ML20141N836

CPC 1985 Annual Rept

ML20141N836
Person / Time
Site:	Palisades, Big Rock Point, Midland, 05000000
Issue date:	12/31/1985
From:	Mccormick W, Mcnish T CONSUMERS ENERGY CO. (FORMERLY CONSUMERS POWER CO.)
To:	Harold Denton Office of Nuclear Reactor Regulation
References
NUDOCS 8603180186
Download: ML20141N836 (36)

Text

{{#Wiki_filter:Consumers Power Company I,^,,". *," General Offices. 212 West Mechgan Avenue. Jackson, MI 49201 (517) 788 1030 March 13, 1986 Dockets No. 50-155, 50-255 50-329, 50-330 Nuclear Regulatory Commission Att: Mr. Harold R. Denton Director of the Office of Nuclear Reactor Regulation Washington, DC 20555 1985 ANNUAL REPORTS Centlemen: In conformity with the requirements of Paragraph 50.71(b) of 10 CFR Part 50, enclosed are 10 copies of the Consumers Power Company 1985 annual financial report. Sincerely, s T. A. McNish TAM /mf 31h PD 1 I ( N b OC0386-0009A-EX03

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Y e "New beginnings" are announced so routinely today that the For some of them, the mechanics of energy-the switches and phrase sometimes loses its meaning. That is not the case here. engines and pumps-were the all-consuming passion They I i In every sense, new beginnings are what this annual report is wanted to budd machines-bigger and better machines-and l all about, make those machines run Others wondered. it electncity and gas could rnake hght. what else could they do? Their minds I$(trj[}[]l[} r in the executive of' ice, new leadership is in piace-envisioned dozens of uses tr' the new forms of power, dose i ons umma% hansW w scoety MaHy. he wm 'l} jg, %4 3 3 4 }( l In 6 nances, an intenm recovery plan enters its trst full year of I e aM MseNes Nw M seu Me new wonh l implementation and a major rate case is in progress. Their talents lay in attract;ng money through investment and in I IIIIII in operations, a new study of ophons for the Midland energy earning rnoney through marketing and service. facility is under way. llI.5 New technologies, new services, new finanang and marketing Lastly, dunng 1986 Consurners Power Company begins its strategies.. Consumers Power Company begins its second { second hundred years of corporate hfe and pubhc service. century as it began 's first, seeking new avenues of service to i The Company's founders were dreamers and entrepreneurs its customers and new opportunities for its investors I \\ SHAREHOLDER General Offices Trastee INFORMATION 212 West Michigan Avenue Slaking Fand Debentares j Jacksen. MI 49201 United States Trust Company of New York Telephone (517) 788-0550 45 Wall Street l New York, NY 10005 Ig86 Ananal Meeting 3 The annual rnecting wdl be he!d at 10 a m. Jackson time on Transfer Agent and Paying Agent Tuesday Apnl 8.1986, at the George E Potter Center. Jackson First Mortgage Beads Community College. 2111 Emmons Road. Jackson, Mich A National Bank of Detroit i nobce of meeting proxy statement and proxy will be maded to PO Box 1774 l l shareholders in March 1986 The prompt return of signed Detroit, MI 48232 l i proxies w;ll be appreciated Availability of Reports I Stock Listing Stockhc!ders may cbta:n. w:thout charge and exclusive of ( l Consumers Power Company stock is hsted on the New York exhibits a copyof the 1985 form 10 K AnnualReport,whichis l j Stock Exchange and the M,dwest Stock Exchange under the an annual thng with the Secunt es and Exchange Commission. l symbol CMS The Company *dl turnish any exhibits to this report to any shareholder requeshng them, but may require payment of a fee l Transfer Agent to cover their cost Requests must indicate that, as of February l l Commen, Preference and Preferred Stock 21.1986, the record date of the annualineet;ng of share-L ( Consumers Power Cornpany holders. the person making the request was a benehaal owner 212 West Michigan Avenue of secunbes ent.tled to vote at the annual meeting l Jackson. MI 49201 l A Finanaal and Stahshcal Supplement to the 1985 Annual I Registrar Report covenng 1975-1985 is avariable to ir.terested share-Common, Preference and Preferred Stock holders at no charge } Comenca Bank-Jackson, N A l 245 West Michigan Avenue A cassette recording of the 1985 Annual Report text is avaitable Jackson. MI 49201 tree of charge to shareholders with impaired sight Trustee Please address all requests for these reports to Thomas A 6 i First Mertgage Beads McNish, Secretary Consumers Power Company. 212 West Manufacturers Hwnver Trust Company M;chigan Avenue, Jackson, MI 49201. 600 Fifth Avenue i l New York, NY 10020 I I i

Consolidated Financial Highlights Dollars in Thousands Except Per Share Amounts 1985 1984 1983 Total operating revenue $3,298,328 $3 235.570 $2.973.691 Net income (loss) $(289,772) $221,058 $347,764 Net income (loss) after dividends on preferred and preference stock S(389,548) $99.814 $248.140 Earnings (loss) per average common share $(4.42) $114 $312 Average number of common shares outstanding (000) 88,885 87,884 79.470 $108 $2 46 Cash dividends paid per common share Retum on average common equity (17.2)% 43% 11 9 % Net investment in plant $3,812,498 $3 816.804 $7,119.016 Total assets $8,814,594 $9.218.244 $8,487,709 Total capitali ation 88,581,789 $7,067.360 $6.606,562 Electnc customers 1,382,788 1.366.964 1,355.060 Gas customers 1,228,859 1.198.471 1,180,713 THE COMPANY Consumers Power Company, Michigan's largest put4 utikty, Malet Sehsidiaries is celebrating its centennial of service in 1986 The Company Nortnern Michigan Exploraton Company expiores for, acqueres traces its origin to the Jackson Electnc l'ght Works, founded in ard sells oil and natural gas (U S and foreign operahons) 1886 in Jackson, M: cit, where the Company still maintains its headquarters The name Consumers Power Company dates Mich gan Gas Storage Company purchases gas from inter-from 1910. state p4pehnes. stores and transports gas, seus to Consumers Power. Today the Company provides electnc and/or natural gas service in 67 of the 68 count:es in Michigan's Lower Peninsula Selective Conechon Services, Ince collects past due utihty Two of every thres Michigan residents, some 6 milhon peopa. bdis are served by the Company Ut>hty Systems, inc operates telephone informaban systems Consumers Power supphes energy to more than 46.000 farms for utihties, municipat<hes and others and to leading manufacturers, including those in the automo-tive, chemical, food product metal, paper and phsmaceutical Huron Hydrocarbons,Inc : operates underground hydrocarbon industnes storage facihties and other related activihes at the Marysville gas reforming plant Dunng 1985 the Company increased tne number of customers served by its electnc and natural gas systems by almost 40.000. and set a record for annual electnc sales i CONTENTS 2 Letter to Shareholders 4 Electnc Ooerabons 6 Natural Gas Operahons 8 NOVECO 10 Building the Future 12 Management's Discussion and Analysis 16 Consohdated Statement of Income 17 Consohdaicd Statement of Changes in Financial Position 18 Conschdated Balance Sheet 19 Consoidated Statement of Capdaktahon 20 Conschdated Statement of Capital in Excess of Par Value of Common Stock 20 Notes to Conschdated Financial Statements 21 Consohdated Statement of Retained Eamings 31 Report of !ndependent Pubhc Accountants 32 Selected Financial Informahon 32 Oumerly Financial and Common Stock Informatic'i Directors and Othcers (inside back cover) 1

TO Our Shareh0lders Financially.1985 was a dismal year for Consumers Power need to utihte this asset Gaining their support and fully resolv-Company, with the Company poshng a net loss of $270 mdhon ing the Dow htigahon and the currerit rate case are the corner-and a net loss 0: $390 mdhon after peterred and preterence stones of our Company's recovery dividends. The loss is harsh evidence of the severe inancial consequences of the idled Midland project. it av underscores These issues underscore the fact that we have many chal-how much our Company's future still depends upon recovery of lenges to overcome before the Company is on the road to a substantial part of our investment in Midland. certain recovery But I beheve we can succeed ^'t" u9 ope'*t'ng revenues increased shghtiv in 1955 to $3 3 One of the reasons i accepted ine challenge of coming to Con-h in the past 3 bilhon. the Company m the fourth quarter wrote oft approxi-sumers Power last November was because of the basc, under-yeats, eleClriC mately $488 mahon of its $948 mdhon investment in facihties tying strengths of the company Those strengths have tended sales have

• nd '*' at M'd'and that *"e anocated to ine oow Chemicai to be omkad m tne unei e rnent nents. bunwy are Company under a contract to provide process steam The there nonetheless. Consumers Power operates the safest and increased by a remaining $460 mdhon of that investment is the contract ter-second most ethcient ut hty system in the nation it also has 10%al Of alm 0si minanon payment we are seeking from Dow in ht ganon which very compet tive electnc and gas rates and serves most of tre will Conhnue dunng 1986.

high growth areas of Msthigan. Moreover, the techmcal exper-12%, Clearly hse e tne Company s empiovees is impressive Subse,ary ac-indicating the in December we submitted to the M.chigan Pubhc Service Imties such as those of N0MECO. M.chigan Gas Storage Com-i Commission (MPSC) a rate requed which, if granted. will allow par'y, Uthty Systems. Inc and Select ye Collection Services. need f0r future us io,,co,,, in,,,ma,n,ng inree tourtns. m S3 i edkon. e our inc demonstrate ine canpany s potennai w broad invotve-CapaCily. Midland investment As the 1985 tnancial results show, we ur-ment in enerp expwabm. supply and sexes gently need prompt rate action by the MPSC. We have asked for an increase of 9 6 percent, or $165 7 mahon annually, in My long-term goal as chairman is to post on the Company to partial and immedia'e rate reher beginning late in 1986 and for make the fullest possible use of the<e inherent strengths, both an addibonal 8 6 percent increase, or $162 7 mdbon annually, for our stockholder $' benett and for the basic job ttus Company efectree in late 1987. A!! hough tNs increase is sign.lcant, our performs: po*enng Michigan's progress rates stdl edl be compebtive. As Michgan's largest news-paper, The Oe/ rod News, has rioted, more than 80 percent of We have already taken important steps to move the Comoany u S. utikties charge higher rates than Consumers Power forward by reorganizing and strengthenmg managernent We also will enhance our board of difectors. sublect to your ap-The Anal rate treatment, of course, wdl be impacted by the ul-provalin Apnl bmate disposebon of the facility Midland is not merely an asset l C8 Plan ta have on tne Company s ba:ance snet. it is aiso a vue pow r thee n see i new nom,nees u ine bo,d iney n peopie a specific p' int 855et '" M'ch'can'5 econom'c tu'u'e

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o' P'om'a'ac' ia M'ch'o'a 'ad a* boav-'ecooned *de'5 rence ut the MPSC.one of my in.bal achons was to order a new who will tend presbge and strengre to our eforts dunng our rec 0mmendatien study of opbons b using M>Cand Ths comprehensrve study recovery and beyond They n Dr. John Deutch, provost d the On Midland... a'u mi mir naminnbandement a canp%m as a nucieu Massacnusetts insidute e reen= ton and wmer u S under. plant it also edi consider non nuctear alternatives. such secretary of Energy. Thomas Russell, chairman and CEO of this spring, as compienn, u,eiand as a coai, n,ta,ai gss como.ned. rede,ai.uogui Capaanon. and Robert runie. chairman and cycle plant. CEO of Scaled Power Corporabon After some in.fral concern about examining the Midland plant in the management ranks we are forging a strong comb nahon issue. this new study has received considerable support and of talent from within the Company and several newcomers who encouragement m the M.chigan press and from an increasing bnng strengths that edl be of special value in November, John number of state oscials and busness leaders it simply makes W Clark prwd the Company as senint vice president of com-sense to examine the ophons for Midland particularly m view rnunicahons His expenence in the energy industry and in state of the Company's conhnued gro*th in demand Ior electncity in and rederal governtnent *di be invaluable m coordinahng all of 1985 the Company sold a record 27 5 bdhon kdowatt hours of the Company's communicahons activit es. including pubhc electroty in the past three years. electnc sales have increased afairs govemrnental atairs and internal cornmunicahons At by a total of almost 12 percent, clearty indicahng the r*ed for the same bme. Bernie Schroeder, the Company's veteran chiet tuture capacity federal lobbyist, was named vice president of governmental afairs in December. Hamdton M Robichaud pned the We plan to have a specdic recommendahon on Midland to put Company as vice presider'. for human resources He bnngs in-before the MPSC and other state officia's and business leaders depth experience in personnel pohcies and administrat on. On this spring The task of educabng people on Midtand will not February 1.1986. Dr Fredench W Buckman reloined the be simple But I am convinced that because of the growing Company as vice president tar nuclear operahons He eas the need for new electnc capacit/ to support Michigan's growing Company's esecuhve director of nuclear actmties in 1977-economy, and the $4 2 bakon already invested. Michigan's 1982 and has headed a nuclear consulhng firm for the past 2 regulators, poht: cal leaders and the pubhc edi appreciate the several years

l i l l l l Also joining the Company in February as vice president of U l planning and investor re!ations writ be Victor J Fryhng well 1 respected by the inancial community And Anally. Daed A. .,3, 1 M,kelonis. the lead attorney on our rate case. f'as tecn named vice president and general attorney f All of us in rnanagement are making a concerted effort to im- ) Drove the Company's credtbaty, upgrade its image and l g l strengthen the lines of communication between the Company i and the regulatory community, state cfhcials and our cus- , #am ~ Michigan,s future tome,s wna, no p,,bnc onnt,,s enn,ei,in, m sa,0,,ts 0,n l 8C0nomiC 9IOwth tate. since it is regu'ated by law and iudged by pubhc opinion. tt'e hkehhood of its success is much improved atth better gg g com/nunicahons in an atmosphere of mutual respect and r tied to Consumers c*peahon inus. it is npataniinat we strenginen our Power's abillty ta c **"'"c " 5 b '" * "'" '"' "* P Y ' S **" ' 5

• 4" outsc groups p0wer that The Companiumployees and sharenoldes nan ben wtal progIess.

j sources of sucpnrt through t'ie d thcul! days of the past year. l Also. our Daard of directors has gwen tirelessly of its time and l l' energ,es in ins rega'd. we cwe specW thanks and great ap-l preciation to four directors *ho *di be ret;nng in Apnl Newton Cut;er Jr.. Jchn Hannon Jr. John Suertn and Wa'ter Boris. our t chef finan;ial off,cer in adddion. ne are very grateful for the longhme sery'ce of Al Ayrrond. *ho resigned from the board i November 6,1985. and John Sety who retted as chairman l October 31.1985 j Even as we addvss the current problems. it is important that I am encouraged as our Company begins its second 100 years I

• e begin to develc3 our strateg>es beyond the recovery penod and am locking forward to moving our Company into the f

Now 's J particularty apt time for tornard tNnk.ng because ins promisine future that a*1ts us year Consumers Power Company turns the corner from its first I century of seruce mto its second Sincere!y. ( Consumers Fewer's serwce territr/y covers 75 percent cf j[ D;[ Q Consumers Mrchigan s Lower Pen nsu!a two of every three M.cNgan /* j residents are served by the Company in a very real sense. Wuham i McCntmick Jr [ Power Can be a y,cn,gan s,utu,, econ,m,c g,0,n,nd p, ogress,,e ned,o Cnayan a tre gard and leader again in Consumers Power s ab,nty to pc.er tnat progress v.chigan Chet Executwe Otcer j g needs a hea: thy and prod xhve Consumers Power Company to j meet the growth needs of M.chigan in tNs rega'd your man-February 5,1986 industry and agement and empiovees pledge our tumorts to restae the i econ 0mlC Company to manaal hearh i deveiOpment to i beheve rnat tne tuture can ne b,,gnt rot tne state and ior our Michigan. Compary Consumers Power can be a leader agarn in attract l ing new industry and econorr ic development to Michigan Just as in the opening days of the Company s first century. oppor-i tunihes exist for us to show the way New technologies are coming that hold great opportunities for us Cogenerat on and a:terna'e energy sources are errerg ng_ and *e should be ac-tively invoh ed in them We have already succes; fully entered the oil and gas enclorahon business. and I beheve *e can do i even more there Further down the road is a wide range of energy-ref ated seroces that can be of va!ue to our state and its cibler% even as they benefit our Company 5 3 2

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-.. _ _ - ~. _ t l l l i 264 days of cor.linuous availability, the longest in its history, including the next major increment of power that will allow the i before being shut duwn for refuehng and main'enance Company to accommodate the growing needs of our exishng ) customers and to attract new customers to Michigan. j E!hciency contnbutes to cheaper electnc.ty, but the Company also is working on other trorsts to keep energy costs competi-For the near future. the incomplete Midland facihty may offer j tive. Several special incentive rates have been designed the best opportunity for system expansion. This spnng the i specifically to keep existing industry in Michigan and to lure Company will conclude its internal study ut ophons for Midland new business to the state. A special rate for the metal-methng and will seek pubhc and regulatory support either for acandon-l industry, where the use of electncity is a very large part of busi-ment of the project or for a completion, Nan The key questions j ness costs, he! ped existing customers remain competihve and to be answered are: How much additional capacity will be in business, the rate helped save 600 jobs at one facihty alone needed dunng the 1990s? ls there a cost e5ective means olin-Other special rates are aimed at helping Mc'iigan attract new stalkng that new capacity at Midland? What form-nuclear, or expandir.g facihties that range from small ndustnes to huge coal, gas combined cycle-should that capacity take? Car-product 10n plants looking beyond Midland, the Company will consider a vanety l Residential customers also ber efit from the Company's eftorts of scenanos for meeting energy needs, incsJing cogeneration I to keep rates competitive An industry survt y found that for out and other alternative energy projects. If any clear t,'nd has typical residential customer's montNy use of 500 kilowatt-emerged dunng the turbulent years since the 1973 oil embar. hours, more than 80 percent of the nation s utshbes charge go, it ts the increased importance of electnc energy to our more than Consumers Power economicwell-being initssecondcenturyof serviceasinits Erst it will be Consumers Power Company's challenge to Gratifying as the Company's competitiveness and generahng demonstrate the benetts of electnc power and to ;:rovide those performance are, the pnmary focus of our efforts is the future, benefits through dependable and ethcient service During 1985 Consumers { Puner Company sold a record l i 27.5 billion kilowatt hours of j electrici y. Spurred by growth t 1 in the industrial sector, the l Company's sales have j i j increased almost 12 percent over the past three >vars. ,/\\ I Electric Sales (billions of kWh) j 35 / 30 2Ts 26 9 l 2s 8 ~ ~ 25 t g ~ / I 15 ~ ~ k t g,y l 10 ~ ~ [ 5 ~ 3 1983 1984 1985 i~aN' SAN # i 5 l l

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Tr.e big news of 1985, homever, came from foreign shores. What is perhaps most impressive about NOMECO's recent-where NOMEC0's expanJing involvement offers exciting year results is that they have come against a background of promise for the future Jast oser a year has passed since Aus-hard times in the oil and natural gas industries Yet even in the traka gave N0MECO its tirst foreign od production. and events face of depressed markets and general uncertainty, NOMECO Ocwn Under continue to De upbeat Austrahan production has remained debt free from 1978 ur.til late 1984, funding its entire reached more than 500 barrels per day, and att signs cortinue esploration program interna'ly With such management skill to point to further success as explora: ion proceeds in nearby and w,th opportunities to be reahted around the g!obe. New Zealand NOMECO has loined with a group of Austrahan NOMECO c!early will continue to be a source of strength and and New Zealand companies to earn an interest in the only on-growth for its parent company shore permit where significant produchon has been lound in Colombia and Suriname, drilhng on NOMECO interests is scheduled to beg:n during the first quarter of 1986 in Ecuador, a st.Il r. ewer exploration program is just now starting to take shape Dollars in Thousands (Except Earnings Per Share) g Highlights 1985 1984 1983 Total revenues S 89,771 $ 90.107 $ 90,848 Net income $ 13,445 $ 10.569 $ 19.152 Cash dividends pid S 5,000 $ 4 500 $ 6.000 Eamings per share $.92 5 72 $131 Return on equity 10% 9% 17% Return on capital 10% 9% 17 % internal cash flow $ 57,086 $ 57.830 $ 49.059 Capital expenditures S 84,998 $ 58.013 $ 43.080 Total assets $218,531 $181.111 $172.161 N, Sa!es Gas (VMct) 8,937 9.017 8.802 Oil and condensate (Mtbi) 1,855 1.756 1.657 Natural gas liquids (Vbbi) 320 331 433 ewNM Gas (Bct) 69.1 57 1 571 Oil and condensate (VMtbi) 7.8 81 80 We:ls drced 191 108 127 Success rat o 49% 43 % 43 % Total productive wells 724 414 362 Gross acreage 32,824,000 23 733 000 33.763.000 Net acreage 3,882,000 2.673.000 6.949.000 9

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industnal customers whow energy cash re a major part of Cit, and Muskegon SCS (Se6eti ve Collex fion Services Inc ) operating expenses ihose rates *Nch offer savings of 6 inovides man,tgement of past the au cunts to utshfies and percent to 40 percent send a clear message to existing and other industres Utiht, Systems tot operates an energy theft potenhai customers %chigan tntends to 70w and prosper hothnr and utters informahur services a utthhes municipah Consumers Power Company intends to gn;w and prosper with.t hes and others Expanding :ts range of services s another aspect of me Com inese act:vittes and mixe 7<e a new look to Consumers pany s growth In years to come that espansion ma, incluoe Power Comoany as et celeDrates.ts centenmai Nnt that the cogeneration protects increased explorahon for fossd fuels and basic goa; has changed the Company exists to identity and deve'coment of diternahve enery resources Toda, the Com provide to customers the best energy and energy related ser pany is marketing a brodd spectrum of Dusiness services stem vices ' alaDie Ont, the twus has changed it es forward ming trom its own ta' ranging techmca. and professional continuing to dc our loh of powennq Mir Ngan s progress espertise htty years ago for esampie Consumers power s 'aDreator, esisted pomanly to assist apphante manufactu ers 0, test +ng r their products and rerominending design changes to impruve performance 'odav LCS (LaDorator, Commercia Ser icest v ma'kets techn<a' services ranging from advanced.nstrument cahbrahon to nondestructive teshng of a,rcraft components 'IC f Technical Da,ning Centers c; Consumers Paweri afters courses 'n a.anety 7t :ndustna sk,!is at its 'ac mt!es m Bay Through. tforts hke t he weepp y appliant e st. res <.r it s earh E days and its high te< hn b e i4 u... _. n. M i 'l Con. urners P iwer (. mpans n continualb +an hing f,r new bu. ince < pp. rt un it ies -<>s,ur / u s e )) Nn M ) y w,, w , l ,y n g y t wee l M- [ .k,.F( t m O e % gb p f( G.- V. t s.y-M ,N 8g. ti

Management's Discussion and Analysis Consumers Power Company and Subs 4 aries I __-_E________ RESULTS OF OPERAT10lI$ OVERVIEW The Company had a net los s nt approximately $270 milhon in inc rates and there is no assurance that such taxes can be 1985. After deducting div dends on preferred and preference recovered from Dow. E stock, the net loss was approximately $390 mdhon or $4 42 per average cornmon share Net ntome was approximately $221 Since the Jufy 16.1984, shutdown of the Midland protect. net mdhon in 1984 and $348 mdhon in 1983 After payment of income has been adversely affected by the loss of Midland Al-dividends on preferred arj preference stock, earnings per aver-lowance for Funds Used During Construchon (Af UDC) and the age comn on share acre $1.14 in 1984 and $312 in 1983 charging of previously capitahled M:d!and financing costs to k interest expense AFUDC in 1985.1984 and 1983 was apprax-In December 1985 the Company charged earnings for a portion imately $3 mdhon. $152 milhan and $242 mahon. respectively. of its investment in certain Midland nuclear fuel and certain I facihbes allocated toThe Dow Chemical Company (Dow) under a Because of the depressed market for uranium concentra'es and General Agreement with Dow The pretan wnte-ott of approxi-the Midland protect shutdown. Plateau Resources Limited s y rnately $488 mdhon reflected the 1948 mdhon investment less uranium assets were wntten down in 1985 and 1984 The the terminahon payment bdhng to Dow The after-tat amount wnte-downs decreased eamings by approximatefy $21 mdhon. was approximately $331 mdkon or $3 76 per average common net of tax, and by approx;mately $46 mdhen, net of tax. for L, share. The ardnt of deferred income taxes was increased in 1985 and 1984. respectively 1985 by apocximately $65 mdhon to recognize that income taxes, which relate to certain Midland nuclear fuel and certain The eshmated eflects of inflabon are descnbed in Note 14 to the facihties allocated to Dow, wdl not be recovered through elec-Conschdated Financial Statements ELECTRIC UTILITY In 1985 net operahng income decreased pnmanly due to growth in the Michigan economy The August 1984 interim rate OPERATIONS higher income taxes. Income taxes increased due to increased order which granted rehef in the annual amount of $137 mdhon operating income betore income taxes and the loss of the Mid. provided increased revenue in both periods. J land interest expense deductions which are now reflected as part of "Other income (Deductions)" on the Conschdated Power Costs k Statement of Income Both sales and taritt rate revenue were The generahon mix used to meet total Company requirements higher in 1985 than 1984 for 1985.1984 and 1983 was-Net operating income increased in 1984 because of growth in 1985 1984 1983 sa!es and the August 1984 tard! rate increase. Fossd and other 58 U 3 % U% Nxitar 19% 4% 15% Electric Revenue and Sales { Purchased and Corgonents of operahng revenue vanances were: interchange 25% 38 % 28 % 100% 100 % 100 % g increase (Decrease) From Pnor Year y (Mdhons) 85/84 84/83 in 1985 tuel for generanon costs increased approximately $14 [ Sales $ 27 $ 31 rMhon due to the increased operahon of the Pahsades nuclear E Tariff rates 93 46 plant and increased sales The average cost per kdowatt hour Power supply cost recovery (79) 11 generated decreased from 195 cents to 167 cents because of Other (2) 4 a mix of more nuclear and less fossd generation The dec ease of appron'mately $77 milhon in purchased and interchange r S $152 power costs resulted from the operahon of Paksades Sales increased 2.1 percent in 1985 and 4 5 percent in 1984 In 1984 fuel for generahon costs decreased by approximately Industnal sales increased 2 8 percent in 1985 and 8 5 percent $9 mdhon The decrease pnmanly resulted from a Palisades in 1984. The increased sales in 1985 reflect the conhnued outage The increase in purchased and interchange costs re-r suited from the Pahsades outage and increased sales ~ GAS UTILITY in 1985 net operating income inceased 33 percent, pnmanly 1984 Net operahng income also increased 30 percent in 1984 OPERATIONS because of revenue result ng trom a final rate order issued by largely because of rate increases granted by the MPSC. the Michigan Pubhc Snyte Cc nmission (MPSC) in hgust m 12

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E Management's Discussion and Analysis m Consumers Power Company and Subsidianes l l l CAPITAL REQUIREMENTS In the next few years. a major use of the Company s cash ib construction esumphon of construction at Midland or ret E be to reduce its debt and other obkgations During 1986-90 bishment ol existing units The construction expenditures edt payments for restructured bank-related debt. first mortgage be used pnmanly to maintain sate service, meet new customer bonds, other long-term debt and preferred and preference stock requests and keep exishng generahng plants operahng The wdt total approximately $16 bdhon Company plans to fund its 1986-90 construchon expenditures E with internal funds i The restructunng of approximately $12 bilhon of its bank-related debt in 1985 without an increase in interest rate options Eshmated construction expenditures for NOMECO are $60 md-or margins provided what the Company beheves to be a man-tion for 1986 and $330 mdhon for the penod 1986 90 L ageable repayment schedule. The Company repaid approxo NOMECO's expenditures are for lease acquisihon, exploration mately $174 mdhon under the restructuring agreement in and development of od and gas properties and for the purchase 1985 Quarterly pnncipal pa yments. ranging from S39 mdhon of od and gas reserves NOMEC0 presently expects to spend 7 to $47 m lhon, are scheduled through July 1991. approximately 75 percent ol its expenditures in the continerital United States (30 oercent in Mich gan) and 25 percent else-The Company s estimate of construction espend,tures is $131 where, and it expects to use enternal funds to finance a port on mdhon for 1986 and $750 makon (exclusive of $90 mahon for of t!'ese enpend.tures Construct on expenditures for the Com- [- nuclear fuel) for the period 1986 90 These estimated con-pany's remaining subsidiaries are not espected to be material L struchon expenditures are consistent with the 6nancial dunng this pened stabihlahon rate order and assume no new generahng plant INTERNAL SOURCES Because of the short term hquidity problem related to the Mid. generate mternal cash savings of approximately $$75 mdhon OF CASH land shutdown, the Conschdated Statement of Changes in Fi-over the next six years The sources of the cash savings over nancial Posihon was changed frcm a " funds for gross property the six-year period are expected to be reduced operahon and g addit ons" format to a " cash and temporary cash investments" maintenance espense ($220 makon). reduced construchon format in 1985 Conschdated sources of cash have significant-costs ($280 mikon). cash dividends from NOMECO ($60 md - ly shifted since the Midland project shutdown. The percentage kon) and sales of assets ($15 mdhon) However, some shitting { of total cash provided from operabons increased to 77 percent among these sources is hkety. in 1985 from 49 percent in 1984, whde the percentage of cash from financing actmhes decreased to 23 percent in 1985 from in December 1985 the Company lled testimony and exhibits 51 percent in 1984 which support its request for M d!and rate rehef in the prudency phase of the Midland rate case The Company beheves that the f Rate increases provide a major source of cash for the Com-M<dtand project was planned responsibly and costs were in-pany The Company's pending electnc rate case. in which it curred prudently. reasonably and in gorx! f aan The Company's seeks recovery of approximately $31 bdhon of its Midland in-fihng requested recovery over 15 years of apptcaimately $31 P vestment was separated into two phasesin September 1984 a bdhon of its Midtand investment and a return on the debt and financial stabihlation phase and a prudency phase On August preferred and preferent e stock associated with that investment 24 1985. after the Company had met certain condihons im-The Company d.d not ask for a return on comrnon equity posed by the MPSC, financial stab,hlat on rate rekel for six Nedher did it request any recwery from its electnc retail cus-g years in the annual amount of $94 mdhon became effective tomers of expenditures at Midland for certatn nuclear fuel and The $94 mdhon is subiect to reduchon fo. addihonal net certain facikhes al:ocated to Dow the Con.pany is seding in proceeds from the disposthon of Midland nuclear fuel, and its khgabon to recover a $460 mdbon terminahon payment from continuation is subject to certain condit ons M,chigan's attor-Oow ney general has appealed the MPSC's financial stabihtahon E rate order to the courts if the rate increase is terminated. the The amount of cash from internal sourc is wdl. in the long term. effect on the Company s financial cond hon would be matenally depend largely on the level and timing of recovery of the Com. adverse pany s Midland investment. which will be determined in the prudency phase of the Midtand rate case The financial stabihlation rate of der requires that the Company EXTERNA; FINANCINGS The Company must be able to raise capital to improve its elec-financed pomanty though a $240 mdhon loan trom the Com-inc and gas facihhes and respond to unenpected needs and pany's and Gas Storage s rnalor supphers of natural gas The opportunihes Short term borrowings are necessary for the loan was repaid in March 1985 Company and Michigan Gas Starage Company (Gas Storage) to finance seasonal gas and fuel inventories Because tradr On August 241985 the Company and Cas Storage encuhx!a t onal short term borrowing sources were not avadable after the $300 milhon, six year, short term revolving credit and act.ep = Midland shutdown, the 1984 85 seasonal gas inventones were fance facdity agreement (RCAFA) The RCAF A wdl be used to 14

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Consolidated Statement of income Consumers Power Company and Subsidiaries Thousands. Except Per Share Amounts Year Ended December 31 1985 1984 1983 SPERATING REVEME Electric utihty $1,897,243 $1.658.465 $1.506.065 Gas uhhty 1,533,258 1.508,114 1.399,987 Other 87,829 68.991 67.639 Total operating revenue $3,298,328 $3.235.570 $2.973 01 OPERATING EXPENSES Fuel for electric generation S 372,228 $ 357.872 $ 366.%2 AN8 TA HS Purchased and interchange power 219,397 296.649 208,802 Cost of gas sold 1,831,183 1.053.093 1.012.909 Other 435,754 430.443 423.279 Total operatiori expenses 82,858,580 $2.138.057 $2.011.952 l Maintenance 145,929 134.463 146.084 Depreciahon, deplebon and amorttraban 201,333 206.444 177.866 General taxes 188,855 158.280 140.002 Income taxes 235,929 105.847 28.555 Total operating expenses and taxes $2,888,8M $2.743.091 $2.504.459 NET OPERATING Electnc utshty S 348,928

f. 379.333

$ 373.173 INCOME Gas utihty 138,454 102.979 79.396 Other 12,340 _, 10.167_ 16.663 Total net operahng income S 489.722 $ 492.479 $ 469.232 STMER INCOME Wnte-down of Midland nuclear project costs S (487,737) l l DEDUCTIONS) Wnte-down of uranium assets (38,388) (84.574) Nonoperating income taxes, net 219,558 76.633 (2.454) 67.822 118.353 Allowance for other funds used dunng construchon Other. net 3,594 24.589 24._621 iotal other income (deductions) $ (382,845) $ 84.470 $ 140.520 INTEREST CHARSES Interest on long term debt S 485,458 $ 380.187 $ 332.149 Other 53,759 59.914 53.636 j Anowance for borrowed funds used dunng constnachon (2,688) , 84.210) (123.797) ( l _ - _ ___ _ _ _. _ _ _ _ Net interest charges S 458,889 $ 355891 $ 261.988 GT INCOME (LOS$) Net income (loss) $ (284,772) $ 221.058 $ 347.764 Dividends on preferred and preference stock 119,778 121.244 99,624 Net income (loss) after dividends on preferred and preference stock 8 (389,544) 3 43814 $ 248.140 Average number of common shares outstanding 88,885 8,%4 79.470 Earnings (loss) per average common share $(4.42) $114 $312 The accompanying notes are an in;egral part of this statement. 16

Consolidated Statement of Changes in Financial Position Consumers Power Company and Subsidiaries Thousands of Dollars Year Ended December 31 1985 1984 1983 CASH PROVIDE 0 BY Operations Net income (loss) $(289,772) $ 221.058 $ 347.764 Depreciation, depletion and amortization 218,880 213.174 186.641 Deferred income taxes, net 1,939 41.503 (4.569) Deterred investment tax credit, net (23,538) 14 356 (20.019) (67.822) (118.353) Allowance for other funds used during construction Wri',e-down of Midland nuclear project costs 487,737 Write-down of uranium assets 38,300 84.574 S 453,54G $ 506.843 $ 391.464 Working Capital $eurces(Uses) Accounts receivable $ (8,592) $ 32.997 $ (108.931) Accrued revenues (71,134) 42.020 (64.788) i 2 223) 64.281 T [ Gas in underground storage 58,048 Generatir g piar,t fuel stock (3,810) (665) 37.888 F Accounts payable (7,517) 9.491 91.492 i Accrued taxes 814 (708) (541) Deterred income taxes 42,435 (29.690) 49 593 Revenue reserved for refund (85,217) 22 051 (68.033) Other, nel 127,889 46.466 81.497 I $ 70,894 $ 49 739 $ 82.458 I Flaancing Activities $ 13 472 $ 324 480 Common stock 53 000 165.000 Preference stock 185 000 131.500 First mortgage t;onds Notes payable 188,807 256 939 32.790 Bank loans 15,350 275 000 Cap'tal leases (228) 30.263 14 738 Sa!e and leaseback of nuclear fuel 14,794 3 295 18.859 5,330 41.338 46.410 Other $ 201,853 $ 583 307 $1.008.777 z E Other, net $ (48,808) $ (15 413) $ (83 643) f Total cash provided $ 879,485 $1.124 476 $1.399 056 CASH USE0 FOR Peduction of nctes payable $ 240,000 $ 92,975 $ 183.002 Petirement of debt and equity securles 225,055 104,418 58 724 3 Div+dends 119,778 215 628 293 377 Construction expend,r res (a!'ef deducting 4'lcwance for othat funds i u r:. used durmg construction) 205,839 622 428 854 732 Total cash used S 793,870 $1.035 449 $1.389 835 Increase (decrease) in cash and ternporary cash investmenh $(114,185) $ 89 027 9 221 E L m II I

Consolidated Balance Sheet Consumers Power Company and Subsidianes Thousands of Dollars December 31 1965 1984 ASSETS P! ant (At Onginal Cost) k Electnc utility $4,056,118 $3.884.249 b Gas uht.ty 1,404,609 1.377.327 Other 487,969 457.181 $5,948,694 $5.718.757 Less provision for accumulated depreciaSon 2,254,742 2.002.907 1 $3,693,954 $3.715.850 118,536 100.954 Construction work in progress $3,812,490 $3.816 804 I Midland Nuclear Project $3,673,950 $4.195.247 Current Assets g Cash $ 11,594 $ 14.299 y Temporary cash investments at cost, which approximates market 2,554 114.036 T. Accounts receivable. less reserves of $5.857.000 in 1985 and $6 976.000 in 1984 273,234 264.642 Actrued revenues 264,815 193.681 gi Gas in underground storage, at average cost 224,233 280 279 Generating plant tuel stock, at average cost 73,039 69.429 = Matenals and supphes, at average cost 91,883 90.556 128,340 _ _ }58 123 y Prepayments and other _ _ _ _ _ _ _ $1,069,694_ _ _ $1._150;480 Oeferred Gebits and Nencurrent Assets $ 58,440 $ 55.713 g Total assets $8,614,594 ~ ~ $9.218 244 i STOCMHOLDER$' Capitallraties (See Conschdated Staiement of Capitahlation) ~ INVESTMENT Commnn stachholders' equity $1,893,642 $2.282.336 ANO LI ABILITIES Redeemable pre +erence stock 269,700 279 285 Nonredeemable preference stock 358,000 358,000 ^ Redeemable preferred stock 122,055 126.555 Nonretemable preferred stock 334,779 334.779 Long term rtebt 3,573,676 3.389.010 Noncurrent obbgihons under capital leases 29,916 297.395 $6,581.769 $7.067.360 Current Liabilities Curtent matuntres and sinking fund on long term debt and current porton of capitalleavs $ 228,730 $ 85.826 Accounts payable 228,158 235.675 Notes payable 166,607 417.699 Accrued taxes 198,253 197.639 Deterred income ta,es 165,022 122.587 Accrued interest 132,151 121.338 Reverue reserved for refund 39,737 104 954 Other 108,860 128 638 $1,267,558 $1.414.356 Deferred Credits and Nencurrent Liabilities Deterred income tanes S 525,530 $ 523 591 Octerred investment tas ued<t 123,531 147.069 Other 116,206 65M8 $ 765,267 $ 136 528 Constnxt on commitments. kbgatan and other conhngenoes (Notes 2. 3. 6. 7 and 10) Total stcrbholders' investment and habihtles $8,614,594 $9 218 244 The attompanprig notes are an mttypal part of th6 siternent 18

~ Cons?lidated Statement of Capitalizati e... - J 3! Con e m N e' "w, tod %twi'n e ' 4 Q u e n, o ce. nu u, [- ?," e,v o 1985 "M4 1985 '%4 s, i. e 2 COMM01

• ""' ' *
• iT N.au i:

'W 1' - STOCNHULDERS' 'J5lkk)000 e. - 88,065,039 88 orn u n 5 880,650 iWW x. EQUITY 4"' t " C "s ";*d' 824 371 KJ48'i % nec w % 240,686 n 40 J 44 4.:- he- ' l.7 52,065 SJ st ' < anu a... n r ..h 5' 4 # , a e a,- .n*, $1,89 3,642 $J JHJ lit, PREFERENCE STOCN- +c ~ ~.i > 185 % i' W 'r><,i 10,800 ' t ta 10,800 '4 400 -s 1,800,000

1. ' i ' +

/1,500 V xm Cumulative, $1 par value, $J N> ' cH. i N-/ 4 2,000,000 55,000 $$ uh! 3 authertred 2 oJ $J ' t ' c+ .e, E. 2,000,000 Ww 55,000 6 MJ O 40,000,000 shares 4 1 i? ' * 'a'ec. a + 1,900,000

• uh' 49,400

>om .+ $ Je~ .'c, .a 4 1. $J '.c. ',, 2,000,000 km M 50,000 win S 269,700 i Nm j - , -,. c.. .a.4 y 2,000,000 ao S 50,030 i m im ,i.

• g s <... e, i t ;

$J c,, 2,000,000

• a 50,000 se om

$J ' c. 4, i 'i ', ' l 1,600,000

• u 40,000 in
• y-1J c.

4 e w 3,000,000 i m kn 82,500 (

• m

$J V 'c- .i - ...r s un 82,500 ( a 3,000,000 tt $J m co'.a 2,000,000 Wo 53,000 L! * ' i-1 ti I? m + .4 $ 358,000 i N ho I.. h. 't q ',6 PREFERRED STOCN- + + c > 54 79,550 at a S 7,955 i < is is 256,000 25,600 w Cumulative. 4 k $100 par value, ' d 425,000 ma 42,500 tt 1 ' ' f,',. 100,000 9 o 10,000 m i[ aethe< ired 360,000 4*< w 36,000 9e -1: 7,500.000 shares

• -}*

e. 5 122.055 1 + >,

+ 1' S 4' $ 3,806,005 5't* 23,928 ? c 23,592 h'l- / - ; i ;, +,

1. k.

',.,**,l 52,552 1 " c 113,940 .( 'c 4,315 i ,'f' c 3,356 c a. 10,644 J ', v.' ,2 i $ 3,5 7 3,6 78 5e ? - S 36,962 L CAPIT AL LE ASE5 .c - i t.' 7,047 .,.7 s + < ' ).. - 29,915 i 4 < i e 5 16,581,765 i e o i I i ,g ( g E' 'A ,.g .,,, - - -,..;, 4 g..; de. ; ' '; Jy," - ', ,g.f., , - ';,q. 7,7 -.,. ,1.,',.g

..,ys.',, cy, i, s. X = ' -

,,a, . 4, 3.,. r Consolidated Statement of Capitalin Excess of Par Value of Common Stock Consumers Power Company and Subsidianes Shares Outstanding 'housands of Dollars 1985 1984 1983 1985 1984 1983 t Balance at January 1 88,085,039 86.915.196 70.675.587 $823,813 $32l.382 $659,141 Issuance of common stock Sa!es through underanters 12.000.000 126.000 Dividend Aeinvestment and Common Stock Purchase Plan 979.143 2.240 891 1.849 19.121 Pension Plan 1.815.718 15.343 Employee Stock Ownership Plan 31.200 66.400 20 620 L Employees' Savings Plan 139.500 116 600 105 1.000 Net gain on reacquired stock 558 457 157 Balance at Cecember 31 88,085,039 88.065.039 86 915.1 % $824,371 $823.813 $821.38-1 The accompany'ng notes are an integral part of this statement Notes to Consolidated Financial Statements g

1. SIGlilFICANT ACCOUlifillG POLICIES On July 16.1984, the Company discontinued cape regard og ite appropna'e method of determining tahting AFUDC and Anancing costs on its Midland and funding decommissioning costs was recently Conselldalles Policy nuclear prorct reopened The accompanyrg conschdated Anancial state-i

. L iclude the accounts of Consumers Power Maintenance, Depreciaties and Oeplellen A Nuclear Regulatory Commission proposal would Company (the Company) and the following whouy The Corrpany charges repairs and rninor property require a uthty to accumulate a decommissioning owned subsidianes Northern M,chigan Esplorahon replacements to mamtenance expense Property re. tund either w> thin hve years or one third of a plant's [ Company (NOVECO) M ch'gan Gas Storage Com-bred or disposed et in the normal course of business iematning operahng ticense ptnod. whichever is pany (Gas Stora7) Plateau Resources Limited is charged to the provision for accumu!ated de-greater, to the level that would ha ve been attained if (Plateau). Selective Collect.on Services. Inc, Uhhty preciaton less net salvage credits the accumutation of funds had starttd at the begtn-Systems. loc.nd Conar Corporahan The Cortpany ning of the plant s hte and its subscanes are referred to as ' the Com-Depreciation provisions for utibly plant are based panies " These statements esclude att intercom-on stra'ght line and units of production rates ap. Iluc' ear Feel Cast pany amounts except intercompany profits in gas proved by the MPSC Compos te depreciahon rates Nuclear fuel cost is amortiled to fuel empense on the inventory, which are ahowed by the ratemakmg for e!ectnc and gas utthty plant mere approxima'ely basis of the quant.ty of heat produced for electnc = pobcres of tne Michigan Pubhc Service Comm:ssion 2 99% and 3 %% in 1985. 2 98% and 4 00% in generahon Under the Noctear Waste Pohcy Act of (MPSC) 1984 and 2 98 % and 3 59% in 1983 respective'y 1982 (Act), the Deputment of [nctgy (DOE) has the respons!b hty for the storage and disposal of spent Accrued Revenues Capttahzed oil and gas esploration and develop-nuclear fuel At December 31.1985. the Company's The Company accrues revenues for services ren-ment costs are depleted on the units of poduchon habil.ty for spent nuclear fuel burned pnar to April 1, dered to custerners but not bt!'ed at month end rnethod. while cther plant is depreciated ugng 1983 including accrued interest. was $56 4 milhon straight hne rates NOMECO foltows the futi cost Of the pnncipal amount of $44 3 milhon, appron-Allewance f or Funds Used During Construe. methodof accounhngforitsoil andgas producing imately $40 $ rnelhon has been either inovered ties (AFUDC) actmt es The compos:te of these rates was appron. from customers or is being recovered under MPSC Under ut.hty regulatory prachces. the cost of f nanc-imately 7 32% in 1985. 8 54% in 1984 and 616% author lation Authot ration to recover an ad4tional ing the Company s construct on pro lects is added to in 1983 $3 8 milhon has been requested from the MPSC A E ut.hty piant cost The correspond.nq cred t is added sing!c. tump sum payment,includmg mterest trora to other income (equity funds) and deducted from In management s opmion, the Companit:s' provo Agil 1,1983. will be made poor to dehvery of me interest thyges (borrrnred funds) on the Con-sion for accumutated depreciation is reasonauf spent nuclear fuel to the DOE Dehvery is eyected sohdated Sfa'ement of Income The Company's adequate to cover depreciahon on the orig:nal cost to beg n no echer than 1998 For fuel burned after E AfUDC base conmts of accumulated constn;chon of plant Agil 7,1983, the Act provides for an assenment of worli in proyess empend.tures. less prevor,1f one mill per kilowatt hour of nuclear genef ation capitahled ATUCC and certa n other ind. rect capo lluclear Decommissioning Cests this amount is charged to nuclear tuel espense and tabled construction costs Af u0C was computed at Based on a 1984 engineermg study. the cost of rerovered through elatnc rates a rate of to 4 % of the ATUCC base from Januvy 1 dnommooning the Pahsades and Big Rot k nu. 1983. through May 18.1983.10 9% through clear plantus appooma'ety $ 190 milton in 1985 lavestment hcluded From Rate Base August 17,1984. and 114% through Decenter 31, dettars The Company rer: overed a small port on of in Apol 1981 the MPSC escluded the Company's 1985 decommistoning costs pnor to August 1980 in its Meysville gas reformmg plant from the rate base, electnc rates in August 1980 the MFSC ehmmated but ordered that the investment be carned in ' plant any prov.90n for inovery of decommis90ning held for future use" and p tmitted inovery of the "'"Y * *" #" ""* "9 "##"'d '" # **"' "*"' '# U ' *"9 0 20 Consolidated Statement of Retained Earnings Consumers Power Company and Subsidianes Thousands of Dollars 1985 1984 1983 Balance at January 1 $530,234 $624 804 $570.417 Net income (loss) (259,772) 221.058 347.764 $350,482 $845 862 $918.181 Less cash dmdends: Preferred stock 34,270 34 656 35 051 Preference stock 85,506 86.588 64.573 94J84 193.753 Common stock Balance at December 31 $740,886 % 30 234 $624 804 The accompanying notes are an integral part of this statement. i years At December 31,1985, the unrecovered in-the Plan. however, stock appreciahon rights may be Reclassifications and $tatement vestment was approximately $78 mdhon exercised without the shareholders' approval of the Format Change Plan The Plan provides that up to 900.000 shares Where apptconate the consohdated financial state-Execettve Stock Opties and Stock of the Company's common stock may be issued ments include amounts reclassied to reflect the Appreciaties Rights Plas under the Plan These shares ma y be either issued 1985 presentahons Such reclassacahons do not The Company in 1985 estabbshed an Executive shares reacquered by the Company or authonted but a'ect net earmngs The Consohdated Statement of Stock Option and Stock Appreciation Rights Plan in'ssued shares The ophon price on each gf ant Changes in Financial Posihon refMcts a change (the Plan) for key management employees The Plan date is the market price on the date of grant During trorn a " gross property aMhons" format to a format is subject to approvat by the Company's share-1985 options covenng 200.000 shares were out-tnat shows the net change in cash and temporary holders Aaards under the Plan may be in the form standing at an exercise pnce of $7% No options cash investments of common stock options with associated stock ap-were exercised in 1985 preciation rights The stock opt!ons are not enercis-Other able unless the Company's shareholders approve Notes 8 and 9 conta>n informahon on retirement befehts and income tan expense, respectively

2. THE M10LAlto PROJECT The Company has approximatefy $3 7 bdhon in probable that the M4and investment wnutd not be M@and costs as an "c'her asset" on its Dxember recovered through rates. from Dcw or otheraise, and The M.diand nuclear plant was designed to provtde 31.1985, Conschdated Balance Sheet Of this if the unrecoveratte amount could be reasonably 1.357 megamatts of capacity for the Company's amount, the Company is seeking to recovcr in a estimated electnc system and to furnish process steam ser-pending electnc rate case approximately $31 bd-vice to The Dow Chemical Corrpany (Dow) The hon from its electnc retad customers The rrra.ning The Finanaal kcounhng Standards Board has is board of directors authonted management to shut amount includes a $460 mahon terminahca seed a proposed arnendment to Statt ment of Finan.

down the Midland pro;ect on July 16.1984 pa yment the Corrpany is attempt.ng to terover from cial kcuunting Standard (SFAG) No 't. Ncount. Dow in current bbgation and $93 mdhon which the tog for the fllecIs of CerIain 7ges al Regulation, The Company beheves that the Mdand plant is a Company plans to recover from ets wholesa!e elec. which would be appicable to the Mdand invest-valuable asset for the Corrpany and the state of M,ch. tric custorners for further discusuon of the pend!ng ment if att or a porton of the plant is abandoned igan and..herefore. is conduct ng a study nf op-electnc rate case and the Dow htigation. see Notes 7 under the poposed amendment. the Company tions for the Mdand project The ophons include and 10. respechvely nould be required te atust the cost of as M4and complehon as a non-nuclear facihty, completion as investment to ref!ut the present va!ue of the sob-a nuclear plant and abandonment if the plant is in December 1985 the Company charged cam.ngs able future revenoes exptted to be pov*d to completed, the Company cannot currently estimate for a p6thon of its investment in certa <n M4and recover those costs the a flerern betmeen that how much of the exist ng investment would be us-nuclear fuel and certain faciht:es allocated to the amount and the amount of Mdand costs carned on able, The Company would seek full recovery, in-Dow Chemical Company (Do*) under a General the Company s boubs would be immed>ately rn og cluding a return on common equity, from its Agreement w:th Dow The pretan write off cl apprcni-ni/cd as a loss it the plant is abandoned and the customers for any portion of its current investment mately $488 mdhon reflected the $948 mdhon in-poposed amendment is implemented at the end of er the plant wtuch is determined to be usable The vestment less the terminahon payment bdhng to 1986, then as measured by the Company's recovery of the cost of any port on of the plant which Dow The after tax amount was approntma'ely $331 Dnernber 1985 rate likng. the loss currenty en may uit ma'ely be abandoned would cont.nue to te mdhon or $3 76 per average common share Addo p<ted would be approoma'ely $f00 mahon net of sought in the Company's current electric rate hhng 1 onal write downs would be required if it tptame any tan tfref.ts if aga:lable 21 Ilotes CJ Consolidated Financial Statements Consumera Power Company and Subsidiaries The Company's management is unable to pedict the Midland investment are not recovered through losses would have a material adverse effect on nel the level and bming of any amounts of the M diand the ratemaking process, trom Dow or otherwise, or if income, common stockholders' equity and the investment that would be recovered under any of the a signi6 cant ente-down is required under tte Company's abihty to pay cash dividends to its optioru being studied it significant portions of p oposed amendment to SF AS No 11, tt'e resuiting shareholders (see Note 5) _ _ _ _. _, _.. __~.__ _

3. CAPITAL REQUIREMENTS generated funds, whde NOMEC0 expects to use ex.

amount of Arst mortgage bunds for purposes other ternal funds br a portion of its expenditures than refundings Based upon December 31,1985, The Companies' construchon expend.fures are es-Stockholders' equity, the Company cannot issue timated at apptoximately $191 miikon for 1986 and Vanous provisions in the Company's first Mortgage long-term evidences of indebtedness that are not $1.1 bilhon (exclusive of $90 mdhon for nuclear Bond Indenture (Indenture), Restated Articles of in-securedby Arstmortgagebonds Baseduponcam-fuel) for the pened 1986-90, of which the Ce corporation (Articles). the Restructunng Credit ings, the Company cannot issue peterred stock. pany's portions are estimated at $131 mdhon and Agreement (RCA) and Michigan taw restnct the M(higan la w does not permit the issuance and sale $750 mdhon, respechvely the Company's port ons Company's abihty to sell secunties Under the most of common stock for less than its par value At ar2 consistent with the Anancal stabd'lat on rate restnct ve provision, wh(h is contained in the RCA, December 31,1985, the traded pice of the Com-cder (see Nota 7) The Company plans to fund its at December 31,1985, the Company would be per-pan,'s common stock was below its par value of 1986-90 construction prograrn with internally mitted to issue approximately $75 milhon pnnapal $10

4. SMORT TERM SORROWING $

percent of "ehgible" inventories The borrow:ngs At December 31.1985, approximately $18 milhon under this agreement are secured by a 6rst pnorJy was outstanding under a trade note to Trunkhne The Company has authoritation from the Federal secunty interest in the receivables and natural gas. Gas Company (in nhkne). which was reped in Jan-Energy Regulatory Commission (FERC) to issue up ccal and od inventones of the Company and Gas uary 1986 At December 31.1985, approximately to $500 mdkon of short term debt on or before $'orage Under the RCAFA, the Company guaran- $45 mdbon was outstanding to Trunkhne and to December 31,1986 On August 24,1985, the Com-tees Gas Starage s obhgabons Commitment fees of Panhandle Eastern Pipe Line Company for retroac-pany, Gas Storage and 13 banks executed a six-h% to %% per annum adt be paid on the unused five production costs which are expected to be year. Short-term revolving cred:t and acceptance porton of each bank's commitment. At December repa d by October 31,1986 facihty agreement (RCAFA) for $300 mahon the 31,1985. the Cornpany s obhgabons were appron-RCAF A will be used to inance seasonal gas and fuel imately $74 mdhon and Gas Starage s obhgabons upon the closing of the restructunng. the Oak way 11, inventones and for other working capital require-were approximatefy $30 mukan See Note 5 for cer-Inc (04 *ay ll) and Oakwaf IV, Inc (Oakway IV) 6 ments during the next six years Bank borrowings fain other terms and condihons of the RCAFA construct on Ananong arrangements, included as ard bankers' acceptances under the RCATA are notes payable at December 31,1984. became re-hmited to a borrowing base which equals the sum of structured loans subject to the terms and condihons 85 percent of "ehg:ble" accounts receivable plus 75 of the RCA (see Note 5)

5. CAPITAll2Afl0N has returned to ' Anancal health " Under the RCA l efereece and befetted $leck and the RCAF A, the Cornpany ma y not declare cash Under the Company's Art cles at December 31, if senificant porbons of the Midland investment are dividends on cominon stock earher than January 1, 1985. retained earnings of approximately $42 mil-not recovered (see Note 2). the Comnany's Anancial 1988 (unless the MPSC has authonted an eather honoutof totalretainedearn ngsof approximately integnty could be threatened, the Conyany's abihty payment), and only after the pnnapal amount of the

$241 mdhon could not be distnbuted as cash to issue future debt or to pay cash dividends to its restructured debt has been reduced by $500 milhon dividends on preference stoth Under Mict gan law. shareholders would be signiscantly restntted or Unbl the pnnopal amount has been reduced by an cash dividends on preferred stock ma y be paid out pms>bly chminated, and the Company's abihty to addshonal $250 rndhon, the Company may only of "st.rplus." which at December 31,1985. was ap-provide adequate service to customers in the future declare such divdends to the extent of $100 for proximately $16 bilkon cculd be impatred each$300of addihonaldebtpaid Underthernost restnchve provision of the Cormny's Arbdes and At the Company's ophon all or part of its preference Commea $tock its Indenture. at December 31,1905. retained eam and preterted stor k may be repurchased. either at a ifG Ccmpany has not paid a cash divdend on com-ings of approximately $63 mdhon out of total re-lied pr ce or at progressively decreasing pnces mon stock since the third quarter of 1984 in 1984 tair.ed eamir'gs of approximately $241 mdhon could Cerfacn issues are subject to restochons that and 1983. cash dividends pa4 per common share not be distnbuted as cash dividends on common prohibit repurchase with funds raised from the is-werQ $168 and $2 46. respectively stock suance of secunhes ranbng pnot to or on panly with the repurchased stock and having a lower in. The Anancal stabihlahon rate order prohibits the At December 31,1985, common stoc h was reserved ferest or div4end rate payment of cash divdends On cornmon stock unhl as folicws 1.024 289 shares for the Ernployee Stock at least 1988. and permits only ' tchen" divdends Ownership Plan. 1.945 900 shares for the Em-therCa!!er unhl $19 bdhon of the Company s debt playees' Savings Plan and 2.027 005 shares to, the and other obbgat ons is rapad and the Company D!vidend Reinvestment and Common Stock Pur. chase Plan 22 1 L %.h.. .-.1 a. r...

,.L.

.} J. --~ Repurchase and Redempt:on Features Lent Term Geht hrst mortg)ge bonds are secuted t:y a rnortgage k/,, p Reporchases at Company's Option Mandatory Redemptions and lien on %bstanhatly all prop'rty of the Company .~.. Pnce R istnc-Pnce (Exchdng tons in Annual ;Excheng - '+ 1 g g g ~ Accrued Effective E!'ect Number Ace ued hrst dMn ~. + n'. Through Through ol Shares Diodends) Redemphon Dividends) Senes (4) Due 1985 1984

r.. > 4

,o Redeemable preference 4 1986 $ 23,928 $ 23 928 3% 1987 12,578 12.576 k 'l $85 00 $1.040 00 Sept 1986 None 3 600 $1.000 00 Oct 1984 3 85 30 15 Apnl 1990 Aprd 1990 100 000 27 50 May 1985 12 % 1387 88,342 70 000 3 98 28 75 Oct-1990 None 100 000 26 00 Nov 1985 45 1988 27,243 27 243 4 00 29 00 Nov 1986 Nov 1986 100 000 25 00 Dec 1986 13 S 1988 24,500 24 500 a l'.i 4 02 31 52 Aug 1987 Aug 1987 100 000 2750 Sept 1987 13S 1988 7,000 7.000 [' " *..

• y' 3 78 31 28 Sept-1987 Sept 1987 100 000 2750 Oct 1987 4%

1989 18,989 18 969 16 02 1989 80,000 80 000 Redeematte preferred 16 32 1989 50,000 50 000 ' f {.' S 4 52 $ 104 725 None None 4 000 $ 102 725 Apnl 1952 1S% 1989 100,000 100.000

4. - - "

9 25 107 00 March 1987 March 1987 16 000 100 00 Aprd 1982 3w 1990 20,755 20 755 9 00 107 00 March 1988 March 1988 25 000 100 00 Aptd 1983 4h 1990 13,932 13 932 9 70 107 00 Dec 1989 Dec. 1989 5.000 100 00 Jan 1986 4% 1991 18,084 18.084 i t-8 625 105 00 Dec 1%6 None 72.000 100 00 Jan 1986 15 1991 38,479 '4479 13 40 1992 50,000 50 000 .i Nonredeemab!e preference 16 % 1992 75,000 75 000 r. $ 2 43 $ 26 50 Aug 1986 None 13N 1993 20,000 20 000

?

'i '- 2 23 26 50 Oct 1987 Nnne 11 % 1994 39,000 42.000 .3 '... 'i 2 50 26 75 Juif 1988 None 15 1%4 85,000 85 000 3 60 31 10 Dec 1987 Dec 1987 16 5 1994 100,000 100 000 [.7 ' *c 4 40 31 90 Nov 1988 Nov 1988 5N 1996 38,484 39.425 E 4 40 31 90 Nov 1988 Nov 1988 94 1996 51,400 56 050 y.' 6 1%7 54,877 55310 . O. R,,; .g Nonredei.mable preferred 8% 1997 32,020 34 680 /.. J ,J $ 4 50 $ 110 00 None None 6% 1%8 48,159 47.368 Y' @. 7 4 16 103 25 None None 6N 1998 43,444 43 488 '; [,' - 7 45 103 00 March 1986 None 91 1%8 21,800 23 340 7 72 103 00 June 1987 None 7% 1%9 47,455 48 468 1 'd T 76 105 31 Mav 1988 None 8% 1999 54,599 54 599 .,+y-10 % 1999 72,800 78 000 e 7 68 103 00 Oct 1988 None T' 8% 2000 50,000 50 000 IIS 2000 58,250 60.000

t.,,

• 75 2001 57,184

$7.450 81 2001 57,413 59 209 73 2002 82,398 62183 $"'i,"- .e-'." 73 2002 43,393 41927

8. '-

2003 75,000 75 000 9 2006 80,000 60 000 .N. ' - 94 2006 80,000 60 000 8% 2007 100,000 100 000 l' BN 2007 85,000 85 000 ' "4 9 2 0(18 75,000 75 000 10 % 2009 100,000 100 000 i g 12 % 2010 75,000 75 000 12 S 2010 100,000 100 000 14 % 2012 50,000 50 000 4 ;*, y ' 12 % 2013 80,000 80 000 hr*,t rnortgage ronds $2,522,344 $2.551583 ],/. ' l en tmnds tracqwl 2 t ,? for sir *ng fund 8,750 3 722 4 e $2,515,594 $2 547 861 ,'t g. f. Er

• 1

.g cn 3, u s.. % e -., ~..,. ..y.p ,,.. - ac < g. -..,. d. . y< .m=, 4,, , i... :, Notes to Consolidated Financial Statements Consumers Power Company and Subsidanes r. Add:tional first mortgage bonds ecure $26 mdhon Quarter!y pt:napal payments un[er the RCA range revenues ava able to the Company to bc insuthoent of the Company's obhgabons under its insta!! ment from $39 mdhon to $a7 mdhon and are scheduled 10 assure its ongoing finanaal viabihty (2) result in saies contracts and $110 mdhon of the Company's through July 1991 Under the hCA. the interestia'e the Company being unable to repay twowings obhgabons under the RCA cptionsandmarginsof thebank relateddebthave when due. or (3) result in the Company being un-rot been increased Al December 31,1985 $325 able to perform, or the banks being unable to en Under its Indenture, the Company is required by mdhon of the restructured debt had a tied interest force. any loan document The RCA also requires October 1 of each year ta depost wah the trustee rate averaging 13 2% and approomately $668 md. prepa,ments from the net prorceds of the safe of cash and/or bonds equal to 1% of the total prin-kon had floanng interett rates ranging from 9 2% to rertain anets and the issuance of tertain debt In opal amount of all first mortgage bords authen-10 7% w,th an average rate of 9 8k 1985 approomately $25 mdhon received from the k ticated before the preceding January 1, eittept disposal of Mdland nuclear fuel *as used to prepay ^ refund,ng ser!es A $600 000 sinLng tund depos.t The restructured bank related debt is secured by a obhgabons under the 3CA is due far the 4%% Sinking Fund Debentures by setand rnortgage on assets subject to the hen of the September 1 of each year indenture, a second hen on the rece'vables and Other Det>t naturatgas coalandodinventoriesof the Company Restructured Debt and Gas Storage. and the pledge of $110 mdhon of At December 31.1985. NOME CO ewed appon. mate-neniy inued hrst mortgage tends of the Company ly $18 mdhon under a $50 rnahon loan agreement Under the RCA. *Nch tycame e&ctive August 24 and the outitancng shares of common stoth of w th several banks secured by certain darneshc oil 1985. the Company restructured its bank-related NCVE C0 All restructured debt that *4t previousty and gas properbes the maomum amount avadable dett of approoma'ely $12 bdhon tar repayment secured cortinues to be secured by the same ($46 8 rndhon at December 31,1985) var,es based over a penod ct sa years Park related debt includ prcperty upor od and gas reserves and poces Borrowings ed bank t?rm loans at the Company a1d Pla!em under the agreement are revolving tredit loans nuclear fuel lease obhgat,ans and construtt on The RCA and the RCAF A contain terms and condr

• Nch convert tu term ica s on June 30.1986 The Ananong arrangements n'th Oahnay 11 and Oak-bons that require the Company to rna,ntain term loans *dl te payabte in 36 monthly install.

way IV As a resuit of the RCA, the conschda'ed sutoent cash ticw to meet a!! cash requirerents trents through June 30.1989 Under the terms of captah/abon amount at Decerrtwr 31,1985 in-and that hmet the int utrence of nem debt. the tt e loan. accounts rece vable from the Company are cludes the Oaknay 11 and Oakaay IV corstruchon payment of cash d.vdends the sa'e or drsposal of hm;ted to $6 mdhon and cannot remarn unsat6 tied t,nanong arrargements reported as notes payaNe anets and the making of investments Both the for more than 90 days, and advances to the Com at December 31.1984, and a nuttear toel lrase ob RCA and the RCATA include among their de%tt pany may t'ot exceed $25 mdhon and must be bgabon prev!ously accounted for as an cperatng provisions a promon *hereby the lender coidd repid *: thin 60 dan of the Arst advance Yeady lease Current tratur,t es oficng term debt inctodes reqmre immaate pa yment of the restn(tured debt. cash (bvdend payments to the Company are re the currert port,on of restrurtured debt ir:terent and other amounts payable if certa,n events stocted to the greater 0160% of net intome fur the onur *hch in the reasonable opinion of the tour r,reredaj quarters or $t() mdhon (hmited to [ ' mapfy oarks[ nodd hkely (1)(ause !be 100% of ret income) h Five Year Maturilles and Annual $1nking fund Requirements of Long Term Debt and fledeemable Preference and Preferred $leck, including Mandatory fledempliens Decernter 31.1985 Thrv,are of Douars Restruttured O't er S'rtog Preferente Pre' erred De bt Mayrus Fund Stor k Stak fotal 1986 $166 492 $ 31 $99 $ 30 940 $11450 $12 211 $252 692 1987 158 219 91 tM 30 910 16 950 12 211 309 984 1988 168 262 69893 30 910 16 950 12 211 298 2 % 1989 173 589 255 931 35 529 13 350 12 211 490 601 g 1999 188 000 38 991 35520 13 350 12 211 288 072 In 1985 appwma'ely $7 35 mahon of frst rrort gage tonds and detentu es and $215 rnahon of r preference sty k *ere pufchased t1 parhaHy sahsty 1986 feqwremer'ts = = Em 24 i} .r... ' ct

4. CAPITAL ANO OPERATING LEA $1$

Minimum rental commitments under noncancelable Capital lease payments for the years ended leases at December 31,1985, are approornately Decerrter 31 censist of the toaoning The Companies have vanous Icasirg arrangements for a nuclear tra:ning center, vehicles, construction thousands of Dollars Thousandsof Dollars

,(./.

equipment, computer equipment, buddings and Capital Operahng 1985 1984 l ' other assets Upon the closing ot the restruc.turing. Leases leases gg, g g4 g g 7 p7 the Campanyi three nuclear fuel leases became 1986 $11.088 $ 35118 Interest expense 18,8b2 19.288 O '. restructured loans sublect to the terms and condi. 1987 10 782 27 283 ';'. I ~ tions of the RCA (see Note 5). 1988 9 498 29 091 1989 6.111 16.1 % ( ings Theinibaltermsof theleasesexpirein2003-1991 and thereafter 11 051 102.878 The Company leases tno of its general othce budd - 1990 4 953 14.848 Pmperties under capitat leases at Decemter 31 a'e v. there are two hve year renewal ophons subiect to Thea vls of Do4r5 i. Total minimum lease esca' anon clauses and a tt"rd five year renewal op, tion at the f+r marhet rental value At the expirahon payments $54083 $217.014 1;',' ^ of the basic or any renewal term, the Company has less Amount representing ~ IM option to purchase the bmidings at the fair mar-interest 17 121 c Wy 20,315 m liet value The annual rentals are subint to qua Present va ue ci net G n ubtty 11,581 11 517 gy drenniat esta14 hon and currently appronmate $1 minimum lease 0mer 17.134 16 339 ~, rndhen The Company is required to pay taxes. y payments m %2 Iotal oross aucts $49,012 $313 520 F2-maintenance, insuranse and other overahng costs Less Current pothon 7 047 Len Acumulated amortinton 2 O.J long term $29 915 Dettocutify 3,945 2.020 h %'. ' Gn ut hty 1,481 1 210 4bi >. '4'M Otrer 8,544 4 175 The Company chsges lease pa rrents for obhga r het anets $38,982 $305 515 }p' tions under any capital or operahng lease to cperahrg expense Opmahng lease payments net g 4.; of subiease rentafs and includ ng charge to ckat ^ Cedam of the Cr;9"y t rapital lease obhgihnra ing and otVr accounts, were appormately $f 7 mm nH for n o fring lenes it these rndhon $54 moon and $72 mdhon for the iree leases had tren captahms, the effnt on espense r years erxicd Deter ter 31,1985.1984 anu C83 wooid net te ma'enal Add.tonai sened anets (net respechvely, of which $24 mahon. $5 md! on and of arrumutted amtA/ation) that would ha,e tren $15 mdhon, respemeiy. were conhngent upon recorded at Ceremtre 31,1985 ano 984 acre ap Md9' posimately $431 mdhno and $127 3 rNhon te yrchwety Ihe relair1]long tef m l athhhes ret.6H1cd Would have tef) appr0s mately $35 8 rndhon aTj $1181 fndhori resplT hbely and the related curf er't cbl glhons would have tren $ 7 3 rndhon anr119 2 mahnn. rey e tnely

7. RATE MATTER $

conditions On August 241985. the restruounng ms and(5)providedfor repumentof $19bdhon ano the rate intrene trcame efter hve of its dett and othgahon; over the not sin years The Company s eiKiric rate case requeshng The MF SC nd' hold a Coritested r ase p'r< rtding recovery of its V44nd investment pendmq behr0 8y MUch 15,19% and annuady thereat'er the arnually on the Compa 1y 5 compl,arve tihngs atwi the MPSC. nas sepeated into taa phces in Sep Cornpany mnt fue rey;rts n th the MPSC demnn c tserene mrNnt the Con pany s comphw e If he lember 1984 a finantaal stabih/ahon phne and a strahng conhn#d comphante e,th the cordhons Ontnpany los to rem +a in romphase. the r ate prudency phne Ihe Anar%I statrh/et<on phne set forth in the Myth 291%5 onict indud rg nw rece not tennmate if the rte ircene n terms was hmtted to considerahons relahng to the level of cor4hnns that lite Company hn (1) not resumed nahd tha#cr t on the Company 5 f.nU0al cornh rate rehef netenary lo pef mit the Company 10 C00 construction at M dland e thout approval t't the hon WHI (A mMerial'y 4harse tinue as an o()r'f ahng ent.tv On March 29 1905. MrSC. (2) tr:mained out o' b Wruptc y. (3) not pd and My 24. I985, the MF5C issued rate orders an, tash dividends on the Company s common het por ecos fam the d>.poenn of the Malund that Qf an'ed tbe Cofnpany knanCal $tabdl/ation strAk ufitd at len! 1%8. and lhon only in trAen nydeaf fuel Adl rk,rt ary rf a pir te r.e try etved rate rehef in the annual amount of $94 mdhon for a amourits unhl the Company $ bank relged delt fr6m th6 or@f. aNj the Company must a; py M the perfod Of sid years, h Wome ef!ective upon the arid other othgahons ha <c br+n p+d anr1 the Com kIPSC for apptov d n to lhe apprnpnfe dmpin tun restructunng of the Company s $12 bdhon cl ba4 pany hn tr!urned to ' f nanc sal hedh,(4} poydj jf uther pWeds imm the We or Wyqe of the related debt, and in remain eMethve upon cer'a.n ed for $!qnihr ant cash saongs over ft e not sis MutWnt phant arw! frorn I.tv}ihon rethd io itu on 2h Notes to Consolidated Financial Statements Consumers Power Company and Subs:iares struct;on T he $94 mdhon hnancial stabihlahon rate peated this athon to the Supreme Court, where it is for more than 10 year 5, the attorney general has relief has been reduced from $99 rndhon to reflect pending appealed virtually every MPSC rate order atlecting the receipt of arptcomately $23 rndhor in cash and the Company More recentty,other intervening par-associated interest savings from the r%posal of The prudency phase of the pend'ng electnc case ties have also appcaled such rate orders Con. M dtand nuclear fuel from the dispwalof M,dland wih exammt the reasonableness and prudence of sequently, many appeals are pending in the ingham nuclear fuel, the Company expects to receive addF espenddures for the Midland plant to deterrmne County Circuit Court, the Michigan Court of Appeals tic 1al cash of approximately $16 mdhon. of which what pothon, it any, of the Mid!and investment and the Michigan Supreme Court These include $2 mdkon had been received by Cwmber 31 should be recovered by the Company in December htigabon involving. among other things a!!cged 1981 and nuclear fuel current!y va;oed at approo 1985 the Company filed teshmony and exhhts oveicr&ctions under the fuel cost adjustment imately $30 mdhon for the Paksades and Big Rock which support the Company's request for M41and clame. December 1971 purchased and interchange nuclear ptets rate rel e! The Company's 6hng requested recovery power adjustment clau*,e revenue collected under over 15 years of approximately $31 bdhon of its protection of court order, replacement power costs The M<higan attorney general appealed the March M4tand investment and for a return dunng the attnbutable to Pahsades nuclear plant outages 29 and July 24 rate orders to the Ingham County amortilabon pe"od to allow the Company to meet entending beyond !O da ys, alleged impudent oper - Circuit Court the M.chigan Court of Appeais and the its obhgabons to pay interest on its debt and ahon and unlawful pass through of costs of the M chigan Su;cerne Court. seeking a stay in dividends on its preferred and preference stock as. Marysvdle plant n 1978 and 1979. the Avil 1983 Novemtxt 1985 the Supreme Court den;ed the ap sociated eth the Vidiand protect The Company rs and August 1984 enal gas ra:e ordets authorizing pt;cahon for stay Pending trfore it e Circuit Court is requeshng an intenm ra:e increase in the annual the Compan/ o ircrease its gas rates, a May 1983 t the attceney general s request that the ' ate orders be amount of $259 7 mdhon (inclusive et the $94 md - of der authoriang the Company to increase its elec-found unlanful hon electnc tare incease granted in the 6nancial inc rates, and the rate desrgn aspect of varms stabiklahon pf'ase) and an addibonal annual orders The Company is vigorously pursuing these On Jufy 24.1985. the MpSC also issued an order amount of $162 I mdhon as 6nal rate rebet mat lers authentng the Company 'o issue the secunhes necessary for the restructunnq of the Company s Revenue resuihng from the rate inuease granted in Because of the present M4fand related uncertain-bank-taated oebt The attorney general appealed the 6nandal stabih/ahon phase edl be o!! set ties, management cannot pred(t what ettect the the secont es order to the Court of Appea!s and the against the M4!and investment ultimately auc*ed ufhmate resolution of these matters edl have upon Supreme Court, seeking a stay On August 23. to be recovemi in the prudency phase therefore. the Company s 6nancial position or results of ager. 1985. me Supreme Court denied the request for Ihe fmanaal stabih/ahon revenue of $30 mdhon at ahons stay On August 291985 theCourtof Appea'sde December 31,1985, is nnt reflected in current earn nied the a!!arney general 5 appeal nl the securities ings tml has been reserved untilinal M dia'4 rate ordet "for lath of rnent " The a"c,rney genesi ap rehef 6 grr.!cd in the pr*nry phase

8. RETIREMENT BENEFIT $

At January 1.1985 and 1984. using 7 5% and in 1985 the Company ottered ehgible employees 10% assumed rates of returnaespectwef the ac - sutial trnetds to terminate : heir employment As a f The Compames have a trusteed noncontnbutory tuanauf computed pesent vatues of vested ac-result. app oomately $14 mahon. which repesents plan covennq sutNanha ly ad employees Pension cumutated tenefits were $424 6 mdhon and $405 6 lump sum payments and the pesent value of future costs aurued are br,ed on tutrent service costs, mdhon. resptf vely. and nonvested accumulated supplemental payments, nas chvged to espense intercs! on unfunded pior teroce costs and amor beu: hts mere $413 mdhon and $416 mdhon. te These trnefits are being pad direr.tly from Com-lintion over a 25 year p o x1of unfunded p ror ser spttevety Adeucaseof approomately$219rnd pany assets The net present value of espected fu v(e (osts Pehn m er,, los 19M 1*,M aj ',on in the yahje nt MI acuued trnefrfs was due to ture payments at Det. ember 31.1985. mit appos. 1C3 cas apprus.matery $23 3 moon. $35 8 md plan and attuanal asu.ubon U. ages the pian imately $6 2 rrolkon hon and $39 6 mdhon, respthvely in 1985 assets at January 1.1985. and January t 1984 changes in attuinal assumpt,cns reflect,nq an at were1595 8 m,; hon and $569 4 meon respttwe!y sumed inucase in the rate of investment return and a deucase in the Cnmpany 5 wmbtorce deucased in aMhon to penvan trnefds the Compantes nel penbon esperSe by a[ pr0rimately $11 mdhCn prGvide certain 6 edith cve and hte insurance trn In IC4 a thange in actuanal assumphons, primar efds for their te red emp;oyees These benefits are dy an assumed troer,e in the rate of in,estment provided throug,iinssence companies whose return and pfan amendments. derreased net pen premiums a'e brel on trefds pad The Campa von esp >nse Ly approomately $8 5 rnahon The rues reungm/e the rosts of the trnet ts for their te Company s bnding pohty has tren to fund bred employees by esp nung the semiums as arnnunts atuued for pengon esp n,e for the year pad the amounts esp:nsr4 for 1985.1984 and However. for plan year 1983 the Compny fermed 1983 wee appwmately $8 4 mdhon $8 8 mdhon a tawer of the mamum fundmg standed The and $6 8 nuthon. tespthrely IC] rontt t uhun is tring funded over a 15 year pened 26 I

9. INCetIE TAX EXPENSE Components of laceae Tan Espense Thousands of Dollars The Companies lie a conschdated federal income Year Ended December 31 1985 1984 1983 tax return. For income tax purposes, the Companies Federal incorre taxes (credit)- - -

- - - -(4,445) $ 3$0I5- - - - - - - -- -- $ 6.004 use hberahled depreciahon methods which mchade the class hfe asset depreciahon range system and Defenedince taxes. the accelerated cost teruvery system Deterred in. Ctgrent. net-Accrued revenues S 39,149 3 (25,711) $ 26.226 corne taxes under these methods are charged to in. Revenue reserved for refund (101) 1.879 20.921 come tax expense and credited to accumulated deferred income taxes. As the hming ddterences Other, net 3,347 (5.858) 2.446 reverse, the related deterred taxes are credited to m-3 4t,435 $ (29 690) $ 49.593 come tan expense. Noncurrent-Accelerated depreciahon. deplebon and amortitahon-Deterred in current year S 38,845 $ 43.094 $ 45,046 Reversal of poor years' deterrals (22,979) (15.532) (16.810) Net operahng loss carryforwards (5,180) 55109 (55.709) Midland plant, net (23,194) M dland nuclear fuel disposal 41,936 Wnte down of uranium assets (17,4f t) (38.904) Financial stabiktation (13,659) Unsuccessful exploration costs 10,572 4.299 9198 Special compensahon (8,845) (997) _ __Other, net _ _ _ _ _ _ ..(22) (6.166). 13.106 $ 1,939 $ 41.503 $ (4.569) D.eterred inv_estment. tax cre_d t._ net _. _ _ _. _ _. __. - S (23,530) $ 14 356 $(20.019) Totalincome tan expense S 18,371 3 29.214 $ 31.009 Operahng S 235,929 $105 847 $ 28,555 Nonoperahpg.__,_ _ - (219,558) _ (76.633) 2,454 fatal income tan espense $ 16,371 $ 29 214 $ 31.009 .-. - _ -. - _ - -.. -. ~. The federal mcome tan credit results primanty from Statetory Fedetel laceae ias Rate Roses. Certain of the Company's indirect constructm tax dedcIfms of Midland costs reduced by the loss siled to the Ifleetive lesome Tas Retes costs, pinc+4'ly the borrowed pnrunn of AlUDC, of previctsly used investment tan credit (liC) A have been capitahted for bank purposes according porbon 0 the Companies' 1985 tan net operahng Yearinded to the provises of the MPSC's Uniform System of 8 loss edl be carnal back to c",et 1984 taxable in. Oacember 31 1985 1984 1983 Accounts but are expenad for mcome tan pur-come and edi resr"... A refund of app'comately Statutory federal poses Consistent with past MPC.C ratemalung $3 5 mdhon the remainder of tt'e tas net operahng income tan rate (48.8)% 46 0% 46 0% #ces, the resuinng tan redixtm is rdated m the Conschdated Statement of income in a 1080 loss is avadable to be carned foraard unbl the year increase (deuease)in genenc nrder. the MPSC ruled that deterred income 2000 taies trom tanes on ind rect construction costs wouhl be Bonow d pxt o d The 1985 nonoperahng income tan credit results AFUDC and other rec gnited in future rate cases Hwever, the MPSC's rutmg prohibited deferred tan accounting primardy from the ente down of the M.dland steam mcrect capid/M construchon costs (1.3)% (24 7)% (20 4)% f r generahng plants under construction at the time investment, the write down of uranium assets and interest deduchons relahng to the Midland noctear Other porhon of d tre orda The equity pxhon of AFUDC while (12 5)% (14 4j% CiD'hd f# I"k D"'D 505 'S " ' i"C'"d#d

• D'Ol"I AFUDC

'8'able income Capitakted overheads liC used la reduce current income taxes pa yabte is p,,,,,iy g,,,4 g through $2.0% - Al Daemier 31,1985. the net amount of cumula. l deferred and amorhied over the life of the related I proper?y,Gutept that Gas Storage s IIC is a reduc-Ddlerences in tmh h vis ince Ia s hmmg differerx es tur which deferred mcome lases have not tren provided ts approsi-hon to income tan expense in the year in whir.h it is and tan degnidon S'M I829 ***" used At December 31.1985. the tofat amount of and amortitaton 3.7% 18% 11% / unused liC was approomately $375 mdhon, of Other, net (1.9)% 11% (41)% wtrIh $216 mme relates to V diand these II'"CV' '"CU'h' Id' amounts enpire dur og 1993 2000 rates 8.5% 11 7 % 82% 27 Notes to Consolidated Financi:1 Statements Consumers Power Company and Subsid: anes IO.LITICATION ANO OTHER CONTINGENCIES A numtwr of shareholders *ho purchased the Com Trunk hne is the largest suppher ot aatural gas to the pany's common. preference and preferred stock Company, povid og either directly or indirntly al-In July 1983 Dow not.t;ed tte Company that it was dunng 1982 and 1983 have fded class action suits rnost 60% of the Company's reamrements Trunt exercising a option to term:nate its contract for the agtnst the Company, certin of the Company 5 do hoe has contracted to purchase all of the gas c8sts purchase of process steam seroce from the M4tand rectors and others who parbcipated in pubhc offer-affikate. Trur,khne LNG Company, which has 10 plant by reason of the Company's inabihty to meet ing of the Company's stock, and in cnnnection turn contracted to purchase trom Sonatrach (the na the commercial steam operahon date in the con. w,th the Company s Omdend Remvestment and tronal od and g is company of Algena) the liqurfinj trxt De* afs0 tied a complant for declaratcry Common Stock Purchase Plan Some et the suits natural Qas (LNG) egavalent of approsimately 2 3 l ludgment agrnst the Company. asking to be also name Bet,htel Pot er Corporahon (Bechtel), the inUmn cbcNC teet of natural gis over a 20 year r;heved St its obhgahons under the contract On - Company's principal contractor for the M41and penod commencing in Decemtri 1982 The reflec-j ciudtng fs obhgabon to make a terminahon polect. as a defendan! The complaints a"ege, lionin Trunkhne s rates of LNG after it began arnv-payment est, mated by the Company to be approni-generally. that the Company artMciahy int!ated the ing in September 1982, caused the Comp 3ny 5 cost inately $460 mdhon) because of certain anegedly market pnce of its pubhcly traded securities by of gas to increne substantially and the Cornpany wrongful conduct by the Company and for withtWd ng mtormahon and d,sseminahog rnis and others instituted prorceengs beta s the F(RC damages in an unspotied amount in e acess ct $60 teamng mformahon regung the M4 land pl3nt and the DOE ask ng that frunkhne s hcense to em rndhon The Company has anseered Don s com. and Ine Company s financial cond, hon m registra pxt tte LNG be revoaed pla.nt, denymg Dow 5 a#gattons of wrongful Lon sta'ements, prospectuses and other docu conduct, and has countWr!Jimed against Dcw ments, and. In some of the su.ts, that Othtel Appeals by the Company and othcts of a DOE dai-seek'ng, among other thmgs. the rufl amount of the oded and abeltmi the aHegedly n'ong'ul conduct of sion dechn ng to revoke Trur khne s hanse are cut-trminahon payment caned tcr in the ccmtract and the Company The Company beheves that each of rently pen 4ng in Decembrr 1983 Trunkhne an-rMonetary damages in an unsp?cded amount inal the complaints apnst at is withnut merit and noun (ed that 11 had terrporaf dy tuss'ndn1 the put beg to in Ottcter 1984 in the M4tand County Cr# intends to wage a ugonm defense Other share-c.haset of A!genan lNG Snnatrach and the LNG cut Court ite Campany is v'gnrou Jy prasecuttg hciders have filed denvat:ye surts agrnst the Com transporters ha.e invched artstrabon prone 4ngs its defense and counterclaim pany and certain d. rectors These suits allege ag+nst Trunkhne, claiming damages of approm generalty that the dJetton breached their duhes to mately $10 bdhon for breach of contract the Com In 1980 the Company entered mto a ;ong term con the Company and its sharthulders by certain acts of pany and other Trunkhoe custarners have taken the tract for residual fuel od A:th Un on Carbide Corpo rnismauagement involwng the V4ard pqett The pnoon in Trurikhne s pend ng rate case trture the ration A dspute arose txtween the part es as to suits have tx en of are espited to be consoldatn1 F[ AC that Irunkhne shoeld not be p>fmitted to pa s their respito,e obhgat ons under the contract in A ogorous ddense n;th respect to ahe< phons on to them any anards rr so!!mg from the arbitrat on July 1982 Umon Ca'04e inst.tutnt u.t n tederat aga,nst the Company 6 espntal to be waged pmce@ngs it the artetrahon protecengs are ut court and cla:med damar;rs in an umped timately determined adser',ety to Trur4hne. a wi the amourit essced nq $162 5 raAon tur breach of con in addhon h the matters dalusnt above and e A FIRC por eeengs are determmni aderly to the tract In August 1982 Union Cartade not:t.nlIt'e where in these Notes in the cid nary course of buss Company, there em be a substant al adverse cllnt Company that it was cantehnq me contratt and re ness the Comp jmes are prf.es Io certain lerpt and upon the Company in the amount of appros.mately serwng its remed es for t/each of the contr)d in its attunistrat we proceedngs Lttore varmus cnurts one ta;f of it e dtnages assesmi agenst Ironk. anser h the compl+nt. amung other thmgs the and governmental ager. cms mvolong rate mues hoe. unless the Company n 4tde to recover such Company den es that d 6 in breach of the contt xt Ondueng the rm ovny 61 replan ment pc*er costs costs trnm its customers The su ! K currentff in docowry and the Comuny affr but de to the Pahsade outy m 19d h eny' 6 unalde to predEt the nut (ome at the dKnute rComental Mues m(Gme fases. ldr%ng crmtraC However, the CompaN mhruh to n ye a ogone tual and omef matten ddeme Prtaese of the present V4tand te a'ed uncertain t:es manarmerit cannot freda f what tfn! the uit mate resofat.on 9f these swis pror evengs rnat ters or cla ms Adl h.be Upon tf e Cum [any s fMn cial pott.on or re! J M of np f ahord lt substantial I losses are mr oug in conrnt;on w th these mat h"fs ttf re could he a 7!enat adFf se r6tt on the Cort w y 2b L

11. SESMENTS OF 58818855 Thousands of Dollars Year Ended Decernber 31 1945 1984 1983

~ The Conschdated Statement of income shows Depreciation, depletion and amortizabon Operahng Revenue and Net Operating income by Electnc utikty 8 111,147 $ 110.632 5 107.686 segment. Other data for the Companies' business Gas utihty S4,760 54.435 44 873 segments are summanled as follows Other 35,428 41.377 25.307 8 201,333 $ 206.444 $ 177.866 Operahngincome taxes (a) Electnc ut kty 8 164,322 $ 55 299 $ 354 Gas ubhty 54,758 46.058 16.392 Other 6,849 _ 4.490 11.809 $ 235,929 $ 105.847 $ 28 555 IdenhAable assets Electnc ubhty $2.845,900 $2.845.099 16.101.767 Gas utihty 1,030,002 1.102.259 1.094.291 Other 4,718,692tt) 5.270 886(b) 1.291.651 84,414,594 $9 218.244 $8.487,709

r. =.=_ - -

~ = Constniction evpenditures $ 415.472 $ 742.120 Midland nuclear project S Electne uhhty 98,274 114.860 132.025 Gas ubbty 40,854 41,152 38.244 Other 66,709 58166 60 6 % $ 205,839 $ 690 250 $ 973085 67.822 118.353 Less Afu0C -- other $ 205,839 $ 622.428 $ 854132 (a) Income fases (and othef carporate expenses)of the Company are alloca ed to segments in accordance with the accounting requirements of the MPSC and the FERC (b) includes $3 7 bilhon and $4 2 bilhon for 1985 and 1984. respechvely. related to the M,diand nuclear project

12. J0lWTLY OWNEO UTILITY PLANTS

13. PLATEAU RES0t#Cl3 LIMlitt

14. IFFICTS OF CNAB60#6 PRICES (UNAutiftt)

Company's portion at Cecember 31,1935 and 1984 Plateaa was organized for me acquisibon. espora. Ion and develcpment of properbes for the m,ning. Intahon distorts trad:tional nnancia! statements Ludington milkng and safe of uranium In 1984 Plateau sus-whn.h are based on historical costs and, therr4are. Pumped Campbell pended operabons because of the depressed manet on dottars of varying purchasing power this note Unit 3 for uranium concentrates and tre shutdoan of the presents the efer.ts of c, hanging pnc es on common Storage ~~~ Midland project stockholderf equit/ Since a number of pigments Undicded owner $p and nhmatn are used to calculate this rnforma-interest $10% 93 3 % The Cmschdated Statement of income for 1985 and tion, it should be considered as only an app ;nima - Net investment (000) 1985 $137,376 $458.676 1984 include charge of appoximately $21 me bon d the c nts d changing pnce e 1984 140.661 475,398 hon, net d tan, or 23 centi per share. and aporog - tmately $46 milhon, net of tan or 52 cents per the current cost method presents changes in the Accumulated deprecia. eare, respectively for wnte downs of Plateais specific pnces of plant investment from the date the W (000) utanium asets plant was acqumno me ment Cunet cost ad l 1985 $ 41.514 $ 91689 1984 38 227 14,877 lustments are intended to measure income amer l Upon the closing of the restructonng Plateau's ret'ethog it e cost of rnentoning a company s Dd"" "" bd" *'me a reuucWcambN produchve capacitt l Operats, maintenance and other expenses of the b N krms and cmdMWe %w % S plant are shared by the Company and the to. the current cost of plant is determired primanty by owners in the same taho as the ownership interests applying ne Hand, Whinnan kien d Pubhc Uhhtf Operahan and maintenance empenses on the Con. I, neuchon Cats to trie plant accounts try year of sohdated Statement of Incorne include tre Com. pany's share of these expenses 29 Notes to Consolidated Financial Statements Consumers Power Company and Subsidianes acquisition and represents an ethmated cost of re. The cost of fuel consumed in electnc generation and The current regulatory potess allows only the his-placing exishng assets Current cost does not the cost of gas sold are recovered on a reasonably toncal cost of plant to be recovered in rates as de-necessanly represent the replacement cost of the current bass, therefore, these amounts are not re-preciahonempense Thus,thecurrent yearimpactof Companies' produchve capacity since the actual re-stated The Companies' enventones, which have rel inflahon on net histoncal plant is shown as an ero-placement of present facihhes will occer over time ahvely short turnover penods, are also not restated sion in stoc kholders' equity This erosion refIccts an as new facihhes, d.!!crent in kind, are constructed increase in current cost depreciahon expense and and placed in service Nuclear plant amounts are Since only the hastancal cost of plant can be used to the adjustment to net recoverable cost Although the restated by apptying the est mated cuneet con. compute the tan deduchon for depreciahon. the substant al use of ined rate Anancing (debt which struction cost per kilowatt of capacity to the emishng excess current cost depreciahon amount reduces can be repaid with dollars of less purchasing power) planti capacibes income without any corresponding reduction to in-partially of' sets this ero90n, there is a signif6 cant come tan espense Without this reduchon 6ncome impact on common stoc kholders' investment The current year's prov'sion for depreciat on is de-ta nes are levied on the Companies et rates which,in because of 6ntahon termined by applying to the restated plant amounts real terms. exceed estabhshed statutory rates Out-the deprectahon rates as ustd in the histoncal ing penods of persistent inlahon and rapid!y in-trercial statements creas ng pnces. ths ta n pohcy efechvely results in a las on stockholders'investmerd Ettests of Clisogleg Prices Milhons of Average 1985 Dollars. Escept As Reported Amounts Cunent Cost l Nel loss after dividends on preferred and preference stock as reported _ _ __ ${389 5) [ros:an d common stockholder $ eqwty due to changing prices ~ Cost in excess of histoncal co3t of plant not recoverable in rates as depreciahon $220 3 f acess of increase in general prices over specific prices (a) 112 3 __(R,ethng effect of ined rate financing. _ (2478) Net erosion of common stockho!ders' equity $84 8 h[et loss a'ter hvidends on preferred and preference stoch[as akusted $(474 3) (a) AlDecember 31,1985 plant net of accumulated depreclahon was $161 be!kon on a current cost t; asis and $7 5 birhon on a historical cost bats Midtand retated costs are included in both the current ;ost and historical cost amounts Five Year Compatises of Selected Fiesocial leformaties as lleported le Financial Stats-meets and as Adiested for ttie Eltects of Cliang6eg Pr6ses Aterage 1985 DoHars [scept As Repntted Amounts M,Ilions of Dollars Except Per Share Amounts 1985 1984 1983 1982 1981 Net income (loss) after dividends on pretened and p;terence stock As reported S(389.5) $998 $2481 $2028 $1814 As adtusted for changes in specific prices S(474.3) $315 $1921 $178 3 155 8 (arnings (loss) per a verage common share As reported $(4.42) $114 $112 $116 $312 As ad,usted for changes in specific poces $(5 39) $ 36 $2 42 $278 $ 96 Net assets at year end As reported $ *,893.8 $2.282 3 $2.263 5 $1898 8 $1,673 7 At net retoserable amount 81,843.4 $2.345 6 $2 403 0 $2.092 3 $1918 0 Ottsethng effect of bed rate nnancing $247.8 $1717 $190 7 $184 8 $3979 Escess of increase n specific pr(es wer r.nerai cnces S(112.3) $(16 8) $294 3 $(25 8) $239 4 i 30 Report of Independent Auruun Anneuses & co, Public Accountants neriunr. Siwine To Consumers Power Company-As discussed in Notes 7 and 10. the Company is in-In our auditors' report dated February 6,1985, our volved before vanous courts and goveqmental opinion on the 1984 and 1983 Anancia' statements We have examined the conschdated balance sheet agenctes in htigabon and proceedings relahng to eas quahned as being si,blect to, among other un-and statement of capitahtahon of CONSUMERS contractual disputes. shareholders' suits, rate is-certaint.es. ihe reaktahon of the estimated net i POWER COMPANY (a Michigan corporation) and sues. income taxes and vanous other matters Man-reahlable value of the uramum assets of a sub-i subsidianes as of December 31,1985 and 1984, agement cannot predict

• hat ef'ect the ultimate sidiary ite carrying value of these assets was and the related conschdated statements of income, resolubon of these matters will have upon the Com-reduced in 1985 to an amount which should not retained eamings capitalin excess of par value of panis $nancial posihon or results of operahons if matenally escoed the amounts to be rea'ited in the common stock and changes in Anancial posthon tnt substantial losses are incurred in connection with eventof asafeorhquidahonof theassets Accord-each of the three years in the pened ended these matters, there could be a matenal adverse ing'y. our present opinion on the 1984 and 1983 Decembef 31,1985 Our esaminahons were made eHect on the Company Anancial statements. as presented heron, is no in accordance with generally accepted aud>hng longer quahfied *.tn respect to this matter.

Standards and, accordingly, included such tests of As discussed in Notes 5 and 7, dur'ng 1985 the the CIccantog records and such other aud.t,ng Company was granted rate rehef under the Snancial procedures as we considered necessary in the stabihlahon phase of its electnc rate case, and circumstances bank relateddebtof approximately$12bilhonwas restructured for repayment over a period of sin At December 31,1985, the ba!ance sheet includes years By conhnuing to receive Anancial stabihza-February 5.1986 an asset of approxima'.,fy $3 7 bdhon relahng to the hon rate rehef and achieving forecasted results. the Company's investment in the M d!and nut! ear Company should have sufhttent cash low to meet project Construction on the project was stopped in itsshort terminancialneeds However,majorcon-1984 ad the Company is studying its ophons for cerns remain regarding several uncertaint es which the protect As discussed in Notes 2 and 7, in may a'fect the Company's long tem I quidity and December 1985 the Cortpany nled testmony nnancial seobihty these include. among other fac-relahng to its apphcanon to the Michigan Pubhc tors. the amount and t ming of the recovery of its Serece Commission seeking rate rehet to recover M dtand investment. esposure to loss contingencies approntmately $31 bdhon of its M:dland invest-and the related impact of such factors on the Com rnent Furthef, as biscussed in Notes 2 and 10. the pany's abihty to meet scheduw,1 debt payments Company has a claim agtnst the Dow Chemical and cont nue in eostence the accornpanying Company for a contract termina$on payment of an-nnancial statements do not include any adiust-prosimaidy $460 mJhon in connect on eith Don's rnents relahng to the recoverabihty of recerded as-involvement in the project Dow has lied a coin-set amounts or the amounts and classAcahon of plaint against the Company ask,ng to be reheved of habihhes that might be necessary should the Com-its obhgabons under the contract 11 signincant por. pany be unable to rneet scheduled debt payments tions of the M dland investment are not recovered or cnntnue in emtence thrcugh the ratem.tking process. from Dow or other-wise, the adverse e!!ect on the Company s f nancial in our opinion, subject to the efect of such adtust-posibon ant"esu'ts of operahons could be substan-ments, if any, as rnight have tren requited if the llal Ar*,0, a, discussed in Note 2, a proposed outcome of the uncartainhes discuwd in the amedment to Statement of Financial Accounting preced.ng paragraphs were known, the Anancial Standards No 71 could. if issued as pinposed. statememts referred to above present fairly the Anan-requita a maienal ente down in the carrymg vah;e cial posit on of Consumers Power Company and of the M.df and investment sub*449es as ** December 31,1985 and 1984, and the resu, of their operahons and ct'anges in Ananaal pr,ihon for each of the three years in the pened en x1 December 31,1985 in conformity n'th gerefaly accepted account og prinopfes. ap-phed on a conmfent bam 31 Selected Financial leformation Consumer: Power Company and Subsidianes Thousands of Dollars, Except Per Share Amounts 1985 1984 1983 1982 1981 Total operating revenue 83,298,328 $3.235.570 $2 973.691 $2.731.081 $2.733.973 Net income (loss) $(249,772) $221.058 1347.764 $280,549 $247,789 Net income (loss) after dividends on preferred and preference stock $(389,548) $99.814 $248,140 $202,785 $181,404 Earnings (loss) per average common share S(4.42) $1.14 $312 $3.16 $312 Total assets $8,814,594 $9.218.244 $8,487.709 $7.595.323 $6.872,187 tong-term debt. excluding current matunties 33,573,878 13.389.010 $3.275.406 $2.904.986 $2.369.603 Noncurrent obkgations under capita' leases $29,915 $29',395 $11.825 Redeemable preference and preferred stock S391,755 $405.840 $416.055 $420.555 $313.014 Cash dmdends paid per common share $108 $2 46 $2 44 $2.36 Book value per share of cornmon stock $21.50 $2592 $26 04 $2687 $27.78 Quarterly Financial and Common Stock Information Consumers Power Company and Suwd. anes Quarters Ended 1985 (Unaudited) 1984 (Unaudited) var 31 June 30 Sept 30 Dec 31 Mar 31 June 30 Sept 30 Dec 31 Total operat ng revenue (000) $1.098.386 $635.737 $632.459 $931.746 $1.064 626 $645.819 $628.153 $896 972 Totai net operating income (000) $145 548 $93 370 $111,137 $139667 $149.773 $104 439 $122.301 $115.966 Net incorne (loss)(000) $63 679 $7.725 $22.929 $(364.105) $125.184 $78.199 $33.751 $(16.076) Net income (loss) after dmdends on preferred and preference stock (000) $33 582 $(22 250) $(6.949) $(393.931) $94 722 $47.867 $3383 $(46.158) Eanings (loss) per average common share $ 38 $(25) $( 08) $(4 47) $108 5 54 $ 04 $(52) Casa div< ends paid per comrnon share $ 63 $ 35 $ 10 Common stock poces(a) High $7 $8% $8% $8% $16% $10 $7% $54 Low $4 % $6% $6% $64 $94 $5% $43 $44 (a) Based on NYSE-Composite fransaurons The common stock of the Company is listed on the New York and %dwest stock enchanges The Cornpany had approximately 157.000 comrnon shareholders of cord as of December 31,1985 32 1 Board Executive Officers Northern Eichigan of Officers Expleration Directors Company Officers As of February 5,1986 Walter R. Berls,64* William T. McCormick Jr.,41 Charles F. Brews,60 Richard J. Bertess,54 ExecAve Vice President of the Chairmanof theBoard, Chief Executive Vice President. Customer Services President and Chief Executne Omcer Company. Jackson, Michigan Omcer and President Frederick W. Beckman,39 Robert A. Bene,39 E. Ilowtes Coller Jr.,70* James B. Falstee,61 Vice Presdent. Nuclear Operations Vice Presdent. Explorahon Retired. New Vernon. New Jettey Vice Chairman of the Board James W. Ceek,45 Paul E. Selger,43 l Robert E. Bewar,63 Walter R. Boris,64* Vice Fresdent. Projects. Engineenna Vice President. Secretary and l Chairman of the Execubve and Finance Executive Vice Presdent. Finance and Construchon Treasurer l Committees K mart Corporahon. Detroit. Michigan Stephen N. Ilowell,53 Russell B. DeWitt 62 William T. Metsemisk Jr.,41 Executive Vice President. Energy Vice President. Energy Supply Chairman of the Board James B. Falahee,61 Distnbution Seruces Vice Chairman of the Board of the William N. Stephens lil,36 Comp:ny. Jackson. Michigan Jack W. herselds,62 Victor J. Fryling,38 Vice Presdent. Land and Legat Executive Vice President. Energy Vice President. Planning and Investor Richard M. Sillett,62 Supply Relahons Gerden L. Wright,43 Chairman of the Board Vice President. Operahons Old Kent Financial Corporation. Jebe W. Clark 41 Richard M. Griswold,54 Grand Rapids, Michigan Senior Vice President. Treasurer Communicahons Jehe C. Naseen Jr.,63* Setdes L. Neles,56 Reteed President Lawreece B. Liedemer,64 Vice Present. Fossil and Hydro i Bankers Trust Company and Bankers Senior Vice President and Operabons Michigan Gas Trust Nenak Capaahm Gwerat C=ns* Storage Company New York. New York Ratestd C. Llacele Jr., $1 Vice Presdent, Distobut;on Operahons Officers C. N. Iluthard Jr., M.B.,66 Forrner Presdent and Director Thomas A. McNish,48 Tha Up;ohn Company. Secretaq Kalamaloa, M(higan David A.Mikeleels,3T Walter R. Betis,64' Lois A. Leed, Ph.D.,58 Vice Presdent and Vice Presdent Professor College of Human Ecology General Attorney M:chigan State University. James B. Falahee,61 East Lansing. Michigan Reheel J. Odievak, $2 Vice Presdent Vice Presdent. Gas William T. McCormick Jr.,41 Transmission / Fuel Supply llichard M. Seisweld,54 Chairman of the Board. Treasurer Chief Execuhve Omcer and President Hamilton M. Robichaud,49 of the Cornpany. Vice President. Human Resources Lawrence B. Lindemet,64 Jachon, Michigan V(e Presdent and General Counsel N.B.W. Schroeder,38 See T. McIlese,64 V.ce Presdent. Governmental A4rs William T. McCormick Jr.,41 Chairman of the Board and Chief Chairman of the Boarj Execut:va Omcer Samuel N. Spring,58 L:bbey Owens Ford Cornpany. Vice Presdent and Controlier Thomas A. McNish,48 ioledo Ohio Secretary Rey A. Wells,50 Paul S. MetaMte,10 Vice President. General Sercces Rehott J. Odievak,52 Former Chairman and Director Vir:e Pre 9 dent Burrcoghs Corporahon. Detrc:t. M4hgan Jack W. Reynolds,62 Presdent Jene C. Seerth,12' former Chirrran and Dirator Samuel N. Spring,58 Emeritus Control!ct Gerber Products Company. i Frernont. Michigan

• Retiring April 1986

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