ML19344A097
| ML19344A097 | |
| Person / Time | |
|---|---|
| Site: | Midland |
| Issue date: | 08/29/1977 |
| From: | CONSUMERS ENERGY CO. (FORMERLY CONSUMERS POWER CO.) |
| To: | |
| References | |
| NUDOCS 8007310604 | |
| Download: ML19344A097 (126) | |
Text
{{#Wiki_filter:- - - . . - ~ . . . . . . _
?
- BEFORE THE:
4 UNITED.' STATES' NUCLEAR' REGULATORY' COMMISSION f
. : Docket No. 50-329 Docket No.' 50-330 1
In the Matter of CONSUMERS POWER COMPANY' i APPLICATION FOR REACTOR CONSTRUCTION PERMIT AND OPERATING LICENSE W 1 ..
. for._ the MIDLAND PLANT Units Nos. 1 and 2
-AMENDMENT NO. 33 l
l l 1 I 1
.~.
we4
. ._ _ _ . _ .~ .
.m-t
_I
- O. ,
. OPERATING LICENSE APPLICATION GENERAL-INFORMATION TABLE OF CONTENTS Page No.-
1.' ~NAME OF APPLICANT . . . . .. .. ................ 1
- 2. ~ ADDRESS'0F APPLICANT . . .. .. ................
1 4
- 3. DESCRIPTION OF BUSINESS OF APPLICANT .............. 1
- 4. CORPORATE DATA . . . . . ... ..... ............ 2
- 5. LICENSES APPLIED FOR . . . . ... ............... 4
- 6. FINANCIAL QUALIFICATIONS ..... ............... 5
- 7. COMPLETION DATES . . . . .. ... ............... 6
, 8. REGULATORY AGENCIES . . . .. ...... ............ 6
- 9. TRADE AND NEWS PUBLICATIONS . . . . ............... 7'
- 10. RESTRICTED DATA.. . . . . .. ... ............... 7
- 11'. COMMUNICATIONS . . .. . . . ... ............... 8 APPENDIX' A -
SUMMARY
OF ANNUAL OPERATING COSTS APPENDIX B - ESTIMATED DECOMMISSIONING COSTS , APPENDIX C - 1976 ANNUAL REPORT TO' STOCKHOLDERS APPENDIX-D - PROSPECTUS.of May- 24,'1977, $85,000,000 Principal Amount of First Mortgage Bonds', 8-7/8% Series Due 2007 APPENDIX E - BASIS _FOR COMPLETION DATE EXTENSION APPENDIX.F - TRADE AND NEWS PUBLICATIONS V I' .
---- - , , , , , , . . - - . . , - --v...
. ,..-,.e. .
t j :. l (~
' ' J.
BEFORE THE UNITED STATES NUCLEAR REGULATORY COMMISSION Docket No. 50-329 Docket No. 50-330. In the Matter of a l: CONSUMERS POWER COMPANY l I Application for Reactor Construction Permit and Operating License for Midland Plant !. Units Nos. 1 and 2 i Amendment No. 33 1 l \v GENERAL INFORMATION
- 1. NAME'0F APPLICANT'
- Consumers Power-Company.-(hereinafter called " Applicant")
l
- 2. : ADDRESS OF. APPLICANT 212 West Michigan. Avenue.
Jackson,' Michigan 49201
- 3. DESCRIPTION OF-BUSINESS OF APPLICANT l
l . Applicant is a public utility engaged in. the generation, purchase, trans-l mission, distribution and sale of' electricity, and in the purchase, pro-Jduction, manufacture, storage, transmission,. distribution and sale'of. gas. Applicant !also supplies steam; service in one community. Applicant owns
.p and operates electric generating plants with aggregate net demonstrated-
- Q-) capability of- 5,721,300 kilowatts, and'is constructing additional plants,
- 9. -
. [E
} \m- :
'ncluding i the Midland Units, which'will add 2,868,000 kilowatts (nameplate rating) to its generating capacity.- Applicant renders electric service to approximately 1,240,000 customers.in an area'of approximately 27,800
+ square miles,' having a population of approximately 3,300,000, in the Lower Peninsula of the: State of Michigan. Applicant has an' electric coordina-tion: agreement with The Detroit Edison Company for coordination of plan-ning, design and-operation of the electric systems'of the parties, mutual 1 assistance during emergencies, and' effectuation of the maximum practical 4 economy -in providing the electric power requirements of ' each system. Applicant.has an agreement with The Detroit Edison Company and The 1 Hydroelectric Power Commission of Ontario for interconnections linking , their power systems and also' for mutual assistance during emergencies, improved reliability of bulk power supply, -and effectuation of econo-t , mies. by . coordinated development and exchange of power. Applicant has agreements with several other major utilities. operating in Michigan, Ohio, Indiana and Illinois providing for interconnection services and other transactions. . Applicant also maintains interconnections with the Michigan Municipals and Cooperatives Power Pool and the Cities of Lansing, Holland and Hillsdale, Michigan, and interchanges ~ power with the Edison Sault Electric Company. l t 1 .
- 4. = CORPORATE. DATA '
Applicant.is: incorporated under the laws of,'and operates solely within the ~ State of Michigan. Applicant's principal office is at 212 West Michigan )
. Avenue,= Jackson. Michigan.- The names and addresses of its directors and l '
principal . officers, all of whom are citizens of the United States, are
;( /"')NL e , -
as'follows: .i I 2 0 .,-w .,- , ,.. - --s.y-
,w y- y
4
) .n-Name ' Position Business Address s
Alphonse H. Aymondi Chairman >of the Board Consumers Power Company of Directors Jackson, MI 49201 Walter R. Boris ' Executive Vice President Consumers Power Company Land Director- Jackson, MI 49201 l' E. Newton Cutler, Jr Director.
~
Lindsley Road-l' New Vernon, NJ 07976 i-Richard W. Gillett. Director Old Kent Financial Corporation One Vandenberg Center-Grand Rapids, MI 49502
-Martha W. Griffiths; Director Griffiths & Griffiths PO Box 407 Romeo, MI 48065 John W. Hannon, Jr.
. Director bankers Trust Company
,. PO Box 318 Church Street Station New York, NY 10015 ("" Don ~T. McKone Director Libbey-Owens-Ford Company ( ,}/ - 811 Madison Avenue Toledo, OH 43695 C. S.~ Harding Mott Director 500 Mott Foundation Building Flint, MI 48502 Lyle C. Roll
. ~ Director Kellogg Company 235 Porter Street Battle Creek, MI 49017 F
John D. Selby- . President and Director Consumers Power Company-Jackson, MI 49201 John B.~Simpson Executive.Vice President- Consumers Power Company l- and Director Jackson, MI' 49201 John'C. Suerthn Director- Gerber Products Company 445 State Street Fremont, MI 49412
- Robert B. White Director Citibank, NA 399 Park Avenue New York, NY 10022 Russell C. Youngdahl Executive Vice President Consumers Power Company
' L. ([\ ,/- and Director- Jackson, MI 49201
~
, 3.
Q .e - Position Business Address 4
' John W.--Kluberg S;nior Vice President- Jackson, MI 49201 LJame's B.-Falahee Senior Vice President Jackson, MI 49201' i ; ' Stephen.H. Howell.
Vice. President- Jackson,,MI 49201
- Lowell L. Shepard _ - Vice President - Jackson, MI 49201
^ Raynard'C. Lincoln- - Vice President Jackson, MI 49201 Jack W.'Reynolds Vice President Jackson, MI 49201' 1 Charles R. Bilby Vice President Jackson, M1 49201 _ Robert J. Fitzpatrick Vice President Jackson, MI 49201 Lawrence B. Lindemer Vice President and l General Counsel Jacksot, MI- 49201 James W. Cook Vice President Jackson, MI 49201 [ Paul A. Perry Secretary and Assistant-Treasurer - Jackson, MI 49201 4 l Richard-M. Griswold Treasurer and Assistant Secretary Jackson, MI 49201 > l
- Samuel N. Spring Controller Jackson, MI 49201 l.
^ I
- Applicant is not' owned, controlled or dominated by an alien, a foreign - .1
)
corporation, or foreign government, and is filing this application on-its 4 own behalf and not as-the agent or representative of any other person.-
.5. LICENSES APPLIED FOR A-
~ Applicant requests a Class 103 operating license for.each of the two Midland
- units, to be; effective for a period'of forty-(40) years from date of' issuance.
i
- Construction' Permits CPPR-81 and.CPPR-82 were issued for Midland Plant Units 1~and 2, respectively,1on December 15, 1972, and were amended on.
s p i 3] _ Mayf 23,- .1973. - 1
- 4' m,
;y.
F 4 e t"- - - - ' 7 'v~-+ m- e>E+ ww = ere e ir'm-ETr
1 r [
? -
' -O3 L t.) - ' 1 Applicant'also' requests such additional; source, special nuclear.and
' byproduct material licenses as may- be necessary or appropriate to. . or -
L in~ connection'with or incidental to, the possession, use or operat?.on-of Midland Plant Units 1 and 2, including, but not limited to,_a license l . pursuant to 10 CFR Part' 70- to receive, own, store, possess and transfer i l special nuclear material and to use such special nuclear material as i reactor fuel. L Midland Units'l'and 2 will generate electrical energy for Applicant's integrated electric system and will generate process steam for the ! Midland,' Michigan chemical plant complex of The Dow Chemical Company.
' Applicant expects to operate each of the two reactors-initially at a core I
output of'2452 MWe, although the core of each reactor may be capable of i s_ an output of'2552 MWt. With both cores _ operating at 2452 MWt the two' units ! will-have a combined capability of approximately 1300 electrical megawatts p and 4 x;100 lbs/hr of process steam. The facilities are described in de-l- tail'in the Final Safety Analysis Reportiwhich is a part of this applica-t ! tion.
)
~
- 6. FINANCIAL QUALIFICATIONS I
Estimated-costs of operation of the Midland Units for the years'1981 through { I i 1986 arefattached hereto as Appendix A. Estimated costs of permanently.
' shutting the faclities down and maintaining them in a safe condition are I
. attached as Appendix'B. '
AJcopy;of~ Applicant's annual report to stockholders for the year ended
- December.31, 1976'is attached hereto as Appendix C. A copy of_ Applicant's \' ,
most recent securities. prospectus is attached as Appendix D.
- 5' 1 e - a m , - , -+ - ~,e
.Q NJ
- 7. COMPLEIION DATES The presently-scheduled date for commencement of fuel loading of Unit 1
__s November 1,1961, and the- presently-scheduled commercial- operation date.for Unit 1 is March 1, 1982. The presently-scheduled date for com- ; mencement of fuel loading of Unit 2 is November 1, 1980 and the presently-scheduled. commercial- operation date for Unit 2 is March 1,1981. Constructien Permit CPPR-81 (Para. 2A) states that:
"The earliest date for.the completion of Unit 1 of the facility is December 1, 1977 and the latest date for completion of the facility is December 1, 1978."
i Construction Permit CPPR-82 (Para. 2A) states that:
"The earliest date for the completion of Unit 2
~
of the facility is December-1, 1978 and the latest L' date for completion of'the facility is December 1,
-1979." '
Applicant requests.that Construction-Permit CPPR-81 be amended to change I the earliest and latest dates for completion of Midland Plant Unit 1 from
'? December 1,1977" and " December 1,1978" to " October 1,1981" and I a
" October 1, 1982", respectively. Applicant requests that Construction i Permit CPPR-82 be amended to change the earliest and latest dates for com--
pletion of Midland' Plant-Unit 2 from " December 1, 1978" and " December 1, 1979" to " October 1,"1980" and " October l', 1981", respectively. A statement of good cause' for the requested extensions is attached as Ap-pendix E.
- 8... REGULATORY'GENCIES A
{} Regulatory agencies that' have' jurisdiction over the rates and services cincident'to"the proposed activity are:
- 6 ~
=
- a y'
a 3 5,_ . Michigan Public Service Commission JP.O.~ Box 30221 Lansing, Michigan'48909 Federal Power Commission 825 North Capitol Street Washington,'D.C. 20426
- 9. TRADE AND NEWS PUBLICATIONS Trade'and news peblications which circulate-in the area in:and near Midlan'd,. Michigan,;and elsewhere in the State of Michigan, and which Applicant considers-appropriate to give reasonable notice of the appli-cation to those municipalities, private utilities, public bodies and cooperatives that might have a potentia 1 ' interest in the facility, are listed.in Appendix F.
- 10. -RESTRICTED' DATA >
() This application'does not contain'any Restricted Data or other defense information. Applicant agrees that it will not permit any individual to have access ~to Restricted Data until the Civil Services Commission shall.have made:an investigation and report to the Nuclear Regulatory Commission on the character,; associations and loyalty of such individual,' and the Nuclear Regulatory. Commission shall-have determined that per-mitting-such person'to have access to. Restricted Data will.not endanger the common-defense and security. 3 The' Department of Energy Organization Act transfers to the Federal Energy
- Regulatory' Commission.certain of the functions lof-thelFPC, including those re-lating toilicensing and operationiof' hydroelectric projects, rates for trans-mission and sale of electric energy in int'erstate commerce, the' interconnection.
Eof facilities (otherithan emergency interconnection) and, to the~ extent the Com-mission determines, accounting policies: and practices. Other FPC functions are
,s.
1( ) :transferredEtoithe. Secretary of Energy. . The-Act will take effect in December Th /2 ~
~1977:or. on 'such earlier date as the President:may prescribe, at which time the LFPC will cease'toiexist.
- c. ,
7 e ._
. ~ .
. , . . ~ , , _ ra . . - . . . .,
~
u
~ 11.' ' ' COMMUNICATIONS AllcommunicationspertainingtotEis_applicationshouldbesentto:
Mr. Stephen H.-Howell-Vice President Consumers Power Company 1 212 ~ W. Michigan Avenue
. Jackson, Michigan 49201 In addition, it is requested that copies of each communication be sent to:
Mr. Paul A. Perry
., Secretary Consumers Power' Company l 212 W. Michigan Avenue Jackson, Michigan 49201 Judd-L. Bacon, Esq ,
Managing Attorney Consumers Power Company 212 W.-Michigan Avenue Jackson, Michigan 49201 O)
\m- Michael I. Miller, Esq L Isham,. Lincoln & Beale -
Suite 4200, One First National Plaza R
~ Chicago,' Illinois 60670 I
CONSUMERS POWER COMPANY Dated August' 29, 1977 By- /s/StephenH.Howell Stephen H. Howell, Vice President [, ; Sworn and subscribed' to before me this 29th day of August , .,977.
/s/LindaR.Thayer l
-( S E A L-) ? Notary Public, Jackson County, Michigan-
- My Commission Expires. July 9 , 19 19 v
w 8' - 4
. -. . . . ._. .__..-., . __ . z-....- _ .--.... .. - . .
. . - . ..~. . .. -. . - . -. - . .
^
Appendix A-Summary of-Annual Costs Initial Five Years of Operation and Levelized Annual Costs (Millions of 1981 Dollars) Leve1 4.ed Item' 1981(1) 1982(1) 1983 1984 1985 1986 Annual-o&M 4 12.' '$ 25 $ 27 $ 29 $ 31 $ 33 - $ 49 Fuel 42 91' 92 91 99 115 176'
. Insurance- 3 4 4 5 5 5 6 Taxes 79 95 95 95 95 95- 95 Depreciation 4 _ 5 5 5- 5' 5 5 Total $140 $220 $223 $225- $235 $253 $331 1
1 (1 Assumes commercial operation dates. of March 1,1981 for Unit 2 and March 1,1982 -for Unit 1.
- ( }Levelized over plant operating life.
t i b
O 1 APPENDIX 3. ] 1 Estimated Decommissioning
- Costs 1 (Millions of 1981 Dollars) l 1
Activity- Estimate Pre-deco =missioning Costs 7.1 System Decontamination, Removal and Disposal 6.h
-l -b Vessel /Irternals Removal and Disposal 5.3 V Structure Removal and Disposal 8.3 0.3 l
i Backfi31 and Landscaping. Temporary Facilities, Supplies, and Equipment Rental 6.0 Utility Staff and Security Force 27.2 Engineering h.6 - Nuclear Insurance 0.7 Contingency 16.5 Total 82.4-
' Prompt Removal / Dismantling Based on an Engineering Evaluation of Nuclear Power Reactor Decommissirning Alternatives, National Environmental Studies Project, Atomic Industrial Forum, Inc, Nove=ber 1976. !
[D : k I - t
.- - . _ . , , __.,,,..x .. . ~ , ,.p , , ,,,-
~
l Consumers Power Company Annual Report 1976 i
'O -c
;, New Regional _
Operating Structure
. o serve chigan s utare
_ energy neads more officiently.
- s ,
i
~
i lo 1 i l i. l l t i l lO
~ h:1 :201M_
The Corporate Ohctives of Consumers Pr er Company g Subsequent to the major eeurganization of operations in 1976, the Board of Directors approved a new statement of corporate objectives of Consumers Power Company which reflect today's char:ging business conditions. They are. . .
- 1. Provide the highest standards of service at the lowest possible cost, commensurate with the rates authorized by regulatory agencies.
- 2. Provide a fair return on the funde supplied by investors through efficient management and by seeking eg'litable rates for the services provided.
- 3. Deal courteously with customers and the public, providing information about energy and rate matters important to them and their well-being.
- 4. Meet the needs of the Company's service area and the state by providing the level of service necessary to encourage Michigan's economic development.
- 5. Protect and enhance the environment through thorough planning and prudent use of energy resources and technoRgy.
- 6. Provide employees with fair wages and benefits, good and safe working conditions and career development opportunities for men and women of all races and creeds.
- 7. Participate in the social, civic and economic development of the state and of the communities served.
- 8. Encourage public understanding of the American competitive enterprise i system, complying with all laws and working to improve the economic and socia! benefits which the system engenders.
Contents The Management Letter 1-3 Consumers Power Company /1976 4-19 l l Statement of income 20 Statement of Source of Funds for Gross Property Additions 21 Balance Sheet 22-23 Statement of Retained Earnings 24 Statement of Capitalin Excess of Par Value 24 Notes to the Financial Statements 25-31 Auditors' Report 31 Summary of Statement of Income /1976-72 32 Management's Discussion and Analysis of the Statement of Income 33 Consumers Power Company Stock Prices and Dividends, and Principal Markets on Which Traded 34 Company Directors, Officers, Regions and General Managers 35 Annual Meeting, Transfer Agents and Registrars 36 Map: Electric and Natural Gas Service Areas. .inside Back Cover Consumers Power Company Annual Report 1976
' 212 West Michigan Avenue, Jackson, Michigan 49201 (517) 788-0550 '
N [} Q.[ ' ' \ , ; - , ps *
, + -
m, .
~
J - f e , s
+ \
1 . s J l A-N r ^ 4 i. s p / I A. ll. Aymond J. D. Selby To Our Fellow Shareholders: The substantial improvement in the Company's affairs which be- i gan in 1975 continued throughout 1976 and Consumers Power l Earnings reached an all time high ended the year with all-time record earnings of $3.63 per average , share of common stock outs.anding. However, that record r6- ] i quires qualification, which we will turn to in a moment. , j For the year 1976 gross operatmg revenues amounted to l
$1,581,252,000, an increase of $240,152,000, or 17.9 percent, over 1975. Kilowatthour sales of electricity increased 8.8 percent, to 24.9 billion, and volume sales of gas rose 7.2 percent, totalinq 341 billion cubic feet.
Increased salos of energy resulted from improved in&.;strial activity, weather that was much colder than i emal Juring the fourth quarter, and the addition of approximately 18,z00 new elec-tric cue;mers and nearly 18,300 new residential' gas customers. Increased revenues reflected the same factors as sales as well Revenues and sales increased as electric and gas rate increases and the operation of clauses substantially which allow the Company to pass through to customers the increased cost of gas purchased for resale and 90 percent of the increased costs of purchased and interchange power and fuel for electric generation. l In reaching $3.63 per chare for the year 1976, the .;u...?any's ( earnings increased steafly for eight straight quarters and com-pared with $1.32 restated earnings for 1974 and $2.62 restated earnings for 1975. This earnings performance is heartening and reflects partial ate relief as well as the results of continued belt tightening and iealignment of operations to achieve maximum efficiency. Un-Additional rate increases still fortunately, even as impressive a climb in earnings as the Com-O necessary pany has achieved since early 1975 does not signal an end to the pressing need for additional rate increases. The Company still was unable to earn the authorized rate of nn n - 1 l l wo 6 . m i _ _ . _ _ _ _ _ __-__-_.-._._..____________________.___j _
return from its utility operations. The authorized rate of return on its utility operations is based on out-of-date costs of c Further evidence of the inadequacy of the Company's rate i in its low preferred stock and bond credit ratings. This has. l substantially incraa-ad construction financing costs which must i ultimately be passeo on to customers. Meanwhile, it has been I necessary to issue common stock at about three-fourths of book l value and thus dilute shareholder equity in the business. Adequate earnings and stock performance can only be Rates must realistically reflect costs achieved if there is a realistic relationship between the price of the service and the cost of providing it. That relatianship has not ' e.visted for the last ten years although we were closer to achiev-ing it in 1976 than in any other recent year. To achieve that ' relationship, the Company is seeking higher rates that will in- ; crease earnings and improve its credit ratings and ability to at-tract capital at reasonable costs. At the same time, the Comoany is seeking authorization of additional revenue through account-ing changes that will allow the recovery of certain costs more quickly than is now possible, which will imprt,.a the quality of our earnicgs and also help us achieve higher credit ratings. Higher credit ratings needed to These c .anges include recognition of certain construction work attract capital at reasonable costs in progress in the rate base and modified income tax allocation rules. In recent years, utility affairs have perhaps been raore dra-matically and adversely influenced by sweeping econcmic change than those of any other major segment of the American economy. Shareholders who have been reading these management let-ters since 1968 or thereabouts have noted the growing concern reflected by your management as creeping inflation became rampant inflation while the difficulty of obtaining regulato - derstanding and adequate rates greatly increased. Over the past eight or nine years we have seen the evol of what can only be called a completely new ball game. We have-left the days of relatively stable costs, steady growth and signifi-cant marketing opportunities behind us. Emphasis today is on energy conservation. Yet demand for energy continues to in-crease as the economy grows. We now face severely inflated Demand for energy continues to grow costs and the need to achieve levels of cost efficiency unparal-teled in the Company's history. And that's what we've been doing, la the early years of this period, before the pinch became the crunch, we asked for rate increases that were modest by today's standards, improved our work procedures and adopted technological advances designed to streamline operations. About mioway in the period, in 1972, the Company discontinued its traditional marketing operations, including appliance merchandising and hc.me economics con-sultation, placed strict restrictions on the hiring of new employe9s and reinforced its already rigorous cost controls. In 1974, with deeply depressed earnings and a slowed down economy, it was necessary to reduce the work force by approximately 900 em-ployees and effect severe reductions in the construction program. Looking at these recent years another way, as 1967 ended the Company had 10,837 employees. At the end of 1972 the work force numbered 11,947. At year-end 1976 the number was down Fewer employees are serving to 10,248. But compared to 1967 those fewer employees were more customers conducting utility operat;ons involving 233,251 more electric cus-tomers (up 23.3 per. cent), 225,616 more gas customers (up 29.5 percent), $1,104,071,000 more gross operating revenues annually (up 231.4 percent), and $1,668,578,000 more investment in (up 99.9 percent). Needless to say, our employees in 1976 making the utmost use of technology and improved procedures. So the Company has been responding actively and decisively ~2
;to change over a most difficult period. And in 1976 it continued fy to respond.'Beginning with very basic realignments of manage-Di i ment responsibilities, the Company eliminated the traditional sep-aration of gas and electric operations and became a fully inte-grated energy company geared to most efficiently serving its existing customers and structured conservatively for moderate growth in energy demands. All energy distribution and customer-related activities were centralized under one officer,' all energy supply activities under another, and major engineering and con-strrtion projects under a third.
Changing times required a major . L 1 spring the Company began implementing the most sweep-reorganizstion ing reorganization of operations in the corporation's history. Electric and gas distribution -for many years geared to strong-grortn demands and conducted through 15 operating divisions wkt, separate gas and electric departments-were consolidated into eight operating regions with new service area boundaries and integrated energy distribution departments utilizing all feas-ible technical innovations to provide the best possible service at the lowest possible cost. All other departments also streamlined operations under the new integrated regional structure. Advances made earlier that supported the reorganization included improved communications procedures using central customer record files connected to video terminals in customer contact locations; elec-tronically dispatched work orders; centrally dispatched materials from storerooms; advanced work scheduling procedures and up-dated construction standards. In responding to change, in charting aggressive yet prudent Company's aggressive self-help plans for the future, the Company has taken other dramatic steps. efforts successful It is vigorously pursuing new avenues of fuel supply, among them g the establishment of a wholly-owned subsidiary to find and supply n ( J uranium for its nuclear plants. The Company is instituting major
.v new maintenance programs to improve plant availability, and con-tinues to engage in successful and unique self-help efforts to in-crease Michigan's gas supplies. This activity includes both the construction and operation of the Marysville gas reforming plant and extensive exploration and development in Michigan and else-where. The latter is conducted by a wholly-owned subsidiary, Northern Michigan Exploration Company,' which contributed sig-nificantly to the Company's net income for 1976. The Company also participates actively in research and development activities involving alternative sources of energy.
Change and effective response to it-that is the challenge of the -utility business today. We believe your Company in 1976 _ moved further toward developing maximum capability to meet We must continue to build to meet and master the changes ahead, recording significant progress growing energy needs during difficult times. That is important, because we do not antici-pate a return in the foreseeable future of the heady load-building days of a decade ago. Energy conservation is the order of the
~
day. Yet we must continue to build to meet growing energy needs. With the support and understanding that is urgently needed from~ the appropriate federal and state authorities, and tt .. con-tinued dedicated performance of our employees, we believe the job will be done. Sincerely,
/
A t
\
A')t- J. D. Selby, President A. H. Aymond, Chairman of the Board February 11,1977 3
2nergy Production The availability of electric generating capacity wa
.: - and Supply impr ved nd the gas supply picture brightened somewhat during the year. In restructuring and combining Company operations, one major department was created with responsibility for both electric bulk power and gas supply and production, and all transmission activities.
The Company's Palisades nuclear generating plant performed well during e 9 last eight months of 1976, after being scheduled down for four months for steam generator tube inspection, planned maintenance and refueling. Early in 1977, Palisades achieved a milestone with the generation of its 10-billionth kilowatthour of elec-tricity. Though operational for only the latter two-thirds of 1976, the plant supplied 12.8 percent of the Company's total electric generating requirements for the year. Palisades, Big Rock Point Operate C .,mg 1976 the 3,091,525,900 kilowatthours of electricity gener-at 1.ow Cost ated by the Company's two nuclear plants cost customers an estimated $24 million less than comparable generation by the Company's fossil-fueled plants. The Palisades and Big Rock Point plants generated electricity in 1976 at a cost of .916c per kilowatt-hour for fuel, operating and maintenance costs, compared to a system average of 1.456c per kilowatthour for fuel, operating and maintenance costs and to 1.702c per kilowatthour for fossil-fueled generation alone. Maintenance Stepped Up, A new plant maintenance program initiated in 1976 represented Plant Availability improved a major step toward improving plant availability. The pro locludes substantial increases in the maintenance budget mechanical repair staff to maintain the Company's 14 coal a oil-fired steam electric generating units on an around-the-clock schedule. The Company's maintenance program had been scaled down sharply for three years as part of the Company's overall belt tightening measures. The new program is regarded as essential both to provide adequate and dependable service and to avoid higher maintenance costs in the future. The electric system forced outage rate improved during the year reducing the need for higher-cost purchased power to meet customers' demands. Two of the best performances were re-corded by the J. R. Whiting plant, with an availability of 85.9 per-cent, and the Ludington pumped storage plant, with 84.8 percent availability. The five units at the B. C. Cobb plant also were avail-able more than 80 percent of the time. The total cost of fuel for electric generation plus purchased and interchange power was $393,910,992 in 1976, a 15.7 percent increase over 1975. Coal Supplies Coal fuels approximately half of the Company's steam-electric generating capability. Long-term coal contracts for various terms through 1987 cover more than 90 percent of the Company's coal requirements. The balance is met by short-term contracts and spot purchases. The Company's coal-fired generating units burned 5,589,000 tons of coalin 1976 at an average cost of $23.37 per ton as compared to $21.60 per ton in 1975. The cost and availability of coal supplies may be adversely affected by future changes in government requirements, particu-larly environmental regulations, as well as by shortages of road equipment and higher coal industry labor and land reci
. tion costs. In the light of such t certainties, the Compan working to develop new sources of coal supply for new power 4.
. .::s plants as well as to supplement existing long-term contracts.
[~) V Since the Company does not believe that present or near-term sulfur dioxide " scrubber" technology is adequate, it is searching diligently for new sources of low-sulfur coal. Canada Continues to Reduce When the 632,000-kilowatt Karn 4 generating unit is completed in Crude Oil Exports 1977, approximately one-fourth of the Company's electric gener-ating capacity will be based on oil, most of which will be crude oil used at Karn units 3 and 4, presently being furnished under contract from Canadian suppliers. However, the Canadian government has curtailed petroleum exports to the U.S. which has resulted in allocation of crude oil imports, and reduction of the Company's imports from 20,000 barrels to 13,872 barrels per day. The Canadian government has indicated that it expects to end exports of crude oil to the U.S. by 1981. To date, the Company has been able to supplement its crude oil supply with other petroleum products and the two Karn units are
- being converted at a cost of $20 million to uss residual fuel oil as well as crude, which will better assure the Company's ability to secure a long-term fuel supply.
Company generating units burned moie than seven million bar-reis of oil in 1976 at an average cost of $13.60 per barrel, com-pared to $12.85 per barrel in 1975. Nuclear Fuel Subsidiary Formed The Company's contracts for nuclear fuel for the Big Rock Point and Palisades generating plants currently cover requirements for a minimum of four years. Those agreements are with major pri-vate industrial suppliers of nuclear fuel and related services and with the U.S. government. To help meet the Company's long-term requirements for uranium, the Company has formed a wholly-p owned subsidiary, Plateau Resources Limited. Plateau was (a) formed to engage in the acquisition, exploration and development w , w. p~@m y.g.po T >D.L ,' ,
;At , l f s'(
*~ %. , '
.- ~
t - - C. .p e , , - rs?
.-af r'g 4 .i.
' Mt
', g Q. . . g{
- * ~-w
't L. [9 Rk *
, y,
-I N4 + l mm-p g W,
--Q
,4 ,
' s, n . V
'inJ..: ;
am n . p w -. , . a ' t -. c.. C '
*g
, .- -? y
[u w. (.. a , . . 3 .,.i. ,4
,3 h,m og,4 L _i 1 q 'g & ,,
'! ..?,-{l g .e .1 : 3 , . 4 #. y?f Y f.:.. . . _ _" 4- .1 9.g _ g. }
4 e A <gs'p.s_. c t,- u. Jc3f. _ _ f,*a 3 4 ,.e4e_s s.- . r7,
/
5 xm,,,P .a .,
't>
D g t .-
, A 3 W ,%. l. 4.L A 1
3
- a
-)s
;g*[
3 1*, f, '
. ;$J A'
y~
,jt p QQtl - m I
O5 ! Di ' l areu = ... v. n,d .
.. c
,< O
,o e
c .we+MN$wpbem
. w:e ms x
y g. , p .,. ,n s , 3 s ,., >,n v ,_ w ; u
'r
of properties for the mining and milling of uranium and t chase and sell uranium, principally to provide uranium oxi processing into fuel for Company plants. Plateau currently mining claims on some 31,200 acres in Utah and Colorado and has options to purchase 13,300 acres more. In addition. it has rights to purchase mined ores from 14,600 acres in Utah. Plateau is conducting exploration work to determine the extent of the recoverable reserves present on both its owned and optioned properties. Plateau is constructing an ore-buying station in Utah, and plans to build a uranium ore processing mill in Utah within the next year. Natural Gas Curtailments Ease During 1976 approximately 68 percent of the Co.npany's gas sup-ply was obtained from its major pipaline suppliers, Trunklir.e Gas Company and Panhandle Eastern Pipe Line Company,14 percent came from Michigan fields and 18 percent was from the Marysville reforming plant. Although contracts with Trunkiine and Panhandle provided for delivery of 34S billion cubic feet of natural gas in 1976, declines in production available to the pipelines resulted in deliveries of only 228 billion cubic feet, about 65 percent of the contracted volumes. But while interstate pipeline deliveries have been decreasing every year since 1971, they now are leveling off and are expected to increase to some extent over the next two years due to new gas production in the Gulf of Mexico. I ffective December 1,1976 the Federal Power Commission au-thoracd increases in "new gas" prices which are expected to raise the Company's rates by about 20c per thousand cubic feet. Company Actions to Maintain The Company since the late 1960's has taken decisive steps to Gas Service provide Michigan consumers with additional supplies of gas, off-setting in large part curtailments from traditional suppliers. Northern Michigan Exploration Company (NOMECO), a w owned subsidiary of the Company formed in 1967, has carrie n an aggressive gas exploration program in the northern Lower Peninsula of Michigan and elsewhere for the past several years ! and further details on NOMECO's activities will be found on page 7 of this Annual Report. The Company receives approximately 85 million cubic feet of natural gas per day from the northern _ i Michigan area, which includes approximately 30 million cubic feet per day from NOMECO. Consumers Power also receives approxi-mately 17 million cubic feet per day from producers in the south-ern Lower Peninsula, where an expanded exploration and devel-opment program has been mapped out for the next few years. Another important gas supply effort by the Company was the completion of the Marysville gas reforming plant in 1974. In 1976 Marysville provided about 163 million cubic feet per day of the Company's total gas supply, and reached as high as 234.7 million cubic feet on occasion. The feedstocks that are reformed into pipeline-quality gas at Marysville are imported from Canada. Due to Canadian curtail-ments of exports of those feedstocks in August, September and October of 1976, the Marysville plant operated at about 60 per-cent of capacity. In November operations increased to 90 percent of capacity and are expected to continue at that level through the remainder of the 1976-77 hehting season. The Company is investi-gating alternate feedstock sources and believes adequate sup-plies will be available over the near term. Although at increased initial plant cost, it has proved highly advantageous that Marys-ville was specifically designed and built to accept a wide ran feedstocks. Energy Research and Development The Company actively supports research and development more efficient uses of fuels and into alternative energy sources. 6 m .
.m
e Cooperative prograris with the U.S. government and private man-(m) U ufacturers involve e. perimentation in such areas as more efficient use of uranium in nuc; ear reactors, expanded uses for coal, more efficient methods of removing pollutants from coal and the use of oil from shale to produce electricity. For 1977 the Com?any has budgeted more than $3 million for Electric Power Reserch Institute projects and nearly one-half million dollars for breeder reactor research, the latter a Federal Energy Research and Development Administration project being conducted Pintly with the Electric Power Research Institute. As a member of the Michigan Energy and Resource Research . Associatior. (MERRA), the Company is engaged in a number of studies including a pro.cosal developed in cooperation with The Detroit Edison Company to conduct a pilot test of a wind turbine generator in Michigan. The Ludington plant site is one of 17 ex-perimental windmill sites under consideration by the Energy Re-search and Development Administration. The Company is also participating in a statewide effort to bring a Federal solar energy research laboratory to Michigan. In early 1977 the Company sought approval from the Michigan Public Service Commission for four new experimental programs aimed at reducing peak demand for electricity and helping to reduce costs. Over several years this research will cost $1.2 mil-tion and involve voluntary customer participation. The goal is to see if the Company can reduce its costs and save customers money by shifting electric demand from peak times to periods of lower power requirements. The programt include (1) a system to allow the Company to manage its load by remote control via power lines of equipment such as central air conJoners and O electric space and water heaters, (2) establishing rates that would V vary depending on when energy is used, (3) test installations of storage heating systems in homes whose occupants would pay less for power at night while a ceramic-brick experimental unit stores heat for use during the day, and (4) offering a new com-mercial and industrial interruptible rate to customers who have a curtailable electric demand of at least 5,000 kilowatts. l Northern Michigan it was a good year for this wholly-owned subsidiary. )
-Exploration Company Northern Michigan Exploration Company (NOMECO) was formed in 1967 to carry on a gas exploration and develo n nent program in the northern Lower Peninsula of Michigan and elsewhere, and operates primarily in the contiguous 48 states. NOMECO has vary-ing interests in oil and gas leases on lands covering approxi-mately 462,500 acres in northern lower Michigan from which it provides significant supplies to the Company.
NOMECO also is participating in the exploration and develop-ment of 49,000 acres offshore Louisiana in 11 tracts of which NOMECO's net participation is 5,500 acres, and has additional interests in 257,000 acres elsewhere in the lower 48 states. NOMECO in all has interests in more than 135 oil and gas wells and in 1976 participated in the drilling of 40 wells, discovering gas in seven and oil in 11. NOMECO's net daily production at the end of 1976 was approximately 4,300 barrels of oil and 60 million cubic feet of gas, and the subsidiary had proven reserves of 7.7 l million barrels of oil and 93 billion cubic feet of gas. i O) k in 1976, NOMECO had gross revenues of $34.5 million and net income of more than $9.2 million, with total assets in excess of l l l l
$81.8 million.-
7
Energy Distribution and in a reorganization designed to improve operating Customer Service efficiency and better serve customers, responsibilg for all electric and gas distribution and customer-related service activities was brought together. In May, through the consolidation of 15 operating divisions into eight operating regions, many field activities were centralized to improve overall efficiency. Thus, the Company moved from a long-standing posture established to meet strong growth de-mands and provide for optimum marketing of its services to a new structure de'igned to operate in a period of conservation and reduced growth by taking full advantage of modern data processing communications and other technical innovations - all to assure the best possible service at the lowest possible cost. In the new integrated energy concept, each of the eight re-gion operations is supervised ty a general manager responsible for engineering, construction, oper2 tion and maintenance of elec-tric and gas distribution systems, energy consulting services, accounting, customer services, internal services and employee and community affairs. Each region general manager served as manager of a former Company division. At the time of their ap-pointments, the eight region managers had served witn the Com-pany for periods rangina from 22 years to 30 years. The managers and headquarters cities of the eight new oper-ating regions are identified on page 35 of this Annual Report. Concurrent with the reorganization, former division managers W. L. Whitfield of the South Oakland Division, Bob D. Hilty of the Northwest Division, George L. Mayhew of the Macomb Division and A. Frank Brewer of the Jackson Division elected to take retirement effective October 1,1976, under the Company's Retirement Incentive Program. The Early Retirement incentive Program was conceived and implemented on a "one-time" basis for personnel age 55 and over. It was designed to benefit employees who might be ad-versely affected by the reorganization while at the same time significantly reducing the work force to effect savings and im-prove efficiency. Due to the success of the program, the reorgan-ization was carried out with a minimum of disruption to employ-ees and Company operations. Another important benefit of the program was the opening of new avenues of promotion for many younger employees whose skills and services are valuable to the organization and to whom additional incentives to remain and grow with the Company are important. Aside from the increase in efficiency which will benefit the Company on a continuing basis, the reorganization raised the customer / employee ratio to 222 customers per employee as of December 31, 1976. On March 31, 1974, that ratic was 185 cus-tomers per employee. Over- the same period, the Company's gross investment per employee rose from $280,000 in March 1974 to $394,000 in December 1976. Ice btorm Worst in History in early March the most severe ice storm in the Company's his-tory hit throughout its electric service area leaving nearly 300,000 customers without electricity for varying periods and resulting in approximately $12 million in damages, most of which was cov-ered by insurance. Some 3,000 Company employees and 1,000 employees from neighboring utilities and outside contractors worked long h ) to restore service to customers, many of whom were without j tricity for several days. Despite continuous cold weather, ic , : rain and flooding during the storm, virtual!y all service was re-l l 8 i l
, - m -- - - - - . , . , - - - - - - - - - - - - - -- - - - - - - - - - - .
. i g' .
) 5 , S O - g 4
N& *
? .
}f h ', - U k l I_.
, y ,)
f,% j
%w [
1 ,j , - - 3 e
-n. ~
~# f ,
., z
- f. , , *' [s ~ }4',\
. ^^.: ~
,* arL.
y;) a - ~
-- m is ? ,,,,._
... %, . :: ., . .s. (
.. . : ~.. u . n,
, . r ~q _.
ar s.. m:, y is. V 4 kfg f..,, *, (y<j-;^ .%,.},
~-
L;?'.:,
- y
. r... e ,'
;..r k n .
- g >* ~ -.y * '
, p ,y
, .- - p , ,s .
~
e s. ,n rl* i
, .pw , - 1, .
g e C
'I <, <
> ,; , ., r ' *;y' U
, v x ; -- , ...~-
,', e ,,-.nn .;
c , -.p., ;
, ,s,- ,
- i h ,(, e.J 4
A, r 5 (,y k- $4 ;; p 'e , y_ ,, , .
.. - , 4 t
,s.% e -f.", .'.s . .
/ , 3 l
- s
,1 89 ' ehm 's
[ 4 3
.t , ;.; ,.*,S~~.. q . ,
%, '~ q
j
* + ' '
>.l. ,,,,g -
7,y ', 1 . ,. l ,
,- ~ , , c,y , a + ,,. /. <4
- s Y
- w. , * ). je :b , ? ~an f "( -- ft a.p*lW ,. s )l.: },
l'% (;; { '9 - - a . l\
- ,,e ;
l.
~
***'*-*,. w %[ . f .,..
2K Q .
.",'I*:[JG!.
., d, 88 8' f c.Q *' air -
* + - -
. m p ,f g -*ji. c./ e
- L y.,j
,~,,,._ . >
., ,- , ,, - cs- a , -
4( g
, v -J,,p s . < g .~ , - --.
- b ,,;;. - ~ o c e f,.. ,?- A y[ g. ,-
1
- e
- e
$:?
\
.h rr -
. , 5,L ly ,
l* , ; .1 *
- N .
h
.~.*ey;y
?
h: . , > fi w . . +Jgu;,t,y A :^**
..J' 1 Q ~.Q&,' l ~,,i.:- ~
. ., . ,f 4 .,
. / u) yn.yj.s,.
t
*t_ x> . y> 3 .w . . -g, ;y -
, , . \1 ,&
(
,iY/ [ [r. v- l, N, N N,5 ; , s.# f
_r~..
. de
.s .,, .
. .e-
, . , :i 3 y .e -
; f ;.-//
.rm ,,(s 7, y ,g, J ' .\ g-* ; <
- h' f ', '
.y...,- #.* .
g/lQ*
< ,,ifk- -s , Se
- , , , A . - 8 = er 7 %
f,f. .
-, af f ,,.
I f . < ~;[,'*'
.,&';} y
% 'W;mQf ,
.._t
..' l
,A F ,
. ...i p M
ns (.- ,x 4 $4*p.ng d n , a e m, ,uc i, ,g p#v r-;. L .?u,o rie -
,3 y,- % .g ~4 .
,,t, ~
f f.gj h{ , . 4 y', ,h .' 3! / :v ' 4;;W[' 1 s hk . d[. M 6k.q}sg. (
,E ,1 ;,
- r. m> % %
kiiMt $ k5 E, G0
$ m '%[h%:.$M s ou W M.s-W 9 9 .c.. G # F.A l ifEU ' , 40p
~ .
~
'~
;M - .
d'b - - rl !n, , _ k.
+
4w. 43-- my, t' i *
- r.
- m
,,[. . q- r f ,M'*" '
jkR;REE' __ -
stored within two weeks. The Company is grateful for the out-
'ste1 ding cooperation and diligence displayed by its empt and all who helped restore service, as well as for the su and understanding of its customers during the emergency.
Company Encourages Energy To encourage the efficient and wise use of electricity and natural Conservation gas, the Company disseminates information on energy conserva-tion through radio, television and newspaper advertising and pamphlets and displays at customer service locations. In re-sponse to the Company's home insulation program,25,178 homes were insulated during 1976, resulting in an estimated annual sav-ing of 5Y0 million cubic feet of gas. Since the program began in December 1973, more than 84,500 homes have been insulated with an estimated saving of 1,865 million cubic feet of natural gas. The Company works on a continuing basis with its cus-tomers as well as with regulatory and governmental organizations in research and other efforts to encourage the most efficient use of energy. Electric and Gas Sales Up From 1975 At the end of 1976 the Company was serving 1,235,957 electric customers located in 61 lower Michigan counties in a service area encompassing 27,800 square miles within which 3.3 million peo-pie live. Electric customers included 7,726 industrial, 120,936 commercial and 1,106,440 residential. The Company sold a total of 24.9 billion kilowatthours, as compared to 22.9 billion kilowatt-hours in 1975 for an 8.8 percent increase for the year. The Company was serving 990,519 gas customers at year-end 1976 in 40 lower Michigan counties including 6,441 industrial, 67,132 commercial and 916,946 residential customers, of whom 856,761 use natural gas for home heating. The 12,900-square-mile gas service area has 3.8 million residents and includes mu the populous suburban area north and west of Detroit. A to 341 billion cubic feet of natural gas was distributed to custo in 1976, up 7.2 percent from 1975 when distribution totaled 318.2 billion cubic feet. The increases in electric and gas sales were due to colder weather (overall,1976 was 5% percent colder than normal based on a thirty-year average), the economic upturn in Michigan, and the addition of nearly 18,300 new residential gas customers and approximately 18,200 new electric customers.
, ~? ? e
, N $ lf *
,5 t .
- w. [9 O' m ,e 2
g-
}m .
+ %y' 5
gY y l5 $ f' y W. .., 5 4 j$k
. O. gm- W !, . .
gW7 AH:' .- -; f ;gN' N J- I ((
- L s g
, n, m ..
,. c . _ .___ , O N
ca Electic and Gas Projects To satisfy modest electric load growth forecasts of U s2 percent per year over the next 10 years and assure Engineering and an adequate reserve electric generating capacity of
. Construct,on s at least 20 percent, the Company continued construction of three large plants. And, parallel to other organizational changes, responsibility for engineering and construction of major electric and gas projects was centralized.
Karn, Campbell and Midland Unit 4 of the Dan E. Karn generating plant located at Essexville, Michigan, originally scheduled for commercial operation in the spring of 1977, has been delayed several months because of damage to the economizer section of the steam generator. Installation of Karn 4 will result '; projected reserves of 27 percent on the Com-pany's system ~ as summer of 1977. During 1976, $30 million was spent on the N.J.000-kilcwatt, oil-fired unit and an estimated $8 million will t . squired to complete it. Total cost of Karn 3 and 4 is projectu at $240 million. The 770, 00-kilowatt Unit 3 of the James H. Campbell generat-
'ing plant at Port Sheldon, Michigan is expected to be completed in 1980 and will result in an estimated reserve capacity of 28 percent that summer. Nearly $20 million was spent on Campbell 3 in 1976 and $92 million is budgeted for construction in 1977. Total cost of the Campbell unit is estimated at $510 million.
~ The Company's largest ongoing construction project is the two-unit nuclear generating plant in Midland, Michigan, scheduled for operation in 1981 and 1982. The $1.67 billion plant will add ( 1,361,000 kilowatts of capacity to the Company's system and will V provide up to 4,050,000 pounds per hour of process steam to The Dow Chemical Cnmpany. The Company spent $152 million on Midland construction in 1976 and has budgeted $245 million for the project in 1977. Operation of the Midland units will result in projected reserves on the electric system of 23 percent for the summer of 1981 and 23 percent for the summer of 1982. For planning purposes, both reserve figures reflect the possible re-moval of the Palisades nuclear generating plant from service for reconditioning at that time. Constraction permits for the Midland plant have been re-manded by a U.S. Circuit Court of Appeals to the Nuclear Regula-tory Commission for reconsideration of certain issues. Pending the outcome of those proceedings, the Company is continuing construction as scheduled. A further discussion of this matter is contained in the Corporate Review section of this report. Based on current load projections, a new generating unit may be needed for service in 1986. Work is under way to identify pos-sible sites for the new unit, which is expected to be coal-fired. Environmental Protection in 1976 During 1976 the Company spent almost $89 million on environ-mental protection. Of that amount, approximately $73 million went -
< for capital investments including $23 million for O collution con-trol, $17 million for water pollution control, $30 mih.on in nuclear radiation control and the balance for solid waste disposal, noise abatement, aesthetics'and land use. Approximately $16 million
, . Was spent on operation and maintenance of environmental facili-ities including incremental costs for low-sulfur coal and energy O costs for operation of environmental equipment.
O During the year construction was completed on new electro-b static precipitators at Unit 1 of the James H. Campbell plant and Unit 1 of the Dan E. Karn plant. Conspuction of the Dan E. Karn Unit 2 electrostatic precipitator will ' completed early in 1977. 11 J
o m. m- "3' se i 11 a The ;,recipitators remove fly ash, a waste product from the ! burned to generate electricity. i - The $13.8-million Campbell 1 precipitator was installe.d t , ! prove ash collection from about 90 percent to the higher level ' now required by air quality regulations. A modification to the pre-cipitator on Campbell 2 was started in 1976 for service in 1978 at i an estimated cost of $25 million. The precipitators at the Karn } units, which tota!ed $21 million in costs, will increase as'i collec-tion from about 80 percent to the higher level now required. i In 1976 the Company also began construction of additional effluent control systems at all of its generating plants to comply ' } with recently adopted Federal and State clean water rules. These ! effluent control systems are designed to assure that no chemical j l or physical impurities from plants.are discharged into nearby l l bodies of water. The systems are expected to be in operation in - ! i mid-1977 and will cost an estimated $8 million. ' 'l i 1977-1981 Environmental Costs To comply with environmental requirements, estimates are that i ' the Company will have to spend $756 million in the period 1977 l through 1981 -about $515 million for capital investment and the i j balance for operation and maintenance of pollution control facili- ; j ties and for low-sulfur coal. That means an environmental ex- ) penditure of over $300 per customer over that period. ' { Although the Company supports necessary environmental pro-i l grams, in certain cases the Company believes that the additional ' l costs required to satisfy environmental regulations are difficult to
~
justify tnrough a cost-benefit analysis. Environmental protection systems and equipment are nonrevenue producing and the ulti- l 1 l mate cost of environmental protection is borne by customers. l j Money spent for pollution controls also increases operating c l without improving either efficiency or reliability of service. f i Company continu3s to study environmental requirements present data to regulatory bodies in an attempt to obtain modi-j . fication of those requirements it believes do not justify the added expense to consumers of electricity. p 77 9 ,
** y ,
l
-'~
. ; / =- + p o
+ a r :: [ Y e mMb A n
!.t i ,~~
' *y'Q l' l '
- g. . .
) n Q .t. . A ;,J r ~~4' ! [. h 4 ? y[, i j y,4 pi v! l, (f r,,w I
;, 1 ,
_4 . {~~b 5[
- n ..
l e
- g? , i , i'g- nw .
_ . j .
- c. M= M-G,g.
-,m s.xar. s.. m p
- , g. . . . ,. t . e g ,
R
Corporate Review-1976 Earnings per share on the Company's common stock continued to [] increase steadily in 1976. Earnings per average share of common 4"/' stock outstandirm were $3.63 as compared to $2.62 restated earn-ings for 1975. Earnings for 1970 through 1975 were restated to reflect the interest portion ($6.8 million for that period) of a $30 million court-ordered refund to customers, which is discussed be-low._ Earnings per share, assuming full conversion of the Com-pany's convertible securities, were $3.44 per share in 1976. All costs also continued to increase. Over the past three years, fuel cost increases have been staggering; the cost of fossil fuel burned has gone up 149 percent, while the cost of gas has risen 144 percent. Company Refunding $30 Million in November, pursuant to an Ingham County, Michigan circuit to Customers court order, the Company began processing a refund of nearly.
$30 million to customers who received electric or natural gas service from the Company in 1970 and 1971. The order required the refund of a portion of a 1969 rate increase including interest and applicable sales tax. The refund decision followed the Com-pany's unsuccessful appeals of a 1969 Michigan Public Service Commission order relating to an income tax surcharge issue. A
- reserve to cover the refund obligation excluding interest charges had been established earlier by the Company.
To date, the Company has sent checks totaling more. than
$22,600,000 to more than one million customers, and is continuing -
an extensive communications program in an attempt to locate the customers who have moved since 1970 and 1971. MPSC Granted Company $33.9 Million in April 1976 the Michigan Public Service Commission granted
-Increase in Electric Rates .the Company an increase in its electric rates of $33.9 million an-
[ nually and increased the authorized rate of return on common V[m equity from 12.12% to 12.75% in the electric business. The Com-pany nad requested an increase of $106.7 million in May 1975. In May_1976 both the Company and the Attorney General of Michigan appealed the rate order. Th_e Company requested the Circuit Court to require the Michigan Public Service Commission to authorize
$41,605,000 in additional rates, including $14,800,000 to be made -
effective immediately. The Attorney General requested the Court to reverse the MPSC rate order. In June 1976 the Court denied the Company's request for an immediate increase. The other matters covered in the appeals are not decided. In the April 1976 order
~
the MPSC also authetized tne Company to pass through 90 percent of monthly increases and decreases in certain purchased and in-terchange power costs to its customers. The order also amended the Comoanv's then existing -fuel cost adjustment clause to. permi' ord/ 90 preent of the increases and decreases in monthly fuel .; cats to be a?omatically passed through to customers.' The
- - am;unt of purchased 'd interchange power cost which may be l pr.ssed through to customers is determined monthly by the MPSC snd reflected in customers' bills three months after such costs .
are incurred. Company Files New Roquest P *.. crease On January 31, 1977, the Company filed an application with the in Electric Rates Michigan Public Service Commission to increase its. electric rates by $164 million annually, including $43.7 million in an immediate 1 interim increase. The application seeks an increase in the Com-pany's authorized rate of return on common equity to 13.5 percent in the interim and to 15 percent in the final order. The rate in-crease and the higher rate of return are essential to improve the (N)-
'O Company's credit ratings so that required construction can be
-financed at acceptable costs.
131
Gas Rate Case Stiii Pending in November 1974, the Company applied to the Michigan Pu Service Commission for an increase in its gas rates in an an > amount of $54,157,000, including a requested interim rate crease of $39.559,000. In June 1975, the MPSC granted the Com-pany an interim rate increase in the annual amount of $29,194,000 and in March 1976 the MPSC issued an order finally deciding some issues in the proceedir'g and sending back other issues for further hearing. Among the issues finally determined by the MPSC's March 1976 order was the rate of return on common equity to be allowed the Company, which determination the Com-pany has appealed to the courts. Because the issues sent back did not include a consideration of current cost of service data,in July 1976 the MPSC granted a Company motion that it be allowed to present in the remanded proceeding updated cost information other than that relating to return on common equity. The updated data presented by the Company in the proceeding demonstrate that the Company's gas rates currently in effect result in an annual revenue deficiency of $26,288,000. On December 15,1976, the Company asked for $21,962,000 of that amount in an addi-tional interim gas rate increase. The Company hopes to have a decision on its interim request in early 1977 and expects a final order in the proceeding in the second quarter of 1977. NOMECO Application Denied in January 1977 the Federal Power Commission issued an order denying an application by the Company's subsidiary, Northern Michigan Exploration Company (NOMECO), to sell and arrange to have transported to the Company gas developed by NOMECO in fields located offshora Louisiana. NOMECO had applied to the FPC in June 1974 for authorization to sell the gas, in quantities of up to 40 million cubic feet per day, to the Company. In the inter
- NOMECO has been selling its gas from offshore Loisisiana to of the Company's interstate pipeline suppliers Trunkline Company, under temporary authorization from the FPC. The FPC's order, which reversed a decision by the Administrative Law Judge hearing the case, was premised on the grounds that other customers of Trunkline needed the gas more than did the Com-pany, and that, in any event, the Company will indirectly (as a customer of Trunkiine) receive the cenefit of a major portion of the new supply. The Company has filed a petition for rehearing of the January order with the FPC.
NP.C Reviewing Midland in July 1976 the United States Court of Appeals in Washington, Construction Permits D.C., remanded the matter of the construction permits for the Midland nuclear generating plant to the Nuclear Regulatory Com-mission for further review. The Court ordered the NRC to recon-sider waste disposal and to consider other unaddressed fuel cycle issues. energy conservation alternatives and other issues affecting the environmental cost-benefit analysis performed for the plant including any changed circumstances regarding The Dow Chemical Company's need for process steam and the in-tended continued operation of Dow's fossil-fueled generating facilities. It also ordered clarification of the report on the plant issued by the forrt 'r Atomic Energy Commission's Advisory Com- l mittee on Reactor Safeguards. The Company has petitioned for U.S. ! Supreme Court review of the Court of Appeals July decision. I Pursuant to the Court of Appeals decision, the NRC ordered an l Atomic Safety and Licensing Board (ASLB) to be reconvened for the Midland plant to consider the remanded issues. In Nc1 ember 1976 the ASLB commenced hearings to consider whether t l construction permits for Midland should be continued, modifi i or suspended pending the outcome of the rcope'1ed proceeding. 14
Electric Sales Gas Sales BlLLICNS OF K:LOWATTHOURS BILL!CNS CF CUB:C FEET
/ \
V
- 26 390
- 24 360 M
- 22 330 e mamm 20 300 18 270
- 16 240 - uman" 14 - 210 -
.~ n . .
*mC#I3
- r. > l -)
180 - r ^m , J- . ~ N 150 -
, .. .y" gm
,_ ,fi~ g.,,
8-
"Y *
. :. a.m .
^"c . '7 , .- A. 120 -- , -
6- -1.5 #~ 90 -
"w-4- 60 - .
?
2- - 30 - 0 0 66 67 68 69 70 71 72 73 74 75 76 66 67 68 69 70 71 72 73 74 75 76 citer Other industnat incustr:al and Commerc ai
;~ . -w, ,-7m, 9 Comraere:al f. '
- Other 9es: dent ai a.a. n f
.p , ,,
, Res.denttai Res:centia: Us.ng Gas for Space Heat ng Gas and Electric Customers Plant Additions and truprovements THOUSANDS MILUONS OF DCLLARS
- 1300 390
!a.-- F;
- 1200 360 W e, .rM' "
- 1100 ... ~d-i 330
- 1000 m -.-,n 7 b u' -h/ -r 3 a ., .., N t> y
<pei 4
.:r 300 .
- 900 -. 4.nc+ ::4.- .-
k, , , 's w :h, !,4 5.a -- 270 800 -j . ' .J-y _ ,;s,j a> ~~v% :; . [; [d {u) i ? ;240
- 700 -
i 'E
- t -
I 210 4 ii M. [O "
% E; PQ +j C r1 M . _ .
- 600 .- ?q N. g<j ~
.*i! n M.,' p M,, M 180
- 500 u_M " n%Ma.?'i "c:[3D-6 k,$ $2 ie ;Pig *.. 150
- 400 -m q N ,
~-
WN@
. - m
?! 0 v3 w: .;r f 4a~ n-n N 6 O r.1 sd-120 -
- 300 5.
7,
': - */ M>-N; M M ;jj. 97 90 - s 4 , y, 9 M
h3 y
;d;,e.J p du
- <00 . ~ +x. +s k. n.n
,3, .,
& 60 -
100 - .,e?-0 2 vu
;
- A [Y - mxd; N .A ,d K, 9, ai s
- 30 -
0 [.
\ ,,-
66 67. 68 69 70 71 72 73 74 75 76 66 67 68 69 70 71 72 73 74 75 76 , -.u-M E.ectric Customers Omer
- Gas Customers Gas E' ectr:0
i Cost of Gas Sold Cost of Fuel and Purchased i CENTS PER MCF and Interchange Power i P/lLLS PER KWH t i 140 O 14 1 l 130 - 13 120 - 12 gy r
.. j 110 - 11 f
i 100 - 10 ~ 4
.. 1 -
j 90 9 W,M : rman 15',j # 80 M - 8 ' .!
- - Ga c 70 l" - 7 '
Wd B ', . 60 ." y - 6 w e. "', l Q L, , , ,
~
;4 50 Wo - 5 .. e 40 9 V 'j 7 "
m +' R ~.4 n+
"h,tu',, - 4 W . e ,: % a ' . ' . ^V'D. -' 5 j
30 C~" ~ - n';j
;.- , & ,i
;;: . : in - 3-~~=~,,e. 1 x '.ci e v
y@ ! 20 3; o
'^ O ,,
.w
=.
- c3
c.' M, N
^NN%x M'j..2 u v,: - 2 0
,s ' -
. --g .; " gf s
' ^y J K< e . .
% 2
.t ;..>
, ;) + . :; - &g . ., 'g';
( 2:+ y :q - *; yy-
;s. c 1
l 10 .: 4 -
- rq M 7 yn*
.' . i -
1 -(: y; ~. ; .
.c:i l'*: ym a m. , L. .- n, .c. w , .
g- . . . . . y, g. . 0
- i. .
0 - 1 66 67 68 69 70' 71 72' 73 '74'75 76 66 67 68 69 70 71 72 73 74 75 76 i i f i }
-l .
t } Average Cost of Long-term Debt Average Cost of Preferred and Preference Stoc6 i PEACENT
)
PERCENT l i '
< l i
i 80 80 a f nv--- i l 70 - 7.0 I" y/% r*? + 60
'p*q' r ,;
,. . . , ~ . . .
.a - 60 >
n, W'a, .M. ,+3 3 a s' - es ! 50 !$.,)s b,
~.
/. >. - 5.0 . ,
I ,
.1 . . .
- I t *yge, .
g 1 t .e o% i. ge 774 .% ,t~ 1 40 A .45 U N, di 6;l 5!- #
! l-} d
^
f c,4 "'4 -s Ne:. p .e - 4 I .c4 f.. . s'4 <A 1
- .- 1 f) , .ql
+
1 v'a %"r b}j , ' h:e 2.jY y u D f,' U :f '
.c , 4 .C, . ".. . _ .
3 0 -t 2( . 3ir
. 4
- 30 . Q ; l. Y . ; -
,i
*+- 1 ' q.? ., :*9 1 % .% -! -- '
,: .g.q' t',
+
.y.a. : .e+A 3 e,< p yy , , .q : .
'A .,,
~
, 2 0 - d~ aD]4 . 2fT;,
~
dl h?' wn M - 2.0 -E[t D' '
. :p <
C
- 2 M .~
) f./ j . .d
- V y;f(4 G. jj . 0;bj - -".
,a..,,
a , i, . [, C .1 1.0 .m i y! 'd. A .f t r 1 . ;J f s' 4
;4 - 1.0 -~ fY mI '
+
,:] O: %'j . *'g ';
l ;-$ .. ,. a
- ; _4 , . (< >
1 t 0 - 0 66 67 68 69 70 71 72 73 74 75 76 66 67 68 69 70 71 72 73 74 75 76 l i m l i F
-7 g
in its testimony in the proceeding, the Company estimated that a 1 five month suspension would result in a nine montn delay in com-G)' . mercial operation of the plant and add $336 million to the plant's
- capital and generating costs. A nine month suspension would delay operation 15 months and add $579 million to capital and generating costs. The Company has investad approximately $426 million in the $1.67 billion plant. Following completion of the sus-pension hearings which is expected early in 1977, hearings will be held on the remanded issues themselves, barring further review.
New Financing in 1976 During 1976 the Company issued new securities in the total amount of approximately $353 million which included three issues of First Mortgage Bonds, one issue of Preference Stock and two issues of Common Stock. Proceeds from the sale of those securi-ties were used to help finance the construction prograrr. and to repay short-term borrowings made for that purpose. Securities . were issued as follows: First Mortgage Bonds June 70 million. 9% % Series, Effective interest cost to due 1996 the Company: 9.93% July
$60 million,9%% Series, Effective interest cost to due 2006 the Company: 9.85%
October
$60 million,9% Series, Effective interest cost to due October 1,2006 the Company; 9.14%
d Preference Stock June
$30 million gross proceeds from sale Cost after underwriting of 2,000,000 shares, cumulative, $1 commissions: 10.167%
par value, at $25 per share, annual dividend rate: $2.43 Common Stock During 1976 the Company negotiated the sale of two issues of common stock through underwriting groups headed by' Morgan g Stanley & Co. Incorporated. In February,2.5 million shares were sold at $21% per share and in November,3 million shares were sold at $21% per share. Proceeds from the sales were $50.9 mil-tion and $62.1 million, respectively, after deduction of under-writing discounts and commissions. In November the Company implemented its new Dividend Rein-vestment and Common Stock Purchase Plan for common stock thareholders. Under the plan, participating common shareholders have cash dividends on their shares of common stock automati-
- cally reinvested or they may reinvest their cash dividends and '
may also make optional cash payments of from $25 to $5,000 per quarter toward the purchase of new shares of common stock. Participants in the plan pay no brokerage commission or service
. charge when they purchase shares.
1977 Financing The Company estimates construction expenditures for 1977 of ( p} ' approximately $540 million. To finance the 1977 construction pro-V' gram and retire $24 million of maturing bonds,it will be necessary for the Company to issue additional securities in the approximate 17 b_ '
amount of $430 million during 1977. The timing and natur those issues have not yet been determined. Palisades Suit In October settlements totaling $13.5 million were reached two of five suppliers the Company has sued for problems which occurred at the Palisades nuclear generating plant. Settlements largely relating to claims associated with the plant's main steam condenser were reached with the Ingersoll-Rand Compar.y and the Wolverine Tube Division of UOP, Inc., formerly Universal Oil Products Company. The Company filed the suit in August 1974 in Federal District Court in Grand Rapids, Michigan. The plant was out of service during much of 1973 and 1974 due to steam generator tube cor-resion, condenser problems and damage caused by vibration of reactor core internals. The suit against the other defendants, Bechtel Corporation and Combustion Engineering, Inc., is pend-ing, but is not expected to come to trial before early 1978. Dividends and Shareholder Meetings During the year the Company paid $61,038,000, or $2.00 per share, in dividends to its common shareholders and $30,949,000 in divi-dends to holders of preferred ind preference stock. Preference shareholders had converted 4U,133 shares of the $5.50 prefer-ence stock issued in 1975 and 363,091 shares of the S6.00 prefer-ence stock issued in 1974 to 3,042,581 shares of common stock at year end. As of December 31, 1976, there were 139,161 common share-holders and 34,630 preferred and preference shareholders. The Company's shareholders reside in all 50 states, the District of Columbia and 28 foreign cour'tries. Approximately 60 percent of all shareholders are Michigan residents, with average holdings of 160 shares. The Company's 1976 Annual Meeting of Shareholders was hE!"J April 13,1976, in the Company's Parnall Office Building. A total of 24,069,705 shares, or 70.6 percent of all shares of stock out-standing, was represented at the meeting either in person or by proxy. Following the Annual Meeting, Regional Meetings of Share-holders were held in April in seven service area cities, with total attendance in excess of 6,000. The 1977 Annual Meeting of Shareholders will take place Tues-day, April 12, at 2:00 PM Jackson time in the Parnall Office Build-ing,1945 West Parnall Road, Jackson, Michigan. Regional Shareholder Meetings in 1977 are scheduled as follows: April 13 Jackson April 21 Flint April 14 Kalamazoo April 26 Traverse City April 19 Grand Rapids April 27 Saginaw April 20 Lansing April 28 Royal Oak Further details wil! be released prior to those meetings. Management Responsibility As a part of the major reorganization of the Company which com-Realigned b;ned gas and electric operations, the following management changes were made: John B. Simpson, a director and executive vice president formerly responsible for gas groups, assumed responsibility for electric and gas distribution operations, all cus-tomer-related service activities, general services, region op tions and oil and gas exploration; Russell C. Ycungdahl, a dir tor and executive vice president formerly in charge of elect u groups, assumed responsibility for supply, production and trans-18
mission of electricity and natural gas: and Stephen H. Howell, former vice president for electric plant projects, became vice president for engineering and construction of all major electric and gas production and transmission facilities. All three men report to President John D. Selby. New Officers Named in January 1977 the Eoard elected James B. Falahee senior vice president for legal, regulation and public affairs. He had ; been vice president and general counsel. At the same time, the l Board elected Lawrence B. Lint *c;ner vice president and general i counsel. Mr. Lindemer is a former Justice of the Michigan Su- ! preme Court and was a senior partner in a large central Michigan law firm for 20 years prior thereto. I Effective July 1,1976, W. Anson Hedgecock, vice president for customer service and energy consulting services, elected early retirement from the Company. Mr. Hedgecock had served the Company for 40 years and had been a vice president for 11 years. Eugene B. Hedges, vice president for gas operations, also took early retirement, effective October 1,1976. Mr. Hedges had been with the Company 27 years and had served as a vice president since 1972. W. Jack Mosley, vice president for energy planning, retired effective February 1,1977. Mr. Mosley joined the Company in 1962 and had served as vice president since 1969. In January 1977 the Company announced that James W. Cook will join Consumers Power to succeed Mr. Mosley as vice president for energy planning effective March 1,1977. Mr. Cook holds de-grees in chemical and nuclear engineering and prior to joining Consumers Power Company held senior management responsi- , bilities with Stone & Webster, Inc., a major architect-engineering firm engaged in utility nuclear construction. I l l l l t in Memoriam The Company was saddened in 1976 by the death of Lee D. Ferden, a former member of the Board of Directors and for dec-ades an outstanding community leader of Chesaning, Michigan. Mr. Ferden, who served on the Board from 1945 to 1975, made many valuable contributions to the Company's progress during his years as a director. 19 i
~ -- _ _ _ , ._ . , _ _ ~ . . __ . --. _ . _
Statement Consumers Power Compang of Income W YEAR ENDED DECEMBER 31 1976 1975 Thousands of bollars CPERATING REVENUE (Note 1): Electric . . . . . . . . . . . . . . . . . . . . . . . . $ 878,468 $ 757,741 Gas 700.236
. . . . . . 581.294 Steam . . . . . . . . . . . . . . . . . . . . . . . . . 2,548 2.065 Total operating revenue. 51.531.252 $1.341.1C0 OPERATING EXPENSES AND TAXES:
Operation-Purchased and interchange power $ 127,464 $ 90,891 Fuel consumed in electric generaticn . 266,447 249.556 Cost of gas sold . . . . . . . . . . . . . . . . . . . 460,458 375,495 Other . . . . . . . . . 194.555 179.029 Total operation . . . . . . . . . . $1,048,924 $ 894,971 Maintenance . . 68,724 57,6
. Depreciation and amortization . . . . . . . . . . . . 96,954 93,6 General taxes . . 77,365 67,6 income taxes (Note 12) . . . 77,315 57,564 Total operating expenses and taxes $1.369.282 SL171.455 Net operatmg income . . . . . . . . . . . . . . 5 211 970 $ 169,645 OTHER INCOME:
Allowance for funds used during construction (Notes 1 and 13) . . $ 33,848 $ 24,825 Income of subsiciaries mtes 1 and 14l 10,779 11,432 Gain on reacquisition of long-term debt . . . . . . . . . . . . . 2,539 2,958 Cther, net . 1.469
. . . 1.438 Net other income . . . . . . . . . . . . . . . $ 48,635 $ 40,653 INTEREST CHARGES:
Interest on long-term debt . . . . . . . . . . . . . . . . $ 113,695 $ 101,340 Other interest charges . 2.365- 9.022 Total interest charges . . . . . . . . . . $ 116,060 $ 110.362 Netinccme . . . . $ 144,545 5 %,b DIVIDENDS ON PREFERRED STOCK 24,071 24,093 DIVIDENDS ON NONCONVERTIBLf. PREFERENCE STOCK . 1,701 - DIVIDENDS ON CONVERTIBLE PREFERENCE STOCK . . 5,177 5,993 Net income after dmdends on preferred and preference stock (Note 2; 5 113.596 5 69.550 EARNINGS PER SHARE OF COMMON STOCK ASSUMING NO DILUTION BASED ON AVERAGE SHARES OUTSTANDING (Notes 2 and 3): $3.63 $2.62
~
EA?NINGS PER SHARE OF COMMON STOCK ASSUMING FULL DILUTION BA50 ON AVERAGE SHARES OUTSTANDING (Notes 2 and 3 : $3.44 $2.49 The accompanying notes are an integral part of this statement. 20
p Statementof Source Consumers Power Company V of Funds forGross Property Additions YEAR ENDED DECEMBER 31 1976 1975 SOURCE OF FUNDS FOR GROSS PROPERTY ADDITIONS: Thousands of Dollars Funds generated from operations: Net ir.come after dividends on preferred and preference stock . . .... . $ 113,596 $ 69,850 Principal noncash items-
, Depreciation and amortization Per statement of income . . 96,954 93.635 Charged to other accounts . .. 8,849 5,164 Ocferred inecme taxes, net .. 26.603 31.318 investment tax credit, net ... . 14,643 24,431 Allowance for funds used during construction (33.848) (24,825)
Undistributed earnings of subsidiaries . (8,400) (9,512)
$ 218,391 5H0.001 Less-Dividends declared on common stock .. 61,038 53,271 Retirement of long term debt and preferred stcck . 15.848 14.733
$ 141,511 5122.002 Funds obtained rn ne,v financing: Issuance of ccmmon stock 5 113.023 5 -
Issuance of preference stock 50,000 50,000
') Sale of first mortgage bcnds 190,000 150.000 Net proceeds from installment sales contracts payable 18,64J 14,153 increase (decrease' in other Icng-term debt 60 (115)
(Decrease)in notes payable (38,500) _ (80,000) Less refunded first mortgage bonds . (60.000) 26.324)
$ 273.226 $ 47.714 Other sources (uses)of funds: Changes in net current assets and current liabilities (excluding obligations expected to be refinanced)-
Temporary cash investrnents. . $ (36,450) $ - Accounts receivable (54,489) 4.335 Accrued revenues .. . . (28,060) (13,443) Refundabie income taxes. - 17.651 Materials and supplies-fuel stock . ... (11,515) (972) Gas in underground storage . 8,253 ;37,335) Accounts payable . ......... 15,238 8,714 Accrued taxes . 67,776 3.633 Other . . . ........ . (35,198) 16,518 5 (74.445) 5 (840) Property sold under leaseback arrangements . .... 10,689 29,426 Other, net . , (31.670) I2.696)
$ (95.426) $ 25.890 Total funds for construction from above sources $ 319,311 5195.605 Allowance for funds used during construction . . . .. .. . 33.848 24,825 Gross property additiens . . . . . . . .. 5 353.159 5220.431
( ) Denotes deduction. The accompanying notes are an integral part of this statement. 1 21 j
Balance Sheet g Assets DECEMBER 31 1976 1975 Thousands of Dollars llTlLITY PLANT: At original cost-Plant in service and held for future use-Electric . . . . . . . . . . . . . . . . . $2.276,100 $2,179,313 Gas . . . . . . . . . . 1,015.562 995,114 Steam . . . . . . . 3,306 3,306 Common to all departments . . 43,616 43.200
$3,338,584 $3,220,933 Less-Provision for accrued depreciation . 864,945 777.395
$2,473,639 $2,443,538 Construction work in progress (Notes 4 and 5) . . . . 627.886 423.102
$3,101,525 $2.866,640 4
OTHER PHYSICAL At cost or less-less provision for accrued depreciation of PROPEHTY: $363,000 in 1976 and $270,000 in 1975 2,876 5 3.045 $ O thvESTMENTS: Wholly 4wned subsidiaries (Note 1)- Michigan Gas Storage Company . . . . $ 20,427 $ 21,265 Northern Michigan Exploration Company (Note 14) 39,914 30.676 Other, at cost or less . . . . . . . . 5,971 1,071 5 66.312 5 53.012 CURRENT Cash . . . . . . . . . . . . . . $ 20,804 $ 19,6E6 ASSETS: Temporary cash investments. at ccst 36,450 - Accounts receivable, less reserves of $2,341,000 in 1976 and $1,337,000 in 1975 146,898 92,409 Accrued reves. es (Note 1) . 112,169 84,109 Materials and supplies, at average cost-Fuel stock . . . . . . . . . . . . . . . . . 75,951 64,436 Other . . . . . . . . . 38,722 34,389 Gas in underground storage, at average cost . . 87,615 95,868 Prepayments and other . . . 69,936 32.525 Total current assets . . . . . . . . . . . . . . . $ 588,545 5 423,402 OTHER: Deferred debits (Note 11) . $ 55,185 $ 15,2
$3.814.612 $3.361.1 The accompanying notes are an integral part of this statement.
22
Stockholders' Consumers Power Company (vi Investment and Liabilities DECEMBER 31 1976 1975 Thousands of Dollars CAPITAllZATION: Common stockholders' equity-Common stock, $10 par value, authorized 42,500,000 shares; outstanding 34.846,409 and 27,561,474 shares, respectively (Notes 6 and 7) $ 348,464 $ 275,615 Capital in excess of par value 318.837 252.203 Retained earnings (Notes 2 and 6) .. ... 306,584 254,026
$ 973.885 $ 731.344 Less-Capital stock expense . . .
14,223 11,502 Total common stockholders' equity 5 959.662 $ 770.342 Preferred and preference stock-Preferred stock, cumulative, $100 par value, authorized 5,000,000 shares (Notes 5 and 7) . . .. . $ 346,334 3 346,734 Preference stock, cumulative $1 par value, authcrized 5.000,000 shares, cutstanding 2,743.776 and 1.239.396 shares. respectively (Note 7) 2.744 1.239 Capital in excess of par value of preference stock . 84,445 60,730 g Total preferred and preference stock 5 433.523 $ 408.703 Total stockholders' investment .. . . $1,393,185 $1,179,045 Long-term debt (Notes 5 and 8). 1,589.881 1.403.183 Total capitalaation . ... .
$2,963,066 2.582.233 CURRENT LIABILITIES: Current obligations expected to be refinanced-First Mortgage Bonds. 2?a% Series due 1977 and 83i% Series due 1976. respectively (Note 81 5 24.010 $ 60,000 Notes payable to banks (average interest rate in 1975 of 7.25%). - 34,500 Notes payable to subsidiaries (average interest ratt in 1975 of 725%) *000
$ 24,010 $ 98,500 Other current liabilities-Current maturities ar,d sinking fund en long-term debt iNote 8) 5 16.635 $ 15.490 Accounts payable . . ...... ... 151,129 135,891 Accrued taxes . . . . 172.960 105.184 Accrued interest . . . .... .... 38,109 41,251 Other . . . . .. 65.313 55.632
$ 444,146 $ 353,448 Total current liabilities . .. . . 5 468.156 $ 451.948 DEFERRED Deferred income taxes (Note 12) . .
. . . $ 270,708 $ 231,125 CREDITS AND investment tax credit (Note 12). 79,750 67,251 RESERVES: Other . . . . . . 32,932 28,576 5 383,390 p $ 326.952
$3,814,612 $3,361,133 The accompanying notes are an integral part of this statement.
23
Consumers Power Compa Statement of Retained Earnings YEAR ENDED DECEMBER 31 1976 1975 Thousands of Dollars BALANCE-Beginning of year, as previously reported $240,126 RESTATEMENT- for interest applicsle to rate refund tNote 2) 12679) BALANCE-As restated $254,026 $237,447 ADD-Net income after dividends on preferred and preference stock 113.596 69150
$367,622 $307,297 DEDUCT-Cash dividends on common stock of $2.00 per share . 61.038 53.271 BALANCE-End of year (Note 6) ... $306.584 $254.026 i
- O Statement of Capitalin Excess of ParValue ;
YEAR ENDED DECEMBER 31 1976 1975 Thousands of Dollars COMMON STOCK BALANCE-Beginning of year . . .. . . $252,203 $247,231 Net gain on reacquisiticn of preferred stock. 201 220 Excess over par value of common stock issued upon conversion of preference stock 7,625 4,752 l Excess over .nar value of 5.500.000 shares of common stcck issued 58.022 - Excess over par value of common stock issued as part of the dividend reinvestment plan 786 - BALANCE-End of year. 5318.837 5252.203 l PREFERENCE STOCK BALANCE-Beginning of year . . . . . . $ 60,730 $ 29,400 Excess over par value of preference stock issued 48.000 49.000 Excess over par value of preference stock converted to common stock (17,6705 ( . (24.285) BALANCE-End of year. 5 84.445 3 60.7. The accompanying notes are an integral part of these statements. i l 24
<n Notes to the Consumers Power Company ! J Financial Statements 1 SIGNWICANT ACCOUNTING POLICIES The Company follows the equity method of accounting for the investment in its wholly-owned subsidiaries, Michigan Gas Storage Ccmpany and Northern Michigan Exploration Company. Uncer this method of accounting the Company's interest in the earnings of the suosidiaries is reflected currently in earnings and in the carrying value of the investments. The Company provides depreciation on the basis of straight line rates approved by the Michigan Public Service Commission (MPSC). Composite depreciation rates were approximately 2.86% in 1976 and 2.85% in 1975 for electric property and 3.64% in 1976 and 3.67% in 1975 for gas property. 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 costs, interest on unfunded prior service costs, and amortization of prior service costs. (See Note 11) Allowance for funds used during construction, a noncash item included in other income, represents the estimated cost of funds applicable to utiliti plant in process of construction capitalized as a component of the cost of utility plant. Under established regula-tory practices, the Company is permitted to earn a return on the capitalized cost of such funds and to recover the same in the rates charged for utility services. (See Note 13) Reference is made to Note 12 for information regarding income taxes. 2 RESTATEMENT Litigation with respect to electric and gas rate increases which became effective in 1969 and for which the Company had estab-lished a reserve for refund Exc!usivc cf interest charges resulted in a court order requiring the Company to refund amounts relating to an income tax surcharge issue. In July 1976, the Circuit Court approved a plan for refund and established an interest rate to be r3 applied to the cumulative balances. In October 1976, the Company corpleted the refund deterrnination in accordance with the ( l Court approved plan, resulting in the determination of an accrued interest obligation of $3,470,000 (net of $3,364,000 in income
%> taxes) applicable to 1970-1975. Of this amount, $791,000 net of $767,000 in income taxes (or $.03 per share)is applicable to 1975 and as such has been reflected as a reduction in net income and in earnings per share previously reported for that year. Retained earnings at December 31,1974 have been restated for interest applicable to the years 19701974.
3 EARNINGS PER SHARE Earnings per share of Common Stock assuming no dilution are computed based on the average number of shares outstanding during the period, which were 31,300,333 and 26,676,554 in 1976 and 1975, respectively. Earnings per share of Common Stock assuming full dilution are computed as if all outstanding shares of the Convertible Preference Stock were converted to Common Stock as of the dates of issuance of the Convertible Preference Stock, after elimination of the related dividends on the Preference Stock. The average number of outstanding shares of Common Stock under this assumption was 34,487,013 and 30,436.741 in 1976 ano 1975, respectively. 4 NUCLEAR GENERATING PLANTS The Palisades Nuclear Plant 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 P! ant's reactor vessel internal components, steam generators, main condenser and other equipment. In April 1975, the Plant was returned to operation subject to a requirement to shut down for steam generator tube inspection after a limited period of operatien. In December 1975, the Plant was shut down for such purpose and for refueling and maintenance. The Plant resumed operation in May 1976 with restrictions in the license requiring shutdown for steam generator tube inspection within 15 calendar rnonths. The Company's application for a full-term,40-year operating license is pending before the Nuclear Regulatory Commission (NRC). In August 1974, the Coupany filed suit in a U.S. District Court seeking not less than $300 million in past and future damages, together with equitable relief, from suppliers of components and design work for the Plant. In October 1976, the Company settled with two of the suppliers for $13,500,000. The suit is pending. Construction work in progress includes $425,707,000 at December 31,1976 and $273,812.000 at December 31,1975, related to the Midland Nuclear Plant which is estimated to be completed ln 19811982 at a presently estimated total cost of $1.67 billion. The issuance of construction permits by the Atomic Energy Commission (AEC). now NRC, in December 1972 was upheld by an Appeal Board of the AEC in May 1973 but was appealed to the U.S. Court of Appeals for the District of Columbia Circuit. In Ju'y 1976, the Court of Appeals remanded the case (o the NRC for further proceedings, including reconsideration of waste disposal and other unaddressed fuel cycle issues, energy conservation alternatives and other issues affecting the environmental cost-benefit analysis performed for th ? [3f Plant and also for clarification of the renort on the Plant issued by the AEC's Advisory Committee on Reactor Safeguards. An Atomi-Safety and Licensing Board has been reconvened for the Midland Plant for the purpose of considering the remanded issues and also whether the construction permits should be continued, modified, or suspended pending the outcome of the reopened proceeding. Hearings on the latter question commenced in the fall of 1976. Barring further review, hearings would also be held on the remanded 25
c Notes (continued) g c Jes. On the basis of the remand, the NRC would have the authority to vacate or suspend the administrative order which authorized t,te issuance of the construction permits and the parties who have opposed the co..struction of the Plant could request the NRC to take such action. Any such action would be vigorously opposed and in the opinion of counsel substamial arguments would be asserted in support of the Company's position. Construction, delayed since 1970, was resumed in June 1973 and is continuing. The Company is seeking U.S. Supreme Court rniew of the Court of Appeals' decision. If the Company is not ultimately successfulin these 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 proceeding, to evaluate the ultimate effect of the remand on the mvestment in and commitments with respect to the Midland Nuclear Plant. 5 CONSTRUCTION PROGRAM AND FINANCING RESTRICTIONS Capital expenditures in 1977 are currently estimated to total $540 million and total construction expenditures through 1981 are presently estimated to approximate $2.7 billion. Substantial commitments have been made with respect to the construction program m future years. In order to finance this construction program and to meet remaining debt maturities of $195.3 million through 1981 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 earnings coverage provisions of the Indenture covering the Company's First Mortgage Bonds require for the sale of additional mortgage bonds, except for certain refunding purposes, minimum earnings coverage, before income taxes, of at least two times pro forma annual interest charges on bonds and other equal or prior ranking indebtedness. The Compan/s Articles of incorporation require, for the issuance of additional shares of Preferred Stock, specified earnings coverages, including minimum earnings coverage after income taxes of at least one and one-half times the pro forma annual interest charges on all indebtedness , and Preferred Stoc' dividend requirements. The Company presently has arrangements with bank: providing for short-term borrowings of up to $221,200,000 (including accept-ance draft commitments up to $20,000,000) which are subject to periodic review. In connection with these arrangements, the Company 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 borrow lngs outstanding as determined from the banks' records after adjustment for uncollected funds. There are no legal restrictions on the withdrawal of these funds. When issued, the bank
- acceptance drafts are secured by a lien on certain of the Company's fuelinventories.
During IS76 and 1975, average short term borrowings outstanding amounted to $9,782,000 and $72,500,000, respectively, and weighted average interest rate (calculated daily) was 7.13% per annum and 8.33% per annum, respectively, excluding the effect of compensating balances. The maximum amount outstanding at any one time was $59,500,000 during 1976 and $152,200,000 during 1975. 6 COMMON STOCK in February 1976, the Company issued 2,500,000 shares of Common Stock for $50338.000. In November 1976, the Company 3,000.000 shares of Common Stock for $62,085.000 As of December 31,1976,430.010 shares of Common Stock are reserved for issuance in connection with a Common Stock Dividend Reinvestment Plan which became effective with the November 20, 1976 dividend. In November 1976, the Company issued 69,990 shares of Common Stock for $1,486.000 in connection with the Plan. At December 31,1976, 947,636 shares of Common Stock are reserved for issuance upon conversion of the $6.00 Preference Stock and 1,635,055 shares of Common Stock are reserved for issuance upon conversion of the $5.50 Preference Stock. At Decerr.5er 31,1976. l retained earnings in the amount of $30,584,000, out of total retained earnings of $306,584.000, cannot be distributed as cash divi-dends en Common Stock under provisions of The Articles of Incorporation of the Company. There are also other restrictions as to payment of dividends on Common Stock which are presently less restrictive. 7 PREFERRED STOCK AND PREFERENCE STOCK DECEMBER 31 l i Preferred Stock is represented by: REDEMPTION PRICE 1976 1975 l i PER SHARE Thousands of Dollars l
$4.50-E47,788 Shares Outstanding $110.00 $ 54,779 $ 54,779
$4.52-115.550 Shares Outstanding 104.725 11,555 11.955
$4.16-100,000 Shares Outstanding 103.25 10,000 10,000
$7.45-700,000 Shares Outstanding 108.00 70.000 70,000
$7.72-700.000 Shares Outstanding )
108.00 70.000 70,000 l
$7.76-750.000 Shares Outstanding 109.19 75,000 75.000 l
$7.68-550,000 Shares Outstanding 108.00 55 000 55.000 l Total Preferred Stock. $346.334 The Preferred Stock of the Company is redeemable as a whole or in part, at the option of the Company, at the above redemption prices plus accrued dividends to the date of redemption, except that prior to April 1,1978. July 1,1977, June 1,1978 and November 26
7 si Consumers Power Company t L) 1,1978, the $7.45, $7.72, $7.76 and $7 68 Preferred Stock, respectively, may not be redeemed through certain refunding operations. The Company is required to endeavor to purchase and retire annually 4,000 hares of the $4.52 Preferred Stock at a price per share not to exceed $102.725 plus accrued dividends.
~ln August 1974, the Company issued 600,000 shares of $6.00 Preference Stock, convertible into Common Stock at 'our shares of Comrnon Stock for each share of Preference Stock. During 1976 and 1975,150,617 and 212,474 shares of $6.00 Preference Stock were converted into 602,468 and 849,896 shares of Common Stock, respectively. Beginning in 1979, the Company is required to purchase or redeem annually 37,500 shares of the $6.00 Preference Stock at a pnce per share of $50 plus accrued dividends.
In June 1975, the Company issued 1,000,000 shares of $5.50 Preference Stock convertible into Common Stock at a convarsion price of $15.50 per share (equal to approximately 3225 shares of Common Stock for each share of Preference Stock). During 1976 and 1975, 345,003 and 148,130 shares of $5.50 Preference Stock were converted into 1,112,477 and 477,740 shares of Common Stock, respectively. Beginning in 1980, the Company is required to purchase or redeem annually 50,000 shares of the $5.50 Prefer-ence Stock at a price per share of $50 plus accrued dividends. The Company has the option to receive credit for any shares converted. The $6.00 and $5.50 Preference Stock of the Company is redeemable in whole or in part, at the option of the Company, after July 31,1979 and June 30,1980. respectively, at a price per share of $52.50 plus accrued dividends and at decreasing prices after July 31,1984 and June 30,1985, respectively.. In August 1976, the Company issued 2,000,000 shares of $2.43 Nonconvertible Preference Stock. The Nonconvertible Preference Stock is redeemable at any time, in whole or in part, at the option of the Company at a price per share of $27.43 plus accrued dividends if redeemed prict to September 1,1981, and at decreasing prices thereafter, except that prior to September 1,1981 it may not be redeemed through certain refunding operations. 8 LONGTERM DEBT Long term debt is represented by: DECEMBER 31 (g) 1976 1975 Thousands of Do!!ars First Mortgage Bonds, secured by a mortgage and lien on substantially all property-8%% Series due 1976 . 5 - $ 60,000 2?s% Series due 1977 . , , 24.010 24,010 9%% Series due 1980 . . . 75,000 75,000 3%% Series due 1981. 38.992 38.992 11%% Series due 1982. . . . . . 50,000 50,000 3%44% Series due 1984 1991. 206.420 211,937 114% Series due 1994. . . ... . 60,000 60,000 5?i%9?s% Series due 1996-1998.. 306.771 246.042 7%%8%% Series due 1999-2000. . . . 155,000 155,000 11h% Series due 2000. . . . 75.000 75,000 7%%9%% Series due 20012006. . 435.000 315.000 Total First Mortgage Bonds . 51,426.193 $1,311.041 Installment Sales Contracts Payable, average interest rate 6.57% in 1976 and 1975..... (net of $3,775,000 and $22,418,000, respectively, held by
. Trustee pending completion of construction) . . 100,925 82,282 Sir, king Fund Debentures. 4ta%. due 1994 . 35.800 36.400 Term Bank Loan, due 1981 at 117% of Bank's prime rate .. 50,000 50,000 Other .. . . . . 59 42 Unamortized net debt premium (discount) . . .
(2,451) (1.087) 51.610.526 $1.478.678 Deduct-Current maturities and sinking fund-First Mortgage Bonds , , . . . .. $ 16,035 $ 14,848
. Sinking Fund Debentures . . . . . . . . .. . 600 600 First Mortgage Bonds,2%% Series due 1977 and 8%% Series due 1976, respectively 24,010 60,000 Other .
- 42
,, 5 40,645 $ 75,490 Total long-term debt 51.569.881 $1.403.153
{V) in December 1975, the Company executed $31,000,000 principal amount of installment sales contracts, for which the Company has pledged a like amount of first mortgage bonds as security for its obligations under such contracts. 27
Notes (continued) g 9 LEASE OBLiliAil0NS AND RENTALS In 1974, the Cornpany executed a nuclear fuel lease whereby the Lessor has acquired a 100% interest in nuclear fuel utilized at the Palisades Nuclear Plant. The Lessor's remaining investment in the nuclear fuel at December 31,1976 was $32,500,000. The fuel lease provides for a term ending on November 18,1980, with provision for one year extensions from time to time to a date not later
~ than November 19, 2029, subject to earlier termination in certain events. The quarterly lease charges consist of a fuel factor computed on the basis of heat producten plus interest costs and administrative fees and expenses incurred by the Lessor, and in the event of termination of the fuel lease, an amount equal to the Lessor's remaining investnent. The Company is also responsible for payment o! mes, maintenance, operating costs, risks of loss and insurance.
In June 1975, the Company entered into sale-ard-leaseback 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 with two five-year renewal options subject to escala-tion clauses and a third five-year renewal cption at the then fair market rental value with the option to purchase at the expiration of the basic term or any renewal term at the then fair market sales value. Annual rentals under the leases are subject to quadrennial escalation and currently approximate $2,816,000. Taxes, insurance and other operating costs relating to the buildings are required to be paid by the Company, Rentals, including amounts charged to clearing and cther accounts, amounted to $25,893,000 in 1976 and $18,681,000 in 1975. Rertals contingent upon usage were $10.513,000 in 1976. The minimum rental commitments for leases presently in effect will amount to approximately 18,721,000 in 1977 and 1978, $8,729,000 in 1979, $8,444,000 in 1980 and $5,811,000 in 1981, $21,679,000 for the period 19821986, $14,227,000 for the period 1987-1991, $14,079.000 for the period 19921996 and $18,303,000 for remaining years. If all noncapitalized financing leases were capitalized, the effect on income would not be material. 10 RATE MATTERS ON APPEAL Litigation is pending in the Ingham County Circuit Court (the " Circuit Ccurt") which includes, among other things, a claim for refund to customers amounting to approximately $7,763.000 plus interest charges with respect to electric rates placed in effect in October 1969 by court order but not approved by the Michigan Public Service Commission (MPSC) until April 1970. In November 1974 the MPSC issued an order as a result of a rehearing with respect to an earlier gas rate order, the principal effect of which was to assign to commercial and industrial customers certain costs relating to the Marysville Gas Reforming Plant resulting in a reduction of approximately $23,000,000 in residential revenue requirements and a corresponding increase in comme'cia and industrial revenue requirements. In December 1974 an industrial customer appealed the rehearing order to the Circuit Court and requested it to re-establish the rates which had been in effect prior to the rehearing order and to direct refund of any unlawful rates collected from the customer pursuant to the order. In Deceinber 1976 the Circuit Court affirmed the actions taken by the MPSC in the November 1974 order and the industrial customer filed a cisim of appeal with respect to such affirmation with the Mich f5urt of Appeals. In January 1975 the MPSC authorized an increase in the Company's electric ratas of $66,231,000 on an annual basis which included an interim increase of $27,624,000 authorized in September 1974. The Attorney General of Michigan and the IJAWCAP appealed the artier of the MPSC authorizing the increase in rates to the Circuit Court and requested the Circuit Court to restrain and enjoin the increase in electric rates during the pendency of the litigation. No action has been taken by the Circuit Court with respect to such request. In June 1975 the MPSC authorized the Company to place in effect, under bond and subject to refund, an interim gas rate increase in the annual amount of $29,194,000. The interim rates remain in erfect under bond. An industrial customer appealed the June 1975 order to the Circuit Court and requested it to re-establish the rates in effect prior to June 1975, and to direct refund of any increases in gas rates collected by the Company from the intervenor after June 1975. No action has been taken by the Circuit Court with respect to such request. In Maich 1976 the MPSC issued an order in the proceeding deciding some contested matters (includin, rate of return on common equity) and remanding others for the taking of additional testimony. The Company has on appeal in the courts the MPSC's determination as to rate of return on common equity. In August 1975 the Attorney General filed a complaint and motion in the Circuit Court in connection with a July 1975 order of the MPSC involving the fuel adjustment clause wGh included a request for immediate refund to customers of at least $12,789.000. In January 1977, the Circuit Court denied the Attorney General's request for immediate refund on the ground that a " material dispute" existed with respect to the Attorncy Geaeral's allegations, and denied the injunctive relief sought by the Attorney General on the ground that the Circuit Court was " unable to find" that probable cause existed that irreparable harm would result if the relief were not granted. At the same ti,ne, the Circuit Court granted the Compan)'s motion for accelerated judgment on the grou that the July 1975 order was "not final." The appeal period has not yet run with respect to the Circuit Court's action. In April 1976 the MPSC issued an order authorizing the Company to increase its electric rates in the annual amount of $33.977,0 The order also found that the Company's existing fuel cost adjustment clause had not resulted in any cost overrecoveries by the 28
c3 Consumers Power Company G Company and authorized a monthly purchased and interchange power clause which operates to pass through 90 percent of monthly mereases and decreases in such costs (after monthly notice and hearing). The Company appealed the April 1976 order to the Circuit Court requesting, among other things, that it be granted an additional rate increase in the annual amount of approximately $41,600,000. The Attorney General appealed the April 1976 order to the Circuit Court requesting, among other things, that the Circuit Court order refunds of all amounts collected in excess of the rates in effect prior to April 1976, enjoin the purchased and interchange power hearing procedures and direct the MPSC to investigate alleged "overcollection" under the Company's fuel cost adjustment clause. Appeals to the Circuit Court have also been taken by the Company of one, and by the Attorney General of several, of the orders issued by the MPSC following monthly purchased and interchange power hearings held pursuant to the April 1976 order in which the MPSC has authorized purchased and interchange power expense adjustments in the Company's rates. The Circuit Court has not acted on any of these appeals. 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. 11 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 $17,454,000 in 1976 and $16,033,000 in 1975. Of these amounts $14,028,000 in 1976 and $12,761,000 in 1975 were charged directly to expense accounts with the remainder being charged to various construction, clearing and other accounts. (N As of January 1,1976, the date of the most recent actuary's report, the actuarially computed value of vested benefits was l V) $203,000,000. The market value of the assets of the plan was $172,500,000 at January 1,1976 and $211,458,000 at December 31, 1976. If the market value of the assets of the plan should fall and remain below the vested benefits, the actuarial method used in determining the annual contribution will fund this amount over a period of years. The Company revised its Pension Plan as of July 1,1976, to comply with the Ernployee Retiremsnt tacome Security Act of 1974. Compliance with the Act will not significantly merease the Company's future annual contributirn since the Company's plan, in effect prior to July 1,1976, generally conformed to at least the minimum requirements of the Act. In July 1976, the Company adopted an Early 3etirement incentive Program, in connection with a reorganization of its work force, at an estimated cost of approximately $14,000,000, included in deferred debits, which will be amortized over a five year period for accounting purposes, pursuant to an order of the MPSC, and which will be reflected in rates to the extent the savings and value of the program to the overall reorganization justify s=h cuts. In the opinion of managsment, the savings and value cf the program justify such costs. 12 INCOME TAX EXPENSE Income tax expense is made up of the following components: YEAR ENDED DECEMBER 31 1976 1975 Tnousaads of DoHars Federal income taxes . . . . . . . . .. . . . $40,518 $ 906 State income taxes . . . . (2,920) 3,872 Deferred Federal income taxes, net , . . ... . 28,370 26,431 Deferred State income taxes, net . . . . . (1,767) 4,887 Charge equivalent to investment tax credit, net . . 14,643 24.431 Total . . . . . . . . $78.844 560,5H Charged to utility operations (See Statement of Income) . . . . $77,315 $57,564 Charged to nonutility cperations . . . 1,529 2.963 Total . . . . . . . . . . . . . .. ... . . . . $78,844 $60,527 The Company utilizes liberalized depreciation and the " class life asset depreciation range system" for income tax purposes.
- Income tax deferred due to the use of these methods is charged to income currently and credited to a reserve for deferred income
~ taxes. As these timing differences reverse, the related deferrals are credited to income.
29
Notes (continued) g Certain costs, principally interest, which are capitaiized for financial reporting purposes in accordance with the provisions of the Uniform System of Accounts, are expensed for income tax purposes and the resulting tax reduction is reflected currently in the income statement as ordered by the Michigan Public Service Coinmission. The investment tax credit and jeo development investment credit utilized as a reduction of the current year's income tax are deferred and amortized to operating expense over the life of the related property. - The total income tax expense as set forth above produces an affective income tax rate of 35.3% in 1976 and 37.7% in 1975. The following schedule reconciles the stJtutory federalincome tax rate of 48% to such effective income tax rates. YEAR EhoED DECEMBER 31 1976 1975 AMOUNT RATE AMOUNT RATE Thousands Thousands ofDouars of Donars Income tax expense at Federal statutory tax rate $107,227 48 0 % $ 77,023 48.0 % Increase (reductian)in taxes resulting from: Certain capitrized ccnstruction ecsts, principa ly interest, deducted currently for mccme tax purposes for which no deferred taxes are previded in acccrdance with the requirements of the MPSC . (21,251) (9.5; (16,607) (10.3) State inceme taxes, net of rederal income tax benefit (3,285) (1.5) 4,554 2.8 Amortization of deferred investment tax cred;t (2.281) (1.0; (2.119) (1.3) Equity in earnings of subsidiaries . (5,174) (2.3) (5,487) (3. Other mistenaneous items 3.608 1.6 3.163 1. Total income tax expense $ 78,*44 35.3 % $ 60,527 37.7 % 13 ALLOWANCE FOR FUNOS USED DURING CONSTRUCTION The allowance for funds used during construction was capitalized at a rate of 8% in 1976 and 1975. Based on the Company's source of funds for gross property additions, and assuminr that the cost of financing other than common eq'Jity financing was equitalent to the current cost of long-term and rMrt term debt (before income tax effect), preferred stock and other sources avail-sble in each year, the estimated common equity component of the allowance for funds used during construction amounted to 5.2% and 5.7% of net income available for Common Stock for 1976 and 1975, respectively. 14 NORTHERN MICHIGAN EXPLORATION COMPANY Northern Michigan Exploration Company (Northern), a wholly-owned subsidiary of the Company, is engaged in gas and oil explora-tion and development programs. The Company's Board of Directors has authorized a total common stock investment of $20,000,000. Northern follows full cost accounting for financial reporting purposes, including a policy of capitalizing interest costs related to properties in process of development. Interest capitalized amounted to $174,000 in 1976 and $447.000 in 1975. Had these interest costs not been capitalized, the Company's net income would have been reduced approximately $88,000 in 1976 and $220,000 in 1975. Summarized financial information is shown below. 1976 1975 Operating revenues . 534,490,000 $25,685,000 Net income 9.239,000 8.777.000 Gas and oil properties . . . 63,188,000 62,259,000 Note receivaDie frcm parent. at 7%% - 3.875.000 Total assets 81,809.000 74,953,000 Stockholder's investment. 39.914,000 30.676.000 Production payment . 15,000,000 23,500,000 15 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, gas liquids allocation, gas curtailments, environmental issues, licensing, reclamation costs under coal contracts and other matters, the outcome of which might result in a decrease in the Compa revenues and/or increases in construction expenditures and or operating expenses. In pending litigation, the City of Livonia . seeking damages and other relief relating to curtailment of gas service resulting from a gas allocation program authorized by the 30
o Consumers Power Company \vl MPSC. It is the opinion of counsel that the Company's defenses to the suit are va!id and that the plaintiff's contentions therein are without merit. In testimony before a Nuclear Regulatory Commission Atomic Safety and Licensing Board in the remeded proceeding relating to the Midland Nuclear Plant (see Note 4), Dow Chemical Company officials have indicated that Dew i: consioning the possibility of making a breach of contract claim agMnst the Cnapany for damages alleged to be in erecss uf $100,000,000 and to ta attributable to the delay in completion of the Plant beyond 1950. The Company believes it is not in default of its contractual ebligations to Dow. 16 QUARTERLY FINANCIAL INFORMATION Summarized quarterly financial information for 1976 is shown below: THREE MONTHS ENDED March 31, June 30, Sept. 30, Dec. 31, 1976 1976 1976 1976 Thousands cf Dollars Total operating revenue .
$465,299 $333,214 $298,213 $484,526 Net operating income. 63,141 45.614 43,472 59.743 Net income . . . . . . . . . . 44,674 28,514 28,587 42,770 Net income after dividends on Preferred and Preference Stock 37,130 21,172 20.868 34.426 Earnings per share:
Assuming no dilution $1.25 $ .68 $ .67 $1.04 Assumirg fall dilution 1.16 .66 .64 .99 V'7 17 REPLACEMENT COST INFORMATION (UNAUDITED) The impact of recent increases in the rate of inflation, environmental regulations and requirements of Federal and State regulatory agencies have resulted in a replacement cost of productive capacity (generally utility plant) which is significantly greater than the historical cost of these assets reported in the Company's financial statements. The Company's ability to replace plant in the future as well as to expand will be contingent upon its ability to finance the needed additions. This, in turn, will depend on the Company's ability to obtain adequate and timely rate relief. In compliance with reporting requirements, quantitative replacement cost informa-tion is included in the Company's annual report to the Securities and Exchange Commission on Form 12A. ARTHUR ANDERSEN & CO. D ET aotT. Micu toAN To the Board of Directors, Consumers Power Company: We have examined the balance sheet of CONSUMERS POWER COMPANY (a Michigan corporation) as of December 31,1976, and December 31,1975, 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 4, the issuance of construction permits for the Midland Nuclear Plant by the Atomic Energy Commission-(AEC), now NRC, in December 1972 was upheld by ao Appeal Board of the AEC in May 1973, but was appealed ? intervenors to the U.S. Court of Appeals for the District of Columbia Circuit. In July 1976, the Court of Appeals remanded the case to the NRC for further proceedings. The Company is unable at this time, pending further developments in the proceedings, to evaluate the ultimate effect of the remand 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 31,1976 and December 31,1975, 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. eb a 77. & >n , 31
3 Summary of Ctatement of Income 1976-1972 1878 1975 1874 1973 1972 Thousands of Dollars Operating Revenue Electric . . . . . . . . . . $878,468 $757,741 $619,958 $495,723 $416, 4 Gas . . 700.236 581.294 483,832 337,906 332.035 Steam . . . . . . . . . . . . . . 2,548 2,065 1,593 1,325 1,374 Operating Revenue Deductions, Except in. cme Taxes fuel Consumed in Electric Generatien 266.447 249 556 172.050 105.391 91.969 Purchased and interchange Power . . . . 127,464 90.891 143,394 70,006 56,662 Cost of Gas Sold . . . . 460,458 375.495 293,190 175.185 156.238 Other Operation and Maintenance . . . . 263,279 236,636 208,759 187,436 180,807 Depreciation and Amortization 96.954 93.635 82.944 73.428
. . . . 62.937 General Taxes . . . . . . . 77,365 67,678 63,058 54,160 48,204 Net Operating income Before Income Taxes Electric . . 202.926 161.468 78,614 121.196 84.627 Gas . . . . . . . . . 86,159 65,461 63,192 48,083 68,954 Steam . . . 200 2$0 182 69 55 income Taxes Federal Income Tax . . . . . . . . 38,970 (1,602) (251) 2468 10,759 State inccme Tax . . (2,901) 3.417 (764) 2.754 3.185 Deferred income Tax (Net) . . . . . . . . . . 26,603 31,318 26.191 25,072 18,972 investment Tax Credit Wet) . 14,643 24,431 (5.118) 14,057 5.960 Net Operating income Electric . . . . . . . . . 151,952 120,276 75,982 87,938 69.855 Gas . . . . . 59.864 49.166 45,802 44,814
. . . . 37.374 Steam . . . . . . . . . . . 154 203 146 85 91 Allowance for Funds Used During Construction 33,848 24.825 21.875 23.223 25.455 Other incoma . . . . . . 14,787 15,828 11,066 6,940 5,416 Interest Charges 116.060 110.362 94.783 75.370 66:565 income Before Cu.nulative Effect of Change in Method of Recording Rerenue . . . . . - - 60,088 80,190 7
Cumula:ive Effect on Years Prior to 1974 of Accruing Est:r,ated Unbilled Revenue After Deduction for Related income Tues - - 24.864 - - Net income (1) . 144,545 99.936 84,952 80,190 73,066 Cash Dividends cn Preferred Stock 2 ,071 24.093 24.039 17,746 11,251 Cash Dividends on Nonconvertible Preference Stock. 1,701 - - - - Cash Dividends on Converte!e Preference Stock . 5,177 5.993 1.451 - - Net income After Dividends on Preferred and Preference Stock 113,596 69,850 59,412 62,444 67,815 Cash Dividends on Common Stock . 61,038 53.271 52.467 52.467 49.163 Common Stock-Average Shares Outstanding-Assuming No Dilution (Thousands of Shares) . . . . 31,300 26,677 26,234 26,234 24,584 Earnings per Share of Commen Stock Based on Average Shares Outstanding-Assuming No Dilution (2) Before Cumulative Effect of Change in Method of Recording Revenue . . . . . . $3.63
. . . $2.62 $1.32 $2.33 $2.76 Cumulative Effect on Years Prior to 1974 of Accruing Estimated Unbilled Revenue After Deduction for Related income Taxes. - -
.95 - -
Total-Assuming No Di!ution (1) 3.63 2.62
. . 2.27 2.38 2.76 Common Stock-Average Shares Outstanding-Assuming Full Dilution (Thousands of Shares) , 34,487 30,437 27,157 26,234 24,584 Earn!ngs per Share of Commen Stock Based on Average .
Shares Outstanding-Assuming Full Dilution (3) Before Cumulative Elfect of Change in Method of Recording Revenue . 53.44 $2.49 $1.33
$2.38 $2.76 Cumulative Effect on Years Prior to 1974 of Accruing Estimated.
Unbilled Revenue After Deduction for Related Income Taxes - -
.92 - -
Total-Assuming full Dilution (1) . 3.44 2.49 2.25 2.38 2.76 Pro forma Amounts Assuming Change in Method cf Recording Revenue ls Applied Retroactively Net income . . . . . . . . . . . . - -
$ 60.088 $ 82.667 $83 Earnings per Share of Commen Stock-Assuming No Dildon . - -
$1.32 $2 47 $2.a Earnings per Share of Common Stock-Assuming Full Dilution . - -
$1.33 $2.47 $2.93 Cash Dividends Paid per Share . 52.00
. $2.00 $2.00 $2.00 $2.00 32
Management's Eiscussion and Analysi3 of the Statement of Income 73 Electric revenue increased $137,783,000 in 1975 and employee wages and benefits charged to op-
) and $120,727,000 in 1976, and gas revenue in- erations.
creased $97,462,000 in 1975 and $118,942,000 in Depreciation and amortization expenses increased 1976. The increased revenues reflected additional $10,691,000 in 1975 and $3,319,000 in 1976, result-customers, rate increases, electric fuel and cost of ing from additions to depreciable property, gas adjustment clause revenues, together with purchased and interchange power adjustment General taxes increased $4,620,000 in 1975 and clause revenues, increased economic activity and $9,687,000 in 1976, primarily the result of increased colder than normal weather in 1976. property subject to real and personal property taxes and the addition in 1976 of the Michigan Fuel for generation costs increased $77,506,000 in Single Business Tax. 1975 and $16,891,000 in 1976. In 1975 the average fossil and nuclear fuel cost per kWh generated in 1975, the net result of the increased revenues rose 27.5% reflecting the increased cost of coal partially offset by higher costs was $85,221.000 and oil consumed at the steam generating plants. growth in net operatir income before income in 1976 the average fossil and rmclear fuel cost taxes. Income taxes ; , eased $37.506,000 leaving per '<Wh generated rose 7.7% reflecting the higher an increase in net operating income of $47,715,000. cost of oil and nuclear fuel. In 1976, the net result of the increased revenues partially offset by higher costs was a $62,076,000 Purchased and interchange power costs de- growth in net operating income before income creased $52,503,000 in 1975 and increased taxes. Income taxes increased $19,751,300. income
$36,573,000 in 1976. The decrease for 1975 re- taxes in 1976 reflect the elimination of the State flects the reduction in the purchased power re- Income Tax and increased interest expense. The quirement due to the placement of Unit No. 3 of net result of the increased net operating income the Karn Plant into service in 1975 and the place- and the increased income taxes was an increase in ment of the Palisades Nuclear Plant back into net operating income of $42,325,000.
service, particily offset by an increase in the unit cost of purchased and interchange power. The A'lowance for funds used during construction in-creased $2,950,000 in 1975 and $9,023,000 in 1976. (\ k. increase in 1976 reflects the Company's increased system requirements along with the replacement The increase results primarily from increased con-of reduced internal generation, partially offset by a struction at the Midland Nuclear Plant during 1975 4.4% decrease in the average cost per kWh for and 1976. purchased and interchange power. Net other income (exclusive of allowance for funds Cost of gas sold increased $82,305,000 in 1975 and used during construction) increased $4,762,000 in
$84,963,000 in 1976. The 1975 incre.'se reflects a 1975 reflecting increased earnings of subsidiary 34.4% increase in the average cost per Mcf, par. companies. The decrease of $1,041,000 in 1976 as tially offset by a 4.7% decrease in gas sendout. compared to 1975 was due to reduced Michigan The 1976 increase reflects a 13.9% increase in the Gas Storage Company earnings because of a Fed-average cost per Mcf and a 7.6% increase in gas eral Power Commission-ordered reduction in a sendout due to colder weather in 1976. The in. filed rate increase and a decline in interest income.
creases in the average cost per Mcf reflect the The sale of first mortgage bonds, the sale of in-higher prices put into effect by pipeline suppliers stallment sales contracts in connection with pollu-and the increased costs of liquid hydrocarbon tion control equipment and the sale of a seven-feedstock for the production of synthetic. natural year promissory note, partially offcet by reduced gas at the Marysville Gas Reforming Plant. The short-term borrowings at lower interest rates re-Increases in cost are almost totally offset by the suited in increased ir terest charges of $15,579,000 cost of gas adjustment clause which permits pass- in 1975 and $5,698,000 in 1976. through to customers. The issuance of preference stock in 1975 and Other operation and maintenance expenses in- 1976, partially offset by conversions of the prefer-creased $27,877,000 in 1975 and $26,643,000 in ence stock, increased dividends on the preferred
- 1976. Major increases reflected in these amounts and preference stock $4,546,000 in 1975 and were maintenance at the various generating plants $863,000 in _1976.
M '
- (1) Net income and Earnings per Share have been restated from amounts previously reported in amounts of $791,000 ($.03 per share),
/7 i
$745,000 (5.02 per share), $703,000 ($.03 per share) and $664,000 ($.02 per share) for 1975,1974,1973 and 1972, respectively, to reflect the resolution of the tax surcharge issue which resulted in the determination of an accrued interest obligation that has *> been retroactively recorded for the applicable periods.
(2) After reduction for Cash Dividends on Preferred and Preference Stock. (3) After reduction for Cash Dividends on Preferred Stock and Nonconvertible Preference Stock. 33
Consumers Power Company Dividends and Stock Prices O Dividends Paid Per Share Calendar Quarter-1975 Calendar Quarter-1976 Security 1 2 3 4 1 2 3 4 Common Stock: $0.50 $0.50 $0.50 $0.50 $0.50 $0.50 $0.50 $0.50 Preferred Stock:
$4.16 1.04 1.04 1.04 1.04 1.04 1.04 1.04 1.04 4.50 1.125 1.125 1.125 1.125 1.125 1.125 1.125 1.125 4.52 1.13 1.13 1.13 1.13 1.13 1.13 1.13 1.13 7.45 1.8625 1.8625 1.8625 1.8625 1.8625 1.8625 1.8625 1.8625 7.68 1.92 1.92 1.92 1.92 1.92 1.92 1.92 1.92 7.72 1.93 1.93 1.93 1.93 1.93 1.93 1.93 1.93 7.76 1.94 1.94 1.94 1.94 1.94 1.94 1.94 1.94 Preference Stock:
$6.00 1.50 1.50 1.50 1.50 1.50 1.9 1.50 1.50 5.50 0.306 1.375 1.375 1.375 1.375 _
1.375 2.43 - - - - - - - 0.24' High and Low Sales Prices on New York Stock Exchange Calendar Quarter-1975 Calendar Quarter-1976 Security 1 2 3 4 1 2 3 4 High Lew High Law High Low High Law High low High Low High Law High Law Common Stock: 15 9 % 19 % 13 % 18 % 16 19 % 16 % 21 % 19 22 19 % 22 % 20 22 % 21 Preferred Stock: 51.16 39 % 30 37 % 35% 33h 35% 33% 3A 44 37 44 40?i 44% 39:<. 46 43 4.50 41 31 %' 42 % 36 % 42 % 39 42 % 38 48 40 46 % 42 48 % 44 % 50 % 46 % 4.52 46b 34b 41 40b 441) 414 23th 41 % 50 44 % 47t 46 % 50 % 4 9 i 50 % '9 7.45 65 % 51 % 65 % 58 68 61 67 % 60 % 75 63 % 74 % 70 % 77 % 70 % 79 75 7.63 64!. 55 66 56 69i'- E4 67b 63 761i 67 % 76 72 80 72 % S2 77 7.72 66 % 52 68 60 72 62 68 % 62 % 78 66 % 76 % 71 % 79 % 72 % 82 % 78 7.76 67 55 67!) 59 69b 64 63% 62b 78 66 78 73 80h 73 % 32b 78W Preference Stock:
$6.00 59 % 49 76 55 74 64 % 76 67 % 85 75 % 82 % 78 % 88 % 81 90 84 %
5.50 59% 51H 61 54 63% 60 h 67 63b 71% 64H 73 67% l 2.43 - - - - 26 % 26 % 26 % 25 l Exchanges on which the Company's Equity Securities Are Listed For Trading: Common stock is listed on the New York and Midwest stock exchanges. Preferred and Preference stock are listed on the F aw York Stock Exchange. 34
Company Directors Company Officers
" A. H. AYMOND A. H. AYMOND l y Chairman of the Board of the Company Chairman of the Board, Chief Executive Officer V Jacksor, Michigsn JOHN D. SELBY WALTER R. BORIS President, Chief Operating Officer Executive Vice President of the Company Jackson, Michigan JOHN B. SIMPSON Exect,tive Vice President. Energy Distribution. Customer Services, EDWARD N. COLE General Services, and Oil and Gas Exploration Chairman of the Board of International Husky, Inc.,
an air freight company RUSSELL C. YOUNGDAHL Executive Vice President, Energy Supply, Production and Transmission Bloomfield Hills, Michigan WALTER R. BORIS JR~ E. NEWTON CUTLER'rd of Horizon Bancorp, Executive Vice President, Finance and Corporate Affairs Chairman of the Boa a bank holding company JOHN W. KLUBERG Morristown, New Jersey Senior Vice President, Acccunting and Corporate Information Systems RICHARD M. GILLETT JAMES B. FALAHEE Chai rman of the Board and Chief Executive Officer of Old Kent Senior Vice President, Legal, Regula*!cn and Public Affairs Financial Corporation, a bank holding company Grand Rapids, Michigan W. ANSON HEDGEC0CK' Vice President, Customer Service and Energy Consulting Services MARTHA W. GRIFFlTHS Attorney, Griffiths and Griffiths W. JACK MOSLEY" Romeo, Michigan Vice President, Energy Planning JOHN W. HANNON, JR. EUGENE B. HEDGES"* President of Bankers Trust Company and Bankers Trust Vice President, Gas Operations
" STEPHEN H. HOWELL New York' ew Y r Vice President, Projects Engineering and Construction DON T. McKONE President and Chief Operating Officer of Libbey Owens-Ford LOWELL L SHEPARD Vice President, Region Operations Company, a diversified corporation Toledo, Ohio RAYNARD C. LINCOLN, JR.
Vice President, General Services C. S. HARDING MOTT [_}
\*j Chairman and Trustee of the Charles Stewart Mott Foundation, a philanthropic foundation JACK W. REYN0LDS V ce President, Personnel Flint, Michigan CHARLES R. BILBY sc C .ai .an of the Board of Kellegg Company, cereal manufacturer ROBERT J. FITZPATRICK Battle Creek, Michigan Vice President,Public Affairs JOHN D. SELBY LAWRENCE B. LINDEMER"'
President of the Company Vice President and General Counsel Jackson, Michigan JAMES W. COOK"* ** JOHN B. SIMPSON Vice President, Energy Planning Executive Vice President of the Company Jacksan, Michigan PAUL A. PERRY Secretary JOHN C. SUERTH RICHARD M. GRISWOLD Chairman of the Board and Chief Executive Officer of Gerber Products Company, producer of baby needs Treasuru Fremont, Michigan SAMUEL N. SPRING Controller DR. E. GIFFORD UPJOHN Director of The Upjohn Company, pharmaceutical manufacturer *pr. Hedgececk retired early effective July 1.1976 Kalamazoo, Michigan "Mr. Mos:ey retired effectrve february 1.1977
*"Mr. Hedres retired earty effective october 1,1976 RUSSELL C. YOUNGDAHL ""Mr. tindemer joined the company effective January 17,1977
*""ur. cook taus enice effective March 1,1977 Executive Vice President of the Company
"*"'"i'""
Regions and General Managers (Headquarters cities in parentheses) Central Region (Saginaw) CHARLES F. BROWN Eastern Region (Flint) STANLEY M. JURRENS Metro Region (Reyal Oak) EUGENE A. WAGGENER Northern Region (Traverse City) JOHN G. G0ENSE ( ) South Central Region (Lansing) WILLIAM A. HOLTGRElVE Southeastern Region (Pontiac) RALPH HAHN Southwestern Region (Kalamazoo) K. EUGENE McGRAW Western Region (Grand Rapids) J. LAURENCE GILLIE 35
Transfer Ager,ts Financial and Statistical Common, Preference and Preferred Stock Summary Available g A Financial and statisticarTup-Consumers Power Company po covering the y a s 19 Jackson, Michigan 49201 1976 is available to all interested Bankers Trust Company shareholders at no charge. New York, New York 10017 Registrare Common Stock The National Bank of Jackson Jackson, Michigan 49201 Bankers Trust Company Shareholders New York, New York 10017 Who Receive Duplicate Reports
- Registrars Preference Shareholders who own shares of more than one class of Company and Preferred Stock stock may receive more than one copy of the Annual Report. Se-City Bank and Trust Company, N.A. curities and Exchange Commis-Jackson, Michigan 49201 sion rules provide that the Com-pany may omit sending an Annual ew ork, ew or 10017 Report to a shareholder if such shareholder authorizes the Com-pany in writing to do so, pr that at least one report is another shareholder at the e Notice of Annual Meeting address.
If two or more copies of the The annual meeting of shareholders of Consumers Power Company's Annual Report to Company will be held on Tuesday, April 12,1977, at 2:00 PM Shareholders are being sent to Jackson time at the Company's Parnall Office Building,1945 you and you wish to have the mail-West Parnali Road, Jackson, Michigan. A notice of meeting, ing of duplicate reports discon-proxy statement and proxy will be mailed to shareholders in tinued, please notify the Com-March 1977. Prompt signing and return of proxies will be pany in writing. Please include in appreciated by the management. your letter the classes of stock (common, preferred or prefer-ence) for which you want your name removed for Annual Report mailings, your name, address and signature. Annual Report on Form 12-K
- This will not affect the malling of your dividend checks, intenm A copy of Consumers Power Company's Annual Report, with- reports, proxies, and proxy state-out exhibits, for t% fiscal year ended December 31,1976, on ments, which each shareholder Form 12 K, required to be filed with the Securities and Ex- will continue to receive exactly change Commission pursuant to Rule 13a 1 under the Secur- as before.
itles Exchange Act of 1934, will be furnished by the Company You may request that your without charge to any shareholder who so requests. Such name be added to the list for An-report will be available to shareholders after May 1,1977. naal Reports at any time in the Requests from beneficial owners et securities must indi- future. cate that, as of February 25, 1977, the record date for the annual meeting of shareholders, the person making such request was a beneficial owner of securities entitled to vote at such meeting.
*Pfease address all correspond.
j Mr. P. A. Perry, Secretary, Con 3 Power Cornpany, 212 West Michigan l Avenue. Jackson, Michigan 49201. 36 t
~ -
4
?
UPpg4 09 'Ch/g / CONSUMERS POWER / COMPANY ) i ELECTRIC AND 4 ' NATURAL GAS i l SERVICE AREAS .M s A g CorporateHeadquarters l f Region Headquarters City / , 0 Straits w Electric Service Area wy ! d f i
.] Natural Gas Service Area p d
/ >' v3 4, Combination Electric and l Natural Gas Service Area j h Big Rock Point Plant h Steam Plant-Nuclear
, s h $ team Plant-Fossil h Peaking Plant-Fossil 'l Gaylord g us
/ p h Peaking Plant-Hydro g i ' / Storage Fields 4
' / Consumers Power Co. 4 l
{ f
' Gas Producing Ater r4 Northern Michigan j
/ / p Storage Fields y t
I TRAVERSE -
"- " {V// Michigan Gas Storage Co. g
' / CITY ' s#
/ / Gas Fields I / / Consumers Power Co.
- - MICHIGAN -
l ,
/
/ ws s'yy ,,,
t / *P Q x l (j/ Riverside Storage Field va, , ggg< 3 j h wh. Cranberry 1.ake Storage Field T M! 4 a Winterfield Storage Field Y2A m . A, ' ' r ., #*g, . v , N. ]
.a y $)
,' jw::
s l Ludington Pumped Storage Plant g j j i f;'~ i m. ' ,::. ; 4~ Jj
* .. A 4
! '. L *n r
, . llT;s ,dr.q 4 q J
- e,; g L '> 4
?l
-~
~
, y v.fg{gm;]n. f: Midland< Plant
- u. . . .
~ y _n Site" h ..
J. C. Weadock Plant d f;$ v
*O, 4
*s
.4
,j:.1 D ;-+
O. E. Karn Plant y s*M.y+bg, a7 -
' ne'; 3;s;. f/2 ^, @y a,, ;',n ,,
SA'GINAW . H , Cr - ' E- / ,c , j O B. C. Cobb Plant V ;gY yy 7., q
.e r
J \ 0. u . , e Hessen
%j (]. + 4 2 .
1 s , b;d fA p lThetford . Storags e %. ',Pe A , 4 *: l + . ,- e Field
' T id.
f l A
~~s
[ [O V 7 5" p^ h! M
?QN,Q'D
) gIL N
$$ -((S ^ - . .M.f =- ,T. y
' ' . C 4[ , + ~ Puttygut Marysville 8' '898 Gas 4
W James H. Campbell kGRAND RAP DS ' - c. *
. , W, Field ' Reforming NNg W :', n ; Ney,p, 1 -
Plant ^ y /,'a s k Ray' Storage Field f) Plant ,
~
s'"a""a* Tie Overtsel 0**'**S2W62x '" 5 7Wtt~i>~G W', 3 .:J a ; Jh /'J' *Ei6 55$'*'*** PONTIAC s ."da * ( - fra Storage Field
' lv Storage Field Qye Qw a ','s. W> ~ .*N ^Wi M Q$9sj&A ," * ,
~7, s ,X, e
, Four Corners d'A - - >- ~ '
Storage Field
,Q 'ir 3 m
Ma on Aq og~ Gas Producing G4 Mi Area d"* ??'3 ' 9,' $YALOAs wm-
~-
g; . { Hy*Q, / . w q s a d w= m%%Vn N7wcm m)N ,nL. u n) o p.,,*tV O. q,1 w.r M, . E Af A. 3 sm @4x
/r;rA.:t, Northville
,a O- ,e i p- Storage KALAMAZOO ON k;dVACKSON Md Palisades Plant " "i $ Q"
= , h h,A?8
,y p.- p:gQ vid pp %gg i$'j[A '
j J Bryce E. Morrow Ptant GX vg Q:hC
"**% WMS s :b.~5 7v;t ,
~ '
l
- e O t
Justin R.WhitiniPlant g aw v g. Y ha
O The Company Consumers Power Company was incorporated in _ Michigan in 1968 and is the successor to a corpora-g tion of the same name which was organized in g Maine in 1910 and which did business in Michigan c from 1915 to 1968. ,E The Company is a public utility engaged y generation, purchase, distribution and sale o - 3 tricity, and in the purchase, production, manufac-g ture, storage, distribution and sale of gas, in the 3 Lower Peninsula of the State of Michigan. Th9 y Company also supplies steam service in one com- .q munity. The population of the territory served by g the Company is estimated to exceed 5,200,000. The
! Company's utility operating revenues in 1976 were g derived approximately 56% from electric service
< and 44% from gas service. E The industries in the territory served by the Com-y pany include automobile and ' automobile equip- .o ment, primary metals, chemicals, fabricated meta! 2 products, pharmaceuticals, machinery, oil refining, j paper and paper products, agriculture, food pro? 3: ucts and a diversified list of other industries. m The Company has four wholly-owned sub-N sidiaries. Northern Michigan Exploration Company p is engaged in exploration and development, pur-e chase and sale of oil and natural gas, primarily
@ operating in the lower 48 states. Michigan Gas Stor-y age Company is engaged in the purchase, trans-u mission, storage and sale to the Company of gas y from interstate pipeline suppliers. Michigan Utility y Collectior. Drvice Co. Inc. is engaged in a special e collection service for past due utility service bills.
Ei in addition, in 1976 the Company formed Plateau
! Resources Limited to engage in acquisitio 8 pioration, and development of properties f j mining and milling of uranium, and to parc e and sell uranium.
APPDTDIX D PROSPECTUS (V)
$85,000,000 Consumers Power Company FIRST 310RTGAGE BONDS,8%% SERIES DUE 2007 Interest payable June I and December !
Redeemable on 30 days' notice (a) at any time, at the option of the Company, as a whole or in part, at the regular redemption price of19838% to and including May 31,1979, and at decreasing prices thereafter to and incluong May 31,2006 and thereafter at 100% and (b) at the special redemption price of 100% through operation of certain provisions of the Mortgage, together in each case with accrued interest:prosided. however, that no redemption may be effected at a regular redemption price prior to June 1,198:irem or in anticipation of moneys borrowed at an interest cost to the Company ofless than 9.01% per annum. See
- Description of New Bonds-Redemption Provirions"herein.
Application will be made to list the New Bonde on the New York Stock Excharge. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND ENCHANGE C03fMISS10N NOR HAS THE COAfMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESEbTATION TO THE CONTRARY IS A CRintINAL OFFENSE. O PRICE 99.50% AND ACCRUED INTEREST Underwriting Price to Discounts and Proceeds to Public(1) Commissione( ) Companyil)(3) Per Bond.. . . . . . . . . . . 99.50 % .896 % 98.604 % Total.. . . . . . . ... . . $84,575,000 $761,600 $83,813,400 (!) I'lus accrued interest, if any, from June 1,1977. (1) The company has agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities .let of 1933. (3) Before deduction of estimated expenses of $250,000 payable by the Company. The New Bonds are offered by the several Underwriters named herein, subject to prior sale, when, as arid if accepted by the Underwriters, and subject to approval of certain legal matters by Simpson Thacher & Bartlett, counsel for the Underwriters. It is expected that delivery of the New Bonds will be made on or about June 1,1977, at the ofice of .1forgan Stanley & Co. Incorporated,55 Water Street, New York, N. Y., against payment therefor in New York funds. 3f0RGAN STANLEY & CO. Incorporated LOEB RIIOADES & CO. INC. PAINE, WERBER, JACKSON & CURTIS incorporated S3IITII BARNEY, IIARRIS UP1IA31 & CO. WERTIIEI3I & CO., INC. . f) . Incorp-,rsted
.lfay 24,1977
Consumers Power Company (the " Company") is subject to the informational requir.c Securities and Exchange Securities Act of 1934 and in accordance therewith files reports and other in Exchange Commission. . Information, as of particular dates, concerning .lirectors and officers, their remuneration, the principal holders of securities of the Company and any of such persons in transactions with the Company, as of particular dates, is disclosed distributed to shareholders of the Company and filed with the Comminion. statements 6101, 1100 and other information can be inspected and copied at the offices of the Com South
Dearborn Street,
Chicago, Illinois; Room 1100. Feder , New York; and Suite 1710, Tishman Bailding,10960 Wilshire Boulesard, Los Angeles, C Copies of such material can be obtained from the Public Reference Section of the Com Washington, D.C. 20549 at prescribed rates. In addition, reports, proxy staternents a . concerning the Company can be inspected at the offices of the New York Stock Eschange Midwest Stock Exchange. The Company's executive othces are located at 212 West Jackson, Michigan 49201 (telephone number: , 517 - 788-1030). No person is authorized to give any information or to make any representations oth contained in this Prospectus in connection with the offer contained in this Prospectus a Company or any underwriter. Neither the delisery of this P under any circumstances, create any implication that there has been no change in the Company to as the "Newsince Bonds".the date hereof. The First Mortgage Bonds offered hereby are herein O TABLE OF CONTENTS Py pg The Company.. 3 Regulation . General Problems of the Industry.. 3 19 Use of Proceeds.. Operating Statistics.. 3 3I Construction Program.. Description of New Bonds.. 4 33 Capitalization . Experts .. 6 36 Legal Opinions. Statement ofincome. 7 36 Report ofIndependent Public Accountants.. 37 Management's Discussion and Analysis of the Statement ofIncome . Financial Statements.. 38 10 Business . Underwriters.. 12 53 IN CONNECTION WITII Tills OFFERING, Tile UNDERWRITERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN Tile MARKE NEW BONDS OR ANY OTilER BONDS OF Tile COMPANY AT LEVELS AB WillCil MAY BI:MIGIIT OTIIERWISE PREVAIL IN Tile OPEN MARKET. SUCll TRANSACTIONS EFFECTED ON Tile NEW YORK STOCK EXCllANGE OR IN Tile OVER-COUNTER ANY TIME. MARKET. SUr". STABILIZING. IF COMMENCED, MAY BE DISCONTINUED AT 2
4 L
- 1
[9 s Tile COMPANY L 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 h estimated to exceed 5,200,000,- The Company's utility operating revenues were derived about $6% from electric service and 44% from gas service for the twc!ve morths ended December 31,1976.
The industries in the territory served by the Company include automobile and automobile equip nent, primary metals, chemicals, fabricated metal products, pharmaceuticals, machinery, oil refining, paper and paper products, food products and a diversified list of other industries. GENERAL PROBLEMS OF T11E INDUSTRY The Company has been experiencing problems common to the utility industry in general, certain of t!'e salient features being the difficulty and length of time requited in obtaining an adequate return on
' invested capital (sce " Regulation-Michigan Public Service Commission" and " Statement of Income"),
restrictions on operations and increased costs and delays attributable to inflation and environmental considerations (see"Regulatiod-Compliance with Environmental Requirements and Nuclear Regulatory Commission"), the necessity of obtaining substantial amounts of outside capital to finance the Company's construction program (see "Use of Proceeds" and Note 3 to Financial Statements), the difficulty in obtaining adequate supplies of fuel and gas at reasonab!c prices (see " Business-Electric Fuel Supply and Gas Senice" and " Regulation-Federal Energy Administration") and cancellation and delays in
~
m - construction and operating problems with respect to new large generating units (see " Business-Electric Senice"," Regulation-Michigan Public Service Commission and Nuclear Reg :latory Commission" and
)
s ,/ Note 2 to Financial Statements). In July 1976 a U. S. Court of Appeals remanded to the U. S. Nuclear Regulatory Commission orders granting construction permits for the Company's Midland Nuclear Plant for reconsideration of, among other things, waste disposal and other issues involving construction and fueling oinuclear generating plants. In February 1977 the U. S. Supreme Court granted the Company's request for a writ of certiorari to review the Coun of Appeals decision. If the Company is not ultimately successful in the Midland proceeding, the erfect upon the Company's future power resources and financial position could be materially adverse (see " Regulation-Nuclear Regulatory Commission"). USE OF PROCEEDS
'The net proceeds from the sale of the New Bonds offered hereby will be used to finance in part the Company's construction program.
To tinance the 1977 construction program of approximately $593,156.000 and to satisfy a debt maturity of S24.010.000, the Company has raised approximately $40,000.000 from the sale of First Mortgage Bonds in March 1977 and $78.000,000 from the sale of 3.500.000 shares of Common Stock in y ' May 1977 and expects to raise approximately $32,000,000 from the proposed issuance of 320,000 shares of Preferred Stock in June 1977; In addition to the New Bonds offered hereby, the Company proposes to issue
. additional Preference Stock, First Mortgage Bonds and Common Stock. later in 1977. The balance required will be provided from internal sources. and short term borrowings. The Company has arrangements with banks which provide for short-term borrowings of approximately $221,200,000 which-may be used to finance the construction budget on an interim basis (see Note 3 to Financial Statements).
The Company estimates that its construction program for the years 1977 through 1981 will cost. approximately $2.7 billion, including expenditures for. environmental protection amounting to approxi . mately $516 million. In order to finance this program and to meet remaining debt maturities during this period of $195.3 million, it will be necessary for the Company to sell securities in addition to those
- i j } mentioned above, the amounts and types of which have not yet been determined.
1 / Nm/
.3 L
f
- ___._.-.s .______----.-_.__----_31
It is necessary for the Company, in order to issue and sell First Afortgage Bonds, to meet certain earnings and other requirements. The Company's First Afortgage Bond Indenture requires for the sale of additional bonds, except for certain refunding purposes, minimum earnings coverage, before income taxes, of at least two times pro forma annual interest charges on bonds and other equal or prior ranking indebtedness, as defined in the Indenture. On this basis, such pro forma coverage for the 12 months ended December 31,1976 would be at least 2.66. Based on this coverage at an assumed interest rate of 10% the Company can sell at least S472,000,000 of First hfortgage Bonds in addition to the S125,000,000 mentioned above. The Company is considering requesting Bondholders to consent under the provisions of the Indenture to various changes therein which would have the etTect ofincreasing the amount of First 51ortgage Bonds which may be issued. The Company is unable to predict whether, if >o requested, the requisite consents of Bondholders will be secured. 'Ite Company believes, however, that failure to secure such consents would not have any maarial etreet upon its ability to finance its construction requirements outlined above. The Company's Articles ofIncorporation require for the issuance of additional shates of Preferred Stock specified earnings coverages, including minimum earnings coverage after income taxes of at least one and one half times the pro forma annual interest charges on all indebtedness and Preferred Stock dividend requirements. 'in this basis, such pro forma coverage for the 12 months ended December 31,1976 would be at least 1.61 Based on this coversee at an assumed dividend rate of 10% the Company can issue after the issuance of .ne $125,000,000 principal amount of First Afortgage Bonds referred to above at least 1,150,000 shares of Preferred Stock, S100 par value, in addition to those mentioned above; for each additional $1,000,000 of First hlortgage Bonds issued at an assumed interest rate of 10% the number of shares of Preferred Stock, $100 par value, issuable at an assumed dividend rate of 10% would be reduced by 10,000 shares. Such coverages were computed including allowance for funds used during
,:onstruction, which, in the opinion of the Company's General Counsel, was properly so included. In February 1977 the Federal Power Commission issued an order revising its system of accounts which specifies a procedure for determining the maximum rate which can be used by the Company without prior Commission approval for computing the allowance. The order also reclassified the interest ponion of the allowance (formerly an item of"other income") as a credit against interest charges (reference is made to the fifth paragraph under " Regulation-Federal Power Commission"). These changes may slightly decrease the above earnings coverage provisions in the future and may reduce the maximum amount of First 51ortgage Bonds and Preferred Stock the Company would otherwise be permitted toissue. Earning for coverage calculation purposes also include revenues collected pursuant to interim gas rates ( reference is made to the seventh paragraph under " Regulation-Niichigan Public Service Commission"). The amounts of additional First Afortgage Bonds and Preferred Stock which can be issued in future years will be contingent upon increases in earnings through rate increases or otherwise. The issuance of Preference Stock is not subject to meeting any earnings coverage test.
CONSTRUCTION PROGRASI As of Niarch 28,1977, the Company had incurred or proposed to incur construction costs for property additions in 1977, including about $106,000,000 for environmental protection additions, in an estimated amount of 5593,156,000. The 1977 program as projected includes $358,437,000 of costs for construction of three major projects as follows: Project and Estimated Estimated Location iear of Total Cost Features Operation To Compan>(a)(b) Midland Plant ( M2dland. Michigan ) Two nuclear fueled ururs with aggregate nameplate First umt in 1981.sec- $ 1,670,000.000 raung of alsout 1,361.000 kilowatts (estimated ws: ond unit m 1982 5943 per kw) and 4,050 000 pounds per hour of process steam (c )(d ) D. E Karn Plant, Uruts 3 and 4 Two od fired uruts at existmg plant to aJJ approu- Urut 3 in 1975 t e). $ 274,100,000 mately 1.237.000 k:lowatts ( nameplate rating) (esti- Urut 4 in 1977 ( Essendle, Michigan) mated cost S194 per kw) of capacity of which approumately 500,000 kilowatts are avadable from Urut 3 1 H. Campbell Plant. Urut 3 ( Port Sheldon, One coal fired unit at existing plant to add approxi- 1980 $ 537,000,000 Michigan ) mately 770.000 kdowaits (nameplate ratmg) (esti-mated cost S662 per kw) oicapacity (a) Estimated costs are subject to review and change from time to time to reflect changes in schedule, inflation rates, additions to or changes in license conditions and regulations and other factors. 4
X:, [ ; .
~# .c. .
- (b) Costs (in thousands of dollars) have been incurred or are scheduled to be incurred as follows:-
~O{Uf
( ,: Estimated -
^
After 1977 Prior to 1977 - l{
. Midland Plant ' $425.811 $245.000 $999.189
~ D. E. Karn Plant 249,461 21.237 t 3.402
~ L H. Campbell Plant 24.680- ,92.200 ' 420.120
~ (c) Reference is made to" Regulation-Nuclear Regulatory Commission" and to Note 2 to Financial
. Statements herein.
. (d) The steam will be furnished to The Dow Chemical Company for industrial processes.' See
" Business-Electric Service"-
(e) Unit 3 at the D. E. Karn Plant, which was placed in service in 1975, presently has a net rating of approximately 500,000 kilowatts.1'Certain. boiler modifications must be made before the Unit can be
- operated at its full design capacity of 605,000. kilowatts (nameplate rating). Such modifications tvill'
. commence upon completion of Unit 4 and are not expected to be completed until the spring of 1978.
1 The 1977 construction Program includes $234,719,000 for other facilities, including other electric
' production facilities, power supply projects, electric transmission and distribution facilities, gas supply lines, gas production, transmission and distribution: facilities and' general, miscellaneous and steam additions. Of this amount,it is estimated $197,531,000 will be incurred for electric additions;$33,001,000 for gas additions and $4,187,000 for general, miscellaneous and steam additions.-
The Company will need significant and timely rate increases if revenues and income are to reach and
-be maintained at levels which will result in sufficient internally generated funds to' meet its operational requirements and permit external financing of its construction program at reasonable cost. For recent information concerning rates, see" Regulation-Michigan Prblic Service Commission". If adequate funds cannot be obtained from outside financing 'and internal sources, the Company will,'as it has in the past,
.- l curtail its construction program to the extent feasible, although this may afect' adversely the reliability of
; ' service for future customer requirements. Deferrals of planned construction may result in near-term
- (%
L expenditure reductions, but cost escalations and general intiationary price trends may cause the long-term efect of such deferrals to be an overall increase in the Company's required investment. n .. , o b, ~_.
~
. -: 5 b J t .
'p.*
j k- _a .. ,
CAPITAllZATION The following table sets forth the capitalization of the Company as of December 31,1976 and as adjusted to reflect the sale in Alarch 1977 of $40,000.000 princip,.I amount of First afortgage Bonds, the proposed issue in Jun 1977 of 320,000 shares of Preferred Stock, the proposed sale in June 1977 of the New Bonds, the issue in Alay 1977 o 3,500.000 shares of Common Stock, conversions of the Company's Preference Stock which is convertible and tne Common Stock issued under the Company's Dividend Reinvestment and Common Stock Purchase Plan at Alarch 31, 1977 and the balance of proceeds of Installment Sales Contracts held by the Trustee pending certification of construction expenditures. Outstanding % of Decernher 31, As Capitalharion Title of Class 19 % Adjusted As Adjusted Thousands of Dollars Lor.g-term debt ( 1 ) First mortgage bonds (2) $1,386,148 $ 1,511,148 Installment sales contracts payable ( 2 ) . 100,925 104,700 Sinking fund debentures due 1994- 35,200 35,200 Term bank loan-- 50,000 50,000 Other. 59 59 Unamortized net debt premium ( discount) . (2.451) (2,451) Total long. term debt (see Note 7 to Financial State-ments ) - . . $1,569.881 $ 1,698,656 53.0 % Preferred stock, cumulative, $100 par value, authorized 5,000,000 shares, outstanding 3,463,33S shares and 3,783,338 shares as adjusted (1). $ 346,334 $ 378,334 11.8 Preference stock, cumulative, $1 par value, authorized 5,000,000 shares, 2,743,776 shares outstanding at December 31,1976 and 2,679,869 shares as adjusted (1) (see Note 6 to Financial State-ments) - . $ 87,189 $ 83,995 2.6 Common stockholders
- equit)( 1)
Common stock, $10 par value, authorized 42,500,000 shares, outstanding 34.846,409 shares at December 31,1976 and 38,643,869 shares as adjusted ( 3 ).. $ 348,464 $ 386,439 Capitalin excess of par value(3) . .. . 318.837 366,622 Retained earnings . 306,584 306,584 Less- Capital stock expense . . . (14,223) (14,648)(4) Total common stockholders' equity. $ 959,662 $1,044.997 32.6 Total capitalization.. $2.963,066 $3,205,9S2 100.0 % (1) Reference is made to Financial Statements and notes related thereto. (2) Concurrently with the execution of Installment Sales Contracts in December 1975 the Company pledged
$31,000,000 principal amount of First N!ortgage Bonds as security for its obligations under such contracts.
(3) 867,816 shares of Common Stock are reserved for issuance upon conversion of the $6.00 Preference Stock, and 1.493,274 shares of Common Stock are reserved for issuance upon conversion of the 55.50 Preference Stock at N1 arch 31,1977 In April 1977 the authorized number of shares of Common Stock was increased to 60,000.000. (4) This amount gives effect to estimated expenses payable by the Company in connection with the proposed issuance of 320,000 shares of Preferred Stock and 3.500,000 shares of Common Stock. (5) The Company has been authorized by the Federal Power Commission ("FPC") to incur short-term borrowings of up to $335,000,000. The Company has arrangements with banks providing for total short-term borrowings of approximately $221,200,000. As of December 31,1976, the annual sinking fund requirements on long-term debt amount to $16,635,000. (6) Reference is made to Note 8 to Financial Statements for information concerning lease obligations. O
- ~
4
' ' CONSUMERS POWE2 COMPANY p- ,
STATEMENT OF INCOME -
. & The following Statement ofIncome of Consumers Power Company for .the five years ended December 31,1976
[N : has been examined by Arthur Andersen & Co., independent public accountants, as set forth in their report included () cisewhere in this Prospectus / The opinion in their report is qualif:ed subject to the effect, if any, on the financial statements of the resolution of the Midland Plant matter discussed in Note 2 to Financial Statements. The report-comments on a ch'ange made effective as of Ja'nuary 1,1974 (with which they concur) in the method of recording revenue as discussed in Note (a) to the Statement ofIncome. This statement should be read in conjunction with the Financial Statements and related notes appearing elsewhere in this Prospectus. Year Ended December 31
~1972- ~t973 1974 1975- 1976 Thousands of Dollars -
Operating Revenue (a)(b):-
' Electric _ ' $416.994 - $495,723 $ 619.958 . $ . 757,741 ' $ 878.468 Gas - .. 332.085 ' 337.906 483.832 _ 581.294 700.236
- Steam - .. 1,374 1.325 1.593 2.065 2.548 Total operaung revenue $750.453 $834.954 $1.105.383 $1.341.100 $1.581.252 Operatmg Expenses and Taxes: . .
Fuel Consumed in Electric Generation S 91.969 $105,391 $ 172.050 $ 249.556 = $ 256.447 Purchased and Interchange Power '56,662 70,006 143,394 90.891 127,464 Cost of Gas Sold 156.238 175,I85 293.190. 375.495 460.458 Other Operation 139,620 I43,173 153.619 179.029 194.555
- Total Operation (c)(d) $444.489 ~ $493,755 $ 762.253 $ 894.971 $1,048.924 Maintenance .s 41.187 44,263 $5,140 57.607 68,724 Depreciation and amortization 62,937 73,428 82,944 93.635 96,954 General taxes 48.204 $4.160 63.058 67.678 77,365 income taxes ( e) '38.876 43.951 20.058 57.564 77.315 Totaloperating expenses and taxes $635.693 $709.557 ' $ 983.453 $1.171.455 $1.369.282 Net operating income $l14.760 $125,397 $ 121.930 $ 169.645 $ 211,970 Other incorne: - -
Allow ance for funds used dunng construcuon( f) $ 25,455 $ 23.223 $ 21,875 $ 24.825 5 33.848 Income of subsidianes. I.92e 3.341 7,371 II,432 10.779 Gain on reacquisition oflong-term debt 2,970- 1,609 - 2,833 2,958 2,539 -
- (N - Other, net . 526' I.990 862 1.438 1.469
- (") Interest charger Net otherincome
~ $ 30.871
- $ 63,754..
$ 30.163 $ 32.941 $ = 40.653 $ , 48.635 .
Interest on iong-term debt- $ 71.322 $ $4.948 $ 101.340 $ 113.695 Other interest charges 2,811 4.048 9.835 9.022 2.365 To'talinterest charges - ~ $ 66.565 ' S 75.370 $ 94,783 $ 110.362 $ 116.060-Income Before Cumulauve Effect of Change in Method of Recording' . Revenue ( a l _ $ 79.066 $ 80,190 $ 60,088 ' $ 99.936 $ 144,545
- Cumulauve Efect on Years Pnor to 1974 cf Accruing Esttmated 'abdled -
Revenue after Deduction for Related Income Tates( a) _ 24.864 Net inceme $ 79,066 L $ 80.190 $ M.E $ 99.9M s Ia4 545 m.m Dividends on Preferred and Preference Stock - l 1.251 17,746 25.540 30.086 - Net locome after Dividends on Preferred and Preference Stock - $ 67.815 $ 62.444 $ ' 59,412 $ 69,850 $ 113.596 Earnmgs Per Share of Common Stock Assumirig No Ddution Based on
~ Average Shares Outstanding ( g):
Before cumulatne effect of change in method of recordmg revenue ( a 1 . $2.76 $2.38 $1.32 $2.62 . $3.63 Cumulauve effect on years prior to 1974 of accnung esumated unbilled ' 95
- revenue - - - -
Total ' 52.76 $2.38 $2.27 $2.62 $3.63 Earnings Per $h'are of Common Stock Assuming Full Ddution Based on Average Shares Outstanding ( g 1: Before cumulauve effect of change in method of recording revenue ( a ).... $2.76 $2.38 $1.33 $2.49 $3.44 Cumulauve effect on years prior to 1974 of accruing esumated unbdled
- resenue._ . - - .92 - -
Total .- - -
- $2.76 $2.38 - $2.25 $2.49 $3 44 Pro Forma Amounts Assuming Change in Method of Recording Revenues is -
Applied Retroacuvely(a):-
- Net income ( Thousands of dollars) $ 83.302 $ 82.667 $ 60.088 Earmngs per share of common stock assuming no ddution based on
. average shares outstandmg(g) c $2.93 $2.47 $ 1.32
- Earmngs per share of common stock assuming full ddution based on .
average shares outstandmgt g) $2.93 $2.47 $1.33 ja . Cash Daidends Per Common Share ' . 52.00 $2.00 $2.u0 $2.00 $2.00
.I E E-
~
~
y
)1 L Rauc of Earmngs to Fixed Chargest h ) ' ._
2.71 2.60 _1.79 _ i s
~
Sde Page 8 for Notes to Statement ofIncome,-
;7 E -
o ,.
CONSUMERS POWER CONIPANY NOTES TO STATEMENT OF INCO3tE (a) Prior to 1974, the Company followed the policy of not recording revenues relating to service rendered but not billed at the end of the accounting period since the changes in such unrecorded amounts from year to year were generally not significant. Due to the accelerating increase in costs and rate levels, the disparity between costs and revenues as a result er this method of accounting has increased. Accordingly, etTective January 1,1974, the Company changed to a preferable method of accounting to accrue the amount of unbilled revenues for services provided to the month end to more closely match costs and revenues. This change had the effect of increasing net income and earnings per share of common stock in 1974 by $9,016,000 and $.34, respectively, before the cumulative erTect for periods prior to 1974. The cumulative etTect of the change for years prior to 1974 of $51,860,000 less income taxes of
$26,996,000 (a net effect of S.95 per share) has been reflected in the statement ofincome for 1974. The pro forma amounts shown on the statement ofincome raflect net income and earnings per share assuming the change in method of recording revenues was applied retroactively.
(b) Litigadon is pending in the Ingham County Circuit Court (the " Circuit Court") which includes, among other things, a claim for refund to customers amounting to approximately $7,763,000 plus interest charges with respect to electric rates placed in effect in October 1969 by court order but not approved by the Alichigan Public Service Commission (N1PSC) until Apnl 1970. In Novernber 1974 the N1PSC issued an order as a result of a rehearing with respect to an earlier gas rate order, the principal effect of which was to assign to commercial and industrial customers certain costs relating to the Alarysville Gas Reforming Plant, resulting in a reduction of approximately 523,000,000 in residential revenue requirements and a corresponding increase in commercial and industrial revenue requirements. In December 1974 an industrial customer appealed the rehearing order to the Circuit Court and requested it to re-establish the rates which had been in effect prior to the rehearing order and to direct refund of any unlawful rates collected from the customer pursuant to the order. In December 1976 the Circuit Court affirmed the actions taken by the NtPSC in the November 1974 order and the industrial customer filed a claim of appeal with respect to such affirmation with the Alichigan Court of Appeals. In January 1975 the h1PSC authorized an increase in the Company's electric rates of $66.231,000 on an annual basis which included an interim increase of $27.624.000 authorized in September 1974. The Attorney General of Niichigan and the UAW-CAP appealed the order of the NIPSC authorizing the increase in rates to the Circuit Court and requested the Circuit Court to restrain and enjoin the increase in electric rates during the pendency of the litigation. No action has been taken by the Circuit Court with respect to such request. In June 1975 the hlPSC authorized the Company to place in.etTect, under bond and subject to refund, an interim gas rate increase in the annual amount of $29,194.000. The interim rates established by the June 1975 order were in effect until N1 arch 1977, when the NiPSC issued an order authorizing an additional interim gas rate increase in the annual amount of $4.928,000. The interim rates are currently in etrect under bond. An industrial customer appealed the June 1975 order to the Circuit Court and requested it to re-establish the rates in etrect prior to June 1975, and to direct refund of any increases in gas rates collected by the Company from the intervenor after June 1975. No action has been taken by the Circuit Court with respect to such request. In Af arch 1976 the NIPSC issued an order in the proceeding deciding some contested matters (including rate of return on common equity) and remanding others for the taking of additional testimony. The Company has on appeal in the courts the N1PSC's determination as to rate of return on common equity. In August 1975 the Attorney General of Alichigan filed a complaint and motion in the Circuit Court in connection with a July 1975 order of the 51PSC involving the fuel adjustment clause which included a request for immediate refund to customers of at least $12,789,000. In early 1977 the Circuit Court denied the Attorney General's requests for immediate refund and injunctive relief and g' ranted the Company's motion for accelerated judgment. In February 1977 the Attorney General filed motions for leave to amend his complaint and for rehearing of the January 1977 opinion, to which the Company responded. In N1 arch 1977 the Circuit Court entered an order denying the Attorney General's motions for leave to amend his complaint and for rehearing on the grounds that such matters were not properly before the court. The 8
m < ~ - 3' g. .
~ _ _ _
~ '
~ >$ h.. - ,
> u l N l N ,
n '
- y ._ ,
r r .c-g 4 a e A q, ~L 9; _. , 77^ ? CONSUMERS POWER COMPANY NOTES TO STATEMENT OF INCOME--(Continued)
- fAttorney Gdneral filed a claim of appeal r'specting e the Circuit Court's February 1977 order with the m- Michigan Court of Appeals DThe appeal period has not yet run with respect to the Circuit Court's March
, 11977 order.;
In April 1976 the MPSC issued an order authorizing the Company to increase its electric rates in the
" annual amount of $33,977,000. The order also found that the Company's existing fuel cost adjustment
. clause had not resulted in any cost overrecoveries by the. Company and authorized a monthly purchased
-and interchange power clause which operates to pass;through 90 percent of monthly increases and.
~
. decreases in such costs (after monthly notice and hearing). The Company appealed the April 1976 order-o : to the Circuit Cou'n requesting, among other things, 'that it be granted an additional rate increase in the
~
4 _
< annual amount of approximately $41,600,000. The Attorney General appealed the April 1976 order to the ,- 1 Circuit Court requestirig, among 'other things, that the Circuit Court order refunds of all amounts collected -
in excess of the rates in efect prior to April 1976, enjoin the purchased and interchange power hearing procedures and' direct the:MPSC to investigate alleged "overcollection" under the Company's fuel cost
; adjustment clause. Appeals to the Circuit Court have also been taken by the Company of one, and by the
~ Attorney-General' of several, of the orders issued ;by the MPSC following monthly purchassd and linterchange' power hearings held pursuant to the April 1976 order in which theLMPSC has authorized purchased and interchange power expense adjustments in the Company's rates. The Circuit Court has not
; acted on any of these appeals.-
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.
- (c) The Company receives a portion ofits gas supply from two ofits wholly-owned subsidiaries and, accordingly, operation expense includes approximatelyc$47,953,000 in 1972, $49,213,000 in 1973,
$55,210,000 in 1974, $61,415,000 in 1975 and $74,174,000 in 1976, relating to the cost of gas purchased from these ~ subsidiaries;
" (d) Reference is made to Note 10 to Financial Statements for information relating to the Company's pension plan..
'(e) Reference is made to Note 13 to Financial Statements for information relating to income taxes.
(f) Prior to i977 the allowance for funds used during construction,' a non-cash item which was
~
included in other income,'was defined in the applicable regulatory systems of accounts as the net cost,. during the' period of construction. of borrowed funds used for construction and a reaso'nable rate on other fun'ds when se usedc Under established regulatory practices, the Company is permitted to earn a return on
' the; capitalized cost of such funds and to recover the same in the' rates charged for utility services. In February 1977 the FPC issued an Order, effective January 1,1977, revising its system of accounts which
- specifies a procedurd for determining the maximum rate which can be used by the Company without prior FPC approval for computing the allowance. The February 1977 order provides for a credit of the portion of the allowa'nce allocable to borrowed funds to' amounts recorded as interest charges and limits amounts
. rdcorded a's other' income and' deductions to the portion of the allowance allocable to other funds used in
. constructioni (The composite rate. used by the Company to capitalize the cost of fcnds devoted to construction was
;7.5% 7.5% 7.75% 8.0% and;8.0% in the years 1972 through 1976. The current rate being used is 8.5%
Based on'the Company's source of funds for gross property additions, and assuming that the cost'of
> ~f inancing other'thanfcommon equity fin'a ncing was equivalent to the current cost oflong-term and short-term debt (before income tax efect), Preferred Stock and other sources available in each of the, periods, a the estimated common equity co.mponent of the allowance for funds used during construction amounted to ~
11.9% 9.7% 10.8% 5.7% and 5.2%of net incom6 available for Common Stock for the years 1972 through, _w l1976. . . {' <
' f(g) Earnings per share of Common Stock assuming no dilution are computed based on the average r ,t .
l n' umber of shareso ' utstanding' during thE periods shown as follo' w sr24,583,838 shares in 1972,26.233,838
- j ,
- : share in 1973 and 1974,26,676,554 shares in 1975 and 31,300,333 shares in 1976.'
l (& _.g - 1f '~
^ >
- a[. / .
- j. h < s
) S, ,
- w;+ , gg .-- ,,
. w. x
+-L..
~!'.
CONSUMERS POWER COMPANY NOTES TO STATEMENT OF INCOME--(Concluded) Earnings per share of Common Stock assuming full dilution have been computed as if all outstanding shares of the convertible Preference Stock were converted to Common Stock as of the dates ofissuance of the convertible Preference Stock, after elimination of the related dividends. The average number of outstanding shares of Common Stock under this assumption was as folloivs: 24,583,838 shares in 1972, 26,233,838 shares in 1973, 27,156,915 shares in 1974, 30,436,741 shares in 1975 and 34,487,013 shares in 1976. (h) For the purpose of computing the ratio of earnings to fixed charges, earnings represent the Company's income before the cumulative effect of the change in method of recording revenue referred to in (a) above (including allowance for funds used during construction but excluding undistributed income of subsidiaries), and before deducting income taxes and fixed charges. Fixed charges represent the Company's totalinterest charges plus the estimated interest portion oflease rentals. The annualinterest requirement on the New Bonds will be $7,543,750. The pro forma rado of earnings to fixed charges for the twelve months ended December 31,1976 is approximately 2.35 based on long-term debt outstanding on that date after giving effect to (i) the balance of the Installment Sales Contracts executed in 1975, (ii) the sale in March 1977 of the S40,000,000 principal amount of First Mortgage Bonds due 1997, (iii) the proposed sale of the New Bonds at an assumed interest rate of 9%% and (iv) the estimated interest portion oflease rentals. A difference of %% in the assumed interest rate of the New Bonds will change this ratio approximately .002. For the purpose of the pro forma computadon, short-term interest is assumed to be the same as for the twelve months ended December 31,1976. For the twelve months ended March 31,1977, total operadng revenue, net operating income, net income, net income after dividends on preferred and preference stock and earnings per share of common stock (assuming no dilution and assuming full dilution) were $1,660,054,000, $224,639,000, $159,378,000, $127,725,000, $3.91, and S3.73, respectively; these amounts are derived from financial statements of the Company, which have 1 een enmined by independent public accountants and included in the Company's quarterly report to the Securities and Exchange Commistion on Form 10-Q. The opinion in their report, dated May 11,1977,is qualified subject to the effect, if any, on the financial statements of the resolution of the matters relatir g to the Midland Nuclear Plant, as discussed in Note 2 to Financial Statements. For suca period the ratio and pro forma ratio of earnings to fixed charges were 2.89 and 2.54, respectively, calculated on the same basis as the ratio and pro forma ratio for the twelve mor.ths ended December 31, 1976, described above. As compared to the twelve months ended March 31,1976, net income after dividends on preferred and preference stock increased $45,435,000. Most of this increase reflected increased utility net operating income. Electric revenue increased $118,055,000 and gas revenue increased $142,167,000. The increases in electric revenue resuhed from rate increases and the pass-through to customers of 90% ofincreased cost of fuel used in electric generation and purchased and interchange power costs. Gas revenue increased as a result of cost of gas adjustment clause revenues and rate increases. The increased revenues were partially offset by higher operating costs, principally cost of gas sold, fuel used in generation, purchased and interchange power and increased labor and generadng plant maintenance costs. Earnings per share assuming no diluuon and assuming full dilution increased S.92. MANAGEMENT'S DISCUSSION AND ANALYSIS OF TIIE STATEMENT OF INCOME Electric revenue increased $137,783,000 in 1975 and $120,727,000 in 1976. The 1975 increase consisted of $141,377,000 relating to rate increases and increased fuel cost adjustment clause factors, partially offset by a decrease of $3,594,000 reflecting a 1.9% decrease in sales volumes. The 1976 increase consisted of $53,662,000 relating to rate increases and increased fuel cott adjustment clause factors, $62,756,000 reflecting an 8.8% increase in sales volume due to increased customers and an overall improvement in the economy and $4,309,000 resulting from the recording ofrevenue which had previously been reserved for possible refund in a wholesale rate case. Gas revenue increased 597,462,000 in 1975 and $118,942,000 in 1976. The 1975 increase resulted from S123,792,000 relating to rate increases and increased cost of gas adjustment clause factors partially 10
,~ .
. _ m ~. , ~ _
, 16 -
N - s
._Q r
- ( m ~
m ,
,[ -
I f L. av , u , , 1
~
p
~
]ogset by? a decrease of $26,330,000 relating primarily to a decrease in' sales volumes of 4.6% reflecting ~
AD . ' warmer than normal weather. 3The 1976 increase resulted from $73,599,000 relating to rate increases and :
~
fincreassd cost of gas adjustment clause factors and $45,343,000 relating to increased sales volumes of 7.2%
' primarilyldue
; to colder than normal weather and increased customers.
. j Fuel'for generatio'n costs increassd $77,506,000 in 1975 and $16,891,000 in 1976. In 1975 the average J fossil and nuclear fuel cost per kwh generated rose 27.5%, reflecting the increased cost of coal and oil k consumed at the steam ' generating plantsh in 1976 the average fossil and nuclear fuel cost-per kwh :
U -
! generated rose 7.7%, reflecting the higher cost of fossil and nuclear fuel.,
~
f . . Purchased and interchange power costs decreased $52;503,000 in 1975 and increased $36,573,000 in' ~ H 11976. The decrease for .1975 reflects the-reduction in thel purchased power requirement due toL the. t placement of Unit No. 3 of the Karn Plant into service in 1975 and the placement of the Palisades Nuclear .
~
p Plant back into service, partially osset by an increase in the unit cost of purchased and interchange power. The increase in 1976 reflects the Company's increased system requirements along with the replacement of - F reduced internal generation, partially offset by a 4.4% decrease in the average cost per kwh for purchased I and interchange power. v ' ! . Cost of gas sold increased $82,305,000 in 1975 and $84,%3,000 in 1976. The 1975 increase reflects a : , 34.4% increase in the average cost per Mcf. partially offset by'a 4 7% decrease in gas sendout. . The 1976 k ~ increase reflects a 13.9% increase in the average cost per Mcf and a 7.6% increase in gas sendout due to ^ colder weather in 1976. The increases in the average cost per Mcf reflect the higher prices put into effect j 1 - by ' pipeline suppliers and the increased costs of liquid hydrocarbon feedstock for 'the production ofJ ! synthetic natural gas as the Marysville Gas Reforming Plant.; The increases in cost are almost totally offset [ ; by the cost of gas adjustment clause which permits pass-through'to customers. [ !Other operation and maintenance expenses increased $27,877,000 in 1975 and $26,643,000 in 1976.. Major increases reflected;inlthese amounts were maintenance at the variousl generating plants and 7 employee' wages and benefits charged to operations. 0 L Depreciation W amortization expenses mcreased $10,691,000 in 1975 and $3,319,000 in 1976, J resulting from additions to depreciable p operty, General taxes increased $4,620,000 in 1975 and $9,687,000 in 1976, primarily the result ofincreased property. subject to real and personal property taxes and the addition in 1976 of the Michigan Single ? Business Tax. : i; ,
- In 1975 the net result' of the increased revenues partially offset by higher costs was $85,221,000 growth -
~
[ r in~ net ' operating income before income taxesc Income taxes increased $37,506.000 leaving an increase in
- ' net operating income of $47,715,000. -In 1976, the net result of the increased revenues partially offset by
[ ' higher costs =was a:$62,076,000 growth in net; operating income before income taxes (' Income taxes : F increased $19,751,000.' Income taxes in 1976 reflect the elimination of the State Income Tax and increased interest expense.1 The net result of the increased net operating income and the increased income taxes was an mcrease m net operatmg income of $42,325,000. 4 Allowance for funds used during construction increased $2,950,000 in 1975 and $9,023,000 in 1976. [ The increase results primarily from increased construction'at the Midland Nuclear Plant during 1975 and {
~ 1976.?
. Net other income (exclusive of allowance for funds used during construction) increased $4,762.000 in
~
[ ?l975 reflecting increased earnings-of subsidiary companies. DThe decrease of.31,041,000. in 1976 as
~
compared to11975.was due to reduced Michigan Gas Storage Company earnings because of a Federal ! : Power Commission-ordered reduction in' ~a filed rate increase and a decline in interest income. , , . .m __ The sale of first mortgage bonds, the sale ofinstallment sales contracts in connection with pollution i f;c f
, control equipmen't and. the sale of a seven-year promissory note, partially offset by reduced short. term
'~
n - ? borrowings' at lower' interest rates resulted m mereased interest charges of-$15,579,000 in .1975 and- ' [. 1
;$5,698.000 inil976.1 SThe' issuance of preference stock in 1975 and 1976, partially offset by conversions of the preference
" ~
istock, increased ' dividends on the preferred'and preference stock $4,546,000 in 19.75 and $863,000 in 1976. s: ,, {. ,_ hy *<' s
<n . m m' pf
- ,' Al . . . '
- ; - , ; - )
~
~ * -
, j _ ,
BUSINESS Electric Service The Company renders electric service in an area of approximately 27,800 square miles, having a population of approximately 3,300,000. Principal cities served are Battle Creek, Bay City, Flint, Grand Rapids, Jackson, Kalamazoo, Niuskegon, Pontiac, Saginaw and Wyoming. The Company owns and operates electric generating plants with aggregate net demonstrated capability of 5,721,300 kilowatts and, as shown under " Construction Program" above, is constructing additional plants which will add 2,868,000 kilowatts (nameplate rating) to the Company's generating capacity as follows: Kilowatts Plants Present 1;nder Plants Construction Fossil fuel steam-electric plants (6 at present, 3 units under construction) Coal . 2,393,000 770,000 Oil .- . 1,000,000 737,000 Nuclear steam-electric plants (2 at present, I under construction) . 736,000(a) 1,361,000 Pumped storage plant ( 1) . . 954,700( b) - Hydroelectric plants (13) z 133,600 - Combustion turbine plants (7).. , 504,000 - Total . 5,721,300( a) 2,868,000
~
(a) See " Regulation-Nuclear Regulatory Commission" and Note 2 to Financial Statements. G (b) This represents the Company's share of the capacity of the Ludington Pumped Storage Plant. The Company and The Detroit Edison Company have Slfe and 49Fo undivided ownership, respectively,in the plant and the capacity of the plant is shared accordingly. Agreements are in erTect providing for the purchase by Commonwealth Edison Company of one-third of the capacity from the plant until early August 1983 and one-sixth of the capacity from the plant thereafter until early August 1988. The Company has in recent years encountered a number of serious problems in connection with its construction and operation of new,large-size generadng plants. These problems have included,in the case of the Palisades Nuclear Plant, mechanical and operating problems which have limited the availability and the capacity of the plant. accessitating the purchase of more expensive replacement power; and in the case of the hiidland Plant. administrative and other litigation involving environmental and licensing issues which have caused sestantial delays in the construction and completion of the plant and a substantial increase in the total estimated cost of construction: and in the case of the fourth unit at the Karn Plant, damage caused by tubes freezing and bursting in the economizer section of the steam generator, which will cause a delay in commercial operation until late 1977. Furthermore, difficulties in obtaining capital funds have caused delays in the construction of the Niidland Plant, deferment of the scheduled commencement of commercial operation of the oil-fired fourth unit of the D. E. Karn Plant from 1975 to 1977 and the 770,000 kilowatt (nameplate rating) coal-fired unit at the Campbell Plait from 1978 to 1980, and the cancellation of the proposed two-unit, 2,300,000 kilowatt Quanicassee Nuclear Plant. In addition, the Company is operating the third unit at the D. E. Karn Plant at a reduced level pending certain boiler modifications. In testimony before a Nuclear Regulatory Commission Atomic Safety and Licensing Board in the remanded proceeding relating to the hfidland Nuclear Plant, 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 to be in excess of $100,000,000 and attributable to the delay in completion of the Plant beyond 1980. The Company believes it is not in default of its contractual 12
~ '
q , 3 pv 7
' ~
77, '
;7 " v ,- ~ '= '
W
- A. , -, , ^- w% ,
3< 2 A 4 , + - -
.{ # . _ -
O J-l . . , ~ . 3 , . ~
+
,' < n ;
N 1 "q .: ,n
.;, , j--
+ 9 Cp 1 . .. - .s .
, . 1 . .
; obligations to Dow." The amount invested by the Company in equipment at the Midland Plant allocable to :
d bxf
~ the servicelof' process steam to Dow, which may not be salvageable in the event Dow is entitled to ~ .
d
~
2 *
- terminate the ^ contract,?is estimate'd at approximately:$114,000,000 as of May 1,1977. - See "Regu---
x - ' lation--Nuclear Regstatory. Commission".- p '
~ . ...:.,
The Company's electric generating plants are interconnected by a transmission system operating at ], from.1383WV3 345,000 volts which is also interconnected at a number of locations with transmission L.
- -=u -
facilities of unaffiliated systems. . . J The Company has an electric coordination' agreement with Detroit Edison providing for coordination (of planning, design and operation'of the electric systems of the parties, the rendering of mutual assistance during emergencies and thel effecting of the' maximum practical economy in providing the electric power [ ,
- requirements of each system. ;There are five 138,000 volt and four 345,000 voit interconnections between
' the systems. .These interconnections permit a sharing of the reserve capacity of the two' systems and a h - 1 substantial reduction in investment in plant facilities for each company. Pursuant to an order of the. - MPSC, the Compar./ has infeffect permanent emergency electrical procedures to be implemented in the . event of short or long-term generating capacity shortages, shortages or interruption of fuel supply and - } unavailability of firm or standby ' power from established-interconnections. The procedures include ,
~
t automatic and manual load shedding, voltage reduction, req'uests for voluntary curtailment, interruption' of-
- selected distribution circuits on a rotadonal basis and curtailment of certain commercial and industrial z customers. .
The Company has an agreement with Detroit Edison and Ontario Hydro for interconnections linking . 3 t- the power systems of the Company and Detroit Edison with the power system of Ontario Hydro and also l. providing for mutual assistance during emergencies, improved reliabihty of bulk' power supply and the j effecting of economies by coordinate.d development and exchange of power.1Two 230,000 volt and two ' ? 345,000 ,oit interconnections have been established under the agreement. A hearing is presently pending }= ~ before'the FPC with' respect to one of the 345,000 volt interconnections. See " Regulation-Federal Power j.
. Commission". .
' The Company has agreements with seve al other major electric utilities operating in Michigan, Ohio,~ '
[ : Indiana and Illinois providing for interconnection services and.'other transactions. The Company also
'm'aintains interconnections with the Michigan.Municipals and Cooperatives Power Pool and the Cities of
' Lansing,-Holland and Hillsdale and interchanges power with 'the Edison Sault Electric Company.'
j' :For the summer of 1977 the net demonstrated capability of the Company's interconnected system y planned to be available is 5,575,000 kilowatts (after the net sale of 48,000 kilowatts) to serve a projected - i .~ ' maximum' demand of 4,510,000 kilowattsJ The net maxim'um demand on the interconnected system was ,
- ^
' 4,394,295 kilowatts on' August 27,1973 and in 1976 was 4,281,510 kilowatts on December 2,' 1976.
~
1 h Eh 4e Fuel Supply j; _ . Approximately 50% of the Company's owned generating capability (excluding pumped storage) is - O L dependent upon coal as a source of fuel and requires approximately 6 million tons of coal annually. The . } Company has long-term coal contracts which cover in excess of 80% ofits coal requirements'during 1977.
- These long-term, contracts provide for base period deliveries through 1977 and in some instances through t
L . ?l988 (including options for renewal'under some agreements). The sulfur content of the contract coal i^ ,
' ranges from'O.6% to'4.0% by weight, the majority'of such sulfur content falling between 2.0% and 3.0% j sulfuri Approximately 800,000 tons per year of coal containing 1% or less sulfur are under long-term n ; contract from' mines located in castern Kentu'cky and 2.4m' illion tons per yea, , r coal containing more jc -than.1% sulfur are under long-tc3 contract from mines located in Ohio. The remaining lons term .
~
. x L eontract coal supplies are from mines 'in ' northern West Virginia, Illinois and western Kentucky. The -
f -
. Company's' coal requirements'not under long-term contract and that' quantity of coal. under long-term 4 j' ~
; contracts.which are not delivered.must be supplied through short-term agreements or spot purchases at E .
prices' generally higher than coal obtained under long-term contracts.: At present the FOB mine price for
; such spot purchases of coal ranges from $16 to $26 per ton as compared to long-term contract FOB mine
- pr. ices fot similar quality coal of from Sii to $25 per; ton..
i
,y ~
' - g3-
; ~
.9 _.
L... p,, j 4- ,
X 4 _ T q - * + m; . -
e
+ , - .
N' @+ d 4 N, #f.P*N*-% "3 w'>&dp*+a '*M'*D'Mb -"L'WIr% ?? Y G Y d",Y-g*'/'"WV't t P t'h 95 ' W *W e.,T4 Y* ' '
As of March 1,1977 the Company's coal inventory amounted to approximately 107 days' supply. ~ . Future changes in governmental requirements, shortages of railroad cars and labor and equipment problems pertaining to the coal industry could adversely atTect cost and availability of coal supplies. See
' Regulation-Compliance with Environmental Requirements" for matters pertaining to meeting the United States Environmental Protection Agency (" EPA") regulations on coal-fired generating units.
The Company is developing new sources of coal supply, which will provide coal for new power plants and supplement existing long-term contracts and replace the existing fuel supplies at one or more existing generating units. In connection with the Company's generating units which presently burn oil, the Company intends to impon crude oil, Energy Stream (a petroleum product) and residual fuel oil from Canada in 1977. The Company expects to import approximately 7.5 million barrels in 1977 and 10 million barrels in 1978. Canadian export licenses and U.S. import licenses are required to be renewed from time to time and the receipt of such licenses is not necessarily assured. Long-term export licenses from The National Energy Board of Canada permit the exportation of Energy Stream to the Company through December 1978 and the exponation of residual fuel oil to the Company through December 1979. Provisions in the licenses provide for their extension through December 1981 for Energy Stream and through August 1982 for residual fuel oil if certain conditions are met. On June 22,1976 the Company entered into a contract with Union Carbide Corporation to purchase from 20,000 to 26,000 barrels per day of Canadian residual oil to be burned at the Karn Plant. The contract, which was for a five year period commencing September 1, 1977, was subject to a condition su~ c equent of receipt by December 2,1976 of a license from the Canadian Government to export all of the oil subject to the contract. The license actually granted by the Canadian Government did not in the opinion of the Company fulfill the requirements of the contract in that it permitted the export of 26,000 barrels per day for a term of only two years and four months with the possibility of extension to the full five years after later Canadian Gevernment review. Union Carbide Corporation representatives have claimed that the license fulfills the conditions of the contract and that the contract was not rendered null and void for failure to meet the condition subsequent. The Company has offered to enter into a new agreement provided that cenain contract provisions are revised to better protect the Company in the light of the license term. The parties have entered into negotiations in an attempt to resolve their differences but eventual agreement and deliveries of residual oil from Union Carbide Corporation are not presently certain. The Canadian government began curtailing exports of crude oil in January 1976 and has announced that further curtailraents can be expected and that it expects to end expons entirely in 1981. This should not have any adverse effect on the Company's Energy Stream or residual oil deliveries. Presently Canadian crude oil expons have been authorized at a level of 315,000 barrels per day. For additional information see " Regulation-Federal Energy Administration" and " Gas Service" below. Petroleum products are allocated under regulations administered by the Federal Energy Adminis-tration ("FEA"). The FEA has also promulgated regulations for the mandatory allocation of Canadian crude oil, which has resulted in the reduction of deliveries to the Karn Plant. Although the FEA has placed the Karn Plant within the first priority for allocation of Canadian crude oil, the adjusted base period volume upon which daily allocations are based is 13,872 barrels per day as opposed to the 20,000 barrels per day needed by that facility. Nevenheless, the Company has been able for the near term to obtain an adequate volume of other petroleum to supplement the crude oil supply, so as to allow it to accept an allocation of an average of only 10.288 barrels per day of Canadian crude oil during the first six months of 1977. The Company is not assured of receiving its required allocations and the failure to receive the same could have an adverse etTect upon the Company's generation. See " Regulation-Federal Energy Administration" The Company has contracts for nuclear fuel requirements for the Big Rock Point Plant and the Palisades Nuclear Plant providing for the supply of nuclear fuel, including uranium ore concentrates, enrichment of the uranium hexafluoride and fabrication of nuclear fuel assemblies. The contracts cover requirements for a minimum of the next four years. These contracts are with major private industrial suppliers of nuclear fuel and related services and with the United States government. The Company also has a contract for reprocessing spent nuclear fuel, but the privately owned reprocessing racility planned to 14
r [ l 3 be usid is not presently in operation and'the owner has stated its intention not to reopen 'this facility. h (") ~ - - Moreover, Lthe reprocessor is claiming _ that changed circumstances excuse .its performance of its reprocessing contract with the Company or entitle the reprocessor to terminate 'the contract, which may ~ necessitate new arrangements for storage, reprocessing or other disposition of spent fuel at substantial
. additional cost to the Company. ,The Company has filed suit against the reprocessor in the U.S. D istrict i'
- Court for the. Western District of New York, seeking a declaration of rights under the reprocessing contract and other relief. At the Big Rock Point Plant spent fuel storage capacity is sufficient to last through 1981.
At the' Palisades Plant spent fuel storage capacity is sufficient to last through late 1977. The Company is presently seeking ' authorization from the U.S. Nuclear Regulatory Commission to expand spent fuel storage capacity at the Palisades Plant to assure adequate storage through 1985, which cost of expansion is estimated at $3,200,000; The Company also has' contracts for several but not all segments of the nuclear fuel supply chain for the initial and some of the reload cores for the Midland Plant. Thes'e include contracts for the supply of a portion of the uranium ore concentrates, conversion to uranium hexafluoride, enrichment of the uranium hexatluoride, and fabrication of nuclear fuel assemblies for the initial cores for the Midland Plant; NoL contractual arrangements have been made for reprocessing and reconversion of the spent initial core fuel-
~
. assemblies expected to be discharged from the Midland Plant in the period 1982 through 1985. The availabiity and price of such reprocessing and reconversion and the availability and price of reload fuel supplies and services cannot be accurately predicted at this time.
In June 1976 Plateau Resources 1.imited (" Plateau"), a Utah corporation, was formed as a wholly ' owned subsidiary of the Company to engage in exploration for and purchase, mining milling and sale of uranium. Plateau owns certain unpatented and currently nonproducing mining claims in approximately 82,400 acres in Utah and Coloradof While there is evidence of uranium mineralization on such claims, additional exploration is planned and under way to determine whether economically recoverable reserves are present. Plateau also has options to purchase certain other unpatented and currently unproductive lq j mining claims in approximately'l1,000 acres in Utah and Colorado. In addition, it has rights to purchase V mined ores from i1,200 acres in Utah. Plateau is conducting exploration work during the option periods to - determine whether economically recoverable reserves are present. Plateau has not filed any reports on uranium reserves with any regulatory agencies. The Company's overall average cost of fuel burned has increased substantially in recent years as shown in the following table: Percentageof FuelConwmed Cents Per Million Stu Fuel Conwmed Based on Total Bau Burned 1976- 1975. 1974 1973 t972 1976 1975 1974 1973- 1972 101.2- 94.3 74.5 48.9 44.0 58.5 60.5 75.6 70.1' 75 5 Coal. 77.8 20.0 18 5 13.3 9.7 . 5.0 Oil - 235.0 222.6 ' 196.8 85.4 153,7 'l25.6 88.7 66.4 54 8 5.0 5.9 8.4 5.3 7.7 Gas Nuclear
- 45.9 37.1 22.6 24.4 24 3 16 5 15 1 2.7 14.9 Il.8 90 4 49.6 44.2 100 0 100.0 100.0 100 0 100.0 All Fuels 121.
== 5 li- t.2 =. ,::::= ==== - -
~? The costs'of nuclear fuel consumed in 1972 through 1974 reflect an assumed value for residual plutonium and uranium, and the costs in 1975 reflect an assumed value for residual uranium. The ,
probability of recycling residu'al plutonium and uranium in the future has become speculative because of governmental, environmental and other opposition to the reprocessing of spent _ nuclear fuel and to the use of recycled plutonium as a fuel materiali On that basis nuclear fuel costs for 1975 reflect a zero salvage value for residual plutonium, and substantially all of the nuclear fuel costs for 1976 reflect a zero salvage value. for both residual plutonium and' uranium as well as additional future costs to be incurred in perpetual storage of spent nuclear fuel. Further, virtually all of the value for plutonium residual material-assumed for 1972 through 1974 has been reversed by charging the same to the 1975 nuclear fuel cost. The p increased. nuclear fuel costs for 1975 and 1976 also reflect the decision made to replace the entire Palisades fuel core during the first half of 1976. T J. t
- . v 15 3
I . + - c - - -.
- Cas Ser ice The Company renders gas service in an a rea of approximately 12,900 square miles having a population of approximately 3,800,000. Principal cities served are Bay City, Flint Jackson, Kalamazoo, Lansing, Pontiac, Royal Oak, Saginaw, Warren and a number of suburban communities near Detroit.
The Company owns gas transmission and distribution mains and other gas lines, compressor stations and facilities, and storage rights, wells and gathering facilities in several fields in Niichigan. The Company and N!ichigan Gas Storage Company ("Stcrage Company"), a wholly-owned subsidiary of the Company, store a portion of their respective gas supplies in the warmer months of the year for use in the colder months of the year. For 1976 approximately 47% of the Company's gas supply was obtained from Trunkline Gas Company ("Trunkline"), a wholly-owned subsidiary of Panhandle,21% from Panhandle Eastern Pipe Line Company (" Panhandle") through Storage Company.14% from Alichigan fields and 18% from the N!arysville Gas Reforming Plant. Gas is furnished by Trunkline to the Company pursuant to a contract providing for the delivery of approximately 255 billion cubic feet of natural gas per year. Storage Company presently has a contract with Panhandle providing for the delivery of 92 billion cubic feet of gas per year. Substantially all the gas purchased from Panhandle by Storage Company is, in turn, sold by Storage Company to the Company. Since 1971 the Company and Storage Company have experienced curtailments from their respective pipeline suppliers and are currently experiencing additional curtailments which are expected to continue for an indefinite period. These curtailments aggregated approximately 123 billion cubic feet of gas (35% , of contract entitlement) in 1976 and are expected to be approximately 107 billion cubic feet (31% of contract entitlement) in 1977. The curtailments could increase to higher levels in the future. The curtailments hnposed by the pipeline companies are arTected by proceedings before the FPC, and orders issued in such proceedings determine the curtailment procedures and affect the severity of the curtailments placed into effect by the pipeline companies. See " Regulation-Federal Power Commission" The peak-day transmission and distribution system capacity, assuming availability of adequate gas supply, is in excess of 2,800 million cubic feet. The maximum daily sendout of natural gas for the Company through January 31,1977 was 2,346 million cubic feet on Jar,aary 17,1977. In recent years, Panhandle and Trunkline have applied to the FPC for several increases in their wholesale gas rates. Some of these increases have been approved and the remainder are pending before the FPC for approval. If the pending increases are approved, the cost of gas purchased by Storage Company from Panhandle would increase approximately $10,500.000 on an annual basis and the cost of gas purchased by the Company from Trunkline would increase approximately $8,900.000 on an annual basis. Any increase in such wholesale rates to Storage Company would be passed on to the Company under Storage Company's cost of service rates approved by the FPC. The Company expects to recover substantially all of any such additional expense incurred by reason of such proceedings through the operation of cost of gas adjustment clauses cantained in its retail rate schedules for gas service. In July 1976 the FPC issued an order authorizing interstate pipeline suppliers. including Panhandie and Trankline, and the producers from whom they purchase gas to file revised taritTs reflecting increased uniform natural gas rates, effective July 27,1976, for gas dedicated to interstate commerce on or after January 1,1973. An August 1976 order of the IJnited States Court of Appeals for the District of Columbia Circuit permits the tariffs to be filed subject to refund of any portion of the new rates subsequently held to be unlawful. la September 1976 Panhandle and Trunkline filed revised tariffs with tlie FPC retlecting such increased prices paid to producers. In October 1976 the FPC issued an order directing that gas fum certain recompleted wells would not qualify for the higher rates prescribed by its July 1976 order and otherwise reducing the price increase authorized by the July 1976 order for certain gas. The FPC's October 1976 order directed that Panhandle and Trunkline file revised taritTs retlecting the revised policy embodied therein on or before November 24,1976 to become effective December 1,1976 Fursuant to these revised tariffs, on December 1,1976 the cost of gas purchased by Storage Company from Panhandle increased by the annual amount of approximately $9,900.000 plus a surcharge in the amount of appro.~imately $3,500,000 to be spread over the 12-month period commencing on that same date: and the 16
i~ I . cost of gas purchased by the Company from Trunkline increased by the annual amount of approximately u $43,000,000 plus a surcharge in the amount of approximately $14,000,000 to be spread over a 12-month period commencing on that same date. The Company expects to recover substantially a!! of any additional expense resulting from these proceedings through the operation of its cost of gas adjustment clauses. As a consequence of the national gas shortage and in order to protect service to its existing customers and to limit new customer requirements to the gas supply available, the Company has been following a gas allocation program authorized by the AIPSC. Under such program, the Company is currently issuing permits for use of gas only for new re<idential uses. The Company is unable to predict whether it will be required in the future to cease adding any new customers of any class of service or to curtail gas service to its existing firm customers. Such actions are dependent upon the extent of future curtailments on the part of th,; pipeline suppliers referred to above, and upon the continued receipt of feedstock for the hlarysville Gas Reforming Plant and the receipt of additional natural gas supplies from the sources of supply hereinafter described. The 51PSC has approved a curtailment program for existing firm gas customers, to be invoked ifit becomes necessary. The Company has initiated several programs to provide it with additional supplies of gas. The
. Company is engaged in a gas exploration program in the southern part of the Lower Peninsula of hiichigan at an estimated cost of $10.300,000 for development and exploration in the 1977-1981 period.
Since 1963 approximately $5,700,000 has been invested in lease holdings not yet determined to be productive. The Company owns all or part of the working interest in 58 producing oil or gas wells, and 2 wells soon to be placed on production in several fields in the southern part of the Lower Peninsula of Niichigan. Northern hiichigan Exploration Company (" Northern"), a wholly-owned subsidiary of the Company, has carried on a gas exploration program in the northern part of the Lower Peninsula of Niichigan for the past several years, and has varying interests in oil and gas leases on lands covering approximately 463,000 acres in that area. Such leases authorize exploration for oil and gas and provide for landowners' royalties. Since 1967 approxim ately $14,500,000 has been invested in lease holdings not yet determined to be productive. Northern own; all or a part of the working interest in 84 oil or gas wells in
) several fields in northern Niichigan. Further drilling and development will be required in some of the v/
fields in which these wells are located, and additional exploration is planned in northern hiichigan at an estimated cost of $29,900,000 for the 1977-1981 period. Northern is also participating with others in the exploration and development of 49,100 acres in offshore Louisiana in 11 tracts and Northern's net participation therein is 5,531 acres. Since 1970 approximately $10,300.000 has been invested in orishore Louisiana on acquisition and evaluation of tracts not yet determined to be productive, and an additional estimated 5726,000 for exploration and
~
development will be incurred in the 1977-1981 period. Four production platforms have been set on three of these tracts. Production has commenced from three of the developed platforms. Production equipment is being installed on the faurth platform. The United States Geological Survey has proposed a Unitization Agreement pertaining to certain natural gas production in Vermilion Blocks 320 and 321, Offshore Gulf Coast. Under the proposed Unitization Agreement a group in which Northern is participating would be entitled to only 31.86% of production, retroactive to November 14,1975. Because the group has produced and is producing more than 31.86% of the gas produced, the effect of the proposal would be to create a contingent liability on Northern's part of approximately 5700,000 as of hlarch 1,1977 and the liability could increase by approximately 550,000 per month until it is finally determined whether the percentage of production assigned to the group is as large as it should be and whether the United States Geological Survey has the power to impose this unitization. The group has appealed to tFe Director of the United States Geological Survey. In June 1974 Northern applied to the FPC for authorization to sell and arrange for the transportation of up to 40 million cubic feet of gas per day to the Company from these three tracts. See " Regulation-Federal Power Commission" Northern is participating with others in the exploration of approximately 257,000 acres on various prospects in Texas, California, and Louisiana. In addition, under an exploratory agreement entered into
- with other operators, Northern has a right to earn a 20% interest in a petroleum concession in the Kingdom of Tonga.
17
The Company's geologists and petroleum engineers estimated, as of January 1,1977, that Northern held working interests which amount to approximately 8 million barrels of proven oil reserves as well as approximately 92 billion cubic feet of proven gas reserves. In 1976 the net income of Northern provided 6.4% of the net income of the Company. Reference is made to Note 4 to Financial Statements for fu ther information relating to Northern. No reports have been filed with any regulatory agencies which include total oil or gas reserves. The Company estimates that in 1977 net production of Northern will consist of approximately 1,350,000 barrels of oil and approximately 20,000,000 Nicf of gas. For the years 1972 through 1976 net oil and gas production of Northern is shown in the following table: 1976 1975 1974 t973 1971 Oil-Barrels.. 1,337,000 -1,I69,000 1,020,000 640,000 340.000 Gas-Nicf - 16,984,000 11,338,000 4.817,000 2,815,000 1,384,000 The Company has gas purchase contracts with several producers, including Northern,in the northern hiichigan area and has placed in service pipelines to transport gas purchased in this area to its integrated gas transmission system. The Company is currently receiving approximately 95 million cubic feet of natural gas per day from this northern hiichigan area, including approximately 30 million cubic feet per day from Northern. The Company is also receiving approximately 20 million cubic feet per lay of gas from producers near hiason, hiichigan. In April 1974 the Company completed the construction of a gas reforming plant at Afarysville, hiichigan for converting natural gas liquids into gas. Such liquids are imported from Canada under a purchase agreement expiring in 1988, which provides for delivery to the Company of up to 50,000 barrels per day. The 51arysville Plant, which produced up to 235 million cubic feet of gas per day in 1975, had an average production rate in 1975 of approximately 183 million cubic feet of gas per calendar day. For 1976 the peak production rate was 230 million cubic feet per day and the Plant had an average production rate of approximately 162 million cubic feet per calendar day. The cost to the Company of such gas, due in large part to U.S. and Canadian governmental duties and taxes,is and will be substantially in excess of the cost of natural gas now received by the Company from interstate pipelines and .other sources and has resulted and will continue to result in a substantial increase in the cost of service to the Company's gas customers. The impact of the U.S. and Canadian governmental duties and taxes in future years is uncertain. Canadian export licenses and U. S. import licenses for the natural gas liquids are required to be renewed from time to time. The receipt of such licenses is not necessarily assured. The Canadian government announcement with respect to the curtailment of oil exports referred to under " Business-Electric Fuel Supply" also applies to the majority of the feedstock for the hfarysville Gas Reforming Plant. Natural gas liquids to be converted into gas by the reforming plant are included in the allocation regulations administered by the FEA. Although the FEA has plamd the reforming plant within the first priority for allocation of natural gas liquids, the adjusted base period volume upon which daily allocations are based is 27,306 barrels per day as opposed to the 36,780 barrels per day needed by that facility. Because a significant portion of the Company's gas supply comes from the reforming plant if , the Company were unable to obtain feedstock for that plant due to reduction of Canadian exports or lack of an adequate FEA assignment order, the ability of the Company to serve its present natural gas customers could be substantially adversely affected and there could be a substantial adverse errect on the earnings of the Company. The Company has petitioned the FEA for allocation authorizations to cover the volumes of natural gas liquids under contract to be imported from Canada as well as additional smaller quantities bemg purchased by the Company in Afichigan. This petition is the subject of pending proceedings before the FEA. See " Regulation-Federal Energy Administration Employees The Company has approximately 10,300 employees, of whom about 4.300 operating, maintenance and construction employees are represented by the Utility Workers Union of Amenca, AFL-CIO. The current three year agreement between the Company and the Union expires September I,1977 18
T L( /~f* REGULATION J % ): Compliance with Environmental Requirements
~
- .The Company and its subsidiaries, Northern, Storage Company and Plateau, are subject to regulation with regard to environmental quality, including air and water quality zonings and other matters, by various
' Federal State and local authorities.JThe Company and its subsidiaries are attempting to insure that their' facilities meet applicable environmental regulations and standards. However,it is not presently possible to -
- forecast the ultimate effect of environmental quality regulations upon the existing and proposed facilities and operations of the Company and its subsidiaries.. Moreover, developments in these and other areas may require the Company or its subsidiaries to modify, supplement, replace or cease operating existing -
equipment and facilities, and may delay or impede construction and operation of new facilities, at costs which could be substantial.- s For many years the Company has followed an environmental protection program which has included reforestation along' Michigan rivers and the siting of electric generating plants and transmission lines with consideration for the impact of such facilities upon the environment. Iranore recent years the program has included installation of electrostatic precipitators to remove particulates from smoke emissions at electric generating plants and conversion of electric generating units to burn cleaner fuels. The program through 1980' includes, among other things, installation of new precipitators and adding new controls and
~
modifying previously installed precipitators at existing plants; utilization of coal with low sulfur content; l use of oil instead of coal; and construction of ponds or towers to cool water at new generating plants before it is returned to its source. The Company estimates that it may be required to make capital expenditures of ~ approximately $516,000,000 during the five years 1977-1981 for environmental protection, including about
$106,000,000 in 1977 and $148,000,000 in 1978.
1 Regulation promulgated under the Federal Clean Air Act, as amended, by EPA in August 1973 required, unless other measures are approved by EPA, that various steps be taken by the Company to
\ reduce emissions of sulfur dioxide at the J. H. Campbell Plant, Units I and 2; the D. E. Karn Plant, Units I and 2; the B. C. Cobb Plant; and the J. C. Weadock Plant, Units 7 and 8. Such generating facilities have
& an aggregate generating capability of over 2,000 megawatts. Specifically, the regulations required that the . Company should have notified EPA no later than October 1,1973 ofits intention to either (i) utilize fuel with a sulfur content of not more than 1% percent or (ii) install stack gas desulfurization equipment to reduce emisdons to an equivalent amount, not later than July 1,1975. The regulations further required
-that the Company notify EPA not later than January 31,1974 ofits intention to either (i) utilize fuel with a s'lfur u content of not more than 1 percent or (ii) install stack ~ gas desulfurizadon equipment to reduce
+ emissions to an equivalent amount, not later than July 1,1978. Dates were also specified in the regulations for various increments of progress to be met in achieving the lowered sulfur dioxide emissions by July 1, 1975 and July 1,1978. The Company believed that adequate amounts oflow sulfur fuel cannot be secured i _ to permit conversion of such plants to low sulfur fuel by July 1,1978. Moreover, the Company believed that stack gas desulfurization techn' ology was not adequately developed to assure that any such equipment > would operate by July 1978 with sufficient reliability to assure. satisfactory operation of its plants.- In September 1973 the Company instituted suit in the U. S.' Court of Appeals for the Sixth Circuit against EPA fo'r review of the regulations which would require the Company to take immediate steps toward the reduction of sulfur dioxide emissions at the generating plants mentioned above. A stay of the regulations .~ was issued by the Court.: The matter is pending before the Court.'
! The Company has entered into performance contracts (" compliance schedules") with the Michigan Air Pollution Control Commission regarding the four plants referred to in the preceding paragraph; under which the Company was required to submit to the Commission by January 1,1977, sulfur dioxide' control
. strategies and time schedules for' implementing the control strategies not later than January 1,1980. The
. control strategy and time schedule submitted for the D. E. Karn Plant,' Units 1 & 2 provides for the burning oflow sulfur coal by January 1,1980. In submitting control strategies and time schedules for the
~ l J. H. Campbell Units ! & 2. B. C. Cobb Plant and J. C. Weadock Plant Units 7 & 8, the Company sought a i five year extension beyond January 1,.1980 by which the required reductions in sulfur dioxide emissions
, M) , w
, r > ---
must be achieved .he Company is unable to predict whether the requested exten-ion will be granted. If the requested extension is not granted, it may be possible to secure by 1980 sumcient quantities oflow sulfur coal to meet the burn requirements of these units. The cost of such coal would be substantial and its burning may require modifications to particulate emission control devices. The compliance schedules also require the Company to monitor air quality in the vicinity of the four plants and to periodically report the results thereof to the Commission. Should the data secured by such monitoring at any time fail to substantiate that emissions from such plants are not causing or contributing to ambient levels of sulfur dioxide in excess of applicable air quality standards, the compliance schedules provide that the Company must then submit to the Commission sulfur dioxide control strategies and time schedules for the implementation thereof as expeditiously as practicable. The compliance schedules were submitted to EPA for approval, and in September 1974 EPA issued a notice approving the compliance schedule for control of sulfur dioxide at the J. H. Campbell Plant. EPA has not yet taken omcial action with regard to the compliance schedules for sulfur dioxide at the D. E. Karn, B. C. Cobb and J. C. Weadock Plants. As a result of EPA's approval of the Campbell Plant compliance schedule, the EPA sulfur dioxide regulations no longer apply to that plant. Similarly, should EPA's approval be secured for the remaining compliance schedules, such schedules will replace the regulations as regards the other affected plants. The Company's existing units either comply, or are being modified to comply, with applicable particulate emission standards. In December 1974 and June 1975, EPA issued regulations establishing a mechanism for " prevention of significant air quality deterioration"in areas where air pollution levels of sulfur dioxide and particulate matter are below the national ambient air quality standards. In December 1976, EPA issued an interpretive ruling which sets forth the conditions under which new or expanded stationary air pollution sources may be constructed in areas in which national ambient air quality standards have not been achiesed. In August 1976, a petition was filed with EPA which asked the agency to revise its sulfur dioxide emission standards for new or modified coal-fired power plants. The revision sought by the petition would require a 90 percent reduction in sulfur dioxide emissions from such plants. The Company is unable at this time to predict the effect of these actions on its future operations. In 1973, EPA delegated to the State of Michigan responsibility for processing applications and issuing National Pollutant Discharge Eliminadon Syste n (" NPDES") permits under the Federal Water Pollution Control Act, as amended, and applicable standards. With respect to existing facilities and plants, the Federal law requires achievement of emuent limitations that necessitate the application of the "best practicable control technology currently available" by July 1,1977 and the "best available technology economically achievable" by July 1,1983. With respect to new steam electric power plants, standards of performance established pursuant to the Federal law require achievement of emuent limitations that necessitate the application of the "best available demonstrated control technology." The standards for cooling water intake structures are also required to rerlect the "best technology availaisle for minimizing adverse environmental impact." NPDES permits for all major steam electric generating facilities of the Company, and the Ludington Pumped Storage Plant, have been issued by the State of Michigan. The permits restrict or will restnct the discharges from Company facilities pursuant to State and Federal water quality standards and Federal emuent guidelines. However, for certain emuent limitations. the steam generating plant permits, and a permit for a major gas compressor station of Storage Company, impose study requirements and all of the permits except the Ludington permit allow demonstrations to show that existing restrictions are adequate or additional restrictions are onnecessary. Inasmuch as the extent and effect of restrictions upon the operation of Company facilities will depend in significant measure upon the outcome of the demonstration studies required or permitted by the NPDES permits, the Company is unable to forecast at this time the ultimate effects upon Company facilities of the requirements under the Federal Water Pollution Control Act, as amended, and State law. However, such effects upon the Company's operating expenses and the operation of its facilities could be material. The Staff of the Michigan Water Resources Commission ("MWRC") is of the opinion, based on demonstration studies, 20
2?:\ ~n n-.: , -m 3l
~~ -
+ l ' M[ W9i f%- K Y : v' ' ~ ' ' h o 4, .. s 4, W.4.. . m a
~
,g , 7: ' y
,,'g 1
hy
}
2 v s , Ue
" c 1 K , :
ma . ' E thaithe existing' codling lwaterlintakistructuresL at the'D. ES Kam Plant,'J. C. W'eadock Plant, J. H.' MQ %, z
.~
iCampbell Plant-and J; RpWhiting Plant.doLnot reflect. the,"best technologyf available for minimizing '
- J adverse environmental impact." = The' efects'of these findings on the operating expenses and operations of L '
[7 ~
'E these fadilities,are presently undefined but could be material.iThe existing cooling water intakes at the Big 1 TRock Nuclear. Plant and; Palisades Nuclear Plant in the' opinion of the Staf, reAcct the "best technology = ~
P'
- Lavailableifor minimizing adversefenvironmental impact'.' Additional demonstration studies are. being 2 p reviewed by'the MWRC Stas.; Applications for NPDES permits for some of the Company's hydroelectric '1 f~
gen 4 rating facilities have not yet'been acted upo_n.1 ,rc
, y, ~
. In Novemberil975,' EPA [issuedIregulationsL under theTFederal Water Pcilution Control Act '
(Amendments of:19721requiringicach state tofdevelop and implement. a water quality management ' program,' incorporating =an antidegradation policy. J The' Company is presently ur.able to forecast the - ultimate efect that these regulations ~may have upon its operations.. Parties other than the Company have ~ "
. challengeo these regulations in the federal courts.
s- _
% .'Mich'igan Public Service Commission .
s The Company is subject to the jurisdiction o t ef h MPSC, which has general power of supervision and L ; regulation of public utilities in-Michigan:wititirespect to rates, accounting, services, certai n fauities, ascertainment of values, the issuance of securities, and various other matters. In the opinion of the General : Counsel for the Company, Storage Company, Northern and Plateau are not public utilities under the laws l l of Michigan. p - Litigation islpending'in the Circuit Court which includes, among other things, a claim. for refund to p customers amountirig to approximately $7,763,000 plus interest charges with respect to electric rates placed 4 in efect in October 1969 by court order but not approved by the MPSC until April 1970;- !o
. In November'1973 'the MPSC authorized interim electric and gas rate increases. In December 1973 1 the Attorney General of Michigan (" Attorney General") appealed the interim rate orders tolthe Circuit -
Courtincluding a request for a temporary 1 injunction staying their efectiveness, which request has not been ~ acted upon.T In January 1974 the MPSC authorized increases in the Company's electric and gas ' rates of :
, $31,000,000 and $46,600,000,2respectively, on an annual basis, In Novembsr 1974 the MPSC issued'an order as a result'or a rehearing with respect to the gas rate increase, the principal efect of which was to m - assign t'o commercial and industrial customers all capital, operation and maintenance costs associated with 1the Marysville Gas Reforming Plant, resulting in a reduction'or ap' proximately $23,000,000 in residential ~
~ '
i revenue requirements hnd a corresponding irm. ease in commercial and industrial revenue requirements. In ~
- December 1974 an iddustrial customer that it.tervened in the proceeding appealed the rehearing order to l the Circuit Court and requested it to re-establish the rates in efect prior to the November 1974 order and ~
l
~
i {to direct refund of any unlawful ratei collected from the intervenor by'the' Company pursuant'to the N ' interim orderi ?In~ December)19761 t l r Circuit Court amtmed'the actions taken by thi-MPSC in its
~
' . November 1974 order? Also in December' 1976 the industrial customer filed a claim of appeal respecting the Circuit Court's amtmation with the Michigan Court of Appeals.
- 1
~
M , a tin Septersb'er 1974 the MPSC ' authorized an interim increase in electric rates of $27,624,000 on an
- annual basis;Tandlin4 JanuaryEl975,Xthe MPSCJ authorized ia further increase in electric rates of
- Lapproxima.;ly $38,600,000 oh a_n annual basis over and above the interim increase previously approved. ,
p EinLi ts January fl975; order.fthe MPSC(alsoiauthorized: adjustment clauses providing. for automatic - ,
*y Jc adjustmeht of theLCompany's electric and. ga's billings for certain increases or decreases in fuel cost and cost
~
~
9e tof gas sold.(These clauses permitted recovery of substantially"all of fossil fuel cost increases after billing j!ags up to 60 days in the case of ele'ctric service and increases in cost of gas sold after billing lags up to 30 '
# ;l
,; idays.iri.thEcase of gas service.iIn its order, the MPSC also modified the fuel cost adjustment clauses in thel
~
I iCompiny's c!ectric rate'slto reflect changes in~ cost _s of nuclear fuel.EThe Attorney General and the UAW-
<W
; CAP h' ave appealed the January 1975 ~ order of the MPSC. to the Circuit Court and ha've requested it to i restrain and enjoin ~the' increase in electric rates during the pendency of the htaauon. No action has Ma
- l t
i
~
ttaken by the Circuit Courtiwith respect to such request. l q d. A , , y ,
'D M il C~ 2 M- -
21-
.?
e Ij. : *
?$ - ,
f)1
+
r :- 7-; x h ; ' - $ , m y c& % - --j_ o r - 4
- \
s "*: p;l9 Q u +
~
s- i , ,g. 3.y.g(h.A g N M
%g , m.. D; ,
1 -
- s 5w+1 pp , g3 _ . ,
- - ~, ,
1
. n,.
,,~ _,nu. u , __ __,
In July 1974 the Company filed an application with the h1PSC requesting authority to amend the fuel adjustment clauses in the Company's electric rate schedules to reflect, among other things, changes in purchased and interchange power costs. In July 1975 the NIPSC issued an order remanding and consolidating the proceedings for rehearing with the Company's then pending electric rate proceeding (see below) and further ordering that the fuel cost adjustment clauses approved in the January 1975 order referred to above be retained pending such rehearing. In August 1975 the Attorney General filed a Complaint and hiotion for Temporary Injunction in the Circuit Court asking, among other things, that the h1PSC's order of July 1975 be enjoined, vacated and set aside. The Complaint and hiotion alleged that the Company had improperly collected more than $12,789,000 of fuel adjustment clause revenue ( through the application of the adjustments to all kilowatt-hours sold whether generated or purchased) and had unnecessarily renegotiate 1 fong-term coal purchase contracts resuldng in increases in the cost of coal over and above that provided for eriginally in such contracts. The Complaint and Afotion asked that the hf PSC be enjoined and restrained from continuing to permit the Company a recover under its fuel cost adjustment clauses (i) more fuel clause revenues than the Company incurs in increased fuel cost expenses and (ii) higher fuel costs incurred as a resuit of the renegotiated coal purchase contracts. The Complaint and Nfotion fu 'her asked that the Circuit Court order immediate refunds by the Company to its customers of at least $12,789,000. In September 1975 the Company filed a motion for accelerated judgment respecting the Attorney General's Complaint and Afotion. In February 1976 the Attorney General amended such Complaint and hiotion to funher allege: (i) that during the period January 1974 through November 1975 the Company's fuel cost adjustrnent clauses operated so as to raise its electric rates
$103,000,000 higher than the increased cost of fuel burned by the Company, (ii) that during the period February 1975 through November 1975, the Company's fuel cost adjustment clauses operated so as to raise its electric rates $57,700,000 higher than the increased cost of fuel burned by the Company, and (iii) during the period February 1975 through November 1975 the Company's fuel cost adjustmer.t clauses operated so as to raise the Company's electric rates Si7.200,000 more than the sum of(a) the cost of fuel burned by the Company and (b) the esdmated cost of the fuel expense portion of power purchased by the Company from others. The amount of $103,000,000 mentioned in clause (i) of the preceding sentence was, as indicated in the Attorney General's amended Complaint and hiotion and the atlidavit attached -
thereto, taken from an h!PSC Staff report, which report has been corrected by the Staff to state that the
$103,000,000 was in error and should have been stated to be $12,881,000. It is the Company's opinion that the amounts described in clauses (ii) and (iii) of the same sentence would,if calculated on a basis consistent with the correction of the amount shown in clause (i), be $9,893,000 and $4,739,000, respectively. In early 1977 the Circuit Court denied the Attorney General's requests forimmediate refund and injunctive relief and granted the Company's motion for accelerated judgment. In February 1977 the Attorney General filed motions for leave to amend his complaint and for rehearing of the January 1977 opinion, to which the Company responded. In Alarch 1977 the Circuit Court entered an order denying the Attorney General's motions for leave to amend his complaint and for rehearing on the grounds that such i
matters were not properly before the court. The Attorney General filed a claim of appeal respecting the Circuit Court's February 1977 order with the Afichigan Court of Appeals. The appeal period has not yet run with respect to the Circuit Court's hfarch 1977 order. In April 1976 the A1PSC issued an order authorizing the Company to increase its rates for retail electric se vice by the amount of $33,977,000 annually. In the order, the htPSC stated that the Company's existing fuel cost adjustment clauses have not re ulted in overrecoveries of cost by the Company, authorized a purchased and interchange power clause which operates to pass through 90% of monthly increases and decreases in certain purchased and aterchange power costs (after monthly notice and headng) and amended the Company's existing fuel cost adjustment clauses so as to permit only 90% of increases and decreases in monthly fuel costs to be automatically passed along to its customers. The h1PSC also ordered semiannual hearings, which would result in refunds to customers of amounts collected through the operation of the two clauses in excess of 90% of the amounts actually expended for fuel and purchased and interchange power over and above the levels reflected in the basing points in the ciauses. In Afay 1976 the Company and the Attorney General appealed the April 1976 order to the Circuit Court. The Company's appeal requested the Coun to require the A1PSC to authorize an additional rate increase of approximately S.il,600,000; to order the A1PSC to place approximately $14,800,000 of the approxi-22
E qQ ._
. additional rate increase in effect immediately; and to modify the semiannual review mately S41,600,000 1(' '") procedure for fuel costs and purchased and interchange power adjustments so that the review procedure would allow correction of underrecoveries of costs as well as overrecoveries of costs. The Attorney General requested the Court in his appeal to immediately enjoin the hearing procedure established under the purchased and interchange power provision approved by the MPSC: to immediately ' enjoin any purchased pow'er adjustment charges; to issue a permanent injunction, after hearing on the merits, ordering refunds of all amounts collected in excess of the rates in effect prior to the April 1976 order and enjoining the MPSC ,
from permitting the Company to collect any rates pursuant to said order; and to issue a permanent injunction directing the MPSC to conduct an investigation into overcollections under the fuel adjustment
- clause and to order refunds of excess collections of fuel costs under the clause. In June 1976 the Court denied the Company's requ'est that the~ MPSC be ordered.to place-approximately $14,800,000 of the ~
approximately $41,600,000 additional rate increase in effect immediately. The remainder of the appeals
~
are pending. In orders issued following the first several of the monthly purchased and interchange power hearings provided for in the April 1976 order, the MPSC authorized purchased and interchange power expense adjustments in the Company's rates, after reducing such expense to reflect the cost of pcwer purchased to replace that which would have been generatedo' y certain far.ilities out of service for periods in excess of 90 days. The Company and the Attorney General appealed the first such monthl j order to the Circuit Court and the Attorney General has appealed several of the subsequent monthly orders. In June 1975 the MPSC authorized a partial and interim increase in the Company's gas rates of
$29,194,000 on an annual basis. In July.1975 an industrial intervenor in the proceeding appealed the interim rate order to the Circuit Court, requesting that the MPSC be directed to reestablish the gas rates which had been in effect prior to such interim rate order and that the Company be directed to refund any increase in gas rates paid b; .e intervenor pursuant to the interim order. In March 1976 the MPSC issued an order in the proceeding deciding some contested matters and remanding' others for the taking of additional testimony. The remanded proceeding was limited to questions of (i) the amount of the Company's investment in its synthetic natural gas plant near Marysville, Michigan, that should be included
^ (Q)" in its approved gas rate base (ii) the appropriate ratemaking treatment of 'he t new Michigan Single Bt ness Tax (iii) the appropriate design and operadon of the Company's purchased gas adjustment clause and (iv) the various contested rate design and charges issuesc in finally deciding all otherissues, the MPSC found that the Company was experiencing an annual revenue deficiency of $881,000 over and above the interim increase of $29,194,000 previously granted in this proceeding, but declined to authorize an increase in the Company's rates to offset the additional revenue deficiency. These interim rates were placed in effec
- under bond. In April 1976 the Company filed an appeal with the Circuit Court on the ,
! ' matters finally decided by the MPSC in its March 1976 order. In July 1976 the MPSC agreed to expand the remanded gas rate proceedings to consider the Company's request for additional gas rate reliefin an annual amount of $18,948,000 exclusive of the rate reliefinvolved in the remanded Marysville Plant issue
~
and over and above the interim increase of $29,194,000 previously granted. In view of the expansion of the remanded proceedings, the Company amended its appeal of the March order in September 1976 so as to limit the appeal to the single issue of rate of return on common equity ' In September 1976 the Circuit Court denied the Company's appeal, and in November 1976 the Company filed a claim of appeal with the Michigan Court of Appeals respecting such denial. In September 1976 the Company filed a motion in the-remanded gas rate proceedings requesting an additional partial and interim increase in its gas rates of not less than S24.483,000 on an annual basis. .In Ma.c' 1977 the MPSC issued an order authorizing an
; additional partial and interim increase in the Company % gas rates of $4,928,000 on an annual basis. These s interim rates also were placed in effect under bond.
In January 1977, the Company filed an application with the MPSC requesting authority to increase its
. rates for the sale of electricity approximately $164.200,000 on an annual basis, and requesting partial and .
-immediate electric rate relief in the annual amount of approximately $43,700,000. The application is pending before the MPSC.
- All of tr.- above calculations pertaining to amounts of rate relief granted or requested are based on the jq. test years governing the respective rate cases, and revenues actually realized depend upon actual unit sales
! }. of electricity and gas; y
23
,. - , . .- , . , y -...,--
In March 1976 the Lummus Company, the principal contractor involved in constructing the Marysville Plant, commenced suit against the Company in the United States District Court of New Jersey claiming damages of SI,800,000 for unpaid costs and fees allegedly owed to Lummus for work performed in connection with the plant. In Alay 1976 the Company filed counterclaims against Lummus in the amount of $5,000,000 in damages for breach of contract and for revenue losses of $10,000,000 annually beginning in June 1975 because the MPSC has disallowed the inclusion of certain Marysville Plant costs in the Company's rate base. In August 1974 the MPSC approved the sale to the Company, at a price of 87 cents per thousand cubic feet, of 12.2 billion cubic feet of gas by Michigan Consolidated Gas Company (" Consolidated"), a gas distribution company operating in Michigan. Subsequently, the Attorney General appealed the MPSC order to the Circuit Coun, requesting that the Company be restrained from charging its customers approximately $4,000,000 of the costs incurred in purchasing the gas. In April 1975 and January 1977 the MPSC authorized further sales of gas to the Company by Consolidated. Pursuant to said authorizations the Company purchased 2.6 billion cubic feet in 1975 at a price of 87 cents per thousand cubic feet, plus purchased gas adjustments allowed in Consolidated's tariffs and 10.0 billion cubic feet in 1977, at a price of 117.1 cents per Mcf plus purchased gas adjustment. In May 1975 the Attorney General appealed the MPSC's April 1975 order to the Circuit Court and in February 1977 the Attorney General appealed the HPSC's January 1977 order to the Circuit Court. Under the theory of the Attorney General, the Company's customers would have incurred excess charges of as much as $1,000,000 with respect to the sale authorized in 1975 and $3,700,000 with respect to the sale authorized in 1977. No action has been taken by the Circuit Court with respect to any of these appeals and the suits are pending. In May 1976 the Company submitted an application to the MPSC for approval of certain accounting and ratemaking treatment of costs which will be incurred in implementing an early retirement incentive program ("ERIP") for its employees in connection with a reorganization. of its work force. In its application, the Company requested authority, among other things, to include as a part of utility cost of service over a 5-year period, the one-time costs of approximately $14,000,000 associated with implementa-tion of the ERIP. In July 1976 the MPSC issued an order approving the accounting treatment of such costs proposed by the Company. The July 1976 order deferred to a later rate proceeding a decision as to the ratemaking treatment to be accorded the one-time costs associated with the ERIP, but indicated that the ratemaking treatment requested by the Company would be approved to the extent that savings resulting from the ERIP and ERIP's value to the overall reorganizationjustified such one-time costs. In the opinion of the Company's management, such savings and value will justify such one. time costs. There has been pending before the MPSC since November 1974 an application by the Company for authorization to pay an increased price of approximately 89e per Mcf for gas purchased pursuant to certain contracts with producers in the northern Michigan area. The price currently paid under such contracts is approximately 47e per Mcf. The MPSC has historically held that such price increases may be placed in effect only prospectively. In September 1976, one of the producers with which the Company has contracted to purchase gas filed an amended petition in the proceeding requesting among other things, that the MPSC approve such price increase retroactively, to January 1,1976. In February 1977 the MPSC issued an interim order in the proceeding authorizing a temporary increase in the price paid producers to 88.77c per Mcf, but subject to refund to t% wtent,if any, the MPSC ultimately determines in a final order in the proceeding. The interim order at: .horized the Company to pass such increased costs through to its customers pursuant to the cost of gas adjustment clause in the Company's tariffs. The interim order created a " locked-in" period to which the producer's claim for retroactive relief would apply. As of February 18, 1977, the end of this locked-in period, the cumulative increase in price for gas purchased from the producer, and other producers similarly situated, retroactive to January 1,1976 was approxi-mately $11,500,000. Federal Power Commission The FPC has jurisdiction over Storage Company and Northern as natural gas companies within the meaning of the Natural Gas Act, which jurisdiction relates, among other things, to the acquisition and operation of assets and facilities and to rates charged by Storage Company and certain of the rates charged by Northern. In instances of shortage of supply, the FPC has entered orders curtailing deliveries of natural 24
d.. i h ; gas transmitted by interstate pipelines to various users to amounts less than provided in the gas sales
- contract. Under certain circumstances, the FPC also has the power under the Natural Gas Act to modify
.[j'
' gas sales contracts'ofinterstate pipeline companies. The FPC has issued a policy statement favoring an 1end-use priority system for pipeline curtailments. The end-use priority system places residential and small
~
. commercial service in the highest priority and interruptible senice in the lowest priority. As natural gas companies under the Natural Gas Act, Panhandle, Trunkline and Storage Company are subject to the FPC's regulations. Trunkline and Panhandle (through Storage Company) provide the major portion of the Company's gas supply. The efect of the FPC regulations, present or future, upon the Company's gas supply and operations cannot be determined although such efect may be materially adverse.
In August 1975 the presiding Administrative Law Judge in the Panhandle curtailment proceeding issued an Initial Decision on a permanent curtailment plan for the Panhandle system. The plan provided that the amount 'of gas to which the Company (through Storage Company) and other Panhandle customers are entitled (after calculation of curtailments)'would be reduced to the extent that allowable Panhandle deliveries, when totaled with natural gas availaole to such customers from other sources, exceed the highest curtailment category then being served on'the Panhandle system. The efect of such a provision, under certain circumstances, would have been to deprive the Company of any deliveries of Panhandle gas through Storage Company. In February 1976 the FPC issued an order in the proceeding prescribing an interim curtailment plan for Panhandle. The plan was adopted on an interim basis because the FPC had not yet completed the environmental impact analysis required under the National Environmental Policy Act ("NEPA"). The February 1976 order directed Panhandle to file a revised gas curtailment plan embodying five curtailment categories based on end-use. The order also eliminated the
- alternate source condition contained in the cunailment plan proposed by the presiding Administrative Law Judge. In August 1976 the FPC issued an order denying a rehearing ofits February 1976 order. Certain intervenors have appealed the FPC's February 1976 and August 1976 orders to the courts. In March 1977, the presiding Administrative Law Judge issued an Initial Decision approving, after NEPA review, the same curtailment plan for Panhandle which had been approved by the FPC's February 1976 order.
rh In March 1976 the FPC issued an order in a Trunkline proceeding approving a permanent curtailment ( ) C/ plan (reflecting a settlement agreement among Trunkline's customers) which assigned equal weight to. end-use and to contract demand factors.. Thereafter,in March 1976 Trunkline tendered for filing with the FPC revised taris sheets reflecting the plan. Storage Company has not submit'ted any proposed curtailment plan to the FPC. Certain aspects of the Company's electric business are subject to regulation by the FPC, including compliance with the FPC's rules and regulations respecting accounting applicable to "public utilities" and
" licensees", the transmission of electric energy in interstate commerce and the rates and charges for the sale of such energy at wholesale, and 'the construct' ion, operation and ' maintenance of hydroelectric '
projects, as provided by the Federal Power Act.- The Company has accepted licenses authorizing the
. continued operationind maintenance of a number ofits constructed hydroelectric projects, which licenses
~ ~
expire in 1993 except for one license which expires in.1980.. The Company and Detroit Edison have accepted from the FPC a license extending to the year 2019 to' construct, operate and maintain the Ludington Pumped. Storage Plant.~ The Federal Power Act provides that if a new license for a - hydroelettric project is not issued to the original licensee upon expiration of the original license, a new
~
license may be issued to a new licensee, or the United States may take over the project upon paying severance damages,if any, and the amount of the original licensee's" net investment"in the project but not in v xss of the fair value thereof. _ An issue has been raised in litigation to which the Company is not a party as to the provisions of the prescribed systems of accounts relating to ,the allowance for funds used during construction (see
" Statement ofIncome" and'No;e (f) thereto)c Although the FPC,in classifying the item in its prescribed system of accounts as " miscellaneous non-operating income",~ indicated that it "is and always has been additional earnings which in fact enhance the boch value of a utility's assets and the book value of its
-capital shares", a claim has been asserted in the litigation that the allowance is not in fact income as generally'tinderstood but rather a projection of future eatnings not retlecting any actual yield on assets or l f - any revenue during any tiscal period and not in fact earned upon completion of construction. The E lix'i v
L 25
$ .r4 r
1 y g t y -
-+
Company is unable to predict the ultimate outcome of the litigation, if any, upon the Company, its accounting procedures, or the computation of earnings coverages under the Indenture and the Articles of Incorporation of the Company. In 1977 the FPC issued an Order, effective January 1,1977, revising its system of accounts which specifies a procedure for determining the maximum rate which can be used by the Company without prior FPC approval for computing the allowance. The February 1977 Order provides for a credit of the ponion of the allowance allocable to borrowed funds to amounts recorded as interest charges and limits amounts recorded as other income and deductions to the portion of the allowance allocable to other funds used in construc-ion. In August 1975 the FPC issued an order accepting the Company's revised rate tariffs increasing wholesale electric rates by $5,066,000 on an annual basis, suspended the rate increase for 30 days and authorized it to become effective in September 1975 subject to final FPC determination as to the reasonableness of such increase and also subject to possible refund. In March 1977 the FPC issued in order approving a settlement agreement submitted by the parties. The revised tariffs contained in the settlement agreement will produce a test-year revenue increase of $4,058,000. On March 31,1977 refunds totaling approximately $1,313,000, including interest at 9% per annum, were made to the Company's wholesale customers. The Company purchases electric energy at wholesale from Detroit Edison and resells it in the City of Pontiac, Michigan. In April 1976 the FPC approved a wholesale rate settlement agreement submitted by Detroit Edison, the Company and other panies to a Detroit Edison wholesale rate proceeding before the FPC. Pursuant to the terms of the settlement agreement, the amounts paid by the Company to Detroit Edison for electric energy for resale in Pontiac were increased by approximately S2,746,000 on an annual basis (based on a test year of 12 months ended December 1975). The agreement between Detroit Edison and the Company for the supply of electric energy to the Company at Pontiac expired in August 1976 and the parties are negotiating a new contract. In March 1977 Detroit Edison filed revised wholesale rate tariffs which would,if allowed to become etTective, increase the amount paid by the Company for electric energy for resale in the City of Pontiac by $5,853,000 on an annual basis. The matter is pei. Jing before the FPC. In June 1974 Nonhern filed an application with the FPC for authority to sell and arrange for the delivery to the Company of up to 40,000,000 cubic feet per day of natural gas to be produced from Northern's lehsehold interests in the Federal domain, offshore Louisiana. In June 1975 Northern was granted a certificate of public convenience and necessity to sell this gas supply to Trunkline. This cenificate would be cancelled in the event the FPC ultimately approves Northern's request to sell this gas supply to the Company. In September 1975 the presiding Administrative Law Judge issued an Initial Decision approving Northern's application to sell this gas supply to the Company. In January 1977 the FPC issued an order overruling the Initial Decision and denying Northern's application. In February 1977, the Company and an association of gas distribution companies nled petitions with the FPC asking that the FPC rehear the order. In March 1977 the FPC issued an order granting the petitions for rehearing. Should Northern ultimately fail to obtam the requested authorization to sell the gas in question to the Company, the gas would continue to be sold to Trunkline; and, as a direct and indirect customer of Trunkline, the Company would continue to receive approximately one-half of such gas. In July 1975 the FPC issued an order allowing the Company's joint application with Detroit Edison for a founh interconnection with Ontario-Hydro and to export electnc energy to Canada, but also ordering public hearing. Several municipalities have intervened, alleging adverse c'ntitrust implications.
- Nuclear Regulatory Commission Under the Atomic Energy Act of 1954 and the Energy Reorganization Act of 1974, the Company is subject to the jurisdiction of the United States Nuclear Regulatory Commission ("NRC"). formerly the regulatory arm of the United States Atomic Energy Commission FAEC"), with respect to the design, construction and operation of its nuclear power plants and with respect to certain other uses of nuclear materials.
In 1967 the AEC granted the Company a permit to construct the Palisades Nuclear Plant and thereafter authorized operation of the plant at successively higher power levels. Operation at full power was authorized in March 1973. The plant 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 generators, main condenser and other equipment. The Company commenced 26
s suit in the United States District Court for the Western District of Michigan against the following suppliers 7
4 i of components and services for the plant: Combustion Engineering, Inc.: Ingersoll-Rand Company; Wolverine Tube Division of Universal Oil Products Company: Bechtd Corporation; and Bechtel Company. The suit seeks specific performance of certain contractual . undertakings and at least
$300,000,000 in damages for defective components and services supplied for the plant. In October 1976 the Company entered into a settlement agreement pursuant to which the Company's claims against Ingersoll Rand Company and UOP, Inc. (formerly Universal Oil Products Company) were dismissed from the suit following payment to the Company of $13.500,000. In May 1977 the Company entered into a settlement agreement with Bechtel Corporation and Bechtel Company pursuant to which the Company's claims against Bechtel will be dismissed from the suit and the Company will receive approximately
$14,000,000 in cash and future services. The operating license issued by the AEC for the plant is provisional in nature and was scheduled to expire in March 1974, but has been automatically extended pending action on the Company's application for a full-term,40-year operating license. The matter is pending before the NRC. The plant is presently operating under restrictions in its license requiring shutdown for steam generator tube inspection within 15 calendar months after its startup in May 1976. In April 1977 the Company filed an application with the NRC requesting a five-month extension cf the Plant's current operating cycle. The NRC has published a notice that it is considering issuance cif the Amendment, and providing opportunity for a hearing to any person whose interest may be affected. To date, approximately 3,700 of the Plant's 17,000 steam generator tubes have been plugged because of damage from various forms of corrosion. Additional tube plugging and consequent reductions in the Plant's electrical output are possible. Although it does not know yet that such action will be necessary, the Company, for planning purposes,is assuming that the Plant will be taken out of service for major steam generator modifications when the Midland units are in commercial operation, which is presently scheduled to occur in 1981 and 1982. The effect of such further plugging, reductions and outage, if any, upon the Company's earnings and financial position cannot be predicted at this time. See Note 2 to Financial Statements.
In December 1973 the AEC announced new regulations relating to emergency core cooling synms. Under the new rules,it has been necessary to modify the Big Rock Point Plant at a cost of approximately ((>) $5,400,000, and it will be necessary to make minor equipment changes at the Palisades Nuclear Plant and to modify the design of the Mid land Plant (referred to below). The NRC has granted certain exemptions from the requirements fo, the Big Rock Point Plant, and has modified certain operating limitations at both the Palisades and Big Rock Point Plants. Neither plant has been derated because of the new requirements. The AEC issued construcdon permits for the Midland Plant in December 1972. Thereafter intervenors appealed the granting of the permits and in May 1973 an Atomic Safety and Licensing Appeal Board of the AEC affirmed the issuance of the construction permits, subject to conditions imposing several new reporting requirements with respect to quality assurance matters. In the summer of 1973 the intervenors instituted appeals to the U. S. Court of Appeals for the District of Columbia Circuit from the action of the AEC in granting the construction permits. In July 1976 the Court remanded the orders granting construction permits for the plant to the NRC for reconsideration of waste disposal and other unaddressed fuel cycle issues, energy conservation alternatives and other issues affecting the environmental cost-benefit analysis performed for the plant (taking into account changed circumstances regarding The Dow Chemical Company's need for process steam, and the intended continued operation of The Dow Chemical Company's fossil-fuel generating facilities) and also for clarification of the report on the plant issued tiy the AEC's Advisory Committee on Reactor Safeguards. The NRC ordered an Atomic Safety and Licensing Board ("ASLB") to be reconvened for the Midland Plant to consider these matters. A heanng commenced in November 1976 on the question of whether the construction permits should be continued, modified or <uspended pending the outcome of the reopened proceeding. In testimony given in the proceeding the Company estimated that a five-month suspension of the construction permits for Midland would result in a nine-month delay in commercial operation of the plant and add $336 million to the plant's capital and generating cost. A nine-month suspension would delay operation fifteen months and add $579 million to capital and generating cost. In February 1977 the U.S. Supreme Court agreed to review the Court of /.ppeals decision in response to the Company's petition. The Company has asked the NRC to stay the ASLB proceeding pending completion of the Supreme Court review. An Atomic Safety r3 and Licensing Appeal Board denied this request in April 1977. If the Company is not ultimately successful
~
~in the Midland proceeding. the erTect upon the Company's future power resources and financial position
( ) 27 L
)r-could be materially adverse. Construction work in progress includes $425,707,000 at December 31,1976 related to the Alidland Plant. See Note 2 to Financial Statements. Under the Atomic Energy Act, as amended, applications to construct commercial nuclear reactors are subject to review to determine whether the activities under the license would create or maintain a situation inconsistent with the Federal antitrust laws and the NRC is required to refer such applications to the Attorney General of the United States ("U.S. Attorney General") for his advice. In June 1971 the U.S. Attorney General advised the AEC that the granting of authorization to construct the Alidland Plant "may maintain a situation inconsistent with the antitrust laws" and recommended that the AEC conduct a hearing to determine w hether there is any factual basis to so fmd. A number of municipal electric systems and generating and transmission cooperatives intervened in the proceeding. The NRC is authorized to issue or refuse to issue any license applied for or to issue a license with such conditions as it deems ' appropriate, and ifit f nds there are adverse anti rust aspects involved in any license applications, it is also to consider, in determining whether a license shall be issued, such other factors as in its judgment it deems necessary to protect the public interest, including the need for power in the affected area. The U.S. Attorney General indicated an intention to seek conditions in any license for the Alidland Plant which would, among other things, require the Company to interconnect and share reserves with any utility engaged or proposing to engage in the generation of electric power, require the Company to engage in coordinated operations, development and electric plant construction with any such other electric utility, and to wheel power across the Company's transmission system. In July 1975 the ASLB issued an initial decision in the proceeding, finding that (i) the record did not disclose any scheme or conspiracy, the purpose or etTect of which is to create or maintain a situation inconsistent ,with the antitrust laws, (ii) the Company's activities under the Afidland Plant licenses are not a material element and significant factor in any scheme or conspiracy, the purpose or effect of which is to maintain a situation inconsistent with the antitrust laws, and (iii) no nexus exists between the Company's activities under the Afidland Plant licenses and any actual or alleged situation inconsistent with the antitrust laws. The ASLB authorized the NRC's Director of Regulation to continue, as issued, the Niidland Plant construction permits without the imposition of any antitrust restrictions. The Justice Department, the NRC Regulatory StatT and the intervening municipal electric systems and generating and transmission cooperatives have appealed the decision. In December 1972 the AEC amended the Big Rock Point Plant operating license to authorize the use of a full core loading of mixed-oxide nuclear fuel containing plutonium as well as uranium. The transition to the use of such fuel was planned to extend over a period of several years, with a few fuel assemblies having been installed in 1973 and with greater use of such fuel to occur in 1974 and later years. In Niarch 1973 an organization began suit in the United States District Court for the Western District of Niichigan to prevent the use of such mixed-oxide fuel at the Big Rock Point Plant. In April 1973 the AEC orTered an opportunity for public hearing on the December 1972 license amendment and the organization opposing the use of mixed-oxide fuel at the plant was granted the right to intervene and to have a public hearing. In June 1974 the Court ordered the lawsuit held in abeyance pending completion of the AEC proceeding. In Nfarch 1975 the NRC ordered the administrative hearing held in abeyance until its further order. The NRC is conducting a generic rulemaking hearing on the environmental effects of the use of mixed-oxide fuel, and the Company, with other utility companies, is a participant in the rulemaking. In April 1975 the Company petitioned the NRC for a declaratory order to clarify the current status and etrectiveness of the license amendment issued by the AEC in December 1972. In August 1975 the NRC issued an order stating that the amendment may not be utilized until NEPA statements have been issued and a hearing held. The procedure and schedule announced by the NRC in November 1975 for the generic rulemaking included provisions permitting interim licensing of various plutonium related facilities. The State of New , York and various environmental groups petitioned for review of the NRC order by the United States Court of Appeals for the Second Circuit and the Company and other utilities intervened in the Court proceeding. In Afay 1976 the Court upheld the proposed NRC procedures. but forbade the NRC to license commercial-scale uses of plutonium pending completion of the rulemaking. In Af arch 1977 the United States Supreme Court agreed to review the Court of Appeals decision. If the use of mixed-oxide fuel in the Company's nuclear generating plants is prohibited or delayed as a result of the foregoint proceedings, the Company's expense for nuclear fuel is likely to be substantially increased. 28
' g >
m- -
, }_ _g: J / - .4_ '
m
~
7 1 A'r- / u e . N < Under Ee Price-Anderson a'mendments to the Atomic EnergMet, the Company maintains private _ : insurance and agreements ofindemnity Nith the NRC to ' cover public liability for the consequences of i ~' I l nuclear incidents which might occur at the Company's nuclear ' power plants. Such nuclear insurance and -
. iindemnity coverage does not include coverage of the plant facilities themselves. To cover possible damage
- to these facilities, the Company maintains property damage insurance from Nuclear Mutual Limited, a
- - Bermuda mutual insurance company of which the Company is a member, in the maximum amount available from such insurer L which is presentiv $175,000,000,~ or the insurable value of the facility,-. ~
'whichever is.less. : Except for the Company's Big Rock' Point Plant, such' insurance does not equal in
_- amount th: sums invested or to be invested in the Company's nuclear plants. The Company is therefore a
~
self-insurer'foreany loss to its nuclear plant. facilities to the extent its investment in them- exceeds
$175.000,000 at any location, The Company regards this risk to be acceptable because of the very low
~
- probabilities of occurrence believed to be associated with incidents which could give rise to losses in excess -
of the insurance. - The Company believes that its practice in this regard is co'nsistent with that of other-utilities similarly situa'ed. t In a decision'not involving the Company, a Federal District Judge for the'
- Western District of North Carolina has found the $560,000,000 limitation on public liability arising from a .
nuclear incident contained in the Price-Anderson' amendments unconstitutional. -The Company under-4 stands that one of the parties in the case intends to appeal the decision to the United States Supreme Court. Federal Energy. Administration. The FEA was created by the Federa! Energy Administration Act of 1974. The FEA administers provisions of that Act, the Emergency Petroleum Allocation Act of 1973, as amended, the Energy Supply an'd Environmental Coordination Act of 1974, as amended, the Energy Policy and Conservation Act and the Energy Conservation and Production Act. The FEA is asserting jurisdiction with respect to the use and/or allocation of natural gas, natural gas liquids (" NGL"), coal, crude oil, residual fuel oil and refined - petroleum products produced in or imponed into the United States. For additional information see -
" Business-Electric Fuel Supply and Gas Service"
- In May 1975 the FEA issued an order and a modification thereof which was further' modified in -
December 1975, allocating NGL for use at the Marysville Reforming Plant as requested by the Company,
~
However, the FEA order conditioned the approved allocation of NGL upon certain requirements believed by the Company to be beyond the power of the FEA._ Accordingly, the Company has prosecuted various f appeals including appeals'in the United States District Court for the Eastern District of Michigan and the FEA Omce of Excdptions and Appeals.o A group of petrochemical manufacturers (" Petrochemical Energy Group"),' seeking'an order ' denying the allocation of feedstock, has'also prosecuted appeals before the Courts and the FEA Office of Exceptions and Appeals. Similarly,'a group of liquefied petroleum-gas) dealers (" National LP Ga's Association") has appealed to the FEA Office.of Exceptions and Appeals. In
! addition, General Motors Corporation has. intervened in the Company's appeal before the United States District Court for the Eastern District of Michigan and. appealed to the FEA Office of Exceptions and iAppeals in an~ effort to have conditions placed on the allocation of NGL which'would restrict the Company's sales of natural gas.
^
In March and April 1976.the United States District Court for the Eastern District of Michigan issued
~
. Opinions and Orders in which it found that the FEA has authority to allocate NGL but it has no authority -
to condition its allocation of NGL to the Company's Marysville facility'on the termination of any natural
; gas service't'o' customers of the Company or to require' the Company to notify specified groups of customers that their service "may be terminated" ? Accordingly, the FEa 'vas' enjoined from requiring such notice.
Nevertlys, the Court concluded that the FEA, when allocating ngl . has "the freedom to consider such factors as=the end use of the' synthetic natural gas produced from the NGL feedstocks, the nature and E extent.of state regulation.of the natural gas Lwith which' the synthetic natural gas is commingled, the
- adequacyof(the Company's) requests to the state agency for the incremental pricing of synthetic natural =
~
c - T gas. 'and (the Company's) sensitivity _to energy. management problems in m'a king commitments for new -
. _ , and additional natural gas service." 1In Aprd 1976 the FEA Otfice of Exceptions and Appeals,in response
~
_. - I ~ ito appeals, issued'an order generally modifying the FEA Decisions and Orders in Accordance with the iCourt Opinions and Orders. Min' June 1976 the Company submitted an " Application for Adjustment of Base
~
[N J J _ y x -
. 29 1
, T.-
L
.$ h a ,
- b. , , _.-
x + ,
, - . v -
t ,, [y Qg a p (.
- e ' ..'.
t
/
l Period Volume-SNG Feedstocks" to the FEA for the purpose of securing FEA's approval for the Company's indefmite continued use of feedstock beyond December 31, 1976, the termination of then existing FEA Decisions and Orders on the subject. Although a hearing on the application has been held the only ruling yet received has been a further modification of existing Decisions and Orders extending the allocatim. of feedstock through September 1977. The FEA stated that the modification was necessary in order to allow completion of an FEA environmental review and to allow the Company "to meet its natural gas obligations to high priority customers until a fmal evaluation can be made by FEA of the June i petition." The FEA in response to curtailed exports of" crude oil" from Canada has undertaken to allocate such exports. The term " crude oil" as used in the applicable allocation regulations includes the heavier NGL (pentanes and heavier hydrocarbons or " condensate") which make up approximately 70% of the feedstock for the Marysville Reforming Plant. Under the regulations both the Company's Karn and Weadock Plants' crude oil fired electric generating facilities at Essexville, Niichigan and the Alarysville Reforming Plant have been included within the first priority for Canadian crude cil allocation. However, the adjusted base volume upon which daily allocations are based is 13,872 barrels per day for the Karn and Weadock Plants and 27,306 barrels per day for the NIarysville facility as opposed to the 20,000 barrels per day and 36,780 barrels per day needed by those facilities. The reduction of crude oil deliveries to the Karn and Weadock Plants is being offset in the first half of 1977 with a different petroleum, and actual crude oil deliveries are expected to average 10,288 barrels per day during the first six months of 1977 pursuant to an FEA notice published on Af arch 17,1977. If the reduction in Canadian deliveries of oil is not modified or alternatives thereto are not found, the reduction in oil supplies could adversely affect the Company's electric generation in the last half of 1977. If the reduction of Canadian feedstock for the hf arysville Reforming Plant continues and substitute supplies are not made available, the reduction could have an adverse effect on the Company's ability to serve some ofits existing gas customers. Equal Employment Opportunity Commiuion In January 1972 the U. S. Equal Employment Opportunity Commission ("EEOC") charged the Company and the Utility Workers Union of America with violation of Title VII of the 1964 Civil Rights Act, alleging discrimination against Negroes and females in matters of hiring, promotion, training, compensation, membership, referral representation and other terms and conditions of employment. An investigation was conducted and an ex parte decision was rendered by the EEOC finding reasonable cause to believe that the Company discriminated against females and that the Union failed to equally represent l females. EEOC has proposed a conciliation agreement be negotiated with the Company as a means of 4 correcting the alleged discrimination, but no such agreement has yet been entered mto. l l 30 9
[' :; - .? :L; J.e , , t s 3 fD: OPERATING STATISTICS S(V/
!?/ ~ Year Ended December 31 1972 1973 1974fI) 1975(l) 1976(l)
Electric sandsof Energy) K=h : Generated.' Purchased and Sold (Thou-Generated-a'fter stauon loss and use: ,
. Fosal Fuel 17.379.239 17,360,718 17.604,024 17,771,385 ' '.7.232,137 Nuclear 2.125,281 . 2.834.049 - 415.840 2,718.287 3.091,326 Hydro 410.287 U22.871 1.898,680 I,923.430 1.861,455
/urchased (including interchange) 4,404.300 6,114,921 7,536.015 4.694.783 6.884, % 7 Less energy fo pumping ( lI.622 ) (l.380.519) (2.011.274) (2.034.609) - (l.982.761) '
Total Electric Energy' Generated and Pur.- . -
~ chased 24.307.485 26,352.040 25,445.285 25,079.276 - 27.087,324 Lost. unaccounted for and uied by Company . (2.229.011) 12.250.040) (2,093 470) (2.169,218) (2.163.991)
Total Energy Sold _ 22.078.474 24.102.000 23.351.315 22,910.058 '24.923,333 Electnc Sales (Thousands of Kwh):.
- Residential . -
6,841,221 7,090,854 7.256.793 7.387,498 7,624,253 Commercial _ 4.699.559 s 5,160,245- 5.151.271 - 5,326,880 5.576.02I Industnal 9,575,919 10,773,530 9.853.911 9.295,515 10,796.384 Interdepartmental and Other 235.871 239.152 229.628 228.568 228.553
- Total Sales to Ulumate Consumers 21.352.570 23,263.781 22,491,603 22,238,454 24,225.211 Other Resale 725.904 838.219 859.712 67!.604 698,122 Total Electric Sales 22.078.474 24.102,000 23.351.345 22.910.058 24.923.333 ~
Gas Produced. Purchased and Sold ( l.000 cubic feet):
. Gas Produced and Purchased: l f( Marysville Reforming Plant 8,285.680 55.915,663 66.251.059 59.359.472 A )_ Michigan Fields. ..
- Trunkline Gas Company 18.105.307 231.889.872 26.266.614 193,031,460 34.632.831 160.628.605 42.334.663 152.165.583-46.011,215 154.558.639 Michigan Gas Storage Company 95.612.848 88.973.946 86.484.085 78.665.25I 73,524,860 Oiher purchases. -
21.989.179 10.207.856 2.599.028 - Total Gas Produced and Purchased - 346.408.027 338.546,879 347.869.040 342,015.584 333,454,186 Net ( to) from Storage ~ 'I5.550,365 1,644,445 ( 7.539.10 t ) (l8,425.329) ' I4.116.720 Compressor Smian and Other Use (2.455,853) (2.823.656) .(766,418) (106.750) 615,401 Lost, unaccounted for and used by Company - (6.239.695)~ (7.608.269) ( 5,9 l 9.899 ) (5.316.088) (7.099.386) Total Gas Sold . 353.262.844 329.759.399 333.643.622 318.167,417 341.086.921 Gas Sales ( l.000 cubic fdet n Residential-Home Heating 150,602.418 - 136.323.023 143.597.553 140,172.064 i S3,647,184 Other Residential 3.313,156 3,016,273 2,723.682 2,638.926 2,616.807 Industnal and Commercial- 187.916.368 183.124.071 180,012,128 167.934.003 178.577.638 Interdepartmental I l.430.902 7.296,032 7.310,259 7.422.424 ~ 6.245.292 Total Sales to Ulumate Consumers 353.262,844 329.759.399 333,643.622 3i8.167,417 341.086.921 Resa!e.-. .o - - - - - Total Gas Sales 353.262.844 - 329,759.399 3h,443.622 318.167.417 341.086.921
' Sales of Steam ( l.000 pounds) -682.412 655.895 711.602 759.577 743.858 '
' (l') lacludes unbilled sales, see Note t a) to Statement of Income.
. .G . _
d b , 3, A
.] g 4
-5 -- ' ; -
l l OPERATING STATISTICS Year Fnded December 31 1972 1973 1914(I) 1975(I) 1976(I) Cost of Elestns Energy Generated and Purch.ised-Genera ted .. $116.527.291 $133.170,016 $ 212.831.366 $ 296.967.411
$ 328.042.050 Purchacd (including nterchange) 56.662.305 70.005.649 143.393.750 90.891.29s 127.463.528 Other Power Supply Espenses.. 4.493.910 2.182.207 2.032.748 6.976.269 2.442.103 Total Cost of Electne Energy Generated and Purchased.. $177.683.506 $205.35 7.872 $ 358.257.864 $ 394.834.948 $ 457.947.681 Average Fuel Cost per Kwh Generated ( mills ) 43 5 22 9.55 12. I h I3. I I Cost o(Gas Sold.
Gas Produced and Purchased: Whigan Facids... $ 6.238.777 5 11.183.615 15.502.104 $ 33.5ko.197
$ $ 43.655.220 Mar >uille Reforming Plant -
13.387.838 155.129.305 201.134.499 204.107.036 Trunkline Gas Company. . . , . . . . 100.583.943 93,418.396 90.794.471 121.496.973 143.896.380 Michigan Gas Storage Company 47,502.774 47.746.032 52.753.074 57.253.267 65.756,560 Other Purchases.. - 8.538.992 3.009.792 17.793 _.924 Total Cost of Gas Produced and Pur-chased .. $154.325.494 $183.529.795 $ 322.717.946 $ 416.474.728 $ 457,415.196 Net t to) from Storage - 2.891.134 (6.130.724) (26.660.246) Compressor Stanon and Other Use (37.335.772) 6.951.484 (978.398) 12.213.618) (2.867.338) (3.643.592) (3.908.967) Total Cost of Gu Sold. .. ._ $ 156.238.230 $ $ 293.189.362 $ 375.495.364 g5.185.453 $ 460.457.713 Electrl: Revenue: Residenual.... $ 158.414.916 $ 179.025,208 $ 224.545.029 $ 273.903,354 $ 303,040.637 Cc-mmerdal 106 26R.572 125.615.891 149.625.752 194.046.598 221.646.947 Ind u stnal .. 131.708.824 162.914.439 204.719.205 252.777.507 310.264.540 Interdepanmental and other. 7.374.312 8.165.332 9.036.206 10.359.528 t i.0l 8.888 Total Sales to Ulumate Consumers. $403.766.62 4 $475.720.870 $ 587.94.192 5 731,086,987 $ 845.971.03 Other Resale.- 9.004.411 15.406.962 26.337.174 21.783.581 26.622.930 Total Electric Sales Revenue.. $412.771.035 5491.127.832 $ 614.283.366 $ 752.870.568 $ 872.593.942 Reserve for Refund.. I i 16.203 ) - - - - Net Total Electne Sales Resenue..- $412.654.832 $491.127.832 $ 614.283.366 $ 752.870.568 $ 872.593 Miscellaneous Electne Revenue .. 4.339.234 4.594.728 5.674.806 4 M70.498 5.874 Total Elettnc Revenue . ..-.. $416.994.066 $495.722.560 $ 619.958g 5 57.741.066
$ 878.468.083 Gas Revenue:
Residennal- Home Heaung $ 174.891.7 C $172.040.351 $ 236.729.294 $ 265.183.425 5 322.944.645 Other Readenual .. . . . . . . . . . . 6.211.764 5.947.518 6.633.759 6.974.875 7.345.497 Industnal and Commercial.~ 141.761.585 152.543.621 229.438.841 294.301.782 Inte rde pa rt mental .. 356.009.607 6.413.403 5.056.497 8.317.030 I I.tOO.405 11.257.222 Total sales to ttumate Co sumers.. $329.278.464 $335.587.957 $ 481.118.924 5 57s.060.487 $ 607,556.971 R esale .. - - - - - Total Gas Sales Revenue.. $ 329.278.464 $335.587.987 5 481,il8.924 5 578.060.487 Reserve for Refund.. $ 697.556.971 1266.955) - - - - Net Gas sales Revenue ... ... $329.011.509 $335.587.987 $ 481.118.924 5 578.06fA45 $ 697,556.971 Miscellaneous Gas Revenue.. 3.074.019 2,318.351 2.712.700 3.233.486 2.678.991 Total Gas Revenue.. 5332.035.528 $ 337.906.338 $ 4s3.831.624 5 581.293.973 $ 700.235.962 Steam Revenue.. $ l.373.540 $ l.324.748 $ l.592.906 $ 2.064.433 $ 2.547.801 Total Operaung Resenue.. ... $750.453.134 $834.953.686 $ 1.105.382.702 $ 1.341499.4'2 $ 1.581.251.846 Net Operaung Income before State and Federal in. come Tazes: Elect nc ., . . . . . .
$ 84 t27.334 $ 121.195.636 $ 78.614.435 $ 161.468.029 $ 202.926.174 G as . ... 5 68.953.534
$ 48.083.242 $ 63.191.693 5 65.460,845 5 86.158.803 Flectne Customers ( end or permd ) . ... 1.147.507 1.180.846 1.203.214 1.217.720 1,235.957 Gas Customers t end of penod ) .. 910.513 936.323 957.907 971.913 490.519 Steam Coromers (end of period) . . 125 121 115 121 117 Kilowatt hours per Reudenual Customer-Averaget 2 ) . 6.780 6.816 6.775 6.845 6.912 Average Cost per MCF-.m..-...
All Gas Produced and Purchased . 4455e 54 21e 92.77s 121.77e Average Revenue per MCF- 137.17e Total Gas Saleg 2 )... 93.14 101.77e 141.04e I?9.33c 200.92c (1) Includes unbilled revenue, see Note (a) to Statement of Income. (2 ) Excludes unbilled sales.
o y
'( [ DESCRIPTION OF NEW BONDS L/
. General The New Bonds are to'be issued under an Indenture dated as of September 1,1945, between the L Company and.Citibank, N.A., as Trustee, as supplemented by various supplemental indentures (the
" Mortgage"), copies of which are filed as exhibits to the registration statement. In connection with the change of the State ofincorporation from Maine to Michigan in 1968, the Company succeeded to and was substituted for the' Maine corporation under the Mortgage. - The statements herein concerning the New Bonds and the Mongage are an outline and do not purpon to be complete. They make use of defined terms and are qualified in their entirety by express reference to the cited sections and articles of the Mortgage.
' The New Bonds will mature June 1,2007 and will bear interest at the rate shown in their title, payable semiannually on June I and December I in each year. Interest will, subject to certain excepdons, be paid to holders registered at the close of business on the May 15 or November 15, as the case may be, next preceding the interest payment date. The New Bonds will be issued only as registered Bonds without coupons in denominations of $1,000 and any multiple thereof. The New Bonds are exchangeable,in each
! case for a like aggregate principal amount of New Bonds of other authorized denominations, and are transferable, at the corporate trust office of the Trustee in New York City, without payment of any charge other than for any tax or other governmental charge required to be paid by the Company. (Thirty-seventh Supplemental Indenture, Section 1.)
.The Company will make application for the listing of the New Bonds on the New York Stock Exchange.
- Priority and Security 1
i
) The New Bonds will rank pari passu as to security with bonds of other series now outstanding or V. hereafter issued under the Mortgage, which,in the opinion of the Company's General Counsel,is a direct first lien on substantially all the Company's fixed property and franchises, subject only to excepted l
encumbrances as defined in the Mortgage. . The Mortgage permits, with certain limitations specified in l Section 7.05, the acquisition of property subject to prior liens and, under certain conditions specified in l Section 7.14, permits the issuance of additionalindebtedness under such prior liens to the extent of 60% of net property additions made by the Company to the property subject to such prior liens. l Sinking (Impro ement) Fund Requirement The Mortgage (Section 2.12) provides for annual sinking fund payments, which began in 1956,in an amount equal to 1% of the, aggregate principal amount of bonds authenticated (exclusive of bonds authenticated to refund other bonds) prior to Jemuary I of the year in which the deposit is made less cenain bonds retired. Payments may be made in cash or in principal amount of bonds authenticated under the' Mongage, whether or not such bonds have previously been disposed of by the Cor7m. Deposited cash is to be used to retire bonds of such series (one or more) as the Company may desi, te or may be withdrawn by the Company against the deposit of bonds. After the bonds of all series created prior to December 31,1959 have been retired, the sinking fund will be replaced by an improvement fund and the
' improvement fund requirement (which will then be 1% of the principal amount of New Bonds and of l bonds of any other series having such an improvement fund requirement less certain bonds retired) r-l . also be satisfied and cash withdrawn to the extent of 60% of unfunded net property additions. (Thin, j : seventh Supplemental Indenture, Section 2.)
Maintenance and Replacement Requirement The Mortgage (Section 7.07)' requires the Company as of the end 'of each calendar year to have
- applied for maintenance, renewals and replacements of the mortgaged and pledged property, with certain
[] TL) - exceptions,' the greater of the following amounts: (i) 15% of gross operating revenues derived by the 33-9
*- 4 +-w 4x w s.
i Company subsequent to December 31,1945 and up to the end of such calendar year from such mortgaged and pledged property after deducting the cost of electricity, gas and steam purchased for resale or (ii) the sum of the amounts equal to 4% of the principal amount of bonds outstanding at the end of each calendar year; or to the extent of any deficiency to certify to the Trustee unfunded net property additions or deposit with the Trustee cash or bonds (taken at their principal amount). A credit balance established in any year may be carried forward and used to meet requirements during a later period or to effect a withdrawal of deposited cash or bonds or to restore as unfunded property any property previously certified. Issuance of Additional Bonds Additional bonds may be issued under the Mortgage to the extent of 60"e of unfunded net property additions or against the deposit of an equal amount of cash,if, for any period of twelve consecutive months within the fifteen preceding calendar months, the net earnings of the Company (before income or excess profits taxes) shall have been at least twice the interest requirements for one year on all bonds outstanding and to be issued and on indebtedness of prior or equal rank. Additional honds may also be issued to refund bonds theretofore outstanding under the Nfortgage. Deposited cash may be applied to the retirement of bonds or be withdrawn to the extent of 60% of unfunded net property additions. ( Articles I, IV, V and VI.) The New Bonds are to be issued against unfunded net property additions which, at December 31, 1976, amounted to $715,568,563.54, of which $66,666,666.67 became funded upon the issuance in March 1977 of $40,000,000 principal amount of First Mortgage Bonds,8%% Series due 1997. Release and Substitution of Property The Mortgage provides that, subject to various limitations, property may be released from the lien thereof when sold or exchanged, upon the basis of cash deposited with the Trustee, bonds or purchase money obligations delivered to the Trustee, prior tien bonds delivered to the Trustee or reduced or assumed by the purchaser, property additions acquired in exchange for the property released, or upon a showing that unfunded net property additions exist. The Mortgage also permits the withdrawal of cash upon a showing that unfunded net property additions exist or against the deposit of bonds or the application thereof to the retirement of bonds. ( Articles VI, VII and X.) Limitations on Disidends The Mortgage (Section 7.15) in etTect prohibits the payment of cash dividends on Common Stock except out of retained earnings accumulated after September 30,1945 and unless after such payment there remains of such retained earnings an amount equivalent to the amount by which the charges to income or retained earnings since December 31,1945 for repairs, maintenare and depreciation shall have been less than the maintenance and replacement requirement computed in accordance with Section 7.07 of the Mortgage. Other restrictions on dividends are imposed by the Articles of Incorporation of the Company. Reference is made to Note 5 to Financial Statements. Modification of Mortgage The Mortgage, the rights and obligations of the Company and the rights of the bondholders may be modified by the Company only with the consent of the holders of 75% in principal amount of the bonds and of not less than 60"o of the principal amount of each series affected. However, no modification of the terms of payment of principal or interest and no modification affecting the lien or reducing the percentage required for modification is etTective against any bondholder without his consent. ( Article XVII.) Redemption Prmisions The New Bonds will be redeemable at the option of the Company in whole or in part at any time on thirty days' notice at the principal amount and accrued interest, (a) without premium if redeemed for the sinking or improvement fund, pursuant to the maintenance and replacement requirement or by the use of 34
3 proceeds of released property or (b) plus the regular redemption premiums set forth below for all other n ,/ redemptions: provided, however, that none of the New Bonds shall be redeemed prior to June 1,1982 at the regular redemption premiums if such redemption is for the purpose or in anticipation of refunding such New Bond through the use, directly or indirectly, of funds borrowed by the Company at an effective interest cost to the Company (computed in accordance with generally accepted financial practice) ofless than 9.01% pet annum. (Thirty-seventh Supplemental Indenture, Section 1.) If redeemed If redeemed during during 12 months 12 months period Regular period Regular ending the Redemption ending the Redemption last d ay of Premium last day of Premiurn Stay % Sisy 4 1978.. . .. 8.88 1992. 4.60 1979. . 8.57 1993. 4.29 1980.. ... 8.27 1994 ... . 3.98 1981. - - . . . .. 7.96 1995. 3.68 1982. 7.66 1996. ... 3.37 1983 .. -.. . . . 7.35 1997 3.07 1984. .. 7.04 1998..... . . . 2.76 1985- 6.74 1999. 2.45 1986. 6.43 2000- 2.15 1987. 6. I 3 200I. 1.84 1988. . . 5.82 2002. 1.54 1989 . 5.51 2003. .. 1.23 1990.. 5.21 2004 . 0.92 f^ 1991. 4.90 2005. ,. . . 0.62 (v) 2006.. _ ... 0.31 and without premium if redeemed after hiay 31,2006. Concerning th frustee In the regular course of business, the Company and its subsidiaries borrow funds from several banks for the companies' purposes. During 1976, the Company made short. term bank borrowings from time to tima, each at the prime interest rate then in effect, from Citibank, N.A., in the maximum amount of
$18,000.000 at any one time outstanding. On June 20,1974 the Company borrowed $50,000.000 from such bank under a promissory note maturing in 1981 and bearing interest at a fluctuating rate related to the Bank's prime lending rate. Citibank, N.A., is trustee of the Employees' Savings Plan of the companies, is trustee for two issues of pollution cotitrol revenue bonds which are secured by First Afortgage Bonds and the agent for the Company's dividend reinvestment plan.
The Trustee or the holders of 20% in aggregate principal amount of the bonds may declare the principal due on default, but the holders of a majority in aggregate principal amount may annul such declaration and waive the default if the default has been cured. (Section i1.05.) The holders of a majority in aggregate principal amount may direct the time, method and place of mnducting any proceeding for the enforcement of the hfortgage. (Sections 11.01 and i1.12.) No bondholder has the right to institute any proceedings for the enforcement of the hfortgage unless such holder shall have given the Trustee written notice of a default, the holders of 20% shall have tendered to the Trustee indemnity against costs, expenses and liabilities and requested the Trustee to take action, the Trustee shall have declined to take action or failed so to do within sixty days and no inconsistent directions shall have been given by the holders of a majority (Section i1.14.) The Trustee is not required to advance or risk its own funds or otherwise incur personal financial liability in the performance of any ofits duties if there is reasonable ground for believing
^
f s that repayment is not reasonably assured to it. (Section 16.03.) t ;
~
35 I
Defaults By Section I1.01 of the Mortgage, the following are defined as " defaults" Failure to pay principal when due; failure to pay interest for sixty days; failure to pay any installment of any sinking or other purchase fund for runety days; certain events in bankruptcy, insolvency or reorganization; and failure to perform any other covenant for ninety days following written demand by the Trustee for the Company to cure such failure. By Section 9.03, a failure to provide money for the redemption of bonds called for redemption also constitutes a default. The Mortgage does not require any periodic evidence to be furnished as to tha absence of default or as to compliance with the terms thereof. EXPERTS The Financial Statements including the Statement of Income for each of the five years in the period ended December 31,1976 set forth in this Prospectus have been examined by Arthur Andersen & Co., independent public accountants, as indicated in their report with respect thereto, and are included herein in reliance upon the authority of said firm as experts in auditing and accounting in giving such report. Reference is made to said report in which the opinion is qualified subject to the etTect, if any, on the financial statements of the resolution of the matter discussed in Note 2 to Financial Statements and which comments on a change in 1974 ( with which they concur) in the method of recording revenue as discussed in the Notes to Financial Statements. Statements under the eleventh sentence of the last paragraph under "Use of Pixeeds", under " Regulation" and under " Description of New Bonds", as to matters of law and legal conclusions, have been reviewed by Lawrence B. Lindemer, Esq., General Counsel for the Company, and all such statements are made on his authority as an expert. LEGAL OPINIONS Opinions as to the legality of the securities offered hereby will be rendered to the Purchasers by Lawrence B. Lindemer Esq. or Judd L. Bacon, Esq., General Counsel and Managing Attorney, respectively, for the Company, and by Messrs. Winthrop, Stimson, Putnam & Roberts New York, N. Y., of counsel to the Company and by Messrs. Simpson Thacher & Banlett, New York, N. Y., counsel for the Purchasers. As of February 28,1977,36 shares of Common Stock of the Company were credited to Lawrence B. Lindemer's account in the Employees' Savings Plan. Mr. Lindemer is an otheer of the Company and an otheer and director of each ofits subsidiaries. As of February 28,1977,296 shares of Common Stock of the Company were credited to Judd L. Bacon's account in the Employees' Savings Plan and 7 shares of Common Stock of the Company were credited to his account in the Employees' Stock Option Plan. He and his wife own as joint tenants 32 shares of Common Stock of the Company. His wife owns 47 shares of Common Stock of the Company. Mr. Bacon is employed by the Company as Managing Attorney. 36 O
E
; , REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
(.j To Consumers Power Company: We have examined the balance sheet of CoNsuutRs PowtR COMPANY (a Alichigan corporation) as of December 31,1976, and the related statements ofincome, retained earnings, capital in excess of par value and source of funds for gross propeny additions for each of the five years in the period ended December 31, 1976.- Our examination was made in accordance with genera:ly 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 issuance of construction permits for the Midland Nuclear Plant by the Atomic Energy Commission ( AEC), now NRC,in December 1972 was upheld by an Appeal Board of the AEC in May 1973, but was appealed by intervenors to the U.S. Coun of Appeals for the District of Columbit Circuit. In July 1976 the Coun of Appeals remanded the case to the NRC for further proceedings. The Company is unable at this time, pending further developments in the proceedings, to evaluate the ultimate effect of the remand 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 31,1976, and the results ofits operations and the source of funds for gross property additions for each of the five years in the period ended December 31,1976 in conformity with generally accepted accounting principles which, other than for the change in 1974 with which we concur in the method of recording revenue as discussed in the Notes to Financial Statements, were consistently applied during the periods. g ARTHUR ANDERsEN & CO. Detroit, Michigan, Apnl 20,1977.
.aW' I
~ /
37 L
CONSUNIERS POWER COMPANY B ALANCE SIIEET ASSETS December 31. Ei Thusands of Dollan UTiuTY PLANT-at original cost: Plant in service and held for future use (Note 17)- Electric . .. .. . . $2,276,100 Gas . , .. 1,015,562 Steam.. . .. 3,306 Common to all departments.. .. .. 43,616
$3,338,584 Less-Provision for accrued depreciation. 864,945
$2,473,639 Construction work in prog:ess (Notes 2 and 3 ) . 627,886
$3,101,525 OTHER PHYSICAL PROPERTY-at cost of less-less provision for accrued depreciation of
$363,000. , S 3,045 INVESTMENTS:
l Wholly-owned subsidiaries ( Note 1 )- Michigan Gas Storage Company. S 20,427 Northern Michigan Exploration Company ( Note 4) . 39,914 Other, tt cost or less . 5,971 l S 66,312 l CtJRRENT ASSETS: Cash . .. . . - . . .. S 20,804 Temporary cash investments, at cost.. 36,450 Accoun:s receivable, less reserve of $2,341,000.. . 146,898 Accrued revenues ( Note 1 ) . . I12,169 Materials and supplies, at average cost-Fuel stock .. .. .. 75,95i Other.. 38,722 Gas in underground storage, at average cost . 87,615 Prepayments and other.. 69,936 i S 588,545 OTHER: Deferred debits (Note 10). .. S 55,185 l 53,814,612 l 1 1 The Notes to Financial Statements are an integral part of this statement. 38 l
'loI CONSUMERS POWER COMPANY .
J BAI ANCE SHEET - STOCKHOLDERS' INVESTMENT AND LI A BILITIES December 31. 3" Thousands of Dollars CAPITAUZATION: Common stockholders' equity- , Common stock, $10 par value,' authorized 42,500,000 shares, outstanding 34,846,409 shares (botes 5 and 6).. . .. . . . . . . . . . . . S. 348,464 Capital in excess of par value.... .. ... . . . . , . 318,837 Retained earnings (Note 5)... . . ..-.. . 306,584
. S 973,885 Less-Capital stock expense : . 14,223 Total common stockholders' equity-- . S 959.662 Preferred and preference stock-Preferred stock, cumulative, $100 par value, authorized 5,000,000 shares ( Notes 3 and 6). . .. .. ___.... S 346,334 Preference stock, cumulative SI par value, authorized 5,000,000 shares, (Note 6)
Convertible, $50 stated value,743,776 shares outstanding.. . 37,189 Non-convertible,2,000,000 shares outstanding. 2,000 - Capitalir excess of par value of non. convertible preference stock 1 48,000 Total preferred and preference stock . . . . S 433.523-Total stockholders' investment . . . . - , S1,393,185 Long. term debt (Notes 3 and 7)..-. ... .. 1.569,881 Totai capitalization = . . . . $2,963,066 CURRENT LIABILITIES: Current obligations expected to be refinanced-First Mortgage Bonds,2h% Series due 1977 ( Note 7) . . . . . 5 24,010 Other current liabilities-Current maturities and sinking fund on long. term debt ( Note 7) $ 16,635 Accounts payable (includes $13,294,000 due to subsidiaries) . . . . . 151,129 Accrued taxes:- . . . . . . I72,960 Accrued interest - . - . . - - . . 38,109 Other- ._ .... . . _ - 65,313 S 444,146 TEtal current liabilities S 468,156 DEFERRED CREDITS AND RESERVES: Deferred income taxes (Note 13) _.. ..
. _ . S 270,708 Investment tax credit (Note 13).. ... .. . . 79,750 Other..- . . ... 32,932 S 383.390
- CONSTRUCTION COMMITMENTS AND CONTINGENT LIABILrrIES ( Notes 3 and 15)
- S3,814,612 L The Notes to Financial Statements are an integral part of this statement.-
u}A( - 39
-~ k .
L..
CONSUMERS POWER COMPANY STATE 5 TENT OF RETAINED EARNINGS Year Ended December 31 1972 1973 1974 1975 1976 Thousands of Dollars Balance Beginning of Period $197.519 $216,166 $230.502 $237.447 $254.026 Add: Ne: Income . 79.066 80,190 84,952 99.936 144.545 Equity in undistnbuted earnings of subsidiaries at Decem. ber 31.1972 (Note I) - 4.359 - - -
$276.585 $300.715 $315.454 $337.383 $398.571 Deduct Cash dividends on preferred stuck.. $ i1.251 $ 17,746 $ 24.089 $ 24.093 $ 24.071 Cash dividends on preference stock. - -
1.451 5.993 6.878 Cash dividends on common stock ($2.00 per share )..- 49.168 52.467 52.467 53.271 6I.038
$ 60.419 $ 70.213 $ 78.007 $ 83.357 $ 91.987 Balance End of Penod ( Note 5) $216.166 $230.502 $237.447 $254.026 $306.584 STATEMENT OF CAPITAL IN EXCESS OF PAR VALUE Year Fnded December 31
_1972 1975 _1973 _1974 _ _19"6 Thousands of Dollars COMMON STOCK Balance Seginning of Penod .. $209.038 $246.788 $247.070 $247.23I $252.203 Add: Excess os er par value of common stock issued .. 37.620 - - - 58.022 Excess over pu value of preferred stock issued . - 156 - - - Excess over par value of common stock issued as part of the dividend reinsestment plan.. - - - - 786 Net gain on reacquisition of preferred stock .. 130 126 161 220 201 Excess over par value of common stock issued upon conversion of preference stock .. - - - 4.752 7.625 Balance End of Penod .. $246.788 $247,070 $247.231 $252.203 $318.837 PREFERENCE STOCK Ba.ance Beginrang of PenoJ.. . . . $- Excess over par value of preference stock issued 48.000 Balance End of Penod. $48.000 The Notes to Financial Statements are an integral part of these staternents. 40 O
[] CONSUMERS POWER COMPANY
\~[
STATEMENT OF SOURCE OF FUNDS FOR GROSS PROPERTY ADDITIONS Yeme Ended Decem',er 31 1972- 1973 1974 1975 1976 Tleasands of Dollars Source of Fund. ror Gross Property Additions:
- Funds ge; ; rated from operations- .
' Netincome c
~ .
$ 79,066 $ 80,190 $ 84,952* $ 99,936 $144,545 Principal noncash items-Depreciation and amortizauon-Per statement ofincome 62,937 73,428 82,944 93.635 96,954 Charged to other accounts I I,473 13.616 4,420 $.164 8.849 Deferred income taxes, net 18.972 25,0P 26,191 26,603 -
31.318 Investment tax credit, net. 5,960 14.0 7 (5,II8) 24,431 14.o43 Allowance for funds used during construction .(25,455) (23,2D ) (21.875). (24,825) (33.848)
' Undastributed earnings of subsidiaries -
(1.541) 85.688)- ( 9.512) ( 8.400 )
$152,953 ' $181,599 $165,826 $220.147 $249,346 Less- .
^ Dividends on preferred stock 11,251 17,746 24.089 24.093 24.071 Dividends on preference stos k- - - 1,451 5,993 6,878 Dividends on common stock 49,168 52,467 52.467 53.271 61,038 Retirement orlong term debt and preferred stock . 11,738 -12,938 13,688 14.788 15.848
$ 80.796 $ 98.448 $ 74.131 $122.002 $141,511 Funds obtained from new Anancingi Issuance of common stock . $ 59.620 $ .
$ - $ - $113,023 Issuance of preference stock - - 30,000 50,000 50.000 lisuance of preferred stock 70.000 130,000 - - -
Sale of first mortgage bonds 120,000 75,000 110.000 150.000 190.000 Sale oflong-term note
' [O .j Net proceeds from installment sales contracts payable 31,744 50.000 36,385 14,153 18,643 (f increase ( decrease ) in other long. term debt (4.418) (3,915) (174) (115) ' 60 -
Increase ( decrease) in notes payable and commercial paper 6.500 19,300 73,700 (38,500) (80.000)
- Less refunded Arst mortgage bonds - - - - (86,324) (60.000)
$25',702 $252.129 $299.911 $ 47,714 $273.226
- Other sources ( uses I of fundr ~
. Changes in net current assets an'd current liabilities (excluding
- obligations expected to be refinanced)-
.Ternporary cash investments 5 - $ 5 -
s
$ - $(36.450)
Accounts receivable (15.678) (29,509) _.- (490) 4.395 (54.489) j Accrued revenues - -' - (70.666) (13,443). (28.060) Refundable income taxes -- - (17,651) 17.651 - i ' Materials and supphes 298 (9,942) - (42.926) (3,416) (15.848) Gas in underground storage 1,612. (37,3361 (6.227) (26.601) 8,253 Accounts payable - 13,607 7,801 26,866 8,7 ' 4 15.238
- Accrued taxes .__ . 2,4II (929) 45,594 3,633 67,776
; Other, net 7.433 8.794 17.645 18.962 L30,865)
$ 9.683 - $ (993) $( 97,248) $ (840)- $( 7@5)
Property sold under leaseback arrangements - - 32,094 29,426 10,689 Other. net. . . 5.482. (11.877) 11.997 - ( 2.696 ) -(31.670)
. $ 15,165 $( 12.870) $( 53.157) $ 25.890 $( 95.426) -
Total Funds for Construction from above Sources $347.663 - ' $337,707 $320,885 $195.606 - $219,3I1
- Allowance for Funds Used Dunns Construction- 25.455 - 23.223 21,875 - 24.825 Gross Property Addmons 33 83
$373.118 $360.930 $342.760 $220.431 $353.159
<
- Includes ' cumulative; eff'ect on' years prior to 1974 of change in method of recording revenue amounting to
, L $24,864,000, net of related income taxes.-
'(i ) Denoteideduction.
j'N . :ThENotes to Financial Statements are an integral part ef this statement. a )
. \ .s/
N ; - 7 A 4
)
CONSUN1ERS POWER CONIPANY NOTES TO FINANCIAL STATE \lENTS 1, SIGNtFICANT ACCOUNTING POLICIES Effective January 1,1973, the Company adopted the equity method of accounting for the investment in its wholly-owned subsidiaries pursuant to Federal Power Commission Order No. 469. Under this method of accounting the Com;iany's interest in the earnings of the subsidiaries is retlected currently in earnings and in the carrying value of the investments. Prior years, which include dividends paid by one of the subsidiaries, have not been restated for this change in accounting .,ince the effect was not material; however, retained earnings have been credited with the undistributed earnings of the subsidiaries at December 31,1972 in the amount of $4,359,000. At December 31,1976, the undistributed earnings of subsidiaries were $29,536,000. The Company provides depreciation on the basis of straight-line rates approved by the Niichigan Public Service Commission (N1PSC) (See Note 1I). Effective January 1,1974, the Company changed its method of accounting to accrue revenues for service rendered but not billed at month end. Prior to January 1,1974, operating revenue was recognized at the time of monthly billi1gs on a cycle basis [See Note (a) to the Statement of Income]. The Company makes annual contributions to the pension plan suflicient to cover current service costs, interest on unfunded prior service costs and amortization of prior service costs (See Note 10). Reference is made to Note 13 for information regarding income taxes. Reference is made to Note (f) to the Statement of Income for information regarding the allowance for funds used dring construction.
- 2. NuC1.EsR GENERATING PLANTS The Palisades Nuclear Plant 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 generators, main condenser and ather equipment. In April 1975, the Plant was returned to operation subject to a requirement to shut down for steam generator tube inspection after a limited period of operation. In December 1975, the Plant was shut down for such purpose and for refueling and maintenance. The Plant resumed operation in Niay 1976 with restrictions in the license requiring shutdown for steam generator tube inspection within 15 calendar months. The Company's application for a full-term, 40-year operating license is pending before the Nuclear Regulatory Commission (NRC). In August 1974, the Company filed suit in a U.S. Dirtrict Court seeking not ;ess than
$300 million in past and future damages, together with equitable relief, from suppliers of components and design work for the Plant. In October 1976, the Company settled with two of the suppliers for $13,500,000, in May 1977, subsequent to the date of the Auditors' Report, the Company settled with two of the three remaining suppliers for approximately $14,000,000 in cash and future services. The suit is pending against Combustion Engineering, Inc., the remaining defendant.
Construction work in progress includes $425,707.000 at December 31,1976. related to the Niidland Nuclear Plant which is estimated to be completed in 1981-1982 at a presently estimated total cost of $1.67 billion. The issuance of construction permits by the Atomic Energy Commission ( AEC), now NRC, in December 1972 was upheld by an Appeal Board of the AEC in May 1973, but was appealed to the U.S. Court of Appeals for the District of Columbia Circuit. Construction, delayed since 1970, was resumed in June 1973 and is continuing. In July 1976 the U.S. Court of Appeals remanded the case to the NRC for further proceedings, including reconsideration of waste disposal and other unaddressed fuel e>cle issues, energy conservation alternatives and other issaes arrecting the environmental cost-benefit analysis performed for the Plant and also for clarification of the report on the Plant issued by the AEC's Advisory Committee on Reactor Safeguards. An Atomic Safety and Licensing Board ("ASLB") has been reconvened for the Midland Plant for the purpose of considering the remanded issues and also whether the 42
CONSlJMERS POWER CONIPANY
/
NOTES TO FINANCIAL STATEMENTS-(Continued) construction permits should be continued, modified, or suspended pending the outcome of the reopened proceeding. Hearings on the latter question commenced in November 1976. In February 1977 the U.S. Supreme Court granted the Company's request for a writ of certiorari to review the Court of Appeals decision. On the basis of the Supreme Court's action, the Company in hiarch 1977 reques:ed the NRC to stay the ASLB proceedings. On April 29,1977 an NRC Safety an 1 Licensing Appeal Board denied the Company's motion to stay further hearing pending a decision by the Supreme Court. If the Company is not ultimately successfulin the Slidland proceeding, 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 proceeding, to evaluate the ultimate etTect of the remand on the investment in and commitments with respect to the Niidland Nuclear Plant.
- 3. Construction PROGRAM AND FINANCING RtsTaicTioNs Capital expenditures in 1977 are currently estimated to total approximately $593 million and total construction expenditures through 1981 are presently estimated to approximate $2.7 billion. Substantial commitments have been made with respect to the construction program in future years.
In order to finance this construction program and to meet remaining debt maturities of $195.3 million through 1981 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 earnings coverage provisions of the Indenture covedng the Company's First Afortgage Bonds require for the sale of additional mongage bonds, except for certain refunding purposes, minimum earnings coverage, before income taxes, of at least two times pro forma annualin:erest charges on bonds and other equM or pnor ranking indebtedness. The Company's Anicles of Inco poration require, for the issuance of additional shares of Preferred Stock, o specified earnings coverages, including minimum ;arnings coverage after income taxes of at least one and (*/ ) one-half times the pro forma annual interest enarges on all indebtedness and Preferred Stock dividend requirements. The Company presently has arrangements with banks providing for short-term borrowings of up to
$221,290,000 (including acceptance draft commitments up to $20,000,000) which are subject to periodic review. In connection with these arrangements, the Company is generally required to maintain average compensating balances with the banks, over an unspecified period of time, equal to 10% of the totalline of credit plus 10% of the average borrowings outstanding as determined from the banks' records after adjustment for uncollected funds. The e are no legal restrictions on the withdrawal of these funds. When issued, the banker's acceptance drafts are secured by a lien on certa... of the Company's fuel inveraories.
Dunng 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 etTect of compensating balances. The maximum amount outstanding at any one time was $59,500,000 during 1976. 4 NORTHERN hilcHIGAN EXPLORATION COMPANY Northern hiichigan Exploration Company (Northern), a wholly-owned subsidiary of the Company, is engaged in gas and oil exploration and development programs. The Company's Board of Directors has authorized a total common stock investment of $20,000.000. Northern follows full cost accounting for financial reporting purposes, including a policy of capitalizing interest costs related to properties in process of development. Interest capitalized amounted to 51,500,000 in 1973, $2.300,000 in 1974, S447,000 in 1975 and $174,000 in 1976. Had these interest costs not been capitalized, the Company's net income would have been reduced approxima'ely $800,000 in - 1973, $1,200.000 in 1974 $220,000 in 1975 and $88,000 in 1976. Prior to commencement of significant gas deliveries, Northern deferred all exploration and development costs from inception to December 31, 1971. Initial operations were commenced on a small scale in 1972 and the Company adopted'the equity I l. 43
CONSUMERS POWER COMPANY NOTI'S TO FINANCIAL STATEMENTS-(Continued) method of accounting for its subsidiaries on January 1,1973 (See Note 1). Summarized financial information for the four years ended December 31,1976 is shown below.
) ear Ended December 31 1973 1974 1975 1976 Thousands of Douars Operating resenues 5 3.791 $12.286 $25.685 534.490 Net income 1,522 5.268 8.777 9.239 Gas ar.d od propenies as of end of period 39.670 54.708 62.259 63.188 Total amts as of end of penod .. 43.597 61.471 74.953 81.809 Stodholder's inse.tment as af end of penod._. 16.631 21.899 30.676 39.914 Production pay ment as of end of penod.. ... ... 25.000 27.500 23.500 15.000
- 5. COMMON STOCK In February 1976, the Company issued 2,500,000 shares of Common Stock for $50,938,000. In November 1976, the Company issued 3,000,000 shares of Common Stock for $62,085,000. As of December 31, 1976, 430,010 shares of Common Stock are reserved for issuance in connection with a Common Stock Dividend Reinvestment Plan which became effective with the November 20, 1976 dividend, in November 1976, the Company issued 69,990 shares of Common Stock for $1,486,000 in connection with the Plan. At December 31, 1976, 947,636 shares of Common S;ock are reserved for issuance upon conversion of the $6.00 Preference Stock and 1,635,055 shares of Common Stock are reserved for issuance upon conversion of the $5.50 Preference Stock. At December 31, 1976, retaine earnings in the amount of $30,584,000, out of total retained earnings of $306,584,000, cannot be distributed as cash dividends on Common Stock under provisions of the Articles ofIncorporation of the Company. There are also other restrictions as to payment of dividends on Common Stock which are presently less restrictive. In April 1977, the authorized number of shares of Common Stock was increased to 60,000,000.
- 6. PREFERRED STOCK AND PREFERENCE STOCK Preferred Stock is represented by-December 31, 1976 Redemption Price Thousands Per Share of Dollars
$4.50-547,788 Shares Outstanding.. $ 110.00 $ 54,779
$4.52-115.550 Shares Outstanding.. 104.725 11,555
$4.16-100,000 Shares Outstanding.. .. 103.25 10,000
$7.45-700.000 Snares Outstanding.. I08.00 70.000
$7.72-700,000 Shares Outstanding.. 108.00 70,000
$7.76-750,000 Shares Outstanding.. . 109.19 75,000
$7.68-550,000 Shares Outstanding.. 108.00 55,000 Total Preferred Stock.. .. $346,334 The Preferred Stock of the Company is redeemable as a whole or in part, at the option of the Company, at the above redemption prices plus accrued dividends to the date of redemption, except tha 44
3 : ,- - 4
!('Y ~
CONSUMERS POWER COMPANY
' NOTES TO FINANCI A1. STATEMENTS-iContinued )
; ~ prior to April l',1978, Julyll,1977. June 1,1978 and November I,1978, the $7.45, $7.72, $7.76 and $7.68 Preferred Stock, respectively, may not be redeemed through certain refunding operations.
. The Company is required.to endeavor to purchase and retire annually 4,000 shares of the S4.52
' Preferred Stock at a price per share not to exceed $102.725 plus accrued dividends.
~
Jin" August l1974, the Company issued 600,000 shares of $6.00 Preference Stock, convertible into
- Common Stock at four shares of Common Stock for each share of Preference Stock. During 1976 and
^ 1975,150,617 and 212,474 shares of $6.00 Preference Stock were converted into 602,468 and 849,896 shares 'of Common Stock, respectively. At December 31,: 1976,~ there are 236,909 shares of 56.00
- Preference Stock.outstar. ding. 'Beginning in 1979, the Company is' required to purchase 'or redeem .
annually 37,500 shares of the $6.00 Preference Stock at a price per share of $50 plus accrued dividends. In' Jure 1975, the Company iss'ued 1,000.000 shares of $5.50 Preference Stock convertible into Common Stock at a conversion price of $15.50 per shiire (equal to approximately 3.225 shares of Common JStock for each share of Preference Stockf. During 1976 and 1975,345,003 and 148,130 shares of $5.50
-. Preference Stock were converted into 1,112,477 and 477,740 shares of Common Stock, respectively. _ At
; December 31,1976, there are 506,867 shares of $5.50 Preference Stock outstanding. -Beginning in 1980, the Company is required to purchase or redeem annually 50,000 shares of the $5.50 Preference Stock at a price per share of $50 plus accrued dividends. The Company has the option to receive credit for any .
. shares converted.
ThkS6.00 and $5.50 Preference Stock of the Company is redeemable in whole or in part, at the option
. ' of the Company, after July 31,1979 and June 30,1980. respectively, at a price per share of $52.50 plus accrued dividends and at decreasing prices after July 31,1984 and June 30,1985, respectively.
, c
~
In August' 1976, the Company, issued 2,000,000 shares of $2.43 Preference Stock. Such Preference L - Stock is not convertible and is redeemable at any time,in whole orin part, at the option of the Company at
. a price per share of $27.43 plus accrued dividends if redeemed prior to September 1,11981, and at L decreasing prices ~thereafter, except that prior to September 1.-1981 it may not be redeemed through
- certain refunding operations.
h a w 3 h * -.
^ab.jU 43 p
6 [.
,_ g -" , l. ' y j
~
* ~
]
l CONSUMERS POWER COMPANY NOTES TO FINANCIAL STATD1ENTS-(Continued)
- 7. Loso-Ttnu DEBT Long-term debt is represented by:
December 31,
'Z2 Thousands a Dollars First Mortgage Bonds, secured by a mortgage and lien on substan-tially all property of the Company-2h% Series due 1977.- S 24,010 9%% Series due 1980.. .. 75,000 3thce Series due 1981. .. 38,992 11%% Series due 1982. 50,000 3% Series due 1984.. 23,107 4 + Series due 1986.. 30,804 3%% Series due 1987.. . . I7,732 4%"c Series due 1987-- 182 4%?e Series due 1988.. . .. 30,953 4%Cc Series due 1989., . 25,670 3%% Series due 1990.. 22,743 4%Ce Series due 1990.. 27,015 4%% Series due 1991. .. 28,214 Ilh7c Series due 1994.. 60.000 573re Series due 1996.. 54,785 9?i% Series due 1996.. . . 70,000 6% Series due 1997.. 72,981 67s"e Series due 1998.. 54,558 6%% Series due 1998. 54,447 7%Fe Series due 1999.- . 50,000 8% Series due 1999.. . 55,000 8%"c Series due 2000.. .._.. 50,000 I I 4% Series due 2000.. 75,000 8h?c Series due 2001. 60,000 74% Series due 2001. 60,000 7tEc Series due 2002. .. 70.000 7%% Series due 2002. .
50.000 8%% Series due 2003.. 75,006 9% Series due 2006.. .. 60,000 9%Fe Series due 2006.. 60,000 Total First Mortgage Bonds . $1,426,193 46 0
. CONSUMERS POWER COMPANY NOTES TO FINANCIAL STATEMENTS-(Continued) g
%, [-
December 31,
'Et
- Thousands of Dollars Installment Sales Contracts Payable, average interest rate 6.57% (net of $3,775,000 held - by Trustee pending completion of construction) ...... __ : _ . $ 100,925 Sinking Fund Debentures,4%%, due 1994.._ . . . . 35,800
- Term Bank Loan, due 1981 at i17% of Bank's prime rate .. 50,000
, - Other- __.____
_ . - - . . . . . . . . . . . 59
. Unamortized Net Debt Premium (Discount)-not material by individualissue=- . . . . . . . . . .
(2,451)
$1,610,526 Deduct-Current Maturities and Sinking Fund-First Mortgage Bonds . . . $ 16,035 Sinking Fund Debentures . . 600 First Mortgage Bonds,2h% Series due 1977. . 24,010
$ 40,645 Total Long-Term Debt.- . . . . . . . .. $1,569,881 In December 1975, the _ Company executed $31,000,000 principal amount of installment sales contracts, for which the Company has pledged a like amount of first mortgage bonds as security for its obligations under such contracts.
Under the terms of the Indenture securing the First Mortgage Bonds, the Company is required, on or before October I of each year, to deposit with the Trustee,' cash and/or bonds in an amount equal to 1% of
\ the aggregate principal amount of bonds of all series, other than refunding series, authenticated pnor to b[_ '
January I of the year of deposit. The annual sinking fund requirement is $16,035,000. In addition, a
$600,000 sinking fund deposit is due on the 4%% Sinking Fund Debentures on or before September I of each year. In March 1977, the Company sold $40,000,000 principal amount of First Mortgage Bonds, 8%% Series due 1997.
Based on the above, maturities and annual sinking fund requirements oflong-term debt for the five years subsequent to December 31,1976 are shown below: Lang-serm Annual
; Year Ending Debe Sinking Fund December 31, Mtfuriales Requirements
' (Thousands of Dollars) 1977 $24.010 $16.635
'1978 700 17.035 1979 1.550 17,035 1980' 77J50 ~ 17.035 1981. 91,542 17,035 After the proposed sale of $85,000,000 pnncipal amount of First Mortgage Bonds, the annual sinking fund requirements for 1978-1981 will increase to $17,885,000.
- 8. LEASE OsuGATtONS AND RENTAI.s -
In 1974,'the Company executed a nuclear fuel lease whereby the Lessor has acquired a 100% interest in nuclear fuel utilized at the Palisades Nuclear Plant. The Lessor's remaining investment in the nuclear fuel at December 31.1976 was $32,500,000. The fuel lease provides for a term ending on November 18, 1980, with provision for one year extensions from time to time to a date not later than November 19,2029, subject to earlier termination in certain events. The quarterly lease charges consist of a fuel factor computed on the basis of heat production plus interest costs and administrative fees and expenses incurred by the Lessor, and,in the event of termination of the fuellease, an amount equal to the Lessor's remaining-
-investment. The Company is also responsible for payment of taxes, maintenance, operating costs, risks of Lloss and insurance.-
- fm In June 1975, the Company entered into sale-and-leaseback transactions aggregating $26,000,000
= with respect to two of the Company's general otYice buildings. The leases have an initial term of 28 years
(%/}i 47
CONSUNIERS POWER CONIPANY NOTES TO FINANCIAL STATEN1ENTS-(Continued) 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 basic term or any renewal term at the then fair market sales value. Annual rentals under the leases are subject to quadrennial escalation and currently approximate $2.816,000. Taxes, insurance and other operating costs relating to the buildings are required to be paid by the Company. Rentals, including amounts charged to clearing and other accounts, amounted to approximately
,,, S4.867,000 in 1972, $5,703,000 in I973,55,427,000 in 1974, SI 8,681,000 in i975 and $25,893,000 in i976.
i Rentals contingent upon usage included in the preceding totals were 59,555,000 for 1975 and $10,510,000 in 1976. The minimum rental commitments for leases presently in effect will amount to approximately
$8,721.000 in 1977 and 1978, 58,729,000 in 1979, $8,444,000 in 1980 and $5,811,000 in 1981. The minimum rental commitments for leases presently in effect for the five year periods ended December 31, 1986,1991 and 1996 amount to approximately $21,679,000, $14,227,000 and $14,079,000, respectively; the remaining rental commitment amounts to approximately $18,303,000.
If all noncapitalized financing leases were capitalized, the effect on income would not be material.
- 9. RATE hlATrrRS Reference is made to Note (b) to the Statement of income for information regarding rate matters.
- 10. PENSION Pt.AN The Company has a trusteed noncontributory pension plan under which full-time regular employees within specified age limits and periods of service are qualified to participate. The contributions to the Plan were $13,066,000 in I972, SI4.607,000 in 1973, S15,387,000 in 1974, S16,033,000 in i975 and SI7,454,000 in 1976. Of these amounts $9,817,000 in 1972, $10,968,000 in 1973, S11,817,000 in 1974, S12,761,000 in 1975 and $14,028,000 in 1976 were charged directly to expense accounts with the remainder being charged to various e mstruction, clearing and other accounts.
As of January 1,1976, the date of the most recent actuary's report, the actuarially computed value of vested benefits was $203,000,000. The market value of the assets of the plan was $172,500,000 at January 1,1976 and $211,458,000 at December 31,1976. If the market value of the assets of the plan should fall and remain below the vested benefits, the actuarial method used in determining the annual contribution will fund this amount over a period of years. The unfunded prior service cost at January 1,1976 amounted to approximately $20,490,000. The Company revised its Pension Plan as of July 1,1976, to comply with the Employee Retirement Income Security Act of 1974. Compliance with the Act will not significantly increase the Company's future annual contribution since the Company's plan, in errect prior to July 1,1976 generally conformed to at least the minimum requirements of the Act. In July 1976, the Company adopted an Early Retirement Incentive Program. in connection with a reorganization ofits work force, at a cost of approximately $14.000,000, included in deferred debits, which will be amortized over a five-year period for accounting purposes, pursuant to an order of the MPSC, and which will be reflected in rates to the extent the savings and value of the program to the overall reorganization justify such costs. In the opinion of management, the savings and value of the program justify such costs.
- 11. DEPRECIATION Composite depreciadon rates were approximately 2.95% for electric plant and 3.01% for gas plant in 1972; 2.92 % for electric plant and 3.01% for gas plant in 1973; 2.80% for electric plant and 3.56% for gas plant in 1974; 2.85 % for electric plant and 3.67% for gas plant in 1975 and 2.86% for electric plant and 3.64% for gas plant in 1976. In the opinion of management, the balance in the prevision for accrued depreciation at December 31, 1976 is reasonably adequate to cover the requirements for depreciation 48 o
,=
n) (
\~ ' '
CONSUMERS POWER COMPANY NOTES TO FINANCIAL STATEMENTS-(Continued)
. accrued on the original cost of the depreciable utility plant._ At the time properties are retired or otherwise
' disposed ofin the normal course of business, charges are made to the provision for accrued depreciation in
.the amount of such retirements, less net salvage credits, and no other adjustments of the provision for -
accrued depreciation are normally made Depletion rates, established for each producing field based on the total cost ofleaseholds divided by the estimated recoverable reserves, are applied to withdrawals from each field to determine the provision for depletion.
- 12. M AINTENANCE
-. It is the practice of the Company'to charge to maintenance the cost of repairs of property and
. replacements and renewals ofitems determined to be less than units of property, except for sach costs as are charged to transportation expenses, stores expenses or other clearing accounts and redistributed from these accounts, together with other charges, to various operating, construction and other accounts. The latter amounts so charged are not considered significant and are not readily determinable. Costs of replacements and renewals ofitems considered to be units of property are charged to the utility plant.
. accounts and charges for the units of propeny replaced are made to the provision for accrued dcpreciation -
and removed from utility plant accounts. Property additions are charged to the utility plant accounts.
- 13. INCOME tax EXPENSE Income tax expense is made up of the fellowing components:
Year Ended December 31 1972 1973 1974 1975 19*6 Thousands of Dollars Federalincome taxes. 5 9.657 5 2,985 5 1,309 5 906 540.518
. State income taxes -- 2,988 2,928 (543) 3.872 (2.920)
Deferred Federalincome taxes. net i5.929 *1.133 22.091 26.431 28,370 (N N/
)' Deferred state income taxes, net .
3.043 3,939 4.100 4,887 (I,767) Charge equivalent to investment tax credit, net. 5.960 14.057 . ( 5.118 ) 24.431 14.643 Total - 537,577 545.042 521.839 560,527 J8.844 Charged to utdity operaticas $38.876 543,951 - $20,058 557,564 577.315 Charged to nonutdary operations - ( l.299) "I.091 1,751 2.963 1.529 Total ,. 537,577 545,042 - 521,839 560.527 - 578.844 Current Federal and state income taxes for 1974, as shown above, reflect a credit of $17,651,000
' attributable to the carryback of 1974's net operating loss to prior years,' offset by provisions for income taxes of $9,790,000 related 'to the 1974 increment in unbilled revenues: $5,904,000 related to the cancellation of the Quanicassee Nuclear Plant; and $3,446,000 related to other timing difrerences.
The Company utilizes liberalized depreciation and the " class life asset depreciation range system" for income tax purposes.~ Income tax deferred due to the use of these methods is charged to income currently and credited to a reserve for deferred income taxesc .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 1972 'l973 . 1974 1975 1976 Thousands of Dollars Accelerated depreciation- . .
. Amount deferred during year. 520.467 ' 526,656 527,595 533.069 531,340 Less-Taxes deferred in prior Sears credited to in-come _
-(658)' '(747) (567) (914) (3.900)
. 519,809 - 525.909 527.028 532.155 527.440
, Accelerated amoruzation of emergency facdities-
_ Taxes deferred in pnor years credited to income . . - (837) '4837) (837) - (837) (837) Total 518,972 525.072. 526.191 531.318 526,603-
. ,m .
't Y
, t L 49-N m
4
CONSUSIERS POWER CONIPANY NOTES TO FIN ANCIAL STATDIENTS-(Continued) Certain costs, principally interest, which are capitalized for fmancial reporting purposes in accordance with the provisions of the Uniform System of Accounts, are expensed for income tax purposes and the resulting tax reduction is reflected currently in the income statement as ordered by the hiichigan Public Service Commission. The investment tax credit and job development investment credit utilized as a reduction of the current year'4 income tax are deferred and amortized to operating expense over the life of the related property. The following schedule reconciles the statutory Federal income tax rate to the effective income tax rates. Year Fnded December 31 1972 1973 1974 1975 1976 Federal income taa statutory rate .. 48.0% 48.0 % 48 0% 48 0 % 48 0% increaw ( reduction)in income tax rate resultmg from: Certain capitaltzed construction cost.s. pnncipally in-terest, deducted currently for income tax purpows for which no deferred taxes are prouded in ac-cordance with the requirements of the MPSC .. ( 13.9) ( 12.5 ) ( 17.9) (10 3) (95) State mcome taxes. net of Federalincome tax benent 2.7 2.9 2.3 2.8 (l 5) Amortization of deferred insestment tax credit ( .8 ) ( l.1 ) ( l .8 ) i 1.3 ) f 1.0 ) Equity in camings of subsidianes.. ( .8 ) ( l.3 ) (4 3) ( 3 4) ( 2.3 ) Other rniscellaneous items . .. (30) - .4 1.9 I6 Effective income tax rate . 32.2 % 36.0% 26.7% 37.7% 35 3%
===2-
- 14. SUPPLEMENTARY INCOME INFORMATION Depreciation, depletion and amortization:
In addition to the amounts set forth in the Statement of Income, depreciation of transportation and other equipment was charged to clearing accounts in the following amounts: $3.279,000 in 1972, $3,375,000 in 1973, $3,460,000 in 1974, $3,672,00u in 1975 and $3,502,000 in 1976. Also, depreciation, depletion and amortization was chnged to accounts, other than depreciation and amortization, in the Statement ofIncome in the following amounts: $8,194,000 in 1972, $10,241,000 in 1973, $960.000 in 1974, $1,492,000 in 1975 at.d $5,347,000 in 1976. Taxes, other than incon.e taus, charged to operating expenses, follow: Year Ended December 31 T1 1973 1974 1975 1976 Thousands of Dollars Real and grsonal property taxes.- $4n.027 544.092 $51.341 $5".908 558,829 Payroll taxes .. 4.211 5,395 6.304 6.446 7.225 f.,ichigan Smgle Busir:ess tax.- - - - - 5.8N Other taxes... 3.966 4.673 5.413 5.324 5.432 General taxes-we Statement of Income .. $48.204 $ 54.160 $6'.058 567.678 577.365,
CONSUMERS POWER COMPANY NOTES TO FINANCIAL STATEMENTS-(Continued)
- 15. CONTINOENT b!ABIUTIES The Company is involved in certain legal and administrative proceedings before various courts and governmental agencies and m contractual matters with others concerning rates, gas liquids allocation, gas cunailments, environmental issues, licensing, land reclamation costs under coal contracts 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 operating expenses.
In testimony before a Nuclear Regulatory Commission Atomic Safety and licensing Board in the remanded proceeding relating to the Midland Nuclea- Plant (see Note 2), Dow Chemical Company ("Dow") officials have indicated that Dow is considering the possibility of making a breach of centract claim against the Company for damages alleged to 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 ofits contractual obligations to Dow.
- 16. QUARTERLY FINANCIA1. INFORMATION Summarized quarterly fmancialinformation for 1976 is shown below:
Three Months Ended March 31, June 30 Sept.30, Dec. 31, 1976 1976 1976 1976 j'"' Thousands or Dottars \ J Total operating revenue .. $465,299 $333,214 $298,213 $484,526 Net operating income.. 63,141 45,614 43,472 59.743 Net income . . 44,674 28,514 28,587 42,770 Net income after dividends on Preferred and Preference Stock = . . . . 37,130 21,172 20,868 34,426 Earnnes per share: Assumka no dilution.. ,
$ 1.25 $ .68 $ .67 $ 1.04 Assuming full dilution.. , 1.16 .66 .64 .99
- 17. REPLACEMENT COST INFORMATION (Unaudited)
The fcilowing replacement cost information for certain of the Company's assets and related depreciat.on is presented to comply with the reporting requirements of the Securities and Exchange Commission. The Company advises readers of the imprecise nature of this data and of the many subjective judgments required in estimating the replacement cost of productive capacity. This information does not purport to represent the projected current value of the assets, the amounts which could be realized if the assets were to be sold, the reproduction costs of assets currently owned, or the historical costs of such assets adjusted for inflation. Further, as this data is limited to selected categories of assets and related depreciation, there are inherent limitations in using this i nformation to compute the etTect ofinflation on the Company. Moreover, for regulated utilities such as the Company, whose rates and char:;es are based upon the historical costs of their assets, an evaluation of replacement costs may be oflimited worth. 51
r CONSUMERS POWER COAIPANY NOTES TO FINASCIAL STATf3 TENTS-4Conduded) ie estimated replacement cost of the mpany's productive capacity and the estimated accumulated deprvation and depreciation expense restated for the replacement cost is is follows (in millions): At December 31,1976: Utility Plant in Service.. ,S 7,400 Less Provision for Accumulated Depreciation.. 2,400
$ 5,000 Depreciation Expense for tl e Year Ended December 31,1976., S 200 The original cost of land, landrights, nuclear fuel, mineral resource assets and intangible plant, amounting to $167 million at December 31, 1976, is excluded from this replacement cost information.
Noncapitalized leases are not significant. The replacement cost of the electric generation facilities was determined by applytng the estimated construction cost per kilowatt of units recently installed or currently planned for construction, trended to December 31,1976 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 December 31, 1976 using a composite process and petrochemical plant construction cost index. The Handy-Whitman Index of Public Utility Construction Costs for the North Central Division 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 December 31,1976 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 functior.al class depreciatice 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. average age of the historical assets to the annual replacement 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, 1976. Sush 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.echnically improved replacement facilities. Also, the Company is subject to governmental regulation in the determination of a fair rate of return on its investment. Under such regulation, costs incurred in the replacement of productive capacity would ultimately expand the base on which such allowabic return is determined. No recognition was given to the added revenues that would normally be reali,<.d from the recovery of increased costs through the regulatory ratemaking process. 52
g UNDERWRITERS The underwriters named below (the " Underwriters") have severally agreed, subject to certain conditions, to purchase from the Company the respective principal amounts of New Bonds set forth below. Principal Name Amount Principal Name Amount Morgan Stanley & Co incorporated ; $ 7.850.000 Stephens Inc. .$ eMON Loeb RhoaJes & Co. Inc. ... 6.000.000 Cohn. Hochsdn Co. 300.000 Paine. Webber. Jackson & Cunas Incorporated.-. 7.250.000 Craigie Incorporated 300.000 Smnh Barney. Harns Upham & Co. Daniels & Bell,Inc. . 300,000 Incorporated .. 7.250.000 Equitable Secundes Corporauon.- 300,000 Werthetm & Co.. Inc._. 7.250.000 Freehhng & Co.- 300,000 SoGen-Swiss International Corporauon 5.000.000 Greenshacids & Co inc.- 300.000 Hornblower. Weeks. Noyes & Trask Frank Henjes& Company Inc.. 300.000 Irnorporated .. 3.500.000 Howe. Barnes & Johnson, Inc... . . . . 300.000 Oppenheimer & Co., Inc. 3.500.000 Edward D. Jones & Co. 300,000 Shearson Hayden Stone Inc._ 3.500,000 Paul Kendnck & Co.,Inc.. 300.000 Wm. E. Pollock & Co., Inc.- 2,500.000 Kirkpatnck. Pettis, Smith. Pohan Inc.. 300.000 Scandinavun Secunties Corporation - 2,500,000 Laidlaw-Coggeshall Inc. 300.000 Wood Struthers& WinthropInc. 2.500.000 A E. Masten & Co. Incorporated - 300.000 A. E. Ames & Co. Incorporated 1.500,000 Printon Kane & Co. . 300.000 First of Michigan Corporauon.. 1,500.000 Scherck. Stein & Franc. Inc. 300,000 Keefe Bru>ette & Woods. Inc.. l.500.000 Suez American Corporadon - 300.000 AJvest, Inc.. 1,000.000 Thomas & Company. Inc., 300.000 Nomura Secunties Internauonal. Inc. , 1.000.000 K. J. Brown & Company,Inc. 150.000 Wathng. Lerchea & Co. Incorporated.. IN0.000 First Heritage Corp rauon .. 150.000 Yamaichi International ( Amenca ). Inc. l.000.000 First Mid Amenca Inc.. 150.000 Bateman Eichler. Hdi Richards Incorperated. _ '800.000 Furman Selz Mage Retz & Birney Incorporated 150,000 Sanford C. Bernstein & Co., Inc. .. 800.000 Harns n & Cornpann Mom
'- Bruns. Nordeman. Rea & Co. 800.000
""# ""*I b#" M0.000 Daina Sc6 unties Amenca Inc. Hugh Johnson & Company. Inc. . 150.000 800.000 k # ##'
v Folger Nolan Flemtng Douglas Incorporated . . fJ0.000 ' ""~ Phahps. Appel& Walden,Inc. 150.000 The Nkko Secundes Co. International. Inc... ... 100.000 Sade & Co... I50.000 Shuman. Agnew & Co. Inc. . 400.000 Birr. WJson & Co.,Inc. Seidler, Arnett & Spillane Incorporated..- ...-... 150.000 600 000 Smith. Hague & Co , incorporated., 150.000 J J. B. Hdhard. W. L. Lyons,Inc. .- . 600.000 Sterlmg. Grace & Co incorporated.. 150.000 Hoppin. Watson Inc., 600.000 Hans Utsch & Co,Inc. 150.000 Jesup & Lamont incorporated 600.000 Weinnch Zitzmann-Whitehead Inc. l$0.000 Moore & Schley, Cameron & Co.. t M 000 C. T. Williams & Co., Irc... 150.000 New hard, Cook & Co. Incorporated.- 600.000 New Japan Secunties international Inc. . 600.000 The Underwriting Agreement provides that the several obligations of the Underwriters are subject to the approval of certain legal matters by counsel and to the conditions that no stop order suspending the etrectiveness of the Registration Statement shall have been issued or proceedings therefor initiated, that an appropriate order of the AlPSC is in etTect and that there has been no material adverse change in the condition of the Company from that referred to in or contemplated by the Registration Statement. The nature of the Underwriters' obligation is such that they are committed to take and pay for all of the New Bonds if any are taken: provided that, under certain circumstances involving a default of Underwriters, less than all of the New Bonds may be purchased. The Underwriters through their representatives, Aforgan Stanley & Co. Incorporated: Loeb Rhoades '
' & Co. 'inc.: Paine, Webber, Jackson & Curtis incorporated: Smith Barney. Harris Upham & Co.
~ Incorporated and Wertheim & Co. Inc., have advised the Company as follows:
The several Underwriters propose to offer part of the New Bonds directly to the public at the pubhc etTering price set forth on the cover page hereof and part to dealers at a price which represents a concession of.70% of the principal amount under the public offering price. Any Underwriter may allow and such dealers may reallow a concession. not in excess of.3757. to certain other dealers. 33
.-._.A
p . y L^- a ! Appendix E
'Paga l'of 11 r
i
' APPE;lDIX E
' 3 ASIS FOR C0!?LETIO:i DATE EXEISIO:I
- Earliest and latest-completion dates for the !!idland Plant Units 1 and 2 are - ,
- requested to be extended as follows:
a) -Unit'l from December 1, 1977 and December 1, 1978
- to - ' October 1, 1961 and October 1,~1982 b); Unit 2 from December 1, 1978 and December 1, 1979 to October 1, 1980 and October 1, 1981 The construction schedule for both Midland Units 1 and 2 has been delayed for r reasons -beyond the Applicant's control. The delays were caused by reevaluation of construction' time due to changing project scope and industry experience.
svitching unit: completion sequence,.and adverse financial conditions. 'f a Both units have' been delayed 9 months due to reevaluation of construction time ' because of changing project scope and industry experience. Project scope chanEed principally because of changed design and construction criteria for 1
. safety related sy's te=s .and structures. In addition, experience from the indus-4 ,
.try indicated that more time was needed to design-and construct the Midland .
Plant. , Unit 2 was rescheduled'to be completed one year ahead of . Unit 1, resulting in , a delay of Unit 1~of 13 months and an advance in the schedule of Unit 2 of 11 - , months. - Unit sequence was switched because of the en6 1 neering complexities of - i' the combined electric and process steam unit, the earlier need for the all-
~ electric _ unit .due to projected electrical load denand and .the projected' need
- for. process steam.'
Both units were delayed 1 month due to a delay in actual construction remobiliza- 11j,~
- tien in February 1973 and the advancement of _ Unit 2 design activities over those
~
of Unit 1.- l- ' ~ Both~ units were _ delayed 2k months' due to adverse financial conditions 'in 19'Th and 1975 which made it impossible.to- obtain financial. resources en reasonable terms. This= resulted in adjusting construction and engineering activities to
' match projected- available financing.~
l . . ! The' requested extension involves no significant hazards considerations or undue-
- risk ~ to:the health and safety of the public.
6 f v (
.U y'_"
'e ,.
2 ~ ; s 2 g
, L . , ,. .;.-- . , _. , - . -. , , - . . _ -% . - , ,; ; .. ,-
, , App;ndix-E Paga 2 of 11 pe
( I-v' RESPONSE "O 3 A Varga Letter to S li hevell, dated 10/27/70
. Questions
- 1. Appendix E states that construction time was reevaluated to include
~ " changing project scope" which resulted " principally because of changed design and construction criteria for safety-related systems and struc-tures".- During~our meeting of March 21 and 22, 1978, you identified the more significant 'exampics of changing project scope which , influenced schedules. Of these examples stated (as listed in our meeting sun =ary
. dated March 27,1978), specify the pacing items which contributed to the schedule delay, and specify the relative significances of the various examples specified in terns of the schedule. Provide a general chronology (by dates) for those itess of changed project scope which had a pacing effect on the Midland schedule and shoving overlaps of cchedule influence between contributing events. +
- 2. Appendix E states that construction time was reevaluated to include ex-perience from the industry which indicated that more time was needed to design and construct ludland Plant Units 1 and 2. Identify and describe the specific ~ design and construction areas for Midland Plant Units 1 and 2 for which you found the schedule to be in need of revision and the specific nO' " industry experience" you used for the reevaluation of each such Midland area.-
Response to Questions 1 and 2 The seven specific items referenced'in the March 27, 1976 =eeting su==ary have not.been individually evaluated to assess their i= pact on the PNoject schedule. However, collectively these items when considered as a group does impact the schedule through additional quantities and productivity (unit / rates) adjust =ents
~
and will be discussed further below.
. A chronology,by dates for the individual items has not been developed, but the seven .ite=s. specified _ vere.added to the Project's Technical Scope during the
. period.of job suspension (Dece=ber 1970 to February 1973) and were not considered L
~
part of the Project's' scheduling requirements in 1970-(october 1970 Definitive as
~
e 11/Toi Ks
- s. .
~' .!Appsndix E Page.3'of 11-
~
s
./ \
(v, ) 4 Asti:.: ate Jchedule) ana no effort vcs made to consider these itcss in the
- ~ .schedale requirements until the scheduling effort which took place in, f
f :gepte=ber 1972.' r
; .'It should te noted that Project ' activities, except for ' licensing support.
a l
! were limited during job suspension (December 1970 to February 1973) due to I the Dov/Co'nsumers Contract $ equirementsflimiting nonrecoverable costs-(cost I' which could not'be recovered at a different site) to a desi 6nated arount prior' to the receipt of. the., Construction Permit.
1 } decause of the contractual no'ncoverable costs restraint, little scheduling work occurred during -job suspension until Consumers equested Bechtel in July 1972 .{ E to proviue 'a preliminary budget and ~ schedule based on the' assumptions of 1 renobilization in Sep'tember 1972, receipt of the Construction Permit in February [ 1973 and Unit (l' fuel load in-January 1978. This, schedule is sunnaricec in , i i Exhibit 1 as the. preliminary August.~28,1972 schedule and provided the basis
! for the Construction Permit (CPPR-81) completion dates (earliest date Decenber '
- - - 1,1977 and latest' da' et December 1,- 1973) .
1 In-early September 1972, Consumers under the nonrecoverable costs limitation' felt' that remobilization could not occur unti1~ January 1973 and directed Bechtel
'to reviseithe August 26, 1972 schedule taking ~'into consideration a delay of
- four monthsL in renobilization. and a-delay of five conths d'ie to increased Project
; scope and cilanging productivity iunit/ rates) resulting in a delay in'fuelIload-E iof 9 months'. 'This; revision-is a : srized in Exhibit 1 as thel Revision B 2
' September;1h[.1972 schedule.
\
+- .,. E_
x); , ,4 . 3 .- . 4
.. w ,.
. t 1 s
.11/7o i}
~
,EA > . f ,
+ - . a, , , s . - ,
.; ,.,4 , . . . :, a , ,;,-,- , , w; ,, , ,. ,, , - , . , - -
-App:ndix E Paga 4 of 11 '
h .' The five-r.onth delay in the.Geptember 14, 1972 schedule critical path occurred' in the completion of the auxiliary. building civil / structural' activities to ele-- vation 61h'. and start of auxiliary building large pipe and in the bulk materials (large pipe and electrical commodities) installation duration. The civil / e structural milestone'and att.rt of large pipe were delayed one conth frem the
. August 28, 1972 schedule to reflect cask drop design criteria chan6es. The bulk materials installation' duration was extended four months due to revised productivity (unit / rates)-reflectin6 3echtel's experience from other jobs and changing QA requirements of 10CFR50 Appendix D. The pipefitter and electrician- ,
nanpcver peaking which resulted from the productivity changes was considered in developin6 the extension of the bulk material installation duration. a I l l
\
s t .,
. ., 11/TS y . ,;
, + -
App:ndix 3 Pact 5 of 11
' m Question.
3 . Appendix E states that adverse financial conditions in 197h and 1975 made it impossible to obtain financial resources on reasonable terms, that this resulted in adjusting construction and en61neering activities, and resulted . in a ' delay of 2h months for both units. Describe in greater detail ~ hov adverse financial conditions in 1974 and 1975 contributed to the delays for the Midland units. . SpeciP/ what financing alternatives were considered to avoid these delays. Define the criteria which you used for judging the acceptability of these alternatives. 'w*hich specific areas of construction and engineering had the pacing influences and to what extent did each con-tribute to the total delay for the 24-month delay?
Response
The conditions prevailin6 in 197h were bleak for the entire electric utility industry. The Arab oil e=bargo be6i nning in late 1973 began a restructuring of prices for all fuels while the inflation of 197h and 1975 cree.ted cost pressures which electric utilities could not reflect, on a timely basis, in the prices they charged for electricity. The decision by Consolidated Edison
~
T [Q Conpany of New York, to forego its re6ular quarterly dividend in !My of 197h shocked the investment community and vividly illustrated the impact these conditions were having upon the industry.- Investors' skepticism of the l industry in 197h was reflected in the capital markets as securities underwriters were unable to market successfully the securities of some electric utilities and interest rates for both long-term and short-term debt instruments were rapidly increasing.
~
' National Economic Research Associates,. Inc , reported that as of October 15,197h, utility construction cutbacks for the period 197h-76 total $16.1 billion. Those cutbacks affected some 132,k90 megawatts of planned generating capacity, of which 89,300 megawatts were nuclear.
Consumers Power Company confronted these 6eneral conditions of 197h with continually L/~N
]- declining earnings,lsuch that it was legally precluced from issuing. preferred' stock 11/78
Appendix E
.Pags 6 of 11' t
V. . by- August and first mortgage bonds by September because of coverage requirements. Consumers Power Company cannot legally sell its common stock at less than par value ($10 per sh'are) and' by September of 197h the price had dropped to 101/h.
" The price dropped below $10 in :Tovember 197k ar 1 closed as lov as $9 in December 197k. 'A new preference stock was issued in July of 197k. Although no coverage test is required on this stock the Company was advised by its investment bankers in October of 197h that it vuuld not be reasonably marketable in significant >
er.ounts . Further, the Company was advised that little investment interest existed-for its unsecured indebtedness (downgraded earlier in 197k to BBB) and any offering would be of high costs and yield limited new capital. In October the Company negotiated the sale and leaseback of $32.5 million of its nuclear fuel supplies. In Jovember of 197k, faced with the inability to raise significant additional , O capital, the uncertainty .of when the Michigan Public Service Commission would act on its pending applications to raire the prices charged for electricity and natural gas as well as the' uncertainty surrounding the operation of the Palisades nuclear facility and. the substantial additional capital necessary to continue the construc-tion program as it then stood and refund over 66 million dollars of bonds coming due in mid 1975, the Company was forced to delay each of the Midland nuclear units. This decision was' made with full knowledge that the required pro forma coverage requirements (12 months ended) for the issuance of additional first mort 6 age bonds and preferred stock could not recover before mid 1975'because of the delay by the Michigan Public Service Commission in granting requested rate treatment. and that additional sale and' leaseback arr wements might provide 20-50 million of capital to fund ,the construction program. Although numerous financial projections -
-vere mac.e with various; assumptions about operating conditions, regulatory treatment-q
, and the acceptance -of Consumers Power Company securities to the capital markets, l t c M the :lovember delay decision was.made leaving the option for additicnal delay s.
N[ 11/78
~
4
. ~ _. _ . . _ _ . u., _ 2, .
. _ J
LApptndix E Pag 2 T-of 11: o r - yn
,)' ' decisions t if earnings were not restored.to 'the level necessary to attract capital
~
1( _
-by mid-1975 In early 1975, the Cc=pany negotiated a coal inventory financing and by June soll and leased back its General Office buildings. .'In June of 1975, the Cc=pany sold -50 =illion of. convertible preference stock and:in July,150
.=illion of first =ortgage bonds =arking its improved financial health and the acceptance of'its securities by the capital =arkets for the first ti=e in over ten =cnths.
As'a result of' a questionnaire forwarded to Consu=ers Power Company on May 29, 197h by the Deputy Director for Reactor Projects of the. Atomic Energy Comsission regarding the Cc=pany's financial status, the period from April 197h through Dece=ber of 1975 has been docu=ented in considerable detail. Attached as Exhibit 2 is a list of the staff correspondence and the respcnses Consumers Power ~Cc=paray
% provided at that ti=e.
- LJ The pacing influence contributing to the total delay of 2h months was the reduc-tien in manual labor from approximately 1,000 persons in August 197h to an approximate average of 200 persons in 1975 This reduction plus the-1976 time duration to restaff (approximately 6 =enths) to the same =anual labor level of August 197h was the pacing or principal factor contributing .to the delay of 2h
.=onths. Also,' engineering and procurement activities were reduced' in 1975 from
'300 persons'to-a lov of approximately1100 persons. This. reduction had a con-struction-delay' impact by reducing the lead: time from approved design to ~ start ofs construction in 'additien tof i=pacting -the: placing of purchase orders causing.
. delays in-'the. delivery.of =aterials and~co=ponents.
The l foregoing factors, taken together, resulted 'in a schedule extension of 2h
;=cnths;
_ ,q: q l l
~
11/76
'l
+ :v
v %
, App:ndix E
.,. pagaL6 ofL11 g
- ( 't
%I Question
'k. Describ'e-the special: Quality Assurance provisions which were and are being
~
implemented for, materials and ecmponents as a result of the. extended-con-
.struction period.
Restonse In order ,to protect existing materials and components on ' site, and to prevent
~
unacceptable -deterioration 'during the extended -construction period, a joint plan was developed by;Bechtel and Consumers Power Company ce=mencing in November 197h to address 'the problem. . The key elements of this plan were as follows:
- Determine delivery dates for equipment and material, and arrange for 1 storage at:the-vendor facility whenever possible.
i - Contact vendors to' determine special requirements-for long-ter= storage. Special procedures and requirements were. to be approved by Bechtel i
, . . Engineering.
, : (__, *
- For materials and components stored at the site:
- 1. ' Modify-existing Bechtel Construction storage procedures to. cover the extended ' period.
.2. Incorporate new vendor requirements for extended. storage into existing field procedures.
- Contact the Babcock & Wf.leox Company (B&W) for any special requirements 1 ,
for NESS-related materials and components.
- Contact the General Electric Company -(GE) to arrange storage and- disposi- [
i . . tion ~ of turbine / generator components.
.\
1 While _the initial: steps of the above-described plan vere being implemented, a 'l fdetdile'd estimate of: physical require =ents for site storage of materials and
~
, components 'was made. This included a review of all purchase orders to determine I _,N Sp. 1sizesland . quantities, followed by a categorization into the four levels; of Y [.
111/T6
- v "@
App:ndix'E Paga 9 of 11 U[ Y
- storage specified by ANSI Nh5 2.2. ' Following an economic analysis of alternatives to provide" satisfactory . site storage, the following actions were taken:
- A nev -10',000 cubic foot Class A varehouse was constructed.
- A@ additional 60,000 cubic foot Classes 3 and'C varehouse was constructed. -
- A 60-acre plus addition to the Class 'D outside laydown area was scheduled ~,
~ vith completion'specified in 1976.
Meetings vere held vith representatives of B&W and GE to determine requirements for the NSSS and turbine / generator equipment, ~respectively. B&W prov'.ded special long-term storage. instructions for components within their scope of supply. An interior. ' nspection i of major NSSS vessels stored on site was reco= mended to deter-mine the "as received" condition prior to extended storage. This inspection.was accomplished over the summer of.1975 Special. site storage facilities were de-signed for the reactor coolant pump motors and the reactor pressure vessel
' (a J-internals. Off-site storage of the turbine / generator components was arranged with commercial varehouces and GE.
By the su==er of 1975, site storage procedures were modified by Bechtel Construc-tion to reflect additional' requirements for long-term storage. .All long-term related. storage activities undertaken vere performed by 3echtel Construction: Field ,
)
' Engineers and monitored by Bechtel Quality Control Engineers (Q-listed items T, as an 'j
'l expanded part of their normal activities. These storage related duties. vere'. )
l
, described in site storage procedures. Implementation of long-term storage require-
=ents,;vhere applicable, has continued to date.
Evaluations o'f Bechtel activities in the area of long-term storage vere conducted
. _ by; Consumers Power Company! throughout' the extended pericd and have continued to l
.,v 1
). J datElvhere. applicable. These included a for=al audit program for Q-listed items l v
y- '\
; . .11/78 6.
73 - J3;-
~
lAppendix E--
.PaEe 10 of 11
- j >
1 i t i:- Q , 1 - p- , . s
- j. . conducted by CP Co Quality Assurance = Engineers and .a monitoring program for non-1 i .
3 .:
;Q-listed items conducted by Construction Field Engineers. -In addition inspections .
Tbk NRCIRegion III-Inspection and Enforcement have revieve'd Consumers Power -
~
/ Company's activities (in the area of long-term storage 'on a routine basis. -j F ,
j; t
+
3 t .- f i-4
~
i3 - de *
- 4
- (
f, . . i 1 Y 1.e 1 i-
- - .3 I
i- e. - 1 J
. h' i-
.I l-4 I
.v. e. '
j.,. -'1 p- , , i ' 1 i .- 1 l '. .j
- \
\
- $ lj c s
.. \ f .: , a - e 2 F'
> a .
a ,
- . , 3
i *. y ; 11/73 i' i. f *
.n s e ,.
[ x s .'C a - <__ 1_. _ 1.. _ L .. < - . . W '. . . 4-.-~~-~-~ww.-..~,----.-,-- , .. . ..
- - ~~-* +-
._. f~
*~. . 'AppIndix E'
'Paga-11'of 11:
lLfH i .i J-
.v- ,
'Questien
-5. L Appendix -E' accounts for 33 months. of delay- due to changing project scope l- '(9 months) and financial conditions-(2h months). However, the delay.
I' ' associated with operation of the first operating unit is 3h months (ie, the difference between December 1,'1977 and < 0ctober 1,1980. What is the ~ reason for this one additional menth .of: delay?
' Response
,. ~ The additional ~ month delay to the 9-month and 2h-month delays previously dis-i . cussed was added to the Project schedule in Februarr 1973 This schedule-is l
-summarized as the' Revision 5, March 29, 1973, schedule in Exhibit 1 and is due to the qtetual- remobilization of Bechtel in February 1973 instead of the' January ;
-1973 planned remobilization contained in the September lh,1972 schedule basis.
~~5.. Also,' cthe decision to complete Unit 2 first was made at this time and the status of design,; procurement and construction of this unit was behind Unit 1
- necessitating more worklto do or catch up; this. impacted the end date. When
-\
(. . considered together,- these two items resulted in a 1-month delay. I' f u L -- f h 1
^
8 . < i
.. '11/73
^
W l ' _ , n
. ;-1 ~;, , , , , , _ , . . .,
MILELIO NF. SUMn ARY SCHE 3ULE: F E-STARi 1, PRELIMINAR CONSTR g PLANT CONSTFUCTIDI 8/28/]2 yg RE440BI:.lZE P ERMIT
,....~~-i R E-S'IART
- 2. REVil l0N B 9 14/72 PERMIT C0hSTR PLANT CONSTf uCT108 RE.WOBill;'E 16 ? ,
Rt-START PERM C TR MANT CONm UCTI0r
- 3. REVI! ION 5 Jf29/73, RE MOBILI EE CCNSTRUGTION 5 0W001WN RE START DUETO TARGET FUEL LOAD PERMr' CDNSTR f LANT C3NSTRtlCT10N FU ANCIAI RESTRICTIONI
'SCHEllULE Al:G1978 9 RE-AOBILli
( E
.C 7 JFM AMJ JAS OND JFM AMJ JAS OND JFM AMJ JAS OND JFM AMJ JAS OND JFM AMJ J A Sl 1972 1973 1974 1975 1978
- 1. CONSTRUCTION OF UNIT 1 ( BASE SCHEDULE FOR CONSTR PERMIT l
- 2. CONSTRUCTION OF UNIT 1 FIRST WITH 9 MOS DELAY FROM BASE SCHEDULE
- 3. CONSTRUCTION OF UNIT 2 FIRST WITH I MOS DELAY OF ITEM 2 PLUS 1 M0 DELAY FOR SWITCHING UNITS
- 4. CONSTRUCTION OF UNIT 2 FIRST WITH 10 MOS DELAY OF ITEM 3 PLUS 24 MOS DELAY FOR FINANCIAL RESTRICT 10h5 ,
4
EXHIBIT 1 FLEL CJMrJERl;iAL LO4D OPERATION M: O FL EL CO AMERCIAL LCAD DPERATlilN (MD UEL h I l0MMEllCIAL 1.0 AD OPERA'10N MN' FUEL COMMERCIAL PLANT CD4STRUtTION LOAD GPERATION MS ~ OND JFM AMJ JAS OND JFM AMJ JAS OND JFM AMJ JAS OND JFM AMJ JAS OND JFM AMJ JAS OND 1977 1978 1979 1980 1981 4
.k 1 MIDLAND PROJECT:
[,
~ ~
FIRST UNIT' TARGET SCHEDULE MILESTONES g
.; MIDLAND PROJECT MANAGEMENT 11/13/73 L.
60 EXHIBIT 2 i 1974'& 1975 Correspondence Regarding the Financial Status of Consu;..ars Power Company Date of i Consumers Power Company Date of NRC Reques't Response j -- May~29,-1974 June 13,1974- [
- June 12,.1974 June 17, 1974
. September 13, 1974 March 17,1975 May 19,1975 i September 13, 1974 - { September 13, 1974. August 18, 1975
; September 13,1974 November 10,'1978
-September 13, 1974 March 2,1976
- O i
2 h-I 4 a i J l 1
.s - - , . -n.- n- - , , - - , , , . - ,, - . , n.---
m Page 1.of 2-n APPENDIX F~ TRADE AND NEWS PUBLICATIONS j j 1. Trade Publications Electric Light and P,ver 3 Electrical World
-Engineering News-Record Nuclear Industry Power-
~
Public Utilities Fortnightiv' 4 Scientific American i Transmission and Distribution
- 2. News Publications County Publication
'Alcona Alcona County Rei.ew (Harrisville)
Allegan. Allegan County News-Gazette Alpena The Alpena News ' Antrim County News (Bellaire) Antrim. l ("' Arenac Arenac County Independent (Standish)- 1-()} . Barry Bay Hastings Banner The Bay City Times
; Benzie Benzie Record-Banner (Beulah)
- _ Berrien- lbe Herald-Palladium (Benton Harbor)
The Daily Star (Niles) 1 Branch Coldwater: Daily ~deporter- ! ^ Calhoun Battle Creek Enquirer and News l i Cass Marshall Evening Chronicle Dowagiac Daily News j' p Charlevoix Charlevoix County Press (Boyne City) L Charlevoix-Courier
- Cheboygan- Cheboygan Daily Tribune I Chippewa The' Evening News (Sault Ste Marie)
, Clare Clare~ Sentinel Clinton Clinton County News (St. Johns) Crawford Crawford' County Avalanche (Grayling)- Eaton - Charlotte Republican-Tribune p .Ennet Petoskey News-Review, i . The Harbor Light (Harbor Springs) Genessee The Flint Journal ' Gladwin The' Gladwin- County' Record & Beaverton Clarion (Gladwin) Grand Traverse The Traverse City Record-Eagle , ;Gratiot< Daily Record-Leader (Alma) { Eillsdale~ The Hillsdale Daily News Houghton The Daily Mining Gazette (Houghton) { " Huron ~ ' Huron Daily Tribune (Bad Are)= j ' - s_,/ , -Ingham The State Journal (Lansing) j _Ionia Ionia Daily. Sentinel-Standard Portland Independent Review and 0bserver
- t. 1 l'
W r y- *- w ap b-ems =- *y-res -
Appendix F
-s Page 2 of 2 .v )
. 2. News Publications (Contd) County Publication Iosco Oscoda Press-Isabella Daily Times-News (Mt. Pleasant) Jackson Jackson Citizen-Patriot Kalamazoo Kalamazoo Gazette Kalkaska ' Leader and Kalkaskian (Kalkaska) Kent The Grand Rapids Press Lowell Ledger-Suburban Life Lake Lake County Star (Baldwin)' Lapeer Lapeer County Press
'Leelenau The Leelenau Enterprise-Tribune Lenawee Adrian Daily Telegram !
Livingston- Livingston County Press (Howell) Macomb Macomb Daily (Mt. Clemens) Manistee The Manistee News Advocate l Mason Ludington Daily News Mecosta The Pioneer.(Big Rapids) Midland Midland Daily News Missaukee The Waterfront (Lake City) Monroe Monroe Evening News .! Montcalm The Daily News &'Belding Banner (Greenville) _ g-~s). Montmorency Montmorency County Tribune (Atlanta) { 1
. ('-4' Muskegon- The-Muskegon Chronicle
ad -
i Newaygo The Newaygo Sun Oakland The Oakland Press (Pontiac) Oceana- Hart Journal 1 Ogemaw Ogemaw County Herald (West Branch) Osceola Osceola County Herald (Reed City) Oscoda Oscoda County News (Mio) Otsego Otsego County Herald-Times (Gaylord) Ottawa Grand Haven Tribune The Holland Evening Sentinel l Zeeland Record Presque Isle Presque Isle County Advance'(Rogers City) Roscommon Roscommon Herald-News Saginaw 'The.Saginaw News
- St. Clair The Times Herald (Port Huron)
St._ Joseph . Sturgis Journal Three Rivers Commercial Shiawassee The Argus-Press (Owosso) Van Buren South Haven Daily Tribune The Courier-Leader (Paw Paw) Washtenaw The Ann Arbor News The Chelsea Standard Wayne- Detroit Free Press The Detroit News ('"'s Wexford' Cadillac Evening News-X.; .
~ . , - - - -}}