuclear Plant
Investment
In November 1983, Consumers filed an electric rate case with the MPSC
which sought recovery of its investment in the abandoned portion of the
Midland nuclear plant. This case was separated into two phases in
September 1984: a financial stabilization phase, MPSC Case No. U-7830,
Step 3A, and a prudence phase, MPSC Case No. U-7830, Step 3B. Numerous
orders were issued in these cases, including one issued in 1985 in the
financial stabilization phase which contained certain conditions to
Consumers' receiving financial stabilization rate relief.
On May 7, 1991, the MPSC issued final orders in both Step 3A and Step 3B
proceedings. The MPSC ruled, among other things, that Consumers could
recover approximately $760 million of its $2.1 billion of abandoned
Midland investment. In Step 3A, the MPSC reviewed Consumers' compliance
with the financial stabilization order conditions. Consumers, as well as
the Attorney General and ABATE, among others, filed applications for
rehearing with the MPSC of the May 7 Orders in Step 3A and Step 3B which
were all denied by the MPSC. Several parties, including Consumers, have
appealed the MPSC determinations in these orders to the Court of Appeals.
Regarding the Step 3B order, the Attorney General and ABATE primarily
disagreed with the standard used by the MPSC to determine the amount of
investment that is recoverable by Consumers from its electric customers,
contending that recovery should not be allowed for utility assets that
have not been placed in service. Consumers disagreed with the date the
MPSC determined it would have been prudent for Consumers to abandon
construction of the Midland nuclear facility and the reduction in
recoverable investment that resulted from this determination. In the
Step 3A appeal, the Attorney General and ABATE contended that Consumers
did not fully comply with the financial stabilization orders. Oral
arguments were held on the appeals from the May 7 Step 3A order in
December 1993 and on the Step 3B appeal on October 19, 1994. A decision
on the Step 3A appeals has been held in abeyance pending resolution of
Step 3B appeals. The Court of Appeals affirmed the MPSC determinations in
Step 3B in an order issued in December 1994. Consumers and ABATE have
filed applications for leave to appeal the Court of Appeals decision to
the Michigan Supreme Court. The Attorney General filed a delayed appeal
in February.
Appeal of 1991 General Electric Rate Case Order
Certain aspects of the electric rate case orders issued by the MPSC in
May 7, 1991 and July 1, 1991 were appealed by the Attorney General, ABATE
and the Michigan Association of Home Builders. The appeals of the
Attorney General and the Michigan Association of Home Builders were
dismissed and in May 1994, the Court of Appeals denied ABATE's appeal. In
January 1995, the Michigan Supreme Court denied ABATE's application for
leave to appeal this decision.
1993 Electric Rate Case
On May 10, 1994, the MPSC issued a final order in this case which
increased annual electric revenues by $58 million, or about 2.8 percent,
and approved an allowed rate of return on common equity of 11.75%. The
rate increase is effective for service rendered on and after May 11, 1994.
In August 1994, the MPSC denied petitions for rehearing filed by Consumers
and the Attorney General. The Attorney General has appealed the MPSC
order to the Michigan Court of Appeals arguing that the MPSC cannot
require Consumers to spend money on DSM programs and that a modified
interruptible rate authorized by the MPSC is unlawful because it permits
Consumers to negotiate rates, for certain customers, within a specified
range.
1994 Electric Rate Case Filing
In November 1994, Consumers filed a request with the MPSC which could
increase its retail electric rates in a range from $104 million to $140
million, depending upon the ratemaking treatment afforded sales losses to
competition and the treatment of the MCV contract capacity above 915 MW.
The request includes recognition of increased expenditures related to
continuing construction activities and capital additions aimed at
maintaining and improving system reliability and increases in financing
costs. The filing addresses the ratemaking effect of jurisdictional sales
losses by assuming adoption of a proposed special nonjurisdictional rate
to large, qualifying industrial customers as requested by Consumers in an
earlier June 1994 filing with the MPSC. An alternative approach presented
would use the MCV contract capacity above 915 MW for jurisdictional
electric customers and offer discounted jurisdictional tariffs. Consumers
has also requested that the MPSC eliminate the rate subsidization of
residential rates in a two-step adjustment. In addition, Consumers
proposes to eliminate all DSM expenditures after April 1995 and further
requests MPSC approval to recover costs associated with the proposed
settlement of the proceedings concerning the operation of Ludington.
Under MPSC rate case scheduling policies, a final order in this case is
expected in October 1995.
Request for Approval of a Competitive Tariff for Certain Industrial
Customers
In January 1995, the MPSC dismissed a filing made by Consumers, seeking
approval of a plan to offer competitive, special rates to certain large
qualifying customers. Consumers had proposed to offer the new rates to
customers using high amounts of electricity that have expressed an
intention to or are capable of terminating purchases of electricity from
Consumers and have the ability to acquire energy from alternative sources.
Consumers subsequently filed a new, simplified proposal with the MPSC
which would allow Consumers a certain level of rate-pricing flexibility
and allow the use of the MCV contract capacity above the level currently
authorized by the MPSC to respond to customers' alternative energy
options.
1994 Gas Rate Case Filing
In December 1994, Consumers filed a gas rate case requesting an increase
in its gas rates of $21 million annually. The request, among other
things, incorporates cost increases, including costs for postretirement
benefits and costs related to Consumers' former manufactured gas plant
sites. Consumers requested that the MPSC authorize a 13 percent rate of
return on equity, instead of the currently authorized rate of
13.25 percent. Under MPSC rate case scheduling policies, a final order in
this case is expected in late 1995.
MCV - RELATED PROCEEDINGS
Consumers and the MCV Partnership engaged in arbitration to determine
whether Consumers was entitled to reduce the fixed energy charges payable
to the MCV Partnership. In January 1995, the arbitrator ruled in favor of
Consumers' interpretation of the PPA and found that Consumers was entitled
to the immediate return of an estimated $21 million, representing the
fixed energy amounts for which Consumers did not receive full cost
recovery during the years prior to the Settlement Order (1990 - 1992).
Consumers received these funds on February 16, 1995. The arbitrator
postponed the return of payments for 1993 and 1994 because the Settlement
Order (which established Consumers recovery of MCV costs for those and
future years) is still subject to pending appeals. The amount under
dispute in 1994 is approximately $9 million and increases each year
thereafter, averaging approximately $17 million per year over the life of
the contract. Consumers believes it is premature to recognize any current
year earnings benefit from this award at this time until the remaining
amount of MCV capacity is sold or the market for the capacity is
confirmed.
In March 1994, a lawsuit was filed in federal court for the southern
district of New York against CMS Energy, Consumers and CMS Holdings. The
lawsuit was filed by the Owner Participants who, along with a partnership
in which CMS Midland is a partner, are the lessors of the MCV Facility.
The action alleged compensatory and punitive damages in excess of
$1 billion and sought injunctive relief relating to Consumers' payments of
fixed energy charges to the MCV.
On February 8, 1995, the Owner Participants filed a notice of dismissal of
this lawsuit. Since the lawsuit had not progressed beyond a preliminary
stage, no court action was required for dismissal of this suit.
CMS Energy, Consumers and CMS Holdings have also dismissed the lawsuit
that had been initiated by them on March 28, 1994, in Midland County,
Michigan, in response to the Owner Participant lawsuit in New York. The
dismissals are without prejudice and the parties have agreed that the
dismissals will be without costs or attorney fees, each side bearing its
own.
A separate suit filed by CMS Holdings against its partners in First
Midland Limited Partnership (the partnership that is one of the lessors of
the MCV Facility) to obtain a refund of tax indemnity payments owed to
CMS Holdings by the other partners was decided in favor of CMS Holdings.
The remaining portion of the $8 million originally in dispute, plus
interest, have been paid. An order of dismissal was entered February 2,
1995 after the payments were received.
On May 5, 1994, the MCV Partnership notified Consumers of its desire to
commence a second arbitration proceeding, this one regarding the
methodology for calculation of the energy charge payable under the PPA.
The MCV Partnership maintains that Consumers has breached the PPA in
misapplying or misinterpreting the methodology for calculation since
commercial operation in March 1990. In January 1995, MCV Partnership
estimated that it is owed additional energy charge revenues for the years
1990-1994 of amounts ranging from $2.3 million to $6.7 million per year
and estimated additional amounts of $6.3 million annually for 1995 through
the end of the PPA. Consumers believes that the PPA is clear on the
manner in which energy charges are to be calculated and that Consumers has
followed the specified procedure correctly throughout the term of the PPA.
In accordance with the dispute resolution procedures set out in the PPA,
an arbitrator acceptable to both parties has been selected. The schedule
established by the arbitrator requires briefs to be filed in June 1995 and
anticipates a decision being issued in August 1995.
PALISADES PLANT -- SPENT NUCLEAR FUEL STORAGE
In April 1993, the NRC amended its regulations, effective May 7, 1993, to
license the design of the dry spent fuel storage casks to be used by
Consumers at Palisades. In May 1993, the Attorney General and certain
other parties commenced litigation to block Consumers' use of the storage
casks, alleging that the NRC had failed to comply adequately with the
procedural requirements of the Atomic Energy Act and the NEPA. In January
1995, the U.S. Sixth Circuit Court of Appeals rejected the claims of the
Attorney General and certain other parties and upheld the NRC's rulemaking
action. The Court found that the NRC's environmental assessment satisfied
NEPA requirements, and that a site-specific environmental analysis
concerning the use and operation of the dry storage casks at Palisades was
not required. As of February 1995, Consumers had loaded nine dry storage
casks with spent nuclear fuel and expects to load four additional casks
prior to Palisades' 1995 refueling outage.
In the latter part of 1995, Consumers plans to unload and replace one of
the dry storage casks previously loaded because of minor flaws detected in
the welds in the liner of the cask. Although testing following cask
loading did not disclose any leakage from the cask, Consumers has
nevertheless decided to remove the spent fuel from the cask and insert it
in another cask. Consumers has examined the radiographs for all of the
casks fabricated for it to date, and has found all other welds acceptable.
In order to address concerns raised subsequent to the initial cask
loading, Consumers and the NRC analyzed the effects of seismic and other
natural hazards on the support pad on which the casks are placed and
concluded that the pad location is acceptable to support the casks.
CMS ENERGY'S EXEMPTION UNDER PUHCA
CMS Energy is exempt from registration under PUHCA. In December 1991, the
Attorney General and the MMCG filed a request with the SEC for the
revocation of CMS Energy's exemption. In January 1992, CMS Energy
responded to the revocation request affirming its position that it is
entitled to the exemption. In April 1992, the MPSC filed a statement with
the SEC that recommended that the SEC impose certain conditions on
CMS Energy's exemption. CMS Energy is vigorously contesting the
revocation request and believes it will maintain the exemption. There has
been no action taken by the SEC on this matter.
LUDINGTON PUMPED STORAGE PLANT
In October 1994, Consumers, Detroit Edison, the Attorney General, the DNR
and certain other parties signed an agreement in principle designed to
resolve all legal issues associated with fish mortality at Ludington. A
definitive settlement agreement was subsequently filed with the FERC on
February 28, 1995. The proposed settlement, which allows for the
continued operation of the plant through the end of its FERC license, will
require Consumers and Detroit Edison to continue using a seasonal barrier
net as well as monitoring new technology which may further reduce fish
loss at the plant. The proposed settlement also requires Consumers to
make annual payments to the Great Lakes Fishery Trust, develop and improve
recreational areas and convey undeveloped land to the State of Michigan
and the Great Lakes Fishery Trust. Upon approval of the settlement
agreement, Consumers will transfer land (with an original cost of $9
million and a fair market value in excess of $20 million), make an initial
payment of approximately $3 million and incur approximately $1 million of
expenditures related to recreational improvements. Future annual payments
of approximately $1 million are also anticipated over the next 24 years
and are intended to enhance the fishery resources of the Great Lakes. The
agreement is subject to MPSC approval of Consumers' recovery of all such
settlement costs from electric customers, and approval by the FERC.
The proposed settlement would resolve lawsuits filed by the Attorney
General in 1986 and 1987 on behalf of the State of Michigan in the Circuit
Court of Ingham County, seeking damages from Consumers and Detroit Edison
for injuries to fishery resources because of the operation of the
Ludington plant and the revocation of the plant's bottom-lands lease. The
state sought $148 million (including $16 million of interest) for past
injuries and $89,000 per day for future injuries, with the latter amount
to be adjusted upon installation of "adequate" fish barriers and other
changed conditions. Since 1986 the parties have continued to dispute, in
various courts, the amount of actual damages as well as the best
alternative to mitigate future damages.
STRAY VOLTAGE LAWSUITS
Consumers has experienced an increase in the number of lawsuits relating
to so-called stray voltage, which results when small electrical currents
present in grounded electric systems are diverted from their intended
path. Claimants contend that stray voltage affects farm animal behavior,
reducing the productivity of their livestock operations. Investigation by
Consumers of prior stray voltage complaints disclosed that many factors,
including improper wiring and malfunctioning of on-farm equipment can lead
to the stray voltage phenomenon. Consumers maintains a policy of
investigating all customer calls regarding stray voltage and working with
customers to address their concerns including, when necessary, modifying
the configuration of the customer's hook-up to Consumers' system. On
October 27, 1993, a complaint seeking certification as a class action suit
was filed against Consumers in a local circuit court. The complaint
alleged that in excess of a billion dollars of damages, primarily related
to lost production by certain livestock owned by the purported class, were
being incurred as a result of stray voltage from electricity being
supplied by Consumers. Consumers believed the allegations to be without
merit and vigorously opposed the certification of the class and this suit.
On March 11, 1994, the court decided to deny class certification for this
complaint and to dismiss, subject to refiling as separate suits, the
October lawsuit with respect to all but one of the named plaintiffs. On
April 4, 1994, the plaintiffs appealed the court's denial of class
certification in this matter to the Court of Appeals. Subsequent to the
filing of this appeal and the submission of the plaintiffs' brief on this
issue, the Court of Appeals on its own motion issued an order which
decided that since the lead case in the class action suit had not been
dismissed, the trial court's decision to deny class certification was an
interlocutory order and therefore not ripe for appeal. The Court of
Appeals order also found that the trial court's decision that the other
named plaintiffs had been misjoined was final and ripe for appeal. This
issue had not been raised in the plaintiffs' appeal or brief. Consumers
has addressed both issues in its brief filed with the Court of Appeals on
July 14, 1994, in support of the trial court's decision. This matter is
pending before the Court of Appeals. A number of individuals who would
have been part of the class action have refiled their claims as separate
lawsuits. At February 28, 1995, Consumers had 81 separate stray voltage
cases pending.
RETAIL WHEELING PROCEEDINGS
On April 11, 1994, the MPSC issued an Opinion and Interim Order which
approved the framework for a five year experimental retail wheeling
program for Consumers and Detroit Edison, and remanded the case to the ALJ
to determine appropriate rates and charges. The MPSC stated that the
purpose of the experiment is to gather and evaluate information regarding
whether retail wheeling is in the public interest and should occur on a
permanent basis. The experimental program will commence with each
utility's next solicitation of additional supply side resources. In
February 1995, the ALJ issued a PFD which, among other things, found that
retail wheeling is likely to create additional stranded investment costs
which could be considered costs of transition from a regulated environment
to an unregulated environment and that retail wheeling participants should
bear their proportionate share of these costs. The PFD also stated that
there should be no restrictions on the entities that can be third party
power suppliers in the experiment and that retail wheeling charges should
include costs associated with DSM programs, nuclear decommissioning,
SFAS 106 costs, and amortization of the Midland plant. A ruling on the
ALJ's recommended rate design is expected from the MPSC by mid-1995. In
the short term, Consumers does not expect this experimental program to
have a material impact on its financial position or results of operations.
WHOLESALE WHEELING PROCEEDINGS
Consumers has an approved open-access interconnection service schedule on
file with the FERC for wholesale wheeling transactions. In 1992,
Consumers also filed a separate but complementary open-access transmission
tariff that would make both firm and non-firm transmission service
available to eligible power generators, including investor-owned
utilities, facilities that meet the ownership and technical requirements
under PURPA, independent power producers, and municipal and cooperative
utilities. The FERC accepted the filing, effective May 2, 1992, subject
to refund, and ordered a hearing before an ALJ. In September 1993, the
ALJ issued an initial decision that would compel reductions of the tariff
rates ranging from 25% to 65%. On November 1, 1993, Consumers filed
exceptions with the FERC, which are still pending, seeking reversal of the
rate reductions proposed in the ALJ's initial decision. As of January 1,
1995, the amount of firm transmission service currently subject to the
tariff is 21 MW.
ENVIRONMENTAL MATTERS
Consumers is subject to various federal, state and local laws and
regulations relating to the environment. Consumers has been named as a
party to several actions involving environmental issues. However, based
on its present knowledge and subject to future legal and factual
developments, CMS Energy and Consumers believe that it is unlikely that
these actions, individually or in total, will have a material adverse
effect on their financial condition. See Item 1. BUSINESS. CONSUMERS AND
CMS ENERGY ENVIRONMENTAL COMPLIANCE.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF
SECURITY HOLDERS.
CMS Energy
None in the fourth quarter of 1994 for CMS Energy.
Consumers
None in the fourth quarter of 1994 for Consumers.
42
PART II
ITEM 5. MARKET FOR CMS ENERGY'S AND CONSUMERS' COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS.
CMS Energy
Market prices for CMS Energy's common stock and related security holder
matters are contained herein in Item 8, CMS Energy's Quarterly Financial
and Common Stock Information, which is incorporated by reference herein.
Number of common shareholders at February 28, 1995 was 62,996.
Consumers
Consumers' common stock is privately held by its parent, CMS Energy, and
does not trade in the public market. In February, May, August, November
and December 1994, Consumers paid $16 million, $66 million, $31 million,
$36 million and $27 million cash in dividends, respectively, on its common
stock.
ITEM 6. 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. 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.
43
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Index to Financial Statements:
CMS Energy Page
Selected Financial Information 46
Management's Discussion and Analysis 48
Consolidated Statements of Income 60
Consolidated Statements of Cash Flows 61
Consolidated Balance Sheets 62
Consolidated Statements of Long-Term Debt 64
Consolidated Statements of Preferred Stock 65
Consolidated Statements of Common Stockholders' Equity 66
Notes to Consolidated Financial Statements 67
Report of Independent Public Accountants 91
Quarterly Financial and Common Stock Information 92
Consumers Page
Selected Financial Information 94
Management's Discussion and Analysis 95
Consolidated Statements of Income 104
Consolidated Statements of Cash Flows 105
Consolidated Balance Sheets 106
Consolidated Statements of Long-Term Debt 108
Consolidated Statements of Preferred Stock 109
Consolidated Statements of Common Stockholder's Equity 110
Notes to Consolidated Financial Statements 111
Report of Independent Public Accountants 133
Quarterly Financial Information 134
44
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45
CMS Energy Corporation
1994 Financial Statements
46
Selected Financial Information CMS Energy Corporation
1994 1993 1992 1991 1990
Operating revenue (in millions) ($) 3,619 3,482 3,146 2,998 3,028
Net income (loss) (in millions) (a) ($) 179 155 (297) (276) (494)
Average common shares outstanding
(in thousands) 85,888 81,251 79,877 79,988 81,339
Earnings (loss) per average
common share (a) ($) 2.09 1.90 (3.72) (3.44) (6.07)
Cash from operations (in millions) (b) ($) 612 484 456 530 375
Capital expenditures, excluding capital
lease additions and DSM (in millions) (b) ($) 575 550 487 353 425
Total assets (in millions) ($) 7,384 6,964 6,848 6,194 7,917
Long-term debt, excluding current
maturities (in millions) ($) 2,709 2,405 2,725 1,941 3,321
Non-current portion of capital
leases (in millions) ($) 108 115 98 68 68
Total preferred stock (in millions) ($) 356 163 163 163 156
Cash dividends declared per
common share ($) .78 .60 .48 .48 .42
Market price of common stock
at year-end ($) 22-7/8 25-1/8 18-3/8 18-3/8 27-7/8
Book value per common share at
year-end ($) 12.78 11.33 9.09 13.28 17.36
Return on average common equity (%) 17.3 18.3 (33.2) (22.4) (29.4)
Return on assets (%) 4.7 4.5 (2.3) (0.6) (3.2)
Number of common shareholders
at year-end 63,628 66,795 70,801 72,729 76,348
Number of employees at year-end
(full-time equivalents) 9,972 10,013 9,971 9,212 9,484
Electric utility statistics
Sales (millions of kWh) 34,462 32,764 31,601 31,813 31,743
Customers (in thousands) 1,547 1,526 1,506 1,492 1,475
Average sales rate per kWh (cents) 6.29 6.28 5.82 5.73 5.89
Gas utility statistics
Sales and transportation
deliveries (bcf) 409 411 384 362 351
Customers (in thousands) (c) 1,448 1,423 1,402 1,382 1,362
Average sales rate per mcf ($) 4.48 4.46 4.55 4.58 4.64
47
Selected Financial Information (Continued) CMS Energy Corporation
1994 1993 1992 1991 1990
Electric and gas non-utility statistics
CMS Energy's share of unconsolidated
independent power production
revenue (in millions) ($) 385 334 284 246 197
Independent power production
sales (millions of kWh) 6,216 5,019 4,057 3,342 3,233
Natural gas pipeline, storage and
marketing revenues (in millions) ($) 145 142 89 42 30
Gas marketed for end-users (bcf) 66 60 45 23 16
Exploration and production statistics
Sales (net equiv. MMbbls) 5.6 5.0 4.3 3.7 3.5
Proven reserves (net equiv. MMbbls) 93.3 69.8 70.9 60.3 48.2
Proven reserves added (net equiv.
MMbbls) 29.0 3.9 15.0 16.0 14.7
Finding cost ($/net equiv. bbl) 5.92 4.97 4.88 6.58 5.52
(a) Amount in 1991 included an extraordinary loss of $14 million, after tax or $.18 per average
common share.
(b) Certain prior year amounts were restated for comparative purposes.
(c) Excludes off-system transportation customers.
48
CMS Energy Corporation
Management's Discussion and Analysis
CMS Energy is the parent holding company of Consumers and Enterprises.
Consumers, a combination electric and gas utility company serving the
Lower Peninsula of Michigan, is the principal subsidiary of CMS Energy.
Consumers' customer base includes a mix of residential, commercial and
diversified industrial customers, the largest of which is the automotive
industry. Enterprises is engaged in several non-utility energy-related
businesses including: 1) oil and gas exploration and production, 2)
development and operation of independent power production facilities, 3)
gas marketing services to utility, commercial and industrial customers,
and 4) storage and transmission of natural gas.
On January 1, 1995, Consumers was internally reorganized into separate
electric utility and gas utility strategic business units. The
restructuring, while not affecting Consumers' or CMS Energy's consolidated
financial statements or corporate legal form, is designed to sharpen
management focus, improve efficiency and accountability in both business
segments and better position Consumers for growth in the gas market and to
meet increased competition in the electric power market. Management
believes that the strategic business unit structure will allow each unit
to focus more on its own profitability and growth potential, and will, in
the long term, allow Consumers to be more competitive.
On February 14, 1995, CMS Energy mailed a proxy statement to its
shareholders seeking their approval to amend its Articles of Incorporation
and authorize a new class of Common Stock of CMS Energy. This proposed
new class of Common Stock, designated Class G Common Stock, would reflect
the separate performance of the gas distribution, storage and
transportation businesses currently conducted by Consumers and Michigan
Gas Storage (such businesses, collectively, would be the "Consumers Gas
Group"). The existing CMS Energy Common Stock would continue to be
outstanding if and after any shares of Class G Common Stock were issued by
CMS Energy and would reflect the performance of all of the businesses of
CMS Energy and its subsidiaries, including the business of the Consumers
Gas Group, except for the interest in the Consumers Gas Group attributable
to any outstanding shares of the Class G Common Stock.
CMS Energy also filed a shelf-registration statement with the SEC on
February 15, 1995 covering the issuance of up to $200 million of
securities. Such securities could encompass Common Stock of CMS Energy
(including Class G if approved), Preferred Stock of CMS Energy or a
special purpose affiliate of CMS Energy, and/or unsecured debt of
CMS Energy. CMS Energy will continually evaluate the capital markets and
may offer such instruments from time to time, at terms to be determined at
or prior to the time of the sale.
Consolidated Earnings
Consolidated net income for 1994 totaled $179 million or $2.09 per share,
compared to net income of $155 million or $1.90 per share in 1993 and a
net loss of $297 million or $3.72 per share in 1992. The improved net
income in 1994 reflects a significant increase in utility electric sales,
the impact from a May 1994 electric rate increase, the recognition of
incentive revenue related to DSM programs, and the favorable resolution of
a previously recorded gas cost contingency. The increased 1993 net income
reflects the Settlement Order related to power purchases from the MCV
Partnership as well as increased electric sales and gas deliveries.
Earnings in 1994 and 1993 also reflect growth of non-utility businesses.
Cash Position, Financing and Investing
CMS Energy's primary ongoing source of operating cash is dividends from
its principal subsidiaries. Consumers effected a quasi-reorganization as
of December 31, 1992, which allowed it to resume paying common dividends
(see Note 7 to the Consolidated Financial Statements). Consumers paid
$176 million in common dividends in 1994. CMS Energy also received cash
dividends of $9 million from its non-utility subsidiaries. CMS Energy
paid $67 million in cash dividends to common shareholders compared to $49
million in 1993. The $18 million increase reflects an annual increase of
$.12 per share, from $.72 per share to $.84 per share, commencing third
quarter 1994.
CMS Energy's consolidated cash requirements are met by its operating and
financing activities. In 1994, 1993 and 1992, CMS Energy's consolidated
cash from operations was derived mainly from Consumers' sale and
transportation of natural gas and its generation, sale and transmission of
electricity and from CMS NOMECO's sale of oil and natural gas.
Consolidated cash from operations for 1994 reflects Consumers' record-
setting electric sales and increased electric rates which were approved by
the MPSC in mid-1994. Cash from operations for 1993 primarily reflected
increased electric sales and gas deliveries from 1992 levels and reduced
after-tax cash shortfalls resulting from Consumers' purchases of power
from the MCV Partnership. During 1992, CMS Energy generated cash
primarily from its consolidated operating activities.
CMS Energy's primary use of cash continues to reflect its utility
construction expenditures, improvements in the reliability of its electric
and gas utility transmission and distribution systems and expansion of its
non-utility businesses. It also has used its cash to retire portions of
long-term securities and to pay common and preferred dividends.
Financing Activities: In January 1994, CMS Energy filed a shelf-
registration statement with the SEC permitting the issuance and sale of up
to $250 million of GTNs. As of January 31, 1995, CMS Energy had issued
approximately $99 million of GTNs with interest rates ranging from 6.75 to
8.50 percent and reduced the principal amount of Series B Notes
outstanding by $114 million, to a balance of $167 million. Also, in July
1994, CMS Energy refinanced its Secured Credit Facility with a new $400
million Unsecured Credit Facility and extended the termination date to
June 30, 1997. Additionally, in October 1994, CMS Energy filed a shelf-
registration statement for the offering and issuance of up to two million
shares of common stock. As described in the SEC filing, the shares may be
offered and issued in connection with acquisitions of energy-related
businesses and assets.
In January 1995, CMS Generation entered into a one-year $118 million
bridge credit facility for the acquisition of HYDRA-CO. CMS Energy is
currently evaluating permanent financing options.
In early 1994, Consumers issued and sold 8 million shares of Class A
Preferred Stock (cumulative, without par value) with an annual dividend of
$2.08. Net proceeds of $193 million from the sale were used for general
corporate purposes, including debt retirement and improvements to
Consumers' distribution systems. Consumers continued its effort to reduce
its future interest charges by retiring $101 million of high-cost first
mortgage bonds. In November 1994, Consumers entered into a new $400
million unsecured, variable rate, five-year term loan and subsequently
used the proceeds to refinance its long-term, variable rate credit
agreement and to reduce short-term borrowings.
In October 1993, CMS Energy issued 4.6 million shares of common stock at a
price of $26-5/8. The net proceeds of $119 million were used to reduce
existing debt and for general corporate purposes. During 1993, Consumers
retired $51 million of high-cost outstanding debt and refinanced $573
million of other debt at lower interest rates. In November 1993,
CMS NOMECO amended the terms of its loan agreement and increased the
amount to $110 million.
For further information on financing activities, see Note 7.
Investing Activities: Capital expenditures (excluding assets placed under
capital leases of $36 million), deferred DSM costs and investments in
unconsolidated subsidiaries totaled $637 million for 1994 as compared to
$710 million in 1993 and $525 million in 1992. CMS Energy's expenditures
for its utility, independent power production, oil and gas exploration and
production, and natural gas pipeline, storage and marketing business
segments were $456 million, $30 million, $115 million and $31 million,
respectively.
Financing and Investing Outlook: CMS Energy estimates that capital
expenditures, including DSM, new lease commitments and investments in
unconsolidated subsidiaries, will total approximately $2.2 billion over
the next three years.
In Millions
Years Ended December 31 1995 1996 1997
- ----------------------- ---- ---- ----
Electric utility (a) $325 $255 $269
Gas utility (a) 127 119 111
Oil and gas exploration and production (b) 132 100 110
Independent power production (c) 255 144 117
Natural gas pipeline, storage and marketing 100 29 20
---- ---- ----
$939 $647 $627
==== ==== ====
(a) Includes a portion of anticipated capital expenditures common to
both utility businesses.
(b)(c) 1995 capital expenditures include requirements of (b)$42 million
and (c)$155 million for acquisitions which commenced in 1994 but did not
close until 1995.
CMS Energy is required to redeem or retire approximately $720 million of
long-term debt during 1995 through 1997. Cash generated by operations is
expected to satisfy a substantial portion of these capital expenditures
and debt retirements. Additionally, CMS Energy will continue to evaluate
the capital markets in 1995 as a source of financing its subsidiaries'
investing activities.
Consumers has several available sources of credit including unsecured,
committed lines of credit totaling $185 million and a $470 million working
capital facility. Consumers has FERC authorization to issue or guarantee
up to $900 million in short-term debt through December 31, 1996.
Consumers uses short-term borrowings to finance working capital, seasonal
fuel inventory and to pay for capital expenditures between long-term
financings. Consumers has an agreement permitting the sales of certain
accounts receivable for up to $500 million. At December 31, 1994 and
1993, receivables sold totaled $275 million and $285 million,
respectively.
Electric Utility Results of Operations
In Millions
Pretax Operating Income
------------------------------
Change Compared to Prior Year
1994/1993 1993/1992
--------- ---------
Sales $ 33 $ 34
Weather - 11
Resolution of MCV power cost issues - 126
Rate increase and other regulatory issues 38 5
O&M, general taxes and depreciation (22) (44)
----- -----
Total change $ 49 $132
===== =====
Electric Sales: Total electric sales in 1994 were a record 34.5 billion
kWh, a 5.2 percent increase from 1993 levels which includes a 4.2 percent
increase in system sales to Consumers' ultimate customers. Strong
industrial sales accounted for 58 percent of the growth. In 1994,
residential and commercial sales increased 1.6 percent and 3.0 percent,
respectively, while industrial sales increased 6.8 percent. The
significant increase in electric sales reflects the continued improvement
in economic conditions in Michigan and broad-based growth in sales to
industrial customers. Growth in industrial sales was the strongest in the
automotive and chemical sectors. Total electric sales in 1993 were 32.8
billion kWh, a 3.7 percent increase from the 1992 levels. The 32.8
billion kWh includes a 3.8 percent increase in system sales.
Power Costs: Power costs for 1994 totaled $950 million, a $42 million
increase from the corresponding 1993 period. This increase reflects
increased kWh production at Consumers' generating plants and greater power
purchases from outside sources to meet increased sales demand. Power
costs for 1993 compared to 1992 reflect the impact of $126 million
relating to the resolution of MCV power cost issues (see Note 3).
Operation and Maintenance: Increases in other operation and maintenance
expense for 1994 and 1993 reflected increased expenditures to improve
electric system reliability.
Depreciation: The increased depreciation for 1994 reflects additional
capital investments in property and equipment.
Electric Utility Issues
Power Purchases from the MCV Partnership: Consumers' obligation to
purchase contract capacity from the MCV Partnership was 1,132 MW in 1994
and increases to 1,240 MW in 1995 and thereafter. In 1993, the MPSC
issued the Settlement Order that permits Consumers to recover
substantially all payments for 915 MW of contract capacity purchased from
the MCV Partnership. The market for the remaining 325 MW of contract
capacity was assessed at the end of 1992. This assessment, along with the
Settlement Order, resulted in Consumers recognizing an after-tax loss of
$343 million for the present value of estimated future underrecoveries of
power purchases from the MCV Partnership. This loss included all fixed
energy amounts at issue in the arbitration proceedings discussed below.
Additional losses may occur if actual future experience materially differs
from the 1992 estimates. ABATE and the Attorney General have appealed the
Settlement Order to the Court of Appeals. As anticipated in 1992,
Consumers continues to experience cash underrecoveries associated with the
Settlement Order. These after-tax cash underrecoveries totaled $61
million for 1994. Estimated future after-tax cash underrecoveries and
possible additional losses for the next five years if none of the
additional capacity is sold are shown in the table below.
After-tax, In Millions
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
Expected cash underrecoveries $60 $56 $55 $ 8 $ 9
Possible additional under-
recoveries and losses (a) $20 $20 $22 $72 $72
(a) If unable to sell any capacity above the MPSC's authorized level.
Consumers and the MCV Partnership engaged in arbitration to determine
whether Consumers was entitled to reduce the fixed energy charges payable
to the MCV Partnership. In January 1995, the arbitrator ruled in favor of
Consumers' interpretation of the PPA and found that Consumers was entitled
to the immediate return of an estimated $22 million, representing the
fixed energy amounts for which Consumers did not receive full cost
recovery during the years prior to the Settlement Order (1990 - 1992).
Consumers had escrowed approximately $16 million of this amount. The
arbitrator postponed the return of payments for 1993 and 1994 because the
Settlement Order is still subject to pending appeals. The amount under
dispute in 1994 is approximately $9 million and increases each year
thereafter, averaging approximately $17 million per year over the life of
the contract. Consumers believes it is premature to recognize any current
year earnings benefit from this award at this time until the remaining
amount of MCV capacity is sold and/or the market for the capacity is
confirmed. In a second arbitration proceeding, the MCV Partnership is
seeking additional payments from Consumers which the MCV has estimated at
$6.3 million annually for an alleged breach of the PPA.
In 1994, the lessors of the MCV Facility filed a lawsuit against
CMS Energy, Consumers and CMS Holdings, alleging breach of contract,
breach of fiduciary duty and negligent or fraudulent misrepresentation
relating to the MCV Partnership's failure to object to the Settlement
Order in light of Consumers' interpretation of the Settlement Order. The
action alleged damages in excess of $1 billion and sought injunctive
relief relative to Consumers' payments of the fixed energy charges. In
February 1995, after the arbitrator's decision, the lessors voluntarily
withdrew the lawsuit.
In July 1994 and February 1995, Consumers terminated power purchase
agreements with a 65 MW coal-fired cogeneration facility and a 44 MW wood
and chipped tire plant. Consumers plans to seek MPSC approval to
substitute 109 MW of less expensive contract capacity from the MCV
Facility which Consumers is currently not authorized to recover from
retail customers. For further information, see Note 3.
Electric Rate Case: In May 1994, the MPSC granted Consumers a $58 million
annual increase in its retail electric rates. The order provides
Consumers with higher revenues associated with increased expenditures
primarily related to capital additions, operation and maintenance,
postretirement benefits and the continuation of certain DSM programs. The
MPSC order generally supported Consumers' rate design proposal and reduced
the level of subsidization of residential customers by commercial and
industrial customers. Consumers filed a request with the MPSC in November
1994, to increase its retail electric rates in a range from $104 million
to $140 million annually (see Note 4). Additionally, in January 1995,
Consumers filed a request with the MPSC, seeking approval to increase its
traditional depreciation expense by $21 million and reallocate certain
portions of its utility plant from production to transmission, resulting
in a $28 million decrease. If both aspects of the request are approved,
the net result would be a decrease in electric depreciation expense of $7
million.
Special Rates: In January 1995, the MPSC dismissed a filing made by
Consumers, seeking approval of a plan to offer competitive, special rates
to certain large qualifying customers. Consumers had proposed to offer
the new rates to customers using high amounts of electricity that have
expressed an intention to or are capable of terminating purchases of
electricity from Consumers and have the ability to acquire energy from
alternative sources. Consumers subsequently filed a new, simplified
proposal with the MPSC which would allow Consumers a certain level of
rate-pricing flexibility, and allow use of MCV contract capacity above the
level currently authorized by the MPSC, to respond to customers'
alternative energy options.
PSCR Matters: Consumers experienced an extended refueling and maintenance
outage at Palisades during 1993. From mid-February through mid-June 1994,
Palisades took an unscheduled outage to repair valve leakage and conduct
other needed inspections and repairs. In November 1994, an ALJ issued a
proposal for decision that recommended a $4 million disallowance of
replacement power costs related to the 1993 outage. Consumers accrued a
loss for this issue for 1994. Recovery of replacement power costs and the
prudency of actions taken during the 1994 outage will be reviewed by the
MPSC during the 1994 PSCR reconciliation proceeding.
Electric Conservation Efforts: In 1993, Consumers completed the customer
participation portion of several DSM programs designed to encourage the
efficient use of energy. During 1994, Consumers recognized $11 million in
incentive revenue, related to Consumers' achievement of certain DSM
program objectives approved by the MPSC in 1992. A final order,
authorizing Consumers to collect the $11 million incentive, is expected
from the MPSC by mid-1995. In 1994, as part of Consumers' electric rate
case, the MPSC authorized Consumers to continue certain DSM programs. For
further information, see Note 4.
Electric Environmental Matters: The 1990 amendment of the federal Clean
Air Act significantly increased the environmental constraints that
utilities will operate under in the future. While the Clean Air Act's
provisions require Consumers to make certain capital expenditures in order
to comply with the amendments for nitrogen oxide reductions, Consumers'
generating units are presently operating at or near the sulfur dioxide
emission limits which will be effective in the year 2000. Therefore,
management believes that Consumers' annual operating costs will not be
materially affected.
In 1990, the State of Michigan passed amendments to the Environmental
Response Act, under which Consumers expects that it will ultimately incur
costs at a number of sites, even those in which it has a partial or no
current ownership interest. Parties other than Consumers with current or
former ownership interests may also be considered liable for site
investigations and remedial actions. Consumers believes costs incurred
for both investigation and required remedial actions will be recovered in
rates or from others.
Consumers is a so-called "potentially responsible party" at several sites
being administered under Superfund. Along with Consumers, there are
numerous credit-worthy, potentially responsible parties with substantial
assets cooperating with respect to the individual sites. Based on current
information, management believes it is unlikely that Consumers' liability
at any of the known Superfund sites, individually or in total, will have a
material adverse effect on its financial position or results of
operations.
The EPA has asked a number of utilities in the Great Lakes area to
voluntarily retire certain equipment containing specific levels of
polychlorinated biphenyls. While Consumers believes that it is largely in
compliance with the EPA's request, it has agreed to a 10-year retirement
period for certain equipment included in the EPA's request. Consumers
does not anticipate that any significant additional costs will be incurred
as a result of this agreement. For further information regarding electric
environmental matters, see Note 12.
Electric Outlook
Competition: Consumers currently expects customer demand for electricity
within its service territory will increase by approximately 1.6 percent
per year over the next five years. Economic growth and an increasing
customer base are expected to lead to consistently higher annual sales.
However, Consumers (along with the electric utility industry) is
experiencing accelerating competitive pressures which may result in a
negative impact on Consumers' sales growth. The primary sources of this
competition include: the installation of cogeneration or other self-
generation facilities by Consumers' larger industrial customers; the
formation of municipal utilities which would displace retail service by
Consumers to an entire community; and competition from neighboring
utilities which offer flexible rate arrangements designed to encourage
movement to their respective service areas. Several of Consumers'
industrial customers are studying these options.
Consumers is pursuing several strategies to retain its current "at-risk"
customers. These strategies include a request that the MPSC allow
Consumers to offer special competitive service rates to current industrial
customers which have demonstrated an ability to seek alternate electric
supplies and to attract new customers which are considering locating or
expanding facilities in Michigan. As part of its current electric rate
case, Consumers has requested that the MPSC eliminate the rate
subsidization of residential customers. If approved, commercial and
industrial customers' electric costs would decrease by a total of
approximately $80 million per year.
Consumers is committed to holding operation and maintenance costs level
and continuing to improve customer service. Consumers is also working
with large customers to identify ways to improve the efficiency with which
energy is used.
In April 1994, the MPSC approved a framework for a five-year experimental
retail wheeling program for Consumers and Detroit Edison. Under the
experiment, up to 60 MW of Consumers' additional load requirements could
be met by retail wheeling. The program becomes effective upon Consumers'
next solicitation for capacity. In February 1995, an ALJ issued a
proposal for decision that addressed the methodology for pricing
transmission rates to be used for the experiment. An MPSC order is
expected by mid-1995. In the short-term, Consumers does not expect this
experiment to have a material impact on its financial position or results
of operations.
Nuclear Matters: In late 1993, the NRC completed a review of Consumers'
performance at Palisades that showed a decline in performance. To provide
NRC senior management with a more in-depth assessment of plant
performance, the NRC conducted a diagnostic evaluation inspection at
Palisades during 1994 which found certain performance, operational and
management deficiencies at the plant. Consumers subsequently filed its
response to the NRC's diagnostic evaluation report and included both
short- and long-term enhancements planned to improve Palisades'
performance. Acceptable performance at Palisades will require continuing
performance improvements and additional expenditures at the plant, which
have been included in Consumers' total planned level of expenditures.
Consumers' on-site storage pool at Palisades is at capacity, and it is
unlikely that the DOE will begin accepting any spent nuclear fuel by the
originally scheduled date in 1998. Consumers is using NRC-approved dry
casks, which are steel and concrete vaults, for temporary on-site storage.
Several appeals relating to NRC approval of the casks and Consumers' use
of the casks had been pending. In January 1995, the U.S. Sixth Circuit
Court of Appeals issued a decision, effectively allowing Consumers to
continue using dry cask storage at Palisades.
Consumers is required to make certain calculations and report to the NRC
about the continuing ability of the Palisades reactor vessel to withstand
postulated "pressurized thermal shock" events during its remaining license
life. Preliminary analysis of more recent data from testing of similar
materials indicates that the Palisades reactor vessel could exceed, prior
to the year 2000, a temperature screening criterion established by NRC
regulations. Consumers is continuing to analyze alternative means to
permit continued operation of Palisades to the end of its license life in
the year 2007. Consumers cannot predict the outcome of these efforts.
For further information regarding Palisades, see Note 13.
The staff of the SEC has questioned certain accounting practices of the
electric utility industry, including Consumers, regarding the recognition,
measurement and classification of decommissioning costs for nuclear
generating stations in the financial statements. In response to these
questions, the FASB has agreed to review the accounting for removal costs,
including decommissioning. If current electric utility industry
accounting practices for such decommissioning are changed, annual
provisions for decommissioning could increase, estimated costs for
decommissioning could be recorded as a liability rather than as
accumulated depreciation, and trust fund income from the external
decommissioning trusts could be reported as investment income rather than
as a reduction to decommissioning expense.
Stray Voltage: Consumers has recently experienced increases in the number
of lawsuits relating to the effect of so-called stray voltage on certain
livestock. At January 31, 1995, Consumers had 81 separate stray voltage
lawsuits pending. CMS Energy believes that the resolution of these
lawsuits will not have a material impact on its financial position or
results of operations. For further information, see Note 12.
Gas Utility Results of Operations
In Millions
Pretax Operating Income
-----------------------------
Change Compared to Prior Year
1994/1993 1993/1992
--------- ---------
Sales $ (3) $ 7
Weather - 10
Regulatory recovery of gas cost 10 12
O&M, general taxes and depreciation (19) 9
----- -----
Total change $(12) $38
===== =====
Gas Deliveries: Gas sales and gas transported in 1994 totaled 409 bcf, a
.4 percent decrease from 1993. In 1993, gas sales and gas transported
totaled 410.6 bcf, a 6.9 percent increase from 1992 deliveries.
Gas Utility Issues
Gas Rates: In December 1994, Consumers filed a request with the MPSC to
increase Consumers' annual gas rates by $21 million. The requested
increase in revenue reflects increased expenditures, including those
associated with postretirement benefits, and proposes a 13 percent return
on equity. A final order from the MPSC is expected in late 1995.
Consumers' most recent rate filing for its electric utility business
resulted in an approved rate of return on equity of 11.75 percent.
In June 1994, the FERC approved a stipulation and agreement in full
settlement of a rate proceeding originally filed by Michigan Gas Storage
in 1993, which provides Michigan Gas Storage with estimated annual
revenues of $20 million. For further information regarding gas utility
rates, see Note 4.
Gas Environmental Matters: Under Michigan's Environmental Response Act,
Consumers expects that it will ultimately incur investigation and remedial
action costs at a number of sites, including some of the 23 sites that
formerly housed manufactured gas plant facilities, even those in which it
has a partial or no current ownership interest. Parties other than
Consumers with current or former ownership interests may also be
considered liable for site investigations and remedial actions. There is
limited knowledge of manufactured gas plant contamination at these sites
at this time.
Data available to Consumers and its continued internal review have
resulted in an estimate for all costs related to investigation and
remedial action for all 23 sites of between $48 million and $112 million.
These estimates are based on undiscounted 1994 costs. At December 31,
1994, Consumers has accrued a liability for $48 million. Any significant
change in assumptions such as remediation technique, nature and extent of
contamination and regulatory requirements, could impact the estimate of
remedial action costs for the sites.
Consumers requested recovery and deferral of certain investigation and
remedial action costs in its gas rate case filed in December 1994.
Consumers believes that remedial action costs are recoverable in rates as
the MPSC in 1993 addressed the question of recovery of investigation and
remedial action costs for another Michigan gas utility as part of a gas
rate case. In order to be recovered in rates, prudent costs must be
approved in a rate case. The MPSC has approved similar deferred
accounting requests by two other Michigan utilities relative to
investigation and remedial action costs. Accordingly, Consumers has
recorded a regulatory asset for the accrued liability that was established
for these estimated remedial action costs. Consumers has initiated
discussions with certain insurance companies regarding coverage for some
or all of the costs which may be incurred for these sites. For further
information, see Note 12.
Gas Outlook
Consumers currently anticipates gas deliveries to grow approximately 2.3
percent per year (excluding MCV transportation and off-system deliveries)
over the next five years, primarily due to a steadily growing customer
base. Additionally, Consumers has several strategies which will support
increased load requirements in the future. These strategies include
increasing efforts to promote natural gas to Consumers' current customers
that are using various non-gas furnaces and appliances. Consumers plans
additional capital expenditures to construct new gas mains that are
expected to expand Consumers' system. Management also believes there
exists significant potential for developing industrial process fuel
conversion projects.
New technologies being developed on a national level, such as the emerging
use of natural gas vehicles and commercial gas cooling equipment, also
provide Consumers with sales growth opportunities. In addition, as air
quality standards continue to become more stringent, management believes
that greater opportunities exist for converting industrial boiler load to
natural gas.
In 1994, Consumers purchased approximately 83 percent of its required gas
supply under long-term contracts, and the balance on the spot market.
Trunkline supplied approximately 35 percent of the total requirement. In
late 1994, Consumers' supply contract with Trunkline was replaced by
several one- and two-year contracts with independent producers. Consumers
estimates its purchases under long-term gas contracts will range from 70 -
80 percent in future years. Consumers also has transmission contracts
totaling approximately 90 percent of its supply requirements. These
contracts vary in length from one to ten years. Consumers' ability to
purchase gas during the off-season and store it in its extensive
underground storage facilities continues to help provide customers with
low, competitive gas rates.
Oil and Gas Exploration and Production
Pretax Operating Income: 1994 pretax operating income increased $5
million from 1993, reflecting higher gas sales volumes, lower
international write-offs, and the gain from assignment of a gas supply
contract, partially offset by lower average market prices for oil and gas.
1993 pretax operating income decreased $4 million from 1992, primarily
reflecting lower average market prices for oil and $10 million of
international write-offs, partially offset by higher gas and oil sales
volumes and higher average market prices for gas.
Capital Expenditures: In June 1994, CMS NOMECO acquired for $22.5 million
a working interest in the Espinal block in Colombia, South America, which
is operated by LASMO Oil (Colombia) Limited, from Sun Company, Inc. The
other interest holder is Empresa Colombiana de Petroleos (Ecopetrol), the
Colombian State Oil Company. The block which includes 250,000 acres is
currently producing 8,500 barrels of oil per day. CMS NOMECO estimates
the block to contain at least 75 million barrels of proven oil reserves of
which CMS NOMECO's share of production is 14.7 percent.
In September 1994, a consortium in which CMS NOMECO is a 29 percent
participant was awarded the right to enter into an agreement with Maraven,
S.A., a unit of the Venezuelan state oil company, to develop the Colon
block in the Maracaibo basin of southwest Venezuela. The agreement
commits the consortium to spend at least $160 million over the next three
years in a development program involving reworking, re-equipping and re-
entering wells, and drilling new wells to optimize production from
existing proved reserves. Total production from the block is expected to
approximate 30,000 barrels per day by 1997. The consortium's operating
fee and profit compensation is approximately $4.90 per barrel of
production during the 20-year life of the concession.
The 1994 capital expenditures also reflect pipeline and road construction
and development drilling in Ecuador. Production commenced in May 1994. By
year end all three fields were producing at a pipeline-curtailed rate of
33,000 barrels per day compared to total productive capacity of 43,000
barrels per day. Further, the Ministry of Energy and Mines in Ecuador has
recently informed the consortium members that the Ministry will seek to
renegotiate the Risk Service Contract and other contracts governing the
project. CMS NOMECO cannot predict the outcome of these negotiations.
CMS NOMECO holds a 14 percent working interest.
In mid-1994, CMS NOMECO negotiated an agreement to acquire Walter.
Because of the need to obtain governmental approvals, the transaction did
not close until early 1995. CMS NOMECO's acquisition of Walter will add
net production of 5,500 barrels per day in 1995 and proven reserves of
approximately 20 million barrels of oil.
CMS Energy currently plans to invest $342 million over the next three
years in its oil and gas exploration and production operations. These
anticipated capital expenditures, which reflect the acquisition of Walter,
will be concentrated in North and South America and Africa.
Independent Power Production
Pretax Operating Income: 1994 pretax operating income increased $15
million, primarily reflecting higher capacity sales from the MCV
partnership, as well as additional equity earnings by the CMS Generation
subsidiaries due to the addition of new electric generating capacity.
Sales and revenues related to CMS Energy's ownership interest increased 24
percent and 15 percent, respectively, over the prior year. 1993 pretax
operating income increased $21 million from 1992, primarily reflecting the
addition of new electric generating capacity and improved equity earnings
and operating efficiencies.
Capital Expenditures: In 1994, GPSLP, an unconsolidated affiliate of
CMS Generation, obtained financing and began construction on the Genesee
Power Station. CMS Generation has a 50 percent ownership interest in
GPSLP, the 35 MW wastewood-fueled power plant near Flint, Michigan.
Completion of the project is scheduled for Spring 1996 with an estimated
cost of $94 million. CMS Generation's share of GPSLP equity committed
upon completion of the project approximates $11 million.
In June 1994, CMS Generation acquired a 41 percent ownership interest in
the Centrales Termicas Mendoza electric generating plant in western
Argentina's Mendoza Province. CMS Generation is the lead developer and
the plant operator. With major retrofitting and maintenance, this
facility has the potential to produce 382 MW of generating capacity from
oil and natural gas. CMS Generation's operational responsibility for the
plant commenced on November 1, 1994.
In July 1994, CMS Generation acquired a 32.5 percent ownership interest in
Toledo Power Company, which holds two operating power plants totaling 135
MW of generating capacity located on the island of Cebu in the
Philippines.
In January 1995, CMS Generation completed its acquisition of Niagara
Mohawk Power Corporation's independent power subsidiary, HYDRA-CO.
CMS Generation purchased 100 percent of HYDRA-CO's stock for $207 million,
including approximately $52 million of current assets. CMS Generation
partially financed the acquisition with a $118 million bridge credit
facility supplied by a consortium of four banks led by Union Bank of
California. CMS Generation assumes ownership in 735 megawatts of gross
capacity and 224 megawatts of net ownership. CMS Generation will manage
and operate eight plants previously managed by HYDRA-CO and will also
assume construction management responsibility for a 60-megawatt diesel-
fueled plant which has begun in Jamaica. The plant is scheduled to go
into service in the third quarter of 1996.
CMS Energy currently plans to invest $516 million relating to its
independent power production operations over the next three years,
primarily in domestic and international subsidiaries and partnerships.
These anticipated capital expenditures include a $155 million requirement
for the HYDRA-CO acquisition. CMS Generation will also pursue
acquisitions of operating electric generating plants in Latin America,
southern Asia and the Pacific Rim region.
Natural Gas Pipeline, Storage and Marketing
Pretax Operating Income: 1994 pretax operating income increased $2
million over 1993, reflecting earnings growth from gas pipeline and
storage projects and gas marketed to end-users. In 1994, 66 bcf was
marketed compared to 60 bcf in 1993.
Capital Expenditures: In January 1994, CMS Gas Transmission acquired a 50
percent ownership interest in Moss Bluff Gas Storage Systems, a high
deliverability salt cavern storage facility on the Gulf Coast of Texas,
for $18 million.
Effective January 1, 1995, CMS Gas Transmission increased its ownership of
Antrim Limited Partnership to 100 percent by acquiring the remaining 40
percent interest. Under a new agreement with MichCon, CMS Gas
Transmission will provide a gas treating service for up to 260 MMcf/d of
Antrim gas. CMS Gas Transmission currently plans to expand this existing
120 MMcf/d treating complex to accommodate new Antrim production. This
$22 million expansion will treat gas connected to a number of gathering
lines including CMS Gas Transmission's South Chester gathering system and
deliver gas to MichCon's Northern Michigan pipeline network.
CMS Energy currently plans to invest $149 million over the next three
years relating to its non-utility gas operations, continuing to pursue
development of natural gas storage, gas gathering and pipeline operations
both domestically and internationally and work toward the development of a
Midwest "market center" for natural gas through strategic alliances and
asset acquisition and development.
Other
Other Income: Other income for 1994 decreased $34 million when compared
to the corresponding 1993 period, reflecting the sale of the remaining MCV
Bonds in December 1993 which eliminated the bond interest income. The
1992 loss included a $343 million charge related to the Settlement Order.
Public Utility Holding Company Act Exemption: CMS Energy is exempt from
registration under PUHCA. However, the Attorney General and the MMCG have
asked the SEC to revoke CMS Energy's exemption from registration under
PUHCA. On April 15, 1992, the MPSC filed a statement with the SEC
recommending that CMS Energy's current exemption be revoked and a new
exemption be issued conditioned upon certain reporting and operating
requirements. If CMS Energy were to lose its current exemption, it would
become more heavily regulated by the SEC; Consumers could ultimately be
forced to divest either its electric or gas utility business; and
CMS Energy would be restricted from conducting businesses that are not
functionally related to the conduct of its utility business as determined
by the SEC. CMS Energy is opposing this request and believes it will
maintain its current exemption from registration under PUHCA.
60
Consolidated Statements of Income CMS Energy Corporation
In Millions,
Except Per Share Amounts
Years Ended December 31 1994 1993 1992
Operating Revenue Electric utility $2,189 $2,077 $1,863
Gas utility 1,151 1,160 1,126
Oil and gas exploration and production 85 77 70
Independent power production 45 21 (8)
Natural gas pipeline, storage and marketing 145 142 89
Other 4 5 6
---------------------------------
Total operating revenue 3,619 3,482 3,146
---------------------------------
Operating Expenses Operation
Fuel for electric generation 306 293 305
Purchased power - related parties 482 467 460
Purchased and interchange power 162 148 112
Cost of gas sold 785 801 749
Other 625 571 555
---------------------------------
Total operation 2,360 2,280 2,181
Maintenance 192 206 203
Depreciation, depletion and amortization 379 364 347
General taxes 184 193 184
---------------------------------
Total operating expenses 3,115 3,043 2,915
---------------------------------
Pretax Operating Electric utility 335 286 154
Income (Loss) Gas utility 135 147 109
Oil and gas exploration and production 8 3 7
Independent power production 20 5 (16)
Natural gas pipeline, storage and marketing 9 7 5
Other (3) (9) (28)
---------------------------------
Total pretax operating income 504 439 231
---------------------------------
Income Taxes 104 92 22
---------------------------------
Net Operating Income 400 347 209
---------------------------------
Other Income Accretion income (Note 4) 13 14 15
(Deductions) Accretion expense (35) (36) -
Other income taxes, net 12 17 168
MCV Bond income - 32 34
Loss on MCV power purchases - settlement (Note 3) - - (520)
Other, net 18 15 9
---------------------------------
Total other income (deductions) 8 42 (294)
---------------------------------
Fixed Charges Interest on long-term debt 193 204 169
Other interest 18 24 35
Capitalized interest (6) (5) (3)
Preferred dividends 24 11 11
---------------------------------
Net fixed charges 229 234 212
---------------------------------
Net Income (Loss) $ 179 $ 155 $ (297)
=================================
Average Common Shares Outstanding 86 81 80
=================================
Earnings (Loss) Per Average Common Share $ 2.09 $ 1.90 $(3.72)
=================================
Dividends Declared Per Common Share $ .78 $ .60 $ .48
=================================
The accompanying notes are an integral part of these statements.
61
Consolidated Statements of Cash Flows CMS Energy Corporation
In Millions
Years Ended December 31 1994 1993 1992
Cash Flows From Net income (loss) $ 179 $ 155 $(297)
Operating Activities Adjustments to reconcile net income (loss) to
net cash provided by operating activities
Depreciation, depletion and amortization (includes
nuclear decommissioning depreciation of $49,
$46 and $46, respectively) 379 364 347
Debt discount amortization 37 36 12
Capital lease amortization 36 31 41
Deferred income taxes and investment tax credit 56 56 (185)
Accretion expense 35 36 -
Accretion income - abandoned Midland project (13) (14) (15)
MCV power purchases - settlement (Note 3) (87) (84) -
Loss on MCV power purchases - settlement (Note 3) - - 520
Changes in other assets and liabilities (Note 15) 12 (88) 25
Other (22) (8) 8
------ ------ ------
Net cash provided by operating activities 612 484 456
------ ------ ------
Cash Flows From Capital expenditures (excludes capital lease additions
Investing Activities of $36, $58 and $69, respectively and DSM) (Note 15) (575) (550) (487)
Investments in partnerships and unconsolidated
subsidiaries (53) (108) (12)
Investments in nuclear decommissioning trust funds (49) (46) (46)
Cost to retire property, net (38) (32) (14)
Deferred demand-side management costs (9) (52) (26)
Proceeds from sale of property 20 6 12
Proceeds from MCV Bonds - 322 10
Sale of subsidiary - (14) -
Proceeds from Bechtel settlement - - 46
Other (5) (5) (1)
------ ------ ------
Net cash used in investing activities (709) (479) (518)
------ ------ ------
Cash Flows From Proceeds from bank loans, notes and bonds 701 673 607
Financing Activities Issuance of preferred stock 193 - -
Increase (decrease) in notes payable, net 80 44 (493)
Issuance of common stock 30 132 -
Repayment of bank loans (473) (192) (1)
Retirement of bonds and other long-term debt (279) (645) (12)
Payment of common stock dividends (67) (49) (38)
Payment of capital lease obligations (35) (26) (36)
Retirement of common stock (2) (3) (1)
------ ------ ------
Net cash provided by (used in)
financing activities 148 (66) 26
------ ------ ------
Net Increase (Decrease) in Cash and Temporary Cash Investments 51 (61) (36)
Cash and temporary cash investments
Beginning of year 28 89 125
------ ------ ------
End of year $ 79 $ 28 $ 89
====== ====== ======
The accompanying notes are an integral part of these statements.
62
Consolidated Balance Sheets CMS Energy Corporation
ASSETS In Millions
December 31 1994 1993
Plant and Property Electric $5,771 $5,472
(At Cost) Gas 2,102 1,964
Oil and gas properties (full-cost method) 934 845
Other 73 67
----------------
8,880 8,348
Less accumulated depreciation, depletion and amortization (Note 2) 4,299 4,022
----------------
4,581 4,326
Construction work-in-progress 245 257
----------------
4,826 4,583
----------------
Investments First Midland Limited Partnership (Notes 3 and 18) 218 213
Independent power production 151 115
Midland Cogeneration Venture Limited Partnership (Notes 3 and 18) 74 67
Other 56 26
----------------
499 421
----------------
Current Assets Cash and temporary cash investments at cost, which
approximates market 79 28
Accounts receivable and accrued revenue, less allowances
of $5 in 1994 and $4 in 1993 (Note 6) 154 149
Inventories at average cost
Gas in underground storage 235 228
Materials and supplies 75 74
Generating plant fuel stock 37 41
Deferred income taxes (Note 5) 34 17
Trunkline settlement (Note 4) 30 31
Prepayments and other 186 195
----------------
830 763
----------------
Non-current Assets Postretirement benefits (Note 10) 484 491
Nuclear decommissioning trust funds (Note 2) 213 165
Abandoned Midland project (Note 4) 147 162
Trunkline settlement (Note 4) 55 86
Other 330 293
----------------
1,229 1,197
----------------
Total Assets $7,384 $6,964
================
63
CMS Energy Corporation
STOCKHOLDERS' INVESTMENT AND LIABILITIES In Millions
December 31 1994 1993
Capitalization Common stockholders' equity $1,107 $ 966
(Note 7) Preferred stock of subsidiary 356 163
Long-term debt 2,709 2,405
Non-current portion of capital leases 108 115
----------------
4,280 3,649
----------------
Current Liabilities Current portion of long-term debt and capital leases 64 368
Notes payable 339 259
Accounts payable 193 171
Accounts payable - related parties 50 46
Accrued taxes 217 233
MCV power purchases - settlement (Note 3) 95 82
Accrued interest 40 40
Accrued refunds 25 28
Other 198 189
----------------
1,221 1,416
----------------
Non-current Deferred income taxes (Note 5) 582 509
Liabilities Postretirement benefits (Note 10) 550 540
MCV power purchases - settlement (Note 3) 324 391
Deferred investment tax credits 181 191
Trunkline settlement (Note 4) 55 86
Regulatory liabilities for income taxes, net (Notes 5 and 17) 16 6
Other 175 176
----------------
1,883 1,899
----------------
Commitments and Contingencies (Notes 2, 3, 4, 11, 12 and 13)
Total Stockholders' Investment and Liabilities $7,384 $6,964
================
The accompanying notes are an integral part of these statements.
64
Consolidated Statements of Long-Term Debt CMS Energy Corporation
In Millions
December 31 1994 1993
First Mortgage Bonds Series (%) Due
5-7/8 1996 $ 36 $ 36
6 1997 50 50
8-3/4 1997 - 5
8-3/4 1998 248 248
6-5/8 1998 45 45
6-7/8 1998 43 43
9-1/8 1998 - 5
7-5/8 1999 - 48
8-7/8 1999 200 200
7-1/2 2001 57 57
7-1/2 2002 62 62
7-1/2 2002 - 43
6-3/8 2003 300 300
7-3/8 2023 300 300
------- -------
1,341 1,442
Long-Term Bank Debt 400 469
Senior Deferred Coupon Notes 355 466
Unsecured Credit Facility 196 -
Pollution Control Revenue Bonds 131 131
Bank Loans 110 115
Nuclear Fuel Disposal 95 90
General Term Notes 94 -
Senior Serial Notes 36 45
4-5/8% Debentures - 26
Tax Exempt Bonds - 22
Other 6 13
------- -------
Principal Amount Outstanding 2,764 2,819
Current Amounts (21) (333)
Net Unamortized Discount (34) (81)
------- -------
Total Long-Term Debt $2,709 $2,405
======= =======
LONG-TERM DEBT MATURITIES AND IMPROVEMENT FUND OBLIGATIONS In Millions
First Senior Unsecured
Mortgage Improvement Long-Term Deferred General Credit
Bonds Fund Bank Debt Coupon Notes Term Notes Facility Other Total
1995 $ - $8 $ - $ - $ - $ - $ 13 $ 21
1996 36 8 - - - - 46 90
1997 50 8 - 172 92 196 115 633
1998 336 7 200 - - - 37 580
1999 200 3 200 183 2 - 29 617
The accompanying notes are an integral part of these statements.
65
Consolidated Statements of Preferred Stock CMS Energy Corporation
Optional
Redemption Number of Shares In Millions
December 31 Series Price 1994 1993 1994 1993
Consumers' Preferred Stock
Cumulative, $100 par value,
authorized 7,500,000 shares,
with no mandatory redemption $4.16 $103.25 68,451 68,451 $ 7 $ 7
4.50 110.00 373,148 373,148 37 37
7.45 101.00 379,549 379,549 38 38
7.68 101.00 207,565 207,565 21 21
7.72 101.00 289,642 289,642 29 29
7.76 102.21 308,072 308,072 31 31
Consumers' Class A Preferred Stock
Cumulative, no par value,
authorized 16,000,000 shares,
with no mandatory redemption 2.08 (Note 7) 8,000,000 - 193 -
---- ----
Total Preferred Stock $356 $163
==== ====
The accompanying notes are an integral part of these statements.
66
Consolidated Statements of Common Stockholders' Equity CMS Energy Corporation
In Millions,
Except Number of Shares
Other Retained
Number Common Paid-in Earnings
of Shares Stock Capital (Deficit) Total
Balance at January 1, 1992 79,824,385 $1 $1,537 $(478) $1,060
Net loss (297) (297)
Common stock dividends declared (38) (38)
Common stock reacquired (9,101) (1) (1)
Common stock reissued 150,438 3 3
----------- -- ------- ------ -------
Balance at December 31, 1992 79,965,722 1 1,539 (813) 727
Net income 155 155
Common stock dividends declared (49) (49)
Common stock reacquired (97,442) (3) (3)
Common stock issued 5,135,726 132 132
Common stock reissued 192,789 4 4
----------- -- ------- ------ -------
Balance at December 31, 1993 85,196,795 1 1,672 (707) 966
Net income 179 179
Common stock dividends declared (67) (67)
Common stock reacquired (85,174) (2) (2)
Common stock issued 1,389,578 30 30
Common stock reissued 33,350 1 1
---------- -- ------- ------ -------
Balance at December 31, 1994 86,534,549 $1 $1,701 $(595) $1,107
========== == ======= ====== =======
The accompanying notes are an integral part of these statements.
67
CMS Energy Corporation
Notes to Consolidated Financial Statements
1: Corporate Structure
CMS Energy is the parent holding company of Consumers and Enterprises.
Consumers, a combination electric and gas utility company serving the
Lower Peninsula of Michigan, is the principal subsidiary of CMS Energy.
Consumers' customer base includes a mix of residential, commercial and
diversified industrial customers, the largest of which is the automotive
industry. Enterprises is engaged in several non-utility energy-related
businesses including: 1) oil and gas exploration and production, 2)
development and operation of independent power production facilities, 3)
gas marketing services to utility, commercial and industrial customers,
and 4) storage and transmission of natural gas.
2: Summary of Significant Accounting Policies and Other Matters
Basis of Presentation: The consolidated financial statements include
CMS Energy, Consumers and Enterprises and their wholly owned subsidiaries.
CMS Energy uses the equity method of accounting for investments in its
companies and partnerships where it has more than a 20 percent but less
than a majority ownership interest and includes these results in operating
revenue. For the years ended December 31, 1994, 1993 and 1992, equity
earnings (losses) were $34 million, $17 million, and $(6) million,
respectively.
Gas Inventory: Consumers uses the weighted average cost method for
valuing working gas inventory. Cushion gas, which is gas stored to
maintain reservoir pressure for recovery of working gas, is recorded in
the appropriate gas utility plant account. Consumers stores gas inventory
in its underground storage facilities.
Maintenance, Depreciation and Depletion: Property repairs and minor
property replacements are charged to maintenance expense. Depreciable
property retired or sold plus cost of removal (net of salvage credits) is
charged to accumulated depreciation. Consumers bases depreciation
provisions for utility plant on straight-line and units-of-production
rates approved by the MPSC. The composite depreciation rate for electric
utility property was 3.5 percent for 1994 and 3.4 percent for 1993 and
1992. The composite rate for gas utility plant was 4.2 percent for 1994,
4.4 percent for 1993 and 4.3 percent for 1992.
CMS NOMECO follows the full-cost method of accounting and, accordingly,
capitalizes its exploration and development costs, including the cost of
non-productive drilling and surrendered acreage, on a country-by-country
basis. The capitalized costs in each cost center are being amortized on an
overall units-of-production method based on total estimated proven oil and
gas reserves.
The composite rates for Consumers' common property, CMS NOMECO's other
property, and other property of CMS Energy and its subsidiaries were 4.3
percent in 1994, 4.5 percent in 1993 and 4.7 percent in 1992.
New Accounting Standards: In December 1994, the American Institute of
Certified Public Accountants issued Statement of Position 94-6, Disclosure
of Certain Significant Risks and Uncertainties, effective for 1995 year-
end financial statements. CMS Energy does not believe that it will be
significantly affected by the statement, which requires disclosures about
the nature of a company's operations and the use of estimates in financial
statements. For other recent accounting standards regarding financial
instruments, see Note 8.
Nuclear Fuel Cost: Consumers amortizes nuclear fuel cost to fuel expense
based on the quantity of heat produced for electric generation. Interest
on leased nuclear fuel is expensed as incurred. Under federal law, the DOE
is responsible for permanent disposal of spent nuclear fuel at costs to be
paid by affected utilities. However, in 1994, the DOE asserted that it
does not have a legal obligation to accept spent nuclear fuel without an
operational repository. The DOE is exploring options to offset the costs
incurred by nuclear utilities to store spent nuclear fuel on site. For
fuel burned after April 6, 1983, Consumers charges disposal costs to
nuclear fuel expense, recovers it through electric rates and remits it to
the DOE quarterly. Consumers elected to defer payment for disposal of
spent nuclear fuel burned before April 7, 1983, until the spent fuel is
delivered to the DOE, which was originally scheduled to occur in 1998. At
December 31, 1994, Consumers has recorded a liability to the DOE of $95
million, including interest. Consumers has been recovering through
electric rates the amount of this liability, excluding a portion of
interest.
Nuclear Plant Decommissioning: Consumers collects estimated costs to
decommission its two nuclear plants through a monthly surcharge to
electric customers which currently totals $45 million annually. On March
1, 1995, Consumers filed updated decommissioning estimates with the MPSC
which increased the estimated decommissioning costs for Big Rock to $290
million from $221 million and for Palisades to $502 million from $423
million (in 1994 dollars). The increase in the estimated decommissioning
costs principally reflects the unavailability of low- and high-level
radioactive waste disposal facilities. Amounts collected from electric
retail customers and deposited in trusts (including trust earnings) are
credited to accumulated depreciation. To meet NRC decommissioning
requirements, Consumers prepared site-specific decommissioning cost
estimates for Big Rock and Palisades, assuming that each plant site will
eventually be restored to conform with the adjacent landscape, and that
all contaminated equipment will be disassembled and disposed of in a
licensed burial facility. Consumers currently plans to maintain the
facilities in protective storage until radioactive waste disposal
facilities are available. As a result, the majority of decommissioning
costs will be incurred significantly later than originally anticipated.
Consumers has asked the NRC for an exemption from its requirement for
assurance that the Big Rock decommissioning funds will at least equal the
adjusted "minimum certification" amount of $361 million (in 1994 dollars)
since the site specific cost study for Big Rock demonstrates that a lesser
amount will cover the projected decommissioning costs for which the
assurance is required. When Big Rock's and Palisades' NRC licenses expire
in 2000 and 2007, respectively, the trust funds are estimated to have
accumulated to $257 million and $686 million, respectively. At the time
the plants are fully decommissioned (in the years 2030 for Big Rock and
2046 for Palisades), the trust funds are estimated to provide $1 billion
for Big Rock and $2.1 billion for Palisades including trust earnings over
this period. Accordingly, Consumers believes that the current
decommissioning surcharge is sufficient. At December 31, 1994, Consumers
had an investment in nuclear decommissioning trust funds of $213 million.
For information regarding reactor embrittlement at Palisades, see Note 13.
Reclassifications: CMS Energy has reclassified certain prior year amounts
for comparative purposes. These reclassifications did not affect the net
income or net losses for the years presented.
Related-Party Transactions: In 1994, 1993 and 1992, Consumers purchased
$48 million, $52 million and $36 million, respectively, of electric
generating capacity and energy from affiliates of Enterprises. Affiliates
of CMS Energy sold, stored and transported natural gas and provided other
services to the MCV Partnership totaling approximately $22 million, $27
million and $21 million for 1994, 1993 and 1992, respectively. For
additional discussion of related-party transactions with the MCV
Partnership and the FMLP, see Notes 3 and 18. Other related-party
transactions are immaterial.
Revenue and Fuel Costs: Consumers accrues revenue for electricity and gas
used by its customers but not billed at the end of an accounting period.
Consumers also accrues or reduces revenue for any underrecovery or
overrecovery of electric power supply costs and natural gas costs by
establishing a corresponding asset or liability until it bills these
unrecovered costs or refunds the excess recoveries to customers following
reconciliation hearings conducted before the MPSC.
Utility Regulation: Consumers accounts for the effects of regulation
under SFAS 71, Accounting for the Effects of Certain Types of Regulation.
As a result, the actions of regulators affect when revenues, expenses,
assets and liabilities are recognized. Consumers' regulatory assets and
liabilities are described in Note 18.
Other: For significant accounting policies regarding income taxes, see
Note 5; for pensions and other postretirement benefits, see Note 10; and
for cash equivalents, see Note 15.
3: The Midland Cogeneration Venture
The MCV Partnership, which leases and operates the MCV Facility,
contracted to sell electricity to Consumers for a 35-year period beginning
in 1990 and to supply electricity and steam to The Dow Chemical Company.
At December 31, 1994, Consumers, through its subsidiaries, held the
following assets related to the MCV: 1) CMS Midland owned a 49 percent
general partnership interest in the MCV Partnership; and 2) CMS Holdings
held through the FMLP a 35 percent lessor interest in the MCV Facility.
Power Purchases from the MCV Partnership: Consumers' obligation for
purchase of contract capacity from the MCV Partnership under the PPA was
1,132 MW in 1994 and increases to a maximum amount of 1,240 MW in 1995 and
thereafter. Prior to 1993, the MPSC allowed Consumers to recover costs of
power purchased from the MCV Partnership at levels significantly less than
Consumers paid. In March 1993, the MPSC approved, with modifications, a
settlement proposal which allowed Consumers to recover substantially all
of the payments for its ongoing purchase of 915 MW of contract capacity
effective January 1993. Capacity and energy purchases from the MCV
Partnership above the 915 MW level can be competitively bid into
Consumers' next solicitation for power or, if necessary, utilized for
current power needs. In either instance, the MPSC would determine the
levels of recovery from retail customers at a later date. The Settlement
Order also provides Consumers the right to remarket to third parties the
remaining contract capacity. At the request of the MPSC, the MCV
Partnership confirmed that it did not object to the Settlement Order.
ABATE and the Attorney General have appealed the Settlement Order to the
Court of Appeals.
The PPA provides that Consumers is to pay to the MCV Partnership a minimum
levelized average capacity charge of 3.77 cents per kWh, a fixed energy
charge and a variable energy charge which is based primarily on Consumers'
average cost of coal consumed. The Settlement Order permits Consumers to
recover capacity charges averaging 3.62 cents per kWh for 915 MW of
capacity and the prescribed energy charges associated with the scheduled
deliveries within certain hourly availability limits, whether or not those
deliveries are scheduled on an economic basis. For all economic energy
deliveries above the availability limits to 915 MW, Consumers is allowed
to recover 1/2 cent per kWh capacity payment in addition to the variable
energy charge.
In 1992, Consumers recognized an after-tax loss of $343 million which was
the present value of an undiscounted after-tax loss of $789 million, based
on Consumers' estimated future underrecoveries of power costs under the
PPA as a result of the Settlement Order. This loss was based, in part, on
management's assessment of the future availability of the MCV Facility,
and the effect of the future power market on the amount, timing and price
at which various increments of the capacity, above the MPSC authorized
level, could be resold. Additional losses may occur if actual future
experience materially differs from the 1992 estimates. As anticipated in
1992, Consumers continues to experience cash underrecoveries associated
with the Settlement Order. These after-tax cash underrecoveries,
including fixed energy charges (in connection with a dispute with the MCV
Partnership discussed below) which were being escrowed, were $61 million
in 1994 and $59 million in 1993. If Consumers is unable to sell any
capacity above the current MPSC-authorized level, future additional after-
tax losses and after-tax cash underrecoveries would be incurred.
Consumers estimates its future after-tax cash underrecoveries and possible
additional losses for the next five years if none of the additional
capacity is sold are shown in the table below.
After-tax, In Millions
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
Expected cash underrecoveries $60 $56 $55 $ 8 $ 9
Possible additional under-
recoveries and losses (a) $20 $20 $22 $72 $72
(a) If unable to sell any capacity above the MPSC's authorized level.
At December 31, 1994 and 1993, the after-tax, present value of the
Settlement Order liability totaled $272 million and $307 million,
respectively. The reduction in the Settlement Order liability during 1994
reflects after-tax cash underrecoveries related to capacity totaling $57
million, partially offset by after-tax accretion expense of $22 million.
In connection with the MPSC's approval of the settlement proposal
discussed above, Consumers and the MCV Partnership engaged in arbitration
under the PPA regarding the payment of certain fixed energy charges. In
January 1995, the arbitrator ruled in favor of Consumers' interpretation
of the PPA and found that Consumers was entitled to the immediate return
of an estimated $22 million, representing the fixed energy amounts for
which Consumers did not receive full cost recovery during the years prior
to the Settlement Order (1990 - 1992). Consumers had escrowed
approximately $16 million of this amount. The arbitrator postponed the
return of payments for 1993 and 1994 because the Settlement Order is still
subject to pending appeals. The amount under dispute in 1994 is
approximately $9 million and increases each year thereafter, averaging
approximately $17 million per year over the life of the contract.
Consumers believes it is premature to recognize any current year earnings
benefit from this award until the remaining amount of MCV capacity is sold
and/or the market for the capacity is confirmed.
In May 1994, Consumers was notified by the MCV that it was initiating
further arbitration proceedings under the PPA to determine whether the
energy charge paid to the MCV is being properly calculated. Consumers
believes that its calculation of the energy charge is correct. The amount
in dispute, which relates to the period beginning in 1990 and continuing
through the term of the PPA, has been estimated by the MCV Partnership to
total $6.3 million annually. An arbitrator has been selected and a ruling
is expected in the third quarter of 1995. Consumers cannot predict the
outcome of this arbitration.
In 1994, the lessors of the MCV Facility filed a lawsuit against
CMS Energy, Consumers and CMS Holdings, alleging breach of contract,
breach of fiduciary duty and negligent or fraudulent misrepresentation
relating to the MCV Partnership's failure to object to the Settlement
Order in light of Consumers' interpretation of the Settlement Order, which
is the subject of the arbitration between the MCV Partnership and
Consumers discussed above. The action alleged damages in excess of $1
billion and sought injunctive relief relative to Consumers' payments of
the fixed energy charges. In February 1995, after the arbitrator's
decision, the lessors voluntarily withdrew this lawsuit.
In July 1994, Consumers paid $30 million to terminate a power purchase
agreement with a 65 MW coal-fired cogeneration facility. Additionally, in
February 1995, Consumers agreed to pay $15 million to terminate a power
purchase agreement with a 44 MW wood and chipped tire facility. Consumers
plans to seek MPSC approval to substitute less expensive contract capacity
from the MCV Facility which Consumers is currently not authorized to
recover from retail customers. This proposed substitution of capacity
would start in late 1996, the year the coal-fired cogeneration facility
was scheduled to begin operations. The capacity substitution represents
significant savings to Consumers' customers, compared to the cost approved
by the MPSC for similar facilities. As a result, Consumers has recorded a
regulatory asset of $45 million ($30 million in 1994), which it believes
will ultimately be recoverable in rates.
MCV-related PSCR Matters: Consistent with the terms of the 1993
Settlement Order, Consumers withdrew its appeals of various MPSC orders
issued in connection with several PSCR cases. Consumers also agreed not
to appeal any MCV-related issues raised in future orders for these plan
cases and related reconciliations to the extent those issues are resolved
by the Settlement Order. In March 1994, the MPSC issued an order in the
PSCR reconciliation case for 1992 confirming Consumers' recovery for the
purchase of 840 MW from the MCV in accordance with the MPSC plan case
order and allowing recovery for the purchase of power above 840 MW based
on replacement power costs. The MPSC subsequently confirmed the recovery
of MCV-related costs consistent with the Settlement Order as part of the
1993 and 1994 plan case orders. ABATE or the Attorney General has
appealed these plan case orders to the Court of Appeals.
4: Rate Matters
Electric Rate Case: In May 1994, the MPSC granted Consumers a $58 million
annual increase in its retail electric rates. The order provides
Consumers with higher revenues associated with increased expenditures
primarily related to capital additions, operation and maintenance,
postretirement benefits, and the continuation of certain DSM programs.
The MPSC order generally supported Consumers' rate design proposal and
reduced the level of subsidization of residential customers by commercial
and industrial customers by allocating $40 million of the rate increase to
residential customers.
In November 1994, Consumers filed a request with the MPSC which could
increase its retail electric rates in a range from $104 million to $140
million, depending upon the ratemaking treatment afforded sales losses to
competition and the treatment of the MCV contract capacity above 915 MW.
The request includes a proposed increase in Consumers' authorized rate of
return on equity to 12.75 percent from 11.75 percent, recognition of
increased expenditures related to continuing construction activities and
capital additions aimed at maintaining and improving system reliability
and increases in financing costs. Consumers has requested that the MPSC
eliminate the remainder of rate cross-subsidization of residential rates
in a two-step adjustment, eliminate all DSM expenditures after April 1995
and allow recovery of all jurisdictional costs associated with the
proposed settlement of the proceedings concerning the operation of
Ludington (see Note 12). In January 1995, Consumers filed a request with
the MPSC, seeking to adjust its depreciation rates and to reallocate
certain portions of its electric production plant to transmission
accounts, which if approved would result in a net decrease in depreciation
expense of $7 million (see Electric Rate Case discussion in the
Management's Discussion and Analysis).
Abandoned Midland Project: In 1991, the MPSC ordered that Consumers could
collect $35 million pretax annually for the next 10 years for its
abandoned nuclear project. Consumers is amortizing the abandoned assets
against current income over the recovery period using an interest method.
Consumers was not permitted to earn a return on the portion of the
abandoned investment for which the MPSC was allowing recovery. The loss
of a return on the amount being recovered is reflected in earnings as
accretion income. An after-tax total of $27 million remains to be
included in accretion income through April 2001. In December 1994, the
Court of Appeals upheld the MPSC orders allowing recovery of the abandoned
investment. Consumers and ABATE have appealed this decision to the
Michigan Supreme Court. Management cannot predict the outcome of this
issue.
Electric DSM: As a result of settlement discussions regarding DSM and an
MPSC order, Consumers agreed to spend $65 million over two years on DSM
programs. Consumers completed the customer participation portion of these
DSM programs in 1993. Based on the criteria set out in the DSM settlement
agreement approved by the MPSC, Consumers has achieved all the agreed-upon
objectives. Consumers believes that the MPSC will ultimately allow
collection of $11 million of incentive revenue. Accordingly, during 1994,
Consumers recognized $11 million in revenue, related to its DSM program.
A final order from the MPSC is expected by mid-1995.
In 1994, as part of Consumers' electric rate case, the MPSC authorized
Consumers to recover DSM expenditures which exceeded $65 million and to
continue certain programs ($30 million annually) in 1994 through 1996.
Consumers is deferring program costs and amortizing the costs over the
period these costs are being recovered from customers in accordance with
an MPSC accounting order. The unamortized balance of deferred costs
totaled $71 million at December 31, 1994 and 1993.
PSCR Issues: In November 1994, an ALJ issued a proposal for decision in
the 1993 PSCR reconciliation proceeding that addressed issues related to
an extended refueling and maintenance outage that began at Palisades in
June 1993 and ended in November 1993. Consumers conceded that one day of
the 1993 outage was unnecessary, while the ALJ found that 22 days of the
outage were the result of imprudent actions and recommended a disallowance
of $4 million of replacement power costs. While Consumers has taken
exception to the ALJ's proposal, it has accrued a loss for this issue for
1994. In addition, from mid-February through mid-June 1994, Palisades
took an unscheduled outage to repair valve leakage and conduct other
needed inspections and repairs. The 1994 outage will be reviewed as part
of the 1994 reconciliation proceeding.
The Energy Act imposes an obligation on the utility industry to
decommission DOE uranium enrichment facilities. In 1994, the MPSC
authorized Consumers to recover through electric rates its required
decommissioning payments to the DOE. At December 31, 1994, Consumers'
remaining liability and regulatory asset each totaled $25 million.
Gas Rates: In July 1994, the MPSC approved an agreement previously
reached between the MPSC staff and Consumers, to charge $10 million of
costs for postretirement benefits against 1994 earnings. The agreement
was reached in response to a claim that gas utility business earnings for
1993 were excessive. This charge against earnings partially offsets
savings related to reduced state property taxes. The agreement also
provides for an additional $4 million of postretirement benefit costs to
be charged against 1995 earnings instead of being deferred. As part of
the agreement, Consumers filed a gas rate case in December 1994.
Consumers requested an increase in its gas rates of $21 million annually.
The request, among other things, incorporates cost increases, including
costs for postretirement benefits and costs related to Consumers' former
manufactured gas plant sites. Consumers requested that the MPSC authorize
a 13 percent rate of return on equity, instead of the currently authorized
rate of 13.25 percent. Consumers expects an MPSC decision in late 1995.
Consumers' most recent rate filing for its electric utility business
resulted in an approved rate of return on equity of 11.75 percent.
GCR Issues: In 1993, the MPSC provided that the price payable to certain
intrastate gas producers by Consumers be reduced prospectively. As a
result, Consumers was not allowed to recover $13 million of costs incurred
prior to February 1993. Consumers previously had accrued a loss in
excess of the disallowed amount. Future disallowances are not
anticipated, unless appeals filed by the intrastate producers are
successful.
In 1992, the FERC approved a settlement involving Consumers, Trunkline and
certain other parties, which resolved numerous claims and proceedings
concerning Trunkline liquified natural gas costs. The settlement
represents significant gas cost savings for Consumers and its customers in
future years. In 1992, Consumers recorded a liability and regulatory
asset for the principal amount of payments due Trunkline. In 1993, the
MPSC approved a separate settlement agreement providing full recovery of
the liability over a five-year period. At December 31, 1994, the
remaining liability and regulatory asset were $85 million.
Estimated losses for certain contingencies discussed in this note have
been accrued. Resolution of these contingencies is not expected to have a
material impact on the financial statements.
5: Income Taxes
CMS Energy and its subsidiaries (including Consumers) file a consolidated
federal income tax return. Income taxes are generally allocated based on
each subsidiary's separate taxable income. CMS Energy and Consumers
practice full deferred tax accounting for temporary differences.
CMS Energy uses ITC to reduce current income taxes payable and defers and
amortizes ITC over the life of the related property. Any AMT paid
generally becomes a tax credit that can be carried forward indefinitely to
reduce regular tax liabilities in future periods when regular taxes paid
exceed the tax calculated for AMT.
The significant components of income tax expense (benefit) consisted of:
In Millions
Years Ended December 31 1994 1993 1992
- ----------------------- ----- ----- -----
Current federal income taxes $ 36 $ 19 $ 39
Deferred income taxes 66 67 (177)
Deferred income taxes - tax rate change - (1) -
Deferred ITC, net (10) (10) (8)
----- ----- -----
$ 92 $ 75 $(146)
===== ===== =====
Operating $ 104 $ 92 $ 22
Other (12) (17) (168)
----- ----- -----
$ 92 $ 75 $(146)
===== ===== =====
The principal components of CMS Energy's deferred tax assets (liabilities)
recognized in the balance sheet are as follows:
In Millions
December 31 1994 1993
- ----------- ------- -------
Property $ (601) $ (580)
Unconsolidated investments (246) (194)
Postretirement benefits (Note 10) (179) (180)
Abandoned Midland project (Note 4) (51) (57)
Employee benefit obligations (includes
postretirement benefits of $176 and $182) (Note 10) 205 204
AMT carryforward 154 110
MCV power purchases - settlement (Note 3) 146 165
ITC carryforward (expires 2005) 37 48
Other (13) (8)
------- -------
$ (548) $ (492)
======= =======
Gross deferred tax liabilities $(1,661) $(1,571)
Gross deferred tax assets 1,113 1,079
------- -------
$ (548) $ (492)
======= =======
The actual income tax expense (benefit) differs from the amount computed
by applying the statutory federal tax rate to income before income taxes
as follows:
In Millions
Years Ended December 31 1994 1993 1992
- ----------------------- ------ ------ ------
Net income (loss) before preferred
dividends $ 203 $ 166 $ (286)
Income tax expense (benefit) 92 75 (146)
------ ------ ------
295 241 (432)
Statutory federal income tax rate x 35% x 35% x 34%
------ ------ ------
Expected income tax expense (benefit) 103 84 (147)
Increase (decrease) in taxes from:
Capitalized overheads previously
flowed through 5 5 5
Differences in book and tax
depreciation not previously deferred 6 6 9
ITC amortization and utilization (9) (11) (11)
Nonconventional fuel tax credit (8) (6) (4)
Other, net (5) (3) 2
------ ------ ------
$ 92 $ 75 $ (146)
====== ====== ======
6: Short-Term Financings
In 1994, the FERC granted Consumers' request for authorization to issue or
guarantee up to $900 million of short-term debt through December 31, 1996.
Consumers has an unsecured $470 million facility and unsecured, committed
lines of credit aggregating $185 million that are used to finance seasonal
working capital requirements. At December 31, 1994, $170 million and $166
million were outstanding under these facilities at weighted average
interest rates of 6.3 percent and 7.3 percent, respectively. Consumers
has an established $500 million trade receivables purchase and sale
program. At December 31, 1994 and 1993, receivables sold under the
agreement totaled $275 million and $285 million, respectively. Accounts
receivable and accrued revenue in the Consolidated Balance Sheets have
been reduced to reflect receivables sold.
7: Capitalization
CMS Energy
Capital Stock: On February 14, 1995, CMS Energy mailed a proxy statement
to its shareholders seeking their approval to amend its Articles of
Incorporation and authorize a new class of Common Stock of CMS Energy.
This proposed new class of Common Stock, designated Class G Common Stock,
would reflect the separate performance of the gas distribution, storage
and transportation businesses currently conducted by Consumers and
Michigan Gas Storage (such businesses, collectively, would be the
"Consumers Gas Group"). The existing CMS Energy Common Stock would
continue to be outstanding if and after any shares of Class G Common Stock
were issued by CMS Energy and would reflect the performance of all of the
businesses of CMS Energy and its subsidiaries, including the business of
the Consumers Gas Group, except for the interest in the Consumers Gas
Group attributable to any outstanding shares of the Class G Common Stock.
CMS Energy also filed a shelf-registration statement with the SEC on
February 15, 1995 covering the issuance of up to $200 million of
securities. Such securities could encompass Common Stock of CMS Energy
(including Class G if approved), Preferred Stock of CMS Energy or a
special purpose affiliate of CMS Energy, and/or unsecured debt of
CMS Energy. CMS Energy will continually evaluate the capital markets and
may offer such instruments from time to time, at terms to be determined at
or prior to the time of the sale.
CMS Energy's Articles permit it to issue up to 250 million shares of
common stock at $.01 par value and up to 5 million shares of preferred
stock at $.01 par value. Under the Unsecured Credit Facility and the
Indentures pursuant to which the GTNs are issued, which currently contain
CMS Energy's most restrictive dividend covenants, CMS Energy is permitted
to pay, as dividends on its common stock, an amount not to exceed the
total of its net income, as defined in the Indentures, and any proceeds
received from the issuance or sale of common stock as defined in the
agreements and $120 million, provided there exists no event of default
under the terms of the Unsecured Credit Facility or GTNs. The same
formula applies to limits available to repurchase or reacquire CMS Energy
stock for either the payment of dividends or repurchase of stock.
In October 1994, CMS Energy filed a shelf-registration statement for the
offering and issuance of up to two million shares of common stock. As
described in the SEC filing, the shares may be offered and issued in
connection with acquisitions of energy-related business and assets. In
October 1993, CMS Energy issued an additional 4.6 million shares of common
stock at a price of $26-5/8. The net proceeds of $119 million were used
to reduce existing debt and for general corporate purposes.
Long-Term Debt: In October 1992, CMS Energy received proceeds of $130
million and $219 million from the issuance of Series A and Series B Notes,
respectively. Interest will accrue and increase the principal to the face
value of the Notes through October 1, 1995. After such date, interest
will be paid semi-annually commencing April 1, 1996, at a rate of 9.5
percent per annum for the Series A Notes and 9.875 percent per annum for
the Series B Notes. As of January 31, 1995, $328 million of Notes was
outstanding.
In January 1994, CMS Energy filed a shelf-registration statement with the
SEC permitting the issuance and sale of up to $250 million of GTNs. The
net proceeds are being used to reduce the amount of Notes outstanding and
for general corporate purposes. The GTNs may be offered from time to time
on terms to be determined at the time of sale. As of January 31, 1995,
$99 million of GTNs was outstanding at a weighted average interest rate of
7.5 percent and the principal amount of Series B Notes outstanding was
reduced by $114 million to a balance of $167 million.
In July 1994, CMS Energy refinanced its Secured Credit Facility with a new
$400 million Unsecured Credit Facility and extended the termination date
to June 30, 1997. As of December 31, 1994, $196 million was outstanding at
a weighted average interest rate of 6.8 percent leaving $204 million
available at December 31, 1994.
Consumers
Capital Stock: During 1994, Consumers issued and sold 8 million shares of
Class A Preferred Stock (cumulative, without par value) with an annual
dividend of $2.08. Net proceeds to Consumers were $193 million. The
stock is redeemable at the option of Consumers, on or after April 1, 1999,
at a redemption price of $25 per share plus accrued dividends.
At December 31, 1992, Consumers effected a quasi-reorganization in which
Consumers' accumulated deficit of $574 million was eliminated against
other paid-in capital. This action had no effect on CMS Energy's
consolidated financial statements.
First Mortgage Bonds: Consumers secures its first mortgage bonds by a
mortgage and lien on substantially all of its property. Consumers' ability
to issue and sell securities is restricted by certain provisions in its
First Mortgage Bond Indenture, Articles and the need for regulatory
approvals in compliance with appropriate state and federal law. In the
first quarter of 1994, Consumers redeemed first mortgage bonds totaling
$101 million. These redemptions completed Consumers' commitment to the
MPSC, under a 1993 financing order to refinance certain long-term debt.
Long-Term Bank Debt: In 1994, subsequent to MPSC authorization, Consumers
entered into a new $400 million unsecured, variable rate, five-year term
loan and subsequently used the proceeds to refinance its then existing
long-term, variable rate, credit agreement and to reduce short-term
borrowings. At December 31, 1994, the new loan carried a weighted average
interest rate of 6.5 percent. In 1993, Consumers entered into an interest
rate swap agreement, exchanging variable-rate interest for a fixed-rate
interest of 5.2 percent on $250 million of its long-term bank debt. The
swap agreement hedges the variable rate exposure associated with
Consumers' long-term bank debt and had the effect of increasing the
weighted average interest rate to 5.3 percent from 5.0 percent for the 12-
month period ended December 31, 1994. The current swap agreement began to
decrease in February 1995 and will terminate by May 1996. In February
1995, Consumers entered into another hedging agreement for $100 million to
reduce its exposure to variable rate interest associated with its long-
term bank debt.
Other: Consumers has a total of $131 million of long-term PCRBs
outstanding (secured by irrevocable letters of credit and first mortgage
bonds) with a weighted average interest rate of 4.8 percent as of December
31, 1994.
In 1994, Consumers received a $100 million equity investment from
CMS Energy. The investment was consistent with CMS Energy's plan to
improve Consumers' capital structure and was recognized and included in
the capitalization structure employed by the MPSC as part of Consumers'
most recent electric rate order.
CMS NOMECO
As of December 31, 1994, CMS NOMECO had total debt outstanding of $129
million. Senior serial notes amounting to $36 million with a weighted
average interest rate of 9.4 percent are outstanding from a private
placement. Available existing credit lines total $110 million. At
December 31, 1994, $89 million was outstanding at a weighted average
interest rate of 7.3 percent. CMS NOMECO also has $4 million outstanding
under other credit agreements.
CMS Generation
In May 1994, MOAPA redeemed $22 million of Clark County, Nevada tax-exempt
bonds. The bonds had been included in current maturities on the balance
sheet and the funds held in a trust account had been included as other
current assets. The bonds were issued in 1990 for the purpose of
providing partial funding for the development of a proposed tires-to-
energy solid waste disposal and resource recovery facility which was never
constructed.
In January 1995, CMS Generation entered into a one-year $118 million
bridge credit facility, for the acquisition of HYDRA-CO. CMS Energy is
currently evaluating permanent financing options.
8: Financial Instruments
The carrying amounts of cash, short-term investments and current
liabilities approximate their fair values due to their short-term nature.
The estimated fair values of long-term investments are based on quoted
market prices or, in the absence of specific market prices, on quoted
market prices of similar investments or other valuation techniques. The
carrying amounts of all long-term investments in financial instruments,
approximate fair value. The carrying amount of long-term debt was $2.7
billion and $2.4 billion and the fair value of long-term debt was $2.6
billion and $2.6 billion as of December 31, 1994 and 1993, respectively.
Although the current fair value of the long-term debt may differ from the
current carrying amount, settlement of the reported debt is generally not
expected until maturity.
The fair values of CMS Energy's off-balance-sheet financial instruments
are based on the amounts estimated to terminate or settle the instruments.
The fair value of interest rate swap agreements was $(5) million and $6
million and guarantees/letters of credit outstanding were $123 million and
$96 million as of December 31, 1994 and 1993, respectively (see Note 7).
Effective January 1, 1994, CMS Energy adopted SFAS 115, Accounting for
Certain Investments in Debt and Equity Securities, which did not
materially impact CMS Energy's financial position or results of
operations.
9: Executive Incentive Compensation
Under CMS Energy's Performance Incentive Stock Plan, restricted shares of
common stock of CMS Energy, stock options and stock appreciation rights
may be granted to key employees based on their contributions to the
successful management of CMS Energy and its subsidiaries. The plan
reserves for award not more than 2 percent of CMS Energy's common stock
outstanding on January 1 each year, less the number of shares of
restricted common stock awarded and of common stock subject to options
granted under the plan during the immediately preceding four calendar
years. Any forfeitures are subject to award under the plan. At December
31, 1994, awards of up to 402,316 shares of common stock may be issued.
Restricted shares of common stock are outstanding shares with full voting
and dividend rights. Performance criteria were added in 1990 based on
CMS Energy's total return to shareholders. Shares of restricted common
stock cannot be distributed until they are vested and the performance
objectives are met. Further, the restricted stock is subject to
forfeiture if employment terminates before vesting. If key employees
exceed performance objectives, the plan will allow additional awards.
Restricted shares vest fully if control of CMS Energy changes, as defined
by the plan. At December 31, 1994, 314,856 shares of the 330,356
restricted shares outstanding are subject to performance objectives.
Consumers' Executive Stock Option and Stock Appreciation Rights Plan, an
earlier plan approved by shareholders, remains in effect until all
authorized options are granted or September 25, 1995. At December 31,
1994, options for 43,000 shares remained to be granted.
Under both plans, for stock options and stock appreciation rights, the
exercise price on each grant date equaled the closing market price on the
grant date. Options are exercisable upon grant and expire up to 10 years
and one month from date of grant. The status of the restricted stock
granted under the Performance Incentive Stock Plan and options granted
under both plans follows:
Restricted
Stock Options
---------- ---------------
Number Number Price
of Shares of Shares per Share
--------- --------- ---------------
Outstanding at January 1, 1992 275,063 1,291,091 $ 7.13 - $34.25
Granted 101,000 215,000 $17.13 - $18.00
Exercised or Issued (37,422) (21,000) $13.00 - $16.00
Canceled (15,375) (50,000) $20.50 - $33.88
------- --------- ---------------
Outstanding at December 31, 1992 323,266 1,435,091 $ 7.13 - $34.25
Granted 132,000 249,000 $25.13 - $26.25
Exercised or Issued (54,938) (152,125) $ 7.13 - $21.13
Canceled (84,141) (33,000) $20.50 - $33.88
------- --------- ---------------
Outstanding at December 31, 1993 316,187 1,498,966 $ 7.13 - $34.25
Granted 133,500 273,000 $21.25 - $22.38
Exercised or Issued (39,361) (158,300) $ 7.13 - $22.00
Canceled (79,970) (123,000) $26.25 - $33.88
------- --------- ---------------
Outstanding at December 31, 1994 330,356 1,490,666 $ 7.13 - $34.25
======= ========= ===============
10: Retirement Benefits
Postretirement Benefit Plans Other Than Pensions: CMS Energy and its
subsidiaries adopted SFAS 106, Employers' Accounting for Postretirement
Benefits Other than Pensions, effective as of the beginning of 1992 and
Consumers recorded a liability of $466 million for the accumulated
transition obligation and a corresponding regulatory asset for anticipated
recovery in utility rates (see Note 18). CMS Energy's non-utility
subsidiaries expensed their accumulated transition obligation liability.
The amount of such transition obligation is not material to the
presentation of the consolidated financial statements or significant to
CMS Energy's total transition obligation. Both the MPSC and FERC have
generally allowed recovery of SFAS 106 costs. The MPSC's generic order
allows utilities three years to seek recovery of costs. In May 1994, the
MPSC authorized recovery of the electric utility portion of these costs
over 18 years. In December 1994, Consumers requested recovery of the gas
utility portion of these costs (see Note 4). CMS Energy funds the
benefits using external Voluntary Employee Beneficiary Associations.
Funding of the health care benefits coincides with Consumers' recovery in
rates. A portion of the life insurance benefits have previously been
funded.
Retiree health care costs at December 31, 1994, are based on the
assumption that costs would increase 10 percent in 1995, then decrease
gradually to 6 percent in 2004 and thereafter. The health care cost trend
rate assumption significantly affects the amounts reported. For example,
a 1 percentage point increase in each year's estimated health care cost
assumption would increase the accumulated postretirement benefit
obligation as of December 31, 1994 by $85 million and the aggregate of the
service and interest cost components of net periodic postretirement
benefit costs for 1994 by $10 million.
For the years ended December 31, 1994, 1993 and 1992, the weighted average
discount rate was 8 percent, 7.25 percent and 8 percent, respectively, and
the expected long-term rate of return on plan assets was 7 percent, 8.5
percent and 8.5 percent, respectively. Net periodic postretirement
benefit cost for health care benefits and life insurance benefits was $54
million in 1994, $51 million in 1993 and $49 million in 1992. The 1994,
1993 and 1992 cost was comprised of $13 million, $13 million and $10
million for service plus $41 million, $38 million and $39 million for
interest, respectively.
The funded status of the postretirement benefit plans is reconciled with
the liability recorded at December 31 as follows:
In Millions
1994 1993
------ ------
Actuarial present value of estimated benefits
Retirees $ 338 $ 282
Eligible for retirement 44 54
Active (upon retirement) 170 190
------ ------
Accumulated postretirement benefit obligation 552 526
Plan assets at fair value 36 4
------ ------
Projected postretirement benefit obligation
in excess of plan assets (516) (522)
Unrecognized prior service cost (39) (39)
Unrecognized net loss 35 41
------ ------
Recorded liability $ (520) $ (520)
====== ======
CMS Energy's postretirement health care plan is partially funded; the
accumulated postretirement benefit obligation for that plan is $536
million and $514 million at December 31, 1994 and 1993, respectively.
Supplemental Executive Retirement Plan: Certain management employees
qualify under the SERP. SERP benefits, which are based on an employee's
years of service and earnings as defined in the SERP, are paid from a
trust established and funded in 1988. Because the SERP is not a qualified
plan under the Internal Revenue Code, earnings of the trust are taxable
and trust assets are included in consolidated assets. At December 31,
1994 and 1993, trust assets at cost (which approximates market) were $19
million and $18 million, respectively, and were classified as other non-
current assets.
Defined Benefit Pension Plan: A trusteed, non-contributory, defined
benefit Pension Plan covers substantially all employees. The benefits are
based on an employee's years of accredited service and earnings, as
defined in the plan, during an employee's five highest years of earnings.
Because the plan is fully funded, no contributions were made for plan
years 1992 through 1994.
Years Ended December 31 1994 1993 1992
- ----------------------- ------ ------ -----
Discount rate 8.0% 7.25% 8.5%
Rate of compensation increase 4.5% 4.5% 5.5%
Expected long-term rate of return on assets 9.25% 8.75% 8.75%
Net Pension Plan and SERP costs consisted of:
In Millions
Years Ended December 31 1994 1993 1992
- ----------------------- ----- ----- -----
Service cost $ 24 $ 19 $ 19
Interest cost 51 50 48
Actual return on plan assets 21 (92) (36)
Net amortization and deferral (85) 34 (20)
----- ----- -----
Net periodic pension cost $ 11 $ 11 $ 11
===== ===== =====
The funded status of the Pension Plan and SERP reconciled to the pension
liability recorded at December 31 was:
In Millions
Pension Plan SERP
1994 1993 1994 1993
----- ----- ----- -----
Actuarial present value of
estimated benefits
Vested $ 421 $ 471 $ 17 $ 16
Non-vested 61 56 - -
----- ----- ----- -----
Accumulated benefit obligation 482 527 17 16
Provision for future pay increases 154 138 11 8
----- ----- ----- -----
Projected benefit obligation 636 665 28 24
Plan assets (primarily stocks
and bonds, including $79 in 1994
and $87 in 1993 in common stock
of CMS Energy) at fair value 637 692 - -
----- ----- ----- -----
Projected benefit obligation less
than (in excess of) plan assets 1 27 (28) (24)
Unrecognized net (gain) loss from
experience different than assumed (35) (56) 5 8
Unrecognized prior service cost 40 45 2 (1)
Unrecognized net transition
(asset) obligation (39) (44) 1 1
----- ----- ----- -----
Recorded liability $ (33) $ (28) $ (20) $(16)
===== ===== ===== =====
Beginning January 1, 1986, the amortization period for the Pension Plan's
unrecognized net transition asset is 16 years and 11 years for the SERP's
unrecognized net transition obligation. Prior service costs are amortized
on a straight-line basis over the average remaining service period of
active employees.
11: Leases
CMS Energy, Consumers, and Enterprises lease various assets, including
vehicles, aircraft, construction equipment, computer equipment, nuclear
fuel and buildings. Consumers' nuclear fuel capital leasing arrangement
is scheduled to expire in November 1996. The maximum amount of nuclear
fuel that can be leased increased during 1994 to $80 million. The lease
provides for an additional one-year extension upon mutual agreement by the
parties. Upon termination of the lease, the lessor would be entitled to a
cash payment equal to its remaining investment, which was $59 million as
of December 31, 1994. Consumers is responsible for payment of taxes,
maintenance, operating costs, and insurance.
Minimum rental commitments under CMS Energy's non-cancelable leases at
December 31, 1994, were:
In Millions
Capital Operating
Leases Leases
------- --------
1995 $ 50 $ 10
1996 60 6
1997 17 5
1998 15 5
1999 12 4
2000 and thereafter 21 20
----- -----
Total minimum lease payments 175 $ 50
Less imputed interest 24 =====
-----
Present value of net minimum lease payments 151
Less current portion 43
-----
Non-current portion $108
=====
Consumers recovers these charges from customers and accordingly charges
payments for its capital and operating leases to operating expense.
Operating lease charges, including charges to clearing and other accounts
as of December 31, 1994, 1993 and 1992, were $10 million, $10 million and
$15 million, respectively.
Capital lease expenses for the years ended December 31, 1994, 1993 and
1992 were $43 million, $34 million and $47 million, respectively.
Included in these amounts for the years ended 1994, 1993 and 1992, are
nuclear fuel lease expenses of $21 million, $13 million and $17 million,
respectively.
12: Commitments, Contingencies and Other
Ludington Pumped Storage Plant: In 1994, Consumers, Detroit Edison, the
Attorney General, the DNR and certain other parties, signed an agreement
in principle designed to resolve all legal issues associated with fish
mortality at Ludington. The proposed settlement, which allows for
continued operation of the plant through the end of its FERC license, will
require Consumers and Detroit Edison to continue using a seasonal barrier
net as well as monitoring new technology which may further reduce fish
loss at the plant. The proposed settlement also requires Consumers to
make annual payments to the Great Lakes Fishery Trust, develop and improve
certain recreational areas and convey certain undeveloped land to the
State of Michigan and the Great Lakes Fishery Trust. Upon approval of the
settlement agreement, Consumers will transfer land (with an original cost
of $9 million and a fair market value in excess of $20 million), make an
initial payment of approximately $3 million and incur approximately $1
million of expenditures related to recreational improvements. Future
annual payments of approximately $1 million are also anticipated over the
next 24 years and are intended to enhance the fishery resources of the
Great Lakes. The agreement is subject to the MPSC permitting Consumers to
recover all such settlement costs from electric customers, and approval by
the FERC.
The proposed settlement would resolve two lawsuits filed by the Attorney
General in 1986 and 1987 on behalf of the State of Michigan. In one, the
state sought $148 million (including $16 million of interest) for past
injuries and $89,000 per day for future injuries, reduced only upon
installation of "adequate" fish barriers and other changed conditions.
Each year, a barrier net is installed at Ludington by Consumers and
Detroit Edison from April to October. In the other, the Attorney General
sought to have Ludington's bottomlands lease declared void.
Environmental Matters: Consumers is a so-called "Potentially Responsible
Party" at several sites being administered under Superfund. Although
Superfund liability is joint and several, along with Consumers, there are
numerous credit-worthy, potentially responsible parties with substantial
assets cooperating with respect to the individual sites. Based upon past
negotiations, Consumers estimates its total liability will average less
than 4 percent of the estimated total site remediation costs, and such
liability will probably not exceed $6 million. At December 31, 1994,
Consumers has accrued a liability for its estimated losses. Consumers and
CMS Energy believe that it is unlikely that their liability at any of the
known Superfund sites, individually or in total, will have a material
adverse effect on their financial positions or results of operations.
Under Michigan's Environmental Response Act, Consumers expects that it
will ultimately incur investigation and remedial action costs at a number
of sites, including some of the 23 sites that formerly housed manufactured
gas plant facilities, even those in which it has a partial or no current
ownership interest. Parties other than Consumers with current or former
ownership interests may also be considered liable for site investigations
and remedial actions. There is limited knowledge of manufactured gas
plant contamination at these sites at this time.
Consumers has prepared plans for remedial investigation/feasibility
studies for several of these former manufactured gas plant sites to define
the nature and extent of contamination at these sites and to determine
which of several possible remedial action alternatives, including no
action, may be required under the Environmental Response Act. The DNR has
approved three of four plans for remedial investigation/feasibility
studies submitted by Consumers.
The findings for the first remedial investigation indicate that the
expenditures for remedial action at this site are likely to be minimal.
However, Consumers does not believe that a single site is representative
of all of the sites. Data available to Consumers and its continued
internal review have resulted in an estimate for all costs related to
investigation and remedial action for all 23 sites of between $48 million
and $112 million. These estimates are based on undiscounted 1994 costs.
At December 31, 1994, Consumers has accrued a liability of $48 million.
Any significant change in assumptions such as remediation technique,
nature and extent of contamination and regulatory requirements, could
impact the estimate of remedial action costs for the sites.
Consumers requested recovery and deferral of certain investigation and
remedial action costs in its gas rate case filed in 1994. Consumers and
CMS Energy believe that remedial action costs are recoverable in rates as
the MPSC in 1993 addressed the question of recovery of investigation and
remedial action costs for another Michigan gas utility as part of a gas
rate case. In order to be recoverable in rates, prudent costs must be
approved in a rate case. Any costs amortized in years prior to filing a
rate case may not be recoverable. The MPSC has approved similar deferred
accounting requests by two other Michigan utilities relative to
investigation and remedial action costs. Accordingly, Consumers has
recorded a regulatory asset for the accrued liability that was established
for these estimated remedial action costs. Consumers has initiated
discussions with certain insurance companies regarding coverage for some
or all of the costs which may be incurred for these sites.
The federal Clean Air Act contains provisions that limit emissions of
sulfur dioxide and nitrogen oxides and require enhanced emissions
monitoring. All of Consumers' coal-fueled electric generating units burn
low-sulfur coal and are presently operating at or near the sulfur dioxide
emission limits which will be effective in the year 2000. Beginning in
1995, certain coal-fueled generating units will receive emissions
allowances (all of Consumers' coal units will receive allowances beginning
in the year 2000). Based on projected emissions from these units,
Consumers expects to have excess allowances which may be sold or saved for
future use. The Clean Air Act's provisions required Consumers to make
capital expenditures totaling $25 million to install equipment at certain
generating units. Consumers estimates capital expenditures for in-process
and possible modifications at other coal-fired units to be an additional
$50 million by the year 2000. Final acid rain program nitrogen oxide
regulations specifying the controls to be installed at the other coal-
fired units are not expected earlier than 1996. Management believes that
Consumers' annual operating costs will not be materially affected.
Capital Expenditures: CMS Energy estimates capital expenditures,
including investments in unconsolidated subsidiaries, DSM and new lease
commitments, of $939 million for 1995, $647 million for 1996 and $627
million for 1997. Capital expenditures for 1995 include requirements of
$197 million for acquisitions which commenced in 1994 but did not close
until 1995.
Commitments for Coal and Gas Supplies: Consumers has entered into coal
supply contracts with various suppliers for its coal-fired generating
stations. These contracts have expiration dates that range from 1995 to
2004. Consumers contracts for approximately 60 - 70 percent of its annual
coal requirements which in 1994 totaled $261 million (63 percent was under
long-term contracts). Consumers supplements its long-term contracts with
spot-market purchases to fulfill its coal needs.
Consumers has entered into gas supply contracts with various suppliers for
its natural gas business. These contracts have expiration dates that
range from 1995 to 2003. Consumers contracts for approximately 70 - 80
percent of its annual gas requirements which in 1994 totaled $662 million
(83 percent was under long-term contracts). Consumers supplements its
long-term contracts with spot-market purchases to fulfill its gas needs.
Public Utility Holding Company Act Exemption: CMS Energy is exempt from
registration under PUHCA. However, the Attorney General and the MMCG have
asked the SEC to revoke CMS Energy's exemption from registration under
PUHCA. In 1992, the MPSC filed a statement with the SEC recommending that
CMS Energy's current exemption be revoked and a new exemption be issued
conditioned upon certain reporting and operating requirements. If
CMS Energy were to lose its current exemption, it would become more
heavily regulated by the SEC; Consumers could ultimately be forced to
divest either its electric or gas utility business; and CMS Energy would
be restricted from conducting businesses that are not functionally related
to the conduct of its utility business as determined by the SEC.
CMS Energy is opposing this request and believes it will maintain its
current exemption from registration under PUHCA.
Other: As of December 31, 1994 CMS Energy and Enterprises have guaranteed
up to $117 million in contingent obligations of unconsolidated affiliates
of Enterprises' subsidiaries.
CMS NOMECO has hedging arrangements which are used to reduce the risk of
price fluctuations for its spot sales of oil and gas. These arrangements
limit potential gains/losses from any future decrease/increase in the spot
prices.
CMS NOMECO periodically enters into oil and gas price hedging arrangements
to mitigate its exposure to price fluctuations on the sale of crude oil
and natural gas. As of December 31, 1993, CMS NOMECO was party to gas
price collar contracts on 7.3 bcf of gas for the delivery months of
January through December 1994 at prices ranging from $2.05 to $2.30 per
MMBtu. Also, CMS NOMECO has contracts on 7.3 bcf of gas for the delivery
months of January through December 1995 at prices ranging from $2.05 to
$2.35 per MMBtu. These hedging arrangements are accounted for as hedges;
accordingly, any gains or losses are deferred and recognized on the
settlement dates. As of December 31, 1993 and December 31, 1994, the fair
value of these hedge arrangements was not materially different than the
book value.
CMS NOMECO also has one arrangement which is used to fix the prices that
CMS NOMECO will pay to supply gas for the years 2001 - 2006 by purchasing
the economic equivalent of 10,000 MMBtu per day at a fixed, escalated
price starting at $2.82 per MMBtu in 2001. The settlement periods are
each a one-year period ending December 31, 2001 through 2006 on 3.65
MMBtu. If the "floating price," essentially the then current Gulf Coast
spot price, for a period is higher than the "fixed price," the seller pays
CMS NOMECO the difference, and vice versa. If a party's exposure at any
time exceeds $2 million, that party is required to obtain a letter of
credit in favor of the other party for the excess over $2 million and up
to $10 million. At December 31, 1994 and December 31, 1993, the seller
had arranged a letter of credit in CMS NOMECO's favor for $3 million and
$10 million, respectively.
Consumers has experienced increases in the number of lawsuits filed
against it relating to so-called stray voltage. Claimants contend that
stray voltage results when small electrical currents present in grounded
electrical systems are diverted from their intended path. Consumers
maintains a policy of investigating all customer calls regarding stray
voltage and working with customers to address their concerns including,
when necessary, modifying the grounding of the customer's service. At
January 31, 1995, Consumers had 81 separate stray voltage lawsuits
pending.
In addition to the matters disclosed in these notes, Consumers and certain
other subsidiaries of CMS Energy are parties to certain lawsuits and
administrative proceedings before various courts and governmental
agencies, arising from the ordinary course of business involving personal
injury and property damage, contractual matters, environmental issues,
federal and state taxes, rates, licensing and other matters.
The ultimate effect of the proceedings discussed in this note is not
expected to have a material impact on CMS Energy's financial position or
results of operations.
13: Nuclear Matters
In 1993, the NRC approved the design of the spent fuel dry storage casks
now being used by Consumers at Palisades. Subsequently, the Attorney
General and certain other parties attempted to block Consumers' use of the
storage casks, alleging that the NRC had failed to comply adequately with
the procedural requirements of the Atomic Energy Act and the National
Environmental Policy Act. In January 1995, the U.S. Sixth Circuit Court
of Appeals rejected these allegations and upheld the NRC's rulemaking
action. The court found that the NRC's environmental assessment satisfied
National Environmental Policy Act requirements, and that a site-specific
environmental analysis concerning the use and operation of the storage
casks at Palisades was not required. As of February 28, 1995, Consumers
had loaded nine dry storage casks with spent nuclear fuel and expects to
load four additional casks prior to Palisades' 1995 refueling.
In the latter part of 1995, Consumers plans to unload and replace one of
the loaded casks. In a review of the cask manufacturer's quality
assurance program, Consumers detected indications of minor flaws in welds
in the steel liner of one of the loaded casks. Although testing has not
disclosed any leakage, Consumers has nevertheless decided to remove the
spent fuel and insert it in another cask. Consumers has examined
radiographs for all of its casks and has found all other welds acceptable.
In order to address concerns raised subsequent to the initial cask
loading, Consumers and the NRC each analyzed the effects of seismic and
other natural hazards on the support pad on which the casks are placed,
and concluded that the pad location is acceptable to support the casks.
The Low-Level Radioactive Waste Policy Act encourages the respective
states, individually or in cooperation with each other, to be responsible
for the disposal of low-level radioactive waste. Currently, a low-level
waste site does not exist in Michigan, and no other states' repositories
are available to Michigan generators of such waste. Consumers stores low-
level waste at its nuclear plant sites and plans to continue to do so
following final shutdown of the plants, if necessary, until a permanent
storage site is provided. Consumers currently estimates that a permanent
low-level radioactive waste disposal site will be available by the year
2027.
Consumers maintains insurance coverage against property damage, debris
removal, personal injury liability and other risks that are present at its
nuclear generating facilities. If certain loss events occur at its own or
other nuclear plants similarly insured, Consumers could be required to pay
maximum assessments of: $33 million in any one year to NML and NEIL; $79
million per event under the nuclear liability secondary financial
protection program, limited to $10 million per event in any one year; and
$6 million in the event of nuclear workers claiming bodily injury from
radiation exposure. Consumers considers the possibility of these
assessments to be remote.
In November 1993, Palisades returned to service following a planned
refueling and maintenance outage that had been extended due to several
unanticipated repairs (see Note 4). The results of an NRC review of
Consumers' performance at Palisades published shortly after the planned
outage showed a decline in performance ratings for the plant. To provide
NRC senior management with a more in-depth assessment of plant
performance, the NRC conducted a diagnostic evaluation inspection at
Palisades. The inspection, completed in June 1994, found certain
performance, operational and management deficiencies at Palisades. The
NRC acknowledged that the new Palisades senior management team, in place
since early 1994, had recognized and begun to address the deficiencies.
In August 1994, Consumers filed its response to the NRC's diagnostic
evaluation report and included both short- and long-term enhancements
planned to improve Palisades' performance. Acceptable performance at
Palisades will require continuing performance improvements and additional
expenditures at the plant, which have been included in Consumers' total
planned levels of expenditures.
As an NRC licensee, Consumers is required to make certain calculations and
report to the NRC about the continuing ability of the Palisades reactor
vessel to withstand postulated "pressurized thermal shock" events during
its remaining license life, in light of the embrittlement of reactor
vessel materials over time due to operation in a radioactive environment.
If the results of the calculation indicate that an NRC temperature
screening criterion will be exceeded, Consumers must determine what, if
any, plant modifications are necessary to avoid exceeding the screening
criterion and prevent potential reactor vessel failure as a result of
postulated pressurized thermal shock events. Analysis of recent data from
testing of similar materials indicates that the Palisades reactor vessel
could exceed the screening criterion prior to the year 2000. Consumers is
continuing to analyze alternative means to permit continued operation of
Palisades to the end of its license life in the year 2007. It is
currently estimated that expenditures for corrective action related to
this issue could total $20 million to $30 million. Consumers cannot
predict the outcome of these efforts.
14: Jointly Owned Utility Facilities
Consumers is responsible for providing its share of financing for the
jointly owned facilities. The following table indicates the extent of
Consumers' investment in jointly owned utility facilities:
In Millions
December 31 1994 1993
- ----------- ----- -----
Net investment
Ludington - 51% $119 $114
Campbell Unit 3 - 93.3% 337 349
Transmission lines - various 31 32
Accumulated depreciation
Ludington $ 76 $ 74
Campbell Unit 3 224 210
Transmission lines 11 11
15: Supplemental Cash Flow Information
For purposes of the Statement of Cash Flows, all highly liquid investments
with an original maturity of three months or less are considered cash
equivalents. Other cash flow activities and non-cash investing and
financing activities for the years ended December 31 were:
In Millions
1994 1993 1992
----- ----- -----
Cash transactions
Interest paid (net of amounts capitalized) $162 $193 $203
Income taxes paid (net of refunds) 39 32 19
Non-cash transactions
Nuclear fuel placed under capital lease $ 21 $ 28 $ 30
Other assets placed under capital leases 15 30 39
Capital leases refinanced - 42 -
Assumption of debt - - 15
Changes in other assets and liabilities as shown on the Consolidated
Statements of Cash Flows at December 31 are described below:
In Millions
1994 1993 1992
----- ----- -----
Sale of receivables, net $ (10) $ 60 $ 25
Accounts receivable (15) 22 6
Accrued revenue 20 (48) 88
Inventories (4) (32) 23
Accounts payable 26 (31) 20
Accrued refunds (3) (49) (143)
Other current assets and liabilities, net 4 (4) 46
Non-current deferred amounts, net (6) (6) (40)
----- ----- -----
$ 12 $(88) $ 25
===== ===== =====
16: Reportable Segments
CMS Energy operates principally in the following five business segments:
electric utility, gas utility, oil and gas exploration and production,
independent power production, and natural gas pipeline, storage and
marketing.
The Consolidated Statements of Income show operating revenue
and pretax operating income by business segments. Other segment
information follows:
In Millions
Years Ended December 31 1994 1993 1992
- ----------------------- ------- ------- -------
Depreciation, depletion and amortization
Electric utility $ 257 $ 241 $ 230
Gas utility 76 73 76
Oil and gas exploration and production 41 45 38
Independent power production 2 2 2
Natural gas pipeline, storage and marketing 2 1 1
Other 1 2 -
------- ------- -------
$ 379 $ 364 $ 347
======= ======= =======
Identifiable assets
Electric utility (a) (b) $ 4,364 $ 4,100 $ 3,845
Gas utility (b) 1,673 1,628 1,574
Oil and gas exploration and production 469 398 364
Independent power production 536 488 333
Natural gas pipeline, storage and marketing 109 75 60
Other 233 275 672
------- ------- -------
$ 7,384 $ 6,964 $ 6,848
======= ======= =======
Capital expenditures (d)(e)
Electric utility (c) $ 358 $ 403 $ 390
Gas utility (c) 134 158 116
Oil and gas exploration and production 115 83 68
Independent power production 30 110 12
Natural gas pipeline, storage and marketing 31 14 6
Other 5 - 2
------- ------- -------
$ 673 $ 768 $ 594
======= ======= =======
(a) Includes abandoned Midland investment of $147 million, $162 million
and $175 million for 1994, 1993 and 1992, respectively.
(b) Amounts include an attributed portion of Consumers' other common
assets to both the electric and gas utility businesses.
(c) Includes capital leases for nuclear fuel and other assets and electric
DSM costs (see Statement of Cash Flows). Amounts also include an
attributed portion of Consumers' capital expenditures for plant and
equipment common to both the electric and gas utility businesses.
(d) Includes equity investments in unconsolidated partnerships of $53
million for 1994, $108 million for 1993 and $12 million for 1992.
(e) Certain prior year amounts have been adjusted for comparative
purposes.
17: Effects of the Ratemaking Process
The following regulatory assets (liabilities) which include both current
and non-current amounts, are reflected in the Consolidated Balance Sheets.
These assets represent probable future revenue to Consumers associated
with certain incurred costs as these costs are recovered through the
ratemaking process.
In Millions
December 31 1994 1993
- ----------- ------- -------
Postretirement benefits (Note 10) $ 503 $ 510
Income taxes (Note 5) 189 189
Abandoned Midland project (Note 4) 147 162
Trunkline settlement (Note 4) 85 117
DSM - deferred costs (Note 4) 71 71
Manufactured gas plant sites (Note 12) 47 -
Power purchase contract (Note 3) 30 -
Uranium enrichment facility (Note 4) 25 33
Other 31 39
------- -------
Total regulatory assets $ 1,128 $ 1,121
======= =======
Income taxes (Note 5) $ (205) $ (195)
DSM - deferred revenue (21) (17)
------- -------
Total regulatory liabilities $ (226) $ (212)
======= =======
At December 31, 1994, $864 million of Consumers' regulatory assets are
being recovered through rates being charged to customers over periods of
up to 18 years. Consumers anticipates MPSC approval for recovery of the
remaining amounts.
Consumers is experiencing increased competition, particularly in its
electric utility business. Municipalization and self-generation, among
other forms of competition, could restrict Consumers' ability to establish
rates sufficient to recover specific costs associated with its regulatory
assets.
18: Summarized Financial Information of Significant Related Energy
Supplier
Under the PPA with the MCV Partnership discussed in Note 3, Consumers'
1994 obligation to purchase electric capacity from the MCV Partnership was
approximately 15 percent of Consumers' owned and contracted capacity.
Summarized financial information of the MCV Partnership follows:
Statements of Income
In Millions
Years Ended December 31 1994 1993 1992
- ----------------------- ----- ----- -----
Operating revenue (a) $ 579 $ 548 $ 488
Operating expenses 378 362 315
----- ----- -----
Operating income 201 186 173
Other expense, net 183 189 190
----- ----- -----
Net income (loss) $ 18 $ (3) $ (17)
===== ===== =====
Balance Sheets
In Millions
December 31 1994 1993
- ----------- ------ ------
Assets
Current assets (a) $ 206 $ 181
Property, plant and equipment, net 2,012 2,073
Other assets 154 146
------ ------
$2,372 $2,400
====== ======
Liabilities and Partners' Equity
Current liabilities $ 218 $ 198
Long-term debt and other non-current liabilities (b) 2,081 2,147
Partners' equity (c) 73 55
------ ------
$2,372 $2,400
====== ======
(a) Revenue from Consumers totaled $534 million, $505 million and $444
million for 1994, 1993 and 1992, respectively. At December 31, 1994, 1993
and 1992, $48 million, $44 million and $38 million, respectively, were
receivable from Consumers.
(b) FMLP is a beneficiary of an owner trust that is the lessor in a
long-term direct finance lease with the lessee, MCV Partnership.
CMS Holdings holds a 46.4 percent ownership interest in FMLP (see Note 3).
At December 31, 1994 and 1993, lease obligations of $1.7 billion were owed
to the owner trust of which FMLP is the sole beneficiary. CMS Holdings'
share of the interest and principal portion for the 1994 lease payments
was $62 million and $20 million, respectively, and for the 1993 lease
payments was $63 million and $16 million, respectively. The lease
payments service $1.2 billion in non-recourse debt outstanding as of
December 31, 1994 and 1993 of the owner-trust whose beneficiary is FMLP.
FMLP's debt is secured by the MCV Partnership's lease obligations, assets,
and operating revenues. For 1994 and 1993, the owner-trust whose
beneficiary is FMLP made debt payments of $175 million and $172 million,
respectively. The 1993 amounts included $10 million of principal and $25
million of interest on the MCV Bonds held by Consumers through December
1993.
(c) CMS Midland's recorded investment in the MCV Partnership includes
capitalized interest, which is being amortized to expense over the life of
its investment in the MCV Partnership.
91
ARTHUR ANDERSEN LLP
Report of Independent Public Accountants
----------------------------------------
To CMS Energy Corporation:
We have audited the accompanying consolidated balance sheets and
consolidated statements of long-term debt and preferred stock of CMS
ENERGY CORPORATION (a Michigan corporation) and subsidiaries as of
December 31, 1994 and 1993, and the related consolidated statements of
income, common stockholders' equity, and cash flows for each of the three
years in the period ended December 31, 1994. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also
includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of CMS
Energy Corporation and subsidiaries as of December 31, 1994 and 1993, and
the results of their operations and their cash flows for each of the three
years in the period ended December 31, 1994 in conformity with generally
accepted accounting principles.
ARTHUR ANDERSEN LLP
Detroit, Michigan,
January 31, 1995 (except with respect to
certain matters discussed in Notes 2, 3, 7 and 13
to the consolidated financial statements as to
which the date is March 1, 1995).
92
Quarterly Financial and Common Stock Information CMS Energy Corporation
In Millions,
Except Per Share Amounts
1994 (Unaudited) 1993 (Unaudited)
Quarters Ended March 31 June 30 Sept. 30 Dec. 31 March 31 June 30 Sept. 30 Dec. 31
Operating revenue $1,142 $796 $767 $914 $1,046 $742 $758 $936
Pretax operating income $175 $108 $125 $96 $168 $82 $102 $87
Net income $78 $30 $40 $31 $72 $24 $32 $27
Earnings per average
common share $.92 $.35 $.46 $.36 $.90 $.30 $.40 $.30
Dividends declared per
common share $.18 $.18 $.21 $.21 $.12 $.12 $.18 $.18
Common stock prices (a)
High $25 $22-7/8 $23-3/8 $23-1/4 $20-7/8 $25-1/2 $27-1/2 $27-1/8
Low $21-1/8 $19-5/8 $20-5/8 $20-7/8 $17-7/8 $19-1/2 $24-7/8 $23
(a) Based on New York Stock Exchange - Composite transactions.
93
Consumers Power Company
1994 Financial Statements
94
Selected Financial Information Consumers Power Company
1994 1993 1992 1991 1990
- ----------------------------------------------------------------------------------------------------------
Operating revenue (in millions) ($) 3,356 3,243 2,978 2,908 2,968
Net income (loss) (in millions) (a) ($) 226 198 (244) (249) (382)
Net income (loss) after dividends
on preferred stock (in millions) ($) 202 187 (255) (260) (393)
Cash from operations (in millions) (b) ($) 598 403 470 347 474
Capital expenditures, excluding capital
lease additions and DSM (in millions) ($) 447 451 411 279 339
Total assets (in millions) ($) 6,809 6,551 6,596 5,986 7,700
Long-term debt, excluding current
maturities (in millions) ($) 1,953 1,839 2,079 1,846 2,944
Non-current portion of capital
leases (in millions) ($) 108 106 88 57 56
Total preferred stock (in millions) ($) 356 163 163 163 168
Number of preferred shareholders
at year-end 10,599 7,037 7,376 7,616 7,991
Book value per common share at
year-end ($) 16.96 15.28 14.64 17.67 20.46
Return on average common equity (%) 14.9 14.8 (18.8) (16.2) (20.5)
Return on assets (%) 4.9 4.7 (0.2) (0.6) (2.3)
Number of employees at year-end
(full-time equivalents) 9,482 9,567 9,531 8,933 9,209
Electric statistics
Sales (millions of kWh) 34,462 32,764 31,601 31,813 31,743
Customers (in thousands) 1,547 1,526 1,506 1,492 1,475
Average sales rate per kWh (cents) 6.29 6.28 5.82 5.73 5.89
Gas statistics
Sales and transportation
deliveries (bcf) 409 411 384 362 351
Customers (in thousands) (c) 1,448 1,423 1,402 1,382 1,362
Average sales rate per mcf ($) 4.48 4.46 4.55 4.58 4.64
- ----------------------------------------------------------------------------------------------------------
(a) Amount in 1991 included an extraordinary loss of $14 million, after tax.
(b) Certain prior period amounts were restated for comparative purposes.
(c) Excludes off-system transportation customers.
95
Consumers Power Company
Management's Discussion and Analysis
Consumers is a combination electric and gas utility company serving the
Lower Peninsula of Michigan, and is the principal subsidiary of
CMS Energy, an energy holding company. Consumers' customer base includes
a mix of residential, commercial and diversified industrial customers, the
largest of which is the automotive industry.
On January 1, 1995, Consumers was internally reorganized into separate
electric utility and gas utility strategic business units. The
restructuring, while not affecting Consumers' consolidated financial
statements or corporate legal form, is designed to sharpen management
focus, improve efficiency and accountability in both business segments and
better position Consumers for growth in the gas market and to meet
increased competition in the electric power market. Management believes
that the strategic business unit structure will allow each unit to focus
more on its own profitability and growth potential, and will, in the long
term, allow Consumers to be more competitive.
Consolidated Earnings
Consolidated net income after dividends on preferred stock totaled $202
million in 1994, compared to net income of $187 million in 1993 and a net
loss of $255 million in 1992. The improved net income in 1994 reflects a
significant increase in electric sales, the impact from a May 1994
electric rate increase, the recognition of incentive revenue related to
DSM programs, and the favorable resolution of a previously recorded gas
cost contingency. The increased 1993 net income reflects the Settlement
Order related to power purchases from the MCV Partnership. Earnings in
1993 also reflect increased electric sales and gas deliveries.
Cash Position, Financing and Investing
Consumers' operating cash requirements are met by its operating and
financing activities. In 1994, 1993 and 1992, cash from operations was
derived mainly from the sale and transportation of natural gas and the
generation, sale and transmission of electricity. Cash from operations
for 1994 reflects record-setting electric sales and increased electric
rates which were approved by the MPSC in mid-1994. Cash from operations
for 1993 primarily reflected increased electric sales and gas deliveries
from 1992 levels and reduced after-tax cash shortfalls resulting from
Consumers' purchases of power from the MCV Partnership. During 1992,
Consumers generated cash primarily from its consolidated operating
activities.
Consumers' primary use of cash continues to reflect extensive construction
expenditures and improvements in the reliability of its electric and gas
transmission and distribution systems. Consumers has also used its cash
to retire portions of long-term debt when appropriate and to pay common
and preferred dividends.
Financing Activities: Consumers declared $176 million in common stock
dividends during 1994, of which $16 million were attributable to 1993
earnings. Consumers also issued and sold 8 million shares of Class A
Preferred Stock (cumulative, without par value) with an annual dividend of
$2.08. Net proceeds of $193 million from the sale were used for general
corporate purposes, including debt retirement and improvements to
Consumers' distribution systems. Additionally, Consumers received a $100
million equity investment from CMS Energy in 1994.
In early 1994, Consumers continued its effort to reduce its future
interest charges by retiring $101 million of high-cost first mortgage
bonds. In November 1994, Consumers entered into a new $400 million
unsecured, variable rate, five-year term loan and subsequently used the
proceeds to refinance its long-term, variable rate credit agreement (see
Note 7) and to reduce short-term borrowings. During 1993, Consumers
retired $51 million of high-cost outstanding debt and refinanced $573
million of other debt at lower interest rates.
Investing Activities: Capital expenditures (excluding assets placed under
capital leases of $36 million) and deferred DSM costs totaled $456 million
in 1994 as compared to $503 million in 1993 and $437 million in 1992.
These amounts primarily represent capital investments in Consumers'
electric and gas utility business units.
Financing and Investing Outlook: Consumers estimates that capital
expenditures, including DSM and new lease commitments, related to its
electric and gas utility operations will total approximately $1.2 billion
over the next three years.
In Millions
Years Ended December 31 1995 1996 1997
- ----------------------- ---- ---- ----
Consumers
Construction (including DSM) $403 $347 $319
Nuclear fuel lease 32 4 38
Capital leases other than nuclear fuel 12 15 17
Michigan Gas Storage 5 8 6
---- ---- ----
$452 $374 $380
==== ==== ====
Consumers is required to redeem or retire approximately $190 million of
long-term debt during 1995 through 1997. Cash generated by operations is
expected to satisfy a substantial portion of these capital expenditures
and debt retirements.
Consumers has several available sources of credit including unsecured,
committed lines of credit totaling $185 million and a $470 million working
capital facility. Consumers has FERC authorization to issue or guarantee
up to $900 million in short-term debt through December 31, 1996.
Consumers uses short-term borrowings to finance working capital, seasonal
fuel inventory and to pay for capital expenditures between long-term
financings. Consumers has an agreement permitting the sales of certain
accounts receivable for up to $500 million. At December 31, 1994 and
1993, receivables sold totaled $275 million and $285 million,
respectively.
At December 31, 1994, Consumers' capital structure consisted of
approximately 34 percent common equity, 8 percent preferred stock, and 58
percent long- and short-term debt (including capital leases and notes
payable). Consumers' goal is to achieve and maintain a capital structure
consisting of approximately 36 percent common equity, 10 percent preferred
stock and 54 percent debt. Management expects to achieve this structure
through accumulated earnings, controlled capital expenditures, the
issuance of new preferred stock and equity investments from CMS Energy.
Electric Utility Results of Operations
Electric Pretax Operating Income: The $49 million improvement in 1994
electric pretax operating income compared to 1993 reflects increased
electric system sales of $33 million, partially offset by higher electric
operating costs and depreciation. Other factors contributing to the 1994
increased electric pretax operating income were the impact of the May 1994
electric rate increase, and the recognition of $11 million in revenue,
related to DSM, based on having achieved all objectives agreed upon with
the MPSC. The 1993 increase of $132 million from the 1992 level reflects
an increase of $126 million relating to the resolution of the
recoverability of MCV power purchase costs under the PPA and increased
electric system sales of $45 million, partially offset by higher electric
operating costs and depreciation.
In Millions
Impact on Pretax Operating Income
----------------------------------
Change Compared to Prior Year
1994/1993 1993/1992
--------- ---------
Sales $ 33 $ 34
Weather - 11
Resolution of MCV power cost issues - 126
Rate increase and other regulatory issues 38 5
O&M, general taxes and depreciation (22) (44)
----- -----
Total change $ 49 $132
===== =====
Electric Sales: Total electric sales in 1994 were a record 34.5 billion
kWh, a 5.2 percent increase from 1993 levels which includes a 4.2 percent
increase in system sales to Consumers' ultimate customers. Strong
industrial sales accounted for 58 percent of the growth. In 1994,
residential and commercial sales increased 1.6 percent and 3.0 percent,
respectively, while industrial sales increased 6.8 percent. The
significant increase in electric sales reflects the continued improvement
in economic conditions in Michigan and broad-based growth in sales to
industrial customers. Growth in industrial sales was the strongest in the
automotive and chemical sectors. Total electric sales in 1993 were 32.8
billion kWh, a 3.7 percent increase from the 1992 levels. The 32.8
billion kWh includes a 3.8 percent increase in system sales.
Power Costs: Power costs for 1994 totaled $950 million, a $42 million
increase from the corresponding 1993 period. This increase reflects
increased kWh production at Consumers' generating plants and greater power
purchases from outside sources to meet increased sales demand. Power
costs for 1993 totaled $908 million, a $31 million increase as compared to
1992.
Operation and Maintenance: Increases in other operation and maintenance
expense for 1994 and 1993 reflected increased expenditures to improve
electric system reliability.
Depreciation: The increased depreciation for 1994 reflects additional
capital investments in property and equipment.
Electric Utility Issues
Power Purchases from the MCV Partnership: Consumers' obligation to
purchase contract capacity from the MCV Partnership was 1,132 MW in 1994
and increases to 1,240 MW in 1995 and thereafter. In 1993, the MPSC
issued the Settlement Order that permits Consumers to recover
substantially all payments for 915 MW of contract capacity purchased from
the MCV Partnership. The market for the remaining 325 MW of contract
capacity was assessed at the end of 1992. This assessment, along with the
Settlement Order, resulted in Consumers recognizing an after-tax loss of
$343 million for the present value of estimated future underrecoveries of
power purchases from the MCV Partnership. This loss included all fixed
energy amounts at issue in the arbitration proceedings discussed below.
Additional losses may occur if actual future experience materially differs
from the 1992 estimates. ABATE and the Attorney General have appealed the
Settlement Order to the Court of Appeals. As anticipated in 1992,
Consumers continues to experience cash underrecoveries associated with the
Settlement Order. These after-tax cash underrecoveries totaled $61
million for 1994. Estimated future after-tax cash underrecoveries and
possible additional losses for the next five years if none of the
additional capacity is sold are shown in the table below.
After-tax, In Millions
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
Expected cash underrecoveries $60 $56 $55 $ 8 $ 9
Possible additional under-
recoveries and losses (a) $20 $20 $22 $72 $72
(a) If unable to sell any capacity above the MPSC's authorized level.
Consumers and the MCV Partnership engaged in arbitration to determine
whether Consumers was entitled to reduce the fixed energy charges payable
to the MCV Partnership. In January 1995, the arbitrator ruled in favor of
Consumers' interpretation of the PPA and found that Consumers was entitled
to the immediate return of an estimated $22 million, representing the
fixed energy amounts for which Consumers did not receive full cost
recovery during the years prior to the Settlement Order (1990 - 1992).
Consumers had escrowed approximately $16 million of this amount. The
arbitrator postponed the return of payments for 1993 and 1994 because the
Settlement Order is still subject to pending appeals. The amount under
dispute in 1994 is approximately $9 million and increases each year
thereafter, averaging approximately $17 million per year over the life of
the contract. Consumers believes it is premature to recognize any current
year earnings benefit from this award at this time until the remaining
amount of MCV capacity is sold and/or the market for the capacity is
confirmed. In a second arbitration proceeding, the MCV Partnership is
seeking additional payments from Consumers which the MCV has estimated at
$6.3 million annually for an alleged breach of the PPA.
In 1994, the lessors of the MCV Facility filed a lawsuit against
CMS Energy, Consumers and CMS Holdings, alleging breach of contract,
breach of fiduciary duty and negligent or fraudulent misrepresentation
relating to the MCV Partnership's failure to object to the Settlement
Order in light of Consumers' interpretation of the Settlement Order. The
action alleged damages in excess of $1 billion and sought injunctive
relief relative to Consumers' payments of the fixed energy charges. In
February 1995, after the arbitrator's decision, the lessors voluntarily
withdrew the lawsuit.
In July 1994 and February 1995, Consumers terminated power purchase
agreements with a 65 MW coal-fired cogeneration facility and a 44 MW wood
and chipped tire plant. Consumers plans to seek MPSC approval to
substitute 109 MW of less expensive contract capacity from the MCV
Facility which Consumers is currently not authorized to recover from
retail customers. For further information, see Note 3.
Electric Rate Case: In May 1994, the MPSC granted Consumers a $58 million
annual increase in its retail electric rates. The order provides
Consumers with higher revenues associated with increased expenditures
primarily related to capital additions, operation and maintenance,
postretirement benefits and the continuation of certain DSM programs. The
MPSC order generally supported Consumers' rate design proposal and reduced
the level of subsidization of residential customers by commercial and
industrial customers. Consumers filed a request with the MPSC in November
1994, to increase its retail electric rates in a range from $104 million
to $140 million annually (see Note 4). Additionally, in January 1995,
Consumers filed a request with the MPSC, seeking approval to increase its
traditional depreciation expense by $21 million and reallocate certain
portions of its utility plant from production to transmission, resulting
in a $28 million decrease. If both aspects of the request are approved,
the net result would be a decrease in electric depreciation expense of $7
million.
Special Rates: In January 1995, the MPSC dismissed a filing made by
Consumers, seeking approval of a plan to offer competitive, special rates
to certain large qualifying customers. Consumers had proposed to offer
the new rates to customers using high amounts of electricity that have
expressed an intention to or are capable of terminating purchases of
electricity from Consumers and have the ability to acquire energy from
alternative sources. Consumers subsequently filed a new, simplified
proposal with the MPSC which would allow Consumers a certain level of
rate-pricing flexibility, and allow use of MCV contract capacity above the
level currently authorized by the MPSC, to respond to customers'
alternative energy options.
PSCR Matters: Consumers experienced an extended refueling and maintenance
outage at Palisades during 1993. From mid-February through mid-June 1994,
Palisades took an unscheduled outage to repair valve leakage and conduct
other needed inspections and repairs. In November 1994, an ALJ issued a
proposal for decision that recommended a $4 million disallowance of
replacement power costs related to the 1993 outage. Consumers accrued a
loss for this issue for 1994. Recovery of replacement power costs and the
prudency of actions taken during the 1994 outage will be reviewed by the
MPSC during the 1994 PSCR reconciliation proceeding.
Electric Conservation Efforts: In 1993, Consumers completed the customer
participation portion of several DSM programs designed to encourage the
efficient use of energy. During 1994, Consumers recognized $11 million in
incentive revenue, related to Consumers' achievement of certain DSM
program objectives approved by the MPSC in 1992. A final order,
authorizing Consumers to collect the $11 million incentive, is expected
from the MPSC by mid-1995. In 1994, as part of Consumers' electric rate
case, the MPSC authorized Consumers to continue certain DSM programs. For
further information, see Note 4.
Electric Capital Expenditures: Consumers estimates capital expenditures,
including deferred DSM costs and new lease commitments, related to its
electric utility operations of $325 million for 1995, $255 million for
1996 and $269 million for 1997. These amounts include an attributed
portion of Consumers' anticipated capital expenditures for plant and
equipment common to both the electric and gas utility businesses.
Electric Environmental Matters: The 1990 amendment of the federal Clean
Air Act significantly increased the environmental constraints that
utilities will operate under in the future. While the Clean Air Act's
provisions require Consumers to make certain capital expenditures in order
to comply with the amendments for nitrogen oxide reductions, Consumers'
generating units are presently operating at or near the sulfur dioxide
emission limits which will be effective in the year 2000. Therefore,
management believes that Consumers' annual operating costs will not be
materially affected.
In 1990, the State of Michigan passed amendments to the Environmental
Response Act, under which Consumers expects that it will ultimately incur
costs at a number of sites, even those in which it has a partial or no
current ownership interest. Parties other than Consumers with current or
former ownership interests may also be considered liable for site
investigations and remedial actions. Consumers believes costs incurred
for both investigation and required remedial actions will be recovered in
rates or from others.
Consumers is a so-called "potentially responsible party" at several sites
being administered under Superfund. Along with Consumers, there are
numerous credit-worthy, potentially responsible parties with substantial
assets cooperating with respect to the individual sites. Based on current
information, management believes it is unlikely that Consumers' liability
at any of the known Superfund sites, individually or in total, will have a
material adverse effect on its financial position or results of
operations.
The EPA has asked a number of utilities in the Great Lakes area to
voluntarily retire certain equipment containing specific levels of
polychlorinated biphenyls. While Consumers believes that it is largely in
compliance with the EPA's request, it has agreed to a 10-year retirement
period for certain equipment included in the EPA's request. Consumers
does not anticipate that any significant additional costs will be incurred
as a result of this agreement. For further information regarding electric
environmental matters, see Note 12.
Electric Outlook
Competition: Consumers currently expects customer demand for electricity
within its service territory will increase by approximately 1.6 percent
per year over the next five years. Economic growth and an increasing
customer base are expected to lead to consistently higher annual sales.
However, Consumers (along with the electric utility industry) is
experiencing accelerating competitive pressures which may result in a
negative impact on Consumers' sales growth. The primary sources of this
competition include: the installation of cogeneration or other self-
generation facilities by Consumers' larger industrial customers; the
formation of municipal utilities which would displace retail service by
Consumers to an entire community; and competition from neighboring
utilities which offer flexible rate arrangements designed to encourage
movement to their respective service areas. Several of Consumers'
industrial customers are studying these options.
Consumers is pursuing several strategies to retain its current "at-risk"
customers. These strategies include a request that the MPSC allow
Consumers to offer special competitive service rates to current industrial
customers which have demonstrated an ability to seek alternate electric
supplies and to attract new customers which are considering locating or
expanding facilities in Michigan. As part of its current electric rate
case, Consumers has requested that the MPSC eliminate the rate
subsidization of residential customers. If approved, commercial and
industrial customers' electric costs would decrease by a total of
approximately $80 million per year.
Consumers is committed to holding operation and maintenance costs level
and continuing to improve customer service. Consumers is also working
with large customers to identify ways to improve the efficiency with which
energy is used.
In April 1994, the MPSC approved a framework for a five-year experimental
retail wheeling program for Consumers and Detroit Edison. Under the
experiment, up to 60 MW of Consumers' additional load requirements could
be met by retail wheeling. The program becomes effective upon Consumers'
next solicitation for capacity. In February 1995, an ALJ issued a
proposal for decision that addressed the methodology for pricing
transmission rates to be used for the experiment. An MPSC order is
expected by mid-1995. In the short-term, Consumers does not expect this
experiment to have a material impact on its financial position or results
of operations.
Nuclear Matters: In late 1993, the NRC completed a review of Consumers'
performance at Palisades that showed a decline in performance. To provide
NRC senior management with a more in-depth assessment of plant
performance, the NRC conducted a diagnostic evaluation inspection at
Palisades during 1994 which found certain performance, operational and
management deficiencies at the plant. Consumers subsequently filed its
response to the NRC's diagnostic evaluation report and included both
short- and long-term enhancements planned to improve Palisades'
performance. Acceptable performance at Palisades will require continuing
performance improvements and additional expenditures at the plant, which
have been included in Consumers' total planned level of expenditures.
Consumers' on-site storage pool at Palisades is at capacity, and it is
unlikely that the DOE will begin accepting any spent nuclear fuel by the
originally scheduled date in 1998. Consumers is using NRC-approved dry
casks, which are steel and concrete vaults, for temporary on-site storage.
Several appeals relating to NRC approval of the casks and Consumers' use
of the casks had been pending. In January 1995, the U.S. Sixth Circuit
Court of Appeals issued a decision, effectively allowing Consumers to
continue using dry cask storage at Palisades.
Consumers is required to make certain calculations and report to the NRC
about the continuing ability of the Palisades reactor vessel to withstand
postulated "pressurized thermal shock" events during its remaining license
life. Preliminary analysis of more recent data from testing of similar
materials indicates that the Palisades reactor vessel could exceed, prior
to the year 2000, a temperature screening criterion established by NRC
regulations. Consumers is continuing to analyze alternative means to
permit continued operation of Palisades to the end of its license life in
the year 2007. Consumers cannot predict the outcome of these efforts.
For further information regarding Palisades, see Note 13.
The staff of the SEC has questioned certain accounting practices of the
electric utility industry, including Consumers, regarding the recognition,
measurement and classification of decommissioning costs for nuclear
generating stations in the financial statements. In response to these
questions, the FASB has agreed to review the accounting for removal costs,
including decommissioning. If current electric utility industry
accounting practices for such decommissioning are changed, annual
provisions for decommissioning could increase, estimated costs for
decommissioning could be recorded as a liability rather than as
accumulated depreciation, and trust fund income from the external
decommissioning trusts could be reported as investment income rather than
as a reduction to decommissioning expense.
Stray Voltage: Consumers has recently experienced increases in the number
of lawsuits relating to the effect of so-called stray voltage on certain
livestock. At January 31, 1995, Consumers had 81 separate stray voltage
lawsuits pending. Consumers believes that the resolution of these
lawsuits will not have a material impact on its financial position or
results of operations. For further information, see Note 12.
Gas Utility Results of Operations
Gas Pretax Operating Income: For 1994, gas pretax operating income
decreased $11 million compared to 1993, reflecting slightly lower gas
sales and higher depreciation and gas operating costs, which include $10
million of postretirement benefit costs related to the gas settlement with
the MPSC (see Note 4), partially offset by the favorable resolution of a
previously recorded gas cost contingency. During 1993, gas pretax
operating income increased $37 million from the 1992 level, reflecting
higher gas deliveries (both sales and transportation volumes) and more
favorable regulatory recovery of gas costs related to transportation.
In Millions
Impact on Pretax Operating Income
---------------------------------
Change Compared to Prior Year
1994/1993 1993/1992
--------- ---------
Sales $ (3) $ 7
Weather - 10
Regulatory recovery of gas cost 10 12
O&M, general taxes and depreciation (18) 8
----- -----
Total change $(11) $37
===== =====
Gas Deliveries: Gas sales and gas transported in 1994 totaled 409 bcf, a
.4 percent decrease from 1993. In 1993, gas sales and gas transported
totaled 410.6 bcf, a 6.9 percent increase from 1992 deliveries.
Gas Utility Issues
Gas Rates: In December 1994, Consumers filed a request with the MPSC to
increase Consumers' annual gas rates by $21 million. The requested
increase in revenue reflects increased expenditures, including those
associated with postretirement benefits, and proposes a 13 percent return
on equity. A final order from the MPSC is expected in late 1995.
Consumers' most recent rate filing for its electric utility business
resulted in an approved rate of return on equity of 11.75 percent.
In June 1994, the FERC approved a stipulation and agreement in full
settlement of a rate proceeding originally filed by Michigan Gas Storage
in 1993, which provides Michigan Gas Storage with estimated annual
revenues of $20 million. For further information regarding gas utility
rates, see Note 4.
Gas Capital Expenditures: Consumers estimates capital expenditures,
including new lease commitments, related to its gas utility operations of
$127 million for 1995, $119 million for 1996 and $111 million for 1997.
These amounts include an attributed portion of Consumers' anticipated
capital expenditures for plant and equipment common to both the electric
and gas utility businesses.
Gas Environmental Matters: Under Michigan's Environmental Response Act,
Consumers expects that it will ultimately incur investigation and remedial
action costs at a number of sites, including some of the 23 sites that
formerly housed manufactured gas plant facilities, even those in which it
has a partial or no current ownership interest. Parties other than
Consumers with current or former ownership interests may also be
considered liable for site investigations and remedial actions. There is
limited knowledge of manufactured gas plant contamination at these sites
at this time.
Data available to Consumers and its continued internal review have
resulted in an estimate for all costs related to investigation and
remedial action for all 23 sites of between $48 million and $112 million.
These estimates are based on undiscounted 1994 costs. At December 31,
1994, Consumers has accrued a liability for $48 million. Any significant
change in assumptions such as remediation technique, nature and extent of
contamination and regulatory requirements, could impact the estimate of
remedial action costs for the sites.
Consumers requested recovery and deferral of certain investigation and
remedial action costs in its gas rate case filed in December 1994.
Consumers believes that remedial action costs are recoverable in rates as
the MPSC in 1993 addressed the question of recovery of investigation and
remedial action costs for another Michigan gas utility as part of a gas
rate case. In order to be recovered in rates, prudent costs must be
approved in a rate case. The MPSC has approved similar deferred
accounting requests by two other Michigan utilities relative to
investigation and remedial action costs. Accordingly, Consumers has
recorded a regulatory asset for the accrued liability that was established
for these estimated remedial action costs. Consumers has initiated
discussions with certain insurance companies regarding coverage for some
or all of the costs which may be incurred for these sites. For further
information, see Note 12.
Gas Outlook
Consumers currently anticipates gas deliveries to grow approximately 2.3
percent per year (excluding MCV transportation and off-system deliveries)
over the next five years, primarily due to a steadily growing customer
base. Additionally, Consumers has several strategies which will support
increased load requirements in the future. These strategies include
increasing efforts to promote natural gas to Consumers' current customers
that are using various non-gas furnaces and appliances. Consumers plans
additional capital expenditures to construct new gas mains that are
expected to expand Consumers' system. Management also believes there
exists significant potential for developing industrial process fuel
conversion projects.
New technologies being developed on a national level, such as the emerging
use of natural gas vehicles and commercial gas cooling equipment, also
provide Consumers with sales growth opportunities. In addition, as air
quality standards continue to become more stringent, management believes
that greater opportunities exist for converting industrial boiler load to
natural gas.
In 1994, Consumers purchased approximately 83 percent of its required gas
supply under long-term contracts, and the balance on the spot market.
Trunkline supplied approximately 35 percent of the total requirement. In
late 1994, Consumers' supply contract with Trunkline was replaced by
several one- and two-year contracts with independent producers. Consumers
estimates its purchases under long-term gas contracts will range from 70 -
80 percent in future years. Consumers also has transmission contracts
totaling approximately 90 percent of its supply requirements. These
contracts vary in length from one to ten years. Consumers' ability to
purchase gas during the off-season and store it in its extensive
underground storage facilities continues to help provide customers with
low, competitive gas rates.
Other
Other Income: Other income for 1994 decreased $38 million when compared
to the corresponding 1993 period, reflecting the sale of the remaining MCV
Bonds in December 1993 which eliminated the bond interest income. The
1992 loss included a $343 million after-tax charge related to the
Settlement Order.
Public Utility Holding Company Act Exemption: CMS Energy is exempt from
registration under PUHCA. However, the Attorney General and the MMCG have
asked the SEC to revoke CMS Energy's exemption from registration under
PUHCA. On April 15, 1992, the MPSC filed a statement with the SEC
recommending that CMS Energy's current exemption be revoked and a new
exemption be issued conditioned upon certain reporting and operating
requirements. If CMS Energy were to lose its current exemption, it would
become more heavily regulated by the SEC; Consumers could ultimately be
forced to divest either its electric or gas utility business; and
CMS Energy would be restricted from conducting businesses that are not
functionally related to the conduct of its utility business as determined
by the SEC. CMS Energy is opposing this request and believes it will
maintain its current exemption from registration under PUHCA.
104
Consolidated Statements of Income Consumers Power Company
In Millions
Years Ended December 31 1994 1993 1992
Operating Revenue Electric $2,189 $2,077 $1,863
Gas 1,151 1,160 1,126
Other 16 6 (11)
---------------------------------
Total operating revenue 3,356 3,243 2,978
---------------------------------
Operating Expenses Operation
Fuel for electric generation 306 293 305
Purchased power - related parties 482 467 460
Purchased and interchange power 162 148 112
Cost of gas sold 662 678 673
Other 560 516 492
---------------------------------
Total operation 2,172 2,102 2,042
Maintenance 188 203 201
Depreciation, depletion and amortization 335 316 307
General taxes 178 187 179
---------------------------------
Total operating expenses 2,873 2,808 2,729
---------------------------------
Pretax Operating Electric 335 286 154
Income (Loss) Gas 135 146 109
Other 13 3 (14)
---------------------------------
Total pretax operating income 483 435 249
Income Taxes 120 116 51
---------------------------------
Net Operating Income 363 319 198
---------------------------------
Other Income Dividends from affiliates 17 16 16
(Deductions) Accretion income (Note 4) 13 14 15
Accretion expense (35) (36) -
Other income taxes, net 13 25 178
MCV Bond income - 32 34
Loss on MCV power purchases - settlement (Note 3) - - (520)
Other, net 6 1 (1)
---------------------------------
Total other income (deductions) 14 52 (278)
---------------------------------
Interest Charges Interest on long-term debt 135 152 150
Other interest 17 22 15
Capitalized interest (1) (1) (1)
---------------------------------
Net interest charges 151 173 164
---------------------------------
Net Income (Loss) 226 198 (244)
Preferred Stock Dividends 24 11 11
---------------------------------
Net Income (Loss) after Dividends on Preferred Stock $ 202 $ 187 $ (255)
=================================
The accompanying notes are an integral part of these statements.
105
Consolidated Statements of Cash Flows Consumers Power Company
In Millions
Years Ended December 31 1994 1993 1992
Cash Flows From Net income (loss) $ 226 $ 198 $(244)
Operating Activities Adjustments to reconcile net income (loss) to
net cash provided by operating activities
Depreciation, depletion and amortization (includes
nuclear decommissioning depreciation of $49,
$46 and $46, respectively) 335 316 308
Capital lease and other amortization 35 30 40
Deferred income taxes and investment tax credit 57 50 (179)
Accretion expense 35 36 -
Accretion income - abandoned Midland project (13) (14) (15)
MCV power purchases - settlement (Note 3) (87) (84) -
Loss on MCV power purchases - settlement (Note 3) - - 520
Other (14) (3) 3
Changes in other assets and liabilities (Note 15) 24 (126) 37
------ ------ ------
Net cash provided by operating activities 598 403 470
------ ------ ------
Cash Flows From Capital expenditures (excludes capital lease additions
Investing Activities of $36, $58 and $69, respectively and DSM) (Note 15) (447) (451) (411)
Investments in nuclear decommissioning trust funds (49) (46) (46)
Cost to retire property, net (38) (32) (14)
Deferred demand-side management costs (9) (52) (26)
Proceeds from sale of property 14 1 12
Other 1 (2) (1)
Proceeds from MCV Bonds - 322 10
Sale of subsidiary - (14) -
Proceeds from loan to affiliate - - 50
Proceeds from Bechtel settlement - - 46
------ ------ ------
Net cash used in investing activities (528) (274) (380)
------ ------ ------
Cash Flows From Repayment of bank loans (469) (31) -
Financing Activities Payment of common stock dividends (176) (133) -
Retirement of bonds and other long-term debt (Note 7) (133) (641) (12)
Payment of capital lease obligations (34) (24) (35)
Payment of preferred stock dividends (19) (11) (11)
Proceeds from bank loans 400 - 60
Proceeds from preferred stock 193 - -
Contribution from stockholder 100 - -
Increase (decrease) in notes payable, net 80 44 (79)
Proceeds from bonds - 644 -
------ ------ ------
Net cash used in financing activities (58) (152) (77)
------ ------ ------
Net Increase (Decrease) in Cash and Temporary Cash Investments 12 (23) 13
Cash and temporary cash investments
Beginning of year 13 36 23
------ ------ ------
End of year $ 25 $ 13 $ 36
====== ====== ======
The accompanying notes are an integral part of these statements.
106
Consolidated Balance Sheets Consumers Power Company
ASSETS In Millions
December 31 1994 1993
Plant (At original cost) Electric $5,771 $5,472
Gas 2,064 1,939
Other 30 26
---------------------
7,865 7,437
Less accumulated depreciation, depletion
and amortization (Note 2) 3,794 3,550
---------------------
4,071 3,887
Construction work-in-progress 241 248
---------------------
4,312 4,135
---------------------
Investments Stock of affiliates (Note 17) 317 291
First Midland Limited Partnership (Notes 3 and 19) 218 213
Midland Cogeneration Venture Limited
Partnership (Notes 3 and 19) 74 67
Other 8 6
---------------------
617 577
---------------------
Current Assets Cash and temporary cash investments at cost, which
approximates market 25 13
Accounts receivable and accrued revenue, less allowances
of $4 in 1994 and $4 in 1993 (Note 6) 100 110
Accounts receivable - related parties 12 12
Inventories at average cost
Gas in underground storage 235 228
Materials and supplies 75 73
Generating plant fuel stock 37 41
Deferred income taxes (Note 5) 35 17
Trunkline settlement (Note 4) 30 31
Postretirement benefits (Note 10) 25 25
Prepayments and other 143 156
---------------------
717 706
---------------------
Non-current Assets Postretirement benefits (Note 10) 478 485
Nuclear decommissioning trust funds (Note 2) 213 165
Abandoned Midland project (Note 4) 147 162
Trunkline settlement (Note 4) 55 86
Other 270 235
---------------------
1,163 1,133
---------------------
Total Assets $6,809 $6,551
=====================
/TABLE
107
Consumers Power Company
STOCKHOLDERS' INVESTMENT AND LIABILITIES In Millions
December 31 1994 1993
Capitalization (Note 7) Common stockholder's equity
Common stock $ 841 $ 841
Paid-in-capital 491 391
Revaluation capital 15 -
Retained earnings since December 31, 1992 80 54
---------------------
1,427 1,286
Preferred stock 356 163
Long-term debt 1,953 1,839
Non-current portion of capital leases 108 106
---------------------
3,844 3,394
---------------------
Current Liabilities Current portion of long-term debt and capital leases 45 355
Notes payable 339 259
Accounts payable 165 148
Accounts payable - related parties 51 49
Accrued taxes 173 171
MCV power purchases - settlement (Note 3) 95 82
Accrued interest 37 39
Accrued refunds 25 28
Other 187 183
---------------------
1,117 1,314
---------------------
Non-current Liabilities Deferred income taxes (Note 5) 568 485
Postretirement benefits (Note 10) 532 527
MCV power purchases - settlement (Note 3) 324 391
Deferred investment tax credit 179 190
Trunkline settlement (Note 4) 55 86
Regulatory liabilities for income taxes,
net (Notes 5 and 18) 16 6
Other 174 158
---------------------
1,848 1,843
---------------------
Commitments and Contingencies (Notes 2, 3, 4, 11, 12 and 13)
Total Stockholders' Investment and Liabilities $6,809 $6,551
=====================
The accompanying notes are an integral part of these statements.
108
Consolidated Statements of Long-Term Debt Consumers Power Company
In Millions
December 31 1994 1993
First Mortgage Bonds Series (%) Due
5-7/8 1996 $ 36 $ 36
6 1997 50 50
8-3/4 1997 - 5
8-3/4 1998 248 248
6-5/8 1998 45 45
6-7/8 1998 43 43
9-1/8 1998 - 5
7-5/8 1999 - 48
8-7/8 1999 200 200
7-1/2 2001 57 57
7-1/2 2002 62 62
7-1/2 2002 - 43
6-3/8 2003 300 300
7-3/8 2023 300 300
------- -------
1,341 1,442
Long-Term Bank Debt 400 469
Pollution Control Revenue Bonds 131 131
Nuclear Fuel Disposal 95 90
4-5/8% Debentures - 26
Other 5 12
------- -------
Principal Amount Outstanding 1,972 2,170
Current Amounts (9) (321)
Net Unamortized Discount (10) (10)
------- -------
Total Long-Term Debt $1,953 $1,839
======= =======
LONG-TERM DEBT MATURITIES AND IMPROVEMENT FUND OBLIGATIONS In Millions
First Mortgage Improvement Long-Term
Bonds Fund Bank Debt Other Total
- -----------------------------------------------------------------------------------------------------------
1995 $ - $8 $ - $ 1 $ 9
1996 36 8 - 29 73
1997 50 8 - 74 132
1998 336 7 200 2 545
1999 200 3 200 - 403
===========================================================================================================
The accompanying notes are an integral part of these statements.
109
Consolidated Statements of Preferred Stock Consumers Power Company
Optional
Redemption Number of Shares In Millions
December 31 Series Price 1994 1993 1994 1993
Preferred Stock
Cumulative, $100 par value,
authorized 7,500,000 shares,
with no mandatory redemption $4.16 $103.25 68,451 68,451 $ 7 $ 7
4.50 110.00 373,148 373,148 37 37
7.45 101.00 379,549 379,549 38 38
7.68 101.00 207,565 207,565 21 21
7.72 101.00 289,642 289,642 29 29
7.76 102.21 308,072 308,072 31 31
Class A Preferred Stock
Cumulative, no par value,
authorized 16,000,000 shares,
with no mandatory redemption 2.08 (Note 7) 8,000,000 - 193 -
---- ----
Total Preferred Stock $356 $163
==== ====
The accompanying notes are an integral part of these statements.
110
Consolidated Statements of Common Stockholder's Equity Consumers Power Company
In Millions
Other Retained
Common Paid-in Revaluation Earnings
Stock Capital Capital (Deficit) Total
Balance at January 1, 1992 (a) $841 $ 965 $ - $(319) $1,487
Net loss (244) (244)
Preferred stock dividends declared (11) (11)
Quasi-reorganization (Note 7) (574) 574 -
---- ------ ------ ------ -------
Balance at December 31, 1992 (a) 841 391 - - 1,232
Net income 198 198
Cash dividends declared:
Common stock (133) (133)
Preferred stock (11) (11)
---- ----- ------ ------ -------
Balance at December 31, 1993 (a) 841 391 - 54 1,286
Net income 226 226
Cash dividends declared:
Common stock (176) (176)
Preferred stock (24) (24)
Implementation of SFAS 115
January 1, 1994, net of tax (Note 8) 20 20
Unrealized loss, net of tax (5) (5)
Stockholder's contribution (Note 7) 100 100
---- ----- ------ ------ -------
Balance at December 31, 1994 (a) $841 $ 491 $ 15 $ 80 $1,427
==== ===== ====== ====== =======
(a) Number of common stock shares outstanding was 84,108,789.
The accompanying notes are an integral part of these statements.
111
Consumers Power Company
Notes to Consolidated Financial Statements
1: Corporate Structure
Consumers is a combination electric and gas utility company serving the
Lower Peninsula of Michigan, and is the principal subsidiary of
CMS Energy, an energy holding company. Consumers' customer base includes
a mix of residential, commercial and diversified industrial customers, the
largest of which is the automotive industry.
2: Summary of Significant Accounting Policies and Other Matters
Basis of Presentation: The consolidated financial statements include
Consumers and its wholly owned subsidiaries. Consumers uses the equity
method of accounting for investments in its companies and partnerships
where it has more than a 20 percent but less than a majority ownership
interest.
Gas Inventory: Consumers uses the weighted average cost method for
valuing working gas inventory. Cushion gas, which is gas stored to
maintain reservoir pressure for recovery of working gas, is recorded in
the appropriate gas utility plant account. Consumers stores gas inventory
in its underground storage facilities.
Maintenance, Depreciation and Depletion: Property repairs and minor
property replacements are charged to maintenance expense. Depreciable
property retired or sold plus cost of removal (net of salvage credits) is
charged to accumulated depreciation. Consumers bases depreciation
provisions for utility plant on straight-line and units-of-production
rates approved by the MPSC. The composite depreciation rate for electric
utility property was 3.5 percent for 1994 and 3.4 percent for 1993 and
1992. The composite rate for gas utility plant was 4.2 percent for 1994,
4.4 percent for 1993 and 4.3 percent for 1992. The composite rate for
other plant and property was 4.7 percent for 1994 and 1993 and 5.8 percent
for 1992.
New Accounting Standards: In December 1994, the American Institute of
Certified Public Accountants issued Statement of Position 94-6, Disclosure
of Certain Significant Risks and Uncertainties, effective for 1995 year-
end financial statements. Consumers does not believe that it will be
significantly affected by the statement, which requires disclosures about
the nature of a company's operations and the use of estimates in financial
statements. For other recent accounting standards regarding financial
instruments, see Note 8.
Nuclear Fuel Cost: Consumers amortizes nuclear fuel cost to fuel expense
based on the quantity of heat produced for electric generation. Interest
on leased nuclear fuel is expensed as incurred. Under federal law, the DOE
is responsible for permanent disposal of spent nuclear fuel at costs to be
paid by affected utilities. However, in 1994, the DOE asserted that it
does not have a legal obligation to accept spent nuclear fuel without an
operational repository. The DOE is exploring options to offset the costs
incurred by nuclear utilities to store spent nuclear fuel on site. For
fuel burned after April 6, 1983, Consumers charges disposal costs to
nuclear fuel expense, recovers it through electric rates and remits it to
the DOE quarterly. Consumers elected to defer payment for disposal of
spent nuclear fuel burned before April 7, 1983, until the spent fuel is
delivered to the DOE, which was originally scheduled to occur in 1998. At
December 31, 1994, Consumers has recorded a liability to the DOE of $95
million, including interest. Consumers has been recovering through
electric rates the amount of this liability, excluding a portion of
interest.
Nuclear Plant Decommissioning: Consumers collects estimated costs to
decommission its two nuclear plants through a monthly surcharge to
electric customers which currently totals $45 million annually. On March
1, 1995, Consumers filed updated decommissioning estimates with the MPSC
which increased the estimated decommissioning costs for Big Rock to $290
million from $221 million and for Palisades to $502 million from $423
million (in 1994 dollars). The increase in the estimated decommissioning
costs principally reflects the unavailability of low- and high-level
radioactive waste disposal facilities. Amounts collected from electric
retail customers and deposited in trusts (including trust earnings) are
credited to accumulated depreciation. To meet NRC decommissioning
requirements, Consumers prepared site-specific decommissioning cost
estimates for Big Rock and Palisades, assuming that each plant site will
eventually be restored to conform with the adjacent landscape, and that
all contaminated equipment will be disassembled and disposed of in a
licensed burial facility. Consumers currently plans to maintain the
facilities in protective storage until radioactive waste disposal
facilities are available. As a result, the majority of decommissioning
costs will be incurred significantly later than originally anticipated.
Consumers has asked the NRC for an exemption from its requirement for
assurance that the Big Rock decommissioning funds will at least equal the
adjusted "minimum certification" amount of $361 million (in 1994 dollars)
since the site specific cost study for Big Rock demonstrates that a lesser
amount will cover the projected decommissioning costs for which the
assurance is required. When Big Rock's and Palisades' NRC licenses expire
in 2000 and 2007, respectively, the trust funds are estimated to have
accumulated to $257 million and $686 million, respectively. At the time
the plants are fully decommissioned (in the years 2030 for Big Rock and
2046 for Palisades), the trust funds are estimated to provide $1 billion
for Big Rock and $2.1 billion for Palisades including trust earnings over
this period. Accordingly, Consumers believes that the current
decommissioning surcharge is sufficient. At December 31, 1994, Consumers
had an investment in nuclear decommissioning trust funds of $213 million.
For information regarding reactor embrittlement at Palisades, see Note 13.
Reclassifications: Consumers has reclassified certain prior year amounts
for comparative purposes. These reclassifications did not affect the net
income or net losses for the years presented.
Revenue and Fuel Costs: Consumers accrues revenue for electricity and gas
used by its customers but not billed at the end of an accounting period.
Consumers also accrues or reduces revenue for any underrecovery or
overrecovery of electric power supply costs and natural gas costs by
establishing a corresponding asset or liability until it bills these
unrecovered costs or refunds the excess recoveries to customers following
reconciliation hearings conducted before the MPSC.
Utility Regulation: Consumers accounts for the effects of regulation
under SFAS 71, Accounting for the Effects of Certain Types of Regulation.
As a result, the actions of regulators affect when revenues, expenses,
assets and liabilities are recognized. Consumers' regulatory assets and
liabilities are described in Note 18.
Other: For significant accounting policies regarding income taxes, see
Note 5; for pensions and other postretirement benefits, see Note 10; and
for cash equivalents, see Note 15.
3: The Midland Cogeneration Venture
The MCV Partnership, which leases and operates the MCV Facility,
contracted to sell electricity to Consumers for a 35-year period beginning
in 1990 and to supply electricity and steam to The Dow Chemical Company.
At December 31, 1994, Consumers, through its subsidiaries, held the
following assets related to the MCV: 1) CMS Midland owned a 49 percent
general partnership interest in the MCV Partnership; and 2) CMS Holdings
held through the FMLP a 35 percent lessor interest in the MCV Facility.
Power Purchases from the MCV Partnership: Consumers' obligation for
purchase of contract capacity from the MCV Partnership under the PPA was
1,132 MW in 1994 and increases to a maximum amount of 1,240 MW in 1995 and
thereafter. Prior to 1993, the MPSC allowed Consumers to recover costs of
power purchased from the MCV Partnership at levels significantly less than
Consumers paid. In March 1993, the MPSC approved, with modifications, a
settlement proposal which allowed Consumers to recover substantially all
of the payments for its ongoing purchase of 915 MW of contract capacity
effective January 1993. Capacity and energy purchases from the MCV
Partnership above the 915 MW level can be competitively bid into
Consumers' next solicitation for power or, if necessary, utilized for
current power needs. In either instance, the MPSC would determine the
levels of recovery from retail customers at a later date. The Settlement
Order also provides Consumers the right to remarket to third parties the
remaining contract capacity. At the request of the MPSC, the MCV
Partnership confirmed that it did not object to the Settlement Order.
ABATE and the Attorney General have appealed the Settlement Order to the
Court of Appeals.
The PPA provides that Consumers is to pay to the MCV Partnership a minimum
levelized average capacity charge of 3.77 cents per kWh, a fixed energy
charge and a variable energy charge which is based primarily on Consumers'
average cost of coal consumed. The Settlement Order permits Consumers to
recover capacity charges averaging 3.62 cents per kWh for 915 MW of
capacity and the prescribed energy charges associated with the scheduled
deliveries within certain hourly availability limits, whether or not those
deliveries are scheduled on an economic basis. For all economic energy
deliveries above the availability limits to 915 MW, Consumers is allowed
to recover 1/2 cent per kWh capacity payment in addition to the variable
energy charge.
In 1992, Consumers recognized an after-tax loss of $343 million which was
the present value of an undiscounted after-tax loss of $789 million, based
on Consumers' estimated future underrecoveries of power costs under the
PPA as a result of the Settlement Order. This loss was based, in part, on
management's assessment of the future availability of the MCV Facility,
and the effect of the future power market on the amount, timing and price
at which various increments of the capacity, above the MPSC authorized
level, could be resold. Additional losses may occur if actual future
experience materially differs from the 1992 estimates. As anticipated in
1992, Consumers continues to experience cash underrecoveries associated
with the Settlement Order. These after-tax cash underrecoveries,
including fixed energy charges (in connection with a dispute with the MCV
Partnership discussed below) which were being escrowed, were $61 million
in 1994 and $59 million in 1993. If Consumers is unable to sell any
capacity above the current MPSC-authorized level, future additional after-
tax losses and after-tax cash underrecoveries would be incurred.
Consumers estimates its future after-tax cash underrecoveries and possible
additional losses for the next five years if none of the additional
capacity is sold are shown in the table below.
After-tax, In Millions
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
Expected cash underrecoveries $60 $56 $55 $ 8 $ 9
Possible additional under-
recoveries and losses (a) $20 $20 $22 $72 $72
(a) If unable to sell any capacity above the MPSC's authorized level.
At December 31, 1994 and 1993, the after-tax, present value of the
Settlement Order liability totaled $272 million and $307 million,
respectively. The reduction in the Settlement Order liability during 1994
reflects after-tax cash underrecoveries related to capacity totaling $57
million, partially offset by after-tax accretion expense of $22 million.
In connection with the MPSC's approval of the settlement proposal
discussed above, Consumers and the MCV Partnership engaged in arbitration
under the PPA regarding the payment of certain fixed energy charges. In
January 1995, the arbitrator ruled in favor of Consumers' interpretation
of the PPA and found that Consumers was entitled to the immediate return
of an estimated $22 million, representing the fixed energy amounts for
which Consumers did not receive full cost recovery during the years prior
to the Settlement Order (1990 - 1992). Consumers had escrowed
approximately $16 million of this amount. The arbitrator postponed the
return of payments for 1993 and 1994 because the Settlement Order is still
subject to pending appeals. The amount under dispute in 1994 is
approximately $9 million and increases each year thereafter, averaging
approximately $17 million per year over the life of the contract.
Consumers believes it is premature to recognize any current year earnings
benefit from this award until the remaining amount of MCV capacity is sold
and/or the market for the capacity is confirmed.
In May 1994, Consumers was notified by the MCV that it was initiating
further arbitration proceedings under the PPA to determine whether the
energy charge paid to the MCV is being properly calculated. Consumers
believes that its calculation of the energy charge is correct. The amount
in dispute, which relates to the period beginning in 1990 and continuing
through the term of the PPA, has been estimated by the MCV Partnership to
total $6.3 million annually. An arbitrator has been selected and a ruling
is expected in the third quarter of 1995. Consumers cannot predict the
outcome of this arbitration.
In 1994, the lessors of the MCV Facility filed a lawsuit against
CMS Energy, Consumers and CMS Holdings, alleging breach of contract,
breach of fiduciary duty and negligent or fraudulent misrepresentation
relating to the MCV Partnership's failure to object to the Settlement
Order in light of Consumers' interpretation of the Settlement Order, which
is the subject of the arbitration between the MCV Partnership and
Consumers discussed above. The action alleged damages in excess of $1
billion and sought injunctive relief relative to Consumers' payments of
the fixed energy charges. In February 1995, after the arbitrator's
decision, the lessors voluntarily withdrew this lawsuit.
In July 1994, Consumers paid $30 million to terminate a power purchase
agreement with a 65 MW coal-fired cogeneration facility. Additionally, in
February 1995, Consumers agreed to pay $15 million to terminate a power
purchase agreement with a 44 MW wood and chipped tire facility. Consumers
plans to seek MPSC approval to substitute less expensive contract capacity
from the MCV Facility which Consumers is currently not authorized to
recover from retail customers. This proposed substitution of capacity
would start in late 1996, the year the coal-fired cogeneration facility
was scheduled to begin operations. The capacity substitution represents
significant savings to Consumers' customers, compared to the cost approved
by the MPSC for similar facilities. As a result, Consumers has recorded a
regulatory asset of $45 million ($30 million in 1994), which it believes
will ultimately be recoverable in rates.
MCV-related PSCR Matters: Consistent with the terms of the 1993
Settlement Order, Consumers withdrew its appeals of various MPSC orders
issued in connection with several PSCR cases. Consumers also agreed not
to appeal any MCV-related issues raised in future orders for these plan
cases and related reconciliations to the extent those issues are resolved
by the Settlement Order. In March 1994, the MPSC issued an order in the
PSCR reconciliation case for 1992 confirming Consumers' recovery for the
purchase of 840 MW from the MCV in accordance with the MPSC plan case
order and allowing recovery for the purchase of power above 840 MW based
on replacement power costs. The MPSC subsequently confirmed the recovery
of MCV-related costs consistent with the Settlement Order as part of the
1993 and 1994 plan case orders. ABATE or the Attorney General has
appealed these plan case orders to the Court of Appeals.
4: Rate Matters
Electric Rate Case: In May 1994, the MPSC granted Consumers a $58 million
annual increase in its retail electric rates. The order provides
Consumers with higher revenues associated with increased expenditures
primarily related to capital additions, operation and maintenance,
postretirement benefits, and the continuation of certain DSM programs.
The MPSC order generally supported Consumers' rate design proposal and
reduced the level of subsidization of residential customers by commercial
and industrial customers by allocating $40 million of the rate increase to
residential customers.
In November 1994, Consumers filed a request with the MPSC which could
increase its retail electric rates in a range from $104 million to $140
million, depending upon the ratemaking treatment afforded sales losses to
competition and the treatment of the MCV contract capacity above 915 MW.
The request includes a proposed increase in Consumers' authorized rate of
return on equity to 12.75 percent from 11.75 percent, recognition of
increased expenditures related to continuing construction activities and
capital additions aimed at maintaining and improving system reliability
and increases in financing costs. Consumers has requested that the MPSC
eliminate the remainder of rate cross-subsidization of residential rates
in a two-step adjustment, eliminate all DSM expenditures after April 1995
and allow recovery of all jurisdictional costs associated with the
proposed settlement of the proceedings concerning the operation of
Ludington (see Note 12). In January 1995, Consumers filed a request with
the MPSC, seeking to adjust its depreciation rates and to reallocate
certain portions of its electric production plant to transmission
accounts, which if approved would result in a net decrease in depreciation
expense of $7 million (see Electric Rate Case discussion in the
Management's Discussion and Analysis).
Abandoned Midland Project: In 1991, the MPSC ordered that Consumers could
collect $35 million pretax annually for the next 10 years for its
abandoned nuclear project. Consumers is amortizing the abandoned assets
against current income over the recovery period using an interest method.
Consumers was not permitted to earn a return on the portion of the
abandoned investment for which the MPSC was allowing recovery. The loss
of a return on the amount being recovered is reflected in earnings as
accretion income. An after-tax total of $27 million remains to be
included in accretion income through April 2001. In December 1994, the
Court of Appeals upheld the MPSC orders allowing recovery of the abandoned
investment. Consumers and ABATE have appealed this decision to the
Michigan Supreme Court. Management cannot predict the outcome of this
issue.
Electric DSM: As a result of settlement discussions regarding DSM and an
MPSC order, Consumers agreed to spend $65 million over two years on DSM
programs. Consumers completed the customer participation portion of these
DSM programs in 1993. Based on the criteria set out in the DSM settlement
agreement approved by the MPSC, Consumers has achieved all the agreed-upon
objectives. Consumers believes that the MPSC will ultimately allow
collection of $11 million of incentive revenue. Accordingly, during 1994,
Consumers recognized $11 million in revenue, related to its DSM program.
A final order from the MPSC is expected by mid-1995.
In 1994, as part of Consumers' electric rate case, the MPSC authorized
Consumers to recover DSM expenditures which exceeded $65 million and to
continue certain programs ($30 million annually) in 1994 through 1996.
Consumers is deferring program costs and amortizing the costs over the
period these costs are being recovered from customers in accordance with
an MPSC accounting order. The unamortized balance of deferred costs
totaled $71 million at December 31, 1994 and 1993.
PSCR Issues: In November 1994, an ALJ issued a proposal for decision in
the 1993 PSCR reconciliation proceeding that addressed issues related to
an extended refueling and maintenance outage that began at Palisades in
June 1993 and ended in November 1993. Consumers conceded that one day of
the 1993 outage was unnecessary, while the ALJ found that 22 days of the
outage were the result of imprudent actions and recommended a disallowance
of $4 million of replacement power costs. While Consumers has taken
exception to the ALJ's proposal, it has accrued a loss for this issue for
1994. In addition, from mid-February through mid-June 1994, Palisades
took an unscheduled outage to repair valve leakage and conduct other
needed inspections and repairs. The 1994 outage will be reviewed as part
of the 1994 reconciliation proceeding.
The Energy Act imposes an obligation on the utility industry to
decommission DOE uranium enrichment facilities. In 1994, the MPSC
authorized Consumers to recover through electric rates its required
decommissioning payments to the DOE. At December 31, 1994, Consumers'
remaining liability and regulatory asset each totaled $25 million.
Gas Rates: In July 1994, the MPSC approved an agreement previously
reached between the MPSC staff and Consumers, to charge $10 million of
costs for postretirement benefits against 1994 earnings. The agreement
was reached in response to a claim that gas utility business earnings for
1993 were excessive. This charge against earnings partially offsets
savings related to reduced state property taxes. The agreement also
provides for an additional $4 million of postretirement benefit costs to
be charged against 1995 earnings instead of being deferred. As part of
the agreement, Consumers filed a gas rate case in December 1994.
Consumers requested an increase in its gas rates of $21 million annually.
The request, among other things, incorporates cost increases, including
costs for postretirement benefits and costs related to Consumers' former
manufactured gas plant sites. Consumers requested that the MPSC authorize
a 13 percent rate of return on equity, instead of the currently authorized
rate of 13.25 percent. Consumers expects an MPSC decision in late 1995.
Consumers' most recent rate filing for its electric utility business
resulted in an approved rate of return on equity of 11.75 percent.
GCR Issues: In 1993, the MPSC provided that the price payable to certain
intrastate gas producers by Consumers be reduced prospectively. As a
result, Consumers was not allowed to recover $13 million of costs incurred
prior to February 1993. Consumers previously had accrued a loss in excess
of the disallowed amount. Future disallowances are not anticipated,
unless appeals filed by the intrastate producers are successful.
In 1992, the FERC approved a settlement involving Consumers, Trunkline and
certain other parties, which resolved numerous claims and proceedings
concerning Trunkline liquified natural gas costs. The settlement
represents significant gas cost savings for Consumers and its customers in
future years. In 1992, Consumers recorded a liability and regulatory
asset for the principal amount of payments due Trunkline. In 1993, the
MPSC approved a separate settlement agreement providing full recovery of
the liability over a five-year period. At December 31, 1994, the
remaining liability and regulatory asset were $85 million.
Estimated losses for certain contingencies discussed in this note have
been accrued. Resolution of these contingencies is not expected to have a
material impact on the financial statements.
5: Income Taxes
Consumers and its subsidiaries file a consolidated federal income tax
return with CMS Energy. Income taxes are generally allocated based on
each company's separate taxable income. Consumers' accrued federal income
tax benefits from CMS Energy were $33 million and $49 million as of
December 31, 1994 and 1993, respectively. Consumers practices full
deferred tax accounting for temporary differences as authorized by a
generic MPSC order.
Consumers uses ITC to reduce current income taxes payable and defers and
amortizes ITC over the life of the related property. Any AMT paid
generally becomes a tax credit that can be carried forward indefinitely to
reduce regular tax liabilities in future periods when regular taxes paid
exceed the tax calculated for AMT.
The significant components of income tax expense (benefit) consisted of:
In Millions
Years Ended December 31 1994 1993 1992
- ----------------------- ----- ----- -----
Current federal income taxes $ 51 $ 41 $ 52
Deferred income taxes 67 61 (172)
Deferred income taxes - tax rate change - (2) -
Deferred ITC, net (11) (9) (7)
----- ----- -----
$ 107 $ 91 $(127)
===== ===== =====
Operating $ 120 $ 116 $ 51
Other (13) (25) (178)
----- ----- -----
$ 107 $ 91 $(127)
===== ===== =====
The principal components of Consumers' deferred tax assets (liabilities)
recognized in the balance sheet are as follows:
In Millions
December 31 1994 1993
- ----------- ------- -------
Property $ (535) $ (518)
Unconsolidated investments (236) (184)
Postretirement benefits (Note 10) (177) (178)
Abandoned Midland project (Note 4) (51) (57)
Employee benefit obligations (includes
postretirement benefits of $172 and $178) (Note 10) 200 200
MCV power purchases - settlement (Note 3) 146 165
AMT carryforward 89 64
ITC carryforward (expires 2005) 37 48
Other (6) (8)
------- -------
$ (533) $ (468)
======= =======
Gross deferred tax liabilities $(1,388) $(1,319)
Gross deferred tax assets 855 851
------- -------
$ (533) $ (468)
======= =======
The actual income tax expense (benefit) differs from the amount computed
by applying the statutory federal tax rate to income before income taxes
as follows:
In Millions
Years Ended December 31 1994 1993 1992
- ----------------------- ------ ------ ------
Net income (loss) $ 226 $ 198 $ (244)
Income tax expense (benefit) 107 91 (127)
------ ------ ------
333 289 (371)
Statutory federal income tax rate x 35% x 35% x 34%
------ ------ ------
Expected income tax expense (benefit) 117 101 (126)
Increase (decrease) in taxes from:
Capitalized overheads previously
flowed through 5 5 5
Differences in book and tax
depreciation not previously deferred 6 6 9
ITC amortization and utilization (9) (10) (10)
Affiliated companies' dividends (6) (6) (5)
Other, net (6) (5) -
------ ------ ------
$ 107 $ 91 $ (127)
====== ====== ======
6: Short-Term Financings
In 1994, the FERC granted Consumers' request for authorization to issue or
guarantee up to $900 million of short-term debt through December 31, 1996.
Consumers has an unsecured $470 million facility and unsecured, committed
lines of credit aggregating $185 million that are used to finance seasonal
working capital requirements. At December 31, 1994, $170 million and $166
million were outstanding under these facilities at weighted average
interest rates of 6.3 percent and 7.3 percent, respectively. Consumers
has an established $500 million trade receivables purchase and sale
program. At December 31, 1994 and 1993, receivables sold under the
agreement totaled $275 million and $285 million, respectively. Accounts
receivable and accrued revenue in the Consolidated Balance Sheets have
been reduced to reflect receivables sold.
7: Capitalization
Capital Stock: During 1994, Consumers issued and sold 8 million shares of
Class A Preferred Stock (cumulative, without par value) with an annual
dividend of $2.08. Net proceeds to Consumers were $193 million. The
stock is redeemable at the option of Consumers, on or after April 1, 1999,
at a redemption price of $25 per share plus accrued dividends.
At December 31, 1992, Consumers effected a quasi-reorganization in which
Consumers' accumulated deficit of $574 million was eliminated against
other paid-in capital. This action was approved by Consumers' Board of
Directors and did not require shareholder approval.
First Mortgage Bonds: Consumers secures its first mortgage bonds by a
mortgage and lien on substantially all of its property. Consumers' ability
to issue and sell securities is restricted by certain provisions in its
First Mortgage Bond Indenture, Articles and the need for regulatory
approvals in compliance with appropriate state and federal law. In the
first quarter of 1994, Consumers redeemed first mortgage bonds totaling
$101 million. These redemptions completed Consumers' commitment to the
MPSC, under a 1993 financing order to refinance certain long-term debt.
Long-Term Bank Debt: In 1994, subsequent to MPSC authorization, Consumers
entered into a new $400 million unsecured, variable rate, five-year term
loan and subsequently used the proceeds to refinance its then existing
long-term, variable rate, credit agreement and to reduce short-term
borrowings. At December 31, 1994, the new loan carried a weighted average
interest rate of 6.5 percent. In 1993, Consumers entered into an interest
rate swap agreement, exchanging variable-rate interest for a fixed-rate
interest of 5.2 percent on $250 million of its long-term bank debt. The
swap agreement hedges the variable rate exposure associated with
Consumers' long-term bank debt and had the effect of increasing the
weighted average interest rate to 5.3 percent from 5.0 percent for the 12-
month period ended December 31, 1994. The current swap agreement began to
decrease in February 1995 and will terminate by May 1996. In February
1995, Consumers entered into another hedging agreement for $100 million to
reduce its exposure to variable rate interest associated with its long-
term bank debt.
Other: Consumers has a total of $131 million of long-term PCRBs
outstanding (secured by irrevocable letters of credit and first mortgage
bonds) with a weighted average interest rate of 4.8 percent as of December
31, 1994.
In 1994, Consumers received a $100 million equity investment from
CMS Energy. The investment was consistent with CMS Energy's plan to
improve Consumers' capital structure and was recognized and included in
the capitalization structure employed by the MPSC as part of Consumers'
most recent electric rate order.
8: Financial Instruments
The carrying amounts of cash, short-term investments and current
liabilities approximate their fair values due to their short-term nature.
The estimated fair values of long-term investments are based on quoted
market prices or, in the absence of specific market prices, on quoted
market prices of similar investments or other valuation techniques. The
carrying amounts of all long-term investments, except as shown below,
approximate fair value.
In Millions
December 31 1994 1993
- -----------
Available-for-sale Amortized Fair Unrealized Amortized Fair Unrealized
securities Cost Value Gain (Loss) Cost Value Gain
- ------------------ --------- ----- ----------- --------- ----- ----------
Common stock
of CMS Energy
(Note 17) $ 43 $ 67 $ 24 $ 42 $ 72 $ 30
Nuclear
decommissioning
investments 223 213 (10) 165 165 -
The carrying amount of long-term debt was $2.0 billion and $1.8 billion,
and the fair value, as calculated by debt-pricing specialists, was $1.9
billion and $2.0 billion at December 31, 1994 and 1993, respectively.
Although the current fair value of the long-term debt may differ from the
current carrying amount, settlement of the reported debt is generally not
expected until maturity.
The fair values of Consumers' off-balance-sheet financial instruments are
based on the amounts estimated to terminate or settle the instruments. At
December 31, 1994, the fair value of Consumers' interest rate swap
agreement was $4 million, representing the amount that Consumers would
receive to terminate the agreement. At December 31, 1993, Consumers would
have paid $5 million to terminate the agreement. This beneficial change
resulted from an increase in market interest rates. Guarantees and
letters of credit were $7 million at December 31, 1994 and 1993. For
held-to-maturity securities, see Note 17.
Effective January 1, 1994, Consumers adopted SFAS 115, Accounting for
Certain Investments in Debt and Equity Securities, which resulted in an
increase in assets of $30 million with a corresponding increase in
stockholders' equity of $20 million, net of tax. Consumers classifies
unrealized losses on nuclear decommissioning investments in accumulated
depreciation.
9: Executive Incentive Compensation
Consumers participates in CMS Energy's Performance Incentive Stock Plan.
Under the plan, restricted shares of common stock of CMS Energy, stock
options and stock appreciation rights may be granted to key employees
based on their contributions to the successful management of CMS Energy
and its subsidiaries. The plan reserves for award not more than 2 percent
of CMS Energy's common stock outstanding on January 1 each year, less the
number of shares of restricted common stock awarded and of common stock
subject to options granted under the plan during the immediately preceding
four calendar years. Any forfeitures are subject to award under the plan.
At December 31, 1994, awards of up to 402,316 shares of common stock may
be issued.
Restricted shares of common stock are outstanding shares with full voting
and dividend rights. Performance criteria were added in 1990 based on
CMS Energy's total return to shareholders. Shares of restricted common
stock cannot be distributed until they are vested and the performance
objectives are met. Further, the restricted stock is subject to
forfeiture if employment terminates before vesting. If key employees
exceed performance objectives, the plan will allow additional awards.
Restricted shares vest fully if control of CMS Energy changes, as defined
by the plan. At December 31, 1994, 314,856 shares of the 330,356
restricted shares outstanding are subject to performance objectives.
Consumers' Executive Stock Option and Stock Appreciation Rights Plan, an
earlier plan approved by shareholders, remains in effect until all
authorized options are granted or September 25, 1995. At December 31,
1994, options for 43,000 shares remained to be granted.
Under both plans, for stock options and stock appreciation rights, the
exercise price on each grant date equaled the closing market price on the
grant date. Options are exercisable upon grant and expire up to 10 years
and one month from date of grant. The status of the restricted stock
granted under the Performance Incentive Stock Plan and options granted
under both plans follows and includes shares for employees of CMS Energy
and non-utility affiliates.
Restricted
Stock Options
---------- ---------------
Number Number Price
of Shares of Shares per Share
--------- --------- ---------------
Outstanding at January 1, 1992 275,063 1,291,091 $ 7.13 - $34.25
Granted 101,000 215,000 $17.13 - $18.00
Exercised or Issued (37,422) (21,000) $13.00 - $16.00
Canceled (15,375) (50,000) $20.50 - $33.88
------- --------- ---------------
Outstanding at December 31, 1992 323,266 1,435,091 $ 7.13 - $34.25
Granted 132,000 249,000 $25.13 - $26.25
Exercised or Issued (54,938) (152,125) $ 7.13 - $21.13
Canceled (84,141) (33,000) $20.50 - $33.88
------- --------- ---------------
Outstanding at December 31, 1993 316,187 1,498,966 $ 7.13 - $34.25
Granted 133,500 273,000 $21.25 - $22.38
Exercised or Issued (39,361) (158,300) $ 7.13 - $22.00
Canceled (79,970) (123,000) $26.25 - $33.88
------- --------- ---------------
Outstanding at December 31, 1994 330,356 1,490,666 $ 7.13 - $34.25
======= ========= ===============
10: Retirement Benefits
Postretirement Benefit Plans Other Than Pensions: Consumers adopted SFAS
106, Employers' Accounting for Postretirement Benefits Other than
Pensions, effective as of the beginning of 1992 and recorded a liability
of $466 million for the accumulated transition obligation and a
corresponding regulatory asset for anticipated recovery in utility rates
(see Note 18). Both the MPSC and FERC have generally allowed recovery of
SFAS 106 costs. The MPSC's generic order allows utilities three years to
seek recovery of costs. In May 1994, the MPSC authorized recovery of the
electric utility portion of these costs over 18 years. In December 1994,
Consumers requested recovery of the gas utility portion of these costs
(see Note 4). Consumers funds the benefits using external Voluntary
Employee Beneficiary Associations. Funding of the health care benefits
coincides with Consumers' recovery in rates. A portion of the life
insurance benefits have previously been funded.
Retiree health care costs at December 31, 1994, are based on the
assumption that costs would increase 10 percent in 1995, then decrease
gradually to 6 percent in 2004 and thereafter. The health care cost trend
rate assumption significantly affects the amounts reported. For example,
a 1 percentage point increase in each year's estimated health care cost
assumption would increase the accumulated postretirement benefit
obligation as of December 31, 1994 by $84 million and the aggregate of the
service and interest cost components of net periodic postretirement
benefit costs for 1994 by $10 million.
For the years ended December 31, 1994, 1993 and 1992, the weighted average
discount rate was 8 percent, 7.25 percent and 8 percent, respectively, and
the expected long-term rate of return on plan assets was 7 percent, 8.5
percent and 8.5 percent, respectively. Net periodic postretirement
benefit cost for health care benefits and life insurance benefits was $53
million in 1994, $51 million in 1993 and $49 million in 1992. The 1994,
1993 and 1992 cost was comprised of $13 million, $13 million and $10
million for service plus $40 million, $38 million and $39 million for
interest, respectively.
The funded status of the postretirement benefit plans is reconciled with
the liability recorded at December 31 as follows:
In Millions
1994 1993
------ ------
Actuarial present value of estimated benefits
Retirees $ 336 $ 281
Eligible for retirement 43 54
Active (upon retirement) 166 187
------ ------
Accumulated postretirement benefit obligation 545 522
Plan assets at fair value 35 4
------ ------
Projected postretirement benefit obligation
in excess of plan assets (510) (518)
Unrecognized net loss from experience
different than assumed 2 8
------ ------
Recorded liability $ (508) $ (510)
====== ======
Consumers' postretirement health care plan is partially funded; the
accumulated postretirement benefit obligation for that plan is $530
million and $510 million at December 31, 1994 and 1993, respectively.
Supplemental Executive Retirement Plan: Certain management employees
qualify under the SERP. SERP benefits, which are based on an employee's
years of service and earnings as defined in the SERP, are paid from a
trust established and funded in 1988. Because the SERP is not a qualified
plan under the Internal Revenue Code, earnings of the trust are taxable
and trust assets are included in consolidated assets. At December 31,
1994 and 1993, trust assets at cost (which approximates market) were $14
million and $16 million, respectively, and were classified as other non-
current assets.
Defined Benefit Pension Plan: A trusteed, non-contributory, defined
benefit Pension Plan covers substantially all employees. The benefits are
based on an employee's years of accredited service and earnings, as
defined in the plan, during an employee's five highest years of earnings.
Because the plan is fully funded, no contributions were made for plan
years 1992 through 1994. Amounts presented below for the Pension Plan
include minor amounts for employees of CMS Energy and non-utility
affiliates which are not distinguishable from the plan's total assets.
Years Ended December 31 1994 1993 1992
- ----------------------- ------ ------ -----
Discount rate 8.0% 7.25% 8.5%
Rate of compensation increase 4.5% 4.5% 5.5%
Expected long-term rate of return on assets 9.25% 8.75% 8.75%
Net Pension Plan and SERP costs consisted of:
In Millions
Years Ended December 31 1994 1993 1992
- ----------------------- ----- ----- -----
Service cost $ 23 $ 19 $ 19
Interest cost 50 49 47
Actual return on plan assets 21 (92) (36)
Net amortization and deferral (85) 34 (20)
----- ----- -----
Net periodic pension cost $ 9 $ 10 $ 10
===== ===== =====
The funded status of the Pension Plan and SERP reconciled to the pension
liability recorded at December 31 was:
In Millions
Pension Plan SERP
1994 1993 1994 1993
----- ----- ----- -----
Actuarial present value of
estimated benefits
Vested $ 421 $ 471 $ 13 $ 12
Non-vested 61 56 - -
----- ----- ----- -----
Accumulated benefit obligation 482 527 13 12
Provision for future pay increases 154 138 6 5
----- ----- ----- -----
Projected benefit obligation 636 665 19 17
Plan assets (primarily stocks
and bonds, including $79 in 1994
and $87 in 1993 in common stock
of CMS Energy) at fair value 637 692 - -
----- ----- ----- -----
Projected benefit obligation less
than (in excess of) plan assets 1 27 (19) (17)
Unrecognized net (gain) loss from
experience different than assumed (35) (56) 3 5
Unrecognized prior service cost 40 45 1 -
Unrecognized net transition
(asset) obligation (39) (44) 1 1
----- ----- ----- -----
Recorded liability $ (33) $ (28) $ (14) $(11)
===== ===== ===== =====
Beginning January 1, 1986, the amortization period for the Pension Plan's
unrecognized net transition asset is 16 years and 11 years for the SERP's
unrecognized net transition obligation. Prior service costs are amortized
on a straight-line basis over the average remaining service period of
active employees.
11: Leases
Consumers leases various assets, including vehicles, aircraft,
construction equipment, computer equipment, nuclear fuel and buildings.
Consumers' nuclear fuel capital leasing arrangement is scheduled to expire
in November 1996. The maximum amount of nuclear fuel that can be leased
increased during 1994 to $80 million. The lease provides for an
additional one-year extension upon mutual agreement by the parties. Upon
termination of the lease, the lessor would be entitled to a cash payment
equal to its remaining investment, which was $59 million as of December
31, 1994. Consumers is responsible for payment of taxes, maintenance,
operating costs, and insurance.
Minimum rental commitments under Consumers' non-cancelable leases at
December 31, 1994, were:
In Millions
Capital Operating
Leases Leases
------- --------
1995 $ 43 $ 6
1996 60 3
1997 17 3
1998 15 2
1999 12 2
2000 and thereafter 21 20
----- -----
Total minimum lease payments 168 $ 36
Less imputed interest 24 =====
-----
Present value of net minimum lease payments 144
Less current portion 36
-----
Non-current portion $108
=====
Consumers recovers these charges from customers and accordingly charges
payments for its capital and operating leases to operating expense.
Operating lease charges, including charges to clearing and other accounts
as of December 31, 1994, 1993 and 1992, were $8 million, $8 million and
$12 million, respectively.
Capital lease expenses for the years ended December 31, 1994, 1993 and
1992 were $40 million, $32 million and $44 million, respectively.
Included in these amounts for the years ended 1994, 1993 and 1992, are
nuclear fuel lease expenses of $21 million, $13 million and $17 million,
respectively.
12: Commitments and Contingencies
Ludington Pumped Storage Plant: In 1994, Consumers, Detroit Edison, the
Attorney General, the DNR and certain other parties, signed an agreement
in principle designed to resolve all legal issues associated with fish
mortality at Ludington. The proposed settlement, which allows for
continued operation of the plant through the end of its FERC license, will
require Consumers and Detroit Edison to continue using a seasonal barrier
net as well as monitoring new technology which may further reduce fish
loss at the plant. The proposed settlement also requires Consumers to
make annual payments to the Great Lakes Fishery Trust, develop and improve
certain recreational areas and convey certain undeveloped land to the
State of Michigan and the Great Lakes Fishery Trust. Upon approval of the
settlement agreement, Consumers will transfer land (with an original cost
of $9 million and a fair market value in excess of $20 million), make an
initial payment of approximately $3 million and incur approximately $1
million of expenditures related to recreational improvements. Future
annual payments of approximately $1 million are also anticipated over the
next 24 years and are intended to enhance the fishery resources of the
Great Lakes. The agreement is subject to the MPSC permitting Consumers to
recover all such settlement costs from electric customers, and approval by
the FERC.
The proposed settlement would resolve two lawsuits filed by the Attorney
General in 1986 and 1987 on behalf of the State of Michigan. In one, the
state sought $148 million (including $16 million of interest) for past
injuries and $89,000 per day for future injuries, reduced only upon
installation of "adequate" fish barriers and other changed conditions.
Each year, a barrier net is installed at Ludington by Consumers and
Detroit Edison from April to October. In the other, the Attorney General
sought to have Ludington's bottomlands lease declared void.
Environmental Matters: Consumers is a so-called "Potentially Responsible
Party" at several sites being administered under Superfund. Although
Superfund liability is joint and several, along with Consumers, there are
numerous credit-worthy, potentially responsible parties with substantial
assets cooperating with respect to the individual sites. Based upon past
negotiations, Consumers estimates its total liability will average less
than 4 percent of the estimated total site remediation costs, and such
liability will probably not exceed $6 million. At December 31, 1994,
Consumers has accrued a liability for its estimated losses. Consumers
believes that it is unlikely that its liability at any of the known
Superfund sites, individually or in total, will have a material adverse
effect on its financial position or results of operations.
Under Michigan's Environmental Response Act, Consumers expects that it
will ultimately incur investigation and remedial action costs at a number
of sites, including some of the 23 sites that formerly housed manufactured
gas plant facilities, even those in which it has a partial or no current
ownership interest. Parties other than Consumers with current or former
ownership interests may also be considered liable for site investigations
and remedial actions. There is limited knowledge of manufactured gas
plant contamination at these sites at this time.
Consumers has prepared plans for remedial investigation/feasibility
studies for several of these former manufactured gas plant sites to define
the nature and extent of contamination at these sites and to determine
which of several possible remedial action alternatives, including no
action, may be required under the Environmental Response Act. The DNR has
approved three of four plans for remedial investigation/feasibility
studies submitted by Consumers.
The findings for the first remedial investigation indicate that the
expenditures for remedial action at this site are likely to be minimal.
However, Consumers does not believe that a single site is representative
of all of the sites. Data available to Consumers and its continued
internal review have resulted in an estimate for all costs related to
investigation and remedial action for all 23 sites of between $48 million
and $112 million. These estimates are based on undiscounted 1994 costs.
At December 31, 1994, Consumers has accrued a liability of $48 million.
Any significant change in assumptions such as remediation technique,
nature and extent of contamination and regulatory requirements, could
impact the estimate of remedial action costs for the sites.
Consumers requested recovery and deferral of certain investigation and
remedial action costs in its gas rate case filed in 1994. Consumers
believes that remedial action costs are recoverable in rates as the MPSC
in 1993 addressed the question of recovery of investigation and remedial
action costs for another Michigan gas utility as part of a gas rate case.
In order to be recoverable in rates, prudent costs must be approved in a
rate case. Any costs amortized in years prior to filing a rate case may
not be recoverable. The MPSC has approved similar deferred accounting
requests by two other Michigan utilities relative to investigation and
remedial action costs. Accordingly, Consumers has recorded a regulatory
asset for the accrued liability that was established for these estimated
remedial action costs. Consumers has initiated discussions with certain
insurance companies regarding coverage for some or all of the costs which
may be incurred for these sites.
The federal Clean Air Act contains provisions that limit emissions of
sulfur dioxide and nitrogen oxides and require enhanced emissions
monitoring. All of Consumers' coal-fueled electric generating units burn
low-sulfur coal and are presently operating at or near the sulfur dioxide
emission limits which will be effective in the year 2000. Beginning in
1995, certain coal-fueled generating units will receive emissions
allowances (all of Consumers' coal units will receive allowances beginning
in the year 2000). Based on projected emissions from these units,
Consumers expects to have excess allowances which may be sold or saved for
future use. The Clean Air Act's provisions required Consumers to make
capital expenditures totaling $25 million to install equipment at certain
generating units. Consumers estimates capital expenditures for in-process
and possible modifications at other coal-fired units to be an additional
$50 million by the year 2000. Final acid rain program nitrogen oxide
regulations specifying the controls to be installed at the other coal-
fired units are not expected earlier than 1996. Management believes that
Consumers annual operating costs will not be materially affected.
Capital Expenditures: Consumers estimates capital expenditures, including
DSM and new lease commitments, of $452 million for 1995, $374 million for
1996 and $380 million for 1997.
Commitments for Coal and Gas Supplies: Consumers has entered into coal
supply contracts with various suppliers for its coal-fired generating
stations. These contracts have expiration dates that range from 1995 to
2004. Consumers contracts for approximately 60 - 70 percent of its annual
coal requirements which in 1994 totaled $261 million (63 percent was under
long-term contracts). Consumers supplements its long-term contracts with
spot-market purchases to fulfill its coal needs.
Consumers has entered into gas supply contracts with various suppliers for
its natural gas business. These contracts have expiration dates that
range from 1995 to 2003. Consumers contracts for approximately 70 - 80
percent of its annual gas requirements which in 1994 totaled $662 million
(83 percent was under long-term contracts). Consumers supplements its
long-term contracts with spot-market purchases to fulfill its gas needs.
Public Utility Holding Company Act Exemption: CMS Energy is exempt from
registration under PUHCA. However, the Attorney General and the MMCG have
asked the SEC to revoke CMS Energy's exemption from registration under
PUHCA. In 1992, the MPSC filed a statement with the SEC recommending that
CMS Energy's current exemption be revoked and a new exemption be issued
conditioned upon certain reporting and operating requirements. If CMS
Energy were to lose its current exemption, it would become more heavily
regulated by the SEC; Consumers could ultimately be forced to divest
either its electric or gas utility business; and CMS Energy would be
restricted from conducting businesses that are not functionally related to
the conduct of its utility business as determined by the SEC. CMS Energy
is opposing this request and believes it will maintain its current
exemption from registration under PUHCA.
Other: Consumers has experienced increases in the number of lawsuits
filed against it relating to so-called stray voltage. Claimants contend
that stray voltage results when small electrical currents present in
grounded electrical systems are diverted from their intended path.
Consumers maintains a policy of investigating all customer calls regarding
stray voltage and working with customers to address their concerns
including, when necessary, modifying the grounding of the customer's
service. At January 31, 1995, Consumers had 81 separate stray voltage
lawsuits pending.
In addition to the matters disclosed in these notes, Consumers and certain
of its subsidiaries are parties to certain lawsuits and administrative
proceedings before various courts and governmental agencies, arising from
the ordinary course of business involving personal injury and property
damage, contractual matters, environmental issues, federal and state
taxes, rates, licensing and other matters.
The ultimate effect of the proceedings discussed in this note is not
expected to have a material impact on Consumers' financial position or
results of operations.
13: Nuclear Matters
In 1993, the NRC approved the design of the spent fuel dry storage casks
now being used by Consumers at Palisades. Subsequently, the Attorney
General and certain other parties attempted to block Consumers' use of the
storage casks, alleging that the NRC had failed to comply adequately with
the procedural requirements of the Atomic Energy Act and the National
Environmental Policy Act. In January 1995, the U.S. Sixth Circuit Court
of Appeals rejected these allegations and upheld the NRC's rulemaking
action. The court found that the NRC's environmental assessment satisfied
National Environmental Policy Act requirements, and that a site-specific
environmental analysis concerning the use and operation of the storage
casks at Palisades was not required. As of February 28, 1995, Consumers
had loaded nine dry storage casks with spent nuclear fuel and expects to
load four additional casks prior to Palisades' 1995 refueling.
In the latter part of 1995, Consumers plans to unload and replace one of
the loaded casks. In a review of the cask manufacturer's quality
assurance program, Consumers detected indications of minor flaws in welds
in the steel liner of one of the loaded casks. Although testing has not
disclosed any leakage, Consumers has nevertheless decided to remove the
spent fuel and insert it in another cask. Consumers has examined
radiographs for all of its casks and has found all other welds acceptable.
In order to address concerns raised subsequent to the initial cask
loading, Consumers and the NRC each analyzed the effects of seismic and
other natural hazards on the support pad on which the casks are placed,
and concluded that the pad location is acceptable to support the casks.
The Low-Level Radioactive Waste Policy Act encourages the respective
states, individually or in cooperation with each other, to be responsible
for the disposal of low-level radioactive waste. Currently, a low-level
waste site does not exist in Michigan, and no other states' repositories
are available to Michigan generators of such waste. Consumers stores low-
level waste at its nuclear plant sites and plans to continue to do so
following final shutdown of the plants, if necessary, until a permanent
storage site is provided. Consumers currently estimates that a permanent
low-level radioactive waste disposal site will be available by the year
2027.
Consumers maintains insurance coverage against property damage, debris
removal, personal injury liability and other risks that are present at its
nuclear generating facilities. If certain loss events occur at its own or
other nuclear plants similarly insured, Consumers could be required to pay
maximum assessments of: $33 million in any one year to NML and NEIL; $79
million per event under the nuclear liability secondary financial
protection program, limited to $10 million per event in any one year; and
$6 million in the event of nuclear workers claiming bodily injury from
radiation exposure. Consumers considers the possibility of these
assessments to be remote.
In November 1993, Palisades returned to service following a planned
refueling and maintenance outage that had been extended due to several
unanticipated repairs (see Note 4). The results of an NRC review of
Consumers' performance at Palisades published shortly after the planned
outage showed a decline in performance ratings for the plant. To provide
NRC senior management with a more in-depth assessment of plant
performance, the NRC conducted a diagnostic evaluation inspection at
Palisades. The inspection, completed in June 1994, found certain
performance, operational and management deficiencies at Palisades. The
NRC acknowledged that the new Palisades senior management team, in place
since early 1994, had recognized and begun to address the deficiencies.
In August 1994, Consumers filed its response to the NRC's diagnostic
evaluation report and included both short- and long-term enhancements
planned to improve Palisades' performance. Acceptable performance at
Palisades will require continuing performance improvements and additional
expenditures at the plant, which have been included in Consumers' total
planned levels of expenditures.
As an NRC licensee, Consumers is required to make certain calculations and
report to the NRC about the continuing ability of the Palisades reactor
vessel to withstand postulated "pressurized thermal shock" events during
its remaining license life, in light of the embrittlement of reactor
vessel materials over time due to operation in a radioactive environment.
If the results of the calculation indicate that an NRC temperature
screening criterion will be exceeded, Consumers must determine what, if
any, plant modifications are necessary to avoid exceeding the screening
criterion and prevent potential reactor vessel failure as a result of
postulated pressurized thermal shock events. Analysis of recent data from
testing of similar materials indicates that the Palisades reactor vessel
could exceed the screening criterion prior to the year 2000. Consumers is
continuing to analyze alternative means to permit continued operation of
Palisades to the end of its license life in the year 2007. It is
currently estimated that expenditures for corrective action related to
this issue could total $20 million to $30 million. Consumers cannot
predict the outcome of these efforts.
14: Jointly Owned Utility Facilities
Consumers is responsible for providing its share of financing for the
jointly owned facilities. The following table indicates the extent of
Consumers' investment in jointly owned utility facilities:
In Millions
December 31 1994 1993
- ----------- ----- -----
Net investment
Ludington - 51% $119 $114
Campbell Unit 3 - 93.3% 337 349
Transmission lines - various 31 32
Accumulated depreciation
Ludington $ 76 $ 74
Campbell Unit 3 224 210
Transmission lines 11 11
15: Supplemental Cash Flow Information
For purposes of the Statement of Cash Flows, all highly liquid investments
with an original maturity of three months or less are considered cash
equivalents. Other cash flow activities and non-cash investing and
financing activities for the years ended December 31 were:
In Millions
1994 1993 1992
----- ----- -----
Cash transactions
Interest paid (net of amounts capitalized) $147 $177 $176
Income taxes paid (net of refunds) 34 90 6
Non-cash transactions
Nuclear fuel placed under capital lease $ 21 $ 28 $ 30
Other assets placed under capital leases 15 30 39
Capital leases refinanced - 42 -
Assumption of debt - - 15
Changes in other assets and liabilities as shown on the Consolidated
Statements of Cash Flows at December 31 are described below:
In Millions
1994 1993 1992
----- ----- -----
Sale of receivables, net $ (10) $ 60 $ 25
Accounts receivable (4) 19 30
Accrued revenue 24 (48) 91
Inventories (5) (32) 24
Accounts payable 19 (25) 21
Accrued refunds (3) (48) (143)
Other current assets and liabilities, net 12 (45) 38
Non-current deferred amounts, net (9) (7) (49)
----- ----- -----
$ 24 $(126) $ 37
===== ===== =====
16: Reportable Segments
The Consolidated Statements of Income show operating revenue and pretax
operating income by segments. These amounts include earnings (losses) from
investments accounted for by the equity method of $16 million, $6 million
and $(10) million for 1994, 1993 and 1992, respectively. Other segment
information follows:
In Millions
Years Ended December 31 1994 1993 1992
- ----------------------- ------- ------- -------
Depreciation, depletion and amortization
Electric $ 257 $ 241 $ 230
Gas 76 73 76
Other 2 2 1
------- ------- -------
$ 335 $ 316 $ 307
======= ======= =======
Identifiable assets
Electric (a) (b) $ 4,364 $ 4,100 $ 3,845
Gas (b) 1,673 1,628 1,574
Other (c) 772 823 1,177
------- ------- -------
$ 6,809 $ 6,551 $ 6,596
======= ======= =======
Capital expenditures (d)
Electric $ 358 $ 403 $ 390
Gas 134 158 116
------- ------- -------
$ 492 $ 561 $ 506
======= ======= =======
(a) Includes abandoned Midland investment of $147 million, $162 million
and $175 million for 1994, 1993 and 1992, respectively.
(b) Amounts include an attributed portion of Consumers' other common
assets to both the electric and gas utility businesses.
(c) Reclassified 1992 to include independent power production, which is no
longer significant enough for Consumers to report separately. Also, other
was reduced in 1993 by the sale of the remaining $309 million of MCV
Bonds.
(d) Includes capital leases for nuclear fuel and other assets and electric
DSM costs (see Statement of Cash Flows). Amounts also include an
attributed portion of Consumers' capital expenditures for plant and
equipment common to both the electric and gas utility businesses.
17: Related-Party Transactions
Consumers has an investment of $250 million in 10 shares of Enterprises'
preferred stock. Beginning in 1997, a five-year redemption program of $50
million per year will commence. In addition, Consumers has an investment
in approximately 3 million shares of CMS Energy common stock with a fair
value totaling $67 million (see Note 8) at December 31, 1994. As a result
of these two investments, Consumers received dividends on affiliates'
common and preferred stock totaling $17 million in 1994 and $16 million in
1993 and 1992. MGL, a wholly owned subsidiary of Consumers, was dissolved
in December 1994. As a result, MGL's $10 million promissory note to its
wholly owned subsidiary, CMS Midland, was replaced with a short-term note
from Consumers, in satisfaction of a covenant related to CMS Midland's
general partnership interest in the MCV Partnership.
Consumers purchases a portion of its gas from an affiliate, CMS NOMECO.
The amounts of purchases for the years ended 1994, 1993 and 1992 were
$1 million, $3 million and $3 million, respectively. In 1994, 1993 and
1992, Consumers purchased $48 million, $52 million and $36 million,
respectively, of electric generating capacity and energy from affiliates
of Enterprises. Consumers and its subsidiaries sold, stored and
transported natural gas and provided other services to the MCV Partnership
totaling approximately $13 million for 1994 and $14 million for 1993 and
1992. For additional discussion of related-party transactions with the
MCV Partnership and the FMLP, see Notes 3 and 19. Other related-party
transactions are immaterial.
18: Effects of the Ratemaking Process
The following regulatory assets (liabilities) which include both current
and non-current amounts, are reflected in the Consolidated Balance Sheets.
These assets represent probable future revenue to Consumers associated
with certain incurred costs as these costs are recovered through the
ratemaking process.
In Millions
December 31 1994 1993
- ----------- ------- -------
Postretirement benefits (Note 10) $ 503 $ 510
Income taxes (Note 5) 189 189
Abandoned Midland project (Note 4) 147 162
Trunkline settlement (Note 4) 85 117
DSM - deferred costs (Note 4) 71 71
Manufactured gas plant sites (Note 12) 47 -
Power purchase contract (Note 3) 30 -
Uranium enrichment facility (Note 4) 25 33
Other 31 39
------- -------
Total regulatory assets $ 1,128 $ 1,121
======= =======
Income taxes (Note 5) $ (205) $ (195)
DSM - deferred revenue (21) (17)
------- -------
Total regulatory liabilities $ (226) $ (212)
======= =======
At December 31, 1994, $864 million of Consumers' regulatory assets are
being recovered through rates being charged to customers over periods of
up to 18 years. Consumers anticipates MPSC approval for recovery of the
remaining amounts.
Consumers is experiencing increased competition, particularly in its
electric utility business. Municipalization and self-generation, among
other forms of competition, could restrict Consumers' ability to establish
rates sufficient to recover specific costs associated with its regulatory
assets.
19: Summarized Financial Information of Significant Related Energy
Supplier
Under the PPA with the MCV Partnership discussed in Note 3, Consumers'
1994 obligation to purchase electric capacity from the MCV Partnership was
approximately 15 percent of Consumers' owned and contracted capacity.
Summarized financial information of the MCV Partnership follows:
Statements of Income
In Millions
Years Ended December 31 1994 1993 1992
- ----------------------- ----- ----- -----
Operating revenue (a) $ 579 $ 548 $ 488
Operating expenses 378 362 315
----- ----- -----
Operating income 201 186 173
Other expense, net 183 189 190
----- ----- -----
Net income (loss) $ 18 $ (3) $ (17)
===== ===== =====
Balance Sheets
In Millions
December 31 1994 1993
- ----------- ------ ------
Assets
Current assets (a) $ 206 $ 181
Property, plant and equipment, net 2,012 2,073
Other assets 154 146
------ ------
$2,372 $2,400
====== ======
Liabilities and Partners' Equity
Current liabilities $ 218 $ 198
Long-term debt and other non-current liabilities (b) 2,081 2,147
Partners' equity (c) 73 55
------ ------
$2,372 $2,400
====== ======
(a) Revenue from Consumers totaled $534 million, $505 million and $444
million for 1994, 1993 and 1992, respectively. At December 31, 1994, 1993
and 1992, $48 million, $44 million and $38 million, respectively, were
receivable from Consumers.
(b) FMLP is a beneficiary of an owner trust that is the lessor in a
long-term direct finance lease with the lessee, MCV Partnership.
CMS Holdings holds a 46.4 percent ownership interest in FMLP (see Note 3).
At December 31, 1994 and 1993, lease obligations of $1.7 billion were owed
to the owner trust of which FMLP is the sole beneficiary. CMS Holdings'
share of the interest and principal portion for the 1994 lease payments
was $62 million and $20 million, respectively, and for the 1993 lease
payments was $63 million and $16 million, respectively. The lease
payments service $1.2 billion in non-recourse debt outstanding as of
December 31, 1994 and 1993 of the owner-trust whose beneficiary is FMLP.
FMLP's debt is secured by the MCV Partnership's lease obligations, assets,
and operating revenues. For 1994 and 1993, the owner-trust whose
beneficiary is FMLP made debt payments of $175 million and $172 million,
respectively. The 1993 amounts included $10 million of principal and $25
million of interest on the MCV Bonds held by Consumers through December
1993.
(c) CMS Midland's recorded investment in the MCV Partnership includes
capitalized interest, which is being amortized to expense over the life of
its investment in the MCV Partnership.
133
ARTHUR ANDERSEN LLP
Report of Independent Public Accountants
----------------------------------------
To Consumers Power Company:
We have audited the accompanying consolidated balance sheets and
consolidated statements of long-term debt and preferred stock of CONSUMERS
POWER COMPANY (a Michigan corporation and wholly owned subsidiary of CMS
Energy Corporation) and subsidiaries as of December 31, 1994 and 1993, and
the related consolidated statements of income, common stockholder's
equity, and cash flows for each of the three years in the period ended
December 31, 1994. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also
includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
Consumers Power Company and subsidiaries as of December 31, 1994 and 1993,
and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 1994 in conformity with
generally accepted accounting principles.
As discussed in Note 8 to the consolidated financial statements, effective
January 1, 1994, the Company changed its method of accounting for certain
investments in debt and equity securities.
ARTHUR ANDERSEN LLP
Detroit, Michigan,
January 31, 1995 (except with respect to
certain matters discussed in Notes 2, 3, 7 and 13
to the consolidated financial statements as to
which the date is March 1, 1995).
134
Quarterly Financial Information Consumers Power Company
In Millions
1994 (Unaudited) 1993 (Unaudited)
Quarters Ended March 31 June 30 Sept. 30 Dec. 31 March 31 June 30 Sept. 30 Dec. 31
Operating revenue $1,074 $734 $705 $843 $988 $681 $702 $872
Pretax operating income $172 $105 $117 $89 $156 $74 $101 $104
Net income $85 $46 $52 $43 $78 $26 $45 $49
Preferred stock dividends $3 $7 $7 $7 $3 $3 $3 $2
Net income after preferred
stock dividends $82 $39 $45 $36 $75 $23 $42 $47
135
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.
Consumers
Consumers' definitive Proxy Statement, except for the organization and
compensation committee report contained therein, is incorporated by
reference herein. See also Item 1. BUSINESS for information pursuant to
Item 10.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
AND REPORTS ON FORM 8-K.
(a)(1) Financial Statements and Reports of Independent Public
Accountants for CMS Energy and Consumers are listed in Item 8
in the Index to Financial Statements, and are incorporated by
reference herein.
(a)(2) Financial Statement Schedules and Reports of Independent Public
Accountants for CMS Energy and Consumers are listed after the
Exhibits in the Index to Financial Statement Schedules, and are
incorporated by reference herein.
(a)(3) Exhibits for CMS Energy and Consumers are listed after Item (c)
below and are incorporated by reference herein.
(b) Reports on Form 8-K for CMS Energy and Consumers.
CMS Energy
Current Reports dated October 5, 1994, November 21, 1994,
January 10, 1995 and February 2, 1995 covering matters reported
pursuant to Item 5. Other Events.
Consumers
Current reports dated October 5, 1994, November 21, 1994,
January 10, 1995 and February 2, 1995 covering matters reported
pursuant to Item 5. Other Events.
(c) Exhibits, including those incorporated by reference (see also
Exhibit volume).
136
The following exhibits are applicable to CMS Energy and Consumers except
where otherwise indicated "CMS ONLY":
CMS Energy
and Consumers
Exhibit Numbers
- ---------------
(1)-(2) - Not applicable.
(3)(a) (CMS ONLY) - Articles of Incorporation of CMS Energy
Corporation, as Amended. (Designated in CMS Energy
Corporation's Form S-8 dated June 30, 1989, File
No. 1-9513, as Exhibit (4).)
(3)(b) (CMS ONLY) - Copy of the By-Laws of CMS Energy Corporation.
(3)(c) - Restated Articles of Incorporation of Consumers
Power Company.
(3)(d) - Copy of By-Laws of Consumers Power Company.
(4)(a) - Composite Working Copy of Indenture dated as of
September 1, 1945, between Consumers Power Company
and Chemical Bank (successor to Manufacturers
Hanover Trust Company), as Trustee, including
therein indentures supplemental thereto through the
Forty-third Supplemental Indenture dated as of
May 1, 1979. (Designated in Consumers Power
Company's Registration No. 2-65973 as
Exhibit (b)(1)-4.)
Indentures Supplemental thereto:
Consumers
Power Company
Sup Ind/Dated as of File Reference Exhibit
------------------- ---------------- -------
65th 02/15/88 Form 8-K dated
Feb 18, 1988
File No 1-5611 (4)
66th 04/15/88 Form 10-Q for
quarter ended
March 31, 1988
File No 1-5611 (4)(d)
67th 11/15/89 Reg No 33-31866 (4)(d)
68th 06/15/93 Reg No 33-41126 (4)(c)
69th 09/15/93 Form 8-K dated
September 21, 1993
File No 1-5611 (4)
(4)(b) (CMS ONLY) - Indenture between CMS Energy Corporation and NBD
Bank, National Association, as Trustee.
(Designated in CMS Energy's Form S-3 Registration
Statement filed May 1, 1992, File No. 33-47629, as
Exhibit (4)(a).)
First Supplemental Indenture dated as of October 1,
1992 between CMS Energy Corporation and NBD Bank,
National Association, as Trustee. (Designated in
CMS Energy's Form 8-K dated October 1, 1992, File
No. 1-9513, as Exhibit (4).)
Second Supplemental Indenture dated as of
October 1, 1992 between CMS Energy Corporation and
NBD Bank, National Association, as Trustee.
(Designated in CMS Energy's Form 8-K dated
October 1, 1992, File No. 1-9513, as Exhibit (4).)
(4)(c) (CMS ONLY) - Indenture between CMS Energy Corporation and Chase
Manhattan Bank (National Association), as Trustee,
dated as of January 15, 1994. (Designated in
CMS Energy's Form 8-K dated March 29, 1994, File
No. 1-9513, as Exhibit (4a).)
First Supplemental Indenture dated as of
January 20, 1994 between CMS Energy Corporation and
Chase Manhattan Bank (National Association), as
Trustee. (Designated in CMS Energy's Form 8-K
dated March 29, 1994, File No. 1-9513, as
Exhibit (4b).)
(5)-(9) - Not applicable.
(10)(a) (CMS ONLY) - Credit Agreement dated as of July 29, 1994, among
CMS Energy Corporation, the Banks, the Co-Agents,
the Documentation Agent and the Operational Agent,
all as defined therein, and the Exhibits thereto.
(Designated in CMS Energy Corporation's Form 10-Q
for the quarter ended June 30, 1994, File
No. 1-9513, as Exhibit (4).)
(10)(b) - Employment Agreement dated as of August 1, 1990
among Consumers Power Company, CMS Energy
Corporation and William T. McCormick, Jr.
(Designated in CMS Energy Corporation's Form 10-K
for the year ended December 31, 1990, File
No. 1-9513, as Exhibit (10)(c).)
(10)(c) - Employment contract effective as of March 1, 1987
among CMS Energy Corporation, Consumers Power
Company and S. Kinnie Smith, Jr. (Designated in
Consumers Power Company's Form 10-K for the year
ended December 31, 1987, File No. 1-5611, as
Exhibit (10)(g).)
(10)(d) - Employment Agreement effective as of June 15, 1988
among Consumers Power Company, CMS Energy
Corporation and Victor J. Fryling. (Designated in
Consumers Power Company's Form 10-K for the year
ended December 31, 1988, File No. 1-5611, as
Exhibit (10)(i).)
(10)(e) - Employment Agreement dated May 26, 1989 between
Consumers Power Company and Michael G. Morris.
(Designated in Consumers Power Company's Form 10-K
for the year ended December 31, 1990, File
No. 1-5611, as Exhibit (10)(f).)
(10)(f) - Employment Agreement dated May 26, 1989 between
Consumers Power Company and David A. Mikelonis.
(Designated in Consumers Power Company's Form 10-K
for the year ended December 31, 1991, File No. 1-
5611, as Exhibit 10(h).)
(10)(g) - Employment Agreement dated May 26, 1989 among
Consumers Power Company, CMS Energy Corporation and
John W. Clark. (Designated in CMS Energy
Corporation's Form 10-K for the year ended
December 31, 1990, File No. 1-9513, as
Exhibit (10)(f).)
(10)(h) - Employment Agreement dated March 25, 1992 between
Consumers Power Company, CMS Energy Corporation and
Alan M. Wright. (Designated in Consumers Power
Company's Form 10-K for the year ended December 31,
1992, File No. 1-5611, as Exhibit 10(j).)
(10)(i) - Employment Agreement dated March 25, 1992 between
Consumers Power Company and Paul A. Elbert.
(Designated in Consumers Power Company's Form 10-K
for the year ended December 31, 1992, File
No. 1-5611, as Exhibit 10(k).)
(10)(j) - Consumers Power Company's Executive Stock Option
and Stock Appreciation Rights Plan effective
December 1, 1989. (Designated in Consumers Power
Company's Form 10-K for the year ended December 31,
1990, File No. 1-5611, as Exhibit (10)(g).)
(10)(k) - CMS Energy Corporation's Performance Incentive
Stock Plan effective as of December 1, 1989.
(Designated in CMS Energy Corporation's Form 10-K
for the year ended December 31, 1990, File
No. 1-9513, as Exhibit (10)(h).)
(10)(l) - CMS Deferred Salary Savings Plan effective
January 1, 1994. (Designated in CMS Energy
Corporation's Form 10-K for the year ended
December 31, 1993, File No. 1-9513, as
Exhibit (10)(m).)
(10)(m) - Consumers Power Company's Executive Incentive
Compensation Plan effective February 1993, as
amended March 1994. (Designated in Consumers Power
Company's Form 10-K for the year ended December 31,
1993, File No. 1-5611, as Exhibit (10)(n).)
(10)(n) - Consumers Power Company's Supplemental Executive
Retirement Plan effective November 1, 1990.
(Designated in Consumers Power Company's Form 10-K
for the year ended December 31, 1993, File
No. 1-5611, as Exhibit (10)(o).)
(10)(o) - Senior Trust Indenture, Leasehold Mortgage and
Security Agreement dated as of June 1, 1990 between
The Connecticut National Bank and United States
Trust Company of New York. (Designated in Midland
Cogeneration Venture Limited Partnership's Form S-1
filed November 23, 1990, File No. 33-37977, as
Exhibit 4.1.)
Indenture Supplemental thereto:
Supplement No. 1 dated as of June 1, 1990.
(Designated in Midland Cogeneration Venture Limited
Partnership's Form S-1 filed November 23, 1990,
File No. 33-37977, as Exhibit 4.2.)
(10)(p) - Collateral Trust Indenture dated as of June 1, 1990
among Midland Funding Corporation I, Midland
Cogeneration Venture Limited Partnership and United
States Trust Company of New York, Trustee.
(Designated in CMS Energy Corporation's Form 10-Q
for the quarter ended June 30, 1990, File
No. 1-9513, as Exhibit (28)(b).)
Indenture Supplemental thereto:
Supplement No. 1 dated as of June 1, 1990.
(Designated in Midland Cogeneration Venture Limited
Partnership's Form S-1 filed November 23, 1990,
File No. 33-37977, as Exhibit 4.4.)
(10)(q) - Amended and Restated Investor Partner Tax
Indemnification Agreement dated as of June 1, 1990
among Investor Partners, CMS Midland Holdings
Corporation as Indemnitor and CMS Energy
Corporation as Guarantor. (Designated in
CMS Energy Corporation's Form 10-K for the year
ended December 31, 1990, File No. 1-9513, as
Exhibit (10)(v).)
(10)(r) - Environmental Agreement dated as of June 1, 1990
made by CMS Energy Corporation to The Connecticut
National Bank and Others. (Designated in
CMS Energy Corporation's Form 10-K for the year
ended December 31, 1990, File No. 1-9513, as
Exhibit (10)(y) and Form 10-Q for the quarter ended
September 30, 1991, File No. 1-9513, as
Exhibit (19)(d).)**
(10)(s) - Indemnity Agreement dated as of June 1, 1990 made
by CMS Energy Corporation to Midland Cogeneration
Venture Limited Partnership. (Designated in
CMS Energy Corporation's Form 10-K for the year
ended December 31, 1990, File No. 1-9513, as
Exhibit (10)(z).)**
(10)(t) - Environmental Agreement dated as of June 1, 1990
made by CMS Energy Corporation to United States
Trust Company of New York, Meridian Trust Company,
each Subordinated Collateral Trust Trustee and
Holders from time to time of Senior Bonds and
Subordinated Bonds and Participants from time to
time in Senior Bonds and Subordinated Bonds.
(Designated in CMS Energy Corporation's Form 10-K
for the year ended December 31, 1990, File
No. 1-9513, as Exhibit (10)(aa).)**
(10)(u) - Amended and Restated Participation Agreement dated
as of June 1, 1990 among Midland Cogeneration
Venture Limited Partnership, Owner Participant, The
Connecticut National Bank, United States Trust
Company, Meridian Trust Company, Midland Funding
Corporation I, Midland Funding Corporation II, MEC
Development Corporation and Institutional Senior
Bond Purchasers. (Designated in Midland
Cogeneration Venture Limited Partnership's Form S-1
filed November 23, 1990, File No. 33-37977, as
Exhibit 4.13.)
Amendment No. 1 dated as of July 1, 1991.
(Designated in Consumers Power Company's Form 10-K
for the year ended December 31, 1991, File
No. 1-5611, as Exhibit (10)(w).)
(10)(v) - Power Purchase Agreement dated as of July 17, 1986
between Midland Cogeneration Venture Limited
Partnership and Consumers Power Company.
(Designated in Midland Cogeneration Venture Limited
Partnership's Form S-1 filed November 23, 1990,
File No. 33-37977, as Exhibit 10.4.)
Amendments thereto:
Amendment No. 1 dated September 10, 1987.
(Designated in Midland Cogeneration Venture Limited
Partnership's Form S-1 filed November 23, 1990,
File No. 33-37977, as Exhibit 10.5.)
Amendment No. 2 dated March 18, 1988. (Designated
in Midland Cogeneration Venture Limited
Partnership's Form S-1 filed November 23, 1990,
File No. 33-37977, as Exhibit 10.6.)
Amendment No. 3 dated August 28, 1989. (Designated
in Midland Cogeneration Venture Limited
Partnership's Form S-1 filed November 23, 1990,
File No. 33-37977, as Exhibit 10.7.)
Amendment No. 4A dated May 25, 1989. (Designated
in Midland Cogeneration Venture Limited
Partnership's Form S-1 filed November 23, 1990,
File No. 33-37977, as Exhibit 10.8.)
(10)(w) - Request for Approval of Settlement Proposal to
Resolve MCV Cost Recovery Issues and Court Remand,
filed with the Michigan Public Service Commission
on July 7, 1992, MPSC Case No. U-10127.
(Designated in CMS Energy Corporation's and
Consumers Power Company's Forms 10-K for the year
ended December 31, 1991 as amended by Form 8 dated
July 15, 1992 as Exhibit (28).)
(10)(x) - Settlement Proposal Filed on July 7, 1992 as
Revised on September 8, 1992 by Filing with the
Michigan Public Service Commission. (Designated in
CMS Energy Corporation's and Consumers Power
Company's Forms 8-K dated September 8, 1992 as
Exhibit (28).)
(10)(y) - Michigan Public Service Commission Order Dated
March 31, 1993, Approving with Modifications the
Settlement Proposal Filed on July 7, 1992, as
Revised on September 8, 1992. (Designated in
CMS Energy Corporation's and Consumers Power
Company's Forms 10-K for the year ended
December 31, 1992 as Exhibit (10)(cc).)
(10)(z) - Unwind Agreement dated as of December 10, 1991 by
and among CMS Energy Corporation, Midland Group,
Ltd., Consumers Power Company, CMS Midland, Inc.,
MEC Development Corp. and CMS Midland Holdings
Company. (Designated in Consumers Power Company's
Form 10-K for the year ended December 31, 1991,
File No. 1-5611, as Exhibit (10)(y).)
(10)(aa) - Stipulated AGE Release Amount Payment Agreement
dated as of June 1, 1990, among CMS Energy
Corporation, Consumers Power Company and The Dow
Chemical Company. (Designated in Consumers Power
Company's Form 10-K for the year ended December 31,
1991, File No. 1-5611, as Exhibit (10)(z).)
(10)(bb) - Parent Guaranty dated as of June 14, 1990 from
CMS Energy Corporation to MCV, each of the Owner
Trustees, the Indenture Trustees, the Owner
Participants and the Initial Purchasers of Senior
Bonds in the MCV Sale Leaseback transaction, and
MEC Development. (Designated in Consumers Power
Company's Form 10-K for the year ended December 31,
1991, File No. 1-5611, as Exhibit (10)(aa).)**
(11)-(12) - Not applicable.
(13) - Not Applicable.
(14)-(20) - Not applicable.
(21)(a) (CMS ONLY) - Subsidiaries of CMS Energy Corporation.
(21)(b) - Subsidiaries of Consumers Power Company.
(22) - Not applicable.
(23) - Consents of experts and counsel.
(24)(a) - Power of Attorney for CMS Energy Corporation.
(24)(b) - Power of Attorney for Consumers Power Company.
(25)-(26) - Not applicable.
(27)(a) - Financial Data Schedule UT for CMS Energy
Corporation.
(27)(b) - Financial Data Schedule UT for Consumers Power
Company.
(28) - Not applicable
* Five copies of this exhibit have been signed by, or on behalf of, each
of five Owner Participants. With regard to each of the agreements, each
copy is substantially identical in all material respects except as to the
parties thereto. Therefore, pursuant to Instruction 2, Item 601(a) of
Regulation S-K, CMS Energy Corporation and Consumers Power Company are
filing a copy of only one such document.
** Obligations of only CMS Holdings and CMS Midland, second tier
subsidiaries of Consumers, and of CMS Energy but not of Consumers.
Exhibits listed above which have heretofore been filed with the Securities
and Exchange Commission pursuant to various acts administered by the
Commission, and which were designated as noted above, are hereby
incorporated herein by reference and made a part hereof with the same
effect as if filed herewith.
143
Index to Financial Statement Schedules
Page
Schedule II Valuation and Qualifying Accounts and Reserves
1994, 1993 and 1992:
CMS Energy Corporation . . . . . . . . . . . . . 144
Consumers Power Company. . . . . . . . . . . . . 145
Report of Independent Public Accountants
CMS Energy Corporation . . . . . . . . . . . . . 146
Consumers Power Company. . . . . . . . . . . . . 147
Schedules other than those listed above are omitted because they are
either not required, not applicable or the required information is shown
in the financial statements or notes thereto.
Columns omitted from schedules filed have been omitted because the
information is not applicable.
144
CMS ENERGY CORPORATION
Schedule II - Valuation and Qualifying Accounts and Reserves
Years Ended December 31, 1994, 1993 and 1992
(Millions of Dollars)
Balance at Charged Charged to Balance
Beginning to other at End
Description of Period Expense Accounts Deductions of Period
Accumulated provision for
uncollectible accounts
(substantially all
Consumers Power Company):
1994 $4 $12 - $11(a) $5
1993 $5 $ 9 - $10(a) $4
1992 $5 $11 - $11(a) $5
Reserve for rights to
additional MCV Bonds:
1994 - - - - -
1993 - - - - -
1992 $366 - - $366 -
(a) Accounts receivable written off including net uncollectible amounts of $10 in 1994, $8 in 1993, and
$10 in 1992 charged directly to operating expense and credited to accounts receivable.
145
CONSUMERS POWER COMPANY
Schedule II - Valuation and Qualifying Accounts and Reserves
Years Ended December 31, 1994, 1993 and 1992
(Millions of Dollars)
Balance at Charged Charged to Balance
Beginning to other at End
Description of Period Expense Accounts Deductions of Period
Accumulated provision for
uncollectible accounts:
1994 $4 $11 - $11(a) $4
1993 $5 $ 9 - $10(a) $4
1992 $5 $11 - $11(a) $5
Reserve for rights to
additional MCV Bonds:
1994 - - - - -
1993 - - - - -
1992 $366 - - $366 -
(a) Accounts receivable written off including net uncollectible amounts of $10 in 1994, $8 in 1993, and $10 in
1992 charged directly to operating expense and credited to accounts receivable.
146
ARTHUR ANDERSEN LLP
Report of Independent Public Accountants
----------------------------------------
To CMS Energy Corporation:
We have audited in accordance with generally accepted auditing standards,
the consolidated financial statements included in CMS Energy Corporation's
1994 Annual Report to shareholders incorporated by reference in this Form
10-K, and have issued our report thereon dated January 31, 1995 (except
with respect to certain matters discussed in Notes 2, 3, 7 and 13 to the
consolidated financial statements as to which the date is March 1, 1995).
Our audit was made for the purpose of forming an opinion on those basic
consolidated financial statements taken as a whole. The schedule listed
in Item 14(a) is the responsibility of the Company's management and is
presented for purposes of complying with the Securities and Exchange
Commission's rules and is not part of the basic consolidated financial
statements. This schedule has been subjected to the auditing procedures
applied in the audit of the basic consolidated financial statements and,
in our opinion, fairly states in all material respects the financial data
required to be set forth therein in relation to the basic consolidated
financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Detroit, Michigan,
January 31, 1995.
147
ARTHUR ANDERSEN LLP
Report of Independent Public Accountants
----------------------------------------
To Consumers Power Company:
We have audited in accordance with generally accepted auditing standards,
the consolidated financial statements included in Consumers Power
Company's 1994 Annual Report to shareholders incorporated by reference in
this Form 10-K, and have issued our report thereon dated January 31, 1995
(except with respect to certain matters discussed in Notes 2, 3, 7 and 13
to the consolidated financial statements as to which the date is March 1,
1995). Our audit was made for the purpose of forming an opinion on those
statements taken as a whole. The schedule listed in Item 14(a) is the
responsibility of the company's management and is presented for the
purpose of complying with the Securities and Exchange Commission's rules
and is not part of the basic consolidated financial statements. This
schedule has been subjected to the auditing procedures applied in the
audit of the basic consolidated financial statements and, in our opinion,
fairly states in all material respects the financial data required to be
set forth therein in relation to the basic consolidated financial
statements taken as a whole.
ARTHUR ANDERSEN LLP
Detroit, Michigan,
January 31, 1995.
148
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, CMS Energy Corporation has duly caused this Annual
Report to be signed on its behalf by the undersigned, thereunto duly
authorized, on the 15th day of March 1995.
CMS ENERGY CORPORATION
By William T. McCormick, Jr.
---------------------------
William T. McCormick, Jr.
Chairman of the Board
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Annual Report has been signed below by the following persons on behalf of
CMS Energy Corporation and in the capacities and on the 15th day of March
1995.
Signature Title
- ----------------------------------- ----------------------------------
(i) Principal executive officer:
Chairman of the Board,
Chief Executive Officer
William T. McCormick, Jr. and Director
- -----------------------------------
William T. McCormick, Jr.
(ii) Principal financial officer:
Senior Vice President,
Chief Financial Officer
A M Wright and Treasurer
- -----------------------------------
Alan M. Wright
(iii) Controller or principal
accounting officer:
Vice President, Controller
P. D. Hopper and Chief Accounting Officer
- -----------------------------------
Preston D. Hopper
(iv) A majority of the Directors
including those named above:
James J. Duderstadt* Director
- -----------------------------------
James J. Duderstadt
149
Signature Title
- ----------------------------------- ----------------------------------
K R Flaherty* Director
- -----------------------------------
Kathleen R. Flaherty
Victor J. Fryling* Director
- -----------------------------------
Victor J. Fryling
Earl D. Holton* Director
- -----------------------------------
Earl D. Holton
Lois A. Lund* Director
- -----------------------------------
Lois A. Lund
Frank H. Merlotti* Director
- -----------------------------------
Frank H. Merlotti
W. U. Parfet* Director
- -----------------------------------
William U. Parfet
Percy A. Pierre* Director
- -----------------------------------
Percy A. Pierre
S. Kinnie Smith, Jr.* Director
- -----------------------------------
S. Kinnie Smith, Jr.
Robert D. Tuttle* Director
- -----------------------------------
Robert D. Tuttle
Kenneth Whipple* Director
- -----------------------------------
Kenneth Whipple
John B. Yasinsky* Director
- -----------------------------------
John B. Yasinsky
* By Thomas A. McNish
----------------------------------
Thomas A. McNish, Attorney-in-Fact
150
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Consumers Power Company has duly caused this Annual
Report to be signed on its behalf by the undersigned, thereunto duly
authorized, on the 15th day of March 1995.
CONSUMERS POWER COMPANY
By William T. McCormick, Jr.
-----------------------------
William T. McCormick, Jr.
Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Annual Report has been signed below by the following persons on behalf of
Consumers Power Company and in the capacities and on the 15th day of March
1995.
Signature Title
- ----------------------------------- ----------------------------------
(i) Principal executive officer:
President and
Michael G. Morris Chief Executive Officer
- -----------------------------------
Michael G. Morris
(ii) Principal financial officer:
Senior Vice President and
A M Wright Chief Financial Officer
- -----------------------------------
Alan M. Wright
(iii) Controller or principal
accounting officer:
Vice President and
Dennis DaPra Controller
- -----------------------------------
Dennis DaPra
(iv) A majority of the Directors
including those named above:
James J. Duderstadt* Director
- -----------------------------------
James J. Duderstadt
151
Signature Title
- ----------------------------------- ----------------------------------
K R Flaherty* Director
- -----------------------------------
Kathleen R. Flaherty
Victor J. Fryling* Director
- -----------------------------------
Victor J. Fryling
Earl D. Holton* Director
- -----------------------------------
Earl D. Holton
Lois A. Lund* Director
- -----------------------------------
Lois A. Lund
William T. McCormick, Jr.* Director
- -----------------------------------
William T. McCormick, Jr.
Frank H. Merlotti* Director
- -----------------------------------
Frank H. Merlotti
W. U. Parfet* Director
- -----------------------------------
William U. Parfet
Percy A. Pierre* Director
- -----------------------------------
Percy A. Pierre
S. Kinnie Smith, Jr.* Director
- -----------------------------------
S. Kinnie Smith, Jr.
Robert D. Tuttle* Director
- -----------------------------------
Robert D. Tuttle
Kenneth Whipple* Director
- -----------------------------------
Kenneth Whipple
John B. Yasinsky* Director
- -----------------------------------
John B. Yasinsky
*By Thomas A. McNish
----------------------------------
Thomas A. McNish, Attorney-in-Fact