ML19329E787

Forwards Responses to a Giambusso 740612 Supplemental Request for Financial Info.Util 740613 Response & Encl Matl to Be Resubmitted as Amends to OL Application

ML19329E787
Person / Time
Site:	Palisades, Midland
Issue date:	06/27/1974
From:	Howell S CONSUMERS ENERGY CO. (FORMERLY CONSUMERS POWER CO.)
To:	Anthony Giambusso US ATOMIC ENERGY COMMISSION (AEC)
Shared Package
ML19329E765	List: ML19329E764 ML19329E787
References
NUDOCS 8006170941
Download: ML19329E787 (110)

Text

{{#Wiki_filter:_ _ _ _ _ _ _ _ _ _ _ _ _ ~" \\,} Consumers Power Company Vote Presnient Generas Offices: 212 West Michtgen Avenue..Jacisson, M6Chigan 49201. Area Code 517788-0550 June 27, 1974 Docket Nos. 50-329, 50-330 and 50-255 Mr. Angelo Giambusso Deputy Director for Reactor Projects Directorate of Licensing U. S. Atomic Energy Cocznission Washington, DC 20545

Dear Mr. Giambusso:

On June 13, 1974, Consumers Power Company responded to your May 29, 1974 request for infor=ation on the Company's financial condition and financing plans. By letter of June 12, 1974, which I received on June 17, you forwarded two additional questions on this subject. I am enclosing two copies of our response to this supple-mental request. On June 24, 1974, a member of my staff received a call from your Mr. McKay indicating that our responses to your requests for financial infomation should be submitted in the form of amend-ments to the license applications for both the Midland and Palisades facilities. Accordingly, we vill resubmit the information in amend-ment form in the near future, including any changes in the responses that may be necessary to bring them up to date. Yours very truly, /s/S.H.Howell SHH/pb CC: Harold F. Reis, Esq Hon. William H. Ward Howard J. Vogle, Esq Irving Like, Esq Myron M. Cherry, Esq James A. Kendall, Esq 8006170 2

Qucation No. 1 Identify nnd state the amount of each major system-wide source of con-struction funda which vill be realized during the twelve months' period beginning June 1, 1974 assuming fuel costs and interest rates remain the same for the following cases: (1) Palisades is not returned to service until December 1, 1974 and con-struction at Midland remains on schedule. (2) Palisades is not returned to service until December 1,1974 and con-struction at Midland is delayed 6 months.

Response

(1) Internal Sources Internal sources are made up principally of retained earnings, de-preciation, deferred taxes and several miscellaneous items. It is currently estimated that net internally generated funds for the period June 1, 1974 through May 31, 1975 vill be $118 million if Palisades starts operation on December 1, 1974. A delay of six months in Midland construction vill not materially affect this esti-mated amount of internally generated funds. (2) External Sources The Cmpany plans to raise funds through extemal sources for the twelve months beginnin6 June 1,1974 as outlined below: 1. A $50 million 7-year tem loan frm First National City Bank in New York was completed on June 20, 1974. 11. Approximately $50 million of convertible preference stock in the summer of 1974 iii. Approximate'_y $100 million of first mortgage bonds in late sum-mer of 1974.

w g iv. Approximntcly $40 million of straip;ht preference atock in the fall of 1974. v. A $35 million nuclear fuel lease is currently being negotinted. Closing is expected in the sasner of 1974. vi. Approximately $11 million vill be taken down frcm prior issues of pollution control revenue bonds. The trustee holds the funds from the sale of pollution control revenue bonds until ecmstruc-tion on the associated projects is perfomed. This amounts to about $286 million to be raised throu6h external ) sources. 1 In addition to the extemal sources outlined above, the Company has access to significant amounts of bank credit as indicated in its June 13, 1974 response to the AEC Staff's May 29, 1974 request for financial infomation. Assuming that a construction delay at Midland includes only the stoppage of manual labor and subcontract work while engineering, supervision, material procurement and receiving continue, the esti-mated reduction in projected construction expenditures vould be ap-proximately $15 million. This reduction in projected construction expenditures vould reduce the need for externally-generated funds' but would not be expected to change the financing program outlined above except to reduce short-tem borrowings. In the foregoing response, and in the Company's recponse to Ques-tion No.1 of the AEC Staff's May 29, 1974 request, the Company has E

3 outlined its present plans for raising capital for expansion from extemal sources over the next year. However, given the present uncertainties in the securities markets and the difficulties now being experienced by utilities in their attempts to raise capital, one should recognize that the Company's financing plans are subject to change, even over the relatively short period in question. Should this occur in any material way, the Ccanpany intends to supplement its responses to advise the AEC Staff of any such changes. ) 4 i e i 1 -a.

-Question No. 2 Please include on your balance sheet or as a footnote any extraordinary outstanding or anticipated claims against Consumers Power Company.

Response

There are no extraordinary outstanding or anticipated claims against Consumers Power Company other than those mentioned in the Notes to Financial Statements subnitted as part of Exhibit A to the Company's June 13, 1974 response to the AEC starr's May 29, 1974 request for ri-nancial information. 4 4 s D h ) !r a

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i SUPPLEMENTAL INIVRMATION ON FINANCIAL QUALIFICATIONS OF CNSUMERS POWER COMPANY Question No.1 of the May 29, 1974 Request (Cf. Question No.1 of the June 12, 1974 Request) Identify and state the amount of each major system-wide source of construction funds which will be realized during the 12 months' period beginning June 1,1974 assuming all of the following: (a) Palisades is returned to service at the earliest probable date (please specify). (b) Construction of the Midland units continues on schedule. (c) Fuel costs and interest rates remain at their present levels.

Response

It is currently estimated that the earliest probable date the Palisades Plant could be returned to service is January 25, 1975 Pursuant to an interim license amendment, the Plant operated at a naninal 30% of capacity, with short periods of operation at higher power levels, to carry out a program to remove chemicals from the steam generators. The Plant was again removed frcan service in November in order to replace tubinE in the main steam condenser. On November 14, 1974, the Company announced a likely delay of at least one year each in the commercial operation dates for the two Midland Plant units (see revised response to Question No. 2 of the May 29, 1974 Request, below). The Cmpany currently estimates that its internally-generated funds through May 31, 1975 will be in the range of $80-$90 mil. lion, which is signi-ficantly lower than estimated in its responses to the.AEC's Miy 29 and June 12, 1974 requests. The reduction is due primarily to lower earnings (attributable to sharply higher costs of fuel for electric generation, higher purchased power costs due to less than anticipated availability of Palisades, higher costs of

2 gas and higher costs of money) and to substantial increases in funds tied up in inventories of coal, oil, natural gas and gas reforming plant feedstocks (attributable to the increased quantities belq inventoried and the large increases in cost of fuels). It should be pointed out that the reduction in estimated internally-generated funds is due in large part to reflecting inflationary effects in the current estimate rather than the constant fuel costs and interest rates you asked that we assume in our previous responses. Since June 1, 1974, consumers power company has raised funds from external sources as follows: (1) A $50 million 7-year tem loan from First National City Bank of New York on June 20,197h. (2) Approximately $30 million fran convertible preference stock issued in Au6ust of 1974. -(3) Approximately $110 million from first mortgage bonds issued in August and September 1974. (k) Approximately $32 million from a nuclear fuel lease on November 19, 1974. (5) Approximately $6 million has been taken down from prior inaues of polluti-n cont.rol revenue bonds. The trustee holds the runds frcm the sale of pollution control revenue bonds until construction on the associated projects is per-formed. It is estimated that an additional $5 million vill be taken down from such bond issues through May 31, 1975

3 This amounts to approximately $233 millien which has been raised or vill be available frca consummated external financings through May 31, 1975 At the present time, the ComInny cannot issue additional mortgage bonds or preferred stock because of insufficient earnings to meet coverage requirements incorporated in the Company's Indenture and Articles of In-corporation, respectively; nor can the Company issue common stock because the stock is selling below its par value of $10 a share and Michigan lav prohibits the sale of stock below par value. Furthermore it is our judg-ment that the Company currently cannot issue significant amounts of addi-tional preference stock or unsecured long-tem debt. The Company does expect, however, that earnings vill improve sufficiently to be able to issue $50 million of first mortgage bonds in the second quarter of 1975, assu=ing that (1) the Company will be granted at least $56 million of the $72 million in relief requested in its pending electric rate pmceeding, as has been reccanmended by the staff of the Michigan Public Service Commission, (2) the Palisades Plant vill operate for at least two months between now and the end of May 1975, and (3) there vill be some extension of bank credit or other short-term credit arrangements to cover tempor-cry requirements for short-term financing in excess of present lines of' bank credit (see Response to Question No. 9 below). t

h Question No. 2 of May 29,1974 Request If the aggregate amount of the estimated construction funds de-veloped for Item.1 above is less than the construction budget for the twelve months' period beginning June 1,1974 using the assumptions described in Item 1, indicate whether or not certain construction pro,jects (describe and state the dollar amounts involved) could be delayed to bring about a Parity between estimated construction funds and the construction budget.

Response

On November 14, 1974 Consumers Power Company announced a $147 mil-lion cut in its proposed construction expenditures for the calendar year 1975 This cut is likely to result in a delay of at least one year each in the comercial operation dates for the two Midland Plant units, and an 8-month delay in the connercial operation date for the fossil-fired Karn Unit No. 4. The Company's press release announcing the cut and the delays of these units is attached as Exhibit A. The cut reduced estimated re-quirements for construction funds for the twelve-month Ieriod beginning June 1,1974 to $357 million. At the present time, under the assumptions stated in the revised respons'e to Question No.1 of the May 29, 1974 re-quest, we anticipate bein6 able to raise suffiGent capital to finance the planned constniction program as ao reviced at lennt, t,hrough May ll, lif/',. The estimated requiremente for construction funds are at111 being reviewed. In the event of a material change in such requirements, or the Company's ability to finance them, the Company intends to supplement the foregoing response.

5 Question No. 3 of May 29,1974 Request Provide copies of Consumers Power Company's incane and sources of construction funds statements for the most recent twelve months' period and balance sheet dated as of the end of the same period. Copies of simi-lar statements for the corresponding twelve months ' period ended in the previous year should also be submitted.

Response

Attached as Exhibit B are Consumera Power Company's statement of income for the 12 months ended september 30, 1974 and september 30, 1973, balance sheet as of September 30, 1974 and september 30, 1973, statement of sources of funds for gross property additicus for the 12 months ended September 30, 1974 and september 30, 1973, and notes to the financial state-ments. 9 r-,

6 4 Question No. 2 of June 12, 1974 Request . Please_ include on your balance sheet or as a footnote any extra-ordinary outstanding or anticipated claims against Consumers Power Company.

Response

There are no extraordinary outstanding or anticipated claims against Consumers Power Company other than those mentioned in the Notes to Financial Statements submitted as part of Exhibit B hereto. 4

7 Qut*stion No. k of May 29, 197h Request Provide copies of the most recent Officer's Certificate prepared in connection with the issuance of mortgage bonds and showing interest coverage and debt ratio calculations pursuant to the applicable indenture. Respcuse Attached as Exhibit C are copies of the two certificates which include information concerning interest coverage and debt ratio calcula-tions pursuant to the Company's Indenture. The first is the Net Earnin6s Certificate provided in connection with the September 1974 sale of $50 million First Mortgage Bonds,11-1/4% Series due 1982, which contains the ccuputation of eamings before taxco available to pny int,erest on First Mortgage Bonds under the tems of the Company's Indenture. The second is the Accountant's Certificate provided in connection with the same sale of bonds, which contains the computation of the amount of prop-erty available at that time to be funded for the issuance of additional First Mortgage Bonds. The Indenture ccatains no provisions pertaining to required capitalization ratios. i

fr ' Question No. 5 of May 29,1974 Request Provide an estimate with detailed calculations of the amount of additional first mortgage bonds which could be issued at the present time pursuant to the applicable indenture and assuming a realistic range of current interest costs.

Response

For the 12 months ended September 30, 1974, the Indenture Net Earnings and Interest Earnings Requirement are: Net Earnings - $157,688,674 Interest Eernings Requirement - $168,600.698 The calculations of not eamings and annual interest requirements on first mortgage bonds are attached as Exhibits D and E, respectively. The Interest Earnings Requirement exceeds the Net Eamings. Therefore, at this time, no additional first mortgage bonds may be issued. 4 i I n 9 s e ~

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9 -Question No. 6 of May 29,1974 Request Provide projections of coverages of interest on long-tem debt to' be outstanding based on definitions included in the applicable bcmd indenture for each successive twelve month period beginning with the twelve months' period ending May 31, 1974 and ending with the twelve months' period tenainating May 31, 1975

Response

For the 12 months ended September 30, 1974, the Company's In-denture covera 6e was 1.87 It is expected that the interest coverage viil be returned to a level sufficient to permit the issusace of addition-al bonds in the second quarter of the calendar year 1975 t k 4

LO i Question No. 7 of May 29,1974 Request Provide. copies.of the most'recent prospectus prepared in con-nection with the issuance of securities.

Response

Attached as Exhibit.F is a copy of the Prospectus dated August 21, 1974 prepared in connection with the sale of $50 million First Mortgage Bonds,11-1/!+% Series due 1982. P 0 6 9 e 4 1 9 l o_ _j

11 Question No. 8 of May 29, 1974 Request Indicate the dollar amount on an annualized basis of requests for rate increases still pending before state and Federal regulatory agencies.

Response

Pending rate cases, all of which are electric, are as follows: a. On April 23, 1974 the Company filed electric rate Case U 4576 before the Michigan Public Service Commission (MPSC). The proposed an-nual revenue increase is $72,159,000 based on a year-end 1973 test period. At the same time, the Company requested partial and immediate relief in the amount of $54,659,000 annually. On September 16, 1974 the Company received partial and immediate relief in the amount of $27,624,000. On November 14, 1974 the Company applied to the MPSC for additional partial and immediate rate relief in the amount of approximately $27 million an-

nually, b.

On November 15, 1974 the Company filed before the MPSC a re-quest for a public pumping rate increase of not less than $2,256,000 based upon a test period for the 12.nonths ended May 31, 1974. c. On July 8,1974 the Ccanpany requested authority fran the }dPSC to amend its existing fuel cost adjustment clause to reflect the cost of purchased and net interchange power which Consumers Power must purchase to meet its electric system requirements as well as the cost of fossil fuel. The proposed clause would result in the realization of vary-in6 amounts of revenue as the costs of fossil fuel and purchased and net interchange power increase or decrease. On November 22, 1974, following issuance of an opinion of the Attorney General of the State of Michigan to the effect that the MPSC cannot allow an automatic flow-through of

12 { entire expense of purchased and interchange power without prior not. ice and hearing, the MPSC issued an order to show cause why exinting purchased po.ier or similar adjustment clauses should not be rescinded or pending applications for approval of such clauses should not be dismissed. In addition, the Cmpany plans to file before the MPSC, on November 27, 1974, a request to increase its gas rates to produce ddi-tional revenues'of $54,157,000 annually, based od normalized gas opera-tions at the end of the proposed test period at June 30, 1974. simultaneously, the Company plans to file a request for partial and immediate relief in said case for at least $39,559,000 annually. Two of the rate cases pending at the time of the Company's June 13, 1974 response have been resolved. In the Wholesale for Resale electric rate case before the Federal Poer Commission (FPC), Docket E-7803, the FPC issued an order on August 30, 1974 approving rates reached.n settle-ment negotiations and making such rates effective as of June 7,1973 The annual revenue increase approved is approximately $1,030,000. The order required the Ccapany to refund approximately $1,334,000, including interest, of revenues collected during the period June 7,1973 through september 24, 1974. on July 8, if/4, in steam rate Case U-4522, the MPs0 issued an order authorizing rates which vill produce a revenue increase of $192,543 annually. i

13 Question No. 9 of May 29,197k Request - Indicate the present and maximum amount of bank credit and ex-plain those factors, such as interest coverage and capital stmeture ratios, which tend to limit an expansion of such credit, i-

Response

The Company.has authority from its Board of Directors and the FPC to issue up to $300 million of debt maturing in nine months or less, which includes borrowings from banks or the issuance of eczumercial paper or a combination thereof. At the present time the Company has lines of credit with six large banks in the aggregate amount of $137 million. There ..is no restriction on the expansion of such short-term credit relating to intere'st coverages. Ilowever, the Company's Articles of Incorporation I' require the affirmative vote of a majority of the outstandin6 shares ( of Prefermd Stock for the issuance of unsecured indebtedness in excess of 20% of the aggregate of capital,' aurplus and secured indebtedneau, ex-cept to refund unsecured indebtedness or to redeen Preferred Stock. As of September 30, 1974 the 20% limit was approximately $h86 million. The - Company's Articles of Incorporation also require the affimative vote of a majority of all the outstanding shares of stock and a negative vote of less than 1/3 of the shares of Preferred Stock for the Company to is-sue indebtedness maturing in 12 months or more in excess of 30% of the ' aggregate of Preferred Stock, preference stock, conunon stock and surplus, unless the indebtedness consists either of bonds under the existing mort-gage or bonds or other evidences of indebtedness under a refunding in- ' denture, or indebtedness secured by the pledge of debt securities of either type to an equal principal amount-of such debt securities. As of September 30, 1974, the 30%. limit was approximately $329 million. O W e-2 -e* -nw m- ,e-w c- +--y.e--.-i1, g.,%c.- e-----y e ,,-m+%- ,--~mw.vm-r-e g+

14 The balance of unsecured debt maturing in nine months or less which the Company may issue, other than debt falling within one of the stated exceptions, was approximately $327 million at September 30, 1974. ~ The balance of debt maturing in 12 months or more which the Company may issue, 'other than debt falling within one of the stated exceptions, was approximately $136 million at that date. r a 't 9

L5 Question No.10 of May 29,1974 Request-Indicate the average age of accounts receivable applicable to electric service and gas service with the electric service accounts re-ceivable classified as (a) residential, (b) commercial-industrial, (c) pub-lie authorities, and (d) other electric utilities as of the latest available date and the corresponding date of the previous year.

Response

As of September 30, 1974 and september 30, 1973 the Company had creice accounts receivable of $52,085,752 and $42,199,349, respectively. Attached as Exhibit G is information on the Company's accounts' receivable and accounts receivable in arrears as of September 30, 1974 and september 30, 1973 Page G-1 provides infonnation on accounts receivable in arrears for only a current bill (from 1 to 30 days in arrears) by class of account. The Company does not separate arrears accounts by electric and gas but maintains such accounts in c Mned form. Any public authority in ar-rears vould be included in "Cortmercial." Any other electric utilities would be included in "Other." Page G-2 provides information on accounts receivable in arrears for more than one bill (31 days or more but not more than six months) by class of account. After six months, accounts receivable in arrears are written off to expense as bad debts. Page G-3 provides information on accounts receivable for which the customer has been disconnected either at the customer's request or as a resultM3he Company's discornect policy. PaEe G-4 totals the arrearages set forth on pages G-1, G-2 and G-3 For the 12 months ended December 31, 1973 the total uncollected bills charged off to bad debts were $1,628,06% or.20% of sales for 1973 For 1972 the amount was $1,213,577 or.16% of sales. The corresponding figures for the first three quarters of 1974 vere $1,727,772 and '.23%. For the first three quarters of 1973 they were $1,178,154 and.19%. e

' ~ %,c Exhibit A A-1 Consumers Power Company G.'neral Of fices 212 West Michigan [ven e, Jackson, Michigan.19201 e Area Code 517 7HH G700 FOR RELEASE IMMEDIATELY LANSING, Michigan, November 14 -- Consumers Power Company infozzed the Michigan Public Service Commission today that inability to raise the funds needed for continuation of its electric building program has compelled a further cutback in construction and a delay in effective service dates of two major power plants. In an updating of. testimony given to the Commission on September 6, 1974 in Grand Rapids, the company said depressed earnings resulting from inadequate .svenues prevent it from selling new securities. This, in turn, has forced i additional deferments which will postpone the in-service dates of the company's two Midland nuclear. units by one year each, to 1980 and 1981, respectively; and the in-service date of the oil-fired fourth unit of the Dan E. Karn plant by eights months, until the fall of 1976. The company's decision to reduce its building program still Parther was made known by A. H. Aymond, president and chairman of the board of Consumers Power Company, in a letter to Wi3.liam G. Rosenberg, chairman of the Public Service Commission. Mr. Aymond said, in part: "Should earnings fail to be restored to the level necessary to attract capital, it seems certain that it will be necessary for the company not only to defer indefinitely all major construction, as The Petroit Edison Company has recently done, but also to discontinue the connection of new customers and the environmental and safety programs needed to keep existing plants operating. --more-- ~

A-2 " Consequences of further deferment or elimination by the Company of major construction programs could have serious effects as early as next summer and may, in the longer run, be disastrous for the people of the State of Michigan. We hope that such actions will not become necessary." The Midland complex represents a total of 1,300,000 kilowatts of generating capacity, and Karn Unit No. 4 a capacity of 660,000 kilowatts. Karn Unit No. 3, an oil-fired generating plant with a capacity of 644,000 kilowatts, is nearing completion and is expected to be in service about February 1, 1975. Two months ago, the company informed the Public Service Coc: mission that it was compelled by financial difficulties to cancel plans to build a 2,300,000 kilowatt nuclear power plant near Quanicassee, Michigan, and to defer construction of an 600,000 kilowatt third unit at the coal-fired James H. Camp-bel] plant near Port Sheldon, Michigan, from 1979 to 1981. i "When I testified in Grand Rapids on September 6,1974," Mr. Aymond recalled, "I stated that despite our best efforts the ccmpany had very nearly i reached the end of its ability to obtain outside financing to carry on its construction program. Since that time, the company's financial condition has worsened. "We have wrung everything we reasonably can out of costs over which we have some control, but uncontrollable costs continue to depress earnings. ? The company's revenues have not kept pace with cost increases, and despite our efforts earnings have fallen to the point where, during the third quarter of 1974,. they failed to even cover the dividends on the ccmpany's preference stock. Clearly, capital expenditures must be brought into balance with the company's ability to attract capital." --more--

A-3 The company's earnings per share of common stock meanwhile have declined from $2.41 for the 12 months ended December 31, 1973, to $1.43 per share for the 12 months ended September 30, 1974. In the same period of time, the value of the company's common stock has declined from $22.75 par share to approximately $10, or about 64 percent less than book value. The company therefore is prevented from selling first mortgage bonds or preferred stock and, by its price, from selling common stock to raise new capital. Mr. Aymond estimated that the company would have spent approximately $413 million on new facilities in 1975, if it had been able to maintain its present building schedule. Such a construction program, together with the necessity of refinancin6 $86 million in 2-7/8 percent first mortgage bonds maturing September 1,1975, would have required the company to raise $370 minion in long-term securities. This, Mr. Aymond said, was impossible. t The cutbacks announced today will reduce the 1975 construction budget by $147 minion. Neverth2ess, the company still is faced with the need to raise $220 million in new capital in 1975, if it can find the means to do so. Mr. Aymond said the deferments of Midland Units 1 and 2, and Karn Unit No. 4, will be very costly. He estimated f, hat -- at present values -- additional construction and operatin6 costs of close to $200 million would be incurred by reason of the slowdown. However, he added, even more serious is the resulting impairment of the company's ability to render reliable service to its customers in the future. Mr. Aymond concluded: "In the final analysis, the company's ability to finance its curtailed construction program will depend on the restoration of earnings to adequate levels. Accordingly, it is a question of real concern to the management of the company whether the cuts made are deep enough." rN# November 14, 1974

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r L Exhibit B B-1 CONSUMERS POWER COMPA W STATEMEtrF OF INCCME AND RETAINED FALVINOS FOR THE WELVE M0!GS C(DIO SEPTEGER 30, 1974 OPERATING REYDUE: 197h E Electric $564,325,428 $k75,022,695 Gaa. 413,063,227 3k0,574,539 i steen 1,k89,897 1,329,8n l Total operating revenue (Note 5) 5975,576,552 5616,927,c35 0FRATING EXPDISES AND TAXES: Operation - Purchased and interchange power (Note 3) $130,134.975 $ 56,077,253 Puel used in electric generation 137,088,739 105,939,625 Coat of gas sold 2k1,716,118 163,509, % 6 Other 150,016,395 1h1,74,kh8 3 Total operation $656,956,227 44 M. Dj,672 Maintenance 46,952,053 Lk,674,76k Depreciation and amortization (Note 1) 80,897,482 70,c35,926 General taxes Income taxes (Note 13) 59,896,092 50,552.220 16,319,430 53,5E8,30? Total operating expenses and taxes 5d63,021,2 % ao9 :>, 21,coi g Net operating inceme 5115,b57,2td 3129,505,970 OTHER INCOME: Allowance for funds used during construction (Note 1) 20,923,534 25,064,930 l Income from subsidiaries (Note 1) 6,737,618 3,067,198 i Other 4,5kk,296 2,279,797 Net other income 5 32,205,446 4 !J,b u,925 l INTEREST CHARGES: Interest on long-tem debt $ 79,976,206 $ 69,k25,789 Interwst on notes payable 6,213,715 1,910,314 i Cther l 279,843 138,c19 Total interest charges a 66,469.764 a 71,474,121 l Net income 9 61,592,952 o o5,443,774 DIVIDDTDS ON PREFERRED AND PREFERETCE STOCK 24,155,372 15,724,3h1 Net income after dividends on preferred stock 4 37,437,550 $ 69,719,433 l DIVIDENDS Gt CC.40CN STOCK - OECIARED ICRING THE PERIOD AT 1HE RATE OF 50.0d PG SEARE PER QUARTER 52,467,676 52,L67,676 Balance to retained earnings $(15.030,096) $ 17,251,757 A8d - Ad,justment to retained earnings (Note 8) 4,359,272 Retained earnings < Beginning of period 233,266,M6 212,255,M7 RETAINED EARNI GS - End of period (see balance sheet) _$216,63o 170 ggy 1 I The accompanying notes are an integral part of thic statement. I i S 4 . 3 8 9 6

r B-2, Co':5" EPs two cryrcY BAIA M P 'T N '" 30.17Pa STOCRM913tPS' TTYFSTMT9? ASS?TS Ag3 LgA3gLI;gg3 1"IT11TY FN*r CAIITA'Z2.ATICh At oristral cost

• Caron stockholders' equity -

212at is service and held for future use. 197'4 1 Canon stoct 310 par value, authorised 32,X)O,000 1'F'b 1 Il"*'l* $1,917,45,893 $1.6,w3.113 s%res, ociatani: s 26,233,838 $ 2f7,E*,3So 4 .380 G** 838,750,W3 r$0,216.654 Capital is excess cf par value (! rote 10) 247,232,615 247.C70,343 3,2?o.3% 3 J65,047 Cc:ma to til departmeet* 77,251,c#2 in.6ee.c10 petained earnir.as (Note 9) 2'

• J IM 233,P(6 W 32,Ub7.3,34 42.L n,753.024

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14 st provisten fer accrued depreciattan (Note 1) _ 7e7,poo, ry)1 GM.1P S. 452 lass: Capital stock expense 8,C11,lal 6,231,3CO 42,1W,4 3, *-3 51.0,i,7C.0 72 Construettes work in progress (Note 2) ,yy g yg,.y pg,pt,,69 , K,G. ns U, W,'m,_-1 Freferrei s*3ck et=41stive,1100 par value, authoriked 5,0 W. Coo snares (note lo) 3',7,133,800 292.533.800 Frefere=re stack, e.=:alative, $1 par value, authorise4 o-ws y,v33;g.,,,.ym, 4 5.wo.0m su es, outstanm, 6w wo (.ote m 6w,=0 81 Trsvision for accrued depreciattom and capital in excels cf par value of preference stock 29,L??,!OO ' #' II 2,791,b35 2,835,022 Total stoetholders' investaent 51,0 *., T. 7r 2 M.'YF %J" Img-te-m delt (*:cte 11) $1, LLS, ?* 8.01'. $1,?31.**7 PLS Tctal capitaltration $2, *' *. "*. *:4 $?,M!.kS4 (kb IN11y-oc.et sds:11 aries (:ote 1) ,{1chigan Oas ?t.rege Cma.y g gp g g g pg, Mb'!M MPA Wte W f ]e's-Tpicration Corpany (Note h) 25,(T,)9,336 17.611,837 To banks (avers &e icterest rate of 11.93% and 10. ort. respectively) 67,700,000 $ (16,000,0m) ~ .. s 3,p 1,977 P/v7,L 31 Caszeretal paper (everage interest rate of 11.921 and 9.8i:5. 8 LL"

• 6 3 5 3 2.cTe, sed respe:tively) 1.F*?,9 St 7n0 E S

T.. ' n> 1 a,.11.M ' f f,, -, Ct'"Wr:T 1*A!!'.!*!ES: (Exelating motes payable, e e within one year) $ 16,795,853 13,2(9,502 Currect ranrities an.1 sirAing fund - lenc-terz dett (kte 11) i %4,G7 4,716,t69 3,' 8* Acccrzts ;a; atie (includes $2,665,262 mai $2,351,1,00, respectively, Custoaers, lyts reserve cf $7Ct,928 and $716.022, due to scriliaries) 67,250,2*7 k9,095,3?) otIr 52.085,752 42,199.3f.9 Acemt tans G. M,5:6 71,7 30,1LS 2,%3 M 3,52,6,( 2 5 Acc m 1 'n eest 29,1LO,176 23,64,7id V terlds ar.1 sr;;*es, at everage cost 83.7:5,944 50,317,578 DivtJe:As ce:1 area os cca som stock 22.?k,%f**

• 116 a u.:,rgr:.-! riersce, at everage cost 67.872, % 7 35 M,375 Othe r

18. !'i',0?b 11,L?1 779 9,co'.612 f

"%-X,i3 5 IE.4 S 4 23. opt.T S I V., % m2 DI3TitCD C?I-**S: d Deferred 1 :=, taxes $ 19h,*-8,1M $ IM,507,1 1rwestrer.t tan credit M,*4. 534 M.T-A.3' ) Custa=ers' alwances for construction and other 6,' 70.*?3 P. "'.CS l 3 23,:M.L57 $. r t.? ' ', ' ' 22,P30.7?3 8,50'i.310 l CYC!ATI:3 *ISF37ES (*:ote 5) i 1*.*'?. W f 13 M* ? ' h 0L3,701 7?5_ f2,(4t M,L_23 g3,c;3yL,7'S !?.( ?1.'*f,' ' 3 The 4::wrv31cd utes are e integrc part of 1,his statement,

B-3 i STATEMENT OF SOURCE OF FUTGS MR GROSS PROPERTY ADDITIOUS 12 Mo Ended September 30 SOURCE OF WNDS FOR GROSS PROPERTY ADDITIONS 1974 1973 Punds Generated From Operations Net Income After Dividends on Preferred Stock $ 37,437,580 $ 69,719,433 Principal Noncash Items 4 Depreciation and Amortization l Per Statement of Income 80,897,482 70,035,926 Charged to Other Accounts 3,906,603 17,963,027 Deferred Income Taxes, Net 28,370,149 22,812,206 Investment Tax Credit, Net (107,815) 15,447,934-Common Equity Component of Allowance for Funds Used During Construction (6,331,696) (6,891,104) Undistributed Earnin6s of Subsidiaries (Note 1) (4,607,620) (1,717,199) $139,564,683 $187,370,223 Less Dividends Declared on Common Stock $ 52,467,676 $ 52,467,676 Retirement of Long-Term Debt and Pref Stock 13,688,000 12.938,000 $ 73,409,007 $121.964,54/ 4 Funds obtained From New Financing Issuance of Common Stock (Note 15) $ 59,620,000 Issuance of Preferred Stock $ 55,000,000 75,000,000 Issuance of Preference Stock 30,000,000 Issuance of First Mort 6 age Bonds 110,000,000 125,000,000 Net Proceeds From Installment Sales Contracts Payable 36,784,957 28,439,616 Increase (Decrease) in Other Long-Term Debt 49,665,467 (3,977,869) Increase (Decrease) in Notes Payable 47,850,326 (34,700,000) $329,300,750 $249,381.747 Funds Obtained From Other Sources Conmon Equity Component of Allowance for Funds Used During Construction $ 6,331,696 $ 6,891,104 Change in Net Current Assets and Current Liabilities (51,852,416) 10,146,349 Other, Net (17,859,125) 446,368 $(63,379,845) $ 17,483,821 { (Increase) Decrease in Investment in Northern Michigan Exploration Co (Note 4) $ (2,700.000) $ (1.550.000) 3(66,079.845) s 15,933.691 GROSS PROPERTY ADDITIONS (Note 14) 3336,629.912 $387,260.115 (-) Denotes deduction. The accompanying-notes are an integral part of these statements.

B-4 ( NOTES TO FINANCIAL STATEMENTS (1) SIGNIFICANT ACCOUNTING POLICIES The Company's wholly-owned subsidiaries, Michigan Gas Storage Company and Northern Michigan Exploration Company, have not been consolidated as they are not significant. Effective January 1,1973, the Ccmpany, pursuant to Federal Power Commission Order No, h69, adopted the equity method of accounting for the investuent in subsidiaries. Under this method of accounting the Company's interest in the earnings of the subsidiarit.s is reflected currently in earnings and in the carrying value of the investments. The Company provides depreciation on the basis of straight-line rates approved by the Michigan Public Service Commission. Composite de-preciation rates were approximately 2 91% for electric property and 3 01% for gas property for the 12 months ended September 30, 1973 -and 2.81% for electric property and 3 50% for gas property for the 12 months ended September 30, 1974. ~ Operating revenue is recognized at the time of monthly billings on a cycle basis for electric and gas service. The Company makes annual contributions to the pension plan sufficient s to cover current service costs, interest on unfunded prior service costs and amortization of prior service costs (see Note 6). ' Allowance for funds used during construction, included in other income, represents the estimated cost of funds applicable to utility plant in process of construction capitalized as a component of the cost of utility plant. The allowance was capitalized at a rate of 7-1/2% in 1973 and 7-3/4% in 1974. (2) CONSTRUCTION WORK IN PROGRESS Construction work in progress included $87,750,000 at September 30, 1973 and $167,380,000 at September 30, 1974 related to the Midland Plant. The issuance of construction permits by the Atomic Energy Ccmmission (AEC) in December 1972 was upheld by an Appeal Board of the AEC in May 1973 but has been appealed to the U.S. Court of Appeals for the District of Columbia Circuit. Construction, delayed since 1970, was resumed *.n June 1973 In December 1973 the AEC issued an order for the Company to show cause why all construction activity chould not

be suspended pending a showing that th, Company is in complionw with the AEC's quality assurance regulation and that there in reasonable assurance that such compliance will continue throughout the construction process. Followin6 hearing, an Atomic Safety and Licensing Board of the AEC on September 25, 1974 determined the issues favorably to the Company's pocition. Certain interveners have petitioned to reopen the record and reconsider the decision in order to consider the effects of litigation by the Company against Bechtel Corporation.and Bechtel Company and others '.cith respect to the Company's Palisades Plant.

Bechtel is the archi.ect-engineer for.the Midland Plant. The matter is pending.

B -5 N0'IES 'ID FINANCIAL STATEMENTS (Contd) (2) CONSTRUCTION WORK IN PROGRESS (Contd) 'Jhe Company has cancelled plans to construct a two-unit, 2,300 megawatt nuclear power plant near Quanicassee, Michigan for initial operation in 1983 and 1985 The decision to cancel the $1.4 billion project was based upon the currently prevailing market conditions for utility se-curities, the Company's inadequate earnings, and the need for raising capital for other construction projects during the lengthy construction period required to build the Quanicassee Plant. Total costs (excluding land costs and expenditures which may have value in connection with the future use of the site for a generating plant) consisting of engineer-ing, licensing. expenses and other preliminary work having no salvageable value are expected to amount to approximately $13,700,000. The Company intends to petition the Michigan Public Service Commission for authority to amortize such costs net of related income taxes to operations over a period of years. If such authority is not granted, it may be necessary to make a charge against current. operations in 1974 for all or a part of such costs incurred. (3) PA1ISADES NUCIZAR PLANT The Palisades Nuclear Plant was shut down in August 1973 for repairs. The net cost of replacement power, net of related income taxes amount-ing to $2,172,000 ($.08 per share of com=en stock) for the 12' months ended September 30, 1973 and $23,199,000 ($.88 per share of common stock) for the 12 months ended September 30, 1974 has been charged to Income. The Plant resumed limited operation in October 1974 pursuant to a 90-day authori::ation to carry out a program to remove chemical impurities from the Plant's steam generators, idhile such program was being conducted, leaks in the Plant's steam condenser required further shutdown to permit repairs. It is expected that the Plant will con-tinue to be out of service until at least mid-January 1975 After the shutdown of the Palisades Plant in Au6ust 1973, the net cost of replacement On February 4, power was deferred pending regulatory approval.1974, reques Public Service Commission and the costs previously deferred were written off and prior months' financial statements, commencing with September 1973, were restated accordingly. (4) NORTHERN MICHIGAN EXPIORATION COMPANY Northern Michigan Exploration Company (Northern), a wholly-owned sub-sidiary of the Company, is engaged in gas exploration programs in northern Michigan and the southern United States. The Company'c Board of Directors has authorized loans to Northern up to a maximum of $20,000,000 and has authori:cd a total common utock invenLment of $20,000,000. The Po=pany's investment in Northern consicted of J e b

B-6 / NOTES TO FINANCIAL STATEMENTS (Contd) (k) NORTHERN MICHIGAN EXPLORATION COMPANY (Contd) $10,k00,000incommonstock,$1,711,837 in undistributed earnings of the subsidiary and $5,500,000 in notes at September 30, 1973 and $14,600,000 in common stock, $6,499,306 in undistributed earnings of the subsidiary and $4,000,000 in notes at September 30, 1974 (5) RATE MATTERS On January 18, ISrl4, the Michigan Public Service Commission (MPSC) autho-rized increases in the Company's electric and gas rates of $31,000,000 and $46,600,000, respectively, on an annual basis. The rate increases included interim increases aggregating $50,000,000 divided equally be-tween electric and gas rates which were placed in effect November 10, 1973 In December 1973, the Attorney General of the State of Michigan appealed the interim rate orders of the MPSC. The authorized rate in-creases became effective on January 19, 1974 except for approximately $14,571,000 of the gas rate increase which became effective on April 20, 1974 after the Company had submitted proof to the MPSC that the second unit of the Marysville Gas Reforming Plant was fully and commercially operable. On November 19, 1974, the Michigan Public Service Commission, pursuant to a limited rehearing of the Company's gas rate proceeding, ordered the Company to revise and restructure its rates for natural gas service, decreasing the rates for residential customers and increasing'. the rates for commercial'and industrial service, effective November 25,' 1974. In April 1974 the Company submitted an application to the MPSC to in-i crease its electric rates by not less than $72,159,000 annually and at the same time requested partial and interim relief in the amount of $54,659,000 annually. On September 16, 1974, the MPSC approved partial and interim rate relief in the Company's electric rates of $27,624,000 annually, under bond and subject to refund with interest in the event the final order in the case shall provide a lesser amount of rate re-lief. On November 14, 1974, the Company applied to the MPSC for addi-tional partial and immediate electric rate relief in the amount of approximately$27,000,000 annually. Litigation-is pending with respect to electric and gas rate increases which became effective in 1969 and which are subject to refund relating to the reduction and elimination of the Federal income tax surcharge. In March and April 1974, the Court ruled in favor of the MPSC with re-spect to the income tax surcharge issue and ordered the Company to re-fund $24,542,632 to'its electric and gas customers. The Company has established a reserve stated net of related income taxes in the amount of $11,867,818, and believes that the amount of such reserve is adequate to cover the refund obligation, exclusive of interest charges which are presently not capable of determination.- The Company is appealing the a y --w

B -7 I NOTES 'IO FINANCIAL STATEMENTS (Contd) -(5)' RATE MATIERS (Contd) Court Orders of March and April 1974 The litigation also involves a claim with respect to the legality of the electric rate increase, which became effective in 1969, on the grounds that the increased rates oe-came effective by Court Order in October 1969, that the MPSC did not issue an order approving said rates until April 1970 and that as a re-sult, the electric rates charged during the period are subject to re-fund in an amount of approximately $7,763,000, plus interest charges which are presently not capable of' determination, for which no reserve has been provided. (6) PENSION PLAN The Company has a trusteed noncentributory pension plan under which full-time regular employees within specified age limits and periods of ser-vice are qualified to participate. The contributions to the plan were - $14,131,000 for the 12 months ended September 30, 1973 and $15;446,000 for the 12 months ended September 30, 1974 Of these amounts $10,411,000 for the 12 months ended September 30, 1973 and $11,984,000 for the 12 months ended September 30, 1974 were charged directly to expense accounts with the remainder being charged to various construction, clearing and other accounts. The unfunded prior service cost at January 1,1974, the date of the most recent actuary's report, amounted to approximately $21,569,000. (7) CONSTRUCTION COMMITMENTS AND FINANCING RESTRICTIONS As of November 6,1974, capital expenditures for property additions in 1974 were estimated to total approximately $335,000,000. Total con-struction expenditures over the five years ending December 31, 1978 are ' presently estimated to approximate $1,800,000,000. Substantial commit-ments have been made with respect to capital expenditures in future years. In order to finance this construction program and to meet'First Mortgage Bond maturities of $170,334,000 during the five years ending December 31, 1978, it will be necessary for the Company to sell substantial additional securities, the amounts, timing and nature of which have not yet been ~ determined. The carnings coverage provisions of the Indenture covering the Company's First Mortgage Bonds require for the issuance of additional mortgage bonds, except for certain refunding purposes, minimum earnings coverage, before income taxes, of at least two times pro forma annual interest charges on bonds. The Company's Charter requires for the issu-ance of additional shares of preferred stock specified earnings coverages, including minimum earnings coverage, after income taxes, of at least one and one-half times the pro forma annual interest charges on all indebted-ness and preferred dividend requirements. the coverages for the-twelve months ended SeptemberOn the basis of these formulae 30, 1974 (computed including electric allowance for funds used during construction) are, re-spectively, not less than 1.87 times as compared with the requirement of at least two times and not less than 1.12 times as compared with the re-quirement of at least one and one-half times. The amounts of additional First Mortgage Bonds and preferred stock which can be issued in future years will be contingent upon increases in earnings through rate increases or otherwise.

B -8 I NOTES TO FINANCTAL STATEMENTS (Contd) (8) ADJUSTMENT TO RETAINED EAPRINGS On February 1, 1973 the Federal Power Commission revised its accounting regulations to prescribe the use of " equity" accounting for long-term investments in ccemon stocks of subsidia'ry co=panies (Docket No. R-395, Order No. 469). Pursuant to the order, effective with the year 1973, the Company changed frem the ecst to the equity method of accounting for the investment in the subsidiary cc=panies. Under this method of accounting the Ccmpany's interest in the earnings of the subsidiaries is reflected currently in earnings and in the carrying value of the investments. Prior years have not been restated for this change in accounting since the effect was not material; however, retained earn-ings have been credited with the undistributed earnings of the sub-sidiaries at December 31, 1972 in the amount of $4,359,272. (9) LIMITATION ON DIVIDENDS At September 30, 1974, retained earnings in the amount of $96,439,244 are not available for the payment of cash dividends on common stock under provisions of the Articles of Incorporation of the Ccmpany which, ex-cept under certain circu= stances, prohibit the payment of common stock dividends in cash which would reduce the percentage of cc::non stock equity to total capitalization below 25%. There are also other re-strictions as to payment of dividends en ec= mon stock which, however, are presently less restrictive than the limitation mentioned above. After giving effect to the balance of In M ament Sales Contracts exe-cuted in August 1973 and February 1974, retained earnings in the amount of $99,264,387 would not be available for payment of cash dividends on common stock. (10) FREFERRED STOCK AND FREFERENCE STOCK Preferred stock is represented by: Rede=ption Price September 30, September 30, per Share 197h 1973 $4.50 - 547,788 Shares Outstanding $110.00 $ 54,778,800 $ 54,778,800 $4.52 - 123,550 Shares outstanding 104.725 12,355,000 12,755,000 - $4.16 - 100,000 Shares Outstanding 103 25 10,000,000 10,000,000 $7.45 - 700,000 Shares outstanding 108.00 70,000,000, 70,000,000 $7 72 - 700,000 Shares outstanding 108.00 70,000,000 70,000,000 37 76 - 750,000 Shares outstanding 109.19 75,000,000 75,000,000 37.68 - 550,000 Shares outstanding 108.00 55.000,000 Total Preferred Stock $3h7,133,800 8292,533,800 ~

~ B -9 NOTES TO FINANCIAL STATEMETITS (Contd) ( (10) PREFERRED STOCK AND PREFERENCE STOCK (Contd) The preferred stock of the Company is redeemable as a whole or in part, at the option of the Company, at the above redemption prices plus ac-crued dividends to the date of redemption, except that prior to April 1, 1978, July 1, 1977, June 1, 1978 and November 1, 1978, the $7.45, $7 72, $7 76 and $7.68 preferred stock, respectively, may not be redeemed through certain refunding operations. The Company is required to endeavor to purchase and retire annually 4,000 shares of the $4.52 preferred stock at a price per share not to exceed $102 725 plus accrued dividends. Such purchases of pre-ferred stock resulted in a net gain of $126 666 during the 12 months ended September 1973 and $160,272 during the 12 months erided September 1974 which was credited to capital in excess of par value. On April 9, 1974 the Ccmpany's shareholders approved an increase of 1,500,000 shares in the authorized preferred stock from 3,500,000 shares to 5,000,000 shares. On April 9,1974 the Company's afiareholders approved a revision in the Company's Articles of Incorporation to authorize 5,000,000 shares of cumulative $1 par value Preference Stock. In August 1974 the Company sold 600,000 shares of $6.00 Preference Stock, convertible into Common Stock on and after November 1, 1974 at 4 shares of Common 2 Stock fer each chare of Preference Stock, (11) - LONG-TERM DEBT Long-term debt at September 30 is represented by: First Mortgage Bonds, secured by a mortgage and lien en substantially all property - 12L. 1.913. 2-7 8% Series due 1975 86,324,000 $ 86,324,000 8-3 4% Series due 1976 60,000,000 60,000,000 2-8% Series due 1977 24,010,000 24,010,000 3% 3/4% Series due 1981 - 1991 263,269,000 275,957,000 11-1/4% Series due 1982 50,000,000 11-3/8% Series due 1994 60,000,000 5-7/8%-6-7/8% Series due 1996 - 1998 247,550,000 247,550,000 7-1/2%-8-5/8% Series due 1999 - 2003 470 000 000 h70.000,000 Total First Mortgage Bonds $1,261,153,000 $1,163,841,000

B -10 NOTES TO FINANCIAL STATEMENTG (Contd) (11) IONG-TERM DEBT (Contd) 1974 E ~ Installment Sales Contracts Payable (Net of $8,475,427 Held by Trustee Pending Completion of Construction) 65,224,573 $ 28,439,616 Sinking Fund Debentures, 4-5/8%, due 1994 37,000,000 37,600,000 Term Bank loan 50,000,000 other 426,494 4,513,249 Unamortized Net Debt Premium 708,194 2,201,849 $1,414,512,261 }_1,236,595,714 Deduct: Current Maturities Included in Current Liabilities 364,247 $ 4,116,469 Sinking Fund Debentures - Current Sinking Fund Requirement Included in Current Liabilities 600,000 600,000 964,247 $ 4,716,469 Total Long-Tem Debt $1,413,548,014 $1231,879,245 3 (12) COMPENSATING BALANCES AND NOIES PAYABLE The Company has agreements with banks providing for short-tem borrowings of up to $137,000,000. In :ennection with these agreements the Com-pany is required to maintain average compensating balances with the banks, 'over an unspecified period of time, equal to 10% of the total line of credit plus 10% of the average borrowings outstanding, as deter-mined from the bank's records after adjustment for uncollected. funds. There are no legal restrictions on the withdrawal of these funds. In addition, the Company issued commercial paper from time to time on a short-term basis, generally for periods of less than one month. Average short-term borrowings outstanding for the 12 months ended September 30, 1974 amounted to $55,840,208, the maximum amourt out-standing at any one time during the period was $112,650,000 and the weighted average interest rate during the period was 11.13%, excluding the effect of compensating balances. (13) INCOME TAX EXPENSE l Income tax expense for the 12 months ended September 30 is made up.of the following components: I

B -11 NOTES To FINANCIAL STATEMENTS (Contd) (13) INCCME TAX EXPENSE (Contd) 1974 12Z1 Charged to Utility Operations ..(10'114,066) $ 8,352,907 Federal Income Taxes State Income Taxes (1,828,839) 3,975,256 Deferred Federal Income Taxes, Net 23,960,865 19,201,026 Deferred State Income Taxes, Net 4,409,285 3,611,18e Charge Equivalent to Investment Tax Credit, Net (107,815) 15,h47,934 Total (See Statement of Income) $16,319,43o $50,588,303 Charged to Nonttility Operaticns 2,183,286 645,569 Total Inccme Tax Expense $ 18,502,716 431,233,872 The Company utilizes liberalized depreciation and the " class life asset depreciation range sistem" for inecme tax purposes. Income tax de-ferred due to the use of these methods is charged to income currently and credited to a reserve for deferred income taxes. As income taxes previously deferred become payable, the related deferrals are credited to income. Certain costs, principally interest, capitalized in'acc,ordance with the provisions of the Uniform System of Accounts, are expensed for income tax purposes and the tax reduction resulting therefrom is reflected in the income statement currently as ordered by the Michigan Public Service Co= mission. The investment tax credit and job development investment credit utilized as a reduction of the current year's income tax is deferred and amor-tized to operating expense over the life of the related property. The total tax expense as set forth above produces an effective income tax rate of 23.1% for the 12 months ended September 30, 1974 and 37 5% for the 12 months ended September 30, 1973 The following schedule reconciles the statutory Federal income tax rate of 48% to the effective income tax rate.

B -12,, 4 NOTES TO FINANCIAL STATEMENTS (Contd) (13) INCOME TAX EXPENSE (Contd) 1974 1973 Amount Rate Amount Rate Computed " Expected" Tax Expense $ 38,445,876 48.0% $ 65,605,266 48.0% Increase (Reduction) in Taxes Resulting From: Certain Capitalized Construc-tion Costs,- Principally Interest, Deducted Currently for Income Tax Purposes for Which No Deferred Taxes Are Provided in Accordance With the Requirements of the MPSC (14,023,660) (17 5) (16,848,798) (12 3) State Income Taxes, Net of Federal Income Tax Benefit 1,333,146 1.6 4,176,59h 3.1 Amortization of Deferred Investment Tax Credit (1,625,273) (2.0) (1,292,003) (.9) Other IUscellaneour Items (5,627,373) (7.0) (407,187) (.4) Actual Tax Expetle ,$ 18,502,716 21 1% $ 51,233,872 37.5'l (14) CONTFIBUTIONS IN AID OF CONSTRUCTION Effective January 1, 1974 the Company, pursuant to Federal Power Commission Order 490, reclassified Contributions in Aid of Construction as an offset to Utility Plant at original cost. The financial statements for ' September 30, 1973 have been restated to a comparable basis. (15) COMMON STOCK ISSUE In October 1972, the Company sold 2,200,000 shares of its common stock at a net price of $27.10 per share. In connection with this transaction, $22,000,000, representing the par value of the shares issued, was credited to the common stock account and $37,620,000 was credited to capital in excess of par value. (16) NUCLEAR FUEL LEASING On November 19, 1974, the Company announced the sale and leaseback of approx-imately $32 million of Nuclear Fuel. The leasing agreement's initial life is for five years. 9

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EXHIBIT C - ~ 4, C-1 NET EARNINGS CERTIFICATE 0 9 ~8. N. Spring, en accountant appointed by the board of di. rectors of Cens=ers Power Ccmpany, hereinafter sometimes, called the " Company," L;._S HERE3Y CERTIFr to First National City Ilank, as Trustee & the.. Indenture cf Censuners Power Company dated as of September 1,

• .** 'hvtaphEu:.i.zacaded.M supplemented, hereinafter sometimes referred to

..:_.as tbe.+8'.Wenturc[' that the net earnings of the Cc=pany for the twelve

c /

..zzesemC.a calendar months ended June 30, 1974 stated pursuant to Sec-tion 1 o3 of said Indenture are as follows: I. Net earnings for the twelve month' s . ended. June 30, 19715

,jl) Cross operating revenues -

vi-

• ic

$531,398,260 x :.., cas 393,986,223 - :.?.*. -i..esteam 1,401,066 h?(2).Teci. nonoperatin; revenues excluding ince:s taxes $25,375,516 (3) Applicable net nenoperating rev-enues, being the lesser of the amount ($25,375,516) specified in Subdivision I (2) or en

• 7^* r e camount ($25,291,2 55) ocual to 6

..15% of the interest earninCs .t

w '. -.requirenent specified in

~- ~, < f-c..: Subdivision III 25,291,455 4952,o77,009 -(4) operating expenses - Operation $596,251,2d4 Maintenance h6,331,976 . Provision for Depreciation 78,099,164 Taxes (other than taxes on incene) 58,035,123 e

C -2 Excess of 15% of cross operating, revenues, after deduction of the aggrecate cost of electric energy and gas purchased for resale (no steem having been purchased for resale), over the ,aggrcCate of actual charges for current repairs and r.aintenance and charges to expense to provide for depreciation $778,717,547 , Net Earnincs $173,359,h6] n.(A) Principal cmount and interest rates of the respective bonds on which the annual !nterest charges referred to in Subdivisien II (B) are calculated. Consumers Power Co=pany First Mdrtgage Bonds - Principai Descrittion Amount-(1) 2-6% Series Due 1975 $86,324,000, 8-3 hf, Series Due 1976 60,000,000 2-7 8% Series Duc 1977 24,010,000 3-1 &% series Due 1931 39,000,000 3% Series Due 1984 23,419,c00 4% Series Due 1936 32,338,000' 3-1 % Series Due 1937 22,11;1,000 4-4% Series Due 1987 194,000 %-1 2% Series Duc 1983 33,611,C00 4-5 6% Scrics Due 1939 27,662,000' 3-4% Series Due 1990 24,732,000 4-8% Series Duc 1990 29,233,000 4-5 8% Series Duc 1991 30',939,000 5-8%SeriesDue1996 59,000,000 6% Series Due 1997 73,550,000 6-8% Series Duc 1998 55,000,000 6-6% Series Due 1998 55,000,000 7-85 Scrics Due 1999 50,000,000 8-1 4% Series Due 1999 55,000,000 8-5 G$ Series Duc 2000 50,003,000 8-05 Series Duc 2001 60,000,000 7-1 23 Series Due 2001 60,000,000 7-1 Series Duc 2002 70,000,000 7-1 P$ Series Duc 2002 50,000,000 8-5 dj Series Duc 2003 75,000,000 11 6$SeriesDue1994 60,000,000 (2)ll-1/h%SeriesDuc1982 50,0QO,000 +

C -3 , (B) Annual interest charges upon - (1) All bends authentiented under the Indenture end outstanding (asdefined)onthedateof such certificate $78,679,649 ~(2) Bonds applied for in the applica-tion in connection with which this certificate is made .5,625,00o (3) All prior lien bends outstanding (asdefined)enthedateof such certificate (h) All o'ther indebtedness outstanding (as defined) on the date of such certificate Aggregate annual interest charges $ 8h,304,349 III. Interest earnings requirement (200f, of the aggregate annual interes charges specified .inaccordancewithSubdivisionII(3)above) $168,609,693 She undersigned has recd the covencnts cnd conditions of the Indenture (together with the definitions relevant thereto) relating to the requirements for a net earnings certificate as part of an applica-tion for the authenticatica cnd delivery of bonds, in accordance with the provisions of Sections 1.03,1.07 and 4.01 thereof; he is informed of matters relevant to the statements contained in this certificate through personal knowledce and excmination of records of the Company and reports or information furnished to hh by officers or employees of the Company having knowledge of the relevant facts; he has conferred with counsel with respect to the foregoing; cnd the statement c.d ' opinions contained in this certificate are based on such knowledce, . examination and investigation. ~ In the opinien of the undersicned, he has made such excm-inntion or investigation as is necessary to enabic him to expres: an . informed opinion as to whether or not the covenants or conditions pro-vided in said Indenture (including any covenants ccmpliance with unich constitutes a condition precedent) relatin, to the requirement for a net earnincs certificate as part of an application under the provisions of Articic IV of the Indenture for the authentication and delive:/ of bonds, have been complied with; and in his opinion, such conditions and covenants have been complied with. In this certificate the; allor:mcc for' ilmd: used durinc construction applicabic.to clectric construction, recorded on the-books' of the Company as Other Incene p zuante.to Federal *pover t e e p

u.4 y Cocaission Order No 436, is included in net nonoperating revenues. The inclusion of the allowance for funds used during construction in net nonoperating revenues is in acco-dance with generally accepted account-l ~ ing principles. l I Dated: Septe=ber 3, 1974 t f S. N. Surine Accountant S \\ e f e e \\ 9 / d i I \\ a t k t ... -.. ~ _. - T. ' -

C ~5 .. 9 FATE OF MICHIGAN ) ) as: COUNTY OF JACKSON ) S. N. Spring, being duly sworn, deposes and says that he is an ac-countant appoit ted by the board of directors of Consumers Power Companyi that he executed the foregoing certificate as such, and that the same is true to the best of his knowledge, information and belief.

3 u

S. N. Spring 3 - Ssbscribed and svorn to before e.e this 3rd day or september 1974 ~ Helen I. Dempski NOTARY PUBLIC Jackson 'ounty, Michigan C My commission expires January 9, 1976 I e s / O e 5 o se c, G .r d ~

Q ee ,W c -6 ACCotmTANT'S CERTIFICATE S. N. Spring, an accountant appointed by the board of directors of Consumers Power Corpany, hereinafter sometimes called the " Company," DOES hTRE3Y CERTIFY to First National City Bank, as Trustee under the Indenture of Consu=ers Power Co=pany dated as of Septe=ber 1,19h5, as a= ended and supple =ented, herein-after sometimes referred to as the " Indenture," as follows: (a) The amount of net preperty additions stated pursuant to paragraph (3) of Sec-tion 4.01 of said Inden-ture, in subdivision (b) of the most recent cer-tificate heretofore filed complying with the re-quirements of said para-graph (3) $2,838,130,8h7 39 (b) The cost of the gross prop-crty additions cade or ac-quired by the Co=pany or becoming-such during the period covered by this certificate, namely, the period from May 31, 1974, to June 30, 1974, l'n-clusive, or concurrently being acquired or beco ing such,(such preperty ad-ditions being descri~ced as provided by subdivision (y) of paragraph (3) of ~ Section 4.01 of said In-denture), other than prop-erty additions, if any, heretofore specified in accordance with subdivisien f (b) of parcsraph (3) of said Section h.01 in a certifi-cate filed complying with the requirements of said paragraph (3) as property additions as authori cd by the last paragraph of See-tion 1.10'of said Indenture, is the amount set opposite each of the following itens, all of which are located in the State of Fuchigan: e

c -7 7enstruction Work in Progress Electric Plant Ludington Pu= ped Storage Plant - six units 4 (23,679) ~ Midland Plant 3,784,910 Quanicassee - Units 1 and 2 (7,610,476) Karn Plant - Units 3 and b 6,153,8h2 J. H. Campbell Plant - Unit 3 67,199 Palisades Plant (22,100) Miscellaneous generating plant 1,070,20T additions and i= prove =ents Additions and improve =ents necessitated by load growth - transmission system 229,822 ' Interconnections 1,035,5h6 Replacczent of obsolete, in-adequate or damaged equipment - substations 7,907 Purchase of land and landrights h97,9h3 Replacement of obsolete, in-adequate or damaged equipment - transmission lines 75,162 Miscellaneous relocations - transmission lines and substa-tions 22,90h I Additions and improvements - Ludington Pumped Storage Plant (702) Additions and improvements necessitated by load growth - distribution substations 5h3,582 Purchase electric ceters 99.k0h Electric distribution system - additiens and improvc=ents 3,792,360 S 0 4

u.o Plant transfers 356 Adjustnent of prior year's (1,749) additions 4 9,722,438 Gas Plant Misc compressor stations, buildings and storage field additions 4 109,521 Transmission system additions and improve =ents 21h,270 Pumping and regulating equip-ment additions and improvements 68.h55 Distribution system additions and improvements - blanket 1 h97*193 projects Distribution system additions and improvements - specific projects 49,390 Purchase of land and landrights 10,805 Plant transfers (52,266) Addretsent of prior year's ad-ditions 10,059 $ 1,907,432 General and Miceellaneous Plant } .Carage equipment h,;65 Office furniture and mechanical equipment 127,780 Tools, implements and testing equipment 158,101 Office and service buildings 253,805' Communicatien system - additions and improvements 1,332 9 ~ m

i c -9 Misc land purchases, special ~ assessments and surveys (23) 4 545,560 s Total cost of property addi-tions made or acquired during the period covered by this certificate 12,175,h30.c0 (c) The original fair value of each of the gross property additions (which has not been retired) described in subdivision (b) above is not less than the cost thereof (d) The amount of such gross prop-erty additions 12,lT5,h30.00 (e) None of such gross property ad-ditions consist of plant or property operated by others (f) The retirenents (described as provided in subdivision (y) of paragraph (3) of Section k.01 of said Indenture) dur-ing the period covered by this certificate, are as follows: Retirenent Work in Prorress i Electric Plant i \\ Improvecents - various gener-ating plants 9,?32 Replace obsolete, inadequate or damaged equipnent - transmission lines 16,880 Replace obsolete, inadequate or ds-'ged equip =ent - substations 3,723

• l E

c _lo Miscellaneous relocations - transmission lines and sub-stations 7,090 Interconnections 35.372 Additions and improvements necessitated by load growth - ~ ~~, distribution substations 70,896~ .m Additions and i= prove =ents ~ j necessitated by load growth - 1,831 distribution systen Electric distribution system 411,179 5,548 Land sold '561,751 Gas Plant Gas distribution system - blanket projects 267,h60 Pumping and regulating 1 951 equip =ent 3 870 Land sold 270,281 General and Miscellaneous Plant Garage equipment 326 Office furniture and mechanical equipment 67,453 Tools, implements and testing equipment 29,3h9 97,128 Sale of land held for future use 650 Total retirements during the l period covered by this cer-l tificate 929,810.00 n.

C.11 (g) The amount of net property additions during the period 11,2hS,620.00 covered by this certificate (h) The amount of net property additions to June 30, 1974 3 $2,8h9,376,h67.?c inclusive (i) The enount of unfunded net - property additions calcu

• 1ated (subject to the pro-visions'or Section 1.10 of i

said Indenture) as of the date of this certificate and the co=putation thereof in the manner provided by Section 1.11 of said In-denture, is as follows: From the aggregate of: (1) The amount of net property additions (subdivision (h) above) $2,8h9,376,467.39 (2) The principal amount of bonds authenticated under said Indenture made the basis of the release of property or made the basis for the withdrawal of, or re-tired or to be retired by the use or applica-tion already made or directed of, proceeds of released property and (3) Proceeds of released property now held by the Trustee and 1or the withdraval, use or ap-plication of which no other application, re-quest or direction is now pending i 1' \\ i e

V C.12 1 Less the amount of cash sought to be withdrawn, pursuant to the provi-sions of paragraph (1) of Section 10.05 of said Indenture, in.the g application of which this certificate forms apd which aggregate is $2,8h9,376,h67.39 there is deducted the sun of the following: (a) Ten-sixths (10/6ths) of the aggregate principal amount of bonds heretofore authen-ticated under the Indenture and delivered upon the basis of unfunded net property ad-ditions or for the authenti-cation and delivery of which upon such basis any other application is now pending $1,998,876,666.67 and (b) Ten-sixths (10/6ths) of the amount of cash heretofore deposited with the Trustee for the authentication and delivery of bonds under Section 6.01 of said Indenture and subse-quently withdrawn under Section 6.02 thereof up'on the basis of un-funded n.et property additions or for the Withdrawal of which upon such basis any other application is nov pending 26,123,333.33 and. e

. - C-13 '(c) The aggregate of: (i) The total a=ount of unfunded net prop-erty additions cer-tified to satisfy 4 unsatisfied balances of the maintenance and, replacement re-quirement $231,966,061.70 and (ii) AJf. cash and bonds deposited with or acquired by the Trustee under the provisions of -Section 7.07 of said Indenture which have been withdrawn or for-the withdrawal of which any other application is now pending, and all bonds the vaiv'er of the right to the authentication and delivery of which has been or e is being revoked under the provisions of said Section 7 07, upon the basis of unfunded net property addi-tions $231,966,061 70 Less the arount (not exceedin6 'uch ag-s gregate) by which the same has been offset by any avail-able maintenance . credit or by the deposit of bonds authenticated under ,e -w

C.14 said Indenture or by the waiver of the right to the authentication and delivery of bonds as provided in said Section 7.07 $ ik.289,978.18 $ 217,676,083.52 $2,2h2,676,083 52 The balance remaining, con-stituting the a= cunt of unfunded net property ad- $ 606,700,383 87 ditions (j) The amount of unfunded net property additions, if any, made the basis for the ap-plication of which this certificate is a part 83,333,333.33 and ~ (k) The amount equal to the ex-cess, if any, of the amount stated in the foregoing subdivision (i) over the enount, ii any, stated in the foregoing subdivision (J) $ 523,367,050 54 Since the termination of the period covered by this certificate, the Company has not made retirements in excess of the sus of the' amount certified pursuant to the foregoing subdivision (k) and the amount of the gross property additions made since such termination, and the properties described herein as property additions pursuant to subdiv.ision (b) hereof are, or concurrently with the granting of the application of which this certificate forms a part, vill become property additions; no portion ~ of the amount thereof has been included in subdivision (b) of any other certificate filed with the Trustee complying with the requirements of paragraph'(3) of Section h.01 of said Indenture; the items of property described in this certificate as propdrty additions are de-sirable in the conduct of the business of the Company and are not subject to. any prior lien; the provisions of Section 7.05 of the Indenture were complied with in acquiring such property; and no portion of the cost of the property additions described in this certificate should properly have been charged, and no portion has been charged, to maintenance or to any other operating expense account. That for the period since the end of the calendar year 1973 and through June 30,197h (such date being the last day of the calendar month pre-ceding the date of this certificate to which the information is reasonably available): 9

~ C 15 (i) The amount applied by the Company for main-tenance and renewals and replacements, as defined in Section 7.07 of said Indenture, of the mortgaged and pledged property (other than specially classified property), is $ 29,892,h20.00 s (ii) The maintenance and replace =ent requirement computed in accordance with the requirements of said Section 7 07 is $ 49,978,782.00 The undersigned has read the covenants or conditions of the Indenture relating to the requirements for an accountant's certificate as part of an ap-plication under the provisions of Article IV of the Indenture for the authenti-cation and delivery of bonds, and the definitions relevant to such covenants or condition. ; he is acquainted with the property additions and retirements de-scribed irt this certificate and the relevant facts concerning them, through personal knowledge and examination of records of the Company and reports or information furnished to his by officers or employees of the Company having knowledge of the relevant facts; he has conferred with counsel with respect to the foregoing; and the statements and opinions contained in this certificate are based on such knowledge, examination and investigation. In the opinion of the undersigned, he has =ade such exa=ination or in-vestigation as is necessary to enable him to express an infor=ed opinion as to whether the covenants or conditions provided in said Indenture relating to the requirements for an accountant's certificate as part of an application under the provisions of Article IV of the Indenture for the authentication and delivery of bonds, have been ecmplied with; and in his opinion such conditions and covenants have been co= plied with. Dated: September 3, 1974 1 S. N. Spring Accountant I O I t e e

STATE OF MICHIGNI ) ) ss: COUNTY OF JACKSON ) ' S. N. Spring, being duly sworn, deposes and says that he is an ac-countant appointed by the board of directors of Consur.ers Power Company; that be executed the foregoing certificate as such', and that the same is true to the best of his k::culedge, infor ation and belier. S. N. Spring Subscribed and svorn to before me this 3rd day of September 1974 Helen I. De=pski NOTARY PUBLIC Jackson County, Michigan My commission expires January 9,1976 l t '. O .;.gi::. I O t 7 l

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EXHIBIT D CONSU!ERS P01/ER C0!EMIY Calculation of Het Earnings per Indenture 12 Months Ended as of September 30, 1974 Gross operating revenues - Electric $ 564,325,428 Gas ~ 413,o63,227 steam 1,489,897 Net nonoperating revenues ext 1"M ng income taxes $30,586,049 Applicable net nonoperatin6 revenues, being the lesser of the amount ($30,586,049) or an amount ($25,291,454) equal to 157, of the interest earnings requirement 25,291,454 $1,004,170,c06 Operating expenses - operatica $ 658,975,c69 Maintenance 46,952,053 Provision for Depreciation 80,666,329 l Taxes (other than taxes on incoce) 59,887,881 Ercess of 15% of cross operating revenues, after deduction of the c6gregate cost of electric energy and gas purchased for resale (nosteenhavingbeen purchased for resale), over the aggregate of actual charges for current repairs and maintenance and charges to expense to provide for depreciation $ 846,481,332 Net Earnings $ 157,688,674 6

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AKH.LBIT E CONSt1ERS POWER Co?6ANY Calculation of Annual Interest Requirement on First Mortgage Bonds per Indenture As of September 30, 1974 Consumers Power Co=pany First Mortga6e Bonds - Principal Description Amount 2-8%SeriesDue1975 $86,324,000 8-3 4% Series Due 1976 60,000,000 2-8%SeriesDue1977 ' 24,010,000 3-8% Series Due 1981 39,000,000 3% Series Due 1984 23,419,000 4% Series Due 1936 32,338,000 3-4% Series Due 1987 22,141,000 4-3 4% Series Due 1987 194,000 4-2% Series Due 1988 611,000 33,662,000 , 4-8% Series Due 1989 27, 3-4% Series Due 1990 24,732,000 4-5 8% Series Due 1990. 29,233,000 4-5 8% Series Due 1991 30,939,000 5-8% Series Due 1996 59,000,000 6% Series Due 1997 78,550,000 6-8% Series Due 1998 55,000,000 6-5 85 Series Due 1993 55,000,000 7-5 8% Series Due 1999 50,000,000 8-1 h% Series Duc 1999 55,000,000 8-5 8% Series Due 2000 50,000,000 8-8% Series Due 2001 60,000,000 7-2%SeriesDue2001 60,000,000 7-2% Series Due 2002 70,000,000 7-1 Series Due 2002 50,000,000 8-Series Due 2003 75,000,000 11-3 8% Series Due 1994 60,000,000 11-4%SeriesDue1982 50,000,000 Annual interest charges upon - All bonds authenticated under the Indenture and outstanding (as defined) at September 30, 1974 $84,304,849 .: ' prior lien bonds outstanding at September 30, 1974 All other indebtedness outstanding (asdefined)atSeptember30, 1W4 Aggregate annual interest charges $ 84,30h.849 Intercsb tarnings requirement (200% of the aggregate annual interest charges) $168,609,698 nd

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EAhjBif p PROSPECTUS \\ rv po,ooo,ooo i Consumers Power Company FIRST MORTGAGE BONDS,11%9' SERIES DUE 1982 o Interest payable.11 arch 1 and September 1 Not redeemable prior to September 1,1981; then redeemable at 100% pines accrued interest. dpplication teill be made to list the Neto Bonds on the New York Mock Exchange. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIE AND EXCHANGE COAD11SSION NOR HAS THE COADUSSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRE. SENTATION TO THE CONTRARY IS A CRIA11NAL OFFENSE. T' ' PRICE 100%% AND ACCRUED INTEREST Underteriting Price to Discounts and Proceeds to Publie(1) Commissions (3) Company (1)(3) Per Bond............ 100.50 % 1.15 % 99.35 % Total. S50,250,000 S575,000 S49,675,000 (1) Plus accrued interest, if any, from September 1,1974. (t) The Company has agreed to indemnify the t'nderscriters against certain liabilities, including liabilities under the Securities Act of 1933. (3) Before deduction of estimated expenses of $175,000 payable by the Company. The New Bonds are offered by the several Underirriters named herein, subject to prior sale, when, as and if accepted by the Underteriters, and subject to approval of certain legal matters by Simpson Thacher f Bartlett, counsel for the Underteriters. It is expected that delivery of the New Bonds scill be made on or about September 5,1974, at the office of.1[ organ Stanley f Co. Incorporated, 140 Broadway, New York, N. Y., against payment therefor in New York funds. MORGAN STANLEY & CO. Incorporated %Y Jugust 21, 1974

Consumers Power Company (the " Company") is subject to the informational requirements of the Securities Exchange Act of 1934 and,in accordance therewith, files reports and other information with the Securities and Exchange Commission. Information, as of particular dates, concerning directors and officers, their remuneration, the principal holders of securities of the Company and any material interest of such persons in transactions with the Company, as of particular dates,is disclosed in proxy statements distributed to shareholders of the Company and filed with the Commiuion. Such reports, proxy statements and other information can be inspected at the office of the Commission at Room 6101,1100 L Street, N. W., Washington, D. C., where copies can be obtained from the Commission at prescri'>ed rates. In addition, reports, proxy statements and other information concerning the Company can be inspected at the offices of the New York Stock Exchange, the Detroit Stock Exchange and the Midwest Stock Exchange. The Company's executive offices are located at 212 West Michigan Avenue, Jackson, Michigan 49201 (telephone number: 517 - 788-1030). 4 No person is authorized to give any information or to make any representations other than those contained in this Prospectus in connection with the offer contained in this Prospectus and, if given or made, any such information or representation must not be relied upon as hasing been authorized by the Company or any Underwriter. Neither the delisery of this Prospectus nor any sale made hereunder shall, under any circumstances, create any implication that there has been no change in the affairs of the Company since the date hereof. The First Mortgage Bonds offered hereby are herein sometimes referred i to as the "New Bonds". 1 i 7 .s j TABLE OF CONTENTS Py Page The Company 3 Operating Statistics 24 Use of Proceeds - 3 Description of New Bonds.. 26 Construction Expenditures-3 Experts - . 28 Capitalization - 6 Legal Opinions = 28 Statement ofIncome _ 7 Underwriters. 29 Business - 1I Report ofIndependent Public Accountants.. 3I Regulation..... 16 Financial Statements.- 32 IN CONNECTION WITil TIIIS OFFERING, TIIE UNDERWRITERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS WillCII STABILIZE OR MAINTAIN Tile MARKET PRICES OF TIIE i NEW BONDS AND ANY OTilER BONDS OF TIIE COMPANY AT LEVELS ABOVE TIIOSE WillCil MIGitT OTIIERWISE PREVAIL IN Tile OPEN MARKET. SUCil TRANSACTIONS MAY BE EFFECTED ON TIIE NEW YORK STOCK EXCilANGE OR IN TIIE OVER-TIIE-COUNTER MARKET. SUCII STABILIZING. IF COMMENCED, MAY !!E DISCONTINUED AT ANY TIME. \\ 2 I w-m- w

THE COMPANY Consumers Power Company was incorporated in Michigan in 1968 and is the successor to a ^ corporation of the same name which was organized in Maine in 1910 and which did business in Michigan ( from 1915 to 1968. The Company is a public utility engaged in the generation, purchase, distribution and sale of electricity, and in the purchase, production, manufacture, storage, distribution and sale of gas, in the Lower Peninsula of the State of Michigan. The Company also supplies steam service in one community. The population of the territory served is estimated to exceed 5,200,000. The Company's utility operating revenues were derived about 58% from electric service and 42% from gas service for the twelve months ended May 31,1974. The industries in the territory served by the Company include automobile and automobile equipment, primary metals, chemicals, fabricated metal products, pharmaceuticals, machinery, oil refining, paper and paper products, food products and a diversified list of other industries. General Problems of the Industry The Company has been experiencing problems common to the utility industry in general, such as the difficulty in obtaining an adequate return on invested capital (see " Statement ofIncome" and " Michigan Public Service Commission" under " Regulation")r the restriction on operations and increased costs and delays attributable to environmental considerations (see " Compliance with Environmental Requirements" and " Atomic Energy Commission" under " Regulation"), the necessity of obtaining substantial amounts of outside capital to finance the Company's construction program (see " Construction Expenditures") and the difficulty in ob:aining adequate supplies of fuel at reasonable prices (see " Electric Fuel Supply" under " Business"). USE OF PROCEEDS The net proceeds from this sale of New Bonds will be used to finance in pan the Company's construction program and to repay shon-term borrowings made and to be made in connection with interim ( financing of the construction program. It is estimated that just prior to this sale of New Bonds short term borrowings will aggregate approximately $85,000,000. The Company estimates that its construction program for the years 1974 through 1978 will require expenditures of approximately $2.2 billion. In order to finance this program and to meet First Mortgage Bond maturities of $170,334,000 during this period,it will be necessary for the Company to sell substantial additional securities, the amounts and types of which have not yet been determined. The sale of cenain securities may be restricted as set fonh under" Statement ofIncome". In August 1974 the Company sold $60,000,000 principal amount of First Mortgage Bonds,11%% Series due 1994, and 600,000 shares of $6.00 Preference Stock (the "New Preference Stock"), and it may issue additional equity securities later in 1974. References herein to $110,000,000 of First Mortgage Bonds include the New Bonds and such First Mortgage Bonds, I1h% Series due 1994. ) CONSTRUCTION EXPENDITURES As of June 5,1974 the Company had made or proposed to make capital expenditures for property additions in 1974 in an estimated amount of 5360,318,250, which estimate gives effect to a decision by the Company in June 1974 to effect a utrenchment program involving the elimination of approximately $60,000,000 from its construction budget for 1974. The 1974 progratn as projected includes $197,552,000 of expenditures towards the construction of three major projects as follows: Estimated Estimated Project and Year of Total Cest tecttion Features Operation to Company (a) Palisades Plant Nuclear fueled with initial full capacf'y of about 700,000 (b) 3 188,600,000 (Van Buren kilowatts and ulumate capacity of a%ut 773,000 kilo. County, Michigan ) watts 3

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,.'.LG ~ ~ : -... n . ~. -,- .,~~r t Estismated Estimated ~ = Project med Year of Total Cost LAcasise Feasures Operation so Compesy(s) First unitin 1979 sec- $ 940,000,000 Midland Plant . Two nuclear fueled units with Mare capacity of about ( Near Midland,- 1,300,000 kilowatts and 4.0 pounds per hour of. ond unit in 1980 ' ./ Michigan) process stean*( b)(c) - D. E. Karn - Two oil fired units at existing plant to add approximately Unit 3 in early 1975, ' $ 234,000,000 Plant, Units. I,307.000 kilowatts of capacity (d) Unit 4 in late 1975 - 3 and 4 ( Near.. - Essenville,. Michigan) (a) Expenditures have been made or are scheduled to be made as follows: Prior to 1974 _1974 After 1974 Palisades Plant $I86.048.000 $ 8,552,000 ' Midland Plant $104,073,000 $101,000.000 $ 734,927,000 D. E. Karn Plant S 92.578.000 $ 88,000,000 $ 53,422,000 (b) Reference is made to " Atomic Energy Commission" under " Regulation" and to Note ( b) to the Statement ofIncome herein.< . (c) The steam will be furnished to The Dow Chemical Company for industrial processes. (d) In connection with the construction of the two oil fired units and the conversion of other units to burn oil,' the Company has a purchase agreement with a Canadian supplier to import oil from Canada. See " Business-Electric Fuel Supply". (N) v The 1974 construction program includes $162,766,250 for other facilities, including other electric production facilities power supply projects, electric transmission and distribution facilities, gas supply lines, gas production, transmhsion and distribution facilities, steam additions and general and mis-cellaneous additions. Of this amount,it is estimated $112,934,650 will be expended for electric additions, $41,906,000 for gas additions and $7,925,600 for general, miscellaneous and steam additions. 1974 construction expenditures estimated to amount to $360,318,250 as of June 5,1974 plus sinking . fund and other long-term debt retirements in 1974 of $17,309,000 total $377,627,250.' This requirement will be financed through the issuance and sale of long-term securities, and the balance from internal - sources and short-term'borrowings. The long-term 1974 financing consists of $34,700,000 principal amount of Installment Sales Contracts issued in February 1974; $50,000,000 Term Bank Loan made in - June 1974; $60,000,000 principal amount of First Mortgage Bonds issued in August 1974; 600,000 shares b ($30,000,000) of Pre'ference Stock issued in August 1974; $50,000,000 principal amount of New Bonds in : .1 September 1974; $35,000,000 proposed sale and lease back arrangement for nuclear fuel later in 1974; plus $50,000,000 in long-term securities of a type to be determined later in the year. After underwriting h

commissions and estimated expenses of issuance, the balance of approximately $72,500,000 will be

provided from internal sources and from short-term borrowings.

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The Company has cancelled plans to construct a two-unit,2,30') megawatt nuclear power plant near Quanicassee, hiichigan for initial use in 1984 and 1986. The decis.on to cancel the S t.4 billion project was made for the reason that in view of currently prevailing market conditions for utility securities and the ~ ( Company's presently inadequate earnings, the Company could not be assured of raising sufficient new capital over the lengthy construction period of the project to finance the project in addition to the hundreds of milhons of dollars which must be raised for other projects to meet customer demands over the next ten yecs. Total costs (not including land costs) incurred to date for the plant are approximately $13,500,000 which consist of engineering, license application, environmental impact studies, and other preliminary work. A portioa of such costs may be salvageable in the event the Company locates a plant on this site at some time in the future. The Company intends to petition the Afichigan Public Service Commission for authority to amortize any remaining costs to operations over a period of years. If such authority is not granted, it may be necessary to make a charge against current operations in 1974 for all or a part of the costs incurred. Continuation of the Company's construction program Jepends upon continuing availability of substantial amounts ofoutside capital from frequent sales ofdebt and equity securities over the foreseeable future. The balance of funds needed is expected to be provided from internal sources. The Company will need significant and timely rate increases if revenues and income arc to be maintained at levels which will result in sufficient internally renerated funds and which will permit external financing ofits construction program and its operational requirements at reasonable cost. If adequate funds cannot Se obtained from outside financing and internal sources, the Company, of necessity, will further curtail its construction program to the extent reasible. The Company is currently studying its revised construction schedules and budgets with a view to additional future cutbacks should the unavailability of furb make this necessary. Any expenditure reductions which might result from the deferral of constructior. could be significantly offset by cost escalations and by general inflationary price trends. l f {' 5 m=a--w. %.-~-,..w..- <-w n% e---m- .s

CAPITALIZATION The following table sets forth the capitalization of the Company as of May 31,1974 (excluding current portions oflong term debt) and as adjusted to retlect the balance of the $34,700,000 principal ] amount ofInstallment Sales Contracts with the City of Marysville and the Chaner Township of Hampton, Michigan, executed in February 1974, the balance of the $39,000,000 principal amount of Installment Sales Contracts with Covert Township and the City of Luna Pier, Michigan executed in August 1973, the execution of a $50.000,000 term bank loan in June 1974, the sale of $110,000,000 principal amount of First Mongage Bonds in the summer of 1974 and the sale of 600,000 shares of New Preference Stock in August 1974. Outstanding % of May 31. As Capitalization Tiele of Class 1974 Adjusted As Adjusted Thousands of DoHars Long-term debt ( 1) First mongage bonds-- $1,151,153 S1,261.153 Installment sales contracts payable 59,631 73,700 4h% Sinking fund debentures due 1994-. 37,000 37,000 Term bank loan (2 ). 50,000 Other long-term debt 123 123 Unamortized net debt premium 2,061 2,061 Total long-term debt.. 51,249,968 $ 1,424,031 56.3% Preferred stock, cumulative, $100 par value, authorized 5,000,000 shares, outstanding 3,471,338 shares ( 1 ) $ 347,134 S 347,134 Preference stock, cumulative, $1 par value, authorized 5,000,000 shares, none outstanding at May 31,1974 and - 600,000 shares as adjusted (1) 600 Capital in excess of par value of preference stock 29,400 Total preferred and preference stock........ S 347,134 S 377,134 14.9% Common stockholders' e.quity V Common stock, $10 par value, authorized 32,500,000 shares, outstanding 26,233,838 shares (3) S 262,338 3 262,338 Capitalin excess of par value-247,231 247,231 Retained earnings ( 1) 227,852 227,852 Less-Capital stock expense (7,005) ( 8,880)(4 ) Total common stockholders' equity-- S 730,416 S 728,541 28.8% - Total capitalization (5 ) - $2,327,518 S2,529,712 100.0 % (I) Reference is made to Financial Statements and notes related thereto. (2) On June 20, 1974 the Company borrowed $50,000,000 from a bank under a promissory note maturing in 1981 and bearing interest at a fluctuating rate (13.8% at August 20, 1974) related to the bank's prime lending rate. The proceeds were used to repay short-term borrowings. (3) 2,400,000 shares of Common Stock are reserved for issuance upon conversion of the New Preference Stock. (4) This amount gives erTect to estimated expenses payable by the Company iri connection with the sale of 600,000 shares of New Preference Stock. (5) The Company has been authorized by the Federal Power Commission.o incur shon-term borrowings of up to $300,000,000. The Company has agreements with banks providing for short-term borrowings of up to $137,000,000. As of May 31,1974 shon-term borrowings amounted to $104,510,000 and the current sinking fund requirements on long-term debt amounted to $13,288,000. See "Use of Proceeds." l 6 'J .a

CONSUMERS POWER COMPANY STATEMENT OF INCOME ( . The following Statement ofIncome of Consumers Power Company for the fwe years ended December 31.1973 has been examined by Arthur Andersen & Co., independent public accountants, as set forth in their report elsewhere in this Prospectus. The Statement ofIncome for the twelve months ended May 31, 1974 (including the notes related thereto), which has not been examined by independent public accountants, reflects, in the opinion of the Company, all adjustments (which consist only of normal recurring adjustmems) necessary to present fairly the results of operations for such period. This statement should be read in conjunction with the Financial Statements and related notes appearing elsewhere in this Prospectus. Year Ended December 31 Twelve Meaths Ended 1969 1970 1971 1972 1973 May 31,1974 (l'eaudited) Thousands of Dollars Operating Revenue: (a) Electric $308.000 $334,904 $364.230 $416,994 5495,723 $522,574 Gas -- 240,536 273,874 286,091 332,085 337,906 386,161 Steam I.239 1,212 1.2% 1,374 1,325 1,390 Total operating revenue $549,775 5609,990 $651,6!7 $750,453 $834,954 5910,125 Operating Expenses and Taxes: Operation (b)(c)(d) $280,384 $324,789 $378,987 $444,489 $493,755 $581,625 Maintenance 26,121 32,818 31,512 41,187 44.263 46,529 Depreciation and amortization 51,881 55,608 58,210 62,937 73,428 77,895 General taxes 37,058 39,062 43,873 48,204 54,160 57,260 Income taxes (e) 59.472 54.281 37.585 39,519 44.633 29,491 ( Total operating expenses and taxes $454,916 $506,558 $550,167 $636,336 $710.239 5792,800 Net operating income $ 94,859 5103,432 $101,450 $114.117 $124,715 $117,325 Otherincome: Allowance for funds used during construc-tion (f) S 8,421 $ 14,108 $ 21,862 $ 25,455 5 23,223 $ 21,942 Income ofSubsidiaries 1,350 1,650 1,897 1,920 3,341 4,701 Gain on reacquisition orlong. term debe.. 769 I,074 1,260 1,418 1,609 1,613 Other, net - 282 530 889 526 1,990 2,132 Net otherincome $ 10,822 $ 17,362 $ 25,908 3 29,319 $ 30,163 3 30,388 Interest Charges: Interest on long. term deb' S 35,867 $ 44,774 $ 53,829 $ 63,754 5 71,322 S 74,669 Otherinterest charges 2,854 3.188 1,749 1,504 2,663 4.092 Totalinterest charges $ 38,721 $ 47,962 5 55,578 $ 65.258 $ 73,985 $ 78,761 Net Income S 66,960 $ 72,832 3 71,780 $ 78,178 5 80,893 3 68,952 Dividends on Preferred Stock 3,534 3.517 7,108 11,251 17,746 21,902 Net income After Dividends on Preferred Stock 3 63,426 $ 69,315 $ 64.672 5 66,927 $ 63,147 5 47,050 Earnings per Share of Common Stock (g) 3 2,79 2.95 5 2.69 5 2.72 2.41 I.79 Cash Dividends Declared Per Share of Com-mon Stock (h) $ l.425 5 2.00 2.00 2.00 2.00 5 2.00 Ratio of Earnings to Fixed Charges (i) 4.28 3.67 2.98 2.81 2.69 2.23 See Notes to Statement of Income. I 7 _agn-f 5 y h. e %g.Mh.w*- 4 sui-.- -h--

NOTES TO STATE 5 TENT OF INCONf E (Including Notes Related to t'naudited Statement of Income) (a) On January 18,1974, the hiichigan Public Service Commission ("hf PSC") authorized increases in the Company's electric and gas rates of $31,000,000 and $46,600,000, respectively, on an annual basis. The rate increases included interim increases aggregating $50,000,000 divided equally between electric and gas rates which were placed in effect November 10, 1973. Of the r.u Sorized gas rate increase, approximately $14,571,000 became effective on April 20,1974 after the secord unit of the Af arysville Gas Reforming Plant became ful!y and commercially operable. In response to requests by the hiichigan Attorney General and others for a rehearing on the authorized rate increases, the AfPSC on Alarch 27, 1974, reaffirmed the rate increases granted on January 18,1974. In addition, the hf PSC noted that the authorized rate schedules were based on capital ex'penditures relating to the Starysville Gas Reforming Plant in the amount of $119,700,000, which amount represented estimated costs at the time of the Company's rate a'pplication, and that consideration for rate purposes of subsequent additional costs estimated to aggregate $35,300,000 is to be delayed pending completion of a performance audit with respect to the Alarysville Gas Reformi-Plant conducted under the auspices of the Commission's Staff. In April 1974 the Company submitted an application to the NIPSC to increase its electric rates by not less than $72,159,000 annually and at the same time requested partial and interim reliefin the amount of $54,659,000 annually. It is not expected that the AfPSC will act upon the application er the request for partial and interim relief until later in 1974 following hearings and other investigation of the requests. Litigation is pending in the Ingham County Circuit Court with respect to electric and gas rate increases which became effective in 1969 and which are subject to refund relating to the reduction and elimination of the Federal income tax surcharge. In 1970, the Court issued a temporary injunction permitting the Company to collect the rates without adjustment for the subsequent reduction and elimination of the income tax surcharge, subject to possible refund, with interest, of a portion of the amounts collected. As a result of further authorizations by the hfPSC in December 1971 to increase electric and gas rates effective December 14 and December 23, 1971, respectively, the Company believes that there are no refund 3 obligations with respect to service rendered subsequent to these dates. In Alarch and April 1974, the Court ruled in favor of the hiPSC with respect to the income tax surcharge issue and ordered the Company to refund $24,542,632 to its electric and gas customers. The Company has established a reserve stated net of related income taxes in the amount of $11,867,818, and believes that the amount of such reserve is adequate to cover the refund obligation, exclusive ofinterest charges which are presently not capable of determination but which may be substantial in amount. The Company is undertaking to seek judicial review of the Court orders of Alarch and April 1974, including a request for a stay of the refund pending furtherjudicial action. The litigation also involves a claim with respect to the legality of the electric rate increase, which became effective in 1969, on the grounds that the increased rates became etrective by Court order in October 1969, that the Af PSC did not issue an order approving said rates until April 1970 and that as a result, the electric rates charged during the period are subject to refund in an amount o approximately r $7,763,000, plus interest charges which are presently not capable of d: termination, for which na reserve has been provided. (b) Throughout 1972 operations of the Palisades Nuclear Plant were significantly restricted by the Atomic Energy Commission ("AEC") and, accordingly, the Company capitalized an allowance for funds used during construction ($5,600,000) and other costs normally charged to operations ($2,000,000) on a pro rata basis reflecting actual outpnt of the plant during the year. In December 1972, the cost of the plant including fuel ($176,294,000) was transferred to plant in service. The Palisades Nuclear Plant has been shut down since August 1973 for repairs to certain reactor vessel internal components and the steam generators of the plant. It was thought that repairs had been completed and the plant would be returned to service during hiay 1974. However, during pre-operational tests being conducted in preparation for start up of the plant, two tubes in one of the plant's two steam generators failed to withstand the pressure buildup. Start up of the plant has been delayed pending completion of testing and additional repair work on the steam generators. Further testing will be necessary prior to start up. In addition,it is likely that the AEC will offer an opportunity for public hearing before 8

i the plant is returned to commercial operation. During the period of shutdown the Company also installed cooling towers which were originally scheduled to be tied into the plant during a 12-week outage in the first six months of 1974. The net cost of replacement power, net of related income taxes, amounting to ( $7,221,000 ($.27 per share of common stock) for the year ended December 31,1973 and $16,687,000 ($.64 per share of common stock) for the twelve months ended Afay 31, 1974, has been charged to income. (c) The Company receives a portion of its gas supply from its wholly-owned subsidiaries and, accordingly, operation expense includes approximately, $37,170,000 in 1969, $39,465,000 in 1970, $40,770,000 in 1971, $47,953,000 in 1972, $49,213,000 in 1973 and $51,817,000 for the twelve months ended Af ay 31,1974, relating to the cost of gas purchased from these subsidiaries. (d) Reference is made to Note 7 to Financial Statements for information relating to the Company's pension plan. (e) Reference is made to Notes 15 and 16 to Financial Statements for information relating to income taxes. (f) The a!!owance for funds used during construction, included in other income, is defined in the applicable regulatory systems of accounts as the net cost, during the period of construction, of borrowed funds used for construction and a reasonable rate on other funds when so used. Under established regulatory practices, the Company is permitted to earn a return on the capitalized cost of such funds and to recover the same in the rates charged for utility services. The composite rate used by the Company to capitalize the cost of funds devoted to construction was 6.8%,7.6%,8.0%,7.5%,7.5% and 7.6%in the years 1969 through 1973 and the twelve months ended Afay 31,1974, respectively. The current rate being used is 7.75%. The amount capitalized has increased since 1969 principally as a result of substantial increases in construction work in progress and in the costs of capital. Based on the Company's source of funds for gross property additions, and assuming that the cost of financing other than common equity financing was equivalent to the current cost oflong-term and short-term debt ( before income tax effect), preferred stock and other sources available in each of the periods, the estimated common equity component of the allowance for funds used during construction amounted to 5.3%,7.9%,10.9%,12.0%,9.6% and 13.3% of net income available for common stock for the years 1969 through 1973 and the twelve months ended Af ay 31,1974, respectively. (g) Earnings per share of common stock are computed based on the average number of shares outstanding during the periods shown as follows: 22,768,900 shares in 1969, 23,506,780 shares in 1970, 24,033,838 shares in 1971,24,583,838 shares in 1972,26,233,838 shares in 1973 and 26,233,838 shares for the twelve months ended Niay 31,1974. (h) The quarterly dividend on common stock formerly declared in December was declared in January starting in 1970. Therefore, the dividends declared in 1969 only include three quarterly dividend declarations. Dividend payments have continued to be made in the months of February, h!ay, August and November. (i) For the purpose of computing the ratio of earnings to fixed charges, earnings represent the Company's net income (including allowance for funds used during construction ), before deducting income taxes and fixed charges. Fixed charges represent the Company's interest expense and amortization of debt discount, premium and expense. (j) Reference is made to " Construction Expenditures" for information relating to cancellation of the Quanicassee Nuclear Plant project. The pro forma ratio of earnings to fixed charges for the twelve months ended Alay 31,1974, is approximately 1.81, based on long-term debt outstanding at that date (excluding < urrent maturities and including the balance ofInstallment Sales Contracts executed in August 1973 and February 1974) after giving effect to the issuance of the New Bonds at an assumed interest rate, the sale of S60,000,000 principal amount of First Afortgage Bonds,112 % Series due 1994, the retirement of all short-term borrowings, and 3 the execution of the $50,000,000 term bank loan in June 1974. 9 O I -*-+-as

.n. - a The earnings coverage provisions of the Indenture covering the Company's First Mortgage Bonds t ' require for the issuance of additional mortgage bonds, except for certain refunding purposes, minimum earnings coverage, before income taxes, of at least two times r$ro forma annual interest charges on bonds. q On the basis of this formula, the pro forma coverage (assuming the issuance of $110,000,000_ of First r ~ Mortgage Bonds) for the twelve months ended June 30,1974 (computed including allowance for funds used during construction applicable to Electric Construction, which,'in the opinion of the Company's - General Attorney,is properly so included) would be at least 2.00 times as compared with the requirement of at least two times. The amounts of additional First Mongage Bonds which can be issued in future years will be contingent upon increases in earnings through rate increases or otherwise. The Company's Charter requires for the issuance of additional shares of Preferred Stock specified 4 . earnings coverages, including minimum earnings coverage, after income taxes, of at least one and one-half times the pro forrita annualinterest charges on allindebtedness and preferred dividend requirements. On the basis of this formula, the pro forma coverage'(assuming the issuance of $110,000,000 of First Mortgage Bonds and including the $50,000,000 term bank loan) for the twelve months ended June 30, .1974 (computed including allowance for funds used during construction applicable to Electric Construe-tion, which,in the opinion of the Company's General Attorney, is properly so included) would be at least 1.19 times as compared with the requirement of at least one and one-half times. The amounts of additional Preferred Stock which can be issued in future years will be contingent upon increases in earnings through rate increases or otherwise. 'At May 31,1974, after giving effect to the execution.of the $50,000,000 term bank loan in June 1974, . the balance of Installment Sales Contracts executed in August 1973 and February 1974, the sale of $110,000,000' principal amount of First Mortgage Bonds and the sale of 600,000 shares of the New Preference Stock, retained earnings in the amount of $103,980,000 would not be available for the payment . of cash dividends on common stock under provisions of the Company's Articles ofincorporation which, except under certain circumstances, prohibit the payment of common stock dividends in cash which would reduce the percentage of common stock equity to total capitalization below 25% There are also other restrictions as to the payment of dividends on common stock which, however, would be less restrictive than the limitation mentioned above. The decrease in net income for the twel e months ended May 31,1974 from the twelve months ended / December 31,1973 is principally the result of continuing inadequate levels of electric and gas rates in s-relation to increases in operating costs (principally purchased power, fuel and gas, including the continued cost of replacemen' power during the Palisades Nuclear Plant shutdown), higher interest costs, continuing t inflation and a flattening demand for electricity and gas. The decrease in earnings per share of Common Stock in 1973 and for the twelve months ended May 31,1974 is the result of all the factors affecting net income, increased dividends due to the issuance of additional Preferred Stock and to a larger average number of shares of Common Stock outstanding. The Company believes that the most significant factors accouming for the flattening demand in electric energy sales were energy conservation measures and reduced business activity, particularly in the automobile and automobile equipment industries. With . respect to gas sales, the Company believes that the flattening demand was due in large part to warmer than normal weather and the curtailment of sales to seasonal customers as well as conservation measures and reduced business activity. The foregoing adverse factors are continuing and if not offset by proportionate increases in operating revenues, including periodic rate relief, or otherwise, will continue to adversely affect earnings. For the twelve months ended July 31,1974, total operating revenue, net income and earnings per share of common stock were $941,838,664, $66,714,207 and $1.67, respectively; these amounts are unaudited but in the opinion of the Company include all adjustments (which consist only of normal recurring adjustments) necessary to a' fair statement of such amounts. The decrease in net income for the twelve months ended July 31,1974 from the twelve months ended May 31,1974 is principally the result of continuing inadequate levels of electric and gas rates in relation to increase in operating costs (principally purchased power, fuel and gas, including the continued cost of replacement power during the Palisades . Plant shutdown), higher interest costs, continuing inflation and a flattening demand for electricity and gas. ~~ 1 The decrease in earnings per share of common stock for the twelve months ended July 31,1974 from the twelve months ended May 31, 1974 is the result of all the factors affecting net income and increased dividends due to the issuance of additional preferred stock. y 10 'b-., --s <.w --4m+, s e arehen -3e-, - g - p-w E r..:ob w =-rde.*-,

BUSINESS Electric Senice ( The Company renders electric service in an area of approximately 27,800 square miles, having a population of approximately 3,300,000. Principal cities served are Battle Creek, Bay City, Flint, Grand Rapids, Jackson, Kalamazoo, Af uskegon, Pontiac and Saginaw. The Company owns and operates electric generating plants with aggregate capacity of 5,363,100(a) kilowatts and, as shown under " Construction Expenditures" above, is constructing additional plants which will add 2,607,000 kilowatts to the Company's generating capacity as follows: Kilowatts Present Plants Plants (*nder Construction Fossil fuel steam-electric plants (6 at present,2 units under construction) Coal - 2,400,000 Oil.....~. 542,000 1,307,000 Nuclear steam-electric plants (2 at present, I under construction). 771,000(a) 1,300,000 Pumped storage plant ( I) - 994,500(b) Hydroelectric plants ( 13 ). 133,600 Gas turbine plants ( 7). 522,000 Total 5,363.100(a) 2,607,000 (a) This includes 700,000 kilowatts for the Palisades Nuclear Plant. See " Atomic Energy [ Commission" under" Regulation" and Note (b) to the Statement ofIncome herein. ~ (b) This represents the Company's share of the capacity of the Ludington Pumped Storage Plant. The Company and The Detroit Edison Company have 51% and 49% undivided ownership, respectively,in the plant and the capacity of the plant is shared accordingly. Agreements are in effect providing for the purchase by Commonwealth Edison Company of one third of the capacity from the plant until early August 1983 and one-sixth of the capacity from the plant thereafter until early August 1988. The Company's electric generating plants are interconnected by a transmission system operating at from 138,000 to 345,000 volts. The Company has an electric coordination agreement with The Detroit Edison Company providing for coordination of planning, design, construction and operatica of the electric systems of the parties, the rendering of mutual assistance during emergencies and the effecting of the maximum practical economy in providing the electiic power reouirements of each system. There are four 138,000 volt and four 345,000 volt interconnections between the systems. These interconnections permit a sharing of the reserve capacity of the two systems and a substantial reduction in investment in plant facilities for each company. The Company and The Detroit Edison Company have filed a joint petition with the AfPSC for approval of certain emergency procedures to be invoked,if necessary, in the event of anticipated or predictable energy shortages in the electric service areas of the two companies. In January 1974 the hf PSC authorized on an interim basis emergency electrical procedures to be followed by the two companies and a proceeding is currently pending before the A1PSC to determine whether the procedures should be permanently adopted. The Company has a'n agreement with The Detroit Edison Company and Ontario Hydro for interconnections linking the power systems of the Company and Detroit Edison with the power system of Ontario Hydro and also providing for mutual assistance during emergencies, improved reliability of bulk 7( l1

~. p._ q.v.. , a._ -._ _ _.__ u n._ power supply and the effecting of economies by coordinated development and exchange of power. Two 4 230,000 volt and one 345,000 volt interconnections have been established under the agreement. , The Company has agreements with several other major electric utilities operating in Michigan, Ohio, O! Indiana and Illinois providing for interconnection services and other transactions. The Company also j' ~ maintains interconnections with the Michigan'Municipals and Cooperatives Power Pool, the Cities of Lansing and Holland and interchanges power with the Edison Sault Electric Company. The maximum net demonstrated capability for the summer of 1974 of the Company's interconnected i l ' system including supplemental purchases is 5,525,000 kilowatts (including the Palisades Nuclear Plant) to serve a projected maximum demand of 4,330,000 kilowatts. The net maximum demand on the interconnected system through July 31,1974 was 4,394,295 kilowatts on August 27,1973. j Electric Fuel Supply s In addition to substantial and continuing increases in fuel costs, the Company is also experiencing limitations and restrictions on the availability of fuel. L For the twelve months ended May 31,1974, approximately 55% of the Company's kilowatt-hour I requirements were obtained from coal-fired generation,6% from nuclear,7% from oil,3% from peaking units- (oil and gas), -l% from hydro (including net pumped storage generation) and 30% from-purchased and interchanged power. _ ' Approximately 55% of the Company's owned generating capability (excluding pumped storage) is dependent upon coal as a source of fuel and requires approximately 6.5 million tons of coal annually. The Company has long-term coal contracts which provide for the delivery of approximately 90% ofits coal requirements in 1974. These long-term contracts provide for deliveries through 1977 and in some instances through 1982. The sulfur content of the contract coal ranges from 0.6% to 4.0% by weight, the majority of which falls between 2.0% and 3.0% sulfur. Approximately 900,000 tons oflow-sulfur coal per year is under long-term contract from mines located in eastern Kentucky, and 3.7 million tons of high-sulfur coal per year is' under long-term contract from mines loca.ed in Ohio. The remaining long-term . contract coal supplies are from mines in northern West Virginia, Indiana and western Kentucky. Due to f shortages of railroad cars, enforcement of the Federal Coal Mine Health and Safety Act of 1969 in mines serving the Company, equipment breakdowns at mines and breakdowns of coal-handling facilities at the ' Company's plants, as much as 10% of the long-term contract coal may not be available in 1974. The . balance of the Company's coal requirements not under long-term contract and that quantity of coal under 'long-term' contracts which cannot be delivered must be supplied through short-term agreements or spot purchases at prices substantially higher than coal obtained under long-term contracts. At present the price for such spot purchases of coal with less than 1% sulfur ranges from $25 to $37 per ton as compared to long-term contract prices of from $13 to $20 per ton. As of August I,1974 the Company's coalinventory amounted to approximately 78 days' supply. The Company is undertaking a program to maintain or improve coal inventories to a level equal to or above normal seasonal levels because of the expiration in November 1974 of the labor agreement between the United Mine Workers and the mine owners. Future changes in governmental requirements pertaining to the coal industry.could adversely affect cost ' and availability of coal supplie's. See "Regu-lation-Compliance with Environmental Requirements" for matters pertaining to meeting EPA regu-lations on coal-fired generating units.- ' The Company is negotiadng for supplies oflow-sulfur coal from two or more new mines which are to become operatio'nal from'1976 to '!978. These new sources are intended to supply low-sulfur coal to - supplement existing long-term contracts and to possibly replace the existing fuel supplies at one or more existing-generating units. Although there is no assurance that the Company will complete such - negotiations, the Company believes that any successful compledon of current negotiations for new coal supplies will require the Company's participation in partial or total ownership of the coal mines. In connection with generating units which burn crude oil and the construction of new oil-burning " generating unitsi the Company expec.ts to impon from Canada approximately 2,700,000 barrels in 1974, ' increasing to an annual rate of approximately 11,000,000 barrels beginning in November 1975. As a result ~N I-g 12 -I l - - -.:..a +a-.- .~

. ~

L of taxes and other increases in cost, imported low sulfur crude oil from Canada increased to $12.46 per barrel as of June 1,1974 as compared to $4.12 per barrel a year earlier. The Company expects to recover -( substantially all of such additional expense through the operation of fuel adjustment clauses included in its J rate schedules for electric service. For additional information see " Gas Service" below. The Federal Energy OHice ("FEO") adopted mandatory fuel allocation regulations, under which volumes of middle distillates, residu'al and crude oils are to be allocated. Such regulations are now - administered by the Federal Energy Administration ("FEA"). The Company is to be allocated 100% ofits 1972 volume of middle distiliate oil (as reduced by application of an allocation factor), or as otherwise determined by the FEA, but not less than 100% of current requirenients for nuclear plants, start-up, testing, and flame stability of coal fired plants (except for peaking uses). Crude and residual oils used as fuel for electric generation are to be allocated among utilities using such fuel on the basis of the amount available and the recommendations of the Federal Power Commission ("FPC") so that, if necessary, each utility 1, "within appropriateL groupings" will absorb an equal percentage cutback of power generation to the . maximum extent possible..While the Company is not assured of receiving its required allocations, and the failure to receive the same could have an adverse errect upon its supplies of oil and the Company's i generation, to date such supplies have been adequate to meet the Company's requirements. . Under the Energy Supply and Environmental Coordination Act of 1974, the FEA is also authorized to r.llocate coal to plants switching fren gas or petroleum products by reason of FEA order and to other c persons to the extent necessary to assist in meeting the nation's fuel requirements in a manner consistent, to the fullest extent possible, with environmental requirements. The Company's overall average cost of fuel burned has increased substantially, as shown below, and 7 further increases are expected for the foreseeable future. 3-Cents per Million Bou Percensase of Total l Fuel Communed Fuel Consumed 1973 1972 1971 1970 1969 1973 1972 1971 1970 1%9 t t t t t ('D Coal-- 48.9 44.0 42.9 36.6 31.2 70.1 75.5 85.0 86.2 92.9 Oil.............. - 85.4 77.8 79.9, 84.1 82.7 9.7 5.0 2.7 .3 .2 Gas 66.4 54.8 45.4 43.0 41.1 5.3 7.7 10.1 11.3 4.4 Nuclear - . 24.I 24.3 27.8 36.0 33.9 I4.9 11.8 2.2 2.2 2.5 All Fuels..... 49.6 44.2 43.8 - 37.4 31.8 100.0 100.0 100.0 100.0 100.0 [ increased to 69.le per million Btu as a result of higher fossil fuel costs and a lower percentage of nuclear For the five months ended May 31, 1974, the Company's overall average cost of fuel consumed fuel consumed. For this period, the percentage of total fuel consumed and cost per million Btu of fuel 4 consumed for the four fuel classes are, respectively, coal: 81.5% and 59.0c, oil: 9.2% and 157.6c, gas: 7.4% and 83.2e and nuclear: 1.9% and 20.lc. The Company's present nuclear fuel requirements are for the Big Rock Point Plant and the Palisades Nuclear; Plant. = The Company has contracts for each of these plants providing for the supply of all - segments' of the nuclear fuel supply chain, including uranium ore concentrates and the conversion to uranium hexa 8uoride; enrichment of the uranium hexafluoride; fabrication of nuclear fuel assemblies; and i ~ transportation, reprocessing and reconversion of the " spent" nuclear fuel assemblies. The contracts cover - requirements for a minimum of the next five years. These agreements are with major private industrial suppliers of nuclear fuel and related services and with the United States government. - The Company also has contracts for most but not all segments of the nuclear fuel cycle for the initial

cores for. the Midland Plant. These include contracts for the supply of uranium ore concentrates,

conversion to uranium hexafluoride, enrichment of the uranium hexafluoride, and fabrication of nuclear fuel assemblies for the initial cores for the Midland Plant, toge'her with transportation, reprocessing and t

- reconversion of the initial batches of" spent" nuclear fuel assemblies discharged from each of the two Midland Plant units. } q 13 4 4 f 8- - f, a7_v -.wcy e 7, w ,.,,4,_,.,

~ Gas Ser ice The Company renders gas service in an area of approximately 12,900 square miles having a q population of approximately 3,800,000. Principal cities served are Bay City, Flint, Jackson, Kalamazoo, ) Lansing, Pontiac, Royal Oak, Saginaw, Warren and a number of suburban communities near Detroit. The Company owns gas transmission and distribution mains and other gas lines, compressor stations and facilities, and storage rights, wells and gathering facilities in several fields in Alichigan. The Company and Michigan Gas Storage Company (" Storage Company"), a wholly-owned subsidiary of the Company, store a portion of their gas supply in the warmer months of the year for use in the colder months of the year. For the twelve months ended Afay 31,1974, approximately $2% of the Company's gas supply was obtained from Trunkline Gas Company ("Trunkline"),25% from Storage Company,8% from Afichigan fields,9% from Marysville Gas Reforming Plant and 6% from miscellaneous spot purchases. Gas is furnished by Trunkline to the Company pursuant to a contract providing for the delivery of approximately 255 billion cubic feet of natural gas per year. Storage Company presently has a contract with Panhandle Eastern Pipe Line Company (" Panhandle") providing for the delivery of 92 billion cubic feet af gas per year. Since 1971 the Company has experienced curtailments from its pipeline suppliers and is currently experiencing additional curtailments which are expected to continue for an indefinite period. These curtailments aggregated approximately 64 billion cubic feet of gas in 1973, are expected to be 90 billion cubic feet in 1974 and could increase to a higher levelin the future. The curtailments imposed by the pipelice companies are the subject of pending proceedings before the FPC, and orders issued in such proceedings will determine the curtailment procedures ultimately to be placed into effect by the pipeline companies. The maximum daily sendout of natural gas for the Company through June 30,1974 was 2,283 million cubic feet on Jamsary 15, 1972. Of this total, 691 million cubic feet were purchased from Storage Company,897 million cubic feet were delivered from the Company's storage field;,649 million cubic feet were purchased from Trunkline and 46 million cubic feet were obtained from producing hiichigan fields. f' N - The peak-day system capacity is in excess of 2,800 million cubic feet. ( In Afay 1973, Panhandle applied to the FPC for increases in its wholesale gas rates which would, if approved, result in an increase in the cost of gas purchased by Storage Company from Panhandle of approximately S4,700,000 annually. Any increase in such wholesale rates to Storage Company would be passed on to the Company under Storage Company's cost-of-service rates approved by the FPC. Panhandle's proposed rates were suspended by the FPC until December 1,1973 and settlement discussions have been held among Panhandle,its customers and the FPC statT. A proposal of settlement has been submitted to the FPC for approval which would result in an increase in Storage Company's rates by approximately S3,400,000 per year. In hf ay 1974, Trunkline applied to the FPC for increases in its wholesale gas rates which would, if approved, result in an increase in the cost of gas purchased by the Company from Trunkline of approximately $28,600,000 per year. The FPC suspended the proposed tariffs until December 1,1974. The Company expects to recover substantially all of any such additional expense incurred by reason of such proceedings through the operation of cost-of-gas-sold clauses contained in its retail rate schedules for gas service. As a consequence of the nadonal gas shortage and in order to protect service to its existing customers and to limit new customer requirements to the gas supply available, between Af ay 1973 and Af ay 1974 the Company issued permits only to new residential and home heating customers. In late Atay 1974 the Nf PSC authorized the Company to art. ch a limited number of new small commercial and industrial customers in addition to new residential and home heating customers. The Company is unable to predict whether it will be required in 1974 and later years to cease adding customers or to curtail gas service to any of its customers other than seasonal customers or whether it will be able to continue attaching additional load. Such actions are dependent upon the extent of future curtailments on the part af the Company's pipeline suppliers referred to above and the receipt of additional gas supplies from the sources of supply hereinafter described. The Con'pany has filed a petition, which is pending, with the N1PSC for approval of a curtailment program foi its gas customers, to be invoked ifit becomes necessary. v 14 a...

a 2i. a ,The Company has initiated several programs to provide it with additional supplies of gas. Nonhern Michigan Exploration Company (" Northern"), a wholly-owned subsidiary of the Company, has carried on a gas exploration program in the nonhern part of the Lower Peninsula of Michigan for the past several L years, and has varying interests in oil and gas leases on lands covering approximately 500,000 acres in that area.' Such leases authorize exploration for oil and gas with the right to retain a portion of any oil or gas produced thereunder. Northern owns part of the working interest in 44 oil or gas wells in several fields in northern Michigan.' Further drilling and development will be required to determine the size of the fields in which these wells are located, and additional geophysical surveys and exploratory wells are planned in . northern Michigan.: Northern is also participating with others in the exploration and development of 93,050 acres in . offshore Louisiana in 21 tracts and Northern's net ownership therein is 10,900 acres. Four production ' platforms have been set on' three of these tracts; dewlopment drilling is in progress on three of the platforms and has been completed on one platform. In June 1974 Northern applied to the FPC for authorization to sell and arrange for the transportation of up to 40 million cubic feet of gas per day to the Company from these three tracts. Delivery to the Company of Northern's share of gas from this

1. ~

development is not expected' before the end of 1974 and will be subject to the receipt of regulatory approvals, which is not assured. _ The Company's geologists and petroleum engineers estimate that Northern presently holds wocking interests which amount to approximately 12 million barrels of proven oil reserves and approximately 2 million barrels of probable oil reserves as well as approximately 135 billion cubic feet of proven pas reserves and approximately 40 billion cubic feet of probable gas reserves. Reference is made to Note 5 to the Financial Statements for further information relating to Northern. The Company has gas purchase contracts with several producers in the northern Michigan area and - l has placed in service pipelines to transport gas purchased in this area to its integrated gas transmission [ system. By the end of 1973 the Company was receiving approximately 35 million cubic feet of natural gas i; ( per day from this northern Michigan area and deliveries are expected to increase to 60 million cubic feet by 'the latter part of 1974. The Company also is engaged in a gas exploration program in the southern part of the Lower Peninsula of Michigan. 2 The Company has been receiving gas from producers near Mason, Michigan. Purchases from this source amounted to approximately 15 million cubic feet of gas per day at the end of 1973. During N73 the Company also made spot purchases of gas aggregating approximately 22 billion cubic feet and is making further purchases in 1974. The Company in April 1974 completed the construction of a gas reforming piant at Marysville, Michigan for converting natural gas liquids into gas. Such liquids are imported from Canada under a purchase agreement expiring in 1988, which provides for delivery to the Company of up to 50,000 barrels per day. The plant began production at an average rate of approximately 100 million cubic feet of gas per day in September 1973, and production ranging up to 235 million cubic feet of gas per day has been attained since April 1974. The cost to the Company of such gas, including overheads, fixed charges, import fees and export taxes,is and will be substantially in excess of the present cost of other gas now ~ . received b'y the Company from interstate pipelines and other sources and has resulted and will result in a substantial increase in the cost of service to the Company's gas customers. In connection with the natural gas liquids to be converted into gas by the reforming plant, as a result of Canadian export taxes and other T increased costs, the feedstock cost about $12.00 per barrel as of June 1974 as compared to less than $4.00 . per barrel.a year earlier. - The Company expects to recover substantially all of such additional expense - : through the operation of cost-of-gas sold clauses contained in its rate schedules for gas service. The impact 'of the Canadian tax in future years is unknown because it is based upon the difference between the price of ' foreign crude oil (other than Canadian) in eastern Canada and Canadian crude oil, with the aim being to

have the export price of Canadian crude oil at least equal to the price of foreign crude oil in eastern l

j7 Canada. Future policies of the Canadian government regarding the levy of such a tax are uncertain. 4 Canadian export licenses and United States import licenses for the natural gas liquids and crude oil are

Q required to be renewed from time to time. The receipt of such licenses is not necessarily assured.

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a~: =- ~ ~ - r ~ 'In connection with the natural gas liquids to be converted into gas by the reforming plant, the FEO .t granted the Company an interim determination in February 1974 exempting such liquids from certain . propane allocation regulations pending further analysis of the circumstances by the FEO. Subsequently revised Mandatory Petroleum Allocation Regulations were published. Such allocation regulations are now _ administered by the FEA.' As a result of the revisions, the Company was required to petition for an ~ -adjustment ofits base period solume of feedstock. The February 1974 order of the FEO will remain in efect until the FEA rules on the Company's petition. Receipt of a favorable ruling on the petition is not assured and failure to receive a favorable ruling could have a substantial adverse impact on the Company's ability to produce gas at the Marysville Gas Reforming Plant, the cost of producing reformed gas, and the i Company's ability to serve its gas customers. Employees - The' Company has approximately 11,200 employees, of whom about 5",000 operating, maintenance and construction employees are represented by the Utility Workers Union of America, AFL-CIO. The current working agre ment between the_ Company and the Union was reached on August 31,1971 and expires August 31,1974. Pursuant to the agreement increases in wages were made on June 18,1973. in addition to cost ofliving increases. The wage increases, together with wage increases placed in etTect for ~ office and technical employees, resulted in additional costs ( before income taxes) in 1973 of approximately $3,661,000 of which approximately $2,770.000 was charged to operations. REGULATION ' Compliance With Environmental Requirements The Company and its subsidiaries, Northern and Storage Company, are subject to regulation with regard to environmental quality, including air and water quality (including thermal discharges) and other matters, by various Federal, State and local authorities and are also subject to zoaing and other regulation {' by local authorities. The Company and its subsidiaries are attempting to insure that their facilities meet 8 applicable e'nvironmental regulations and standards. However, it is not presently possible to forecast the ultimate efect of environmental quality regulations upon the exi; ting and proposed facilities and [, operations of the Company and its subsidiaries. Moreover, developments in these and other areas may require the Company or its subsidiaries to modify, supplement, replace or cease operating equipment and i facilities, and may delay or impede construction and operation of new facilities, at costs which could be substantial. 4 I-For many years the Company h'as followed an environmental protection program which included reforestation along Michigan rivers and the siting of electric generating plants and transmission lines with ? consideration for the_ impact of such facilities upon the environment. In more recent years the program has included installation of electrostatic precipitators to remove particulates from smoke emission at electric f. generating plants and conversion of electric generating units to burn cleaner fuels. The program through i 1978 includes,. among other things, installation of new precipitators and adding new controls and [ . modifying previously installed precipitators at existing plants; utilization of coal with a lower sulfur i - content; construction of new smoke stacks at generating plants designed to reduce ground level concentrations of sulfur dioxide due to "downwash" conditions; and construction of ponds or towers to j, recycle cooling water at new generating plants. The Company made capital expenditures of $45,000,000 in 1973 and estimates that it will make capital expenditures of more than $330,000,000 during the five -years 1974-1978 for environmental protection. ' Regulations promulgated by the United States Environmental Protection Agency (" EPA")in August L '1973 will require, unless other measures are approved by EPA, that various steps be taken by the j . Company t'o reduce emissions of sulfur dioxide at the J. H. Campbell Plant, Units I and 2; the D. E. Karn l Plant, Units I and 2; the B. C. Cobb Plant and the J. C. Weadock Plant, Units 7 and 8. Such generating

~

facilities' have an aggregate generating capability of over 2,000. megawatts. Specifically, the new regulations required that the Company should have notified EPA no'later than October 1,1973 ofits ' intention to either (i) utilize fuel with a sulfur content of not more than 1% percent or (ii) install stack gas i J L desulfurization equipment to reduce emissions to an equivalent amount, not later than July 1 1975. The ~ new regulations further required that the Company notify EPA not later than January 31,1974 of its ) .g 16 g-f} Y.h,. ' m. N. s m m ' _E E7-w w 'w .,,s-sh. O +-* --w w-- k w

19 mt. nuon to either (i) utilize fuel with s sulfur content of not more than I percent or (ii) install stack gas desulfurization equipment to reduce emissions to an equivalent amount, not later than July 1,1978. Dates -( are also specified in the regulations for various increments of progress to be met in achieving the lowered sulfur dioxide emissions by July 1,1975 and July 1,1978. The Company believes that adequate amounts oflow sulfur fuel may not be available to permit conversion of such plants to low sulfur fuel. Moreover, the Company believes that stack gas desulfurization technology is not adequately de. eloped to assure that any such equipment would allow satisfactory operation ofits plants. In September 1973, the Company instituted suit in the U. S. Court of Appals for the Sixth Circuit against EPA for review of the regulations which would require the Company to take immediate steps toward the redution of sulfur dioxide emissions at the generating plants mentioned above. A stay of the regulations was issued by the Court. The matter is pending before the Court. The Company has entered into performance contracts -(" compliance schedules") with the State of Michigan regarding the four plants, under which ccmpliance schedules the Company would be required to slibmit to the Michigan Air Pollution Control Commission by January 1,1977 sulfur dioxide control strategies and time schedules for the implementation of the same not later than January 1,1980. The compliance schedules also require the Company to monitor air quality in the vicinity of the four plants and to periodically report the results thereof to the Commission. Should the data secured by such monitoring at any time fail to substantiate that emissions from such plants are not causing or contributing to ambient levels of sulfur dioxide in excess of applicable air quality standards, the compliance schedules provide that the Company must then submit to the Commission sulfur dioxide control strategies and time schedules for the implementation thereof as expeditiously as practicable. The Company has submitted the compliance schedules tc, EPA for approval. Should EPA's approval be secured, the requirements of the new EPA regulations will be replaced by said compliance schedules. In a proposed rulemaking published in February 1974, EPA solicited public comment as to whether the compliance schedules should be approved. In August 1974, EPA issued a notice disapproving particulate abatement compliance schedules for the Company's D. E. Karn and J. H. Campbell Plants which had been entered into between the Company and the State of Michigan. Pursuant to such compliance schedules, the Company is proceeding with the / installation of" add-on" precipitator units with in-service dates of July 1,1976 for the D. E. Karn Plant and ~ June 1,1977 for the J. H. Campbell Plant. EPA's disapproval'of such compliance schedules was premised upon the schedules' failure to meet the final compliance date of July 1,1975 required by EPA's regulations and court interpretations thereof. The Company has commenced discussions with representatives of the Michigan Air Pollution Control Commission and EPA in an attempt to arrive at a mutually agreeable resolution of the matter. The Company is unable to forecast the ultimate results of such discussions, but they could have a material adverse impact upon the Company's construction cost, operaCng expenses and power resources. EPA gave public notice in July 1973 that it intends to issue regulations setting up a mechanism for preventing "significant deterioration" of air quality in areas where air pollution levels are below the national ambient air quality standards. At the same time, EPA stated that any policy adopted will have a substantial impact on the nature, extent and location of future industrial, commercial and residential development throughout the United States and could affect a n;mber of economically and socially .important matters, including the cost of producing and transporting electricity. In August 1974, EPA made a preliminary announcement of the regulations it propo<es with respect to the prevention of significant deterioration of air quality and indicated that final regulatioss with respect thereto would be issued in the near future.. In addition, in August 1974. EPA propose /. that several areas in the State of Michigan, ' including areas in which the Company's B. E. Morrow, J. R. Whiting, D. E. Karn and J. C. Weadock Plants are located, be designated as " air quality maintesance areas" ("AQMAs") for particulate matter. ~ Such generating facilities presently have an aggregat< generating capability of over 1,700 megawatts. AQMAs are areas which have the potendal for violati. n of national ambient air quality standards within 10 years. The states have been directed by EPA to analyze air quality in AQMAs and, where such analysis shows that such areas will not maintain such standards during the 10-year period, to develop plans which demonstrate that such standards will be maintained. The Company is unable to forecast the effect of the ultimate regulations which will be adopted by EPA in these matters, or of any state plan, upon its operations but such regulations or state plan could have a materially adverse impact upon the Company's M

construction cost, operating expenses and power resources.

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and facilities are currently pending under the Federal Water Pollution Control Act Amendments of 1972 m

(the "1972 Amendments").1In October 1973, the EPA delegated to ac. agecey of the State of Michigan ) responsibility for processing the applicadons under the 1972 Amendments and applicable standards. With respect to existing facilities and plants, the 1972 Amendments require achievement of emuent limitations that necessitate the application of the "best practicable control technology currently available" by July 1, 1977 and the "best available technology economically achievable" by July 1,1983. Ley also require that the standards for cooling water intake structures must reflect the "best technology available for minimizing ' adverse ' environmental impact." With respect to future steam electric power plants, standards of performance required to be established by the 1972 Amendments will require, achievement of emuent limitations that necessitate the application of the "best available demonstrated control technology," ' including, where practicable, a standard permitting no discharge of pollutants. Proposed guidelines for emuent limitations have been issued by EPA for public comment. The Company is not presently able to evaluate the effect of any standard or guideline ultimately to be adopted, although such effect may be ~ substantially adverse to the Company's operations. The FEO issued reguladons in May 1974 establishing priorities for use of certain low sulfur petroleum products. Such regu. 4ons are now administered by the FEA. The intent of the regulations is to prevent the use oflow-sulfur,oel oil in new power generators, coal-to-oil fuel conversions and to delay shifts to lower sulfur content fuel oils than were in use in November 1973, except where such actions are required to achieve primary ambient air quality standards under the Federal Clean Air Act or to comply with EPA new source performance standards. The Company has arranged to purchase oil to fuel the D. E. Karn IJnits 3 and 4, two generating units scheduled to commence operation in 1975. The Company has applied to the Michigan Air Pollution Control Commission for a certification that the use of such oilis essential to meet the primary ambient air quality standards of the air quality region in which the plant is located. i. Under the regulations, the FEA is required to grant an exception to the regulations upon receipt of such a certification. Because the oil may be oflower sulfur content than required by primary ambient air quality standards,' the Company may be required to apply for an exception from the regulations on other grounds. 3 Receipt of such an exception is not assured, and the failure to receive the same could adversely affect the Company's cost of generating electricity with the units and/or the Company's ability to obtain an adequate supply of fuel to operate the units. Michigan Public Service Commission The Company is subject to the jurisdiction of the MPSC, which has general power of supervision and regulation of public utilities'in Michigan with respect to rates, accounting, services, certain facilities, ascertainment of values, the issuance of securities, and various other matters. . Adjustment clauses authorized by the MPSC in 1973, provide for reflecting in the Company's residential gas and electric rates certain changes in fuel cost and cost of gas sold. Similar clauses had theretofore been in effect covering industrial and commercial rates. Together they permit recovery of substantially all of such fossil fuel cost increases after billing lags up to 60 days in the case of electric service and increases in cost of gas sold after billing lags up to 30 days in the case of gas service. In July j 1974 the Company applied to the MPSC for authority to amend the adjustment clauses in its electric rates so as to eliminate the delay that presently occurs before increased fuel costs are collected and to include the cost of purchased and net interchange power in the adjustment. The Company is also requesting the C MPSC td eliminate the billing delay with respect to gas service in connection with the partial rehearing ordered by the MPSC on its own motion on March 27,1974 and referred to below. In March 1973 the Company submitted applications to-the MPSC to increase its electric rates by = approximately $59,000,000 annually and its gas rates by approximately $83,000,000 annually. At the . same time the' Company requested interim gas rate relief of approximately $55,600,000 annually pending ~ ' the outcome of that rate case. IIn April 1973 the MPSC dismissed the applications without hearing (and - ^ without prejudice to the filing of new applications) principally on the grounds that the rate relief requested ~was excessive and contrary to criteria for public utility rate increases established in January 1973 by the 1 o Federal Cost of Living Council pursuant to the Federal Economic Stabilization Act of 1970, as amended, and contrary to similar criteria established under rules of the MPSC adopted in May 1972 pursuant to the 3 aforesaid Federal Act. In'May 1973, the Company petitioned the MPSC to reconsider such dismissal ] 18 4due,m e gg 4 qs 4.+-goh4,. p.W d d=g.y. 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~. m f order, whiclIpetition ts pending. In addition,in April 1973 the Company submitted new applications to the MPSC for authorization to increase its electric rates by approximately $36,100,000 annually and its gas 4 : r ( rates by approximately $50,400,000 annually. In filing the new applications, the Company acted without ~~ prejudice to and with specific reservation ofits legal rights to further challenge the MPSC's dismissal order of April 1973. In November 1973 the MPSC authorized interim rate increases, efective November 10, -q. -1973, aggreganng $50,000,000, divided equally between the pending electric and gas rate proceedings, subject to refund, pending the final determination of the Commission and directed its Star to cause an investigrion to be made as to the planning and construction of the Marysville Gas Reforming Plant to determine whether the feasibility of the plant and its cost of construction were justified. In December 1973 the Attorney General of the State of Michigan instituted judicial review of the interim rate orders, including a request for a temporary injunction staying their efectiveness, which request has not been acted upon by the Coun. On January 18,1974, the MPSC authorized increases in the Company's electric and gas rates of $31,000,000 and $46,600,000, respectively, on an annual basis. The rate increases included the interim increases aggregating $50,000,000 which were placed in efect November 10, 1973. Of the authorized gas rate increase, approximately $14,571,000 became efective on April 20, 1974 after the second unit of the Marys@ Gas Reforming Plant became fully and commercially operable. In response to requests for a rehearing on the authorized rate increases, including such a request by the Attorney General of Michigan, on March 27, 1974 the MPSC reaffirmed the electric rate increase granted on January 18,1974, and on its own motion ordered a partial rehearing with respect to the gas rate increase. Such rehearing, which is now in the briefing stage, is limited to a review of the portion of the gas decision U which allocates among residential, commercial and industrial customers the amount of revenues previously authorized and a consideration of the manner in which the cost of gas sold adjustment clauses of the rates operate to' pass through increases in the cost of gas to the Company's various classes of customers. The MPSC also announced its decision to delay recognition of costs of the Marysville Gas Reforming Plant in excess of. $119,700,000 (which costs are estimated to presently aggregate $155,000,000) pending ~ completion of a performance audit conducted under the auspices of the MPSC Stas to be completed in 1974. Further, the MPSC also strongly urged the Company not to file any new gas rate application during 7 the pendency of the limited rehearing. In April 1974 the Company submitted an application to the MPSC to increase its electric rates by not less than $72,159,000 annually and at the same time requested partial and interim reliefin the amount of $54,659,000 annually. In August 1974, the Stadof the MPSC recommended that the Company be granted partial and interim reliefin the amount of $27,624,000 annually. It is not expected that the MPSC will act upon the application or the request for partial and interim relief until later in 1974 following hearings and other investigation of the requests. j In September 1969 the MPSC authorized increases in the Company's electric and gas rates of $16,514,000 and $21,308,000, respectively, on an annual basis. Litigation is pending in a State Court with I respect to such increases, which became efective in 1969 and which are subject to refund reladng to the reduction and elimination of the Federalincome tax surcharge then in efect. The MPSC order authorizing the increases required that the rates be reduced to reflect any subsequent reduction in or expiration of the } Federal income tax surcharge. However, in February 1970, the Court granted a temporary injunction permitting the Company to continue to collect the rates without adjustment for the later reduction and j. elimination of the income tax surcharge, subject to possible refund, with interest, of the amounts collected if the MPSC order with respect to the income tax surcharge had not been stayed by the Court. As a result of further authorizations by the MPSC in 1971 to increase electric and gas rates efective December 14 and December 23,1971, respectively, the Company believes that there are no refund obligations with respect to service rendered subsequent to these dates. In March and April 1974, the Court ruled in favor of the MPSC with respect to the issue of the income tax surcharge and ordered the Company to refund $24,542,632 to its electric and gas customers. In connection with:this litigation, the Company has

established a reserve stated net of related income taxes in the amount of $11,867,818. The Company believes that the amount of such reserve is adequate to cover the refund obligation, exclusive ofinterest charges which are presently not capable of determination but which may be substantial in amount. The Company is undertaking to seek judicial review of the Court orders of March and April 1974, including a request for a stay of the refund pending furtherjudicial action. The pending litigation, which also involves

[ ' appeals taken by the Company as well as by parties opposing the rate increases, includes, among other things, a claim for refunds to customers amounting to approximately $7,763,000, plus interest charges 7 19 t ._ n a - b J W-4 w ,M

which are presently not capabic of determination, for which.no reserve has been provided. This claim is based upon the circumstance that the electric rates were placed in effect by the Court's order on October 22,1969, but the MPSC did not issue an order approving such rates until April 20,1970. f. In 1974, the MPSC issued proposed rules covering customer standards and billing practices for [ residential electric and gas service. Among other things, the rules would require utilities to extend the time for payment of service bills, eliminate late payment charges and, in most instances, se;urity deposits, establish procedures to provide customers with opportunity for hearing with respect to contested service bills prior to service termination, and other similar provisions. If the rules become effective they are likely to add substantially to the Company's cost of rendering service and could lead to substantial increases in delinquent payments for utility services rendered. In the opinion of the General Counsel for the Company, Storage Company and Northern are not public utilities under the laws of Michigan. Federal Power Commission The FPC has jurisdiction over Storage Company as a natural gas company within the meaning of the Natural Gas Act, which jurisdiction relates, among other things, to the acquisition and operation of assets and facilities and to rates charged by Storage Company. If the Company obtains from Northern deliveries of gas produced in offshore Louisiana, as described under " Business-Gas Service", Ncrthern will be subject to FPC's jurisdiction as a natural gas company within the meaning of the Natural Gas Act. In instances of shortage of supply, the FPC has entered orders curtailing deliveries of natural gas transmitted by intersta:e pipelines to various users to amounts less than provided in their gas sales contracts. Under certain circumstances, the FPC also has the power under the Natural Gas Act to modify gas sales contracts of interstate pipeline companies. The FPC has adopted an end-use priority system for pipeline curtailments and is now considering adoption of a proposed rule which would make the end-use priority system also applicable to certificate proceedings for transmission of additional gas supplies. The end-use priority system places residential and small commercial service in the highest priority and interruptible service in the lowest priority. As natural gas companies under the Natural Gas Act, Panhandle, Trunkline and Storage Company, which provide the major portion of the Company's gas supply, are subject to the l FPC's regulations. The effect of FPC regulations, present or future, upon the Company's gas supply and Q operations cannot be determined although such effect may be materially adverse. () l The Company has accepted licenses under Part I of the Federal Power Act for a number of its constructed hydroelectric projects. The Company and The Detroit Edison Company have accepted a license extending to the year 2019 from the FPC to construct, operate and maintain the Ludington - Pumped Storage Plant. As a licensee, certain of the Company's operations are subject to regulation by the i FPC, including compliance with the FPC's rules and regulations respecting accounting applicable to licensees. The Act provides that if a new license for a hydroelectric project is not issued to the original licensee upon expiration of the original license, a new license may be issued to a new licensee, or the L United States may take over the project, upon paying severance damages,if any, and the amount of the l original licensee's " net investment"in the project but not in excess of the fair value thereof. By reason of tb: interconnections linking the electric system of the Company with the systems of j companies in other states, the Company is a "public utility" under Part II of the Federal Power Act and i certain of the Company's operations are subject to regulation by the FPC, including compliance with the FPC's rules and regulations respecting accounting applicable to "public utilities", the transmission of l electric energy in interstate commerce and the rates and charges for the sale of such energy at wholesale, as provided by the Federal Power Act. The Company is also subject to the general supervision and I regulation of the MPSC as described above, including the fixing of almost all retail rates and charges for the sale of electricity and gas. In November 1972, the Company tendered for filing with the FPC proposed increases in its wholesale electric rates so as to increase the Company's wholesale electric revenues approximately SI,500,000 on an annual basis. The increased rates became effective in June 1973, subject to refund, pending FPC determination as to their reasonableness. A number of municipal electric systems and rural electric cooperatives intervened in the proceeding and opposed the proposed increases. Hearings upon the Company's application and related issues have been held in abeyance pending settlement discussions involving the Company, the intervenors and the FPC statT. A proposal of settlement satisfactory to all of s the parties was submitted to the FPC for approvalin late June 1974. Under such proposal, the Company's 20 2

a wholesale electric rates would be increased so as to increase the Company's electric revenues by approximately $1,030,000 annually as of June 7,1973 and appropriate refunds of a portion of sums collected under the rates which became effective in June 1973, together with interest thereon, would be k required to be made by the Company. Atomic Energy Commission In 1967 the AEC granted the Company a permit to construct the Palisades Nuclear Plant, described under ** Construction Expenditures" above..In March 1970, the AEC gave public notice ofits proposed issuance of a provisional operating license for the plant. Thereafter, a number of organizations and individotls intervened in the proceedings before the AEC and opposed the licensing of the plant. In view of the crucial importance of getting the plant in operation at the earliest possible date, and faced with indefinite delays in completion of the AEC hearing, the Company reached an agreement with the intervenors in March 1971 whereby the Company would install cooling towers to substantially eliminate thermal discharges into Lake Michigan and other equipment to eliminate ' release of virtually all radioactive materials in liquid discharges and, subject to certain conditions, the intervenors agreed to withdraw their opposition to a full-power operating license. The additional facilities, which cost an estimated $31,000,000 to construct, are expected to result in additional annual costs in excess of $5,000,000 attributable to reduced thermal efficiency of the plant, some curtailment of generating capability and increased operating and maintenance expenses, as well as fixed charges on the invested capital. The Palisades Nuclear Plant has been out of service for the reasons described in Note (b) to the Statement of Income herein. In addition, it is likely that the AEC will offer an opportunity for public hearing before the plant is returned to commercial operation. The operating license issued by the AEC for the plant is provisional in nature and was scheduled to expire in March 1974, but was automatically extended pending AEC action on the Company's application for a full-term,40-year operating license. The application will be subject to the rignt of any person whose interest may be affected by the proceeding to intervene and request a public hearing on the application. In 1971, the AEC announced that it was reviewing the adequacy of emergency core cooling systems ( (ECCS) in light; water power reactors, and thereafter held a public rule-making hearing with respect ta new regulations covering ECCS design (Docket No. RM-50-1). In December 1973, the AEC announced its new regulations which provide that licensees, including the Company, must achieve compliance with the new ECCS acceptance criteria by early August 1974, except as extensions of time for submission of required ECCS performance evaluation and proposed license changes are approved by the AEC With respect to the Palisades Nuclear Plant, the AEC has granted the Company an extension of time for compliance with the new criteria until October 21,1974. In the rneantime, the Plant must be operated in accordance with the AEC's Interim Acceptance Criteria for ECCS. With respect to the Big Rock Point Plant, the Compny has been granted a similar extension of time until March 31,1975, except that it must submit and operate in conformity with a preliminary evaluation and proposed license changes by October 31,1974, enless an exemption is granted. The Company has obtained a variance permitting it to operate the Big Rock Point Plant even though the Plant is not in compliance with the AEC's Interim Acceptance Criteria for ECCS. To comply with the new rules,it may be necessary to modify the designs of the Big Rock Point Plant, the Palisades Nuclear Plant and the Midland Plant (referred to below) and it may be necessary to derate the Big Rock Point Plant and/or the Palisades Nuclear Plant. The cost of such potential modifications and deratings cannot be estimated at this time but could be substantial. Intervenors in the AEC rule-making proceeding have taken an appeal to the U. S. Court of Appeals for the District of Columbia Circuit (Docket No. 74-1295) from the AEC regulations issued in December 1973. In May 1973 a suit was commenced against the AEC for a declaratoryjudgment and injunctive relief. The suit sought to compel the revocation of operating licenses heretofore issued by the AEC for 20 nuclear generating units, including the Palisades Nuclear Plant. The basis for the suit was that operation of these units in accordance with certain AEC interim criteria for emergency. ore cooling systems allegedly constitutes a threat to the public health and safety. The court dismissed the suit. In July 1973 the plaintiffs in such suit petitioned the AEC to revoke immediately the operating licenses of the 20 nuclear generating units on the same grounds alleged in the lawsuit. The petition was denied and an appeal from the denial is j now pending before the U. S. Court of Appeals for the District of Columbia Circuit ( Docket No. 73-1872 ). ~u 21 L. .a.__ \\

u y_a i ' In 1%9 the Company applied to the AEC for permits to construct the Midland Plant, described under .- Construction Expenditures" above.; Various organizations and individuals intervened in the proceeding (and objected to the granting of such permits. After extended hearings the AEC issued construction permits for the MidSnd Plant in December 1972. Thereafter the intervenors appealed the granting of the permits and in May 1973 an Atomic Safety and Licensing Appeal Board of the AEC affirmed the issuance of the construction permits, subject to conditions imposing several new reporting requirements with respect to . quality assurance matters. Construction on the site, which was halted in November 1970, was resumed in June 1973. In the summer of 1973, the intervenors instituted appeals to the U. S. Court of Appeals for the District of Columbia Circuit (Docket Nos. 73-1776 and 731867) from the action of the AEC in granting the construction permits and such appeals are pe,tJirig. In May 1972 some of the intervenors began suit in i a Federal Court to prevent construction of the Midland Plant, contending that the AEC had not complied with the National Environmental Policy Act of 1969 in the proceedings for issuance of the construction - permits for the plant. The Company and the AEC have moved to dismiss the suit. In March 1973 another intervenor began suit in a State Court in Jackson County, Michigan, seeking damages and a declaratory judgment that the plant violates a Michigan' environmental protection act and constitutes a nuisance. The case was transferred to Midland County, Michigan, where it was decided in the Cc mpany's favor in June 1974 on motions based on' legal grounds. An appeal from such decision is pending. Following AEC inspections of the implementation of the quality assurance program at the Midland construction site, the AEC's Director of Regulation issued an order in December 1973 for the Company to show cause why all activities under the construction permits for the Midland Plant should not be suspended pending a showing that the Company is in compliance with the AEC's quality assurance regulations and that there is reasonable assurance that such compliance will continue throughout the construction process. The Company responded to the order to show cause by a motion to dismiss and an answer noting that the most recent AEC inspection had found the Company to be in compliance with AEC quality assurance regulations. Certain of the intervenors in the construction permit proceeding requested a hearing on the order to show cause.! Also, in December 1973, the same intervenors petitioned the AEC to revoke the 1 construction permits for the Midland Plant. The AEC,in January 1974, denied the petiuon to revoke the construction permits, denied the Company's motion to dismiss the order to show cause, and granted the f intervenors' requests for a public hearing. A hearing on the show cause order was held in July 1974 and ' the matteris pending. If the Atomic Safety and Licensing Board appointed to conduct the hearing decides that the Company is not implementing its quality assurance program in compliance with AEC regulations, or that.there is not reasonable assurance that such. implementation will continue throughout the construction process, it will determine whether the construction permits for the Midland Plant shall be modified, suspen'ded or revoked, or whether other action is warranted by the record. The Company is unable to predict the outcome of these proceedings before the AEC, as well as the outcome of the litigation described in this paragraph and the immediately preceding paragraph. However, if the Company is not successful in the AEC proceedings or the litigation, the effect upon the Company and its power resources could be materially adverse. In January and February 1974, certain individuals reported to the AEC and publicly charged that the Company and'certain ofits employees had,in 1972 and early 1973, willfully and wrongfully withheld information from the AEC, and falsified information submitted to the AEC, about malfunctioning of the _ waste gas decay system and other occurrences at the Company's Palisades Nuclear Plant. An organization petitioned the AEC to isme a show cause order to hold a hearing on whether the operating license of the Palisades Nuclear Picat should be revoked, suspended or modified or other penalties imposed in connection with the sharges. - The U.-S. Attorney General was also requested to investigate. AEC investigators found.ha: there 'was no basis to conclude that the Company or its employees deliberately ~ withheld any clearly uportable information. In August 1974, the U. S. Justice Department concluded its investigation of the charges and decided not to institute criminal action against the Company or any Company official.' However, the AEC has cited the Company for several license violations in connection .. with the charges and other occurrences and proposes to assess the Company $19,000 in civil penalties for such license violations. . Under amendments to the Atomic Energy Act which became effective in December 1970, applications , to construct commercial nuclear reactors are subject to review to determine whether the activities under the V 22 l3 g 1 y+.' %[. .s.E.1. 4%... ,s s - k. : ~,. -..,,,. n - h'

license would create or maintain a situation inconsistent with the Federal antitrust laws and the AEC is required to refer such applications to the Attorney General of the United States for his advice. In June 1971, the Attorney General advised the AEC that the granting of authorization to construct the hiidland Plant "may maintain a situation inconsistent with the antitrust laws" and recommended that the AEC ( conduct a hearing to determine whether there is any factual basis to so find. A number of municipal electric systems and generating and transmission cooperatives have intervened in the proceeding. The AEC is authorized to issue or refuse to issue any license applied for or to issue a license with such conditions as it deems appropriate, and ifit finds there are adverse antitrust aspects involved in any license applications, it is also to consider,in determining whether a license shall be issued, such other factors as in its judgment it deems necessary to protect the public interest, including the need for power in the atrected area. The Attorney General has indicated an intention to seek conditions in any license for the hiidland Plant which would, among other things, require the Company to interconnect and share reserves with any utility engaged or proposing to engage in the generation of electric power, require the Company to engage in coordinated operations, development and electric plant construction with any such other electric utility, and to wheel power across the Company's transmission system. An AEC hearing with respect to the antitrust issues began in late 1973 and concluded in June 1974. An initial decision is expected later in 1974. In December 1972 the AEC amended the Big Rock Point Plant operating license to authorize the use of a full core loading of nuclear fuel containing plutonium as well as uranium. The transition to the use of such fuel will ext;nd over a period of several years, with a few fuel assemblies having been installed in 1973 and with greater use of such fuel to occur it 1974 and later years. The use at the Big Rock Point Plant of developmental fuel assemblies and fuel rods containing plutonium had been authorized and carried out since 1969. In hiarch 1973 an organization began suit in the U. S. District Court for Western Alichigan ( File No. G58-73CA) to prevent the use of such plutonium fuel at the Big Rock Point Plant. A temporary injunction against the 1973 fuel loading was refused by the Court. The lawsuit is pending and is opposed by the Company as well as by the AEC. In April 1973 the AEC otTered an opportunity for public hearing on the December 1972 license amendment and the organization opposing the use of plutonium fuel at the plant has been granted the right to intervene and to have a public hearing. The matter is pending ( AEC Docket No. 50-155). In June 1974, the Court ordered the lawsuit held in abeyance pending completion of the AEC proceeding. k Under the Price-Anderson amendments to the Atomic Energy Act, the Company maintains private insurance and agreements ofindemnity with the AEC to cover public liability for the consequences of nuclear incidents which might occur at the Company's nuclear power plants. Such nuclear insurance and indemnity coverage does not include coverage of the plant facilities themselves. To cover possible damage to these facilities, the Company maintains property damage insurance from Nuclear N1utual Limited, a Bermuda mutual insurance company of which the Company is a member, in the amount of $130,000,000, or the insurable value of the facility, whichever is less. At the Company's Big Rock Point Plant and presently at the Company's Alidland Plant, the amount of insurance equals the insurable value of the facilities. The Company is a self-insurer for any loss to its Palisades Nuclear Plant to the extent its investment in the Plant exceeds $130,000,000. The Company regards this risk to be acceptable because of the very low probabilities of occurrence believed to be associated with incidents which could give rise to losses in excess of the insurance. The Company's practice in this regard is consistent with that of other utilities similarly situated. In Af ay and June 1974, following a request by an organizadon that the AEC review the Company's continuing financial qualifications to construct the Alidland Plant and operate the Palisades Plant,in view of the Company's declining earnings and other events, the AEC requested the Company to furnish to it certain information as to the Company's financial condition and financing plans. The Company furnished the requested information in June and July 1974 and the matter is pending. Equal Employment Opportunity Commission In January 1972 the U. S. Equal Employment Opportunity Commission ("EEOC") charged the Company and the Utility Workers of America with violation of Title VII of the 1964 Civil Rights Act, alleging discrimination against Negroes and females in matters of hiring, promotion, training, com-pensation, membership, referral representation and other terms and conditions of employment. An investigation was conducted and an exparte decision was rendered by the EEOC finding reasonable cause to believe that the Company discriminated against females and that the Union failed to equally represent (. females. EEOC has proposed a conciliation agreement be negotiated with the Company as a means of correcting the alleged discrimination, but no such agreement has yet been entered into. 23 I

. _. ~.. _ OPERATING STATISTICS Twelie Months 'n Year Ended December 31 Ended ) Mey 31, 1969 1970 1971 1972 1973 1974 Electric Energy Generated. Purchased and Sold (Thousands of Kwh): Generated-aner station loss and use: Fossil Fuel 17,517.548 17,701,285 17,465,481 17,379,239 17,360,718 16,584,835 Nuclear 401,049 362,430 368,988 2,125,281 2,834,049 1,510,330 Hydro 495,638 438,625 438,635 410,287 1,422,871 1,814.554 Purchased (including interchange) I,848,148 2,268,680 4,118,538 4,404,300 6,112,898 7,911,176 Less energy for pumping (l1,622) (I,380,519) (l,917,670) Total Electric Energy Generated and Purchased 20,262,383 20,771,020 22,391,642 24,307,485 26,350,017 25,903,225 Lost, unaccounted for and used by Company. (I,783,020) (I,964,343) (1,895,889) (2,229,01I) (2,248,017) (2,246,517) Tota! Erergy Sold 18,479,363 18,806,677 20,495.753 22.078.474 24,102,000 23,656,708 Electric Sales (Thousands of Kwh): Residential 5,546,263 5,931,840 . 6,328,749 6,841,221 7,090,854 7,131,275 Comme cia! 3,673,709 4,027,215 4,349,075 4,699,559 5,160,245 5,I43,314 ladustrial 3,578,389 8,073,913 8,972,723 9,575,919 10,773,530 10.239,761 laterdepartmental and Other 191,951 2' s26 223,849 235,871 239,152 231,401 TotalSales to Ultimate Consumers 17,990,312 18...,494 19,874,396 21,352,570 23,263,781 22,745,751 Other Resale 489,031 565,183 621,357 725,904 838,219 910,957 Total Electric Sales 18,479,363 18.806,677 20,495,743 22,078,474 24,102,000 23,656,708 Gas Produced. Purchased and Sold (I,000 cubic feet): '/ Gas Produced and Purchased: Marysville Reforming Plant 8,285,680 30,076,281 Michigan Fields 16,600,080 17,196,639 13,194,067 18,905,307 26,266,614 29,745,620 Trunkline Gas Company 197,825,691 226,111,937 247,445,052 231,889,872 193,031,460 183.262,040 Michigan Gas Storage Company 87,821,500 90,697,573 88,327,683 95,612,848 88,973,946 87.968,580 Other purchases _ 21,989,179 21,599,978 Total Gas Produced and Purchased 302,247,271 334,006,149 348,966,802 346,408,027 338.546,879 352,652,499 Net (to) from Storage (10,937,194) (13,896,516) (9.882,117) 15.550,365 1,633,498 (18,001,437) Compressor Station and Other Use (2,724.061) (3,604,715) (2,871,811) (2,455,853) (2,835,560) (2,355,813) lost, unaccounted for and used by Company (6,824,203) (6,160,960) (2,339,363) (6,239,695) (7,585,417) (5,785,988) Total Gas Sold 281,761,813 310,343,958 333,873,511 353,262.844 329,759.400 326,509,261 Gas Sales (I,000 cubic feet): Residential-Home Heating 129,060,276 134,435,759 138,223,553 150,602,418 136,323.024 139,790,436 Other Residential 3,997,083 3,733,980 3,225,088 3,313,156 3,016,273 2,865,187 ladustrial and Commercial ,,, 139,497,140 152,704,824 176,350.317 187,W 6,368 183,124,071 176,517,956 Interdepartmental 7,214,920 18,507.064 15,262,159 11,430,902 7,296,032 7,335,682 Total Sales to Ultimate Consumers 279,769,419 309,381,627 333,061,i17 353,262,844 329,759,400 326,509,26I Resale 1,992,394 % 2,331 812,394 Total Gas Sales 281,761.813 310.343,958 333,873,511 353,262,844 329,759,400 326,509,26l Sales of Steam (1,000 pounds) 847,854 814.225 742.650 682.412 655,895 671,938 24 \\

OPERATING STATISTICS Year Ended December 31 k Tnebe Months Ended May 31, 1969 1970 1971 1972 1973 1974 Cost of Electric Energy Generated and Purchased: Generated S 75,480,196 $ 88,977,135 $107,250,285 $116,527,591 $133,170,016 $140,280,920 Purchased (includinginterchange) 13,530,397 19,330,636 41,860,127 56,662,305 70,005,649 106,375,448 Other Power Supply Expenses 1,229,019 1,808,747 3,573,083 4,493.910 2,182.207 I,542,847 Total Cost of E!:ctric Energy Gener-ated and Purchased $ 90,239,612 $110,116,518 $152,683,495 $177,683,806 $205,357,872 $248,199,215 Average Fuel Cost per KWH Generated (mi!!s)_ 3.30 3.93 4.72 4.72 5.22 6,11 Cost of Gu Sold: Gas Produced and Purchased: Mictugan Fields - 3 4,628,947 $ 4,591,473 $ 3,457,574 $ 6,238,777 5 11,183,615 3 13,253,473 Marysville Reforming Plant 13,387,838 63.334,127 Trunkline Gas Company 70,399,838 80,393,575 91,690,210 100,583,943 93,418,386 91,817,568 Michigan Gas Scorage company 37,170,023 39,465,259 40,770,482 47,502,774 47,746,032 50 340,191 Other purchases 17,793,924 17,459,383 Total Cost of Gas Produced and Pur-chased $112,198,808 $124,450,307 $135,918,266 $154,325.494 $183,529,795 $236,204,742 Net (to) from Storage (4,413,756) (5,320,212) (4,466.597) 2,891,134 (6,130,724) (15,744,947) Compressor Station and Other Use (896,939) (1,255,232) (1,041,007) (978,398) (2,213,618) (3,148,371) . Total Cost of Gas Sold. $106,888,lt3 $l17,874,863 $130,410,662 3156,238,230 $175,185,453 $217,311.424 Electric Revenue: Residential $119,298,937 $133,I31,798 $141,106,619 $158,414,916 $179,025,208 $189,209,992 Commercial 76,246,495 87,727,018 95,839,344 106,268,572 125,615,891 129,453,952 ladustrial 98,132,472 102,501,526 118,617,428 131,708,824 162,914,439 167,498,888 Interdepartmental and Other 5.320,222 6,101.768 6,561,662 7,374,312 8.165,332 8,423,192 - Total Sales to Ultimate Consumers. $298,998.126 $329,462,I10 $362,125,053 $403,766,624 $475,720,870 $494,586,024 ( Other Resale 5,567,956 6,661,084 7,778,805 9,004.41I 15,406,962 23,307,379 Tota! Elec ric Sales Revenue $304J66,082 3336.123,194 $369,903,858 $412,771,035 $491,127,832 $517,893,403 Reserve for Possible Refund (5.929,745) (9.367,949) (116,203) Net Electric Sales Revenue $304,566,082 3330,193,449 $360,535,909 $412,654,832 $491,127,832 $517,893,403 Miscellaneous Electnc Revenue 3,433,596 4,710,705 3.693,861 4.339,234 4.594,728 4,680,475 Total Electric Revenue $307,999,678 $334,904,154 $364,229,770 $416,994,066 $495,722,560 $522,573,878 Gas Revenue: Residential-ifome fleating $133,776,482 $150,050,985 $154,419,444 $l74,891,712 $172,040,351 $200,315,113 Other Residential. - 6,097,784 6,614,752 5,906,707 6,211,764 5,947,518 6.043,764 Industrial and Commercial 93,716,797 108,666,729 121,435,319 141,761,585 152,543,621 171,411,520 laterdepartmental 3,079,358 8,094,531 6,944,951 6,413,403 5,056,497 6,016,198 Total Sales to Ultimate Consumers $236,670,421 $273,426,997 $288,706,421 $329,278,464 $335,587,987 $383,786,595 Resale 796,401 456,805 375,958 Total Gas Sales Revenue $237,466,822 $273,883,802 $289,082,379 $329,278,464 $335,587,987 $383,786,595 Reserve for Possible Refund (3,258,764) (5,603.017) (266,955) Net Gas Sales Revenue - $237,466,322 $270,625,038 $283,479,362 $329,011,509 $335,587,987 $383,786,595 Miscellaneous Gas Revenue 3,068,960 3,248,642 2,612,093 3,074,019 2.318,350 2,374,169 Total Gas Revenue , 5240,535,782 $273,873,680 $286,091,455 $332,085,528 $337,906,337 $386.160,764 Steam Revenue $ l.239,386 3 1,213.671 $ 1,295,582 $ 1,373,540 $ I,324,783 $ 1,390,461 Total Operating Revenue $549,774,846 $609.989,505 $651,616,807 $750,453.134 $834,953,685 $910,125.103 Net Operating Income before State and Federal Income Taxes-Electric $100,424,652 5 92.746,462 $ 75,249,390 $ 84,627,334 $12!,195,636 $100,056,720 Gas S 54,297,237 $ 65,377,230 $ 64,106.732 $ 68,953,534 $ 48,083,242 3 46,660,641 Electric Customers (end of period) 1,057,735 1,082.442 1,112,607 1,147,507 1,180,846 1,187,700 Gas Customers (end orperiod) 830,011 854,117 879,535 '910,513 936,323 942,544 Steam Customers (end of period) 386 318 220 125 121 115 Kilowatt hours per Residential Customer-Average, 5,954 6,222 6,467 6,780 6,816 6,777 s 25 P-

~. _ _ _ ~ \\ DESCRIPTION OF NEW BONDS General The New Bonds are to be issued under an Indenture dated as of September I,1945, between the Company and First National City Bank, as Trustee, as supplemented by various supplemental indentures (the " Mortgage"), copies of which are filed as exhibits to the registration statement. In connection with the change of the State ofincorporation from Maine to Michigan in 1968, the Company succeeded to and was substituted for the Maine corporation under the Mortgage. The statements herein concerning the New Bonds and the Mortgage are an outline and do not purport to be complete. They make use of defined terms and are qualified in their entirety by express reference to the cited sections and articles of the Mortgage. l The New Bonds will mature September 1,1982 and will bear interest at the rate shown in their title, payable semi-annually on March I and September I in each year. ' Interest will, subject to certain exceptions, be paid to holders registered at the close of business on the February 15 or August 15, as the case may be, next preceding the interest payment date. The New Bonds will be issued only as registered Bonds without coupons in denominations of $1,000 and any multiple thereof. The New Bonds are exchangeable, in each case for a like aggregate principal amount of New Bonds of other authorized denominations, and are transferable, at the corporate trust office of the Trustee in New York City, without payment of any charge other than for any tax or other governmental charge required to be paid by the Company. (Twenty-eighth Supplemental Indenture, Section 1.) The Company will make application for the listing of the New Bonds on the New York Stock Exchange. Priority and Security The New Bonds will rank pari passu as to security with bonds of other series now outstanding or hereafter issued under the Mortgage, which, in the opinion of the Company's General Counsel,is a direct first lien on substantially all the Company's fixed property and franchises, subject only to excepted encumbrances as defined in the Mortgage. The Mortgage permits, with cenain limitations specified in O) Section 7.05, the acquisition of property subject to prior tiens and, under certain conditions specified in Section 7.14, permits the issuance of additional indebtedness under such prior tiens to the extent of 60% of net property additions made by the Company to the property subject to such prior liens. Redemption Prmisions The New Bonds will not be redeemable prior to September 1,1981 but will be redeemable at the option of the Company after August 31,1981 in whole or in part at any time on thirty days' notice at the principal amount and accrued interest. Sinking (Improvement) Fund Requirement The Mortgage (Section 2.12) provides for annual sinking fund payments, which began in 1956,in an amount equal to 1% of the aggregate principal amount of bonds authenticated (exclusive of bonds authenticated to refund other bonds) prior to January I of the year in which the deposit is made less certain bonds retired. Payments may be made in cash orin principal amount of bonds authendcated under the Mortgage, whether or not such bonds have previously been disposed of by the Company. Deposited cash is to be used to retire bonds of such series (one or more) as the Company may designate or may be withdrawn by the Company against the deposit of bonds. After the bonds of all series created prior to December 31,1959 have been retired, the sinking fund will be replaced by an improvement fund and the improvement fund requirement (which will then be 1% of the principal amount of bonds of any series having such an improvement fund requirement less certain bonds retired) may also be satisfied and cash withdrawn to the extent of 60% of unfunded net property additions. There is no improvement fund requirement for the New Bonds. Maintenance and Replacement Requirement The Mortgage (Section 7.07) requires the Company as of the end of each calendar year to have applied for maintenance, renewals and replacements of the mortgaged and pledged property, with certain s.s 26

~,-.- i exceptions, the greater of the fofowing amounts: (i) 15% of gross operating revenues derived by the Company subsequent to December 11,1945 and up to the end ofsuch calendar year from such mortgaged and pledged property after deducti' g the cost of electricity, gas and steam purchased for resale or (ii) the sum of the amounts equal to 4% of ue principal amount of bonds outstanding at the end of each calendar year; or to the extent of any deficiency to certify to the Trustee unfunded net property additions or deposit t with the Trustee cash or bonds (taken at their principal amount). A credit balance established in any year may be carried forward and used to meet requirements during a later period or to effect a withdrawal of deposited cash or bonds or to restore as unfunded property any property previously certified. Issuance of Additional Bonds Additional bonds may be issued under the Mortgage to the extent of 60% of unfunded net property additions or against the deposit of an equal amount ofcash,if, for any period of twelve consecutive months within the fifteen preceding calendar months, the net earnings of the Company (before income or excess profits taxes) shall have been at least twice the interest requirements for one year on all bonds outstanding and to be issued and on indebtedness of prior or equal rank. Additional bonds may also be issued to refund bonds. theretofore outstanding under the Mortgage.. Deposited cash may be applied to the retirement of bonds or be withdrawn to the extent of 60% of unfunded net property additions. ( Articles I, IV, V and VI.) The New Bonds are to be issued against unfunded net property additions which, at May 31,1974, after adjustment for the issuance of the $60,000,000 of First Mortgage Bonds,11%% Series due 1994, amounted to approximately $595,000,000. I i l Release and Substitution of Property The Mortgage provides that, subject to various limitations, property may be released from the lien thereof when sold or exchanged, upon the basis of cash deposited with the Trustee, bonds or purchase money obligations delivered to the Trustee, prior tien bonds delivered to the Trustee or reduced or assumed by the purchaser, property additions acquired in exchange for the property released, or upon a ( showing that unfunded net property additions exist. The Mortgage also permits the withdrawal of cash upon a showing that unfunded net property additions exist or against the deposit of bonds or the application thereof to the retirement of bonds. (Articles VI, VII and X.) Limitations on Dividends The Mortgage (Section 7.15) in effect prohibits the payment of cash dividends on Common Stock except out of retained earnings accumulated after September 30,1945 and unless after such payment there i remains of such retained earnings an amount equivalent to the amount by which the charges to income or retained earnings since December 31,1945 for repairs, maintenance and depreciation shall have been less than the maintenance and replacement requirement computed in accordance with Section 7.07 of the Mortgage. Other restrictions on dividends are imposed by the Articles ofIncorporation of the Company. Reference is made.to Note 10 to Financial Statements. Modification of Mortgage The Mortgage, the rights and obligations of the Corapany and the rights of the bondholders may be modified by the Company only with the consent of the holders of 75% in principal amount of the bonds and of not less than 60% of the principal amount of each series afected. However, no modification of the terms of payment of principal or interest and no modification affecting the lien or reducing the percentage required for modification is effective against any bondholder without his consent. (Article XVII.) ' Concerning the Trustee 'In the regular course of business, the Company and its subsidiaries borrow short-term funds from 4 several banks for the companies';iurposes. During 1973, the Company made short-term bank borrowings from time to time, each at the prime interest rate then in effect, from First National City Bank in the maximum amount of $27,000.000 at any one time outstanding. On June 20,1974 the Company borrowed 550,000,000 from such bank as described under " Capitalization". First National City Bank is Trustee of r

x 27 a - -.

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.. ~ - the Employees' Savings Plan of the companies and Mr. E. Newton Cutler, Jr., Senior Vice President of First National City Bank, is a director of the Company. The Trustee or the holders of 20% in aggregate principal amount of the bonds may declare the principal due on default, but the holders of a majority in aggregate principal amount may anm.1 such declaration and waive the default if the default has been cured. (Section 11.05.) The holders of a majority in aggregate principal amount may direct the time, method and place of conducting any proceeding for the enforcement of the Mortgage. (Sections 11.01 and 11.12.) No bondholder has the right to institute any proceedings for the enforcement of the Mortgage unless such holder shall have given the Trustee written notice of a default, the holders of 20% shall have tendered to the Trustee indemnity against costs, expenses and liabilities and requested the Trustee to take action, the Trustee shall have declined to take action or failed so to do within sixty days and no inconsistent directions shall have been given by the holders of a majority. (Section 11.14.) The Trustee is not required to advance or risk its own funds or otherwise incur personal financial liability in the performance of any of its duties if there is reasonable ground for believing that repayment is not reasonably assured to it. (Section 16.03.) Defaults By Section 11.01 of the Mortgage, the following are defined as " defaults": Failure to pay principal when due; failure to pay interest for sixty days; failure to pay any installment of any sinking or other purchase fund for ninety days; certain events in bankruptcy, insolvency or reorganization; and failure to perform any other covenant for ninety days following written demand by the Trustee for the Company to cure such failure. By Section 9.03, a failure to provide money for the redemption of bonds called for redemption also constitutes a default. The Mortgage does not require any periodic evidence to be furnished as to the absence c f default or as to compliance with the terms thereof. EXPERTS The Financial Statements including the Statement ofIncome for the five years ended December 31, p. 1973 set forth in this Prospectus have been examined by Arthur Andersen & Co., independent public j V accountants, as indicated in their report with respect thereto, and are included herein in reliance upon the authority of said firm as experts in auditing and accounting in giving such report. Statements under " Regulation" and " Description of New Bonds", as to matters of law and legal conclusions, have been reviewed by Harold P. Graves, Esq:, General Counsel for the Company, and all such statements are made on his authority as an expert. Statements under " Notes to Statement of Income" that the pro forma coverages have been " computed including allowance for funds used during construction applicable to Electric Construction, which,in the opinion of the Company's General Attorney,is properly so included", as to matters oflaw and legal conclusions, have been reviewed by James B. Falahee, General Attorney for the Company, and all such statements are made on his authority as an expen. LEGAL OPINIONS The legality of the securities offered hereby will be passed upon for the Company by Harold P. Graves, Esq., or James B. Falahee, Esq., Jackson, Michigan, General Counsel and General Attorney, respectively, for the Company, and by Messrs. Winthrop, Stimson, Putnam & Robens, New York, N. Y., and for the Underwriters by Messrs. Simpson Thacher & Bartlett. New York, N. Y. As of May 31,1974, 830 shares of common stock of the Company were credited to Harold P. Graves' account in the Employees' Savings Plan. He and his wife own as joint tenants 189 shares of common stock of the Company. Mr. Graves is an officer of the Company and a director and/or an officer of each ofits subsidiaries. As of May 31,1974,297 shares of common stock of the Company were credited to James B. Fatahee's account in the Employees' Savings Plan. He and his wife own as joint tenants 75 shares of common stock of the Company. Mr. Falahee is employed by the Company as General Attorney. Q/ 28 i ~~. ~. y-ey

~ UNDERWRITERS n Under the terms of and subject to the conditions contained in an Underwriting Agreement dated August 21,1974, the Underwriters named below have severally agreed to purchase, and the Company has agreed to sell to each Underwriter, severally, the respective principal amounts of New Bonds set forth i below. Principal Principal Name Amount Name Amount Morgan Stanley & Co, Incorporated, S 7,850,000 Lepercq, de Neuf!ize & Co. Incorporated 3 200,000 Adams & Peck. 250,000 Loewi & Co. Incorporated -_.. _ 200,000 250.000 Loeb, Rhoades & Co... 750,000 AdSest Co.. American Secunties Corporation 300,000 Manley, Bennett. Mcdonald & Co. 250,000 A. E. Ames & Co. Incorporated. 200,000 A. E. Masten & Co. Incorporated 150,000 Arnhold and S. Bleichroeder, Inc. 300,000 Mcdonald & Company... 300.000 Bacon, Whipple & Co.. 300.000 McMaster Hutchinson & Co.... -. --.. 200,000 300,000 McLeod, Young, Weir, Incorporated. 150,000 Robert W. Baird & Co. Incorporated.. - Bateman Eichler, Hill Richards, Incorporated 300,000 Merrill Lynch, Pierce, Fenner & Smith Bear. Stearns & Co.. 500,000 incorporated. 900,000 William Blair & Company. 300,000 The Milwaukee Company.. 200,000 Blunt Ellis & Simmons Incorporated...... 300,000 Moore, Leonard & Lynch, Incorporated. 200,000 Blyth Eastman Dillon & Co. Incorporated. 750,000 Moseley, Hallgarten & Estabrook Inc. 400,000 Boettcher & Company. 250,000 Newhard, Cook & Co. Incorporated. 150,000 Bosworth, Sullivan & Company, Inc.. 150,000 John Nuveen & Co. Incorporated 400,000 J. C. Bradford & Co. 300,000 The Ohio Company..... 300,000 Alex. Brown & Sons 400,000 Paine, Webber, Jackson & Curtis Butcher & Singer. 250,000 Incorporated. 750,000 The Chicago Corporation. 200,000 Parker / Hunter Incorporated 300,000 150,000 Chiles, Heider & Co., Inc. 150,000 Piper, Jaffray & Hopwood Incorporated. City Securities Corporatiort. 150,000 Wm. E. Poliock & Co., Inc. 300,000 Crowell, Weedon & Co. _ 250,000 Prescott, Ball & Turben. 400,000 300,000 Dain, Kalman & Quail, Incorporated 300,000 R. W. Pressprich & Co. Incorporated Dillon, Read & Co. Inc... _..~ 750,000 Rattensperger Hughes & Co., Inc. 150,000 Drexel Burnham & Co. Incorporated. 750.000 Rand & Co., Inc... 200,000 A. G. Edwards & Sons, Inc, 250,000 Rauscher Pierce Securities Corporation 300,000 Edwards & Hanly..,...... 250,000 Reynolds Securities Inc. 750,000 300,000 Reinholdt & Gardner. 300,000 Elkins, Morris, Stroud & Co. Fahnestock & Co.. 250,000 The Robinson.Humphrey Company, Inc.. 300,000 The First Boston Corporation....... 900,000 Wm. C. Roney & Co. 250,000 ~ First Equity Corporation of Florida 150,000 Rotan Mosle Inc.... 250,000 First of Michigan Corporation. 400,000 L. F. Rothschild & Co. ~... 500,000 First Southwest Company....... 300,000 Salomon Brothers 900,000 150,000 R. Rowland & Co. Incorporated 150,000 Folger Nolan Fleming Douglas Incorporated Fulton, Reid & Staples, Inc. 200,000 Scharff & Jones, Inc. 150,000 Goldman, Sachs & Co. 750.000 Shields Model Roland Securities Greenshields & Co Inc 200,000 Incorporated _....... 500,000 Halsey, Stuart & Co. Inc. 750,000 Shuman. Agnew & Co Inc. 300,000 Harris, Upham & Co. Incorporated...... 400,000 Smith, Barney & Co. Incorporated 750.000 Herzfeld & Stern 200,000 SoGen. Swiss International Corporation 400,000 Hibbard & O'Connor Securities, Inc 150,000 Stern Brothers & Co. 200.000 J. J. B. Hilliard, W. L L>ons Inc. 200,000 Stern, Frank, Me>er & Fox. Incorporated - 150,000 Hoppin, Watson Inc.. 200,000 Stifel, Nicolaus & Con,yany Incorporated 150,000 Hornblower & Weeks.Hemphill, Noyes Stone & Webster Securities Corporation 750,000 Howard, weil, Labouisse, Friedrichs.. - -.......... 750,000 Stone & Youngberg. 200.000 Incorporated..... Stuart Brothers. 250,000 Incorporated._. 250,000 Sutro & Co. Incorporated 250,000 Howe, Barnes & Johnson, Inc. 150,000 Thomas & Company, Inc... 150,000 E. F. Hutton & Company Inc........ 750,000 Thomson & McKinnon Auchincloss The Illinois Company Incorporated 150,000 Kohlmeyer Inc. 400.000 Interstate Securities Corporation. 150,000 Spencer Trask & Co. Incorporated. 400.000 Janney Montgomery Scott Inc.. ~... 250,000 Tucker, Anthony & R. L. Day 400,000 Johnston, Ismon & Co. Incorporated 250,000 UBS.DB Corporation 400,000 Josephthal & Co........_... 150,000 G. H. Walker, Laird Incorporated 400,000 Keefe, Bruyette & Woods, Inc. 750,000 Watling, Lerchen & Co. Incorporated. 300,000 200,000 Warburg.Paribas, Inc. 400,000 Kidder, Peabody & Co. Incorporated. Kormendi, Byrd Brothers, Inc. 200.000 Weeden & Co. luorrerated 500.000 Kuhn, Loeb & Co. 750,000 U' 750,000 w.crtheim & Co., In,c.. Ladenburg, Thalmann & Co. Inc, 300,000 heat, First Secunties, Inc. 300,000 Lazard Freres & Co...... 750,000 Legg Mason / Wood Walker White, Weld & Co. Incorporated 750,000 Dw, of First Regional Securities, Inc 200,000 Dean Witter & Co. Incorporated. 750.000 Lehman Brothers Incorporated. 750.000 Wood, Struthers & Winthrop Inc. 500.000 i Totat $50,000,000 ) l j 29 l 1 ..~ l

. The Underwriting Agreement provides that the several obligations of the Underwriters are subject to the approval of cenain legal matters by counsel and to the conditions that no stop order suspending the 'n efectiveness of the Registration Statement is in efect and no proceedings for such purpose are pending I before or threatened by the Securities and Exchange Commission, that an appropriate order of the MPSC is *n efect and that there has been no material adverse change (not in the ordinary course of business) in the condition of the Company from that set forth in or contemplated by the Registration Statement. The nature of the Underwriters' obligation is such that they are committed to take and pay for all of the New Bonds if any are taken. The Underwriters propose to ofer pan of the New Bonds directly to the public at the public ofering price set forth on the cover page hereo.f and pan to dealers at a price which represents a concession of.80% of the principal amount under the public ofering price and any Underwriter may ofer New Bonds to cenain dealers who are either a parent or a subsidiary of such Underwriter at not less than such price o dealers. The Underwriters may allow and such dealers may reallow a concession, not in excess of.375%, to cenain other dealers. 1 l / () 30 ---u y

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS (- To Consumers Power Company-We have examined the balance sheet o'CONsuutRs power COMPANY (a Michigan corporation) as of December 31,1973, and the related stater.sents ofincome, retained earnings, capital in excess of par value and source of funds for gross property additions for the five years then ended. Our examination was made in accordance with generally accept +1 auditing standards, and accordingly included such tests of the accounting records and such other auditing procedures as we considered necessary in the circumstances. In' our opinion, the financial statements referred to above present fairly the financial position of Consume.s Power Company as of December 31,1973, and the results ofits operations and the source of funds for fross property additions for the periods stated,in conformity with generally accepted accounting principles applied on a consistent basis during the periods. ARTHUR ANDERsEN & CO. Detroit, Michigan, April 25,1974. O ha. 31 m

CONSUMERS POWER COhlPANY BALANCE SHEET .) ASSETS December 31. May 31, 1973 1974 (tleaudited) Thousands of Douars Utility Plant, at original cost ( Note 2 ): Plant in service and held for future use-Electric-- $1.895,704 $1,893,213 Gas - 889,129 888,438 -z Steam.... 3.280 3,780 Common to all departments.. 71.481 71,564 $2,859.594 $2.856,495 Less-Provision for accrued depreciation 653,537 686,722 $2,206,057 S2,169,773 Construction work in progress ( Note 4)..... 359.548 483,533 $2,565,605 $2,653,306 Other Physical Property: At cost or less....... 2,764 5 2,774 Less-Provision for accrued depreciation 37 37 f) 2,727 2,737 Q Investments: Wholly-owned subsidiaries-hiichigan Gas Storage Company ( Note I )...... $ 20,111 S 20,358 Northern Stichigan Exploration Company ( Notes I and 5)..... 16,631 22,560 Other, at cost or iess... 922 842 $ 37,664 $ 43,760 Current Assets: Cash (Note 14) 12,243 13,652 1 Accounts receivable, less reserves of $674.000 and $704.000 respec-i tively,(includes $85,000 and $121,000 respectively due from subsidiaries)= 67,295 63,454 ' Materials and supplies, at average cost - 52,483 65,676 Gas in underground storage, at average cost...... 31,931 21,827 - Propeny taxes-future period, net...... 27,903 15,877 I Prepayments and other-1,076 5,,564 -S 192,931 $ 186,050 Deferred Debits. 6.926 9,967 S2.805,853 S2,895,820 The Notes to Financial Statements are an integral part of this statement. l k 32 l -*e .= ..w+ ~, )

CONSUMERS POWER COMPANY (- BALANCE SifEET STOCK HO L DE RS' IN VESTM ENT AN D LI ABILITIES December 31, May 31, 1973 1974 (Unaudited) Thousands of Dollars Capitalization: Common stockholders' equity-Common stock, $10 par value, authorized 32,500,000 shares, outstanding 26,233,838 shares-- S 262,338 $ 262,338 Capitalin excess of par value. 247,070 247,231 Retained earnings (Note 10)- 228,397 227,852 S 737,805 S 737,421 Less-Capital stock expense. 6,975 7,005 Total common stockholders' equity S 730,830 $ 730,416 Preferred stock, cumulative, $100 par value, authorized 5,000,000 . 347,534 347,134 shares (Note 1I )- Total stockholders' investment - $1,078,364 $1,077,550 Long-term debt (Note 12)-- 1,222,340 1,249,968 Total capitalization- $2,300,704 $2,327,518 ~ - Notes Payable, due within one year ( Notes 3 and 14): To banks (average interest rate of 9.80% and 11.46% respectively).. S 43,000 $ 63,700 Commercial paper (average interest rate of 9.62% and 10.84% respe,ctively) 1,800 40,810 $ 44,800 $ 104,510 Current Liabilities (excluding notes payable due within one year): Current matur; ties and sinking fund on long-term debt ( Note 12 ). 17,309 14,019 Accounts payable (includes $6,981,000 and $3,755,000 respectively due to subsidiaries) -- 100.311 58,064 Accrued taxes-57,831 72,404 Accrued interest 20,787 24,116 Other - 22,893 35,987 S 219,131 S 204,590 Deferred Credits and Reserves: Deferred income taxes ( Note 16). S 173,616 $ 188,815 Investment tax credit ( Note 15 ) 47,938 50,332 Other-19,664 20,055 $ 241,218 $ 259,202 Construction Commitments ( Note 9) $2,805.853 $2.895,820 The Notes to Financial Statements are an integral part of this statement. 33

CONSUMERS POWER COMPANY m STATEMENT OF RETAINED EARNINGS -I a Twelve Months Year Ended December 31 Ended May 31, 1%9 1970 1971 1972 1973 1974 (Unaudited) Thousands of Dollars . Balance Beginning of Period $125,503 5156,483 3178,995 $195,599 $213,358 $233.270 Add- ' Net income 66,960 72,832 71,780 78,178 80,893 68,952 Equity in undistributed earnings of subsid-iaries at Decernber JI,1972 (Note l) 4,359 5192,463 $229,315 5250,775 5273,777 $298,610 $302,222 Deduce Cash dividends on preferred stock $ 3,534 3 3,517 $ 7,108 5 11,251 5 17,746 3 21,902 Cash dividends on common stock declared in the amounts of $1.425 per share in 1969 and $2.00 per share in 1970, 1971, 1972,1973 and the twelve months ended May 31,1974 31446' 46,803 48,068 49,168 52,467 52,468 5 35,930 $ 50,320 $ $5,176 5 60.419 3 70,213 $ 74,370 Balance End of Period (Note 10) 5156,483 $178,995 $195,599 $213,358 5228,397 $227,852

• The quarterly dividend on common stock formerly declared in December was declared in January starting in 1970. Therefore, the dividends declared in 1969 only include three quarterly dividend

>N' declarations. Dividend payments have condnued to,be made in the months of February, May, August and November. STATEMENT OF CAPITAL IN EXCESS OF PAR VALUE Twelve Months Year Ended December 31 Ended May 31, 1969 1970 1971 1972 1973 1974 (Unaudited) Thousands of Dollars Balance Beginning of Period $187,654 $187,756 S208,905 $209.038 5246,788 $246,914 Add: Excess over par value of common stock sold. 21,012 37,620 Excess over par value of preferred stock sold 156 156 Net gain on reacquisition of preferred stock.. 102 137 133 130 126 161 Balance End of Period $187,756 S208,905 $209.038 5246,788 $247,070 5247,231 The Notes to Financial Statements are an integral part of these statements. - / 34

CONSUMERS POWER COMPANY STATEMENT OF SOURCE OF FUNDS FOR GROSS PROPERTY ADDITIONS \\- Taelve Year Ended December 31 Afonths Ended 1%9 1970 1971 1972 1973 Afmy 31,1974 (Unaudited) Thousands of Dollars ' Source of Funds for Gross Propeny Additions: Funds generated from operations-Net income after dividends on preferred stock, S 63,426 3 69,315 5 64,672 5 66,927 5 63,147 3 47,050 Principal noncash items-Depreciauon and amortization (Notes 8 - and 17)- Per statement ofincome _ 51,881 55,608 58,210 62,937 73,428 77,895 Charged to other accounts 5,200 6.162 6,403 I I,472 13,616 9,394 Deferred income taxes, net 10,962 10,222 14,300 I8,9 72 25,072 29,130 Investment tax credit, net 3,416 448 5,751 5,960 14,057 8,237 Allowance for funds used dunng con-struction (8,421) (14,108) (21,862) (25,455) (23.223) (21,942) Undistributed earnings of subsidiaries (Note 1) (1,541) (2,946) 5126,464 $127,647 $127,474 $140,813 $164,556 3146,818 1.ess-Dividends declared on common stock... 32,446' 46,803 48,068 49,168 52,467 52,468 Retirement of long-term debt and pre-ferred stock 7,788 9,438 10.538 II,738 12,938 12,938 3 86,230 $ 71,406 5 63,868 $ 79,907 5 99,151 5 81,412 Funds obtained from new financing: Issuance ofcommon stock S S 33,661 3 59,620 S Issuance of preferred stock 70,000 70,000 130,000 130,000 issuance of first mortgage bonds - 105,000 I10,000 120,000 120,000 75,000 75,000 Net proceeds from installment sales contracts payable 31,744 59,631 Increase (decrease) in other long-term debt 12,730 (4,239) (4,418) (3,915) (2,102) Increase (decrease ) in notes payable 6,900 12,600 (36,500) 6,500 19,300 34,510 $111,900 $168.991 3149,261 $251,702 $252,129 3297,039 Funds obtained from other sources-Allowance for funds used during construction S 8,421 3 14,108 $ 21,862 S 25,455 S 23,223 $ 21,942 Increase in reserve for possible rate refunds (Note 6). 4,406 7,278 184 Change in net current assets and current liabdities" (2,171) (15,I40) 7,018 9,020 (1,6%) (25,502) (Increase) decrease in investment in Northern l Michigan Exploration Company (Note 5) _. (2,000) (4,000) (4,000) 4,000 (8,600) ( 5,700 ) Other, net. 193 33 62 2,850 (3,332) (7,630) $ 4.443 3 (593) $ 32,220 S 41,509 $ 9,595 $(16,890) Gross Property Additions (Note 2 L $202,573 $239,804 3250,349 $373,118 5360,875 5361,561

• See Note to " Statement of Retained Earnings"

" The changes in the individual accounts classified as current assets and current liabilities are not material in relation to gross property additions. The Notes to Financial Statements are an integral pan of this statement. 35

yy _2 ~ -, - 1 CONSUMERS POWER COMPANY - NOTES TO FINANCIAL STATEMENTS (Inciadas Nc:es Related to Usaudeed Financial Statesments)

1. SIGNIFICANT ACCOUNTING POuCIEs -

The Company's wholly-owned subsidiaries, Michigan Gas Storage Company and Northern Michigan Exploration Company,' have not been consolidated as they are not significant. Effective January 1,1973, ~ the Company,' pursuant to Federal Power' Commission Order No. 469, adopted the equity method of accoundng for the investment in subsidiaries. Under this method of accounting the Company's interest in the earnings of the subsidiaries is reRected currently in carnings' and in the carrying value of the investments. Prior years, which include dividends paid by one of the subsidiaries, have not been restated for this change in accounting since the effect was not material; however, retained earnings have been credited with the undistributed earnings of the subsidiaries at December 31, 1972 in the amumt of

$4,359,272.

.The Company provides' depreciation on the basis of straight-line rates approved by the Michigan Public Service Commission (See Note 8). - Operating revenue is recognized at the time of monthly billings on a cycle basis for electric and gas service. The Company makes annual contributions to the pension plan sufficient to cover current service costs, . interest on unfunded prior service costs and amortization of prior service costs (See Note 7). Reference is made to Notes 15 and 16 for information regarding income taxes. Reference is made to Note (f) to the Statement ofIncome for information regarding the allowance for funds used during construction. ~ 2. CONTRIBtmONs IN AID OF CONSTRUCTION Effective January 1,1974 the Company, pursuant to Federal Power Commission Order No. 490, reclassified contributions in aid of construction as an offset to Utility Plant at original cost.' The financial

]

statements for periods prior to 1974 have been restated to a comparable basis. v 3. FINANCING Reference is made to "Use of Proceeds" for information regarding financing. 4. NUCLEAR GENERATING Pt. ANTS Construction work in progress includes $103,932,000 at December 31,1973 and $131,735,000 at May 31, 1974 related to the Midland Plant.- The issuance of construction permits by the Atomic Energy Commission (AEC) in December 1972 was upheld by an Appeal Board of the AEC in May 1973 but has been appealed to the U. S. Court of Appeals for the District of Columbia Circuit. Construction, delayed since 1970, was resumed in June 1973. 'In December 1973 the AEC issued an order for the Company to show cause why all construction activity should not be suspended pending a showing that the Company is in compliance with the AEC's quality assurance regulations and that there is reasonable assurance that such compliance will continue throughout the construction process. An AEC hearing on the show cause - order was held in July 1974 and the matter is pending. Reference is made to " Construction Expenditures" for information relating to the cancellation of the Company's Quanicassee Nuclear Plant. Reference is made to Note (b) to the Statement of Income for information relating to the Palisades - Nuclear Plant

5. NORTHERN MICHIGAN EXPLORATION COMPANY

.. Northern Michigan Exploration Company (Northern), a wholly-owned subsidiary of the Company,

is engaged in' gas exploration programs in nonharn Michigan and the southern United States. The

-Company's investment in-Northern, excluding equity in the undistributed net earnings of Northern, - consisted of $14,600,000 in common stock at December 31,1973 and $14,600,000 in common stock and y 36 ,w

g-

.+,g,~ n .n

~ CONSUMERS POWER COMPANY i NOTES TO FINANCIAL STATEMENTS-(Continued) ( (Including Notes Related to !!naudited Financial Statements) $4,000,000 in Notes at May 31, 1974. The Company's Board of Directors has authorized loans to Northern up to a maximum of $20,000,000 and has authorized a total common stock investment of $20,000,000.

6. RATE MATTERS Reference is made to Note (a) to the Statement ofIncome forinformation relating to electric and gas rate matters.

7. PENSION Pt.AN The Company has a trusteed noncontributory pension plan under which full-time regular employees within specified age limits and periods of service are qualified to participate. The contributions to the plan were $7,386,000 in 1969, $9,195,000 in I970, $10,575,000 in 1971, $13,066,000 in 1972, $I4,607,000 in 1973 and $15,507,000 for the twelve months ended May 31,1974. Of these amounts, $5,722,000 in 1969,

$6,945,000 in 1970, $8,127,000 in I971, $9,817,000 in 1972, $10,96S,000 in 1973 and $11,961,000 for the twelve months ended May 31,1974 were charged directly to expense accounts with the remainder being charged to various construction, clearing and other accounts. On April 11,1972 the Company's shareholders approved certain revisions in the pension plan which substantially increased the Company's contributions. Concurrent with the revisions to the pension plan, the Company changed two of its actuarial assumptions and increased the period of amortization of unfunded prior service costs from approximately 13 years to 25 years. The assumed rate of return was increased from 34% to 4%% and the method of reflecting unrealized appreciation was changed from the " appreciation account" method to the " assumed growth rate" method. The change in the actuarial assumptions and increase in the period of amortization of prior service costs had the etrect of reducing the ~ impact of the revisions to the plan on net income and earnings per share of common stock for the year 1972 by approximately $1,140,000 and $.05, respectively. The unfunded prior service cost 'at January 1,1974, the date of the most recent actuary's report, amounted to approximately $21,569,000.

8. DEPRECIATION Composite depreciation rates were approximately 2.85% for electric plant and 3.20% for gas plant for the year ended December 31,1969; 2.95% for electric plant and 3.00% for gas plant for the two years ended Decemb:r 31,1971; 2.95% for electric plant and 3.01% for gas plant for the year ended December 31,1972; 2.92% for electric plant and 3.01% for gas plant for the year ended December 31,1973; and 2.83% for electric plant and 3.40% for gas plant for the twelve months ended May 31,1974. In the opinion of management, the balance la the provision for accrued depreciation at December 31,1973 and May 31, 1974 is reasonably adequate to cover the requirements for depreciation accrued on the original cost.of the depreciable utility plant. At the time properties are retired or otherwise disposed ofin the normal course of business, charges are made to the provision for accrued depreciation in the amounts of such retirements, less net salvage credits, and no other adjustments of the provision for accrued depreciation are normally made. Depletion rates, established for each producing field based on the total cost ofleaseholds divided by the estimated recoverable reserves, are applied to withdrawals from each field to determine the provision for depletion.

9. CONSTRUCTION COMWMENTs AND FINANCING REsTRicTroNs As of June 5,1974 capital expenditures for property additions in 1974 were estimated to total approximately $360,318,000. Total construction expenditures over the five years ending December 31, 1978, are presently estimated to approximate $2,260,000,000. Substantial commitments have been made with respect to capital expenditures in future years.

~ 37 ,4 .-w-- wu**- + e

• r

e CONSUMERS POWER COMPANY NOTES TO FINANCIAL STATE 5 TENTS-(Continued) f (Including Notes Related to l'nandited Financial Statements) in order to finance this construction program and to meet first mortgage bond maturities of $170,334,000 during the five years ending December 31,1978,it will be necessary for the Company to sell substantial additional securides, the amounts, timing and nature of which have not yet been determined. The sale of ce'rtain securides may be restricted as set forth under " Statement ofIncome". Reference is made to " Construction Expenditures" for additional information regarding the Com-pany's construcdon program.

10. LIMITATION ON DIVIDENDS At May 31,1974, after giving errect to the execution of a $50 million term bank loan in June 1974 and the sale of $60,000,000 principal amount of First Mortgage Bonds and 600,000 shares of New Preference Stock in August 1974, retained earnings in the amount of S82,623,000 are not available for the payment of cash dividends on common stock under provisions of the Articles ofIncorporation of the Company which, except under certain circumstances, prohibit the payment of common stock dividends in cash which would reduce the percentage of common stock equity to total capitalization below 25% There are also other restrictions as to the payment of dividends on common stock which, however, are presently less restrictive i

than the limitation mentioned above. The limitation on the payment of cash dividends may increase as set forth under " Statement of Income."

11. PREFERRED STOCK AND PREFERENCE STOCK Preferred stock is represented by:

Redemption Price Decemist 31 Ntay 31, Per Share 1973 1974 (l'naudited) Thousands of Dolbrs $4.50-547,788 Shares Outstanding.... $110.00 $ 54,779 $ 54,779 $4.52-127,550 Shares Outstanding (less 4.000 shares purchased for re-tirement in 1974) 104.725 12,755 12,355 $4. I 6-100,000 Shares Outstanding.. 103.25 10,000 10,000 $7.45-700,000 Shares Outstanding... 108.00 70,000 70,000 $7.72-700,000 Shares Outstanding.. 108.00 70,000 70,000 $7.76-750,000 Shares Ortstanding... 109.19 75,000 75,000 $7.68-550,000 Shares Outstanding.. 108.00 55,000 55,000 Total preferred stock $347,534 - $347,134 The preferred stock of the Company is redeemable as a whole or in part, at the option of the Company, at the above redemption prices plus accrued dividends to the date of redemption, except that prior to April 1,1978, July 1,1977 June 1,1978 and November 1,1978, the $7.45, $7.72, $7.76 and $7.68 preferred stock, respectively, may not be redeemed through certain refunding operations. The Company is required to endeavor to purchase and retire annually 4,000 shares of the $4.52 preferred stock at a price per share not to exceed $102.725 plus accrued dividends. On April 9,1974 the Company's shareholders approved an increase of 1,500,000 shares in the authorized preferred stock from 3,500,000 shares to 5,000,000 shares. On April 9,1974 the Company's shareholders approved a revision in the Company's Articles of Incorporation to authorize 5,000,000 shares of cumulative $1 par value Preference Stock. In August 1974, . the Company sold 600,000 shares of $6.00 Preference Stock convertible into Common Stock on and after November 1.1974 at 4 shares of Common Stock for each share of Preference Stock. N g, 38 p .. ~ ~

CONSUMERS POWER COMPANY NOTES TO FINANCIAL STATEMENTS-(Continued) (including Notes Related to Unaudited Financial Statements)

12. LONG-TERM

Dear Long-term debt is represented by:

December 31, May 31, 1973 1974 (Unaudited) Thousands of Dollars First Mortgage Bonds secured by a mortgage and lien on substantially all property-2%% Series due 1975 - S 86,324 S 86,324 8%% Series due 1976 60,000 60,000 2%% Series due 1977. 24,010 24,010 3%% Series due 1981. 39,000 39,000 3% Series due 1984 24,075 24,075 4% Series due 1986. 33,255 33,255 3%% Series due 1987. 25,000 25,000 4%% Series due 1987 - 210 210 4%% Series due 1988 34,326 34,326 4%% Series due 1989 - 28,630 28,630 3%% Series due 1990 30,000 30,000 4%% Series due 1990 29,572 29,572 4%% Series due 1991 31.889 31,889 5%% Series due 1996 59,000 59,000 6% Series due 1997. 78,550 78,550 6%% Series due 1998 55,000 55,000 6%% Series due 1998 55,000 55,000 ^ 7%% Series due 1999 50,000 50,000 8%% Series due 1999 55,000 55,000 ( 8%% Series due 2000 - 50,000 50,000 8%% Series due 2001 - 60,000 60,000 7%% Series due 2001 60,000 60,000 7%% Series due 2002 70,000 70,000 7%% Series due 2002 - 50,000 50,000 8%% Series due 2003. 75,000 75,000 Total First Mortgage Bonds ___ -.. S1,163,841 $1,163,841 Installment Sales Contracts Payable (Net of $7,256,000 and $14,069,000 respectively held in trust pending completion of construction ). 31,744 59,631 Sinking Fund Debentures,4%%, due 1994 37,600 37,600 Other.. 4,310 2,333 Unamortized Net Debt Premium (not material by individualissue). 2,154 2,061 $1,239,649 SI,265,466 Deduct-Current Maturities and Sinking Fund In-cluded in Current Liabilities-1 First Mortgage Bonds - 12,688 11,809 Sinking Fund Debentures-- 600 Other 4,021 2,210 17,309 S 14,019 Securities Reacquired for Sinking Fund Re-quirements (not yet retired) 1,479 17,309 15,498 Total Long-Term Debt.. $1,222,340 $1,249,968 k.

CONSUMERS POWER COMPANY NOTES TO FINANCIAL STATEMENTS-(Continued) (including Notes Related to llaaudited Financial Statements) s Under the terms of we Indenture securing the First Mortgage Bonds, the Company is required, on or before October I of each year, to deposit with the Trustee, cash and/or bonds in an amount equal to 1% of the aggregate principal amount of bonds of all series, other than refunding series, authenticated prior to January I of the year of deposit. With respect to all series which have been issued through December 31, 1973, the annual sinking fund requirement is $12,688,000. In addition, an annual $600,000 sinking fund deposit is due on the 4%% Sinking Fund Debentures on or before September 1 of each year. In addition,in June 1974, the Company borrowed $50,000,000 from a bank under a promissory note maturing in 1981 and bearing interest at a fluctuating rate related to the bank's prime lending rate and in August 1974 sold $60,000,000 principal amount of First Mortgage Bonds, I1h% Series due 1994.

13. MAINTENANCE It is the practice of the Company to charge to maintenance the cost of repairs of property and replacements and renewals ofitems determined to be less than units of property, except for such costs as are charged to transportation expenses, stores expenses or other clearing accounts and redistributed from these accounts, together with other charges, to various operating, construction and other accounts. The latter amounts so charged are not considered significant and are not readily determinable. Costs of replacements and renewals ofitems considered to be units of property are charged to the utility plant accounts and charges for the units of property replaced are made to the provision for accrued depreciation and removed from utility plant accounts. Property additions are charged to the utility plant accounts.

14. COMPENSATING BALANCES AND NOTES PAYABLE The Company has agreements with banks providing for short-term borrowings of up to $132,000,000.

In connection with these agreements the Company is required to maintain average compensating balances with the banks, over an unspecified period of time, equal to 10% of the total line of credit plus 10% of the average borrowings outstanding, as determined from the bank's records after adjustment for uncollected funds. There are no legal restrictions on the withdrawal of these funds. In addition, the Company issued j commercial paper from time to time on a short-term basis, generally for periods ofless than one month. O During 1973 and the twelve months ended May 31,1974, average short-term borrowings outstanding amounted to $31,809,000 and $40,189,000, respectively, the maximum amount outstanding at any one time was $82,000,000 and $104,510,000, respectively, and the weighted average interest rate was 7.85% and 9.65%, respectively, excluding the effect of compensating balances.

15. INCOME tax EXPENSE Income tax expense is made up of the following components:

Twelie Months Year Ended December 31 Ended May 31, 1969 1970 t971 t972 1973 t974 (t'naudited) Thousands of Dollars Charged to utility operations-Federat income taxes. $41,023 $38.824 $14,469 511,371 $ 2.718 5(7.778) Stateincome taxes 4.071 4.737 3.065 3,216 2,786 (98) Deferred federalincome taxes. net 9.753 8.936 12,337 15.929 21,133 24.598 Deferred state income taxes, ne' l.209 I,286 1,963 3,043 3.939 4.532 Charge equivalent to investment tax credit, + net 3,416 448 5.751 5,960 14.057 8.237 Total-see statement ofIncome $59,472 554.281 $37,585 $39.5 69 544,633 529,491 Charged to nonutility operations 677 767 536 253 1,091 1,196 Totatincome tax expense 560,149 $55.048 538,121 539,772 545.724 530.687 The Company utilizes liberalized depreciation and the " class life asset depreciation range system" for income tax purposes. Income tax deferred due to the use of these methods is charged to income currently and credited to a reserve for deferred income taxes. As income taxes previously deferred become payable, the related deferrals are credited to income. (See Note 16) s

y 40 t

CONSUhfERS POWER COAfPANY 3 NOTES TO FINANCIAL STATEMENTS-(Continued) l (Including Notes Related to Unaudited Financial Statements) Certain costs, principally interest, capitalized in accordance with the provisions of the Uniform System of Accounts, are expensed for income tax purposes and the tax reduction resuldng therefrom is reflected in the income statement currently as ordered by the Alichigan Public Service Commission. The investment tax credit and job development investment credit utilized as a reduction of the current year's income tax is deferred and amortized to operating expense over the life of the related property. The following schedule reconciles the statutory Federal income tax rate to the effective income tax rates for the five years ended December 31,1973 and the twelve months ended Af ay 31,1974. Twelve Months Year Ended December 31 Ended May 31, 1969 1970 1971 1972 1973 1974 (Unaudited) Federalincome tax statutory rate . 52.8'c 49.2% 48.0 % 48.0 % 48.0% 48.0 % Increase (reduction)in income tax rate resulting from-Certain capitalized construction costs prin-cipally interest, deducted currently for income tax purposes for which no de-ferred taxes are provided in accordance wich the requirements of the MPSC ( 5.4) ( 7.8 ) (12.8) ( 14.0) ( 12.3) ( 14.8) State income taxes, net of Federal income tax benefit 2.0 2.4 2.4 2.8 2.8 2.3 Amortization of deferred investment tax credit (.5 ) (.6) (.7) (.8) ( 1.0) ( I.5 ) Other miscellaneous items ( I.6 ) (.2 ) ( 2.2 ) (2.3 ) ( l.4 ) (3.2) Effective income tax rate 47.3% 43.0 % 34.7% 33.7% 36.1% 30.8 % =

==

=

16. DEFERRED INCOME TAXES

( ' The Company has elected to compute depreciation allowances for income tax purposes on the basis of the accelerated methods permitted by Sections 167 and 168 of the Internal Revenue Code of 1954. The Alichigan Public Service Commission has prescribed that, during the period when the annual allowances for tax depreciation are more than the normal tax depreciation, the income tax deferred is to be charged to income with a concurrent credit to a reserve for deferred income taxes. During the period when the annual allowances for tax depreciation are less than the normal tax depreciation, amounts previously deferred are charged to the reserve and credited to income. The provisions for deferred income taxes subsequent to 1970 reflect the effect of shortened depreciation lives under a " class life depreciation system"in accordance with liberalized depreciation guide lines under the Revenue Act of 1971. Following is a summary of the provision for deferred income taxes: Twelve Months Year Ended December 31 Ended May 31, 1%9 1970 1971 1972 1973 1974 (Unaudited) Thousands of Dollars Accelerated depreciation-Amount deferred during year $11.938 $11,599 515.595 $20.467 $26.656 530.821 Less-Taxes deferred in prior years credited toincome (302) (540) (458) (658) (7475 (854) Accelerated amortization of emergency facil-_ $11.636S11.059 515.137 519.809 525,909 $29,967 tues~ Taxes deferred in prior years credited to income (674) (837) (837) (837) (837) (837) Total 510.962 510.222 514.300 $I8.972 520072 529.130 41 ~.

CONSUMERS POWER COMPANY NOTES TO FINANCIAL STATEMENTS-(Concluded) (including Notes Related to Unsudited Financial Statements)

17. SUPPLEMENTARY INCOME INFORMATION

- Maintenance: The amounts of maintenance, other than those set forth in the Statement ofIncome, that have been charged to clearing accounts and redistributed are not significant. Depreciation, depletion and amortization: In addition to the amounts set forth in the Statement ofIncome, depreciation of transportation and other equipment was charged to clearing accounts in the following amounts: $2,241,000 in 1969, $2,851,000 in 1970, $2,715,000 in 1971, $3.278,000 in 1972,53,375,000 in 1973 and $3,422,000 for the twelve months ended May 31, 1974, Also, depreciation, depletion and amortization was charged to accounts, other than depreciation and amortization,in the Statement ofIncome in the following amounts: $2,959,000 in 1969, $3,311,000 in 1970, $3,688,000 in 1971,58,194,000 in 1972, $10,241,000 in 1973 and $5,972,000 for the twelve months ended May 31,1974. Taxes, other than income taxes, charged to operadng expenses, follow: Twelie Months Year Ended December 31. Ended May 31, 1%9 1970 1971 1972 1973 1974 (Unaudited) Thousands of Dollars Real and personal property taxes - $30,670 $33,295 $36,607 $40,027 $44,092 $46,436 A Payroll taxes 2,908 3,075 3,650 4,21I 5,395 5,869 Michigan State franchise fee 3,212 2,403 3,444 3,854 4,598 4,897 Other taxes 268 289 172 112 75 58 - General taxes-see Statement ofIncome $37,058 $39,062 $43,873 $48,204 $54,160 $57,260 i I y 42

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~ ' Exhibit G G-1 Accounts Receivable Accounts in Arrears - Current Bill Only % of Accounts % of Account $ Sept 1974 Receivable As Of Sept 1973 Receivable As Of Arrears Sept 30, 1974 Arrears Sent 30, 1973 4.8105% $1,863,090 4.4150% Residential $2,521,235 5 Connercial 981,516 1.8844 960,270 2.2756 Industrial 189,376 o.3636 153,349 0 3634 other 20,837 0.0400 7,393 0.0175 Steam 1,142 0.0022 18,917 0.0448 Total $3,714,106 71307% $3,003,019 7.1163% Sept 197h Sept 1973 Accounts Receivable $52,085,752 $42,199,349 Sept 30, 1974 and Sept 30, 1973 / 8 I i ~

T. _._ :: --- = - : G-2 9 Accounts Receivable i Accounts in Arrears - More Than Current Bill $ of Accounts % of Accounts Sept 1974 Receivable As of Sept 1973 Receivable As of Arrears Sept 30, 1974 Arrears Sept 30, 1973 Residential A3,739,124 7.1788% $2,682,994 6.3579% commercial 563,827 1.0825' 41o,345 0 9724 Industrial 219,o86 o.4206 203,63o 0.4825 other 731 0.0014 236 0.0006 steam 20 o.0001 Total $4,522,788 8.6834% $3,297,205 7.8134% O e e E.., r e 9 ~~ ...,m. '~~

e G-3 ', 4, Accounts Receivable i Disconnected Service Accounts Not Charged Off t $ofAccounts % of Account's Sept 1974 . Receivable As Of Sept 1973 Receivable As Of Arrears Sept 30, 1974 Arrears Sept 30, 1973 9, Residential $1,379,998 2.6495% $ 885,505 2.0984% Connercial 264,598 0 5080 151,005 0.3578 Industrial 19,003 0.0365 20,413 0.0484 45 0.0001 Other Steam Total $1,663,599 319407 $1,056,968 2 5047% e I r 9 i e e h N \\_.J

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Accounts Receivable Total Service Accounts-in Arrears % of Accounts % of Accounts Sept 1974 Receivable As Of Sept 1973 Receivable As Of Arrears Sept 30, 1974 Arrears Sent 30,1973 Residential $7,640,357 14.6688% $5,431,590 12.8713% ccennercial 1,809,941 3.4749 1,521,620 3.6058 Industrial 427,465 0.8207 377,393 0.8943 1 Other 21,568 0.c414 7,673 0.0182 Steam 1,162 'o.0022 18,917 0.0448 Total $9,900,493 19 0080% $7,357,193 17.4344% .e n e E / x.. ,r

' ~ Exhibit G G-1 Accounts Receivable 3 t Accounts in Arrears - Current Bill only % of Accounts %ofAccounts Sept 1974 Receivable As Of Sept 1973 Receivable As Of Arrears Sept 30, 1974 Arrears Sent 30, 1973 Residential $2,521,235 4.8405% $1,863,090 4.4150% Commercial 981,516 1.8844 960,270 2.2756 Industrial 189,376 0 3636 153,349 0 3634 i other 20,837 0.0400 7.393 0.0175 steam 1,142 0.0022 18,917 0.0448 Total $3,714,106 7 1307% $3,003,019 7.1163% Sept 1974 Sect 1973 b Accounts Receivable $52,085,752 $42,199,349 Sept 30, 1974 and sept 30, 1973 O / s e 9 e y 9 g - ~. .- -.}}