ML19329E861

Summary of 740725 Meeting W/Util in Bethesda,Md Re Applicant Present Financial Position & Details of Financial Data.Util 740717 Prospectus Rept Encl

ML19329E861
Person / Time
Site:	Midland
Issue date:	08/22/1974
From:	Engle L US ATOMIC ENERGY COMMISSION (AEC)
To:	Boyd R, Giambusso A, Moore V US ATOMIC ENERGY COMMISSION (AEC)
References
NUDOCS 8006180658
Download: ML19329E861 (51)

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AUG 2 21974 DOCKET NOS.:

29 AND 50-330 THIS DOCUMENT CONTAINS P00R QUALITY PAGES APPLICANT CONSUMERS POWER COMPANT FACILITY

MIDIAND UNITS 1 AND 2 i

' i SUmfARY OF MEETING FOR DISCUSSION OF THE CURRENT FINANCL\\L STATUS OF l

CONSUMERS POWER CCHFANT (CPC) t A meeting was held on July 25, 1974 in Bethesda, Maiyland to discuss

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the appliaant's present financial position and the details of financial data previously submitted. An attendance list is attached as Enclosure 1.

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REGULATORY STAFF CONCEICIS:

The staff eumarized recent indicators of CPC's financial performance and the effect of such performance on the cor:pany's financial ability to continue the construction of Midland Units 1 and 2.

The company's bond ratings were revised downward from Aa (high grade bonds) to A (upper medium grade bonds) by Moody's Investors Service, Inc., on July 9,1974.

e Earnings declined as a result of higher fuel prices; increased high cost purchased power requirements due to the August 1973 shutdown of the Pm14==4es Unit; rising material and' interest costs; and the declining-d==and for electric energy because of energy conservation measures.

Earnings per average comon share declined from A2.77 for the year ended j

June 30, 1973 to $1.79 for the year ended June 30, 1974, 21c below the applicant's annual dividend requirement of $2 per share.

In its announce-ment of the cancellation of the proposed Quanicassee Plant, Units 1 and

'k 2, the applicant sited currently prevailing market conditions for utility securities and present inadequate earnings as reasons for not being

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assured of raising sufficient new espital over the lengthy construction i

period of the project to finance the project in addition to the hundreds of =4114ans of dollars which must be raised for other projects to meet sustomer dammeda over the next ten years. The staff expressed much

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oonearn as to whether or not the applicant, la view of these develop-meats, has a reasonable probability of obtaining the funds necessary t

to sonstruct the M4d1 mad Units 1 and 2.

In reply to the staff's request for up-to-date financial information, the applicant referred to its responses dated June 13, 1974 pursuant to the staff's request of May 29, 1974. Described below are the applicant's addanda to sertain of its responses dated June 13. 1974

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.c SOURCES OF CONSTRUCTION PUNDS h $50 million loan from First National City Bank was executed on June 20, 1974 with interest at 115% of the prime rate for the first two years, n7% for the next two years, and 120% for the remaining three years of the seven-year term of the loan. The loan application did not require a projection of earnings according to the applicant.

$50 million of straight preference stock will be issued in November 1974. m 035 minion miclaar fuel lease is subject to negotiation.

A major New York bank has made a cossaitment based on a five year term

'with interest charges computed at 116% of the prime rate for the first l

two yeare, 117% for the next-two years, and 120% for the fifth and i

last year.

$30 minion in lieu of the proposed $50 million of convert-ible preference stock will be issued in July 1974 (NOTE:

600,000 con-vertible preference shares, a hybrid security scidon.used by utilities, vore actually issu'ed on July 25, 1974 at $50 per share with a 6% dividend rate resulting in a 12% yield according to The Wall Straet Journal of July 26, 1974). The $100 million of first mortgage bonds scheduled for sale in the late sunner of 1974 will be changed to a two-part financing arrangement: $60 million to be sold by negotiation in August 1974 with a twonty year term and a coupon rate of n-3/8%; $50-55 million to be sold later by negotiation with a term of 8-9 years. N $286 million to be raised through external sources during the twelve months beginning

-f Jussa 1, 1974, as described in the company's response of June 13, 1974, l

have been revised as detailed above to amount to $291 minion. Adding the estimated internany generated funds of $97 million, based on the assumption that the Palisades Unit does not operate during the subject twelve months period, to the $291 =1111on results in sources of con-struction funds aggregating $388 million compared with estimated con-

- struction requirements of $364 million.

1 U NES OF BANK CREDIT h appliaast stated that it now has available $132 million as a firm line_of eredit with four large h=h versus the $122 =4114nn line of j

eredit noted in its response of June 13, 1974. h increase in the line r

of credit was meeessary to compensate for the sancanation in June 1974 4

ef a common stock offering.

RATE CAGES h applicant stated that its April 23, 1974 filing for a $72.2 minion

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rate increase is still in the hearing stage which is 50% complete. The requested rate increase of $614,500 for public pumping service use with-i drawn but will be reenheitted to request an increase of $1 million.

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The requested rate increase of $1.5 million for wholesale rates was aettled with the Federal Power Conmission at $1.03 million. The i

i requested rate increase of $192,500 for steam service was approved.

The applicant indicated that it has filed a request with the Michigan Public Service Commission for changes in its fuel adjustnant clause which would recover from ratepayers increases in purchased power costs and provide for recovery on a current basia of increases in the cost of fuel used for generating electric energy and thereby eliminate the l

present two months lag between cost incurrence and recovery from rate-The applicant pointed out that the attitude of the Michigan payers.

Comission will be revealed by its treatment of the requested rate l

increases. If favorable action occurs, the applicant believes that bond rating agencies and investment analysts will be less pesisimistic regarding its financial prospects.

CANCELLATION OF QUANICASSEE PLA'iT, ETITS 1 AND 2 The staff asked the applicant to explain the various factors influencing its decision to cancel plans to construct the Quanicassee Plant. The i

applicant commented as follows:

(1) reference was made to the state-ments on page 4 of its prospectus dated July 17, 1974 for $60 million of first mortgage bonds (Enclosure No. 2), e.g., "... the Cotapany could not be assured of raising sufficient new capital over the lengthy con-l struction period of the project to ' finance the project in addition to the hundreds of millions of dollars which must be raised for other projects to moet customer demands over the next ten years"; (2) construction budgets are avaluated by financial and technical experts and finally approved by the applicant's board of directors. If the probability of obtaining adequate funds from outside financing and internal sources is not favor-l able, the construction program is curtailed. Among many financial constraints is the necessity of maintaining a viable capital structure j

which the applicant considers as 55% long-term debt with the remaining j

45% including common equity and preferred stock; (3) coal-fired generating i

units are superior to nuclear units-with regard to planning flexibility,.

l the shorter construction period, and the regulatory constraints; (4).._

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other construction projects in addition to Quanicassee were clininated orJ eurtailed; and (5) evnergy conservation practices began to be discernible

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in December 1973.7 A 5% decline in residential demand occurred during i

the winter months and was followed by a 2% drop in the spring. Lighting service declined 25% and commercial service dropped 6%-8%. The, applicant revised its forecast of load growth which indicated that a deferral of Quanicassee would be reasonable. It was later decided to cancel the plant largely because of financial constraints.

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QUALITY CONTROL ACTIVITIES h staff emphasized the fact that its financial qualifications review t

is relat ed to the safety aspects of nuclear reactor construction and j

operation, and indicated concern over any cutbacks in quality control and quality aarurense activities associated with the Midland Plant, t

Units 1 and 2.

h app 1 femme stated that safety was paramount and that doubts about its financial ability to construct or operate a

. nuclear facility according to existing safety standards would result in cancellation of the project.

CONSUMERS POWER COMPANY CURRENT ECONOMIES The staff noted that the applicant's earnings per common share of $1.79 for the year ended June 30, 1974 were 21c.per share below the presunt annual dividend requirement of $2 per share (E.nclosure No. 3). The applicant submitted a statement dated June 27, 1974 (Enclosure No. 4) which explained that despite disappointing earnings of $1.79 per share of conemon stock for the 12 months ended May 31, 1974, the applicant's board of directors en June 25, 1974 declared the regular quarterly dividend of 500 a share. h statement included these connaents:

"The company has undertaken stringent economies in order to cut costs. These include a cut of approximately $60 million in the 1974 construction.

budget, the elimination of more than 500 jobs, a total suspension of all motor vehicle purchases, and discontinuance of service building i

construction."

l ESTIMATES OF SOURCES OF CONSTRUCTION EEPENDITURES i

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In response to the staff's request for estimates of sources of system-wide construction expenditures during the construction period for Midland j

the applicant stated that such estimates would -involve projections of I

earnings and would violate certain SEC regulations regarding disclosure l

of information to one party without disclosure to the investing public.

i h staff pointed out that a nember~ef utilities have submitted such projections as====d===ts to their appliaations for construation permits.

l h staff offered to make available to the applicant copias of projections filed by several utilities during the past several months.

t The meeting closed after the applicant agreed to file as an amendment to its CF application the financial data inninding handouts provided the staff during the meeting.

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ENCLOSURE l' MEETING HELD WITH CONSUMERS POWER COMPANY ON MIDLAND UNITS 1 AND 2 DOCKET NOS. 50-329/330 LIST OF ATTENDEES Atomic Energy Countission A. Giambusso V. Moore J. Stolz D. Vassallo I. Peltier L. Engle B. Hurt Consumers Power Company S. Howell J. Bacon J. Bahn B. Fisher W. Boris J. McDivitt

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ENCLOSURE NO. 2

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PROSPECTCS i

$60,000,000 Consumers Power Company FIRST MORTGAGE BONDS,11%% SERIES DUE 1994 interest payable Febraery I and Anquet 1

.4edeemable on 30 dage' notice (a) at any time, et the option of the Compens, as a whole or in part, at 111.?3% to and L,el: ding July 31, 1975, and at decreasing prices thereafter to and including 1sig 21,1992 and thereafter at 100% and (b) commencing August 1,1979 at 100% through operstion of the sinking fund, together la each case with acerned interret; provided, however, that no optionel redemption may be efected prior to August 1,1984 from or in enticipation of menere borroseed at an laterent eoet to the Compang of less than 11.375% per annum.

.1nnual sinking fund payments on each.lugust 1, of $3,000,000 commencing on August 1, 1979, together with a payment at maturity of $15,000,000 on.lugust 1,1994, are calculated to retire 100% of the issue. The Company has the option to deliver New Bonds in lieu of cash and has the non-cumulative option to increase any sinking fund payment by an amount not, exceding such sinking fund payment.

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Appliestion adil be made to list the Neto Bonde on the New brk Stock Exchange.

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE CObibilSSION NOR HAS THE CO3fMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRE-SENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

PRICE 100% AND ACCRUED INTEREST Underwriting Price to Discounts and Proceeds to Publie(1)

Commineione(2)

Compeng(1)(3)

Per Bond..

100 %

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98%%

$60,000,000

$900,000

$59,100,000 Totai,.

(1) M accrued isterest,4f ans, from August 1,1974.

(2) D.e Campany has agreed to indemnify the Underwriters against certain liabmH*=. h -hfrg V~Wt'.

n'.r *1.s Sa.r t.a des of 1933.

(3) Befors deduction of estimated esponses of $190,000 payable by the Company.

g The New Bonds are offered by the several, Underwriters named herein, subject to prior mie, when, as and if accepted by the Underwriters, and subject to approval of certain legal matters by Simpen Bach.:r s-B.1rtl.et emm-l l~ 4- %d-Wt.:ri. !!iuu m ir ihtC L *y.*l a X-w e

sends 1rtil he made on or about August 1,1074, at the office of.1[ organ Stanley f~ Co. Incorporated, 140 Broadway, New York, N. Y., against payment therefor in New Yoric funds.

MORGAN STitNLEY & CO.

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Incorporated July 17,1974

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O Consumers Power Company (the " Company) is subject to the informational requirements of ti.e 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 ann officers, their remuneration, the principal holders of securities of the Company and any material interi. t of such persons in transactions with the Company, as of particular dates, is disclosed in proxy statemem-distributed to shareholders of the Company and filed with the Commission. Such reports. prm statements and other information can be inspected at the office of the Commission at Room 6101,11001.

Street. N. W Washington, D. C., where copies can be obtained from the Commission at prescribed raret.

In addition. renorts. nroxy statements and other information concernino the Camnany can Iw inspects.d at th: stuccs of tut.Nc. Yor Ste: 1.:::n==;:, th: Dctroit Sicca 1.xchange :nd the..

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Exchange. The Company's executive offices are located at 2I2 West Michigan Atenue, Jackson.

Michigan 49201 (telephone number: 517-788-1030).

No person is authorized to give any information or to make any representations other than the c contained in this Prospectus in connection with the offer contained in this Prospectus and, if given er made, any such information or representation must not be relied upon as having been authorized by the Company or any Underwriter. Neither the delivery of this Prospectus nor any sale made hereunder shat!.

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 to as the 'New Bonds.

TABLE OF CONTENTS Page Pm The Company.

3 Operating Statistics...

23 Use ofProceeds.

3 Description of New Bonds -

25 Construenon Expenditures.

3 Experts.....

.... 25 Capitalization.

5 Legal Opinions =

28 Statement ofIncome 6

Underwriters...........

.... 29 hemea 10 Report ofIndependent Public Accountants.. 31 Regulation 15 Financtal Statements..................

32 IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER. ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICES OF THE NEW BONDS AND ANY OTHER BONDS OF THE COMPANY AT LEVELS ABOVE THOSE WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NEW YORK STOCK EXCHANGE OR IN THE OVER.THE.

COUNTER MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT l

ANY TDIE.

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v 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 populadon of the terdtory 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 refming, paper and paper products, food products and a diversified list of other industries.

USE OF PROCEEDS The net proceeds from this sale of New Bonds will be used to snance in part the Company's construction program and to repay short-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 and the New Preference Stock referred to below short-term borrowings will aggregate approximately

$120.000,000.

- 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 maturides 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 certain securities may be restricted as set forth under" State nent ofincome". The Company presently proposes to issue 800,000 shares of Preference Stock (the "New Preference Stock"), the New Bonds and approxi-mately S45,000,000 of additional First Mortgage Bonds in the summer of 1974, and it may issue additional equity securities later in 1974. The sales of the New' Bonds, the additional First Mortgage Bonds and the New Preference Stock are not dependent upon one another. References herein to S105,000,000 of First Mortgage Bonds include the New Bonds and such additional First Mortgage Bonds.

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 $360,318,250, which estimate gives effect to a decision by the Company in June 1974 to erTect a retrenchment program involving the elimination of approximately 550,000,000 from its construction budget for 1974. The 1974 program as projected includes $197,552,000 of expenditures towards the construction of three major projects as follows:

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Pr$et nd Year of Total Cost Locarlos Features Operasian to Compsny(a)

P. isades Plant Nuclear fbeled with inivial ruit e.gf er:%.:: 700.000 m

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. va.tt3uren tulowatts and ultimate capacity of about 773.000 kilo-Couct). Michigan) watts

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.J, l XTJ.trJJ iiiuwam and e.uuu.uuu pounds per hour of ond unitin 198-)

%c.nsgan i process steam (b)(c)

D E. Karn Two oil fired units at existing plant to add approximately Unit 3 in 1974, Unit 4 S 234.000,000 P! ant. Units 1.307.000 kilowatts orcapaczt)(d )

in 1975

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(a) Expenditures have been made or are scheduled to be made as follows:

Prior to t974 t974 After 1974 P f.sades Plant 3180.048.000 5 8.552.00n s

M.dland Plant

$104.073.000 5101.000.000

$ 734.927,000 D. E. Karn Plant S 92.578.000

$ 88.000.000 5 53.422.000 (b) Reference is made to " Atomic Energy Commission" under " Regulation" and to Note (b) m the St<lcuscut =Aluwwc inciciu.

(c) The steam will 1 e furnished to The Dow Chemical Company for industrial processes.

(d) In connection with the construction of the two oil fired utdts and the conversion of other units rn burn oil, the Company has a purchase agreement with a Canadian supplier to import oil from Canada.

See " Business-Bectric Fuel Supply".

He 1974 construedon program includes $162,766,250 for other facilities, including other electric production facilities, power supply projects, electric transmissiot. and distribution facilities, gas supply )

lines, gas production, transmission and distribution facilities, steam additions and general and mis-I cellaneous additions. Of this amount,it is estimated $112,934,650 will be expended for electric additions.

341,906,000 for gas additions and 57,925,600 for general, miscellaneous and steam additions.

De Company has cancelled plans to construct a two-unit,2,300 megawatt nuclear power pla Quamcassee, Michigan forinidal use in 1984 and 1986. The decision to canal the S t.4 billion project was made for the reason that in view of currently prevailing market conditions for utility securities and the j Company's presently inadequate earnings, the Company could not be assured of raising sufficient new j capital over the lengthy construction period of the project to finance the project in addition to the hundreds (

years. Total costs (not including land costs) incurred to date for the plan of mdhons of dollars which must be raised for other projects to meet customer demands over the next ten which consist of engineering, license application, environmental impact studies, and other preliminary l

. work. He Company will explore the possibility of obtaining authorization from the AEC to locate a }

nuclear plant on this site at some time in the future and therefore some of the costs may be salvageable, i butit 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 depends upon matinuing availability of

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substantial amounts of outside capital from frequent sales of debt and equity securities over the foreseeable future. He balance of funds needed is expected to be provided from internal sources. The Company will need sigmficant and timely rate increases if revenues and income are to be maintained at levels which will result in sufficient internally generated funds and which will permit external financing of its construction program and its operational requirements at reasonable cost. If adequate funds cannot be obtained from outside financing and internal sources, the Company,'o,f necessity, will further curtail its construction program to the extent feasible. The Company is currently studying its revised construction schedules and

/,f budgets with a view to additional future cutbacks should the unavailability of funds make this necessary.

Any expenditure reductions which might result from the deferral of construction could be significantly offset by cost escalations and by generalinflationary price trends.

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i CAPITALIZATION

'Ihe following table sets forth the capitalization of the Company as of May 31,1974 (excluding current portions oflong-term debt) and as adjusted to reflect the balance of the S34,700,000 principal amount ofInstallment Sales Contracts with the City of Marysville and the Charter 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 execution of a S50.000,000 term bank loan in June 1974, the sale of $105,000,000 principal amount of Fir Mongage Bonds in the summer of 1974 and the sale of the New Preference Stock.

Outstandias

% of Title of Ca, May 31, As CapitaHandes 1974 Adjusted As Adjussed husands of Douars Long-term debt (1)

First mortgage bonds.......................

$1,151,153

$1,256,153 j

Installment sales contracts payable..1......

59,631 73,700 4%% Sinking fund debentures due 1994..

37,000 37,000 i

Term bank loan (2) 50,000 Otherlong-term debt..

123 123 Unamortzzed net debt premium..

2,06I 2,061 Totallong-term debt...

$1,249,968 SI,419,037 56.0%

Preferred stock, cumulative, S100 par value, authorized 5,000,000 shares, outstanding 3,471,338 shares (1)..... S 347,134 S 347,134 Preference stock, cumulative, 31 par value, authorized 5,000.000 shares, none outstanding at May 31,1974 and 800,000 shares as adjusted ( 1 ).....

800 Capitalin excess ofpar value of preference stock....

39,200

' Total preferred and preference stock.....

S 347,134 S 387,134 15.3 %

Common stockholders' equity Common stock, $10 par value, authorized 32,500,000 shares, outstanding 26,233,838 shares (3)............. S 262,338 S 262,338 Capitalin excess ofpar value..

247,231 247,231 Retained earnings ( 1).

227,852 227,852 Less--Capital stock expense.......

(7,005)

(9.540)(4)

Total common stockholders' equity.......... S 730,416

$ 727,881 28.7%

. Total capitalization (5)......

........ S2,327,518 S2,534,052 100.0 %

(1) Reference is made to Financial Statements and notep related thereto.

d) Os June 20,1974 the Company borrowed $50,000,000 from a bank under a pronussory note maturing in 1981 and bearing interest at a fluctuating rate (13.225% at June 27,1974) related to the bank's prima lending mte The pme-!! rere ::cd to :: pay der: t::= bcr ce. ;;: rhid mcunt:d t:

573,650,000 as of June 27,1974.

(3) The number of shares issuable upon conversion at the initial conversion price will be reserved for

-,arn ua,a wu, esc uf de New Freierence Su.ck.

(4) This amuunt gives etTect to estimated expenses payable by the. Company.

(5) The Company has been authorized by the Federal Power Commission to incur short-term borrowings of up to $300,000,000.

Tue Company has agreements with banks providing for short. term borrowings of up to $132,000,000. As of May 31,1974 short-term borrowings amounted to $104,510,0 and the current sinking fund requirements on long-term debt amounted to S13,288,000.

See "Use of Proceeds."

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y CONSUMERS POWER COMPANY STATEMENT OF INCOME The following Statement ofIncome of Consumers Power Company for the five years ended Der;e:,ber 31, ~1973 has been examined by Arthur Andersen & Co., independent public accountants, as set f rth in their report elsewhere in this Prospectus. The Statement ofIncame for the twelve months ended.my 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 :0.:nal

)

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2 should be read in conjunction with the Financial Statements and related notes appearing elsewhere r: this Prospectus.

j Veer Faul nl Deccenhee 11 To 's.

Mootts Enoed 1%9 1970 1971 1972 1973 May31.1974 i'U.a.,i:.si, T' ousands of Doilan m

Operating Revenue: (a) l Elec:rie 3308.000 5334,904 S364,230

$4:6,994 5495,723 S522.5 ~4 Gas

__ 240,536 273.874 236,091 332,085 337.906 356.!!!

Steam 1.239 1,212 1,296 1,374 1,325 1.3 s0 Totaloperanng revenue 5549,775 3609,990 565I,617 S750,453 5534.954 S910.125 Oper. ting Frpen<a and Taxes:

Operation (b)(c)(d) 3280,384 3324,789 337?,987 5444,489 S493,755 S$5!.C5 Mastenance 26,121 32,818 31,512 41,187 44163 u.529 j

Depreciation and amoruzation 51,881 f 5,608 58,210 62,937 73.428 7 fi5 1

General taxes 37,058

.9,062 43,873 -

48,204 54,160 5'.2f0 Liceme taxes (e) 59,472 54,281 37,585 39,519 44.633 29.491 Total.wr expenses and taxes -

$454,916 3506,558 3550,167 S636,336 5710.239,

5792.lL* >/

Net operatingincome 3 94,859, 3103,432 5101,450 S114,117 SI24.715 511.325 OtherIncome:

Allowana for funds used during construc-tion (f)

S 8,421 S 14,108 3 21,862 S 25,455 S 23.223 5 2i,942 Income ofSubadmnes 1,350 1,650 1,897 1,920 3,341 4 01 Gain oo ssa.spuanon oflong. term debt 769 1,074 1,260 1,418 1,609

!.6:3 Other. net 282 530 889 526 1,990 2.132

$ 10.822 3 17,362 3 25,908 3 29,319 5 30,163 5 30.38d

, Netoiberiscome Innenet Charges:

)

Innesest oniong-term debe S 35,867 5 44,774 5 53,829 S 63,754 S 71,322 5 74,669 Osherinsesenschar==

2.854 3,188 1,749

_ 1,504 2,663 4,092 Tosalinsorset char =~

S 38,721 S 47,962 - S 55,578 5 65,258 5 73.985 5 78.761 NetIncome

, S 66,960 3 72,832 - S 71,780

$ 78,178 5 80,893 S 68.952 Dmdeedson PseferredSeock 3,534,

3.517 7,108 11,251 17,746 21.902 Net Jacome AAer Dmdends on Preferred S"

3 63,426 3 69,315 3 64.672 S 66,927 5 63,147 s 47.050 Earnags per Share of Common Stock (g) _ 3 2.79 2.95 5

2.69 5

2.72 S

2.41 5

1.79 Cash Dividends Declared Per Share of Com-mon Stock (h) 3 1.425 S

2.00 2.00 S

2.00 S

2.00 5 2/.o 223 Ratio ofEamings to Fixed Charges (i) 4.28 3.67 2.98 2.81 2.69

:==

._ _m Ratio of Earnings to Fixed Charges Plus Pre-ferred Dividend R6. sts (Prv. Income

' Tax Basis) (i) 3.65 3.25

• 49 2.23 1.96 1.59 See Notes to Statement ofIncome 6

7.

3 y

NO"IIS TO 3TATEMENT OF INCOME (Inchsene Neses Reinsed to Umsensed Seasement of Imeeme)

(a) On January 18,1974, the Michigan Public Service Commnunn ("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 interim increases aggregating $50,000,000 divided equally Setween electnc and gas rates which were placed in effect November 10, 1973. Of the authorized gas rate increase, appronmately $14,571,000 became effective on April 20,1974 after the second unit of the Marysvdle Gas Reforming Plant became fully and commercially operable. In response to requests by the Machigan Attorney General and others for a rehearing on the authorized rate increases, the MPSC o'n March 27, 1974, reafHrmed the rate increases granted on January 18,1974. In addition, the MPSC noted that the authorized rate schedules we= based on capital expenditures relating to the Marysville Gas Reforming Plant in the amount of $119,700,000, which amount represented estimated costs at the time of the Company's rate application, and that mnsideration for rate purposes of subsequent additional costs i

esumated to aggregate $35,300,000 is to be delayed pending completion of a performance audit with l

respect to the Marysydle Gas ReforminTPlidiE6iidii ted underthe-auspices of the Commmion's Staff.

1 c

$974 the Company submitted an application to the MPSC to increase'itsliectncJates by not l

f ess than $72,159,000 annually and at the same time requested partial and interim reliefin the aniount of

$54,659,000 annually. It is not expected that the MPSC will act upon the application or the request for

-partial and interim relier un," !w ia 1974 following hearings and otherinvestigation of the requests..

V N

1 Litigation is pending in the Ingham County Circuit Court wit!rrespectro electric and gas rate incre~ases which became effective in 1969 and which are subject to refund relating to the reduction and elimination of the Federal income tax surcharge. In IMO, the Coun 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 possib'e refund, with interest, of a portion of the amounts collected. As a result of funber authorizations by the MPSC in December 1971 to increase electric and gas rates effective i

December 14 and December 23, 1971, respectively, the Company believes that there are no refund i

obligations with respect to servim rendered subsequent to these dates. In March and April 1974, the Court ruled in favor of the MPSC wn respect to the income tax surcharge issue and ordered the Company to i

I 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. 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 litigation also invcives a claim with respect to the legality of the electric rate increase, which became effective in 1%9, ca the grounds that the increased rates became effective by Coun (,rder in October 1969, that the MPSC 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 of approximately $7,763,000, plus interest charges which are presently not capable of determination, for which no reserve has been providad.

(b) Throughout 1972 operations of the Palisades Nuclear Plant were significantly restricted by the Atele Energ Cc=me ("AEC") and, accordingly, the Company apitalized an allowance for funds

/

n used during construction (35,600,000) and other costs normally charged to operations ($2,000,000) on a pro rata basis reflecting actual output of the plant during the year. In December 1972, the cast of the plant includiny feet (0 76 7od 000) wa= ta.a..fer+-d to p!2nt in :erri:.

The Palisades Nuclear Plant has been shut down since August 1973 for repairs to certain reactor vesselinternal components ard the steam generators of the plant. It was thought that repairs had been completed and the plant would be retumed to service during May 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 l-generators failed to withstand the pressure buildup. This will require funher testing and repair which will further delay the start up. In addition, public hearings may be required by the AEC before the plant is returned to commercial operation. During the period of shutdown the Company also installea cooling 7

l

~ -

r 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 S7.221,000 (S.27 per share ofcommon stock) for the year ended December 31,1973 and $16,687,000 (S.64 per share of common stock) for the twelve months ended May 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, S37,170,000 in 1969, $39,465,000 in 1970, S40,770,000 in 1971, S47,953,000 in 1972, S49,213,000 in 1973 and S51,817,000 for the twelve months ended May 31,1974. relating to the cost of gas purchased from these subsidiaries.

(c) Refcrcace a mde m %re 7 re Finann,M 5tatement: ferinfc.==ic. rc'4s ;o ifa; Cumpoun pension plap.

(e) Reference is made to Notes 15 and 16 to Financial Statements forinformation relating to income taxes.

(f) He allowance for funds used during construction, induded in other income, is defined in the apolienYe r g ila cry sy~e rs of ec: curs u ie nct cost, dad 2s the period of construction, of horrowed funds used for construction and a reasonable rate on other funds when so used. Under established regulatory practices, the Companyis 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 mmposite 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 May 31,1974, respeedvely. 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 Anannng other than mmmon 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 May 31 l974, respectively.

p (g) Earmags 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 May 31,1974.

(h) He quarterly dividend on common stock formerly dedared in December was declared in January starung in 1970. Herefore, the dividends declared in 1969 only include three quarterly dividend dedarations. Dividend payments have matinued to be made in the months ofFebruary, May, August and November.'

'(i).For the purpose of computing the ratio of earningsItalixed charges, earnings represent the Company's net income (including allowance for funds used during construcuon), before deducting income taxes and fixed charges. Fixed charges represent the Company's interest expense and amortization ofdebt discount, premium and expense. In addition, for the purpose of computing the ratio of earnings to fixed charges plus preferred dividend requirements (pre. income tax basis), preferred dividend requirements represent an amount equal to earnings which, on a pre-tax basis, would be required to meet the preferred stock dividends.

(j) Reference is made to " Construction Expenditures" for information relating to cancellation of the Q-h Nuclear Plant project.

He annual interest requirements on the New Bonds will be $6,825,000.

8 y

---e 7

-- - -+

p

,3 The pro ferma ratio of earnings to fixed charges for the 12 months ended May 31,1974, is

- approximately 1.S2, based on long-term debt outstanding at that date (excluding current maturities and f

1 including the balance ofInstallment Sales Contracts executed in August 1973 and February 1974) after r

i giving effect to the issuance of the New Bonds, the proposed issuance of $45,000,000 principal amount of First Mortgage Bonds at an assumed interest rate, the retirement of all short-term borrowings, and the execution of the $50,000,000 term bank loan in June 1974.

The pro forma rado of earnings to Axed charges plus preferred and preference dividend requirements (pre-income tax basis) for the twelve months ended May 31,1974 is approximately 1.30, based on the adjustments in the foregoing paragraph and a full year's dividend requirements on preferred stock outstanding at that date, after giving effect to the proposed issuance of the New Preference Stock at an assumed dividend rate.

The earnings 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 carnings coverage, before income taxes, of at least two times pro forma annual interest charges on bonds.

The Company's Charter requires for the issuance of additional shares of Preferred Stock specified earnings coverages, including muumum camings coverage, after income taxes, of at least one and one-half times the pro forma annualinterest charges on allindebtedness and preferred dividend requirements. On the basis of these formulae, the pro forma coverages (assuming the issuance of $!05,000,000 of First Mortgage Bonds) for the twelve months ended May 31,1974 (computed including allowance for funds used during construction) would be, respectively, not less than 2.01 times as compared with the requirement of at least two times and (including the $50,000,000 term bank loan) not less than 1.22 times as compared with the requirement 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.

At May 31,1974, after giving effect to the execution of the $50,000,000 term bank loan in June 1974, s

the balance ofInstallment Sales Contracts executed in August 1973 and February 1974, the proposed issuance of $105,000,000 principal amount of First Mortgage Bonds and the proposed issuance of 800.000 shares of the New Preference Stock, retained earnings in the amount of $106,306,247 would not be available for th'e payment of cash dividends on common stock under provisions of the Company's Articles of Incorporation 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 12 months ' ended May 31,1974 from the 12 months ended December 31,1973 is principally the result of continuing inadequate levels of electric and gas rates in relation to increases in operating costs (principally purchased power, fuel and gas, including the continued cost of replacement power during the Palisades Nuclear Plant shutdown)' higher interest costs, continuing inflation and a flattening demand for electncity and gas. The decrease in earnings per share of Commnn Stock in w?3 and for the 12 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 numbei of shares of Common Stock outstanding. The Company bclicvcs that the most significant fac:crs accounting 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 re:pect te g25 riles, the Compey believe= that the flattening demand wm due in large part to warmer than normal weather and the cuat41nnent of sales to scasonal customcrs as wcil as cunservction mc:=res ::d 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.

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BUSINESS Electric Service The Cornpany 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, Muskegon, Pontiac and Saginaw.

He Comcany owns and onerates electric generating plants with ag.~ pe e:pacit r of 9 m 100f::

bbea< ind, n.-10 en nnd:r"Ccn::.:::icn Enpendirarci" r.bovc, = waaru Jug addIdunai piana *1dci:

mill add 2.607,000 kilowatts to the Company's generating capacity as follows:

j Kilowatts Present Ph:::s Plants Under Construction Fossil fuel steam-electric plants (6 et p ese'it, 2 tmitstmderconstruction)

Coal 2,400,000 Oil 542,000 1,307,000 Nuclear steam-electric plants (2 at present, I under construction)..............

77?,000(a) 1,300,000 Pumped storage plant (I) 994,500(b)

Hydroelectricplants(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 hinian" 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-tnird 'of the capacity from the plant until early August 1983 and one-sixth of the capacity from the plant thereafter until early August 1988 He 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 mordination agreement with He Detroit Edison Company providing for coordination of planning, design, mostruction and operation of the electric systems of the parties, the Was of mutual assistance during emergencies'and the effecting of the maximum practical emnomyin

p. Jug the electric power requirements ofeach system. Here are four 138,000 volt and four 345,000 voitinterconnections between the systems. Rese interconnections permit a sharing of the reserve capacity of the two systems and a substantial reduction in investment in plant facilities for each company. He Company and The Detroit Edison Company have filed a joint petition with the MPSC for approval of certain emergency procedures to be invoked, if necessary, in the event of andeipated or predictable energy shortages in the electric service areas of the two companies. In January 1974 the MPSC authorized oc an interim basis emergency electrical procedures to be followed by the two companies and a proceeding is currently pending before the MPSC to determine whether the procedures should be permanently adopted.

The Company has an agreement with The Detroit Edison Company and Ontario Hydro for interconnecdons linbng the power systems of the Company and Detrciit Edison with the power system of Ontario Hydro and also providing for mutual assistance during emergencies, improved reliability of bulk 10

. _ _ _. _ ~

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pewer supply and the effecting of economies by coordinated development and exchange of power. Two 236.000 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, Indiana and Illinois providing for interconnection services and other transactions. The Company also 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 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 May 31,1974 was 4,394,295 kilowatts on August 27,1973.

Electric Fuel Supply In addition to substantial and continuing increases in fuel costs, the Company is also experiencing l imitations and restrictions on the availability of fuel.

For the twelve moriths ended May 31,1974, approximately 55% of the Company's kilowatt-hour recuirements were obtained from coal-fired generation,6% from nuclear,7% from cil,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 deper. dent 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 requtrements in 1974. These long-term contracts provide' for deliveries through 1977 and in some

nsucces 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

. ear 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 located in Ohio. The remaining long-term xntract coal supplies are from mines in northern West Virginia, Indiana and western Kentucky. Due to

hertages 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 calance of the Company's coal requirements not under long-term contract and that quantity of coal under

ong-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 contracM, At present the price far such spot purchases of coal with less than 1% sulfur ranges from S25 to S37 per ton as compared to Iong-term contract prices of from Sl3 to S20 per ton.

As of June 1,1974 the Company's coalinventory amounted to approximately 79 days' supply. The Company is undertaking a program to maintain or improve coal inventories to. level equal to or above normal seasonal levels because of the expiration in November 1974 of the labor agreement between the Lnited Mine Workers and the mine owners. Future changes in governmental requirements pertaining to the coat industry could adversely attect cost and avattaoiltty ot' coal supplies.

r>ee "Regu-

!ation-Compliance with Environmental Requirements" for matters pertaining to meeting EPA regu-

.ations on coal-6 red generating units.

The Company is negotiating for supplies oflow-sulfur coal from two or more new mines which are to Seco. te cperational from 1976 to 1978. These new sources are intended to supply low-sulfur coal to

. ace.te me:,r nm:,3 t..ng :e.=..wrge-. net n 3_:. :My rcM - e c..

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r ! wpph.a at c s cr =erc ec exi3 ring generating units. Although there is no assurance that the Company wi!! complete such negxiations. the Company believes that any successful completion of current negotiations for new coal applies will require the Company's participation in partial or total ownership of the coal mines..

t In connection with generating units which burn crude oil and the construction of new oil-burning

cnerating unin. the Company expects to import from Canada approximately 2.700,000 barrels in 1974, r.

reasing to an annual rate of approximately 11.000,000 barrels beginning in November 1975. As a result f uses and other increases in cost, imported low-sulfur crude oil from Canada increased m S12.46 ~r 1i

C Q

j 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 ir its rate schedules for electric service. For additional informadon see " Gas Service" below.

The Federal Energy Office ("FEO") adopted mandatory fuel allocation regulations, under which volumes of middle distillates, residual and crude oils are to be allocated. Such regulations are ::cs administered by the Federal Energy Administration ("FEA"). The Company is to be allocated 100 ofits 1972 volume of middle distillate oil (as reduced by application of an allocation factor), or as otherm determined by the FEA. but not less than 100% of current requirements for nuclear plants, start.up, tes.n.

and flame stability af ca 3-fire:i p!nnt:: (:-.. p fhr Whg u,;.-W. C.ade.md residuai niit ums n +"e: r r

&ct:ic :n:mtion a m ' e aiiocated among untmes using such fuel on th-basis of the amount availa':.'e s

o and the recommendations of the Federal Power Commission ("FPC") so that, if cecessary, each utSty "within appropriate groupings" will absorb an equal percentage cutback of power generation to *he maximum extent pe<% While the Cornpuy is not assured or receiving its required allocations, and the failure to receive the same could have an adverae effect upon its supplies of oil and the Compa:y's generation, to date mch suppHes hwe been adqu:tc to nuet the Co;npaay's requirements.

he Company's overall average cost of fuel burned has increased substantially, as shown below. and funher increases are expected for the foreseeable. future.

Cents per Million Bru Percentage of Total Fuel Consumed Fuel Consumed 1973 1972 1971 1970 1%9 1972 1972 1971 1970 19 0 e

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Coal 48.9 44.0 42.9 36.6 31.2

0.1 75.5 85.0 86.2 92.9 0i1 85.4 77.8 79.9 84.I 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 24.1 24.3 27.8 36.0 33.9 14.9 11.8 2.2 2.2 2.5 AllFuels 49.6 44.2 43.8 37.4 31.8 100.0 100.0 100.0 100.0 100.0 For the five months ended May 31, 1974, the Company's overall average cost of fuel consumed increased to 69.lc per million Bru as a result of higher fuel costs and a lower percentage of nuclear fuei consumed. For this period, the percentage of total fuel consumed and cost per million Btu of fuel a>nsumed for the four fuel classes are, respectively, coal: 81.5% and 59.0c, oil: 9.2% and 157.6c, gas: 7.49 and 83.2c and nuclear.1.9% and 20.14.

The Company's present nuclear fuel requirements are for the Big Rock Point Plant and the Palisades Nudear 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 hernfluoride; enrichment of the uranium hexafluoride; fabrication of nuclear fuel assemblies; and transportation, repromssmg and reconversion of the " spent" nuclear fuel assemblies. The contracts cover requuements for a mmimum of the next five years. These agreements a're with major private industrial suppliers of nuclear fuel and related services and with the United States government.

He Company also has contracts for several but not all segments of the nuclear fuel cycle for the Midland Plant. Dese include contracts for the supply of uranium ore concentrates, conversion to uranium hexafluoride, and fabrication of nuclear fuel assemblies for the initial cores for the Midland Plant. In Ia:e June 1974, the Company applied to the AEC for enrichment service for initial cores for the Midland Pir.nt but the AEC declined at that time to execute contracts for such services. If the AEC continues to decline to furnish such enrichment services for a substantial period of time and if alternative enrichment services are not available, initial operation of the plant could thereby be delayed.

Gas Service The Company renders gas service in an area of approximately 12,900 square miles hadng a

~

population of approximately 3,800,000. Principal cities served are Bay City, Flint, Jackson, Kalamazoo.

Lanstng, Pontiac, Royal Oak, Saginaw, Warren and a number of suburban communities near Detroit.

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e The Company owns gas tran: mission and distribution mains and other gas lines, compressor stations and facilities, and storage rights, wells and gathering facilities in several fields in Michigam The Company and Michigan Gas Storage Company ('_' Storage Company"), a wholly-owned subsidiary of the Company, store a portion ofits gas supply in the warmer months of the year for use in the colder months of the year.

For the twelve months ended May 31,1974, approximately $2% of the Company's gas supply was obtained from Trunk'ine Gas Company ("Trunkline"),25% from Storage Company,8% from Michigan fields,9% from Marysville Gas Refornung Plant and 6% from miscellaneous spot purcha;,es.

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 of 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 penod.

These curtailments aggregated approximately 64 billion cubic feet of gas in 1973 and are expected to be 90 bi'. lion cubic feet in 1974 and could increase to a higher level in the future. The curtailments imposed by the pipeline companies are the subject of pending proceedmss before the FPC, and orde:s issued in such proceedings will determine the curtailment procedures ultimately to be placed into effect by the pipeline compadies.

The maximum daily sendout of natural gas for the Company through June 30,1974 was 2,283 million cubic feet on January 15, 1972. Of this total, 691 mdlion cubic feet were purchased from Storage Company,897 mdhon cubic feet were delivered from the Company's storage fields,649 million cubic feet were purchased from Trunkhne and 46 mdlion cubic feet wem obtainsd from producing Michigan fields.

The peak-day system capacity is in excess of 2,800 million cubic feet.

la May 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 l

passed on to the Company under Storage Company's cost-of-service rates approved by the FPC.

Panhand!c'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 staff. A proposal of settlement has been tentatively reached which'would result in an increase in Storage Company's rates by approximately $3,400,000 per year. In May 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 proceedags through the operation of cost-of. gas-sold clauses contained in its retail rate schedules for gas service.

As a consequena of the national gas shortage and in order to protect service to its existing customers and to limit new customer requirements to the gas supply available, between May 1973 and May 1974 the Company issued permits only to new residential and home heating customers. In late May 1974 the MPSC authorized the Company to attach a hmited number of new small commercial and industrial customers in add: dan to new residenti.d and home heating customer:. The Comp 2ry is ur.at!e *o p ed!-t Wthritvi!!

be required in 1974 and later years to cease adding customers or to currail gas service to any ofits e...,~..

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...... customers or whether it will he able to continue attaching additionalload.

Such actions are dependent upon the extent of future curtailments on the part of the Company's pipeline suppliers referred to above and the receipt of additional gas supplies from the sources of supply hereinafter described. The Comosnv has filed a oetition, which is pending. with the MPSC for approval of a i

aak;Lt progran for fL i;m cu.:cmcr, - ' ' M Vit Secome ns ci:1 y.

The Company has initiated several programs to provide it with additional supplies of gas. Northern Michigan Exploration Company (" Northern"), a wholly-owned subsidiary of the Company, has carried on a gas exploration program in the northern part of the Lower Peninsula of Michigan for the past several 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 43 oil or gas wells in several fields in 13 y

,q conhern Michigan. Further rilling and development will be required to u.armi.x the au.e v:

which these wells are located. and additional geophysical surveys and explorator) weln are :<.: w.: :

nonhern Michigan.

Nonhern is also participating with others in the exploration and desclopment of 93 '

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offshore Louisiana in 21 tracts and Northern's net ownership therein is 10.900 acres. Four p

...tr.:

platforms have been set on three of these tracts: development drilling is in progress on t's. ' ve platform 3 and has been completed on one platform. In June 1974 Northern app!ied :o h H'f authorization to sell and arrange for the transportation of up to 40 rntilion cubic feet < t gas pcr.: 2 Company from these three tracts. Delivery to the Comn a v - '.....'

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dev.-!e.pm.- % n t n,.uu* hM.- m: : d J ;37.; ano will be subject to the receipt ef r-;...

approvals, which is not assured.

The Company's geclogists and petroleum engineers estimate that Wnhern presently he - s. s interests which =meent to pproxianiately u mt!! ion barrels cf proven oil reserves and appr.Nmn:.- :

million barrels of probable oil reserves as well as approximately 135 billion cWe '-

c' p." te A+

reserves and approximately 40 billion c. bl. le.t a. probaone pc reserves. Referen,e i> made to Ne : 5 "

the Financial Statemems for funher information relating to Nonhern.

The Company has gas purchase contracts with several producers in the nonhern Mi:higan ;re; And has placed in service pipelines to transport gas purchased in this area :o its integrated gas tranic.mc:

system. By the end of 1973 the Company was receiving approximately 35 mi!! ion cubic feet of nat r.. ;u per day from this nonhern Michigan area and deliveries are expected to increase to F milhen cabi: fer by the latter part of 1974. The Company also is engaged in a gas exploration progran-in the souther ; r s' the Lower Peninsula of Michigan.

The Company has been receiving gas from producers near Mason. Michigan Purchases frcr b source amounted to approximately 15 million cubic feet of gas per day at the end of 1^~3. Du: g 6 3 the Company also made spot purchases of gas aggregating approximately 22 billion cubic feet and pian + :'

make further purchases in 1974.

The Company in April 1974 completed the construction of a gas reforming plant at Mr sv."e.

Michigan for convening natural gas liquids into gas. Such liquids are imported from Canada u. der a purchase agreement expiring in 1988, which provides for delivery to the Company of up to 50//h 51-e:s per day. The plant began production at an average rate of approximately 100 million cubic feet of as per t

day in September 1973, and production up to 200 million cubic feet of gas per day commenced i: A;-il 1974. The cost to the Company of such gas, including overheads, fixed charges, import fees and eg n taxes,is and will be substantially in excess of the present cost of other gas now received by the Compicy from interstate pipelines and other sources and has resulted and will result in a substantial increase m :he cost of service to the Company's gas customers. In connection with the natural gas liquids to M con.er e:

into gas by the reforming plant, as a result of Canadian export taxes and other increased costs. tne feedstock costs about $12.00 per barrel as of June 1974 as compared to less than S4.00 per banel a year earlier. The Company expects to recover substantially all of such additional expense throusc the opera::.2n ofcost of gas sold c.lauses 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 pnce of foreign crude ei!

(other than Canadian) in eastern Canada and Canadian crude oil, with the aim being to have the expe :

price of Canadian crude oil at least equal to the price of foreign crude oil in eastern Canada. Fun.r:

policies of the Canadian government regarding the levy of such a tax are uncenain. Canadian exp:r-limnses and United States import licenses for the natural gas liquids are required to be renewed from ti e to time. The receipt of such licenses is not necessarily assured.

In connection with the natural gas liquids to be converted into gas by the reforming plant. the FEO 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. Subsequani the FEO published revised Mandatory Petroleum Allocations effective June 1,1974. Such allocaur-l regulations are now administered by the FEA. As a result of the revisions. the Company was reqcited x l

. petition for an adjustment ofits base period volume of feedstock. The February 1974 order of the FEO 14

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i will remain in effect 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 Company's ability to serve its gas customers.

Employees The Company has approximately 11,300 employees, of whom about 5,200 cperating, maintenance and construction employees are represented by the Utility Workers Union of America, AFL-CIO. The current working agreement 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 effect 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 4

Compliance With Environmental Requirements The Company and its subsidiaries, Northec and Storage Compar.y, 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 zoning and other regulation i

by local authorities. The Company and its subsidiaries are attempting to insure that their facilities meet applicable environmental regulations and standards. However, it is not presently possible to forecast the ultimate effect of environmental quality regulations upon the existing and proposed facilities and cperations of the Company and its subsidiaries. Moreover, developments in these and other areas may require the Company or its subsidiaries to modify, supple nent, replace or cease operating equipment and facilities, and may delay or impede construcuon and operation of new facilities, at costs which could be substantial.

For many years the Company has 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 generating plants and conversion of electric generating units to burn cleaner fuels. The program through 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 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 cool water at new generating plants before it is returned to its source. The Company made capital expenditures of $45,000,000 in 1973 and estimates that it will make capital expenditures of more than 5330 0T,000 during the five years 1974-1978 for environmental protection.

Regulations promulgated by the United States Environmental Protection Agency (" EPA") in August 1973 will require, unicss othcr rr.ca:urca ar: approved by EPA, that vnricca :teps be taken by the Company to reduce emissions of sulfur dioxide at the J. H. Campbell Plant, Units 1 and 2; the D. E. Karn Plant. Units I and 2; the B. C. Cobb Plant and the J. C. Weadock Plant, Units 7 and 8. Such generating c- -:::.:- i..... -,...

,,..,m,;,,,,.,,p,;;;,y nr over 9.nm meanwam S,nacineally the new regulations required that the Company should have nonnea ht% no tater tnart Octooer i, i973 ofits intention to either (i) utilize fuel with a sulfur content of not more than 1% percent or (ii) install stack gas 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 intention to either (i) utilize fuel with a 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 15 j

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sulfur dioxide emissions by July 1,1975 and July 1.1978. The Company believes that adequate m. na oflow sulfur fuel may riot be available to permit conversion of such plants to low sulfur fuel. Mermer the Company believes that stack gas desulfurization technology is not adequately developed to m..e the any such equipment would allow satisfactory operation ofits plants. In September 1973. the Cc. pan.

instituted suit in the U. S. Court of Appeals for the Sixth Circuit against EPA for review of the reg v.na..

which would require tie Company to take immediate steps toward the reduction of su!fi.: m c..c _.-

emissions at the generating plants mentioned above. A stay of the regulations was issued b) 6. Cm...

The matter is pending before the Court. The Company has entered into performance

..-"2n-(" compliance schedules") with the Michigan Air Pollution Control Commission regarding the fL:,'2:S ur.er w;-Jd. u.a.f

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A January 1,1977 sulfur dioxide control strategies and time schedules for the implementation of :: e u. e not later than January 1,1980. The compliance schedules also require the Company to monitor ur ( aia in the vicinity of the four plants and to periodically report the results thereof to the Commission. Sacu:d the data secured by such raonitoring at any time fail to substantiate that emissions from such plants are ec:

causing or contributing to ambient levels of sulfur dioxide in excess of applicable air quality standards. de compliance schedules provtde that the Company must then submit to the Commission sulfur diodde control strategies and time schedules for the implementation thereof as expeditiously as pracucab!e. The Company has submitted te compliance schedules to EPA for approval. Should EPA's approval be secured, the requirements of the new EPA regulations will be replaced by said compliance schedu:es. In a proposed rulemaking pub.ished in February 1974, EPA solicited public comment as to whetner the cornpliance schedules shou:d be approved.

EPA gave public notice in July 1973 that it intends to issue regulations setting up a mechams= for preventing "significant deterioration" of air quality in areas where air pollution levels are beiew the national ambient air quality standards. In announcing that it proposed to consider four alte. native proposals for defming and preventing "significant deterioration", EPA stated that any policy adep:ed 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 number of economically and socially important matters, including the cost of producing and transporting electricity. The Company is unable to forecast the ultime e regulations that will be adopted by EPA in this matter, but it is likely that any such regulations will ma.erially affect the Company's operating expenses and power resources.

Applications for water d.scharge permits for various of the Company's existing and proposed plants and facilities are currently pending under the Federal Water Pollution Control Act Amendments of 1972 (the "1972 Amendments"). 7.n October 1973, the EPA delegated to an agency of the State of Michigan responsibility for processing the applications under the 1972 Amendments and applicable standards. Wi:b respect to existing facilities and plants, the 1972 Amendments require achievement of efHuent limitations that necessitate the application of the "best practicable control technology currently available" by July 1, 1977 and the "best available te:hnology economically achievable" by July 1,1983.. They also require that the standards for cooling water intake structures must reflect the "best technology available for mi++i ';

adverse environmental impact." With respect to future steam electric power plants. standards of performance required to be es:ablished by the 1972 Amendments will require achievement of efnuent limitations that necessitate the application of the "best available demonstrated control technology."

including, where practicable, a.ttandard permitting no discharge of pollutants. Proposed guidelines for efBuent hmitations have been issued by EPA for public comment. The Company is not presently able to evaluate the effect of any stand.trd or guideline ultimately to be adopted, although such effect may be substantially adverse to the Company's operations.

The FEO issued regulations in May 1974 establishing priorities for use of certain low sulfur petro!eum products. Such regulations are ncw administered by the FEA. The intent of the regulations is to prevent the use oflow-sulfur fuel oil in ntw power generators, coal-to-oil fuel conversions and to de!ay 5._ tits to lower sulfur mntent fuel oils than were in use in November 1973, except where such actions are reqttred to achieve primary ambient air quality standards under the Federal Clean Air Act or to comply wi:h EPA new source performance standards. The Company has arranged to purchase oil to fuel the D. E. Karn Units 3 and 4, two generating units scheduled to commence operation in 1974 and 1975, respectively. The Company is in the process of applying to the Michigan Air Pollution Control Commission for a 16 t

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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. 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. 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 i

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 i

regulation of public utilities in Michigan with respect to rates, accounting, services, certain facilities, ascertamment of values, the issuance of securities, and various other matters.

Adjustment clauses authorized by the MPSC in 1973, provide for reaccting 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 efect 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 1974 the Companyapplied to the MPSC for authority to amend the adjustment clauses in its electric rates so as to eliminate tee 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 MPSC to 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.

i 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 583,000,000 annually. At the sarne time the Company requested interim gas rate relief of approximately S55,600,000 annually pending the outcome of that rate case. In April 1973 the MPSC dismissed the applications without hearing (and without p ejudice 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 Federal Cost ofI.iving Council pursuant to the Federal Economic Stabilization Act of 1970, as amended.

md contrary to similar criteria established under rules of the MPSC adopted in May 1972 pursuant to the aforesaid Federal Act.' In May 1973, the Company petitioned the MPSC to reconsider such dismissal order, which petition is 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 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.

1971, aggregating $50,000,000, divided equally between the pending electric and gas rate proceedin :s, subject to refund, pending the final determination of the t ommission and directed its Statito cause an investigation to be made as to the planning and construction of the Marysville Gas Reforming Plant to determir.e vd.etlict t! c remio' ility of tiac piam and its con of construction were justised. 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 effectiveness, which request has not been acted

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la the Cyn-a elmdc and gas rates of 331,000,000 and $46,600,000, respectively, on an annual basis. The rate increases included the interim increases aggregating $50,000,000 which were placed in effect November 10, 1973. Of the authonzed gas rate increase, approximately $14.571,000 became effective on April 20, 1974 after the second unit of the Marysville Gas Reforming Plant became fully and comrnercially operable. In respecse to requests for a rehearing on the authorized rate increases, including such a request by the Attorney i

General of Michigan, on March 27, 1974 the MPSC reaffirmed the c!cctric rate increase granted on January IS,1974, and on its own motion ordered a partial rehearing with respect to the gas rate increase.

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Such rehearing, which has been partially completed,is limited to a review of the portion of the ;:_,.:u. r which allocates among residential, commercial and industrial customers the amount of res enue, err. A i

authorized and a consideration of the mannerin which the cost of gas sold adjustment clause < a a :ce operate to pass through increases in the cost of gas to the Company's various classes of et srmr T:a i

MPSC aho announced its decision to delay recognition of costs of the Marysville Gas Refctming P.,.r.t in excess of $119,700,000 (which costs are estimated to presently aggregate $155,000.000, p.622 completion of a performance audit conducted under the auspices of the MPSC Sra:Y :o be comp;ete m 1974. Further, the MPSC also strongly urged the Company not to file any new ga. rate applic.s : c...n:

the pendency of the limited rehearing which it directed to be completed by September 1,1974.

ia vrti 18 tt: Cc=pr.ny sd,cmucd.ma application to the MiM to increase its electric rates b; no:

less than S72,159,000 annually and at the same time requested partial and interim reliefin the ame.ct: :.f

$54,659,000 annually. It is not expected that the MPSC will act upon the application or t!a re:r.es: ':r panial and interim relieruntil leer in 1974 fc!!cwing hearings and udica invesugation of tne recues" In September 1969 the MPSC authorized increases in the Company's electric and gas rates Of

$16,514,000 cnd S:1,0CS CO'),;e, c.i A!y, on an aittaual oasis. i.iugauon is pending m a state Cour. wid respect to such increases, which became effective in 1969 and which are subject to refuod relating to de reduction and elimination of the Federalincome tax surcharge then in effect. The MPSC order au&ctn.ing the increases required that the rates be reduced to reflect any subsequent reduction in or expirauon of de Federal income tax surcharge. However, in February 1970, the Coun granted a temporary infuncnon permitting the Company to continue to collect the rates without adjustment for the later reduction s'.d elimination of the income tax surcharge, subject to possible refund, with interest, of the amounts ccHered if the MPSC order with respect to the income tax surcharge had not be:en stayed by the Coun. A3 : rei;It of further authorizations by the MPSC in 1971 to increase electric and gas rates effective December 14 and December 23,1971, respectively, the Company believes that there are no refund obligations wid respect to service rendered subsequent to these dates. In March and Apnl 1974, the Court ruled in faver ci se MPSC with respect to the issue of the income tax surcharge and ordered the Company to refund S24,542,632 to its electric and gas customers. In connection with this litigation, the Company en 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. Tn:

Company is underr2kmg to seek judicial review of the Court orders of March and April 1974, inc!.di:g a ~

request for a stay of the refund pending furtherjudicial action. The pending litigation, which also involuts appc21s taken by the Company as well as by parties opposing the rate increases, includes, among cder things, a claim for refunds to customers amounting to approximately S7,763,000, plus interest chargr which are presently not capable of determination, for which no reserve has been provided. This claic is based upon the circumstance that the electric rates were placed in etTect by the Court's order on Octo%r 22,1969, but the MPSC did not issue an order approving such rates until April 20,1970.

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 tin'e for payment of service bills, eliminate late payment charges and, in most instances, security deposits.

establish procedures to provide customers with opportunity for hearing with respect to contested serice bihs prior to service termination, and other similar provisions. If the rules become effective they are likely l

to add substantially to the Company's cost of rendering service and could lead to substantial increases in i

delinquent payments for utility services rendered.

In the opinion of the General Counsel for the Company, Storage Company and Nonhern are nc:

public utilities under the laws of Michigan.

t l

Federal Power Commission The FPC hasjurisdiction 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 operaticn of assen 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", Northern will 5e 18

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subject to FPC's junsdicoon 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 intentate 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 priosity system for pipeline cunallments and is now considering adoption of a proposed rule which would make the end.use priority i

system also applicable to certincate proceedings for transmission of addidonal 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 efect of FPC regulations, present or future, upon the Company's gas supply and operations cannot be determined although such efect may be materially adverse.

I 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 j

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 FPC, including compliance with the FPC's rules and regulations respecung accounting applicable'to licensees. The Act provides that if a new license for a hydroelectric project is not issued to the original t

licensee upon expiration of the original license, a new license may be issued to a new. licensee, or the j

United States may take over the project, upon paying severance damages, if any, and the amount of the original licensee's " net investment"in the project but not in excess of the fair value thereof.

5 i

By reason of the interconnections hnking the electric system of the Company with the systems of companies in other states, the Company is a "public utility" under Part II of the Federal Power Act and certain of the Company's operations are subject to regulation by the FPC, including compliance with the FPC's rules and regulations respecung accounting applicable to "public utilities", the transmission of i

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 regulation of the MPSC as described above, including the 6xing 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 s holesale electric rates so as to increase the Company's wholesale electric revenues approximately $1,500.000 on an annual basis. The increased rates became efective 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 l

Company's application and related issues have been held in abeyance pending settlement discussions involving the Company, the intervenors and the FPC stas. A proposal of settlement satisfactory to all of l

the parties was submitted to the FPC for approval in late June 1974. Under such proposal, the Company's wholesale electric rates would be increased so as to increase the Company's electric revenues by d

I approximately $1,030,000 annually as of June 7,1973 and appropriate refunds of a portion of sums collected under the rates which became efective in June 1973, together with interest thereon, would be required to oc made by the Company.

Atomic Enerwy Commimina l.

In 1967 the AEC granted the Company a permit to construct the Palisades Nuclear Plant, described i

.under " Construction Expenditures" above. In March 1970, the AEC gave public notice ofits proposed i:=== cf n.;:revi:icnal cocratina !! cense for the plat. Thereafrer, a n.ne : -...f.a-a;~en +

1 indivtduals intervened in the proceedings before the AEC and opposed the licensing of the plant. In view of he crucial importance of getting the plant in operation at the earliest possible date, and faced with addnite delays in completion of the AEC. hearing, the Company reached an agreement with the mtervenors in March 1971 whereby the Company would install cooling towers to substantially eliminate d:rrul discharges into Lake Michigan and other equipment u, eliminate release of virtually all

Winctive materials in liquid discharges and, subject to certain condidons, the intervenors agreed to wtdiraw their opposition to a full-power operating license. The additional facilities, which cost an 19 i'-P-P y

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estimated S30.000.000 to construct, are expected to result in additional annual costs in excess of H.W."n.

attributable to reduced thermal eHiciency of the plant, some curtailment of generaung capaWn) nc increased operating and maintenance expenses, as well as fixed charges on the invested cap;tal The Palisades Nuclear Plant has been out of service for the reasons described in Note i" w Statement ofIncome herein. In addition, public heatings may be required by the AEC before tb p!;-.-

returned to commercial operation. The operating license issued by the Arc for the plant n prm. sna..:

nature and was scheduled to expire in March 1974, but was automatically extended pending AEC en:n on the Company's application for a full. term,40-year operating license. The application wi'l oc d;en :c de n:ht cf any =crson whose interest may he abus i, ;:.c p..

--.i... i..... --.n. re.p.~. p.Mb hearing on the application.

In 1971, the AEC announced that it was reviewing the adequacy of emergency core cooiin; sy stems in light-wate! po w c. sensus, and tiiescafter held a public rule-making hearing with respec: to new regulations covering the design of such emergency core cooling systems. In December 19~3. ::: AEC announced its new regulations which provide that licensees, including the Company. must subn.: te de AEC by c:rly August 1974, except as extensions are granted, a plan detailing tww compliance *id :he new rules will be achieved for each of the nuclear plants atfected. The effect of the new rules upon the Company's plants has not yet been determined, but it may be necessary to modify the designs cf de Big Rock Point Plant, the Palisades Nuclear Plant and the Midland Plant (referred to belown and it may be necessary to derate the Big Rock Point Plant and/or the Palisades Nuclear P! ant. The cos: cf su:h potential modifications and deratings cannot be estimated at this time but could be su:i:anza!

Intervenors in the AEC rule-making proceeding have taken an appeal to the U. S. Court of Appeali :or de District of Columbia Circuit (Docket No. RM50-1) from the AEC regulations issued in December !C~3 In May 1973 a suit was commenced against the AEC for a declaratoryjudgment and injunente rei;ef.

The suit sought to compel the revocation of operating licenses heretofore issued by the AEC for M :t.cica:

generating units. including the Palisades Nuclear Plant. The basis for the suit was that operano: cf these units in accordance with certain AEC interim criteria for emergency core cooling sys:em aZegedly constitutes a threat to the public health and safety. The court dismissed the suit. In July 1973 the p'aintiL in such suit petitioned the AEC to revoke immediately the operating licenses of the 20 nuclear genera:irg units on the same grounds alleged in the lawsuit. The petidon was denied and an appeal from the de:121 is now pending before the U.S. Court of Appeals for the District of Columbia Circuit t Docket No. 73-15721 1

In 1%9 the Company applied to the AEC for permits to construct the Midland Plant. described ender l

" 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 constructien permits for the Midland Plant in December 1972. Thereafter the intervenors appealed the granting of the permiu an(in May 1973 an Atomic Safety and Licensing Appeal Board of the AEC affirmed the issuance of the condtruction 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 se District of Columbia Circuit (Docket Nos. 73-1776 and 73-1867) from the action of the AEC in ;raming the construction permits and such appeals are pending. In May 1972 some of the intervenors began suit in a Federal Court to prevent construction of the Midland Plant, contending that the AEC had not complied with the Nsjonal Environmental Policy Act of 1969 in the proceedings for issuance of the cons: uc: ion permits for the plant. The Company and the AEC have moved to dismiss the stut. In March 1973 anc6er intervenor began suit in a State Court in Jackson County, Michigan, seeking damages and a declara:ory judgment that the plant violates a Michigan environmental protection act and constitutes a nuissace. The case was transferred to Midland County, Michigan, where it was decided in the Company's favor in June 1974 on motions based on legal grounds. An appeal from such decision is expected. Following AEC inspections of the implementation of the quality assurance program at the Midland construction site. 6e AEC's Director of Regulation issued an order in December 1973 for the Company to show cause why all activides under the construction permits for the Midland Plant should not be suspended pending a showmg 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 construe: ion process. The 20

r) i 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 ? hearing on the 4

order to show cause. Also,in December 1973, the same intervenors petitioned the AEC to revoke the construction permits for the Midland Plant. The AEC,in January 1974, denied the petition to revoke the construction permits, denied the Company's motion to dismiss the order to show cause, and granted the intervenors' requests for a public hearing. A het ring on the show cause order commenced in July 1974. If the Atomic Safety and Licensing Board appoin;ed 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 construedon permits for the Midland Plant shall be modified, suspended 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 i'

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's operating expenses and its power resources could be materially adverse.

e 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. AEC representatives have investigated the charges and have cited the Compary for several license violations in connection with the chuges. The Company could be subject to monetary or other civil penalties in connection with such violations. The U.S. Attorney General has been requested to investigate the matter, i

and an organization has petitioned the AEC to issue a show cause order or to hold a hearing on whether trie operating license of the Palisades Nuclear Plant should be revoked, suspended or modified or other penalties imposed in connection with the charges. The AEC investigators have found that there is no basis to conclude that the Company or its employees deliberately withheld any clearly reportable information.

The matter is still pending before the Attorney General.

Under amendments to t!fe 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 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 I

1971, the Attorney General advised the AEC that the granting'of authorization to construct the Midland i

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 determuung whether a license shall be issued, such other factors as in its judgmrt it deemt nac-ss try to protect the public in+.erast including 'he need for power in tl e :'ffec*ed area. The Attorney General has indicated an intention to seek conditions in any license for the Midland i

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 untitrat imes bcyn ir iate M73 and conch.ded in kr.c W1.h inidd dai,in

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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. Tne transition to the use of f

wh fuel will extend over a period or several years, with a few fuel assemblies having been installed in 1973 and with greater use of such fuel to occur in 1974 and later years. The use at the Big Rock Point P! ant of developmental fuel assemblies and fuel rods containing plutonium had been authorized and i

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s carried out since 1969. In March 1973 an organization began suit in the U. S. Dairkt Court for \\'.S.:em Michigan (File No. G58 73CA) to prevent the use of such plutonium fuel at the Big Rock Peim Pl.a.t

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temporary injunction against the 1973 fuel loading was refused by the Court. The I.muit is pendire.:nd is opposed by the Company as well as by the AEC. In April 1973 the AEC off: red an opportumty fcr public hearing on the December 1972 license amendment and the organization opposing the u e 0; 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. 50155). In June 1974, the Court ordered the lawsun heid :n abeyance pending completion of the AEC proceeding.

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msurance and agreements ofindemnity with the AEC to cover public liability for the conseben::s -f nuclear incidents which might occur at the Company's nuclear power plants. Such nuc' ear insurance :.nd indemnity coverage does not include coverage of the plant facilities themselves. To cover possib'e dama ge to these facilities. tne Company maintains property damage insurance from Nuclear Mutua! Limi;ed. a Bermuda mutual insurance company of which the Company is a member, in the maximum amount available from such insurer, which is preser..ly S100,000,000, or the insurab.e value of tae facility, whichever is less. Except for the Company's Big Rock Point Plant, such insurance does not equal in amount the sums invested or to be invested in the Company's nuclear plants. The Company is therefore a self-insurer for any loss to its nuclear plant facilides to the extent its investment in them exceeds S100.000,000 at any location. The Company regards this risk to be acceptable because of the very low probabilities ofoccurrence 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 simdarly situated. It is expected that the amount of available insurance caverage will soon be increased by Nuclear Mutual Limited to S130.000,000.

In May and June 1974, following a request by an organizadon that he AEC review the Company's continuing fmancial qualifications to construct the Midland 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 fmancing plans. The Company furnished the requested information in June 1974 and the matter is pending.

Equal Emplopnent Opportunity Commission Id 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 discrimm2 don 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 exporte 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 correctmg the alleged disnimi= tion, but no such agreement has yet been entered into.

22

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/7.

i OPERATING STATISTICS Twelve Months Year Ended December 31 Ended May 31, 1969 1970 1971 1972 1973 13 E!ccinc Er.:r y Gec.arated Purchased and Sold a TSousands of Kwh):

Generated-after stat.on loss and use:

Fossil Fuel 17,517,548 17,701,285 17,465,481 17,379,239 17,360,718 16,584,835 Nucleu 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 ir,terchange)

I,848,148 2,268,680 4.118,538 4,404,300 6,112,898 7,911,176 Less energy ror pumping (11,622)

(1,380,519)

(1,917.670)

. Total Electric Energy Gererated and Purchased _

20,262,383 20,771,020 22,391,642 24,307,485 26,350,017 25.903,225 Lcst. unaccounted for and used by Company (I,783,020)

(I,96.343)

(I,895,889)

(2.229,0!! )

(2,248,017)

(2,246,517)

Total Energy Sold 18,479.363 18,806,677 20.495,753 22,078,474 24,102.000 23.656,708 Ele,, ric Sales (Thousands of Kwh):

Resicenda!

5.546,263 5,931,840 6,328,749 6,841,221 7,090,854 7,131,275 Commercial 3,673,709 4,027,215 4,349,075 4,699,559 5.160,245 5,143,314

!aduarnal 8,578,389 8,073,91J 8,972,723 9,575,919 10,773,530 10,239,761 Interdepartmental and Other 191,951 208,526 223 M9 235,871 239,152 231,401 Total Sales to 111timate Consumers 17,990,312 18,241,494 19,874,396 21,352,570 23,263,781 22,745,751 Power Pool Other Resale 489,051 565,183 621,357 725,904 838,219 910,957 Total Electric Sales 18,479,363 18,806.677 20,495.753 22.078,474 24,102.000 23.656,708 Gas Prodad. Purchased and Sold (1,000 cubic feet):

Ga Produced and Purchased:

8,285,680 30,076,28i Marysville Reforrcing Plant Michigan Fields 16,600,080 17,196,639 13,194.067 18,905,307 26,266,614 29,745.620 Trunidine Gas Company 197,825,691 226.111,937 247,445.052 231,889,872 193,031,460 183.262,0.t0 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 t to) from Storage.

(10,937,194) (13.8 %.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)

'rt:! ts Sold 291 761 913 330,343,058 331,871,511 133.262,844 329.759.400 326,509.261 Gas Sales t 1,000 cubicl'eet):

RsdituG4-IInd I!4atia!

120,060,276 134,435,750 13!,222,553 150,602,4!!

136,321.02a 110. N.41' Oter Res2ential 3,997,083 3,733,980 3,225,088 3,313,156 3,016,273 2,865.187 l-dutnal and Commercial 139,497,140 152,704,824 176,350,317 187,916.368 183,124,071 176,517,956

...... :.... 4 7.2:4."20 3.507.06!

!!.252.!!9

!! 430,M2 7.204.W

'." *.f Total Sales to I;1timate Consumers..

279,769,419 309,381,627 333,061,117 353,262.344 329,759,400 326,509,261 Resale 1,992,394 962,331 812,394 TotalGasS !es 281,761.813 310,343,958 333,873,511 353.262,844 329,759,400 326,509.261 W. : a: cam (1,000 pounds) 847.854 814,225 742,650 682,412 655,895 671.938 23

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DESCRIPTION OF NEW BONDS General The New Bonds are to be issued under an Indenture dated as of September 1,1945, 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 connectic : 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 purpon to be complete. They make use of defmed terms and are qualified in their entirety by express reference to the cited sections and articles of the Mortgage.

The New Bonds will mature August 1,1994 and will bear interest at the rate shown in their title, payable semi. annually on February I and August 1 in each year. Interest will, subject to certain excepdons, be paid to holders registered at the close of business on the January 15 or July 15, as the case may be, next preceding the interest payment date. The New Bonds will be issued only as registered Bonds w?thout 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-seventh 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 Section 7.05, the acquisition of property subject to prior liens and, under certain conditions specifed in Section 7.i4, permits the issuance of additional indebtedness under such prior liens to the extent of 60% of net propeny addidons made by the Company to the property subject to such prior liens.

Sinking (Improvement) Fuad Requirement The Mertgage (Section 2.12) provides for annual sinking fund payments, which began in 1956, in an amount equal to Iro of the aggregate principal amount of bonds authenticated (exclusive of bonds authenticated to refund other bonds) prior to January 1 of the year in which the deposit is made less certain bonds retired. Payments may be made in cash or in principal amount of bonds authenticated 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 beec retired, the sinking fund will be replaced by an improvement fund and the improverrent fund requirement (which will then be 1% of the principal amount of bonds of any other 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.

Section 2 of the Twenty-seventh SupplementM Indenture provides that, so long as any New Bonds are outstanding, the Ccmpany shall, as a sinking fund for the retirement of New Bonds, deliver to the Trustee S3.000,000 in cash or in principal amount of New Bonds on August I of each year, begmnmg with 1979 ano to and including Im. A ne Company has the non-winidadve updun tu inicie43c aisy susI4 =iiikIing fuiii; 4

payment by an amount not exceeding such sinking fund payment and can take credit against any such payment for the principal amount of New Bonds retired on or before any such August I by operation of the prodsions of Section 2.12 of the Mortgage. Not more than $6,000,000 aggregate principal amount of New Bonds may be redeemed on any such August I by operation of the provisions of Section 2.12 of the Mortgage and of Section 2 of the Twenty-seventh Supplemental Indenture, and none of the New Bonds l

l may be redeemed prior to August I,1979 by operadon of the provisions of said Section 2.12.

25 9

I-Maintenance and Replacement Requirement The Afongage (Section 7.07) requires the Company as of the end of each calendar year :o have applied for maintenance, renewals and replacements of the mortgaged and pledged propeny. ui:h se...m exceptions. the greater of the following amounts: (i) 15% of gross operating revenues derived by the Company subsequent to December 31,1945 and up to the end of such calendar year from such nngged and pledged property after deducting the cost of electricity, gas and steam purchased for reule or i E, :ne sum of the amounts equal to 4% of the principal amount of bonds outstanding at the end of each ;.2end.sr year: or to the extent of any deficiency to certify to the Trustee unfunded net propeny.idditions cc.:e;%t with 6e Trustee cash or bonds (taken at'their principal amount). A credit balance established in la ear mv he e,W 6 mud,na ined te =cet re;uir:=:e;,.!.;&,,, r ;,,,,c,,,,,,,;,,,,,,,;,,..,,um m,,

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deposited cash or bonds or to restore as unfunded property any propeny previously certified.

l 1

Issuance of Additional Bonds l

Additional bonds may be issued under the Afortgage to the extent of 60% of unfunded net propeny addi: ions or against the deposit of an equal amount of cash,if, for any period of twelve consec'::ive mer.ds with.n the Efteen preceding ca2endar months, the net earnings of the Company (before income or excess i

proSts taxes) shall have been at least twice the interest requirements for one year on all bonds outs:anding and to be issued and on indebtedness of prior or equal rank. Additional bonds may also be tssued to refund bonds theretofore outstanding under the Afongage. Deposited cash may be applied to de retirement of bonds or be withdrawn to the extent of 60% of unfunded net property additions. ( Ar:ic!cs I.

IV, Y and VI.)

The New Bonds are to be is ued against unfunded net property additions which, at hiay 31.19 4 amounted to approximately $695,000,000.

Release and Substitution of Property The Mongage provides that, subject to various limitations, property may be released from de 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 lien bonds delivered to the Trustee or reduced or assumed by the purchaser, property additions acquired in exchange for the property released, oi upon a showing that unfunded net propeny additions exist. The Afongage also permits the withdrawa! 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. (Anicles VI, VII and X.)

Innitations on Dhidends 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 remains ofsuch retained earnings an amount equivalent to'the amount by which the charges to income or retatned earnings since December 31,1945 for repairs, maintenance and depreciation shall have been less than the maintenance and replacement requirement mmputed in accordance with Section 7.07 of de 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 Mongage, the rights and obligations of the Company and the rights of the bondholders may be modt6ed 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 ofeach series affected. However, no modification of the terms of payment of principal or interest and no modification affecting the lien or reducing the percentage required for modiScation is effective against any bondholder without his consent. ( Article XVII. j Redemption Presisions The New Bonds will he redeemable at the option of the Companyin whole orin part at any time on thirty days' notice at the principal amount and accrued interest, (a) without premium if redeemed fer the 26 i

p r3 J

J

. inking fund or (b) plus the regular redemption premiums set forth below for all other redemptions; provided. however, that none of the New Bonds shall be redeemed prior to August I,1984 at the regular redempdon premiums if such redemption is for the purpose or in anticipation of refunding such New Bond through the use, dircedy or indirectly, of funds borrowed by the Company at an effective interest cost to the Company (computed in accordance with generally accepted finaricial practice) ofless than i1.375?o per annum. (Twenty. seventh Supplemental Indenture Section 1.)

If redeemed If redeemed durins during 12 months 12 months period Regular period Regular ending the Redemption ending the Redempaine last day or Premium last day of Premium July July t.

1975....

11.38 1985......

5.39 19 76............

10.78 19 8 6..........

4.79 1977.............................

10.I8 1987 4.I9 I 9 7 8...............

9.58 1988.........

3.59 I 9 7 9.

8.98 1989-2.99 I 9 8 0......................

8.38 1990.

2.39 1981.

7.78 1991.

1.80 1 9 8 2.............................

7.I8 1992.........

1.20 1983.

6.59 1993.

.60 1984 5.99 and without premium if redeemed after July 31,1993.

Concerning the Trustee In the regular course of business, the Company and its subsidiaries borrow short. term funds from several banks for the companies' purposes. 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 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 pnncipal due on default, but the holders of a majority in aggregate principal amount may annul 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 decitned to take action or failed so to do within sixty days and no inconsistent directions shall have beeri given by the holders of a majority. (Section i1.14.) 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 dudes if there is reasonable ground for believing that repayment is not reasonably assured to it. (Section 16.03.)

Defaults Uy Sccdaa 11.0i orijw Mortgg. the reik%.ne denned n "def=la".

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 er 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 tne redemption of bonds called for redemption also constitutes a default. The Mortgage does not require any periedie evidence to be furnished as to the absence of default or as to compliance with the terms thereof.

27

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EXPERTS The Financial Statements including the Statement ofIncome for the five years ended December.i1.

1973 se forth in this Prospectus have been examined by Arthur Andersen & Co.. independent p.:hl:.

accountants. as indicated in their report with respect thereto, and are included herein in reliance up..n the authen:y of said firm as experts in auditing and accoundng in giving such report.

Statements under " Regulation" and " Description of New Bonds", as to matters of law and lega:

co:clusions. have been reviewed by Harold P. Graves, Esq., General Counsel for the Company. and :.J!

such statemente are made on his authority as an evnert LEGAL OPINIONS Tne legz!ity of the securities offered hereby will be passed upon for the Company by Harold P.

Graves. Esq.. or James B. Falahee, Esq., Jackso 1, Michigan, General Counsel and General Attorney, respectively. for the Company, and by Messrs. Winthrop, Srimson Putnam & Roberts, New York. S. 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 stocs of the Company. Mr. Graves is an officer of the Company and a director and/or an officer of each ofin subsidianes.

As of May 31.1974,297 shares of common stock of the Company were credited to James B. Falahee'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.

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UNDERWRITERS Under the terms of and subject to the conditions contained in an Underwriting Agreement dated July 17,1974, 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 below.

Principal Principal Name Amount Name Amount Morgan Stanley & Co. Incorporated.

$ 9,150,000 Josephthal & Co.

$ 150,000 Adams & Peck.

250,000 Kidder, Peabody & Co. Incorporated 900,000 Adsest Co.

300,000 Kormendi, Byrd Brothers, Inc.

250,000 American Securities Corporation.

400,000 Kuhn, Loeb & Co.

900,000 A. E. Ames & Co. Incorporated.

250,000 Ladenburg, Thalmann & Co. Inc.

400,000 Arnhold and S. Bleichroeder, Inc.

400,000 Lazard Freres & Co.

900,000 Bacon, Whipple & Co.

400,000 Legg Mason / Wood Walker Rol.! '.Y. Baird & Co. Incorporated.

400,000 Div. of First Regional Securities,Inc.

300,000 Bneman Eichler, Hill Richards, Incorporated 400,000 Lehman Brothers Incorporated 900.000 Bear, Stearns & Co.

700,000 Lepercq, de Neuflize & Co. Incorporated 250,000 WD!iam Blair & Company.

400,000 Blunt Ellis & Simmons Incorporated.

400,000 Loeb, Rhoades & Co.

900,000 Blyth Eastman Dillon & Co. Incorporated.

900,000 Loewi & Co. Incorporated.

300,000 Boett:her & Company.

300,000 Manley, Bennett, Mcdonald & Co.

300,000 Bosworth. Sullivan & Company, Inc.

150,000 Mcdonald & Company.

400.000 J. C. Bradford & Co.

400,000 McLeod, Young, Weir, Incorporated 150,000 A!cx. Brown & Sons.

500,000 McMaster Hutchinson & Co.

250,000 Butcher & Singer _.

300,000 Merrill Lynch, Pierce, Fenner & Smith The Chicago Corporation.

250,000 Incorporated.

I,200,000 City Securities Corporation 150,000 The Milwaukee Company.

250.000 Crowell. Weedon & Co.

300,000 Moore, Leonard & Lynch, Incorporated.

250.000 Dtin, Kalman & Quail, beorporated.

400,000 Moseley, Hallgarten & Estabrook Inc.

500.000 Di'!on, Read & Co. be.

900,000 New5ard, Cook & Co. Incorporated.

150,000 Dre.tel Burnham & Co. Incorporated 900,000 The Ohio Company.

400.000 A. G. Ecwards & Sons, Inc..

300,000 Paine, Webber, Jackson & Curtis Edaards & Hanly.

400,000 Incorporated 900,000 E; Lins, Morris, Stroud & Co.

300,000 Parker / Hunter Incorporated

50,000 Fahnestock & Co.

300,000 Piper, Jafiray & Hopwood Incorporated -

400,000 Tr.e First Boston Corporation.

1,200,000 Wm. E. Pollock & Co., Inc.

400.000 First Equity Corporation of Florida.

150,000 Prescott, Ball & Turben.

400,000 First of Michigan Corporation 500,000 R. W. Pressprich & Co. Incorporated 500,000 First Southwest Company 150,000 P.affensperger, Hughes & Co., Inc.

150,000 Fciger Nolan Fleming Douglas Incorporated 400,000 Rand & Co., Inc.

150,000 Fulton, Reid & Staples, Inc..

250,000 Rauscher Pierce Securities Corporation -

400,000 Goldman, Sachs & Co.

900,000 Reinholdt & Gardner.

400,000 Greenshields & Co Inc.

250,000 Reynolds Securities Inc.

900,000 H:.isey, Stuart & Co. Inc..

000,000 The Robinson-Humphrey Company, Inc.

400,000 Harris, Lpham & Co. Incorporated 500,000 Wm. C. Roney & Co.

300,000 Ha,dc.; Ccx !A.

500,0s0 dotan Mosie Inc.

300,000 Herziehl & Stern.

250,000 L F. Rothschild & Co.

700.000 J. L B. Hilliard, W. L. Lyons Inc..

250,000 Salomon Brothers 1,200.000 Hoppin, Watson Inc.

250,000 Shields Securities Corporation.

700,000 Hornblower & Weeks Hemphill, Noyes Shuman, Agnew & Co., Inc.

400.000 I::corrorated.

900,000 Smith, Barney & Co. Incorporated 900.rm

--.-, id. %:i:. t.n =::w rnr.wm Sv0:u Sm:a In:cr:r.:.,..id Uw.ew.,ewu.

~,00,000 heorporated.

300,000 Stern Brothers & Co.

250.000 E. F. Hut:on & Company Inc..

900,000 Stern, Frank, Meyer & Fox, Incorporated 150,000 The !!!inois Company Incorporated.

150,000 Stifel, Nicolaus & Company Incorporated.

150,000 In:ers ate Securities Corporation 150,000 Stone & Webster Securities Corporation.

900,000 Janney Montgomery Scott Inc.

300,000 Stone & Youngberg.

250.000 Johton. Lemon & Co. Incorporated 300,000 Stuart Brothers 300,000

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_ Amount Narne p,g,,cip,j Amouct Sutro & Co. locorporated

$ 300,000 Thomson & McKinnon Auchincloss Watling. Lerchen & Co. Incorporated S Moor.

Kobimeyer Inc.

Weeden & Co. Incorporated 500,000 700.066 Spencer Trad & Co. Incorporated.

Wertheim & Co., Inc.

YuLOOu 500.000 Whcat. First Securities. Inc.

Tucier. Acthony & R. L Day.

500,000 White. Weld & Co. Incorporated 4rpoo<,

L~BS.DR Corporation 916* '

500.000 G.1i. Walker. I.aird Incorporated.

Dean Witter & Co. Incorporated 500,000 190/91 Warburg.Paribas. Inc.

Wood. Struthers & Winthrop Inc.

7003.'ta f00,000

$60.090.'J00 The Underwriting Agreement provides that the several obligadons of the Underwriten the approval of certain legal matters by counsel and to the condidons that no stop ord er &--- -"- licibisadon Statement is m efect and no proceedings for such purpose are e

before or threatened by the Securities and Exchange Commission, that an appropriate or is in efect and that there has been no material adverse change (not in the ordinary cour the condidon of the Company from that set forth in or contemplated by the Registradon i

n nature of the Underwriters'obligadon is such that they are committed to take and pay for all of Bonds if any are taken.

The Underwriten propose to oder part of the New Bonds directly to the public at th price set fonh on the cover page hereof and part to dealers at a price which represents a c of the principal amount under the public offering price and any Underwriter may offer New certain dealen who are either a parent or a subsidiary of such Underwriter at not less dealers. The Underwriters may allow and such dealers may reallow a concession, no cenain other dealers.

4 1

30

s REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS Tc Consumers l'ower Company:

We have examined the balance sheet of CONSUMERS power COMPANY (a Michigan corporadon) as of D : mber 31,1973. and the related statements ofincome, retained earnings, capitalin excess of par value ind source of funds for gross property addidons for the five years then ended. Our examination was made a ncordance with generally accepted auditing standards, and accordingly included such tests of the accusting records and such other auditing procedures as we considered necessary in the circumstances.

la our opinion, the financial statements referred to above present fairly the financial posidon of Censumers Power Company as of December 31,1973, and the resu!ts ofits operations and the source of fu:ds for gross property additions for the periods stated, in conform ; i with generally accepted accounting pr.nciples applied on a consistent basis during the periods.

A 1THUR ANDERsEN & CO.

Dere:t. Michigan.

Ap.125,1974.

GL 1

31

4 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS T.: Consumers Power Company:

We have examined tne balance sheet of CONSUMERS POWER COMPANY (a Michigan corporation) as of December 31,1973. and the related statements ofincome, retained earnings, capital in excess of par value ind source of funds for gross property additions for the five years then ended. Our examination was made a ncordance with generally accepted auditing standards, and accordingly included such tests of the ac;r.mting 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 Cer.sumers Power Company as of December 31,1973, and the results ofits operations and the source of fu:ds for gross property additions for the periods stated,in conformity with generally accepted accounting pt:.ciples applied on a consistent basis during the periods.

ARTHUa ANDERsEN & CO.

Dercit. Michigan.

Ap-! 25,1974.

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CONSUMERS POWER COMPANY bat.ANCE SHEET ASSETS December 31.

May 31, 1973 1974 (Unaudited)

Thoussedsof Dollars Utility Plant, at original cost (Note 2 ):

Plant in service and held for future use-

$1.895,704 S1,893,213 Electric... _

889,129 888,438 3,280 3,280

-.........=

Gas Steam 71,481 71.564 Common to all departments....

$2,859,594

$2,856,495 653,537 686,722 Less-Provision for accrued depreciation.............

$2,206,057

$2,!69,773 359,548 483,533 Construction work in progress (Note 4) ;

$2,565,605

$2,653,306 Other PhysicalProperty:

S 2,764 S

2,774 At cost or les:;

37 37 Less-Provision for accrued depreciadon..

5 2,727 S

2,737 Investments-Wholly-owned subsidiaries-S 20,111 S 20,358 MachiganGas Storage Company (Note 1)......

16,631 22,560 Northern Michigan Exploration Company (Notes I and 5 )........

922 842 Other, at cost or less.................

S 37,664 S 43,760 Current Assets:

S 12,243 S

13,652 Cash ( Note 14 )

...~............

Accounts receivable,less reserves of $674,000 and $704,000 respec-tively (includes $85,000 and $121,000 respectively due from 67,295 63,454 subsidiaries )............

52,483 65,676 Materials and supplies, at average cost............-

31,931 21,827 Gas in underground storage, at average cost....

27,903 15,877 i

Property taxes-future period, net.

1,076 5,564 Prepayments and other..

S I92,93i S I86,050 S

6,926 S

9,967 Deferred Debits.

$2,805,853 S2,895,820 The Notes to Financial Statements are an integral part of this statement.

32 t

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CONSUMERS POWER COMPANY BALANCE SHEET STOCKHOLDERS' INV ESTMENT A N D LI A BILITIES December 31 May 31, 1973 1974 (tlpaedided) musands or o.ames Capitalization:

Common stockholders

• equity-Commor. stock, $10 par value, authorized 32,500,000 shares, S 262,338 S 262,338 outstanding 26,233,838 shares 247,070 247,231 Capitalin excess of par value..........

228,397 227,852 Retained earnings (Note 10).... _

S 737,805 S 737,421 6,975 7,005 Less-Capital stock expense.

S 730,830

$ 730,416 Total common stockholders' equity........

Preferred stock, cumulative,5100 par value, authorized 5,000.000 347,534 347,134 sh ares ( N o te 1 I )............................................

$1,078,364 S1,077,550 Total stockholders' investment...........................

1,222,340 1,249,968 Long term debt (Note 12)...................

$2,300,704 S2,327,518 Total capitalization......

Notes Payable, due within one year (Notes 3 and 14):

S 43,000 S 63,700 g

To banks ( average inter 9st rate of 9.80% and 11.46% respectively)..

Commercial paper (average interest rate of 9.62% and 10.84%

1,800 40,810 respectively ).....

S 44,800 S 104,510 Current Liabilities (excluding notes payable due within one year):

Current maturities and sinking fund on long-term debt (Note 12 ).. S 17,309 S

14,019 Accounts payable (includes $6,981,000 and $3,755,000 respectively 100,3II 58,064 due to subsidiaries )....

57,831 72,404 Aecrue d taxes...........................................

20,787 24,i16 Accrued interest..

22,893 35,987 Other....

S 219,131 S 204,590 Deferred Credits and Reserves:

S 173.616 S 188,815 Deferred income taxes (Note 16)......

47,938 50,332 Investment tax credit (Note 15)..............

19,664 20,055 Other..

S 241.218 S 259,202 Cor.struction Commitments (Note 9)

S2,805,853 S2,895.820 The Notes to Financial Statements are an integral part of this statement.

33

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CONSUMERS POWER COMPANY STATEMENT O'F RETAINED EARNINGS Tuchw Months Year Ended December 31 Emled Ma v.tl.

1969 1970 1971 1972 1973 1974 (Unaudited)

Thousands of Dollare Balance Beginning ef Period

$125,503 5156,483 517R.995 5195.599 5:13.358 5233.270 Add:

Net income 66,960 72,832 71,780 78,178 80.893 M.952 Equity in undasinbuted canungs of subsid-iaries at December 31.1972 (Note I).

4.359

$192,463 5229,315 5250,775

.5273.777 5298,610 5302,222 Deduct Cash dividends on prefened stock 5 3.534 5 3,517 5 7,108 5 11,251 5 17,746 5 21,902 Cash dividends on common stock declared in the smoomis of St.425 per share in 1969 and 52.00 per share in 1970, 1971 1972,1973 and the twelve months ended May 31,1974 -

32,446' 46,803 48,068 49,168 52,467 52.468 5 35,980 5 50,320

$ $5,176 5 60,419 5 70,213 5 74,J70 Balanz End of Period (Note 10)-

$156.483 5178.995 Sl95,J99 5213,358 5228,397 5227,852

• The quarterly dividend on common stock formerly declared in December was declared in hauary Therefore, the dividends declared in

• 1969 only include' three' quarterly dividend starting in 1970.

declarations. Dividend payments have continued to be made in the months of February, May, August and November.

STATEMENT OF CAPTTAL IN EXCESS OF PAR VALUE Tuche Months

~

Year Ended December 31 Ended May 31.

1969 1970 1971 1972 1973 1974 (Unaudited)

Thousands of Dollars Balance Bessamass of Period 5187,654 5187,756 5208,905 5209,038 5246,788 5246.914 Add:

Ezeess 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 prefened stock.

102 11?

IJ3 130 126 161 Balance End of Period

$187,756 5208,905 5209,038 5246,788 5247,070 5247,231 The Notes to Financial Statements are an integral part of these statements.

34 9

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• CONSUMERS POWER COMPANY f

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STATEMENT OF SOURCE OF FUNDS FOR GROSS PROPERTY ADDITIONS Twelve Year Ended December 31 Months Ended i

1969 g

IMI 13 IM3 May 31,1974 (Unaudited)

Thousands of Dollars Source of Funds for Gross Property Additions:

Funds generated from operations:

Net income after dividends on preferred stock. S 63,426 5 69,315 5 64.672 5 66.927 5 63,147 5 47,050

' Prin6ipal noncashitems-Depreciation and amortuation (Notes 8 and 17)-

Per statement ofincome 51,881 55,608 58,210 62,937 73,428 7e Charged to other accounts 5 200 6,162 6,403 11,472 13,616 9,394, /

Deferred income taxes, net 10,962 10.222 I4,300 18,972 25.072 29,130 investment tan credit, net 3,416 448 5,751 5,960 14,057 8.237 Allowarace for funds used during con-struction (8,421)

(14.103)

(21,862)

(25,455)

(23,223)

(21,942)

Undistributed earnings of subsidianes fl.541)

(2,946)

( Note 1) 5126,464 5127,647 5127,474 5140.833 5164,556 5146,818 Less-Davidends declared on common f tocL 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 11,738 12,938 12,938 5 86,230 5 71,406 S 68,868 5 79,907 5 99,15I S 81,412

)

Funds obtained from new finanang:

Nuance orcommon stock 5

$ 33,661 5

$ 59,620 S

Issuance ofpitferred sM 70,000 70,000 130,000 130,000 Issuance of Arst mortsage bonds 105,000 110,000 120,000 120,000 75,000 75,000 Net promeds from installment sales contracts 33,744 59,631 payable In:rease (decrease) in cther long-term debt.

12,730 (4,239)

(4,418)

(3,915)

(2,102)

_ 36,500) 6.500 19,300 34.510

(

Increase (decrease)in notes payable 6.900 12,600 5111,900

$168,991 5149,261 S251,702 5252,129

$297,039 Funds obtained from other souras:

Allowance for funds used during co,rstruction S 8.421 S 14,108 5 21,862 5 25,455 3 23,223 S 21,942 lxrcise in reserve for possible fate.-funds 4,406 7,278 184

( Note 6)

Change in net current asseu and 'currei.t habilities" (2.171)

(15,140) 7.018 9,020 (I,696)

(25,502)

( Isrease) decrease in investment in Northern

' tichigan Exploration Company ( Note 5)..

0.000)

(4,0001 (4,000) 4,000 (8,600)

(5.700)

Otner. net 193 33 62 2.850 (3,332)

(7,630)

S 4,443

$ (593) $ 37,220 5 41.509 5 9,595 S(16,890)

Grou Property Additions ( Note 2; 5202.573

$239.804 5250.349

$373.118 5360.875 536 t.561

• S e Note to " Statement of Retained Earnings"

" The changes in the individual accounts clanified as currem assets and current liabilities are nor rnatari.il in relation to gross property additions.

~

The Note to Financial Statements are an integral part of this statement.

35

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CONSUMERS POWER COMPANY i

NOTES TO FINANCIAL STAIEMENTS (lacluding Notes Related to Unaudited Financial Stasements)

1. SIG or: CANT ACCOUNTING POLICIES The Companfs wholly-owned subsidiaries, Michigan Gas Storage Company and Northern Michigan Exploration Company. have not been con <olidated as they are not significant. Effec:ive January 1,1973, the Company. pursuar.t to Federal Power Commission Order No. 469, adopted tne equity methm: of accoundng for the investment in subsidiaries. Under this method af accounting the Company's interest in the earnings of the subsidiaries is retlected currently in earrings 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 erTect was not material: however, retained earnings have been credited with the undistnbuted earnings of the subsidiaries at December 31. 1972 in the amount ef

$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 us 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 of Income for information regarding the allowance for funds used durc 'onstruction.

2.

CoNTRIntrrlONS IN Ato or 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.

3.

FINANCING Reference is made to "Use of Proceeds" for information regarding financing.

4.

NUCLEAR GENERATING PLANTS 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 Atqmic 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. Cou:t 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 Lt compliance with the AEC's quality assurance regulations and that there is reasonable assurance that such compliance will continue throughout the construction procen. An AEC hearing on the show cause order is scheduled to commence in July 1974.

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 ofIncome for information relating to the Palisad s Nuclear Plant.

5. NORTHERN MICHIGAN EXPLORATION COMPANY Northern Michigan Exploradon Company (Northern), a wholly-owned subsidiary of the Compa ty.

is engaged in gas exploration programs in northern Michigan and the southern United States. The Company's investment in North' rn, excluding equity in the undistributed net earnings of Northern.

e consisted of $14,600,000 in common stock at December 31,1973 and $14,600,000 in common stock and 36

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s CONSUMERS POWER COMPANY NOTES TO FINANCIAL STATEMENTS-(Contieved)

(Includine Neces Italated to Unsedited Fineacial Sentenwets)

S4.000,000 in Notes at May 31, 1974. The Company's Board ur Directors has authorized loans to Nonhern 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 of income for information relating to electric and gas rate matters.

7. PENSION PI.AN The Company has a trusteed noncontributoty 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 wcre S7.386,000 in 1969,59,195,000 in 1970, $10,575,000 in i971, SI3,066,000 in I972, SI4,607,000 in Of these amounts, $5,722,000 in 1969, 1973, and $15,507,000 for the twelve months ended May 31,1974.

56,945.000 in 1970,58,127,000 in 1971,59,817,000 in 1972, $10,968,000 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 i1,1972 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 3%% 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 g

assumptions and increase in the period of amortization of prior service costs had the effect 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 S.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.

l

8. DEPRECIATION Composite depreciadon rates were approximately 2.85% for electric plant and 3.20% for gas plant for the year ended December 31, 1 % 9; 2.95 % for electric plant and 3.00% for gas plant for the two years ended December 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 4

2.83% for electric plant a.3d 3.40% for gas plant for the twelve months enc ed May 31,1974. In the opinion of management, the balance in the ptovision for accrued depreciation at December 31,1973 and May 31, 1974 is reasonably adequate to cover the requirements for depreciation t.ccrued 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 adjustmems of the provision for accrued depreciation are normally

.made. Depletion rates, established for each producing field based on the total cost ofleaseholds divide by the estimated recoverable reserves, are applied to withdrawals from each field to determine the

. proviston for depletion.

9. COMTRUCTION COMMtTMENTS AND FINANciNo RESTRICTIONS 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 52,200,000,000. Substantial commitments have been made with respect to capital expenditures in future years.

37

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CONSUMERS POWER COMPANY NOTES TO FIN ANCIAL STATEMENTS-(Continued)

(lecluding Noses Related to Unaudited Financial Statements)

$170,334,000 during the five years ending Dece i d substantial additional securities, the amounts, timing and nature of which hav The sale of certain securities may be restricted as set fonh under " Statem Reference is made to " Construction Expenditures" for additional inform y

pany's construction program.

10. LIMITArmN ON DIVIDENDS At May 31,1974, after giving effect to the execution of a $50 million d

retained caramas in the amount of $50,748,364 are not available for the p d

common stock under provisions of the Articies of Incorporation of the Compa d reduce the certain circumstances, prohibit the payment of common stock dividends in cas i

percentage of common stock equity to total capitalization below 25%

ii than the to the payment of dividends on common stock which, h under " Statement of Income."

11. PREFIRRED STOCK AND PREFERENCE STOCK Preferred stock is represented by-Redemption Price December 31 May 31, Per Sbare 1973 197d (Unnedited)

Thousands of Dollars

$110.00

$ 54,779

$ 54,779 S4.50-547,788 Shares Outstanding...

$4.52-127,550 Shares Outstanding (less 4,000 shares purchased for re-104.725 12,755 12,355 tirement in 1974).... 4....

103.25 10,000 10,000 S4.16-100,000 Shares Odtstanding....

108.00 70,000 70,000 37.45-700,000 Shares Outstanding.....

108.00 70,000 70,000

$7,72-700,000 Shares Outstaqding....

109.19 75,000 75,000 57.76-750,000 SharesOutstan' ding...

108.00 55,000 55,000 57.68-550,000 Shares Outstanding..

3347,534 5347,134 Total preferred stock........

The preferred stock of the Company is redeemable as a whole o Company, at the above redemption prias plus accrued dividends to 8

prior to April I,1978, July 1,1977, June 1,1978 and November 1,1 prefened stock, respectively, may not be redeemed through certain refun The Company is required to endeavor to purchase and retire annu prefened stock at a price per share not to exceed S102.725 plus accrued d 1,500,000 shares in the On April 9,1974 the Company's shareholders approved an increase of authoriaed prefened stock from 3,500,000 shares to 5,000,000 shares.

On April 9,1974 the Company's shareholders approved a revisio Incorporatan to authoriae 5,000,000 sh. res of curnulative Si par value a

shares orshis new class of stock outstanding.

38

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.,q CONSUMERS POWER COMPANY NOTES TO FINANCIAL STATEMENTS-(Continued)

(including Notes Related to Unaudited Financial Statements)

12. LONG. TERM DEST Long-term debt is represented by-December 31, May 31 1973 IV74 (Unaudited)

Thouunds of Dollars First Mortgage Bonds secured by a mortgage and lien on substantially all property-2 hTo Series due 1975.......

................ S 86.324 S 86,324 8%% Series due 1976 =

60,000 60,000 2 h?o Series due 1977....................~.....

24,010 24,010 3 %% Series due 198 I...................

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%?o Series due 1987.........

210 210 4%fo Series due 1988...........

34,326 34,326 4%% Series due 1989.............

28,6.'0 28,630 3%*o' Series due 1990.....

30,000 30,000 1

4%?o Series due 1990..............

29.572 29,572 4%% Series due 1991.........

31,889 31,889 5 %"o Series due 1996..........

59,000 59,000 78,550 78,550 6% Series due 1997 -

6%?o Series due 1998 -

55,000 55,000 55,000 55,000 6%7o Series due 1998...........

50,000 50,000 7%% Series due 1999....

8%% Series due 1999 55.000 55,000 8%% Series due 2000 -

50,000 50,000 60,000 60,000 8%7e Series due 2001.............

7H% Series due 200 I..........................

60,000 60.000 7%% Series due 2002.......

70.000 70,000 i

7 %% Series due 2002........

50,000 50,000 8%% Series due 2003.

75,000 75,000 Total First Mortgage Bonds......... $1,163.841 51,163,S41 Installment Sales Contracts Payable (Net of

$7,256,000 and $14.069,000 respectively held in trust pending completion ofconstruction)..

31,744 59,631 Sinking Fund Debentures. 4%%, due 1994............

37,600 37,600 O t he r..............................

4,310 2,333 Unamortized Net Debt Premium (not material by individual issue ).......................

2,154 2.c61 S1,239,649 S1,265,466 Deduct-Current Maturities and Sinking Fund In-cluded in Current Liabilities-First Mertgage Bonds -

S 12,688 S

I1.809 Sinking Fund Debenture <--

600 O ther.........

4,021 2.210 S

17,309 S

14.n10 Securities Reacquired for Sinking Fund Re-quirements (not yet retired)..

1,479 S

17,309 S

15.493 Total Long-Term Debt.....

S1,222.340 S1,249,968

=

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s CONSUMERS POWER COMPANY i

NOTES TO FINANCIAL STATEMENTS-(Contie.ued)

(including Notes Related to Unsedited Financial Statements)

Under the terms of the Indenture securing the First Mortgage Bonds, the Company is required, on er before October I of each year, to deposit with the Trustee, cash and/or bonds in an amount equal to the aggregate princip::1 amount of bonds of all series, other than refunding series, authenticated January I of the year of deposit. With respect to all series which have been issued through Dece 1973, the annual sinking fund requirement is S12,688,000. In addition, an annual S600.000 sinking deposit is due on the 4%% Sinking Fund Debentures on or before September I of each year.

In addition on June 20,1974, the Company borrowed $50,000,000 from a bank under a promissory note maturing in 19'81 and bearing interest at a fluctuating rate related to the bank's prime lending

13. MAINTENANCE It is the practice of the Company to charge to maintenance the cost of repairs of property an replacements and renewals ofitems determined to be less than units of property, except for suc are cha'rged to transportation expenses, stores expenses or other clearing accounts and redi these accounts, together with other charges, to various operating, construction and other accounts Costs of latter amounts so charged are not considered significant and are not readily determinable.

replacements and renewals ofitems considered to be units of property are charged to the utilit accounts and charges for the units of property replaced are made to the provision for accrued de 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 S132 In connection with these agreements the Company is required to maintain average compensating balan with the banks, over an unspecified period of time, equal to 10% of the total line of credit plus 10% o average borrowings outstanding, as determined from the bank's records after adjustment for' funds. There are no legal restrictions on the withdrawal of these funds. In addition, the Company iss commercial paper from time to time on a short-term basis, generally for periods ofless than one During 1973 and the twelve months ended May 31,1974, average short term borrowings ou amounted to $31,809,000 and $40,189,000, respectively, the maximum amount outstanding at any one time was S82,000,000 and $104,510,000, respectively, and the weighted average interest rate was and 9.43%, respectively, excluding the effect of compensating balances.

f

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

. Twelve Months Ended Year Ended December 31 May 31.

1974 1969 1970 1971 1972 1 _973 (Unsedited)

Thousands of Dollars I

341,023

$38,824 314.469

$11,371 S 2,718 f(7.778)

Charged to utility operations-4,071 4,787 3.065 3.216 2,786 (98)

Federalincome taxes Deferred federalincome taxes. net 9,753 8,936 12.337 15.929 21,133 24,598 State income taxes f.209 I,286 1.963 3.043 3,939 4,532 Deferred state income taxes. net Charge equivalent to investment tax credit,

.tib 448 5,751 5,960 14.057 8,237 net Total--see Statement of fncome 3572 554,281 537,585 S39,519

$44,633 79.491

,196 677 767 536 253 1,091 Charged to conutahty operations Totalincometaxexpense

- 560,149 555.048 538,121 539,772

$45,724

• A637 The Company utilizes liberalized depreciation and the " class life asset depreciation range income tax purposes. Income tax deferred due to the use of these methods is charged to in and credited to a reserve for deferred income taxes. As' income taxes previously deferred become the related deferrals are credited to income. (See Note 16) 40 u-,.a

...-- w-

s s

. _.i CONSUMERS POWER COMPANY NOTES TO FINANCIAL STATEMENTS-(Continued)

(including Notes Related to llneudited 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 resulting therefmm is reflected in the income statement currently as ordered by the Michigan Public Service Commission.

The investment tax credit andjob 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 May 31,1974.

Twelve Months Year Ended Deceinber 3t Ended May 3t, 1969 1970 1971 IM2 1973 1974 (Unaudited)

Federalincome taa statutory tate '

52.8 %

49.2%

48.0%

48 (,%

48 u%

4tt.0%

In rease (reduedon)in income tax rate resulung from:

Certain capitalized construction costs. pnn.

cipally interest, deducted curready for mcome tax purposes for which no de.

ferred taxes are provided in accordance with the requirements of the MPSC

( 5.4)

(78)

( 12.3)

(14 0)

( 12.3 )

(14 8)

State income taxes. net of Federal income tax benent 2.0 2.4 2.4 2.8 2.8 2.3 Amoruzation of deferred investment tax credn

(.5)

( 61

(.7) 08)

( 1.nl iI 5)

Other mancellaneous items.

( 1.6)

(.2 )

(2.2 )

( 2.3)

( 1.4 )

( 3.2 )

E!fecuve income tax rate 47.3%

4307 34.7%

33.7 %

36.1%

30.8%

==

t

16. DuERRED 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 Michigan Public Service Commission has prescribed that, during the period when the annual.illowances 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 allowanc:s for tax depreciation are less than the normal tax depreciauon, 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 depreciadon 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:

1welve Ntonths Year Ended December 31 Ended

% lay 31.

1%9 1970 1971 1972 1973 1974 4 tlnaudited)

Thousands or Dollars A.celer.Wd depreciacon-Amount deferred dunng year.

$ 11.939 S i l.5'H

$15.595 520.467 526.6 9 5 10.421 Lea-Taxes deferred in pnor years credited ta mcome -

(302)

(540)

(458)

(65S)

G/.7 )

t 554 511.0 %

511.059 515.137

$19.609 525.9M 520.W A te!: rated amortization of emergency faal.

itic s.-

'Iames deferred in pnor years credited to imome in?4)

(83?)

(337)

(837:

a b.t?)

t$37) 514.300

$18.972 525 072

$2 9.130 Total......

5,10.962

$,10.222

.., n

.w.-=,

_.m. w

.nm 41

..e.

s.

s

.)

CONSUMERS POWEit COMPANY NOTES TO FINANCIAL STATEMENIS-tConcluded)

(including Noses Related to l'neudited Financial Statenicuss)

17. Stheuut.Nrany 19 oue: INFORMATION Maintenance:

The ar.iounts of m.:intenance, other than those set forth in the Statement of Inunne. th it have 1 een charged to clearing accounts and redistributed are not significant.

Depreciation, depletion and amortization:

In addition to the amounts >ct forth in the Statement of income, depreciation ofIransportation and other equipment wa> charged to clcaring accounts in the following amounts: S2,241,000 in 1969.

for the S2,851,000 in 1970. S2.715,000 in 1971, $3,278,000 in 1972, $3.375.000 in 1973 and $3,422,000 twelve months ended May 31, 1974 Also, depreciation, depledon and amortization was charged ta accounts, other than depreciation and amortization,in the Statement of Income in the following amounts:

S2,959,000 in 1969,53.311,000 in 1970, $3,688,000 in 1971. SS.194,000 in 1972, $10,241,000 in 1973 and SS 972,000 for the twelve months ended May 31,1974.

Taxe>. other than income taxes, charged to operating expenses, fot'ow:

Taelie Months Yest Ended December 31.

Ended Me3 31, 1%9 1970 1971 1972 1973 1974 (Unsudited)

Thousands of Dollers Iteal and personal propert> t4xes

$30.670 533,295 536.607

$40.027 544.002 546,436 Payroll taxes 2,908 3.075 3,650 4.211-5.M5 5.869 Michigan State franchise fee 3.212 2.403 1.444 3.854 4.5%

4.897 Other tases._

268 289 172 ll2 75 58 543.873 Sp 554.160 Sy General taxes-see Statemerit or income

$37,058 Sg 42 l

e,

.. o

" FOR RELEACE July 25;(-)74 E3 s

s C0llSum8IS Released through Co:::monwealth Services Inc.

70 Fine Street, New York, N. Y.

10005

'. i POW 8r W

'.. ' 2 M sf * *

• o* n A m.s*, J e. = = * *

• i m te C.'

• ON CPM N.

Ga T

CONSUM D S Prv 0t COMPsfT Statement of Inccme 1 n-ig) w th vt kne

$ 752,513 T 9b HL,Od2 Gross (perating Revenue

$ 1 ),ca,053

' J5,175,0M Cperating Expenses 5, G,470

% 263,920 Provisica for De;reciation and Amertization OG.L18

?,616,805 Provisica for Taxes - Federal Inccce l!!.208 087,736

- State Incese Deterred Incese Tax 2 LH,963 1,753, % 3

( 8 8.J67 h,060,352

. General 5 u,55.,254 9,a2s,232 net Operst eg Income 1,639,6cd 1,977,L60 Allowance for Panis Used During Construction 7L5,281 511,!29 Cther Ine:ce (ret) 7,t.M,937 6,0L5,621 Interest Charges o, ci,2uo S 5,b l,5 0 Net Incze 2,008322 1, ?52, ? %

Dividends en Preferred Stock 5 b,u? M4 5 4.539,236 Palance fer Cecznon Stock lo7k 117 12 Hontha Fndet June 30

$531"M,260 NO *.303 Gross (perating Bevenue. Electric 393,986,229 2L0,366,5L9

- cas 1.Lcl,066 1,?60,013

. Steam

!M /t 5,556 J793.757, W Total Cross Operating Pevenue

@b2,Se,:47 E00,25,751 Operating Ex;enses 79,325,373 67.852,k74 Provision for Depreciation and kortisation (1,267,30L) 25,b3b.337 Provision for Taxes Federal Inccane

( ?3',26L) 4,090,19L

- State Inceme

- Deferred Incese Tax 29,8f9,916 01,737,906 58,09L, L67 L9,L67,101

- General 4113,450,339 S k,722. M not cpersting Incese 21,583,732 25,654,365 Allowanee for P2nds Used During Construction 8,64C,007 b,298,dl3 other Inexe (Net) 90,1 7,826 60,wo? a33

)

Interest Charges

$ 6),521,+54 5 M,370,l'.0 tiet Income P2. 5'2,293 1( l*2.0k3 Divideais on Preferred Stock W 4161 1 71,247,-i7 Salance fsr Cc= mon Stock Earnings per Share of Canaan Stock Based on Avarage Shares Cutstandir.g (26,233,633 Shares of 1774 and 25,633,333 Shares in 1973) 11.79

$2.77 Notes: [1) This statement is on the basis of interia f1(ares and is subject to audit and adjustment.

(2) Because of seasonal and other f actors, the earnings for the month should not te tsken as an inihatton of earnings for all er any part of the talance of the current year.

(3) Cn January 18,1976, the M1:higen Public Service Cc:saissi:n (MFm autr.orise1 treresses in the Ceepany's electric and gas rates of $31,000,000 and $L6,600,000, respactirely, en an annua..

basis. The rate increases includei interim increases aggregating $!0,000,C00 d!"ided equality be.

tween electric and gas rates which were placed in effect November IC,1973 The authorized rate increases bect=e effective on Janua y 19, 1974 except for approximately $14.571,000 of the cas rate increase which became effective on April 20, 1974 after the C::::pany had sutsnittei proof to tr.e M7EC that the seecnd unit of the Marysville cas Petormir4 Plant was fully and comercially operable.

G) Litigation is pendir4 vith respect to electric and gas rate increases vnich tees e eff ec.

1:stios of the Federal tive in 1969 ani which are subject to refund relating to the reduction and eli:

In March and April 197L, the C( art rulei in facr t,f the TC with rupe?t *:

income tax surinarge.

the int::ne tu surcharge issue ani ordered the Cocpany to refand $24,fk!,tl? t:.:s el< **. e ! fas he t'c=pany has establishei a reserve stated r.et of relatei it::oce tues ir ths ra..nt :f custccers.

$11.567,613. ani Lelieves that the scount of such reserse is sdequate to co cer Se refund sligsti:r.,

exclustre of interest charges which are presently not capable of deter =inatten.

he Cor pv.y is undertGing ta seek juiicial review of the Court criers ef t' arch and L;ril IS. includir, a re.

quest f:r a stay of the refund penitr4 f'arther judi:tal acticn. The litigstier. s.* so invol.*s a clais.ith respect to the legslity if the electric rate increase, whica b=:*r.e effective 51M.

on the crounds that the increased r'.tes tecame affe:tive by Court Order in S* Jeer 1969,

• a the

• 1e:.

~4C ill not issue an order approvh4 said rates until April 1970 and that as a result.

tric rates chsrted during the periO3 tre subject to rrrani in an scount of appr:xi:a'alj

?.Q. "J, plus interest v Leh is presently nc. epa %e of estermination, for wht:: ro rese-ra nss e '+-

provided.

r.'re nse it s.la 'rie

5) It '.pril 1J74 the Cocpar./ tuteitted an s;pli

stion to t**

FSC t' rates tc riot bss than $72,159,0C? cma.11y ani at tae esse ti=e retuutea pet ta'. and u tat t

e.

lief in the acwit of $54,659,000 arnutlly. It is vt eytted that t he !<!"! v.*.1 vt.r r. t;.e appli:stion or the request for petial v.4 it.terir relief ur.til later 51C fr.. vtr.. u--irrs and other irvastigstion of the rquests.

9 he Palisasies Plant has teer stat icvn sicce Aagast 1973 for rapsirs ir certain wcr vessel int.rrnsi cot penents and the steam generators of the pisnt. It ss thxgh ~.st re psirs hsd been :: pletel 2r.1 the plant weall te returred to service Jurieg May 14. Ewe fer,.:ur*rx p re-cperatiensi testr telr.g conductv ! h preparstion f;r start-up of the plant, t%re vem t d e Psilures N '. r*pnii

,leh.ill in or.e cf th phnt's two stes:

. *rsters.

U.14 will ra ratre Parther t.u tine Parther him, tha start -up.

In u t s tion, puolic hearinfa may te reqaire4 t+ t N.*. e f.re *.N ph -

l is retr.e4 tc. ev=rrelal operati:m 'nrir4 tw pri:t f shutdown the C-rpt.;

2: th _ is.e tsth !

331'2./ *mra which were originall/ ccheJales to be tiel into the plant turit

17. M. ity-M t

the first etz erth of 197L.

• t. r at co:t of rephce=ent. power, enrou.t..f uw :, 1 5 e.d'r.; *.

s..

g..

r]

~JULUoi)RE !O,.

v I!PIDIATEY JACKSON, Michigan, June 27 -- Consumers Power Company today reported earnings of $1.79 per share of co= mon stock outstanding for the 12 months endari May 31, 1974.

This ccmpared to $2.77 for the sa:ne period ended l'ay 31, 1973, a

and represented a decline of nine cents a share frcm carnings reported as of the end of April.

Total gross operating revenues for the year ended May 31 were

$910,125,103, and net operating income was $117,324,517 This compared to

$784,553,027 in gross revenues and net inco=e of $122,905,624 a year earlier.

Balance for common stock was $47,049,812 for the 12 months ended May 31, 1974, compared to $70,649,578 for the same period in 1973 Despite disappointing earnings, the company's board of directors on June 25 declared the regular quarterly dis-idend of 50 cents a share on common stock payable August 20, 1974, to shareholders of record July 19, 1974.

The board also declared the usual dividends on preferred stock, all payable October 1, 1974, to shareholders of record August 30.

The company has undertaken stringent economies in order to cut costs. These include a cut of approximately $60 million in the 1974 con-struction budget, the elir.ination of more than 500 jobs, a total suspension of all motor vehicle purchases, and discontinuance of service building con-scion an struction.

It has pending before the Michigan Public Service Co r d application for permission to raise its electric rates by $72 millien annually, with $54 million being asked in partial and immedis.te rate relief.

i

--more--

.., - ~

Q 2

c Pr. A. H. Aymond, chairman of the board and president of the company said additional capital must be attracted in order to continue construction of additional facilities needed to meet customer demands and that the continue. tion of the co c.cn stock dividend is important in obtaining such capital.

He said that the board also was mindful of the fact that holders of Consumers Power common stock are, for the most part, relatively small holders, including cany retired persons who depend on a continuation of dividend payments for essentia3.

inccme.

More than 74,800 Michigan residents are numbered among the company's holders of co= mon stock, with the average holding being about 163 shares.

Totaa.

shareholders of common stock, including those residing elsewhere, number 112,l40 t with average ownership of 233 shares.

Of the total 112,400 holders of coccon stock, 109,000 are individuals, as distinct from institutions, stockbrokers, nominees, and others.

At the end of 1973, approximately 98 percent of all holders of the company's co= mon stock.

owned less than 1,000 shares.

limr" Jane 27, 1974 n_..a..,

~,

-