Text

Annual Financial Rept 1977
	ML19331C367
Person / Time
Site:	Palisades, Big Rock Point, Midland File:Consumers Energy icon.png
Issue date:	12/31/1977
From:	; CONSUMERS ENERGY CO. (FORMERLY CONSUMERS POWER CO.)
To:	;
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ML19331C366	List: ML19331C365; ML19331C367;
References
	NUDOCS 8008150059
	Download: ML19331C367 (40)
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Commentsof theChaineenand toPresident.14-18' 4~ m&p%s@~Espyh_~ 1-4: J 1977 at Consumers Power C z; r.iln Review f+ O Company Directors OfRoers, Regions and General"1 re.A0 Sw < @W 1 d Statement of income 2 i 3ME ~ 9 6 s Statement of Source of Funds foIr'Oroes Property Additione7MMN 71 1 Balance Sheet 22-23 ;.. _.?.- S chb 4 1 ~ Statement of Capitellasson '24

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% Jv , J %J ^ t T E. 3 Statement of Retained Esmines ? # :,n' Mi. m* W' < L-Statement of Capitalin Encese of Par Value 3 - s < ' 1 Notes to the FinancialStatements 123 fmii Auditors' 32 7'. ..'?'i ~ ~' ~ Consumers Stock Prices and Dividends, n and PrincipalMarketson Traded =3B Summary of Statement of income /1977-73 34 ) .'f +;+; r,ert's Discussion and Analysis of the Statemant of Income 35 )* Annual Meeting. Transfer Agents and Registrars 36 Map: Electric and Natural Gas Service Areas... Inside Back Cover s': \\ Consumers Power Company Annual Report 1977 212 West Michigan Avenue Jackson, Michigan 49201 (517) 788-0550 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, transmission, distribution and sale of electricity, and in the purchase, production, manufacture, storage, transmission, distribution and sale of gas,in the Lower Peninsula of the State of Michigan. The Company also supplies steam service in one community.The population of the territory served by the Company is estimated to exceed 5,200,000. The Company's utility operating revenues in 1977 were derived approximately 56% from electric service and 44% from gas service. The industries in the territory served by the Company include automobile and automobile Equipment, primary metals, Chemicals, fabricated metal products, pharmaceuticals, machinery, oil refining, paper and paper products, agriculture, food products and a diversified list of other businesses. The Company has four wholly-owned subsidiaries. Northern Michigan Exploration Company is engaged in exploration and development, purchase and sale of oil and natural gas, primarily operating in the contiguous 48 states. Michigan Gas Storage Company is engaged in the purchase, transmission and storage of gas and in the sale to the Company of gas from interstate pipeline suppliers. Michigan Utility Collection Service Co. Inc.is engaged in a special collection service for past-due utility service bills. Plateau Resources Limited is engaged in acquisition, exploration, and development of properties for the mining and milling of uranium, and the purchase and sale of uranium. b 1 w 3,

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1 ) L .e t o 8 r .I 1 r s 3 h i A.H.Aymond J. D. Selby 3 t To Our Fellow Shareholders: Beginning with President Carter's characterization of the energy crisis as "the f moral equivalent of war" and ending in the continuing, painfully slow debate t on how to mobilize for that new and unique war,1977 was a year of both I exhilaration and frustration for the energy industry. Certainly energy was never before so prominent in so many Americans' minds, but certainly too the i year's events demonstrated just how far and how rough a road we have to i travel in converting that concern to action. 1 Consumers Power Company was not immune to those events on the na-tional energy scene. Indeed, the past year for your Company in many ways reflected a mixture of concern about energy, on the one hand, versus inde-cision and delay on the part of government, on the other. Progress Made on Your Company recorded substantial progress in many areas during 1977, Key Fronts notably in construction, record service to our customers. and the continuing i search for new supplies of oil, gas and uranium. But there were disappoint-ments as well, foremost among them a decline in earnings per share from { those reported for 1976. That decline was not unexpected, and indeed, we could not realistically have hoped to overcome the problems which brought it e [ about in the space of one year. What is important about 1977 is taat we con-tinued to make solid, steady progress in that direction. s At last year's shareholder meetings we noted that while the bitter cold and ) ,j the energy shortages of the winter of 1976-77 were already fading from many 'l people's minds, Consumers Power Company had no intention of changing its I1 stance: The nation continued to face serious energy problems and during 1977 your management continued tc act to meet Michigan's energy needs 3 The Company has major facilities under construction to meet increased de-mand for electric energy in the 1080s. Those facilities are needed on their a ( j t 4 7s ~

/ present schedules. Only if those schedules are adhered to can the projects be kept within present budgeted costs. Our customers will be hurt not only by inadequate service but also by unnecessarily higher costs if the projects are delayed. And of course they will not be a source of revenues for our stock-d holders until they are completed. Yet the Company's earnings continue to fall short of what is necessary to attract capital for the construction program on reasonable terms. This is dem-i onstrated by market evaluation of the Company's securities. The common stock continues to sell below book value and senior securities continue to O The Company's have inferior ratings requiring unnecessarily high yields to attract new cape-1 Authorized Rates tal indeed, the coverages necessary in order to sell new bonds and preferred Are Too Low stock are barely sufficient at this time and threaten to deteriorate further.The i 1 urgent need for rate relief is clear. l How did this situation come about? 1976 was a pretty good year. Why couldn't we keep up the pace in 1977? We worked hard to control costs and j improve efficiency. The problem is twofold. First, inflation has continued at a q rapid pace in 1976 and 1977 and the prices the Company charged in 1977 other than for fuel, pu ciined gas and purchased power, were based mamly on 1975 costs. Secor d, the Company's earnings in 1976 reflected an inade-quate common equity base. As additional shares were issued in 1977 to bnng common equity closer to an appropriate peicentage of total capital, the earn-ings per share declined. Earnings per share stood at a record high of $3.91 per average share out-standing for the 12 months ended March 31,1977. However, during the last three quarters earnings per share declined and ended at $3.18 for the year, as compared with $3.63 f or 1976. Revenues and net income increased during the year, but the gain was not sufficient to offset the combined impact of m-creased operating costs and a larger number of common shares outstanding. In January 1978 the Michigan Public Service Commission issued a finat order granting an additional $11 million in gas rate relief in a case origmally Gas Rate increase filed in November 1974. In March 1977 the Commission had granted a second inadequate interim gas rate increase of $4.9 million annua:ly, which was in addition to $29.2 million in interim relief allowed in June 1975. The final increase was po-marily based on 1975 costs and consequently a new gas rate mcrease re-quest, designed to bring revenues in line with current cost levels and to :m-prove the Company's authorized rate of return, will be filed early in 1978 in October 1977 hearings were concluded on a request filed by the Com-pany in January for $164 million annually in electric rate relief. A final order in that proceeding is expected in the spring. Even as we sought the rate levels necessary to finance needed construc-Needed Construction tion on reasonable terms, that construction continued.The Company invested almost $20 million a month during 1977 in construction of the twin-unit M.d-Continues land nuclear plant, and by year-end the project was 41 percent complete During the coming year plans call for an investment of an additional $350 mil-tion in the project and maintenance of a work force at the site of more tran 2,800. Also in connection with Midland, we were heartened by the decision of a Nuclear Regulatory Commission Atomic Safety and Licensing Board which permitted construction of the plant to continue pending further proceedings Challenges to the project also continue, but we are confident of its ultimate successful completion. In addition to continuing work on Midland and a new 770-megawatt coe -t fired unit at the J. H. Camp nell plant,in September we brought on line a ma! oil-fired electric generati og unit, Karn 4. That unit and its companion ur t Karn 3, have a total gr.erating capability of 1,120 megawatts. Tied closely to the importance of building new facilities is the need to se-Oil, Gas and Uranium cure adequate fuel supplies to meet both electric and gas demand m the Exploration Aggressive years ahead. During 1977 your Company continued an aggressive resource exploration and development program spearheaded by our wholly-c*r'ed subsidiaries Northern Michigan Exploration Company and Plateau Resources Limited. After lengthy regulatory proceedings, federal authorities last year authorized the transportation to Michigan and sale to Consumers Power of 2

gas produced by Northern Michigan Exploration Company in the offshore Louisiana area of the Gulf of Mexico. Deliveries are expected to begin during 1978 and will increase the Company's annual gas supply by three to four billion cubic feet. Though only a year old, Plateau Resources Limited is already deeply in-volved in uranium exploration and development activities. Its mission is to help ensure adequate fuel suppiies for the Company's nuclear plants in the 1980s and thereafter. We added our 1,000,000th gas customer in October 1977, becoming one of Company Now Serves More Than 1,250,000 Electric only 11 natural gas operating compan es in the nation to serve that number. Customers and 1,000,000 Interestingly, we hN added our 1,000,000th electric customer just 10 years Gas Customers earlier,in 1967. In addition, due to successful gas exploration programs and planned con-servation efforts, plus the good performance of the Marysville gas reforming plant and decreased pipeline curtailments, in 1977 we were able to accept new small industrial and commercial gas customers for the first time since April 1975. And demand from our customers was strong. On the electric side, we set new records during the year both in terms of one-hour demand and 24-hour sendout; on the gas side, customers also established a new record for 24-hour usage, which in turn was surpassed in January 1978. During regional meetings of shareholders last spring, we also noted that the introduction of the President's energy bill marked the nation's long over-due first step toward a critical goal-a national energy policy. We said then that it would be a difficult undertaking, and events si1ce make one wonder if it is not insurmountable. Proposals, counterproposals, confusion, political bickering and delays have failed to produce even the semblance of a realistic plan which acknowledges the importance of energy to our nation. Leadership is the key. At the national level it must meld the best interests of Leadership is the Key to all tae diverse segments of our society into a blueprint that fairly allocates the Continued Progress financial burden of energy growth, but also recognizes the essentiality of energy supplies which are adequate to meet the needs and aspirations of us all. At the state level,in Michigan, a first step toward such leadership emerged late in 1977 with the arinouncement of the formation of the Michigan Commit-tee for Jobs and Energy, an organization dedicated to the premise that an economy that is short on energy is also short on jobs. The Committee's Policy Council includes leaders from virtually every sector of Michigan life including labor, business, industry, agriculture, education, energy producers and dis-tributors, consumers, and other groups and individuals concerned about Michigan's energy future. Consumers Power Company endorsed the forma-tion of the Committee, and we believe it is a good beginning in the quest for i realistic solutions to the energy problems facing the state. l But whatever developments take place on the national and state scenes in the year ahead, your management realizes that a large share of the challenge of continued progress for the Company rests with us. We can hope that lead-j Shareholder, Employee ership on the national scene will ert,erge; we can be heartened by its emerg-j Support Vital ence in Michigan; but we can assure you of this much: That in 1978 we will { continue to act to move your Company forward, and that with the continued i support of shareholders and the demonstrated skills of our employees, our l actions will continue to produce positive results. Sincerely, d_ J. D. Selby, President A. H. Aymond, Chairman of the Board February 10,1978 3 L

t Energy and people 1,000,000 gas customers Mars than 10,650 employees served 1,250,000 electric customers and through distribution systems geared to reliabil ty, efficiency and the wise use of energy As the era of rapid expansionin energy use. In 1976 he Company recrganged demand -an era made possible by its field ope rations, consolidating 15 l low cost, abundant energy sources-operating d. visions into eighs operat-has changed to a period of rising en-ing regions, and during the past year ) l further steps were taken to increase ergy prices and somewhat slower growth, the Company has moved ag-the efficiency of the new system in l [ l gressively to maximize the efficiency meeting increasing, although charg-of its distribution system and stress the ing, energy needs. j need for conservation and wise energy kJ ,I in a major conservation effort, the including administrative and inte es h Company in July submitted to the expense, would be covered through a f surcharge added to the bills of cut Michigan Public Service Commission tomers benefiting from the program. <a a home insulation and furnace retrofit including new gas customers. The program which it believes can result in Company estimates savings of 5 bdhon significant natural gas savings without cubic feet of gas annually af ter the first adverse effects on customers' life-year of the insulation program. 25 te Energy Conservation styles. Although approval of the ex-lion cubic feet annually after the sath Encouraged panded insulation program has been year if all homes are insulated to rec-delayed because of Congressional ommended levels. consideration of related national pro. While awaiting approval of the ei-y - grams, the Company remains commit. panded program, the Company cont

a ted to the program's objectives. The ues to encourage the wise use of Dom t

electricity and natural gas through re-three-phale effort includes: a com. bination sidewall and ceiling insulation dio, television and newspaper aw-program, with customers who partici. tising, brochures made availab's 13 hl pate repaying installation costs over customers and displays at custorv a ten-year period; a two-year fur-service locations.The Company >s ax f nace retrofit testing program to in-continuing its existing home insuaw

f crease heating system efficiency, program and in 1977 this effort '

( z which is already under way in conjurc-suited in the insulation of 361 tion with a national program coordi. homes, which will save an est.rna j nated by the American Gas Associa-830 million cubic feet of gas at tion; and actual installation of those Since this program s inception in nearly 120,700 homes have been retrofit devices which prove cost ef-fective during the test period. Follow-sulated at an estimated total saves ing Commission approval, a subsidiary 2,700 million cubic feet of gas. company would be formed to finance f and operate the program, and its costs, e 4

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EEIRE " EEEEEEEERRE [EEEEEEEEEEE ~ ~EEEE E EEEEEEEEEEE "~ 'IEEEE p -EEEEEE EEEEEEEEEEE ,0 EEEEEEEEEEE pIEnEEEEE 00 !l!l!lll 30 EREIIIIII EERIEEEEEEE 0 57 MN FI 71 77 73 74 75 75 77 67 68 69 70 71 72 73 74 75 76 77 s OTHER j I } '[ INDUSTRIAL AND COMMEROlAL L .s ,~ OTHER REs!DENTIAL f "$s'PTCEH O T G ts 3r At yea' end 1977 the Company was d seesing 1 258 380 electric customers, al 22.423 more than one year earlier in a ly service area encompassing 27,800 ts squa'e miles in 61 tower Michigan .d. count es Industrial electric customers he Electric Sales increase, totated 7.830 commercial. 122.577 and Gas and Electric Customers Gas Sales Decline ges,dential 1.127.103 The population TsousANDs of the service area is approximately 3 3 million its industry features the manufacture of automobiles and their 1400 equipment agriculture and tourism, and includes primary metals, chem-1300 scals metal products, pharmaceuti-gg cats machinery. oit refining. paper and paper products food products and di-1100 verse other businesses During 1977 1000 the state's economy. refleCling gains 900 i of in the nationat economy, continued its lue recovery from the 1974-75 recession. 800 tily Of particular significance was a 7 per-700 te cent increase in domestic new car sales Total employment in the state 600 increased by an estimated 150.000 500 - gobs during the year, while the average annuat unemployment rate fell from the 9 4 percent in 1976 to 7.0 percent in 300 977 1977 Partly in response to those gains. 200 n:ri during 1977 the Company sold a total 100 of 25 7 bil, ion kilowatthours of elec. tric y. a 31 percent increase over 0 ,,,, 7, 7, 7, y 7, 77 p, At year-end the Company was serv-ELECTRIC CUSTOMERS eng 1.014.585 gas customers. an in-C gas CUSTOMERS L

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cr asa of 24,066 during tha ycar. Th3 ciudas much of the populous suburban Company servos 6,483 industrial, ar:a north and west of Dctroit.Warmgr 58,906 commercial, and 949,196 resi-weather and energy conservation dential gas customers (of whom measures by customers in 1977 re-882,470 use naturai gas for home heat-sulted in a decline in gas sales to 312 ing) in 40 lower Michigan counties. billion cubic feet, a decrease of 8.7 The 12,900-square-mile gas service percent from 1976. area has 3.8 million residents and in-In September the Company began ac-riod. The reopening of Priority 11 was cepting for the first time since April in anticipation of increased natural 1975 new small industrial and com-gas supplies resulting from conserva-tion efforts, the continued availability Priority 11 Gas Service Pn?rcial gas customers, classified as Reopened onty 11 customers under a plan ap-of the Marysville gas reforming plant, proved by the Michigan Public Service and successful gas exploration efforts Commission. The Company had con-by the Company's exploration subsid-tinued to add new residential cus-iary and interstate pipeline gas sup-tomers (Priority l} throughout that pe-pliers. Operating, maintenance and construc-ance of eight cents an hour became tion employees represented by the effective - September 5,1977. Addi-Michigan State Util;ty Workers Council tional cost-of-living allowances of up (AFL-CIO) approved a new three-year to 25 cents per hour each year are New Labor Agreement contract effective September 1,1977. possit,le. The new contract provides ( Reached The agreement covers approximately for improved benefits during the term ( 4,500 employees and calls for general of the agreement, as well as for certain wage increases averaging 31.3 cents changes in work rules to improve effi-per hour in each of the three years. An ciency. Increase in the cost-of-living allow- "Miss Dig," the utility communications Upper Peninsula. The new overhead system which has reduced damage to program employs the same procedure underground utility lines in Michigan used for underground facilities. Con-i by an estimated 50 percent, was ex-tractors or others planning work in the panded in July to provide assistance vicinity of overhead lines call a toll- "Miss Dig" Extended to to those working in proximity to over-free number at least 48 hours before Overhead Lines head lines as well. At present an over-beginning work. Participating utilities head pilot program is operable in four with overhead lines in the area are lower Michigan counties. Since 1970, then contacted and their representa-when Consumers Power Company ini-tives inspect the work site and provide tiated it, the underground program has information on voltages and the proper grown to encompass other utilities procedures to be followed in working across the entire state, including the near overhead lines. a ) l ,o 7

m Keeping up with demand Our job: Maintain adequate energy supplies for tha 5,200,000 people who live in our service area r Consumers Power Company is a fully total net demonstrated capability of integrated energy company operating 6,406,300 kilowatts. The gas system, one of the larger electric systems and assuming availability of supply, has a one of the larger natural gas systems peak day transmission and distribution in the United States. The Company's capacity of more than 2.8 billion cubic 25 electric generating plants have a feet. New records for energy supply to both current sendout and demand records electric and gas customers were set in being set on the 20th at 93,298,900 kilo-1977. On January 17 a new 24-hour gas watthours and 4,542,340 kilowatts. sendout record was established when Prior to 1977 the peak records were customer usage reached 2.346 billion 88,503,590 kilowatthours and 4,394,295 cubic feet. The previous peak 24-hour kilowatts, both set in August 1973. An-New Peak Records Set sendout was 2.314 billion cubic feet, other record was established during set on December 6,1976. The 1977 the week ended December 10,1977, record was in turn broken on January when the electric system met custom-10, 1978, when customers required ers' demands for 594,800,500 kilowatt-2.38 billion cubic feet. On the eier:tric hours, which surpassed the 584,508,- system the records for 24-hour send-200 kilowatthours sent to customers out and one-hour demand were both during the week ended January 15, broken three times in July, with the 197-'. The Company's Palisades and Big factor of approximately 91 percent, Rock Point nuclear plants both per-versus an average availability factor formed well, supplying nearly 20 per-of approximately 75 percent for the cent of customers' electric energy re-nuclear industry as a whole. After gen-quirements during 1977, up from 11 erating more than five billion kilowatt-percent in 1976. Big Rock Point, which hours of electricity in 1977, more than went into service in 1962 as the na-ever before, Palisades was taken out Nuclear Reliability tion's fifth commercial nuclear plant, of service in January 1978 for refueling, Demonstrated By set a new world record for continuous scheduled maintenance and testing. Big Rock, Palisades production of electricity by nuclear The two plants also continued to generation. The plant operated a total demonstrate that nuclear power is eco-of 343 continuous days from August nomical. In 1977 they generated power 13, 1976 until July 23,1977, when it at a cost of.209c per kilowatthour in was shut down until October for re-fuel costs, compared to a system aver-fueling and scheduled maintenance. age of 1.208c and an average of 1.541C Also during 1977 the 730,000-kilowatt for fossil-fueled generation alone. Palisades plant had a unit availability Fuel for the Company's fossil-fueled amounted to 6.2 million barrels during electric generating plants continued to the year at an average cost of $14.89 increase in cost. In 1977 cmi-fired per barrel as compared to $13.60 in plants burned 5.6 million tons at an 1976. Fuel, Gas Costs Up average cost of $25.36 per ton as com. The cost of gas purchased and pro-pared to $23.37 in 1976. Consumption duced by the Company also rose, from of oil, which fuels about one-fourth of $1.37 per Mcf in 1976 to $1.63 in 1977, the Company's generating capacity, an increase of 19 percent. n t

Th3 Marysvills gas reforming plant, dure known as "displacem:nt," up to which converts liquid hydrocarbon 35 million cubic feet of gas per day en-feedstocks into pipeline-quality gas, route via interstate pipeline to Con-produced 40 billion cubic feet of gas sumers Power were diverted to the during the year, which represented 12 Ohio utility. In turn, feedstock liquids percent of the Company's total gas originally intended for the Ohio utility's supply. During the extremely cold reforming plant were sent to Marys-weather of January 1977 Marysville not ville, where they were converted into Marysville Ran Smoothly only played a vital role in maintaining pipeline-quality gas for the Company's uninterrupted gas service to the Com-customers. The Ohio utility, in addition pany's customers in Michigan, but also to supplying the feedstock, also paid came to the aid of an Ohio gas utility the cost of reforming it. which was experiencing serious sup-Total gas production at Marysville ply shortages and a partial shutdown since the plant went into operation in of its own reforming plant. For approx-1973 is in excess of 229 billion cubic imately two months, through a proce-feet. The Company's wholly-owned subsidi-some 17,000 acres in Utah and Colo-ary, Plateau Resources Limited, com-rado. With an office in Grand Junction, pleted its first year in June and Colorado, Plateau increased its staff throughout 1977 continued its search to 96 as operational activity increased for uranium, principally to help meet during the year, and also completed an Plateau Has its First the Company's long-term need for fuel ore-buying station in Utah. Based on Birthday for its nuclear plants. Plateau owns exploration work through 1977, it is es-mining claims covering 122,000 acres timated that there are reserves of ap-in Utah, Colorado and Wyoming and proximately 6.2 million pounds of ura-has options to purchase claims on an nium contained in 2.6 million tons of additional 3,000 acres. It also has economically mineable ore on Plateau rights to purchase mined ores from properties. About 73 percent of the Company's billion cubic feet in 1976 to some 100 gas supply in 1977 came from inter-billion cubic feet in 1977, largely due state pipeline suppliers, up 5 percent to new gas production in the Gulf of from 1976. Another 15 percent came Mexico. The Company has all or part Gas Supply improved from Michigan production and 12 per-of working interests in 71 producing cent was produced by the Marysville oil or gas wells in several fields in gas reforming plant. Curtailments from southern lower Michigan, from which pipeline suppliers remained in effect it receives some 8 million cubic feet but eased somewhat, from some 123 of gas per day. Northern Michigan Exploration Com-duction platforms as well as an interest pany, the Company's wholly-owned oil in a fifth platform under construction. and gas exploration and development NOMECO also has interests in 455,000 subsidiary, completed its 10th full year acres onshore Louisiana and in Texas, of operations in November. NOMECO Colorado, Wyoming, Montana, South operates primarily in the lower 48 Dakota and California. states but also has interests in petro-In all, NOMECO has interests in leum concessions in the Kingdom of leases on 4,361,000 acres and has in-Tonga 1,100 miles northeast of New terests in 152 oil and gas wells, as Zealand and the country of Belize in compared to 135 at year-end 1976. In Central America. NOMECO has inter-1977 NOMECO was involved in the NOMECO's Success Story ests in oil and gas leases on approxi-drilling of 56 wells, and found oil or gas Continued mately 471,000 acres in northern lower in 18. The subsidiary's net production Mich;gan, from which it supplies the for 1977 was 1,276,000 barrels of oil Company with some 35 million cubic and 15 billion cubic feet of gas, and its feet of gas per day (an additional 75 proved reserves as of January 1,1978 million cubic feet per day is supplied were 8,620,000 barrels of oil and 79 by other producers in northern lower billion cubic feet of gas. Michigan). For 1977 NOMECO, with total assets NOMECO is also involved in the of $79.5 million, had gross revenues of search for gas and oil in seven tracts $43.5 million and net income of $12.8 located on 32,500 acres offshore Lou-million. Isiana, and has interests in four pro-8 k [

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Lead time is the name of the game Tomorrow's energy can only come from facilities being developed today ni. c. ... a .,c 1.. .,.. m.. v. . An .a w .r. ~ex In the energy business, as perhaps in Michigan, for example, took two and no other, long-range planning and ex-one-half years after the first commer-tended lead times are essential in pro-cial discovery was made until the first viding adequate facilities to meet -in natural gas was delivered to a cus-Consumers Power Company's case-tomer. the needs of millions of people dec-So the planning function and the ades into the future. The lead time re-construction and exploration pro-quired in building a major coal-fired grams are where tomorrow's adequate electric generating plant is now more energy supplies have to begin, than eight years, while building a nu-In its construction activities in 1977 clear plant takes more than 11 years. the Company spent $521 million, ad-i l Exploring for oil and gas, developing vancing three major electric projects discoveries and building gathering and and strengthening its gas supply fa-transmission systems offer similar cilities in the north-central Lower challenges-the development of the Peninsula. gas producing area in northern lower Perhaps the most dramatic construc-up to 4,000,000 pounds of steam per tion event of the year in Michigan oc-curred on July 16 when the 185-ton hour to The Dow Chemical Company dome for Unit 1 of the Midland nuclear for use in industrial processas. Unit 2 is scheduled to go into service in 1981, plant was lifted - by two 300-ton-ca-and Unit 1 -which will produce the pacity ground-based ringer cranes-into position 200 feet above the base process steam for Dow -in 1982. The project, estimated to cost $1.67 billion, of the reactor building. Only a week has been noted nationally as a fore-before Unit 1's 170-ton-capacity polar most example of cogeneration. crane had likewise been lifted into Quarterly press briefings were held Midland Construction place. Progresses Substantially Construction continued on schedule during the year at the plant to keep news media informed on construction throughout 1977 with an average of progress, and public interest remained some 2,500 workers at the plant site. high as more than 3,200 people in By year-end more than $655 million groups of varying sizes visited the site I had been spent on the project, about and were updated on the project by $230 million of it in 1977; and the plant Company personnel, was 41 percent complete. The construction permits for the When in operation, Midland's two Midland plant are the subject of liti-units will have a total generating capa-gation which is discussed on Page 17 l i bility of approximately 1,300 mega-of this Annual Report. That litigation k watts as well as the ability to supply did not delay construction during 1977. The Company's 620-megawatt Unit 4 oil-fired Karn 3 and 4 cost $250 million. Karn 4 Completed, of the Dan E. Karn plants at Essexville, With coal-fired Units 1 and 2, the Karn Placed in Service Michigan, went into commercial op-plants have a total capacity of 1,670 eration in September. Unit 3 originally megawatts, went into operation in 1975. Together, Construction of Unit 3 of the James H. to cost $510 million and is scheduled Campbell plants at Port Sheldon, for commercial service in 1980. At that Campbell 3 Work Proceeds Michigan, continued as planned during time the three coal-fired units at the the year, with an average of nearly 450 Campbell plants will have a total ca-workers on the project. The 770-mega-pacity of 1,430 megawatts. watt nameplate rating unit is expected 11

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n-Th3 Comp;ny's la g:st gas construc-f et daily, or more than 20 parcent, the tion job of 1977 was completed in capacity of the Company's pipeline January 1978, when a new 26-mile system for transporting gas from the Me.e Gas trom the pipeline linked the Muskegon River northern Niagaran trend, an oil and gas s Northern Niagaran Trend Compressor Station near Marion, producing area extending northeast Michigan, with existing facilities to the across the northern Lower Peninsula. north in Missaukee County. The line The cost of the project was approxi-will increase by about 25 million cubic mately $4.5 million. i The Company expects approximately ultimately, to the bills paid by custom- $2.9 billion to be spent on construc-ers for those services. In 1977 alone tion during the five-year period 1978-the Company spent a total of $112 mil-1982. Of that total, anticipated con-lion to meet environmental standards l struction expenditures for environ-involving air, water, nuclear radiation l mental protection are estimated at control, solid waste disposal, noise l Construction Costs include $519 million. In addition, $230 million abatement, aesthetics and land use. Major Environmental in costs will be incurred for operation About $89 million went for capital in-Expenses and maintenance of pollution control vestments in facilities and the remain-equipment and for the premium re-der was incurred as added costs for quired for low-sulfur fuel over the five-operation and maintenance of environ-l year period. mental facilities, including incremental l Meeting environmental require-costs for low-sulfur fuel and energy ments adds significantly to the cost of costs for operation of environmental supplying electric and gas service and equipment. l l The Company has been committed Company and the Michigan Public to a sound policy of environmental Service Commission staf f, allowing two l quality for many decades, and its ac-of the plants until 1983 and one until tivities have borne out that commit-1985 to comply, would cost $95 million ment. However, particularly in these over the period, thus saving customers days of severe inflation, the Company $500 million. And while the delay feels strongly that the cost-benefit would be much more economical, it ratio of every environmental activity would not compromise air quality in should be studied carefully to deter-the areas adjacent to the plants. The mine just what projects are necessary. Company received favorable response Those projects which will bring little to part of its proposal when in January or no measurable improvements but 1978 the MAPCC granted a compli-involve substantial expense should be ance date extension for the J. H. rejected. Campbell plant until 1985, saving As one example of this problem,in the Company's customers an esti-Environmental December 1977 the Company pre-mated $310 million between 1980 and Quality sented evidence to the Michigan Air 1985 provided that subsequent ap- ) Protected Pollution Control Commission proval is also obtained from the Fed-l (MAPCC) to support its prior request eral Environmental Protection Agency. l to modify a January 1,1980 require-The dec'sion allows an orderly and { ment for reduction of sulfur dioxide economical changeover while still as-emissions at three of its electric suring continuing protection of air plants. The Company pointed out that quality. Commission decisions on the j if it was required to convert to low-request for extensions at the two other ( sulfur coal at those plants by 1980, its locations, the Cobb and Weadock customers would pay $595 million for plants, are pending. the substitution during the period Consumers Power Company will 1980-1985, based on the cost of adding continue to present such proposais to precipitators to two plants and using the appropriate authorities whenever the more expensive low-sulfur coal at the Company feels it can save its cus-all three. However, e more gradual tomers money without endangering phasing in of the environmental re-Michigan's environment. quirement, as recommended by the 13 ~

i Corporate Review-1977 1977 was a year of record financing to maintain needed construction ) The year was highlighted by the press-Preferred Stock ing demands of financing, both to pro-July vide the funds necessary for construc- $32 million gross proceeds from pri-tion and to retire maturing debt which vate placement of 320,000 shares, cu-was incurred at interest rates far be-mulative, $100 par value, at $100 per low those now in effect. To accom-share, annual dividend rate: $9.25 1977 Financing plish those aims during 1977 the Com-Cost after underwriting commissions: pany completed new financing in the 9.31 % total amount of approximately $509.5 million, which included three issues of Preference Stock First Mortgage Bcnds, an issue of Pol-October lution Control Revenue Bonds, one is- $50 million gross proceeds from sale sue of Preferred Stock, one issue of of 2,000,000 shares, cumulative, $1 par Preference Stock, and two issues of value, at $25 per share, annual divi-Common Stock, as follows: dend rate: $2.23 First Mortgage Bonds Cost after underwriting commissions: March 9.27 % $40 million,8% % Series due 1997 Effective interest cost to the Company: Common Stock 8.80 % May 3,500,000 shares, $23% per share June Net proceeds after underwriting dis- $85 million,8% % Series due 2007 counts and commissions: $78.5 million Effective interest cost to the Company: 9.01 % November 2,500,000 shares, $24% per share October Net proceeds after underwriting dis- $100 million,8% % Series due October counts and commissions: $58.5 million 15,2007 Ef fective interest cost to the Company: 8.74 % Pollution Control Revenue Bonds Also during the year the Company neg had an increase in a bangm 23 mi lion due August 1,1982-August loan, from $50 million to $75 million, 1,2007 and increased the credit available un-Effective interest cost to the Company: der a lease arrangement for a portion 4.50% to 6.40% depending on respec-of its nuclear fuel from $32.5 million to tive maturity dates $50 million. The need to maintain an expanded $203 million of anticipated participa-construction program and to finance tion by third parties. To finance that 1978 F.inancing that construction will not lessen in the program it is expected that the Com-year ahead. The Company estimates pany will carry out financing in the construction expenditures of approxi-approximate amount of $450 million mately $563 million for 1978, net of during the year. 14

Average Cost of Long term Debt Average Cost of Preferred PERCENT and Preference Stock PERCENT 8.0 8.0 e E 7.0 7.0 ill 6.0 6.0 d ill II ~ i illlilli II III Il I " si ill i Il I !Il I I Illi i "II Il Ill l ill illlilll!' ilillMI 67 68 69 70 71 72 73 74 75 76 77 67 68 69 70 71 72 73 74 75 76 17 The 19,431 shareholders who are en-automatically reinvested in new shares rolled in the Company's dividend rein-of common stock. Participants in the vestment and common stock purchase plan may also invest optional cash pay-plan had dividends of $5,414,067 rein-ments along with their reinvested vested in common stock in 1977, along dividends. Common stock sharehold-Dividend Reinvestment with optional cash payments of ers who are interested in obtaining and Common Stock $ 1,832,50 2. At year-end, 383,021 more information concerning the divi-Purchase Plan shares of stock had been issued to dend reinvestment plan should write plan participants at an average price to: The Stock Transfer Department, of $23.15 per share. Proceeds from the Consumers Power Company, 212 W. issue of stock through the dividend re-Michigan Avenue, Jackson, MI 49201. investment program were used to help Any offering of securities by the Com-finance the construction program. Un-pany will be made only by means of a derthe plan, dividends of shareholders prospectus. who have elected to participate are One facet of the Company's corporate der granting an additional $11 million oicture entering 1978is clear:if neces-relief in this case. sary financing is to be obtained at an Also before the Commission is an acceptable cost, then timely and ade-application filed in January 1977 for J quate rate relief-relief which will $164.2 million in electric rate relief, l bring the Company's revenues, earn-including $43.7 million in interim relief. Ings and rates of return into a realistic Hearings have been completed in the Electric and balance with the cost of doing busi-proceeding and a final order on this re-Gas Rate Cases ness-is essential. In 1977 two such quest is expected in the spring. Of the requests for rate relief were pending total amount requested, some $79.4 before the Michigan Public Service million reflects proposed accounting Commission. In March 1977 the MPSC changes needed to improve the quality authorized $4.9 million annually in in-of earnings and would not increase net terim gas rate relief in a proceeding income. The balance is needed to re-originally filed by the Company in No-cover and meet increased operating vember 1974. That rate relief was in costs and to increase the authorized addition to $29.2 million in interim re-rate of return on common equity in the lief granted in June 1975. In January electric business from the present 1978 the Company received a final or-12.75 percent to 15 percent. 15

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in September a Nuclear Regulatory Chemical Company's need for process Commission Atomic Safety and Li-steam from the plant as well as Dow's censing Board issued a decision al-Intentions concerning continued oper-Iowing construction of the Company's ation of its fossil-fueled facilities, and Midland nuclear generating plant to clarification of the report on the plant continue pending the outcome of hear-Issued by the former Atomic Energy ings on issues which a U.S. Court of Commission's Advisory Committee on Midland Litigation Appeals in July 1976 remanded to the Reactor Safeguards. Continuing NRC for review. That decision was af-At the Company's request, the U.S. firmed by an Atomic Safety and Licens-Supreme Court is reviewing the July ing Appeal Board in February 1978. 1976 Court of Appeals decision. The Hearings on the merits of the issues Court heard arguments in the case in remanded by the Court of Appeals to December 1977, and a decision is ex-the NRC are to be conducted in 1978. pected early in 1978. Those issues are the impact of energy In August the Company applied to conservation and nuclear fuel cycle the NRC for a 40-year operating li-matters on the cost-benefit an11ysis cense for the Midland plant. Included performed for the plant, any changed in the application was the Final Safety l circumstances regarding The Dow Analysis Report, a sescription and safety analysis ot '. e facility and its design and opers.tional capabilities. The Midland plant environmental re-port, another major c'ement of the li-cense application, is scheduled to be submitted to the NRC by March 1,1978. In December an NRC Atomi-Safety and Licensing Appeal Board issued a 432-page decision which remanded proceedings for the taking of further evidence in light of recent events and to determine what conditions should be attached to the Midland constructi?n permits in order to protect smaller util-Plant Additions ities in the Company's service area and improvements against practices which the Appeal MILLIONS OF DOLLARS Board found to be inconsistent with the antitrust laws. The Appeal Board ac- @0 tion reversed the finding of an Atomic 5 Safety and Licensing Board which in 1975 ruled that operation of the Mid-510 E land plant without license conditions 480 E would not be inconsistent with the an-450 titrust laws. Since the 1975 decision 420 E the Company has offered to sell a total 390 E of approximately 12 percent of the 30 E electric portion of the Midland plant to EE-aR Northern Michigan Electric Coopera-330 3M EEE EE tive, Inc. and Wolverine Electric Coop-BEE EE erative, Inc. and has effered to sell to 270 240 -EEE EE 210 EEEEE EE the cities of Holland and Lansing a total of approximately 9 percent of the

llE, electric portion cf the facility. Northern 180 150 Michigan Electnc. Cooperative, Inc.,

l 120 mEEEEEEEEE gggggggggg Wolverine Electnc Cooperative, Inc. 90 and the City of Holland are intervenors EEEEEEEEEEE 60 .m the proceeding. Although the Corn-30 EEEEEEEEE EEEEEEEEE pany expects ultimately to resolve this j $7 es as 7e n n n 14 n 7s n matter through agreement with the co-l operatives and municipalities, the 'l L. OTHER Company does not agree with the find-cas ings of the NRC Appeal Board and ELECTRIC redeW d hs Msbn. 3 17 r

During 1977 the Company reached set-depending on the future value of cer- - c tiements with the three remaining de-tain uranium fuel assemblies. The f. fendants in its lawsuit stemming from Company in 1976 had reached settle-k work done at the Palisades nuclear ments totaling $13.5 million with the k Palisades Suit Settled plant. Under an agreement reached in suit's other two defendants, Ingersoll-df May 1977 with Bechtel Corporation Rand Company and the Wolverine On p @g and Bechtel Company, the Company Tube Division of UOP, Inc. The total 6 accepted approximately $14 million in amount of the settlements reached cash and future services, and under with the five defendants in 1976 and No ~ an agreement reached in December 1977 was approximately $68 million kh with Combustion Engineering,Inc., the in cash and future services. The Com-GW Company accepted approximately pany originally filed the suit in August { 35, $40.5 million in cash and future serv-1974 in Federal District Court in Grand t *lQ ices, which could rise to $60.5 million Rapids. 5 ,W ~y At its April 1977 meeting the Com-The Company's 1977 Annual Meet- _l pany's Board of Directors raised the ing of Shareholders was held April 12, gj quarterly dividend on common stock 1977, in the Company's Parnall Office W D, M by 6 percent, to 53 cents per share. Building. A total of 26,778,071 shares. During the year the Company paid or 69.7 percent of all shares of stock Dividends and $77,866,000, or $2.09 per share,in divi-outstanding, was represanted at the "%J Annual Meeting dends toits common shareholders and meeting either in person or by proxy. ,5M $33,372,000 in dividends to holders of Following the Annual Meeting almost preferred and preference stock. Pref-5,000 shareholders attended eight re-Q erenca shareholders converted gional shareholder meetings held dur-W 680,326 shares of the $5.50 preference ing April in the Company's region 2 ^d stock issued in 1975 and 452,256 headquarters cities. shares of the $6.00 preference stock The 1978 Annual Meeting of Share-T, issued in 1974 into 4,002,652 shares of holders will take place Tuesday, April common stock by year-end. 11, at 2.00 P.M. Jackson time in the 'u As of December 31,1977, there were Parnall Office Building,1945 West Par-154,550 common shareholders and nall Road, Jackson, Michigan. Four re- .i 40,051 preferred and preference gional meetings of shareholders also shareholders. The Company's share-will be held in 1978 as follows: Grand holders include residents of all 50 Rapids, April 12; Lansing, April 18; states, the District of Columbia and 28 Saginaw, April 19; and Pontiac, April foreign countries, with average hold-

20. Further information will be made ings of 259 shares. Approximately 56 available to shareholders prior to the percent of all shareholders are Michi-dates of the regional meetings, gan residents.

3 At the 1977 Annual Meeting, the share-of The Upjohn Company, whc retired Dr. Upjohn Retires, holders elected Robert B. White, exec-in accordance with the Board's retire-R. B. White Elected utive vice president of Citibank, N.A., ment policy. Dr. Upjohn made many to Board New York, a director. Mr. Whito suc-valuable contributions during the l coeded Dr. E. Giffoid Upjohn, director 12 years he served as a director. l . _,, + ( The Company was saddened at the loss on May 2 of Edward N. Cole, a In Memoriam member of the Board of Directors,who died in the crash of a private plane. Mr. Cole was chairman of the board of International Husky, Inc. and Check-er Motors Corporation, and was retired president of General Motors Corpora-tion. He had been a valued member of the Company's Board of Directors .f since October 1974. 1 18

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consuusas eowan coueiny Statement of income i I 4 YEAR ENDED DECEMBER 31 1977 1976 j' Thousands of Dollars OPERATING REVENUE (Note 1): Electric $ 908,963 $ 878,468 l Gas 724,821 700,236 l 2.826 2.548 Steam. 51.636.610 $1.581.252 Total operating revenue. OPERATING EXPENSES AND TAXES: Operation-Fuel consumed in electric generation $ 262.723 $ 266,447 130,005 127,464 Purchased and interchange power 496,567 460,458 Cost of gas sold (Note 1). Other 215.107 194.555 Total operation. $1,104,402 $1,048,924 Maintenance (Note 14) 80,576 68,724 Depreciation and amortization (Note 14). 102,448 96,954 General taxes. 74,397 77,365 62,845 77.315 income taxes (Note 8). Total operating expenses and taxes. 51,424.668 $1.369.282 NET OPERATING INCOME: $ 162,873 $ 151,952 Electric Gas. 48,952 59,864 117 154 Steam Total nat operating income 5 211,942 $ 211.970 OTHER INCOME: Allowance Mr funds used during construction prior to 1/1/77 (Notes 1 ar.d 9) $ 33,848 Allowance for other funds used during construction after 1 1l77 (Notes 1 and 9) 30,444 Income of subsidiaries (Notes 1 and 10). 13,450 19,779 Gain on reacquisition of long term debt. 2,389 2,539 5,508 1,469 Other, net. .................... $ 51,791 3 43.635 Net other income INTEREST CHARGES: Interest on longterm debt. $ 131,931 $ 113,695 562 2,365 Other interest charges Allowance for borrowed funds used during construction after 1/1/77 (Nutes 1 and 9) (23,767) 5 108.726 s 116.060 Total interest charges. Net income. $ 155,007 $ 144,545 25,437 24,071 OlV10 ENDS ON PREFERRED STOCK DIVIDENDS ON NONCONVERTIBLE PREFERENCE STOCK. 5,764 1,701 3,386 5.177 DIVIDENDS ON CONVERTIBLE PREFERENCE STOCK Net income after dividends on preferred and preference stock. $ 120,420 $ 113.596 AVERAGE NUMBER OF SHARES OUTSTANDING: 37,866,497 31,300,333 ASSUMING NO DILUTION 39,942,354 34,487,013 ASSUMING FULL DlLUTION EARNINGS PER SHARE OF COMMON STOCK: 53.18 $3.63 ASSUMING NO DILUTION..... $ 73 $3.44 ASSUMING FULL DILUTION The accompanying notes are an integral part of this statement. t 20

l Statement of Source of Funds consuuens eowes coverny for Gross Property Additions yti,tuoto occtygta 31 1977 1976 f SOURCE OF FUNOS FOR GROSS PROPERTY ADDITIONS: Thousands of Dollars Funds generated Net income $ 155,007 $ 144,545 from operations: Principal noncash items-Depreciation and amortization 102,448 96,954 Per statement of income. Charged to other accounts 5,798 8,849 Deferred income taxes, net 25,328 26.603 investment tax credit, net 46,728 14,643 Allowance for funds used during construction (54,211) (33,8481 Undistributed earnings of subsidiaries (Note 1). (11,189) (8.400) $ 269,909 $ 249,346 Less-Dividends on preferred stock. 25,437 24,071 Dividends on preference stock 9,150 6,878 Dividends declared on common stock 77,866 61,038 Retirement of long term debt and preferred stock. 17,035 15.848 $ 140,421 $ 141,511 Funds obtained from Issuance of common stock $ 146,221 $ 114,508 new financing: Issuance of preferred stock 32,000 50,000 50,000 f,; issuance of preference stock f< Sale of first mortgage bonds 225,000 190,000 Net proceeds from installment sales contracts payable 17,304 18,643 j-Increase in term bank loan 25,000 Increase in other long-term debt, 131 60 f Decrease in notes payable (38,500) p, Less refunded first mortgage bonds. (24,010) (60.000) S $ 471,646 $ 274.711 h Other sources Changes in net current assets and current liabilities k{ (uses) of funds: (excluding obligations expected to be refinanced)- J Temporary cash investments. $(103,274) $ (36,450) p Accounts receivable 22,321 (54,489) Accrued revenues 13,484 (28,060) Generating plant fuel stock 1,142 (8,377) Gas in underground storage (55,198) 8,253 (2,601) 15,238 Accounts payable. Accrued taxes. 4,278 67,776 _jl4,567) (38,336) Other, net $(134,415) $ (74,445) Property sold under leaseback arrangements (Note 5). 25,025 10,689 Increase in investment in Plateau Resources Limited (15,000) (5,000) 2,890 (28,155) Other, net. $(121,500) $ (96,911) $ 490,567 $ 319,311 Total funds for construction from above sources. A!!cwance for funds used during construction 54,211 33.848 Gross property additions. $ 544,778 $ 353.159 Gross property additions by reportable segments: Electric $ 510,792 $ 326,489 I Gas 29,879 24,953 Other 4,107 1,717 i ( ) Denotes deduction. The accompanying notes are an integral part of this statement. 21

Balance Sheet Assets DECEMBER 31 1977 1976 Thousands of Dollars UTILITY PLANT: At original cost-Plant in service and held for future use-Electric. $2,447,839 $2,276,100 Gas 1,037,052 1,015.562 Steam 3,306 3,306 Common to all departments 48,548 43,516 $3,536,745 43,338,584 Less-Provision for accrued depreciation. 968,114 864,945 $2,568,631 $2,473,639 Construction work in progress (Notes 2 and 3) 930,778 627,886 $3,499,409 $3,101,525 OTHER PHYSICAL At cost or less-less provision for accrued depreciation of PROPERTY: $359,000 in 1977 and $363,000 in 1976 5 3,185 3,045 INVESTMENTS: Wholly 4wned subsidiaries (Note 1)- Michigan Gas Storage Company. $ 20,455 $ 20,427 Northern Michigan Exploration Company (Note 10) 52,714 39,914 Plateau Resources Limited 18,361 5,000 988 971 Other, at cost or less $ 92.518 5 66,312 CURRENT Cash $ 20,272 $ 20,804 ASSETS: Temporary cash investments. at cost 139,724 36,450 Accounts receivable,less reserves of $2,557,000 in 1977 at:d $2.341,000 in 1976 124,577 146,898 Accrued revenues (Note 1) 98,685 112.169 7,700 Notes receivable from subsidiary Gas in underground storage, at average cost. 142,813 87,615 61,961 63,103 Generating plant fuel stock, at average cost 67,218 51,570 Materials and supplies, at average cost 79,030 69,936 Prepayments and other $ 741,980 $ 533,545 Total current assets 5 47.958 3 55.185 OTHER: Deferred debits (Note 7), $4,385,050 $3,814,612 The accompanying notes are an integral part of this statement. 22

CONSUMERS POWER COMPANY Stockholders' Investment and Liabilities M DECEMBER 31 1977 1976 Thousands of Dollars CAPITAllZATION: (See Statement of Capitalization) Common stockholders' equity $1,159,570 $ 959,662 Preferred stock 377,934 346,334 Preference stock 123,371 87,189 Long term debt 1,815,671 1,569,881 Total capitalization. $3,476.546 $2,963.066 CURRENT LIABILITIES: Current obligation expected to be refinanced-First Mortgage Bonds,2%% Series due 1977 $ 24,010 Other current liabilities-Current maturities and sinking fund on long-term debt (Note 4) $ 19,345 $ 16,635 Accounts payable 135,017 137,835 Accounts payable to sulsidiaries 13,511 13,294 Accrued taxes. 177,238 172,960 Accrued interest 40,762 38,109 Other 77,293 65,313 $ 463,166 $ 444,146 Total current liabilities $ 463,166 $ 468.156 DEFERRED Deferred income taxes (Note 8) $ 296,503 $ 270,708 CREDITS AND Investment tax credit (Note 8). 122,200 79,750 RESERVES: Other 26,635 32,932 $ 445,338 $ 383,390 Construction Commitments and Contingent Liabilities (Notes 3 and 11) $4,385,050 $3,814,612 The accompanying notes are an integral part of this statement. 23

Statement of Capitalitation CONSUMERS POWER COMPANY DECEMBER 31 1977 1976 Thousands of Dollars Common Stockholders' Equity (Note 4): Common stock, $10 par value, authorized 60,000,000 shares; outstanding 42,199,870 and 34,846,409 shares, respectively $ 421,999 $ 348,464 Capital in excesa of par value 405,502 318.837 Retained earnings, 349,138 306,584 Less-capital stock expense 17,069 14,223 Total common stockholders' equity $1,159,570 $ 959,662 Preferred Stock-cumulative, $100 par value, authorized 5,000,000 shares (Note 4): $4.50-547,788 Shares Outstanding $110.00 Current Redemption Price $ 54,779 $ 54,779 $4.52-111,550 Shares Outstanding 104.725 Current Redemption Price 11,155 11,555 $4.16-100,000 Snares Outstanding 103.25 Current Redemption Price 10,000 10.000 $7.45-700,000 Shares Outstanding 108.00 Current Redemption Price 70,000 70,000 $7.72-700,000 Shares Outstanding 106.00 Current Redemption Price 70,000 70.000 $7.76-750,000 Shares Outstanding 109.19 Current Redemption Price 75,000 75,000 $7.68-550,000 Shares Outstanding 108.00 Current Redemption Price 55,000 55.000 $9.25-320,000 Shares Outstanding 110.00 Current Redemption Price 32,000 Total preferred stock 5 377,934 5 346.334 Preference Stock-cumulative, $1 par value, authorized 5,000,000 shares (Note 4): Shares Conversion Outstanding Price Converted Common Issued 1977 1976 1977 1976 1977 1976 Convertible $6.00, $50 Stated Value 147,744 236,909 TE5d 89,165150,617 356,660 602,468 $ 7.387 5 11,846 Ccnveitible $5.50, $50 Stated Value 319,674 506,867 $15.50 187,193 345,003 603,411 1,112,477 15,984 25,343 Nonconvertible $2.43, $1 Par Value 2,000,000 2,000,000 2,000 2,000 Nonconvertible $2.23, $1 Par Value 2,000,000 2,000 Capitalin excess of par value of nonconvertible preference stock. 96,000 48,000 Total preference stock $ 123,371 5 87,189 Long Term Debt (Note 4): First Mortgage Bonds, secured by a mortgage and lien on substantially all property-2?'s%, Series due 1977 5 $ 24,010 9%%, Series due 1980 75,000 75,000 3%%, Series due 1981 38,992 38,992 11%%, Series due 198'?.. 50,000 50.000 3%4%%, Series due 1984 1991. 195,068 206,420 11%%, Series due 1994... 60,000 60,000 5%%9%%, Series due 1996-2000 497,088 461,771 11%%, Series due 2000... 75,000 75 000 7%%9%%, Series due 20012007 620,000 435,000 Total First Mortgage Bonds $1,611,148 $1,426,193 Installment Sales Contracts Payable, average interest rate 6.48% it,1977 and 6.57% in 1976 (net of $9,471,000 and $3,775,000, respectively, held in trust pending certification of construction expenditures) 118,229 100,925 35,200 35,800 Sinking Fund Debentures,45s%,due1994.. 75,000 50,000 Bank Term Loan, at 114% of Bank's prime rate due 1980 through 1985 190 59 Other..... (4,751) (2,451) Unamortized net debt premium and discount-not material by individual issue $1,835,016 $1,610,526 Deduct.-Current maturities and sinking fund-First Mortgage Bonds 18,045 16,035 Sinking Fund Debentures.. 600 600 First Mortgage Bonds,2%% Series due 1977 24,010 Installment Sales Contracts Payable 700 Total long-term debt $1,815,671 $1,569,881 Total capitalization $3,476,546 $2.963.066 The accompanying notes are an integral part of this statement. 24

Statement of Retained Earnings CONSUMERS POWER COMPANY YEAR ENDED DECEMBER 31 l 1977 1976 Thousands of Dollars ~' BALA' CE-Beginning of year. $306,584 $254,026 1::: ',e* i come after dividends on preferred and preference stock 120,420 113.596 $427,004 $367,622

i;.: i-Cash dividends on common stock declared in the amount of $2.09 per share in 1977 a-d 52 00 per share in 1976 (quarterly dividend increased from $.50 to $.53 per share beginnir:g e A:n' 1977) 77,866 61.038 BALANCE-End of year (Note 4)

$349,138 $306.584 Statement of Capital in Excess of Par Value YEAR ENDED DECEMBER 31 1977 1976 1977 1976 Number of Shares Thousandsof Dollars COMMON STOCK BA!ANCE-Beginning of year 34,846,409 27,561,474 $318,837 $252,203 issuance of common stock through: t Sa es wovgh underwriters 6 000,000 5,500,000 77,035 58,022 y Dividend reinvestment plan 313,031 69,990 4,116 786 } Er;'c,ee stock ownership plan 80,359 1,136 Conversions of preference stock Net gain en recquisition of preferred stock S60,071 1,714,945 4,211 7,625 167 201 g BALANCE-End of year. 42,199,870 E8 g4 $405,502 $318,837 NONCONVDnlBLE PREFERENCE STOCK BALAN:E-Beginning of year 2,000,000 $ 48,000 Issuance of nonconvertible preference stock. 2,000,000 2,000,000 48,000 48,000 MLANCE-End of year 4,000,000 2,000,000 $ 96,000 $ 48,000 The accompanying notes are an integral part of these statements. 25

Notes to the Financial Statcmants 1 SIGNIHCANT ACCOUNTING POLICIES The Company follows the equity method of accounting for the investment in its wholly-owned subsidiaries. Under this method of accounting the Company's interest in the earnings of the subsidiaries is reflected currently in earnings and in the carrying value of the investments. At December 31,1977, the undistributed earnings of subsidiaries were $40,725,000. Operation expense includes approximately $94,390,000 in 1977 and $74,174,000 in 1976 relating to gas purchased from two of these subsitiaries. The Company provides depreciation on the basis of straight-line rates approved by the Michigan Public Service Commission (MPSC). g (See Note 14) The Company accrues revenues for service rendered to utility customers but not billed at month end. The Company makes annual contributions to the pension plan sufficient to cover current service custs, interest on unfunded prior service costs, and amortization of prior service costs over a 25-year period. (See Note 7) The Company capitalizes as a component of the cost of utility plant and includes in other income and as a deduction to interest charges allowance for funds used during construction (AFUDC), a noncash item. AFUDC is the cost of funds applicable to ut;lity plant in process of construction. (See Note 9) Reference is made to Note 8 for information regarding income taxes. 2 NUCLEAR GENERATING PLANTS Construction work in progress includes $655,587,000 at December 31,1977 and $425,707,000 at December 31,1976, related to the Midland Nuclear Plant which is expected to be completed in 19811982 at a presently estimated total cost of $1.67 billion. Con-struction permits issued by the Atomic Energy Commission (AEC), now Nuclear Regulatory Commission (NRC)in 1972 and upheld by an AEC Appeal Board in 1973, were remanded to the NRC for further proceedings in July 1976, by the U.S. Court of Appeals for the District of Columbia Circuit. At the Company's request, the U.S. Supreme Court is reviewing the Court of Appeals decision. Argu-ments were heard in December 1977 and a decision from the Supreme Court is expected in early 1978. Hearings on the meritt of the issues remanded to the NRC, including reconsideration of waste disposal and other fuel cycle issues, energy conservation alternatives and other issues affecting the environmental cost-benefit analysis performed for the Plant and clarification of the report on the Plant issued by the AEC's Advisory Committee on Reactor Safeguards.have not been schedukd. In September 1977, an NRC Atomic Safety and Licensing Board (ASLB) issued a decision allowmg construction of the Plant to cont,nue pending the outcome of the hearings on the issues remanded to the NRC. Intervenors are seeking to have the oider overturned. In July 1975, an ASLB decided that the Plant construction permit should continue without the impt..ition of any antitrust restrictions. That decision was reversed by an NRC Atomic Safety and Licensing Appeal Board in December 1977 and remanded to the ASLB for further proceedings and decision as to specific antitrust remedies to protect smaller utilities in the Company's service area against practices which the Appeal Board found to be inconsistent with the antitrust laws. If the Company is not ultimately successful in the Midland proceedings, the effect on the Company's future power resources and financial position could be materially adverse. The Company is unable at this time, pending further developments in the proceedings, to evaluate the ultimate effect of the remands on the investment in and commitments with respect to the Midland Nuclear Plant. (See Nste 11) in 1974, the Company filed suit in a U.S. District Court seeking damages, together with equitable relief, from five suppliers of components and design work for the Palisades Nuclear Plant, which was shut down for essentially all of a period commencing in August 1973 and extending to early April 1975 to make repairs to certain of the Plant's reactor vessel internal components, steam generatots, main condenser and other equipment. During 1976 and 1977 the Company reached settlements with the five suppliers totaling approximately $68 million in cash and future services, the majority of which has been or will be used to reduce De investment in the Palisades Plant. The amount of the settlement could reach $88 milnon depending on the future value of certain uranium fuel assemblies. In January 1978, the Palisades Plant was taken out of service for a scheduled 14 week outage for refueling, maintenance and testing. The Company's applications for full-term, fortyyear operating licenses for the Palisades and Midland Nuclear Plants are pending before the NRC. 3 CONSTRUCTION PROGRAM AND SHORTTERM BORROWING ARRANGEMENTS Capital expenditures in 1978 are currently estimated to total approximately $563 million and total construction expenditures through 1982 are presently estimated to approximate $2.5 billion, net of anticipated participation by third parties in certain generating units estimated at $203 million and $380 million, respectively, during such periods. Substantial commitments have been made with respect to the construction program in future years. In order to finance this construction program and to raeet debt maturities of $211.8 million through 1982 it will be necessary for the Company to issue substantial additional securities, the amounts, timing and nature of which have not yet been determined. The Company presently has arrangements with banks providing for short term borrowings of up to $208.4 million (including accept-ance draft commitments up to $5.0 million) which are subject to periodic review. In connection with these arrangerents, the Com-pany is generally required to maintain average compensating balances with the banks, over an unspecified period of time, equal to 10% of the total line of credit plus 10% of the average borrowings outstanding as determined from the banks' records after adjustment for uncollected funds. There are no legal restrictions on the withdrawal of these funds. The banker's acceptance drafts, then issued, are secured by a lien on certain of the Company's fuel inventories. During 1977 the Company had no outstanding short-term borrowings. In 1976 average short-term borrowings outstanding amounted to $9,782,000, and the weighted average interest rate (calculated daily) was 7.13% per annum, excluding the offect of compensating balances. The maximum amount outstanding at any one time during 1976 was $59,500,000. 26

CONSUMERS POWER COMPANY 4 CAPITALIZATION At December 31,1977, after giving effect to the issuance of 500,000 shares of $9.00 Preferred Stock, retained earnings in the amount of $42,456.000, out of total retained earnings of $349,138.000, cannot be distributed as cash dividends on Common Stock under provisions of The Articles of Incorporation of the Company. There are also other restrictions as to payment of dividends on Common siock which are presently less restrictive. At December 31, 1977, 116,979 shares of Common Stock are reserved for issuance in o-onnection with a Common Stock Dividend Reinvestment Plan, 590,976 shares of Common Stock are reserved for issuance upon on<ersion of the $6.00 Preference Stock and 1,031,206 shares of Common Stock are reserved for issuance upon conversion of the $5 50 Preference Stock. The Company is required to endeavor to purchase and retire annually 4,000 shares of the $4.52 Preferred Stock at a price per share not to exceed $102.725 plus accrued dividends. The Company is required to purchase or redeem annually 16,000 shares of the 59.25 Preferred Stock at a price of $100 per share plus accrued dividends commencing in 1982. The Preferred Stock of the Company

s redeemable as a whole or in part, at the option of the Company, except that prior to April 1,1978, June 1,1978, November 1,1978, and April 1,1987 the $7.45, $7.76, $7.68, and $9.25 Preferred Stock, respectively, may not be redeemed through certain refunding operations.

In February 1978, the Company issued 500,000 shares of $9.00 Preferred Stock. The current optional redemption price is $110 per share plus accrued d;vidends. The Company is required to redeem at a price of $100 per share plus accrued dividends,25,000 shares annually commencing in 1983. Beginning in 1979, the Company is required to purchase or redeem annually 37,500 shares of the $6.00 Preterence Stock at a price per share of $50 plus accrued dividends. Beginning in 1980, the Company is required to purchase or redeem annually 50,000 shares of the $5.50 Preference Stock at a pnce per share of $50 plus accrued dividends. The Company has the option to receive creit for shares of the $5 50 Preference Stock converted. The $6.00 and $5.50 Preference Stock of the Company are redeemable in whole or in part, at the option of the Company, after Ju!y 31,1979 and June 30,1980, respectively, at a price per share of $52.50 plus accrued dividends and at decreasing prices after Ju'y 31,1984 and June 30,1985, respectively. The $2.43 Preference Stock and the $2.23 Preference Stock are not convertible. The $2.43 Preference Stock is redeemable at any tee, in whole or in part, at the option of the Company at a price per share of $27.43 plus accrued dividends if redeemed prior to September 1,1981, and at decreasing prices thereafter, except that prior to Seotember 1,1981 it may not be redeemed through certain refunding operations. The $2.23 Preference Stock is redeemable at any time, ir who!e or in part, at the option of the Company at a price per share of $27.25 plus accrued dividends if redeemed prior to November 1,1:iB2, and at decreasing prices thereafter, excep' 'V that prict to November 1,1982 it may not be redeemed through certain refunding operations. D The Company has executed $31,000,000 principal amount of Installment Sales Contracts, for which tne Company has pledged a liite amount cf first Mortgage Bonds as security for its obligations unoer such contracts. 1 Under the terms of the Indenture securing the first Mortgage Bonds, the Company is required, on or before October 1 of each year, to deposit with the Trustee, cash and.or bonds in an amount equal to 1% of the aggregate principal amount of bonds of a!I %; ? series. other than refunding series, authenticated prior to January 1 of the year of deposit. In addition, a $600,000 sinking fund dep0 sit is due on the 4%% Sinking Fund Debentures on or before September 1 of each year. /q Maturities and annual sinking fund requirements of long term debt for the five years subsequent to 1977 are shown below: O Annual Debt Sinking Fund Maturities Requiremeats Thousandsof Dollars 1978 5 700 $18,645 1979 1,550 18,645 1980 85,050 18,645 1981 56,%2 18,645 67,950 18,645 1932 5 LEASE OBLIGATIONS ANd RENTALS The, Company leases a portion of the nuclear fuel utilized or to be utilized at the Palisades and the Midland Plants. The Lessor's remaming mvestment in the nuclear fuel at December 31,1977 was approximately $49,000,000. The initial term of the fuel lease runs to November 1981, with provision for one year extensions from time to time to November 2029, subject to earlier termination in certain eventt The quarterly lease charges consist of a fuel facter computed on the basis of heat production plus interest costs and admmistrative fees and expenses incurred by the Lessor. In the event of termination of the fuellease, the lessor would be entitled to an amount equal to the Lessor's remaining investment. The Company is also responsible for payment of taxes, maintenance, operating costs, nsks of loss and insurance. The Company has entered into sale-andleaseback transactions aggregating $26,000,000 with respect to two of the Company's general office buildings. The leases have an initial term of 28 years beginning in 1975 with two five year renewal options subject to escalation clauses and a third five-year renewal option at the then fair market rental value with the option to purchase at the expiration of the t'asic term or any renewal term at the then fair market sales value. Annual rentals under the leases are subject to quadrennial 27

Notes (continued) escalation and currently approximate $2,81M00. Taxes, insurance and other operating costs relating to the buildings are required to be paid by the Company. Rentals. including amounts charged to cleanrig and other accounts, amounted to approximately $21,750,000 in 1977 and $25,893.000 in 1976. Rentals contingent upon usage were approximately $7,663,000 in 1977 and $10.510,000 in 1976. The minimum rental commitments for leases presently in effect will amount to approximately $17,739,000 in 1978, $12,474,000 in 1979 and 1980, $12,078,000 in 1981, $7,214,000 m 1982, $19,343,000 for the period 19831987, $15,638,000 for the period 1988-M 1992, $14,079,000 for the period 1993-1997 and $15,487,000 for remaining years. The Company's lease obligations are accounted for as operating leases in the rate-making process. Accordingly, obligations related to financing leases have been charged to expense as incurred. Had these leases been capitalized the aggregate amounts of assets and liGilities that would have been recorded are $93,665,000 related to utility plant, net of accumulated depreciation and or amortiza-tion and $94,449,000 related to obligations under capital leases,if all financing leases were capitalized, the effect on expense would not be material. 6 RATE MATTERS In January 1978 the MPSC issued an order in a gas rate proceeding authorizing the Company to increase its gas rates in the annual amount of $10,995,000. Interim increases in the annual amount of approximately $34,122,000 ($29,194.000 in June 1975 and $4,928,000 in March 1977) collected under bond and subject to refund, Nd previously been authorized by the MPSC in the proceeding. Hearings and briefing in an electric rate increase proceeding have been completed. Appeals are pending with respect to several electric and gas rate orders, including litigation involving alleged over-collections under the fuel cost adjustment clause, the legality of the purchased and interchange power clause (PPAC) applicable to the Company's electric rates and the legality of the December 1977 PPAC revenue collected under protection of court order. The Company is vigorously pursuing these matters before regulatory bodies and the courts and, in the opinion of management and its counsel, their ultimate resolution should not materially affect the financial position of the Company or the results of operations for the periods involved. 7 PENSION PLAN The Company has a trusteed noncontributory pension plan under which full-time regular employees within specified age limits and periods of service are qualified to participate. The contributions to the plan were $18,502,000 in 1977 and $17,454,000 in 1976. Of these amounts $14,732,000 in 1977 and $14,028,000 in 1976 tvere charged directly to expense accounts with the remainder being charged to various construction, clearing and other accounts. As of January 1,1977, the date of the most recent actuary's report, the actuarially computed value of vested benefits was $226,000,000. The market value of the assets of the plan was $211,460,000 at January 1,1977 and $211,785,000 at December 31, 1977. If the market value of the assets of the plan should remain below the vested benefits, the actuarial method used in deter-mining the anned contribution will fund this amount over a period of years. The unfunded pdor service cost at January 1,1977, amounted to approximately $19,910,000. The Company has proposed changes in the pension plan effective September 1,1977 covering all employees. In addition, the Company has proposed, for salaried cmployees, changes in the pension plan in which hourly employees as a bargaining unit may elect to participate. These proposed changes to be effective January 1,1978 and which are subject to internal Revenue Service approval, would increase the Company's contributions to the Plan and its liability for unfunded prior service costs. In July 1976, tM Company adopted an Early Retirement Incentive Program,in connection with the reorganization of its work force, at a cost of approAimately $14,000.000. The cost, which is recorded in a deferred debit account,is being amortized over a five year period for accounting purposes in accordance with an MPSC order and will be reflected in rates to the extent the savings and value of the program to the overal1 reorganization justify such costs in the opinion of management, the savings and value of the program justify such costs. 8 INCOME TAX EXPENSE income tax expense is made up of the following components: YEAR ENDED DECEMBER 31 1977 1976 Thousandsof Dollars N $ (5,051) $40,518 Federal income taxes Deferred Federal income taxes, net. (2,920) State income taxes 28,215 28,370 (2,887) (1,767) Deferred State income taxes, net Charge equivalent to investment tax credit, net 46,728 14,643 $67,005 $78,844 Total Ch rged to utility operations (See Statement of income). $62,845 $77,315 4,160 1,529 Charged to nonutility operations Total $67,005 $78,844 28 M

CONSUMERS POWER COMPANY The Company utilizes liberalized depreciation and the " class life asset depreciation range system" for income tax purposes. Income tai deferred due to the use of these methods is charged to income currently and credited to a reserve for deferred income taies As these timing differences reverse, the related deferrals are credited to income. Following is a summary of the provision for deferred income taxes: YEAR ENDED DECEMBER 31 1977 1976 Thousands of Dollars Accelerated depreciation-Amount deferred during year $31,137 $31,340 Less-Taxes deferred in prior years credited to income (3,803) (3,900) $27,334 $27,440 Accelerated amertization of emergency facilities-Taxes deferred in prior years credited to income (837) (837) Other, net (1,169) Total TJ57N T2eA)T Certa n costs, principally interest, which are capitalized for financial reporting purposes in accordance with the provisions of the 'e W System of Accounts, are expensed for income tax purposes and the resulting tax reduction is reflected curremly in the mccme statement as ordered by the MPSC. Tre nuestment tax credit and job development investment credit utilized as a reduction ol the current year's income tax are everted and amortized to operating expense over the life of the related property. The t;tal income tax expense as set forth above produces an effective income tax rate of 30.1% in 1977, and 35.3% in 1976. Inc fcDesg schedule reconciles the statutory Federal income tax rate of 48% to such effective income tax rates. YEAR ENDED DECEMBER 31 1977 1976 AMOUNT RATE AMOUNT RATE Thousands Thousands of Dollars of Dollars Income tax expense at Federal statutory tax rate $106,566 48.0 % $107,227 48.0 % increase (reduction) ir. taxes resulting from: Certain capitalized construction costs, principally interest, deducted currently for income tax purposes for which no deferred taxes are provided in accordance with the requirements of the MPSC. (31,461) (14.2) (21,251) (9.5) State income taxes.. (2,887) (1.3) (3,285) (1.5) Amortization of deferred investment tax credit (2,847) (1.3) (2,281) (1.0) Equity in earnings of subsidiaries. (6,456) (2.9) (5,174) (2.3) Other miscellaneous items 4,09') 1.8 3,608 1.6 Tctal income tax expense $ 67,005 30.1 % $ 78.844 35.3 % 9 ALLOWANCE FOR FUNDS USED DURING CONSTRUCTION The Company capitalized AFUDC at a rate of 8.5% in 1977 and 8% in 1976. Substantially all of the AFUDC related to alectric plant construction. Under established regulatory practices, the Company is permitted to earn a return on the capitalized cost of such fands and to recover the same in the rates charged for utility services. Pricr to 1977, AFUDC was defined by the applicable regulatory systems of accounts as the net cost, during the period of con. struction, of borrowed funds used for construction and a reasonable rate on other funds when so used. In February 1977 the Federal Power Commission (FPC) since superseded by the Federal Energy Regulatory Commission (FERC), issued an order, retroactive to January 1,1977, revising its uniform system of accounts. The February 1977 order provides for a credit to amounts recorded as interest charges for that portion of the allowance allocable to borrowed funds and limits the amount recorded as other income to the portion Of the allowance allocable to other funds used during constructica. The allowance for 1976 was based on the Company's source of funds for gross property additions and accordingly has not been reclassified since such amounts would not be comparable to the components of allowance for funds used during construction l dettmined using the FPC formula. Based on the Company's source of funds for gross property additions, and assuming that the cost of financing other than common equity financing was equivalent to the then current cost of long-term and short-term debt }efore,ncome tax effect), preferred stock and other available sources, the estimated common equity component of the allowance i i for funds used during construction amcunted to 5.2% of r,e(income available for Common Stock for 1976. 29

Notes (continued)

==

10 NORTHERN MICHIGAN EXPLORATION COMPANY Northern Michigan Exploration Company (Northern), a whollyowned subsidiary of the Company, is engaged in gas and oil explora-tion and development programs. Northern follows full cost accounting for financial reporting purposes, including a policy of capitalizing interest costs related to properties in process of development. Summarized financial information is shown below. 1977 1976 Operating revenues $43,452,000 $34,490,000 12,800,000 9.239,000 Net income Gas and oil praoerties 69,705,000 63,188,000 79,454,000 81,809,000 Total assets 52,714,000 39,914,000 Stockholder's investment Production payment 4,000,000 15,000,000 in December 1977, the Financial Accounting Standards Board issued a Statement prescribing successful efforts accounting for oil and gas producing companies. The Statement which is effective for fiscal years beginning after December 15, 1978 will be applied retroactively by restating prior periods' financial statements. It is presently estimated that the restatement will reduce net income for 1977 and 1976 by $3,100,000 and $1,000,000, respectively, and retained earnings at December 31,1977 by $15,600,000. Il CONTINGENT LIABILITIES The Company is involved in certain legal and administrative proceedings before various courts and governmental agencies and in contractual matters with others concerning rates, environmental issues, property taxes, licensing, fuel supplies and costs, and other matters, the outcome of which might result in a decrease in the Company's revenues and/or increases in construction expenditures and/or nperating expenses. In testimony before an NRC Atomic Safety and Licensing Board in the remanded proceeding relating to the Midland Nuclear Plant (See Note 2), The Dow Chemical Company (Dow) officials have indicated that Dow is considering the possibility of making a breach of contract claim against the Company for damages alleged ta be in excess of $100,000,000 and to be attributable to the delay in completion of the Plant beyond 1980. The Company believes it is not in default of its contractual obligations to Dow. The amount invested by the Company in equipment at the Midlard Plant allocable to the service of process steam to Dow, which may not be salvage-able in the event Dow is entitled to terminate the contract is estimated at approximately $105,000,000 as of December 31,1977. l2 SEGMENTS OF BUSINESS Depreciathn and amortization expense and income tax expense for 1977 and total assets as of December 31,1977 by department are shown below. 1977 Depreciation income and Tax Amortization Expense Assets Thousands of Dollars Electric $ 67,312 $47,115 $2,832,412 Gas 35,032 15,714 912,759 Steam 104 16 2,135 llnallocated 637,744 $102,448 $62,845 $4,385,050 income taxes and corporate expenses are allocated to departments in accordance with the regulatory accounting requirements of both the MPSC and the FERC. Allocated assets include construction work in progress. Revenue derived from sales to General Motors Corporation amounted to 11.1% of total revenue for the year 1977. 30 l

CONSUMERS POWER COMPANY ( 4 dn$ s %w 9 13 QUARTERLY FINANCIAL INFORMATION M Quarterly financial information for 1977 and 1976 is as follows: ~ QUARTER ENDED March June Sept. Dec. March June Sept. Dec. [ 1977 1977 1977 1977 1976 1976 1976 1976 Thousands of Dollars Total operating revenue .5544,101 $316,688 $326,400 $449,421 $465,299 $333,214 $298213 $484,526 Net operating income 75,810 41,477 46,533 48,122 63,141 45,614 43,472 59,743 Net income.... 59,506 27,529 34,814 33,158 44,674 28,514 28.587 42,770 Net income after dividends Preference Stock 51,259 19,388 26,174 23,599 37,130 21,172 20,868 34,426 on l' referred and Assuming no dilution $1.47 $.53 $.67 $.58 $1.25 $.68 $.07 $1.04 Earnings pcr share: Assuming full dilution 1.40 .52 .66 .57 1.16 .66 .64 .99 14 MAINTENANCE AND DEPRECIATION AND NUCLEAR FUEL. AMORTIZATION 't is the practice of the Company to charge to maintenance the cost of repairs of property and replacements determined to be less than units of property, except for such costs as are charged to transportation expenses, stores exp other clearing accounts and redistributed from these accounts, together with other charges, to various operat other accounts. The latter amounts so charged are not considered significant and are not readily determinable. Property additiuns, replacements and renewals of items considered to be units of property are charged to and units of property retired or otherwise disposed of in the normal course of business are charged to the pr depreciation in the amount of such retirements, less net salvage credits. No other adjustments of the pr depreciation are normally made. Composite depreciation rates were approximately 2.94% for electric plan ,a in 1977 and 2.86% for electric plant and 3.64% for gas plant in 1976. The composite electric rate which is based have been effective since 1975 includes an estimate for the decommissioning costs of the Company's nuclea decommissioning nuclear plants has not been redetermined in light of recent developments and, therefore, retireme ^_ m currently uncertain. The Company plans to seek approval of revised electric depreciation rates to be effective w years, which in all probability will incorporate higher decommissioning c the original cost of the depreciable utility plant.The cost of nuclear fuel is amortized to fuel expense b The Compahy's policy is to review periodically the outlook for spent fuel disposal cost or storage cost and to r a prospective basis after regulatory approval,its estimate of providing for all such costs over the active life of fuel amortization rate utilized to date for accounting and rate purposes is based upon the assumptions that spent nucle residual salvage value and will be chemically processed. In its current electric rate proceeding the Company is se nuclear fuel expense for accounting and rate purposes for the majority of its fuel to reflect the assumptions of ze for spent nuclear fuel and the need for perpetual storage. Depletion rates, established for each reserves, are applied to withdrawals from each field to determine the provisien for depletion. 15 REPLACEMENT COST INFORMATION (UNAUDITED) Estimates of replacement cost information for certain of the Company's assets and related depreciation is prese with the reporting requirements of the Securities and Exchange Commission. The Company advises readers of of this data and of the many subjective judgments required in estimating the replacement cost of productive capacity. tion does not purport to represent the projected current value of the assets, the amounts which could be realized were to be sold, the reproduction costs of assets currently owned, or the historical costs of such assets adjusted fo Further, as this data is limited to selected categories of assets and related depreciation, there are inherent limitat l this information to compute the effect of inflation on the Company. Moreover, for regulated utilities such as the Comp t f 31 l l ___ _ ___,y

Notes (continued) m"S = S = am = rater and charges are based upon the historical costs of their assets, an evaluation of replacement costs may be of limited worth. The estimated replacement cost of the Company's productive capacity and the estimated accumulated depreciation and deprecia-tion expense restated for the replacement cost is as follows: DECEMBER 31 1977 1976 Thousands of Donars Utility Plant in Service.... Less Provision for Accumulated Depreciation $8,200,000 $7,400,000 2,600,000 2.400,000 55.600,000 $5,000,000 Depreciation Expense. 5 2$0000 $ 200,000 The original cost of land, landrights, nuclear "uel, mineral resource assets and intangible plant, amounting to $175 million and $167 million at December 31,1977 and 1976 respectively, is excluded from this replacement cost information. Noncapitalized leases are not significant. The replacement cost of the electric generation facilities was determined by applying the estimated construction cost per kilowatt of units recently installed or currently planned for construction, trended to yearend by an equivalent construction cost escalation rate, to each type of generating capacity in the existing system. The original cost of the synthetic natural gas plant was trended to year-end using a composite process and petrochemical plant construction cost index. The Handy-Whitman Index of Pub!ic Utility Construction Costs for the North Central Divisior was applied to the original cost of electric transmission and distribution facilities and gas storage, transmission and distribution facilities. The original cost of substantially all remaining utility plant was trended to year end using the Bureau of Labor Statistics Wholesale Price Index or the Engineering News Record Construction Cost Index. Depreciation expense for the replacement cost of productive capacity was developed by applying the actual functional class depreciation rates in use to the average replacement cost balance of each functional class. The accumulated depreciation reserve based on the replacement cost was developed by multiplying the weighted aversge age of the historical assets to the annual replace-ment cost depreciation expense. Replacement cost data relating to inventories and cost of goods sold have not been included in this analysis since these amounts are not material. Where practicable, the calculation of replacement cost incorporates the latest technology and provision for pollution control equipment required under environmental regulations as of December 31,1977 and 1976. Such replacement would result in changes in fuel, operation and maintenance costs. In the above figures no consideration was given to any additional operating costs or to any savings from operating efficiencies of technically improved replacement facilities. Also, the Company is subject to governmental regulation in the determination of a fat rate of return on its investment. Under such regulation.. costs incurred in the replacement of productive capacity would ultimat. expand the base on which such allowable return is detemined. No recognition was given to the added revenues that would normally be realized from the recovery of increased costs thrcti;h the ( regulatory ratemaking process. ARTHUR ANDERSEN & CO. D ET ROIT, MIC HIGAN To the Board of Directors, Consumers Power Company: We have examined the balance sheet and statement of capitalization of CONSUMERS POWER COMPANY (a Michigan corporation) as of December 31.1977, and December 31,1976, and the related statements of income, retained earnings, capital in excess of par value and source of funds for gross property additions for the years then ended. Our examination was made in accordance with generally accepted auditing standards, and accordingly included such tests of the accounting records and such other auditing procedures as we considered necessary in the circumstances. As discussed in Note 2, the construction permits for the Midland Nuclear Plant have been remanded to the Nuclear Regulatory Comrnission for further proceedings. The Company is unable at this time, pending further developments in the proceedings, to evaluate the ultimate effect of the remands on the investment in and commitments with respect to the Midland Nuclear Plant. In our opinion, subject to the effect, if any, on the financial statements of the resolution of the matters discussed above, the financial statements referred to above present fairly the financial position of Consumers Power Company as of December 31,1977 'end December 31,1976, and the results of its operations and the source of funds for gross property additions for the years then ended, in conformity with generally accepted accounting principles consistently applied during the periods. [, f8, Detroit, Michigin. February 9,1978. 32 x ~_ _ /

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cOssVMERS POWER COMPANY Summary of Statam:nt S76 1975 1974 1973 of Income 1977-1973 Thousandsof Dollars Operating Revenue $908,983 $878,468 $757,741 $619,958 $495,723 724.821 700,236 581,294 483,832 337,906 Electric 2,826 2,548 2,065 1,593 1,325 Gas Steam. Operating Revenue Deductions, Except income Taxes 262,723 266,447 249,556 172,050 105.391 ( fuel Consumed in Electric Generation 130,005 127,464 90,891 143,394 70,006 Purchased and Interchange Power. 498,567 460,458 375,495 293,190 175,185 Cost of Gas Sold......... 295,683 263,279 236,636 208,759 187,436 Other Operation and Maintenance 102,448 96,954 93,635 82.944 73,428 Depreciation and Amortintion 74,397 77,365 67,678 63,058 54,160 General Taxes Net Operating income Before Income Taxes 209,988 202.926 161,468 78,614 121,196 Electric 64,888 86,159 65,461 63,192 48,083 Gas 133 200 280 182 69 Steam. Income Taxes Federal income Tax. (9,211) 38,970 (1,602) (251) 2,068 (2.901) 3,417 (764) 2,754 State income Tax.. 25,328 26,603 31,318 26,191 25,072 Deferred income Tax (Net). Investment Tax Credit (Net). 46,728 14,643 24,431 (5,118) 14.057 Net Operating income 162,873 151,952 120,276 75.982 87,938 Electric 48,952 59,864 49,166 45,802 37,374 Gas 117 154 203 146 85 Steam. Allowance for Funds Used During Construction (1) 30,444 33,848 24,825 21,875 23,223 Other income 21,347 14,787 15,828 11,066 6,940 108,726 116,060 110,362 94,783 75,370 Interest Charges.(1) Income Before Cumulative Effect of Change in Method of 60,088 Recording Revenue Cumulative Effect on Years Prior to 1974 of Accruing Estimated Unbilled Revenue After Deduction for Related Income Taxes 24,864 Net income 155,007 144,545 99,936 84,952 80,190 25,437 24,071 24,093 24,089 17,746 Cash Dividends on Preferred Stock Cash Dividends on Nonconvertible Preference Stock. 5,764 1,701 3,386 5,177 5,993 1,451 Cash Dividends on Convertible Preference Stock. Net income After Dividends on Preferred and Preference Stock 120,420 113,5 % 69,850 59,412 62,444 Cash Dividends on Common Stock. 77,866 61,038 53,271 52,467 52,467 Common Stock-Average Shares Outstanding-Assuming No Dilution (Thousands of Shares). 37,866 31,300 26,677 26,234 26,234 Earnings per Share of Common Stock Based on Average Shares Outstanding-Assuming No Dilution C) Before Cumulative Etfect of Change in Method of $1.32 Recording Revenue. Cumulative Effect on Years Prior to 1974 of Accruing Estimated Unbilled Revenue After Deduction for Related income Taxes. .95 Total-Assuming No Dilution $ 3.18 $3.63 $2.62 $2.27 $2.38 Common Stock-Average Shares Outstanding-39,942 34,487 30,437 27.157 26,234 Assuming Full Dilution (Thousands of Shares). Earnings per Share of Common Stock Based on Average Shares Outstanding-Assuming Full Dilution (3) Before Cumulative Effect of Change in Method $1.33 of Recording Revenue. Cumulative Effect on Years Prior to 1974 of Accruing Estimated Unbilled Revenue After Deduction for Related Income Taxes .92 Total-Assuming Full Dilution. $ 3.10 $3.44 $2.49 $2.25 $2.38 Pro forma Amounts Assuming Change in Method of Recording Revenue is Applied Retroactively $ 60,088 $ 82,667 Net income Earnings per Share of Common Stock-Assuming No Dilution $1.32 $2.47 Earnings per Share of Common Stock-Assuming Full Dilution. $1.33 $2.47 $2.09 $2.00 $2.00 $2.00 $2.00 Cash Dividends Paid per Share. 34

Management's Discussion and Analysis of the Statement of Income $5,494,000 in 1977 and $3,319,009 in 1976, resulting from UE additions to depreciable property. enue nereased $30,495,000 in 1977 and cr g.,, 727.000 in 1976. The 1977 increase resulted from GENERAL TAXES u,' eased sales volume of 3.1% along with rate in-General taxes decreased $2,968,000 in 1977 and in-c,,ases partially offset by decreased fuel cost adjus,t-creased $9,687,000 in 1976. The decrease in 1977 re-rer? classe revenue due in part to a Michigan Public sulted primarily from the elimination of the Michigan 's. :e Commission (MPSC) order disallowing recovery Franchise Tax and a lower Michigan Single Business r h;.,ta n nuclear fuel expenses. The 1976 increase wastc increased sales volume of 8.8% along with tric construction expenditures, partially offset by in-a Tax, the latter reflecting a larger credit in 1977 for elec-er, se: fuel and purchased power adjustment clause creased real and personal property taxes and payroll a- . ate revenues. taxes. The increase in 1976 was due primarily to in-cis revenue increased $24,585,000 in 1977 and creased real and personal property taxes and the addi-p e 942 000 in 1976. The 1977 increase reflects in' tion in 1976 of the Michigan Single Business Tax. <reased cost of gas adjustment clause and rate revenues ha t a y offset by an 8.7% decrease in sales volume due NET OPERATING INCOME n ic.a -er weather in 1977, The 1976 increase reflects in 1977, the net result of the increased revenues more ,r:reased cost of gas adjustment clause and rate rev-than offset by higher costs was a $14,498,000 decrease e%es s'eng with a 7.2% inerease in sales volume from in net operating income before income taxes. Income t9'$ cae to colder weather in 1976. taxes decreased $14,470,000 reflecting the lower taxable income and a higher interest deduction, leaving a de-OPERATING COSTS crease in net operating income of $28,000, in 1976, the Nei fcr generation costs decreased $3,724,000 in 1977 net result of the increased revenues partially offset by saa mereased $16.891,000 in 1976. The decrease in 1977 higher costs was a $62,076,000 growth in net operating ee' e:ts a 4.3*. decrease in the average fossil and income before income taxes. Income taxes increased a r ::ca' fuel cost per kWh generated, partially offset by $19,751,000. Income taxes in 1976 reflect the elimina-w tion of the State income Tax and increased interest ex-a 7 C'.e. increase in generation from Company-owned ta:At s The decrease in the average cost per kWh was pense. The net result of the increased net operating para'ily due to decreased use of higher cost oil-fired income before income taxes, and the increased income v4!s and the increased use of lower Cost nuclear plants taxes, was an increase in net operating income of ab; with a decrease in nuclear fuel costs in 1977 to $42.325,000. t re' ett an MPSC order relating to the recovery of certa,in ALLOWANCE FOR FUNDS USED nu: lear fuel costs. The 1976 increase was due primarily DURING CONSTRUCTION (AFtIDC) tc a 7 7*. increase in the average fossil and nuclear f e' costs per kWh generated, reflecting a higher cost Beginning.in 1977, AFUDC reflects only the cost of other cf ed and nuclear fuel than in 1975. funds used during construction. The cost of borrowed Purchased and interchange power Costs increased funds used during ConstruClion is offset against interest 52 541000 in 1977 and $36,573,000 in 1976. The increase charges. When the two amounts are added together for fc 1977 reflects an increase in the average price per 1977 the total exceeds 1976 by $20.363,000. The 1976 W.* purchased from 1.85c to 2.01c or 8.8% partially amount was $9,023,000 over the 1975 amount. In both c" set by a 6.2'. decrease in the purchased power re. cases the increases resulted primarily from increased csrement due to increased internal generation. The construction at the Midland Nuclear Plant. merease in 1976 reflects the Company's increased sys-OTHER INCOME tem requirements along with the reduced internal gener-sten. partially offset by a 4.4% decrease in the average Other income increased $6,560,000 in 1977 reflecting ccst per kWh for purchased and interchancje power. Increased interest income from the Company's short-Cost of gas sold increased $36,109,000 in 1977 and 9f" '.nvestments along with increased, earnings of sub- $84 %3.000 in 1976. The 1977 increase reflects an 18.6% sidiaries. The decrease of $1,041,000 in 1976 was,due mcrease in the average cost per Mcf partially offset by to reduced Michigan Gas Storage Company earnings reduced gas sendout associated with the 8.7% decrease because of a Federal Power Commission-ordered re-m cas Mcf sales from 1976 due to warmer weather in duction in a filed rate increase along with a decline in 1977 The 1976 increase reflects a 13.9% ir crease in the interest income, agrage cost per Mcf and a 7.2% increase in gas Mcf INTEREST CHARGES efag' cos't er hather in 1 6 The incmas w Interest expense (exclusive of the allowa,nce for bor-te e c e"e:t by pipeline suppliers and increased costs of rowed funds used during construction) increased in each period, $16,433. as N msu,lt of addit,000 in 1977 and $5,698,000 in 1976, l>cu'd hydrocarbon feedstock for the production of s n-ional sales of long-term debt parti-thetic natural gas at the Marysville Gas Reforming Plant The increases in cost are almost totally offset by the ally ffset in 1977 by no short-term borrowings and in cost of gas adjustment clause which permits pass-1976 by reduced short-term borrowings at lower interest rates. thrcugh to Customers, Other operation and maintenance expenses increased PREFERRED AND PREFERENCE 532 404.000 in 1977 and $26,643,000 in 1976. Major in-STOCK DIVIDENDS C$'5'S'ef ted in these amounts were maintenance The increases in preferred dividends in 1977 and non- , ri and benefits clNrged ratfonsd employee wages n flect the,le preference dividends in 1977 and 1976 re-convertib o issuance of additional securities during those DEPRECIATION AND AMORTIZATION peri ds. The decrease in convertible preference divi-dends in 1977 reflects conversions of previously issued Depreciation and amortization expenses increased convertible preference stock. (1) A!!cwance for funds used during construction for 1977 reflects allowance for other funds used during construction. Interest cha ges for 1977 have been credited with allowance for borrowed funds used during construction. (See Note 9) Q After reduction for Cash Dividends on Preferred and Preference Stock. (3) After reduction for Cash Dividends on Preferred Stock and Nonconvertible Preference Stock. 35

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