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FORM 10-K
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission Registrant; State of Incorporation; IRS Employer
File Number Address; and Telephone Number Identification No.
1-9513 CMS ENERGY CORPORATION 38-2726431
(A Michigan Corporation)
Fairlane Plaza South, Suite 1100
330 Town Center Drive
Dearborn, Michigan 48126
(313)436-9200
1-5611 CONSUMERS ENERGY COMPANY 38-0442310
(A Michigan Corporation)
212 West Michigan Avenue
Jackson, Michigan 49201
(517)788-0550
Securities registered pursuant to Section 12(b) of the Act:
Name of Each
Exchange on
Registrant Title of Class Which Registered
New York
CMS Energy Corporation Common Stock, $.01 par value Stock Exchange
New York
Class G Common Stock, no par value Stock Exchange
Consumers Energy Company Listed on inside cover
Consumers Power Company 8.36% Trust Originated New York
Financing I Preferred Securities Stock Exchange
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. [ ]
2
Consumers Energy Company securities registered pursuant to Section 12(b)
of the Act:
PREFERRED STOCK - Cumulative FIRST MORTGAGE BONDS:
No par value: 6-7/8% Series due 1998
$2.08 Series 6-5/8% Series due 1998
7-1/2% Series due 2001
$100 par value: 7-1/2% Series due 2002
$4.16 Series $7.68 Series
$4.50 Series $7.72 Series
$7.45 Series $7.76 Series
These securities are listed on the New York Stock Exchange.
The aggregate market value of the voting stock of CMS Energy Corporation
held by non-affiliates was $3,258,739,364 based on the closing sale price
of $32-3/4 per share for the 94,968,080 common shares, $.01 par value
CMS Energy Common Stock and $18-3/4 per share for the 7,921,853 common
shares, no par value Class G Common Stock, each outstanding on
February 28, 1997.
CMS Energy held all 84,108,789 outstanding common shares, $10 par value,
of Consumers Energy Company, and the aggregate market value of the voting
preferred stock of Consumers held by non-affiliates was $141,288,486 based
on the closing sale prices shown below.
Aggregate market value of Consumers' voting stock held by non-affiliates.
Number Shares Transaction
Type of Stock Outstanding Price/Share Date Market Value
(2/28/97)
Preferred:
$4.16 68,451 $57 2/27/97 $ 3,901,707
4.50 373,148 58 2/28/97 21,642,584
7.45 379,549 96 2/28/97 36,436,704
7.68 207,565 97 2/26/97 20,133,805
7.72 289,642 99 2/18/97 28,674,558
7.76 308,072 99 2/28/97 30,499,128
--------- ------------
Total 1,626,427 $141,288,486
========= ============
Documents incorporated by reference:
The Registrants' proxy statements relating to the 1997 annual meetings of
shareholders to be held May 27, 1997, are incorporated by reference in
Part III, except for the organization and compensation committee report
and cumulative total return performance graph contained therein.
3
CMS ENERGY CORPORATION
and
CONSUMERS ENERGY COMPANY
ANNUAL REPORTS ON FORM 10-K
TO THE SECURITIES AND EXCHANGE COMMISSION
FOR THE YEAR ENDED DECEMBER 31, 1996
This combined Form 10-K is separately filed by CMS Energy Corporation and
Consumers Energy Company. Information contained herein relating to each
individual registrant is filed by such registrant on its own behalf.
Accordingly, except for its subsidiaries, Consumers Energy Company makes
no representation as to information relating to any other companies
affiliated with CMS Energy Corporation.
TABLE OF CONTENTS
Page
PART I
Item 1. Business. . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Item 2. Properties. . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . 37
Item 4. Submission of Matters to a Vote of Security Holders . . . . . . 40
PART II
Item 5. Market for CMS Energy's and Consumers' Common Equity and
Related Stockholder Matters. . . . . . . . . . . . . . . . . 41
Item 6. Selected Financial Data . . . . . . . . . . . . . . . . . . . . 41
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations. . . . . . . . . . . . . . . . . . 41
Item 8. Financial Statements and Supplementary Data . . . . . . . . . . 42
Item 9. Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure . . . . . . . . . . . . . . . . . .140
PART III
Item 10. Directors and Executive Officers of CMS Energy and Consumers. .140
Item 11. Executive Compensation. . . . . . . . . . . . . . . . . . . . .140
Item 12. Security Ownership of Certain Beneficial Owners and
Management . . . . . . . . . . . . . . . . . . . . . . . . .140
Item 13. Certain Relationships and Related Transactions. . . . . . . . .140
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K. . . . . . . . . . . . . . . . . . . . . . . . .140
4
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5
GLOSSARY
Certain terms used in the text and financial statements are defined below.
ABATE . . . . . . . . . . . . Association of Businesses Advocating Tariff
Equity
ABB . . . . . . . . . . . . . ABB Energy Ventures, Inc.
ALJ . . . . . . . . . . . . . Administrative Law Judge
AMT . . . . . . . . . . . . . Alternative minimum tax
Articles. . . . . . . . . . . Articles of Incorporation
Attorney General. . . . . . . Michigan Attorney General
bcf . . . . . . . . . . . . . Billion cubic feet
Big Rock. . . . . . . . . . . Big Rock Point nuclear power plant, owned by
Consumers
Board of Directors. . . . . . Board of Directors of CMS Energy
Btu . . . . . . . . . . . . . British thermal unit
Class G Common Stock. . . . . One of two classes of common stock of
CMS Energy, no par value, which reflects the
separate performance of the Consumers Gas
Group
Clean Air Act . . . . . . . . Federal Clean Air Act as amended on November
15, 1990
Cherokee. . . . . . . . . . . Cherokee Gas Processing, a partnership of
CMS Gas Transmission and Heritage Gas
Services of Tulsa
CMS Electric and Gas. . . . . CMS Electric and Gas Company, a subsidiary
of Enterprises
CMS Electric Marketing. . . . CMS Electric Marketing Company, a subsidiary
of Enterprises
CMS Energy. . . . . . . . . . CMS Energy Corporation
CMS Energy Common Stock . . . One of two classes of common stock of
CMS Energy, par value $.01 per share
CMS Gas Marketing . . . . . . CMS Gas Marketing Company, a subsidiary of
Enterprises
CMS Gas Transmission. . . . . CMS Gas Transmission and Storage Company, a
subsidiary of Enterprises
CMS Generation. . . . . . . . CMS Generation Co., a subsidiary of
Enterprises
CMS Holdings. . . . . . . . . CMS Midland Holdings Company, a subsidiary
of Consumers
CMS Midland . . . . . . . . . CMS Midland Inc., a subsidiary of Consumers
CMS MST . . . . . . . . . . . CMS Marketing, Services and Trading Company,
a subsidiary of Enterprises
CMS NOMECO. . . . . . . . . . CMS NOMECO Oil & Gas Co., a subsidiary of
Enterprises
Common Stock. . . . . . . . . CMS Energy Common Stock and Class G Common
Stock
Consumers . . . . . . . . . . Consumers Energy Company (formerly Consumers
Power Company), a subsidiary of CMS Energy
Consumers Gas Group . . . . . The gas distribution, storage and
transportation businesses currently
conducted by Consumers and Michigan Gas
Storage
Court of Appeals. . . . . . . Michigan Court of Appeals
CTM . . . . . . . . . . . . . Centrales Termicas Mendoza, an indirect
subsidiary of CMS Generation
Detroit Edison. . . . . . . . The Detroit Edison Company
DOE . . . . . . . . . . . . . U.S. Department of Energy
Dow . . . . . . . . . . . . . The Dow Chemical Company
DSM . . . . . . . . . . . . . Demand-side management
EDEER S.A.. . . . . . . . . . Empresa Distribuidora de Electricidad de
Entre Rios S. A., the electric distribution
utility in Entre Rios Province, Argentina
Energy Act. . . . . . . . . . Energy Policy Act of 1992
Enterprises . . . . . . . . . CMS Enterprises Company, a subsidiary of
CMS Energy
FASB. . . . . . . . . . . . . Financial Accounting Standards Board
FERC. . . . . . . . . . . . . Federal Energy Regulatory Commission
FMLP. . . . . . . . . . . . . First Midland Limited Partnership
GCR . . . . . . . . . . . . . Gas cost recovery
General Motors. . . . . . . . General Motors Corporation
GTNs. . . . . . . . . . . . . CMS Energy General Term Notes(Registered
Trademark), $250 million Series A, $125
million Series B and $150 million Series C
GVK . . . . . . . . . . . . . GVK Industries, the developer of an
independent power project in Jegurupadu,
Andhra Pradesh, India
Huron . . . . . . . . . . . . Huron Hydrocarbons, Inc., a subsidiary of
Consumers
Hydra-Co. . . . . . . . . . . Hydra-Co Enterprises, Inc., a subsidiary of
CMS Generation
ITC . . . . . . . . . . . . . Investment tax credit
Karn Unit 4 . . . . . . . . . D. E. Karn, Essexville, Michigan
kWh . . . . . . . . . . . . . Kilowatt-hour
Ludington . . . . . . . . . . Ludington pumped storage plant, jointly
owned by Consumers and Detroit Edison
mcf . . . . . . . . . . . . . Thousand cubic feet
MCV Facility. . . . . . . . . A natural gas-fueled, combined-cycle
cogeneration facility operated by the MCV
Partnership
MCV Partnership . . . . . . . Midland Cogeneration Venture Limited
Partnership
MD&A. . . . . . . . . . . . . Management's Discussion and Analysis
MichCon . . . . . . . . . . . Michigan Consolidated Gas Company
Michigan Gas Storage. . . . . Michigan Gas Storage Company, a subsidiary
of Consumers
MHP . . . . . . . . . . . . . Moss Bluff Hub Partners, L. P.
Mbbls . . . . . . . . . . . . Thousand barrels
MMbbls. . . . . . . . . . . . Million barrels
MMBtu . . . . . . . . . . . . Million British thermal unit
MMcf. . . . . . . . . . . . . Million cubic feet
MPSC. . . . . . . . . . . . . Michigan Public Service Commission
MW. . . . . . . . . . . . . . Megawatts
Natural Gas Act . . . . . . . Federal Natural Gas Act
NEIL. . . . . . . . . . . . . Nuclear Electric Insurance Ltd.
Nitrotec. . . . . . . . . . . Nitrotech Corporation, a propriety gas
technology company
NML . . . . . . . . . . . . . Nuclear Mutual Ltd.
NOPR. . . . . . . . . . . . . Notice of Proposed Rulemaking
North Michigan. . . . . . . . North Michigan Land & Oil Corporation
NRC . . . . . . . . . . . . . Nuclear Regulatory Commission
Order 888 and Order 889 . . . FERC final rules issued on April 24, 1996
Outstanding Shares. . . . . . Outstanding shares of Class G Common Stock
Palisades . . . . . . . . . . Palisades nuclear power plant, owned by
Consumers
PCB . . . . . . . . . . . . . Polychlorinated biphenyls
Pension Plan. . . . . . . . . The trusteed, non-contributory, defined
benefit pension plan of Consumers and
CMS Energy
PPA . . . . . . . . . . . . . The Power Purchase Agreement between
Consumers and the MCV Partnership with a 35-
year term commencing in March 1990
ppm . . . . . . . . . . . . . Parts per million
PSCR. . . . . . . . . . . . . Power supply cost recovery
PUHCA . . . . . . . . . . . . Public Utility Holding Company Act of 1935
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.
Rate Reduction Bonds. . . . . A potential financing for Consumers which
has the dual advantages of funding potential
transition costs while simultaneously
reducing customer rates
SEC . . . . . . . . . . . . . Securities and Exchange Commission
SERP. . . . . . . . . . . . . Supplemental Executive Retirement Plan
Settlement Agreement. . . . . MPSC Order issued November 14, 1996 in MPSC
Case Nos. U-10685, U-10754 and U-10787
SFAS. . . . . . . . . . . . . Statement of Financial Accounting Standards
Superfund . . . . . . . . . . Comprehensive Environmental Response,
Compensation and Liability Act
Terra . . . . . . . . . . . . Terra Energy Ltd., an oil and gas
exploration and production subsidiary of
CMS NOMECO
TGN . . . . . . . . . . . . . Transportadora de Gas del Norte S. A., a
natural gas pipeline located in Argentina
Union . . . . . . . . . . . . Utility Workers of America, AFL-CIO
Unsecured Revolving Credit
Facility. . . . . . . . . . $450 million unsecured revolving credit and
letter of credit facility dated November 21,
1995
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., an oil and gas
exploration and production subsidiary of
CMS NOMECO
8
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 in all 68 counties of Michigan's Lower
Peninsula, is the largest subsidiary of CMS Energy. Enterprises is engaged
in several domestic and international energy-related businesses including:
oil and gas exploration and production; acquisition, development and
operation of independent power production facilities; energy marketing to
utility, commercial and industrial customers, storage, transmission and
processing of natural gas; and international energy distribution.
CMS Energy is exempt from registration under PUHCA, as described in Item
3. Legal Proceedings.
CMS Energy had consolidated operating revenue in 1996 of $4.3 billion
which was derived 57 percent from its electric utility operations,
30 percent from its gas utility operations, 7 percent from gas
transmission, storage and marketing, 3 percent from oil and gas
exploration and production activities and 3 percent from independent
power production and other non-utility activities. Consumers'
consolidated operations in the electric and gas utility businesses account
for the majority of CMS Energy's total assets, revenue and income. The
unconsolidated share of non-utility electric generation and distribution
and gas transmission and storage revenue for 1996 was $557 million.
Consumers
Consumers was incorporated in Michigan in 1968 and is the successor to a
corporation which was organized in Maine in 1910 and which did business in
Michigan from 1915 to 1968. Consumers was named Consumers Power Company
from 1910 to the first quarter of 1997, when the name was changed to
Consumers Energy Company to reflect its increasing focus on providing
customers with total energy solutions.
Consumers' customer base includes a mix of residential, commercial and
diversified industrial customers, the largest segment of which is the
automotive industry. Consumers is a public utility serving gas or
electricity to almost 6 million of Michigan's 9.5 million residents in all
68 counties in Michigan's Lower Peninsula. Consumers' service area
includes automotive, metal, chemical, food and wood products industries
and a diversified group of other industries.
Consumers had consolidated operating revenue in 1996 of $3.8 billion which
was derived 65 percent from its electric business, 34 percent from its gas
business and 1 percent from its non-utility business. Consumers' rates
and certain other aspects of its business are subject to the jurisdiction
of the MPSC and FERC, as described in CMS Energy and Consumers Regulation
later in this Item.
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, see Item 8. Financial Statements and Supplementary Data -
CMS Energy's Consolidated Financial Statements and Notes to Consolidated
Financial Statements.
For information with respect to the operating revenue, net operating
income, assets and liabilities attributable only to Consumers' business
segments, see Item 8. Financial Statements and Supplementary Data -
Consumers' Consolidated Financial Statements and Notes to Consolidated
Financial Statements.
CMS Energy and Consumers Principal Operations
CMS Energy conducts its principal operations through the following seven
business segments: electric utility operations; gas utility operations;
oil and gas exploration and production operations; independent power
production; energy marketing, services and trading; natural gas storage,
transmission and processing; and international energy distribution.
Consumers conducts CMS Energy's domestic electric and gas utility
operations.
Consumers Electric Utility Operations
Consumers generates, purchases, transmits and distributes electricity in
61 of the 68 counties in the Lower Peninsula of Michigan. Principal
cities served include Battle Creek, Flint, Grand Rapids, Jackson,
Kalamazoo, Midland, Muskegon and Saginaw. Consumers had 1.6 million
electric customers at December 31, 1996. Total electric sales in 1996
were a record 37.1 billion kWh, a 4.4 percent increase from the 1995
levels including a 1.7 percent increase in system sales to Consumers'
ultimate customers. Electric operating revenue in 1996 was $2.4 billion,
an increase of 7.4 percent from 1995. A peak demand of 7,167 MW was
achieved in August 1996, exceeding the 1995 peak by 0.1 percent (or 9 MW).
Peak demand has increased 10.2 percent from the peak achieved in 1994.
Based on actual peaks, Consumers' reserve margin was 12.7 percent in 1996
and 3 percent in 1995. Based on weather-adjusted peaks, Consumers' reserve
margin was 13.3 percent in 1996 and 3.5 percent in 1995.
Including Ludington, in which Consumers has a 51 percent ownership and
capacity entitlement, Consumers owns and operates 28 electric generating
plants with an aggregate net demonstrated capability of 6,256 MW,
available under summer conditions in 1996. In 1996, Consumers purchased
up to 1,648 MW of net capacity, which amounted to 34.3 percent of
Consumers' total system requirements, from independent power producers and
cogenerators, the most significant being the MCV Partnership. 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' electric utility customer base includes a mix of residential,
commercial, and diversified industrial customers, the largest segment of
which is the automotive industry; however, Consumers' electric operations
are not dependent upon a single customer, or even a few customers, the
loss of which would have a material adverse effect on its financial
condition. Consumers' electric operations are seasonal to the extent the
weather may have an effect on revenues. Peak demands for 1996 were
5,925 MW in the winter and 7,167 MW in the summer. For sales by customer
class, see CMS Energy's and Consumers' Sales by Business Segment later in
this Item.
MCV 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 Item 8.
Financial Statements and Supplementary Data - Note 3 of Consumers' Notes
to Consolidated Financial Statements.
Fuel: Consumers has five generating plants which use coal as a fuel
source and which constitute 77 percent of its baseload capacity. These
plants combined to produce a total of 16,928 million kWhs in 1996
requiring 7.5 million tons of coal. At December 31, 1996, Consumers had
long-term contracts covering 60 to 70 percent of its coal requirements for
1997. 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, 1996 amounted to approximately 38 days'
supply.
Consumers owns and operates two nuclear power plants, Palisades, near
South Haven, Michigan, and Big Rock, near Charlevoix, Michigan. In 1996,
the combined net generation of these plants was 5,653 million kWhs, which
constitutes 25 percent of Consumers' baseload generation. Consumers
currently has one contract for uranium concentrates sufficient to cover up
to approximately 10 percent of its requirements. Consumers intends to
purchase the balance of its 1997 concentrate and conversion requirements
in the spot market. Consumers has contracts for nuclear fuel services,
including enrichment of uranium hexafluoride and fabrication of nuclear
fuel assemblies. The enrichment contract covers 70 percent of Consumers'
requirements until the year 2000. The fabrication contract was
renegotiated in 1995 for Palisades and remains in effect for the next six
Palisades reloads with options to extend for an additional two reloads.
The Big Rock fabrication contract remains in effect through the end of the
operating license in the year 2000. These contracts are with major
private industrial suppliers of nuclear fuel and related services and with
the United States Government.
11
As shown below, Consumers generates electricity principally from coal and
nuclear fuel.
Power Generated Millions of kWhs
- -----------------------------------------------------------------------
1996 1995 1994 1993 1992
- -----------------------------------------------------------------------
Coal 16,928 15,956 17,401 16,520 17,024
Nuclear 5,653 5,353 4,904 3,938 5,093
Oil (a) 364 318 322 238 206
Gas (a) 74 238 91 110 12
Hydro 473 420 481 489 490
Net pumped storage (b) (419) (373) (414) (394) (393)
------- ------- ------- ------- -------
Total net generation 23,073 21,912 22,785 20,901 22,432
=======================================================================
(a) Beginning in 1993, reflects 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 Ludington. 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
- -----------------------------------------------------------------------
1996 1995 1994 1993 1992
- -----------------------------------------------------------------------
Coal $1.50 $1.51 $1.57 $1.60 $1.62
Oil 2.67 2.64 2.96 2.90 2.73
Gas (a) 3.60 2.18 2.81 3.13 4.73
Nuclear .50 .49 .46 .40 .38
All Fuels (b) 1.27 1.27 1.34 1.39 1.33
=======================================================================
(a) Beginning in 1993, includes combustion turbines and Karn Unit 4.
(b) 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
and has given notice that it anticipates that it will be unable to accept
spent nuclear fuel for storage by 1998. For a discussion of pending
litigation and legislative action relating to the DOE's obligations in
this regard, see Item 3. Legal Proceedings and Item 8. Financial
Statements and Supplementary Data - Note 2 of Consumers' Notes to
Consolidated Financial Statements. Big Rock has the capacity to
accommodate normal spent fuel discharge through the end of its operating
license in 2000. Consumers' on-site storage pool at Palisades is at
capacity and Consumers is currently storing spent nuclear fuel in an on-
site dry cask storage facility. For a discussion relating to the NRC
approval of dry storage casks and Consumers' use of the casks, see Item 8.
Financial Statements and Supplementary Data - Note 13 of Consumers' Notes
to Consolidated Financial Statements.
Consumers Gas Utility Operations
Consumers purchases, transports, stores and distributes gas and renders
gas service to 1.5 million customers and is authorized to serve in 54 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. See Item 2. Properties. Consumers and 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 even a few customers, and the loss of
any one or even a few of such customers would not have a material adverse
effect on its financial condition.
Consumers' gas operations are seasonal to the extent that peak demand
occurs in winter due to colder temperatures. Consumers' consolidated gas
operating revenue was $1.3 billion in 1996, an increase of 7 percent from
1995. The all-time record 24 hour send-out of natural gas for Consumers
on January 19, 1994 was 3.1 bcf. Consumers considers the peak-day
transportation and distribution capacity of the system to be 3.6 bcf.
Deliveries of gas sold by Consumers, and from other sellers over
Consumers' pipeline and distribution network, to ultimate customers,
including the MCV Partnership, totaled 448 bcf in 1996. See CMS Energy's
and Consumers' Sales by Business Segment later in this Item.
Consumers Gas Supply: In 1996, Consumers contracted to purchase
78 percent of its required gas supply. The contract supply included 38
percent from United States producers outside of Michigan, 22 percent from
Canadian producers and 18 percent from Michigan producers. The remaining
22 percent of Consumers' 1996 gas supply requirements were met by
purchases on the spot market.
Consumers' firm transportation agreements are with Trunkline Gas Company,
Panhandle Eastern Pipeline Company, ANR Pipeline Company and Great Lakes
Gas Transmission, L.P. 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:
13
Volume (dekatherms/day) Expiration
- --------------------------------------------------------------------------
Trunkline Gas Company 41,400 February 1997
336,375 October 2002
Panhandle Eastern Pipeline
Company 40,000 March 2000
25,000 March 2000
ANR Pipeline Company 20,000 October 1999
40,000 October 1999
10,000 December 2001
6,000 December 2002
24,900 October 2003
58,765 October 2003
Great Lakes Gas Transmission,
L.P. 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 and after its firm capacity has been
fully subscribed.
CMS Energy Oil and Gas Exploration and Production
CMS NOMECO is an oil and natural gas producer with activities in Michigan
and 12 other states, the Gulf of Mexico, Colombia, Congo, Ecuador,
Equatorial Guinea, Tunisia, Venezuela and Yemen. In 1996, it produced 4.8
MMbbls of oil, condensate and plant products and 29.4 bcf of gas, compared
to 4.5 MMbbls and 26.3 bcf in 1995.
During 1996, CMS NOMECO participated with a working interest in drilling
wells as follows:
Number of
Number of Wells Successful Wells Success Ratio
Type of Well Gross Net Gross Net Gross Net
- ------------------------------------------------------------------------
Exploratory 9 2.11 - - 0% 0%
Development 28 7.64 25 6.89 89% 90%
------------ -------------
Total 37 9.75 25 6.89 68% 71%
========================================================================
The previous table does not include CMS NOMECO's participation in Devonian
Shale gas wells in Michigan and Indiana, where CMS NOMECO drilled 297
wells (46.88 net) during 1996 with a 99 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 these Blocks in 1994. At the end of 1996, the six fields
were producing at a pipeline-constrained rate of 32,900 barrels per day
compared to total production capacity of 44,000 barrels per day. During
the course of 1996, the consortium and the Ecuadorian Ministry of Energy
and Mines negotiated a conversion of the Risk Service Contract (under
which the parties were operating) into a Production Sharing Agreement.
For additional information, see Item 2. Properties - CMS Energy Oil and
Gas Exploration and Production Properties and Item 7. CMS Energy
Management's Discussion and Analysis - Oil and Gas Exploration and
Production.
CMS Energy Independent Power Production
CMS Generation was formed in 1986 and invests in, develops, converts,
constructs and operates non-utility power generation projects both
domestically and internationally. As of January 1997, CMS Generation had
ownership interests in 2,878 MW (gross) capacity in 30 operating power
projects throughout the United States and in Argentina, India, Jamaica,
and the Philippines. These plants are powered by natural gas, wood, coal,
oil, water, scrap tires, naptha and wind. For additional information, see
Item 2. Properties - CMS Energy Other Properties and Item 7. CMS Energy
Management's Discussion and Analysis - Independent Power Production.
CMS Energy Natural Gas Transmission, Storage and Processing
CMS Gas Transmission, which commenced operations in 1989, owns, develops
and manages domestic and international natural gas transmission,
processing and storage projects. For additional information, see Item 7.
CMS Energy Management's Discussion and Analysis - Natural Gas
Transmission, Storage and Marketing.
CMS Energy International Energy Distribution
CMS Electric and Gas was formed in 1996 to invest in, manage, and operate
international natural gas and electric distribution systems. In 1996, a
seven-company consortium in which CMS Electric and Gas holds a 40 percent
interest acquired 90 percent of the outstanding shares of EDEER S.A. For
additional information, see Item 7. CMS Energy Management's Discussion and
Analysis - International Energy Distribution.
CMS Energy Marketing, Services and Trading
In 1996, CMS MST was formed to provide gas, oil, coal and electric
marketing, risk management and energy management services to industrial,
commercial, utility and municipal energy users throughout the United
States and internationally. The creation of CMS MST is part of a
restructuring of CMS Energy's energy marketing business which included the
merging of CMS Gas Marketing into CMS MST and the transfer of CMS Electric
Marketing's assets to CMS MST.
15
CMS ENERGY'S AND CONSUMERS' CONSOLIDATED REVENUE BY BUSINESS SEGMENT
In Millions
- --------------------------------------------------------------------
Years Ended December 31 1996 1995 1994
- --------------------------------------------------------------------
Electric Operations
Residential $ 878 $ 809 $ 756
Commercial 739 675 646
Industrial 704 687 672
Other system sales 80 78 80
Intersystem sales 45 28 35
-----------------------------
Total Electric Operations 2,446 2,277 2,189
-----------------------------
Gas Operations
Residential 869 821 791
Commercial 254 239 230
Industrial 62 59 57
Other 39 26 19
Transportation 58 50 54
-----------------------------
Total Gas Operations 1,282 1,195 1,151
-----------------------------
Other Consumers Operations 42 39 16
-----------------------------
Total Consumers Revenue 3,770 3,511 3,356
-----------------------------
Oil and Gas Exploration and
Production Operations 130 108 78
-----------------------------
Independent Power Production (a) 140 96 46
-----------------------------
Gas Transmission and Marketing
Operations (b)
Marketing 258 171 129
Transmission 62 25 16
-----------------------------
Total Gas Transmission and
Marketing Operations 320 196 145
-----------------------------
Other CMS Energy Operations (c) 15 18 5
-----------------------------
Reclassification adjustment (d) (42) (39) (16)
-----------------------------
Total CMS Energy Revenue $4,333 $3,890 $3,614
====================================================================
(a) Does not include CMS Energy's share of unconsolidated independent
power production revenue of $493 million in 1996, $497 million in 1995,
and $385 million in 1994.
(b) Does not include CMS Energy's share of unconsolidated natural gas
transmission, storage and marketing revenue of $42 million in 1996, $26
million in 1995, and $7 million in 1994.
16
(c) Does not include CMS Energy's share of unconsolidated international
energy distribution revenue of $22 million in 1996.
(d) Represents the reclassification of Other Consumers Operations to
CMS Energy segments including the consolidated interest in the MCV to
Independent Power Production of $40 million for 1996, $36 million for 1995
and $15 million for 1994, and the remainder to Other CMS Energy
Operations.
CMS ENERGY'S AND CONSUMERS' SALES BY BUSINESS SEGMENT
Consumers Electric and Gas Sales
Years Ended December 31 1996 1995 1994
- --------------------------------------------------------------------
Electric Sales (millions of kWh)
Residential 10,921 10,712 10,222
Commercial 9,978 9,649 9,174
Industrial 12,897 12,688 12,321
Other system sales 1,182 1,351 1,285
Intersystem sales 2,073 1,106 1,460
----------------------------
Total Electric Sales 37,051 35,506 34,462
====================================================================
Gas Sales and Deliveries (bcf)
Residential 190 180 171
Commercial 61 58 55
Industrial 16 15 14
Transportation 181 151 169
---------------------------
Total Gas Sales and Deliveries 448 404 409
====================================================================
CMS Energy Other Sales
Years Ended December 31 1996 1995 1994
- --------------------------------------------------------------------
Oil and Gas Exploration and Production
Sales (net equiv. MMbbls) 9.7 8.9 5.6
====================================================================
Independent Power Production Sales
(millions of kWh) 7,823 7,422 6,216
====================================================================
Gas Marketed for End-users (bcf) 108 101 66
====================================================================
17
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 and various other matters. The
MPSC also has or will have rate jurisdiction over several limited part-
nerships in which CMS Gas Transmission has ownership interests. These
partnerships own or will own and operate intrastate gas transmission
pipelines.
The Attorney General, ABATE, and the MPSC staff typically intervene in
MPSC proceedings concerning Consumers. Unless otherwise noted herein,
these parties have intervened in such proceedings. For many years, almost
every significant MPSC order affecting Consumers has been appealed.
Appeals from such MPSC orders are pending in the Michigan Court of Appeals
and the Michigan Supreme Court. Consumers is vigorously pursuing these
matters. Under Michigan civil procedure, parties may file a claim of
appeal with the Michigan Court of Appeals which serves as a notice of
appeal. The grounds on which the appeal is being made are not finally set
forth until a later date when the parties file their briefs.
MPSC Regulatory Changes: In January 1996, the Governor of the State of
Michigan requested that the MPSC review the existing statutory and
regulatory framework governing Michigan utilities in light of increasing
competition in the utility industry. In response, the MPSC Staff issued
the "Staff Report on Electric Industry Restructuring" in December 1996.
The report recommends a phased-in program of direct access by customers
to electricity suppliers, with a rate freeze for temporarily captive
customers, choice of suppliers, transition cost recovery, and new bond
legislation to securitize transition costs. Consumers and various parties
filed comments on the Staff's report in January 1997. In March 1997,
Consumers and Detroit Edison filed their responses to a February 1997 MPSC
order asking the utilities to provide additional information concerning
certain elements of the plan. At this time, no new legislation has been
introduced. For additional information concerning the MPSC staff report
and Consumers' filings, see Item 7. Consumers Management's Discussion and
Analysis - Forward-Looking Information - Electric Outlook.
In late 1996, the MPSC requested Consumers and other local gas
distribution companies regulated by the MPSC to develop pilot programs
that would allow customers to purchase gas from other suppliers and have
the gas transported through local pipelines. Consumers subsequently
received MPSC approval to initiate a two-year experimental gas
transportation program, Choice Energy, in Bay County, Michigan. For
additional information concerning the MPSC order, see Item 8. Financial
Statements and Supplementary Data - Note 4 to Consumers' Notes to
Consolidated Financial Statements.
Retail Wheeling Proceedings: In April 1994, the MPSC issued an opinion
and interim order which approved the framework for a five-year
experimental retail open access program for "wheeling" of electric power
purchased by customers from other suppliers over the transmission systems
of Consumers and Detroit Edison, and remanded the case to the ALJ to
determine appropriate rates and charges. The MPSC stated that the purpose
of the experiment is to gather and evaluate information regarding whether
retail wheeling is in the public interest and should occur on a permanent
basis. The experimental program will commence with each utility's next
solicitation of additional supply side resources. In June 1995, the MPSC
issued an order that set rates and charges for retail delivery service
under the experiment. In September 1995, the MPSC denied Consumers' and
ABATE's petitions for rehearing of this order. Consumers, ABATE and Dow
have filed claims of appeal of the MPSC's order with the Court of Appeals,
joining Detroit Edison and the Attorney General who had previously
appealed. The Court of Appeals subsequently consolidated the appellate
cases of these parties. This matter is still pending.
Rate Proceedings: In September 1995, Consumers and the MPSC staff reached
a proposed settlement agreement that addressed several outstanding
regulatory issues before the MPSC in three separate proceedings, (i) a
request for approval of a competitive tariff for certain industrial
customers, (ii) a general electric rate case increase request and a
request for approval of cost recovery of the remaining 325 MW of contract
capacity from the MCV Facility and (iii) approval of certain revised
depreciation and accounting practices. In November 1996, the MPSC issued a
final order in the Settlement Agreement which combined the separate
requests. For additional information concerning Settlement Agreement, see
Item 8. Financial Statements and Supplementary Data - Notes 3 and 4 of
Consumers' Notes to Consolidated Financial Statements.
Intrastate Gas Supplier Contract Pricing Dispute: In October 1995, the
MPSC issued an opinion and order in a proceeding that had been initiated
by Consumers regarding a gas contract pricing dispute under three gas
supply contracts. The MPSC found that the pricing mechanism at issue,
that operates within definite ceiling and floor prices, is a definite
pricing provision within the meaning of the state statutes and was
properly implemented by Consumers to reduce gas prices without the prior
approval of the MPSC. The producers subsequently filed a claim of appeal
of the MPSC order with the Court of Appeals, where the case awaits
scheduling of oral arguments.
Prior to the issuance of the MPSC's order, the intrastate gas producers
involved in this MPSC proceeding filed a complaint against Consumers in
Kent County Circuit Court alleging breach of contract. On Consumers'
motion, the court dismissed the lawsuit. The gas suppliers subsequently
filed a petition for rehearing with the court where the matter is still
pending.
MPSC Case No U-10029 - Intrastate Gas Supply: In February 1993, the MPSC
issued an order granting Consumers' request to lower the price to be paid
to one of its intrastate gas suppliers, North Michigan, who then filed an
appeal with the Court of Appeals. In June 1995, the Court of Appeals
affirmed the MPSC's decision and North Michigan's motion for
reconsideration was denied in August 1995. North Michigan filed an
application with the Michigan Supreme Court for leave to appeal the Court
of Appeals' order, which the Michigan Supreme Court subsequently denied.
North Michigan filed a petition for a writ of certiorari with the U.S.
Supreme Court to review the Michigan Supreme Court's decision. In
December 1996, the U.S. Supreme Court denied this petition. This
proceeding is now closed.
Collateral suits claiming relief based on a theory of breach of contract,
among other things, were filed by the producers in the Grand Traverse
County Circuit Court and in the Clinton County Circuit Court, which was
subsequently transferred to Jackson County Circuit Court. The dismissals
of the Grand Traverse County Circuit Court suit and the Jackson County
Circuit Court suit were appealed by the producers to the Court of Appeals,
which affirmed the dismissals in an opinion issued in January 1997. The
producers have filed a motion, which is still pending, for rehearing in
the Court of Appeals.
Federal Energy Regulatory Commission
FERC has limited jurisdiction over 26 independent power projects in which
CMS Generation has an ownership interest which are Qualifying Facilities
under PURPA. FERC also has more comprehensive jurisdiction over 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. Some of Consumers' gas business is also
subject to regulation by the FERC including a blanket transportation
tariff pursuant to which Consumers can transport gas in interstate
commerce.
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,
the consummation of certain mergers, the sale of certain facilities, the
construction, operation and maintenance of hydroelectric projects and the
issuance of securities, as provided by the Federal Power Act.
FERC Regulatory Changes: In April 1996, FERC issued Orders 888 and 889,
which require utilities to file conforming open access tariffs and
functionally unbundle transmission and wholesale sales activities.
Consumers made compliance filings in July and December 1996, which are
still pending FERC resolution. Consumers' open access tariff proceeding
filed in 1992 still awaits FERC decision. Orders 888 and 889 are more
fully discussed in Item 7. Consumers Management's Discussion and Analysis
- - Forward-Looking Information - Electric Outlook.
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. These and other
matters concerning Consumers' nuclear plants are more fully discussed in
Item 8. Financial Statements and Supplementary Data - Notes 2 and 13 to
Consumers' Consolidated Financial Statements.
CMS ENERGY AND CONSUMERS INSURANCE
Consumers maintains $500 million of primary property damage insurance from
NML at each of its operating nuclear plants, Big Rock 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 $2 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 an
accidental premature decommissioning which was 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) or
policy exclusions or if the loss exceeds the combined property damage
policy limits ($2.5 billion for Palisades and $500 million for Big Rock)
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 $20.7 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 or Palisades units. Such costs would
not be covered by the insurance during the first 21 weeks of any outage,
but the major portion of such costs 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 $2.2 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) 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 million for Big Rock 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 $79
million per occurrence 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 $6.3 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 million 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 $250,000 deductible; and a
maximum of $225 million of aircraft insurance. Certain CMS Energy non-
utility operations and projects maintain special insurance with lower
deductibles.
CMS Energy and Consumers are not insured with regard to certain risks,
most notably for damage to its underground gas and electrical equipment,
because it believes that these properties are not subject to large loss
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' current 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 CMS Energy and Consumers Environmental
Compliance 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 incidental to their respective businesses.
CMS ENERGY AND CONSUMERS ENVIRONMENTAL COMPLIANCE
CMS Energy and Consumers and their subsidiaries are subject to regulation
with regard to environmental quality, including air and water quality,
waste management, 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. For additional information concerning
environmental matters, see Item 8. Financial Statements and Supplementary
Data - Note 12 of Consumers' Notes to Consolidated Financial Statements.
Consumers has installed modern stack emission controls and monitoring
systems at its electric generating plants and converted electric gener-
ating units to burn cleaner fuels. It has worked with others to use bottom
ash as final cover for ash disposal areas in place of topsoil and flyash
as a filler for asphalt in road shoulders. It has also worked with local,
state and national organizations on waste minimization and pollution
prevention initiatives and enhanced certain of Consumers' lands for the
benefit of wildlife, as well as provided recreational access to its lands.
Finally, it has worked with universities and other institutions on
projects to protect and, in some instances, 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 $34 million in 1996 and are
estimated to be $21 million in 1997.
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, and more recently, the
Department of Environmental Quality, pursuant to a delegation of authority
from the Environmental Protection Agency under the Clean Air Act and
Michigan Air Pollution Act, as amended. Consumers believes that it is in
substantial compliance with all air use permits.
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 256 to 31. At 116 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 Department of Natural Resources/Department of Environmental
Quality concurrence in closure of 100 of those releases. The remaining
releases are at various stages of cleanup completion. The Michigan
Underground Storage Tank Financial Assurance Act provided a fund to help
pay for the cost of response activities associated with leaking USTs.
Through December 1996, Consumers was reimbursed $4.7 million by this state
fund. This fund was eliminated in 1996, and no future reimbursements will
be available.
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 a contingency program
of removing PCB capacitors outside of substations and replacing them with
non-PCB capacitors, 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 limited number of PCB capacitors in substations. It has
approximately 460,000 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.
National Pollutant Discharge Elimination System 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 hydroelectric projects and pipeline
construction projects, have been issued by the State of Michigan pursuant
to a delegation of authority from the Environmental Protection Agency
under the Federal Water Pollution Control Act of 1972, as amended.
Consumers believes that it is in substantial compliance with National
Pollutant Discharge Elimination System and groundwater discharge/exemption
permits.
CMS ENERGY AND CONSUMERS 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, the possible formation of municipal
utilities, and competition from other utilities offering flexible rate
arrangements, 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 class of independent power producers that,
providing the requirements of Qualifying Facility status are met, are
entitled by statute to have their production purchased by a utility.
Under PURPA, Qualifying Facilities are generally exempt from federal and
state rate regulation. Consumers last signed a PURPA contract in 1993.
Similar to PURPA, the Energy Act was designed, among other things, to
foster competition in the wholesale electric 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), by excluding them from regulation under
PUHCA and by authorizing the FERC under certain conditions to order
utilities that own transmission facilities to provide wholesale
transmission services to or for other utilities and other entities
generating electric energy for sale or resale. One effect of the reduced
regulation has been to encourage investment in wholesale power production
facilities that will compete with utilities to provide generation to meet
future system demand and provide competition for CMS Energy in the
domestic and foreign non-utility electric generation markets.
Some of Consumers' larger industrial customers have explored the
possibility of constructing and operating their own on-site generating
facilities. Consumers has worked with these customers to develop rate and
service alternatives that are competitive with self-generation options.
In an effort to meet the challenge of competition, Consumers has signed
sales contracts with some of its largest industrial customers, including
its largest customer, General Motors.
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.
Consumers has on file with the FERC an open-access transmission tariff as
discussed above in CMS Energy and Consumers Regulation. During 1996
Consumers filed wholesale power sales agreements with FERC to supply power
to six municipal and two cooperative electric utilities which had pre-
existing contracts with Consumers. The new contracts are for a five-year
term beginning January 1997. The rates are unbundled to reflect the cost
of power and transmission and to reflect open access. 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' 1996 revenue from electric operations, Consumers does not
believe that this potential loss is significant.
For additional information concerning electric competition, see Item 7.
Consumers Management's discussion and Analysis - Forward-Looking
Information - Electric Outlook.
Gas Competition
Competition has existed for several years for Consumers' gas operations
and comes primarily from alternate energy sources such as electricity and
alternate fuel sources. In the industrial market segment, customers have
traditionally used alternate fuels such as coal, oil and propane. In the
residential market segment, some customers use propane, fuel oil or
electricity for space heating and water heating; in Consumers' gas
territory, natural gas maintains 96.9 percent market share for residential
space heating and 88 percent for residential water heating. The Natural
Gas Policy Act of 1978 resulted in the deregulation of wellhead gas
prices, substituting supply and demand effects of the marketplace for
regulation. This effectively eliminated artificially-induced curtailments
of gas supply experienced earlier in the decade. Gas competition among
various wellhead suppliers subsequently increased. Order 636 effectively
unbundled the transportation of natural gas from the sale of natural gas
by interstate pipelines thereby requiring pipelines to become common
carriers. Consequently, pipelines must compete for shippers in search of
low priced capacity. Consumers offers unbundled services (transportation
and storage) to its larger end-use customers who choose to acquire gas
supplies from alternate sources. Since Consumers' earnings from its gas
operations are not dependent on gas purchased and resold to its customer
base, Consumers has not suffered any negative earnings impact as a result
of such competition, nor does it believe that any such impact is likely in
the future.
CMS Energy's non-regulated gas subsidiaries face significant competition
from other gas pipeline companies, gas producers, gas storage companies,
and brokers/marketers.
For additional information concerning gas competition, see Item 7.
Consumers Management's discussion and Analysis - Forward-Looking
Information - Gas Outlook.
EMPLOYEES
CMS Energy
As of February 28, 1997, CMS Energy and its subsidiaries had 9,663 full-
time equivalent employees of which 9,541 are full-time employees; the rest
equate to 122 full-time equivalent employees associated with the part-time
work force.
Consumers
As of February 28, 1997, Consumers and its subsidiaries had 8,873 full-
time equivalent employees of which 8,758 are full-time employees; the rest
equate to 115 full-time equivalent employees associated with the part-time
work force. Included in the total are 3,953 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 as of June 1, 1995 and, by
its terms, will continue in full force and effect until June 1, 2000.
25
CMS ENERGY AND CONSUMERS EXECUTIVE OFFICERS
As of February 28, 1997
Name Age Position Period
- --------------------------------------------------------------------------
William T. McCormick, Jr. 52 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 of
Enterprises 1995-Present
Chairman of the Board and
Chief Executive Officer
of Enterprises 1988-1995
Chairman of the Board and
Chief Executive Officer
of Consumers 1985-1992
Victor J. Fryling 49 President and Chief
Operating Officer
of CMS Energy 1996-Present
Vice Chairman of the Board
of Consumers 1992-Present
President and Chief
Executive Officer
of Enterprises 1995-Present
President of CMS Energy 1992-1995
President of Enterprises 1993-1995
President and Chief
Financial Officer
of Enterprises 1992-1993
Executive Vice President
and Chief Financial
Officer of CMS Energy
and Consumers 1988-1992
Michael G. Morris 50 Executive Vice President
of CMS Energy 1996-Present
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
Alan M. Wright 51 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,
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
Rodger A. Kershner 48 Senior Vice President and
General Counsel
of CMS Energy 1996-Present
Senior Vice President and
General Counsel of
Enterprises 1996-Present
Vice President and
General Counsel
of Enterprises 1989-1996
Deputy General Counsel
and Assistant Secretary
of CMS Energy 1994-1995
Assistant General Counsel
and Assistant
Secretary of CMS Energy 1989-1994
John W. Clark 52 Senior Vice President
of CMS Energy 1987-Present
Senior Vice President
of Consumers 1985-Present
James W. Cook 56 Senior Vice President
of CMS Energy 1995-Present
Senior Vice President
of Enterprises 1994-Present
Executive Vice President
of Enterprises 1989-1994
President and Chief
Executive Officer
of CMS Generation 1989-1995
Preston D. Hopper 46 Senior Vice President,
Controller and Chief
Accounting Officer
of CMS Energy 1996-Present
Vice President, Controller
and Chief Accounting
Officer of CMS Energy 1992-1996
Senior Vice President
and Chief Accounting
Officer of Enterprises 1997-Present
Senior Vice President and
Controller of
Enterprises 1996-1997
Vice President and
Controller of Enterprises 1992-1996
Vice President and
Controller of CMS Energy 1991-1992
Rodney E. Boulanger 56 Senior Vice President
of Enterprises 1996-Present
President and Chief
Executive Officer of
CMS Generation 1995-Present
William J. Haener 55 President and Chief
Executive Officer of
CMS Gas Transmission 1994-Present
Gordon L. Wright 54 President and Chief
Executive Officer of
CMS NOMECO 1995-Present
Executive Vice President
and Chief Operating
Officer of CMS NOMECO 1993-1995
Vice President of
Operations of CMS NOMECO 1981-1993
Paul A. Elbert 47 Executive Vice President
and Chief Operating
Officer - Gas of Consumers 1994-Present
Senior Vice President
of Consumers 1991-1994
David W. Joos 43 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
David A. Mikelonis 48 Senior Vice President
and General Counsel
of Consumers 1988-Present
Robert A. Fenech 49 Senior Vice President
of Consumers 1997-Present
Vice President of Consumers 1994-1997
Dennis DaPra* 54 Vice President and
Controller of Consumers 1991-Present
*Mr. DaPra is an executive officer of Consumers but not of CMS Energy.
All other individuals are executive officers of both CMS Energy and
Consumers.
The present term of office of each of the executive officers extends to
the first meeting of the Board of Directors after the next annual election
of Directors of each of CMS Energy and Consumers (scheduled to be held May
27, 1997).
There are no family relationships among executive officers and directors
of CMS Energy and Consumers.
28
ITEM 2. PROPERTIES.
CHARACTER OF OWNERSHIP
The principal properties of CMS Energy, Consumers and their subsidiaries
are owned in fee, except that most electric lines and gas mains are
located, pursuant to easements and other rights, in public roads or on
land owned by others. The statements under this item as to ownership of
properties are made without regard to tax and assessment liens, judgments,
easements, rights of way, contracts, reservations, exceptions, conditions,
immaterial liens and encumbrances, and other outstanding rights. None of
these outstanding rights impairs the usefulness of such properties.
Substantially all of Consumers' properties are subject to the lien of its
First Mortgage Bond Indenture. Substantially all properties of the
subsidiaries of CMS Generation that own interests in operating plants are
subject to liens of creditors of the respective subsidiaries. Properties
of certain Consumers, CMS Gas Transmission and CMS NOMECO subsidiaries are
also subject to liens of creditors of the respective subsidiaries.
CONSUMERS ELECTRIC UTILITY PROPERTIES
Consumers' electric generating system consists of five fossil-fueled
plants, two nuclear plants, one pumped storage hydroelectric facility,
seven gas combustion turbine plants and 13 hydroelectric plants.
1996 Summer Net 1996 Net
Demonstrated Generation
Size and Year Capability (Thousands
Name and Location (Michigan) Entering Service (Kilowatts) of kWhs)
Coal Generation
J H Campbell - West Olive 3 Units, 1962-1980 1,346,100(a) 8,168,527
D E Karn - Essexville 2 Units, 1959-1961 515,000 3,324,179
B C Cobb - Muskegon 2 Units, 1956-1957 296,000 1,931,212
J R Whiting - Erie 3 Units, 1952-1953 310,000 1,796,964
J C Weadock - Essexville 2 Units, 1955-1958 310,000 1,706,846
--------- ----------
Total coal generation 2,777,100 16,927,728
--------- ----------
Oil/Gas Generation
D E Karn - Essexville 2 Units, 1975-1977 1,276,000 428,567
--------- ----------
Ludington Pumped Storage 6 Units, 1973 954,700(b) (418,371)(c)
--------- ----------
Nuclear Generation
Palisades - South Haven 1 Unit, 1971 762,000 5,290,683
Big Rock Point - Charlevoix 1 Unit, 1962 67,000 362,303
--------- ----------
Total nuclear generation 829,000 5,652,986
--------- ----------
Gas/Oil Combustion Turbine
Generation 7 Plants, 1966-1971 345,000 9,373
--------- ----------
Hydro Generation 13 Plants, 1907-1949 73,800 472,892
--------- ----------
Total owned generation 6,255,600 23,073,175
==========
Purchased and Interchange Power Capacity 1,820,600(d)
---------
Total 8,076,200
=========
(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 Ludington. 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 1,240 MW of purchased contract capacity from the MCV Facility.
/TABLE
30
Consumers' electric transmission and distribution lines owned and in
service are shown in the following table.
Structure Sub-Surface
(Miles) (Miles)
Transmission
345,000 volt 1,137 -
138,000 volt 3,276 4
120,000 volt 20 -
46,000 volt 4,102 9
23,000 volt 30 7
------ -----
Total transmission 8,565 20
Distribution (2,400-24,900 volt) 52,071 5,722
------ -----
Total transmission and distribution 60,636 5,742
====== =====
Consumers owns substations having an aggregate transformer capacity of
38,016,960 kilovoltamperes.
CONSUMERS GAS UTILITY PROPERTIES
Consumers' gas distribution and transmission system consists of
22,309 miles of distribution mains and 1,041 miles of transmission lines
throughout the Lower Peninsula of Michigan. Consumers owns and operates
six compressor stations with a total of 133,060 installed horsepower.
Consumers' gas storage fields, listed below, have an aggregate storage
capacity of 242.2 bcf.
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
530 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 109.5 bcf.
Total Certified
Field Name Location Storage Capacity (bcf)
Winterfield Osceola and Clare Counties 72.3
Cranberry Lake Clare and Missaukee Counties 28.2
Riverside Missaukee County 9.0
Consumers' gas properties also include the Marysville gas reforming plant,
located in Marysville, Michigan. Huron and PanCanadian Petroleum Company
are partners in a partnership to use the expanded capacity of the
underground caverns at the Marysville plant for commercial storage of
liquid hydrocarbons. In addition, Consumers and PanCanadian Petroleum
Company are partners in a partnership to use certain hydrocarbon
fractionation facilities at the plant.
CMS ENERGY OIL AND GAS EXPLORATION AND PRODUCTION PROPERTIES
Net oil and gas production by CMS NOMECO for the years 1994 through 1996
is shown in the following table.
1996 1995 1994
Oil and condensate (Mbbls) (a) 4,597 4,267 2,025
Natural gas (MMcf) (a) 29,371 26,348 20,546
Plant products (Mbbls) (a) 240 226 193
Average daily production (b)
Oil (Mbbls) 16.7 16.1 7.1
Gas (MMcf) 97.9 84.9 69.3
Reserves to annual production ratio
Oil (MMbbls) 14.6 14.9 26.1
Gas (bcf) 11.0 10.8 11.3
(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 proved reserves of oil
and gas for the years 1994 through 1996.
Total Worldwide United States International
Oil Gas Oil Gas Oil Gas
(MMbbls) (bcf) (MMbbls) (bcf) (MMbbls) (bcf)
Proved Developed and
Undeveloped Reserves
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
Revisions and other changes (4.1) (23.8) (0.1) (22.9) (4.0) (0.9)
Extensions and discoveries - 13.3 - 2.6 - 10.7
Acquisitions of reserves 20.0 96.2 - 96.2 20.0 -
Sales of reserves (2.4) (6.7) - (1.0) (2.4) (5.7)
Production (4.3) (26.3) (0.7) (26.2) (3.6) (0.1)
---- ----- ---- ----- ---- ----
December 31, 1995 61.1 283.9 1.9 273.2 59.2 10.7
Revisions and other changes 4.7 6.8 1.2 - 3.5 6.8
Extensions and discoveries 4.9 64.6 - 32.6 4.9 32.0
Acquisitions of reserves 0.2 1.0 - 1.0 0.2 -
Sales of reserves (0.6) (3.7) (0.6) (3.7) - -
Production (4.7) (29.4) (0.7) (29.4) (4.0) -
---- ----- ---- ----- ---- ----
December 31, 1996 65.6 323.2 1.8 273.7 63.8 49.5
==== ===== ==== ===== ==== ====
Estimated Proved Developed Reserves
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
December 31, 1995 32.7 254.2 1.8 254.2 30.9 -
December 31, 1996 35.3 270.0 1.8 270.0 33.5 -
==== ===== ==== ===== ==== ====
Equity Interest in Estimated
Proved Reserves of Comeco
Petroleum, Inc. (Yemen)
December 31, 1993 1.5 - - - 1.5 -
December 31, 1994 2.9 - - - 2.9 -
December 31, 1995 2.8 - - - 2.8 -
December 31, 1996 3.2 - - - 3.2 -
==== ===== ==== ===== ==== ====
33
The following table shows CMS NOMECO's undeveloped net acres of oil and
gas leasehold interests.
December 31 1996 1995
Michigan 131,502 143,243
North Dakota 13,840 15,586
Indiana 10,986 7,014
Louisiana (a) 8,088 17,408
Texas (a) 7,005 11,458
Ohio 6,104 4,494
Other states 4,930 4,335
--------- ---------
Total domestic 182,455 203,538
--------- ---------
Colombia 294,330 42,571
Venezuela 230,175 230,175
Equatorial Guinea 113,947 113,947
Tunisia 67,193 67,891
Ecuador 66,430 66,430
Yemen 27,610 401,897
Congo 17,981 17,981
--------- ---------
Total international 817,666 940,892
--------- ---------
Total net acres 1,000,121 1,144,430
========= =========
(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 53 field offices at various locations in Michigan's
Lower Peninsula. Of these, two general office buildings and eleven field
offices are leased. Also owned are miscellaneous parcels of real estate
not now used in utility operations.
34
CMS ENERGY OTHER PROPERTIES
The following table shows interests in independent power plants at
December 31, 1996.
Location Ownership Interest (%) Gross Capacity (MW)
CMS Generation
Wood Fueled
Chateaugay, New York 50.0 20
Grayling Township, Michigan 50.0 39
Genesee Township, Michigan 50.0 35
Imperial Valley, California 40.5 15
Lyonsdale, New York 50.0 19
New Bern, North Carolina 50.0 45
Stratton, Maine 35.0 40
Susanville, California 50.0 36
Fossil Fueled
Andhra Pradesh, India 25.3 235
Cebu Island, Philippines (Carmen) 47.5 46
Cebu Island, Philippines (Sangi) 47.5 89
Filer City, Michigan 50.0 60
Kingston, Jamaica (a) 43.9 56
Lakewood, New Jersey 45.0 236
Little Falls, New York 50.0 4
Mendoza Province, Argentina 80.6 242
Oklahoma City, Oklahoma 8.8 110
Scrap Tire Fueled
Sterling, Connecticut 50.0 31
Hydro Generation
Benton, Maine 50.0 4
Canton, New York 50.0 8
Copenhagen, New York 50.0 3
Corinth, New York 12.5 58
Limay River, Argentina (Arroyito) 17.2 120
Limay River, Argentina (El Chocon) 17.2 1,200
Little Falls, New York 1.0 13
Lyons Falls, New York 50.0 3
Petersburg, Virginia 55.5 3
Port Leyden, New York 12.5 6
Wind Generation
Altamont Pass, California 22.7 30
Montezuma, California 8.5 72
CMS Midland
Fossil Fueled
Midland, Michigan 49.0(b) 1,370
==== =====
(a) Commenced commercial operations in January, 1997.
(b) See the previous section - Consumers Other Properties - for more information.
In 1996, CMS Generation sold its 37.5 percent interest in a 80 MW fossil-
fueled plant in Solvay, New York. In February 1997, CMS Generation
acquired a 29.5 percent interest in a 48 MW fossil-fueled plant in Cavite,
Philippines. CMS Generation also negotiated the purchase of a further
interest which could take its ultimate interest to 44 percent, and has
plans to increase the plant's generating capacity to 63 MW in 1998.
CMS Gas Transmission owns a 75 percent interest in a general partnership
which owns and operates a 25-mile, 16-inch natural gas transmission
pipeline in Jackson and Ingham Counties, Michigan; owns a 24 percent
limited partnership interest in the Saginaw Bay Area Limited Partnership
which owns 125 miles of 10-inch and 16-inch natural gas transmission
pipeline in north-central Michigan; owns a 44 percent limited partnership
interest in a partnership that owns certain pipelines of 20 and 12 miles
interconnected to the Saginaw Bay Area Limited Partnership facilities;
owns natural gas treating plants in Otsego County, Michigan; owns 41 miles
of gas transmission pipeline in Otsego and Montmorency Counties, Michigan;
owns and operates the Bluewater Pipeline, a 3.1 mile pipeline from an
interconnection with Consumers natural gas transmission system to an
interconnection with an existing pipeline at the St. Clair River, south of
Port Huron, Michigan; and owns a 25 percent general partnership interest
in TGN, which owns and operates 2,600 miles of pipeline that provides
natural gas transmission service to the northern and central parts of
Argentina.
In 1996, CMS Gas Transmission commenced operations of the Little Bear
Pipeline, a 46 mile pipeline originating in Montmorency County, Michigan
at an interconnection with the Thunder Bay Pipeline to the carbon dioxide
processing facility at South Chester, Otsego County, Michigan.
In January 1996, CMS Gas Transmission acquired Petal Gas Storage Company,
a natural gas storage facility located in Forrest County, Mississippi.
The salt dome storage cavern provides up to 3.2 bcf per day of ten day
storage service and has the capability of being refilled in 20 days.
In January 1996, CMS Gas Transmission acquired a 50 percent ownership
interest in Nitrotec Corporation, a proprietary gas technology company,
which recently received patents for its helium removal and nitrogen
rejection processes. Nitrotec has helium recovery plants in Colorado and
Kansas. A nitrogen rejection plant in Texas was placed in service in
1996, with another nitrogen rejection plant scheduled to be placed in
service during the first quarter of 1997.
Through the Cherokee Gas Processing partnership, formed in May 1996,
CMS Gas Transmission owns an 82 percent interest in the Lucien, Crescent
and Ames gas gathering systems and processing plants located in Oklahoma.
The Lucien facilities include 380 miles of low-pressure gas-gathering
lines and five compressor stations in Garfield, Logan, Noble and Payne
counties in Oklahoma. It also includes a 10 million cubic feet per day
processing plant in Noble county. The Crescent and Ames systems, acquired
by the partnership in October 1996, contained 1,634 miles of low-pressure
gathering lines, 23,500 HP of compression and a 45 million cubic feet per
day processing plant west of Guthrie, Oklahoma. A portion of the Ames
system consisting of 139 miles of low-pressure gathering lines and 2,395
HP of compression was sold in January 1997.
CMS Energy, through certain subsidiaries, owns a 50 percent interest in
Bay Harbor Limited Liability Company, a resort development in Emmet
County, Michigan, owns 6,000 acres of undeveloped land in Benzie and
Manistee Counties, Michigan, and owns 53 acres of undeveloped land in
Muskegon County, Michigan.
CONSUMERS CAPITAL EXPENDITURES
Capital expenditures during 1996 for Consumers and its subsidiaries
totaled $441 million for capital additions and $6 million for DSM
programs. Of the $441 million, $304 million was incurred for electric
utility additions and $137 million for gas utility additions. These
capital additions include $34 million for environmental protection
additions and $31 million for capital leases of nuclear fuel and other
assets. The electric and gas utility additions include an attributed
portion of capital expenditures common to both businesses.
In 1997, capital expenditures are estimated to be $387 million for capital
additions. Of the $387 million, $272 million will be incurred for
electric utility additions and $115 million for gas utility additions.
These capital addition estimates include $21 million related to
environmental protection additions and $28 million related to capital
leases of nuclear fuel and other assets. 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 1996 for CMS Energy and its subsidiaries
totaled $873 million for capital additions and $6 million for DSM
programs. Of the $873 million, $441 million was incurred by Consumers as
discussed above. The remaining $432 million in capital additions include
$88 million for oil and gas exploration and development, $142 million for
independent power production, $136 million for natural gas transmission,
storage and marketing, $64 million for international energy distribution
and $2 million for other capital expenditures. These capital additions
include $34 million for environmental protection additions and $31 million
for capital leases of nuclear fuel and other assets.
In 1997, capital expenditures are estimated to be $965 million for capital
additions. Of the $965 million, $387 million will be incurred by Consumers
as discussed above. The remaining $578 million in capital additions are
estimated to be incurred as follows: $135 million for oil and gas
exploration and development; $196 million for independent power
production; $110 million for natural gas transmission and storage; $120
million for international energy distribution; and $17 million for
marketing services and trading. These capital addition estimates include
$21 million related to environmental protection additions and $28 million
related to capital leases of nuclear fuel and other assets.
37
ITEM 3. LEGAL PROCEEDINGS.
CMS Energy, Consumers and some of their 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 Item 1. Business - CMS Energy and
Consumers Regulation, Item 7. Management's Discussion and Analysis and
Item 8. Financial Statements and Supplementary Data - Notes to
Consolidated Financial Statements included herein for additional
information regarding various pending administrative and judicial
proceedings involving rate, operating and environmental matters.
CMS ENERGY EXEMPTION UNDER PUHCA
CMS Energy is exempt from registration under PUHCA. In December 1991, the
Attorney General and the Michigan Municipal Cooperative Group filed a
request with the SEC for the revocation of CMS Energy's exemption. In
January 1992, CMS Energy responded to the revocation request affirming its
position that it is entitled to the exemption. In April 1992, the MPSC
filed a statement with the SEC that recommended that the SEC impose
certain conditions on CMS Energy's exemption. CMS Energy is vigorously
contesting the revocation request and believes it will maintain the
exemption. There has been no action taken by the SEC on this matter.
In June 1995, the SEC released a staff report that recommended legislative
options to Congress: 1) repeal PUHCA and strengthen the ability of the
FERC and state regulators to obtain books and records, conduct audits and
review affiliate transactions; 2) repeal PUHCA, without condition; or 3)
amend PUHCA to give the SEC broader exemptive authority. The SEC staff
supported option 1 because it would achieve the benefits of unconditional
repeal, while preserving the ability of states to protect consumers. In
February 1997, a bill was introduced in the United States House of
Representatives to stimulate competitive electric rates and services,
including provisions that would essentially repeal PUHCA on a state-by-
state basis as each state certifies to the SEC that a competitive, non-
discriminatory market for both electric and natural gas energy exists in
such state. This bill would also strengthen the ability of the FERC to
obtain books and records of public utility holding company affiliates and
subsidiaries. CMS Energy management anticipates that additional bills will
be introduced in Congress in 1997 which will propose the repeal or
significant revision of PUHCA.
CONSUMERS STRAY VOLTAGE LAWSUITS
Consumers has a number of lawsuits relating to so-called stray voltage,
which results when small electrical currents present in grounded electric
systems are diverted from their intended path. Claimants contend that
stray voltage affects farm animal behavior, reducing the productivity of
their livestock operations. Investigation by Consumers of prior stray
voltage complaints disclosed that many factors, including improper wiring
and malfunctioning of on-farm equipment, can lead to the stray voltage
phenomenon. Consumers maintains a policy of investigating all customer
calls regarding stray voltage and working with customers to address their
concerns including, when necessary, modifying the configuration of the
customer's hook-up to Consumers' system. In October 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 believes the allegations to be without merit and vigorously
opposed the certification of the class and this suit. In March 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. In April 1994, the
plaintiffs appealed the court's denial of class certification in this
matter to the Court of Appeals. In November 1996, the Court of Appeals
issued a decision dismissing the case. In January 1997, the Court of
Appeals denied plaintiffs' motion for reconsideration. Subsequently the
plaintiffs filed an application for leave to appeal in the Michigan
Supreme Court, where the matter remains pending. A number of individuals
who would have been part of the class action have refiled their claims as
separate lawsuits. At January 31, 1997, Consumers had 22 separate stray
voltage cases pending for trial, down from 30 pending at year end 1995.
CONSUMERS HIGHLAND TOWNSHIP FRANCHISE PROCEEDING
MichCon obtained a revocable franchise in 1956 to provide natural gas
service to Highland Township, Michigan. In 1962, Consumers secured an
irrevocable 30 year franchise to provide natural gas service to Highland
Township. Neither franchise was exclusive. Although MichCon's franchise
for service in Highland Township expired in 1986 and was not renewed,
MichCon continued service to customers in Highland Township. Consumers
secured a revocable renewal franchise for Highland Township in 1992.
Thereafter in 1992, Consumers filed suit to enjoin MichCon from expanding
its gas service to new customers in Highland Township. The Circuit Court
of Oakland County, Michigan denied MichCon's motion for summary
disposition and granted Consumers' petition for an injunction. MichCon
subsequently transferred its remaining rights and interest in Highland
Township to Consumers, ceased doing business there and appealed the
Circuit Court decision with the Court of Appeals. In August 1995, the
Court of Appeals refused to decide the issue addressed by the Circuit
Court (namely whether MichCon, as a holdover utility without any
franchise, could continue to lawfully do business in a township) because
the Court of Appeals concluded that Consumers' 1992 revocable renewal
franchise was invalid since it was not confirmed by a vote of the Highland
Township electorate as the Court determined was required by the Public
Utility Franchise Act. Prior to this decision, the commonly held
interpretation of the Public Utility Franchise Act was that a vote of the
electorate was only required for irrevocable franchises, not revocable
franchises such as that held by Consumers in this case. The Court of
Appeals reversed the Circuit Court decision and remanded the case to the
Circuit Court for entry of summary disposition in MichCon's favor -- even
though the only franchise MichCon had ever possessed was revocable and
thus, under the Court of Appeals' decision, invalid. Although the Court
of Appeals specifically stated in its opinion that continuing to provide
utility service without a valid franchise was not necessarily unlawful,
Consumers currently has over 800 revocable franchises which could be
affected should the Court of Appeals order remain in place. Consumers'
motion for reconsideration and for a stay of the Court of Appeals'
decision was denied. In December 1995, Consumers filed an application,
which is still pending, with the Michigan Supreme Court for leave to
appeal the Court of Appeals' decision. In June 1996, the Michigan
Legislature amended the Public Utility Franchise Act to provide that
revocable franchises may be granted by a township without a vote of the
electorate.
CMS ENERGY INDEPENDENT POWER PRODUCTION PROJECT LITIGATION
In August 1995, William R. Williams and two of his corporations, Altresco
Philippines, Inc. and WRW Corporation (formerly Altresco International,
Inc.), filed a lawsuit against CMS Generation in the Denver County
District Court, State of Colorado, in connection with a project to be
developed in Bantangas, Philippines by Luzon Power Associates, Inc. in
which CMS Generation purchased a 50 percent ownership interest. Luzon
Power Associates, Inc. has an agreement to supply power to the Manila
Electric Company. The complaint alleges breach of a confidentiality
agreement, breach of fiduciary duty, intentional interference with a
contract, breach of implied covenant of good faith and fair dealing, and
unfair competition. The claims primarily relate to a confidentiality
agreement between the parties, and CMS Generation's alleged pursuit of
another project to sell power directly to the Manila Electric Company,
known as the Magellan project, in alleged violation of a restrictive
covenant in the confidentiality agreement. The plaintiffs claim direct
damages of approximately $85 million and indirect damages in a like amount
from loss of future business, plus punitive damages, interest, and
attorney's fees. CMS Generation removed the case to the United States
District Court for the District of Colorado in September 1995, and in
January 1996, that court denied CMS Generation's motion to dismiss the
suit or to transfer the case based on improper venue. A trial date of
July 1997 has been set by the court. CMS Generation believes the
plaintiff's position is without merit and intends to vigorously oppose any
claims they may raise but cannot predict the outcome of this matter.
CONSUMERS JOINT LAWSUIT AGAINST DOE
Under the Nuclear Waste Policy Act of 1982, the DOE is required to begin
accepting deliveries of spent nuclear fuel from commercial operators by
January 31, 1998 for disposal, even if a permanent repository is not then
operational. The unconditional nature of the DOE's obligation was
confirmed by the United States Court of Appeals for the District of
Columbia Circuit in 1996. Utilities and their customers have been
prepaying the costs of DOE transport and disposal through fees based on
electric generation by their nuclear plants. For fuel used after April 6,
1983, Consumers charges disposal costs to nuclear fuel expense, recovers
them through electric rates and remits to the DOE quarterly. Consumers
elected to defer payment for disposal of spent nuclear fuel burned before
April 7, 1983 until the first of its spent fuel is delivered to the DOE.
At December 31, 1996, Consumers had a recorded liability to the DOE of
$106 million, including interest, which is to be paid prior to the first
delivery of spent nuclear fuel to the DOE. Consumers recovered through
electric rates the amount of this liability, excluding a portion of
interest. In January 1997, in response to the DOE's declaration in
December 1996 that it would not begin to accept spent nuclear fuel
deliveries by the date required by law, Consumers and other utilities
filed suit in the United States Court of Appeals for the District of
Columbia Circuit. The utilities are seeking a declaration that they are
relieved of their obligation to remit their quarterly fee payments to the
DOE and are authorized to escrow any related fees collected from their
customers, unless and until the DOE begins to accept spent nuclear fuel.
The suit seeks an order requiring the DOE to develop a program to begin
acceptance of spent nuclear fuel by January 31, 1998. Also in 1997,
federal legislation was reintroduced to clarify the timing of the DOE's
obligation to accept spent nuclear fuel and to direct the DOE to establish
an integrated spent fuel management system that includes designing and
constructing an interim storage facility in Nevada.
CMS ENERGY AND CONSUMERS ENVIRONMENTAL MATTERS
CMS Energy, Consumers and their subsidiaries and affiliates are subject to
various federal, state and local laws and regulations relating to the
environment. Several of these companies have been named parties to various
actions involving environmental issues. However, based on their 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 - CMS Energy and Consumers Environmental
Compliance, Item 7. Management's Discussion and Analysis and Item 8.
Financial Statements and Supplementary Data - Note 12 of Consumers' Notes
to Consolidated Financial Statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF
SECURITY HOLDERS.
CMS ENERGY
None in the fourth quarter of 1996 for CMS Energy.
CONSUMERS
None in the fourth quarter of 1996 for Consumers.
41
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 in Item 8. Financial Statements and Supplementary
Data - CMS Energy's Quarterly Financial and Common Stock Information,
which is incorporated by reference herein. Number of common shareholders
at February 28, 1997 was 92,562.
Consumers
Consumers' common stock is privately held by its parent, CMS Energy, and
does not trade in the public market. In May, August, November and
December 1996, Consumers paid $75 million, $40 million, $48 million and
$37 million in cash dividends, respectively, on its common stock. During
1995, Consumers paid $70 million in cash dividends in May on its common
stock.
ITEM 6. SELECTED FINANCIAL DATA.
CMS Energy
Selected financial information is contained in Item 8. Financial
Statements and Supplementary Data - CMS Energy's Selected Financial
Information which is incorporated by reference herein.
Consumers
Selected financial information is contained in Item 8. Financial
Statements and Supplementary Data - 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. Financial Statements and Supplementary
Data - 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. Financial Statements and Supplementary
Data - Consumers' Management's Discussion and Analysis which is
incorporated by reference herein.
42
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Index to Financial Statements:
CMS Energy Page
Selected Financial Information. . . . . . . . . . . . . . . . . 44
Management's Discussion and Analysis. . . . . . . . . . . . . . 47
Consolidated Statements of Income . . . . . . . . . . . . . . . 62
Consolidated Statements of Cash Flows . . . . . . . . . . . . . 63
Consolidated Balance Sheets . . . . . . . . . . . . . . . . . . 64
Consolidated Statements of Preferred Stock. . . . . . . . . . . 66
Consolidated Statements of Common Stockholders' Equity. . . . . 67
Notes to Consolidated Financial Statements. . . . . . . . . . . 68
Report of Independent Public Accountants. . . . . . . . . . . . 94
Quarterly Financial and Common Stock Information. . . . . . . . 95
Consumers Page
Selected Financial Information. . . . . . . . . . . . . . . . . 98
Management's Discussion and Analysis. . . . . . . . . . . . . . 99
Consolidated Statements of Income . . . . . . . . . . . . . . . 110
Consolidated Statements of Cash Flows . . . . . . . . . . . . . 111
Consolidated Balance Sheets . . . . . . . . . . . . . . . . . . 112
Consolidated Statements of Long-Term Debt . . . . . . . . . . . 114
Consolidated Statements of Preferred Stock. . . . . . . . . . . 115
Consolidated Statements of Common Stockholder's Equity. . . . . 116
Notes to Consolidated Financial Statements. . . . . . . . . . . 117
Report of Independent Public Accountants. . . . . . . . . . . . 138
Quarterly Financial Information . . . . . . . . . . . . . . . . 139
43
CMS Energy
1996 Financial Statements
44
Selected Financial Information CMS Energy Corporation
1996 1995 1994 1993 1992
Operating revenue (in millions) ($) 4,333 3,890 3,614 3,476 3,142
Consolidated net income (loss)
(in millions) ($) 240 204 179 155 (297)
Average common shares outstanding
(in thousands)
CMS Energy 92,462 88,810 85,888 81,251 79,877
Class G 7,727 7,511 - - -
Earnings (loss) per average common share
CMS Energy ($) 2.45 2.27 2.09 1.90 (3.72)
Class G ($) 1.82 .38 - - -
Cash from operations (in millions) ($) 661 682 612 484 456
Capital expenditures, excludes capital
lease additions and DSM (in millions) ($) 659 535 575 550 487
Total assets (in millions) ($) 8,615 8,143 7,378 6,958 6,842
Long-term debt, excluding current
maturities (in millions) ($) 2,842 2,906 2,709 2,405 2,725
Non-current portion of capital
leases (in millions) ($) 103 106 108 115 98
Total preferred stock (in millions) ($) 356 356 356 163 163
Total preferred securities (in millions) ($) 100 - - - -
Cash dividends declared per common share
CMS Energy ($) 1.02 .90 .78 .60 .48
Class G ($) 1.15 .56 - - -
Market price of common stock at year-end
CMS Energy ($) 33-5/8 29-7/8 22-7/8 25-1/8 18-3/8
Class G ($) 18-3/8 18-7/8 - - -
Book value per common share at year-end
CMS Energy ($) 17.02 15.16 12.78 11.33 9.09
Class G ($) 11.19 10.56 - - -
Return on average common equity (%) 15.2 15.9 17.3 18.3 (33.2)
Return on assets (%) 5.3 5.1 4.7 4.5 (2.3)
Number of common shareholders at year-end 55,708 59,983 63,628 66,795 70,801
Number of employees at year-end
(full-time equivalents) 9,712 10,105 9,972 10,013 9,971
45
Selected Financial Information (Continued) CMS Energy Corporation
1996 1995 1994 1993 1992
Electric Utility Statistics
Sales (billions of kWh) 37.1 35.5 34.5 32.8 31.6
Customers (in thousands) 1,594 1,570 1,547 1,526 1,506
Average sales rate per kWh (cents) 6.55 6.36 6.29 6.28 5.82
Gas Utility Statistics
Sales and transportation deliveries (bcf) 448 404 409 411 384
Customers (in thousands) (a) 1,504 1,476 1,448 1,423 1,402
Average sales rate per mcf ($) 4.45 4.42 4.48 4.46 4.55
Electric and Gas Non-Utility Statistics
CMS Energy's share of unconsolidated
independent power production
revenue (in millions) ($) 493 497 385 334 284
Independent power production
sales (millions of kWh) 7,823 7,422 6,216 5,019 4,057
CMS Energy's share of unconsolidated
natural gas transmission, storage and
marketing revenue (in millions) ($) 42 26 7 3 4
Gas marketed for end-users (bcf) 108 101 66 60 45
Exploration and Production Statistics
Sales (net equiv. MMbbls) 9.7 8.9 5.6 5.0 4.6
Proved reserves (net equiv. MMbbls) 122.6 111.2 93.3 69.8 70.9
Proved reserves added (net equiv. MMbbls) 21.1 26.8 29.0 3.9 15.0
Finding cost per net equiv. bbl ($) 2.94 5.06 5.92 4.97 4.88
(a) Excludes off-system transportation customers.
46
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47
CMS Energy Corporation
Management's Discussion and Analysis
This Annual Report contains forward-looking statements as defined by the
Private Securities Litigation Reform Act of 1995, including (without
limitation) discussions as to expectations, beliefs, plans, objectives and
future financial performance, or assumptions underlying or concerning
matters discussed in this document. These discussions, and any other
discussions contained in this Annual Report, except to the extent they
contain historical facts, are forward-looking and, accordingly, involve
estimates, assumptions and uncertainties that could cause actual results
or outcomes to differ materially from those expressed in the forward-
looking statements. In addition to certain contingency matters (and their
respective cautionary statements) discussed elsewhere in this Annual
Report, the Forward-Looking Information section of this MD&A indicates
some important factors that could cause actual results or outcomes to
differ materially from those addressed in the forward-looking discussions.
CMS Energy is the parent holding company of Consumers and Enterprises.
Consumers, a combination electric and gas utility company serving the
Lower Peninsula of Michigan, is the principal subsidiary of CMS Energy.
Consumers' customer base includes a mix of residential, commercial and
diversified industrial customers, the largest segment of which is the
automotive industry. Enterprises is engaged in several domestic and
international energy-related businesses including: oil and gas
exploration and production; acquisition, development and operation of
independent power production facilities; energy marketing to utilities,
commercial and industrial customers; storage, transmission and processing
of natural gas; and international energy distribution.
Consolidated Earnings
In Millions, Except Per Share Amounts
Years Ended December 31 1996 1995 Change
Consolidated Net Income $ 240 $ 204 $ 36
Net Income Attributable to Common Stocks:
CMS Energy 226 201 25
Class G 14 3 11
Earnings Per Average Common Share:
CMS Energy 2.45 2.27 .18
Class G 1.82 .38 1.44
Class G Shares were issued on July 21, 1995. Pro forma net income
attributable to CMS Energy Common Stock and to Class G Common Stock, which
reflects the performance of the gas distribution, storage and
transportation business currently conducted by Consumers and Michigan Gas
Storage, assuming Class G shares were outstanding during the entire period
for the year ended December 31, 1995, would be $189 million and $15
million respectively. Pro forma earnings per share for the year ended
December 31, 1995 would be $2.14 and $1.93 for CMS Energy Common Stock and
Class G Common Stock, respectively.
The increase in consolidated net income for 1996 primarily reflects the
favorable impact of an electric rate increase and operating income
resulting from a refund received by the MCV Partnership which provided a
$6 million earnings benefit for CMS Energy. Earnings in 1996 also reflect
increased electric sales, gas deliveries and revenues from gas loaning
activities. Consolidated net income was also affected by increased
earnings from CMS Gas Transmission's 25 percent ownership interest in TGN
and increased equity earnings resulting from the buy-out of a power
purchase agreement involving a partnership in which CMS Generation owns a
50 percent ownership interest. CMS Gas Transmission and CMS Generation
are subsidiaries of Enterprises. The improved consolidated net income for
1995 over the 1994 level reflects increased utility electric sales and
utility gas deliveries, increased electric utility revenue as a result of
the May 1994 rate increase, reversal of losses previously recorded for gas
utility contingencies (see Note 4), improved operating results from
Consumers' interest in the MCV Facility, and the continuing growth of the
international businesses. For further information, see the individual
results of operations sections of this MD&A.
Cash Position, Investing and Financing
CMS Energy's primary ongoing source of operating cash is dividends from
its subsidiaries. In 1996, Consumers paid $200 million in common
dividends to CMS Energy. Consumers temporarily suspended its common
dividends from mid-1995 until early 1996 to improve its capital structure.
In 1996, Enterprises paid common dividends and other distributions of $119
million to CMS Energy.
Operating Activities CMS Energy's consolidated operating cash
requirements are met by its operating and financing activities.
CMS Energy's consolidated cash from operations is derived mainly from
Consumers' sale and transportation of natural gas, Consumers' generation,
transmission, and sale of electricity and CMS NOMECO's sale of oil and
natural gas. CMS NOMECO's is a subsidiary of Enterprises. Consolidated
cash from operations totaled $661 million and $682 million for 1996 and
1995, respectively. The $21 million decrease includes increased
electricity sales and gas deliveries; lower cash losses associated with
the PPA; CMS NOMECO's increased sales of oil and natural gas; and the
timing of cash payments, receipts and recognition of revenues related to
operations. CMS Energy uses its operating cash primarily to expand its
international businesses, maintain and expand its electric and gas utility
systems, retire portions of its long-term debt and pay dividends.
Investing Activities Net cash used in investing activities totaled $841
million and $1,016 million for 1996 and 1995, respectively. The decrease
of $175 million primarily reflects the 1995 acquisition of Hydra-Co and an
increase in 1996 of proceeds from the sale of property. An increase in
capital expenditures was partially offset by a decrease in investments in
partnerships and unconsolidated subsidiaries during 1996. CMS Energy's
1996 expenditures for its utility and international businesses were $447
million and $432 million, respectively.
Financing Activities Net cash provided by financing activities totaled
$180 million and $311 million for 1996 and 1995, respectively. The net
decrease of $131 million primarily reflects an increase in the repayment
of bank loans, an increase in common stock dividends and a reduction in
proceeds from the issuance of common stock. These changes were partially
offset by increased proceeds from bank loans and notes as well as proceeds
from the sale of preferred securities in 1996.
In 1996, CMS Energy filed shelf-registration statements with the SEC for
the issuance and sale of up to $125 million of Series B GTNs and $150
million Series C GTNs, with net proceeds to be used for general corporate
purposes. On December 31, 1996, CMS Energy had issued and outstanding
$250 million of Series A GTNs and $103 million of Series B GTNs with
weighted-average interest rates of 7.7 percent and 8.0 percent,
respectively.
Also in 1996, CMS Generation refinanced the $118 million bridge credit
facility obtained in connection with the acquisition of Hydra-Co with a
$110 million, five-year term loan. On December 31, 1996, $107 million was
outstanding with a weighted-average interest rate of 7.2 percent.
CMS NOMECO replaced its $140 million revolving credit agreement with a
$225 million revolving credit agreement. On December 31, 1996, $122
million was outstanding under the new agreement with a weighted-average
interest rate of 6.2 percent.
In 1996, CMS Energy declared and paid $94 million in cash dividends to
holders of CMS Energy Common Stock and $9 million in cash dividends to
holders of Class G Common Stock. In July 1996, the Board of Directors
declared quarterly dividends of $.27 per share on CMS Energy Common Stock
and $.295 per share on Class G Common Stock, representing an increase in
the annualized dividend on CMS Energy Common Stock to $1.08 per share from
the previous $.96 per share (a 12.5 percent increase) and an increase in
the annualized dividend on Class G Common Stock to $1.18 per share from
the previous dividend of $1.12 per share (a 5.4 percent increase). In
January 1997, the Board of Directors declared a quarterly dividend of $.27
per share on CMS Energy Common Stock and $.295 per share on Class G Common
Stock, which were paid in February 1997.
In 1996, CMS Energy received net proceeds of $95 million from the issuance
of common stock. The issuance of 2.1 million of those shares completed
the remaining amount on a shelf-registration filing by CMS Energy with the
SEC on February 15, 1995 covering the issuance of up to $200 million of
securities. Proceeds from the sale were used for general corporate
purposes of CMS Energy.
In 1996, CMS Energy filed a shelf-registration statement with the SEC for
the issuance and the sale of up to $500 million of senior and subordinated
debt securities. If securities are issued from this shelf-registration
statement, the net proceeds will be used to invest in the business of
CMS Energy and for its general corporate purposes. Initially, the net
proceeds may be used to refund or refinance a portion of Series A GTNs,
Series A Deferred Coupon Notes and Series B Deferred Coupon Notes.
Other Investing and Financing Matters CMS Energy has available unsecured,
committed lines of credit totaling $155 million and a $450 million
Unsecured Revolving Credit Facility. At December 31, 1996, CMS Energy had
utilized a total of $178 million under these facilities. CMS Energy will
continue to evaluate the capital markets in 1997 as a source of financing
its subsidiaries' investing activities and required debt retirements.
Consumers has several unsecured, committed lines of credit totaling $120
million and a $425 million working capital facility available to meet
short-term borrowing requirements to finance working capital and gas in
storage, and to pay for capital expenditures between long-term financings.
At December 31, 1996, a total of $333 million was outstanding under these
facilities. In October 1996, the FERC authorized the issuance of up to
$900 million of short-term securities through 1998. An agreement is in
place permitting the sales of certain accounts receivable for up to $500
million. At December 31, 1996 and 1995, receivables sold totaled $318
million and $295 million, respectively. In November 1996, the FERC
authorized the issuance of $500 million of long-term securities through
November 1998 for refinancing or refunding purposes. Also in October
1996, Michigan Gas Storage entered into a $23 million secured, variable
rate, seven-year term loan.
CMS Energy is required to redeem or retire $1.9 billion of long-term debt
over the three-year period ending December 1999. In addition, at December
31, 1996, Consumers had a recorded a liability to the DOE of $106 million,
which is to be paid prior to the first delivery of spent nuclear fuel to
the DOE. Delivery of the fuel had originally been scheduled to occur in
1998 (see Note 2). Cash provided by operating activities is expected to
satisfy a substantial portion of these debt retirements. Additionally,
capital markets will continue to be evaluated as a source of financing
required debt retirements.
At December 31, 1996 the book value per share of CMS Energy Common Stock
and Class G Common Stock was $17.02 and $11.19, respectively.
Electric Utility Results of Operations
Pretax Operating Income:
In Millions
Change Compared to Prior Year 1996 vs 1995 1995 vs 1994
Sales (net of special contract discounts) $ 1 $ 59
Rate increases and other regulatory issues 50 9
Operation and maintenance 2 (13)
General tax and depreciation (13) (26)
Other - 1
---- ----
Total change $ 40 $ 30
==== ====
Electric Sales: Total electric sales in 1996 were 37.1 billion kWh, a 4.4
percent increase from the 1995 level as a result of economic growth. This
increase in total electric sales included a 1.7 percent increase in sales
to ultimate customers. Total electric sales in 1995 were 35.5 billion
kWh, a 3.0 percent increase from the 1994 level as a result of economic
growth and warmer summer temperatures. This increase in total electric
sales included a 4.2 percent increase in sales to ultimate customers. The
table below reflects electric kWh sales by class of customer for both
periods:
In Billions of kWh
Years Ended December 31 1996 1995 Change 1995 1994 Change
Residential 10.9 10.7 .2 10.7 10.2 .5
Commercial 10.0 9.7 .3 9.7 9.2 .5
Industrial 12.9 12.7 .2 12.7 12.3 .4
Other 3.3 2.4 .9 2.4 2.8 (.4)
---- ---- --- ---- ---- ---
Total sales 37.1 35.5 1.6 35.5 34.5 1.0
==== ==== === ==== ==== ===
Power Costs:
In Millions
Years Ended December 31 1996 1995 Change 1995 1994 Change
$1,087 $970 $117 $970 $950 $20
The increases in both periods reflect greater power purchases from outside
sources to meet increased sales demand.
Electric Utility Issues
Power Purchases from the MCV Partnership: Consumers' annual obligation to
purchase contract capacity from the MCV Partnership under the PPA is
1,240 MW through the termination of the PPA in 2025. The MPSC allows
Consumers to recover substantially all payments for 915 megawatts (MW) of
contract capacity purchased from the MCV Partnership. The MPSC order
allowing recovery was affirmed by the Court of Appeals in March 1996. At
the end of 1992, Consumers recognized a loss for the present value of the
estimated future underrecoveries of power purchases from the MCV
Partnership.
In November 1996, the MPSC approved a Settlement Agreement proposed by
Consumers and the MPSC staff that addressed cost recovery for the
remaining 325 MW of MCV Facility capacity. Beginning January 1, 1996,
Consumers was permitted to recover an average capacity charge of 2.86
cents per kWh for this power. The approved average capacity charge
increased to 3.62 cents per kWh for 65 MW of the 325 MW on November 1,
1996, and for an additional 44 MW on January 1, 1997. Cost recovery for
the remaining 216 MW is based upon the escalation of the average capacity
charge by three percent annually until it reaches 3.62 cents per kWh in
2004, and remains at this ceiling rate through the end of the PPA
contract.
Consumers anticipates it will continue to experience cash underrecoveries
associated with the PPA as shown below. These after-tax cash
underrecoveries totaled $41 million, $90 million and $61 million in 1996,
1995 and 1994, respectively. For further information, see Note 3.
In Millions
1997 1998 1999 2000 2001
Estimated cash
underrecoveries, net of tax $28 $23 $22 $21 $20
After considering the effects of the Settlement Agreement, Consumers
believes that the original loss recorded in 1992 remains adequate. The
amount of underrecoveries of power costs continues to be based, in part,
on management's best assessment of the future availability of the MCV
Facility. If the MCV Facility operates at levels above management's
estimate over the remainder of the PPA, future losses will need to be
recognized over and above amounts previously recorded. Further, Consumers
would experience greater amounts of cash underrecoveries than originally
anticipated. Management will continue to evaluate the adequacy of the
accrued liability considering actual facility operations.
Electric Rate Proceedings: In February 1996, the MPSC issued a partial
final order in the retail electric rate case filed in 1994, granting a $46
million annual increase in electric retail rates and authorizing a 12.25
percent return on common equity. Separate requests were before the MPSC
to offer competitive special rates to certain large qualifying customers
and to modify certain depreciation rates and practices. In November 1996,
the MPSC issued a final order in the Settlement Agreement which combined
the separate requests. The rate increase and rate of return were not
changed from the partial final order and Consumers was authorized to
accelerate recovery of its nuclear plant investment by charging $18
million of annual steam production plant depreciation expense to the
nuclear production depreciation reserve. Recovery of the additional 325
MW of MCV Partnership contract capacity charges was also approved (see
Note 3).
The Settlement Agreement also requires the establishment of a direct
access program. Customers having a maximum demand of at least 2 MW are
eligible to purchase generation services directly from any eligible third-
party power supplier. The program is limited to 650 MW of sales, of which
410 MW has already been filled by existing contracts; 140 MW may be filled
by either direct access customers or new special contracts which Consumers
has signed and submitted to the MPSC for approval; and the remaining 100
MW must be made available solely to direct access customers for at least
18 months. Rehearing petitions have been filed by Consumers and other
interested parties.
Nuclear Matters: In January 1997, the NRC issued its Systematic
Assessment of Licensee Performance report for Palisades. The report rated
all areas as good, unchanged from the previous assessment.
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. Based on continuing
analysis of data from testing of similar materials, in December 1996,
Consumers received an interim Safety Evaluation Report from the NRC
indicating that the reactor vessel can be safely operated through 2003,
before reaching the NRC's screening criteria for reactor embrittlement.
Consumers believes that, with a change in fuel management designed to
minimize embrittlement, Palisades might be operated to the end of its
license life in the year 2007 without annealing of the reactor vessel, but
will continue to monitor the matter.
Palisades' on-site storage pool for spent nuclear fuel is at capacity.
Consequently, NRC-approved dry casks, which are steel and concrete vaults,
are being used for temporary on-site storage. For further information,
see Note 15.
Electric Environmental Matters: The Clean Air Act significantly increased
the environmental constraints that utilities will operate under in the
future. While the Clean Air Act's provisions require that certain capital
expenditures be made in order to comply with the amendments for nitrogen
oxide reductions, generating units are currently operating at or near the
sulfur dioxide emission limits that will be effective in the year 2000.
Management believes that annual operating costs will not be materially
affected as a result of expenditures to comply.
Under the Michigan Natural Resources and Environmental Protection Act,
Consumers expects that it will ultimately incur investigation and remedial
action costs at a number of sites, and believes that these costs are
properly recoverable in rates.
Consumers is a so-called potentially responsible party at several sites
being administered under Superfund. In addition, 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 the liability at any
of the known Superfund sites, individually or in total, will have a
material adverse effect on CMS Energy's financial position, liquidity or
results of operations. For further information regarding electric
environmental matters, see Note 14.
Stray Voltage: A number of lawsuits have been filed against Consumers
relating to the effect of so-called stray voltage on certain livestock.
As of January 1997, 22 separate stray voltage lawsuits were awaiting
trial court action, down from 30 lawsuits at December 31, 1995, and 83
lawsuits at December 31, 1994. CMS Energy believes that the resolution of
the remaining lawsuits will not have a material impact on its financial
position, liquidity or results of operations.
Gas Utility Results of Operations
Pretax Operating Income:
In Millions
Change Compared to Prior Year 1996 vs 1995 1995 vs 1994
Sales $ 19 $ 12
Reversal in 1995 of gas contingency (23) 23
Recovery of gas costs and other issues 7 (4)
Gas loaning activities 7 -
Operations and maintenance (4) (9)
General taxes and depreciation (5) (7)
Other 1 1
---- ----
Total change $ 2 $ 16
==== ====
Gas Deliveries: Total system deliveries, excluding transport to the MCV
Facility and other miscellaneous transportation, increased 5.1 percent for
1996 compared to 1995 and 6.5 percent for 1995 compared to 1994. The
increased deliveries for each period reflect growth resulting from
customer additions, conversions to natural gas from alternative fuels and
continued strength in the Michigan economy. The table below indicates
total system deliveries and the impact of weather.
In Billions of Cubic Feet
Years Ended December 31 1996 1995 Change 1995 1994 Change
Weather-adjusted deliveries
(variance reflects growth) 337 326 11 326 313 13
Impact of weather 15 9 6 9 1 8
--- --- --- --- --- ---
System deliveries excluding
transport to MCV Partnership 352 335 17 335 314 21
Transport to MCV Partnership 65 54 11 54 77 (23)
Off-system transportation 31 15 16 15 18 (3)
--- --- --- --- --- ---
Total system deliveries 448 404 44 404 409 (5)
=== === === === === ===
Cost of Gas Sold:
In Millions
Years Ended December 31 1996 1995 Change 1995 1994 Change
$750 $674 $76 $674 $662 $12
The cost increase for 1996 was the result of increased sales and the
reversal of a $23 million gas contract contingency during 1995.
Gas Utility Issues
Gas Rate Proceedings: In March 1996, the MPSC issued a final order
decreasing gas rates by $12 million annually and authorizing an 11.6
percent return on common equity. Consumers filed a petition for rehearing
with the MPSC, requesting reconsideration of certain issues. This
petition was denied in June 1996 and the matter is now closed.
Consumers entered into a special natural gas transportation contract with
one of its transportation customers in response to the customer's proposal
to bypass Consumers' system in favor of a competitive alternative. The
contract provides for discounted gas transportation rates in an effort to
induce the customer to remain on Consumers' system. In 1995, the MPSC
approved the contract but stated that the revenue shortfall created by the
difference between the contract's discounted rate and the floor price of
one of Consumers' MPSC-authorized gas transportation rates must be borne
by Consumers' shareholders. In 1995, Consumers filed an appeal with the
Court of Appeals, which is still pending, claiming that the MPSC decision
denies Consumers the opportunity to earn its authorized rate of return and
is therefore unconstitutional.
Gas Cost Recovery Matters: In 1995, the MPSC issued an order regarding a
$44 million (excluding interest) gas supply contract pricing dispute
between Consumers and certain intrastate producers. The order stated that
Consumers was not obligated to seek prior approval of market-based pricing
provisions that were implemented under the contracts in question. The
producers subsequently filed a claim of appeal of the MPSC order with the
Court of Appeals. Consumers believes the MPSC order correctly concludes
that the producers' theories are without merit and will vigorously oppose
any claims they may raise, but cannot predict the outcome of this issue.
In the gas cost recovery reconciliation proceeding for the period April
1995 through March 1996, an issue has arisen questioning whether revenue
from gas loaning (which was a new business activity for Consumers) should,
in whole or in part, be immediately passed through to customers. The
Administrative Law Judge issued a proposal for decision in January 1997
that agreed with the MPSC staff's position that the gas loaning program
uses storage assets of Consumers and therefore recommended that 90 percent
of the revenue should be refunded to customers. For the year ended
December 31, 1996, $6 million would be subject to refund. Consumers will
continue to oppose this view before the MPSC.
Gas Environmental Matters: Consumers expects that it will ultimately
incur investigation and remedial action costs at a number of sites,
including some that formerly housed manufactured gas plant facilities.
Data available, and continued internal review of these former manufactured
gas plant sites, have resulted in an estimate for all costs related to
investigation and remedial action of between $48 million and $98 million.
These estimates are based on undiscounted 1996 costs. At December 31,
1996, Consumers has accrued a liability for $48 million and has
established a regulatory asset for approximately the same amount. Any
significant change in assumptions such as remediation technique, nature
and extent of contamination and regulatory requirements, could affect the
estimate of remedial action costs for the sites.
In accordance with an MPSC rate order, environmental clean-up costs, above
the amount currently being recovered in rates, will be deferred and
amortized over ten years. The order authorizes current recovery of $1
million annually. Consumers is continuing discussions with certain
insurance companies regarding coverage for some or all of the costs that
may be incurred for these sites. For further information regarding
environmental matters, see Note 14.
Oil and Gas Exploration and Production
Pretax Operating Income: 1996 pretax operating income increased $9
million from 1995, primarily due to higher oil and gas prices and volumes,
partially offset by the recognition of a $10 million gain from assignment
and novation of a gas supply contract recorded in the first quarter of
1995. Pretax operating income for 1995 increased $22 million from 1994,
primarily due to higher sales volumes and oil sales prices, income
attributable to the acquisitions of Walter International, Inc., and Terra
Energy Ltd., oil and gas exploration and production companies, and
increased gains from the assignments of gas supply contracts, partially
offset by lower average market prices for gas.
Capital Expenditures: Capital expenditures during 1996 relate primarily
to the development of existing oil and gas reserves.
Independent Power Production
Pretax Operating Income: 1996 pretax operating income increased $22
million from 1995, primarily reflecting a gain on the sale of a power
purchase agreement by a partnership in which CMS Generation owns a 50
percent interest, a gain on the sale of a partnership interest and
increased operating income resulting from a refund received by the MCV
Partnership. Pretax operating income for 1995 increased $25 million,
primarily reflecting higher capacity sales by the MCV Partnership, as well
as additional equity earnings by CMS Generation subsidiaries primarily due
to the Hydra-Co acquisition.
Capital Expenditures and Other: In 1996, CMS Generation, through a
subsidiary, commenced construction of the La Plata Cogeneration Plant, a
128 MW natural gas-fueled, combined-cycle power plant in Buenos Aires
Province, Argentina. Construction of the $110 million plant being built
on the site of a petroleum refinery owned and operated by YPF S.A.,
Argentina's largest oil company, is scheduled to be completed by the fall
of 1997. Also in 1996, CMS Generation increased its ownership interest in
the project from 39 percent to 100 percent by purchasing the remaining 61
percent from a consortium of Argentine investors. The Overseas Private
Investment Corporation is expected to provide $75 million in non-recourse
project financing for the facility.
In 1996, CMS Generation, through a subsidiary, and an affiliate of ABB
signed an agreement with Morocco's national utility, Office National de
l'Electricite, for the privatization, expansion and operation of the 1,320
MW Jorf Lasfar coal-fueled power plant located southwest of Casablanca.
The agreement covers the purchase and operation of two existing 330 MW
electric generating units and construction and operation of another two
330 MW electric generating units by CMS Generation and ABB.
CMS Generation and ABB each will hold a 50 percent interest in the
transaction. CMS Energy posted a $30 million conditional letter of credit
to ensure closing under the agreement, which is targeted for the first
half of 1997 and includes over $1 billion in debt financing. Construction
of the second two units will begin shortly thereafter.
In 1996, CMS Generation, through a subsidiary, increased its ownership
interest in CTM to 81 percent. In 1996, CTM began a project to repower
its electric generating plant in Western Argentina's Mendoza Province.
CMS Generation currently plans to invest $185 million to refurbish and
repower the facility resulting in an increase in the plant's available net
output from 243 MW to 506 MW. Capital markets financing of $85 million is
targeted for the first half of 1997.
As of the first quarter of 1997, GVK, began generating electricity from
all three of its combustion turbines. CMS Generation holds a 25.25
percent interest in GVK and operates the 235 MW plant. Construction is
continuing on the combined-cycle facility with an estimated total cost of
$260 million. GVK has received a Government of India counter-guarantee of
performance of certain obligations under the power purchase agreement by
the Andhra Pradesh State Electricity Board and expects to complete
financing early in 1997.
As of January 1, 1997, Jamaica Private Power Company achieved commercial
operation of the two diesel generators at its 60 MW diesel-fired
independent power project in Kingston, Jamaica. CMS Generation, through a
subsidiary, holds a 44 percent interest in Jamaica Private Power Company
and a 60 percent interest in Private Power Operators Limited, which will
operate the plant. Construction on the balance of the plant, including
the 4 MW waste heat steam turbine, will be complete in the first half of
1997.
Natural Gas Transmission, Storage and Marketing
Pretax Operating Income: 1996 pretax operating income increased $14
million from 1995, reflecting new pipeline and storage investments,
primarily TGN, the continued growth of existing projects, gas marketed to
end-users and the exchange of ownership interests in the Moss Bluff and
Grands Lacs partnerships, as detailed below. In 1995, pretax operating
income increased $5 million over 1994, reflecting growth from new pipeline
investments and the continued growth of existing projects and gas marketed
to end-users.
Capital Expenditures and Other: In 1996, CMS Gas Transmission acquired
Petal Gas Storage Company, a natural gas storage facility located in
Forrest County, Mississippi. The salt dome storage cavern provides up to
3.2 billion cubic feet per day of 10-day storage service and has the
capability of being refilled in 20 days.
In 1996, CMS Gas Transmission acquired 32 percent of the common shares of
Nitrotec. Nitrotec specializes in the development and commercialization
of advanced carbon-based adsorption gas separation technologies. Nitrotec
recently received patents covering its helium removal process and nitrogen
rejection process.
In 1996, CMS Gas Transmission sold its 50 percent ownership interest in
Moss Bluff Gas Storage Systems, a partnership that owns a gas storage
facility, to its partner, MHP, and purchased the remaining 50 percent
ownership interest in the Grands Lacs Limited Partnership, a marketing
center for natural gas, from MHP. This transaction resulted in CMS Gas
Transmission receiving $26 million.
In 1996, Cherokee acquired the Crescent and Ames gas gathering systems and
processing plant in Oklahoma for $34 million. A portion of the Ames gas
gathering system was subsequently sold in January 1997 for $8 million.
CMS Gas Transmission and Heritage Gas Services have partnership interests
in Cherokee of 82 percent and 18 percent, respectively. Cherokee had
acquired the adjacent Lucien gas gathering system and processing plant
earlier in 1996, and has now integrated the two operations. The Crescent
system is providing operating synergies with the Lucien system, and has
increased CMS Gas Transmission's presence in this important domestic gas-
producing region.
In 1996, CMS Gas Transmission, together with Empresa Nacional de
Electricidad S.A., Chile's largest electricity generation and transmission
company, became partners in the Atacama Pipeline, an integrated $700
million project to construct 930 kilometer pipeline that will transport
natural gas across the Andes Mountains from Northern Argentina to markets
in Northern Chile. A 600 MW gas-fueled, combined-cycle generating plant
is planned to be built in two stages at the end of the pipeline in Chile
by a consortium including CMS Generation. Construction is scheduled to
begin in 1997, with gas transportation and plant operations expected in
1999.
International Energy Distribution
Capital Expenditures: In 1996, a seven-company consortium in which
CMS Electric and Gas Company, a subsidiary of Enterprises, holds a 40
percent interest acquired 90 percent of the outstanding shares of EDEER
S.A. for $160 million. EDEER S.A. serves over 200,000 customers,
primarily residential and commercial, in a 55,000 square kilometer area.
In 1996, the Entre Rios Province transferred ownership and operating
management of EDEER S.A. to the consortium.
Forward-Looking Information
Forward-looking information is included throughout this Annual Report.
Material contingencies are also described in the Notes to Consolidated
Financial Statements and should be read accordingly.
Some important factors that could cause actual results or outcomes to
differ materially from those discussed in the forward-looking statements
include prevailing governmental policies and regulatory actions both
domestic and international (including those of the FERC and the MPSC) with
respect to rates, industry and rate structure, operation of nuclear power
facilities, acquisition and disposal of assets and facilities, operation
and construction of plant facilities, operation and construction of
natural gas pipeline and storage facilities, recovery of the cost of
purchased power or natural gas, decommissioning costs, and present or
prospective wholesale and retail competition, among others. The business
and profitability of CMS Energy are also influenced by economic and
geographic factors, including political and economic risks (particularly
those associated with international development and operations, including
currency fluctuation), changes in environmental laws and policies, weather
conditions, competition for retail and wholesale customers, pricing and
transportation of commodities, market demand for energy, inflation,
capital market conditions, unanticipated development project delays or
changes in project costs, and the ability to secure agreement in pending
negotiations (particularly for projects in development), among other
important factors. All such factors are difficult to predict, contain
uncertainties that may materially affect actual results, and may be beyond
the control of CMS Energy.
Capital Expenditures: CMS Energy estimates that capital expenditures,
including new lease commitments and investments in partnerships and
unconsolidated subsidiaries, will total $2.7 billion over the next three
years. Cash generated by operations is expected to satisfy a substantial
portion of capital expenditures. Nevertheless, CMS Energy will continue
to evaluate capital markets in 1997 as a potential source of financing its
subsidiaries' investing activities. CMS Energy estimates capital
expenditures by business segment over the next three years as follows:
In Millions
Years Ended December 31 1997 1998 1999
Electric utility (a) $272 $275 $257
Gas utility (a) 115 103 103
Oil and gas exploration and production 135 150 165
Independent power production 196 162 157
Natural gas transmission and storage 110 100 75
International energy distribution 120 100 100
Marketing, services and trading 17 13 -
---- ---- ----
$965 $903 $857
==== ==== ====
(a) These amounts include an attributed portion of Consumers' anticipated
capital expenditures for plant and equipment common to both the electric
and gas utility businesses.
CMS Energy currently plans to invest $450 million from 1997 to 1999 in its
oil and gas exploration and production operations, primarily in North and
South America, offshore West Africa and North Africa. CMS Energy also
plans to invest $515 million in its independent power production
operations from 1997 to 1999 to pursue acquisitions and development of
electric generating plants in the United States, Latin America, Southern
Asia, the Pacific Rim region and North Africa. Investments totaling $285
million from 1997 to 1999, relating to non-utility gas operations, are
planned to continue development of natural gas storage, gathering and
pipeline operations both domestically and internationally. CMS Energy
plans to invest $320 million from 1997 to 1999 in its international energy
distribution operations related to international expansion. CMS MST plans
to invest $30 million from 1997 to 1999. CMS MST was formed during 1996
as part of CMS Energy's expansion and reorganization of its energy
marketing business. This restructuring is expected to significantly
improve CMS Energy's competitive position in the energy marketplace
throughout the U.S. and abroad. CMS MST will provide gas, electric, oil
and coal marketing, risk management and energy management services
throughout the United States and eventually worldwide.
These estimates are prepared for planning purposes and are subject to
revision.
Electric Outlook: Consumers expects average annual growth of two to three
percent per year in electric system sales over the next five years, based
on the current industry configuration in Michigan. Actual electric sales
in future periods may be affected by abnormal weather, changing economic
conditions, or the developing competitive market for electricity.
Consumers continues to work toward retaining its current retail service
customers by offering electric rates that are competitive with those of
other energy providers, and by improving reliability and customer
communications. Consumers is also taking steps to prepare for a future
environment in which open access is the predominant means by which retail
service customers obtain their power requirements.
Consumers' retail service is affected by competition in several areas,
including the potential installation of cogeneration or other self-
generation facilities by larger industrial customers; the formation of
municipal utilities that would displace retail service to an entire
community; competition from other utilities that offer flexible rate
arrangements designed to encourage movement of facilities or production to
their service areas; economic development competition between utilities;
MPSC direct access programs and potential electric industry restructuring
including regulatory decisions and new state or federal legislation.
In 1996, the MPSC significantly reduced the rate subsidization of
residential customers by large industrial and commercial customers. In
addition, in an effort to meet the challenge of competition, Consumers has
signed long-term sales contracts with some of its largest industrial
customers, including its largest customer, General Motors. Under the
General Motors contract, Consumers will serve certain facilities at least
five years and serve other facilities at least ten years. Certain
facilities will have the option of taking retail wheeling service (if
available) after the first three years of the contract. The MPSC approved
this contract in 1995, and has also approved long-term sales contracts
with other major customers representing a substantial percentage of
Consumers' industrial load deemed to have viable cogeneration
alternatives. These orders have been appealed by the Michigan Attorney
General.
The MPSC-approved Settlement Agreement, among other things, opened up 240
MW of load to competition. Consumers believes it can compete for 140 MW
of load, while 100 MW is reserved for 18 months for direct access on a
lottery basis. Consumers has negotiated special contracts sufficient to
fill the 140 MW of load available under the Settlement Agreement. These
contracts were filed with the MPSC for approval.
In January 1996, the Governor of the State of Michigan requested that the
MPSC review the existing regulatory framework governing Michigan business
in order to improve Michigan's business climate. After the filing of
utility plans as requested by the MPSC earlier in 1996, and after
discussions with many parties, in December 1996, the MPSC staff issued a
report recommending a phased-in program of direct access by electric
customers (also known as customer choice) based on two fundamental
principles: 1) all customers should be eligible to participate in the
emerging competitive market for electric supply; and 2) rates should not
be increased for any customers and should be decreased where possible.
The report also recommends that, beginning in 1997, customers would have
the opportunity to select the power supplier of their choice. All
customers would be eligible to participate, but in the initial years the
total amount would be limited to 150 MW for 1997, increasing an additional
150 MW each year through 2000. In 2001, all commercial and industrial
customers served at primary voltage would be eligible, and in 2004 all
remaining customers would be eligible. This report also recommends
recovery of electric utility transition costs (often referred to as
stranded costs) from those customers exercising a right to purchase power
from generators other than traditional utility suppliers.. Transition
costs consist of two elements: 1) energy supply costs that were incurred
during the regulated era that would not be competitive at market prices if
the electric industry is restructured; and 2) costs that are incurred to
facilitate the transition from regulated monopoly status to competitive
market status. The MPSC staff report states that transition costs should
include the following: 1) regulatory assets (see Note 19); 2) nuclear
capital costs; 3) contract capacity costs in power purchase agreements; 4)
employee-related restructuring costs; and 5) other costs related to
implementing restructuring.
The report also recommends that where possible, the recovery of the
transition costs would be funded through rate reduction bonds, a potential
financing which has the dual advantages of funding transition costs while
simultaneously reducing customer rates. Transition costs not recovered
through rate reduction bonds would be recovered through a transition
charge billed to direct access customers. The transition charge would
begin when the customer takes direct access service and would continue
through 2007. Customers not participating in the direct access program
would be charged bundled rates that include: 1) a base rate freeze; 2)
suspension of the power supply cost recovery process during the
transition period and establishment of a fixed level of fuel and purchase
power recovery based on approved cost levels; and 3) limited performance-
based regulation of the transmission and distribution functions in a
manner which incorporates service standards and allows for the Consumer
Price Index less one percent adjustments on transmission and distribution
rates through the end of 2001.
On March 7, 1997, Consumers filed supplementary data with the MPSC at its
request. This data showed that Consumers has approximately $1.8 billion
of existing transition costs which would be recovered by a transition
charge to be paid by direct access customers through 2007. Restructuring
and implementation costs of $200 million would be recovered by an
implementation charge to direct access customers. Alternatively, if the
securitization approach is pursued and appropriate legislation is passed,
the data indicate that significant customer benefits would result. The
resulting securitization charge would be paid by all customers to service
$4 billion of rate reduction bonds with a proposed 15 year term. Because
of the phase-in schedule for retail direct access service, a substantial
portion of $4 billion in costs that would be subject to the securitization
alternative would be paid by customers on bundled rates prior to getting
choice, thus allowing the transition cost to be charged only to direct
access customers to be limited to $1.8 billion if securitization does not
occur. Securitization results in over $200 million benefit per year to
customers because the 15 year repayment period of the bonds allows the
cost reimbursement by the customer to be spread out over a longer period
than without securitization and because securitization allows the costs
being securitized to be financed at a lower rate.
Several of the elements of electric utility restructuring will need to be
addressed in legislation, including assurance of full transition cost recovery,
securitization of rate reduction bonds and generation deregulation.
Consumers currently expects that electric utility restructuring will occur
in a manner consistent with the MPSC Staff Report, but cannot predict
with certainty the timing of actual implementation, the extent of customer
choice, or resultant financial impacts.
In April 1996, the FERC issued Orders 888 and 889, which require utilities
to provide open access to the interstate transmission grid for wholesale
transactions. Order 888 requires public utilities owning, controlling, or
operating transmission lines in interstate commerce to file non-
discriminatory open access tariffs that contain minimum terms and
conditions of non-discriminatory service; allows utilities to charge their
current conforming transmission rates or apply for new rates; and allows
the full recovery of transition costs. Order 888 also requires that power
pools restructure their ongoing operations and open membership to industry
participants. Order 889 requires that utilities establish electronic
systems to share information about available transmission capacity and to
separate their wholesale power marketing and transmission operations
functions.
Several FERC Order 888 and 889 requirements have been implemented,
including the filing with FERC of Consumers' individual open access tariff
and the Joint Transmission Tariff with Detroit Edison for transmission
service across the Consumers and Detroit Edison transmission systems,
separation of the wholesale merchant function from the transmission
function, implementation of the required Code of Conduct, unbundling of
wholesale interconnection agreements and related issues. Consumers
participated in organizational discussions of a Midwest Independent System
Operator, of which Consumers is a member.
One issue related to FERC Orders 888 and 889 that is not resolved is the
operation of the Michigan Electric Power Coordination Center. Currently,
Consumers and Detroit Edison have an agreement to jointly operate the
Michigan Electric Power Coordination Center pool, which provides
considerable savings to Michigan electric customers. Consumers would
propose to maintain the benefits of the pool for its customers and open up
the pool to other participants on a non-discriminatory basis. Detroit
Edison seeks to terminate the power pool agreement with Consumers
effective April 30, 1997. The current Michigan Electric Power
Coordination Center agreement requires a four-year advance notice for
termination. The FERC is expected to rule on this issue in 1997. The
impact of the FERC decision on Consumers and its customers cannot be
predicted.
Consumers currently applies the utility accounting standard, SFAS 71, that
recognizes the economic effects of rate regulation and, accordingly, has
recorded regulatory assets and liabilities related to its generation,
transmission and distribution operations (see note 19). If rate recovery
of generation-related costs becomes unlikely or uncertain, whether due to
competition or regulatory action, this accounting standard may no longer
apply to Consumers' generation operations. This change could result in
either full recovery of generation-related regulatory assets (net of
related regulatory liabilities) or a loss, depending on whether Consumers'
regulators adopt a transition mechanism for the recovery of all or a
portion of these net regulatory assets. Based on a current evaluation of
the various factors and conditions that are expected to impact future cost
recovery, Consumers believes that its regulatory assets, including those
related to generation, are probable of future recovery.
At the SEC staff's request, the FASB is reviewing the accounting for
closure and removal costs for long-lived assets, including
decommissioning. The current electric utility industry accounting
practices of recording the cost of removal as a component of depreciation
could be changed. The FASB's tentative decision includes recognition of
the cost of closure and removal obligation as a liability based on
discounted future cash flows with the offset recorded as part of the cost
of the plant asset.
Gas Outlook: Consumers currently anticipates gas deliveries to grow two
percent per year (excluding transportation to the MCV Facility and off-
system deliveries) over the next five years, assuming a steadily growing
customer base. Additionally, Consumers has several strategies that will
support increased load requirements in the future. These strategies
include increased efforts to promote natural gas to both current and
potential customers that are using other fuels for space and water
heating. In addition, as air quality standards continue to become more
stringent, management believes that greater opportunities exist for
converting industrial boiler load and other processes to natural gas.
Consumers also plans additional capital expenditures to construct new gas
mains that are expected to expand Consumers' system. Actual gas
deliveries in future periods may be affected by abnormal weather,
alternative energy prices, changes in competitive conditions, and the
level of natural gas consumption. In addition, Consumers has proposed to
the MPSC a fixed gas price for recovery over a three-year period.
Consumers is also offering a variety of energy related services to its
customers including appliance maintenance, home safety, and home security.
In October 1996, the MPSC issued an order requesting Consumers and other
local distribution companies whose rates are regulated by the MPSC to
develop pilot programs that would allow any customers to purchase gas from
other suppliers and have the gas transported through local pipelines.
These pilot programs, which are to be implemented in mid-1997 and last for
two years, are intended to help the MPSC determine whether it is
appropriate to allow all customers access to the competitive gas
transportation market.
Based on a regulated utility accounting standard, SFAS 71, Consumers is
allowed to defer certain costs to the future and record regulatory assets,
based on the recoverability of those costs through the MPSC's approval.
Consumers has evaluated its regulatory assets related to its gas business,
and believes that sufficient regulatory assurance exists to provide for
the recovery of these deferred costs (see Note 19).
Other
New Accounting Standards: In 1996, the FASB issued SFAS 125, Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities, which is effective for 1997 financial statements. In October
1996, the American Institute of Certified Public Accountants issued
Statement of Position 96-1, Environmental Remediation Liabilities,
effective for 1997 financial statements. CMS Energy does not expect the
application of these statements to have a material impact on its financial
position, liquidity or results of operations.
62
Consolidated Statements of Income CMS Energy Corporation
In Millions, Except Per Share Amounts
Years Ended December 31 1996 1995 1994
Operating Revenue Electric utility $2,446 $2,277 $2,189
Gas utility 1,282 1,195 1,151
Oil and gas exploration and production 130 108 78
Independent power production 140 96 46
Natural gas transmission, storage and marketing 320 196 145
Other 15 18 5
------ ------ ------
Total operating revenue 4,333 3,890 3,614
------ ------ ------
Operating Expenses Operation
Fuel for electric generation 296 283 306
Purchased power - related parties 589 491 482
Purchased and interchange power 202 196 162
Cost of gas sold 997 824 785
Other 751 695 621
------ ------ ------
Total operation 2,835 2,489 2,356
Maintenance 178 186 192
Depreciation, depletion and amortization 441 416 379
General taxes 202 196 184
------ ------ ------
Total operating expenses 3,656 3,287 3,111
------ ------ ------
Pretax Operating Electric utility 402 362 332
Income (Loss) Gas utility 153 151 135
Oil and gas exploration and production 39 30 8
Independent power production 68 46 21
Natural gas transmission, storage and marketing 28 14 9
Other (13) - (2)
------ ------ ------
Total pretax operating income 677 603 503
------ ------ ------
Other Income Accretion income (Note 2) 10 11 13
(Deductions) Accretion expense (Note 2) (22) (31) (35)
Other, net 1 10 19
------ ------ ------
Total other deductions (11) (10) (3)
------ ------ ------
Fixed Charges Interest on long-term debt 230 224 193
Other interest 29 27 18
Capitalized interest (8) (8) (6)
Preferred dividends 28 28 24
Preferred securities distributions (Note 8) 8 - -
------ ------ ------
Net fixed charges 287 271 229
------ ------ ------
Income Before Income Taxes 379 322 271
Income Taxes 139 118 92
------ ------ ------
Consolidated Net Income $ 240 $ 204 $ 179
====== ====== ======
Net Income Attributable to Common Stocks CMS Energy $ 226 $ 201 $ 179
Class G $ 14 $ 3 -
====== ====== ======
Average Common Shares Outstanding CMS Energy 92 89 86
Class G 8 8 -
====== ====== ======
Earnings Per Average Common Share CMS Energy $ 2.45 $ 2.27 $ 2.09
Class G $ 1.82 $ .38 -
====== ====== ======
Dividends Declared Per Common Share CMS Energy $ 1.02 $ .90 $ .78
Class G $ 1.15 $ .56 -
====== ====== ======
The accompanying notes are an integral part of these statements.
/TABLE
63
Consolidated Statements of Cash Flows CMS Energy Corporation
In Millions
Years Ended December 31 1996 1995 1994
Cash Flows From Consolidated net income $ 240 $ 204 $ 179
Operating Adjustments to reconcile net income to net cash
Activities provided by operating activities
Depreciation, depletion and amortization (includes
nuclear decommissioning of $49, $51 and $49,
respectively) 441 416 379
Deferred income taxes and investment tax credit 46 75 56
Capital lease and debt discount amortization 41 61 73
Accretion expense (Note 2) 22 31 35
Accretion income - abandoned Midland
project (Note 2) (10) (11) (13)
Undistributed earnings of related parties (64) (53) (25)
Power purchases (Note 3) (63) (137) (87)
Other 20 7 3
Changes in other assets and liabilities (Note 17) (12) 89 12
------- ------- -------
Net cash provided by operating activities 661 682 612
------- ------- -------
Cash Flows From Capital expenditures (excludes capital lease additions
Investing of $31, $31 and $36, respectively and DSM) (Note 17) (659) (535) (575)
Activities Investments in partnerships and unconsolidated
subsidiaries (163) (242) (52)
Investments in nuclear decommissioning trust funds (49) (51) (49)
Cost to retire property, net (31) (41) (38)
Acquisition of companies, net of cash acquired (20) (146) -
Deferred demand-side management costs (6) (9) (9)
Proceeds from sale of property 79 22 20
Other 8 (14) (6)
------- ------- -------
Net cash used in investing activities (841) (1,016) (709)
------- ------- -------
Cash Flows From Proceeds from bank loans, notes and bonds 433 333 701
Financing Proceeds from preferred securities 97 - -
Activities Issuance of common stock 95 160 30
Repayment of bank loans (256) (18) (473)
Payment of common stock dividends (103) (84) (67)
Payment of capital lease obligations (40) (37) (35)
Retirement of bonds and other long-term debt (37) (44) (279)
Increase (decrease) in notes payable, net (8) 2 80
Retirement of common stock (1) (1) (2)
Issuance of preferred stock - - 193
------- ------- -------
Net cash provided by financing activities 180 311 148
------- ------- -------
Net Increase (Decrease) in Cash and Temporary Cash Investments - (23) 51
Cash and temporary cash investments
Beginning of year 56 79 28
------- ------- -------
End of year $ 56 $ 56 $ 79
======= ======= =======
The accompanying notes are an integral part of these statements.
64
Consolidated Balance Sheets CMS Energy Corporation
ASSETS In Millions
December 31 1996 1995
Plant and Property Electric $6,333 $6,103
(At Cost) Gas 2,337 2,218
Oil and gas properties (full-cost method) 1,140 1,074
Other 94 105
------ ------
9,904 9,500
Less accumulated depreciation, depletion
and amortization (Note 2) 4,867 4,627
------ ------
5,037 4,873
Construction work-in-progress 243 201
------ ------
5,280 5,074
------ ------
Investments Independent power production 318 275
Natural gas transmission, storage and marketing 233 193
First Midland Limited Partnership (Notes 3 and 20) 232 225
Midland Cogeneration Venture Limited
Partnership (Notes 3 and 20) 134 103
Other 86 22
------ ------
1,003 818
------ ------
Current Assets Cash and temporary cash investments at cost, which
approximates market 56 56
Accounts receivable and accrued revenue, less allowances
of $10 in 1996 and $4 in 1995 (Note 6) 373 296
Inventories at average cost
Gas in underground storage 186 184
Materials and supplies 86 83
Generating plant fuel stock 30 37
Deferred income taxes (Note 5) 48 24
Prepayments and other 235 230
------ ------
1,014 910
------ ------
Non-current Assets Postretirement benefits (Note 12) 435 462
Nuclear decommissioning trust funds (Note 2) 386 304
Abandoned Midland project 113 131
Other 384 444
------ ------
1,318 1,341
------ ------
Total Assets $8,615 $8,143
====== ======
65
CMS Energy Corporation
STOCKHOLDERS' INVESTMENT AND LIABILITIES In Millions
December 31 1996 1995
Capitalization Common stockholders' equity $1,702 $1,469
Preferred stock of subsidiary 356 356
Company-obligated mandatorily redeemable preferred
securities of Consumers Power Company Financing I (a) 100 -
Long-term debt (Note 7) 2,842 2,906
Non-current portion of capital leases (Note 13) 103 106
------ ------
5,103 4,837
------ ------
Current Liabilities Current portion of long-term debt and capital leases 409 207
Notes payable 333 341
Accounts payable 348 306
Accrued taxes 262 254
Accounts payable - related parties 63 53
Power purchases (Note 3) 47 90
Accrued interest 47 45
Accrued refunds 8 22
Other 206 192
------ ------
1,723 1,510
------ ------
Non-current Deferred income taxes (Note 5) 698 640
Liabilities Postretirement benefits (Note 12) 521 533
Power purchases (Note 3) 178 221
Deferred investment tax credits 161 171
Regulatory liabilities for income taxes,
net (Notes 5 and 19) 66 44
Other 165 187
------ ------
1,789 1,796
------ ------
Commitments and Contingencies (Notes 2, 3, 4, 13, 14 and 15)
Total Stockholders' Investment and Liabilities $8,615 $8,143
====== ======
(a) As described in Note 8, the primary asset of Consumers Power Company Financing I is $103 million principal amount
of 8.36% subordinated interest notes due 2015 from Consumers.
The accompanying notes are an integral part of these statements.
66
Consolidated Statements of Preferred Stock CMS Energy Corporation
Optional
Redemption Number of Shares In Millions
December 31 Series Price 1996 1995 1996 1995
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 (a) 2.08 25.00 8,000,000 8,000,000 193 193
----- -----
Total Preferred Stock $ 356 $ 356
===== =====
(a) Redeemable beginning April 1, 1999.
The accompanying notes are an integral part of these statements.
67
Consolidated Statements of Common Stockholders' Equity CMS Energy Corporation
In Millions, Except Number of Shares
Other Retained
Number Common Paid-in Revaluation Earnings
of Shares Stock Capital Capital (Deficit) Total
Balance at January 1, 1994 85,196,795 $ 1 $1,672 $ - $(707) $ 966
Consolidated net income 179 179
Common Stock:
Dividends declared (67) (67)
Reacquired (85,174) (2) (2)
Issued 1,389,578 30 30
Reissued 33,350 1 1
---------- --- ------ ---- ----- ------
Balance at December 31, 1994 86,534,549 1 1,701 - (595) 1,107
Consolidated net income 204 204
Common stock:
Dividends declared:
CMS Energy (80) (80)
Class G (4) (4)
Reacquired (21,514) (1) (1)
Issued:
CMS Energy 5,039,019 126 126
Class G (a) 124 124
Reissued 41,447 1 1
Change in unrealized
investment-loss (8) (8)
---------- --- ------ ---- ----- ------
Balance at December 31, 1995 91,593,501 1 1,951 (8) (475) 1,469
Consolidated net income 240 240
Common stock:
Dividends declared:
CMS Energy (94) (94)
Class G (9) (9)
Reacquired (31,700) (1) (1)
Issued:
CMS Energy 3,248,225 90 90
Class G (a) 5 5
Reissued 3,085 - -
Change in unrealized
investment-gain 2 2
---------- --- ------ ---- ----- ------
Balance at December 31, 1996 94,813,111 $ 1 $2,045 $ (6) $(338) $1,702
========== === ====== ==== ===== ======
(a) Number of Class G common shares outstanding:
Balance at December 31, 1995 7,618,602
Issued during 1996 257,872
---------
Balance at December 31, 1996 7,876,474
=========
The accompanying notes are an integral part of these statements.
68
CMS Energy Corporation
Notes to Consolidated Financial Statements
1: Corporate Structure
CMS Energy is the parent holding company of Consumers and Enterprises.
Consumers, a combination electric and gas utility company serving the
Lower Peninsula of Michigan, is the principal subsidiary of CMS Energy.
Consumers' customer base includes a mix of residential, commercial and
diversified industrial customers, the largest segment of which is the
automotive industry. Enterprises is engaged in several domestic and
international energy-related businesses including: oil and gas
exploration and production; acquisition, development and operation of
independent power production facilities; energy marketing to utility,
commercial and industrial customers; storage, transmission and processing
of natural gas; and international energy distribution.
2: Summary of Significant Accounting Policies and Other Matters
Basis of Presentation: The consolidated financial statements include
CMS Energy, Consumers and Enterprises and their wholly owned subsidiaries.
The financial statements are prepared in conformity with generally
accepted accounting principles and include the use of management's
estimates. CMS Energy uses the equity method of accounting for
investments in companies and partnerships where it has more than a 20
percent but less than a majority ownership interest and includes these
results in operating income. For the years ended December 31, 1996, 1995
and 1994, undistributed equity earnings were $64 million, $53 million and
$25 million, respectively.
Accretion Income and Expense: In 1991, the MPSC ordered that Consumers
could recover a portion of its abandoned Midland investment over a 10-year
period, but did not allow Consumers to earn a return on that amount.
Consumers reduced the recoverable investment to the present value of the
future recoveries. During the recovery period, the unrecovered asset is
adjusted to its present value. This adjustment is reflected as accretion
income. Conversely, Consumers recorded a loss in 1992 for the present
value of its estimated future underrecoveries of power costs resulting
from purchases from the MCV Partnership (see Note 3), and now recognizes
accretion expense annually to reflect the time value of money on the
recorded loss.
Gas Inventory: Consumers uses the weighted average cost method for
valuing working gas inventory. Cushion gas, which is gas stored to
maintain reservoir pressure for recovery of working gas, is recorded in
the appropriate gas utility plant account. Consumers stores gas inventory
in its underground storage facilities.
Maintenance, Depreciation and Depletion: Consumers' 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 1996,
1995 and 1994. The composite rate for gas utility plant was 4.2 percent
for 1996, 4.3 percent for 1995 and 4.2 percent for 1994.
The composite rate for other plant and property was 5.5 percent for 1996,
4.9 percent for 1995 and 4.7 percent for 1994.
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 proved oil
and gas reserves. Other non-utility depreciable property is amortized
over its estimated useful life; gains and losses are recognized at the
time of sale.
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 current federal
law, as confirmed by court decision, the DOE is required to begin
accepting deliveries of spent nuclear fuel by January 31, 1998 for
disposal, even if a permanent repository is not then operational.
Utilities and their customers have been prepaying the costs of DOE
transport and disposal through fees based on electric generation by their
nuclear plants. For fuel used after April 6, 1983, Consumers charges
disposal costs to nuclear fuel expense, recovers them through electric
rates and remits to the DOE quarterly. Consumers elected to defer payment
for disposal of spent nuclear fuel burned before April 7, 1983 until the
first of its spent fuel is delivered to the DOE. At December 31, 1996,
Consumers has a recorded liability to the DOE of $106 million, including
interest, which is to be paid prior to the first delivery of spent nuclear
fuel to the DOE. Consumers recovered through electric rates the amount of
this liability, excluding a portion of interest. In January 1997, in
response to the DOE's declaration in December 1996 that it would not begin
to accept spent nuclear fuel deliveries by the date required by law,
Consumers and other utilities filed suit in federal court. The utilities
are seeking a declaration that they are relieved of their obligation to
remit their quarterly fee payments to the DOE and are authorized to escrow
any related fees collected from their customers, unless and until the DOE
begins to accept spent nuclear fuel. The suit seeks an order requiring
the DOE to develop a program to begin acceptance of spent nuclear fuel by
January 31, 1998. Also in 1997, federal legislation was reintroduced to
clarify the timing of the DOE's obligation to accept spent nuclear fuel
and to direct the DOE to establish an integrated spent fuel management
system that includes designing and constructing an interim storage
facility in Nevada.
Nuclear Plant Decommissioning: Consumers collected $49 million in 1996
from its electric customers toward the future decommissioning of its two
nuclear plants. In April 1996, Consumers received a decommissioning order
from the MPSC which estimated decommissioning costs for Big Rock and
Palisades to be $317 million and $548 million (in 1996 dollars),
respectively. The estimated decommissioning costs increased from previous
estimates principally due to the unavailability of low- and high-level
radioactive waste disposal facilities. Amounts collected from electric
retail customers and deposited in trusts (including trust earnings) are
credited to accumulated depreciation. To meet NRC decommissioning
requirements, Consumers prepared site-specific decommissioning cost
estimates for Big Rock and Palisades, assuming that each plant site will
eventually be restored to conform with the adjacent landscape, and that
all contaminated equipment will be disassembled and disposed of in a
licensed burial facility. After the plants are retired, Consumers plans
to maintain the facilities in protective storage until radioactive waste
disposal facilities are available. As a result, the majority of
decommissioning costs will be incurred after each plant's NRC operating
license expires. When Big Rock's and Palisades' NRC licenses expire in
2000 and 2007, respectively, the trust funds are estimated to have
accumulated $257 million and $686 million, respectively. It is estimated
that at the time the plants are fully decommissioned (in the years 2030
for Big Rock and 2046 for Palisades), the trust funds will have provided
$1 billion for Big Rock and $2.1 billion for Palisades, including trust
earnings over this decommissioning period. Based on this plan, Consumers
believes that the current decommissioning surcharge will be sufficient to
provide for decommissioning of its nuclear plants. At December 31, 1996,
Consumers had an investment in nuclear decommissioning trust funds of $386
million.
Reclassifications: CMS Energy has reclassified certain prior year amounts
for comparative purposes. These reclassifications did not affect
consolidated net income for the years presented.
Related-Party Transactions: In 1996, 1995 and 1994, Consumers purchased
$50 million, $53 million and $48 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 $17 million, $26 million and $22
million for 1996, 1995 and 1994, respectively. For additional discussion
of related-party transactions with the MCV Partnership and the FMLP, see
Notes 3 and 20. Other related-party transactions are immaterial.
Revenue and Fuel Costs: Consumers accrues revenue for electricity and gas
used by its customers but not billed at the end of an accounting period.
Consumers accrues or reduces revenue for any underrecovery or overrecovery
of electric power supply costs and natural gas costs by establishing a
corresponding asset or liability until it bills or refunds these
differences to customers following an MPSC order.
Utility Regulation: Consumers accounts for the effects of regulation
based on a regulated utility accounting standard, SFAS 71. As a result,
the actions of regulators affect when revenues, expenses, assets and
liabilities are recognized. If all or a separable portion of Consumers'
operations becomes no longer subject to the provisions of utility
regulation, a write-off of related regulatory assets and liabilities would
be required, unless some form of transition cost recovery continues
through rates established and collected for Consumers' remaining
operations. In addition, Consumers would be required to determine any
impairment to the carrying costs of deregulated plant and inventory
assets. For further discussion, see MD&A Forward-Looking Information and
Note 19.
Other: For significant accounting policies regarding income taxes, see
Note 5; for executive incentive compensation, see Note 11; for pensions
and other postretirement benefits, see Note 12; and for cash equivalents,
see Note 17.
3: The Midland Cogeneration Venture
The MCV Partnership, which leases and operates the MCV Facility,
contracted to sell electricity to Consumers for a 35-year period beginning
in 1990 and to supply electricity and steam to The Dow Chemical Company.
Consumers, through two wholly owned subsidiaries, holds the following
assets related to the MCV Partnership and MCV Facility: 1) CMS Midland
owns a 49 percent general partnership interest in the MCV Partnership; and
2) CMS Holdings holds, through the FMLP, a 35 percent lessor interest in
the MCV Facility.
Summarized Statements of Income for CMS Midland and CMS Holdings:
In Millions
Years Ended December 31 1996 1995 1994
Pretax operating income $40 $35 $12
Income taxes and other 11 10 (1)
--- --- ---
Net income $29 $25 $13
=== === ===
Power Purchases from the MCV Partnership: Consumers' annual obligation to
purchase contract capacity from the MCV Partnership under the PPA is 1,240
MW through the termination of the PPA in 2025. The PPA provides that
Consumers is to pay the MCV Partnership a minimum levelized average
capacity charge of 3.77 cents per kWh, a fixed energy charge, and a
variable energy charge based primarily on Consumers' average cost of coal
consumed. The MPSC allows Consumers to recover substantially all of the
payments for its ongoing purchase of 915 MW of contract capacity. The
MPSC order allowing recovery was affirmed in March 1996 by the Court of
Appeals. Consumers is recovering capacity charges averaging 3.62 cents
per kWh for 915 MW of capacity, the fixed energy charge, and the
prescribed energy charges associated with the scheduled deliveries within
certain hourly availability limits, whether or not those deliveries are
scheduled on an economic basis.
Consumers previously recognized a loss in 1992 for the present value of
the estimated future underrecoveries of power costs under the PPA based 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. At December 31, 1996 and 1995, the after-tax present
value of the PPA liability totaled $147 million and $202 million,
respectively. The reduction in the liability since December 31, 1995
reflects after-tax cash underrecoveries of $41 million along with $28
million related to the termination of power purchase agreements, partially
offset by after-tax accretion expense of $14 million. The undiscounted
after-tax amount associated with the liability totaled $549 million at
December 31, 1996.
In November 1996, the MPSC approved a Settlement Agreement proposed by
Consumers and the MPSC staff that addressed cost recovery for the
remaining 325 MW of MCV Facility capacity. Beginning January 1, 1996,
Consumers was permitted to recover an average capacity charge of 2.86
cents per kWh for this power. The approved average capacity charge
increased to 3.62 cents per kWh for 65 MW of the 325 MW on November 1,
1996, and for an additional 44 MW on January 1, 1997. Cost recovery for
the remaining 216 MW is based upon the escalation of the average capacity
charge by three percent annually until it reaches 3.62 cents per kWh in
2004, and remains at this ceiling rate through the end of the contract.
Consumers anticipates it will continue to experience cash underrecoveries
associated with the PPA as shown below.
In Millions
1997 1998 1999 2000 2001
Estimated cash
underrecoveries,
net of tax $28 $23 $22 $21 $20
=== === === === ===
After considering the effects of the Settlement Agreement, Consumers
believes that the original loss recorded in 1992 remains adequate. The
amount of underrecoveries of power costs continues to be based, in part,
on management's best assessment of the future availability of the MCV
Facility. If the MCV Facility operates at levels above management's
estimate over the remainder of the PPA, future losses will need to be
recognized over and above amounts previously recorded. Further, Consumers
would experience greater amounts of cash underrecoveries than originally
anticipated. Management will continue to evaluate the adequacy of the
accrued liability considering actual facility operations.
Power Supply Cost Recovery Matters Related to Power Purchases from the MCV
Partnership: As part of the 1993 and 1994 plan case orders, the MPSC
confirmed the recovery of certain costs related to power purchases from
the MCV Partnership. ABATE or the Attorney General appealed these plan
case orders to the Court of Appeals. In February 1996, the Court of
Appeals affirmed the MPSC's order in the 1993 plan case.
As part of its decision in the 1993 power supply cost recovery
reconciliation case issued in 1995, the MPSC disallowed a portion of the
costs related to purchases from the MCV Partnership, and instead assumed
recovery of those costs from wholesale customers. Consumers believed this
was contrary to the terms of a 1993 MPSC order and appealed this issue.
The MCV Partnership and ABATE also filed separate appeals of this order.
In November 1996, the Court of Appeals affirmed the MPSC's order.
Consumers and the MCV Partnership filed petitions for rehearing of the
Court of Appeals opinion, which were denied in January 1997.
4: Rate Matters
Electric Proceedings: In February 1996, the MPSC issued a partial final
order in the retail electric rate case filed in 1994, granting Consumers a
$46 million annual increase in its electric retail rates and authorizing a
12.25 percent return on common equity. Consumers also had separate
requests before the MPSC to offer competitive special rates to certain
large qualifying customers and to modify certain depreciation rates and
practices. In November 1996, the MPSC issued a final order in the
Settlement Agreement which combined the separate requests. The rate
increase and rate of return were not changed from the partial final order
and Consumers was authorized to accelerate recovery of its nuclear plant
investment by charging $18 million of annual steam production plant
depreciation expense to the nuclear production depreciation reserve.
Recovery of the additional 325 MW of MCV Partnership contract capacity
charges was also approved (see Note 3).
The Settlement Agreement also requires Consumers to establish a direct
access program. Customers having a maximum demand of at least 2 MW are
eligible to purchase generation services directly from any eligible third-
party power supplier. The program is limited to 650 MW of sales, of which
410 MW has already been filled by existing contracts; 140 MW may be filled
by either direct access customers or new special contracts which Consumers
has signed and submitted to the MPSC for approval; and the remaining 100
MW must be made available solely to direct access customers for at least
18 months. Rehearing petitions have been filed by Consumers and other
interested parties.
Gas Proceedings: In March 1996, the MPSC issued a final order in a 1994
rate case, authorizing recovery of costs related to postretirement
benefits and former manufactured gas plant sites (see Note 12). Overall,
however, the order decreased Consumers' gas rates by $12 million annually
and authorized an 11.6 percent return on common equity.
In the GCR reconciliation proceeding for the period April 1995 through
March 1996, an issue has arisen questioning whether revenue from gas
loaning (which was a new business activity for Consumers) should, in whole
or in part, be immediately passed through to customers. The
Administrative Law Judge issued a proposal for decision in January 1997
that agreed with the MPSC staff's position that the gas loaning program
uses storage assets of Consumers and therefore recommended that 90 percent
of the revenue should be refunded to customers. For the year ended
December 31, 1996, $6 million would be subject to refund. Consumers will
continue to oppose this view before the MPSC.
In December 1996, the MPSC authorized Consumers to implement a pilot gas
transportation program for 40,000 customers in Bay County, Michigan. The
pilot program will provide residential and small commercial customers the
opportunity to purchase gas from suppliers other than Consumers for a two
year period beginning April 1997. Consumers will retain its role as sole
transporter and distributor of this gas.
In 1993, the MPSC issued an order favorable to Consumers regarding a gas
pricing disagreement between Consumers and certain intrastate producers,
which was affirmed on judicial review by state courts. In December 1996,
the U.S. Supreme Court denied the producers' request to review that
decision. In early 1995, management concluded that the intrastate
producers' pending appeals of the order would not be successful and,
accordingly, reversed a previously accrued contingency and recorded a $23
million (pretax) benefit.
In 1995, the MPSC issued an order regarding a $44 million (excluding
interest) gas supply contract pricing dispute between Consumers and
certain intrastate producers. The order stated that Consumers was not
obligated to seek prior approval of market-based pricing provisions that
were implemented under the contracts in question. The producers
subsequently filed a claim of appeal of the MPSC order with the Court of
Appeals. Consumers believes the MPSC order correctly concludes that the
producers' theories are without merit and will vigorously oppose any
claims they may raise, but cannot predict the outcome of this issue.
In December 1996, Consumers filed a request with the MPSC to totally
suspend the GCR clause and employ a fixed price for recovery of gas costs
for a period of three years ending in March 2000. There would be no
reconciliations and no reopenings for that period of time. In April 2000,
a new GCR factor would be implemented.
Resolution of the issues discussed in this note is not expected to have a
material impact on CMS Energy's financial position or results of
operations.
5: Income Taxes
CMS Energy and its subsidiaries (including Consumers) file a consolidated
federal income tax return. Income taxes are generally allocated based on
each company's separate taxable income. CMS Energy and Consumers practice
full deferred tax accounting for temporary differences, but federal income
taxes have not been recorded on the undistributed earnings of foreign
subsidiaries where CMS Energy intends to permanently reinvest those
earnings.
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 1996 1995 1994
Current income taxes $ 93 $ 43 $ 36
Deferred income taxes 56 85 66
Deferred ITC, net (10) (10) (10)
---- ---- ----
$139 $118 $ 92
==== ==== ====
The principal components of CMS Energy's deferred tax assets (liabilities)
recognized in the balance sheet are as follows:
In Millions
December 31 1996 1995
Property $ (621) $ (603)
Unconsolidated investments (259) (266)
Postretirement benefits (Note 12) (165) (173)
Abandoned Midland project (40) (46)
Employee benefit obligations
(includes postretirement benefits
of $167 and $175) (Note 12) 201 204
AMT carryforward 172 161
Power purchases (Note 3) 82 112
ITC carryforward - 23
Other (20) (28)
--- ---
$ (650) $ (616)
======= =======
Gross deferred tax liabilities $(1,715) $(1,698)
Gross deferred tax assets 1,065 1,082
------- -------
$ (650) $ (616)
======= =======
The actual income tax expense differs from the amount computed by applying
the statutory federal tax rate to income before income taxes as follows:
In Millions
Years Ended December 31 1996 1995 1994
Consolidated net income before
preferred dividends $268 $232 $203
Income tax expense 139 118 92
---- --- - ----
407 350 295
Statutory federal income tax rate x 35% x 35% x 35%
---- --- - ----
Expected income tax expense 142 123 103
Increase (decrease) in taxes from:
Foreign income taxes 6 3 -
Capitalized overheads previously
flowed through 5 5 5
Differences in book and tax depreciation
not previously deferred 6 6 7
ITC amortization (10) (10) (10)
Section 29 Fuel Tax Credits (13) (13) (8)
Other, net 3 4 (5)
---- --- - ----
$139 $118 $ 92
==== === = ====
6: Short-Term Financings
Consumers has FERC authorization to issue or guarantee up to $900 million
of short-term debt through 1998. Consumers has an unsecured $425 million
facility and unsecured, committed lines of credit aggregating $120
million that are used to finance seasonal working capital requirements.
At December 31, 1996, a total of $333 million was outstanding at a
weighted average interest rate of 6.3 percent, compared with $341 million
outstanding at December 31, 1995, at a weighted average interest rate of
6.5 percent.
Consumers has in place a $500 million trade receivables purchase and sale
program. At December 31, 1996 and 1995, receivables sold under the
agreement totaled $318 million and $295 million, respectively. Accounts
receivable and accrued revenue in the Consolidated Balance Sheets have
been reduced to reflect receivables sold. In 1996, Consumers entered into
a $100 million swap agreement to hedge the variable rate exposure under
the trade receivables purchase and sale program. The swap agreement
terminates in November 1998.
7: Long-Term Debt
At December 31, 1996 and 1995, long-term debt consists of the following:
In Millions
December 31
Maturing/Expiring Interest Rate 1996 1995
First Mortgage Bonds 1996 to 2023 5.875% to 7.375% $1,305 $1,341
Long-Term Bank Debt July 1999 6.0%(a) 400 400
Senior Deferred Coupon
Notes 1997 and 1998 9.5% and 9.875%(a) 347 347
General Term Notes
(Registered Trademark):
Series A 1997 to 2003 7.7%(a) 250 221
Series B 1999 to 2003 8.0%(a) 103 -
Pollution Control
Revenue Bonds 2000 to 2018 5.1%(a) 131 131
Term Loan Agreement:
CMS Energy 2002 7.3%(a) 125 125
CMS Generation 2001 7.2%(a) 107 -
Revolving Line of Credit 1999 6.2%(a) 122 112
Unsecured Revolving
Credit Facility 1998 6.8%(a) 120 118
Nuclear Fuel Disposal (b) 5.1%(a) 106 100
Bank Loans 1997 to 2006 7.4%(a) 102 177
Other - - 3 4
--- ---
Principal Amount
Outstanding 3,221 3,076
Current Amounts (370) (161))
Net Unamortized
Discount (9) (9))
------ ------
Total Long-Term Debt $2,842 $2,906
====== ======
(a) Represents the weighted average interest rate at December 31, 1996.
(b) Due date uncertain (see Note 2).
The scheduled maturities of long-term debt and improvement fund
obligations are as follows: $370 million in 1997, $714 million in 1998,
$845 million in 1999, $20 million in 2000 and $195 million in 2001.
CMS Energy
In 1995, CMS Energy amended the terms of its $400 million Unsecured
Revolving Credit Facility, originally dated July 29, 1994 and increased
the amount to $450 million and extended the termination date to June 30,
1998. CMS Energy also entered into a $125 million, seven-year Term Loan
Agreement dated November 21, 1995.
In 1996, CMS Energy filed a shelf registration with the SEC for the
issuance and sale of up to $125 million CMS Energy Series B General Term
Notes(Registered Trademark), with net proceeds to be used for general
corporate purposes.
Consumers
First Mortgage Bonds: Consumers secures its first mortgage bonds by a
mortgage and lien on substantially all of its property. Consumers'
ability to issue and sell securities is restricted by certain provisions
in its First Mortgage Bond Indenture, its Articles and the need for
regulatory approvals in compliance with appropriate federal law.
Long-Term Bank Debt: Consumers has a $400 million unsecured, variable
rate, long-term loan.
Other: Consumers has FERC authorization through November 1998 to issue up
to $500 million of long-term securities for the purposes of refinancing or
refunding existing long-term securities.
Consumers long-term pollution control revenue bonds are secured by
irrevocable letters of credit or first mortgage bonds.
In October 1996, Michigan Gas Storage entered into a $23 million secured,
variable rate, seven-year term loan. At December 31, 1996, the loan had a
weighted average interest rate of 6.0 percent.
CMS NOMECO
In 1996, CMS NOMECO replaced its $140 million revolving credit agreement
with a $225 million revolving credit agreement which converts to term
loans maturing from March 1999 through March 2003.
Senior serial notes amounting to $28 million, with a weighted average
interest rate of 9.4 percent, were repaid in full on August 10, 1995. In
connection with this early extinguishment of debt, CMS NOMECO incurred a
$1.5 million prepayment premium. The notes were retired with available
proceeds from the bank credit line.
CMS Generation
In 1995, CMS Generation entered into a one-year $118 million bridge credit
facility for the acquisition of Hydra-Co of which $109 million remained
outstanding as of December 31, 1995. In 1996, CMS Generation refinanced
this bridge facility with a $110 million, five-year term loan.
8: Capitalization
CMS Energy
Capital Stock: In 1995, CMS Energy amended its Articles and authorized a
new class of common stock of CMS Energy, designated Class G Common Stock,
which reflects the separate performance of the gas distribution, storage
and transportation businesses of Consumers Gas Group. The pre-existing
CMS Energy Common Stock continues to be outstanding and reflects the
performance of all of the businesses of CMS Energy and its subsidiaries,
including the business of the Consumers Gas Group, except for the interest
in the Consumers Gas Group attributable to the Outstanding Shares. The
filing of the restated Articles with the Michigan Department of Commerce
increased the number of authorized shares of capital stock from 255
million shares to 320 million shares, consisting of 250 million shares of
CMS Energy Common Stock, par value $.01 per share, 60 million shares of
Class G Common Stock, no par value, and 10 million shares of Preferred
Stock, par value $.01 per share.
CMS Energy filed a shelf-registration statement with the SEC on February
15, 1995 covering the issuance of up to $200 million of securities
encompassing Common Stock, Preferred Stock of CMS Energy or of a special
purpose affiliate of CMS Energy, and/or unsecured debt of CMS Energy. In
the third quarter 1995, CMS Energy received net proceeds of $123 million
from the issuance of 7.52 million shares of Class G Common Stock at a
price to the public of $17.75 per share, initially representing 23.50
percent of the common stockholder's equity value attributed to the
Consumers Gas Group. All of the proceeds funded the capital programs and
were used for general corporate purposes of CMS Energy. Initially, such
proceeds were used to repay a portion of CMS Energy's indebtedness, none
of which is attributable to the Consumers Gas Group. The issuance of
additional shares during 1996 and 1995 increased the common stockholders'
equity value attributable to the Consumers Gas Group, represented by the
Outstanding Shares, to 24.24 percent and 23.73 percent as of December 31,
1996 and 1995.
In 1996, CMS Energy received net proceeds of $95 million from the issuance
of common stock. The issuance of 2.1 million of those shares completes
the remaining amount on a shelf-registration filing by CMS Energy with the
SEC on February 15, 1995 covering the issuance of up to $200 million of
securities. Proceeds from the sale were used for general corporate
purposes of CMS Energy.
Other: Under its most restrictive borrowing arrangement at December 31,
1996, none of CMS Energy's consolidated net income was restricted for
payment of common dividends.
Consumers
Capital Stock: In 1996, four million shares of 8.36 percent Trust
Originated Preferred Securities were issued and sold through Consumers
Power Company Financing I, a business trust wholly owned by Consumers.
Net proceeds from the sale totaled $97 million. Consumers Power Company
Financing I was formed for the sole purpose of issuing the Trust
Originated Preferred Securities. Its primary asset is $103 million
principal amount of 8.36 percent unsecured subordinated deferrable
interest notes issued by Consumers which mature in 2015. Consumers'
obligations with respect to the Trust Originated Preferred Securities
under the notes, under the indenture under which the notes have been
issued, under Consumers' guarantee of the Trust Originated Preferred
Securities, and under the declaration by the trust, taken together,
constitute a full and unconditional guarantee by Consumers of the trust's
obligations under the Trust Originated Preferred Securities.
Other: Under the provisions of its Articles at December 31, 1996,
Consumers had $255 million of unrestricted retained earnings available to
pay common dividends.
CMS NOMECO
In 1995, CMS Energy acquired Walter for $49 million, consisting of $27
million of CMS Energy Common Stock and $22 million in cash and assumed
debt. Walter was merged with a wholly owned subsidiary of CMS NOMECO.
In 1995, CMS Energy acquired 100 percent of the common stock of Terra for
$63 million. Terra has become a wholly owned subsidiary of CMS NOMECO.
9: Earnings Per Share and Dividends
Earnings per share attributable to Common Stock, for the year ended
December 31, 1996 reflect the performance of the Consumers Gas Group.
Earnings per share attributable to Common Stock, for the year ended
December 31, 1995 reflect the performance of the Consumers Gas Group since
initial issuance of Class G Common Stock during the third quarter of 1995.
The Class G Common Stock has participated in earnings and dividends from
its issue date. The allocation of earnings (loss) attributable to each
class of common stock and the related amounts per share are computed by
considering the weighted average number of shares outstanding.
Earnings (loss) attributable to Outstanding Shares are equal to Consumers
Gas Group net income (loss) multiplied by a fraction; the numerator is the
weighted average number of Outstanding Shares during the period and the
denominator represents the weighted average number of Outstanding Shares
and retained interest shares, shares not held by the holders of the
Outstanding Shares, during the period. The earnings attributable to Class
G Common Stock on a per share basis, for the year ended December 31, 1996
and 1995, are based on 23.79 percent of the income of the Consumers Gas
Group and 23.45 percent of the income of the Consumers Gas Group since the
initial issuance, respectively.
Earnings per share for Class G Common Stock is omitted from the statement
of income for the year ended December 31, 1994, since Class G Common Stock
was not part of the equity structure of CMS Energy. For purpose of
analysis, following are pro forma data for the years ended December 31,
1995 and 1994 which give effect to the issuance and sale of 7.52 million
shares of Class G Common Stock (representing 23.50 percent of the equity
attributable to Consumers Gas Group) on January 1, 1994.
In Millions, Except Per Share Amounts
Actual Pro Forma Pro Forma
Years Ended December 31 1996 1995 1994
Consolidated Net Income $ 240 $ 204 $ 179
Net Income Attributable to Common Stocks
CMS Energy 226 189 167
Class G 14 15 12
Average Common Shares Outstanding
CMS Energy 92.462 88.810 85.888
Class G 7.727 7.536 7.520
Earnings Per Average Common Share
CMS Energy $2.45 $2.14 $1.94
Class G $1.82 $1.93 $1.66
====== ====== ======
Holders of Class G Common Stock have no direct rights in the equity or
assets of Consumers Gas Group, but rather have rights in the equity and
assets of CMS Energy as a whole. In the sole discretion of the Board of
Directors, dividends may be paid exclusively to the holders of Class G
Common Stock, exclusively to the holders of CMS Energy Common Stock, or to
the holders of both classes in equal or unequal amounts. The Board of
Directors has stated its intention to declare and pay dividends on the
CMS Energy Common Stock based primarily on the earnings and financial
condition of CMS Energy. Dividends on Class G Common Stock are paid at
the discretion of the Board of Directors based primarily upon the earnings
and financial condition of Consumers Gas Group, and to a lesser extent,
CMS Energy as a whole.
In February and May 1996, CMS Energy paid a dividend of $.24 per share on
CMS Energy Common Stock and $.28 per share on Class G Common Stock. In
August and November 1996, CMS Energy paid a dividend of $.27 per share on
CMS Energy Common Stock and $.295 per share on Class G Common Stock. In
January 1997, the Board of Directors declared a quarterly dividend of $.27
per share on CMS Energy Common Stock and $.295 per share on Class G Common
Stock, which were paid in February 1997.
10: Financial Instruments
The carrying amounts of cash, short-term investments and current
liabilities approximate their fair values due to their short-term nature.
The estimated fair values of long-term investments are based on quoted
market prices or, in the absence of specific market prices, on quoted
market prices of similar investments or other valuation techniques. The
carrying amounts of all long-term investments in financial instruments
approximate fair value.
The carrying amount of long-term debt was $2.8 billion and $2.9 billion at
December 31, 1996 and 1995, respectively, and the fair value was $2.9
billion and $3.0 billion on those dates. Although the current fair value
of the long-term debt may differ from the current carrying amount,
settlement of the reported debt is generally not expected until maturity.
The carrying amount of preferred stock and securities was $456 million and
$356 million at December 31, 1996 and 1995, respectively, and the fair
value was $439 million and $344 million on those dates.
The fair values of CMS Energy's off-balance-sheet financial instruments
are based on the amounts estimated to terminate or settle the instruments.
At December 31, 1996, the fair value of CMS Energy's interest rate swap
agreements, with a notional amount of $617 million, was $10 million,
representing the amount that CMS Energy would have to pay to terminate the
agreements. The settlement of the interest rate swap agreements in 1996
did not materially effect interest expense. At December 31, 1995,
CMS Energy would have paid $16 million to terminate the agreements. Also
refer to Note 14 for a discussion of CMS NOMECO's price hedging
arrangements and their fair values. Guarantees were $102 million and $148
million at December 31, 1996 and 1995, respectively.
The amortized cost of CMS Energy's nuclear decommissioning investments,
which are considered available for sale securities in accordance with SFAS
115, Accounting For Certain Investments in Debt and Equity Securities, was
$351 million and $286 million as of December 31, 1996 and 1995. The
unrealized gain, which is classified in accumulated depreciation by
Consumers, was $35 million and $18 million as of December 31, 1996 and
1995.
11: Executive Incentive Compensation
Under CMS Energy's Performance Incentive Stock Plan, restricted shares of
Common Stock of CMS Energy, stock options and stock appreciation rights
may be granted to key employees based on their contributions to the
successful management of CMS Energy and its subsidiaries. Awards under
the plan may consist of any class of Common Stock of CMS Energy and are
subject to performance-based business criteria for certain plan awards.
The plan reserves for award not more than three 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, 1996, awards of up to 986,240 shares of CMS Energy Common Stock and
198,947 shares of Class G Common Stock may be issued.
Restricted shares of Common Stock are outstanding shares with full voting
and dividend rights. These awards vest over five years at the rate of 25
percent per year after two years and are subject to achievement of
specified levels of total shareholder return. Further, the restricted
stock is subject to forfeiture if employment terminates before vesting.
If performance objectives are exceeded, the plan provides additional
awards. Restricted shares vest fully if control of CMS Energy changes, as
defined by the plan. At December 31, 1996, 541,088 shares of the 600,838
restricted shares of CMS Energy Common Stock outstanding are subject to
performance objectives. At December 31, 1996 all of the 16,347 restricted
shares of Class G Stock outstanding are subject to performance objectives.
CMS Energy's Executive Stock Option and Stock Appreciation Rights Plan, an
earlier plan approved by shareholders, expired in 1995. However, options
and stock appreciation rights granted under this plan remain outstanding.
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 ten years
and one month from date of grant. The status of the restricted stock
granted to CMS Energy's key employees under the Performance Incentive
Stock Plan and options granted under both plans follows.
Restricted
Stock Options
Number Number Weighted-Average
of Shares of Shares Exercise Price
CMS Energy Common Stock:
Outstanding at
January 1, 1994 316,187 1,498,966 $ 23.61
Granted 133,500 273,000 $ 22.00
Exercised or Issued (39,361) (158,300) $ 15.64
Forfeited (79,970) - -
Expired - (123,000) $ 31.68
------- -------- --------
Outstanding at
December 31, 1994 330,356 1,490,666 $ 23.50
Granted 253,337 304,000 $ 25.08
Exercised or Issued (43,939) (147,666) $ 14.52
Forfeited (22,307) - -
Expired - (55,000) $ 27.46
------- --------- --------
Outstanding at
December 31, 1995 517,447 1,592,000 $ 24.50
Granted 222,000 368,176 $ 30.55
Exercised or Issued (92,533) (231,550) $ 20.79
Forfeited (46,076) - -
Expired - (12,000) $ 32.88
------- --------- -------
Outstanding at
December 31, 1996 600,838 1,716,626 $ 26.24
======= ========= =======
Restricted shares of Class G Common Stock granted during 1996 and 1995
totaled 9,423 and 6,924, respectively. Options of Class G Common Stock
granted at a price of $17.88 during 1996 and 1995 totaled 11,000 and
10,000, respectively.
The following table summarizes information about stock options outstanding
at December 31, 1996:
Number Weighted- Weighted-
Range of of Shares Average Average
Exercise Prices Outstanding Remaining Life Exercise Price
$13.00 - $19.50 154,500 4.2 years $ 15.82
$19.51 - $29.00 851,450 6.5 years $ 23.59
$29.01 - $34.25 710,676 6.4 years $ 31.67
- --------------- --------- --------- -------
$13.00 - $34.25 1,716,626 6.2 years $ 26.24
=============== ========= ========= =======
The weighted average remaining life of Class G Common Stock options is 9.2
years.
The weighted average fair value of options granted for CMS Energy Common
Stock was $6.94 in 1996, $5.37 in 1995, and $5.32 in 1994. The weighted
average fair value of options granted for Class G Common Stock was $1.59
in 1996 and $1.57 in 1995. Fair value is estimated using the Black-
Scholes model, a mathematical formula used to value options traded on
securities exchanges, with the following assumptions:
Years Ended December 31 1996 1995 1994
CMS Energy Common Stock Options
Risk-free interest rate 6.63% 6.17% 6.94%
Expected stock-price volatility 24.08% 27.12% 28.83%
Expected dividend rate $ .27 $ .24 $ .24
Expected option life 5 years 5 years 5 years
Class G Common Stock Options
Risk-free interest rate 6.63% 6.17%
Expected stock-price volatility 16.19% 16.19%
Expected dividend rate $ .295 $ .295
Expected option life 5 years 5 years
======= =======
CMS Energy applies Accounting Principles Board Opinion 25 and related
interpretations in accounting for the Performance Incentive Stock Plan.
Since stock options are granted at market price, no compensation cost has
been recognized for stock options granted under the plan. The
compensation cost charged against income for restricted stock was $2
million in 1996, $3 million in 1995, and was less than $1 million in 1994.
If compensation cost for stock options had been determined in accordance
with SFAS No. 123, Accounting for Stock-Based Compensation, CMS Energy's
consolidated net income and earnings per share would have been as follows:
In Millions, Except Per Share Amounts
Pro Forma As Reported
Years Ended December 31 1996 1995 1996 1995
Consolidated Net Income $239 $203 $ 240 $ 204
Net Income Attributable to Common Stocks
CMS Energy 225 200 226 201
Class G 14 3 14 3
Earnings Per Average Common Share
CMS Energy 2.43 2.26 2.45 2.27
Class G 1.76 .34 1.82 .38
==== ==== ==== ====
12: Retirement Benefits
Postretirement Benefit Plans Other Than Pensions: CMS Energy and its
subsidiaries provide certain health care and life insurance benefits for
retired employees and their eligible dependents. Substantially all
employees may become eligible for such benefits if they attain retirement
status while working for CMS Energy or its subsidiaries. CMS Energy and
its subsidiaries adopted SFAS 106, Employers' Accounting for
Postretirement Benefits Other Than Pensions, effective as of the beginning
of 1992 and Consumers recorded a liability of $466 million for the
accumulated transition obligation and a corresponding regulatory asset for
anticipated recovery in utility rates (see Note 19). CMS Energy's
international subsidiaries expensed their accumulated transition
obligation liability. The amount of such transition obligation is not
material to the presentation of the consolidated financial statements or
significant to CMS Energy's total transition obligation. The MPSC
authorized recovery of the electric utility portion of these costs in 1994
over 18 years and the gas utility portion in 1996 over 16 years. During
1995, the FERC granted Consumers a waiver of a three-year filing
requirement for cost recovery with respect to its wholesale electric
business. At December 31, 1996, Consumers had recorded a regulatory asset
and liability of $7 million. By early 1997, the FERC had authorized
recovery of these costs. CMS Energy funds the benefits using external
Voluntary Employee Beneficiary Associations, a legal entity, established
under guidelines of the Internal Revenue Code, through which the company
can provide certain benefits for its employees or retirees. Funding of
the benefits coincides with Consumers' recovery in rates.
Retiree health care costs at December 31, 1996 are based on the assumption
that costs would increase 8.5 percent in 1997, then decrease gradually to
6.0 percent in 2004 and thereafter. The health care cost trend rate
assumption significantly affects the amounts reported. For example, a one
percentage point increase in each year's estimated health care cost
assumption would increase the accumulated postretirement benefit
obligation at December 31, 1996 by $97 million and the aggregate of the
service and interest cost components of net periodic postretirement
benefit costs for 1996 by $11 million.
Years Ended December 31 1996 1995 1994
Weighted average discount rate 7.75% 7.50% 8.00%
Expected long-term rate of
return on plan assets 7.00% 7.00% 7.00%
===== ===== =====
Net postretirement benefit costs for the health care benefits and life
insurance benefits consisted of:
In Millions
Years Ended December 31 1996 1995 1994
Service cost $ 13 $11 $13
Interest cost 42 40 41
Actual return on assets (14) (4) -
Net amortization and deferral 8 1 -
--- --- ---
Net postretirement benefit costs $ 49 $48 $54
=== === ===
The funded status of the postretirement benefit plans is reconciled with
the liability recorded at December 31 as follows:
In Millions
1996 1995
Actuarial present value of
estimated benefits
Retirees $ 330 $ 331
Eligible for retirement 66 46
Active (upon retirement) 190 200
---- ----
Accumulated postretirement benefit
obligation 586 577
Plan assets (primarily stocks, bonds
and money market investments) at
fair value 138 78
---- ----
Accumulated postretirement benefit
obligation in excess of plan assets (448) (499)
Unrecognized net (gain) loss from
experience different than assumed (36) 1
Unrecognized prior service cost 7 -
---- ----
Recorded liability $(477) $(498)
===== =====
The health care portion of the accumulated postretirement benefit
obligation is $570 million and $562 million at December 31, 1996 and 1995,
respectively.
Supplemental Executive Retirement Plan: Certain management employees
qualify to participate in the SERP. SERP benefits, which are based on an
employee's years of service and earnings as defined in the SERP, are paid
from a trust established and funded in 1988. Because the SERP is not a
qualified plan under the Internal Revenue Code, earnings of the trust are
taxable and trust assets are included in consolidated assets. At
December 31, 1996 and 1995, trust assets were $30 million and $28 million,
respectively, and were classified as other non-current assets.
Defined Benefit Pension Plan: The Pension Plan covers substantially all
employees. The benefits are based on an employee's years of accredited
service and earnings, as defined in the plan, during an employee's five
highest years of earnings. Because the plan was fully funded, no
contributions were made in 1996 and 1994. A contribution of $9 million
was made in 1995.
Years Ended December 31 1996 1995 1994
Discount rate 7.75% 7.50% 8.00%
Rate of compensation increase 4.00% 4.50% 4.50%
Expected long-term rate of
return on assets 9.25% 9.25% 9.25%
===== ===== =====
Net Pension Plan and SERP costs consisted of:
In Millions
Years Ended December 31 1996 1995 1994
Service cost $ 26 $ 23 $ 24
Interest cost 58 56 51
Actual return on plan assets (63) (168) 21
Net amortization and deferral (6) 103 (85)
--- --- ---
Net periodic pension cost $ 15 $ 14 $ 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
1996 1995 1996 1995
Actuarial present value of
estimated benefits
Vested $504 $496 $ 21 $ 20
Non-vested 72 74 1 1
--- --- --- ---
Accumulated benefit obligation 576 570 22 21
Provision for future pay increases 158 183 15 13
--- --- --- ---
Projected benefit obligation 734 753 37 34
Plan assets (primarily stocks and bonds,
including $117 in 1996 and $104 in 1995
in common stock of CMS Energy) at
fair value 779 779 - -
--- --- --- ---
Projected benefit obligation less than
(in excess of) plan assets 45 26 (37) (34)
Unrecognized net (gain) loss from
experience different than assumed (99) (69) 5 7
Unrecognized prior service cost 39 43 2 2
Unrecognized net transition (asset) (27) (32) - -
--- --- --- ---
Recorded liability $ (42) $(32) $(30)$(25)
=== === === ===
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.
Defined Contribution Plan: CMS Energy provides a defined contribution
401(k) plan to all U.S. employees of CMS Energy and its subsidiaries which
are at least 80 percent owned and have adopted the plan. CMS Energy will
match at least one-half of the amount contributed by employees up to 3
percent of their salary. These contributions to the plan are invested in
CMS Energy Common Stock. Amounts charged to expense for this plan were
approximately $18 million in 1996 and $17 million in 1995 and 1994.
13: Leases
CMS Energy, Consumers, and Enterprises lease various assets, including
vehicles, rail cars, aircraft, construction equipment, computer equipment,
nuclear fuel and buildings. Consumers' nuclear fuel capital leasing
arrangement is scheduled to expire in November 1998 and provides for
additional one-year extensions upon mutual agreement by the parties. Upon
termination of the lease, the lessor would be entitled to a cash payment
equal to its remaining investment, which was $69 million as of December
31, 1996. 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, 1996, were:
In Millions
Capital Operating
Leases Leases
1997 $ 48 $ 9
1998 66 8
1999 14 7
2000 13 5
2001 11 5
2002 and thereafter 14 29
--- ---
Total minimum lease payments 166 $ 63
Less imputed interest 24 ===
---
Present value of net minimum
lease payments 142
Less current portion 39
---
Non-current portion $103
===
Consumers recovers lease 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
for the years ended December 31, 1996, 1995 and 1994, were $8 million, $11
million and $10 million, respectively.
Capital lease expenses for the years ended December 31, 1996, 1995 and
1994 were $46 million, $46 million and $43 million, respectively.
Included in these amounts for the years ended 1996, 1995 and 1994 are
nuclear fuel lease expenses of $25 million, $25 million and $21 million,
respectively.
14: Commitments, Contingencies and Other
Environmental Matters: Consumers is a so-called potentially responsible
party at several sites being administered under the Superfund. Superfund
liability is joint and several and along with Consumers, there are
numerous credit worthy, potentially responsible parties with substantial
assets cooperating with respect to the individual sites. Based upon past
negotiations, Consumers estimates that its share of the total liability
for the known sites will be between $2 million and $9 million. At
December 31, 1996, Consumers has accrued $2 million for its estimated
losses.
Under the Michigan Natural Resources and Environmental Protection Act,
Consumers expects that it will ultimately incur investigation and remedial
action costs at a number of sites, including some of the 23 sites that
formerly housed manufactured gas plant facilities, even those in which it
has a partial or no current ownership interest. Consumers has prepared
plans for remedial investigation/feasibility studies for several of these
sites. Four of the five plans submitted by Consumers have been approved by
the appropriate environmental regulatory authority in the State of
Michigan. Findings for the two completed remedial investigations indicate
that the expenditures for those two sites are likely to be less than the
amounts projected before the studies were performed. However, these
findings may not be representative of all of the sites. Data available
and continued internal review have resulted in an estimate for all costs
related to investigation and remedial action for all 23 sites of between
$48 million and $98 million. These estimates are based on undiscounted
1996 costs. At December 31, 1996, Consumers has accrued a liability of
$48 million and has established a regulatory asset for approximately the
same amount. Any significant change in assumptions, such as remediation
technique, nature and extent of contamination, and legal and regulatory
requirements, could affect the estimate of remedial action costs for the
sites. In accordance with an MPSC rate order issued in March 1996,
environmental clean-up costs above the amount currently being recovered in
rates will be deferred and amortized over ten years. Rate recognition of
amortization expense will not begin until after a prudence review in a
general rate case. The order authorizes current recovery of $1 million
annually. Consumers is continuing discussions with certain insurance
companies regarding coverage for some or all of the costs that may be
incurred for these sites.
The Clear Air Act, as amended on November 15, 1990, contains provisions
that limit emissions of sulfur dioxide and nitrogen oxides and require
emissions monitoring. Consumers' coal-fueled electric generating units
burn low-sulfur coal and are currently operating at or near the sulfur
dioxide emission limits that will be effective in the year 2000. The
Clean Air Act's provisions required Consumers to make capital expenditures
totaling $40 million to install equipment at certain generating units.
Consumers estimates capital expenditures for in-process and proposed
modifications at other coal-fired units to be an additional $35 million by
the year 2000. Management believes that Consumers' annual operating costs
will not be materially affected as a result of expenditures that will be
made to comply with the Clean Air Act.
Capital Expenditures: CMS Energy estimates capital expenditures,
including investments in unconsolidated subsidiaries and new lease
commitments, of $965 million for 1997, $903 million for 1998 and $857
million for 1999.
Commitments for Coal and Gas Supplies: Consumers has entered into coal
supply contracts with various suppliers for its coal-fired generating
stations. These contracts have expiration dates that range from 1997 to
2004. Consumers contracts for 60 - 70 percent of its annual coal
requirements which in 1996 totaled $243 million (62 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 1997 to 2003. Consumers' 1996 gas requirements totaled 266 bcf
at a cost of $747 million, 80 percent of which was under long-term
contracts for one year or more. As of the end of 1996, Consumers had 35
percent of its 1997 gas requirements under such long-term contracts, and
will supplement them with additional long-term contracts and spot-market
purchases.
Other: As of December 31, 1996, CMS Energy and Enterprises have
guaranteed up to $102 million in contingent obligations of unconsolidated
affiliates and unrelated parties.
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, 1996, CMS NOMECO had contracts on
13.8 bcf of gas for the delivery months of January though December 1997 at
prices ranging from $1.92 to $2.80 per MMBtu and on 2.0 million barrels of
oil at prices ranging from $19.50 to $22.90 per barrel. CMS NOMECO paid
$3 million for settlement of January 1997 contracts on 1.6 bcf of gas. As
of December 31, 1996, the fair value of the remaining 1997 gas and oil
contracts reflected payment due by CMS NOMECO of $5 million. These
arrangements are accounted for as hedges; accordingly, gains or losses are
deferred and recognized at such time as the hedged transaction is
completed. If there was a loss of correlation between the changes in (1)
the market value of the commodity price contracts and (2) the market price
ultimately received for the hedged item, and the impact was material, the
open commodity price contracts would be marked to market and gains and
losses would be recognized in the income statement currently.
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 $5 million, that party is required to obtain a letter of
credit in favor of the other party for the excess over $5 million and up
to $10 million. At December 31, 1996, the seller had arranged a letter of
credit in CMS NOMECO's favor for $2.5 million. As of December 31, 1996,
the fair value of this contract reflected $16 million due to the seller,
representing the amount CMS NOMECO would have to pay to terminate the
agreement.
A number of lawsuits have been filed against Consumers relating to the
effect of so-called stray voltage on certain livestock. Claimants contend
that stray voltage results when low-level electrical currents present in
grounded electrical systems are diverted from their intended path.
Consumers maintains a policy of investigating all customer calls regarding
stray voltage and working with customers to address their concerns and has
an ongoing program to modify the grounding of all customer services. As
of January 1997, Consumers had 22 separate stray voltage lawsuits awaiting
trial court action, down from 30 lawsuits at December 31, 1995, and 83
lawsuits at December 31, 1994.
In addition to the matters disclosed in these notes, Consumers and certain
other subsidiaries of CMS Energy are parties to certain lawsuits and
administrative proceedings before various courts and governmental agencies
arising from the ordinary course of business and involving personal
injury, property damage, contractual matters, environmental issues,
federal and state taxes, rates, licensing and other matters.
Estimated losses for certain contingencies discussed in this note have
been accrued. Resolution of these contingencies is not expected to have a
material impact on CMS Energy's financial position or results of
operations.
15: Nuclear Matters
Consumers filed updated decommissioning information with the MPSC in 1995
which estimated decommissioning costs for Big Rock and Palisades. In
April 1996, the MPSC issued an order in Consumers' nuclear decommissioning
case, which fully supported Consumers' request and did not change the
overall surcharge revenues collected from retail customers. The MPSC
ordered Consumers to file a report on the adequacy of the surcharge
revenues with the MPSC at three-year intervals beginning in 1998.
Consumers filed its decommissioning plan for Big Rock with the NRC in
1995.
The NRC has approved the design of the spent fuel dry storage casks now
being used by Consumers at Palisades; however, certain parties, including
the Attorney General, have petitioned the NRC to suspend Consumers'
general license to store spent fuel, claiming that Consumers' cask
unloading procedure does not satisfy NRC regulations. The NRC staff has
reviewed the petition and denied the request to suspend Consumers' general
license to store spent fuel.
Consumers has loaded 13 dry storage casks with spent nuclear fuel at
Palisades. In a review of the cask manufacturer's quality assurance
program, indications of minor flaws in welds in the steel liner of one of
the loaded casks were detected. Radiographic examination of the casks has
found all other welds acceptable. The cask in which the minor flaws were
detected continues to store spent fuel safely and there is no requirement
for its replacement. Nevertheless, Consumers plans to remove the spent
fuel and insert it into a transportable cask. Bids are currently being
taken for the design and fabrication of the transportable cask. Consumers
is monitoring an investigation under way at another utility that also uses
a dry storage cask system for spent nuclear fuel. The other utility
experienced an unexpected ignition of hydrogen gas following the loading
of a cask. Although the event caused no injuries or releases of
radioactive material, and Consumers' procedures had already precluded a
similar event, the NRC has instructed utilities using the dry storage
casks to take certain additional precautions when loading or unloading
casks.
Consumers maintains insurance coverage against property damage, debris
removal, personal injury liability and other risks that are present at its
nuclear generating facilities. This insurance includes coverage for
replacement power costs during prolonged accidental outages. Such costs
would not be covered by insurance during the first 21 weeks of any outage,
but the major portion of such costs would be covered during the next
twelve months of the outage, followed by reduced coverage to 80 percent
for two additional years. If certain loss events occur at its own or
other nuclear plants similarly insured, Consumers could be required to pay
maximum assessments of $23 million in any one year to Nuclear Mutual Ltd.
and National Electric Insurance Ltd.; $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.
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. Based on continuing
analysis of data from testing of similar materials, in December 1996,
Consumers received an interim Safety Evaluation Report from the NRC
indicating that the reactor vessel can be safely operated through 2003,
before reaching the NRC's screening criteria for reactor embrittlement.
Consumers believes that, with fuel management designed to minimize
embrittlement, Palisades might be operated to the end of its license life
in the year 2007 without annealing of the reactor vessel, but will
continue to monitor the matter.
16: Jointly Owned Utility Facilities
Consumers is responsible for providing its share of financing for the
jointly owned facilities. The following table indicates the extent of
Consumers' investment in jointly owned utility facilities:
In Millions
December 31 1996 1995
Net investment
Ludington - 51% $116 $116
Campbell Unit 3 - 93.3% 329 332
Transmission lines - various 35 33
Accumulated depreciation
Ludington $ 84 $ 81
Campbell Unit 3 252 238
Transmission lines 14 14
===== ====
17: Supplemental Cash Flow Information
For purposes of the Statement of Cash Flows, all highly liquid investments
with an original maturity of three months or less are considered cash
equivalents. Other cash flow activities and non-cash investing and
financing activities for the years ended December 31 were:
In Millions
1996 1995 1994
Cash transactions
Interest paid (net of amounts capitalized) $240 $207 $162
Income taxes paid (net of refunds) 82 34 36
Non-cash transactions
Nuclear fuel placed under capital lease $ 28 $ 26 $ 21
Other assets placed under capital leases 3 5 15
Common Stock issued to acquire companies - 90 -
Assumption of debt - 20 -
Capital leases refinanced - 21 -
==== ==== ====
Changes in other assets and liabilities as shown on the Consolidated
Statements of Cash Flows at December 31 are described below:
In Millions
1996 1995 1994
Sale of receivables, net $23 $20 $(10)
Accounts receivable (28) (80) (15)
Accrued revenue (82) (24 20)
Inventories - 43 (4)
Accounts payable 55 112 26
Accrued refunds (13) (3) (3)
Other current assets and liabilities, net 23 30 4
Non-current deferred amounts, net 10 (9) (6)
--- --- ---
$(12) $ 89 $ 12
==== ==== ====
18: Reportable Segments
CMS Energy operates principally in the following five business segments:
electric utility; gas utility; oil and gas exploration and production;
independent power production; and natural gas transmission, storage and
marketing.
The Consolidated Statements of Income show operating revenue and pretax
operating income by business segment. Other segment information follows:
In Millions
Years Ended December 31 1996 1995 1994
Depreciation, depletion and amortization
Electric utility $ 282 $ 272 $ 257
Gas utility 87 83 76
Oil and gas exploration and production 55 52 41
Independent power production 8 4 2
Natural gas transmission, storage
and marketing 7 3 2
Other 2 2 1
---- ---- ----
$ 441 $ 416 $ 379
====== ====== ======
Identifiable assets
Electric utility (a) $4,505 $4,522 $4,364
Gas utility (a) 1,709 1,690 1,673
Oil and gas exploration and production 719 660 469
Independent power production 1,053 840 536
Natural gas transmission, storage
and marketing 449 303 109
Other 180 128 227
---- ---- ----
$8,615 $8,143 $7,378
====== ====== ======
Capital expenditures (b)
Electric utility $ 310 $ 328 $ 358
Gas utility 137 126 134
Oil and gas exploration and production (c) 88 168 115
Independent power production 142 239 29
Natural gas transmission, storage
and marketing 136 178 31
Other 66 14 5
---- ---- ----
$ 879 $1,053 $ 672
====== ====== ======
(a) Amounts include an attributed portion of Consumers' other common
assets to both the electric and gas utility businesses.
(b) Includes capital leases for nuclear fuel and other assets and electric
DSM costs (see Statement of Cash Flows). Amounts also include an
attributed portion of Consumers' capital expenditures for plant and
equipment common to both the electric and gas utility businesses.
(c) Includes common stock issued for acquisitions in 1995.
19: Effects of the Ratemaking Process
The following regulatory assets (liabilities), which include both current
and non-current amounts, are reflected in the Consolidated Balance Sheets.
These assets represent probable future revenue to Consumers associated
with certain incurred costs as these costs are recovered through the
ratemaking process. These costs are being recovered through rates over
periods of up to 16 years.
An accounting standard, effective January 1996, requires impairment losses
on long-lived assets to be recognized when an asset's book value exceeds
its expected future cash flows (undiscounted). The standard also imposes
stricter criteria for retention of regulatory-created assets by requiring
that such assets be probable of future recovery at each balance sheet
date. There was no impact on financial position or results of operations
upon adoption because management believes these assets will be recovered.
For further discussion, see MD&A Forward-Looking Information.
In Millions
December 31 1996 1995
Postretirement benefits (Note 10) $ 460 $ 487
Income taxes (Note 5) 158 176
Abandoned Midland project 113 131
DSM - deferred costs 60 68
Trunkline settlement 25 55
Manufactured gas plant sites (Note 12) 47 47
Power purchase contracts (Note 3) - 44
Uranium enrichment facility 23 25
Ludington Fish Settlement 14 -
Other 18 22
---- ----
Total regulatory assets $ 918 $1,055
====== ======
Income taxes (Note 5) $ (224) $ (220)
DSM - deferred revenue (24) (25)
Other (1) (1)
---- ----
Total regulatory liabilities $ (249) $ (246)
====== ======
20: Summarized Financial Information of Significant Related Energy
Supplier
Under the PPA with the MCV Partnership discussed in Note 3, Consumers'
1996 obligation to purchase electric capacity from the MCV Partnership was
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 1996 1995 1994
Operating revenue (a) $ 645 $ 618 $ 579
Operating expenses 417 386 378
---- ---- ----
Operating income 228 232 201
Other expense, net 162 171 183
---- ---- ----
Net income $ 66 $ 61 $ 18
====== ====== ======
Balance Sheets
In Millions
December 31 1996 1995
Assets
Current assets (b) $ 316 $ 257
Property, plant and
equipment, net 1,889 1,948
Other assets 159 156
----- -----
$2,364 $2,361
======= ======
Liabilities and Partners' Equity
Current liabilities $ 235 $ 219
Long-term debt and other
non-current liabilities (c) 1,930 2,008
Partners' equity (d) 199 134
----- -----
$2,364 $2,361
====== ======
(a) Revenue from Consumers totaled $598 million, $571 million and $534
million for 1996, 1995, and 1994, respectively.
(b) Receivables from Consumers totaled $52 million and $48 million at
December 31, 1996 and 1995, respectively.
(c) FMLP is the sole beneficiary of an owner trust that is the lessor in a
long-term direct finance lease with the lessee, MCV Partnership.
CMS Holdings holds a 46.4 percent ownership interest in FMLP. At
December 31, 1996 and 1995, lease obligations of $1.6 billion were owed to
the owner trust. CMS Holdings' share of the interest and principal
portion for the 1996 lease payments was $64 million and $25 million,
respectively, and for the 1995 lease payments was $66 million and $23
million, respectively. The lease payments service $1.1 billion in non-
recourse debt outstanding as of December 31, 1996 and 1995, of the
owner-trust. FMLP's debt is secured by the MCV Partnership's lease
obligations, assets, and operating revenues. For 1996 and 1995, the
owner-trust made debt payments (including interest) of $192 million.
(d) CMS Midland's recorded investment in the MCV Partnership includes
capitalized interest, which is being amortized to expense over the life of
its investment in the MCV Partnership.
94
ARTHUR ANDERSEN LLP
Report of Independent Public Accountants
----------------------------------------
To CMS Energy Corporation:
We have audited the accompanying consolidated balance sheets and
consolidated statements of preferred stock of CMS ENERGY CORPORATION (a
Michigan corporation) and subsidiaries as of December 31, 1996 and 1995,
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, 1996. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on
these financial statements based upon our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of CMS Energy Corporation
and subsidiaries as of December 31, 1996 and 1995, and the results of
their operations and their cash flows for each of the three years in the
period ended December 31, 1996 in conformity with generally accepted
accounting principles.
Arthur Andersen LLP
Detroit, Michigan,
January 24, 1997.
95
Quarterly Financial and Common Stock Information CMS Energy Corporation
In Millions, Except Per Share Amounts
1996 (Unaudited) 1995 (Unaudited)
Quarters Ended March 31 June 30 Sept. 30 Dec. 31 March 31 June 30 Sept. 30 Dec. 31
Operating revenue $1,283 $938 $929 $1,183 $1,117 $835 $869 $1,069
Pretax operating income $214 $156 $166 $141 $206 $124 $149 $124
Consolidated net income $88 $50 $58 $44 $86 $33 $47 $38
Earning (loss) per average
common share:
CMS Energy $.83 $.54 $.65 $.43 $.99 $.37 $.54 $.37
Class G $1.50 $.16 $(.28) $.44 - - $(.17) $.55
Dividends declared per
common share:
CMS Energy $.24 $.24 $.27 $.27 $.21 $.21 $.24 $.24
Class G $.28 $.28 $.295 $.295 - - $.28 $.28
Common stock prices (a)
CMS Energy:
High $31-7/8 $31-1/4 $31-5/8 $33-3/4 $24-3/4 $25-3/8 $26-3/8 $30
Low $27-13/16 $28 $29 $30-1/8 $22-5/8 $22-1/2 $23-3/8 $26
Class G:
High $20 $19-3/8 $18-7/8 $19-1/4 - - $18-3/4 $18-7/8
Low $17-7/8 $17-1/2 $16-5/8 $17-3/8 - - $16-1/8 $17-5/8
(a) Based on New York Stock Exchange - Composite transactions.
96
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97
Consumers Energy
1996 Financial Statements
98
Selected Financial Information Consumers Energy Company
1996 1995 1994 1993 1992
Operating revenue (in millions) ($) 3,770 3,511 3,356 3,243 2,978
Net income (loss) (in millions) ($) 296 255 226 198 (244)
Net income (loss) available to common
stockholder (in millions) ($) 260 227 202 187 (255)
Cash from operations (in millions) ($) 672 642 598 403 470
Capital expenditures, excluding capital
lease additions and DSM (in millions) ($) 410 414 447 451 411
Total assets (in millions) ($) 7,025 6,954 6,809 6,551 6,596
Long-term debt, excluding current
maturities (in millions) ($) 1,900 1,922 1,953 1,839 2,079
Non-current portion of capital
leases (in millions) ($) 100 104 108 106 88
Total preferred stock (in millions) ($) 356 356 356 163 163
Total preferred securities (in millions) ($) 100 - - - -
Number of preferred shareholders at year-end 9,540 10,084 10,599 7,037 7,376
Book value per common share at year-end ($) 19.96 19.00 16.96 15.28 14.64
Return on average common equity (%) 15.9 15.0 14.9 14.8 (18.8)
Return on assets (%) 5.7 5.3 4.9 4.7 (0.2)
Number of full-time equivalent
employees at year-end
Consumers 8,938 9,262 9,409 9,495 9,459
Michigan Gas Storage 67 70 73 72 72
Electric statistics
Sales (millions of kWh) 37,051 35,506 34,462 32,764 31,601
Customers (in thousands) 1,594 1,570 1,547 1,526 1,506
Average sales rate per kWh cents 6.55 6.36 6.29 6.28 5.82
Gas statistics
Sales and transportation deliveries (bcf) 448 404 409 411 384
Customers (in thousands) (a) 1,504 1,476 1,448 1,423 1,402
Average sales rate per mcf ($) 4.45 4.42 4.48 4.46 4.55
(a) Excludes off-system transportation customers.
/TABLE
99
Consumers Energy Company
Management's Discussion and Analysis
This Annual Report contains forward-looking statements as defined by the
Private Securities Litigation Reform Act of 1995, including (without
limitation) discussions as to expectations, beliefs, plans, objectives and
future financial performance, or assumptions underlying or concerning
matters discussed in this document. These discussions, and any other
discussions contained in this Annual Report, except to the extent they
contain historical facts, are forward-looking and, accordingly, involve
estimates, assumptions and uncertainties that could cause actual results
or outcomes to differ materially from those expressed in the forward-
looking statements. In addition to certain contingency matters (and their
respective cautionary statements) discussed elsewhere in this Annual
Report, the Forward-Looking Information section of this MD&A indicates
some important factors that could cause actual results or outcomes to
differ materially from those addressed in the forward-looking discussions.
Consumers Energy Company (formerly Consumers Power Company) is a
combination electric and gas utility company serving the Lower Peninsula
of Michigan, and is the principal subsidiary of CMS Energy, a holding
company. Consumers' customer base includes a mix of residential,
commercial and diversified industrial customers, the largest segment of
which is the automotive industry.
Consolidated Earnings
In Millions
Years Ended December 31 1996 1995 Change 1995 1994 Change
Net income available to common stockholder $260 $227 $33 $227 $202 $25
The improved net income for 1996 reflects the favorable impact of an
electric rate increase received in February 1996. The 1996 period also
reflects increased electric sales, gas deliveries, and revenues from gas
loaning activities. In addition, other operating income increased during
1996 due to a FERC-ordered refund received by the MCV Partnership from a
gas pipeline supplier. The improved net income for 1995 over the 1994
level reflects increased electric sales and gas deliveries, increased
electric revenue as a result of a mid-1994 rate increase, reversal of
losses previously recorded for gas contingencies and improved operating
results from Consumers' interest in the MCV Facility. For further
information, see the Electric and Gas Utility Results of Operations
sections and Note 4.
Cash Position, Investing and Financing
Operating Activities: Cash from operations is derived from the sale and
transportation of natural gas and the generation, transmission, and sale
of electricity. Cash from operations totaled $672 million and $642
million for 1996 and 1995, respectively. The $30 million increase
resulted from increased electricity sales and gas deliveries, an electric
rate increase, and lower cash losses associated with the PPA. Operating
cash is used primarily to maintain and expand electric and gas systems,
retire portions of long-term debt, and pay dividends.
Investing Activities: Cash used in investing activities totaled $494
million and $519 million for 1996 and 1995, respectively. The cash was
used primarily for capital expenditures.
Financing Activities: Cash used in financing activities totaled $188
million for 1996, compared with $134 million used in financing activities
in 1995. The net increase of $54 million in cash used in 1996 reflects an
additional $130 million in common dividends paid and the redemption of $36
million of maturing first mortgage bonds. These changes were partially
offset by $97 million in proceeds from the sale of Trust Originated
Preferred Securities (see Note 7) in 1996. Common dividends were
temporarily suspended in mid-1995 to improve the capital structure, then
reinstated in May 1996 and continued through year-end.
Other Investing and Financing Matters: Several unsecured, committed lines
of credit totaling $120 million and a $425 million working capital
facility are available to meet short-term borrowing requirements to
finance working capital and gas in storage, and to pay for capital
expenditures between long-term financings. At December 31, 1996, a total
of $333 million was outstanding under these facilities. In October 1996,
the FERC authorized the issuance of up to $900 million of short-term
securities through 1998. An agreement is in place permitting the sales of
certain accounts receivable for up to $500 million. At December 31, 1996
and 1995, receivables sold totaled $318 million and $295 million,
respectively. In November 1996, the FERC authorized the issuance of $500
million of long-term securities through November 1998 for refinancing or
refunding purposes. Also in October 1996, Michigan Gas Storage entered
into a $23 million secured, variable rate, seven-year term loan.
Consumers is required to redeem or retire $1.1 billion of long-term debt
over the three-year period ending December 1999. In addition, at December
31, 1996, Consumers had a recorded liability to the DOE of $106 million,
which is to be paid prior to the first delivery of spent nuclear fuel to
the DOE. Delivery of the fuel had originally been scheduled to occur in
1998 (see Note 2). Cash provided by operating activities is expected to
satisfy a substantial portion of these debt retirements. Additionally,
capital markets will continue to be evaluated as a source of financing
required debt retirements.
At December 31, 1996, Consumers' capital structure consisted of 37 percent
common equity, 10 percent preferred equity (including preferred stock and
preferred securities), and 53 percent long- and short-term debt (including
capital leases and notes payable). The common equity portion of the
capital structure is expected to improve through accumulated earnings and
controlled expenditures.
Electric Utility Results of Operations
Electric Pretax Operating Income:
In Millions
Years Ended December 31 1996 1995 Change 1995 1994 Change
$402 $362 $40 $362 $332 $30
The increase in electric pretax operating income in 1996 reflects the
favorable impact of an electric rate increase received in early 1996 and
the benefit of increased kWh sales and lower maintenance expenses. These
increases were partly offset by decreased revenues due to special contract
discounts negotiated with large industrial customers and increased
depreciation, general taxes and operation expenses. The 1995 electric
pretax operating income compared to 1994 reflects increased kWh sales and
the benefit of the mid-1994 rate increase which included the recovery of
higher postretirement benefit costs. The increase was partially offset by
higher depreciation, general taxes, and operation expenses during 1995,
which included $9 million of additional postretirement benefit costs,
along with the impact of $11 million of DSM incentive revenue during 1994.
The following table quantifies these impacts on Pretax Operating Income:
In Millions
Change Compared to Prior Year 1996 vs 1995 1995 vs 1994
Sales (net of special contract discounts) $ 1 $ 59
Rate increases and other regulatory issues 50 9
Operation and maintenance 2 (13)
General tax and depreciation (13) (26)
Other - 1
---- ----
Total change $ 40 $ 30
==== ====
Electric Sales: Total electric sales in 1996 were 37.1 billion kWh, a 4.4
percent increase from the 1995 level as a result of economic growth. This
increase in total electric sales included a 1.7 percent increase in sales
to ultimate customers. Total electric sales in 1995 were 35.5 billion
kWh, a 3.0 percent increase from the 1994 level as a result of economic
growth and warmer summer temperatures. This increase in total electric
sales included a 4.2 percent increase in sales to ultimate customers. The
table below reflects electric kWh sales by class of customer for both
periods:
In Billions of kWh
Years Ended December 31 1996 1995 Change 1995 1994 Change
Residential 10.9 10.7 .2 10.7 10.2 .5
Commercial 10.0 9.7 .3 9.7 9.2 .5
Industrial 12.9 12.7 .2 12.7 12.3 .4
Other 3.3 2.4 .9 2.4 2.8 (.4)
---- ---- ---- ---- ---- ----
Total sales 37.1 35.5 1.6 35.5 34.5 1.0
==== ==== ==== ==== ==== ====
Power Costs:
In Millions
Years Ended December 31 1996 1995 Change 1995 1994 Change
$1,087 $970 $117 $970 $950 $20
The cost increases in both periods reflect greater power purchases from
outside sources to meet increased sales demand.
Electric Utility Issues
Power Purchases from the MCV Partnership: Consumers' annual obligation to
purchase contract capacity from the MCV Partnership is 1,240 MW through
the termination of the PPA in 2025. The MPSC allows Consumers to recover
substantially all payments for 915 MW of contract capacity purchased from
the MCV Partnership. The MPSC order allowing recovery was affirmed by the
Court of Appeals in March 1996. At the end of 1992, Consumers recognized
a loss for the present value of the estimated future underrecoveries of
power purchases from the MCV Partnership.
In November 1996, the MPSC approved a Settlement Agreement proposed by
Consumers and the MPSC staff that addressed cost recovery for the
remaining 325 MW of MCV Facility capacity. Beginning January 1, 1996,
Consumers was permitted to recover an average capacity charge of 2.86
cents per kWh for this power. The approved average capacity charge
increased to 3.62 cents per kWh for 65 MW of the 325 MW on November 1,
1996, and for an additional 44 MW on January 1, 1997. Cost recovery for
the remaining 216 MW is based upon the escalation of the average capacity
charge by three percent annually until it reaches 3.62 cents per kWh in
2004, and remains at this ceiling rate through the end of the PPA
contract.
Consumers anticipates it will continue to experience cash underrecoveries
associated with the PPA as shown below. These after-tax cash
underrecoveries totaled $41 million, $90 million and $61 million in 1996,
1995 and 1994, respectively. For further information, see Note 3.
In Millions
1997 1998 1999 2000 2001
Estimated cash underrecoveries, net of tax $28 $23 $22 $21 $20
After considering the effects of the Settlement Agreement, Consumers
believes that the original loss recorded in 1992 remains adequate. The
amount of underrecoveries of power costs continues to be based, in part,
on management's best assessment of the future availability of the MCV
Facility. If the MCV Facility operates at levels above management's
estimate over the remainder of the PPA, future losses will need to be
recognized over and above amounts previously recorded. Further, Consumers
would experience greater amounts of cash underrecoveries than originally
anticipated. Management will continue to evaluate the adequacy of the
accrued liability considering actual facility operations.
Electric Rate Proceedings: In February 1996, the MPSC issued a partial
final order in the retail electric rate case filed in 1994, granting a $46
million annual increase in electric retail rates and authorizing a 12.25
percent return on common equity. Separate requests were before the MPSC
to offer competitive special rates to certain large qualifying customers
and to modify certain depreciation rates and practices. In November 1996,
the MPSC issued a final order in the Settlement Agreement which combined
the separate requests. The rate increase and rate of return were not
changed from the partial final order and Consumers was authorized to
accelerate recovery of its nuclear plant investment by charging $18
million of annual steam production plant depreciation expense to the
nuclear production depreciation reserve. Recovery of the additional 325
MW of MCV Partnership contract capacity charges was also approved (see
Note 3).
The Settlement Agreement also requires the establishment of a direct
access program. Customers having a maximum demand of at least 2 MW are
eligible to purchase generation services directly from any eligible third-
party power supplier. The program is limited to 650 MW of sales, of which
410 MW has already been filled by existing contracts; 140 MW may be filled
by either direct access customers or new special contracts which Consumers
has signed and submitted to the MPSC for approval; and the remaining 100
MW must be made available solely to direct access customers for at least
18 months. Rehearing petitions have been filed by Consumers and other
interested parties.
Nuclear Matters: In January 1997, the NRC issued its Systematic
Assessment of Licensee Performance report for Palisades. The report rated
all areas as good, unchanged from the previous assessment.
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. Based on continuing
analysis of data from testing of similar materials, in December 1996,
Consumers received an interim Safety Evaluation Report from the NRC
indicating that the reactor vessel can be safely operated through 2003,
before reaching the NRC's screening criteria for reactor embrittlement.
Consumers believes that with a change in fuel management designed to
minimize embrittlement, Palisades might be operated to the end of its
license life in the year 2007 without annealing of the reactor vessel, but
will continue to monitor the matter.
Palisades' on-site storage pool for spent nuclear fuel is at capacity.
Consequently, NRC-approved dry casks, which are steel and concrete vaults,
are being used for temporary on-site storage. For further information,
see Note 13.
Electric Environmental Matters: The 1990 amendment of the Clean Air Act
significantly increased the environmental constraints that utilities will
operate under in the future. While the Clean Air Act's provisions require
that certain capital expenditures be made in order to comply with the
amendments for nitrogen oxide reductions, generating units are currently
operating at or near the sulfur dioxide emission limits that will be
effective in the year 2000. Management believes that annual operating
costs will not be materially affected as a result of expenditures that
will be made to comply with the Clean Air Act.
Under the Michigan Natural Resources and Environmental Protection Act,
Consumers expects that it will ultimately incur investigation and remedial
action costs at a number of sites, and believes that these costs are
properly recoverable in rates.
Consumers is a so-called potentially responsible party at several sites
being administered under Superfund. In addition, 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 the liability at any
of the known Superfund sites, individually or in total, will have a
material adverse effect on its financial position, liquidity or results of
operations. For further information regarding electric environmental
matters, see Note 12.
Stray Voltage: A number of lawsuits have been filed against Consumers
relating to the effect of so-called stray voltage on certain livestock.
As of January 1997, 22 separate stray voltage lawsuits were awaiting
trial court action, down from 30 lawsuits at December 31, 1995, and 83
lawsuits at December 31, 1994. Consumers believes that the resolution of
the remaining lawsuits will not have a material impact on its financial
position, liquidity or results of operations.
Gas Utility Results of Operations
Gas Pretax Operating Income:
In Millions
Years Ended December 31 1996 1995 Change 1995 1994 Change
$153 $151 $2 $151 $135 $16
Gas pretax operating income increased in 1996 compared to 1995 as a result
of increased gas deliveries and revenues from value added services and gas
loaning activities. Partially offsetting these increases were the
reversal of a previously recorded gas contract contingency during 1995 and
higher operating expenses. Gas pretax operating income increased in 1995
compared to 1994, reflecting higher 1995 gas deliveries, and the reversal
of losses previously recorded for gas contingencies. Partially offsetting
these increases were higher depreciation and gas operation expenses (see
Note 4). The following table quantifies these impacts on Pretax Operating
Income:
In Millions
Change Compared to Prior Year 1996 vs 1995 1995 vs 1994
Sales $ 19 $ 12
Reversal in 1995 of gas contingency (23) 23
Recovery of gas costs and other issues 7 (4)
Gas loaning activities 7 -
Operations and maintenance (4) (9)
General taxes and depreciation (5) (7)
Other 1 1
---- ----
Total change $ 2 $ 16
==== ====
Gas Deliveries: Total system deliveries, excluding transport to the MCV
Facility and other miscellaneous transportation, increased 5.1 percent for
1996 compared to 1995 and 6.5 percent for 1995 compared to 1994. The
increased deliveries for each period reflect growth resulting from
customer additions, conversions to natural gas from alternative fuels and
continued strength in the Michigan economy. The table below indicates
total deliveries and the impact of weather.
In bcf
Years Ended December 31 1996 1995 Change 1995 1994 Change
Weather-adjusted deliveries
(variance reflects growth) 337 326 11 326 313 13
Impact of weather 15 9 6 9 1 8
--- --- --- --- --- ---
System deliveries excluding
transport to MCV Partnership 352 335 17 335 314 21
Transport to MCV Partnership 65 54 11 54 77 (23)
Other Transportation 31 15 16 15 18 (3)
--- --- --- --- --- ---
Total deliveries 448 404 44 404 409 (5)
=== === === === === ===
Cost of Gas Sold:
In Millions
Years Ended December 31 1996 1995 Change 1995 1994 Change
$750 $674 $76 $674 $662 $12
The cost increase for 1996 was the result of increased sales and the
reversal of a $23 million gas contract contingency during 1995.
Gas Utility Issues
Gas Rate Proceedings: In March 1996, the MPSC issued a final order
decreasing gas rates by $12 million annually and authorizing an 11.6
percent return on common equity. Consumers filed a petition for rehearing
with the MPSC, requesting reconsideration of certain issues. This
petition was denied in June 1996 and the matter is now closed.
Consumers entered into a special natural gas transportation contract with
one of its transportation customers in response to the customer's proposal
to bypass Consumers' system in favor of a competitive alternative. The
contract provides for discounted gas transportation rates in an effort to
induce the customer to remain on Consumers' system. In 1995, the MPSC
approved the contract but stated that the revenue shortfall created by the
difference between the contract's discounted rate and the floor price of
one of Consumers' MPSC-authorized gas transportation rates must be borne
by Consumers' shareholders. In 1995, Consumers filed an appeal with the
Court of Appeals, which is still pending, claiming that the MPSC decision
denies Consumers the opportunity to earn its authorized rate of return and
is therefore unconstitutional.
GCR Matters: In 1995, the MPSC issued an order regarding a $44 million
(excluding interest) gas supply contract pricing dispute between Consumers
and certain intrastate producers. The order stated that Consumers was not
obligated to seek prior approval of market-based pricing provisions that
were implemented under the contracts in question. The producers
subsequently filed a claim of appeal of the MPSC order with the Court of
Appeals. Consumers believes the MPSC order correctly concludes that the
producers' theories are without merit and will vigorously oppose any
claims they may raise, but cannot predict the outcome of this issue.
In the GCR reconciliation proceeding for the period April 1995 through
March 1996, an issue has arisen questioning whether revenue from gas
loaning (which was a new business activity for Consumers) should, in whole
or in part, be immediately passed through to customers. The ALJ issued a
proposal for decision in January 1997 that agreed with the MPSC staff's
position that the gas loaning program uses storage assets of Consumers and
therefore recommended that 90 percent of the revenue should be refunded to
customers. For the year ended December 31, 1996, $6 million would be
subject to refund. Consumers will continue to oppose this view before the
MPSC.
Gas Environmental Matters: Consumers expects that it will ultimately
incur investigation and remedial action costs at a number of sites,
including some that formerly housed manufactured gas plant facilities.
Data available, and continued internal review of these former manufactured
gas plant sites, have resulted in an estimate for all costs related to
investigation and remedial action of between $48 million and $98 million.
These estimates are based on undiscounted 1996 costs. At December 31,
1996, Consumers has accrued a liability for $48 million and has
established a regulatory asset for approximately the same amount. Any
significant change in assumptions such as remediation technique, nature
and extent of contamination and regulatory requirements, could affect the
estimate of remedial action costs for the sites.
In accordance with an MPSC rate order, environmental clean-up costs, above
the amount currently being recovered in rates, will be deferred and
amortized over ten years. The order authorizes current recovery of $1
million annually. Consumers is continuing discussions with certain
insurance companies regarding coverage for some or all of the costs that
may be incurred for these sites. For further information regarding
environmental matters, see Note 12.
Forward-Looking Information
Forward-looking information is included throughout this Annual Report.
Material contingencies are also described in the Notes to Consolidated
Financial Statements and should be read accordingly.
Some important factors that could cause actual results or outcomes to
differ materially from those discussed in the forward-looking statements
include prevailing governmental policies and regulatory actions (including
those of the FERC and the MPSC) with respect to rates, industry and rate
structure, operation of nuclear power facilities, acquisition and disposal
of assets and facilities, operation and construction of plant facilities,
operation and construction of natural gas pipeline and storage facilities,
recovery of the cost of purchased power or natural gas, decommissioning
costs, and present or prospective wholesale and retail competition, among
others. The business and profitability of Consumers are also influenced
by economic and geographic factors, including political and economic
risks, changes in environmental laws and policies, weather conditions,
competition for retail and wholesale customers, pricing and transportation
of commodities, market demand for energy, inflation, capital market
conditions, and the ability to secure agreement in pending negotiations,
among other important factors. All such factors are difficult to predict,
contain uncertainties that may materially affect actual results, and may
be beyond the control of Consumers.
Capital Expenditures: Consumers estimates the following capital
expenditures, including new lease commitments, by company and by business
segment over the next three years. These estimates are prepared for
planning purposes and are subject to revision.
In Millions
Years Ended December 31 1997 1998 1999
Consumers
Construction $356 $334 $330
Nuclear fuel lease 14 27 13
Capital leases other than nuclear fuel 14 14 14
Michigan Gas Storage 3 3 3
---- ---- ----
$387 $378 $360
==== ==== ====
Electric utility operations (a) $272 $275 $257
Gas utility operations (a) 115 103 103
---- ---- ----
$387 $378 $360
==== ==== ====
(a) These amounts include an attributed portion of Consumers' anticipated
capital expenditures for plant and equipment common to both the electric
and gas utility businesses.
Electric Outlook: Consumers expects average annual growth of two to three
percent per year in electric system sales over the next five years, based
on the current industry configuration in Michigan. Actual electric sales
in future periods may be affected by abnormal weather, changing economic
conditions, or the developing competitive market for electricity.
Consumers continues to work toward retaining its current retail service
customers by offering electric rates that are competitive with those of
other energy providers, and by improving reliability and customer
communications. Consumers is also taking steps to prepare for a future
environment in which open access is the predominant means by which retail
service customers obtain their power requirements.
Consumers' retail service is affected by competition in several areas,
including the potential installation of cogeneration or other self-
generation facilities by larger industrial customers; the formation of
municipal utilities that would displace retail service to an entire
community; competition from other utilities that offer flexible rate
arrangements designed to encourage movement of facilities or production to
their service areas; economic development competition between utilities;
MPSC direct access programs and potential electric industry restructuring
including regulatory decisions and new state or federal legislation.
In 1996, the MPSC significantly reduced the rate subsidization of
residential customers by large industrial and commercial customers. In
addition, in an effort to meet the challenge of competition, Consumers has
signed long-term sales contracts with some of its largest industrial
customers, including its largest customer, General Motors Corporation.
Under the General Motors contract, Consumers will serve certain facilities
at least five years and serve other facilities at least ten years.
Certain facilities will have the option of taking retail wheeling service
(if available) after the first three years of the contract. The MPSC
approved this contract in 1995, and has also approved long-term sales
contracts with other major customers representing a substantial percentage
of Consumers' industrial load deemed to have viable cogeneration
alternatives. These orders have been appealed by the Attorney General.
The MPSC-approved Settlement Agreement, among other things, opened up 240
MW of load to competition. Consumers believes it can compete for 140 MW
of load while 100 MW is reserved for 18 months for direct access on a
lottery basis. Consumers has negotiated special contracts sufficient to
fill the 140 MW of load available under the Settlement Agreement. These
contracts were filed with the MPSC for approval.
In January 1996, the Governor of the State of Michigan requested that the
MPSC review the existing regulatory framework governing Michigan business
in order to improve Michigan's business climate. After the filing of
utility plans as requested by the MPSC earlier in 1996, and after
discussions with many parties, in December 1996, the MPSC staff issued a
report recommending a phased-in program of direct access by electric
customers (also known as customer choice) based on two fundamental
principles: 1) all customers should be eligible to participate in the
emerging competitive market for electric supply; and 2) rates should not
be increased for any customers and should be decreased where possible.
The report also recommends that, beginning in 1997, customers would have
the opportunity to select the power supplier of their choice. All
customers would be eligible to participate, but in the initial years the
total amount would be limited to 150 MW for 1997, increasing an additional
150 MW each year through 2000. In 2001, all commercial and industrial
customers served at primary voltage would be eligible, and in 2004 all
remaining customers would be eligible. This report also recommends
recovery of electric utility transition costs (often referred to as
stranded costs) from those customers exercising a right to purchase power
from generators other than their traditional utility supplier. Transition
costs consist of two elements: 1) energy supply costs that were incurred
during the regulated era that would not be competitive at market prices if
the electric industry is restructured; and 2) costs that are incurred to
facilitate the transition from regulated monopoly status to competitive
market status. The MPSC staff report states that transition costs should
include the following: 1) regulatory assets (see Note 18); 2) nuclear
capital costs; 3) contract capacity costs in power purchase agreements; 4)
employee-related restructuring costs; and 5) other costs related to
implementing restructuring.
The report also recommends that where possible, the recovery of the
transition costs would be funded through Rate Reduction Bonds. Transition
costs not recovered through Rate Reduction Bonds would be recovered
through a transition charge billed to direct access customers. The
transition charge would begin when the customer takes direct access
service and would continue through 2007. Customers not participating in
the direct access program would be charged bundled rates that include: 1)
a base rate freeze; 2) suspension of the PSCR process during the
transition period and establishment of a fixed level of fuel and purchase
power recovery; and 3) limited performance-based regulation of the
transmission and distribution functions in a manner which incorporates
service standards and allows for the Consumer Price Index less one percent
adjustments on transmission and distribution rates through the end of
2001.
On March 7, 1997, Consumers filed supplementary data with the MPSC at its
request. This data showed that Consumers has approximately $1.8 billion
of existing transition costs which would be recovered by a transition
charge to be paid by direct access customers through 2007. Restructuring
and implementation costs of $200 million would be recovered by an
implementation charge to direct access customers. Alternatively, if the
securitization approach is pursued and appropriate legislation is passed,
the data indicate that significant customer benefits would result. The
resulting securitization charge would be paid by all customers to service
$4 billion of Rate Reduction Bonds with a proposed 15-year term. Because
of the phase-in schedule for retail direct access service, a substantial
portion of $4 billion in costs that would be subject to the securitization
alternative would be paid by customers on bundled rates prior to getting
choice, thus allowing the transition cost to be charged only to direct
access customers to be limited to $1.8 billion if securitization does not
occur. Securitization results in over a $200 million benefit per year to
customers because the 15-year repayment period of the bonds allows the
cost reimbursement by the customer to be spread out over a longer period
than without securitization and because securitization allows the costs
being securitized to be financed at a lower rate.
Several of the elements of electric utility restructuring will need to be
addressed in legislation, including assurance of full transition cost recovery,
securitization of Rate Reduction Bonds and generation deregulation.
Consumers currently expects that electric utility restructuring will occur
in a manner consistent with the MPSC staff report, but cannot predict with
certainty the timing of actual implementation, the extent of customer
choice, or resultant financial impacts.
In April 1996, the FERC issued Orders 888 and 889, which require utilities
to provide open access to the interstate transmission grid for wholesale
transactions. Order 888 requires public utilities owning, controlling, or
operating transmission lines in interstate commerce to file non-
discriminatory open access tariffs that contain minimum terms and
conditions of non-discriminatory service; allows utilities to charge their
current conforming transmission rates or apply for new rates; and allows
the full recovery of transition costs. Order 888 also requires that power
pools restructure their ongoing operations and open membership to industry
participants. Order 889 requires that utilities establish electronic
systems to share information about available transmission capacity and to
separate their wholesale power marketing and transmission operations
functions.
Several FERC Order 888 and 889 requirements have been implemented,
including the filing with FERC of Consumers' individual open access tariff
and the Joint Transmission Tariff with Detroit Edison for transmission
service across the Consumers and Detroit Edison transmission systems,
separation of the wholesale merchant function from the transmission
function, implementation of the required Code of Conduct, unbundling of
wholesale interconnection agreements and related issues. Consumers
participated in organizational discussions of a Midwest Independent System
Operator, of which Consumers is a member.
One issue related to FERC Orders 888 and 889 that is not resolved is the
operation of the Michigan Electric Power Coordination Center. Currently,
Consumers and Detroit Edison have an agreement to jointly operate the
Michigan Electric Power Coordination Center pool, which provides
considerable savings to Michigan electric customers. Consumers would
propose to maintain the benefits of the pool for its customers and open up
the pool to other participants on a non-discriminatory basis. Detroit
Edison seeks to terminate the power pool agreement with Consumers
effective April 30, 1997. The current Michigan Electric Power
Coordination Center agreement requires a four-year advance notice for
termination. The FERC is expected to rule on this issue in 1997. The
impact of the FERC decision on Consumers and its customers cannot be
predicted.
Consumers currently applies the utility accounting standard , SFAS 71,
that recognizes the economic effects of rate regulation and, accordingly,
has recorded regulatory assets and liabilities related to its generation,
transmission and distribution operations (see Note 18). If rate recovery
of generation-related costs becomes unlikely or uncertain, whether due to
competition or regulatory action, this accounting standard may no longer
apply to Consumers' generation operations. This change could result in
either full recovery of generation-related regulatory assets (net of
related regulatory liabilities) or a loss, depending on whether Consumers'
regulators adopt a transition mechanism for the recovery of all or a
portion of these net regulatory assets. Based on a current evaluation of
the various factors and conditions that are expected to impact future cost
recovery, Consumers believes that its regulatory assets, including those
related to generation, are probable of future recovery.
At the SEC staff's request, the FASB is reviewing the accounting for
closure and removal costs for long-lived assets, including
decommissioning. The current electric utility industry accounting
practices of recording the cost of removal as a component of depreciation
could be changed. The FASB's tentative decision includes recognition of
the cost of closure and removal obligation as a liability based on
discounted future cash flows with the offset recorded as part of the cost
of the plant asset.
Gas Outlook: Consumers currently anticipates gas deliveries to grow two
percent per year (excluding transportation to the MCV Facility and off-
system deliveries) over the next five years, assuming a steadily growing
customer base. Additionally, Consumers has several strategies that will
support increased load requirements in the future. These strategies
include increased efforts to promote natural gas to both current and
potential customers that are using other fuels for space and water
heating. In addition, as air quality standards continue to become more
stringent, management believes that greater opportunities exist for
converting industrial boiler load and other processes to natural gas.
Consumers also plans additional capital expenditures to construct new gas
mains that are expected to expand Consumers' system. Actual gas
deliveries in future periods may be affected by abnormal weather,
alternative energy prices, changes in competitive conditions, and the
level of natural gas consumption. In addition, Consumers has proposed to
the MPSC a fixed gas price for recovery over a three-year period.
Consumers is also offering a variety of energy related services to its
customers including appliance maintenance, home safety, and home security.
In October 1996, the MPSC issued an order requesting Consumers and other
local distribution companies whose rates are regulated by the MPSC to
develop pilot programs that would allow any customers to purchase gas from
other suppliers and have the gas transported through local pipelines.
These pilot programs, which are to be implemented in mid-1997 and last for
two years, are intended to help the MPSC determine whether it is
appropriate to allow all customers access to the competitive gas
transportation market.
Based on a regulated utility accounting standard, SFAS 71, Consumers is
allowed to defer certain costs to the future and record regulatory assets,
based on the recoverability of those costs through the MPSC's approval.
Consumers has evaluated its regulatory assets related to its gas business,
and believes that sufficient regulatory assurance exists to provide for
the recovery of these deferred costs (see Note 18).
Other
New Accounting Standards: In 1996, the FASB issued SFAS 125, Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities, which is effective for 1997 financial statements. In October
1996, the American Institute of Certified Public Accountants issued
Statement of Position 96-1, Environmental Remediation Liabilities,
effective for 1997 financial statements. Consumers does not expect the
application of these statements to have a material impact on its financial
position, liquidity or results of operations.
110
Consolidated Statements of Income Consumers Energy Company
In Millions
Years Ended December 31 1996 1995 1994
Operating Revenue Electric $2,446 $2,277 $2,189
Gas 1,282 1,195 1,151
Other 42 39 16
------------------------------
Total operating revenue 3,770 3,511 3,356
------------------------------
Operating Expenses Operation
Fuel for electric generation 296 283 306
Purchased power - related parties 589 491 482
Purchased and interchange power 202 196 162
Cost of gas sold 750 674 662
Other 600 589 562
------------------------------
Total operation 2,437 2,233 2,174
Maintenance 174 183 188
Depreciation, depletion and amortization 371 357 335
General taxes 191 189 178
------------------------------
Total operating expenses 3,173 2,962 2,875
------------------------------
Pretax Operating Electric 402 362 332
Income Gas 153 151 135
Other 42 36 14
------------------------------
Total pretax operating income 597 549 481
------------------------------
Other Income Dividends from affiliates (Note 17) 17 17 17
(Deductions) Accretion income (Note 2) 10 11 13
Accretion expense (Note 2) (22) (31) (35)
Other, net (4) 5 9
------------------------------
Total other income 1 2 4
------------------------------
Interest Charges Interest on long-term debt 139 141 135
Other interest 15 24 17
Capitalized interest (2) (2) (1)
------------------------------
Net interest charges 152 163 151
------------------------------
Net Income Before Income Taxes 446 388 334
Income Taxes 150 133 108
------------------------------
Net Income 296 255 226
Preferred Stock Dividends 28 28 24
Preferred Securities Distributions (Note 7) 8 - -
------------------------------
Net Income Available to Common Stockholder $ 260 $ 227 $ 202
==============================
The accompanying notes are an integral part of these statements.
111
Consolidated Statements of Cash Flows Consumers Energy Company
In Millions
Years Ended December 31 1996 1995 1994
Cash Flows From Net income $ 296 $ 255 $ 226
Operating Activities Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation, depletion and amortization (includes
nuclear decommissioning of $49, $51 and
$49, respectively) 371 357 335
Capital lease and other amortization 40 38 35
Deferred income taxes and investment tax credit 48 57 57
Accretion expense (Note 2) 22 31 35
Accretion income - abandoned Midland project (Note 2) (10) (11) (13)
Undistributed earnings of related parties (40) (36) (16)
Power purchases (Note 3) (63) (137) (87)
Other 5 4 2
Changes in other assets and liabilities (Note 15) 3 84 24
--- --- ---
Net cash provided by operating activities 672 642 598
----- ----- -----
Cash Flows From Capital expenditures (excludes capital lease additions of
Investing Activities $31, $31 and $36, respectively and DSM) (Note 15) (410) (414) (447)
Investments in nuclear decommissioning trust funds (49) (51) (49)
Cost to retire property, net (31) (41) (38)
Deferred demand-side management costs (6) (9) (9)
Proceeds from sale of property - 1 14
Other 2 (5) 1
--- --- ---
Net cash used in investing activities (494) (519) (528)
----- ----- -----
Cash Flows From Payment of common stock dividends (200) (70) (176)
Financing Activities Payment of capital lease obligations (40) (37) (34)
Retirement of bonds and other long-term debt (37) (1) (133)
Payment of preferred stock dividends (28) (28) (19)
Increase (decrease) in notes payable, net (8) 2 80
Preferred securities distributions (8) - -
Proceeds from preferred securities 97 - -
Proceeds from bank loans 23 - 400
Contribution from stockholder 13 - 100
Repayment of bank loans - - (469)
Proceeds from preferred stock - - 193
--- --- ---
Net cash used in financing activities (188) (134) (58)
----- ----- -----
Net Increase (Decrease) in Cash and Temporary Cash Investments (10) (11) 12
Cash and temporary cash investments
Beginning of year 14 25 13
--- --- ---
End of year $ 4 $ 14 $ 25
==== ==== ====
The accompanying notes are an integral part of these statements.
112
Consolidated Balance Sheets Consumers Energy Company
ASSETS In Millions
December 31 1996 1995
Plant Electric $6,333 $6,103
(At original cost) Gas 2,203 2,169
Other 26 30
-----------------------------
8,562 8,302
Less accumulated depreciation, depletion
and amortization (Note 2) 4,269 4,090
-----------------------------
4,293 4,212
Construction work-in-progress 158 190
-----------------------------
4,451 4,402
-----------------------------
Investments Stock of affiliates (Note 17) 298 337
First Midland Limited Partnership (Notes 3 and 19) 232 225
Midland Cogeneration Venture Limited
Partnership (Notes 3 and 19) 134 103
Other 8 7
-----------------------------
672 672
-----------------------------
Current Assets Cash and temporary cash investments at cost, which
approximates market 4 14
Accounts receivable and accrued revenue, less allowances
of $10 in 1996 and $3 in 1995 (Note 6) 148 137
Accounts receivable - related parties (Note 17) 63 10
Inventories at average cost
Gas in underground storage 186 184
Materials and supplies 68 72
Generating plant fuel stock 30 37
Deferred income taxes (Note 5) 27 26
Postretirement benefits (Note 10) 25 25
Prepayments and other 183 181
-----------------------------
734 686
-----------------------------
Non-current Assets Postretirement benefits (Note 10) 435 462
Nuclear decommissioning trust funds (Note 2) 386 304
Abandoned Midland project 113 131
Other 234 297
-----------------------------
1,168 1,194
-----------------------------
Total Assets $7,025 $6,954
=============================
113
Consumers Energy Company
STOCKHOLDERS' INVESTMENT AND LIABILITIES In Millions
December 31 1996 1995
Capitalization Common stockholder's equity
(Note 7) Common stock $ 841 $ 841
Paid-in-capital 504 491
Revaluation capital 37 29
Retained earnings since December 31, 1992 297 237
-----------------------------
1,679 1,598
Preferred stock 356 356
Company-obligated mandatorily redeemable preferred
securities of Consumers Power Company Financing I (a) 100 -
Long-term debt 1,900 1,922
Non-current portion of capital leases 100 104
-----------------------------
4,135 3,980
-----------------------------
Current Liabilities Current portion of long-term debt and capital leases 98 90
Notes payable 333 341
Accounts payable 212 207
Accrued taxes 211 225
Accounts payable - related parties 68 56
Power purchases (Note 3) 47 90
Accrued interest 33 32
Accrued refunds 8 22
Other 176 178
-----------------------------
1,186 1,241
-----------------------------
Non-current Deferred income taxes (Note 5) 646 605
Liabilities Postretirement benefits (Note 10) 500 517
Power purchases (Note 3) 178 221
Deferred investment tax credit 159 169
Regulatory liabilities for income taxes,
net (Notes 5 and 18) 66 44
Other 155 177
-----------------------------
1,704 1,733
-----------------------------
Commitments and Contingencies
(Notes 2, 3, 4, 11, 12 and 13)
Total Stockholders' Investment and Liabilities $7,025 $6,954
=============================
(a) As described in Note 7 to the Consolidated Financial Statements, the primary asset of Consumers Power Company
Financing I is $103 million principal amount of 8.36% subordinated interest notes due 2015 from Consumers.
The accompanying notes are an integral part of these statements.
114
Consolidated Statements of Long-Term Debt Consumers Energy Company
In Millions
December 31 1996 1995
First Mortgage Bonds Series (%) Due
5-7/8 1996 $ - $ 36
6 1997 50 50
8-3/4 1998 248 248
6-5/8 1998 45 45
6-7/8 1998 43 43
8-7/8 1999 200 200
7-1/2 2001 57 57
7-1/2 2002 62 62
6-3/8 2003 300 300
7-3/8 2023 300 300
----- -----
1,305 1,341
Long-Term Bank Debt 400 400
Pollution Control Revenue Bonds 131 131
Nuclear Fuel Disposal (a) 106 100
Other 26 4
----- -----
Principal Amount Outstanding 1,968 1,976
Current Amounts (59) (45)
Net Unamortized Discount (9) (9)
----- -----
Total Long-Term Debt $1,900 $1,922
====== ======
LONG-TERM DEBT MATURITIES AND IMPROVEMENT FUND OBLIGATIONS In Millions
First Mortgage Improvement Long-Term
Bonds Fund Bank Debt Other Total
1997 $ 50 $8 $ - $ 1 $ 59
1998 336 7 200 3 546
1999 200 3 200 105 508
2000 - 1 - 5 6
2001 57 1 - 5 63
(a) Due date uncertain (see Note 2)
The accompanying notes are an integral part of these statements.
115
Consolidated Statements of Preferred Stock Consumers Energy Company
Optional
Redemption Number of Shares In Millions
December 31 Series Price 1996 1995 1996 1995
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 25.00 (a) 8,000,000 8,000,000 193 193
---- ----
Total Preferred Stock $356 $356
==== ====
(a) Redeemable beginning April 1, 1999.
The accompanying notes are an integral part of these statements.
116
Consolidated Statements of Common Stockholder's Equity Consumers Energy Company
In Millions
Other
Common Paid-in Revaluation Retained
Stock Capital Capital Earnings Total
Balance at January 1, 1994 (a) $841 $391 $ - $ 54 $1,286
Net income 226 226
Cash dividends declared
Common stock (176) (176)
Preferred stock (24) (24)
Unrealized investment-gain 15 15
Stockholder's contribution 100 100
----------------------------------------------------------
Balance at December 31, 1994 (a) 841 491 15 80 1,427
Net income 255 255
Cash dividends declared
Common stock (70) (70)
Preferred stock (28) (28)
Change in unrealized investment-gain 14 14
----------------------------------------------------------
Balance at December 31, 1995 (a) 841 491 29 237 1,598
Net income 296 296
Cash dividends declared
Common stock (200) (200)
Preferred stock (28) (28)
Preferred securities distributions (8) (8)
Change in unrealized investment-gain 8 8
Stockholder's contribution 13 13
----------------------------------------------------------
Balance at December 31, 1996 (a) $841 $504 $37 $ 297 $1,679
==========================================================
(a) Number of shares of common stock outstanding was 84,108,789.
The accompanying notes are an integral part of these statements.
117
Consumers Energy Company
Notes to Consolidated Financial Statements
1: Corporate Structure
Consumers Energy Company (formerly Consumers Power Company) is a
combination electric and gas utility company serving the Lower Peninsula
of Michigan, and is the principal subsidiary of CMS Energy, a holding
company. Consumers' customer base includes a mix of residential,
commercial and diversified industrial customers, the largest segment of
which is the automotive industry.
2: Summary of Significant Accounting Policies and Other Matters
Basis of Presentation: The consolidated financial statements include
Consumers and its wholly owned subsidiaries. The financial statements are
prepared in conformity with generally accepted accounting principles and
include the use of management's estimates. Consumers uses the equity
method of accounting for investments in its companies and partnerships
where it has more than a 20 percent but less than a majority ownership
interest.
Accretion Income and Expense: In 1991, the MPSC ordered that Consumers
could recover a portion of its abandoned Midland investment over a 10-year
period, but did not allow Consumers to earn a return on that amount.
Consumers reduced the recoverable investment to the present value of the
future recoveries. During the recovery period, the unrecovered asset is
adjusted to its present value. This adjustment is reflected as accretion
income. Conversely, Consumers recorded a loss in 1992 for the present
value of its estimated future underrecoveries of power costs resulting
from purchases from the MCV Partnership (see Note 3), and now recognizes
accretion expense annually to reflect the time value of money on the
recorded loss.
Gas Inventory: Consumers uses the weighted average cost method for
valuing working gas inventory. Cushion gas, which is gas stored to
maintain reservoir pressure for recovery of working gas, is recorded in
the appropriate gas utility plant account. Consumers stores gas inventory
in its underground storage facilities.
Maintenance, Depreciation and Depletion: Property repairs and minor
property replacements are charged to maintenance expense. Depreciable
property retired or sold plus cost of removal (net of salvage credits) is
charged to accumulated depreciation. Consumers bases depreciation
provisions for utility plant on straight-line and units-of-production
rates approved by the MPSC. The composite depreciation rate for electric
utility property was 3.5 percent for 1996, 1995 and 1994. The composite
rate for gas utility plant was 4.2 percent for 1996, 4.3 percent for 1995
and 4.2 percent for 1994. The composite rate for other plant and property
was 5.5 percent for 1996, 4.9 percent for 1995 and 4.7 percent for 1994.
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 current federal
law, as confirmed by court decision, the DOE is required to begin
accepting deliveries of spent nuclear fuel by January 31, 1998 for
disposal, even if a permanent repository is not then operational.
Utilities and their customers have been prepaying the costs of DOE
transport and disposal through fees based on electric generation by their
nuclear plants. For fuel used after April 6, 1983, Consumers charges
disposal costs to nuclear fuel expense, recovers them through electric
rates and remits to the DOE quarterly. Consumers elected to defer payment
for disposal of spent nuclear fuel burned before April 7, 1983 until the
first of its spent fuel is delivered to the DOE. At December 31, 1996,
Consumers had a recorded liability to the DOE of $106 million, including
interest, which is to be paid prior to the first delivery of spent nuclear
fuel to the DOE. Consumers recovered through electric rates the amount of
this liability, excluding a portion of interest. In January 1997, in
response to the DOE's declaration in December 1996 that it would not begin
to accept spent nuclear fuel deliveries by the date required by law,
Consumers and other utilities filed suit in federal court. The utilities
are seeking a declaration that they are relieved of their obligation to
remit their quarterly fee payments to the DOE and are authorized to escrow
any related fees collected from their customers, unless and until the DOE
begins to accept spent nuclear fuel. The suit seeks an order requiring
the DOE to develop a program to begin acceptance of spent nuclear fuel by
January 31, 1998. Also in 1997, federal legislation was reintroduced to
clarify the timing of the DOE's obligation to accept spent nuclear fuel
and to direct the DOE to establish an integrated spent fuel management
system that includes designing and constructing an interim storage
facility in Nevada.
Nuclear Plant Decommissioning: Consumers collected $49 million in 1996
from its electric customers toward the future decommissioning of its two
nuclear plants. In April 1996, Consumers received a decommissioning order
from the MPSC which estimated decommissioning costs for Big Rock and
Palisades to be $317 million and $548 million (in 1996 dollars),
respectively. The estimated decommissioning costs increased from previous
estimates principally due to the unavailability of low- and high-level
radioactive waste disposal facilities. Amounts collected from electric
retail customers and deposited in trusts (including trust earnings) are
credited to accumulated depreciation. To meet NRC decommissioning
requirements, Consumers prepared site-specific decommissioning cost
estimates for Big Rock and Palisades, assuming that each plant site will
eventually be restored to conform with the adjacent landscape, and that
all contaminated equipment will be disassembled and disposed of in a
licensed burial facility. After the plants are retired, Consumers plans
to maintain the facilities in protective storage until radioactive waste
disposal facilities are available. As a result, the majority of
decommissioning costs will be incurred after each plant's NRC operating
license expires. When Big Rock's and Palisades' NRC licenses expire in
2000 and 2007, respectively, the trust funds are estimated to have
accumulated $257 million and $686 million, respectively. It is estimated
that at the time the plants are fully decommissioned (in the years 2030
for Big Rock and 2046 for Palisades), the trust funds will have provided
$1 billion for Big Rock and $2.1 billion for Palisades, including trust
earnings over this decommissioning period. Based on this plan, Consumers
believes that the current decommissioning surcharge will be sufficient to
provide for decommissioning of its nuclear plants. At December 31, 1996,
Consumers had an investment in nuclear decommissioning trust funds of $386
million.
Reclassifications: Consumers has reclassified certain prior year amounts
for comparative purposes. These reclassifications did not affect net
income for the years presented.
Revenue and Fuel Costs: Consumers accrues revenue for electricity and gas
used by its customers but not billed at the end of an accounting period.
Consumers accrues or reduces revenue for any underrecovery or overrecovery
of electric power supply costs and natural gas costs by establishing a
corresponding asset or liability until it bills or refunds these
differences to customers following an MPSC order.
Utility Regulation: Consumers accounts for the effects of regulation
based on a regulated utility accounting standard (SFAS 71). As a result,
the actions of regulators affect when revenues, expenses, assets and
liabilities are recognized. If all or a separable portion of Consumers'
operations becomes no longer subject to the provisions of utility
regulation, a write-off of related regulatory assets and liabilities would
be required, unless some form of transition cost recovery continues
through rates established and collected for Consumers' remaining
operations. In addition, Consumers would be required to determine any
impairment to the carrying costs of deregulated plant and inventory
assets. For further discussion, see MD&A Forward-Looking Information and
Note 18.
Other: For significant accounting policies regarding income taxes, see
Note 5; for executive incentive compensation, see Note 9; 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 Dow. Consumers, through
two wholly owned subsidiaries, holds the following assets related to the
MCV Partnership and MCV Facility: 1) CMS Midland owns a 49 percent
general partnership interest in the MCV Partnership; and 2) CMS Holdings
holds, through the FMLP, a 35 percent lessor interest in the MCV Facility.
Summarized Statements of Income for CMS Midland and CMS Holdings:
In Millions
Years Ended December 31 1996 1995 1994
Pretax operating income $40 $35 $12
Income taxes and other 11 10 (1)
--- --- ---
Net income $29 $25 $13
=== === ===
Power Purchases from the MCV Partnership: Consumers' annual obligation to
purchase contract capacity from the MCV Partnership is 1,240 MW through
the termination of the PPA in 2025. The PPA provides that Consumers is to
pay the MCV Partnership a minimum levelized average capacity charge of
3.77 cents per kWh, a fixed energy charge, and a variable energy charge
based primarily on Consumers' average cost of coal consumed. The MPSC
allows Consumers to recover substantially all of the payments for its
ongoing purchase of 915 MW of contract capacity. The MPSC order allowing
recovery was affirmed in March 1996 by the Court of Appeals. Consumers is
recovering capacity charges averaging 3.62 cents per kWh for 915 MW of
capacity, the fixed energy charge, and the prescribed energy charges
associated with the scheduled deliveries within certain hourly
availability limits, whether or not those deliveries are scheduled on an
economic basis.
Consumers previously recognized a loss in 1992 for the present value of
the estimated future underrecoveries of power costs under the PPA based 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. At December 31, 1996 and 1995, the after-tax present
value of the PPA liability totaled $147 million and $202 million,
respectively. The reduction in the liability since December 31, 1995
reflects after-tax cash underrecoveries of $41 million along with $28
million related to the termination of power purchase agreements, partially
offset by after-tax accretion expense of $14 million. The undiscounted
after-tax amount associated with the liability totaled $549 million at
December 31, 1996.
In November 1996, the MPSC approved a Settlement Agreement proposed by
Consumers and the MPSC staff that addressed cost recovery for the
remaining 325 MW of MCV Facility capacity. Beginning January 1, 1996,
Consumers was permitted to recover an average capacity charge of 2.86
cents per kWh for this power. The approved average capacity charge
increased to 3.62 cents per kWh for 65 MW of the 325 MW on November 1,
1996, and for an additional 44 MW on January 1, 1997. Cost recovery for
the remaining 216 MW is based upon the escalation of the average capacity
charge by three percent annually until it reaches 3.62 cents per kWh in
2004, and remains at this ceiling rate through the end of the contract.
Consumers anticipates it will continue to experience cash underrecoveries
associated with the PPA as shown below.
In Millions
1997 1998 1999 2000 2001
Estimated cash underrecoveries,
net of tax $28 $23 $22 $21 $20
After considering the effects of the Settlement Agreement, Consumers
believes that the original loss recorded in 1992 remains adequate. The
amount of underrecoveries of power costs continues to be based, in part,
on management's best assessment of the future availability of the MCV
Facility. If the MCV Facility operates at levels above management's
estimate over the remainder of the PPA, future losses will need to be
recognized over and above amounts previously recorded. Further, Consumers
would experience greater amounts of cash underrecoveries than originally
anticipated. Management will continue to evaluate the adequacy of the
accrued liability considering actual facility operations.
PSCR Matters Related to Power Purchases from the MCV Partnership: As part
of the 1993 and 1994 plan case orders, the MPSC confirmed the recovery of
certain costs related to power purchases from the MCV Partnership. ABATE
or the Attorney General appealed these plan case orders to the Court of
Appeals. In February 1996, the Court of Appeals affirmed the MPSC's order
in the 1993 plan case.
As part of its decision in the 1993 PSCR reconciliation case issued in
1995, the MPSC disallowed a portion of the costs related to purchases from
the MCV Partnership, and instead assumed recovery of those costs from
wholesale customers. Consumers believed this was contrary to the terms of
a 1993 MPSC order and appealed this issue. The MCV Partnership and ABATE
also filed separate appeals of this order. In November 1996, the Court of
Appeals affirmed the MPSC's order. Consumers and the MCV Partnership
filed petitions for rehearing of the Court of Appeals opinion, which were
denied in January 1997.
4: Rate Matters
Electric Proceedings: In February 1996, the MPSC issued a partial final
order in the retail electric rate case filed in 1994, granting Consumers a
$46 million annual increase in its electric retail rates and authorizing a
12.25 percent return on common equity. Consumers also had separate
requests before the MPSC to offer competitive special rates to certain
large qualifying customers and to modify certain depreciation rates and
practices. In November 1996, the MPSC issued a final order in the
Settlement Agreement which combined the separate requests. The rate
increase and rate of return were not changed from the partial final order
and Consumers was authorized to accelerate recovery of its nuclear plant
investment by charging $18 million of annual steam production plant
depreciation expense to the nuclear production depreciation reserve.
Recovery of the additional 325 MW of MCV Partnership contract capacity
charges was also approved (see Note 3).
The Settlement Agreement also requires Consumers to establish a direct
access program. Customers having a maximum demand of at least 2 MW are
eligible to purchase generation services directly from any eligible third-
party power supplier. The program is limited to 650 MW of sales, of which
410 MW has already been filled by existing contracts; 140 MW may be filled
by either direct access customers or new special contracts which Consumers
has signed and submitted to the MPSC for approval; and the remaining 100
MW must be made available solely to direct access customers for at least
18 months. Rehearing petitions have been filed by Consumers and other
interested parties.
Gas Proceedings: In March 1996, the MPSC issued a final order in a 1994
rate case, authorizing recovery of costs related to postretirement
benefits and former manufactured gas plant sites (see Note 12). Overall,
however, the order decreased Consumers' gas rates by $12 million annually
and authorized an 11.6 percent return on common equity.
In the GCR reconciliation proceeding for the period April 1995 through
March 1996, an issue has arisen questioning whether revenue from gas
loaning (which was a new business activity for Consumers) should, in whole
or in part, be immediately passed through to customers. The ALJ issued a
proposal for decision in January 1997 that agreed with the MPSC staff's
position that the gas loaning program uses storage assets of Consumers and
therefore recommended that 90 percent of the revenue should be refunded to
customers. For the year ended December 31, 1996, $6 million would be
subject to refund. Consumers will continue to oppose this view before the
MPSC.
In December 1996, the MPSC authorized Consumers to implement a pilot gas
transportation program for 40,000 customers in Bay County, Michigan. The
pilot program will provide residential and small commercial customers the
opportunity to purchase gas from suppliers other than Consumers for a two-
year period beginning April 1997. Consumers will retain its role as
transporter and distributor of this gas.
In 1993, the MPSC issued an order favorable to Consumers regarding a gas
pricing disagreement between Consumers and certain intrastate producers,
which was affirmed on judicial review by state courts. In December 1996,
the U.S. Supreme Court denied the producers' request to review that
decision. In early 1995, management concluded that the intrastate
producers' pending appeals of the order would not be successful and,
accordingly, reversed a previously accrued contingency and recorded a $23
million (pretax) benefit.
In 1995, the MPSC issued an order regarding a $44 million (excluding
interest) gas supply contract pricing dispute between Consumers and
certain intrastate producers. The order stated that Consumers was not
obligated to seek prior approval of market-based pricing provisions that
were implemented under the contracts in question. The producers
subsequently filed a claim of appeal of the MPSC order with the Court of
Appeals. Consumers believes the MPSC order correctly concludes that the
producers' theories are without merit and will vigorously oppose any
claims they may raise, but cannot predict the outcome of this issue.
In December 1996, Consumers filed a request with the MPSC to totally
suspend the GCR clause and employ a fixed price for recovery of gas costs
for a period of three years ending in March 2000. There would be no
reconciliations and no reopenings for that period of time. In April 2000,
a new GCR factor would be implemented.
Resolution of the issues discussed in this note is not expected to have a
material impact on Consumers' financial position or results of operations.
5: Income Taxes
Consumers and its subsidiaries file a consolidated federal income tax
return with CMS Energy. Income taxes are generally allocated based on
each company's separate taxable income. Consumers practices full deferred
tax accounting for all temporary differences as authorized by the MPSC.
Consumers uses ITC to reduce current income taxes payable and defers and
amortizes ITC over the life of the related property. Any AMT paid 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 1996 1995 1994
Current federal income taxes $102 $ 76 $ 51
Deferred income taxes 58 67 67
Deferred ITC, net (10) (10) (10)
---- ---- ----
$150 $133 $108
==== ==== ====
Operating $162 $145 $120
Other (12) (12) (12)
---- ---- ----
$150 $133 $108
==== ==== ====
The principal components of Consumers' deferred tax assets (liabilities)
recognized in the balance sheet are as follows:
In Millions
December 31 1996 1995
Property $ (556) $ (539)
Unconsolidated investments (239) (245)
Postretirement benefits (Note 10) (165) (173)
Abandoned Midland project (40) (46)
Employee benefit obligations
(includes postretirement benefits
of $165 and $173) (Note 10) 195 200
Power purchases (Note 3) 82 112
AMT carryforward 93 94
ITC carryforward - 23
Other 11 (5)
------- -------
$ (619) $ (579)
======= =======
Gross deferred tax liabilities $(1,375) $(1,388)
Gross deferred tax assets 756 809
------- -------
$ (619) $ (579)
======= =======
The actual income tax expense differs from the amount computed by applying
the statutory federal tax rate to income before income taxes as follows:
In Millions
Years Ended December 31 1996 1995 1994
Net income $ 296 $ 255 $ 226
Income tax expense 150 133 108
Preferred securities
distributions (8) - -
--- --- ---
Pretax income 438 388 334
Statutory federal income
tax rate x 35% x 35% x 35%
---- ---- ----
Expected income tax expense 153 136 117
Increase (decrease) in taxes
from Capitalized overheads
previously flowed through 5 5 5
Differences in book and tax
depreciation not previously
deferred 6 6 7
ITC amortization (10) (10) (10)
Affiliated companies'
dividends (6) (6) (6)
Other, net 2 2 (5)
---- ---- ----
Actual income tax expense $ 150 $ 133 $ 108
==== ==== ====
Effective tax rate 34.2% 34.3% 32.3%
6: Short-Term Financings
Consumers has FERC authorization to issue or guarantee up to $900 million
of short-term debt through 1998. Consumers has an unsecured $425 million
facility and unsecured, committed lines of credit aggregating $120 million
that are used to finance seasonal working capital requirements. At
December 31, 1996, a total of $333 million was outstanding at a weighted
average interest rate of 6.3 percent, compared with $341 million
outstanding at December 31, 1995, at a weighted average interest rate of
6.5 percent.
Consumers has in place a $500 million trade receivables purchase and sale
program. At December 31, 1996 and 1995, receivables sold under the
agreement totaled $318 million and $295 million, respectively. Accounts
receivable and accrued revenue in the Consolidated Balance Sheets have
been reduced to reflect receivables sold. In 1996, Consumers entered into
a $100 million swap agreement to hedge the variable rate exposure under
the trade receivables purchase and sale program. The swap agreement
terminates in November 1998.
7: Capitalization
Capital Stock: In 1996, four million shares of 8.36 percent Trust
Originated Preferred Securities were issued and sold through Consumers
Power Company Financing I, a business trust wholly owned by Consumers.
Net proceeds from the sale totaled $97 million. Consumers Power Company
Financing I was formed for the sole purpose of issuing the Trust
Originated Preferred Securities. Its primary asset is $103 million
principal amount of 8.36 percent unsecured subordinated deferrable
interest notes issued by Consumers which mature in 2015. Consumers'
obligations with respect to the Trust Originated Preferred Securities
under the notes, under the indenture under which the notes have been
issued, under Consumers' guarantee of the Trust Originated Preferred
Securities, and under the declaration by the trust, taken together,
constitute a full and unconditional guarantee by Consumers of the trust's
obligations under the Trust Originated Preferred Securities.
First Mortgage Bonds: Consumers secures its first mortgage bonds by a
mortgage and lien on substantially all of its property. Consumers'
ability to issue and sell securities is restricted by certain provisions
in its First Mortgage Bond Indenture, its Articles and the need for
regulatory approvals in compliance with appropriate federal law.
Long-Term Bank Debt: Consumers has a $400 million unsecured, variable
rate, long-term loan. At December 31, 1996, the loan carried a weighted
average interest rate of 6.0 percent. In 1996, an existing interest rate
swap ended and Consumers entered into a new $125 million interest rate
swap agreement, again exchanging variable-rate interest for fixed-rate
interest to hedge a portion of its long-term debt. The swap agreement
terminates in November 1997. At December 31, 1996, the amount of the swap
totaled $125 million at 6.2 percent. After taking into account the effect
of the swaps, the weighted average interest rate on the long-term loan for
the year ended December 31, 1996 was 6.1 percent.
Other: Consumers has FERC authorization through November 1998 to issue up
to $500 million of long-term securities for the purposes of refinancing or
refunding existing long-term securities.
Consumers has a total of $131 million of long-term pollution control
revenue bonds outstanding, secured by irrevocable letters of credit or
first mortgage bonds, with a weighted average interest rate of 5.1 percent
at December 31, 1996.
In October 1996, Michigan Gas Storage entered into a $23 million secured,
variable rate, seven-year term loan. At December 31, 1996, the loan had a
weighted average interest rate of 6.0 percent.
Under the provisions of its Articles at December 31, 1996, Consumers had
$255 million of unrestricted retained earnings available to pay common
dividends.
8: Financial Instruments
The carrying amounts of cash, short-term investments and current
liabilities approximate their fair values due to their short-term nature.
The estimated fair values of long-term investments are based on quoted
market prices or, in the absence of specific market prices, on quoted
market prices of similar investments or other valuation techniques. The
carrying amounts of all long-term investments, except as shown below,
approximate fair value.
In Millions
December 31 1996 1995
Amortized Fair Unrealized Amortized Fair Unrealized
Available-for-sale securities Cost Value Gain Cost Value Gain
Common stock of CMS Energy $ 43 $ 99 $ 56 $ 43 $ 88 $ 45
Nuclear decommissioning
investments (a) 351 386 35 286 304 18
(a) Consumers classifies its unrealized gains and losses on nuclear decommissioning investments in accumulated
depreciation.
The carrying amount of long-term debt was $1.9 billion at December 31,
1996 and 1995, and the fair value was $1.9 billion on those dates. For
held-to-maturity securities and related-party financial instruments, see
Note 17.
9: Executive Incentive Compensation
Consumers participates in CMS Energy's Performance Incentive Stock Plan.
Under the plan, restricted shares of Common Stock of CMS Energy, stock
options and stock appreciation rights may be granted to key employees
based on their contributions to the successful management of CMS Energy
and its subsidiaries. Awards under the plan may consist of any class of
Common Stock of CMS Energy and are subject to performance-based business
criteria for certain plan awards. The plan reserves for award not more
than three 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, 1996, awards of up to 986,240
shares of CMS Energy Common Stock and 198,947 shares of Class G Common
Stock may be issued.
Restricted shares of Common Stock are outstanding shares with full voting
and dividend rights. These awards vest over five years at the rate of 25
percent per year after two years and are subject to achievement of
specified levels of total shareholder return. Further, the restricted
stock is subject to forfeiture if employment terminates before vesting.
If performance objectives are exceeded, the plan provides additional
awards. Restricted shares vest fully if control of CMS Energy changes, as
defined by the plan. At December 31, 1996, 261,866 of the 277,366 shares
of restricted CMS Energy Common Stock outstanding are subject to
performance objectives. Of the 16,347 restricted shares of Class G Common
Stock, all are subject to performance objectives.
Consumers' Executive Stock Option and Stock Appreciation Rights Plan, an
earlier plan approved by shareholders, expired in 1995. However, options
and stock appreciation rights granted under this plan remain outstanding.
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 ten years
and one month from date of grant. The status of the restricted stock
granted to Consumers' key employees under the Performance Incentive Stock
Plan and options granted under both plans follows.
Restricted
Stock Options
Number Number Weighted Average
CMS Energy Common Stock of Shares of Shares Exercise Price
Outstanding at January 1, 1994 200,125 919,033 $ 24.18
Granted 72,250 145,500 $ 22.02
Exercised or Issued (22,510) (138,650) $ 16.85
Forfeited (60,087) -
Expired - (123,000) $ 31.68
------- ------- -------
Outstanding at December 31, 1994 189,778 802,883 $ 23.90
Granted 123,615 147,200 $ 25.53
Exercised or Issued (27,533) (93,333) $ 15.64
Forfeited (16,807) -
Expired - (51,000) $ 27.56
------- ------ -------
Outstanding at December 31, 1995 269,053 805,750 $ 24.93
Granted 84,760 138,520 $ 30.63
Exercised or Issued (50,925) (169,525) $ 21.72
Forfeited (25,522) -
Expired - (12,000) $ 32.88
------- ------- -------
Outstanding at December 31, 1996 277,366 762,745 $ 26.55
======= ======= =======
Restricted shares of Class G Common Stock granted during 1996 and 1995
totaled 9,423 and 6,924, respectively. Options of Class G Common Stock
granted at a price of $17.88 during 1996 and 1995 totaled 11,000 and
10,000, respectively.
The following table summarizes information about CMS Energy Common Stock
options outstanding at December 31, 1996:
Number Weighted Weighted
Range of of Shares Average Average
Exercise Prices Outstanding Remaining Life Exercise Price
$13.00 - $19.50 70,400 4.1 years $ 15.75
$19.51 - $29.00 353,825 6.5 years $ 23.52
$29.01 - $34.25 338,520 5.6 years $ 31.96
--------------- ------- --------- -------
$13.00 - $34.25 762,745 5.9 years $ 26.55
=============== ======= ========= =======
The weighted average remaining life of Class G Common Stock options is 9.2 years.
The weighted average fair value of options granted for the CMS Energy
Common Stock was $6.94 in 1996, $5.37 in 1995, and $5.32 in 1994. The
weighted average fair value of options granted for the Class G Common
Stock was $1.59 in 1996 and $1.57 in 1995. Fair value is estimated using
the Black-Scholes model, a mathematical formula used to value options
traded on securities exchanges, with the following assumptions:
Years Ended December 31 1996 1995 1994
CMS Energy Common Stock Options
Risk-free interest rate 6.63% 6.17% 6.94%
Expected stock price volatility 24.08% 27.12% 28.83%
Expected dividend rate $ .27 $ .24 $ .24
Expected option life 5 years 5 years 5 years
Class G Common Stock Options
Risk-free interest rate 6.63% 6.17%
Expected stock price volatility 16.19% 16.19%
Expected dividend rate $ .295 $ .295
Expected option life 5 years 5 years
Consumers applies Accounting Principles Board Opinion 25 and related
interpretations in accounting for the Performance Incentive Stock Plan.
Since stock options are granted at market price, no compensation cost has
been recognized for stock options granted under the plan. If compensation
cost for stock options had been determined in accordance with SFAS 123,
Accounting for Stock-Based Compensation, Consumers' net income would have
decreased by less than $1 million for 1996 and 1995. The compensation
cost charged against income for restricted stock was $1 million in 1996,
$2 million in 1995, and was less than $1 million in 1994.
10: Retirement Benefits
Postretirement Benefit Plans Other Than Pensions: Consumers provides
certain health care and life insurance benefits for retired employees and
their eligible dependents. Substantially all employees may become
eligible for such benefits if they attain retirement status while working
for Consumers or its subsidiaries. Consumers adopted the required
accounting for these benefits effective in 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). The MPSC authorized recovery of the electric utility
portion of these costs in 1994 over 18 years and the gas utility portion
in 1996 over 16 years. During 1995, the FERC granted Consumers a waiver
of a three-year filing requirement for cost recovery with respect to its
wholesale electric business. At December 31, 1996, Consumers had recorded
a regulatory asset and liability of $7 million. By early 1997, the FERC
had authorized recovery of these costs. Consumers funds the benefits
using external Voluntary Employee Beneficiary Associations. Funding of
the benefits coincides with Consumers' recovery in rates.
Retiree health care costs at December 31, 1996 are based on the assumption
that costs would increase 8.5 percent in 1997, then decrease gradually to
6.0 percent in 2004 and thereafter. The health care cost trend rate
assumption significantly affects the amounts reported. For example, a one
percentage point increase in each year's estimated health care cost
assumption would increase the accumulated postretirement benefit
obligation at December 31, 1996 by $96 million and the aggregate of the
service and interest cost components of net periodic postretirement
benefit costs for 1996 by $11 million.
Years Ended December 31 1996 1995 1994
Weighted average discount rate 7.75% 7.50% 8.00%
Expected long-term rate of return
on plan assets 7.00% 7.00% 7.00%
Net postretirement benefit costs for the health care benefits and life
insurance benefits consisted of:
In Millions
Years Ended December 31 1996 1995 1994
Service cost $ 12 $ 11 $ 13
Interest cost 41 39 40
Actual return on assets (14) (4) -
Net amortization and deferral 8 1 -
---- ---- ----
Net postretirement benefit costs $ 47 $ 47 $ 53
==== ==== ====
The funded status of the postretirement benefit plans for the health care
benefits and life insurance benefits is reconciled with the liability
recorded at December 31 as follows:
In Millions
1996 1995
Actuarial present value of estimated benefits
Retirees $ 327 $ 329
Eligible for retirement 65 45
Active (upon retirement) 183 195
---- ----
Accumulated postretirement benefit
obligation 575 569
Plan assets (primarily stocks, bonds
and money market investments) at
fair value 134 76
---- ----
Accumulated postretirement benefit
obligation in excess of plan assets (441) (493)
Unrecognized prior service cost 6 -
Unrecognized net gain from experience
different than assumed (37) (1)
--- --
Recorded liability $(472) $(494)
===== =====
The health care portion of the accumulated postretirement benefit
obligation is $560 million and $554 million at December 31, 1996 and 1995,
respectively.
Supplemental Executive Retirement Plan: Certain management employees
qualify to participate in the SERP. SERP benefits, which are based on an
employee's years of service and earnings as defined in the SERP, are paid
from a trust established 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,
1996 and 1995, trust assets were $18 million and $19 million,
respectively, and were classified as other noncurrent assets.
Defined Benefit Pension Plan: A trusteed, non-contributory, defined
benefit Pension Plan covers substantially all employees. The benefits are
based on an employee's years of accredited service and earnings, as
defined in the plan, during an employee's five highest years of earnings.
Because the plan was fully funded, no contributions were made in 1996 and
1994. A contribution of $9 million was made in 1995. Amounts presented
below for the Pension Plan include amounts for employees of CMS Energy and
non-utility affiliates which were not distinguishable from the plan's
total assets.
Years Ended December 31 1996 1995 1994
Discount rate 7.75% 7.50% 8.00%
Rate of compensation increase 4.00% 4.50% 4.50%
Expected long-term rate of
return on assets 9.25% 9.25% 9.25%
Net Pension Plan and SERP costs consisted of:
In Millions
Years Ended December 31 1996 1995 1994
Service cost $ 25 $ 22 $ 23
Interest cost 57 54 50
Actual return on plan assets (63) (168) 21
Net amortization and deferral (6) 103 (85)
---- ---- ----
Net periodic pension cost $ 13 $ 11 $ 9
==== ==== ===
The funded status of the Pension Plan and SERP reconciled to the pension
liability recorded at December 31 was:
In Millions
Pension Plan SERP
1996 1995 1996 1995
Actuarial present value of estimated benefits
Vested $ 504 $ 496 $ 13 $ 12
Non-vested 72 74 - -
---- ---- --- ---
Accumulated benefit obligation 576 570 13 12
Provision for future pay increases 158 183 8 7
---- ---- --- ---
Projected benefit obligation 734 753 21 19
Plan assets (primarily stocks and bonds, including
$117 in 1996 and $104 in 1995 of CMS Energy
Common Stock) at fair value 779 779 - -
---- ---- --- ---
Projected benefit obligation less than
(in excess of) plan assets 45 26 (21) (19)
Unrecognized net (gain) loss from experience
different than assumed (99) (69) 1 2
Unrecognized prior service cost 39 43 1 1
Unrecognized net transition (asset) obligation (27) (32) - -
---- ---- --- ---
Recorded liability $ (42) $ (32) $ (19) $(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.
Defined Contribution Plan: Consumers provides a defined contribution
401(k) plan to all U.S. employees of CMS Energy and its subsidiaries which
are at least 80 percent owned and have adopted the plan. Consumers will
match at least one-half of the amount contributed by employees up to 3
percent of their salary. These contributions to the plan are invested in
CMS Energy Common Stock. Amounts charged to expense for this plan were
$17 million in 1996 and $16 million in 1995 and 1994.
11: Leases
Consumers leases various assets, including vehicles, rail cars, aircraft,
construction equipment, computer equipment, nuclear fuel and buildings.
Consumers' nuclear fuel capital leasing arrangement is scheduled to expire
in November 1998 and provides for additional one-year extensions upon
mutual agreement by the parties. Upon termination of the lease, the
lessor would be entitled to a cash payment equal to its remaining
investment, which was $69 million as of December 31, 1996. Consumers is
responsible for payment of taxes, maintenance, operating costs, and
insurance.
Minimum rental commitments under Consumers' non-cancelable leases at
December 31, 1996, were:
In Millions
Capital Operating
Leases Leases
1997 $ 47 $ 3
1998 65 3
1999 14 2
2000 12 2
2001 11 2
2002 and thereafter 14 22
--- ---
Total minimum lease payments 163 $ 34
===
Less imputed interest 24
---
Present value of net minimum
lease payments 139
Less current portion 39
---
Non-current portion $100
===
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
for the years ended December 31, 1996, 1995 and 1994, were $3 million, $7
million and $8 million, respectively.
Capital lease expenses for the years ended December 31, 1996, 1995 and
1994 were $45 million, $45 million and $40 million, respectively.
Included in these amounts for the years ended 1996, 1995 and 1994, are
nuclear fuel lease expenses of $25 million, $25 million and $21 million,
respectively.
12: Commitments and Contingencies
Environmental Matters: Consumers is a so-called potentially responsible
party at several sites being administered under Superfund. Superfund
liability is joint and several and along with Consumers, there are
numerous credit worthy, potentially responsible parties with substantial
assets cooperating with respect to the individual sites. Based upon past
negotiations, Consumers estimates that its share of the total liability
for the known sites will be between $2 million and $9 million. At
December 31, 1996, Consumers has accrued $2 million for its estimated
losses.
Under the Michigan Natural Resources and Environmental Protection Act,
Consumers expects that it will ultimately incur investigation and remedial
action costs at a number of sites, including some of the 23 sites that
formerly housed manufactured gas plant facilities, even those in which it
has a partial or no current ownership interest. Consumers has prepared
plans for remedial investigation/feasibility studies for several of these
sites. Four of the five plans submitted by Consumers have been approved
by the appropriate environmental regulatory authority in the State of
Michigan. Findings for the two completed remedial investigations indicate
that the expenditures for those two sites are likely to be less than the
amounts projected before the studies were performed. However, these
findings may not be 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 $98 million. These estimates are based
on undiscounted 1996 costs. At December 31, 1996, Consumers has accrued a
liability of $48 million and has established a regulatory asset for
approximately the same amount. Any significant change in assumptions,
such as remediation technique, nature and extent of contamination, and
legal and regulatory requirements, could affect the estimate of remedial
action costs for the sites. In accordance with an MPSC rate order issued
in March 1996, environmental clean-up costs above the amount currently
being recovered in rates will be deferred and amortized over ten years.
Rate recognition of amortization expense will not begin until after a
prudence review in a general rate case. The order authorizes current
recovery of $1 million annually. Consumers is continuing discussions with
certain insurance companies regarding coverage for some or all of the
costs that may be incurred for these sites.
The Clean Air Act contains provisions that limit emissions of sulfur
dioxide and nitrogen oxides and require emissions monitoring. Consumers'
coal-fueled electric generating units burn low-sulfur coal and are
currently operating at or near the sulfur dioxide emission limits that
will be effective in the year 2000. The Clean Air Act's provisions
required Consumers to make capital expenditures totaling $40 million to
install equipment at certain generating units. Consumers estimates
capital expenditures for in-process and proposed modifications at other
coal-fired units to be an additional $35 million by the year 2000.
Management believes that Consumers' annual operating costs will not be
materially affected as a result of expenditures that will be made to
comply with the Clean Air Act.
Capital Expenditures: Consumers estimates capital expenditures, including
new lease commitments, of $387 million for 1997, $378 million for 1998 and
$360 million for 1999. For further information regarding capital
expenditures, see Forward-Looking Information in the MD&A.
Commitments for Coal and Gas Supplies: Consumers has entered into coal
supply contracts with various suppliers for its coal-fired generating
stations. These contracts have expiration dates that range from 1997 to
2004. Consumers contracts for 60 - 70 percent of its annual coal
requirements which in 1996 totaled $243 million (62 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 1997 to 2003. Consumers' 1996 gas requirements totaled 266 bcf
at a cost of $747 million, 80 percent of which was under long-term
contracts for one year or more. As of the end of 1996, Consumers had 35
percent of its 1997 gas requirements under such long-term contracts, and
will supplement them with additional long-term contracts and spot-market
purchases.
Other: A number of lawsuits have been filed against Consumers relating to
the effect of so-called stray voltage on certain livestock. Claimants
contend that stray voltage results when low-level electrical currents
present in grounded electrical systems are diverted from their intended
path. Consumers maintains a policy of investigating all customer calls
regarding stray voltage and working with customers to address their
concerns and has an ongoing program to modify the grounding of all
customer services. As of January 1997, Consumers had 22 separate stray
voltage lawsuits awaiting trial court action, down from 30 lawsuits at
December 31, 1995, and 83 lawsuits at December 31, 1994.
In addition to the matters disclosed in these notes, Consumers and certain
of its subsidiaries are parties to certain lawsuits and administrative
proceedings before various courts and governmental agencies arising from
the ordinary course of business and involving personal injury, property
damage, contractual matters, environmental issues, federal and state
taxes, rates, licensing and other matters.
Estimated losses for certain contingencies discussed in this note have
been accrued. Resolution of these contingencies is not expected to have a
material impact on Consumers' financial position or results of operations.
13: Nuclear Matters
Consumers filed updated decommissioning information with the MPSC in 1995
which estimated decommissioning costs for Big Rock and Palisades. In
April 1996, the MPSC issued an order in Consumers' nuclear decommissioning
case, which fully supported Consumers' request and did not change the
overall surcharge revenues collected from retail customers. The MPSC
ordered Consumers to file a report on the adequacy of the surcharge
revenues with the MPSC at three-year intervals beginning in 1998.
Consumers filed its decommissioning plan for Big Rock with the NRC in
1995.
The NRC has approved the design of the spent fuel dry storage casks now
being used by Consumers at Palisades; however, certain parties, including
the Attorney General, have petitioned the NRC to suspend Consumers'
general license to store spent fuel, claiming that Consumers' cask
unloading procedure does not satisfy NRC regulations. The NRC staff has
reviewed the petition and denied the request to suspend Consumers general
license to store spent fuel.
Consumers has loaded 13 dry storage casks with spent nuclear fuel at
Palisades. In a review of the cask manufacturer's quality assurance
program, indications of minor flaws in welds in the steel liner of one of
the loaded casks were detected. Radiographic examination of the casks has
found all other welds acceptable. The cask in which the minor flaws were
detected continues to store spent fuel safely and there is no requirement
for its replacement. Nevertheless, Consumers plans to remove the spent
fuel and insert it into a transportable cask. Bids are currently being
taken for the design and fabrication of the transportable cask. Consumers
is monitoring an investigation under way at another utility that also uses
a dry storage cask system for spent nuclear fuel. The other utility
experienced an unexpected ignition of hydrogen gas following the loading
of a cask. Although the event caused no injuries or releases of
radioactive material, and Consumers' procedures had already precluded a
similar event, the NRC has instructed utilities using the dry storage
casks to take certain additional precautions when loading or unloading
casks.
Consumers maintains insurance coverage against property damage, debris
removal, personal injury liability and other risks that are present at its
nuclear generating facilities. This insurance includes coverage for
replacement power costs during prolonged accidental outages. Such costs
would not be covered by insurance during the first 21 weeks of any outage,
but the major portion of such costs would be covered during the next
twelve months of the outage, followed by reduced coverage to 80 percent
for two additional years. If certain loss events occur at its own or
other nuclear plants similarly insured, Consumers could be required to pay
maximum assessments of $23 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.
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. Based on continuing
analysis of data from testing of similar materials, in December 1996,
Consumers received an interim Safety Evaluation Report from the NRC
indicating that the reactor vessel can be safely operated through 2003
before reaching the NRC's screening criteria for reactor embrittlement.
Consumers believes that with fuel management designed to minimize
embrittlement, Palisades might be operated to the end of its license life
in the year 2007 without annealing of the reactor vessel, but will
continue to monitor the matter.
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 1996 1995
Net investment
Ludington - 51% $116 $116
Campbell Unit 3 - 93.3% 329 332
Transmission lines - various 35 33
Accumulated depreciation
Ludington $ 84 $ 81
Campbell Unit 3 252 238
Transmission lines 14 14
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
1996 1995 1994
Cash transactions
Interest paid (net of
amounts capitalized) $143 $158 $147
Income taxes paid
(net of refunds) 119 43 34
Non-cash transactions
Nuclear fuel placed
under capital lease $ 28 $ 26 $ 21
Other assets placed
under capital leases 3 5 15
Capital leases refinanced - 21 -
Changes in other assets and liabilities as shown on the Consolidated
Statements of Cash Flows at December 31 are described below:
In Millions
1996 1995 1994
Sale of receivables, net $ 23 $ 20 $(10)
Accounts receivable 12 (55) (4)
Accrued revenue (49) 1 24
Inventories 8 54 (5)
Accounts payable 17 48 19
Accrued refunds (14) (4) (3)
Other current assets
and liabilities, net (14) 28 12
Non-current deferred
amounts, net 20 (8) (9)
---- --- ---
$ 3 $ 84 $ 24
===== ==== ====
16: Reportable Segments
The Consolidated Statements of Income show operating revenue and pretax
operating income by segments. These amounts include earnings from
investments accounted for by the equity method of $42 million, $39 million
and $16 million for 1996, 1995 and 1994, respectively. Other segment
information follows:
In Millions
Years Ended December 31 1996 1995 1994
Depreciation, depletion
and amortization
Electric $ 282 $ 272 $ 257
Gas 87 83 76
Other 2 2 2
----- ----- -----
$ 371 $ 357 $ 335
======= ======= =======
Identifiable assets
Electric (a) $4,505 $4,522 $4,364
Gas (a) 1,709 1,690 1,673
Other 811 742 772
----- ----- -----
$7,025 $6,954 $6,809
====== ====== ======
Capital expenditures (b)
Electric $ 310 $ 328 $ 358
Gas 137 126 134
----- ----- -----
$ 447 $ 454 $ 492
======= ======= =======
(a) Amounts include an attributed portion of Consumers' other common
assets to both the electric and gas utility businesses.
(b) Includes capital leases for nuclear fuel and other assets and electric
DSM costs (see Statement of Cash Flows). Amounts also include an
attributed portion of Consumers' capital expenditures for plant and
equipment common to both the electric and gas utility businesses.
17: Related-Party Transactions
Consumers has an investment of $250 million in ten 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 three million shares of CMS Energy Common Stock with a fair value
totaling $99 million (see Note 8) at December 31, 1996. As a result of
these two investments, Consumers received dividends on affiliates' common
and preferred stock totaling $17 million in 1996, 1995 and 1994.
Consumers purchases a portion of its gas from CMS NOMECO. The amounts of
purchases for the years ended 1996, 1995 and 1994 were $24 million,
$19 million and $1 million, respectively. In 1996, 1995 and 1994,
Consumers purchased $50 million, $53 million and $48 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 $13 million for 1996, 1995 and 1994. 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. These costs are being recovered through rates over
periods of up to 16 years.
A new accounting standard, effective January 1996, requires impairment
losses on long-lived assets to be recognized when an asset's book value
exceeds its expected future cash flows (undiscounted). The standard also
imposes stricter criteria for retention of regulatory-created assets by
requiring that such assets be probable of future recovery at each balance
sheet date. There was no impact on financial position or results of
operations upon adoption because management believes these assets will be
recovered. For further discussion, see MD&A Forward-Looking Information.
In Millions
December 31 1996 1995
Postretirement benefits (Note 10) $ 460 $ 487
Income taxes (Note 5) 158 176
Abandoned Midland project 113 131
DSM - deferred costs 60 68
Trunkline settlement 25 55
Manufactured gas plant sites (Note 12) 47 47
Power purchase contracts (Note 3) - 44
Uranium enrichment facility 23 25
Ludington Fish Settlement 14 -
Other 18 22
---- -----
Total regulatory assets $ 918 $1,055
==== =====
Income taxes (Note 5) $ (224) $ (220)
DSM - deferred revenue (24) (25)
Other (1) (1)
---- -----
Total regulatory liabilities $ (249) $ (246)
===== =====
19: Summarized Financial Information of Significant Related Energy
Supplier
Under the PPA with the MCV Partnership discussed in Note 3, Consumers'
1996 obligation to purchase electric capacity from the MCV Partnership was
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 1996 1995 1994
Operating revenue (a) $ 645 $ 618 $ 579
Operating expenses 417 386 378
---- ---- ----
Operating income 228 232 201
Other expense, net 162 171 183
---- ---- ----
Net income $ 66 $ 61 $ 18
==== ==== ====
Balance Sheets
In Millions
December 31 1996 1995
Assets
Current assets (b) $ 316 $ 257
Property, plant and equipment,
net 1,889 1,948
Other assets 159 156
----- -----
$2,364 $2,361
====== ======
Liabilities and Partners' Equity
Current liabilities $ 235 $ 219
Long-term debt and other
non-current liabilities (c) 1,930 2,008
Partners' equity (d) 199 134
----- -----
$2,364 $2,361
====== ======
(a) Revenue from Consumers totaled $598 million, $571 million and $534
million for 1996, 1995, and 1994, respectively.
(b) Receivables from Consumers totaled $52 million and $48 million, at
December 31, 1996 and 1995, respectively.
(c) FMLP is the sole beneficiary of an owner trust that is the lessor in a
long-term direct finance lease with the lessee, MCV Partnership.
CMS Holdings holds a 46.4 percent ownership interest in FMLP. At
December 31, 1996 and 1995, lease obligations of $1.6 billion, were owed
to the owner trust. CMS Holdings' share of the interest and principal
portion for the 1996 lease payments was $64 million and $25 million,
respectively, and for the 1995 lease payments was $66 million and $23
million, respectively. The lease payments service $1.1 billion in non-
recourse debt outstanding as of December 31, 1996 and 1995, of the
owner-trust. FMLP's debt is secured by the MCV Partnership's lease
obligations, assets, and operating revenues. For 1996 and 1995, the
owner-trust made debt payments (including interest) of $192 million.
(d) CMS Midland's recorded investment in the MCV Partnership includes
capitalized interest, which is being amortized to expense over the life of
its investment in the MCV Partnership.
138
ARTHUR ANDERSEN LLP
Report of Independent Public Accountants
----------------------------------------
To Consumers Energy Company:
We have audited the accompanying consolidated balance sheets and
consolidated statements of long-term debt and preferred stock of CONSUMERS
ENERGY COMPANY (formerly Consumers Power Company) (a Michigan corporation
and wholly owned subsidiary of CMS Energy Corporation) and subsidiaries as
of December 31, 1996 and 1995, 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, 1996. These financial statements
are the responsibility of the Company's management. Our responsibility is
to express an opinion on these financial statements based upon our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Consumers Energy
Company and subsidiaries as of December 31, 1996 and 1995, and the results
of their operations and their cash flows for each of the three years in
the period ended December 31, 1996 in conformity with generally accepted
accounting principles.
Arthur Andersen LLP
Detroit, Michigan,
January 24, 1997.
139
Quarterly Financial Information Consumers Energy Company
In Millions
1996 (Unaudited) 1995 (Unaudited)
Quarters Ended March 31 June 30 Sept. 30 Dec. 31 March 31 June 30 Sept. 30 Dec. 31
Operating revenue $1,141 $797 $798 $1,034 $1,032 $750 $772 $957
Pretax operating income $197 $126 $144 $130 $187 $109 $136 $117
Net income $102 $58 $69 $67 $94 $45 $63 $53
Preferred stock dividends $7 $7 $7 $7 $7 $7 $7 $7
Preferred securities
distributions $1 $2 $2 $3 - - - -
Net income available to
common stockholder $94 $49 $60 $57 $87 $38 $56 $46
140
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 and cumulative total return performance
graph 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. Financial
Statements and Supplementary Data 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 Report dated November 14, 1996 covering matters reported
pursuant to Item 5. Other Events.
Consumers
Current Report dated November 14, 1996 covering matters reported
pursuant to Item 5. Other Events.
(c) Exhibits, including those incorporated by reference (see also
Exhibit volume).
141
CMS ENERGY AND CONSUMERS EXHIBITS
Previously Filed
-------------------
With As
File Exhibit
Exhibits Number Number Description
- --------------------------------------------------------------------------
(3)(a) 33-60007 (3)(i) - Restated Articles of Incorporation
of CMS Energy.
(3)(b) 1-9513 (3)(b) - By-Laws of CMS Energy. (1994
Form 10-K)
(3)(c) - Certificate of Amendment to the
Articles of Incorporation dated
March 10, 1997 and Restated
Articles of Incorporation dated
March 25, 1994 of Consumers Energy.
(3)(d) - By-Laws of Consumers Energy.
(4)(a) 2-65973 (b)(1)-4 - Indenture dated as of September 1,
1945, between Consumers 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.
- Indentures Supplemental thereto:
1-5611 (4) - 65th 02/15/88 (Form 8-K dated
Feb. 18, 1988)
33-31866 (4)(d) - 67th 11/15/89
33-41126 (4)(c) - 68th 06/15/93
1-5611 (4) - 69th 09/15/93 (Form 8-K dated
Sept. 21, 1993)
(4)(b) 1-9513 (4)(b) - Indenture dated as of January 1,
1996 between Consumers and The Bank
of New York, as Trustee. First
Supplemental Indenture dated as of
January 18, 1996 between Consumers
and The Bank of New York, as
Trustee. (1995 Form 10-K)
(4)(c) 33-47629 (4)(a) - Indenture between CMS Energy and
NBD Bank, as Trustee.
1-9513 (4) - First Supplemental Indenture dated
as of October 1, 1992 between
CMS Energy and NBD Bank, as
Trustee. (Form 8-K dated Oct. 1,
1992)
1-9513 (4) - Second Supplemental Indenture dated
as of October 1, 1992 between
CMS Energy and NBD Bank, as
Trustee. (Form 8-K dated Oct. 1,
1992)
(4)(d) 1-9513 (4a) - Indenture between CMS Energy and
Chase Manhattan Bank, as Trustee,
dated as of January 15, 1994.
(Form 8-K dated Mar. 29, 1994)
1-9513 (4b) - First Supplemental Indenture dated
as of January 20, 1994 between
CMS Energy and Chase Manhattan
Bank, as Trustee. (Form 8-K dated
Mar. 29, 1994)
1-9513 (4) - Second Supplemental Indenture dated
as of March 19, 1996 between
CMS Energy and Chase Manhattan
Bank, as Trustee. (1st qtr 1996
Form 10-Q)
(10)(a) 33-60007 (4)(ii) - Credit Agreement dated as of
November 21, 1995, among
CMS Energy, the Banks, the Co-
Agents, the Documentation Agent,
the Operational Agent and the Co-
Managers, all as defined therein,
and the Exhibits thereto.
(10)(b) 33-60007 (4)(ii)(A) - Term Loan Agreement dated as of
November 21, 1995, among
CMS Energy, the Banks, the Co-
Agents, the Documentation Agent,
the Operational Agent and the Co-
Managers, all as defined therein,
and the Exhibits thereto.
(10)(c) 1-5611 (10) - Credit Agreement dated as of
July 14, 1995 among Consumers, the
Banks named therein and the First
National Bank of Chicago, as
Administrative Agent.
(10)(d) 1-9513 (10)(c) - Employment Agreement dated as of
August 1, 1990 among CMS Energy,
Consumers and William T.
McCormick, Jr. (1990 Form 10-K)
(10)(e) 1-5611 (10)(i) - Employment Agreement effective as
of June 15, 1988 among CMS Energy,
Consumers and Victor J. Fryling.
(1988 Form 10-K)
(10)(f) 1-5611 (10)(f) - Employment Agreement dated May 26,
1989 between Consumers and
Michael G. Morris. (1990
Form 10-K)
(10)(g) 1-5611 (10)(h) - Employment Agreement dated May 26,
1989 between Consumers and David A.
Mikelonis. (1991 Form 10-K)
(10)(h) 1-9513 (10)(f) - Employment Agreement dated May 26,
1989 among CMS Energy, Consumers
and John W. Clark. (1990
Form 10-K)
(10)(i) 1-5611 (10)(j) - Employment Agreement dated
March 25, 1992 between CMS Energy,
Consumers and Alan M. Wright.
(1992 Form 10-K)
(10)(j) 1-5611 (10)(k) - Employment Agreement dated
March 25, 1992 between Consumers
and Paul A. Elbert. (1992
Form 10-K)
(10)(k) 1-9513 (10)(j) - Employment Agreement dated
January 12, 1996 between CMS Energy
and Rodger A. Kershner. (1995
Form 10-K)
(10)(l) 1-9513 (10) - Employment Agreement dated
March 20, 1996 between CMS Energy
and Preston D. Hopper. (1st qtr
1996 Form 10-Q)
(10)(m) - Employment Agreement dated April 2,
1996 between CMS Energy and
William J. Haener.
(10)(n) - Employment Agreement dated April 4,
1996 between CMS Energy,
CMS Enterprises and James W. Cook.
(10)(o) - Employment Agreement dated
March 19, 1996 between Consumers
and David W. Joos.
(10)(p) 1-5611 (10)(g) - Consumers' Executive Stock Option
and Stock Appreciation Rights Plan
effective December 1, 1989. (1990
Form 10-K)
(10)(q) 33-61595 (4)(d) - CMS Energy's Performance Incentive
Stock Plan effective as of
December 1, 1989.
(10)(r) 1-9513 (10)(m) - CMS Energy Deferred Salary Savings
Plan effective January 1, 1994.
(1993 Form 10-K)
(10)(s) 1-5611 (10)(n) - CMS Energy and Consumers Annual
Executive Incentive Compensation
Plan effective January 1, 1986, as
amended January 1995. (1995
Form 10-K)
(10)(t) 1-5611 (10)(o) - Consumers' Supplemental Executive
Retirement Plan effective
November 1, 1990. (1993 Form 10-K)
(10)(u) 33-37977 (4.1) - 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. (MCV Partnership)
- Indenture Supplemental thereto:
33-37977 (4.2) - Supplement No. 1 dated as of
June 1, 1990. (MCV Partnership)
(10)(v) 1-9513 (28)(b) - Collateral Trust Indenture dated as
of June 1, 1990 among Midland
Funding Corporation I, MCV
Partnership and United States Trust
Company of New York, Trustee. (3rd
qtr 1990 Form 10-Q)
- Indenture Supplemental thereto:
33-37977 (4.4) - Supplement No. 1 dated as of
June 1, 1990. (MCV Partnership)
(10)(w) 1-9513 (10)(v) - Amended and Restated Investor
Partner Tax Indemnification
Agreement dated as of June 1, 1990
among Investor Partners,
CMS Midland as Indemnitor and
CMS Energy as Guarantor. (1990
Form 10-K)
(10)(x) 1-9513 (19)(d)* - Environmental Agreement dated as of
June 1, 1990 made by CMS Energy to
The Connecticut National Bank and
Others. (1990 Form 10-K)
(10)(y) 1-9513 (10)(z)* - Indemnity Agreement dated as of
June 1, 1990 made by CMS Energy to
Midland Cogeneration Venture
Limited Partnership. (1990
Form 10-K)
(10)(z) 1-9513 (10)(aa)* - Environmental Agreement dated as of
June 1, 1990 made by CMS Energy 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. (1990
Form 10-K)
(10)(aa) 33-37977 (10.4) - Amended and Restated Participation
Agreement dated as of June 1, 1990
among MCV 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. (MCV Partnership)
1-5611 (10)(w) - Amendment No. 1 dated as of July 1,
1991. (1991 Form 10-K)
(10)(bb) 33-37977 (10.4) - Power Purchase Agreement dated as
of July 17, 1986 between MCV
Partnership and Consumers. (MCV
Partnership)
- Amendments thereto:
33-37977 (10.5) - Amendment No. 1 dated September 10,
1987. (MCV Partnership)
33-37977 (10.6) - Amendment No. 2 dated March 18,
1988. (MCV Partnership)
33-37977 (10.7) - Amendment No. 3 dated August 28,
1989. (MCV Partnership)
33-37977 (10.8) - Amendment No. 4A dated May 25,
1989. (MCV Partnership)
(10)(cc) 1-5611 (28) - Request for Approval of Settlement
Proposal to Resolve MCV
1-9513 Cost Recovery Issues and Court
Remand, filed with the MPSC on
July 7, 1992, MPSC Case
No. U-10127. (1992 Form 8)
(10)(dd) 1-5611 (28) - Settlement Proposal Filed on
July 7, 1992 as Revised on
1-9513 September 8, 1992 by Filing with
the MPSC. (Form 8-K dated
September 8, 1992)
(10)(ee) 1-5611 (10)(cc) - MPSC Order Dated March 31, 1993,
Approving with 1-9513 Modifications
the Settlement Proposal Filed on
July 7, 1992, as Revised on
September 8, 1992. (1992
Form 10-K)
(10)(ff) 1-5611 (10)(y) - Unwind Agreement dated as of
December 10, 1991 by and among
CMS Energy, Midland Group, Ltd.,
Consumers, CMS Midland, Inc., MEC
Development Corp. and CMS Midland
Holdings Company. (1991 Form 10-K)
(10)(gg) 1-5611 (10)(z) - Stipulated AGE Release Amount
Payment Agreement dated as of
June 1, 1990, among CMS Energy,
Consumers and The Dow Chemical
Company. (1991 Form 10-K)
(10)(hh) 1-5611 (10)(aa)* - Parent Guaranty dated as of
June 14, 1990 from CMS Energy 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. (1991 Form 10-K)
(12) - Statements regarding computation of
CMS Energy's Ratio of Earnings to
Fixed Charges.
(21)(a) - Subsidiaries of CMS Energy.
(21)(b) - Subsidiaries of Consumers.
(23) - Consent of experts for CMS Energy.
(24) - Power of Attorney for CMS Energy
and Consumers Energy.
(27)(a) - Financial Data Schedule UT for
CMS Energy.
(27)(b) - Financial Data Schedule UT for
Consumers.
(99)(a) - CMS Energy: Consumers Gas Group
Financials
(99)(b) - Consumers' March 7, 1997 Response
to MPSC's Request for Information
in MPSC Case No. U-11290
* 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.
146
Index to Financial Statement Schedules
Page
Schedule II Valuation and Qualifying Accounts
and Reserves 1996, 1995 and 1994:
CMS Energy Corporation. . . . . . . . . . . 147
Consumers Power Company . . . . . . . . . . 147
Report of Independent Public Accountants
CMS Energy Corporation. . . . . . . . . . . 148
Consumers Power Company . . . . . . . . . . 148
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.
147
CMS ENERGY CORPORATION
Schedule II - Valuation and Qualifying Accounts and Reserves
Years Ended December 31, 1996, 1995 and 1994
(In Millions)
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 Energy Company):
1996 $4 $21 - $15(a) $10
1995 $5 $10 - $11(a) $4
1994 $4 $12 - $11(a) $5
(a) Accounts receivable written off including net uncollectible amounts of $13 in 1996, $10 in 1995 and $10 in
1994 charged directly to operating expense and credited to accounts receivable.
CONSUMERS ENERGY COMPANY
Schedule II - Valuation and Qualifying Accounts and Reserves
Years Ended December 31, 1996, 1995 and 1994
(In Millions)
Balance at Charged Charged to Balance
Beginning to other at End
Description of Period Expense Accounts Deductions of Period
Accumulated provision for
uncollectible accounts:
1996 $3 $21 - $14(a) $10
1995 $4 $10 - $11(a) $3
1994 $4 $11 - $11(a) $4
(a) Accounts receivable written off including net uncollectible amounts of $13 in 1996, $10 in 1995 and $10 in
1994 charged directly to operating expense and credited to accounts receivable.
148
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
1996 Annual Report to shareholders incorporated by reference in this Form
10-K, and have issued our report thereon dated January 24, 1997. Our
audit was made for the purpose of forming an opinion on those basic
consolidated financial statements taken as a whole. The schedule listed
in Item 14(a) is the responsibility of the Company's management and is
presented for the purpose of complying with the Securities and Exchange
Commission's rules and is not part of the basic consolidated financial
statements. This schedule has been subjected to the auditing procedures
applied in the audit of the basic consolidated financial statements and,
in our opinion, fairly states in all material respects the financial data
required to be set forth therein in relation to the basic consolidated
financial statements taken as a whole.
Arthur Andersen LLP
Detroit, Michigan,
January 24, 1997.
Report of Independent Public Accountants
----------------------------------------
To Consumers Energy Company:
We have audited in accordance with generally accepted auditing standards,
the consolidated financial statements included in Consumers Energy
Company's 1996 Annual Report to shareholders incorporated by reference in
this Form 10-K, and have issued our report thereon dated January 24, 1997.
Our audit was made for the purpose of forming an opinion on those basic
consolidated financial statements taken as a whole. The schedule listed
in Item 14(a) is the responsibility of the Company's management and is
presented for the purpose of complying with the Securities and Exchange
Commission's rules and is not part of the basic consolidated financial
statements. This schedule has been subjected to the auditing procedures
applied in the audit of the basic consolidated financial statements and,
in our opinion, fairly states in all material respects the financial data
required to be set forth therein in relation to the basic consolidated
financial statements taken as a whole.
Arthur Andersen LLP
Detroit, Michigan,
January 24, 1997.
149
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, CMS Energy Corporation has duly caused this Annual
Report to be signed on its behalf by the undersigned, thereunto duly
authorized, on the 14th day of March 1997.
CMS ENERGY CORPORATION
By William T. McCormick, Jr.
---------------------------
William T. McCormick, Jr.
Chairman of the Board
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Annual Report has been signed below by the following persons on behalf of
CMS Energy Corporation and in the capacities and on the 14th day of March
1997.
Signature Title
(i) Principal executive officer:
Chairman of the Board,
Chief Executive Officer
William T. McCormick, Jr. and Director
-----------------------------
William T. McCormick, Jr.
(ii) Principal financial officer:
Senior Vice President,
Chief Financial Officer
A. M. Wright and Treasurer
-----------------------------
Alan M. Wright
(iii) Controller or principal
accounting officer:
Senior Vice President, Controller
P. D. Hopper and Chief Accounting Officer
-----------------------------
Preston D. Hopper
(iv) A majority of the Directors
including those named above:
John M Deutch* Director
-----------------------------
John M. Deutch
James J. Duderstadt* Director
-----------------------------
James J. Duderstadt
K R Flaherty* Director
-----------------------------
Kathleen R. Flaherty
Victor J. Fryling* Director
-----------------------------
Victor J. Fryling
Earl D. Holton* Director
-----------------------------
Earl D. Holton
Lois A. Lund* Director
-----------------------------
Lois A. Lund
Michael G. Morris* Director
-----------------------------
Michael G. Morris
W. U. Parfet* Director
-----------------------------
William U. Parfet
Percy A. Pierre* Director
-----------------------------
Percy A. Pierre
K. Whipple* Director
-----------------------------
Kenneth Whipple
John B. Yasinsky* Director
-----------------------------
John B. Yasinsky
* By Thomas A. McNish
-----------------------------
Thomas A. McNish, Attorney-in-Fact
151
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Consumers Energy Company has duly caused this Annual
Report to be signed on its behalf by the undersigned, thereunto duly
authorized, on the 14th day of March 1997.
CONSUMERS ENERGY 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 Energy Company and in the capacities and on the 14th day of
March 1997.
Signature Title
(i) Principal executive officer:
President,
Chief Executive Officer
Michael G. Morris and Director
-----------------------------
Michael G. Morris
(ii) Principal financial officer:
Senior Vice President and
A. M. Wright Chief Financial Officer
-----------------------------
Alan M. Wright
(iii) Controller or principal
accounting officer:
Vice President and
Dennis DaPra Controller
-----------------------------
Dennis DaPra
(iv) A majority of the Directors
including those named above:
John M Deutch* Director
-----------------------------
John M. Deutch
James J. Duderstadt* Director
-----------------------------
James J. Duderstadt
K R Flaherty* Director
-----------------------------
Kathleen R. Flaherty
Victor J. Fryling* Director
-----------------------------
Victor J. Fryling
Earl D. Holton* Director
-----------------------------
Earl D. Holton
Lois A. Lund* Director
-----------------------------
Lois A. Lund
William T. McCormick, Jr.* Director
-----------------------------
William T. McCormick, Jr.
W. U. Parfet* Director
-----------------------------
William U. Parfet
Percy A. Pierre* Director
-----------------------------
Percy A. Pierre
K. Whipple* Director
-----------------------------
Kenneth Whipple
John B. Yasinsky* Director
-----------------------------
John B. Yasinsky
*By Thomas A. McNish
-----------------------------
Thomas A. McNish, Attorney-in-Fact