ITEM 1. BUSINESS.
GENERAL
CMS ENERGY
CMS Energy, incorporated in Michigan in 1987, is the parent holding company of Consumers and Enterprises. Consumers, a combination electric and gas utility company serving in all 68 counties of Michigan's Lower Peninsula, is the largest subsidiary of CMS Energy. Enterprises is engaged in several domestic and international energy-related businesses including: oil and gas exploration and production; acquisition, development and operation of independent power production facilities; storage, transmission and processing of natural gas; energy marketing, services and trading; and international energy distribution. CMS Energy is exempt from registration under PUHCA, as described in Item 3. Legal Proceedings.
CMS Energy had consolidated operating revenue in 1997 of $4.8 billion. It derived 53 percent from the electric utility operations, 25 percent from the gas utility operations, 14 percent from marketing, services and trading activities, 4 percent from independent power production and other non-utility activities, 2 percent from gas transmission, storage and processing activities, and 2 percent from oil and gas exploration and production activities. Consumers' consolidated operations in the electric and gas utility businesses account for the majority of CMS Energy's total assets, revenue and income. CMS Energy's unconsolidated share of non- utility independent power production, gas transmission and storage, marketing services and trading, and international energy distribution revenue for 1997 was $913 million.
CONSUMERS
Consumers, incorporated in Michigan in 1968, is the successor to a corporation organized in Maine in 1910 that did business in Michigan from 1915 to 1968. Consumers was named Consumers Power Company from 1910 to the first quarter of 1997, when Consumers changed its name to Consumers Energy Company to reflect its increasing focus on providing customers with total energy solutions.
Consumers' customer base includes a mix of residential, commercial and diversified industrial customers, the largest segment of which is the automotive industry. Consumers is a public utility serving gas or electricity to almost 6 million of Michigan's 9.5 million residents in all Lower Peninsula counties. Consumers' service area includes automotive, metal, chemical, food and wood products industries and a diversified group of other industries.
Consumers had consolidated operating revenue in 1997 of $3.8 billion that was derived 67 percent from its electric business, 32 percent from its gas business and 1 percent from its non-utility business. Consumers' rates and certain other aspects of its business are subject to the jurisdiction of the MPSC and FERC, as described in CMS Energy and Consumers Regulation later in this Item.
BUSINESS SEGMENTS
CMS ENERGY AND CONSUMERS FINANCIAL INFORMATION
For information with respect to operating revenue, net operating income, identifiable assets and liabilities attributable to all of CMS Energy's business segments and international and domestic operations, see Item 8. Financial Statements and Supplementary Data - Selected Financial Information and CMS Energy's Consolidated Financial Statements and Notes to Consolidated Financial Statements.
For information with respect to the operating revenue, net operating income, identifiable assets and liabilities attributable only to Consumers' business segments, see Item 8. Financial Statements and Supplementary Data - Selected Financial Information and Consumers' Consolidated Financial Statements and Notes to Consolidated Financial Statements.
CMS ENERGY AND CONSUMERS PRINCIPAL OPERATIONS
CMS Energy conducts its principal operations through the following six business segments: electric utility operations; gas utility operations; oil and gas exploration and production operations; independent power production; energy marketing, services and trading; and storage, transmission and processing of natural gas. Consumers conducts CMS Energy's domestic electric and gas utility operations.
CMS Energy's international operations are subject to the risks inherent in conducting business abroad, including possible nationalization or expropriation, local market price and restrictions. Changes in the relative value of currencies occur from time to time and their effects may be favorable or unfavorable on results of operations. In addition, there are exchange control restrictions in certain countries which may effect repatriation of earnings.
CMS Energy and Consumers believe that they and their subsidiaries are adequately insured for the various risk exposures, including political risk, incidental to their respective businesses.
CONSUMERS ELECTRIC UTILITY OPERATIONS
Consumers generates, purchases, transmits, or distributes electricity in 61 of Michigan's 68 Lower Peninsula counties. Principal cities served include Battle Creek, Flint, Grand Rapids, Jackson, Kalamazoo, Midland, Muskegon and Saginaw. Consumers' electric utility customer base includes a mix of residential, commercial, and diversified industrial customers, the largest segment of which is the automotive industry. Consumers' electric operations are not dependent upon a single customer, or even a few customers, and the loss of any one or even a few of such customers would not have a material adverse effect on its financial condition. Consumers had 1.6 million electric customers at December 31, 1997.
Consumers' electric operations are seasonal. The summer months increase demand for energy, thereby, affecting revenues. Total electric sales in 1997 were a record 38 billion Kwh, a 2.3 percent increase from the 1996 levels including a 1.2 percent increase in system sales to Consumers' ultimate customers. Electric operating revenue in 1997 was $2.5 billion, an increase of 2.8 percent from 1996.
Consumers achieved a peak demand of 7,315 MW in July 1997, exceeding the 1996 peak by 2.1 percent (or 148 MW). Peak demands for 1997 were 5,811 MW in the winter and 7,315 MW in the summer. Based on actual peaks, Consumers' reserve margin was 10.4 percent in 1997 compared to 12.7 percent in 1996. Based on weather-adjusted peaks, Consumers' reserve margin was 10.4 percent in 1997 compared to 13.3 percent in 1996.
Consumers owned and operated 28 electric generating plants for the majority of 1997 with an aggregate net demonstrated capacity of 6,255 MW available under summer conditions in 1997 (including Big Rock which was retired at the end of August). In 1997, Consumers purchased 1,648 MW of net capacity, which amounted to 34.3 percent of Consumers' total system requirements, from independent power producers, the largest being the MCV Partnership. For additional information on Consumers' electric properties, see Item 2.
ITEM 2. PROPERTIES.
CHARACTER OF OWNERSHIP
The principal properties of CMS Energy, Consumers and their subsidiaries are owned in fee, except that most electric lines and gas mains are located, pursuant to easements and other rights, in public roads or on land owned by others. The statements under this item as to ownership of properties are made without regard to tax and assessment liens, judgments, easements, rights of way, contracts, reservations, exceptions, conditions, immaterial liens and encumbrances, and other outstanding rights. None of these outstanding rights impairs the usefulness of such properties.
Substantially all of Consumers' properties are subject to the lien of its First Mortgage Bond Indenture. Substantially all properties of the subsidiaries of CMS Generation that own interests in operating plants are subject to liens of creditors of the respective subsidiaries. Properties of certain Consumers, CMS Gas Transmission and CMS NOMECO subsidiaries are also subject to liens of creditors of the respective subsidiaries.
CONSUMERS ELECTRIC UTILITY PROPERTIES
At December 31, 1997, Consumers' electric generating system consists of five fossil-fueled plants, one nuclear plant, one pumped storage hydroelectric facility, seven gas combustion turbine plants and 13 hydroelectric plants. During 1997, Consumers retired Big Rock. For further information on the Big Rock closing, see Item 8. Financial Statements and Supplementary Data - Note 7 of Consumers Notes to Consolidated Financial Statements.
(a) Represents Consumers' share of the capacity of the Campbell Plant Unit 3, net of 6.69 percent (ownership interests of the Michigan Public Power Agency and Wolverine Power Supply Cooperative, Inc.).
(b) Represents Consumers' share of the capacity of Ludington. Consumers and Detroit Edison have 51 percent and 49 percent undivided ownership, respectively, in the plant, and the capacity of the plant is shared accordingly.
(c) Represents Consumers' share of net pumped storage generation. This facility electrically pumps water during off-peak hours for storage to later generate electricity during peak-demand hours.
(d) Consumers retired Big Rock on August 29, 1997.
(e) Includes 1,240 MW of purchased contract capacity from the MCV Facility.Consumers' owns 8,620 miles of electric transmission lines operating at up to 345 kilovolts, owns 58,555 miles of electric distribution lines and owns substations having an aggregate transformer capacity of 38,287,140 kilovoltamperes.
CONSUMERS GAS UTILITY PROPERTIES
Consumers' gas distribution and transmission system consists of 22,825 miles of distribution mains and 1,057 miles of transmission lines throughout the Lower Peninsula of Michigan. Consumers owns and operates six compressor stations with a total of 133,560 installed horsepower.
Consumers' gas storage fields, listed below, have an aggregate storage capacity of 221.3 bcf. Storage Field Name Location Capacity (bcf)
Overisel Allegan and Ottawa Counties 62.0 Salem Allegan and Ottawa Counties 35.0 Ira St Clair County 6.8 Lenox Macomb County 3.5 Ray Macomb County 64.5 Northville Oakland, Washtenaw and Wayne Counties 12.1 Puttygut St Clair County 14.6 Four Corners St Clair County 3.8 Swan Creek St Clair County .6 Hessen St Clair County 17.0 Lyon - 34 Oakland County 1.4
Michigan Gas Storage owns and operates two compressor stations with a total of 43,400 installed horsepower. Its transmission system consists of 530 miles of pipelines within the Lower Peninsula of Michigan.
Michigan Gas Storage's gas storage fields, listed below, have an aggregate certified storage capacity of 109.5 bcf.
Total Certified Field Name Location Storage Capacity (bcf)
Winterfield Osceola and Clare Counties 72.3 Cranberry Lake Clare and Missaukee Counties 28.2 Riverside Missaukee County 9.0
Consumers' gas properties also include the Marysville Gas Reforming Plant, located in Marysville, Michigan. Huron and PanCanadian Petroleum Company are partners in a partnership to use the expanded capacity of the underground caverns at the Marysville plant for commercial storage of liquid hydrocarbons. In addition, Consumers and PanCanadian Petroleum Company are partners in a partnership to use certain hydrocarbon fractionation facilities at the plant. There is a pending sale of the Marysville Gas Reforming Plant, including substantially all of Consumers' and Huron's partnership interests, to CMS Gas Transmission or a subsidiary thereof.
CMS ENERGY OIL AND GAS EXPLORATION AND PRODUCTION PROPERTIES
Net oil and gas production by CMS NOMECO for the years 1995 through 1997 is shown in the following table.
1997 1996 1995
Oil and condensate (Mbbls) (a)(c) 6,564 4,921 4,383 Natural gas (MMcf) (a) 27,157 29,371 26,348 Plant products (Mbbls) (a) 321 240 226 Average daily production (b) Oil (Mbbls) 20.5 16.7 16.1 Gas (MMcf) 89.1 97.9 84.9
Reserves to annual production ratio Oil (MMbbls) (c) 14.3 16.2 17.5 Gas (bcf) 11.9 11.0 10.8
(a) Revenue interest to CMS NOMECO (b) CMS NOMECO working interest (includes CMS NOMECO's share of royalties) (c) Oil volumes have been restated to reflect new reporting method for Venezuela
The following table shows CMS NOMECO's undeveloped net acres of oil and gas leasehold interests.
December 31 1997 1996
Michigan 138,903 131,502 Indiana 28,839 10,986 Ohio 9,671 6,104 Texas (Including offshore acreage) 9,557 7,005 Louisiana (Including offshore acreage) 4,424 8,088 North Dakota 2,587 13,840 Other states 55 4,930 --------- --------- Total domestic 194,036 182,455 --------- --------- Venezuela 339,521 230,175 Colombia 294,330 294,330 Cameroon 187,636 - Equatorial Guinea 113,806 113,947 Tunisia 67,193 67,193 Ecuador 66,430 66,430 Congo 17,364 17,981 Yemen - 27,610 --------- --------- Total international 1,086,280 817,666 --------- --------- Total net acres 1,280,316 1,000,121 ========= =========
The following table shows CMS NOMECO's estimated proved reserves of oil and gas for the years 1995 through 1997.
(a) The governing license in Venezuela is an oil service contract whereas CMS NOMECO is paid a fee per barrel for oil discovered, lifted, and delivered to Corpoven S.A., a subsidiary of Petroleos de Venezuela S.A.. Additionally, CMS NOMECO receives a fee for reimbursement of certain capital expenditures. The volumes presented represent actual production with respect to which CMS NOMECO is paid a per barrel fee.
CONSUMERS OTHER PROPERTIES
CMS Midland owns a 49 percent interest in the MCV Partnership which was formed to construct and operate the MCV Facility. The MCV Facility was sold to five owner trusts and leased back to the MCV Partnership. CMS Holdings is a limited partner in the FMLP, which is a beneficiary of one of these trusts. CMS Holdings' indirect beneficial interest in the MCV Facility is 35 percent.
Consumers owns fee title to 1,140 acres of land in the City and Township of Midland, Midland County, Michigan, occupied by the MCV Facility. The land is leased to the owners of the MCV Facility by five separate leases, each leasing an undivided interest and in the aggregate totaling 100 percent, for an initial term ending December 31, 2035 with possible renewal terms to June 15, 2090.
Consumers owns or leases three principal general office buildings in Jackson, Michigan and 53 field offices at various locations in Michigan's Lower Peninsula. Of these, two general office buildings and 15 field offices are leased. Also owned are miscellaneous parcels of real estate not now used in utility operations.
For information on capital expenditures, see Item 7. Consumers Management's Discussion and Analysis - Outlook and Item 8. Financial Statements and Supplementary Data - Note 15 of Consumers' Notes to Consolidated Financial Statements.
CMS ENERGY OTHER PROPERTIES
CMS Generation has ownership interests in certain facilities such as Loy Yang, Jorf Lasfar and El Chocon. The Loy Yang assets are owned in fee, but are subject to the security interests of its creditors. The Jorf Lasfar facility is held pursuant to a right of possession agreement with the Moroccan state owned Office National de l'Electricite. The El Chocon facility is held pursuant to a 30 year possession agreement.
CMS Gas Transmission has ownership interests in 367 miles of pipelines in the state of Michigan. Additionally, CMS Gas Transmission owns a 25 percent general partnership interest in TGN, which owns and operates 3,048 miles of pipeline that provides natural gas transmission service to the northern and central parts of Argentina.
In June 1997, CMS Gas Transmission acquired a 260 mile pipeline in western Australia. The acquisition included 30 bcf of proved natural gas reserves with two gas production licenses and an associated gas storage facility in pre-operational testing.
CMS Gas Transmission also has ownership interests in other facilities, including a proprietary gas processing company which has patents for its helium removal and nitrogen rejection processes, gas gathering systems and processing plants, and an enhanced oil recovery project which involves flooding depleted oil reservoirs with carbon dioxide.
CMS Energy, through certain subsidiaries; owns a 50 percent interest in Bay Harbor Company, L.L.C., a development in Emmet County Michigan, owns 6,000 acres of undeveloped land in Benzie and Manistee Counties Michigan; and owns 53 acres of undeveloped land in Muskegon County Michigan.
The following table shows interests in independent power plants at December 31, 1997.
Ownership Gross Location Interest (%) Capacity (MW)
CMS Generation Wood Fueled Domestic 35.0 - 50.0 234 Fossil Fueled Domestic 8.8 - 50.0 410 International Andhra Pradesh, India 25.3 235 Mendoza Province, Argentina 80.6 506 Port of Jorf Lasfar, Morocco 50.0 660 State of Victoria, Australia 49.6 2,000 Other 25.3 - 47.5 386 Scrap Tire Fueled Domestic 50.0 31 Hydro Generation Domestic 1.0 - 55.5 98 International Limay River, Argentina 17.2 1,320 Wind Generation Domestic 8.5 - 22.7 102 CMS Midland Fossil Fueled Midland, Michigan 49.0(a) 1,370
(a) See the previous section - Consumers Other Properties - for more information.
For information on capital expenditures, see Item 7. CMS Energy Management's Discussion and Analysis - Capital Resources and Liquidity and Item 8. Financial Statements and Supplementary Data - Note 19 of CMS Energy's Notes to Consolidated Financial Statements.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS.
CMS Energy, Consumers and some of their subsidiaries and affiliates are parties to certain routine lawsuits and administrative proceedings incidental to their businesses involving, for example, claims for personal injury and property damage, contractual matters, various taxes, and rates and licensing. Reference is made to the combined Item 1. Business - CMS Energy and Consumers Regulation, as well as to each of CMS Energy's and Consumers' item 7. Management's Discussion and Analysis and Item 8. Financial Statements and Supplementary Data - Notes to Consolidated Financial Statements included herein for additional information regarding various pending administrative and judicial proceedings involving regulatory, operating and environmental matters.
CMS ENERGY
EXEMPTION UNDER PUHCA: CMS Energy is exempt from registration under PUHCA. In December 1991, the Attorney General and the Michigan Municipal Cooperative Group filed a request with the SEC for the revocation of CMS Energy's exemption. In January 1992, CMS Energy responded to the revocation request affirming its position that it is entitled to the exemption. In April 1992, the MPSC filed a statement with the SEC that recommended that the SEC impose certain conditions on CMS Energy's exemption. CMS Energy vigorously contested the revocation request and believes it will maintain the exemption. There has been no action taken by the SEC on this matter.
In June 1995, the SEC released a staff report that recommended legislative options to Congress: 1) repeal PUHCA and strengthen the ability of the FERC and state regulators to obtain books and records, conduct audits and review affiliate transactions; 2) repeal PUHCA, without condition; or 3) amend PUHCA to give the SEC broader exemptive authority. The SEC staff supported option 1 because it would achieve the benefits of unconditional repeal, while preserving the ability of states to protect consumers. Several bills were introduced during 1997 in the United States House of Representatives and the United States Senate that would repeal PUHCA. In April 1997, a bill was introduced in the United States Senate that would repeal PUCHA without at the same time deregulating the electric industry. This bill was referred to the Senate Banking Housing and Urban Affairs Committee, the chairman of which is a cosponsor of the bill, and amended by that Committee in June 1997 with a recommendation that the bill pass as amended.
INDEPENDENT POWER PRODUCTION PROJECT LITIGATION: In August 1995, William R. Williams and two of his corporations, Altresco Philippines, Inc. and WRW Corporation (formerly Altresco International, Inc.), filed a lawsuit against CMS Generation now pending in the United States District Court for the District of Colorado, in connection with a project to be developed in Bantangas, Philippines by Luzon Power Associates, Inc. in which CMS Generation owned 50 percent. The complaint alleges breach of a confidentiality agreement, breach of fiduciary duty, intentional interference with a contract, breach of implied covenant of good faith and fair dealing, and unfair competition. The claims primarily relate to a confidentiality agreement between the parties and CMS Generation's alleged violation of a restrictive covenant in the confidentiality agreement. The plaintiffs claim direct damages of approximately $85 million and indirect damages in a like amount from loss of future business, plus punitive damages, interest, and attorney's fees. Most issues raised in the suit are subject to mandatory arbitration, presently scheduled for May 1998. The trial date has been postponed until the fall of 1998. CMS Generation believes the plaintiff's position is without merit and intends to vigorously oppose any claims they may raise but cannot predict the outcome of this matter.
CONSUMERS
STRAY VOLTAGE LAWSUITS: Consumers has a number of lawsuits relating to so-called stray voltage, which results when small electrical currents present in grounded electric systems are diverted from their intended path. Claimants contend that stray voltage affects farm animal behavior, reducing the productivity of their livestock operations. Investigation by Consumers of prior stray voltage complaints disclosed that many factors, including improper wiring and malfunctioning of on-farm equipment, can lead to the stray voltage phenomenon. Consumers maintains a policy of investigating all customer calls regarding stray voltage and working with customers to address their concerns including, when necessary, modifying the configuration of the customer's hook-up to Consumers' system. In October 1993, a complaint seeking certification as a class action suit was filed against Consumers in a Michigan circuit court. The complaint alleged that in excess of a billion dollars of damages, primarily related to lost production by certain livestock owned by the purported class, were being incurred as a result of stray voltage from electricity being supplied by Consumers. In March 1994, the Court decided to deny class certification for this complaint, concluded that the claims of over 200 named plaintiffs had been improperly joined in a single action and dismissed, subject to re-filing as separate suits, the October lawsuit with respect to all but one of the named plaintiffs. Of the original plaintiffs, only 49 re-filed separate cases. All of those 49 cases have been resolved. In April 1994, the plaintiffs appealed the Court's denial of class certification in this matter to the Court of Appeals. The Court of Appeals dismissed the case. In December 1997, the Michigan Supreme Court remanded for further proceedings the March 1994 trial court decision. The Michigan Supreme Court did not disturb the trial court's ruling with respect to denial of class certification, nor did it reverse the trial court determination that the plaintiffs had been improperly joined in a single action, but questioned the trial court's decision requiring each of the improperly joined lawsuits to re-file new lawsuits on an individual basis. Consumers filed a motion for reconsideration with the Michigan Supreme Court, which was denied. At December 31, 1997, Consumers had 12 individual cases, unrelated to the cases discussed above, pending for trial, down from 22 pending at year end 1996.
HIGHLAND TOWNSHIP FRANCHISE PROCEEDING: MichCon obtained a revocable franchise in 1956 to provide natural gas service to Highland Township, Michigan. In 1962, Consumers secured an irrevocable 30 year franchise to provide natural gas service to Highland Township. Neither franchise was exclusive. Although MichCon's franchise for service in Highland Township expired in 1986 and was not renewed, MichCon continued service to customers in Highland Township. Consumers secured a revocable renewal franchise for Highland Township in 1992. Thereafter in 1992, Consumers filed suit to enjoin MichCon from expanding its gas service to new customers in Highland Township. The Circuit Court of Oakland County, Michigan denied MichCon's motion for summary disposition and granted Consumers' petition for an injunction. MichCon subsequently transferred its remaining rights and interest in Highland Township to Consumers, ceased doing business there and appealed the Circuit Court decision with the Court of Appeals. In August 1995, the Court of Appeals refused to decide the issue addressed by the Circuit Court (namely whether MichCon, as a holdover utility without any franchise, could continue to lawfully do business in a township) because the Court of Appeals concluded that Consumers' 1992 revocable renewal franchise was invalid since it was not confirmed by a vote of the Highland Township electorate as the Court determined was required by the Michigan Public Utility Franchise Act. Prior to this decision, the commonly held interpretation of the Michigan Public Utility Franchise Act was that a vote of the electorate was only required for irrevocable franchises, not revocable franchises such as that held by Consumers in this case. The Court of Appeals reversed the Circuit Court decision and remanded the case to the Circuit Court for entry of summary disposition in MichCon's favor -- even though the only franchise MichCon had ever possessed was revocable and thus, under the Court of Appeals' decision, invalid. Consumers application with the Michigan Supreme Court for leave to appeal was granted in April 1997. Subsequently, the Supreme Court dismissed this proceeding citing the June 1996 passage of Michigan Legislation amending the Michigan Public Utility Franchise Act to provide that revocable franchises may be granted by a township without a vote of the electorate. That statute resolved the issue in this case. This proceeding is now closed.
CONSUMERS' JOINT LAWSUIT AGAINST DOE: Under the Nuclear Waste Policy Act of 1982, the DOE was required to begin accepting deliveries of spent nuclear fuel from commercial operators by January 31, 1998 for disposal, even if a permanent storage repository was not then operational. The unconditional nature of the DOE's obligation was confirmed by the United States Court of Appeals for the District of Columbia Circuit in 1996. Utilities, including Consumers, and their customers have been prepaying the costs of DOE transport and disposal through fees based on electric generation by their nuclear plants. In January 1997, in response to the DOE's declaration in December 1996 that it would not begin to accept spent nuclear fuel deliveries in 1998, Consumers and other utilities filed suit in the United States Court of Appeals for the District of Columbia Circuit. The utilities sought a declaration that they are relieved of their obligation to remit their quarterly fee payments to the DOE and are authorized to escrow any related fees collected from their customers, unless and until the DOE begins to accept spent nuclear fuel. The suit also sought an order requiring the DOE to develop a program to begin acceptance of spent nuclear fuel by January 31, 1998. In November 1997, the United States Court of Appeals decided that the contract between the DOE and the utilities provided a potentially adequate remedy if the DOE failed to fulfill its obligations by January 31, 1998. The Court of Appeals issued a written opinion precluding the DOE from excusing its own delay on the grounds that it did not have a permanent repository or interim storage facility. Also in 1997, federal legislation was reintroduced to clarify the timing of the DOE's obligation to accept spent nuclear fuel and to direct the DOE to establish an integrated spent fuel management system that includes designing and constructing an interim storage facility in Nevada. Further litigation before the courts or administrative proceedings before the DOE on this subject is likely as the utilities and their state regulatory agencies strive to secure the benefits of the Nuclear Waste Policy Act.
CMS ENERGY AND CONSUMERS
ANTITRUST LITIGATION: In October 1997, Indeck Energy Services, Inc. and Indeck Saginaw Limited Partnership, independent power producers, filed a lawsuit against CMS Energy and Consumers in the United States District Court for the Eastern District of Michigan. The suit alleges antitrust violations relating to contracts that Consumers entered into with some of its customers as well as claims relating to independent power production projects. The plaintiffs claim damages of $100 million (which can be trebled in antitrust cases as provided by law). The transactions of which plaintiffs complain have been regulated by and are subject to the jurisdiction of the MPSC. On November 21, 1997, Consumers and CMS Energy filed a motion for summary judgement and/or dismissal of the complaint. The motion will be decided in early 1998 before the lawsuit is allowed to proceed. CMS Energy and Consumers presently believe the lawsuit is entirely without merit and will vigorously defend against it, but cannot predict the outcome of this matter.
ENVIRONMENTAL MATTERS: CMS Energy, Consumers and their subsidiaries and affiliates are subject to various federal, state and local laws and regulations relating to the environment. Several of these companies have been named parties to various actions involving environmental issues. However, based on their present knowledge and subject to future legal and factual developments, CMS Energy and Consumers believe that it is unlikely that these actions, individually or in total, will have a material adverse effect on their financial condition, see Item 1. Business - CMS Energy and Consumers Environmental Compliance, Item 7. Management's Discussion and Analysis and Item 8. Financial Statements and Supplementary Data - Note 6 of Consumers' Notes to Consolidated Financial Statements.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
CMS ENERGY
None in the fourth quarter of 1997 for CMS Energy.
CONSUMERS
None in the fourth quarter of 1997 for Consumers.
PART II
ITEM 5.
ITEM 5. MARKET FOR CMS ENERGY'S AND CONSUMERS' COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
CMS Energy
Market prices for CMS Energy's Common Stock and related security holder matters are contained in Item 8. Financial Statements and Supplementary Data - CMS Energy's Quarterly Financial and Common Stock Information, which is incorporated by reference herein. At February 25, 1998, the number of registered shareholders totaled 67,278 for CMS Energy Common Stock and 4,466 for Class G Common Stock.
Consumers
Consumers' common stock is privately held by its parent, CMS Energy, and does not trade in the public market. In May, August, November and December 1997, Consumers paid $70 million, $43 million, $57 million and $48 million in cash dividends, respectively, on its common stock. In May, August, November and December 1996, Consumers paid $75 million, $40 million, $48 million and $37 million in cash dividends, respectively, on its common stock.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA.
CMS Energy
Selected financial information is contained in Item 8. Financial Statements and Supplementary Data - CMS Energy's Selected Financial Information which is incorporated by reference herein.
Consumers
Selected financial information is contained in Item 8. Financial Statements and Supplementary Data - Consumers' Selected Financial Information which is incorporated by reference herein.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
CMS Energy
Management's discussion and analysis of financial condition and results of operations is contained in Item 8. Financial Statements and Supplementary Data - CMS Energy's Management's Discussion and Analysis which is incorporated by reference herein.
Consumers
Management's discussion and analysis of financial condition and results of operations is contained in Item 8. Financial Statements and Supplementary Data - Consumers' Management's Discussion and Analysis which is incorporated by reference herein.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
CMS Energy
Quantitative and Qualitative Disclosures About Market Risk is contained in Item 8.
Item 8. Financial Statements and Supplementary Data - CMS Energy's Management's Discussion and Analysis - Results of Operations - Market Risk Information which is incorporated by reference herein.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Index to Financial Statements:
CMS Energy Page
Selected Financial Information. . . . . . . . . . . . . . . . 38 Management's Discussion and Analysis. . . . . . . . . . . . . 41 Consolidated Statements of Income . . . . . . . . . . . . . . 57 Consolidated Statements of Cash Flows . . . . . . . . . . . . 58 Consolidated Balance Sheets . . . . . . . . . . . . . . . . . 59 Consolidated Statements of Preferred Stock. . . . . . . . . . 61 Consolidated Statements of Common Stockholders' Equity. . . . 62 Notes to Consolidated Financial Statements. . . . . . . . . . 63 Report of Independent Public Accountants. . . . . . . . . . . 97 Quarterly Financial and Common Stock Information. . . . . . . 98
Consumers Page
Selected Financial Information. . . . . . . . . . . . . . . . 101 Management's Discussion and Analysis. . . . . . . . . . . . . 102 Consolidated Statements of Income . . . . . . . . . . . . . . 113 Consolidated Statements of Cash Flows . . . . . . . . . . . . 114 Consolidated Balance Sheets . . . . . . . . . . . . . . . . . 115 Consolidated Statements of Long-Term Debt . . . . . . . . . . 117 Consolidated Statements of Preferred Stock. . . . . . . . . . 118 Consolidated Statements of Common Stockholder's Equity. . . . 119 Notes to Consolidated Financial Statements. . . . . . . . . . 120 Report of Independent Public Accountants. . . . . . . . . . . 144 Quarterly Financial Information . . . . . . . . . . . . . . . 145
1997 Financial Statements
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CMS Energy Corporation Management's Discussion and Analysis
This Annual Report contains forward-looking statements, as defined by the Private Securities Litigation Reform Act of 1995, that include, without limitation, discussions as to expectations, beliefs, plans, objectives and future financial performance, or assumptions underlying or concerning matters discussed in this report. Refer to the Forward-Looking Information section of this MD&A for 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 is a combination electric and gas utility company serving the Lower Peninsula of Michigan and 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: acquisition, development and operation of independent power production facilities; oil and gas exploration and production; storage, transmission and processing of natural gas; energy marketing, services and trading; and international energy distribution.
RESULTS OF OPERATIONS
CMS Energy Consolidated Earnings
In Millions, Except Per Share Amounts Years Ended December 31 1997 1996 Change - --------------------------------------------------------------
Consolidated Net Income $ 268 $ 240 $ 28 Net Income Attributable to Common Stocks: CMS Energy 253 226 27 Class G 15 14 1 Earnings Per Average Common Share: CMS Energy Basic 2.63 2.45 .18 Diluted 2.61 2.44 .17 Class G Basic and Diluted 1.84 1.82 .02 ==============================================================
CMS Energy experienced earnings growth for the fifth consecutive year. This historical growth reflects changes in regulation allowing CMS Energy to invest in other states and countries, and to offer a full range of services and fuels. The increased earnings for 1997 resulted from (i) a February 1996 electric rate increase received by Consumers that benefitted all of 1997, (ii) increased electric sales by Consumers, (iii) improved earnings from the MCV Partnership, (iv) increased revenues from the transmission of electricity for others, (v) increased income from international independent power production, and (vi) increased income from international gas transmission, storage and processing. Partially offsetting these increases, however, were (i) decreased gas deliveries by Consumers due to warmer winter month temperatures in 1997 and the loss of an extra day for the 1996 leap year, (ii) marketing losses due to lower gas margins, and (iii) lower gas production and lower oil and gas prices in the oil and gas exploration and production business. Earnings for 1997 also included recognition of a gain on the sale of CMS NOMECO's entire interest in oil and gas properties in Yemen, an industry expertise service fee in connection with the Loy Yang A acquisition, a gain on the sale of the Ames gas gathering system, and Consumers' adjustment of prior years' income taxes associated with non-taxable earnings on nuclear decommissioning trust funds. Comparatively, the 1996 results included a gain on the sale of a power purchase agreement by a partnership in which CMS Generation owns a 50 percent interest, a gain on the sale of a partnership interest and a refund received by the MCV Partnership.
The increase in consolidated net income for 1996 over 1995 primarily reflects the favorable impact of an electric rate increase and an operating income increase from a refund received by the MCV Partnership that provided a $6 million earnings benefit for CMS Energy. Earnings in 1996 also reflect increased electric sales, gas deliveries and revenues from gas loaning activities. Consolidated net income was also affected by increased earnings from CMS Gas Transmission's 25 percent ownership interest in TGN and increased equity earnings resulting from the sale of a power purchase agreement. CMS Gas Transmission and CMS Generation are subsidiaries of Enterprises.
For further information, see the individual results of operations for each CMS Energy business segment in this MD&A.
Electric Utility Results of Operations
Electric Pretax Operating Income:
In Millions Change Compared to Prior Year 1997 vs 1996 1996 vs 1995 - -------------------------------------------------------------------------- Sales (including special contract discounts) $ 5 $ 1 Rate increases and other regulatory issues 11 50 Operation and maintenance 24 2 General taxes, depreciation and other (19) (14) ---- ---- Total increase/(decrease) in pretax operating income $ 21 $ 39 ==== ====
Electric Sales: Total electric sales in 1997 were 38 billion kWh, an increase of 2.3 percent over 1996 sales. The increase reflects continued economic growth in Michigan and a 1.2 percent increase in sales to ultimate customers, primarily within the industrial class. Total electric sales in 1996 were 37 billion kWh, an increase of 4.4 percent over the 1995 level. The increase in 1996 is primarily attributable to an increase in intersystem sales and a 1.7 percent increase in sales to ultimate customers. This increase also reflects continued economic growth in Consumers' territory.
Power Costs: Cost increases in both 1997 and 1996 over the prior periods reflect greater power purchases from outside sources to meet increased sales demand. The following table quantifies the changes in electric power costs:
In Millions Years Ended December 31 1997 1996 Change 1996 1995 Change - -----------------------------------------------------------------------
$1,139 $1,087 $52 $1,087 $970 $117 =======================================================================
Electric Utility Operating Issues:
Power Purchases from the MCV Partnership: In 1992, Consumers recognized a loss for the present value of the estimated future underrecoveries of power purchases from the MCV Partnership. The after-tax cash underrecoveries are currently based on the assumption that the MCV Facility will be available to generate electricity 91.5 percent of the time over its expected life. For 1997, the MCV Facility was available 99 percent of the time, resulting in after-tax cash underrecoveries of $41 million. Consumers believes it will continue to experience after-tax cash underrecoveries associated with the PPA in amounts as those shown below. For further information, see Power Purchases from the MCV Partnership in Note 3.
In Millions 1998 1999 2000 2001 2002 - -----------------------------------------------------------------------
Estimated cash underrecoveries, net of tax $23 $22 $21 $20 $19 ========================================================================
Consumers bases the above estimated underrecoveries, in part, on an estimate 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, Consumers will need to recognize losses for future underrecoveries larger than amounts previously recorded. Therefore, Consumers would experience larger amounts of cash underrecoveries than originally anticipated. Management will continue to evaluate the adequacy of the accrued liability considering actual MCV Facility operations.
Electric Rate Proceedings: In 1996, the MPSC issued a final order authorizing Consumers to recover costs associated with the purchase of an additional 325 MW of MCV Facility capacity and to accelerate recovery of its nuclear plant investment. To implement the accelerated recovery, the order required an increase in annual nuclear plant depreciation expense by $18 million with a corresponding decrease in fossil-fueled generating plant depreciation expense. The order also established an experimental direct-access program. For further information on these issues, see the Electric Business Outlook section of this MD&A and Notes 3 and 4.
Nuclear Matters: In January 1997, the NRC issued its Systematic Assessment of Licensee Performance report for the Palisades. The report rated all areas as good, unchanged from the previous assessment.
The NRC requires Consumers to make certain calculations and report to it on the continuing ability of the Palisades reactor vessel to withstand postulated pressurized thermal shock. In 1996, Consumers received an interim Safety Evaluation Report from the NRC indicating that the reactor vessel can be safely operated through 2003. Consumers believes that with a change in fuel management designed to minimize embrittlement, Palisades can be operated to the end of its license life in the year 2007.
Palisades' temporary on-site storage pool for spent nuclear fuel is at capacity. Consequently, Consumers is using NRC-approved steel and concrete vaults, commonly known as "dry casks," for temporary on-site storage.
Big Rock closed permanently on August 29, 1997 because management determined that the plant would be uneconomical to operate in an increasingly competitive environment. Consumers originally scheduled the plant to close May 31, 2000, at the end of the plant's operating license. Plant decommissioning began in September 1997 and may take five to ten years to return the site to its original condition. The earlier than planned closure of the plant and the reopening of the South Carolina Barnwell facility to receive low level radioactive waste have changed the method of decommissioning from the safe storage option to immediate dismantlement. This change could have an impact on the estimated decommissioning cost which is required to be updated in a filing with the MPSC by March 31, 1998. For further information on nuclear matters, see Note 11.
Electric Environmental Matters: The Clean Air Act contains significant environmental provisions specific to utilities. During the past few years, Consumers incurred $46 million in capital expenditures. Consumers believes it may incur an additional $30 million in capital expenditures by the year 2000 to comply with the current sulfur dioxide and nitrogen oxide emission limits established by the EPA.
Consumers currently operates within all Clean Air Act requirements and meets current ozone and particulate emission limits. The EPA recently revised the national air quality standards, which may further limit small particulate and ozone related emissions, and proposed that the State of Michigan impose additional nitrogen oxide limits on fossil-fueled emitters, such as Consumers' generating units. It is unlikely that the State of Michigan will establish Consumers' emissions reduction target until mid-to-late 1999. Until this state-mandated target is known, the estimated cost of compliance is subject to significant revision. The preliminary estimate of capital costs to reduce nitrogen oxide related emissions for Consumers' fossil-fueled generating units is approximately $175 million, plus an additional amount totaling $10 million per year for the next 20 years for operation and maintenance costs. Consumers may need an equivalent amount to comply with the new small particulate standards. The State of Michigan objected to the extent of the proposed EPA emission reductions. If the State of Michigan's position were to be adopted by the EPA, costs could be less than the current estimated amounts. Consumers supports the bipartisan effort in the U.S. Congress to delay implementation of the revised standards until the relationship between the new standards and health improvements is established scientifically.
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. Nevertheless, it believes that these costs are properly recoverable in rates under current ratemaking policies.
Consumers is a so-called potentially responsible party at several contaminated sites administered under Superfund. Many other creditworthy, potentially responsible parties, with substantial assets also cooperate 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.
While decommissioning Big Rock, Consumers found that some areas of the plant have coatings that contain both metals and polychlorinated biphenyls. Consumers does not believe that any facility in the United States currently accepts the radioactive portion of that waste. The cost of removal and disposal is currently unknown. These costs would constitute part of the cost to decommission the plant, and will be paid from the decommissioning fund. Consumers is studying the extent of the contamination and reviewing options. For further information regarding these and other environmental matters, see Electric Environmental Matters in Note 10 and Nuclear Plant Decommissioning in Note 2.
Stray Voltage: Various parties have sued Consumers relating to the effect of so-called stray voltage on certain livestock. In December 1997, the Michigan Supreme Court remanded for further proceedings a 1994 Michigan trial court decision that refused to allow the claims of over 200 named plaintiffs to be joined in a single action. The trial court dismissed all of the plaintiffs except the first-named plaintiff, allowing the others to re-file separate actions. Of the original plaintiffs, only 49 re-filed separate cases. All of those 49 cases have been resolved. The Michigan Supreme Court remanded the matter, finding that the proper remedy for misjoinder was not dismissal, but to automatically allow each case to go forward separately. Consumers filed a motion for reconsideration with the Michigan Supreme Court, which was denied. Consumers intends to vigorously defend these cases, but is unable to predict the outcome. As of December 31, 1997, Consumers had 12 individual stray voltage lawsuits, unrelated to the cases above, awaiting trial court action, down from 22 lawsuits as reported at year end 1996.
Other: In October 1997, two independent power producers sued Consumers and CMS Energy in a federal court alleging antitrust violations and economic losses due to special electric contracts signed by Consumers with large customers. The plaintiffs claim damages of $100 million (which a court can treble in antitrust cases as provided by law). The transactions of which plaintiffs complain have been regulated by, and are subject to, the jurisdiction of the MPSC. In November 1997, Consumers and CMS Energy filed a motion for summary judgement and/or for dismissal of the complaint filed by the plaintiffs. Consumers and CMS Energy believe the lawsuit is without merit and will vigorously defend against it, but cannot predict the outcome of this matter.
Consumers Gas Group Results of Operations
Gas Pretax Operating Income:
In Millions Change Compared to Prior Year 1997 vs 1996 1996 vs 1995 - ----------------------------------------------------------------- Sales $(13) $ 3 Gas wholesale and retail services activities (9) 7 Operations and maintenance 24 (4) General taxes, depreciation and other (7) (4) ---- ---- Total increase/(decrease) in pretax operating income $ (5) $ 2 ==== ====
Gas Deliveries: System deliveries in 1997, including miscellaneous transportation, totaled 420 bcf, a decrease of 28 bcf or 6.1 percent compared to 1996. The decreased deliveries for 1997 compared to 1996 reflect warmer temperatures in 1997 and loss of an extra day for the 1996 leap year. Comparable system deliveries for 1996 totaled 448 bcf, an increase of 44 bcf or 10.8 percent compared to 1995. The increased deliveries for 1996 compared to 1995 reflect growth resulting from customer additions, conversions to natural gas from alternative fuels, continued strength in the Michigan economy and the benefit from the added leap year day in 1996.
Cost of Gas Sold: The cost decrease for 1997 was the result of decreased sales and lower gas prices. The cost increase for 1996 was the result of increased sales.
In Millions Years Ended December 31 1997 1996 Change 1996 1995 Change ___________________________________________________________________
$694 $750 $(56) $750 $674 $76 ===================================================================
Consumers Gas Group Operating Issues:
Gas Rate Proceedings: Consumers entered into a special natural gas transportation contract in response to a customer's proposal to bypass Consumers' system in favor of a competitive alternative. In 1995, the MPSC approved the contract. The MPSC stated, however, that Consumers' shareholders must bear the revenue shortfall created by the difference between the contract's discounted rate and the floor price of an MPSC- authorized gas transportation rate. In 1995, Consumers filed an appeal with the Court of Appeals claiming that the MPSC decision denies Consumers the opportunity to earn its authorized rate of return and is therefore unconstitutional. In October 1997, the Court of Appeals issued an opinion affirming the MPSC's order. Consumers has sought a rehearing of the Court of Appeals opinion. For further information on Gas Proceedings, see the Consumers Gas Group Business Outlook section of this MD&A and Note 4.
Gas Cost Recovery Matters: In 1995, the MPSC issued an order favorable to Consumers' position in a $44 million contract pricing dispute (excluding interest) between Consumers and certain gas producers. The Court of Appeals upheld the MPSC order. The gas producers have now appealed to the Michigan Supreme Court. Consumers believes the MPSC order correctly concludes that the producers' theories are without merit. Consumers will vigorously oppose any claims the producers may raise, but cannot predict the outcome of this issue.
Gas Environmental Matters: Consumers expects that it will ultimately incur investigation and remedial action costs at a number of sites, including some that formerly housed manufactured gas plant facilities. Consumers estimates its costs related to investigation and remedial action at $48 million to $98 million. This estimate is based on undiscounted 1998 costs. Any significant change in assumptions, such as remediation technique, nature and extent of contamination and regulatory requirements, could affect the estimate of investigation and remedial action costs for the sites. For further information regarding environmental matters, see Note 10 .
Independent Power Production Results of Operations
Pretax Operating Income: The improved earnings in the independent power production business demonstrates the successful strategy to search for global opportunities. Pretax operating income for 1997 increased $28 million (43 percent) from 1996. This increase primarily reflects increased operating income resulting from increased international earnings, higher electricity sales by the MCV Facility, the industry expertise service fee income earned in connection with the Loy Yang transaction in 1997, and increased earnings attributable to the Loy Yang and Jorf Lasfar projects. These increases were offset by the absence of certain 1996 nonrecurring gains, including the gain on the sale of a power purchase agreement by a partnership in which CMS Generation owns a 50 percent interest. Pretax operating income for 1996 increased $22 million from 1995, primarily reflecting nonrecurring gains and increased operating income from a refund received by the MCV Partnership. See the Capital Resources and Liquidity - Capital Expenditures, and Outlook - International Operations Outlook sections of this MD&A for further discussion of Loy Yang and Jorf Lasfar.
Independent Power Production Operating Issues
Contracts to sell 11 percent of Loy Yang's capacity will expire during 1998. Although Loy Yang will make attempts to replace these contracts at comparable prices, there is no assurance that the new contracts will be at the same price. CMS Generation does not currently expect to incur significant capital costs, if any, at its power facilities to comply with current environmental regulatory standards.
Oil and Gas Exploration and Production Results of Operations
Pretax Operating Income: The oil and gas exploration and production segment of CMS Energy experienced continued growth in 1997. Pretax operating income for 1997 increased $11 million (28 percent) over 1996. This increase is the result of a gain on the sale of CMS NOMECO's entire interest in oil and gas properties in Yemen and 33 percent higher oil production. The increase is offset by lower oil and gas prices and gas production and higher operating expenses. Pretax operating income for 1996 increased $9 million from 1995, primarily due to higher oil and gas prices and volumes, partially offset by the recognition of a $10 million gain from assignment and novation of a gas supply contract recorded in the first quarter of 1995.
Natural Gas Transmission, Storage and Processing Results of Operations
Pretax Operating Income: Similar to the independent power production business, CMS Energy's natural gas transmission, storage and processing business earnings reflect the ability to acquire and develop major pipelines worldwide. Pretax operating income for 1997 increased $7 million (26 percent). The increase primarily reflects income attributable to the Australian pipeline acquired in 1997, income attributable to domestic and international operations and a gain on the sale of a portion of the Ames gas gathering system. These increases were partially offset by the 1996 gain resulting from the dissolution of the Moss Bluff and Grand Lacs partnerships. Pretax operating income for 1996 increased $14 million from 1995, reflecting new pipeline and storage investments, primarily TGN, the continued growth of existing projects, and a gain relating to the Moss Bluff and Grand Lacs partnerships.
Marketing, Services and Trading Results of Operations
Pretax Operating Income: CMS MST provides energy commodity marketing, risk management and energy management services to commercial and industrial customers throughout the United States and plans to expand operations worldwide. Pretax operating income for 1997 decreased $7 million from the 1996 period. The decrease is a result of substantially higher than expected natural gas prices that severely impacted CMS MST's ability to achieve positive margins on fixed price sales, and higher than expected start up costs. Despite the decreased earnings, CMS MST will continue to position itself for future growth in the new energy world. Gas marketed for end users totaled 243 bcf and 108 bcf for 1997 and 1996, respectively. Wholesale electric trading, a new marketing activity for CMS MST in 1997, totaled 900,000 MW. CMS MST completed over 300 energy management services projects resulting in $6 million in revenues.
Market Risk Information
CMS Energy is exposed to market risk including, but not limited to, changes in interest rates, currency exchange rates, and certain commodity and equity prices. Derivative instruments including, but not limited to, futures contracts, swaps, options and forward contracts may be used to manage these exposures. Derivatives are principally used as hedges and not for trading purposes. During 1997, trading activities were immaterial. In the case of hedges, management believes that any losses incurred on derivative instruments used as a hedge would be offset by the opposite movement of the underlying hedged item.
Management uses commodity futures contracts, options and swaps (which require a net cash payment for the difference between a fixed and variable price) and oil swaps to manage commodity price risk. They also use forward exchange contracts to hedge certain receivables, payables and long-term debt relating to foreign investments. Management also uses equity investments in which CMS Energy or its subsidiaries hold less than a 20 percent interest. These commodity, financial and equity instruments do not expose CMS Energy to material market risk.
Interest Rate Risk: Management uses a combination of fixed-rate and variable-rate debt to reduce interest rate exposure. Interest rate swaps and rate locks may be used to adjust exposure when deemed appropriate, based upon market conditions. These strategies attempt to provide and maintain the lowest cost of capital. The carrying amount of long-term debt was $ 3.3 billion at December 31, 1997 with a fair value of $3.3 billion. The fair value of CMS Energy's financial derivative instruments at December 31, 1997, with a notional amount of $1.1 billion, was $13 million, representing the amount that CMS Energy would have paid to terminate these agreements on December 31, 1997. For purposes of the new SEC disclosure requirements, CMS Energy performed a sensitivity analysis. The analysis assesses the potential loss in fair value, cash flows and earnings based upon hypothetical increases and decreases in market interest rates. A hypothetical 10 percent adverse shift in market rates in the near term would not have a material impact on CMS Energy's consolidated financial position, results of operations or cash flows as of December 31, 1997.
Limitations of the Sensitivity Model: Management does not believe that a sensitivity analysis alone provides an accurate or reliable method for monitoring and controlling risk. Therefore, CMS Energy and its subsidiaries rely on the experience and judgement of senior management and traders to revise strategies and adjust positions as they deem necessary. Losses in excess of the amounts determined could occur if market rates or prices exceed the 10 percent shift used for the analysis. The model assumes that the maximum exposure associated with purchased options is limited to premiums paid. The model does not take into consideration that the Trust Preferred Securities are convertible into CMS Energy Common Stock. The model assumes that conversion does not take place. If the conversion occurred, the $173 million of Trust Preferred Securities would be discharged through the issuance of 4.2 million shares of CMS Energy Common Stock. The model also does not quantify short-term exposure to hypothetically adverse price fluctuations in inventories.
For a discussion of accounting policies related to derivative transactions, see Note 9.
CAPITAL RESOURCES AND LIQUIDITY
Cash Position, Investing and Financing
CMS Energy's primary ongoing source of operating cash is dividends from subsidiaries. In 1997, Consumers paid $218 million in common dividends. In October 1997, Consumers returned $50 million of paid-in capital to CMS Energy. During 1997, Enterprises paid common dividends and other distributions of $173 million to CMS Energy. CMS Energy's consolidated operating cash requirements are further met by its operating and financing activities.
Operating Activities: CMS Energy's consolidated net cash provided by operating activities is derived mainly from the sale and transportation of natural gas by Consumers; the generation, transmission, and sale of electricity by Consumers; the sale of oil and natural gas; the transportation and storage of natural gas by CMS Gas Transmission; and the production and sale of electricity by other affiliates. Consolidated cash from operations totaled $657 million and $661 million for 1997 and 1996, respectively. The $4 million decrease resulted from changes in working capital and timing differences related to cash payments, cash receipts and the recognition of revenues for routine operations, which offset an increase in net income. CMS Energy uses its operating cash primarily to expand its international businesses, to maintain and expand electric and gas systems of Consumers, to retire portions of its long-term debt and to pay dividends.
Investing Activities: CMS Energy's consolidated net cash used in investing activities totaled $1.584 billion and $841 million for 1997 and 1996, respectively. The increase of $743 million primarily reflects increases in capital expenditures and investments in partnerships and unconsolidated subsidiaries during 1997. CMS Energy's 1997 expenditures for its utility and international businesses were $371 million and $1.181 billion, respectively, compared to $447 million and $432 million, respectively, during 1996.
Financing Activities: CMS Energy's net cash provided by financing activities totaled $938 million and $180 million for 1997 and 1996, respectively. The increase of $758 million in net cash provided by financing activities resulted from issuing the securities listed in the table below, an increase in notes payable and the reduction in the repayment of bank loans. The retirement of bonds and other long-term debt and the retirement of preferred stock partially offset the 1997 increase.
In Millions Distribution/ Principal Use of Month IssuedMaturity Interest Rate Amount Proceeds - -----------------------------------------------------------------
CMS Energy Senior Notes May 2002 8.125% $ 350 Fund Loy Yang Senior Notes September 2004 7.625% 180 Discharge debt Senior Notes November 2000 7.375% 300 Pay down Senior Credit Facilities
GTNs Series C (2) (2) 7.7% (2) 150 General corporate purposes Series D (2) (2) 7.3% (2) 78 General corporate purposes
Trust Preferred Securities (1) June 2027 7.75% (4) 173 General corporate purposes
Common Stock November N/A 4.142 shares 152 General corporate purposes ------ 1,383 Consumers Trust Preferred Securities(3) September 2027 8.20%(4) 120 Redeem preferred stock ------
Total $1,503 ======
(1)For additional information regarding the sale of these securities see Note 7 and note (b) on the Consolidated Balance Sheets. (2)GTNs are issued from time to time with various maturities. The rate shown herein is a weighted average interest rate. (3)For additional information regarding the sale of these securities see Note 7 and note (a) on the Consolidated Balance Sheets. (4)Distributions are tax deductible.
In 1997, CMS Energy paid $109 million in cash dividends to holders of CMS Energy Common Stock and $10 million in cash dividends to holders of Class G Common Stock. In January 1998, the Board of Directors declared a quarterly dividend of $.30 per share on CMS Energy Common Stock and $.31 per share on Class G Common Stock, payable in February 1998.
In July 1997, the Board of Directors declared quarterly dividends of $.30 per share on CMS Energy Common Stock and $.31 per share on Class G Common Stock. CMS Energy paid these dividends in August 1997, representing an increase in the annualized dividend on CMS Energy Common Stock to $1.20 per share from the previous amount of $1.08 per share (an 11 percent increase) and an increase in the annualized dividend on Class G Common Stock to $1.24 per share from the previous dividend of $1.18 per share (a 5 percent increase).
Other Investing and Financing Matters: At December 31, 1997, the book value per share of CMS Energy Common Stock and Class G Common Stock was $18.73 and $10.91, respectively.
As of December 31, 1997, CMS Energy could issue $241 million in deferred coupon notes, GTNs, CMS Energy Common Stock, subordinated debentures, stock purchase contracts, stock purchase units and Trust Preferred Securities under various outstanding shelf registration statements on file with the SEC.
In July 1997, CMS Energy refinanced a $450 million unsecured revolving credit facility and a $125 million term loan with the $1.125 billion Senior Credit Facilities. The Senior Credit Facilities consist of a $400 million 364-day revolving credit facility, a $600 million three-year revolving credit facility and a five-year $125 million term loan facility. Additionally, CMS Energy has unsecured lines of credit and letters of credit in an aggregate amount of $155 million. These credit facilities are available to finance working capital requirements and to pay for capital expenditures between long-term financings. At December 31, 1997, the total amount utilized under the Senior Credit Facilities was $365 million, including $60 million of contingent obligations, and under the unsecured lines of credit and letters of credit was $21 million.
CMS Energy has a bank commitment through March 1998 to enter into a $580 million credit agreement to fund investments in power projects.
In January 1998, a Delaware statutory business trust established by CMS Energy sold $180 million of certificates due January 15, 2005 in a public offering. In exchange for those proceeds, CMS Energy sold to the trust $180 million aggregate principal amount of 7 percent Extendible Tenor Rate Adjusted Securities due January 15, 2005. Net proceeds to CMS Energy from the sale totaled $176 million.
In January 1998, CMS Energy announced the commencement of an offer to exchange up to $300 million of its privately placed 7.375 percent Senior Unsecured Notes due 2000, Series A for 7.375 percent Senior Unsecured Notes due 2000, Series B that have been registered with the SEC. Other than their registration, the terms of the Series B Notes are substantially identical to the Series A (except that the Series B will not have transfer restrictions). The offer was completed in February 1998.
At December 31, 1997, Consumers had FERC authorization to: (i) issue or guarantee up to $900 million of short-term securities through 1998; (ii) issue, through November 1998, $376 million of long-term securities with maturities up to 30 years, for refinancing or refunding purposes; and (iii) guarantee, through 1999, up to $25 million in loans made by others, to residents of Michigan for the purpose of making energy-related home improvements. In January 1998, Consumers requested authorization to issue, through November 1998, an additional $500 million of long-term securities for refinancing or refunding purposes.
Consumers has an unsecured $425 million credit facility and unsecured lines of credit aggregating $120 million. These facilities are available to finance seasonal working capital requirements and to pay for capital expenditures between long-term financings. At December 31, 1997, the total available amount remaining under these facilities was $168 million.
Consumers also has in place a $500 million trade receivables sale program. At December 31, 1997, $165 million in receivables remained available for sale under the program. For further information, see Note 5.
CMS Energy and its subsidiaries must redeem or retire $1.7 billion of long-term debt over the three-year period ending December 2000. In addition, at December 31, 1997, Consumers had a recorded liability to the DOE of $111 million, which Consumers must pay upon the first delivery of spent nuclear fuel to the DOE. Current federal law originally scheduled delivery of the fuel to occur in 1998 (see Note 2). Consumers plans to refinance $850 million of its long-term debt during 1998 and will continue to evaluate capital markets as a source of financing further debt retirements. In early 1998, Consumers called for the March 1998 redemption of $57 million aggregate principal amount of its 7.5 percent First Mortgage Bonds due 2001 and $62 million aggregate principal amount of its 7.5 percent First Mortgage Bonds due 2002.
In early 1998, Consumers issued $250 million of senior notes due February 1, 2008, at an interest rate of 6.375 percent. The senior notes are secured by a series of Consumers' First Mortgage Bonds, issued contemporaneously in a similar amount. Proceeds from the sale were added to the general funds of Consumers and applied to the payment, at maturity, of $248 million aggregate principal amount of Consumers' 8.75 percent First Mortgage Bonds due February 15, 1998.
The following discussions in Capital Expenditures and Outlook contain forward-looking statements. See the Forward-Looking Information section of this MD&A for some important factors that could cause actual results or outcomes to differ materially from those discussed herein.
Capital Expenditures
In September 1997, a joint venture of affiliates of CMS Generation and ABB Energy Ventures, Inc. collectively invested $395 million for their equity contribution in the Jorf Lasfar project company. Equity bridge loans from private banks provided the funds for their equity investment. CMS Energy guaranteed CMS Generation's 50 percent share of the $395 million borrowing that funded the equity contribution. A consortium of governmental, multilateral and private financial institutions provided an estimated additional $920 million of non-recourse debt financing. Jorf Lasfar is a $1.5 billion privatization and expansion project. CMS Energy anticipates that reinvested cash from operations, estimated at $191 million, will provide the balance of the financing needed for Jorf Lasfar.
In the second quarter of 1997, a consortium comprising subsidiaries of CMS Generation, among others, financed, through a consortium of banks, seventy-seven percent of the consortium's $3.7 billion payment to the Australian State of Victoria government for the Loy Yang acquisition. This financing occurred on a non-recourse basis to CMS Energy and CMS Generation. CMS Generation holds a 50 percent interest in the Loy Yang consortium.
In December 1997, the State of Sergipe, Brazil selected a group consisting of CMS Energy affiliates and CFLCL, to acquire, in a privatization, an 86 percent interest in the Energipe electric distribution utility. By prior agreement, CMS Electric & Gas acquired 39 percent of the equity securities of CFLCL for $180 million, which funded CFLCL's investment in Energipe. CMS Electric & Gas may increase its ownership interest in CFLCL during the first half of 1998.
Looking forward, CMS Energy estimates that capital expenditures, including new lease commitments and investments in partnerships and unconsolidated subsidiaries, will total $3.7 billion over the next three years. Cash generated by operations is expected to satisfy a substantial portion of these capital expenditures. Nevertheless, CMS Energy will continue to evaluate capital markets in 1998 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 1998 1999 2000 - ------------------------------------------------------------------------
Consumers electric operations (a) (b) $ 320 $ 265 $ 255 Consumers gas operations (a) 115 115 115 Independent power production 368 469 400 Oil and gas exploration and production 110 160 175 Natural gas transmission and storage 210 61 100 International energy distribution 142 125 100 Marketing, services and trading 70 25 30 ------ ------ ------
$1,335 $1,220 $1,175 ====== ====== ======
(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.
(b) These amounts do not include preliminary estimates for capital expenditures possibly required to comply with recently revised national air quality standards under the Clean Air Act. For further information see Electric Utility Operating Issues - Electric Environmental Matters above and Note 10.
CMS Energy currently plans investments from 1998 to 2000: (i) for oil and gas exploration and production operations, primarily in North and South America, offshore West Africa and North Africa; (ii) for independent power production operations to pursue acquisitions and development of electric generating plants in the United States, Latin America, Asia, Australia, the Pacific Rim region, North Africa and the Middle East; (iii) to continue development of non-utility natural gas storage, gathering and pipeline operations of CMS Gas Transmission, both domestic and international; (iv) to acquire, develop and expand international energy distribution businesses; and (v) 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.
OUTLOOK
As the deregulation and privatization of the energy industry takes place in the United States and internationally, CMS Energy has positioned itself to be a leading international energy infrastructure company developing and operating energy facilities and providing energy services in all major world growth markets. CMS Energy provides a complete range of international energy expertise from well-head to burner-tip. Beyond 1997 it will continue to grow its businesses by finding opportunities to invest in additional energy infrastructures and to capitalize on being a major, full-service energy company. CMS Energy will increase its involvement in energy projects by pursuing opportunities in oil and gas exploration and development projects, natural gas pipelines and storage facilities, power generation, and electric and gas distribution systems around the world. In addition, CMS Energy will focus more on marketing energy services and trading to take advantage of continued growth opportunities in both the domestic and international markets.
International Operations Outlook
CMS Energy will continue to grow internationally by investing in multiple projects in each country as well as by developing synergistic projects across its lines of business. CMS Energy believes these integrated projects will create more opportunities and greater value than individual investments. Also, CMS Energy will achieve this growth through strategic partnering where appropriate.
To improve the efficiency and focus of its international energy businesses, CMS Energy will separate its development efforts from the operations of its assets. CMS Energy plans to conduct its development efforts from offices in four regions of the world: Dearborn, Michigan for The Americas - Northern Hemisphere; Buenos Aires for The Americas - Southern Hemisphere; London for Africa, Europe and the Middle East; and Singapore for Southeast Asia and Australia.
CMS Energy's development efforts will focus on countries where there are multiple investment opportunities across its businesses, high energy growth expectations, defined legal and regulatory structures, and economic policies that support private investment. CMS Energy will continue to create value by using the extensive knowledge and experience it has gained in the United States over the past century, to gain competitive positions in these countries.
CMS Energy structures its investments to minimize operational and financial risks. These risks are mitigated when operating internationally by working with local partners, utilizing multi-lateral financing institutions, procuring political risk insurance and hedging foreign currency exposure where appropriate.
Electric Business Outlook
Growth: Consumers expects average annual growth of two and one-half percent per year in electric system deliveries over the next five years, based on the present industry and regulatory configuration in Michigan. Abnormal weather, changing economic conditions, or the developing competitive market for electricity may affect actual electric sales in future periods.
Restructuring: Consumers' electric retail service is affected by competition. To meet the challenge of competition, Consumers entered into multi-year contracts with some of its largest industrial customers to serve certain facilities. The MPSC has approved these contracts as part of its phased introduction to competition. Certain customers have the option to terminate their contracts early.
FERC Orders 888 and 889, as amended, require utilities to provide direct access to the interstate transmission grid for wholesale transactions. Consumers and Detroit Edison disagree on the effect of the orders on the Michigan Electric Power Coordination Center pool. Consumers proposes to maintain the benefits of the pool, while Detroit Edison has given notice of early termination. Consumers expects FERC to rule on this issue in 1998.
In June 1997 the MPSC issued an order proposing that beginning January 1, 1998 Consumers would have to transmit and distribute energy on behalf of competing power suppliers to serve retail customers. The order states that by January 1, 2002, all customers would be free to choose (that is, have direct access to) their own power suppliers.
Under the June 1997 order, the MPSC would allow utilities to recover prudently incurred Transition Costs through a charge to all direct-access customers until the end of the transition period in 2007.
Subsequent to the June 1997 order, the MPSC issued orders in October 1997 and early in 1998. Ultimately, the MPSC allowed Consumers: (i) to recover Transition Costs of $1.755 billion through a charge to all direct- access customers until the end of the transition period in 2007, subject to an adjustment through a true-up mechanism; (ii) to commence the phase- in of direct access in March 1998; and (iii) to suspend the power supply cost recovery clause. The orders also confirm the MPSC's belief that Securitization may be a beneficial mechanism for recovery of Transition Costs while recognizing that Securitization requires state legislation to occur. Consumers believes that the Transition Cost surcharge will apply to all customers beginning in 2002. A separate charge to direct-access customers after MPSC review and verification would also recover prudent costs of implementing a direct-access program estimated at an additional $200 million. Nuclear decommissioning costs will also continue to be collected through a separate surcharge to all customers. Consumers expects Michigan legislative consideration of the entire subject of electric industry restructuring in 1998. To be acceptable to Consumers, the legislation would have to provide for full recovery of Transition Costs. Consumers expects the legislature to review all of the policy choices made by the MPSC during the restructuring proceedings to assure that they are in accord with those that the legislature believes should be paramount. For further information regarding restructuring, see Note 4.
Application of SFAS 71: Consumers applies the utility accounting standard, SFAS 71, that recognizes the economic effects of rate regulation and, accordingly, has recorded regulatory assets and liabilities related to the generation, transmission and distribution operations of its business in its financial statements. Consumers believes that the generation segment of its business is still subject to rate regulation based upon its present obligation to continue providing generation service to its customers, and the lack of definitive deregulation orders. 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 the generation segment of Consumers' business. 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. According to recently published Emerging Issues Task Force Issue 97-4, Deregulation of the Pricing of Electricity - Issues Related to the Application of FASB Statements No. 71 and 101, Consumers can continue to carry its generation-related regulatory assets or liabilities for the part of the business being deregulated if deregulatory legislation or an MPSC rate order allows the collection of cash flows from its regulated transmission and distribution customers to recover these specific costs or settle obligations. Consumers believes that even if it was to discontinue application of SFAS 71 for the generation segment of its business, its regulatory assets, including those related to generation, are probable of future recovery from the regulated portion of the business. At December 31, 1997, Consumers had $277 million of generation-related net regulatory assets recorded on its balance sheet, and a net investment in generation facilities of $1.4 billion included in electric plant and property. For further information regarding this issue, see Electric Business Outlook - Restructuring, above.
Consumers Gas Group Business Outlook
Growth: Consumers currently anticipates gas deliveries (excluding transportation to the MCV Facility and off-system deliveries) to grow at an average annual rate of between one and two percent over the next five years based primarily on a steadily growing customer base. Abnormal weather, alternative energy prices, changes in competitive conditions, and the level of natural gas consumption may affect actual gas deliveries in future periods. Consumers is also offering a variety of energy-related services to its customers focused upon appliance maintenance, home safety, and home security.
Restructuring In December 1997, the MPSC approved Consumers' application to implement a statewide, three-year experimental gas transportation pilot program, eventually allowing 300,000 residential, commercial and industrial retail gas sales customers to choose their gas supplier. The program is voluntary for natural gas customers. Customers choosing to remain as sales customers of Consumers will not see a rate change in their natural gas rates. To minimize the risk of exposure to higher gas costs, Consumers currently has contracts in place at known prices covering a portion of its requirements through the year 2000. ABATE, the Attorney General and other parties filed claims of appeal of the MPSC's order with the Court of Appeals. For further information, see Note 4 .
Application of SFAS 71: Based on a regulated utility accounting standard, SFAS 71, Consumers may 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 MATTERS
New Accounting Standards
In 1997, the FASB issued SFAS 130, Reporting Comprehensive Income, and SFAS 131, Disclosures about Segments of an Enterprise and Related Information. Each of these standards requires expanded disclosures effective for 1998. Also in 1997, the Emerging Issues Task Force published Issue 97-4, Deregulation of the Pricing of Electricity - Issues Related to the Application of FASB Statements No. 71 and 101, and Issue 97-13, Accounting for Costs Incurred in Connection with a Consulting Contract or an Internal Project that Combines Business Process Reengineering and Information Technology Transformation. The consensus reached in Issue 97-4 allows a company to maintain regulatory assets and liabilities for part of a business that is being deregulated if deregulatory legislation or a commission rate order allows the collection of regulated cash flows to recover costs or settle obligations. The regulated portion of a business maintains these regulatory assets and liabilities until they are collected or settled, they are impaired, or until the regulated portion of the business becomes deregulated. The consensus reached in Issue 97-13 requires a company to expense the cost of business process reengineering activities as incurred, and requires a company to write off previously capitalized costs as a cumulative effect adjustment in 1997. CMS Energy was not affected by the requirements of this consensus. In addition, CMS Energy does not expect the application of the other statements to materially affect its financial position, liquidity or results of operations.
Computer Modifications for Year 2000
CMS Energy and its subsidiaries use software and related technologies throughout its businesses that the year 2000 date change will affect and, if uncorrected, could cause CMS Energy, among other things, to issue inaccurate bills, report inaccurate data, or incur plant outages. In 1995, CMS Energy began modification of its computer software systems by dividing programs requiring modification between critical and noncritical programs. All necessary program modifications are expected to be completed by the year 2000. CMS Energy devoted significant internal and external resources to these modifications. It will expense anticipated spending for these modifications as incurred, while capitalizing and amortizing the costs for new software over the software's useful life. CMS Energy does not expect that the cost of these modifications will materially affect its financial position, liquidity or results of operations.
Foreign Currency Translation:
CMS Energy adjusts common stockholders' equity to reflect foreign currency translation adjustments for the operation of long-term investments in foreign countries. As of December 31, 1997 the foreign currency translation adjustment was $96 million relating primarily to the U.S. and Australian Dollar exchange rate fluctuations related to Loy Yang. CMS Energy currently believes that the Australian economy is stable and does not expect currency exchange rate fluctuations over the long term to materially adversely affect CMS Energy's financial position, liquidity or results of operations.
FORWARD-LOOKING INFORMATION
Forward-looking information is included throughout this report. This report also describes material contingencies 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 domestic and foreign governmental policies and regulatory actions (including those of FERC and the MPSC) with respect to rates, proposed electric and natural gas industries restructuring, change in industry and rate structure, operation of a nuclear power facility, 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 other important factors. 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 or deflation, capital market conditions, unanticipated development project delays or changes in project costs, 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 CMS Energy.
CMS Energy Corporation Notes to Consolidated Financial Statements
1: Corporate Structure
CMS Energy is the parent holding company of Consumers and Enterprises. Consumers, a combination electric and gas utility company serving the Lower Peninsula of Michigan, is the principal subsidiary of CMS Energy. Consumers' customer base includes a mix of residential, commercial and diversified industrial customers, the largest segment of which is the automotive industry. Enterprises is engaged in several domestic and international energy-related businesses including: acquisition, development and operation of independent power production facilities; oil and gas exploration and production; storage, transmission and processing of natural gas; energy marketing, services and trading; and international energy distribution.
2: Summary of Significant Accounting Policies and Other Matters
Basis of Presentation: The consolidated financial statements include CMS Energy, Consumers and Enterprises and their majority owned subsidiaries. The financial statements are prepared in conformity with generally accepted accounting principles and use management's estimates where appropriate. CMS Energy uses the equity method of accounting for investments in companies and partnerships where it has more than a 20 percent but less than a majority ownership interest and includes these results in operating income. For the years ended December 31, 1997, 1996 and 1995, undistributed equity earnings were $64 million, $64 million and $53 million, respectively.
Accretion Income and Expense: In 1991, the MPSC ordered that Consumers could recover a portion of its abandoned Midland investment over a 10-year period, but did not allow Consumers to earn a return on that amount. Consumers reduced the recoverable investment to the present value of the future recoveries. During the recovery period, Consumers adjusts the unrecovered asset to its present value. It reflects this adjustment as accretion income. Conversely, Consumers recorded a loss in 1992 for the present value of its estimated future underrecoveries of power costs resulting from purchases from the MCV Partnership (see Note 3). It now recognizes accretion expense annually to reflect the time value of money on the recorded loss.
Gas Inventory: Consumers uses the weighted average cost method for valuing working gas inventory. It records cushion gas, which is gas stored to maintain reservoir pressure for recovery of working gas, in the appropriate gas utility plant account. Consumers stores gas inventory in its underground storage facilities.
Maintenance, Depreciation and Depletion: Consumers charges property repairs and minor property replacements to maintenance expense. Depreciable property retired or sold, plus cost of removal (net of salvage credits), is charged to accumulated depreciation. Consumers bases depreciation provisions for utility plant on straight-line and units-of-production rates approved by the MPSC. The composite depreciation rate for electric utility property was 3.6 percent for 1997 and 3.5 percent for 1996 and 1995. The composite rate for gas utility plant was 4.1 percent for 1997, 4.2 percent for 1996 and 4.3 percent for 1995. The composite rate for other plant and property was 8.2 percent for 1997, 5.5 percent for 1996 and 4.9 percent for 1995.
CMS NOMECO follows the full-cost method of accounting and, accordingly, capitalizes its exploration and development costs, including the cost of non-productive drilling and surrendered acreage, on a country-by-country basis. It is amortizing the capitalized costs in each cost center on an overall units-of-production method based on total estimated proved oil and gas reserves.
Other non-utility depreciable property is amortized over its estimated useful life; gains and losses are recognized at the time of sale.
Nuclear Fuel Cost: Consumers amortizes nuclear fuel cost to fuel expense based on the quantity of heat produced for electric generation. Interest on leased nuclear fuel is expensed as incurred. Under current federal law, as confirmed by court decision, the DOE must begin accepting deliveries of spent nuclear fuel by January 31, 1998 for disposal, even if a permanent repository is not then operational. Utilities and their customers have been prepaying the costs of DOE transport and disposal through fees based on electric generation by their nuclear plants. For fuel used after April 6, 1983, Consumers charges disposal costs to nuclear fuel expense, recovers them through electric rates and remits to the DOE quarterly. Consumers elected to defer payment for disposal of spent nuclear fuel burned before April 7, 1983 until it delivers the first of its spent fuel to the DOE. At December 31, 1997, Consumers had a recorded liability to the DOE of $111 million, including interest, which is payable upon the first delivery of spent nuclear fuel to the DOE. Consumers recovered through electric rates the amount of this liability, excluding a portion of interest. In January 1997, in response to the DOE's declaration in December 1996 that it would not begin to accept spent nuclear fuel deliveries in 1998, Consumers and other utilities filed suit in federal court. The utilities sought a declaration relieving them of their obligation to remit their quarterly fee payments to the DOE and authorizing them to escrow any related fees collected from their customers, unless and until the DOE begins to accept spent nuclear fuel. The utilities also sought an order requiring the DOE to develop a program to begin acceptance of spent nuclear fuel by January 31, 1998. A decision was issued by the court in late 1997 affirming the DOE's duty to take delivery of spent fuel, but was not specific as to the relief available for failure of the DOE to comply. Consumers is considering its options. Also in 1997, federal legislation was reintroduced to clarify the timing of the DOE's obligation to accept spent nuclear fuel and to direct the DOE to establish an integrated spent fuel management system that includes designing and constructing an interim storage facility in Nevada.
Nuclear Plant Decommissioning: Consumers collected $50 million in 1997 from its electric customers for the future decommissioning of its two nuclear plants. In April 1996, Consumers received a decommissioning order from the MPSC that estimated decommissioning costs for Big Rock and Palisades to be $330 million and $573 million (in 1997 dollars), respectively. The estimated decommissioning costs increased from previous estimates principally due to the unavailability of low- and high-level radioactive waste disposal facilities. Amounts collected from electric retail customers and deposited in trusts (including trust earnings) are credited to accumulated depreciation. To meet NRC decommissioning requirements, Consumers prepared site-specific decommissioning cost estimates for Big Rock and Palisades, assuming that each plant site will eventually be restored to conform with the adjacent landscape, and that all contaminated equipment will be disassembled and disposed of in a licensed burial facility. The April 1996 MPSC Order also requires Consumers to file updated site-specific decommissioning cost estimates for Big Rock and Palisades by March 31, 1998. The Big Rock estimate will reflect the early shut-down and the switch from the safe storage option to immediate dismantlement because of the reopening of the South Carolina Barnwell radioactive waste disposal facility. After retirement of Palisades, Consumers plans to maintain the facility in protective storage if radioactive waste disposal facilities are not available. As a result, Consumers will incur most of the Palisades decommissioning costs after the plant's NRC operating license expires. When the Palisades' NRC license expires in 2007, the trust funds are currently estimated to have accumulated $686 million. Consumers estimates that at the time Palisades is fully decommissioned in the year 2046, the trust funds will have provided $2.1 billion, including trust earnings, over this decommissioning period. Consumers will determine if the current decommissioning surcharge will be sufficient to provide for decommissioning of its nuclear plants during the first quarter of 1998, after the revised decommissioning cost estimates are computed for Palisades and Big Rock. At December 31, 1997, Consumers had an investment in nuclear decommissioning trust funds of $486 million, spent $23 million for the decommissioning of Big Rock and withdrew $17 million from the Big Rock nuclear decommissioning trust fund.
While decommissioning Big Rock, Consumers found that some areas of the plant have coatings that contain both metals and polychlorinated biphenyls. Consumers does not believe that any facility in the United States currently accepts the radioactive portion of that waste. The cost of removal and disposal is currently unknown. These costs would constitute part of the cost to decommission the plant, and will be paid from the decommissioning fund. Consumers is studying the extent of the contamination and reviewing options.
Reclassifications: CMS Energy has reclassified certain prior year amounts for comparative purposes. These reclassifications did not affect consolidated net income for the years presented. Additionally, CMS Energy has restated all prior year earnings per share amounts to reflect the adoption of SFAS 128, Earnings Per Share, for comparative purposes.
Related-Party Transactions: In 1997, 1996 and 1995, Consumers purchased $51 million, $50 million and $53 million, respectively, of electric generating capacity and energy from affiliates of Enterprises. Affiliates of CMS Energy sold, stored and transported natural gas and provided other services to the MCV Partnership totaling $21 million, $17 million and $26 million for 1997, 1996 and 1995, respectively. For additional discussion of related-party transactions with the MCV Partnership and the FMLP, see Notes 3 and 22. Other related-party transactions are immaterial.
Revenue and Fuel Costs: Consumers accrues revenue for electricity and gas used by its customers but not billed at the end of an accounting period. Consumers accrues or reduces revenue for any underrecovery or overrecovery of electric power supply costs and natural gas costs by establishing a corresponding asset or liability until it bills or refunds these differences to customers following an MPSC order.
Utility Regulation: Consumers accounts for the effects of regulation based on a regulated utility accounting standard (SFAS 71). As a result, the actions of regulators affect when revenues, expenses, assets and liabilities are recognized. If all or a separable portion of Consumers' operations becomes no longer subject to the provisions of utility regulation, a write-off of related regulatory assets and liabilities would be required, unless some form of transition cost recovery continues through rates established and collected for Consumers' remaining operations. In addition, Consumers would be required to determine any impairment to the carrying costs of deregulated plant and inventory assets. For further discussion, see Electric Business Outlook and Consumers Gas Group Business Outlook - Application of SFAS 71, in the MD&A and Note 20.
Other: For significant accounting policies regarding cash equivalents, see Note 12; for income taxes, see Note 13; for executive incentive compensation, see Note 15; and for pensions and other postretirement benefits, see Note 16.
3: The Midland Cogeneration Venture
The MCV Partnership, which leases and operates the MCV Facility, contracted to sell electricity to Consumers for a 35-year period beginning in 1990 and to supply electricity and steam to The Dow Chemical Company. Consumers, through two wholly owned subsidiaries, holds the following assets related to the MCV Partnership and MCV Facility: (i) CMS Midland owns a 49 percent general partnership interest in the MCV Partnership; and (ii) CMS Holdings holds, through FMLP, a 35 percent lessor interest in the MCV Facility.
Summarized Statements of Income for CMS Midland and CMS Holdings (unaudited):
In Millions Years Ended December 31 1997 1996 1995 - ---------------------------------------------------------------------- Pretax operating income $46 $40 $35 Income taxes and other 14 11 10 --- --- --- Net income $32 $29 $25 === === ===
Power Purchases from the MCV Partnership: After September 2007, pursuant to the terms of the PPA and related undertakings, Consumers will only be required to pay the MCV Partnership the capacity charge and energy charge amounts authorized for recovery from electric customers by the MPSC. Prior to then, pursuant to MPSC orders issued to date, Consumers recovered in 1997 approximately 90 percent of the total capacity charge and energy charge amounts being billed by the MCV Partnership and paid to the MCV Partnership by Consumers. Currently, 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, the MPSC also permitted Consumers 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. It remains at this ceiling rate through the end of the PPA term.
Consumers recognized a loss in 1992 for the present value of the estimated future underrecoveries of power costs under the PPA. At December 31, 1997 and 1996, the after-tax present value of the PPA liability totaled $117 million and $147 million, respectively. The reduction in the liability since December 31, 1996 reflects after-tax cash underrecoveries of $41 million, partially offset by after-tax accretion expense of $11 million. The undiscounted after-tax amount associated with the liability totaled $188 million at December 31, 1997. The after-tax cash underrecoveries are currently based on the assumption that the MCV Facility will be available to generate electricity 91.5 percent of the time over its expected life. For 1997 the MCV Facility was available 99 percent of the time, resulting in $13 million over anticipated after-tax cash underrecoveries. Consumers believes it will continue to experience after-tax cash underrecoveries associated with the PPA in amounts as those shown below.
In Millions 1998 1999 2000 2001 2002 - ----------------------------------------------------------------- Estimated cash under- recoveries, net of tax $23 $22 $21 $20 $19
Consumers bases the above estimated underrecoveries, in part, on an estimate 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, Consumers will need to recognize losses for future underrecoveries larger than amounts previously recorded. Therefore, Consumers would experience larger amounts of cash underrecoveries than originally anticipated. Management will continue to evaluate the adequacy of the accrued liability considering actual MCV Facility operations.
In early 1998, the MCV Partnership filed a claim of appeal from the January 1998 MPSC order in the electric utility industry restructuring. On the same day, the MCV Partnership filed suit in the U.S. District Court seeking a declaration that the MPSC's failure to provide Consumers and the MCV Partnership a certain source of recovery of capacity payments after 2007 deprived the MCV Partnership of its rights under the Public Utilities Regulatory Policies Act of 1978. The MCV Partnership is seeking to prohibit the MPSC from implementing portions of the order.
PSCR Matters Related to Power Purchases from the MCV Partnership: As part of a 1995 decision in the 1993 PSCR reconciliation case, 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 decision. The MCV Partnership filed an application for leave to appeal with the Michigan Supreme Court which was denied in January 1998.
4: Rate Matters
Electric Proceedings: In 1996, the MPSC issued a final order that authorized Consumers to recover costs associated with the purchase of the additional 325 MW of MCV Facility capacity (see Note 3) and to accelerate recovery of its nuclear plant investment by increasing prospective annual nuclear plant depreciation expense by $18 million, with a corresponding decrease in fossil-fueled generating plant depreciation expense. It also established an experimental 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 and Consumers would transmit the power for a fee. The program is limited to 650 MW of load, of which existing special contracts represent 410 MW. New special contracts or direct-access load may fill 140 MW of the 650 MW block. The remaining 100 MW will be 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. Direct access for a portion of this 100 MW began during the fourth quarter of 1997.
In May 1997, the MPSC authorized Consumers to collect $17 million from electric customers through a one-time surcharge pertaining to the 1994 PSCR reconciliation. In September 1997, the MPSC further authorized Consumers to collect $13 million from electric customers through a one- time surcharge pertaining to the 1995 PSCR reconciliation.
In January 1998, the Court of Appeals ruled that the MPSC has statutory authority to authorize an experimental electric retail wheeling program. By its terms, no retail wheeling has yet occurred pursuant to that program. Consumers filed with the Michigan Supreme Court seeking leave to appeal that ruling.
For information on other orders, see the Electric Restructuring section below.
Electric Restructuring: As part of ongoing proceedings relating to the restructuring of the electric utility industry in Michigan, in June 1997 the MPSC issued an order proposing that beginning January 1, 1998 Consumers would have to transmit and distribute energy on behalf of competing power suppliers to serve retail customers. The order states that by January 1, 2002, all customers would be free to choose (that is, have direct access to) their own power suppliers.
Under the June 1997 order, the MPSC would allow utilities to recover prudently incurred Transition Costs through a charge to all direct-access customers until the end of the transition period in 2007. Further proceedings, as ordered by the MPSC, took place to address other features of the direct-access programs being considered, including proposals to "true up" Transition Cost charges for changes in sales and market prices of power purchase capacity to the extent they are different from estimates used for calculating Transition Costs. The June order is subject to a claim of appeal filed with the Court of Appeals which questions whether the MPSC has the statutory authority to mandate restructuring on an involuntary basis. In October 1997, the MPSC issued a series of additional orders relating to its electric industry restructuring proceedings. The orders primarily addressed issues involving the design of retail direct-access tariffs, the true-up mechanism in connection with the recovery of Transition Costs, suspension of the power supply cost recovery clause and freezing of power supply costs, and performance-based rate-making.
In January 1998 the MPSC clarified the October 1997 orders on a basis generally consistent with the June 1997 order. The January 1998 order: i) defers the commencement of the phase-in of direct access to begin in March 1998; ii) attempts to clarify the true-up mechanism to be used in connection with the recovery of Transition Costs; iii) confirms implementation of a suspension of the power supply cost recovery clause; and iv) confirms the MPSC's belief that Securitization may be a beneficial mechanism for recovery of Transition Costs while recognizing that Securitization requires state legislation to occur. Consumers expects Michigan legislative consideration of the entire subject of electric industry restructuring in 1998. To be acceptable to Consumers, the legislation would have to provide for full recovery of Transition Costs. Consumers expects the legislature to review all of the policy choices made by the MPSC during the restructuring proceedings to assure that they are in accord with those that the legislature believes should be paramount.
The January 1998 order further estimated a Transition Cost for Consumers at $1.755 billion which is generally consistent with the amount proposed by Consumers. Consumers will recover this cost through a surcharge to direct-access customers through 2007. Consumers believes that this surcharge will apply to all customers beginning in 2002. The surcharge is subject to adjustment through a true-up mechanism to assure that Transition Costs actually incurred are collected. A separate charge to direct-access customers after MPSC review and verification would also recover prudent costs of implementing a direct-access program estimated at an additional $200 million. Nuclear decommissioning costs will also continue to be collected through a separate surcharge to all customers.
Subsequent to the January order, the MPSC issued an order addressing Consumers', among others, motions for clarification of the January order. This order results in: i) a suspension of the PSCR in a manner proposed by Consumers; ii) a termination of the 1998 PSCR plan case; and iii) the establishing of a permanent PSCR/base rate freeze charge in the 1997 PSCR reconciliation proceeding. For further information see Electric Business Outlook - Application of SFAS 71 in the MD&A.
Gas Restructuring: In December 1997, the MPSC approved Consumers' application to implement a statewide experimental gas transportation pilot program. Consumers' expanded experimental program will extend over a three-year period, eventually allowing 300,000 residential, commercial and industrial retail gas sales customers to choose their gas supplier. The program is voluntary for natural gas customers. Participating customers will be selected on a first-come, first-served basis, up to a limit of 100,000 customers on April 1, 1998. Up to 100,000 more customers will be added on April 1 of each of the next two years. Customers choosing to remain as sales customers of Consumers will not see a rate change in their natural gas rates. The order allowing the implementation of this program: (i) suspends Consumers' gas cost recovery clause, effective April 1, 1998 for a three-year period, establishing a gas commodity cost at a fixed rate of $2.84 per mcf; (ii) establishes an earnings sharing mechanism that will provide for refunds to customers if Consumers' earnings during the three year term of the program exceed certain pre-determined levels; and (iii) establishes a gas transportation code of conduct that addresses concerns about the relationship between Consumers and marketers, including its affiliated marketers. This experimental program will allow competing gas suppliers, including marketers and brokers, to market natural gas to a large number of retail customers in direct competition with Consumers. In 1998, the Attorney General, ABATE and other parties filed claims of appeal regarding the program with the Court of Appeals. To minimize the risk of exposure to higher gas costs, Consumers currently has contracts in place at known prices covering 50 percent of its 1998 requirements, 25 percent of its 1999 requirements and 15 percent of its 2000 requirements. Additional forward coverage is currently under review and will be firmed up during the next few months. For further information see Consumers Gas Group Business Outlook - Application of SFAS 71 in the MD&A.
Gas Proceedings: In 1995, the MPSC issued an order regarding a $44 million (excluding interest) gas supply contract pricing dispute between Consumers and certain gas producers. The order stated that Consumers was not obligated to seek prior approval of market-based pricing changes that Consumers implemented under the contracts in question. The Court of Appeals upheld the MPSC order. The producers sought leave to appeal with the Michigan Supreme Court. Their request is still pending. 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 materially affect CMS Energy's financial position, liquidity or results of operations.
5: Short-Term Financings
At December 31, 1997, Consumers had FERC authorization to: (i) issue or guarantee up to $900 million of short-term securities through 1998; (ii) issue, through November 1998, $376 million of long-term securities with maturities up to 30 years, for refinancing or refunding purposes; and (iii) guarantee, through 1999, up to $25 million in loans made by others, to residents of Michigan for the purpose of making energy-related home improvements. In January 1998, Consumers requested authorization to issue, through November 1998, an additional $500 million of long-term securities for refinancing or refunding purposes.
Consumers has an unsecured $425 million credit facility and unsecured lines of credit aggregating $120 million. These facilities are available to finance seasonal working capital requirements and to pay for capital expenditures between long-term financings. At December 31, 1997, a total of $377 million was outstanding at a weighted average interest rate of 6.5 percent, compared with $333 million outstanding at December 31, 1996, at a weighted average interest rate of 6.3 percent.
Consumers also has in place a $500 million trade receivables sale program. At December 31, 1997 and 1996, receivables sold under the program totaled $335 million and $318 million, respectively. Accounts receivable and accrued revenue in the Consolidated Balance Sheets have been reduced to reflect receivables sold.
6: Long-Term Debt
Long-term debt consists of the following:
(a) Represents the weighted average interest rate at December 31, 1997. (b) Due date uncertain (see Note 2).
The scheduled maturities of long-term debt and improvement fund obligations are as follows: $609 million in 1998, $466 million in 1999, $662 million in 2000, $192 million in 2001 and $759 million in 2002.
CMS Energy
In July 1997, CMS Energy refinanced a $450 million unsecured revolving credit facility and a $125 million term loan with the $1.125 billion Senior Credit Facilities. The Senior Credit Facilities consist of a $400 million 364-day revolving credit facility, a $600 million three-year revolving credit facility and a five-year $125 million term loan facility. Additionally, CMS Energy has unsecured lines of credit and letters of credit in an aggregate amount of $155 million. At December 31, 1997, the total amount utilized under the Senior Credit Facilities was $365 million, including $60 million of contingent obligations, and under the unsecured lines of credit and letters of credit was $21 million.
In January 1998, a Delaware statutory business trust established by CMS Energy sold $180 million of certificates due January 15, 2005 in a public offering. In exchange for those proceeds, CMS Energy sold to the trust $180 million aggregate principal amount of 7 percent Extendible Tenor Rate Adjusted Securities due January 15, 2005. Net proceeds to CMS Energy from the sale totaled $176 million.
In January 1998, CMS Energy announced the commencement of an offer to exchange up to $300 million of its 7.375 percent Senior Unsecured Notes due 2000, Series A for 7.375 percent Senior Unsecured Notes due 2000, Series B that have been registered with the SEC. Other than their registration, the terms of the Series B Notes are substantially similar to the Series A(except that the Series B will not have transfer restrictions). The offer was completed in early 1998.
Consumers
First Mortgage Bonds: Consumers secures its first mortgage bonds by a mortgage and lien on substantially all of its property. Consumers' ability to issue and sell securities is restricted by certain provisions in its First Mortgage Bond Indenture, its Articles of Incorporation and the need for regulatory approvals to meet appropriate federal law.
In early 1998, Consumers called for the March 1998 redemption of $57 million aggregate principal amount of its 7.5 percent First Mortgage Bonds due in 2001 and $62 million aggregate principal amount of its 7.5 percent First Mortgage Bonds due in 2002.
In early 1998, Consumers issued $250 million of senior notes due February 1, 2008, at an interest rate of 6.375 percent. The senior notes are secured by a series of Consumers' First Mortgage Bonds, issued contemporaneously in a similar amount. Proceeds from the sale were added to the general funds of Consumers and applied to the payment, at maturity, of $248 million aggregate principal amount of Consumers' 8.75 percent First Mortgage Bonds due February 15, 1998.
Long-Term Bank Debt: Consumers has a $400 million unsecured, variable rate, long-term loan.
In January 1998, two agreements to guarantee interest rates for the issuance of future long-term debt were executed. The first anticipatory debt agreement is for $250 million at 5.5 percent which expires February 10, 1998, and the second agreement is for $200 million at 5.8 percent with an expiration of March 16, 1998.
Other: Consumers' long-term pollution control revenue bonds are secured by irrevocable letters of credit or First Mortgage Bonds.
CMS NOMECO
CMS NOMECO has a $225 million revolving credit facility that converts to term loans maturing from March 1999 through March 2003.
CMS Generation
In January 1998, CMS Generation refinanced a $110 million, five-year term loan with a loan provided by CMS Capital Corp., a subsidiary of Enterprises.
7: Capitalization
CMS Energy
The authorized capital stock of CMS Energy consists of 250 million shares of CMS Energy Common Stock, 60 million shares of Class G Common Stock, and 10 million shares of CMS Energy Preferred Stock.
In 1996, CMS Energy received net proceeds of $95 million from the issuance of CMS Energy and Class G Common Stock. The issuance of 2.1 million of those shares completed the amount remaining on a February 15, 1995 shelf- registration filing with the SEC that covered the issuance of up to $200 million of securities. CMS Energy used the proceeds from the sale for general corporate purposes.
In May 1997, CMS Energy and affiliated business trusts filed a shelf- registration statement with the SEC to issue and sell up to $300 million of CMS Energy Common Stock, subordinated debentures, stock purchase contracts, stock purchase units and preferred securities. In June 1997, 3.45 million units of 7.75 percent tax deductible Trust Preferred Securities were issued and sold through CMS Energy Trust I, a wholly owned business trust consolidated with CMS Energy. Net proceeds from the sale totaled $170 million. CMS Energy formed the trust for the sole purpose of issuing tax deductible Trust Preferred Securities. Its primary asset is approximately $178 million principal amount of 7.75 percent subordinated debentures issued by CMS Energy, which mature in 2027. These tax deductible Trust Preferred Securities are convertible into CMS Energy Common Stock at a rate equivalent to a conversion price of $40.80 per share of CMS Energy Common Stock. CMS Energy used proceeds of the subordinated debentures for general corporate purposes including repayment of debt, capital expenditures, investment in subsidiaries and working capital. CMS Energy's obligations under the subordinated debentures, the indenture through which CMS Energy issued the subordinated debentures, the declaration of trust and the CMS Energy guarantee provide, in the aggregate, a full irrevocable and unconditional guarantee of payments of distributions and other amounts due on the Trust Preferred Securities. For additional information, see note (b) on the Consolidated Balance Sheets.
In November 1997, CMS Energy received net proceeds of $152 million from the issuance of 4.142 million shares of CMS Energy Common Stock. The issuance of those shares completed the amount remaining on the May 1997 shelf-registration with the SEC. Proceeds from the sale were used for general corporate purposes.
Other: Under its most restrictive borrowing arrangement at December 31, 1997, none of CMS Energy's consolidated net income was restricted for payment of common dividends. CMS Energy could pay $354 million in common dividends under its most restrictive debt covenant.
Consumers
In 1996, 4 million shares of 8.36 percent Trust Preferred Securities were issued and sold through Consumers Power Company Financing I, a wholly owned business trust consolidated with Consumers. Net proceeds from the sale totaled $97 million. In September 1997, 4.8 million shares of 8.20 percent Trust Preferred Securities were issued and sold through Consumers Energy Company Financing II, a wholly owned business trust consolidated with Consumers. Net proceeds from the sale totaled $116 million. Consumers formed both trusts for the sole purpose of issuing the tax deductible Trust Preferred Securities. Consumers' obligations with respect to the Trust Preferred Securities under the notes, under the indenture through which Consumers issued the notes, under Consumers' guarantee of the Trust Preferred Securities, and under the declaration by the trusts, taken together, constitute a full and unconditional guarantee by Consumers of the trusts' obligations under the Trust Preferred Securities. For additional information, see Note (a) on the Consolidated Balance Sheets.
In September 1997, the proceeds from the 8.20 percent Trust Preferred Securities were used by Consumers to redeem all outstanding shares of its $7.45, $7.68, $7.72 and $7.76 preferred stock for $120 million.
Under the provisions of its Articles of Incorporation at December 31, 1997, Consumers had $280 million of unrestricted retained earnings available to pay common dividends. In October 1997, Consumers returned $50 million of paid-in capital to CMS Energy.
8: Earnings Per Share and Dividends
EPS attributable to Common Stock for 1997 and 1996 reflect the performance of the Consumers Gas Group. Earnings per share attributable to Common Stock for the year ended December 31, 1995 reflect the performance of the Consumers Gas Group since initial issuance of Class G Common Stock during the third quarter of 1995. The Class G Common Stock has participated in earnings and dividends from its original issue date in July 1995. The allocation of earnings 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 attributable to the Outstanding Shares are equal to Consumers Gas Group net income multiplied by a fraction; the numerator is the weighted average number of Outstanding Shares during the period and the denominator is the weighted average number of Outstanding Shares and retained interest shares, shares not held by the holders of the Outstanding Shares, during the period. The earnings attributable to Class G Common Stock on a per share basis for 1997 and 1996 are based on 24.50 percent and 23.79 percent, respectively, of the income of Consumers Gas Group. The earnings attributable to Class G Common Stock on a per share basis, for the year ended December 31, 1995, are based on 23.45 percent of the income of the Consumers Gas Group since the initial issuance.
Computation of Earnings Per Share:
In Millions, Except Per Share Amounts Actual Actual Actual Pro Forma Years Ended December 31 1997 1996 1995 1995 - ------------------------------------------------------------------------- Net Income Applicable to Basic and Diluted EPS: Consolidated Net Income $268 $240 $204 $204 ==== ==== ==== ==== Net Income Attributable to Common Stocks: CMS Energy - Basic EPS $253 $226 $201 $189 Add conversion of 7.75% Trust Preferred Securities (net of tax) 5 - - - ---- ---- ---- ---- CMS Energy - Diluted EPS $258 $226 $201 $189 ==== ==== ==== ==== Class G: Basic and Diluted EPS $ 15 $ 14 $ 3 $ 15 ==== ==== ==== ====
Average Common Shares Outstanding Applicable to Basic and Diluted EPS: CMS Energy: Average Shares - Basic 96.1 92.5 88.8 88.8 Add conversion of 7.75% Trust Preferred Securities 2.3 - - - Options-Treasury Shares 0.3 0.2 0.2 0.2 ---- ---- ---- ----
Average Shares - Diluted 98.7 92.7 89.0 89.0 ==== ==== ==== ==== Class G: Average Shares Basic and Diluted 8.0 7.7 7.5 7.5 ==== ==== ==== ====
Earnings Per Average Common Share CMS Energy: Basic $2.63 $2.45 $2.27 $2.14 Diluted $2.61 $2.44 $2.26 $2.13 Class G: Basic and Diluted $1.84 $1.82 $ .38 $1.93 ==== ==== ==== ====
Pro forma data for the year ended December 31, 1995 gives effect to the issuance and sale of 7.52 million shares of Class G Common Stock (representing 23.50 percent of the equity attributable to Consumers Gas Group) as if it occurred on January 1, 1995.
Holders of Class G Common Stock have no direct rights in the equity or assets of Consumers Gas Group, but rather have rights in the equity and assets of CMS Energy as a whole. In the sole discretion of the Board of Directors, CMS Energy may pay dividends exclusively to the holders of Class G Common Stock, exclusively to the holders of CMS Energy Common Stock, or to the holders of both classes in equal or unequal amounts. The Board of Directors has stated its intention to declare and pay dividends on the CMS Energy Common Stock based primarily on the earnings and financial condition of CMS Energy. Dividends on Class G Common Stock are paid at the discretion of the Board of Directors based primarily upon the earnings and financial condition of Consumers Gas Group, and to a lesser extent, CMS Energy as a whole.
In February and May 1997, CMS Energy paid dividends of $.27 per share on CMS Energy Common Stock and $.295 per share on Class G Common Stock. In August and November 1997, CMS Energy paid dividends of $.30 per share on CMS Energy Common Stock and $.31 per share on Class G Common Stock. In January 1998, the Board of Directors declared a quarterly dividend of $.30 per share on Energy Common Stock and $.31 per share on Class G Common Stock, which were paid in February 1998.
9: Risk Management Activities and Derivatives Transactions
CMS Energy and its subsidiaries use a variety of derivative instruments (derivatives), including futures contracts, swaps, options and forward contracts, to manage exposure to fluctuations in commodity prices, interest rates and foreign exchange rates. To qualify for hedge accounting, derivatives must meet the following criteria: (i) the item to be hedged exposes the enterprise to price, interest or exchange rate risk; and (ii) the derivative reduces that exposure and is designated as a hedge.
Derivative instruments contain credit risk if the counterparties, including financial institutions and energy marketers, fail to perform under the agreements. CMS Energy minimizes such risk by performing financial credit reviews using, among other things, publicly available credit ratings of such counterparties. The risk of nonperformance by the counterparties is considered remote.
Commodity Price Hedges: CMS Energy accounts for its commodity price derivatives as hedges, as defined above, and as such, defers any changes in market value and gains and losses resulting from settlements until the hedged transaction is complete. If there was a loss of correlation between the changes in (i) the market value of the commodity price contracts and (ii) 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 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 1997 commodity price contracts on 13.8 bcf of gas at prices ranging from $1.92 to $2.80 per MMBtu and on 2 million barrels of oil at prices ranging from $19.50 to $22.90 per barrel. During 1997, CMS NOMECO made net payments of $6 million for settlement of 1997 contracts on 14.1 bcf of gas and 2 million barrels of oil.
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 through 2006 by purchasing the economic equivalent of 10,000 MMBtu per day at a fixed price, escalating at 8 percent per year thereafter, 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 million 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. Accordingly, at December 31, 1997, a letter of credit was not required by either party to the agreement. As of December 31, 1997, the fair value of this contract reflected a payment due from CMS NOMECO of $13 million.
CMS MST uses natural gas futures contracts, options and swaps (which require a net cash payment for the difference between a fixed and variable price).
Interest Rates Hedges: CMS Energy and some of its subsidiaries enter into interest rate swap agreements to exchange variable rate interest payment obligations to fixed rate obligations without exchanging the underlying notional amounts. These agreements convert variable rate debt to fixed rate debt to reduce the impact of interest rate fluctuations. The notional amounts parallel the underlying debt levels and are used to measure interest to be paid or received and do not represent the exposure to credit loss. The notional amount of CMS Energy's and its subsidiaries' interest rate swaps was $1.1 billion at December 31, 1997. The difference between the amounts paid and received under the swaps is accrued and recorded as an adjustment to interest expense over the life of the hedged agreement.
Foreign Exchange Hedges: CMS Energy uses forward exchange contracts to hedge certain receivables, payables, and long-term debt relating to foreign investments. The purpose of CMS Energy's foreign currency hedging activities is to protect the company from the risk that U.S. dollar net cash flows resulting from sales to foreign customers and purchases from foreign suppliers and the repayment of non-U.S. dollar borrowings may be adversely affected by changes in exchange rates. These contracts do not subject CMS Energy to risk from exchange rate movements because gains and losses on such contracts offset losses and gains, respectively, on assets and liabilities being hedged. The notional amount of the outstanding foreign exchange contracts was $50 million at December 31, 1997.
10: Commitments, Contingencies and Other
Electric Environmental Matters: The Clean Air Act limits emissions of sulfur dioxide and nitrogen oxides and requires 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. During the past few years, in order to comply with the Act, Consumers incurred capital expenditures totaling $46 million to install equipment at certain generating units. Consumers estimates capital expenditures for in-process and proposed modifications at other coal-fueled units to be an additional $30 million by the year 2000. Management believes that these expenditures will not materially affect Consumers' annual operating costs.
Consumers currently operates within all Clean Air Act requirements and meets current ozone and particulate emission limits. The Act requires the EPA to review, periodically, the effectiveness of the national air quality standards in preventing adverse health affects. The EPA recently revised these standards. The revisions may further limit small particulate and ozone related emissions. Consumers supports the bipartisan effort in the U.S. Congress to delay implementation of the revised standards until the relationship between the new standards and health improvements is established scientifically.
In October 1997, pursuant to recommendations from the Ozone Transport Assessment Group and the requests of several Northeastern states, the EPA proposed that the State of Michigan impose additional nitrogen oxide limits on fossil-fueled emitters, such as Consumers' generating units. The limits are an effort to reduce statewide nitrogen oxide emissions by 32 percent, as early as 2002. The State of Michigan will have one year to review and challenge the proposed recommendations, and one year after that to implement final requirements. It is unlikely that the State of Michigan will establish Consumers' nitrogen oxide emissions reduction target until mid-to-late 1999. Until this state-mandated target is known, the estimated cost of compliance is subject to significant revision.
The preliminary estimate of capital costs to reduce nitrogen oxide related emissions for Consumers' fossil-fueled generating units is approximately $175 million, plus an additional amount totaling $10 million per year for 20 years for operation and maintenance costs. Consumers may need an equivalent amount to comply with the new small particulate standards. The State of Michigan objected to the extent of the proposed EPA emission reductions. If the State of Michigan's position were to be adopted by the EPA, costs could be less than the current estimated amounts.
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. Nevertheless, it believes that these costs are properly recoverable in rates under current ratemaking policies.
Consumers is a so-called potentially responsible party at several contaminated sites administered under Superfund. Superfund liability is joint and several; along with Consumers, many other creditworthy, potentially responsible parties with substantial assets cooperate with respect to the individual sites. Based upon past negotiations, Consumers estimates that its share of the total liability for the known Superfund sites will be between $3 million and $9 million. At December 31, 1997, Consumers has accrued $3 million for its estimated Superfund liability.
Gas Environmental Matters: 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 23 sites that formerly housed manufactured gas plant facilities, even those in which it has a partial or no current ownership interest. In 1998 Consumers plans to study indoor air issues at residences on some sites and ground water impacts or surface soil impacts at other sites. On sites where the company has received site-wide study plan approvals, it will continue to implement these plans. It will also work toward closure of environmental issues at sites as studies are completed. 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 1998 costs. At December 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. According to an MPSC rate order issued in 1996, Consumers will defer and amortize, over a period of ten years, environmental clean-up costs above the amount currently being recovered in rates. 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 it may incur for these sites.
Capital Expenditures: CMS Energy estimates capital expenditures, including investments in unconsolidated subsidiaries and new lease commitments, of $1.335 billion for 1998, $1.220 billion for 1999 and $1.175 billion for 2000. For further information regarding capital expenditures, see Capital Resources and Liquidity - Capital Expenditures in the MD&A.
Commitments for Coal and Gas Supplies: Consumers entered into coal supply contracts with various suppliers for its coal-fired generating stations. These contracts have expiration dates that range from 1998 to 2004. Consumers contracts for 50 - 75 percent of its annual coal requirements totaling $250 million in 1997 (56 percent was under long-term contracts). Consumers supplements its long-term contracts with spot-market purchases to fulfill its coal needs.
Consumers entered into gas supply contracts and transportation contracts with various suppliers for its natural gas business. These contracts have expiration dates that range from 1998 to 2003. Consumers' 1997 gas requirements totaled 250 bcf at a cost of $694 million, 80 percent of which was under long-term contracts for one year or more. As of the end of 1997, Consumers had 50 percent of its 1998 gas requirements under such long-term contracts, and will supplement them with additional long-term contracts and spot-market purchases.
Other: As of December 31, 1997, CMS Energy and Enterprises have guaranteed up to $543 million in contingent obligations of unconsolidated affiliates and unrelated parties.
Various parties have sued 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. It also has an ongoing mitigation program to modify the service of all customers with livestock.
In December 1997, the Michigan Supreme Court remanded for further proceedings a 1994 Michigan trial court decision that refused to allow the claims of over 200 named plaintiffs to be joined in a single action. The trial court dismissed all of the plaintiffs except the first-named plaintiff, allowing the others to re-file separate actions. Of the original plaintiffs, only 49 re-filed separate cases. All of those 49 cases have been resolved. The Michigan Supreme Court remanded the matter, finding that the proper remedy for misjoinder was not dismissal, but to automatically allow each case to go forward separately. Consumers filed a motion for reconsideration with the Michigan Supreme Court, which was denied. Consumers intends to vigorously defend these cases, but is unable to predict the outcome. As of December 31, 1997, Consumers had 12 individual stray voltage lawsuits, unrelated to the cases above, awaiting trial court action, down from 22 lawsuits as reported at year end 1996.
In October 1997, two independent power producers sued Consumers and CMS Energy in a federal court. The suit alleges antitrust violations relating to contracts which Consumers entered into with some of its customers and claims relating to power facilities. The plaintiffs claim damages of $100 million (which a court can treble in antitrust cases as provided by law). The transactions of which plaintiffs complain have been regulated by, and are subject to, the jurisdiction of the MPSC. In November 1997, Consumers and CMS Energy filed a motion for summary judgement and/or for dismissal of the complaint filed by the plaintiffs. Consumers and CMS Energy believe the lawsuit is without merit and will vigorously defend against it, but cannot predict the outcome of this matter.
Under agreements relating to CMS NOMECO's 1995 acquisition of Walter International, Inc. and its Congo operations, CMS Energy and CMS NOMECO could become jointly and severally liable for the recapture of "dual consolidated losses" under Section 1503(d) of the IRC if a "triggering event" were to occur. Potential triggering events include certain asset or stock dispositions to unrelated parties, certain tax deconsolidations, certain usage of the losses on a foreign tax return, and certain failures to comply with Internal Revenue Service regulations. CMS Energy and CMS NOMECO have no plans to effect any transaction that would be a triggering event. The amount of the potential tax liability could be up to $67 million plus interest. In connection with the same acquisition, a subsidiary of CMS NOMECO could also be jointly and severally liable with an unrelated party for up to $50 million of tax plus interest. In that event, CMS NOMECO has certain indemnity rights against that unrelated party. Additionally, CMS NOMECO and its domestic subsidiaries have incurred losses in certain foreign countries that could be recaptured if a triggering event were to occur. The additional tax liability could be up to $10 million plus interest.
In addition to the matters disclosed in these Notes, Consumers and certain other subsidiaries of CMS Energy are parties to certain lawsuits and administrative proceedings before various courts and governmental agencies arising from the ordinary course of business. These lawsuits and proceedings may involve 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 adverse impact on CMS Energy's financial position, liquidity, or results of operations.
11: Nuclear Matters
Consumers filed updated decommissioning information with the MPSC in 1995 that estimated decommissioning costs for Big Rock and Palisades. In April 1996, the MPSC issued an order in Consumers' nuclear decommissioning case, which fully supported Consumers' request and did not change the overall surcharge revenues collected from retail customers. The MPSC ordered Consumers to file a report on the adequacy of the surcharge revenues with the MPSC at three-year intervals beginning in 1998. Consumers filed a revision to its Post Shutdown Activities Report (formerly decommissioning report) with the NRC to reflect the shutdown of Big Rock.
Big Rock closed permanently on August 29, 1997 because management determined that the plant would be uneconomical to operate in an increasingly competitive environment. Consumers originally scheduled the plant to close May 31, 2000, at the end of the plant's operating license. Plant decommissioning began in September 1997 and may take five to ten years to return the site to its original condition. The earlier than planned closure of the plant and the reopening of the South Carolina Barnwell facility to receive low level radioactive waste have changed the method of decommissioning from the safe storage option to immediate dismantlement. This change could have an impact on the estimated decommissioning cost which is required to be updated in a filing with the MPSC by March 31, 1998. For further information on nuclear matters, see Note 2.
Consumers has loaded 13 dry storage casks with spent nuclear fuel at Palisades. Consumers plans to load five additional casks at Palisades in 1999 pending approval by the NRC. In June 1997, the NRC approved Consumers' process for unloading spent fuel from a cask at Palisades previously discovered to have minor weld flaws. Consumers intends to transfer the spent fuel to a new transportable cask when one is available. Westinghouse Corporation has been contracted to design and fabricate transportable casks for both Palisades and Big Rock. These casks will support the off-load of the cask with minor flaws, continued operation of Palisades and the decommissioning of Big Rock.
Consumers maintains insurance coverage against property damage, debris removal, personal injury liability and other risks that are present at its nuclear generating facilities. Consumers also maintains coverage for replacement power costs during prolonged accidental outages at Palisades. Insurance would not cover such costs during the first 17 weeks of any outage, but would cover most of such costs during the next 58 weeks of the outage, followed by reduced coverage to 80 percent for two additional years. If certain loss events occur at its own or other nuclear plants similarly insured, Consumers could be required to pay maximum assessments of $19 million in any one year to Nuclear Electric Insurance Ltd; $79 million per event under the nuclear liability secondary financial protection program, limited to $10 million per event in any one year; and $6 million if nuclear workers claim bodily injury from radiation exposure. Consumers considers the possibility of these assessments to be remote.
The NRC requires Consumers to make certain calculations and report to it on the continuing ability of the Palisades reactor vessel to withstand postulated pressurized thermal shock events during its remaining license life, considering the embrittlement of reactor vessel materials over time due to operation in a radioactive environment. Based on continuing analysis of data in December 1996 Consumers received an interim Safety Evaluation Report from the NRC indicating that the reactor vessel can be safely operated through 2003 before reaching the NRC's screening criteria for reactor embrittlement. Consumers believes that with fuel management designed to minimize embrittlement, it can operate Palisades to the end of its license life in the year 2007 without annealing the reactor vessel. Nevertheless, Consumers will continue to monitor the matter.
12: Supplemental Cash Flow Information
For purposes of the Consolidated Statements 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 Years Ended December 31 1997 1996 1995
Cash transactions Interest paid (net of amounts capitalized) $293 $240 $207 Income taxes paid (net of refunds) 67 82 34
Non-cash transactions Nuclear fuel placed under capital leases $ 4 $ 28 $ 26 Other assets placed under capital leases 7 3 5 Common Stock issued to acquire companies - - 90 Assumption of debt - - 20 Capital leases refinanced - - 21
Changes in other assets and liabilities as shown on the Consolidated Statements of Cash Flows are described below:
In Millions Years Ended December 31 1997 1996 1995
Sale of receivables, net $ 17 $ 23 $ 20 Accounts receivable (160) (28) (80) Accrued revenue 64 (82) (24) Inventories (15) - 43 Accounts payable 67 55 112 Accrued refunds 4 (13) (3) Other current assets and liabilities, net (6) 23 30 Non-current deferred amounts, net (6) 10 (9) ------ ------ ------ $ (35) $ (12) $ 89 ====== ====== ======
13: Income Taxes
CMS Energy and its subsidiaries (including Consumers) file a consolidated federal income tax return. Income taxes are generally allocated based on each company's separate taxable income. CMS Energy and Consumers practice full deferred tax accounting for temporary differences, but federal income taxes have not been recorded on the undistributed earnings of international subsidiaries where CMS Energy intends to permanently reinvest those earnings. Upon distribution, those earnings may be subject to both U.S. income taxes (adjusted for foreign tax credits or deductions) and withholding taxes payable to various foreign countries. It is not practical to estimate the amount of unrecognized deferred income taxes or withholding taxes on undistributed earnings.
CMS Energy used ITC to reduce current income taxes payable, and amortizes ITC over the life of the related property. Any AMT paid generally becomes a tax credit that CMS Energy can carry forward indefinitely to reduce regular tax liabilities in future periods when regular taxes paid exceed the tax calculated for AMT. The significant components of income tax expense (benefit) consisted of:
In Millions Years Ended December 31 1997 1996 1995
Current income taxes Federal and other $ 79 $ 90 $ 43 Foreign 5 3 - ----- ----- ----- 84 93 43
Deferred income taxes Federal 50 56 85 Foreign (7) - - ----- ----- ----- 43 56 85
Deferred ITC, net (10) (10) (10)
----- ----- ----- $117 $139 $118 ===== ===== =====
The principal components of CMS Energy's deferred tax assets (liabilities) recognized in the balance sheet are as follows:
In Millions December 31 1997 1996
Property $ (647) $ (621) Unconsolidated investments (263) (259) Postretirement benefits (Note 16) (156) (165) Abandoned Midland project (33) (40) Employee benefit obligations (includes postretirement benefits of $155 and $167) (Note 16) 195 201 AMT carryforward 147 172 Power purchases (Note 3) 66 82 Other (14) (20) ------- ------- $ (705) $ (650) ======= =======
Gross deferred tax liabilities $(1,758) $(1,715) Gross deferred tax assets 1,053 1,065 ------- ------- $ (705) $ (650) ======= =======
The actual income tax expense differs from the amount computed by applying the statutory federal tax rate to income before income taxes as follows:
In Millions Years Ended December 31 1997 1996 1995
Consolidated net income before preferred dividends Domestic $229 $237 $219 Foreign 64 31 13 ---- ---- ---- 293 268 232 Income tax expense 117 139 118 ---- ---- ---- 410 407 350 Statutory federal income tax rate x 35% x 35% x 35% ---- ---- ---- Expected income tax expense 143 142 123 Increase (decrease) in taxes from: Capitalized overheads previously flowed through 5 5 5 Differences in book and tax depreciation not previously deferred 8 6 6 Impact of foreign taxes, tax rates and credits 1 8 3 Undistributed earnings of international subsidiaries (10) (2) - ITC amortization (10) (10) (10) Section 29 Fuel Tax Credits (13) (13) (13) Other, net (7) 3 4 ---- ---- ---- $117 $139 $118 ==== ==== ====
14: Financial Instruments
The carrying amounts of cash, short-term investments and current liabilities approximate their fair values due to their short-term nature. The estimated fair values of long-term investments are based on quoted market prices or, in the absence of specific market prices, on quoted market prices of similar investments or other valuation techniques. The carrying amounts of all long-term investments in financial instruments approximate fair value.
The carrying amount of long-term debt was $3.3 billion at December 31, 1997 and $2.8 billion at December 31, 1996, and the fair values were $3.3 billion and $2.9 billion, respectively. Although the current fair value of the long-term debt may differ from the current carrying amount, settlement of the reported debt is generally not expected until maturity. The carrying amount of preferred stock and Trust Preferred Securities was $631 million at December 31, 1997 and $456 million at December 31, 1996, and the fair value was $632 million and $439 million, respectively.
The fair values of CMS Energy's off-balance-sheet financial instruments are based on the amounts estimated to terminate or settle the instruments. At December 31, 1997, the fair value of CMS Energy's interest rate swap agreements, with a notional amount of $1.1 billion, was $13 million, representing the amount that CMS Energy would have to pay to terminate the agreements. The settlement of the interest rate swap agreements in 1997 did not materially affect interest expense. At December 31, 1996, CMS Energy would have paid $10 million to terminate the agreements. Also refer to Note 9 for a discussion of CMS NOMECO's price hedging arrangements and their fair values. Guarantees were $543 million and $102 million at December 31, 1997 and 1996, respectively.
The amortized cost of CMS Energy's nuclear decommissioning investments, which are considered available-for-sale securities in accordance with SFAS 115, Accounting For Certain Investments in Debt and Equity Securities, was $405 million and $351 million as of December 31, 1997 and 1996, respectively. The unrealized gain, which is classified in accumulated depreciation, was $81 million and $35 million as of December 31, 1997 and 1996, respectively.
15: Executive Incentive Compensation
Under CMS Energy's Performance Incentive Stock Plan, restricted shares of Common Stock of CMS Energy, stock options and stock appreciation rights may be granted to key employees based on their contributions to the successful management of CMS Energy and its subsidiaries. Awards under the plan may consist of any class of Common Stock of CMS Energy. Certain plan awards are subject to performance-based business criteria. The plan reserves for award not more than three percent of CMS Energy's Common Stock outstanding on January 1 each year, less (i) the number of shares of restricted Common Stock awarded and (ii) Common Stock subject to options granted under the plan during the immediately preceding four calendar years. Any forfeitures of shares previously awarded increase the number available to be awarded under the plan. At December 31, 1997, awards of up to 749,889 shares of CMS Energy Common Stock and 192,387 shares of Class G Common Stock may be issued.
Restricted shares of Common Stock are outstanding shares with full voting and dividend rights. These awards vest over five years at the rate of 25 percent per year after two years. The restricted shares are subject to achievement of specified levels of total shareholder return and are subject to forfeiture if employment terminates before vesting. If performance objectives are exceeded, the plan provides additional awards. Restricted shares vest fully if control of CMS Energy changes, as defined by the plan. At December 31, 1997, 562,711 of the 748,211 shares of restricted CMS Energy Common Stock outstanding are subject to performance objectives. At December 31, 1997 all of the 19,791 restricted shares of Class G Common Stock outstanding are subject to performance objectives.
Under the plan, stock options and stock appreciation rights are granted with an exercise price equal to the closing market price on each grant date. Options are exercisable upon grant and expire up to ten years and one month from date of grant. The status of the restricted stock granted to CMS Energy's key employees under the Performance Incentive Stock Plan and options granted under both plans follows.
Restricted Stock Options - ------------------------------------------------------------------------- Number Number Weighted-Average of Shares of Shares Exercise Price - ------------------------------------------------------------------------- CMS Energy Common Stock: Outstanding at January 1, 1995 330,356 1,490,666 $ 23.50 Granted 253,337 304,000 $ 25.08 Exercised or Issued (43,939) (147,666) $ 14.52 Forfeited (22,307) - - Expired - (55,000) $ 27.46 -------- -------- -------- Outstanding at December 31, 1995 517,447 1,592,000 $ 24.50 Granted 222,000 368,176 $ 30.55 Exercised or Issued (92,533) (231,550) $ 20.79 Forfeited (46,076) - - Expired - (12,000) $ 32.88 -------- -------- -------- Outstanding at December 31, 1996 600,838 1,716,626 $ 26.24 Granted 366,360 431,500 $ 35.91 Exercised or Issued (159,405) (479,422) $ 26.54 Forfeited (59,582) - - Expired - (2,987) $ 30.13 -------- --------- -------- Outstanding at December 31, 1997 748,211 1,665,717 $ 28.65 ======== ========= ========
Class G Common Stock: Outstanding at December 31, 1995 6,924 10,000 $ 17.88 Granted 9,423 11,000 $ 17.88 ----- ------ ------ Outstanding at December 31, 1996 16,347 21,000 $ 17.88 Granted 8,784 12,000 $ 20.24 Exercised or Issued (1,385) (5,000) $ 17.88 Forfeited (3,955) - - ------- ------- ------- Outstanding at December 31, 1997 19,791 28,000 $18.89 ======= ======= =======
The following table summarizes information about stock options outstanding at December 31, 1997:
Number Weighted- Weighted- Range of of Shares Average Average Exercise Prices Outstanding Remaining Life Exercise Price
$17.13- $24.75 594,000 4.82 years $21.82 $25.13- $33.88 668,217 5.30 years $30.32 $34.25- $38.00 403,500 9.51 years $35.92 --------------- ---------- ---------- ------- $17.13- $38.00 1,665,717 6.15 years $28.65 =============== ========== ========== =======
The range of exercise prices for Class G Common Stock options is $17.88 to $23.31; the weighted average remaining life is 8.8 years.
The weighted average fair value of options granted for CMS Energy Common Stock was $6.38 in 1997, $6.94 in 1996, and $5.37 in 1995. The weighted average fair value of options granted for Class G Common Stock was $1.87 in 1997, $1.59 in 1996 and $1.57 in 1995. Fair value is estimated using the Black-Scholes model, a mathematical formula used to value options traded on securities exchanges, with the following assumptions:
Years Ended December 31 1997 1996 1995
CMS Energy Common Stock Options Risk-free interest rate 6.06% 6.63% 6.17% Expected stock-price volatility 17.43% 24.08% 27.12% Expected dividend rate $ .30 $ .27 $ .24 Expected option life 5 years 5 years 5 years
Class G Common Stock Options Risk-free interest rate 6.06% 6.63% 6.17% Expected stock-price volatility 18.05% 16.19% 16.19% Expected dividend rate $ .31 $ .295 $ .295 Expected option life 5 years 5 years 5 years
CMS Energy applies Accounting Principles Board Opinion 25 and related interpretations in accounting for the Performance Incentive Stock Plan. Since stock options are granted at market price, no compensation cost has been recognized for stock options granted under the plan. The compensation cost charged against income for restricted stock was $6 million in 1997, $2 million in 1996, and $3 million in 1995. If compensation cost for stock options had been determined in accordance with SFAS 123, Accounting for Stock-Based Compensation, CMS Energy's consolidated net income and earnings per share would have been as follows:
In Millions, Except Per Share Amounts Pro Forma As Reported Years Ended December 31 1997 1996 1997 1996
Consolidated Net Income $266 $239 $268 $240 Net Income Attributable to Common Stocks CMS Energy 251 225 253 226 Class G 15 14 15 14 Earnings Per Average Common Share CMS Energy Basic 2.61 2.43 2.63 2.45 Diluted 2.59 2.42 2.61 2.44 Class G Basic and Diluted 1.81 1.78 1.84 1.82
16: Retirement Benefits
Postretirement Benefit Plans Other Than Pensions: CMS Energy and its subsidiaries provide certain health care and life insurance benefits for retired employees and their eligible dependents. Substantially all employees may become eligible for such benefits if they attain retirement status while working for CMS Energy or its subsidiaries. CMS Energy and its subsidiaries adopted SFAS 106, Employers' Accounting for Postretirement Benefits Other Than Pensions, effective as of the beginning of 1992 and Consumers recorded a liability of $466 million for the accumulated transition obligation and a corresponding regulatory asset for anticipated recovery in utility rates (see Note 20). CMS Energy's international subsidiaries expensed their accumulated transition obligation liability. The amount of such transition obligation is not material to the presentation of the consolidated financial statements or significant to CMS Energy's total transition obligation. The MPSC authorized recovery of the electric utility portion of these costs in 1994 over 18 years and the gas utility portion in 1996 over 16 years. During 1995, the FERC granted Consumers a waiver of a three-year filing requirement for cost recovery with respect to its wholesale electric business. At December 31, 1997, Consumers had recorded a regulatory asset and liability of $7 million. By early 1997, the FERC had authorized recovery of these costs. CMS Energy funds the benefits using external Voluntary Employee Beneficiary Associations, a legal entity established under guidelines of the IRC, through which the company can provide certain benefits for its employees or retirees. Funding of the benefits coincides with Consumers' recovery in rates.
Retiree health care costs at December 31, 1997 are based on the assumption that costs would increase 6.5 percent in 1998, then decrease gradually to 5.5 percent in 2004 and thereafter. The health care cost trend rate assumption significantly affects the amounts reported. For example, a one percentage point increase in each year's estimated health care cost assumption would increase the accumulated postretirement benefit obligation at December 31, 1997 by $83 million and the aggregate of the service and interest cost components of net periodic postretirement benefit costs for 1997 by $9 million.
Years Ended December 31 1997 1996 1995
Weighted average discount rate 7.50% 7.75% 7.50% Expected long-term rate of return on plan assets 7.00% 7.00% 7.00%
Net postretirement benefit costs for the health care benefits and life insurance benefits consisted of:
In Millions Years Ended December 31 1997 1996 1995
Service cost $ 10 $ 13 $ 11 Interest cost 41 42 40 Actual return on assets (38) (14) (4) Net amortization and deferral 25 8 1 ---- ---- ---- Net postretirement benefit costs $ 38 $ 49 $ 48 ==== ==== ====
The funded status of the postretirement benefit plans is reconciled with the liability recorded at December 31 as follows:
In Millions 1997 1996
Actuarial present value of estimated benefits Retirees $ 325 $ 330 Eligible for retirement 68 66 Active (upon retirement) 189 190 ----- ----- Accumulated postretirement benefit obligation 582 586 Plan assets (primarily stocks, bonds and money market investments) at fair value 224 138 ----- ----- Accumulated postretirement benefit obligation less than (in excess of) plan assets (358) (448) Unrecognized net (gain) loss from experience different than assumed (83) (36) Unrecognized prior service cost - 7 ----- ----- Recorded liability $(441) $(477) ===== =====
The health care portion of the accumulated postretirement benefit obligation is $565 million and $570 million at December 31, 1997 and 1996, respectively.
Supplemental Executive Retirement Plan: Certain management employees qualify to participate in the SERP. SERP benefits, which are based on an employee's years of service and earnings as defined in the SERP, are paid from a trust established in 1988. Because the SERP is not a qualified plan under the IRC, earnings of the trust are taxable and trust assets are included in consolidated assets. At December 31, 1997 and 1996, trust assets were $44 million and $31 million, respectively, and were classified as other non-current assets.
Defined Benefit Pension Plan: A trusted, non-contributory, defined benefit Pension Plan covers substantially all employees. The benefits are based on an employee's years of accredited service and earnings, as defined in the plan, during an employee's five highest years of earnings. Because the plan was fully funded, no contributions were made in 1997 and 1996. A contribution of $9 million was made in 1995.
Years Ended December 31 1997 1996 1995
Discount rate 7.50% 7.75% 7.50% Rate of compensation increase 3.75% 4.00% 4.50% Expected long-term rate of return on assets 9.25% 9.25% 9.25%
Net Pension Plan and SERP costs consisted of:
In Millions Years Ended December 31 1997 1996 1995
Service cost $ 26 $ 26 $ 23 Interest cost 61 58 56 Actual return on plan assets (163) (63) (168) Net amortization and deferral 93 (6) 103 ----- ----- ----- Net periodic pension cost $ 17 $ 15 $ 14 ===== ===== =====
The funded status of the Pension Plan and SERP reconciled to the liability recorded at December 31 was:
In Millions Pension Plan SERP 1997 1996 1997 1996
Actuarial present value of estimated benefits Vested $ 548 $ 504 $ 24 $ 21 Non-vested 79 72 1 1 ----- ----- ----- ----- Accumulated benefit obligation 627 576 25 22 Provision for future pay increases 165 158 16 15 ----- ----- ----- ----- Projected benefit obligation 792 734 41 37 Plan assets (primarily stocks and bonds, including $153 in 1997 and $117 in 1996 in common stock of CMS Energy) at fair value 882 779 - - ----- ----- ----- ----- Projected benefit obligation less than (in excess of) plan assets 90 45 (41) (37) Unrecognized net (gain) loss from experience different than assumed (157) (99 5) 5 Unrecognized prior service cost 35 39 2 2 Unrecognized net transition (asset) (22) (27) - - ----- ----- ----- ----- Recorded liability $ (54) $ (42) $ (34) $ (30) ===== ===== ===== =====
Beginning January 1, 1986, the amortization period for the Pension Plan's unrecognized net transition asset is 16 years and 11 years for the SERP's unrecognized net transition obligation. Prior service costs are amortized on a straight-line basis over the average remaining service period of active employees.
Defined Contribution Plan: CMS Energy provides a defined contribution 401(k) plan to all U.S. employees of CMS Energy and its subsidiaries which are at least 80 percent owned and have adopted the plan. CMS Energy will match at least one-half of the amount contributed by employees up to 3 percent of their salary. These contributions to the plan are invested in CMS Energy Common Stock. Amounts charged to expense for this plan were approximately $20 million in 1997, $18 million in 1996 and $17 million in 1995.
17: Leases
CMS Energy, Consumers, and Enterprises lease various assets, including vehicles, rail cars, aircraft, construction equipment, computer equipment, nuclear fuel and buildings. Consumers' nuclear fuel capital leasing arrangement expires in November 1999, yet provides for additional one-year extensions upon mutual agreement by the parties. Upon termination of the lease, the lessor would be entitled to a cash payment equal to its remaining investment, which was $47 million as of December 31, 1997. Consumers is responsible for payment of taxes, maintenance, operating costs, and insurance.
Minimum rental commitments under CMS Energy's non-cancelable leases at December 31, 1997, were:
In Millions Capital Operating Leases Leases
1998 $ 42 $ 11 1999 44 11 2000 14 11 2001 12 8 2002 9 8 2003 and thereafter 7 20 ----- ----- Total minimum lease payments 128 $ 69 Less imputed interest 19 ===== ----- Present value of net minimum lease payments 109 Less current portion 34 ----- Non-current portion $ 75 =====
Consumers recovers lease charges from customers and accordingly charges payments for its capital and operating leases to operating expense. Operating lease charges, including charges to clearing and other accounts for the years ended December 31, 1997, 1996 and 1995, were $10 million, $8 million and $11 million, respectively.
Capital lease expenses for the years ended December 31, 1997, 1996 and 1995 were $43 million, $46 million and $46 million, respectively. Included in these amounts for the years ended 1997, 1996 and 1995 are nuclear fuel lease expenses of $25 million for each year.
18: Jointly Owned Utility Facilities
Consumers is responsible for providing its share of financing for the jointly owned facilities. The direct expenses of the joint plants are included in Consumers' operating expenses. The following table indicates the extent of Consumers' investment in jointly owned utility facilities:
In Millions December 31 1997 1996
Net investment Ludington - 51 percent $112 $116 Campbell Unit 3 - 93.3 percent 314 329 Transmission lines - various 34 35
Accumulated depreciation Ludington $ 88 $ 84 Campbell Unit 3 265 252 Transmission lines 14 14
19: Reportable Segments
CMS Energy operates principally in the following business segments: electric utility; gas utility; oil and gas exploration and production; independent power production; natural gas transmission, storage and processing; and energy marketing, services and trading.
The Consolidated Statements of Income show operating revenue and pretax operating income by business segment. Other business and geographic segment information follows:
Business Segments In Millions Years Ended December 31 1997 1996 1995
Depreciation, depletion and amortization Electric utility $ 296 $ 282 $ 272 Gas utility 93 87 83 Independent power production 13 8 4 Oil and gas exploration and production 58 55 52 Natural gas transmission, storage and processing 14 7 3 Marketing, services and trading 1 - - Other 2 2 2 ------ ------ ------ $ 477 $ 441 $ 416 ====== ====== ======
Identifiable assets Electric utility (a) $4,472 $4,505 $4,522 Gas utility (a) 1,644 1,709 1,690 Independent power production 1,699 1,053 840 Oil and gas exploration and production 726 719 660 Natural gas transmission, storage and processing 536 397 272 Marketing, services and trading 191 52 31 Other 525 180 128 ------ ------ ------ $9,793 $8,615 $8,143 ====== ====== ======
Capital expenditures (b) Electric utility $ 255 $ 310 $ 328 Gas utility 116 137 126 Independent power production 704 142 239 Oil and gas exploration and production (c) 132 88 168 Natural gas transmission, storage and processing 115 136 178 Marketing, services and trading 28 - - Other 202 66 14 ------ ------ ------ $ 1,552 $ 879 $ 1,053 ====== ====== ======
Investments in Equity Method Investees Independent power production $1,203 $ 683 $ 603 Natural gas transmission, storage and processing 256 234 193 Marketing, services and trading 26 - - Other 277 85 22 ------ ------ ------ $1,762 $1,002 $ 818 ====== ====== ======
Earnings from Equity Method Investees(d) Independent power production $ 89 $ 91 $ 58 Natural gas transmission, storage and processing 10 12 9 Marketing, services and trading 2 - - Other 8 8 11 ------ ------ ------ $ 109 $ 111 $ 78 ====== ====== ======
Geographic Areas Investments Earnings Pretax in Equity from Equity Operating Operating Identifiable Method Method Revenue Income Assets Investees Investees(d)
United States $4,582 $ 670 $7,991 $ 765 $ 81 International 205 76 1,802 997 28
United States $4,220 $ 653 $7,802 $ 689 $ 98 International 113 38 813 313 13
United States $3,831 $ 601 $7,611 $ 586 $ 75 International 59 18 532 232 3
(a) Amounts include an attributed portion of Consumers' other common assets to both the electric and gas utility businesses.
(b) Includes capital leases for nuclear fuel and other assets and electric DSM costs (see Consolidated Statements of Cash Flows). Amounts also include an attributed portion of Consumers' capital expenditures for plant and equipment common to both the electric and gas utility businesses.
(c) Includes common stock issued for acquisitions in 1995.
(d) These amounts are included in operating revenue in the Consolidated Statements of Income.
20: Effects of the Ratemaking Process
The following regulatory assets (liabilities), which include both current and non-current amounts, are reflected in the Consolidated Balance Sheets. These assets represent probable future revenue to Consumers associated with certain incurred costs as these costs are recovered through the ratemaking process. These costs are being recovered through rates over periods of up to 15 years.
An accounting standard, effective 1996, requires impairment losses on long-lived assets to be recognized when an asset's book value exceeds its expected future cash flows (undiscounted). The standard also imposes stricter criteria for retention of regulatory-created assets by requiring that such assets be probable of future recovery at each balance sheet date. There was no impact on financial position or results of operations upon adoption because management believes these assets will be recovered. For further discussion, see Outlook - Application of SFAS 71 in the MD&A.
In Millions December 31 1997 1996
Postretirement benefits (Note 16) $ 429 $ 460 Income taxes (Note 13) 172 158 Abandoned Midland project 93 113 Manufactured gas plant sites (Note 10) 47 47 DSM - deferred costs 46 60 Uranium enrichment facility 22 23 Ludington Fish Settlement 12 14 Other 16 43 ----- ----- Total regulatory assets $ 837 $ 918 ===== ===== Income taxes (Note 13) $(226) $(224) DSM - deferred revenue (24) (25) ----- ----- Total regulatory liabilities $(250) $(249) ===== =====
21: Equity Method Investments
Certain of CMS Energy's subsidiaries invest in companies, partnerships and joint ventures as part of a strategy for growth through international diversification. The ownership interests for these investments vary from 20 percent to 50 percent and are all accounted for using the equity method of accounting. Following is summarized combined financial information for all equity method investments, except for the MCV Partnership, which is disclosed separately in Note 22 and Loy Yang, which is disclosed separately in this note. For information relating to the geographic location of investees and CMS Energy's and its subsidiaries' equity earnings from and investment in investees refer to Note 19.
Income Statement Data (unaudited) In Millions Years Ended December 31 1997 1996 1995
Operating revenue $1,267 $ 674 $ 587 Operating expenses 808 399 299 ------ ------ ------ Operating income 459 275 288 Other expense, net 175 97 114 ------ ------ ------ Net income $ 284 $ 178 $ 174 ====== ====== ======
Balance Sheet Data (unaudited) In Millions December 31 1997 1996
Assets Current assets $ 439 $ 341 Property, plant and equipment, net 3,335 2,794 Other assets 1,976 164 ------- ------- $ 5,750 $ 3,299 ======= =======
Liabilities and Equity Current liabilities $ 696 $ 293 Long-term debt and other non-current liabilities 3,262 1,351 Equity 1,792 1,655 ------- ------- $ 5,750 $ 3,299 ======= =======
In the second quarter of 1997, a consortium comprising subsidiaries of CMS Generation, among others, financed, through a consortium of banks, seventy-seven percent of the consortium's $3.7 billion payment to the Australian State of Victoria government for the Loy Yang acquisition. This financing occurred on a non-recourse basis to CMS Energy and CMS Generation.
Summarized financial information of Loy Yang:
Income Statement Data (unaudited) In Millions Year Ended December 31 1997
Operating revenue $229 Operating expenses 112 ---- Operating income 117 Other expense, net 114 ---- Net income $ 3 ====
Balance Sheet Data (unaudited) In Millions December 31 1997
Assets Current assets $ 144 Property, plant and equipment, net 3,159 Other assets 4 ------ $3,307 ====== Liabilities and Equity Current liabilities $ 46 Long-term debt and other non-current liabilities 2,352 Equity 909 ------ $3,307 ======
22: Summarized Financial Information of Significant Related Energy Supplier
Under the PPA with the MCV Partnership discussed in Note 3, Consumers' 1997 obligation to purchase electric capacity from the MCV Partnership was 15 percent of Consumers' owned and contracted capacity.
Summarized financial information of the MCV Partnership:
Statements of Income (unaudited)
In Millions Years Ended December 31 1997 1996 1995
Operating revenue (a) $ 652 $ 645 $ 618 Operating expenses 435 417 386 ----- ----- ----- Operating income 217 228 232 Other expense, net 154 162 171 ----- ----- ----- Net income before cumulative effect of accounting change 63 66 61 Cumulative effect of change in method of accounting for property tax 15 - - ----- ----- ----- Net income $ 78 $ 66 $ 61 ===== ===== =====
Balance Sheets (unaudited)
In Millions December 31 1997 1996
Assets Current assets (b) $ 362 $ 316 Property, plant and equipment, net 1,820 1,889 Other assets 169 159 ------ ------ $2,351 $2,364 ====== ======
Liabilities and Partners' Equity Current liabilities $ 285 $ 235 Long-term debt and other non-current liabilities (c) 1,789 1,930 Partners' equity (d) 277 199 ----- ----- $2,351 $2,364 ====== ======
(a) Revenue from Consumers totaled $609 million, $598 million and $571 million for 1997, 1996, and 1995, respectively.
(b) Receivables from Consumers totaled $54 million and $52 million, at December 31, 1997 and 1996, respectively.
(c) FMLP is the sole beneficiary of an owner trust that is the lessor in a long-term direct finance lease with the lessee, MCV Partnership. CMS Holdings holds a 46.4 percent ownership interest in FMLP. At December 31, 1997 and 1996, lease obligations of $1.52 billion and $1.58 billion, respectively, were owed to the owner trust. CMS Holdings' share of the interest and principal portion for the 1997 lease payments was $62 million and $28 million, respectively, and for the 1996 lease payments was $64 million and $25 million, respectively. The lease payments service $1.0 billion and $1.1 billion in non-recourse debt outstanding as of December 31, 1997 and 1996, respectively, of the owner-trust. FMLP's debt is secured by the MCV Partnership's lease obligations, assets, and operating revenues. For 1997 and 1996, the owner-trust made debt payments (including interest) of $192 million. FMLP's earnings for 1997, 1996, and 1995 were $20 million, $17 million, and $14 million, respectively.
(d) CMS Midland's recorded investment in the MCV Partnership includes capitalized interest, which is being amortized to expense over the life of its investment in the MCV Partnership. Covenants contained in financing agreements prohibit the MCV Partnership from paying distributions until certain financial test requirements are met. Consumers does not anticipate receiving a cash distribution in the near future.
ARTHUR ANDERSEN LLP
Report of Independent Public Accountants
To CMS Energy Corporation:
We have audited the accompanying consolidated balance sheets and consolidated statements of preferred stock of CMS ENERGY CORPORATION (a Michigan corporation) and subsidiaries as of December 31, 1997 and 1996, and the related consolidated statements of income, common stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based upon our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of CMS Energy Corporation and subsidiaries as of December 31, 1997 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1997 in conformity with generally accepted accounting principles.
Arthur Andersen LLP
Detroit, Michigan, January 26, 1998.
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1997 Financial Statements
Consumers Energy Company Management's Discussion and Analysis
This Annual Report contains forward-looking statements, as defined by the Private Securities Litigation Reform Act of 1995, that include without limitation, discussions as to expectations, beliefs, plans, objectives and future financial performance, or assumptions underlying or concerning matters discussed in this report. Refer to the Forward-Looking Information section of this MD&A for 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.
RESULTS OF OPERATIONS
In Millions Years Ended December 31 1997 1996 Change 1996 1995Change
Net income available to common stockholder $284 $260 $24 $260 $227 $33
Consumers experienced earnings growth for the fifth consecutive year. This continued growth is the reflection of changes in regulation and Consumers' strategy to target increased deliveries to industrial and commercial customers. The improved net income for 1997 reflects the favorable impact for all of 1997 of an electric rate increase received in February 1996, increased electric sales, the one-time recognition of interest income for $7 million from a related-party property sale, increased revenues from the transmission of electricity for others, and improved earnings from the MCV Partnership. In addition, the improved net income for 1997 reflects an adjustment of prior years' income taxes associated with non-taxable earnings on nuclear decommissioning trust funds of $9 million. The improved net income for 1996 over the 1995 level reflects the favorable impact of an electric rate increase received in February 1996, increased electric sales and gas deliveries, and revenues from gas loaning activities. In addition, other operating income increased during 1996 due to a FERC-ordered refund received by the MCV Partnership from a gas pipeline supplier. For further information, see the Electric and Gas Utility Results of Operations sections of this MD&A and Note 4.
Electric Utility Results of Operations
Electric Pretax Operating Income: In Millions Years Ended December 31 1997 1996 Change 1996 1995 Change
$432 $411 $21 $411 $372 $39
Electric pretax operating income in 1997 benefitted from increased electric sales, the full effect of the February 1996 electric rate increase and extensive control of operation and maintenance costs. Partially offsetting these benefits were lower revenue due to increases in special contract discounts negotiated with large commercial and industrial customers and higher depreciation and general taxes expenses. The increase in electric pretax operating income in 1996 reflects the favorable impact of the February 1996 electric rate increase and the benefit of increased kWh sales and lower maintenance expenses. The increase was partially offset by a decrease in revenues due to increases in special contract discounts negotiated with large industrial customers and increased depreciation, general taxes and operation expenses. The following table quantifies these impacts on pretax operating income:
In Millions Change Compared to Prior Year 1997 vs 1996 1996 vs 1995
Sales (including special contract discounts) $ 5 $ 1 Rate increases and other regulatory issues 11 50 Operation and maintenance 24 2 General taxes, depreciation and other (19) (14) ---- ---- Total increase/(decrease) in pretax operating income $21 $39 ==== ====
Electric Sales: Total electric sales in 1997 were 38 billion kWh, an increase of 2.3 percent over 1996 sales. The increase reflects continued economic growth in Michigan and a 1.2 percent increase in sales to ultimate customers, primarily within the industrial class. Total electric sales in 1996 were 37 billion kWh, an increase of 4.4 percent over the 1995 level. The increase in 1996 is primarily attributable to an increase in intersystem sales and a 1.7 percent increase in sales to ultimate customers. This increase also reflects continued economic growth in Consumers' territory.
Power Costs: Cost increases in both 1997 and 1996 over the prior periods reflect greater power purchases from outside sources to meet increased sales demand. The following table quantifies the changes in electric power costs:
In Millions Years Ended December 31 1997 1996Change 1996 1995 Change
$1,139 $1,087 $52 $1,087 $970 $117
Electric Utility Operating Issues:
Power Purchases from the MCV Partnership - In 1992, Consumers recognized a loss for the present value of the estimated future underrecoveries of power purchases from the MCV Partnership. The after-tax cash underrecoveries are currently based on the assumption that the MCV Facility will be available to generate electricity 91.5 percent of the time over its expected life. For 1997, the MCV Facility was available 99 percent of the time, resulting in after-tax cash underrecoveries of $41 million. Consumers believes it will continue to experience after-tax cash underrecoveries associated with the PPA in amounts as those shown below. For further information, see Power Purchases from the MCV Partnership in Note 3.
In Millions 1998 1999 2000 2001 2002
Estimated cash underrecoveries, net of tax $23 $22 $21 $20 $19
Consumers bases the above estimated underrecoveries, in part, on an estimate 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, Consumers will need to recognize losses for future underrecoveries larger than amounts previously recorded. Therefore, Consumers would experience larger amounts of cash underrecoveries than originally anticipated. Management will continue to evaluate the adequacy of the accrued liability considering actual MCV Facility operations.
Electric Rate Proceedings - In 1996, the MPSC issued a final order authorizing Consumers to recover costs associated with the purchase of an additional 325 MW of MCV Facility capacity and to accelerate recovery of its nuclear plant investment. To implement the accelerated recovery, the order requires an increase in annual nuclear plant depreciation expense by $18 million with a corresponding decrease in fossil-fueled generating plant depreciation expense. The order also established an experimental direct-access program. For further information on these issues, see the Electric Business Outlook section of this MD&A and Notes 3 and 4.
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.
The NRC requires Consumers to make certain calculations and report to it on the continuing ability of the Palisades reactor vessel to withstand postulated pressurized thermal shock. In 1996, Consumers received an interim Safety Evaluation Report from the NRC indicating that the reactor vessel can be safely operated through 2003. Consumers believes that with a change in fuel management designed to minimize embrittlement, Palisades can be operated to the end of its license life in the year 2007.
Palisades' temporary on-site storage pool for spent nuclear fuel is at capacity. Consequently, Consumers is using NRC-approved steel and concrete vaults, commonly known as "dry casks", for temporary on-site storage.
Big Rock closed permanently on August 29, 1997 because management determined that the plant would be uneconomical to operate in an increasingly competitive environment. Consumers originally scheduled the plant to close May 31, 2000, at the end of the plant's operating license. Plant decommissioning began in September 1997 and may take five to ten years to return the site to its original condition. The earlier than planned closure of the plant and the reopening of the South Carolina Barnwell facility to receive low level radioactive waste have changed the method of decommissioning from the safe storage option to immediate dismantlement. This change could have an impact on the estimated decommissioning cost which is required to be updated in a filing with the MPSC by March 31, 1998. For further information on nuclear matters, see Note 7.
Electric Environmental Matters - The Clean Air Act contains significant environmental provisions specific to utilities. During the past few years, Consumers incurred $46 million in capital expenditures. Consumers believes it may incur an additional $30 million in capital expenditures by the year 2000 to comply with the current sulfur dioxide and nitrogen oxide emission limits established by the EPA.
Consumers currently operates within all Clean Air Act requirements and meets current ozone and particulate emission limits. The EPA recently revised the national air quality standards, which may further limit small particulate and ozone related emissions, and proposed that the State of Michigan impose additional nitrogen oxide limits on fossil-fueled emitters, such as Consumers' generating units. It is unlikely that the State of Michigan will establish Consumers' emissions reduction target until mid-to-late 1999. Until this state-mandated target is known, the estimated cost of compliance is subject to significant revision. The preliminary estimate of capital costs to reduce nitrogen oxide related emissions for Consumers' fossil-fueled generating units is approximately $175 million, plus an additional amount totaling $10 million per year for the next 20 years for operation and maintenance costs. Consumers may need an equivalent amount to comply with the new small particulate standards. The State of Michigan objected to the extent of the proposed EPA emission reductions. If the State of Michigan's position were to be adopted by the EPA, costs could be less than the current estimated amounts. Consumers supports the bipartisan effort in the U.S. Congress to delay implementation of the revised standards until the relationship between the new standards and health improvements is established scientifically.
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. Nevertheless, it believes that these costs are properly recoverable in rates under current ratemaking policies.
Consumers is a so-called potentially responsible party at several contaminated sites administered under Superfund. Many other creditworthy, potentially responsible parties, with substantial assets also cooperate with respect to the individual sites. Based on current information, management believes it is unlikely that Consumers' liability at any of the known Superfund sites, individually or in total, will have a material adverse effect on its financial position, liquidity or results of operations.
While decommissioning Big Rock, Consumers found that some areas of the plant have coatings that contain both metals and PCBs. Consumers does not believe that any facility in the United States currently accepts the radioactive portion of that waste. The cost of removal and disposal is currently unknown. These costs would constitute part of the cost to decommission the plant, and will be paid from the decommissioning fund. Consumers is studying the extent of the contamination and reviewing options. For further information regarding these and other environmental matters, see Electric Environmental Matters in Note 6.
Stray Voltage - Various parties have sued Consumers relating to the effect of so-called stray voltage on certain livestock. In December 1997, the Michigan Supreme Court remanded for further proceedings a 1994 Michigan trial court decision that refused to allow the claims of over 200 named plaintiffs to be joined in a single action. The trial court dismissed all of the plaintiffs except the first-named plaintiff, allowing the others to re-file separate actions. Of the original plaintiffs, only 49 re-filed separate cases. All of those 49 cases have been resolved. The Michigan Supreme Court remanded the matter, finding that the proper remedy for misjoinder was not dismissal, but to automatically allow each case to go forward separately. Consumers filed a motion for reconsideration with the Michigan Supreme Court, which was denied. Consumers intends to vigorously defend these cases, but is unable to predict the outcome. As of December 31, 1997, Consumers had 12 individual stray voltage lawsuits, unrelated to the cases above, awaiting trial court action, down from 22 lawsuits as reported at year end 1996.
Other - In October 1997, two independent power producers sued Consumers and CMS Energy in a federal court alleging antitrust violations and economic losses due to special electric contracts signed by Consumers with large customers. The plaintiffs claim damages of $100 million (which a court can treble in antitrust cases as provided by law). The transactions of which plaintiffs complain have been regulated by, and are subject to, the jurisdiction of the MPSC. In November 1997, Consumers and CMS Energy filed a motion for summary judgement and/or for dismissal of the complaint filed by the plaintiffs. Consumers believes the lawsuit is without merit and will vigorously defend against it, but cannot predict the outcome of this matter.
Gas Utility Results of Operations
Gas Pretax Operating Income:
In Millions Years Ended December 31 1997 1996 Change 1996 1995 Change
$153 $158 $(5) $158 $156 $2
Gas pretax operating income decreased in 1997 compared to 1996. The decrease results from reduced gas deliveries due to warmer winter month temperatures in 1997 and the loss of an extra day for the 1996 leap year. Revenues were also down in 1997 due to the elimination of surcharges related to past conservation programs and reduced gas loaning activities. In addition, depreciation costs and general taxes were higher in 1997 from increased investments to serve new customers. Offsetting these decreases to pretax operating income were lower operations and maintenance expenses that resulted from extensive cost controls. Gas pretax operating income increased in 1996 compared to 1995. The increase results from increased gas deliveries and revenues from value-added services and gas loaning activities. Partially offsetting these increases were higher operating, depreciation and general tax expenses. The following table quantifies these impacts on pretax operating income:
In Millions Change Compared to Prior Year 1997 vs 1996 1996 vs 1995
Sales $(13) $ 3 Gas wholesale and retail services activities (9) 7 Operations and maintenance 24 (4) General taxes, depreciation and other (7) (4) ---- ---- Total increase/(decrease) in pretax operating income $ (5) $ 2 ==== ====
Gas Deliveries: System deliveries in 1997, including miscellaneous transportation, totaled 420 bcf, a decrease of 28 bcf or 6.1 percent compared to 1996. The decreased deliveries for 1997 compared to 1996 reflect warmer temperatures in 1997 and the loss of an extra day for the 1996 leap year. Comparable system deliveries for 1996 totaled 448 bcf, an increase of 44 bcf or 10.8 percent compared to 1995. The increased deliveries for 1996 compared to 1995 reflect growth resulting from customer additions, conversions to natural gas from alternative fuels, continued strength in the Michigan economy and the benefit from the added leap year day in 1996.
Cost of Gas Sold: The cost decrease for 1997 was the result of decreased sales and lower gas prices. The cost increase for 1996 was the result of increased sales.
In Millions Years Ended December 31 1997 1996 Change 1996 1995 Change
$694 $750 $(56) $750 $674 $76
Gas Utility Operating Issues:
Gas Rate Proceedings - Consumers entered into a special natural gas transportation contract in response to a customer's proposal to bypass Consumers' system in favor of a competitive alternative. In 1995, the MPSC approved the contract. The MPSC stated, however, that Consumers' shareholders must bear the revenue shortfall created by the difference between the contract's discounted rate and the floor price of an MPSC- authorized gas transportation rate. In 1995, Consumers filed an appeal with the Court of Appeals claiming that the MPSC decision denies Consumers the opportunity to earn its authorized rate of return and is therefore unconstitutional. In October 1997, the Court of Appeals issued an opinion affirming the MPSC's order. Consumers has sought a rehearing of the Court of Appeals opinion. For further information on Gas Proceedings, see the Gas Business Outlook section of this MD&A and Note 4.
GCR Matters - In 1995, the MPSC issued an order favorable to Consumers' position in a $44 million contract pricing dispute (excluding interest) between Consumers and certain gas producers. The Court of Appeals upheld the MPSC order. The gas producers have now appealed to the Michigan Supreme Court. Consumers believes the MPSC order correctly concludes that the producers' theories are without merit. Consumers will vigorously oppose any claims the producers may raise, but cannot predict the outcome of this issue.
Gas Environmental Matters - Consumers expects that it will ultimately incur investigation and remedial action costs at a number of sites, including some that formerly housed manufactured gas plant facilities. Consumers estimates its costs related to investigation and remedial action at $48 million to $98 million. This estimate is based on undiscounted 1998 costs. Any significant change in assumptions, such as remediation technique, nature and extent of contamination and regulatory requirements, could affect the estimate of investigation and remedial action costs for the sites. For further information regarding environmental matters, see Note 6 .
CAPITAL RESOURCES AND LIQUIDITY
Cash Position, Investing and Financing
Operating Activities: Consumers derives cash from operations from the sale and transportation of natural gas and the generation, transmission and sale of electricity. Cash from operations totaled $758 million and $672 million for 1997 and 1996, respectively. The $86 million increase resulted from an increase in net income due to extensive control of operation and maintenance costs and a change in working capital. Consumers uses operating cash primarily to maintain and expand electric and gas systems, to retire portions of long-term debt, and to pay dividends.
Investing Activities: Cash used by Consumers in investing activities totaled $392 million and $494 million for 1997 and 1996, respectively. The $102 million decrease resulted from a decrease in capital expenditures and receipt of $50 million related to CMS Enterprises' repurchase of two shares of its preferred stock. Consumers uses cash primarily for capital expenditures.
Financing Activities: Cash used by Consumers in financing activities totaled $363 million and $188 million for 1997 and 1996, respectively. The increase of $175 million in cash used reflects the redemption of $120 million of preferred stock and a return of equity to Consumers' common stockholder totaling $50 million.
Other Investing and Financing Matters: At December 31, 1997, Consumers had FERC authorization to: 1) issue or guarantee up to $900 million of short-term securities through 1998; 2) issue, through November 1998, $376 million of long-term securities with maturities up to 30 years, for refinancing or refunding purposes; and 3) guarantee, through 1999, up to $25 million in loans made by others, to residents of Michigan for the purpose of making energy-related home improvements. In January 1998, Consumers requested authorization to issue, through November 1998, an additional $500 million of long-term securities for refinancing or refunding purposes.
Consumers has an unsecured $425 million credit facility and unsecured lines of credit aggregating $120 million. These facilities are available to finance seasonal working capital requirements and to pay for capital expenditures between long-term financings. At December 31, 1997, the total available amount remaining under these facilities was $168 million.
Consumers also has in place a $500 million trade receivables sale program. At December 31, 1997, $165 million in receivables remained available for sale under the program. For further information, see Note 5.
Consumers must redeem or retire $1 billion of long-term debt over the three-year period ending December 2000. In addition, at December 31, 1997, Consumers had a recorded liability to the DOE of $111 million, which Consumers must pay upon the first delivery of spent nuclear fuel to the DOE. Current federal law originally scheduled delivery of the fuel to occur in 1998 (see Note 2). Consumers plans to refinance $850 million of its long-term debt during 1998 and will continue to evaluate capital markets as a source of financing further debt retirements. In early 1998, Consumers called for the March 1998 redemption of $57 million aggregate principal amount of its 7.5 percent First Mortgage Bonds due 2002 and $62 million aggregate principal amount of its 7.5 percent First Mortgage Bonds due 2002.
In early 1998, Consumers issued $250 million of senior notes due February 1, 2008, at an interest rate of 6.375 percent. The senior notes are secured by a series of Consumers' First Mortgage Bonds, issued contemporaneously in a similar amount. Proceeds from the sale were added to the general funds of Consumers and applied to the payment, at maturity, of $248 million aggregate principal amount of Consumers' 8.75 percent First Mortgage Bonds due February 15, 1998.
At December 31, 1997, Consumers' capital structure consisted of 38 percent common equity, 10 percent preferred equity (including preferred stock and preferred securities), and 52 percent long- and short-term debt (including capital leases and notes payable).
OUTLOOK
The following discussions contain forward-looking statements. See the Forward-Looking Information section of this MD&A for some important factors that could cause actual results or outcomes to differ materially from those discussed herein.
Capital Expenditures Outlook
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 1998 1999 2000
Consumers Construction $367 $358 $350 Nuclear fuel lease 54 - 1 Capital leases other than nuclear fuel 11 19 16 Michigan Gas Storage 3 3 3 ---- ---- ---- $435 $380 $370 ==== ==== ====
Electric utility operations (a) (b) $320 $265 $255 Gas utility operations (a) 115 115 115 ---- ---- ---- $435 $380 $370 ==== ==== ====
(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.
(b) These amounts do not include preliminary estimates for capital expenditures possibly required to comply with recently revised national air quality standards under the Clean Air Act. For further information see Electric Utility Operating Issues-Electric Environmental Matters above and Note 6.
Electric Business Outlook
Growth: Consumers expects average annual growth of two and one-half percent per year in electric system deliveries over the next five years, based on the present industry and regulatory configuration in Michigan. Abnormal weather, changing economic conditions, or the developing competitive market for electricity may affect actual electric sales in future periods.
Restructuring: Consumers' electric retail service is affected by competition. To meet the challenge of competition, Consumers entered into multi-year contracts with some of its largest industrial customers to serve certain facilities. The MPSC has approved these contracts as part of its phased introduction to competition. Certain customers have the option to terminate their contracts early.
FERC Orders 888 and 889, as amended, require utilities to provide direct access to the interstate transmission grid for wholesale transactions. Consumers and Detroit Edison disagree on the effect of the orders on the Michigan Electric Power Coordination Center pool. Consumers proposes to maintain the benefits of the pool, while Detroit Edison has given notice of early termination. Consumers expects FERC to rule on this issue in 1998.
In June 1997 the MPSC issued an order proposing that beginning January 1, 1998 Consumers would have to transmit and distribute energy on behalf of competing power suppliers to serve retail customers. The order states that by January 1, 2002, all customers would be free to choose (that is, have direct access to) their own power suppliers.
Under the June 1997 order, the MPSC would allow utilities to recover prudently incurred Transition Costs through a charge to all direct-access customers until the end of the transition period in 2007. Subsequent to the June 1997 order, the MPSC issued orders in October 1997 and early in 1998. Ultimately, the MPSC allowed Consumers: 1) to recover Transition Costs of $1.755 billion through a charge to all direct-access customers until the end of the transition period in 2007, subject to an adjustment through a true-up mechanism; 2) to commence the phase-in of direct access in March 1998; and 3) to suspend the power supply cost recovery clause. The orders also confirm the MPSC's belief that Securitization may be a beneficial mechanism for recovery of Transition Costs while recognizing that Securitization requires state legislation to occur. Consumers believes that the Transition Cost surcharge will apply to all customers beginning in 2002. A separate charge to direct-access customers after MPSC review and verification would also recover prudent costs of implementing a direct-access program estimated at an additional $200 million. Nuclear decommissioning costs will also continue to be collected through a separate surcharge to all customers. Consumers expects Michigan legislative consideration of the entire subject of electric industry restructuring in 1998. To be acceptable to Consumers, the legislation would have to provide for full recovery of Transition Costs. Consumers expects the legislature to review all of the policy choices made by the MPSC during the restructuring proceedings to assure that they are in accord with those that the legislature believes should be paramount. For further information regarding restructuring, see Note 4.
Application of SFAS 71: Consumers applies the utility accounting standard, SFAS 71, that recognizes the economic effects of rate regulation and, accordingly, has recorded regulatory assets and liabilities related to the generation, transmission and distribution operations of its business in its financial statements. Consumers believes that the generation segment of its business is still subject to rate regulation based upon its present obligation to continue providing generation service to its customers, and the lack of definitive deregulation orders. 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 the generation segment of Consumers' business. 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. According to recently published Emerging Issues Task Force Issue 97-4, Deregulation of the Pricing of Electricity - Issues Related to the Application of FASB Statements No. 71 and 101, Consumers can continue to carry its generation-related regulatory assets or liabilities for the part of the business being deregulated if deregulatory legislation or an MPSC rate order allows the collection of cash flows from its regulated transmission and distribution customers to recover these specific costs or settle obligations. Consumers believes that even if it was to discontinue application of SFAS 71 for the generation segment of its business, its regulatory assets, including those related to generation, are probable of future recovery from the regulated portion of the business. At December 31, 1997, Consumers had $277 million of generation-related net regulatory assets recorded on its balance sheet, and a net investment in generation facilities of $1.4 billion included in electric plant and property. For further information regarding this issue, see the Electric Business Outlook - Restructuring, above.
Gas Business Outlook
Growth: Consumers currently anticipates gas deliveries (excluding transportation to the MCV Facility and off-system deliveries) to grow at an average annual rate of between one and two percent over the next five years based primarily on a steadily growing customer base. Abnormal weather, alternative energy prices, changes in competitive conditions, and the level of natural gas consumption may affect actual gas deliveries in future periods. Consumers is also offering a variety of energy related services to its customers focused upon appliance maintenance, home safety and home security.
Restructuring: In December 1997, the MPSC approved Consumers' application to implement a statewide three-year experimental gas transportation pilot program, eventually allowing 300,000 residential, commercial and industrial retail gas sales customers to choose their gas supplier. The program is voluntary for natural gas customers. Customers choosing to remain as sales customers of Consumers will not see a rate change in their natural gas rates. To minimize the risk of exposure to higher gas costs, Consumers currently has contracts in place at known prices covering a portion of its requirements through the year 2000. ABATE, the Attorney General and other parties filed claims of appeal of the MPSC's order with the Court of Appeals. For further information, see Note 4 .
Application of SFAS 71: Based on a regulated utility accounting standard, SFAS 71, Consumers may 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 MATTERS
New Accounting Standards
In 1997, the FASB issued SFAS 130, Reporting Comprehensive Income, and SFAS 131, Disclosures about Segments of an Enterprise and Related Information. Each of these standards requires expanded disclosures effective for 1998. Also in 1997, the Emerging Issues Task Force published Issue 97-4, Deregulation of the Pricing of Electricity - Issues Related to the Application of FASB Statements No. 71 and 101, and Issue 97-13, Accounting for Costs Incurred in Connection with a Consulting Contract or an Internal Project that Combines Business Process Reengineering and Information Technology Transformation. The consensus reached in Issue 97-4 allows a company to maintain regulatory assets and liabilities for part of a business that is being deregulated if deregulatory legislation or a commission rate order allows the collection of regulated cash flows to recover costs or settle obligations. The regulated portion of a business maintains these regulatory assets and liabilities until they are collected or settled, they are impaired, or until the regulated portion of the business becomes deregulated. The consensus reached in Issue 97-13 requires a company to expense the cost of business process reengineering activities as incurred, and requires a company to write off previously capitalized costs as a cumulative effect adjustment in 1997. Consumers was not affected by the requirements of this consensus. In addition, Consumers does not expect the application of the other statements to materially affect its financial position, liquidity or results of operations.
Computer Modifications for Year 2000
Consumers uses software and related technologies throughout its businesses that the year 2000 date change will affect and, if uncorrected, could cause Consumers to, among other things, issue inaccurate bills, report inaccurate data, or incur plant outages. In 1995, Consumers began modification of its computer software systems by dividing programs requiring modification between critical and noncritical programs. All necessary program modifications are expected to be completed by the year 2000. Consumers devoted significant internal and external resources to these modifications. It will expense anticipated spending for these modifications as incurred, while capitalizing and amortizing the costs for new software over the software's useful life. Consumers does not expect that the cost of these modifications will materially affect its financial position, liquidity or results of operations.
Derivatives and Hedges
Consumers is exposed to market risk associated with changes in interest rates. Management uses a combination of fixed-rate and variable-rate debt to reduce interest rate exposure. Interest rate swaps may be used to adjust exposure when deemed appropriate, based upon market conditions. Derivatives are principally used as hedges and not for trading purposes. During 1997, trading activities were immaterial. In the case of hedges, management believes that any losses incurred on derivative instruments used as a hedge would be offset by the opposite movement of the underlying hedged item. These strategies attempt to provide and maintain the lowest cost of capital. The fair value of Consumers' financial derivative instruments at December 31, 1997 was immaterial. Additionally, exposure to market risk in the near term would not have a material impact on Consumers consolidated financial position, results of operations or cash flows as of December 31, 1997.
For a discussion of accounting policies related to derivative transactions, see Note 5.
FORWARD-LOOKING INFORMATION
Forward-looking information is included throughout this report. This report also describes material contingencies in the Notes to the 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 FERC and the MPSC) with respect to rates, proposed electric and natural gas industries restructuring, change in industry and rate structure, operation of a nuclear power facility, 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 other important factors. 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 or deflation, 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.
Consumers Energy Company Notes to Consolidated Financial Statements
1: Corporate Structure
Consumers is a combination electric and gas utility company serving the Lower Peninsula of Michigan and is the principal subsidiary of CMS Energy, a holding company. Consumers' customer base includes a mix of residential, commercial and diversified industrial customers, the largest segment of which is the automotive industry.
2: Summary of Significant Accounting Policies and Other Matters
Basis of Presentation: The consolidated financial statements include Consumers and its wholly owned subsidiaries. The financial statements are prepared in conformity with generally accepted accounting principles and include the use of management's estimates. Consumers uses the equity method of accounting for investments in its companies and partnerships where it has more than a 20 percent but less than a majority ownership interest and includes these results in operating income.
Accretion Income and Expense: In 1991, the MPSC ordered that Consumers could recover a portion of its abandoned Midland investment over a 10-year period, but did not allow Consumers to earn a return on that amount. Consumers reduced the recoverable investment to the present value of the future recoveries. During the recovery period, Consumers adjusts the unrecovered asset to its present value. It reflects this adjustment as accretion income. Conversely, Consumers recorded a loss in 1992 for the present value of its estimated future underrecoveries of power costs resulting from purchases from the MCV Partnership (see Note 3). It now recognizes accretion expense annually to reflect the time value of money on the recorded loss.
Gas Inventory: Consumers uses the weighted average cost method for valuing working gas inventory. It records cushion gas, which is gas stored to maintain reservoir pressure for recovery of working gas, in the appropriate gas utility plant account. Consumers stores gas inventory in its underground storage facilities.
Maintenance, Depreciation and Depletion: Consumers charges property repairs and minor property replacements to maintenance expense. Depreciable property retired or sold, plus cost of removal (net of salvage credits), is charged to accumulated depreciation. Consumers bases depreciation provisions for utility plant on straight-line and units-of-production rates approved by the MPSC. The composite depreciation rate for electric utility property was 3.6 percent for 1997 and 3.5 percent for 1996 and 1995. The composite rate for gas utility plant was 4.1 percent for 1997, 4.2 percent for 1996 and 4.3 percent for 1995. The composite rate for other plant and property was 8.2 percent for 1997, 5.5 percent for 1996 and 4.9 percent for 1995.
Nuclear Fuel Cost: Consumers amortizes nuclear fuel cost to fuel expense based on the quantity of heat produced for electric generation. Interest on leased nuclear fuel is expensed as incurred. Under current federal law, as confirmed by court decision, the DOE must begin accepting deliveries of spent nuclear fuel by January 31, 1998 for disposal, even if a permanent repository is not then operational. Utilities and their customers have been prepaying the costs of DOE transport and disposal through fees based on electric generation by their nuclear plants. For fuel used after April 6, 1983, Consumers charges disposal costs to nuclear fuel expense, recovers them through electric rates and remits to the DOE quarterly. Consumers elected to defer payment for disposal of spent nuclear fuel burned before April 7, 1983 until it delivers the first of its spent fuel to the DOE. At December 31, 1997, Consumers had a recorded liability to the DOE of $111 million, including interest, which is payable upon the first delivery of spent nuclear fuel to the DOE. Consumers recovered through electric rates the amount of this liability, excluding a portion of interest. In January 1997, in response to the DOE's declaration in December 1996 that it would not begin to accept spent nuclear fuel deliveries in 1998, Consumers and other utilities filed suit in federal court. The utilities sought a declaration relieving them of their obligation to remit their quarterly fee payments to the DOE and authorizing them to escrow any related fees collected from their customers, unless and until the DOE begins to accept spent nuclear fuel. The utilities also sought an order requiring the DOE to develop a program to begin acceptance of spent nuclear fuel by January 31, 1998. A decision was issued by the court in late 1997 affirming the DOE's duty to take delivery of spent fuel, but was not specific as to the relief available for failure of the DOE to comply. Consumers is considering its options. Also in 1997, federal legislation was reintroduced to clarify the timing of the DOE's obligation to accept spent nuclear fuel and to direct the DOE to establish an integrated spent fuel management system that includes designing and constructing an interim storage facility in Nevada.
Nuclear Plant Decommissioning: Consumers collected $50 million in 1997 from its electric customers for the future decommissioning of its two nuclear plants. In April 1996, Consumers received a decommissioning order from the MPSC that estimated decommissioning costs for Big Rock and Palisades to be $330 million and $573 million (in 1997 dollars), respectively. The estimated decommissioning costs increased from previous estimates principally due to the unavailability of low- and high-level radioactive waste disposal facilities. Amounts collected from electric retail customers and deposited in trusts (including trust earnings) are credited to accumulated depreciation. To meet NRC decommissioning requirements, Consumers prepared site-specific decommissioning cost estimates for Big Rock and Palisades, assuming that each plant site will eventually be restored to conform with the adjacent landscape, and that all contaminated equipment will be disassembled and disposed of in a licensed burial facility. The April 1996 MPSC Order also requires Consumers to file updated site-specific decommissioning cost estimates for Big Rock and Palisades by March 31, 1998. The Big Rock estimate will reflect the early shut-down and the switch from the safe storage option to immediate dismantlement because of the reopening of the South Carolina Barnwell radioactive waste disposal facility. After retirement of Palisades, Consumers plans to maintain the facility in protective storage if radioactive waste disposal facilities are not available. As a result, Consumers will incur most of the Palisades decommissioning costs after the plant's NRC operating license expires. When the Palisades' NRC license expires in 2007, the trust funds are currently estimated to have accumulated $686 million. Consumers estimates that at the time Palisades is fully decommissioned in the year 2046, the trust funds will have provided $2.1 billion, including trust earnings, over this decommissioning period. Consumers will determine if the current decommissioning surcharge will be sufficient to provide for decommissioning of its nuclear plants during the first quarter of 1998, after the revised decommissioning cost estimates are computed for Palisades and Big Rock. At December 31, 1997, Consumers had an investment in nuclear decommissioning trust funds of $486 million, spent $23 million for the decommissioning of Big Rock and withdrew $17 million from the Big Rock nuclear decommissioning trust fund.
While decommissioning Big Rock, Consumers found that some areas of the plant have coatings that contain both metals and PCBs. Consumers does not believe that any facility in the United States currently accepts the radioactive portion of that waste. The cost of removal and disposal is currently unknown. These costs would constitute part of the cost to decommission the plant, and will be paid from the decommissioning fund. Consumers is studying the extent of the contamination and reviewing options.
Reclassifications: Consumers has reclassified certain prior year amounts for comparative purposes. These reclassifications did not affect consolidated net income for the years presented.
Related-Party Transactions: Consumers investment in Enterprises' preferred stock was $200 million in eight shares at December 31, 1997 and $250 million in ten shares at December 31, 1996. Beginning in 1997, Enterprises commenced a five-year redemption program of $50 million per year. In addition, Consumers has an investment in three million shares of CMS Energy Common Stock with a fair value totaling $129 million at December 31, 1997 (see Note 10). From these two investments, Consumers received dividends on affiliates' common and preferred stock totaling $17 million, each year, in 1997, 1996 and 1995. In addition, Consumers recovered $7 million of interest income in 1997 related to the sale of land to an affiliate.
Consumers purchases a portion of its gas from CMS NOMECO. The purchases for the years ended 1997, 1996 and 1995 were $25 million, $24 million and $19 million, respectively. In 1997, 1996 and 1995, Consumers purchased $51 million, $50 million and $53 million, respectively, of electric generating capacity and energy from affiliates of Enterprises. Consumers and its subsidiaries sold, stored and transported natural gas and provided other services to the MCV Partnership totaling $13 million, each year, for 1997, 1996 and 1995. For additional discussion of related-party transactions with the MCV Partnership and the FMLP, see Notes 3 and 17. Other related-party transactions are immaterial.
Revenue and Fuel Costs: Consumers accrues revenue for electricity and gas used by its customers but not billed at the end of an accounting period. Consumers accrues or reduces revenue for any underrecovery or overrecovery of electric power supply costs and natural gas costs by establishing a corresponding asset or liability until it bills or refunds these differences to customers following an MPSC order.
Utility Regulation: Consumers accounts for the effects of regulation based on a regulated utility accounting standard (SFAS 71). As a result, the actions of regulators affect when revenues, expenses, assets and liabilities are recognized. If all or a separable portion of Consumers' operations becomes no longer subject to the provisions of utility regulation, a write-off of related regulatory assets and liabilities would be required, unless some form of transition cost recovery continues through rates established and collected for Consumers' remaining operations. In addition, Consumers would be required to determine any impairment to the carrying costs of deregulated plant and inventory assets. For further discussion, see Electric Business Outlook and Gas Business Outlook-Application of SFAS 71 in the MD&A, Note 4 and Note 16.
Other: For significant accounting policies regarding cash equivalents, see Note 8; for income taxes, see Note 9; for executive incentive compensation, see Note 11; and for pensions and other postretirement benefits, see Note 12.
3: The Midland Cogeneration Venture
The MCV Partnership, which leases and operates the MCV Facility, contracted to sell electricity to Consumers for a 35-year period beginning in 1990 and to supply electricity and steam to Dow. Consumers, through two wholly owned subsidiaries, holds the following assets related to the MCV Partnership and MCV Facility: 1) CMS Midland owns a 49 percent general partnership interest in the MCV Partnership; and 2) CMS Holdings holds, through FMLP, a 35 percent lessor interest in the MCV Facility.
Summarized Statements of Income for CMS Midland and CMS Holdings (unaudited):
In Millions Years Ended December 31 1997 1996 1995
Pretax operating income $46 $40 $35 Income taxes and other 14 11 10 ____ ____ ____ Net income $32 $29 $25 ==== ==== ====
Power Purchases from the MCV Partnership: After September 2007, pursuant to the terms of the PPA and related undertakings, Consumers will only be required to pay the MCV Partnership the capacity charge and energy charge amounts authorized for recovery from electric customers by the MPSC. Prior to then, pursuant to MPSC orders issued to date, Consumers recovered in 1997 approximately 90 percent of the total capacity charge and energy charge amounts being billed by the MCV Partnership and paid to the MCV Partnership by Consumers. Currently, 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, the MPSC also permitted Consumers 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. It remains at this ceiling rate through the end of the PPA term.
Consumers recognized a loss in 1992 for the present value of the estimated future underrecoveries of power costs under the PPA. At December 31, 1997 and 1996, the after-tax present value of the PPA liability totaled $117 million and $147 million, respectively. The reduction in the liability since December 31, 1996 reflects after-tax cash underrecoveries of $41 million, partially offset by after-tax accretion expense of $11 million. The undiscounted after-tax amount associated with the liability totaled $188 million at December 31, 1997. The after-tax cash underrecoveries are currently based on the assumption that the MCV Facility will be available to generate electricity 91.5 percent of the time over its expected life. For 1997 the MCV Facility was available 99 percent of the time, resulting in $13 million over anticipated after-tax cash underrecoveries. Consumers believes it will continue to experience after-tax cash underrecoveries associated with the PPA in amounts as those shown below.
In Millions 1998 1999 2000 2001 2002
Estimated cash underrecoveries, $23 $22 $21 $20 $19
Consumers bases the above estimated underrecoveries, in part, on an estimate 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, Consumers will need to recognize losses for future underrecoveries larger than amounts previously recorded. Therefore, Consumers would experience larger amounts of cash underrecoveries than originally anticipated. Management will continue to evaluate the adequacy of the accrued liability considering actual MCV Facility operations.
In early 1998, the MCV Partnership filed a claim of appeal from the January 1998 MPSC order in the electric utility industry restructuring. On the same day, the MCV Partnership filed suit in the U.S. District Court seeking a declaration that the MPSC's failure to provide Consumers and the MCV Partnership a certain source of recovery of capacity payments after 2007 deprived the MCV Partnership of its rights under the Public Utilities Regulatory Policies Act of 1978. The MCV Partnership is seeking to prohibit the MPSC from implementing portions of the order.
PSCR Matters Related to Power Purchases from the MCV Partnership: As part of a 1995 decision in the 1993 PSCR reconciliation case, 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 decision. The MCV Partnership filed an application for leave to appeal with the Michigan Supreme Court which was denied in January 1998.
4: Rate Matters
Electric Proceedings: In 1996, the MPSC issued a final order that authorized Consumers to recover costs associated with the purchase of the additional 325 MW of MCV Facility capacity (see Note 3) and to accelerate recovery of its nuclear plant investment by increasing prospective annual nuclear plant depreciation expense by $18 million, with a corresponding decrease in fossil-fueled generating plant depreciation expense. It also established an experimental 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 and Consumers would transmit the power for a fee. The program is limited to 650 MW of load, of which existing special contracts represent 410 MW. New special contracts or direct-access load may fill 140 MW of the 650 MW block. The remaining 100 MW will be 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. Direct access for a portion of this 100 MW began during the fourth quarter of 1997.
In May 1997, the MPSC authorized Consumers to collect $17 million from electric customers through a one-time surcharge pertaining to the 1994 PSCR reconciliation. In September 1997, the MPSC further authorized Consumers to collect $13 million from electric customers through a one- time surcharge pertaining to the 1995 PSCR reconciliation.
In January 1998, the Court of Appeals ruled that the MPSC has statutory authority to authorize an experimental electric retail wheeling program. By its terms, no retail wheeling has yet occurred pursuant to that program. Consumers filed with the Michigan Supreme Court seeking leave to appeal that ruling.
For information on other orders, see the Electric Restructuring section below.
Electric Restructuring: As part of ongoing proceedings relating to the restructuring of the electric utility industry in Michigan, in June 1997 the MPSC issued an order proposing that beginning January 1, 1998 Consumers would have to transmit and distribute energy on behalf of competing power suppliers to serve retail customers. The order states that by January 1, 2002, all customers would be free to choose (that is, have direct access to) their own power suppliers.
Under the June 1997 order, the MPSC would allow utilities to recover prudently incurred Transition Costs through a charge to all direct-access customers until the end of the transition period in 2007. Further proceedings, as ordered by the MPSC, took place to address other features of the direct-access programs being considered, including proposals to "true up" Transition Cost charges for changes in sales and market prices of power purchase capacity to the extent they are different from estimates used for calculating Transition Costs. The June order is subject to a claim of appeal filed with the Court of Appeals which questions whether the MPSC has the statutory authority to mandate restructuring on an involuntary basis. In October 1997, the MPSC issued a series of additional orders relating to its electric industry restructuring proceedings. The orders primarily addressed issues involving the design of retail direct-access tariffs, the true-up mechanism in connection with the recovery of Transition Costs, suspension of the power supply cost recovery clause and freezing of power supply costs, and performance-based rate-making.
In January 1998, the MPSC clarified the October 1997 orders on a basis generally consistent with the June 1997 order. The January 1998 order: 1) defers the commencement of the phase-in of direct access to begin in March 1998; 2) attempts to clarify the true-up mechanism to be used in connection with the recovery of Transition Costs; 3) confirms implementation of a suspension of the power supply cost recovery clause; and 4) confirms the MPSC's belief that Securitization may be a beneficial mechanism for recovery of Transition Costs while recognizing that Securitization requires state legislation to occur. Consumers expects Michigan legislative consideration of the entire subject of electric industry restructuring in 1998. To be acceptable to Consumers, the legislation would have to provide for full recovery of Transition Costs. Consumers expects the legislature to review all of the policy choices made by the MPSC during the restructuring proceedings to assure that they are in accord with those that the legislature believes should be paramount.
The January 1998 order further estimated a Transition Cost for Consumers at $1.755 billion which is generally consistent with the amount proposed by Consumers. Consumers will recover this cost through a surcharge to direct-access customers through 2007. Consumers believes that this surcharge will apply to all customers beginning in 2002. The surcharge is subject to adjustment through a true-up mechanism to assure that Transition Costs actually incurred are collected. A separate charge to direct-access customers after MPSC review and verification would also recover prudent costs of implementing a direct-access program estimated at an additional $200 million. Nuclear decommissioning costs will also continue to be collected through a separate surcharge to all customers.
Subsequent to the January order, the MPSC issued an order addressing Consumers', among others, motions for clarification of the January order. This order results in: 1) a suspension of the PSCR in a manner proposed by Consumers; 2) a termination of the 1998 PSCR plan case; and 3) the establishing of a permanent PSCR/base rate freeze charge in the 1997 PSCR reconciliation proceeding. For further information see Electric Business Outlook - Application of SFAS 71 in the MD&A.
Gas Restructuring: In December 1997, the MPSC approved Consumers' application to implement a statewide experimental gas transportation pilot program. Consumers' expanded experimental program will extend over a three-year period, eventually allowing 300,000 residential, commercial and industrial retail gas sales customers to choose their gas supplier. The program is voluntary for natural gas customers. Participating customers will be selected on a first-come, first-served basis, up to a limit of 100,000 customers on April 1, 1998. Up to 100,000 more customers will be added on April 1 of each of the next two years. Customers choosing to remain as sales customers of Consumers will not see a rate change in their natural gas rates. The order allowing the implementation of this program: 1) suspends Consumers' gas cost recovery clause, effective April 1, 1998 for a three-year period, establishing a gas commodity cost at a fixed rate of $2.84 per mcf; 2) establishes an earnings sharing mechanism that will provide for refunds to customers if Consumers' earnings during the three year term of the program exceed certain pre-determined levels; and 3) establishes a gas transportation code of conduct that addresses concerns about the relationship between Consumers and marketers, including its affiliated marketers. This experimental program will allow competing gas suppliers, including marketers and brokers, to market natural gas to a large number of retail customers in direct competition with Consumers. In 1998, the Attorney General, ABATE and other parties filed claims of appeal regarding the program with the Court of Appeals. To minimize the risk of exposure to higher gas costs, Consumers currently has contracts in place at known prices covering 50 percent of its 1998 requirements, 25 percent of its 1999 requirements and 15 percent of its 2000 requirements. Additional forward coverage is currently under review and will be firmed up during the next few months. For further information see Gas Business Outlook - Application of SFAS 71 in the MD&A.
Gas Proceedings: In 1995, the MPSC issued an order regarding a $44 million (excluding interest) gas supply contract pricing dispute between Consumers and certain gas producers. The order stated that Consumers was not obligated to seek prior approval of market-based pricing changes that Consumers implemented under the contracts in question. The Court of Appeals upheld the MPSC order. The producers sought leave to appeal with the Michigan Supreme Court. Their request is still pending. 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 materially affect Consumers' financial position, liquidity or results of operations.
5: Short-Term Financings and Capitalization
Authorization: At December 31, 1997, Consumers had FERC authorization to: 1) issue or guarantee up to $900 million of short-term securities through 1998; 2) issue, through November 1998, $376 million of long-term securities with maturities up to 30 years, for refinancing or refunding purposes; and 3) guarantee, through 1999, up to $25 million in loans made by others, to residents of Michigan for the purpose of making energy- related home improvements. In January 1998, Consumers requested authorization to issue, through November 1998, an additional $500 million of long-term securities for refinancing or refunding purposes.
Short-Term Financings: Consumers has an unsecured $425 million credit facility and unsecured lines of credit aggregating $120 million. These facilities are available to finance seasonal working capital requirements and to pay for capital expenditures between long-term financings. At December 31, 1997, a total of $377 million was outstanding at a weighted average interest rate of 6.5 percent, compared with $333 million outstanding at December 31, 1996, at a weighted average interest rate of 6.3 percent.
Consumers also has in place a $500 million trade receivables sale program. At December 31, 1997 and 1996, receivables sold under the program totaled $335 million and $318 million, respectively. Accounts receivable and accrued revenue in the Consolidated Balance Sheets have been reduced to reflect receivables sold.
Derivatives: Consumers has entered interest rate swap agreements (derivatives) to exchange variable rate interest payment obligations for fixed rate obligations. These swaps attempt to reduce the impact of interest rate fluctuations. To qualify for hedge accounting, derivatives must meet the following criteria initially: 1) the item to be hedged exposes the enterprise to interest rate risk; and 2) the derivative reduces that exposure and is designated as a hedge. The hedged amounts are used to measure interest to be paid or received and do not represent the exposure to principal loss. The difference between the amounts paid and received under the swaps is accrued and recorded as an adjustment to interest expense over the life of the hedged agreement.
Derivative instruments contain credit risk if the counterparties, including financial institutions, fail to perform under the agreements. Consumers minimizes such risk by performing financial credit reviews using, among other things, publicly available credit ratings of such counterparties. The risk of nonperformance by the counterparties is considered remote.
Capital Stock: In 1996, 4 million shares of 8.36 percent Trust Preferred Securities were issued and sold through Consumers Power Company Financing I, a wholly owned business trust consolidated with Consumers. Net proceeds from the sale totaled $97 million. In September 1997, 4.8 million shares of 8.2 percent Trust Preferred Securities were issued and sold through Consumers Energy Company Financing II, a wholly owned business trust consolidated with Consumers. Net proceeds from the sale totaled $116 million. Consumers formed both trusts for the sole purpose of issuing the tax deductible Trust Preferred Securities. Consumers' obligations with respect to the Trust Preferred Securities under the notes, under the indenture through which Consumers issued the notes, under Consumers' guarantee of the Trust Preferred Securities, and under the declaration by the trusts, taken together, constitute a full and unconditional guarantee by Consumers of the trusts' obligations under the Trust Preferred Securities. For additional information, see footnote (a) on the Consolidated Balance Sheets.
In September 1997, the proceeds from Consumers' 8.2 percent Trust Preferred Securities were used to redeemed all outstanding shares of its $7.45, $7.68, $7.72 and $7.76 preferred stock for $120 million.
First Mortgage Bonds: Consumers secures its first mortgage bonds by a mortgage and lien on substantially all of its property. Consumers' ability to issue and sell securities is restricted by certain provisions in its First Mortgage Bond Indenture, its Articles of Incorporation and the need for regulatory approvals to meet appropriate federal law.
In early 1998, Consumers called for the March 1998 redemption of $57 million aggregate principal amount of its 7.5 percent First Mortgage Bonds due in 2001 and $62 million aggregate principal amount of its 7.5 percent First Mortgage Bonds due in 2002.
In early 1998, Consumers issued $250 million of senior notes due February 1, 2008, at an interest rate of 6.375 percent. The senior notes are secured by a series of Consumers' First Mortgage Bonds, issued contemporaneously in a similar amount. Proceeds from the sale were added to the general funds of Consumers and applied to the payment, at maturity, of $248 million aggregate principal amount of Consumers' 8.75 percent First Mortgage Bonds due February 15, 1998.
Long-Term Bank Debt: Consumers has a $400 million unsecured, variable rate, long-term loan. At December 31, 1997 and 1996 the loan carried a weighted average interest rate of 6.4 percent and 6 percent, respectively. In 1996, an existing interest rate swap ended and Consumers entered into a new $125 million interest rate swap agreement, again exchanging variable- rate interest for fixed-rate interest to hedge a portion of its long-term debt. This swap agreement terminated in November 1997. In December 1997, Consumers entered into interest rate swaps of $400 million. After taking into account the effect of the swaps, the weighted average interest rate on the long-term loan for the years ended December 31, 1997 and 1996 was 6.2 percent and 6.1 percent, respectively.
In January 1998, two agreements to guarantee interest rates for the issuance of future long-term debt were executed. The first anticipatory debt agreement is for $250 million at 5.5 percent which expires February 10, 1998, and the second agreement is for $200 million at 5.8 percent with an expiration of March 16, 1998.
In 1996, Michigan Gas Storage entered into a $23 million secured, variable rate, seven-year term loan. At December 31, 1997 and 1996 the loan had a weighted average interest rate of 6.3 percent and 6 percent, respectively. In October 1997 Michigan Gas Storage entered into a $15 million interest rate swap agreement at 6.2 percent which terminates on September 30, 2003. After taking into account the effect of the swap, the weighted average interest rate on the long-term loan for the year ended December 31, 1997 was 6.4 percent.
Other: Consumers has a total of $131 million of long-term pollution control revenue bonds outstanding, secured by irrevocable letters of credit or first mortgage bonds. These bonds had a weighted average interest rate of 5.1 percent at December 31, 1997.
Under the provisions of its Articles of Incorporation at December 31, 1997, Consumers had $280 million of unrestricted retained earnings available to pay common dividends. In January 1998, Consumers declared a $80 million common dividend payable in February 1998.
In October 1997, Consumers returned $50 million of paid-in capital to CMS Energy.
6: Commitments and Contingencies
Electric Environmental Matters: The Clean Air Act limits emissions of sulfur dioxide and nitrogen oxides and requires 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. During the past few years, in order to comply with the Act, Consumers incurred capital expenditures totaling $46 million to install equipment at certain generating units. Consumers estimates capital expenditures for in-process and proposed modifications at other coal-fueled units to be an additional $30 million by the year 2000. Management believes that these expenditures will not materially affect Consumers' annual operating costs.
Consumers currently operates within all Clean Air Act requirements and meets current ozone and particulate emission limits. The Act requires the EPA to review, periodically, the effectiveness of the national air quality standards in preventing adverse health affects. The EPA recently revised these standards. The revisions may further limit small particulate and ozone related emissions. Consumers supports the bipartisan effort in the U.S. Congress to delay implementation of the revised standards until the relationship between the new standards and health improvements is established scientifically.
In October 1997, pursuant to recommendations from the Ozone Transport Assessment Group and the requests of several Northeastern states, the EPA proposed that the State of Michigan impose additional nitrogen oxide limits on fossil-fueled emitters, such as Consumers' generating units. The limits are an effort to reduce statewide nitrogen oxide emissions by 32 percent, as early as 2002. The State of Michigan will have one year to review and challenge the proposed recommendations, and one year after that to implement final requirements. It is unlikely that the State of Michigan will establish Consumers' nitrogen oxide emissions reduction target until mid-to-late 1999. Until this state-mandated target is known, the estimated cost of compliance is subject to significant revision.
The preliminary estimate of capital costs to reduce nitrogen oxide related emissions for Consumers' fossil-fueled generating units is approximately $175 million, plus an additional amount totaling $10 million per year for 20 years for operation and maintenance costs. Consumers may need an equivalent amount to comply with the new small particulate standards. The State of Michigan objected to the extent of the proposed EPA emission reductions. If the State of Michigan's position were to be adopted by the EPA, costs could be less than the current estimated amounts.
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. Nevertheless, it believes that these costs are properly recoverable in rates under current ratemaking policies.
Consumers is a so-called potentially responsible party at several contaminated sites administered under Superfund. Superfund liability is joint and several; along with Consumers, many other creditworthy, potentially responsible parties with substantial assets cooperate with respect to the individual sites. Based upon past negotiations, Consumers estimates that its share of the total liability for the known Superfund sites will be between $3 million and $9 million. At December 31, 1997, Consumers has accrued $3 million for its estimated Superfund liability.
Gas Environmental Matters: 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 23 sites that formerly housed manufactured gas plant facilities, even those in which it has a partial or no current ownership interest. In 1998 Consumers plans to study indoor air issues at residences on some sites and ground water impacts or surface soil impacts at other sites. On sites where the company has received site-wide study plan approvals, it will continue to implement these plans. It will also work toward closure of environmental issues at sites as studies are completed. 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 1998 costs. At December 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. According to an MPSC rate order issued in 1996, Consumers will defer and amortize, over a period of ten years, environmental clean-up costs above the amount currently being recovered in rates. 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 it may incur for these sites.
Capital Expenditures: Consumers estimates capital expenditures, including new lease commitments, of $435 million for 1998, $380 million for 1999, and $370 million for 2000. For further information, see the Capital Expenditures Outlook section in the MD&A.
Commitments for Coal and Gas Supplies: Consumers entered into coal supply contracts with various suppliers for its coal-fired generating stations. These contracts have expiration dates that range from 1998 to 2004. Consumers contracts for 50 - 75 percent of its annual coal requirements, totaling $250 million, in 1997 (56 percent was under long-term contracts). Consumers supplements its long-term contracts with spot-market purchases to fulfill its coal needs.
Consumers entered into gas supply contracts and transportation contracts with various suppliers for its natural gas business. These contracts have expiration dates that range from 1998 to 2003. Consumers' 1997 gas requirements totaled 250 bcf at a cost of $694 million, 80 percent of which was under long-term contracts for one year or more. As of the end of 1997, Consumers had 50 percent of its 1998 gas requirements under such long-term contracts, and will supplement them with additional long-term contracts and spot-market purchases.
Other: Various parties have sued 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. It also has an ongoing mitigation program to modify the service of all customers with livestock.
In December 1997, the Michigan Supreme Court remanded for further proceedings a 1994 Michigan trial court decision that refused to allow the claims of over 200 named plaintiffs to be joined in a single action. The trial court dismissed all of the plaintiffs except the first-named plaintiff, allowing the others to re-file separate actions. Of the original plaintiffs, only 49 re-filed separate cases. All of those 49 cases have been resolved. The Michigan Supreme Court remanded the matter, finding that the proper remedy for misjoinder was not dismissal, but to automatically allow each case to go forward separately. Consumers filed a motion for reconsideration with the Michigan Supreme Court, which was denied. Consumers intends to vigorously defend these cases, but is unable to predict the outcome. As of December 31, 1997, Consumers had 12 individual stray voltage lawsuits, unrelated to the cases above, awaiting trial court action, down from 22 lawsuits as reported at year end 1996.
In October 1997, two independent power producers sued Consumers and CMS Energy in a federal court. The suit alleges antitrust violations relating to contracts which Consumers entered into with some of its customers and claims relating to power facilities. The plaintiffs claim damages of $100 million (which a court can treble in antitrust cases as provided by law). The transactions of which plaintiffs complain have been regulated by, and are subject to, the jurisdiction of the MPSC. In November 1997, Consumers and CMS Energy filed a motion for summary judgement and/or for dismissal of the complaint filed by the plaintiffs. Consumers believes the lawsuit is without merit and will vigorously defend against it, but cannot predict the outcome of this matter.
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. These lawsuits and proceedings may involve personal injury, property damage, contractual matters, environmental issues, federal and state taxes, rates, licensing and other matters.
Consumers has accrued estimated losses for certain contingencies discussed in this Note. Resolution of these contingencies is not expected to have a material adverse impact on Consumers' financial position, liquidity, or results of operations.
7: Nuclear Matters
Consumers filed updated decommissioning information with the MPSC in 1995 that estimated decommissioning costs for Big Rock and Palisades. In April 1996, the MPSC issued an order in Consumers' nuclear decommissioning case, which fully supported Consumers' request and did not change the overall surcharge revenues collected from retail customers. The MPSC ordered Consumers to file a report on the adequacy of the surcharge revenues with the MPSC at three-year intervals beginning in 1998. Consumers filed a revision to its Post Shutdown Activities Report (formerly decommissioning report) with the NRC to reflect the shutdown of Big Rock.
Big Rock closed permanently on August 29, 1997 because management determined that the plant would be uneconomical to operate in an increasingly competitive environment. Consumers originally scheduled the plant to close May 31, 2000, at the end of the plant's operating license. Plant decommissioning began in September 1997 and may take five to ten years to return the site to its original condition. The earlier than planned closure of the plant and the reopening of the South Carolina Barnwell facility to receive low level radioactive waste have changed the method of decommissioning from the safe storage option to immediate dismantlement. This change could have an impact on the estimated decommissioning cost which is required to be updated in a filing with the MPSC by March 31, 1998. For further information on nuclear matters, see Note 2.
Consumers has loaded 13 dry storage casks with spent nuclear fuel at Palisades. Consumers plans to load five additional casks at Palisades in 1999 pending approval by the NRC. In June 1997, the NRC approved Consumers' process for unloading spent fuel from a cask at Palisades previously discovered to have minor weld flaws. Consumers intends to transfer the spent fuel to a new transportable cask when one is available. Westinghouse Corporation has been contracted to design and fabricate transportable casks for both Palisades and Big Rock. These casks will support the off-load of the cask with minor flaws, continued operation of Palisades and the decommissioning of Big Rock.
Consumers maintains insurance coverage against property damage, debris removal, personal injury liability and other risks that are present at its nuclear generating facilities. Consumers also maintains coverage for replacement power costs during prolonged accidental outages at Palisades. Insurance would not cover such costs during the first 17 weeks of any outage, but would cover most of such costs during the next 58 weeks of the outage, followed by reduced coverage to 80 percent for two additional years. If certain loss events occur at its own or other nuclear plants similarly insured, Consumers could be required to pay maximum assessments of $19 million in any one year to Nuclear Electric Insurance Ltd; $79 million per event under the nuclear liability secondary financial protection program, limited to $10 million per event in any one year; and $6 million if nuclear workers claim bodily injury from radiation exposure. Consumers considers the possibility of these assessments to be remote.
The NRC requires Consumers to make certain calculations and report to it on the continuing ability of the Palisades reactor vessel to withstand postulated pressurized thermal shock events during its remaining license life, considering the embrittlement of reactor vessel materials over time due to operation in a radioactive environment. Based on continuing analysis of data in December 1996 Consumers received an interim Safety Evaluation Report from the NRC indicating that the reactor vessel can be safely operated through 2003 before reaching the NRC's screening criteria for reactor embrittlement. Consumers believes that with fuel management designed to minimize embrittlement, it can operate Palisades to the end of its license life in the year 2007 without annealing the reactor vessel. Nevertheless, Consumers will continue to monitor the matter.
8: Supplemental Cash Flow Information
For purposes of the Consolidated Statements 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 Years Ended December 31 1997 1996 1995
Cash transactions Interest paid (net of amounts capitalized) $166 $143 $158 Income taxes paid (net of refunds) 116 119 43
Non-cash transactions Nuclear fuel placed under capital lease $ 4 $ 28 $ 26 Other assets placed under capital leases 7 3 5 Capital leases refinanced - - 21
Changes in other assets and liabilities as shown on the Consolidated Statements of Cash Flows are described below:
In Millions Years Ended December 31 1997 1996 1995
Sale of receivables, net $ 17 $ 23 $ 20 Accounts receivable 31 12 (55) Accrued revenue 20 (49) 1 Inventories (10) 8 54 Accounts payable (30) 17 48 Accrued refunds 4 (14) (4) Other current assets and liabilities, net 17 (14) 28 Non-current deferred amounts, net 35 20 (8) ---- ---- ---- $ 84 $ 3 $ 84 ==== ==== ====
9: Income Taxes
Consumers and its subsidiaries file a consolidated federal income tax return with CMS Energy. Income taxes are generally allocated based on each company's separate taxable income. Consumers practices full deferred tax accounting for temporary differences as authorized by the MPSC.
Consumers used ITC to reduce current income taxes payable, and defers and amortizes ITC over the life of the related property. Any AMT paid generally becomes a tax credit that Consumers can carry forward indefinitely to reduce regular tax liabilities in future periods when regular taxes paid exceed the tax calculated for AMT. The significant components of income tax expense (benefit) consisted of:
In Millions Years Ended December 31 1997 1996 1995
Current federal income taxes $139 $102 $ 76 Deferred income taxes 23 58 67 Deferred ITC, net (10) (10) (10) ---- ---- ---- $152 $150 $133 ==== ==== ====
Operating $160 $162 $145 Other (8) (12) (12) ---- ---- ---- $152 $150 $133 ==== ==== ====
The principal components of Consumers' deferred tax assets (liabilities) recognized in the balance sheet are as follows:
In Millions December 31 1997 1996
Property $ (563) $ (556) Unconsolidated investments (246) (239) Postretirement benefits (Note 12) (156) (165) Abandoned Midland project (33) (40) Employee benefit obligations (includes post- retirement benefits of $153 and $165) (Note 12) 184 195 Power purchases (Note 3) 66 82 AMT carryforward 74 93 Other 8 11 -------- -------- $ (666) $ (619) ======== ========
Gross deferred tax liabilities $ (1,372) $ (1,375) Gross deferred tax assets 706 756 -------- -------- $ (666) $ (619) ======== ========
The actual income tax expense differs from the amount computed by applying the statutory federal tax rate to income before income taxes as follows:
In Millions Years Ended December 31 1997 1996 1995
Net income $ 321 $ 296 $ 255 Income tax expense 152 150 133 Preferred securities distributions (12) (8) - ----- ----- ----- Pretax income 461 438 388 Statutory federal income tax rate x 35% x 35% x 35% ----- ----- ----- Expected income tax expense 161 153 136 Increase (decrease) in taxes from Capitalized overheads previously flowed through 5 5 5 Differences in book and tax depreciation not previously deferred 8 6 6 ITC amortization (10) (10) (10) Affiliated companies' dividends (6) (6) (6) Other, net (6) 2 2 ----- ----- ----- Actual income tax expense $ 152 $ 150 $ 133 ===== ===== =====
Effective tax rate 32.9% 34.2% 34.3% ===== ===== =====
10: Financial Instruments
The carrying amounts of cash, short-term investments and current liabilities approximate their fair values due to their short-term nature. The estimated fair values of long-term investments are based on quoted market prices or, in the absence of specific market prices, on quoted market prices of similar investments or other valuation techniques. The carrying amounts of all long-term investments, except as shown below, approximate fair value.
In Millions December 31 1997 1996 Available-for-sale Amortized Fair Unrealized Amortized Fair Unrealized securities Cost Value Gain Cost Value Gain - ------------------ --------- ----- ---------- --------- ----- ----------
Common stock of CMS $ 43 $ 129 $ 86 $ 43 $ 99 $ 56 Energy Nuclear decommissioning investments (a) 405 486 81 351 386 35 ===== ===== ===== ===== ===== =====
(a) Consumers classifies its unrealized gains and losses on nuclear decommissioning investments in accumulated depreciation.
The carrying amount of long-term debt was $1.4 billion at December 31, 1997 and $1.9 billion at December 31, 1996, and the fair values were $1.4 billion and $1.9 billion, respectively. For held-to-maturity securities and related-party financial instruments, see Note 2.
11: Executive Incentive Compensation
Consumers participates in CMS Energy's Performance Incentive Stock Plan. Under the plan, restricted shares of Common Stock of CMS Energy, stock options and stock appreciation rights may be granted to key employees based on their contributions to the successful management of CMS Energy and its subsidiaries. Awards under the plan may consist of any class of Common Stock of CMS Energy. Certain plan awards are subject to performance-based business criteria. The plan reserves for award not more than three percent of CMS Energy's Common Stock outstanding on January 1 each year, less (1) the number of shares of restricted Common Stock awarded and (2) Common Stock subject to options granted under the plan during the immediately preceding four calendar years. Any forfeitures of shares previously awarded increase the number of shares available for grant. At December 31, 1997, awards of up to 749,889 shares of CMS Energy Common Stock and 192,387 shares of Class G Common Stock may be issued.
Restricted shares of Common Stock are outstanding shares with full voting and dividend rights. These awards vest over five years at the rate of 25 percent per year after two years. The restricted shares are subject to achievement of specified levels of total shareholder return and are subject to forfeiture if employment terminates before vesting. If performance objectives are exceeded, the plan provides additional awards. Restricted shares vest fully if control of CMS Energy changes, as defined by the plan. At December 31, 1997, 229,601 of the 310,351 shares of restricted CMS Energy Common Stock outstanding are subject to performance objectives. At December 31, 1997 all of the 19,791 restricted shares of Class G Common Stock outstanding are subject to performance objectives.
Under the plan, stock options and stock appreciation rights are granted with an exercise price equal to the closing market price on each grant date. Options are exercisable upon grant and expire up to ten years and one month from date of grant. The status of the restricted stock and options granted to Consumers' key employees under the Performance Incentive Stock Plan follows.
Restricted Options Stock ------- ---------- Weighted Average Number Number Exercise CMS Energy Common Stock of Shares of Shares Price --------- --------- -------- Outstanding at January 1, 1995 189,778 802,883 $ 23.90 Granted 123,615 147,200 $ 25.53 Exercised or Issued (27,533) (93,333) $ 15.64 Forfeited (16,807) - Expired - (51,000) $ 27.56 -------- -------- ------- Outstanding at December 31, 1995 269,053 805,750 $ 24.93 Granted 84,760 138,520 $ 30.63 Exercised or Issued (50,925) (169,525) $ 21.72 Forfeited (25,522) - Expired - (12,000) $ 32.88 -------- -------- ------- Outstanding at December 31, 1996 277,366 762,745 $ 26.55 Granted 165,942 152,352 $ 35.97 Exercised or Issued (73,375) (377,317) $ 27.21 Forfeited (59,582) - -------- -------- ------- Outstanding at December 31, 1997 310,351 537,780 $ 28.28 ======== ======== =======
Restricted Stock Options ---------- ------- Weighted Average Number Number Exercise Class G Common Stock of Shares of Shares Price --------- --------- -------- Outstanding at January 1, 1995 - - Granted 6,924 10,000 $ 17.88 -------- -------- ------- Outstanding at December 31, 1995 6,924 10,000 $ 17.88 Granted 9,423 11,000 $ 17.88 -------- -------- ------- Outstanding at December 31, 1996 16,347 21,000 $ 17.88 Granted 8,784 12,000 $ 20.24 Exercised or Issued (1,385) (5,000) $ 17.88 Forfeited (3,955) - -------- -------- ------- Outstanding at December 31, 1997 19,791 28,000 $ 18.89 ======== ======== =======
The following table summarizes information about CMS Energy Common Stock options outstanding at December 31, 1997:
Number Weighted Weighted Range of of Shares Average Average Exercise Prices Outstanding Remaining Life Exercise Price
CMS Energy Common Stock
$17.13 - $24.75 192,800 2.62 years $20.59 $26.25 - $33.88 220,680 5.16 years $30.67 $35.94 - $38.00 124,300 9.65 years $35.98 ------- ---------- ------ $17.13 - $38.00 537,780 5.29 years $28.28 ======= ========== ======
The range of exercise prices for Class G Common Stock options is $17.88 to $23.31; the weighted average remaining life is 8.8 years.
The weighted average fair value of options granted for CMS Energy Common Stock was $6.38 in 1997, $6.94 in 1996, and $5.37 in 1995. The weighted average fair value of options granted for Class G Common Stock was $1.87 in 1997, $1.59 in 1996 and $1.57 in 1995. Fair value is estimated using the Black-Scholes model, a mathematical formula used to value options traded on securities exchanges, with the following assumptions:
Years Ended December 31 1997 1996 1995
CMS Energy Common Stock Options Risk-free interest rate 6.06% 6.63% 6.17% Expected stock price volatility 17.43% 24.08% 27.12% Expected dividend rate $ .30 $ .27 $ .24 Expected option life 5 years 5 years 5 years
Class G Common Stock Options Risk-free interest rate 6.06% 6.63% 6.17% Expected stock price volatility 18.05% 16.19% 16.19% Expected dividend rate $ .31 $ .295 $ .295 Expected option life 5 years 5 years 5 years
Consumers applies Accounting Principles Board Opinion 25 and related interpretations in accounting for the Performance Incentive Stock Plan. Since stock options are granted at market price, no compensation cost has been recognized for stock options granted under the plan. If compensation cost for stock options had been determined in accordance with SFAS 123, Accounting for Stock-Based Compensation, Consumers' net income would have decreased by less than $1 million for 1997, 1996 and 1995. The compensation cost charged against income for restricted stock was $2 million in 1997, $1 million in 1996, and $2 million in 1995.
12: Retirement Benefits
Postretirement Benefit Plans Other Than Pensions: Consumers provides certain health care and life insurance benefits for retired employees and their eligible dependents. Substantially all employees may become eligible for such benefits if they attain retirement status while working for Consumers or its subsidiaries. Consumers adopted the required accounting for these benefits effective in 1992 and recorded a liability of $466 million for the accumulated transition obligation and a corresponding regulatory asset for anticipated recovery in utility rates (see Note 16). The MPSC authorized recovery of the electric utility portion of these costs in 1994 over 18 years and the gas utility portion in 1996 over 16 years. During 1995, the FERC granted Consumers a waiver of a three-year filing requirement for cost recovery with respect to its wholesale electric business. At December 31, 1997, Consumers had recorded a regulatory asset and liability of $7 million. By early 1997, the FERC had authorized recovery of these costs. Consumers funds the benefits using external Voluntary Employee Beneficiary Associations. Funding of the benefits coincides with Consumers' recovery in rates.
Retiree health care costs at December 31, 1997 are based on the assumption that costs would increase 6.5 percent in 1998, then decrease gradually to 5.5 percent in 2004 and thereafter. The health care cost trend rate assumption significantly affects the amounts reported. For example, a one percentage point increase in each year's estimated health care cost assumption would increase the accumulated postretirement benefit obligation at December 31, 1997 by $81 million and the aggregate of the service and interest cost components of net periodic postretirement benefit costs for 1997 by $8 million.
Years Ended December 31 1997 1996 1995
Weighted average discount rate 7.50% 7.75% 7.50% Expected long-term rate of return on plan assets 7.00% 7.00% 7.00%
Net postretirement benefit costs for the health care benefits and life insurance benefits consisted of:
In Millions Years Ended December 31 1997 1996 1995
Service cost $ 9 $ 12 $ 11 Interest cost 40 41 39 Actual return on assets (37) (14) (4) Net amortization and deferral 25 8 1 ---- ---- ---- Net postretirement benefit costs $ 37 $ 47 $ 47 ==== ==== ====
The funded status of the postretirement benefit plans for the health care benefits and life insurance benefits is reconciled with the liability recorded at December 31 as follows:
In Millions 1997 1996
Actuarial present value of estimated benefits Retirees $ 321 $ 327 Eligible for retirement 67 65 Active (upon retirement) 182 183 ----- -----
Accumulated postretirement benefit obligation 570 575 Plan assets (primarily stocks, bonds and money market investments) at fair value 219 134 ----- -----
Accumulated postretirement benefit obligation less than (in excess of) plan assets (351) (441) Unrecognized prior service cost (1) 6 Unrecognized net gain from experience different than assumed (84) (37) ----- -----
Recorded liability $(436) $(472) ===== =====
The health care portion of the accumulated postretirement benefit obligation is $554 million and $560 million at December 31, 1997 and 1996, respectively.
Supplemental Executive Retirement Plan: Certain management employees qualify to participate in the SERP. SERP benefits, which are based on an employee's years of service and earnings as defined in the SERP, are paid from a trust established in 1988. Because the SERP is not a qualified plan under the Internal Revenue Code, earnings of the trust are taxable and trust assets are included in consolidated assets. At December 31, 1997 and 1996, trust assets were $24 million and $18 million, respectively, and were classified as other non-current assets.
Defined Benefit Pension Plan: A trusteed, non-contributory, defined benefit Pension Plan covers substantially all employees. The benefits are based on an employee's years of accredited service and earnings, as defined in the plan, during an employee's five highest years of earnings. Because the plan was fully funded, no contributions were made in 1997 and 1996. A contribution of $9 million was made in 1995. Amounts presented below for the Pension Plan include amounts for employees of CMS Energy and non-utility affiliates which were not distinguishable from the plan's total assets.
Years Ended December 31 1997 1996 1995
Discount rate 7.50% 7.75% 7.50% Rate of compensation increase 3.75% 4.00% 4.50% Expected long-term rate of return on assets 9.25% 9.25% 9.25%
Net Pension Plan and SERP costs consisted of:
In Millions Years Ended December 31 1997 1996 1995
Service cost $ 25 $ 25 $ 22 Interest cost 60 57 54 Actual return on plan assets (164) (63) (168) Net amortization and deferral 93 (6) 103 ----- ----- ----- Net periodic pension cost $ 14 $ 13 $ 11 ===== ===== =====
The funded status of the CMS Energy Pension Plan and Consumers SERP reconciled to the pension liability recorded at December 31 was:
In Millions Pension Plan SERP 1997 1996 1997 1996
Actuarial present value of estimated benefits Vested $ 548 $ 504 $ 12 $ 13 Non-vested 79 72 - - ----- ----- ----- -----
Accumulated benefit obligation 627 576 12 13 Provision for future pay increases 165 158 6 8 ----- ----- ----- -----
Projected benefit obligation 792 734 18 21 Plan assets (primarily stocks and bonds, including $153 in 1997 and $117 in 1996 of CMS Energy Common Stock) at fair value 882 779 - - ----- ----- ----- -----
Projected benefit obligation less than (in excess of) plan assets 90 45 (18) (21) Unrecognized net (gain) loss from experience different than assumed (157) (99) 3 1 Unrecognized prior service cost 35 39 1 1 Unrecognized net transition (asset) obligation (22) (27) - - ----- ----- ----- -----
Recorded liability $ (54) $ (42) $ (14) $ (19) ===== ===== ===== =====
Beginning January 1, 1986, the amortization period for the Pension Plan's unrecognized net transition asset is 16 years and 11 years for the SERP's unrecognized net transition obligation. Prior service costs are amortized on a straight-line basis over the average remaining service period of active employees.
Defined Contribution Plan: Consumers provides a defined contribution 401(k) plan to all U.S. employees of CMS Energy and its subsidiaries which are at least 80 percent owned and have adopted the plan. Consumers will match at least one-half of the amount contributed by employees up to 3 percent of their salary. These contributions to the plan are invested in CMS Energy Common Stock. Amounts charged to expense for this plan were $18 million in 1997, $17 million in 1996 and $16 million in 1995.
13: Leases
Consumers leases various assets, including vehicles, rail cars, aircraft, construction equipment, computer equipment, nuclear fuel and buildings. Consumers' nuclear fuel capital leasing arrangement expires in November 1999, yet provides for additional one-year extensions upon mutual agreement by the parties. Upon termination of the lease, the lessor would be entitled to a cash payment equal to its remaining investment, which was $47 million as of December 31, 1997. Consumers generally is responsible for payment of taxes, maintenance, operating costs, and insurance.
Minimum rental commitments under Consumers' non-cancelable leases at December 31, 1997, were:
In Millions Capital Operating Leases Leases
1998 $ 42 $ 4 1999 44 3 2000 13 3 2001 12 3 2002 9 2 2003 and thereafter 7 15 ---- ---- Total minimum lease payments 127 $ 30 Less imputed interest 19 ==== ---- Present value of net minimum lease payments 108 Less current portion 34 ---- Non-current portion $ 74 ====
Consumers recovers lease charges from customers and accordingly charges payments for its capital and operating leases to operating expense. Operating lease charges, including charges to clearing and other accounts for the years ended December 31, 1997, 1996 and 1995, were $3 million, $3 million and $7 million, respectively.
Capital lease expenses for the years ended December 31, 1997, 1996 and 1995 were $43 million, $45 million and $45 million, respectively. Included in these amounts for the years ended 1997, 1996 and 1995, are nuclear fuel lease expenses of $25 million for each year.
14: Jointly Owned Utility Facilities
Consumers is responsible for providing its share of financing for the jointly owned facilities. The direct expenses of the joint plants are included in Consumers' operating expenses. The following table indicates the extent of Consumers' investment in jointly owned utility facilities:
In Millions December 31 1997 1996
Net investment Ludington - 51 percent $112 $116 Campbell Unit 3 - 93.3 percent 314 329 Transmission lines - various 34 35
Accumulated depreciation Ludington $ 88 $ 84 Campbell Unit 3 265 252 Transmission lines 14 14
15: Reportable Segments
The Consolidated Statements of Income show operating revenue and pretax operating income by segments. These amounts include earnings from investments accounted for by the equity method of $49 million, $42 million and $39 million for 1997, 1996 and 1995, respectively. Other segment information follows:
In Millions Years Ended December 31 1997 1996 1995
Depreciation, depletion and amortization Electric $ 296 $ 282 $ 272 Gas 93 87 83 Other 2 2 2 ------- ------- ------- $ 391 $ 371 $ 357 ======= ======= =======
Identifiable assets Electric (a) $ 4,472 $ 4,505 $ 4,522 Gas (a) 1,644 1,709 1,690 Other 833 811 742 ------- ------- ------- $ 6,949 $ 7,025 $ 6,954 ======= ======= =======
Capital expenditures (b) Electric $ 255 $ 310 $ 328 Gas 116 137 126 ------- ------- ------- $ 371 $ 447 $ 454 ======= ======= =======
(a) Amounts include an attributed portion of Consumers' other common assets to both the electric and gas utility businesses.
(b) Includes capital leases for nuclear fuel and other assets and electric DSM costs (see Consolidated Statements of Cash Flows). Amounts also include an attributed portion of Consumers' capital expenditures for plant and equipment common to both the electric and gas utility businesses.
16: Effects of the Ratemaking Process
The following regulatory assets (liabilities), which include both current and non-current amounts, are reflected in the Consolidated Balance Sheets. These assets represent probable future revenue to Consumers associated with certain incurred costs as these costs are recovered through the ratemaking process. These costs are being recovered through rates over periods of up to 15 years.
An accounting standard, effective 1996, requires impairment losses on long-lived assets to be recognized when an asset's book value exceeds its expected future cash flows (undiscounted). The standard also imposes stricter criteria for retention of regulatory-created assets by requiring that such assets be probable of future recovery at each balance sheet date. There was no impact on financial position or results of operations upon adoption because management believes these assets will be recovered. For further discussion, see Outlook - Application of SFAS 71 in the MD&A.
In Millions December 31 1997 1996
Postretirement benefits (Note 12) $ 429 $ 460 Income taxes (Note 9) 172 158 Abandoned Midland project 93 113 Manufactured gas plant sites (Note 6) 47 47 DSM - deferred costs 46 60 Uranium enrichment facility 22 23 Ludington Fish Settlement 12 14 Other 16 43 ----- ----- Total regulatory assets $ 837 $ 918 ===== =====
Income taxes (Note 9) $(226) $(224) DSM - deferred revenue (24) (25) ----- ----- Total regulatory liabilities $(250) $(249) ===== =====
17: Summarized Financial Information of Significant Related Energy Supplier
Under the PPA with the MCV Partnership discussed in Note 3, Consumers' 1997 obligation to purchase electric capacity from the MCV Partnership was 15 percent of Consumers' owned and contracted capacity. Summarized financial information of the MCV Partnership follows:
Statements of Income (unaudited)
In Millions Years Ended December 31 1997 1996 1995
Operating revenue (a) $ 652 $ 645 $ 618 Operating expenses 435 417 386 ----- ----- ----- Operating income 217 228 232 Other expense, net 154 162 171 ----- ----- ----- Net income before cumulative effect of accounting change 63 66 61 Cumulative effect of change in method of accounting for property tax 15 - - ----- ----- ----- Net income $ 78 $ 66 $ 61 ===== ===== =====
Balance Sheets (unaudited)
In Millions December 31 1997 1996
Assets Current assets (b) $ 362 $ 316 Property, plant and equipment, net 1,820 1,889 Other assets 169 159 ------ ------ $2,351 $2,364 ====== ======
Liabilities and Partners' Equity Current liabilities $ 285 $ 235 Long-term debt and other non-current liabilities (c) 1,789 1,930 Partners' equity (d) 277 199 ------ ------ $2,351 $2,364 ====== ======
(a) Revenue from Consumers totaled $609 million, $598 million and $571 million for 1997, 1996, and 1995, respectively.
(b) Receivables from Consumers totaled $54 million and $52 million, at December 31, 1997 and 1996, respectively.
(c) FMLP is the sole beneficiary of an owner trust that is the lessor in a long-term direct finance lease with the lessee, MCV Partnership. CMS Holdings holds a 46.4 percent ownership interest in FMLP. At December 31, 1997 and 1996, lease obligations of $1.52 billion and $1.58 billion, respectively, were owed to the owner trust. CMS Holdings' share of the interest and principal portion for the 1997 lease payments was $62 million and $28 million, respectively, and for the 1996 lease payments was $64 million and $25 million, respectively. The lease payments service $1.0 billion and $1.1 billion in non-recourse debt outstanding as of December 31, 1997 and 1996, respectively, of the owner-trust. FMLP's debt is secured by the MCV Partnership's lease obligations, assets, and operating revenues. For 1997 and 1996, the owner-trust made debt payments (including interest) of $192 million. FMLP's earnings for 1997, 1996, and 1995 were $20 million, $17 million, and $14 million, respectively.
(d) CMS Midland's recorded investment in the MCV Partnership includes capitalized interest, which is being amortized to expense over the life of its investment in the MCV Partnership. Covenants contained in financing agreements prohibit the MCV Partnership from paying distributions until certain financial test requirements are met. Consumers does not anticipate receiving a cash distribution in the near future.
ARTHUR ANDERSEN LLP
Report of Independent Public Accountants
To Consumers Energy Company:
We have audited the accompanying consolidated balance sheets and consolidated statements of long-term debt and preferred stock of CONSUMERS ENERGY COMPANY (a Michigan corporation and wholly owned subsidiary of CMS Energy Corporation) and subsidiaries as of December 31, 1997 and 1996, and the related consolidated statements of income, common stockholder's equity, and cash flows for each of the three years in the period ended December 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based upon our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Consumers Energy Company and subsidiaries as of December 31, 1997 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1997 in conformity with generally accepted accounting principles.
Arthur Andersen LLP
Detroit, Michigan, January 26, 1998.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
CMS Energy
None for CMS Energy.
Consumers
None for Consumers.
PART III (ITEMS 10., 11., 12. and 13.) CMS Energy
CMS Energy's definitive proxy statement, except for the organization and compensation committee report contained therein, is incorporated by reference herein. See also Item 1. Business for information pursuant to Item 10.
Item 10.
Consumers
Consumers' definitive proxy statement, except for the organization and compensation committee report contained therein, is incorporated by reference herein. See also Item 1. Business for information pursuant to Item 10.
PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a)(1) Financial Statements and Reports of Independent Public Accountants for CMS Energy and Consumers are listed in Item 8. Financial Statements and Supplementary Data and are incorporated by reference herein.
(a)(2) Financial Statement Schedules and Reports of Independent Public Accountants for CMS Energy and Consumers are listed after the Exhibits in the Index to Financial Statement Schedules, and are incorporated by reference herein.
(a)(3) Exhibits for CMS Energy and Consumers are listed after Item (c) below and are incorporated by reference herein.
(b) Reports on Form 8-K for CMS Energy and Consumers.
CMS Energy
Current Report dated December 23, 1997 covering matters reported pursuant to Item 5. Other Events.
Consumers
Current Report dated December 23, 1997 covering matters reported pursuant to Item 5. Other Events.
(c) Exhibits, including those incorporated by reference (see also Exhibit volume).
CMS ENERGY AND CONSUMERS EXHIBITS
PREVIOUSLY FILED WITH FILE AS EXHIBIT EXHIBITS NUMBER NUMBER DESCRIPTION
(3)(a) 33-60007 (3)(i) - Restated Articles of Incorporation of CMS Energy. (3)(b) 1-9513 (3)(b) - By-Laws of CMS Energy. (1994 Form 10-K) (3)(c) 1-5611 (3)(c) - Certificate of Amendment to the Articles of Incorporation dated March 10, 1997 and Restated Articles of Incorporation dated March 25, 1994. (1996 Form 10-K) (3)(d) 1-5611 (3)(d) - By-Laws of Consumers. (1996 Form 10- K) (4)(a) 2-65973 (b)(1)-4 - Indenture dated as of September 1, 1945, between Consumers and Chemical Bank (successor to Manufacturers Hanover Trust Company), as Trustee, including therein indentures supplemental thereto through the Forty-third Supplemental Indenture dated as of May 1, 1979. - Indentures Supplemental thereto: 33-31866 (4)(d) - 67th 11/15/89 33-41126 (4)(c) - 68th 06/15/93 1-5611 (4) - 69th 09/15/93 (Form 8-K dated Sep. 21, 1993) - 70th 02/01/98 - 71st 03/06/98 (4)(b) 1-5611 (4)(b) - Indenture dated as of January 1, 1996 between Consumers and The Bank of New York, as Trustee. (1995 Form 10-K) - Indentures Supplemental thereto: 1-5611 (4)(b) - 1st 01/18/96 (1995 Form 10-K) 1-5611 (4)(a) - 2nd 09/04/97 (3rd qtr 1997 Form 10- Q) (4)(c) - Indenture dated as of February 1, 1998 between Consumers and The Chase Manhattan Bank, as Trustee. (4)(d) 33-47629 (4)(a) - Indenture dated as of September 15, 1992 between CMS Energy and NBD Bank, as Trustee. - Indentures Supplemental thereto: 1-9513 (4) - 3rd 05/06/97 (1st qtr 1997 Form 10- Q) 333-37241 (4)(a) - 4th 09/26/97 1-9513 (4)(b) - 5th 11/04/97 (3rd qtr 1997 Form 10- Q) - 6th 01/13/98 (4)(e) 1-9513 (4a) - Indenture between CMS Energy and The Chase Manhattan Bank, as Trustee, dated as of January 15, 1994. (Form 8-K dated March 29, 1994) - Indentures Supplemental thereto: 1-9513 (4b) - 1st 01/20/94 (Form 8-K dated March 29, 1994) 1-9513 (4) - 2nd 03/19/96 (1st qtr 1996 Form 10- Q) 1-9513 (4)(a)(iv) - 3rd 03/17/97 (Form 8-K dated May 1, 1997) 333-36115 (4)(d) - 4th 09/17/97 (4)(f) 1-9513 (4a) - Indenture dated as of June 1, 1997, between CMS Energy and The Bank of New York, as trustee. (Form 8-K dated July 1, 1997) - Indentures Supplemental thereto: 1-9513 (4b) - 1st 06/20/97 (Form 8-K dated July 1, 1997) (10)(a) 1-9513 (4) - Credit Agreement dated as of July 2, 1997, among CMS Energy, the Administrative Agent, Collateral Agent, Documentation Agent, Syndication Agent, Co-Agents and Lead Manager, all as defined therein, and the Exhibits and Schedules thereto. (2nd qtr 1997 Form 10-Q) (10)(b) 1-5611 (10) - Credit Agreement dated as of July 14, 1995 among Consumers, the Banks named therein and the First National Bank of Chicago, as Administrative Agent. (10)(c) 1-9513 (10)(c) - Employment Agreement dated as of August 1, 1990 among Consumers, CMS Energy and William T. McCormick, Jr. (1990 Form 10-K) (10)(d) 1-5611 (10)(i) - Employment Agreement effective as of June 15, 1988 among Consumers, CMS Energy and Victor J. Fryling. (1988 Form 10-K) (10)(e) 1-5611 (10)(f) - Employment Agreement dated May 26, 1989 between Consumers and Michael G. Morris. (1990 Form 10-K) (10)(f) 1-5611 (10)(h) - Employment Agreement dated May 26, 1989 between Consumers and David A. Mikelonis. (1991 10-K) (10)(g) 1-9513 (10)(f) - Employment Agreement dated May 26, 1989 among Consumers, CMS Energy and John W. Clark. (1990 Form 10-K) (10)(h) 1-5611 (10)(j) - Employment Agreement dated March 25, 1992 between Consumers, CMS Energy and Alan M. Wright. (1992 Form 10-K) (10)(i) 1-5611 (10)(k) - Employment Agreement dated March 25, 1992 between Consumers and Paul A. Elbert. (1992 10-K) (10)(j) 1-9513 (10) - Employment Agreement dated January 12, 1996 between CMS Energy and Rodger A. Kershner. (1995 Form 10-K) (10)(k) 1-9513 (10)(m) - Employment Agreement dated April 2, 1996 between CMS Energy and William J. Haener. (1996 Form 10-K) (10)(l) 1-9513 (10)(n) - Employment Agreement dated April 4, 1996 between CMS Energy, CMS Enterprises and James W. Cook. (1996 Form 10-K) (10)(m) 1-5611 (10)(o) - Employment Agreement dated March 19, 1996 between Consumers and David W. Joos. (1996 Form 10-K) (10)(n) - Employment Agreement dated December 4, 1997 between Consumers and Robert A. Fenech. (10)(o) 1-5611 (10)(g) - Consumers' Executive Stock Option and Stock Appreciation Rights Plan effective December 1, 1989. (1990 Form 10-K) (10)(p) 33-61595 (4)(d) - CMS Energy's Performance Incentive Stock Plan effective as of December 1, 1989. (10)(q) 1-9513 (10)(m) - CMS Deferred Salary Savings Plan effective January 1, 1994. (1993 Form 10-K) (10)(r) 1-5611 (10)(n) - CMS Energy and Consumers Annual Executive Incentive Compensation Plan effective January 1, 1986, as amended January 1995. (1995 Form 10-K) (10)(s) 1-5611 (10)(o) - Consumers' Supplemental Executive Retirement Plan effective November 1, 1990. (1993 Form 10-K) (10)(t) 33-37977 4.1 - Senior Trust Indenture, Leasehold Mortgage and Security Agreement dated as of June 1, 1990 between The Connecticut National Bank and United States Trust Company of New York. (MCV Partnership) Indenture Supplemental thereto: 33-37977 4.2 - Supplement No. 1 dated as of June 1, 1990. (MCV Partnership) (10)(u) 1-9513 (28)(b) - Collateral Trust Indenture dated as of June 1, 1990 among Midland Funding Corporation I, MCV Partnership and United States Trust Company of New York, Trustee. (3rd qtr 1990 Form 10-Q) Indenture Supplemental thereto: 33-37977 4.4 - Supplement No. 1 dated as of June 1, 1990. (MCV Partnership) (10)(v) 1-9513 (10)(v) - Amended and Restated Investor Partner Tax Indemnification Agreement dated as of June 1, 1990 among Investor Partners, CMS Midland as Indemnitor and CMS Energy as Guarantor. (1990 Form 10-K) (10)(w) 1-9513 (19)(d)** - Environmental Agreement dated as of June 1, 1990 made by CMS Energy to The Connecticut National Bank and Others. (1990 Form 10-K) (10)(x) 1-9513 (10)(z)** - Indemnity Agreement dated as of June 1, 1990 made by CMS Energy to Midland Cogeneration Venture Limited Partnership. (1990 Form 10-K) (10)(y) 1-9513 (10)(aa)** - Environmental Agreement dated as of June 1, 1990 made by CMS Energy to United States Trust Company of New York, Meridian Trust Company, each Subordinated Collateral Trust Trustee and Holders from time to time of Senior Bonds and Subordinated Bonds and Participants from time to time in Senior Bonds and Subordinated Bonds. (1990 Form 10-K) (10)(z) 33-37977 10.4 - Amended and Restated Participation Agreement dated as of June 1, 1990 among MCV Partnership, Owner Participant, The Connecticut National Bank, United States Trust Company, Meridian Trust Company, Midland Funding Corporation I, Midland Funding Corporation II, MEC Development Corporation and Institutional Senior Bond Purchasers. (MCV Partnership) 1-5611 (10)(w) - Amendment No. 1 dated as of July 1, 1991. (1991 Form 10-K) (10)(aa) 33-37977 10.4 - Power Purchase Agreement dated as of July 17, 1986 between MCV Partnership and Consumers. (MCV Partnership) Amendments thereto: 33-37977 10.5 - Amendment No. 1 dated September 10, 1987. (MCV Partnership) 33-37977 10.6 - Amendment No. 2 dated March 18, 1988. (MCV Partnership) 33-37977 10.7 - Amendment No. 3 dated August 28, 1989. (MCV Partnership) 33-37977 10.8 - Amendment No. 4A dated May 25, 1989. (MCV Partnership) (10)(bb) 1-5611 (10)(y) - Unwind Agreement dated as of December 10, 1991 by and among CMS Energy, Midland Group, Ltd., Consumers, CMS Midland, Inc., MEC Development Corp. and CMS Midland Holdings Company. (1991 Form 10-K) (10)(cc) 1-5611 (10)(z) - Stipulated AGE Release Amount Payment Agreement dated as of June 1, 1990, among CMS Energy, Consumers and The Dow Chemical Company. (1991 Form 10- K) (10)(dd) 1-5611 (10)(aa)** - Parent Guaranty dated as of June 14, 1990 from CMS Energy to MCV, each of the Owner Trustees, the Indenture Trustees, the Owner Participants and the Initial Purchasers of Senior Bonds in the MCV Sale Leaseback transaction, and MEC Development. (1991 Form 10-K) (12) - Statements regarding computation of CMS Energy's Ratio of Earnings to Fixed Charges (21)(a) - Subsidiaries of CMS Energy. (21)(b) - Subsidiaries of Consumers. (23) - Consents of experts for CMS Energy. (24)(a) - Power of Attorney for CMS Energy. (24)(b) - Power of Attorney for Consumers. (27)(a) - Financial Data Schedule UT for CMS Energy . (27)(b) - Restated Financial Data Schedule UT for CMS Energy. (27)(c) - Financial Data Schedule UT for Consumers. (99) - CMS Energy: Consumers Gas Group Financials.
** Obligations of only CMS Holdings and CMS Midland, second tier subsidiaries of Consumers, and of CMS Energy but not of Consumers.
Exhibits listed above which have heretofore been filed with the Securities and Exchange Commission pursuant to various acts administered by the Commission, and which were designated as noted above, are hereby incorporated herein by reference and made a part hereof with the same effect as if filed herewith.
Index to Financial Statement Schedules
Page
Schedule II Valuation and Qualifying Accounts and Reserves 1997, 1996 and 1995: CMS Energy Corporation . . . . . . . . . . . . 152 Consumers Power Company. . . . . . . . . . . . 152
Report of Independent Public Accountants CMS Energy Corporation . . . . . . . . . . . . 153 Consumers Power Company. . . . . . . . . . . . 153
Schedules other than those listed above are omitted because they are either not required, not applicable or the required information is shown in the financial statements or notes thereto.
Columns omitted from schedules filed have been omitted because the information is not applicable.
ARTHUR ANDERSEN LLP
Report of Independent Public Accountants
To CMS Energy Corporation:
We have audited in accordance with generally accepted auditing standards, the consolidated financial statements included in CMS Energy Corporation's 1997 Annual Report to shareholders incorporated by reference in this Form 10-K, and have issued our report thereon dated January 26, 1998. Our audit was made for the purpose of forming an opinion on those basic consolidated financial statements taken as a whole. The schedule listed in Item 14(a) is the responsibility of the Company's management and is presented for the purpose of complying with the Securities and Exchange Commission's rules and is not part of the basic consolidated financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic consolidated financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic consolidated financial statements taken as a whole.
Arthur Andersen LLP
Detroit, Michigan, January 26, 1998.
Report of Independent Public Accountants
To Consumers Energy Company:
We have audited in accordance with generally accepted auditing standards, the consolidated financial statements included in Consumers Energy Company's 1997 Annual Report to shareholders incorporated by reference in this Form 10-K, and have issued our report thereon dated January 26, 1998. Our audit was made for the purpose of forming an opinion on those basic consolidated financial statements taken as a whole. The schedule listed in Item 14(a) is the responsibility of the Company's management and is presented for the purpose of complying with the Securities and Exchange Commission's rules and is not part of the basic consolidated financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic consolidated financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic consolidated financial statements taken as a whole.
Arthur Andersen LLP
Detroit, Michigan, January 26, 1998.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, CMS Energy Corporation has duly caused this Annual Report to be signed on its behalf by the undersigned, thereunto duly authorized, on the 24th day of March 1998.
CMS ENERGY CORPORATION
By William T. McCormick, Jr. William T. McCormick, Jr. Chairman of the Board and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report has been signed below by the following persons on behalf of CMS Energy Corporation and in the capacities and on the 24th day of March 1998.
Signature Title
(i) Principal executive officer: Chairman of the Board, Chief Executive Officer William T. McCormick, Jr. and Director William T. McCormick, Jr.
(ii) Principal financial officer: Senior Vice President, and Chief Financial Officer A. M. Wright Alan M. Wright
(iii)Controller or principal accounting officer:
Senior Vice President, Controller P. D. Hopper and Chief Accounting Officer Preston D. Hopper
(iv) A majority of the Directors including those named above:
John M Deutch* Director John M. Deutch Signature Title
James J. Duderstadt* Director James J. Duderstadt
K R Flaherty* Director Kathleen R. Flaherty
Victor J. Fryling* Director Victor J. Fryling
Earl D. Holton* Director Earl D. Holton
W. U. Parfet* Director William U. Parfet
Percy A. Pierre* Director Percy A. Pierre
K. Whipple* Director Kenneth Whipple
John B. Yasinsky* Director John B. Yasinsky
* By Thomas A. McNish Thomas A. McNish, Attorney-in-Fact SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Consumers Energy Company has duly caused this Annual Report to be signed on its behalf by the undersigned, thereunto duly authorized, on the 24th day of March 1998.
CONSUMERS ENERGY COMPANY
By William T. McMormick Jr. William T. McCormick, Jr. Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report has been signed below by the following persons on behalf of Consumers Energy Company and in the capacities and on the 24th day of March 1998.
Signature Title
(i) Principal executive officer: Vice Chairman of the Board, President and Director Victor J. Fryling Victor J.Fryling
(ii) Principal financial officer:
Senior Vice President and A. M. Wright Chief Financial Officer Alan M. Wright
(iii)Controller or principal accounting officer:
Vice President and Dennis DaPra Controller Dennis DaPra
(iv) A majority of the Directors including those named above:
John M Deutch* Director John M. Deutch SignatureTitle
James J. Duderstadt* Director James J. Duderstadt
K R Flaherty* Director Kathleen R. Flaherty
Earl D. Holton* Director Earl D. Holton
William T. McCormick, Jr.* Director William T. McCormick, Jr.
W. U. Parfet* Director William U. Parfet
Percy A. Pierre* Director Percy A. Pierre
K. Whipple* Director Kenneth Whipple
John B. Yasinsky* Director John B. Yasinsky
*By Thomas A. McNish Thomas A. McNish, Attorney-in-Fact
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a)(1) Financial Statements and Reports of Independent Public Accountants for CMS Energy and Consumers are listed in Item 8. Financial Statements and Supplementary Data and are incorporated by reference herein.
(a)(2) Financial Statement Schedules and Reports of Independent Public Accountants for CMS Energy and Consumers are listed after the Exhibits in the Index to Financial Statement Schedules, and are incorporated by reference herein.
(a)(3) Exhibits for CMS Energy and Consumers are listed after Item (c) below and are incorporated by reference herein.
(b) Reports on Form 8-K for CMS Energy and Consumers.
CMS Energy
Current Report dated December 23, 1997 covering matters reported pursuant to Item 5. Other Events.
Consumers
Current Report dated December 23, 1997 covering matters reported pursuant to Item 5. Other Events.
(c) Exhibits, including those incorporated by reference (see also Exhibit volume).
CMS ENERGY AND CONSUMERS EXHIBITS
PREVIOUSLY FILED WITH FILE AS EXHIBIT EXHIBITS NUMBER NUMBER DESCRIPTION
(3)(a) 33-60007 (3)(i) - Restated Articles of Incorporation of CMS Energy. (3)(b) 1-9513 (3)(b) - By-Laws of CMS Energy. (1994 Form 10-K) (3)(c) 1-5611 (3)(c) - Certificate of Amendment to the Articles of Incorporation dated March 10, 1997 and Restated Articles of Incorporation dated March 25, 1994. (1996 Form 10-K) (3)(d) 1-5611 (3)(d) - By-Laws of Consumers. (1996 Form 10- K) (4)(a) 2-65973 (b)(1)-4 - Indenture dated as of September 1, 1945, between Consumers and Chemical Bank (successor to Manufacturers Hanover Trust Company), as Trustee, including therein indentures supplemental thereto through the Forty-third Supplemental Indenture dated as of May 1, 1979. - Indentures Supplemental thereto: 33-31866 (4)(d) - 67th 11/15/89 33-41126 (4)(c) - 68th 06/15/93 1-5611 (4) - 69th 09/15/93 (Form 8-K dated Sep. 21, 1993) - 70th 02/01/98 - 71st 03/06/98 (4)(b) 1-5611 (4)(b) - Indenture dated as of January 1, 1996 between Consumers and The Bank of New York, as Trustee. (1995 Form 10-K) - Indentures Supplemental thereto: 1-5611 (4)(b) - 1st 01/18/96 (1995 Form 10-K) 1-5611 (4)(a) - 2nd 09/04/97 (3rd qtr 1997 Form 10- Q) (4)(c) - Indenture dated as of February 1, 1998 between Consumers and The Chase Manhattan Bank, as Trustee. (4)(d) 33-47629 (4)(a) - Indenture dated as of September 15, 1992 between CMS Energy and NBD Bank, as Trustee. - Indentures Supplemental thereto: 1-9513 (4) - 3rd 05/06/97 (1st qtr 1997 Form 10- Q) 333-37241 (4)(a) - 4th 09/26/97 1-9513 (4)(b) - 5th 11/04/97 (3rd qtr 1997 Form 10- Q) - 6th 01/13/98 (4)(e) 1-9513 (4a) - Indenture between CMS Energy and The Chase Manhattan Bank, as Trustee, dated as of January 15, 1994. (Form 8-K dated March 29, 1994) - Indentures Supplemental thereto: 1-9513 (4b) - 1st 01/20/94 (Form 8-K dated March 29, 1994) 1-9513 (4) - 2nd 03/19/96 (1st qtr 1996 Form 10- Q) 1-9513 (4)(a)(iv) - 3rd 03/17/97 (Form 8-K dated May 1, 1997) 333-36115 (4)(d) - 4th 09/17/97 (4)(f) 1-9513 (4a) - Indenture dated as of June 1, 1997, between CMS Energy and The Bank of New York, as trustee. (Form 8-K dated July 1, 1997) - Indentures Supplemental thereto: 1-9513 (4b) - 1st 06/20/97 (Form 8-K dated July 1, 1997) (10)(a) 1-9513 (4) - Credit Agreement dated as of July 2, 1997, among CMS Energy, the Administrative Agent, Collateral Agent, Documentation Agent, Syndication Agent, Co-Agents and Lead Manager, all as defined therein, and the Exhibits and Schedules thereto. (2nd qtr 1997 Form 10-Q) (10)(b) 1-5611 (10) - Credit Agreement dated as of July 14, 1995 among Consumers, the Banks named therein and the First National Bank of Chicago, as Administrative Agent. (10)(c) 1-9513 (10)(c) - Employment Agreement dated as of August 1, 1990 among Consumers, CMS Energy and William T. McCormick, Jr. (1990 Form 10-K) (10)(d) 1-5611 (10)(i) - Employment Agreement effective as of June 15, 1988 among Consumers, CMS Energy and Victor J. Fryling. (1988 Form 10-K) (10)(e) 1-5611 (10)(f) - Employment Agreement dated May 26, 1989 between Consumers and Michael G. Morris. (1990 Form 10-K) (10)(f) 1-5611 (10)(h) - Employment Agreement dated May 26, 1989 between Consumers and David A. Mikelonis. (1991 10-K) (10)(g) 1-9513 (10)(f) - Employment Agreement dated May 26, 1989 among Consumers, CMS Energy and John W. Clark. (1990 Form 10-K) (10)(h) 1-5611 (10)(j) - Employment Agreement dated March 25, 1992 between Consumers, CMS Energy and Alan M. Wright. (1992 Form 10-K) (10)(i) 1-5611 (10)(k) - Employment Agreement dated March 25, 1992 between Consumers and Paul A. Elbert. (1992 10-K) (10)(j) 1-9513 (10) - Employment Agreement dated January 12, 1996 between CMS Energy and Rodger A. Kershner. (1995 Form 10-K) (10)(k) 1-9513 (10)(m) - Employment Agreement dated April 2, 1996 between CMS Energy and William J. Haener. (1996 Form 10-K) (10)(l) 1-9513 (10)(n) - Employment Agreement dated April 4, 1996 between CMS Energy, CMS Enterprises and James W. Cook. (1996 Form 10-K) (10)(m) 1-5611 (10)(o) - Employment Agreement dated March 19, 1996 between Consumers and David W. Joos. (1996 Form 10-K) (10)(n) - Employment Agreement dated December 4, 1997 between Consumers and Robert A. Fenech. (10)(o) 1-5611 (10)(g) - Consumers' Executive Stock Option and Stock Appreciation Rights Plan effective December 1, 1989. (1990 Form 10-K) (10)(p) 33-61595 (4)(d) - CMS Energy's Performance Incentive Stock Plan effective as of December 1, 1989. (10)(q) 1-9513 (10)(m) - CMS Deferred Salary Savings Plan effective January 1, 1994. (1993 Form 10-K) (10)(r) 1-5611 (10)(n) - CMS Energy and Consumers Annual Executive Incentive Compensation Plan effective January 1, 1986, as amended January 1995. (1995 Form 10-K) (10)(s) 1-5611 (10)(o) - Consumers' Supplemental Executive Retirement Plan effective November 1, 1990. (1993 Form 10-K) (10)(t) 33-37977 4.1 - Senior Trust Indenture, Leasehold Mortgage and Security Agreement dated as of June 1, 1990 between The Connecticut National Bank and United States Trust Company of New York. (MCV Partnership) Indenture Supplemental thereto: 33-37977 4.2 - Supplement No. 1 dated as of June 1, 1990. (MCV Partnership) (10)(u) 1-9513 (28)(b) - Collateral Trust Indenture dated as of June 1, 1990 among Midland Funding Corporation I, MCV Partnership and United States Trust Company of New York, Trustee. (3rd qtr 1990 Form 10-Q) Indenture Supplemental thereto: 33-37977 4.4 - Supplement No. 1 dated as of June 1, 1990. (MCV Partnership) (10)(v) 1-9513 (10)(v) - Amended and Restated Investor Partner Tax Indemnification Agreement dated as of June 1, 1990 among Investor Partners, CMS Midland as Indemnitor and CMS Energy as Guarantor. (1990 Form 10-K) (10)(w) 1-9513 (19)(d)** - Environmental Agreement dated as of June 1, 1990 made by CMS Energy to The Connecticut National Bank and Others. (1990 Form 10-K) (10)(x) 1-9513 (10)(z)** - Indemnity Agreement dated as of June 1, 1990 made by CMS Energy to Midland Cogeneration Venture Limited Partnership. (1990 Form 10-K) (10)(y) 1-9513 (10)(aa)** - Environmental Agreement dated as of June 1, 1990 made by CMS Energy to United States Trust Company of New York, Meridian Trust Company, each Subordinated Collateral Trust Trustee and Holders from time to time of Senior Bonds and Subordinated Bonds and Participants from time to time in Senior Bonds and Subordinated Bonds. (1990 Form 10-K) (10)(z) 33-37977 10.4 - Amended and Restated Participation Agreement dated as of June 1, 1990 among MCV Partnership, Owner Participant, The Connecticut National Bank, United States Trust Company, Meridian Trust Company, Midland Funding Corporation I, Midland Funding Corporation II, MEC Development Corporation and Institutional Senior Bond Purchasers. (MCV Partnership) 1-5611 (10)(w) - Amendment No. 1 dated as of July 1, 1991. (1991 Form 10-K) (10)(aa) 33-37977 10.4 - Power Purchase Agreement dated as of July 17, 1986 between MCV Partnership and Consumers. (MCV Partnership) Amendments thereto: 33-37977 10.5 - Amendment No. 1 dated September 10, 1987. (MCV Partnership) 33-37977 10.6 - Amendment No. 2 dated March 18, 1988. (MCV Partnership) 33-37977 10.7 - Amendment No. 3 dated August 28, 1989. (MCV Partnership) 33-37977 10.8 - Amendment No. 4A dated May 25, 1989. (MCV Partnership) (10)(bb) 1-5611 (10)(y) - Unwind Agreement dated as of December 10, 1991 by and among CMS Energy, Midland Group, Ltd., Consumers, CMS Midland, Inc., MEC Development Corp. and CMS Midland Holdings Company. (1991 Form 10-K) (10)(cc) 1-5611 (10)(z) - Stipulated AGE Release Amount Payment Agreement dated as of June 1, 1990, among CMS Energy, Consumers and The Dow Chemical Company. (1991 Form 10- K) (10)(dd) 1-5611 (10)(aa)** - Parent Guaranty dated as of June 14, 1990 from CMS Energy to MCV, each of the Owner Trustees, the Indenture Trustees, the Owner Participants and the Initial Purchasers of Senior Bonds in the MCV Sale Leaseback transaction, and MEC Development. (1991 Form 10-K) (12) - Statements regarding computation of CMS Energy's Ratio of Earnings to Fixed Charges (21)(a) - Subsidiaries of CMS Energy. (21)(b) - Subsidiaries of Consumers. (23) - Consents of experts for CMS Energy. (24)(a) - Power of Attorney for CMS Energy. (24)(b) - Power of Attorney for Consumers. (27)(a) - Financial Data Schedule UT for CMS Energy . (27)(b) - Restated Financial Data Schedule UT for CMS Energy. (27)(c) - Financial Data Schedule UT for Consumers. (99) - CMS Energy: Consumers Gas Group Financials.
** Obligations of only CMS Holdings and CMS Midland, second tier subsidiaries of Consumers, and of CMS Energy but not of Consumers.
Exhibits listed above which have heretofore been filed with the Securities and Exchange Commission pursuant to various acts administered by the Commission, and which were designated as noted above, are hereby incorporated herein by reference and made a part hereof with the same effect as if filed herewith.
Index to Financial Statement Schedules
Page
Schedule II Valuation and Qualifying Accounts and Reserves 1997, 1996 and 1995: CMS Energy Corporation . . . . . . . . . . . . 152 Consumers Power Company. . . . . . . . . . . . 152
Report of Independent Public Accountants CMS Energy Corporation . . . . . . . . . . . . 153 Consumers Power Company. . . . . . . . . . . . 153
Schedules other than those listed above are omitted because they are either not required, not applicable or the required information is shown in the financial statements or notes thereto.
Columns omitted from schedules filed have been omitted because the information is not applicable.
ARTHUR ANDERSEN LLP
Report of Independent Public Accountants
To CMS Energy Corporation:
We have audited in accordance with generally accepted auditing standards, the consolidated financial statements included in CMS Energy Corporation's 1997 Annual Report to shareholders incorporated by reference in this Form 10-K, and have issued our report thereon dated January 26, 1998. Our audit was made for the purpose of forming an opinion on those basic consolidated financial statements taken as a whole. The schedule listed in Item 14(a) is the responsibility of the Company's management and is presented for the purpose of complying with the Securities and Exchange Commission's rules and is not part of the basic consolidated financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic consolidated financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic consolidated financial statements taken as a whole.
Arthur Andersen LLP
Detroit, Michigan, January 26, 1998.
Report of Independent Public Accountants
To Consumers Energy Company:
We have audited in accordance with generally accepted auditing standards, the consolidated financial statements included in Consumers Energy Company's 1997 Annual Report to shareholders incorporated by reference in this Form 10-K, and have issued our report thereon dated January 26, 1998. Our audit was made for the purpose of forming an opinion on those basic consolidated financial statements taken as a whole. The schedule listed in Item 14(a) is the responsibility of the Company's management and is presented for the purpose of complying with the Securities and Exchange Commission's rules and is not part of the basic consolidated financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic consolidated financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic consolidated financial statements taken as a whole.
Arthur Andersen LLP
Detroit, Michigan, January 26, 1998.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, CMS Energy Corporation has duly caused this Annual Report to be signed on its behalf by the undersigned, thereunto duly authorized, on the 24th day of March 1998.
CMS ENERGY CORPORATION
By William T. McCormick, Jr. William T. McCormick, Jr. Chairman of the Board and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report has been signed below by the following persons on behalf of CMS Energy Corporation and in the capacities and on the 24th day of March 1998.
Signature Title
(i) Principal executive officer: Chairman of the Board, Chief Executive Officer William T. McCormick, Jr. and Director William T. McCormick, Jr.
(ii) Principal financial officer: Senior Vice President, and Chief Financial Officer A. M. Wright Alan M. Wright
(iii)Controller or principal accounting officer:
Senior Vice President, Controller P. D. Hopper and Chief Accounting Officer Preston D. Hopper
(iv) A majority of the Directors including those named above:
John M Deutch* Director John M. Deutch Signature Title
James J. Duderstadt* Director James J. Duderstadt
K R Flaherty* Director Kathleen R. Flaherty
Victor J. Fryling* Director Victor J. Fryling
Earl D. Holton* Director Earl D. Holton
W. U. Parfet* Director William U. Parfet
Percy A. Pierre* Director Percy A. Pierre
K. Whipple* Director Kenneth Whipple
John B. Yasinsky* Director John B. Yasinsky
* By Thomas A. McNish Thomas A. McNish, Attorney-in-Fact SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Consumers Energy Company has duly caused this Annual Report to be signed on its behalf by the undersigned, thereunto duly authorized, on the 24th day of March 1998.
CONSUMERS ENERGY COMPANY
By William T. McMormick Jr. William T. McCormick, Jr. Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report has been signed below by the following persons on behalf of Consumers Energy Company and in the capacities and on the 24th day of March 1998.
Signature Title
(i) Principal executive officer: Vice Chairman of the Board, President and Director Victor J. Fryling Victor J.Fryling
(ii) Principal financial officer:
Senior Vice President and A. M. Wright Chief Financial Officer Alan M. Wright
(iii)Controller or principal accounting officer:
Vice President and Dennis DaPra Controller Dennis DaPra
(iv) A majority of the Directors including those named above:
John M Deutch* Director John M. Deutch SignatureTitle
James J. Duderstadt* Director James J. Duderstadt
K R Flaherty* Director Kathleen R. Flaherty
Earl D. Holton* Director Earl D. Holton
William T. McCormick, Jr.* Director William T. McCormick, Jr.
W. U. Parfet* Director William U. Parfet
Percy A. Pierre* Director Percy A. Pierre
K. Whipple* Director Kenneth Whipple
John B. Yasinsky* Director John B. Yasinsky
*By Thomas A. McNish Thomas A. McNish, Attorney-in-Fact