========================================================================== FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 1997 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 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 --- --- Number of shares outstanding of each of the issuer's classes of common stock at April 30, 1997: CMS Energy Corporation: CMS Energy Common Stock, $.01 par value 95,337,648 CMS Energy Class G Common Stock, no par value 7,965,981 Consumers Energy Company, $10 par value, privately held by CMS Energy 84,108,789 ==========================================================================
2 CMS Energy Corporation and Consumers Energy Company Quarterly reports on Form 10-Q to the Securities and Exchange Commission for the Quarter Ended March 31, 1997 This combined Form 10-Q 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 Glossary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 PART I: CMS Energy Corporation Management's Discussion and Analysis . . . . . . . . . . . . . . . . 6 Consolidated Statements of Income. . . . . . . . . . . . . . . . . . 19 Consolidated Statements of Cash Flows. . . . . . . . . . . . . . . . 20 Consolidated Balance Sheets. . . . . . . . . . . . . . . . . . . . . 21 Consolidated Statements of Common Stockholders' Equity . . . . . . . 23 Condensed Notes to Consolidated Financial Statements . . . . . . . . 24 Report of Independent Public Accountants . . . . . . . . . . . . . . 31 Consumers Energy Company Management's Discussion and Analysis . . . . . . . . . . . . . . . . 32 Consolidated Statements of Income. . . . . . . . . . . . . . . . . . 43 Consolidated Statements of Cash Flows. . . . . . . . . . . . . . . . 44 Consolidated Balance Sheets. . . . . . . . . . . . . . . . . . . . . 45 Consolidated Statements of Common Stockholder's Equity . . . . . . . 47 Condensed Notes to Consolidated Financial Statements . . . . . . . . 48 Report of Independent Public Accountants . . . . . . . . . . . . . . 53 PART II: Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . 54 Item 4. Submission of Matters to a Vote of Security Holders . . . . 54 Item 6. Exhibits and Reports on Form 8-K. . . . . . . . . . . . . . 55 Signatures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
3 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 bcf . . . . . . . . . . . . . Billion cubic feet 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 CMS Electric and Gas. . . . . CMS Electric and Gas 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 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, 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 Dow . . . . . . . . . . . . . The Dow Chemical Company EDEER S.A.. . . . . . . . . . Empresa Distribuidora de Electricidad de Entre Rios S. A., the electric distribution utility in Entre Rios Province, Argentina ENDESA. . . . . . . . . . . . Empresa Nacional de Electricidad S.A., Chile's largest electric generation and transmission company Enterprises . . . . . . . . . CMS Enterprises Company, a subsidiary of CMS Energy EPS . . . . . . . . . . . . . Earnings per share FASB. . . . . . . . . . . . . Financial Accounting Standards Board FERC. . . . . . . . . . . . . Federal Energy Regulatory Commission FMLP. . . . . . . . . . . . . First Midland Limited Partnership GCR . . . . . . . . . . . . . Gas cost recovery 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 Kwh . . . . . . . . . . . . . Kilowatt-hour Ludington . . . . . . . . . . Ludington pumped storage plant, jointly owned by Consumers and Detroit Edison 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 Michigan Gas Storage. . . . . Michigan Gas Storage Company, a subsidiary of Consumers MMBtu . . . . . . . . . . . . Million British thermal unit MPSC. . . . . . . . . . . . . Michigan Public Service Commission MW. . . . . . . . . . . . . . Megawatts 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 PPA . . . . . . . . . . . . . The Power Purchase Agreement between Consumers and the MCV Partnership with a 35- year term commencing in March 1990 PSCR. . . . . . . . . . . . . Power supply cost recovery PUHCA . . . . . . . . . . . . Public Utility Holding Company Act of 1935 Retained Interest . . . . . . The interest in the common stockholders' equity of the Consumers Gas Group that is retained by CMS Energy Retained Interest Shares. . . Authorized but unissued shares of Class G Common Stock not held by holders of the Outstanding Shares and attributable to the Retained Interest SEC . . . . . . . . . . . . . Securities and Exchange Commission 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
5 CMS Energy Corporation Management's Discussion and Analysis The MD&A of this Form 10-Q should be read along with the MD&A in CMS Energy's 1996 Form 10-K. This 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 Form 10-Q that are not 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, 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, risk management and energy management services to large customers; storage, transmission and processing of natural gas; and international energy distribution. Consolidated Earnings In Millions, Except Per Share Amounts March 31 1997 1996 Change Three months ended Consolidated Net Income $ 84 $ 88 $ (4) Net Income Attributable to Common Stocks: CMS Energy 75 76 (1) Class G 9 12 (3) Earnings Per Average Common Share: CMS Energy .79 .83 (.04) Class G 1.18 1.50 (.32) Twelve months ended Consolidated Net Income $ 236 $ 206 $ 30 Net Income Attributable to Common Stocks: CMS Energy 225 191 34 Class G 11 15 (4) Earnings Per Average Common Share: CMS Energy 2.41 2.12 .29 Class G 1.53 1.90(a) (.37) (a) Class G shares were issued on July 21, 1995. Proforma earnings per share, assuming Class G shares were outstanding during the entire twelve month period ended March 31, 1996, would be $1.88. The decrease in consolidated net income for the 1997 first quarter compared to 1996 reflects decreased Consumers' gas deliveries due to warmer 1997 first quarter temperatures, decreased Consumers' gas wholesale services revenues in 1997, and decreased Consumers' electric revenues from special contract discounts negotiated with large industrial customers. Partially offsetting these decreases were the favorable impact of Consumers' electric rate increase received in February 1996 which benefited the entire first quarter of 1997 and improved operating results from the MCV Facility in which Consumers has a 49 percent interest. The increase in consolidated net income for the twelve months ended March 1997 compared to the 1996 period reflects the favorable impact of Consumers' electric rate increase received in February 1996, revenues from value- added services and Consumers' wholesale services activities, and improved operating results from the MCV Facility. In addition, other operating income increased during the twelve months ended March 1997 due to a FERC- ordered refund received by the MCV Partnership from a gas pipeline supplier. 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 from a partnership in which CMS Generation owns a 50 percent ownership interest. Partially offsetting these increases were decreased Consumers' electric revenues because of special contract discounts negotiated with large industrial customers and decreased Consumers' gas deliveries due to warmer temperatures during the first quarter of 1997. 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 April 1997, Consumers declared a $70 million common dividend to be paid to CMS Energy in May 1997. Consumers had temporarily suspended its common dividends from mid-1995 until early 1996 to improve its capital structure. In the first quarter of 1997, Enterprises paid common dividends and other distributions of $21 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. Consolidated cash from operations totaled $379 million and $349 million for the first three months of 1997 and 1996, respectively. The $30 million increase resulted from changes in the timing of cash receipts and payments related to Consumers' operations, offset by reduced cash from Consumers' gas sales. CMS Energy uses its operating cash primarily to expand its international businesses, maintain and expand Consumers' electric and gas systems, retire portions of its long-term debt and pay dividends. Investing Activities: Net cash used in investing activities totaled $157 million and $225 million for the first three months of 1997 and 1996, respectively. The decrease of $68 million primarily reflects a decrease in investments in partnerships and unconsolidated subsidiaries, partially offset by an increase in capital expenditures during 1997. CMS Energy's 1997 expenditures for its utility and international businesses were $82 million and $62 million, respectively. Financing Activities: Net cash used in financing activities totaled $221 million and $138 million for the first three months of 1997 and 1996, respectively. The increase of $83 million in cash outflows primarily reflects the issuance 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. During the first quarter of 1997 CMS Energy issued $22 million of Series B and $11 million of Series C GTNs. At March 31, 1997, CMS Energy had $250 million of Series A GTNs, $125 million of Series B GTNs and $11 million of Series C GTNs issued and outstanding with weighted-average interest rates of 7.7 percent, 7.9 percent and 7.9 percent, respectively. 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. In May 1997, CMS Energy issued $350 million of senior unsecured notes due May 15, 2002, at an interest rate of 8.125 percent. Proceeds were used in part to pay down debt with the remainder to fund CMS Energy's equity commitment in connection with the acquisition of a 50 percent interest in the 2,000 MW Loy Yang A electric generating plant and associated mine facilities in the State of Victoria, Australia. In the first quarter of 1997, CMS Energy declared and paid $26 million in cash dividends to holders of CMS Energy Common Stock and $2 million in cash dividends to holders of Class G Common Stock. In April 1997, 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 to be paid in May 1997. 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 March 31, 1997 and 1996, the total amount utilized under these facilities was $216 million and $242 million, respectively. In addition, CMS Energy currently has an unsecured $125 million term loan. CMS Energy is negotiating with a group of banks to replace the unsecured revolving credit facility and the term loan with a credit facility or facilities consisting of a combination of unsecured revolving credit and term loan tranches. CMS Energy expects that the aggregate borrowing capacity under the new facility or facilities may range from $725 million to $1.125 billion. CMS Energy expects to enter into such new credit facility or facilities in the second quarter of 1997. CMS Energy would also continue to have available the unsecured, committed lines of credit totaling $155 million. CMS Energy will continue to evaluate 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 March 31, 1997 and 1996, the total outstanding under these facilities was $88 million and $38 million, respectively. Consumers has FERC authorization to issue or guarantee up to $900 million of short-term securities through 1998 and to issue $500 million of long-term securities through November 1998 for refinancing or refunding purposes. An agreement is also in place permitting the sales of certain accounts receivable for up to $500 million. At March 31, 1997 and 1996, receivables sold totaled $398 million and $280 million, respectively. At March 31,1997, the book value per share of CMS Energy Common Stock and Class G Common Stock was $17.62 and $12.06, respectively. Consumers' Electric Business Unit Results of Operations Electric Pretax Operating Income: In Millions Three Months Twelve Months Ended March 31 Ended March 31 Change Compared to Prior Year 1997 vs 1996 1997 vs 1996 Sales (including special contract discounts) $(3) $(12) Rate increases and other regulatory issues 9 51 Operations and maintenance (3) (4) General taxes and depreciation (3) (11) ---- ---- Total change $ - $ 24 ==== ==== Electric Sales: Total electric sales remained unchanged for the first quarter while showing a 3.4 percent increase for the twelve months ended March 31, 1997 over the comparable 1996 period. The table below reflects electric kWh sales by class of customer for both periods: In Billions of kWh Three Months Ended Twelve Months Ended March 31 1997 1996 Change 1997 1996 Change Residential 2.9 3.0 (0.1) 10.9 10.9 - Commercial 2.4 2.4 - 10.0 9.8 0.2 Industrial 3.0 2.9 0.1 13.0 12.6 0.4 Other 0.7 0.7 - 3.2 2.6 0.6 ---- ---- ---- ---- ---- ---- Total sales 9.0 9.0 - 37.1 35.9 1.2 ==== ==== ==== ==== ==== ==== Power Costs: In Millions March 31 1997 1996 Change Three months ended $ 282 $ 260 $ 22 Twelve months ended 1,110 1,003 107 The cost increases for the three month and twelve month periods ended March 31, 1997 reflect greater power purchases from outside sources to meet sales demand. Consumers' Electric Business Unit Issues Power Purchases from the MCV Partnership: Consumers' annual obligation to purchase capacity from the MCV Partnership is 1,240 MW through the termination of the PPA in 2025. The MPSC currently allows Consumers to recover substantially all payments for 915 MW of capacity purchased from the MCV Partnership. Beginning January 1, 1996, Consumers was also permitted to recover an average capacity charge of 2.86 cents per kWh for the remaining 325 MW of MCV Facility capacity. The approved average capacity charge increased to 3.62 cents per kWh for 109 MW by January 1, 1997. The recoverable portion of the capacity charge for the last 216 MW of the 325 MW increases each year until it reaches 3.62 cents per kWh in 2004, and remains at this ceiling rate through the end of the PPA term. In 1992, Consumers recognized a loss for the present value of the estimated future underrecoveries of power purchases from the MCV Partnership and that estimate remains unchanged. Consumers anticipates it will continue to experience cash underrecoveries associated with the PPA as shown below. These after-tax cash underrecoveries totaled $10 million for the first three months of 1997. For further information, see Note 2. In Millions 1997 1998 1999 2000 2001 Estimated cash under- recoveries, net of tax $28 $23 $22 $21 $20 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 and 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 1996, the MPSC issued a final order which authorized Consumers to recover the costs associated with the purchase of the additional 325 MW of MCV Facility capacity and 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. It also established a direct access program. Rehearing petitions have been ruled upon by the MPSC and resulted in no material changes to the relief granted Consumers. For further discussion on these issues, see Notes 2 and 3. 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 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 7. Electric Environmental Matters: The Clean Air Act contains significant environmental constraints under which utilities will operate in the future. While the Act's provisions will require that certain capital expenditures be made to comply with nitrogen oxide emission limits, generating units are currently operating at or near the sulfur dioxide emission limits that will be effective in the year 2000. Management does not believe that these expenditures will have a material effect on annual operating costs. 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 under current ratemaking policies. 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 6. 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 April 30, 1997, 18 separate stray voltage lawsuits were awaiting trial court action, down from 22 lawsuits at year end 1996. 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. Consumers Gas Group Results of Operations Gas Pretax Operating Income: In Millions Three Months Twelve Months Ended March 31 Ended March 31 Change Compared to Prior Year 1997 vs 1996 1997 vs 1996 Sales $ (17) $(19) Recovery of gas costs and other issues - 4 Gas wholesale services activities (1) 5 Operations and maintenance 4 (3) General taxes, depreciation and other (1) - ---- ---- Total change $(15) $(13) ==== ==== Gas Deliveries: Total system deliveries, excluding transport to the MCV Facility and other miscellaneous transportation, decreased 7.8 percent and 4.2 percent for the quarter and twelve months ended March 31, 1997, respectively. The decreased deliveries for both periods reflect warmer temperatures during 1997. The table below indicates total deliveries and the impact of weather. In bcf Three Months Ended Twelve Months Ended March 31 1997 1996 Change 1997 1996 Change Weather-adjusted deliveries (variance reflects growth) 146 145 1 335 332 3 Impact of weather and leap year (4) 9 (13) 5 23 (18) ---- ---- ---- ---- ---- ---- System deliveries excluding transport to MCV Partnership 142 154 (12) 340 355 (15) Transport to MCV Partnership 17 17 - 66 56 10 Other Transportation 9 14 (5) 24 24 - ---- ---- ---- ---- ---- ---- Total deliveries 168 185 (17) 430 435 (5) ==== ==== ==== ==== ===== ==== Cost of Gas Sold: In Millions March 31 1997 1996 Change Three months ended $314 $346 $(32) Twelve months ended 718 739 (21) The decreases for the three month and twelve month periods ended March 31, 1997 were the result of decreased sales reflecting warmer temperatures and an extra day for leap year in 1996. Consumers Gas Group Issues Gas Rate Proceedings: 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 an MPSC-authorized gas transportation rate 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. As of March 31, 1997, $7 million would be subject to refund if the MPSC adopts the ALJ position. 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 1997 costs. At March 31, 1997, 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. For further information regarding environmental matters, see Note 6. Oil and Gas Exploration and Production Pretax Operating Income: Pretax operating income for the three months ended March 31, 1997 was the same as the comparable period in 1996, as a result of higher oil production volumes offset by lower oil and gas prices and gas volumes, and higher operating expenses. Pretax operating income for the twelve months ended March 31, 1997 increased $15 million over the twelve months ended March 31, 1996, primarily due to higher sales volumes and oil sales prices and income attributable to the acquisition of Terra. Capital Expenditures: Capital expenditures for the three months ended March 31, 1997 relate primarily to the development of existing oil and gas reserves. Independent Power Production Pretax Operating Income: Pretax operating income for the three months ended March 31, 1997 increased $4 million from the same period in 1996, primarily reflecting higher electricity sales by the Midland Cogeneration Venture, additional generating capacity and improved equity earnings. These increases were partially offset because the first quarter 1996 included a gain resulting from a lawsuit settlement. Pretax operating income for the twelve months ended March 31, 1997 increased $33 million from the same period in 1996, 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 in 1996 and increased operating income resulting from higher electricity sales by the MCV and a refund received by the MCV Partnership. 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 plant. CMS Energy posted a $30 million conditional letter of credit to ensure closing under the agreement, which is targeted for the third quarter 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. In the first quarter of 1997, the plant built by 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 steam turbine of the combined-cycle facility which has 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 has completed financing in April 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. In the first quarter of 1997, CMS Generation, through a subsidiary, acquired a 29.5 percent interest in a 48 MW fossil-fueled plant in Cavite, on the island of Luzon in the 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. In March 1997, CMS Generation formed a joint venture with the Thailand- based EGCO Engineering & Services Company Limited, an affiliate of Electric Generating Authority of Thailand, the country's national electric utility, to operate and maintain private power plants in Thailand. The joint venture, known as CMESCO, signed a contract with Thailand's Amata- EGCO Power Limited, to operate and maintain a 170 MW gas-fired cogeneration plant in July 1997. The combined-cycle power plant is now under construction, with completion scheduled in 1998. In May 1997, a consortium comprised of subsidiaries of CMS Generation and NRG Energy, Inc. as well as Horizon Energy Australia Investments acquired the Loy Yang A power facility in a privatization by the Australian State of Victoria. Loy Yang A is Victoria's largest electric generating plant and Australia's lowest-cost electric generating facility. The consortium purchased the 2,000 MW, brown coal-fueled Loy Yang A plant and an associated coal mine supplying both the Loy Yang A and B plants at a purchase price of $3.7 billion. Seventy seven percent of this acquisition cost was project financed by a consortium of banks with the remaining twenty three percent of the payment to the government comprised of partner equity. CMS Generation holds a fifty percent ownership interest and NRG Energy and Horizon Energy Australia Investments each hold twenty five percent. Certain operating and management services for Loy Yang A will be provided by the CMS Generation and NRG Energy subsidiaries and their affiliates. Natural Gas Transmission, Storage and Processing Pretax Operating Income: Pretax operating income for the three months ended March 31, 1997 increased $3 million from the same period in 1996, primarily reflecting new pipeline, storage and processing investments, continued growth of existing projects and a gain on the sale of a portion of the Ames gas gathering system. Pretax operating income for the twelve months ended March 31, 1997 increased $13 million from the twelve months ended March 31, 1996, reflecting new pipeline, storage and processing investments, primarily TGN, the continued growth of existing projects, and the exchange of ownership interests in the Moss Bluff and Grands Lacs partnerships. Capital Expenditures and Other: In the first quarter of 1997, CMS Gas Transmission and ENDESA, Chile's largest electricity generation and transmission company, signed an agreement to develop an integrated $820 million project to construct a 930 kilometer pipeline that will transport natural gas across the Andes Mountains from northern Argentina to markets in northern Chile. A 720 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 Enterprises. Construction is scheduled to begin in 1997, with gas transportation and plant operations expected in 1999. In the first quarter of 1997, CMS Gas Transmission with Columbia Gas System, Inc., MCN Energy Group and Westcoast Energy announced a proposed $600 million pipeline project to carry up to 650 million cubic feet per day of natural gas to New York and other eastern markets. The Millennium Pipeline would provide a new, 380-mile link through a connection with the Great Lakes and TransCanada pipeline systems, flowing western Canadian and U.S. gas to northeastern markets. Construction is scheduled to begin mid- 1999, and gas deliveries are planned to begin in time for the 1999 winter heating season. In May 1997, CMS Gas Transmission announced it will acquire the 420- kilometer (260-mile) Western Australia Natural Gas (WANG) Pipeline near Perth, Australia. CMS Gas Transmission agreed to purchase the West Australian Petroleum-operated assets from Chevron, Texaco, Mobil and Shell. Included in the acquisition are 30 bcf of proven natural gas reserves with two gas production licenses and an associated gas storage facility in pre-operational testing. Terms of the purchase were not disclosed. Marketing, Services and Trading CMS MST was formed 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. Gas marketed for end users was 33 bcf and 29 bcf for the first quarter of 1997 and 1996, respectively. International Energy Distribution Capital Expenditures: 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 $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 Form 10-Q. Material contingencies are also described in the Condensed 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 domestic and foreign 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 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 the following capital expenditures, including new lease commitments and investments in partnerships and unconsolidated subsidiaries, will total $3.2 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 Consumers electric operations (a) $ 270 $ 277 $ 257 Consumers gas operations (a) 115 103 103 Oil and gas exploration and production 135 150 165 Independent power production (b) 698 173 117 Natural gas transmission and storage 110 100 75 International energy distribution 120 100 100 Marketing, services and trading 17 7 3 ------ ------ ------ $1,465 $ 910 $ 820 ====== ====== ====== (a) These amounts include an attributed portion of Consumers' anticipated capital expenditures for plant and equipment common to both the electric and gas businesses. (b) The 1997 amount includes approximately $500 million for the acquisition of a 50 percent ownership interest in the privatization of the Loy Yang A electric generating plant in Australia. 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 $988 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, Australia, 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 $27 million from 1997 to 1999 to 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. Consumers 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 planning for a future environment in which open access is the predominant means by which retail service customers obtain their power requirements. Consumers' electric 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 caused by regulatory decisions and new state or federal legislation. In 1996, the MPSC 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 contracted with some of its largest industrial customers to serve certain facilities a number of years into the future. These contracts have been approved or are under review at the MPSC. FERC issued Orders 888 and 889, as amended on rehearing, requiring utilities to provide open access to the interstate transmission grid for wholesale transactions. Several FERC requirements have been implemented. However, one unresolved issue concerns the Michigan Electric Power Coordination Center Pool, currently operated jointly by Consumers and Detroit Edison. Consumers proposes to maintain the benefits of the pool, while Detroit Edison seeks to terminate the power pool agreement. The FERC is expected to rule on this issue in 1997. In 1996, the MPSC staff recommended: 1) a program of direct access to alternative sources of energy supply by retail electric customers starting in 1997 and phasing in all customers through 2004; and 2) that Consumers recover its transition costs through either a transition charge over a ten-year period ending 2007 only to customers electing direct access or, if the utility has been enabled to issue rate reduction bonds, through a securitization charge to all customers over the term of the bonds. Consumers would continue to provide delivery service to direct access customers. In March 1997, Consumers filed data with the MPSC which estimated that the portion of Consumers' transition costs which would be recovered in the transition charge to direct access customers through 2007 would be $1.8 billion. Direct access implementation costs aggregating an additional $200 million would also be recovered by a separate charge to direct access customers. Alternatively, if the securitization approach is pursued, the resulting securitization charge would be paid by all Consumers customers to service $4 billion of rate reduction bonds. The $4 billion in rate reduction bonds includes the $1.8 billion of costs that would otherwise have been recovered in the transition charge to direct access customers, as well as the costs that would otherwise have been recovered from customers on bundled rates prior to getting choice. Consumers' data indicate that the securitization approach results in more than a $200 million annual savings to customers compared to the rates they would pay under the MPSC staff program in the absence of securitization because the assumed 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 securitized costs 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. Refer to the Consumers 1996 Form 10-K for further details. Consumers currently applies the utility accounting standard, SFAS 71, that recognizes the economic effects of rate regulation and, accordingly, Consumers recorded regulatory assets and liabilities related to its generation, transmission and distribution operations in its financial statements. 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 segment. Such a 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 affect future cost recovery, Consumers believes even if it was to discontinue application of SFAS 71 for the generation segment of its business, that its regulatory assets, including those related to generation, are probable of future recovery. Consumers Gas Group Outlook: Consumers currently anticipates gas deliveries (excluding transportation to the MCV Facility and off-system deliveries) to grow on an average annual basis between one and two percent over the next five years based primarily on a steadily growing customer base. Consumers has several strategies to increase load requirements. 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. Consumers is also offering a variety of energy-related services to its customers focused upon appliance maintenance, home safety, and home security. In 1996 the MPSC issued an order requesting Consumers and other local gas distribution companies, whose rates are regulated by the MPSC, to develop pilot programs that would allow customers to purchase gas directly from other suppliers and have the gas transported through local pipelines. These pilot programs are to last for two years and are intended to help the MPSC determine whether it is appropriate to extend this option to all retail customers. In December 1996, the MPSC approved Consumers' pilot program for 40,000 customers in Bay County. The first customer solicitation ended in March 1997 and resulted in one percent of the customers choosing an alternative supplier for the next year. Another solicitation period will begin in late 1997 for the period April 1998 - March 1999; expected customer interest is unknown at this time. 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. Other New Accounting Standards: In 1997, the FASB issued SFAS 128, Earnings per Share, which is effective for year end 1997 financial statements. The Earnings per Share statement requires dual presentation of basic and diluted EPS on the face of the income statement for all entities with complex capital structures. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity. Basic EPS excludes such dilution. The company is in the process of quantifying the effect of applying the statement.
19 <TABLE> CMS Energy Corporation Consolidated Statements of Income (Unaudited) <CAPTION> Three Months Ended Twelve Months Ended March 31 1997 1996 1997 1996 In Millions, Except Per Share Amounts <S> <C> <C> <C> <C> Operating Revenue Electric utility $ 620 $ 591 $2,474 $2,328 Gas utility 498 548 1,231 1,261 Oil and gas exploration and production 35 31 134 107 Independent power production 29 27 143 100 Natural gas transmission, storage and processing 26 12 76 32 Marketing, services and trading 99 71 286 209 Other 6 3 19 19 ------ ------ ------ ------ 1,313 1,283 4,363 4,056 ------ ------ ------ ------ Operating Expenses Operation Fuel for electric generation 69 73 292 289 Purchased power - related parties 151 140 600 507 Purchased and interchange power 62 47 218 207 Cost of gas sold 416 411 1,002 927 Other 169 170 735 695 ------ ------ ------ ------ 867 841 2,847 2,625 Maintenance 41 40 179 180 Depreciation, depletion and amortization 131 124 448 426 General taxes 61 59 204 199 ------ ------ ------ ------ 1,100 1,064 3,678 3,430 ------ ------ ------ ------ Pretax Operating Income (Loss) Electric utility 106 106 412 388 Gas utility 78 93 143 156 Oil and gas exploration and production 9 9 39 24 Independent power production 10 6 72 39 Natural gas transmission, storage and processing 9 6 29 16 Marketing, services and trading 1 2 1 3 Other - (3) (11) - ------ ------ ------ ------ 213 219 685 626 ------ ------ ------ ------ Other Income (Deductions) Accretion income 2 3 9 11 Accretion expense (5) (7) (19) (30) Other, net 1 2 (1) 6 ------ ------ ------ ------ (2) (2) (11) (13) ------ ------ ------ ------ Fixed Charges Interest on long-term debt 60 57 233 225 Other interest 11 12 43 43 Capitalized interest (3) (2) (9) (9) Preferred dividends 7 7 28 28 Preferred securities distributions 2 1 8 1 ------ ------ ------ ------ 77 75 303 288 ------ ------ ------ ------ Income Before Income Taxes 134 142 371 325 Income Taxes 50 54 135 119 ------ ------ ------ ------ Consolidated Net Income $ 84 $ 88 $ 236 $ 206 ====== ====== ====== ====== Net Income Attributable to Common Stocks CMS Energy $ 75 $ 76 $ 225 $ 191 Class G $ 9 $ 12 $ 11 $ 15 ------ ----- ------ ----- Average Common Shares Outstanding CMS Energy 95 92 93 90 Class G 8 8 8 8 ------ ----- ------ ----- Earnings Per Average Common Share CMS Energy $ .79 $ .83 $ 2.41 $ 2.12 Class G $ 1.18 $ 1.50 $ 1.53 $ 1.90 ------ ----- ------ ----- Dividends Declared Per Common Share CMS Energy $ .27 $ .24 $ 1.05 $ .93 Class G $ .295 $ .28 $1.165 $ .84 ====== ===== ====== ===== <FN> The accompanying condensed notes are an integral part of these statements. /TABLE
20 <TABLE> CMS Energy Corporation Consolidated Statements of Cash Flows (Unaudited) <CAPTION> Three Months Ended Twelve Months Ended March 31 1997 1996 1997 1996 In Millions <S> <C> <C> <C> <C> Cash Flows from Operating Activities Consolidated net income $ 84 $ 88 $ 236 $ 206 Adjustments to reconcile net income to net cash provided by operating activities Depreciation, depletion and amortization (includes nuclear decommissioning of $13, $13, $48 and $51, respectively) 131 124 448 426 Capital lease and debt discount amortization 8 9 40 52 Deferred income taxes and investment tax credit 3 6 43 52 Accretion expense 5 7 19 30 Accretion income - abandoned Midland project (2) (3) (9) (11) Power purchases (15) (12) (66) (112) Undistributed earnings of related parties (13) (21) (56) (62) Other (6) 7 8 14 Changes in other assets and liabilities 184 144 28 106 ------ ------ ------ ------ Net cash provided by operating activities 379 349 691 701 ------ ------ ------ ------ Cash Flows from Investing Activities Capital expenditures (excludes assets placed under capital lease) (132) (110) (681) (514) Investments in nuclear decommissioning trust funds (13) (13) (48) (51) Investments in partnerships and unconsolidated subsidiaries (12) (71) (104) (301) Cost to retire property, net (4) (6) (28) (39) Acquisition of companies, net of cash acquired - (20) - (10) Deferred demand-side management costs - (2) (4) (10) Other (9) (3) - (12) Proceeds from sale of property 13 - 92 22 ------ ------ ------ ------ Net cash used in investing activities (157) (225) (773) (915) ------ ------ ------ ------ Cash Flows from Financing Activities Increase (decrease) in notes payable, net (245) (303) 50 (97) Payment of common stock dividends (28) (24) (107) (90) Repayment of bank loans (27) (246) (38) (255) Payment of capital lease obligations (8) (9) (38) (36) Retirement of bonds and other long-term debt - - (37) (33) Retirement of common stock - - (1) (1) Proceeds from bank loans, notes and bonds 70 339 164 464 Issuance of common stock 17 8 104 159 Proceeds from preferred securities - 97 - 97 ------ ------ ------ ------ Net cash provided by (used in) financing activities (221) (138) 97 208 ------ ------ ------ ------ Net Increase (Decrease) in Cash and Temporary Cash Investments 1 (14) 15 (6) Cash and Temporary Cash Investments, Beginning of Period 56 56 42 48 ------ ------ ------ ------ Cash and Temporary Cash Investments, End of Period $ 57 $ 42 $ 57 $ 42 ====== ====== ====== ====== <FN> The accompanying condensed notes are an integral part of these statements. </TABLE>
21 <TABLE> CMS Energy Corporation Consolidated Balance Sheets <CAPTION> ASSETS March 31 March 31 1997 December 31 1996 (Unaudited) 1996 (Unaudited) In Millions <S> <C> <C> <C> Plant and Property (At Cost) Electric $ 6,412 $ 6,333 $ 6,130 Gas 2,374 2,337 2,287 Oil and gas properties (full-cost method) 1,154 1,140 1,096 Other 95 94 86 -------- -------- -------- 10,035 9,904 9,599 Less accumulated depreciation, depletion and amortization 4,991 4,867 4,747 -------- -------- -------- 5,044 5,037 4,852 Construction work-in-progress 235 243 200 -------- -------- -------- 5,279 5,280 5,052 -------- -------- -------- Investments Independent power production 325 318 297 Natural gas transmission, storage and processing 235 233 235 First Midland Limited Partnership (Note 2) 235 232 226 Midland Cogeneration Venture Limited Partnership (Note 2) 140 134 104 Other 88 86 25 -------- -------- -------- 1,023 1,003 887 -------- -------- -------- Current Assets Cash and temporary cash investments at cost, which approximates market 57 56 42 Accounts receivable and accrued revenue, less allowances of $9, $10 and $3, respectively (Note 4) 301 373 356 Inventories at average cost Gas in underground storage 51 186 39 Materials and supplies 89 86 85 Generating plant fuel stock 44 30 16 Deferred income taxes 42 48 22 Prepayments and other 185 235 186 -------- -------- -------- 769 1,014 746 -------- -------- -------- Non-current Assets Postretirement benefits 427 435 458 Nuclear decommissioning trust funds 401 386 323 Abandoned Midland Project 108 113 126 Other 396 384 441 -------- -------- -------- 1,332 1,318 1,348 -------- -------- -------- Total Assets $ 8,403 $ 8,615 $ 8,033 ======== ======== ======== </TABLE>
22 <TABLE> <CAPTION> STOCKHOLDERS' INVESTMENT AND LIABILITIES March 31 March 31 1997 December 31 1996 (Unaudited) 1996 (Unaudited) In Millions <S> <C> <C> <C> Capitalization Common stockholders' equity $ 1,775 $ 1,702 $ 1,541 Preferred stock of subsidiary 356 356 356 Company-obligated mandatorily redeemable preferred securities of Consumers Power Company Financing I (a) 100 100 100 Long-term debt 2,629 2,842 3,094 Non-current portion of capital leases 99 103 98 -------- -------- -------- 4,959 5,103 5,189 -------- -------- -------- Current Liabilities Current portion of long-term debt and capital leases 668 409 113 Notes payable 88 333 38 Accounts payable 323 348 267 Accrued taxes 228 262 223 Accounts payable - related parties 65 63 60 Accrued interest 49 47 49 Power purchases (Note 2) 47 47 90 Accrued refunds 6 8 28 Other 189 206 187 -------- -------- -------- 1,663 1,723 1,055 -------- -------- -------- Non-current Liabilities Deferred income taxes 689 698 638 Postretirement benefits 529 521 539 Power purchases (Note 2) 167 178 215 Deferred investment tax credit 158 161 168 Regulatory liabilities for income taxes, net 75 66 53 Other 163 165 176 -------- -------- -------- 1,781 1,789 1,789 -------- -------- -------- Commitments and Contingencies (Notes 2, 3, 6 and 7) Total Stockholders' Investment and Liabilities $ 8,403 $ 8,615 $ 8,033 ======== ======== ======== <FN> (a) As described in Note 4 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 condensed notes are an integral part of these statements. </TABLE>
23 <TABLE> CMS Energy Corporation Consolidated Statements of Common Stockholders' Equity (Unaudited) <CAPTION> Three Months Ended Twelve Months Ended March 31 1997 1996 1997 1996 In Millions <S> <C> <C> <C> <C> Common Stock At beginning and end of period $ 1 $ 1 $ 1 $ 1 ------ ------ ------ ------ Other Paid-in Capital At beginning of period 2,045 1,951 1,959 1,734 Common stock reacquired - - (1) (1) Common stock issued: CMS Energy 16 7 99 100 Class G 1 1 5 125 Common stock reissued - - - 1 ------ ------ ------ ------ At end of period 2,062 1,959 2,062 1,959 ------ ------ ------ ------ Revaluation Capital At beginning of period (6) (8) (8) 1 Change in unrealized investment-gain (loss) - - 2 (9) ------ ------ ------ ------ At end of period (6) (8) (6) (8) ------ ------ ------ ------ Retained Earnings (Deficit) At beginning of period (338) (475) (411) (527) Consolidated net income 84 88 236 206 Common stock dividends declared: CMS Energy (26) (22) (98) (84) Class G (2) (2) (9) (6) ------ ------ ------ ------ At end of period (282) (411) (282) (411) ------ ------ ------ ------ Total Common Stockholders' Equity $1,775 $1,541 $1,775 $1,541 ====== ====== ====== ====== <FN> The accompanying condensed notes are an integral part of these statements. </TABLE>
24 CMS Energy Corporation Condensed Notes to Consolidated Financial Statements These financial statements and their related condensed notes should be read along with the consolidated financial statements and notes contained in the 1996 Form 10-K of CMS Energy Corporation that includes the Report of Independent Public Accountants. Certain prior year amounts have been reclassified to conform with the presentation in the current year. In the opinion of management, the unaudited information herein reflects all adjustments necessary to assure the fair presentation of financial position, results of operations and cash flows for the periods presented. 1: Corporate Structure and Basis of Presentation 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, risk management and energy management services to large customers; storage, transmission and processing of natural gas; and international energy distribution. 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 three and twelve month periods ended March 31, 1997, undistributed equity earnings were $13 million and $56 million, respectively, and $21 million and $62 million for the three and twelve months periods ended March 31, 1996. 2: 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 Three Months Ended Twelve Months Ended March 31 1997 1996 1997 1996 Pretax operating income $8 $2 $46 $27 Income taxes and other 2 - 14 7 --- --- --- --- Net income $6 $2 $32 $20 === === === === Power Purchases from the MCV Partnership: Consumers' annual obligation to purchase 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. 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. Beginning January 1, 1996, Consumers was also permitted to recover an average capacity charge of 2.86 cents per kWh for the remaining 325 MW of MCV Facility capacity. The approved average capacity charge increased to 3.62 cents per kWh for 109 MW by January 1, 1997. The recoverable portion of the capacity charge for the last 216 MW of the 325 MW increases each year until it reaches 3.62 cents per kWh in 2004, and remains at this ceiling rate through the end of the PPA term. Consumers previously recognized a loss in 1992 for the present value of the estimated future underrecoveries of power costs under the PPA. Consumers believes that the original loss recorded remains adequate. At March 31, 1997 and December 31, 1996, the after-tax present value of the PPA liability totaled $140 million and $147 million, respectively. The reduction in the liability since December 31, 1996 reflects after-tax cash underrecoveries of $10 million partially offset by after-tax accretion expense of $3 million. The undiscounted after-tax amount associated with the liability totaled $535 million at March 31, 1997. 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 under- recoveries, net of tax $28 $23 $22 $21 $20 === === === === === 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 and 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 a 1995 decision in the PSCR reconciliation case for 1993, 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 an earlier 1993 settlement order and appealed. The MCV Partnership and ABATE also filed separate appeals of this order. In November 1996, the Court of Appeals affirmed the MPSC's 1995 order. Consumers and the MCV Partnership filed petitions for rehearing of the Court of Appeals opinion, which were denied in January 1997. 3: Rate Matters Electric Proceedings: In 1996, the MPSC issued a final order which authorized Consumers to recover costs associated with the purchase of the additional 325 MW of MCV Facility capacity (see Note 2) and 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. It also established 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. An additional 140 MW may be filled by new special contracts which Consumers has signed and submitted to the MPSC for approval or direct access customers and the remaining 100 MW must be made available solely to direct access customers for at least 18 months. In April 1997, a lottery was held to select the customers to purchase 100 MW by direct access. Gas Proceedings: 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. As of March 31, 1997, $7 million would be subject to refund if the MPSC adopts the ALJ position. Consumers will continue to oppose this view before the MPSC. In 1996, the MPSC authorized Consumers to implement a pilot gas transportation program 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. Out of the 40,000 eligible customers, fewer than 500 volunteered to participate in the program. Consumers will retain its role as transporter and distributor of this gas. 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 changes 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. Resolution of the issues discussed in this note is not expected to have a material effect on CMS Energy's financial position or results of operations. 4: Short-Term and Long-Term Financings, and Capitalization CMS Energy CMS Energy has available unsecured, committed lines of credit totaling $155 million and a $450 million unsecured revolving credit facility. At March 31, 1997 and 1996, the total amount utilized under these facilities was $216 million and $242 million, respectively. In addition, CMS Energy currently has an unsecured $125 million term loan. CMS Energy is negotiating with a group of banks to replace the unsecured revolving credit facility and the term loan with a credit facility or facilities consisting of a combination of unsecured revolving credit and term loan tranches. CMS Energy expects that the aggregate borrowing capacity under the new facility or facilities may range from $725 million to $1.125 billion. CMS Energy expects to enter into such new credit facility or facilities in the second quarter of 1997. CMS Energy would also continue to have available the unsecured, committed lines of credit totaling $155 million. During the first quarter of 1997 CMS Energy issued $22 million of Series B and $11 million of Series C GTNs. At March 31, 1997, CMS Energy had issued and outstanding $250 million of Series A GTNs, $125 million of Series B GTNs and $11 million of Series C GTNs with weighted-average interest rates of 7.7 percent, 7.9 percent and 7.9 percent, respectively. In May 1997, CMS Energy issued $350 million of senior unsecured notes due May 15, 2002, at an interest rate of 8.125 percent. Proceeds were used in part to pay down debt with the remainder to fund CMS Energy's equity commitment in connection with the acquisition of a 50 percent interest in the 2,000 MW Loy Yang A electric generating plant and associated mine facilities in the State of Victoria, Australia.. Consumers 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 March 31, 1997, a total of $88 million was outstanding at a weighted average interest rate of 6.8 percent, compared with $38 million outstanding at March 31, 1996, at a weighted average interest rate of 6.2 percent. Consumers has also in place a $500 million trade receivables purchase and sale program. At March 31, 1997 and 1996, receivables sold under the agreement totaled $398 million and $280 million, respectively. Accounts receivable and accrued revenue in the Consolidated Balance Sheets have been reduced to reflect receivables sold. 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. Under the provisions of its Articles of Incorporation at March 31, 1997, Consumers had $343 million of unrestricted retained earnings available to pay common dividends. In April 1997, Consumers declared a $70 million common dividend to be paid in May 1997. 5: Earnings Per Share and Dividends In April 1997, Consumers declared a $70 million common dividend to be paid to CMS Energy in May 1997. In the first quarter of 1997, Enterprises paid common dividends and other distributions of $21 million to CMS Energy. Earnings per share attributable to Common Stock, for the three and twelve month periods ended March 31, 1997 and the three months ended March 31, 1996 reflect the performance of the Consumers Gas Group. Earnings per share attributable to Common Stock, for the twelve months ended March 31, 1996 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 during the period. The earnings attributable to Class G Common Stock on a per share basis, for the three months ended March 31, 1997 and 1996, are based on 24.29 percent of the income of the Consumers Gas Group and 23.72 percent of the income of the Consumers Gas Group since the initial issuance, respectively. In January and April 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, payable in February and May 1997, respectively. 6: 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 March 31, 1997, 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 1997 costs. At March 31, 1997, 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 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 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 these expenditures. Capital Expenditures: CMS Energy estimates capital expenditures, including investments in unconsolidated subsidiaries and new lease commitments, of $1,465 million for 1997, $910 million for 1998 and $820 million for 1999. For further information regarding capital expenditures, see Forward-Looking Information in the MD&A. Other: As of March 31, 1997, 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 had made net payments of $4.0 million for settlement of January, February, and March 1997 contracts on 4.0 bcf of gas and 810,000 bbls of oil. As of March 31, 1997, the fair value of the remaining 1997 gas and oil contracts reflected a net payment due to CMS NOMECO of $1.6 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 March 31, 1997, neither party was required to post a letter of credit. As of March 31, 1997, the fair value of this contract reflected [$13] 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 mitigation program to modify the service of all customers with livestock. As of April 30, 1997, Consumers had 18 separate stray voltage lawsuits awaiting trial court action, down from 22 lawsuits at year end 1996. In addition to the matters disclosed in these notes, CMS Energy and Consumers and certain of their 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 CMS Energy's financial position or results of operations. 7: Nuclear Matters 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 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 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. 8: 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 periods ended March 31 were: In Millions Three Months Ended Twelve Months Ended 1997 1996 1997 1996 Cash transactions Interest paid (net of amounts capitalized) $ 63 $ 60 $257 $215 Income taxes paid (net of refunds) - 2 80 36 Non-cash transactions Nuclear fuel placed under capital lease $ 3 $ - $ 31 $ 20 Other assets placed under capital leases 2 1 4 4 Common Stock issued to acquire companies - - - 66 Assumption of debt - - - 4 Capital leases refinanced - - - 21
31 ARTHUR ANDERSEN LLP Report of Independent Public Accountants ---------------------------------------- To CMS Energy Corporation: We have reviewed the accompanying consolidated balance sheets of CMS ENERGY CORPORATION (a Michigan corporation) and subsidiaries as of March 31, 1997 and 1996, and the related consolidated statements of income, common stockholders' equity and cash flows for the three-month and twelve-month periods then ended. These financial statements are the responsibility of the Company's management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to the financial statements referred to above for them to be in conformity with generally accepted accounting principles. We have previously audited, in accordance with generally accepted auditing standards, the consolidated balance sheet and consolidated statement of preferred stock of CMS Energy Corporation and subsidiaries as of December 31, 1996, and the related consolidated statements of income, common stockholders' equity and cash flows for the year then ended (not presented herein), and, in our report dated January 24, 1997, we expressed an unqualified opinion on those statements. In our opinion, the information set forth in the accompanying consolidated balance sheet as of December 31, 1996, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived. Arthur Andersen LLP Detroit, Michigan, May 9, 1997.
32 Consumers Energy Company Management's Discussion and Analysis The MD&A of this Form 10-Q should be read along with the MD&A in Consumers' 1996 Form 10-K. This 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 Form 10-Q that are not 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, 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 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 March 31 1997 1996 Change Three months ended $ 88 $ 94 $ (6) Twelve months ended 254 234 20 The decrease in earnings for the first quarter of 1997 compared to the same 1996 period reflects decreased gas deliveries due to warmer 1997 temperatures, decreased gas wholesale services revenues in 1997 and decreased electric revenues because of special contract discounts negotiated with large industrial customers. Partially offsetting these decreases were the favorable impact of an electric rate increase received in February 1996 which benefited the entire first quarter of 1997 and improved operating results from the MCV Facility in which Consumers has a 49 percent interest. The increase in earnings for the twelve months ended 1997 compared to the 1996 period reflects the favorable impact of an electric rate increase received in February 1996, revenues from value- added services and gas wholesale services activities, and improved operating results from the MCV Facility. In addition, other operating income increased during the twelve months ended 1997 due to a FERC-ordered refund received by the MCV Partnership from a gas pipeline supplier. Partially offsetting these increases were decreased electric revenues because of special contract discounts negotiated with large industrial customers and decreased gas deliveries due to warmer temperatures during the first quarter of 1997. For further information, see the Electric and Gas Utility Results of Operations sections and Note 3. 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 $368 million and $308 million for the first three months of 1997 and 1996, respectively. The $60 million increase resulted from changes in the timing of cash receipts and payments related to Consumers' operations, offset by reduced cash from gas sales. 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 $98 million and $103 million for the first three months of 1997 and 1996, respectively. The cash was used primarily for capital expenditures. Financing Activities: Cash used in financing activities totaled $262 million and $211 million for the first three months of 1997 and 1996, respectively. The increase of $51 million in cash used reflects the 1997 absence of proceeds from preferred securities sold in 1996 offset by a reduction in the decrease of notes payable. 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 March 31, 1997 and 1996, the total outstanding under these facilities was $88 million and $38 million, respectively. Consumers has FERC authorization to issue or guarantee up to $900 million of short-term securities through 1998 and to issue $500 million of long-term securities through November 1998 for refinancing or refunding purposes. An agreement is also in place permitting the sales of certain accounts receivable for up to $500 million. At March 31, 1997 and 1996, receivables sold totaled $398 million and $280 million, respectively. Electric Utility Results of Operations Electric Pretax Operating Income: In Millions March 31 1997 1996 Change Three months ended $ 106 $ 106 $ - Twelve months ended 412 388 24 Electric pretax operating income for all periods ending March 31, 1997 benefited from the favorable impact of an electric rate increase received in February 1996. The first quarter of 1997 reflects three months of rate increase compared to two months for the comparable quarter in 1996. The twelve months ended 1997 reflects a full twelve months of rate increase compared to only two months for the comparable period in 1996. The twelve months ended 1997 also benefited from increased electric sales and lower maintenance expenses when compared to the 1996 period. The increases in both periods were partly offset by decreased revenues because of special contract discounts negotiated with large industrial customers. The first quarter of 1997 also reflects higher operating expenses than the comparable 1996 period. During the twelve months ended 1997 there were higher operation, depreciation and general tax expenses than in the comparable prior period. The following table quantifies these impacts on Pretax Operating Income: In Millions Three Months Twelve Months Ended March 31 Ended March 31 Change Compared to Prior Year 1997 vs 1996 1997 vs 1996 Sales (including special contract discounts) $(3) $(12) Rate increases and other regulatory issues 9 51 Operations and maintenance (3) (4) General taxes and depreciation (3) (11) ---- ---- Total change $ - $ 24 ==== ==== Electric Sales: Total electric sales remained unchanged for the first quarter while showing a 3.4 percent increase for the twelve months ended March 31, 1997 over the comparable 1996 period. The table below reflects electric kWh sales by class of customer for both periods: In Billions of kWh Three Months Ended Twelve Months Ended March 31 1997 1996 Change 1997 1996 Change Residential 2.9 3.0 (0.1) 10.9 10.9 - Commercial 2.4 2.4 - 10.0 9.8 0.2 Industrial 3.0 2.9 0.1 13.0 12.6 0.4 Other 0.7 0.7 - 3.2 2.6 0.6 ---- ---- ---- ---- ---- ---- Total sales 9.0 9.0 - 37.1 35.9 1.2 ==== ==== ==== ==== ==== ==== Power Costs: In Millions March 31 1997 1996 Change Three months ended $ 282 $ 260 $ 22 Twelve months ended 1,110 1,003 107 The cost increases for the three month and twelve month periods ended March 31, 1997 reflect greater power purchases from outside sources to meet sales demand. Electric Utility Issues Power Purchases from the MCV Partnership: Consumers' annual obligation to purchase capacity from the MCV Partnership is 1,240 MW through the termination of the PPA in 2025. The MPSC currently allows Consumers to recover substantially all payments for 915 MW of capacity purchased from the MCV Partnership. Beginning January 1, 1996, Consumers was also permitted to recover an average capacity charge of 2.86 cents per kWh for the remaining 325 MW of MCV Facility capacity. The approved average capacity charge increased to 3.62 cents per kWh for 109 MW by January 1, 1997. The recoverable portion of the capacity charge for the last 216 MW of the 325 MW increases each year until it reaches 3.62 cents per kWh in 2004, and remains at this ceiling rate through the end of the PPA term. In 1992, Consumers recognized a loss for the present value of the estimated future underrecoveries of power purchases from the MCV Partnership and that estimate remains unchanged. Consumers anticipates it will continue to experience cash underrecoveries associated with the PPA as shown below. These after-tax cash underrecoveries totaled $10 million for the first three months of 1997. For further information, see Note 2. In Millions 1997 1998 1999 2000 2001 Estimated cash under- recoveries, net of tax $28 $23 $22 $21 $20 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 and 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 1996, the MPSC issued a final order which authorized Consumers to recover the costs associated with the purchase of the additional 325 MW of MCV Facility capacity and 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. It also established a direct access program. Rehearing petitions have been ruled upon by the MPSC and resulted in no material changes to the relief granted Consumers. For further discussion on these issues, see Notes 2 and 3. 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 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 6. Electric Environmental Matters: The Clean Air Act contains significant environmental constraints under which utilities will operate in the future. While the Act's provisions will require that certain capital expenditures be made to comply with nitrogen oxide emission limits, generating units are currently operating at or near the sulfur dioxide emission limits that will be effective in the year 2000. Management does not believe that these expenditures will have a material effect on annual operating costs. 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 under current ratemaking policies. 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 5. 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 April 30, 1997, 18 separate stray voltage lawsuits were awaiting trial court action, down from 22 lawsuits at year end 1996. 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 March 31 1997 1996 Change Three months ended $ 78 $ 93 $(15) Twelve months ended 143 156 (13) Gas pretax operating income decreased in both the three month and twelve month periods ended March 31, 1997, as a result of decreased gas deliveries due to warmer temperatures during the first quarter of 1997 and an extra day for leap year in 1996. The first quarter of 1997 also reflects higher depreciation and general tax expenses, partially offset by lower operation and maintenance expenses. The decrease in gas pretax operating income for the twelve months ended March 31, 1997 also reflects higher operation, depreciation and general tax expenses, partially offset by lower maintenance expenses and benefits from gas wholesale services activities. The following table quantifies these impacts on Pretax Operating Income: In Millions Three Months Twelve Months Ended March 31 Ended March 31 Change Compared to Prior Year 1997 vs 1996 1997 vs 1996 Sales $(17) $(19) Recovery of gas costs and other issues - 4 Gas wholesale services activities (1) 5 Operations and maintenance 4 (3) General taxes, depreciation and other (1) - ---- ---- Total change $(15) $(13) ==== ==== Gas Deliveries: Total system deliveries, excluding transport to the MCV Facility and other miscellaneous transportation, decreased 7.8 percent and 4.2 percent for the quarter and twelve months ended March 31, 1997, respectively. The decreased deliveries for both periods reflect warmer temperatures during 1997. The table below indicates total deliveries and the impact of weather. In bcf Three Months Ended Twelve Months Ended March 31 1997 1996 Change 1997 1996 Change Weather-adjusted deliveries (variance reflects growth) 146 145 1 335 332 3 Impact of weather and leap year (4) 9 (13) 5 23 (18) --- --- --- --- --- --- System deliveries excluding transport to MCV Partnership 142 154 (12) 340 355 (15) Transport to MCV Partnership 17 17 - 66 56 10 Other Transportation 9 14 (5) 24 24 - --- --- --- --- --- --- Total deliveries 168 185 (17) 430 435 (5) === === === === === === Cost of Gas Sold: In Millions March 31 1997 1996 Change Three months ended $314 $346 $(32) Twelve months ended 718 739 (21) The decreases for the three month and twelve month periods ended March 31, 1997 were the result of decreased sales reflecting warmer temperatures and an extra day for leap year in 1996. Gas Utility Issues Gas Rate Proceedings: 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 an MPSC-authorized gas transportation rate 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. As of March 31, 1997, $7 million would be subject to refund if the MPSC adopts the ALJ position. 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 1997 costs. At March 31, 1997, 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. For further information regarding environmental matters, see Note 5. Forward-Looking Information Forward-looking information is included throughout this 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 12 16 14 Michigan Gas Storage 3 3 3 ---- ---- ---- $385 $380 $360 ==== ==== ==== Electric utility operations (a) $270 $277 $257 Gas utility operations (a) 115 103 103 ---- ---- ---- $385 $380 $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 planning for a future environment in which open access is the predominant means by which retail service customers obtain their power requirements. Consumers' electric 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 caused by regulatory decisions and new state or federal legislation. In 1996, the MPSC 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 contracted with some of its largest industrial customers to serve certain facilities a number of years into the future. These contracts have been approved or are under review at the MPSC. FERC issued Orders 888 and 889, as amended on rehearing, requiring utilities to provide open access to the interstate transmission grid for wholesale transactions. Several FERC requirements have been implemented. However, one unresolved issue concerns the Michigan Electric Power Coordination Center Pool, currently operated jointly by Consumers and Detroit Edison. Consumers proposes to maintain the benefits of the pool, while Detroit Edison seeks to terminate the power pool agreement. The FERC is expected to rule on this issue in 1997. In 1996, the MPSC staff recommended: 1) a program of direct access to alternative sources of energy supply by retail electric customers starting in 1997 and phasing in all customers through 2004; and 2) that Consumers recover its transition costs through either a transition charge over a ten-year period ending 2007 only to customers electing direct access or, if the utility has been enabled to issue rate reduction bonds, through a securitization charge to all customers over the term of the bonds. Consumers would continue to provide delivery service to direct access customers. In March 1997, Consumers filed data with the MPSC which estimated that the portion of Consumers' transition costs which would be recovered in the transition charge to direct access customers through 2007 would be $1.8 billion. Direct access implementation costs aggregating an additional $200 million would also be recovered by a separate charge to direct access customers. Alternatively, if the securitization approach is pursued, the resulting securitization charge would be paid by all Consumers customers to service $4 billion of rate reduction bonds. The $4 billion in rate reduction bonds includes the $1.8 billion of costs that would otherwise have been recovered in the transition charge to direct access customers, as well as the costs that would otherwise have been recovered from customers on bundled rates prior to getting choice. Consumers' data indicate that the securitization approach results in more than a $200 million annual savings to customers compared to the rates they would pay under the MPSC staff program in the absence of securitization because the assumed 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 securitized costs 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. Refer to the Consumers 1996 Form 10-K for further details. Consumers currently applies the utility accounting standard, SFAS 71, that recognizes the economic effects of rate regulation and, accordingly, Consumers recorded regulatory assets and liabilities related to its generation, transmission and distribution operations in its financial statements. 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 segment. Such a 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 affect future cost recovery, Consumers believes even if it was to discontinue application of SFAS 71 for the generation segment of its business, that its regulatory assets, including those related to generation, are probable of future recovery. Gas Outlook: Consumers currently anticipates gas deliveries (excluding transportation to the MCV Facility and off-system deliveries) to grow on an average annual basis between one and two percent over the next five years based primarily on a steadily growing customer base. Consumers has several strategies to increase load requirements. 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. Consumers is also offering a variety of energy-related services to its customers focused upon appliance maintenance, home safety, and home security. In 1996 the MPSC issued an order requesting Consumers and other local gas distribution companies, whose rates are regulated by the MPSC, to develop pilot programs that would allow customers to purchase gas directly from other suppliers and have the gas transported through local pipelines. These pilot programs are to last for two years and are intended to help the MPSC determine whether it is appropriate to extend this option to all retail customers. In December 1996, the MPSC approved Consumers' pilot program for 40,000 customers in Bay County. The first customer solicitation ended in March 1997 and resulted in one percent of the customers choosing an alternative supplier for the next year. Another solicitation period will begin in late 1997 for the period April 1998 - March 1999; expected customer interest is unknown at this time. 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. Other New Accounting Standards: In 1997, the FASB issued SFAS 128, Earnings per Share and SFAS 129, Disclosure of Information about Capital Structure, which are effective for year end 1997 financial statements. Consumers does not expect the application of these statements to have a material effect on its financial position, liquidity or results of operations.
42 (This page intentionally left blank)
43 <TABLE> Consumers Energy Company Consolidated Statements of Income (Unaudited) <CAPTION> Three Months Ended Twelve Months Ended March 31 1997 1996 1997 1996 In Millions <S> <C> <C> <C> <C> Operating Revenue Electric $ 620 $ 591 $2,474 $2,328 Gas 498 548 1,231 1,261 Other 9 4 49 33 ------ ------ ------ ------ 1,127 1,143 3,754 3,622 ------ ------ ------ ------ Operating Expenses Operation Fuel for electric generation 69 73 292 289 Purchased power - related parties 151 140 600 507 Purchased and interchange power 62 47 218 207 Cost of gas sold 314 346 718 739 Other 130 132 583 574 ------ ------ ------ ------ 726 738 2,411 2,316 Maintenance 40 39 174 178 Depreciation, depletion and amortization 111 108 374 364 General taxes 57 56 192 191 ------ ------ ------ ------ 934 941 3,151 3,049 ------ ------ ------ ------ Pretax Operating Income Electric 106 106 412 388 Gas 78 93 143 156 Other 9 3 48 29 ------ ------ ------ ------ 193 202 603 573 ------ ------ ------ ------ Other Income (Deductions) Dividends from affiliates 4 4 17 16 Accretion income 2 3 9 11 Accretion expense (5) (7) (19) (30) Other, net 1 - (4) 4 ------ ------ ------ ------ 2 - 3 1 ------ ------ ------ ------ Interest Charges Interest on long-term debt 35 35 138 140 Other interest 8 8 31 37 Capitalized interest - (1) (1) (3) ------ ------ ------ ------ 43 42 168 174 ------ ------ ------ ------ Net Income Before Income Taxes 152 160 438 400 Income Taxes 55 58 148 137 ------ ------ ------ ------ Net Income 97 102 290 263 Preferred Stock Dividends 7 7 28 28 Preferred Securities Distributions 2 1 8 1 ------ ------ ------ ------ Net Income Available to Common Stockholder $ 88 $ 94 $ 254 $ 234 ====== ====== ====== ====== <FN> The accompanying condensed notes are an integral part of these statements. </TABLE>
44 <TABLE> Consumers Energy Company Consolidated Statements of Cash Flows (Unaudited) <CAPTION> Three Months Ended Twelve Months Ended March 31 1997 1996 1997 1996 In Million <S> <C> <C> <C> <C> Cash Flows from Operating Activities Net income $ 97 $ 102 $ 290 $ 263 Adjustments to reconcile net income to net cash provided by operating activities Depreciation, depletion and amortization (includes nuclear decommissioning of $13, $13, $48 and $51, respectively) 111 108 374 364 Capital lease and other amortization 8 9 39 36 Deferred income taxes and investment tax credit - 3 46 37 Accretion expense 5 7 19 30 Accretion income - abandoned Midland project (2) (3) (9) (11) Undistributed earnings of related parties (9) (4) (46) (30) Power purchases (15) (12) (66) (112) Other 1 3 3 6 Changes in other assets and liabilities 172 95 80 58 ----- ----- ----- ----- Net cash provided by operating activities 368 308 730 641 ----- ----- ----- ----- Cash Flows from Investing Activities Capital expenditures (excludes assets placed under capital lease) (77) (83) (404) (422) Investments in nuclear decommissioning trust funds (13) (13) (48) (51) Cost to retire property, net (4) (6) (28) (39) Other (4) 1 (4) 2 Deferred demand-side management costs - (2) (4) (10) ----- ----- ----- ----- Net cash used in investing activities (98) (103) (488) (520) ----- ----- ----- ----- Cash Flows from Financing Activities Increase (decrease) in notes payable, net (245) (303) 50 (97) Payment of capital lease obligations (8) (9) (38) (36) Payment of preferred stock dividends (7) (7) (28) (28) Preferred securities distributions (2) (1) (8) (1) Retirement of bonds and other long-term debt - (1) (37) (1) Proceeds from preferred securities - 97 - 97 Contribution from stockholder - 13 - 13 Payment of common stock dividends - - (200) (70) Proceeds from bank loans - - 23 - ----- ----- ----- ----- Net cash used in financing activities (262) (211) (238) (123) ----- ----- ----- ----- Net Increase (Decrease) in Cash and Temporary Cash Investments 8 (6) 4 (2) Cash and Temporary Cash Investments, Beginning of Period 4 14 8 10 ----- ----- ----- ----- Cash and Temporary Cash Investments, End of Period $ 12 $ 8 $ 12 $ 8 ===== ===== ===== ===== <FN> The accompanying condensed notes are an integral part of these statements. </TABLE>
45 <TABLE> Consumers Energy Company Consolidated Balance Sheets <CAPTION> ASSETS March 31 March 31 1997 December 31 1996 (Unaudited) 1996 (Unaudited) In Millions <S> <C> <C> <C> Plant (At original cost) Electric $6,412 $6,333 $6,130 Gas 2,242 2,203 2,207 Other 26 26 26 ------ ------ ------ 8,680 8,562 8,363 Less accumulated depreciation, depletion and amortization 4,378 4,269 4,195 ------ ------ ------ 4,302 4,293 4,168 Construction work-in-progress 114 158 199 ------ ------ ------ 4,416 4,451 4,367 ------ ------ ------ Investments Stock of affiliates 295 298 336 First Midland Limited Partnership (Note 2) 235 232 226 Midland Cogeneration Venture Limited Partnership (Note 2) 140 134 104 Other 9 8 9 ------ ------ ------ 679 672 675 ------ ------ ------ Current Assets Cash and temporary cash investments at cost, which approximates market 12 4 8 Accounts receivable and accrued revenue, less allowances of $8, $10 and $3, respectively (Note 4) 61 148 173 Accounts receivable - related parties 62 63 12 Inventories at average cost Gas in underground storage 51 186 39 Materials and supplies 72 68 74 Generating plant fuel stock 44 30 16 Postretirement benefits 25 25 25 Deferred income taxes 21 27 23 Prepayments and other 132 183 143 ------ ------ ------ 480 734 513 ------ ------ ------ Non-current Assets Postretirement benefits 427 435 458 Nuclear decommissioning trust funds 401 386 323 Abandoned Midland Project 108 113 126 Other 239 234 309 ------ ------ ------ 1,175 1,168 1,216 ------ ------ ------ Total Assets $6,750 $7,025 $6,771 ====== ====== ====== </TABLE>
46 <TABLE> <CAPTION> STOCKHOLDERS' INVESTMENT AND LIABILITIES March 31 March 31 1997 December 31 1996 (Unaudited) 1996 (Unaudited) In Millions <S> <C> <C> <C> Capitalization Common stockholder's equity Common stock $ 841 $ 841 $ 841 Paid-in-capital 504 504 504 Revaluation capital 36 37 29 Retained earnings since December 31, 1992 385 297 331 ------ ------ ------ 1,766 1,679 1,705 Preferred stock 356 356 356 Company-obligated mandatorily redeemable preferred securities of Consumers Power Company Financing I (a) 100 100 100 Long-term debt 1,652 1,900 1,923 Non-current portion of capital leases 97 100 96 ------ ------ ------ 3,971 4,135 4,180 ------ ------ ------ Current Liabilities Current portion of long-term debt and capital leases 348 98 89 Accrued taxes 190 211 201 Accounts payable 164 212 165 Notes payable 88 333 38 Accounts payable - related parties 70 68 64 Power purchases (Note 2) 47 47 90 Accrued interest 25 33 26 Accrued refunds 6 8 28 Other 147 176 166 ------ ------ ------ 1,085 1,186 867 ------ ------ ------ Non-current Liabilities Deferred income taxes 633 646 599 Postretirement benefits 508 500 520 Power purchases (Note 2) 167 178 215 Deferred investment tax credit 157 159 166 Regulatory liabilities for income taxes, net 75 66 53 Other 154 155 171 ------ ------ ------ 1,694 1,704 1,724 ------ ------ ------ Commitments and Contingencies (Notes 2, 3, 5 and 6) Total Stockholders' Investment and Liabilities $6,750 $7,025 $6,771 ====== ====== ====== <FN> (a) As described in Note 4 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 condensed notes are an integral part of these statements. </TABLE>
47 <TABLE> Consumers Energy Company Consolidated Statements of Common Stockholder's Equity (Unaudited) <CAPTION> Three Months Ended Twelve Months Ended March 31 1997 1996 1997 1996 In Millions <S> <C> <C> <C> <C> Common Stock At beginning and end of period $ 841 $ 841 $ 841 $ 841 ------- ------- ------- ------- Other Paid-in Capital At beginning of period 504 491 504 491 Stockholder's contribution - 13 - 13 ------- ------- ------- ------- At end of period 504 504 504 504 ------- ------- ------- ------- Revaluation Capital At beginning of period 37 29 29 17 Change in unrealized investment-gain (loss) (1) - 7 12 ------- ------- ------- ------- At end of period 36 29 36 29 ------- ------- ------- ------- Retained Earnings At beginning of period 297 237 331 167 Net income 97 102 290 263 Common stock dividends declared - - (200) (70) Preferred stock dividends declared (7) (7) (28) (28) Preferred securities distributions (2) (1) (8) (1) ------- ------- ------- ------- At end of period 385 331 385 331 ------- ------- ------- ------- Total Common Stockholder's Equity $ 1,766 $ 1,705 $ 1,766 $ 1,705 ======= ======= ======= ======= <FN> The accompanying condensed notes are an integral part of these statements. </TABLE>
48 Consumers Energy Company Condensed Notes to Consolidated Financial Statements These financial statements and their related condensed notes should be read along with the consolidated financial statements and notes contained in the Consumers 1996 Form 10-K that includes the Report of Independent Public Accountants. In the opinion of management, the unaudited information herein reflects all adjustments necessary to assure the fair presentation of financial position, results of operations and cash flows for the periods presented. 1: Corporate Structure Consumers is a combination electric and gas utility company serving the Lower Peninsula of Michigan, and is the principal subsidiary of CMS Energy, 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: 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 Three Months Ended Twelve Months Ended March 31 1997 1996 1997 1996 Pretax operating income $8 $2 $46 $27 Income taxes and other 2 - 14 7 --- --- --- --- Net income $6 $2 $32 $20 === === === === Power Purchases from the MCV Partnership: Consumers' annual obligation to purchase 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. 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. Beginning January 1, 1996, Consumers was also permitted to recover an average capacity charge of 2.86 cents per kWh for the remaining 325 MW of MCV Facility capacity. The approved average capacity charge increased to 3.62 cents per kWh for 109 MW by January 1, 1997. The recoverable portion of the capacity charge for the last 216 MW of the 325 MW increases each year until it reaches 3.62 cents per kWh in 2004, and remains at this ceiling rate through the end of the PPA term. Consumers previously recognized a loss in 1992 for the present value of the estimated future underrecoveries of power costs under the PPA. Consumers believes that the original loss recorded remains adequate. At March 31, 1997 and December 31, 1996, the after-tax present value of the PPA liability totaled $140 million and $147 million, respectively. The reduction in the liability since December 31, 1996 reflects after-tax cash underrecoveries of $10 million partially offset by after-tax accretion expense of $3 million. The undiscounted after-tax amount associated with the liability totaled $535 million at March 31, 1997. 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 under- recoveries, net of tax $28 $23 $22 $21 $20 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 and 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 a 1995 decision in the PSCR reconciliation case for 1993, 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 an earlier 1993 settlement order and appealed. The MCV Partnership and ABATE also filed separate appeals of this order. In November 1996, the Court of Appeals affirmed the MPSC's 1995 order. Consumers and the MCV Partnership filed petitions for rehearing of the Court of Appeals opinion, which were denied in January 1997. 3: Rate Matters Electric Proceedings: In 1996, the MPSC issued a final order which authorized Consumers to recover costs associated with the purchase of the additional 325 MW of MCV Facility capacity (see Note 2) and 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. It also established 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. An additional 140 MW may be filled by new special contracts which Consumers has signed and submitted to the MPSC for approval or direct access customers and the remaining 100 MW must be made available solely to direct access customers for at least 18 months. In April 1997, a lottery was held to select the customers to purchase 100 MW by direct access. Gas Proceedings: 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. As of March 31, 1997, $7 million would be subject to refund if the MPSC adopts the ALJ position. Consumers will continue to oppose this view before the MPSC. In 1996, the MPSC authorized Consumers to implement a pilot gas transportation program 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. Out of the 40,000 eligible customers, fewer than 500 volunteered to participate in the program. Consumers will retain its role as transporter and distributor of this gas. 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 changes 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. Resolution of the issues discussed in this note is not expected to have a material effect on Consumers' financial position or results of operations. 4: Short-Term Financings and Capitalization 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 March 31, 1997, a total of $88 million was outstanding at a weighted average interest rate of 6.8 percent, compared with $38 million outstanding at March 31, 1996, at a weighted average interest rate of 6.2 percent. Consumers has also in place a $500 million trade receivables purchase and sale program. At March 31, 1997 and 1996, receivables sold under the agreement totaled $398 million and $280 million, respectively. Accounts receivable and accrued revenue in the Consolidated Balance Sheets have been reduced to reflect receivables sold. 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. Under the provisions of its Articles of Incorporation at March 31, 1997, Consumers had $343 million of unrestricted retained earnings available to pay common dividends. In April 1997, Consumers declared a $70 million common dividend to be paid in May 1997. 5: 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 March 31, 1997, 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 1997 costs. At March 31, 1997, 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 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 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 these expenditures. Capital Expenditures: Consumers estimates capital expenditures, including new lease commitments, of $385 million for 1997, $380 million for 1998 and $360 million for 1999. For further information regarding capital expenditures, see Forward-Looking Information in the MD&A. 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 mitigation program to modify the service of all customers with livestock. As of April 30, 1997, Consumers had 18 separate stray voltage lawsuits awaiting trial court action, down from 22 lawsuits at year end 1996. 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. 6: Nuclear Matters 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 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 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. 7: 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 were: In Millions Three Months Twelve Months Ended Ended March 31 1997 1996 1997 1996 Cash transactions Interest paid (net of amounts capitalized) $ 48 $ 45 $160 $164 Income taxes paid (net of refunds) 1 5 115 48 Non-cash transactions Nuclear fuel placed under capital lease $ 3 $ - $ 31 $ 20 Other assets placed under capital leases 2 1 4 4 Capital leases refinanced - - - 21
53 ARTHUR ANDERSEN LLP Report of Independent Public Accountants ---------------------------------------- To Consumers Energy Company: We have reviewed the accompanying consolidated balance sheets of CONSUMERS ENERGY COMPANY (a Michigan corporation and wholly owned subsidiary of CMS Energy Corporation) and subsidiaries as of March 31, 1997 and 1996, and the related consolidated statements of income, common stockholder's equity and cash flows for the three-month and twelve-month periods then ended. These financial statements are the responsibility of the Company's management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to the financial statements referred to above for them to be in conformity with generally accepted accounting principles. We have previously audited, in accordance with generally accepted auditing standards, the consolidated balance sheet and consolidated statements of long-term debt and preferred stock of Consumers Energy Company and subsidiaries as of December 31, 1996, and the related consolidated statements of income, common stockholder's equity and cash flows for the year then ended (not presented herein), and, in our report dated January 24, 1997, we expressed an unqualified opinion on those statements. In our opinion, the information set forth in the accompanying consolidated balance sheet as of December 31, 1996, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived. Arthur Andersen LLP Detroit, Michigan, May 9, 1997.
54 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The discussion below is limited to an update of developments that have occurred in various judicial and administrative proceedings, many of which are more fully described in CMS Energy's and Consumers' Forms 10-K for the year ended December 31, 1996. Reference is made to the Condensed Notes to the 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 addition to a specific challenge to CMS Energy's exemption, there have been various generic administrative and legislative proposals to repeal or revise PUHCA in recent years. In April 1997, a bill was introduced in the United States Senate which would repeal PUHCA without at the same time deregulating the electric industry. The bill was referred to the Senate Banking, Housing and Urban Affairs Committee, the chairman of which is a co-sponsor of the bill. 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. At April 30, 1997, Consumers had 18 separate stray voltage cases awaiting action at the trial court level. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS At Consumers' Special Meeting of Shareholders held on March 10, 1997, the shareholders approved an amendment to Consumers' Articles of Incorporation changing the name from Consumers Power Company to Consumers Energy Company. The vote was 84,108,789 shares in favor of the amendment, with no shares voted against or abstaining. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) List of Exhibits (4) - CMS Energy: Third Supplemental Indenture dated as of May 6, 1997 between CMS Energy and NBD Bank, as Trustee (12) - CMS Energy: Statements regarding computation of Ratio of Earnings to Fixed Charges (15) - CMS Energy: Letter of Independent Public Accountant (27)(a) - CMS Energy: Financial Data Schedule (27)(b) - CMS Energy: Restated 1996 Financial Data Schedules (27)(c) - CMS Energy: Restated 1995 Financial Data Schedules (27)(d) - CMS Energy: Restated 1994 Financial Data Schedules (27)(e) - Consumers: Financial Data Schedule (27)(f) - Consumers: Restated 1996 Financial Data Schedules (27)(g) - Consumers: Restated 1995 Financial Data Schedules (27)(h) - Consumers: Restated 1994 Financial Data Schedules (99) - CMS Energy: Consumers Gas Group Financials (b) Reports on Form 8-K A Current Report on Form 8-K dated March 7, 1997 was filed by each of CMS Energy and Consumers covering matters pursuant to "Item 5. Other Events."
56 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, each registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. The signature for each undersigned company shall be deemed to relate only to matters having reference to such company or its subsidiary. CMS ENERGY CORPORATION ------------------------------------ (Registrant) Dated: May 14, 1997 By A. M. Wright ------------------------------------ Alan M. Wright Senior Vice President, Chief Financial Officer and Treasurer CONSUMERS ENERGY COMPANY ------------------------------------ (Registrant) Dated: May 14, 1997 By A. M. Wright ----------------------------------- Alan M. Wright Senior Vice President and Chief Financial Officer