ML20196J380

CMS Energy Corp 1987 Annual Rept

ML20196J380
Person / Time
Site:	Palisades, Big Rock Point, Midland, 05000000
Issue date:	12/31/1987
From:	Mccormick W, Mcnish T CMS ENERGY CORP.
To:	Harold Denton Office of Nuclear Reactor Regulation
References
NUDOCS 8803140300
Download: ML20196J380 (41)

Text

t

, ],y ;%.-.

r:

,k

,capsp4 1

4 q;-.

p.

ec ;s-g

~

S g

o r.

1 v

D I lhill o

i I

D q].

u

+

W 4

e

.. +,

p 3

%g g

p

['!

KAc 7.Eggy..

4.*

f t

.. w.

14

~

p b

9 s

hM #

..hIh

__m A_

8803140300 871231 d

PDR ADOCK 05000153 I

DCD u

~r -

-:gn,

s 85\\66\\87

\\

The Company

\\

(,\\l% f lici gs (lillH il ain oi is hiilding t ioiijian\\

a li d illetl lli \\la\\ l'hI Ils lIlills llhll stilisull.il \\

is ( i lli-s tililrl s l'a ih t ! ( i alllllati\\ ( (. I'( t i l, \\ lit liigall s !al gt's!

jiuhln iilihl s md \\nu i n.i s b o u t h-l.o gr a i ionhuia-loin unhl\\ ( l'( i i l o i n u lo s C h 1 o n.ovi.o nannale.is st I \\ n r ill li7 i >l Illt t i'% i a stilit it s Ili \\Ili Iilg tll l t ih t 'l s

l'e n n i s u la.u n i sei\\rs n nulln oi poiph ab iul Iw, iho tis.il \\ln lugan s i r so irlu s

( \\l'i r' nei g s 's i >l hel jo unal \\ silln n h.o \\ is ( \\l% I li-it'll0 Ist s ( i iilll la l l \\

.I q !i\\ t'l willn l t t illll Lill \\ h llli ill\\ rs t lilt'ill s.tlle l s il K l Illi ell s lil e Itt ! g \\ -I t lalt't l it f l\\ lilt s ils g

nian o uihsohai n s un lusic % q lhet ii \\ln hig in I \\l>h o I alu ni ( < einji ui\\ % h ali\\< ( < ilh ( inai %isn<s ( \\l%

I illu s %I\\n(,.nul( \\l% (.i in I ain ni Net Income (Loss) n,u.ons of twars Operating Highlights Ohllioni of Dollars, turpt Per sharc 1)ai4 1987 19Ni 19M5 l'W4 19M Net m(ome (loss).

$184

$65

$(390) il(M

$24N Aserage number of comumn shares outstandmg (0(Kn.

58,371 MM.005 M8.065 M 7,MM I 79,470 Larnings (loss) per a\\crage common share

$ 2.15

$.74

$(4 42)

$ 1.14

$312 Operating resenue.

82.801

$3,109

$3,298

$3.236

$2,974 Cash from operations

$597

$5M7

$429

$351

$251 Capital expenditures (less AFUDC and capitalized interes()

82ss

$190

$203

$538

$731 Total a s set s.............

39,35s

$8.670

$8,659

$9,218

$N,45 Long-term debt. excluding current maturities..........

83,209

$3.255

$3.577

$3.3N9

$3.275 Non <urrent portion of capital leases....................

Soo

$62

$67

$297

$12 Total preference and preferred stock...............,...

S4ct

$911

$1.085

$ 1,099

$ 1.056 Preference and preferred stock with mandatory redemption..............................

878

$299

$392

$406

$416 Cash disidends paid per common share.......J r........

$ 1.08

$2.46 Book value per common share '......, ;,..,....... ;..,.. -

834.53

$22,00 :

$21.50

' $23,92

$26DI R et urn on a s sets.'............................... ! "....,

s.4 %

4.5% -

. - (.2)%

5.2 % -

6.9%

Return on average common equity...............,4....

9.3%

!3.4%'

(18.7)%

4.4 % '

i1.9%

Eiectric statistics L

/F C. Main sptene sales (millions of kWh) -......... i.....,;

37,say j. ?,26.914 L ' 26.397y 26.023 24,953

~

Custooces (000)...%.....,w.... n.. <.....1.i.

11,49e ?

> l.400 '

= 1.583 -

41,367 '

'l.355 F Aserage sales ruse (e/kWh)'..............l. p....&

S.00 N 6.29 L s 6.12 :

6.09

'5.78 t.,,,,

w oy a

Dedheviro (bcib:....,:.n. n u.%.... n..va..J.(

ses-

~368]

277i 273 E l.251e +4 279' nana-wes (geth........- c...'.g!. L, u..,.. e. '..v.

W.. W........

4,see; z1221.

'1.198; 1.181 Ameenge seles saar 48Anse....J

, 44p.-

, 5.t a = 4 5.71

5.36 S.04'

'seadsden

%d

.jMlSt.s:

hy.,

i

.~

E c s.s :

d o. i.n.%.,,,g.4 sv.,l a -

- 44., j P,

4um.

-c sa g~ m y 4

7 gg,g f gy,g, q74 1

.,; e K

~

.S.S

$4 4 %,

qcMilt.8s ' ', II M i e

- m m.

w

' ' f q y,,

t h

a j

- p<

b,

1. & di

2. v : % ;y

• hy) 2 1..

e 85 86 87 85 86 87 85 86 87

\\\\

\\*\\

g tst 4

\\

\\

Earnings (Loss)

Closing Price Cash From per Average of Commen Stock Operations Common Share at Year end Donars per Share Table of Contents 1.ctier to Shareholders.

.2 Electric Operations.

.6 Natural Gas Operations.

.8 Slidland Cogeneration Veninre.

.11 N051LCO.

.13 Other Operations.

.14 51anagement's 1)iscuuion and.\\nalpis.

.16 Corporate Restruc ture:g and Su.umary of Significant.\\uounting l'olitics.

.19 Consolidated Statement of Income

.20 Consolidated Statement of Changes in Finantial Position.

.21 Consolidated Italan(c Sheet.,

.22 Coinolidated Statement of l'referetu e and Pirlerted Stos L.

.23 Consolidated 5tatement of 1.ong l'eim 1)cht....24 Consolidated Statement of Conunon Sto(Lhohler s' Equin

.25 Notes to Consolulated Fm.n(ial Statements.

.25 Repot t of Independent Public.\\uonntants.

.34 Qu.u te.h Fmaiuial and Conunon Sto(L Inf orraation.

.35

!)irec tors and Ollu crs.

.36 1988 Annual Meeting

'I he annual inerting wdl be held at 10 a.m. Eastern

!)aylight S.ning Time on Wednesday, Sta31,1988. at the George E. Potter Center, Jackson Conununity College,2111 Enunons Road.J.u kson. Stic h..\\ notic e of meeting. proy statement and prou will be nuited i,. sharcholderiin Stan h 19ss. 'I he prompt return of signed prosies will be apprniated.

t lD 1

e fer an al'ter tax saving of $50 million from 1086. One entire category of high cost securities - preference sto(L - was climinated byJan. I,1988 The Slidland Cogeneration Venture (.\\lCV), an im-portant part of.\\lithigan's energy future, came to life in 1987.'lhe NICV will put to use $1.5 billion of aucts from the uncompleted Slidland nuclear project, and wdl he the nation's largest cogeneratien plant.

Nimi of the necenary third party equity imest.

ment has been conunitted, and construction debt has been conunitted by four major imernational banks.

All major contracts for equipment, engineering and comtruction ha,e been awarded, site preparation has begun, and more than three quarters of the project's initial natural gas fuel supply has been se(ured.

'I he most important remaining financial uncertain-ty facing the Company is recmcry, through clutric rates, of $2.1 billion of CPCo's Alidland imestmeat that can't be med in the plant comersion. The Com-pany belieses its argwnent for full recmeiy is salid.

!!oweser, the Stichigan Public Ser ice Conuniuion 2TO OUR S H A R E H O I. D E R S :

(%IPSC) staff has re(onunended limiting that termer) reatly imprmed hnancial results, to only $1.3 billion of the $2.1 billion. A hnal decision organiiational thanges and na-is expected in the lauer half of 1989.

tional recognition highlighted the progreu of CSIS Energy during Continued Productivity in Utility Operations 1987-For the fourth comecutisc Scar, CPCo set a record The Company reported earn-for annual electric sales. Along the way it set 30 other ings to (ommon shareholders of electiic sendout records, including new tecord sum.

$181 million, a 183 pertent in-mer and winter hourly peak demands. Gas deliseries crease mer 1986 carnings of $65 declined slighth as a result of unmually warm weath-million. On a per share basis, the Compan) ( arned er carh in 19i7.

$2.15, a 191 percent incicase mer the $.71 per share reported in 1986.

A teorgamration at our annual meeting in Alay es-tablished CNIS Energy as Comumers Power's new parent compan). 'lhe mm e imprmed our flesibility to take adsantage of hnancial and bminen opportu-nities that arise in a (hanging energy indmtry. As hlithigan's largest utilits Comumers l'ower (CPCo) will continue to be the major contributor to the suc-cess of Chl5 Energv.

Productivity CPCo rapped a suneuful 1987 with its selection customers per as America's "I'tility of the Year" by Elutoc ladt &

employee

/kn, the national news magazine of the electric util-

}

}

\\

it) industry.

g, 1

Financial Base Strengthened The Compam's imprmed fmancial results in 1987 largely stem from record electric sales, continued suc.

cru in low ering operating expemes, redu(ed debt in-The Company's terest and preferred and prefercrue disidend cmts, recovery contin-the tapitaliiation of interest from the imesonent in ved in t es7, with the Slidland Cogeneration Wnture, and a (hange in improvemente in a((ounting for in(ome taAes.

virtunity every The Company reduced preferred and preference sete,ory that te sto(L by $100 million during 1987. That, together important to with the refmancing of high-(ost debt, reduced our e6nensteteuccess, interest (mis and preferred and prefeien(c disidends

e i

CPCo has the highest employee productisity rate among the nation's 25 largest electric and combina-tion utilities for the latest period measured. At > car-l end !!)S7 the mility sersed 271 (ustomers per em-pimee a ratio mmh more ellkient than the !!)86 group mean of 157 cuitemers per employce.

Y An cady retirement program and inter nal :corgan-f.

irations trimmed employment by 700 employees and ieduced payroil(osti h> about $25 million annually.

In the most recent national rankings. CI'Cds pow-er plants remained the second most eth(icnt generat-

[

ing sptem in the U.S., and the mmt eth(icnt for utili-ties operating more than one generating plant.

1)uring !!IS7. our emplosecs won a National Safety Coumil commendation for more than 5.5 million work hours without a lost wo:Lday injur).

waharn T. McConnicur.

CPCo's employees desene a great deal of credit for these auomplishments. Their dedication, profes-sionalism and utilit) experience prmide a solid base for our growth in other areas of the energy indmtry.

CMS Energy's New Opportunities cms Energy's 3

Obsiomh. CPCo will continue to be a major (on.

financial tributor to CN!S Energ). Ilut our scorganiiation posi, improvement has tions m to take adsantage of opportunities that will been rewarded result in the growth of the Company, which is intend.

with upsreded ed to increase shareholder salue. CMS Energ) will ratinse for bonds concentrate its expanding hmincu a(tisities in ener.

and other g)-related areas.

securitie s.

Inng established and suuculul subsidiaries, hke Northern Mit higan Exploration Compan), will take on an expanding role. 'I he exploration and desclop-ment (ompan) resumed its profitable performance in

!!iS7 h) posting net earnings of $!) million f rom op-eratiom compared to a $1 million lou in !!)S6.

Innmatise new hminen opportunities, such as the Midland Cogeneration \\'enture and the propmed senture between CPCo and llechtel Power Corpora-Impact of the non to own and operate CPCo's Palisades nudcar Reduction in plant, aho (an mntribute to shareholder salue.

Interest and

'! hese hmincu opportunities are (haratteristic of Preferred /

CMN Energs's tramition plam to become a broad.

Preference based energs mmpany. We heliese that our innma-Dividends tise strategies will be suucssful in the thanging and MJhons of Donars increasingh mmpetitise energs indmtn.

As we mniinue our grow th and our fmaruial rems-cry in !! ISM. opportunits - the opportunity to mn-tinue imprming the salue of mur imestment - will

\\t he foremmt in the desclopment of the Company's goah.

lb 5-William T. M(Cm mi(LJr.

e, Chairman of the Itoard and

% t g (\\ o or,m nos s inte est Chief Exc(utisc Othcer o

hb 21. loss 85 86 87

_r

.: " Y

...; w.;

j p[y-l

.9_

- ?g...

. 3

-,.N

' ~

t

. g's c i

4

+

4f:

.g e

.4 3

y,

, gj,,.

s 7,

-t-

..L:f; 4 ;

" f

-L a.

3 o

s..( /,

s_ - _g unk ; . B

l..

.3 _ j. ' k "* ) I i it; i, t N. his annual report Is the first for C)RS Energy M'- f. f Corporation. In 1987. Consumers Power Company' v. i '. { r made the transition from Michigan's largest' utility to a . 4- . 1 ~ l s j" holding cominny with readervision sadiversified

i

.r.g4 [i enefgy company. As C p cIpal subsl i

[.9..

.o ~ ~ lary,CpCewillcontinthtagIRichiga gdeshinSal, [- T,'.: ~ lty, providing energy te.6 nillilon of 4thty. sq.WilllioW i. s y Q kc o ' "Westdentsc The nationbl' reputation, e opeihtlonal ex-i + .p ...g hi,. ' cellence e.stablished by CPOo etver ore than a centu7 %(6 ,a. ..c.. ~ ry, together writh Ils thanagemo,n xpertise,, providbs i: .S . $MS Energ$lth a solid bese f growth irgte warlods c sec'tdrs of the energf Industry CMS Energy piready .s er: has several energy.related, n lity businesses, In. S ?' cluding a,very successfuloil d gis exploration busi - 'f. 8 ~ ness. CMS Energy will see dditional energy-related. l' . Investment opportunities, nstionally pnd looRRichigan, that will increase shareholder value and position the = .I ' ~ CompWny se a growing and competi,tive force-lo a rap. s-Idly changing energy ladustry. I r ?

• y

.s.-l .?> ': ' - N . k.,, , k.. g p gl ' ' g r '_ +: q

• . *y

g.f. r., w .'.U' : - yi+ r

w. 3

, y r

i 7,pr.

.p. -- v:,' .. ). -,. - 2 '.1,, .1 g-

p.,

v-i , 2 '. (. I'. ~. ;;y : _ . l+ - Q ' ~. \\ Q-g y .p .\\,: i.; - 4' Q .. f4 -a-6 I ') [ f, 'l sg ~ '7', N ',-. M ... )- e y. 6 h y g -f L g-W., ~. .4., n f

• ],,.

a = e. .... - ~ \\ 'k 4 ~.,. S,,H.. f;- / A'~J u , a \\ ,,w. gg i e .,. 5 v ' '

• g

.p . 'ly[q 9 e 3 _ ~. s h,, ,,,k

• g a v.

'-i. k.-- = p . ", M * - './'

• S-s _.

J ,') )@_. qq ' ' -(.. 4 . a ri ' - ', 'TY ', $k - h ;> t

{'

'., i x.f ' ~_.q',: .Q.4 'r' 7.. u

w

.# g ,P 'g y r*' ~k ....,,..T / \\'.M ._..h si. .e T. -, 4 j?.. gd4 %.+ f,; " " -. l j-. gA, '; - - r s 3 GGQ,h. ~ yV... ~.. c* g,f ?, ,f y.:. 3 3 .r .. c.,, .tr .,y

_, e.

,'

• p *,

(. _,..} t' . '. R.t.: + s t w~ ~ i .~ o .s s. / .. a l ^ -l .g. s e ',^ t " \\ e' .s s b .V I- .e[p\\ls, [c h r _. T'., ..g.,,' . t ...s s... 'I _,,.., a . f \\ ..\\* s. e y "gr e'. i': g. t o g c . [. '. 'g h . i. f g %'. p. P tv, ), e 4. e 6 1 ./ 4 x-~..#... \\ .k s-4- =- .s s e# )M 8 ,e ,,.,,e ,6 4 y ;, 4 r

• _ _ ',...

-..', W' - _. r.yl' [f% y.,^, s.

83 \\ 84 85 86 87 ELECTRIC OPERATIONS he magnitude of Comumers Pow-g er s finamial reoner) and its oper* ating en cileme carned it thc lues-tigiom "l'tility of the Year" award in 1987. The selec tion is made an-nually by Ehtoc light U / ban, the national news magaiine of the cic(tric utility indmity. 'l he maga. eine praised CPCo "for its at hies e-ments in halting and then resersing a near death spi-tal and hiinging new life to a future that's growing Inighter escr> day." The sele (tion took on additional Imter when CPCo, spurred by a heahh> economy in its senice area, pmted reond elec tric sales for the fourth con-Electrio sales neewtha se(utis e ) car. B6flens of kWn Sale, totaled 27.8 billion kilowatt hours (LWh),3.1

• Record annual sates per(ent higher than the presious record set in 1986 "Emetuding sales to (culuding sales to the Pontiac senice territory, which Pont ac service area was sohl during the Scar), and generated $1.6 billion 6 Operating excel
• in resenue. 'l he c(onomic growth, together with hot isnce end its weather, produced a peak demand record of 5,100 financial turna megawatts (MW) inJuly (5.3 percent higher than the tround earned existing re(ord set a ) car earlier).

CPCe the prestl* llrisk sales continued into earl) 1988; a winter peak glaus Utility of demand record of 1,770 MW was set irlJanuar),inore the Year" award, than 4 per(ent liigher than a jncsiom peak set in I)c-(ember 19NL New elettric imtallatium totaled about 20,000 in 19M7, up 22.6 percent from an already fast pa(c in 1986.1)emand was strongest in western and south (entral Mic higan. CI'Co now senes 1.-l million elec-tric (mtomen in 61 of the 68 counties in Mi(higan's 1.ower Penimula. Growth Expected to Continue CPCo expet ts elec tric sales to (untinue growing user the next sescral yean despite the decline in ac. mtomop Mug. He de-( an Electric Market Profile' (rease ni clatric sales to thn market n being more N8 M4 b!i.on kwn bit,on kwn thaii oliset by iiureased sales to the rest of the indus-g g*Encluding sales trial, cornmer(ial and residential sc< tors. CPCo pro- \\ o Pont.ac jc(ts annual sales to reach 29.l billion LWh by 1991. Service area 'I his inacasirig dernand for eln trit it) underu otes Reeldeedeel the urgetic) of securing new ele (tric generating (a.

p. hits.,b a (omcqueme of the new all time peak, CPCo's resene margin dropped to 12.9 per(ent, sub-stantiall) helow the 23 percent lesel needed to aume rehable senite lesels. Purchases of electri(it) from the Midland Cogeneration Venture, beginning in 1990, will help sohc the supply problem.

CPCo is meeting this imreased demand for eintricity with indmiry !cading eth(icm). Its gener-ating plants had the second host heat rate in the l'.S., au ording to a sune) of the countr3's 100 larg-est eintric utilities published in 1987 by liktnc 1987 1931 lagAt & lba n magasine.

h3 ' 84 85 ss 87 ing company to own and operate CPCo's Palisades nuclear plant, if the sale is completed, and af ter necessary regu- )4 latory approvals base been obtained, CPCo would transfer the plant to the new company for cash and an \\ \\ ownership interest in the wmpany, llechtel, and pm. sihly other imestors, would own the remainder of the company. Completion of the propmed arrangement wouhl resohe all outstanding legal disputes between the two companies mer wotL llechtel did on the unhnished Midland nuclear plant. The two corporations antici-pate completing the tramaction in late 1988, ptmid-ed that acceptable fmancing and terms ran be negoti-ated which will presene the potential benefits for New Electrie CP(:o and its customers, lasteHallone CP( o would continue operating the plJnt for three to fne years under an operating contract with the gen-erating company. CPCo wouhl buy electricity from the Palisades plam under a long term, wholesale pur. (based power contract. Efforts to Protect the Environment in October, CPCo sold its Pontiac elettric senice 7 CPCo spent $54 million during 1987 on environ-territory to Detroit Edison for $10.25 million. The mental protection measures. Pontiac senice territory was an isolated CPCo senice The utility fmished comerting its coal burning teriitory within Detroit Edison's senice area and was plants to use only low sulfur coal, completing a 13-being seniced with ele (tricity generated by Detroit year program to reduce sulfur dioxide eminiom. Edimn. CPCo still senes Pontiac with natural gas. CPCo has reduced thme emissiom nearly 65 percent CPCo settled a lawsuit with tJnina Carbide Corpo. between 1975 and 1988. ration, imohing CPCo's (cuation of purchases of CPCo is working to resohe differences with state high-(mt fuel oil under a long. term contract. The officiah and comenation groups mer fhh Lilled dur-suit, which miginally mught damages exceeding ing operation of the 1.udington pumped storage h>- $162.5 million, was settled for $39.2 million. droelectric facility. The plant, jointly owned by CPCo and The Detroit Edimn Compan), is the target of seserallawsuits because of the fnh Lilled. During 1987, a $572,(HH) study was undertaken of barrier nets and other methods that might reduce fish loues at the facihtv. ~lhe researth was funded bs CPCo Detroit Edison and the Electric Power Re-search Institute. In cooperation with Michigan wildlife groups. CPCo leased mme ofits land near Saginaw to be (on-serted into a managed waterfowl nesting area. 'the project will be fmanced with prisate funds. The utility aho helped the l'.S. Army Corin of En-ginects mhe a problem with waterfowl deaths along a dike in Lake Erie 12 miles east of the mouth of the Cmahoga Riser near Ciescland. Ohio, by donating gi-ant reed grau root from its Karn Weado(L plant site. CPCo is also experimenting with new ways to turn coal ash from a waste dispmal problem into a meful product. 'thme include ming ash in place of topmil to grow segetation and present erosion on ash stor-age area embankments, and as a substitute for asphalt in road shoulders. CPCe had receed electrie sales for Palisades Sale Proposed the teurth eenoes. CICo and llechtel Pow er Corporation base utovepoor, reached a tentathe agreement to form a new generat-

tumbled in 1986. Coal users represent another poten. tial marLet CPCo has targeted for switching to gas. Transportation senice I-gas puuhased by a cus-tomer directly from a producer or broker and deliv. cred by CPCo - has become an important segment of CPCo's market senice. Transportation gas rc. counted for 48 bcf of CPCo's deliscries in 1987, a 61 percent increase oser 1986. Ily agreeing te transport gas, CPCo continues to recesse resenue from these accounts, instead of losing the customer to another fuel, such as oil. The gas fired cogeneration market may prose to be one of CPCo's largest growth areas oser the next few years. Some 50 large industrial and commercial ener. gy users hase been identified as potential cogenera-tors in CPCo's Michigan market territory. CPCo also projects a potential market in small-package cogeneration units. %ese small cogenera-tors are being marketed to small sized and, oser time, to medium sized commercial facilities, and a growing number of businesses are expected to use them oser 8 O A S O P E R A T I O N S the next five years. C PCo is the 6thlarge bution firm in the U.S., as meas-ured by the number of customers it senes. CPCo supplies natural gas to 1.3 million customers in 40 of the 68 counties in Michigan's !.ow er Peninsula. CPCo delisered 258.2 billion cubic feet (bcf) of natural gas in 1987, down 3.7 percent from the preGous > car primarily as a result of warmer winter months in early 1987, when temperatures aseraged 14 percent abose normal. Resenues from gas opentions totaled $1.1 billion, down 13 percent from 1986 due to lower costs for punhased gas, lower solumes delisereci, and the in. creasing role of transportation business. New gas installations continued to increase. They totaled more than 21,000, up 2.6 percent from the already large increase in installations in 1986. Much of the growth occurred in the residential sec-Gas Market Profile tor of suburban Detroit, where more than half of 258 2 bef 2so.4 bet CPCo's natural gas sales are made. Portions of Oak. land, Macomb and Wayne counties rank among the fastest growing metropolitan regions in the country. Marketing Efforts To encourage industry to locate or expand in Michigan, CPCo offers incentise rates that can reduce gas costs by 810 percent. !n addition to such eco-Trenopertatten nomic deselopment rates, CPCo offers special incen-service ter large tise comract rates to encourage continued use of nat-eustomere repre-ural gas by customers with alternatise oil burning ca. sente a growing pability in their plants, part of CPCo's CPCo was successful last ) car in recapturing some noterei,ee buel. industrial customers who had switched to the use of fuel oil to meet their energy needs when oil prices noss-1987 1991

._=.3 <p ., (,.y %y,y y. ' .r ,,a ,y a1

t. y '

y.y.;, -

4.,.,.; &s.

4~ .. g; (., + ;,, + 9 47.', z,.., :r, 2 -9.- ._.y ' x..; a,/ .,. t h. ;, 'q 3, a."g:,. .;4., [ ,ri d. :. y..g y,. 4 4 6 '-l..h f*,, t

c. 3..g~

A, 4 ai a ....f'.. e p .g. i e -(y _ y, (. y np 1 ~. ,.., m. ,,( (. ,k.,f N -y .' b h N,$.h k h f.n)f[ [' ir '( r ? $'S.:.l h th$n.$k f h \\.1 f. i. ' N hff y \\, ' y }, i = ^ g _,.s Y, ).l i e. ,f \\, -. ', -.'*,,. g g-e ' ~ '? < L W. ^ ^ -' r, 2,'. ~ ' M, 9_*

• f... * ^

z -) /- . 4_. s .,..~:.. ', e r1-L ....-9 + e,, .+ u t,e. -..e-,m. z p..i.

• s. ;

-pe' -< - Y. 3 ) ? -( ; o.p .s.. - N 4 4,' - 4, 4 . -.. '% '-+:y... ' 4.# 5 o a as s 'n 0 _b =" 9, ( -. .g ' Y,

t. -

' Q N'- j e,_ . 5. _ -_. ,a "s' .g '^',. y 4 'i.. T- ^'# ^R--^'* ^ i e 'l ~ 'f' 't. ". [y!- ?gl"-. Er s J., g - 4 y gy. $ g%.; ' y:- - ? f. ._y \\ y' 3f * .-)- C..e.... . ( .3 3; 4 '- ,P 8.,D.' .' " - Q% c / ' 1l 3. Q e y ;, ". 'r f + -fl '[-[ ^ 3,.., q 'g k. j ' ~ h a- ~ ?* 9, y .y .,8. v.' - j .~ 3 1.- 9.*, r, -..,. s.

• g, -

~ ,, j2. Q -7, 3 S 'c'.' ,\\ - .) L -,'s ..y zJ n

s., -

.j' 4 s ~,. Ve p., h ' M i n. ,J A'; q.n,.s s .y Q

m. * * ;,_.

.r.. ?.a A).g l5 g 13,.. .; ) ...,.. - fa a ^ ~ ,.g g. p ..A / d '- '3.q -, *'- -. -. t t ~ -[. A.. ' - 'h d + g,, e# 4-4,- 3.. . <j.'e 4. s.- ,N, ~ l i% ( 1 1;. '. 2 4 ? ^ ,

Q ,-

f( x 4. 7$ 's [ '.5 ' - _ ;_ -:} ? s y Q *,,.'y} a .q- ? A. a.

..p A;

".y.5 '

l l ', ' '. y.

1 L J 5 +- '..me ,x ..- ~ J - = - r ,9 v* -\\ .h.....? kh: cs Q C -%Q 9 f './ ~ L

g f

p.. %.

..s.r i 3 .o

y p..-

p-v,..:l. . ld;.<... c ~ y n M.' y ,e ,3 "f ^ ? s. Q; ' ..:ng _ : ' tn'. p.-.;: r M..L w ~' s M;u. j f. I~l:.~f 4. g [ y ~ ' \\ '/' y -' + N $,,,..f [ m^.] '. L - '. ~ _ - ~ .n / g, ~e a /,J ,./.. / '. l. y:% Q, l',.. E .s., s" 1, 6 /,f 14. 4 g.~~. ~ ./ e , w /t Y ~! '). ' (; -f N f ' 5f ,Y E Oy [ f._ : ] ' .e f' L l 4

~ R:,tso C:mpetitivo CPCo has aggressively negotiated with its gas sup-pliers and has purchased gas in the spot market to reduce its rates and remain competitive. This resulted in the reduction of a typical resiiential customer's annual gas bill of $60 between December 1986 and g; > ~ 5 December 1987. The 1987-88 winter heating costs to residential gas customers decreased by approximately 6 percent compared to a year earlier. As a result, res-idential gas costs today are actually less than in 1984. To make commercial and industrial gas rates more competitive and help hiichigan's business climate, i' CPCo has asked the SIPSC to correct an unfair rate design often called "skewing." Under this regulatory

== pohcy, residenual gas rates are kept artificially low through subsidies which increase the rates charged CPCo is successfully commercial and industrial customers. It has the elfect marketing natural gas of pushing rates for those large customers higher as an erricient way of than the true cost of serving them. heating major con-CPCo's proposal to eliminate the subsidy of resi-struction sites, so dential rates wouhl essentially set rates at the cost to that work can continue CPCs la moving serve customers, it would reduce rates for large cus-dunng Michigan's 9 cogressively to di-tomers by 16-34 percent, while increasing residential fngid winters. versity gas sup-rates by about 2 percent. If the proposal is approved, pliss and main

• residential customers will still pay less for their gas trin its position than they paid in 1984.

ss Michigan's lawast cost major 1.ong term Gas Contracts gre distritmtion in 1987, CPCo signed new, long-term gas supply camp:ny. contracts with three pipeline suppliers to extend and diversify its natural gas supply and to lower costs. Panhandle Eastern Corporation's two interstate gas subsidiaries, Panhandle Eastern Pipe 1.ine and Trunkline Gas, signed 10-year contracts coscring sales and transportation services. The agreements re-place and extend presious contracts CPCo had with the pipelines. The utility also signed a 12. year gas transportation contract with ANR Pipeline, a unit of The Coastal Corporation. Under the agreement, by 1990 CPCo can increase its 3carly transportation service from ANR Pipeline by up to 40 bef of gas. CPCo also has the right to later convert its transportation ser ices to Nsw G:s installations a finn sales contract for all or a portion of the volume. \\\\\\ The new agreements are part of a corporate strat-egy designed to increase gas supply flexibility and yy hold down costs for CPCo's gas customers. is a \\ 83 84 85 86 87

I

• MIDL AND COGENER ATION VENTURE he Slidland Cogeneration Venture P~

(h!CV), whose creativity has cap- ~ ~ tured the attention of the interna- {.: tional er.ergy industry, made giant g strides in 1987. The.\\lCV part-i nership will convert a portion of Consumers Power's unfinished Sfidland nuclear project into the nation's largest cogeneration plant using the latest cogeneration technology. The partnership gives its equity participants an op-g portunity to imest in an emerging new independent power production industry. The 51CV partnership's strategy has focused on at- -m tracting vendor equity partners who have secondary Representatives of interests in the SICV project through construction or the intematonal supply obligations. The combination of obligations udland Cogeneration and potential return on investment in a successful Venhte partnership project has resuhed in a strong consortium. broke ground for the Since theJanuary 1987 formal agreement in which project in october opposite: subsidiaries of CPCo and The Dow Chemical Compa-1987. 11 Twsive gas tur-ny created the AICV partnership, five other equity bines (sketch) are partners base joined. They are subsidiaries of IlllC being built to join Brown Boveri, Inc., The Coastal Corporation, Com-the stsam turbine bustion Engineering. Inc., Iluor Corporation and (photo) already in Panhandle Eastern Corporation. place at the MCV. Support for Project Crows Togsther, the tur-g bines wul becorne roposed, ground-breaking ceremonies were held at America's largest y; ; g gathered to support the project as a creatne solmion to 51ichigan's future energy needs, and as an innosa-tive use of an otherwise unproductive imestment. In October, Rodney lloulanger was appointed president and chief executise officer of the 51CV part-nership. lie presiously had hehl the same positions with ANG Coal Gasification Company Bismarck, N.D., which operates the Great Plains Coal Gasifica-tion plant under contract to the U.S. Department of Energy. The.\\tCV plant is scheduled to begin operating in CPCo Peak Demand "*9'**"* early 1990. At full power it will be capable of produc-ing' l.370 megawatts of electricity and up to 1.35 mil-lion pounds per hour of steam. Dow's adjacent Slid-land complex will use up to 75 megawatts of power; most of the plant's remaining electric production will be sold to CPCo for resale to its own customers. Dow 'a-also has contracted to purchase initially up to 600,000 S g pounds per hour of the plant's process steam. \\ \\ Financing, Gas Supply Lined Up A construction financing commitment for the SICV has hun obtained from a consortium of banks. The First National Bank of Chicago and three co manag-ing lenders - Swiss llank C,rporation, Algemene Bank Nederland N.V., Chicago branch, and Bank of .\\fontreal - have committed to provide construc-tion financing. 83 84 85 86 87 \\

-g During the past fne years, CPCo customers have in-Reserves Required to creased their demand for electricity by 16 percent, or 25 % Assure Reliable Power m about 1,000 megawatts - almost the capacity of the .\\lCV. 20 % The.\\tCV will help meet the state's growing power needs at highly competitise prices. Under pemling 15 % Reserve Margin With MCV proposals CPCo rates couhl rise about 14 percent by >N. 1991. This wouhl be equivalent to a compound annu- -N al increase of only about 3.5 percent, less than the 10 % projected rise in the Consumer Price Index during ~ 5% this period The cost of the facility, per Lilowatt of capacity, is [ os expected to be 20 percent below the aserage cost of recently completed, base-load generating plants in -5% the U.S., and about half the aserage cost of plants 87 88 89 90 91 92 93 94 95 96 97 recently built in.\\fichigan. CPCo Reserve Margin The.\\lCV is a part of the new independent power generation industry, which is expected to play an in-creasingly important role in prosiding elecuicity in the U.S. 12 As ofjanuary 1988, the partnership has contracted for 78 pet (ent of the NIC\\"s initial gas supply and 59 percent of the supply needed for full operation. Ne-gotiations are continuing for the remainder of the gas supply. Engineering for the N!CV is scheduled for comple-j tion in spting 1988, when construction is expected to begin. Regulatory Approvals Obtained The.N!G\\"s air-use peimit was approsed in Febru-ary 1988. It was the final regulatory approval sequired to begin on site construction. The.\\lCV passed another milestone in early 1987 3 when the Federal Energy Regulatory Commission ap-prosed the project as a "qualif>ing facility" under prosisions of the federal Public l'tility Regulator) Policies Act (PURPA). Under federal law, utilities like CPCo purchase power from qualif>ing cogeneration plants at the utility's "asoided cost.' That rate is based on the costs a utility avoids by purchasing elec-tricity from cogenerators and small power producers. In the case of CPCo, PURPA means the utility asoids basing to build its own base-load plants by obtaining the elecuicity the.\\lCV and other cogenerators and small power producers can proside at equivalent cost. The.\\lCV partnership has applied to the.\\f PSC to establish capacity rates for electricity to be sold to Consumers Power by the.\\tCV. The h!C\\"s proposed aserage capacity rate is competitise with rates for the Electricity pur. two.\\lichigan cogeneration projects the.\\lPSC al-chased from the ready has approsed. The SIPSC has ordered a com-MCV will help prehensise heating on the request. CPCo fill its cus-temers' growing Electricity Costs Competitive demand for The NICV and other PURPA projects will help fdl onsrgy. Stichigan's critical need for new electric capacity, s

83 84 85 86 87 ( \\ Explorztlon Efforts Suonful \\ \\ A m3jor oil discovery in South America promises a \\w significant increase in reserves. NO.\\f ECO is a partner g,'g $ in a joint venture established to explore for oil in a i.* e 500,000-acre contract area approximately 150 miles l southeast of Quito, capital of Ecuador. A successful I i exploratory well was tested at 2,102 barrels per day I" g at year-end, making this the second oil field to be 6 discovered in the contract area in 1987 by NOh!ECO and its partners. _N The company participated in four successful wells s in the.\\fichigan deep gas play, including the NO.\\lECO Ilutter flighland = l-7 well which tested at 6.6 million cubic feet of gas per day and commenced sustained production during the > car. Oll and Natural NON!ECO's recent acquisition of domestic re-cas Reserves senes and its emphasis on foreign exploration reflect Milhons of Net a growing trend in the exploration industry.The U.S. Equivalent Barrels has already been explored extensively; given current price levels, many larger independent oil and gas firms are shifting their resources into acquisitions and NORTHERN MICHIGAN EXPLORATION COMPANY overseas operations. 13 N orthern .\\fichigan Exploration Acquisitions added 13.1 bcf of natural gas and Company (NONIECO) is.\\fichi-560,000 barrels of oil to NOhlECO's resenes at a gan's largest independent oil and cost of $9.1 million. gas producer, and among the 100 largest in the U.S. It celebrated its 20th annisersary in 1987 with a mbstantial financial turnaround. Net income totaled $9 million in 1987,in sharp contrast to a $1 mil-lion loss in 1986. This doesn't mclude a one time gain of $14.2 million due to new accountmg requirements, which adjusted prior deferred taxes for lower federal income tax rates. Total resenue declined slightly. to $69.3 million,2.8 percent below 1986. Oil prices improsed m 1987. NO.\\!ECO's price per barrel aseraged $18.22 during the year. an improse-ment oser a 1986 aserage of $15.12. The aserage price of natural gas sold during 1987 was $2.82 per mcf. NO.\\f ECO anticipates a long term rise in prices. Ilecause of this. the subsidiary is putting greater emphasis on adding natural gas resenes. Not income (Loss) Production of natural gas rose 7 percent to 12.1 Milhons of Douars

• o es n t include a bcf. Oil and condensate output fell 16 percent to 1.6 million barrels.

0"*'t""* 98* ' During 1987, NO.\\1ECO successfully held down $14 2 rruition due t an accoeng expenses, including exploration costs. Capital expen-ditures totaled $37.4 million, up 13.7 percent from

change, the presious year's $32.9 million.

NONIECO's success in its exploration program is i reflected by its fmding costs - a calculation of the 'e, reserves added per dollar of exploration and des elop-ment cost. This indicator totaled $7.57 per equivalent Major discoveries barrel of resenes in 1987 and $7.09 in 1986. g and acquisitions Total reserves increased 5 percent to 21 million hav2 put NOMECO equivalent barr els. Oil and condensate reserves u in o strong sta)cd at 6.9 million barrels. Resenes of natural gas growth position. increased 10 percent to 86 bcf. 85 86 87

l l s 1 ( O T H E R O P E R A T I O N S, Capotita: ~ Anumber of sma Financist prog. cxpected to grow in importance ress can be repre. for CMS Energy. The efforts of sented by these sescral are particularly significant, computer compo. nonts, symbols of l Selective Collection Ser' rices innovation in a l Selective Collection Sen ices, competitive world. Inc. (SCS) was organized in 1972 l l to centralize CPCo's efforts to recover losses from uncollectible accounts. The company now markets these successlid collection senices to 16 other companics. SCS's success rate with collections aserages 37 percent, double the utility industry average. SCS's automated telephone dialing equipment can make 34,000 collection calls daily, and c;m provide additional business senices like telemarketing. SCS also operates a computerized had-debt data base and a telephone service through which a client's customer", can pay bills via credit card. Diversified energy 14 CMS Utility Services operations will CMS Utility Senices, Inc. is best known for play an increas. operating the Miss Dig program for CPCo and other ingly important Michigan utilities. The sy stem coordinates excavation role in cus work by contractors to prevent damage to utility pipes Energy's future, and cables. Use increased more than 15 percent in 1987, setting a new record of ahnost 373,000 calls. Ilut the subsidian's primary mission now is to become a major prmider of utility related products and senices, and to imest in businesses that support the energy and utility industries. Its fint new senture includes imestment in the de-selopment of a hand. held, computerized communica-Selective Collect on tion unit, from which it will carn royalties. Services' debt collec-tion business uses telecommunicatens . CMS Generation Company was created.m 1986 to u m n p mno pw g nerann pm,Ms to build a 37 percent ou@out h mung h inkmh to bnw a major success rate. double P"i'i ""'.in the emerging independent power-P the industry average "N of 18 percent. The subsidiary plans to develop new power gener- - ~ ation projects,imest in existing projects and possibly 9 acqune existmg cogeneration compames. + Esen if annual growth in electric power demand is only 2 percent, over 40,000 MW of additional electric +/ eration and independent power protiucers are likely power generation capacity will be required nationally by the mid 1990s. Research indicates that cogen-z' s to supply a substantial portion of the new demand. CMS Generation will provide CMS Energy with growth opportunities in one of its primary lines of business - electric power supply. '/ ing participation in projects in several states. CMS d The company is negotiating for equity and operat- . '/. Generation's goal is to base interests in projects to- '.n-taling 300 to 400 MW by the early 1990s.

"57* ;d IV .e ' + */ '.- ~. ..3 g

• • P..P

=h,

• ,-i.- -

? ,g " k ,.g 4 4 .v)>. s. i. r ..r A - p- ?; 2 i: / A *,. r'\\ %g, 2 y , y...'.... .N h... y 4: - Y2 ....2-w + s .,;,. ' " - y3- /x y ;.y_.

_ -;' g;,

,g j\\ - .q J

r. ;~ i

~

g.,q e

up),/;,f f,.k kf u y.. g, yi. y p.z",,; e Q. " -,,.f.. F 0 ~ f&> --' 'r i p '; i ,y '., +... 7 (., #" g g.,. w,i-Q.>.,;.;;.f (.- f.. 41 - r + .c' ,y ~x ..g . 4 1 Nf6 fj Y -h'E,,. N. " ^ I

y}_.',.r y,

'.g' j., A. -'.4 . y' y fl ' ' ' gY * ' a, a i d' '~; g. ' ~- ' = ,2 l ~ I. ', .Y '. r (A *,,,; s ~ ft t r ..,/ e.4 ' hg_l: / ,*L-N' ,,3 .,a} . i y e' ..s 1 ., ; gg

c, *a%

+. 4y / ( n.. 6 tass an.rsy. Y [' _ .. g 'r g..,, ' ! - g ggg s.., 7 ,-.s. %p.j,pW. T'.: 1 '"1 :.o' gyggged 131, a.: ? p 3 . ' anne ss.m.- t ~ , G.. - -g. J - e.,.- . 'k -..L PGrC9nt In M..

g. 'y ',

('t pJM-syi c -t .s K

• $g

[ ' 187,33 lggggy-I ,/ /tV l c- ^ i,' tant sten ver- .,, -.,r ^ ..? ' wardin % ' ~..a 9,8 Coenpany's d,.f 9 ( 9 h., p D financial i T 9 - -+ ,.x, - +. ' recovery. J- , y-N/ g Q '. '.~ $ =' ., p. .. ys a Q> .'s%=. (., i. ' ; ; 5.' A t. ~a-4 / . pi/ 'I ...s. ,/ yy .. - -. - i y ph j ~ ~ /. k g' p* l' '5 ^ ^ _. - m &g f f'~,./ ? '.'Q y h ^ ; 2;f _ Q ' Y 'j@ h Y . ' :-.), .] yy - I'sm s N Y ud i ..f'v>

g*;

+ '- d g,* g-~ *4' g ~ 4*.hJ" y % g%rs h ,27%%?,:.1:s's./*y;* * - J' r N. l-7 - V av2nm.*?;~ ~ y. ar#4'jT;-'?'P9';# 2 .-l '-L. i v gin'dt.i'd., rgC* p[EkkN i s.* gpawrg.fa ' ik y . 'Y'&,&,gy:f.' 7

';V p.

y% q 4, '4.,

g. "{

f \\' g_

Corporate Structure Sales

• l In 1987 Consumers Power Company (Consumers)

Electric sales in Consumen* main system incicased 3.4 i l repositioned itself to take better advantage of future utility and penent oser 1986. New electric installations in 1987 increased non-utility business opportunities by forming a holding 22.6 percent oser 1986. Consumers projects aserage annual company with two principal operating subsidiaries. electric sales growth of 1.8 percent for the next 10 years. In Stay CSIS Energy Corporation (the Company) became Gas deliseries in 1987 decreased 3.7 percent from 1986. the parent company of Consumers and C515 Enterprkes New gas installations were up 2.6 penent from 1986. Gas de. Company (Enterprises).' Enterprises then acquired all of the theries are expected to remain constant mer the next fise years. common stock of certain of Consumers' wholly owned subsidiaries in exchange for preferred stock of Enterprises. Rates Enterprises is now the major operating subsidiary for non. Consumers continues to receise financial stabilization regulated businesses. L'nder the holding company concept, the rate relief in the annual amount of $90 million whi(h, although utility and non-utility businesses are each auountable for their not recorded as resenue, prosides cash. In September own economic resources and capital costs. Consumers' gas rates inacase d by $16 million annually upon As the principal operating subsidiary of the Company, the expiration of a one-year rate reduction. Consumers' consolidated operations account for the major lloweser,(ash flow suffered as the Stichigan Public share of the Company's total assets, resenues and income. Senice Conunission (51PSC) ordered reductions in electric and 'Iherefore, the Company's financial condition, changes in its gas rates and refunds to customers. During 1987 the 5!PSC liquidity and its future fmancial outlook depend primarily on inued a final electric rate order whic h reduced electric rates by the operating, imesting and financial actisities of Comumers. $21.8 million annually from the rates set in an earlier interim order. L'nder the final rate oider Consumers refunded Financial Condition dPinoximately $76 million in 1987. Comumers was aho ordered to reduce its gas rates bs 16 During 1987, as shown in the auompanying graphs, the $23.1 million per > car and its electric rates by $73.5 million'per Company impuned its capital mix and lowered as relathe ua to reflect lower federal income tax raies. Consumers was capital (mts by reducing Comumers' high-(mt debt and equity allowed to continue to (ollect $21.7 million of the eletnic securities. During the year, subsidiaries of Consumers and a annual reduction, but future rate action could resuh in refunds subsidiary of'!he Dow Chemical Compan) entered into a of amounts currently being collected. partnership, the Slidland Cogeneration Venture I.inuted CA How was further affected as Consumen was Partnerdup (NICV Partnenhip), to comert a portion of the ordend - becane oflower f(deral imome tax rates - to Slidiarut plant into a gaufueled, combmed-c)(le cogeneration refund $22 million in 1987 and $16.1 million in 1988 for faciht). ihe planned comersion shotdd suengthen the ,,cxcess" deferred tax reser es. Ilecame the Company currently Compam balar4e sheet by comertmg non-carnmg auen nuo a> s the ahernathe minimum federal income tax, the rate future carmng assets. reductions adser cl> a!!cci cash flow as there is no corres-ponding reduction to the pa> ment of federalimome taxes. Liquidity Ahhough tuning and anmunn of. cash hom fuime rate The Compant had substantial cash How from operating acthities in 1987. Sounes of(ash inchuled re(ord setting acqn an-(hhuh to pu6(t, sesnal procnchngs wiU aHnt elet tric sales, decreased operating cmts and continued financial b" '""P,'"} ' h""',e cash position. ~1 hese pro (cedings

• ' " ' ' ' """"""" '"4""""

'"'""}' stabilitation rate relief. A new credit agreement for Comumers' Slidland imestment; a gas rate case filed m. 1987 that requeued bant debt also coninbuted to liquidity by dela>ing wheduled # """"'" "*'"'"." "I"f "PPh E 1987 repayments until later yean. (mts and (criain replacement power (mn. lhese itenu are l more fully discuned in the Company's notes to its comolidaied Imancial uatements. Embedded Cost of Capital l C Long term Debt Palisades Nucicar Plant O Preference and Preferred Stock As part of a tentathe agreement with llechtel Power Amounts Outstanding Corporation (llechtell to settle claims in conneition with (Billions cf Dollars) liethiel's work on the cameled Slidland pn> ject, Consumen 1985: E $3.8 would come) its Paliudes nuclear plant to a new generating \\ O $1.1 '"* Pd"b "'CCh i"4 h d"d'"' ""'C' ""d 3" C4"i' F "'C'C't I" i I "#

• M"""d "E """P'"h C"*"*CIC'iC"I"E'h" 1986: E $3 5 9g$

benefits of the tentatise agreement and the asailability of O $.9 aueptable financing for the new generating company. 198h 3 $3A O $.5 Financial Flexibility 6 't he Company has a number of financing schicles it can me to fmance in future capital needs. In Slay 1987 Comumers exc(uted a long term $783 million uedit agreement whic h l 9 replaced its Reurmturing Credit Agreement. 'lhe medit agreement reduces Comumen' relathe capital cmts became interest rates under the urdit agreement are gencially lower than rates currenth obtainable under ahernathe financings. L

The agreement also deferred principal payments until planned comersion of the 51idland plant, the possible transfer August 1990. of the Palisades nuclear plant, and the Company's efforts to Comumers and its Alichigan Gas Storage Company diversify into energy related fields. subsidiary have executed an amended short term revohing flowever, the continued receipt of fmancial stabilization credit and acceptance facility agreement (RCAFA) for $400 rate relief and the timing and amount of the recovery through million. The RCAFA provides capital for purchasing seasonal rates of $2.1 billion of the abandoned 5fidland insestment and fuel imentories and for other working capital uses. full recovery of Consumers' imestment in the SICV Partnership Other financing sources include: sales of Comumers' remain of vital importance to the Company. In the case which receivables for up to $100 million outstanding at any one time; will decide how much of the abandoned Afidland imestment a $50 million line of credit; $135 million of promissory notes; a will be reemered, the SIPSC staff has filed testimony Eurocommercial paper program; and Enterprises * $50 million concluding that Consumers should recoser $1.3 bilhon mer a resohing credit agreement. 10-year period with no return on its unreco ered imestment. Consumers has regulatory apprmals to issue in 1988 not With respect to Consumers' imestments in the SICV more than $250 million oflong-term debt and to issue or Partnership, much of the uncertainty has been resolved in the guarantee $800 million of short. term debt. past year. The SICV Partnership has recched commitments for inJanuary 1988, because of a recent accounting rule. a major share of the third party equity imestment, tentativel) Comumers wrote down its abandoned Alidland imestment as a arranged construction financing, and secured major amounts of result of Consumers' assessment that no return will be allowed natural gas supplies. The Federal Energy Regulatory on the unan.ortiicd imestment mer the recmcry period. Commission has issued an order finding that the SICV will be a Consumers has chosen to adopt this accounting rule qualifying facility after initial operation under the federal Public retroactisch. At Dec. 31,1987, the net effect of applying this Utility Regul tory Policies Act. Howeser, full recmery by the rule was to reduce retained earnings by approximately $616 SICV Partnership ofits imestment still requires apprmal of a million. During the reco cry period Consumers will accrue a capacity rate that it can charge Consumers for the electricity 37 return on the unamortiied imestment. Ahhough the write-Consumers purchases and the extent to which it can sell down does not affect cash flow,it will present Consumers from capacity not purchased by Consumers. In addition, full recovery paying cash disidends on common stock during part or all of by Consumers ofits imestment in the AICV Partnership 1988. depends on the arnount of proceeds from the sale of notes to be receised from the AICV Partnership for the transfer of Capital Requirements Alidland assets. Capital requirements, excluding the requirements of the The Company belieses that the same forces that Slidland Cogeneration Venture (3fCV), are estimated at $262 produced deregulation in the gas industry are now acthe in the million for 1988 and $236 million for 1989. Consumers expects electric industry, and that Consumers is positioning itself to to be able to entirely fund its expenditures with cash from successfully compete in this emironment. Besides Consumers operating acthities. 'Ihe AICV Partnership has secured a lowering customer energy costs. the Company plans to commitment leuer from a group of banks to prmide up to $675 continue to imest in energprelated business opportunities. million of senio: bank debt to finance completion of the SICV. Under the financial stabilitation rate orders, Consumers is Ruults of Operations permitted to spend up to $50 million on the NICV. Overview Net income in 1987, after the cumulathe efIcct of a Ouuwk change in accounting for income taxes, was $184 million, or The Compan>'s fmancial pmition and operating result' $2.15 per aserage common share. 'Ihe 1987 carnins;s ir. crease should continue to imprme as a result of further reductions of reflects capitalized interest on the 51CV assets, early adoption Comumers' capital costs, anticipated electric sales growth, the of the new accounting standard on income taxes, increased electric sales, holding down operating costs, imprmed oil and gas operations and decreased interest expense and preference Capital!aation stock dhidends. Capitaliied interest on the SICV assets resuhed Ratios in earnings per share of $.98. Early adoption of the liability G Common Equity

• method of accounting for income taxes accounted for $.21 per g9 t O Preference and share for 1987. 'lhe earnings increase was tempered by lower Preferred Stock gas sales, the revenue refund in Step 2 of the pending electric p E Long-Term Debt /Captal rate case and the settlement by Consumers of the Union Leases (including Current Carbide Corporation (Union Carbide) law suit.

Matunties) The Company had net income in 1986 of $65 million or Y} (, ' $.7 4 per as erage common share. Earnings in 1986 reflected increased electric sales,imprmed control of operating \\\\ expenses, reduced pemion expense and decreased fixed charges. Earnings were partially othet by reduced gas delheries, and reduced earnings from oil and gas operations.

• Prior to restabng 1986 and In 1985 the Company had a net loss of $390 million or 1987 for a wnte-down of

$4 A2 per aserage common share. The net loss resulted i a portion of Consumers-principally from the $331 million after tax write down of abandoned Mdand certain Alidland nuclear fuel and certain Slidland facilities, and investment. a $65 million innease in Alidland.related deferred taxes. 85 86 87 \\

Electric Utility Operations Grs Rerenue end Sales In 1987 r.et operating income decreased primarily Components of operating resenue variances were: because of the Step 2 resenue refund and the Union Carbide Increase (Decrease) from Prior Year lawsuit settlement, partially ofket by holding down operation and maintenar:ce expemes. I)ue to an expanding c(onomy (Slillions of Dollars) and higher than normal summer temperatures. Consumers e7/ss 86/85 set record sales and a new hourly peak demand in 1987. Sales. 8 (27) (16)% $ (28) (11)% in 1986 net operating income increased primarily due to Transportation fees 14 a 14 5 m(reased sales. Tariff rates (10) (6) (5) (2) Gas cost recoscry (143) (86) (231) (95) Electric Revenue and Sales other... Components of operating resenue variances were: 1 8 3 S(165) (t oo)% $(215)(100)% Increase (1)eucase) from Prior Year Gas delisered to cmtomers, which includes gas (51illions of I)ollars) tr nsported for end mers, deucased 3.7 percent in 1987 and 87/86 86/85 3.9 percent in 1986. Gas deliseries decreased in 1987 due to warmer weather. 'Ihe 1986 decrease was due to warmer Sales (excluding Pontiac). S 38 26% SM 18 % wcather and the loss of some customers hasing dual fuel Pontiac sales. (25) (17) capabilitt because oflower oil prices. 'the 1987 dec rease in Tariff rates. (94) (65) tailf rate sesenue resulted from the $16 milhon rate reduction r supply cost re(men. 2 41 a2 mer a 12-month period which ended Sept.1.1987, and the rate sedudion of $23 million annually for the lower federal S(145) (100)% $79 100% g income tax rate. 'lhe 1986 redudion in tariff resenue resuhed from the above-mentioned $16 million temporary Excluding sales to the City of Pontiac (the Ponn.ac rate redudion. ~ diuribution system was sold to The 1)ctroit Edison Compan) in l Odober 1987). sales increased 3.1 percent in 1987, with Cost ol'Cas Sold j residential and (ommeirial sales inacasing a combined 4.7 'the 1987 deucase of $133 milhon was the result of a l penent. Industrial sales increased 1.5 percent. Sales inucased $91 million decrease ('ue to lower sales and a $39 million ) 1.8 pen ent in 1986, with (onunercial sales inucasing 1,1 deocase due to reduced supplier (mts. I he aserage cost of gas percent. Tarill rate resenue refle(n the Step 2 refund and sold deucased to $3.12 from $3.30 per thomand cubic feet related rate reduction, and the $52 million annual rate Om0. In 19s6 the cmt of gas sold deucased from $3.85 per redudion due to the lower federal natutory tax rate. 'Ihc nuf primarily due to lower major supplier prices, inacased me "Other" redmtion rellcos the SIPSC-ordered refund for of spot market punhases and lower sales. "exccu" defened taxes. ( Oil and Gas Emploration and Production Pou er Costs Northern hiichigan Exploration Company s 1987 net op- ) Power (mis deucased $33 million in 1987. The deucase C' ' U " E "'"*" I

• P ""

R

• f"" b "'" * " "

reflec ts a $22 million deucase for diu ontinued I,ontiac charges to depletion expeme for certain foreign aucts and op-erating (mt reductions. Parn. lly ofhening the impact of lower punhases the asadability of lower-cmt purchased power, and a inucased generation from the lower cosi Palisades nuclear ml udunu s was an increase in the aserage price per banel..I he plant, panially olbei by (mis to seule the Union Carbide ""P"" "I'."""""'d gas solmnes was oma h a redm non m the law suit. The.ncrage (mt per kilowatt-hoin (LWh) generated "' "'" R " P ""' P"' " lhe 1986 deucase resuhed liom the general de(h. l deocased to 1.69 cents hom 1.83 cents, not including the ne m i Union Caibide settlement. 'the aserage cmt per LWh od and gas prices and a&htional depletion expeme of $5.5 on aher taxes for wschans of tenain heQn auen. m punhased deucased to 2.27 cents from 2.60 cents. Power cosh for 1986 inocased $19 million, including Fized Charges l $12 million for an anticipated settlement of the Union Carbide Interest expeme in 1987 refleca capitaliicd interest of lawsuit. The aserage ont per kWh generated increased to 1.83 $110 million on the NICV project anets,inluced interest (osts (ents from 1.67 (ents, not imluding the Union Carbide charge, of $48 million due to first mortgage bond redemptions by due to the extended outage at the lower cmt Palisades nuclear Comumers, and reduced interest expeme on Comumers' bank plant. 'lhe aserage cmt of pun based power decreased to 2.60 debt of $16 million due to repaymena and lower imerest rates. cents per LWh from 3.01 cena due io the asailability oflower- 'I be deucase in interest expeme was panially ofhet by $27 cost pun hased power. million ofinterest on new first mortgage bonds inued b3 Comumers, interest on customer refunds and interest on notes Oa) Utility Operations payable. The 19x6 interest expeme decline primarily reflected In 1987 net operating imome deucased due to lower repayments and lower interest raies on the restru tured bank gas deliseries, and deucased tarill rates resuhing from a $16 debt. fewer first mortgage bonds outstanding and smaller million raic reduaion mer the 12 month period ending Sept. resenes for customer refunds. 1.1987. Prefereme and prefened stock disidends deucased $38 million in 1987. 'Ihe deucase was due to redemption of almmt all of Comumers' preference umL. In 1986 preference sto(L disidends were also lower from the presiom > car due to prefereme simk redemptions.

Corporato Itostructuring depreciation is reasonably adequate to cover depreciation on In Slay 1987 CSIS Energy Corporation (the Company) the original cost of plant. became the parent holding company of Consumers Power Company (Consumers) and C5tS Enterprises Company Nuclerr Plant Decommissioning Costs (Enterprises). InJune 1987 Enterprises acquired from InJanuary 1987 Consumers began wilecting decommis-Comumers all of the common stock of Northern Alichigan sioning costs through a monthly surcharge on its electric Exploration Company (NOh!ECO) and fne other Consumers customers' bills.'these funds are deposited in trust as required subsidia-ies in exchange for preferred stock of Enterprises. The by the SIPSC order authorizing the surcharge, The surcharge is restructuring did not result in any change in the ownership of based upon assumed decommissioning costs in 1987 dollars of Consumers' preferred sto(L or ofits debt securities. $50 million and $100 million for the liig Rock I'oint and Palisades plants, respecthcly, and upon certain other assump-Significant Accounting Policios tions as to remaining plant life, inflation and fund earnings. Consolidation Policy A Nuclear Regulatory Conunission proposal would 'Ihe accompanying consolidated financial statements require utilities to accumulate decommissioning funds within include the accounts of the Company, Consumers and fne years or one-third of a plant's remainin;; operating license Enterprises, their respectise wholly owned subsidiaries, and the period, whicheser is greater, to the level that would hase been hiidland Cogeneration Venture I.imited Partnership,in which attained if the accumulation of funds had started at the subsidiaries of Consumers currently hold a majority interest. beginning of the plant's life. 51anagement belieses that any These statements exclude all material intercompany amounts, additional, unfunded decommissioning costs, which could be except intercompany prof ts in Comumers' gas imentory, significant, would be recmerable through adjustments of rates. which are allowed by the ratemaking policies of the Stichigan Public Senice Commission (51PSC). Spent Nuclear fuel Costs l'uct for electric generation includes spent nudcar fuel 39 Revenues and Tuct Cost 5 costs based on the quantity of heat produced for electric Consumers accrues resenues for electricity and gas used generation. Under federal law, the Department of Energy is by its cmtomers but not billed at month-end. Consumers also respomible for storing and disposing of spent nuclear fuel. The aurues resenues for electric power supply costi and gas costs, principal amount of the obligation for spent nuclear fuel subjc(t to annual reconciliation hearings conducted before the burned prior to April 7,1983,is $14.3 million. 'lhe entire AIPSC. Consumers records any mer-recovery or under-recmen amount has been, or is being, re(mered under AIPSC of fuel cmts as a liability or an asset until these cmts are authorization. Cmts for fuel burned af ter April 7,1983, are refunded or billed to its customers. (harged to nudcar fuel expense and recmered through electric l'on ratemaking purpmes, the SIPSC reduces current rates. resenues resulting from certain tax deferrals achiesed by accelerated tax deductiom (temporary differences) allowed Non-earning Assets under current federal income tax law. Under this policy, rates Consumers' rate base excludes the Alarynille gas will be increased in the future to recmer the increase in taxes 1cforming plant. 'Ihe SIPSC ordeied that the imesiment be when these accelerated deductium reurse. Ellecthejan. I, carried in plant held for future use and permitted recmcry of 1987, Comumers aurues resenues currently to reflect the the undepreciated imestment mer approximately 10 > cars. At future benefit expated to be recei ed under this policy. (See Dec. 31,1987, the remaining net imestment was $51.6 million. "Change in Slethod of Accounting for Income Taxes.") For a dhcussion of the abandoned Alidiand imestment, see Notes I and 4. Maintenance, Depreciation and Depletion Property repairs and minor propett) replacements are Change in Method o/ Accounting for Income Tates charged to maintenan(e expeme. Depreciable property retired 'lhe 1987 financial statements reflect the liability method or sohl(net of any sahage credito is charged to accumulated of accounting for income taxes. Prior to 1987, income taxes depreciation. Sahage amounts from the abandoned Alidland were accounted for hy the deferwd method. Under the project reduce the Alidland imestment. deferred method, deferred tax credits were not adjusted for Depreciation pimisium for utility plant are based on changes in enacted federal tax rates. Also, under the deferred straight-line and units-of prmhaiion rates apprmed by the method, utilities that met specified criteria of accounting for SIPSC. 'ihe compmite depteriation rate for electric utility rate-regulated enterprhes did not record deferred taxes for plant was 3.0 percent for 1987,1986 and 1985, and for gas realized tax benefits where the regulator used these benef ts to utility plant was 3.9 percent in 1987,3.8 percent in 1986 and reduce allowable costs for ratemaking purposes. 4.0 penent in 1985. A major feature of the liability method is that deferred N05tECO follows the full-cmt method of accounting for tax liabilities are adjusted for enacted tax rate d,anges. Utilities its cmts. Capitaliicd oil and gas exploration and deselopment mmt prmide defe rred taxes for all temporary ddferences. cmts are expemed on the units-of. production method, while Initial application of the liability method requires a company to other plant cmts are expemed using straight.line rates. 'Ihe apply the accounting as of the beginning of the year. composite rates for NO',lECO's plant, Comumers' common ~lhis (hange increased earnings and earnings per share plant, and other subsidia ies' plant were approximately 6.4 by $18 million and $.21 per share for 1987, respecthely. percent in 1987,8.9 penent in 1986 and 7.3 penent in 1985. These rates relic <t N051ECO write dowm of foreign Restated Amounts imestments of $1.9 million, $10.2 million and $.9 million in Restatements to the accompanying financial statements 1987,1986 and 1985, respecthcly. for comparati e purposes had no effett on net income. In management's opinion, the prmision for accumulated

'!housands, Except Per Share Amounts Years Ended December 31 1987 1986 1985 Operating Revenue Electrie. $1,6 3 0,981 $ 1.775,912 $ i,697,243 1,122,365 1,287.789 1,533.256 Gas.. Oil and gas exploration and production 44,908 41,034 61,598 2,286 4,016 6,231 i Other. Total operating resenue. 2,800,540 3,108,751 3,298,328 Operating Expenses l'uel for electric generation.. 381,663 373.879 372,226 Purchased and interchange power 225,671 266,723 219,397 Cost of gas sold. 668,864 801,388 1,031,183 Other operating expenses. 415,781 413,988 435,751 Total operation expenses. 1,691,979 1,855,978 2,058,560 Slaintenance. 127,487 142,566 145,929 Depreciation, depletion and amortiration. 216,263 214,067 201,333 General taxes. 154,513 172,639 166,855 Total operating expenses 2,190,242 2,385,250 2,572,677 Operating income Before income Taxes 610,298 723.501 725,651 Income Taxes 162,373 245,287 235,929 20 Met Operating income (Loss) Electric 343,838 358.311 340,928 Gas. 96,059 121,221 136,454 Oil and gas exploration and production 9,689 531 14,259 Other. (1,661) (1,849) (1,919) Total net operating income 447,925 478,214 489,722 Other income (Deductions) Non-operating income taxes, net. 38,347 94,702 219,558 Write-down of Niidland nuclear project costs. (487,737) Write-down of uranium assets. (38,300) Other, net. 15,441 3,313 3,594 Total other income (deductions). 53,788 98.015 (302,885) Fixed Charges Interest on long-term debt. 338,316 376,969 405,450 Other. 41,369 22.011 53,759 Capitalized interest. (139,678) (595) (2f>00) Preference and preferred stock disidends. 74,836 112,792 119,776 Net fixed charges 314,843 511.177 576.385 Net income (loss) before cumulatise efTect of change in accounting for income taxes 186,870 65,052 (389,548) Cumulatise effect of change in accounting for income taxes. (3,070) Not income (Loss). $ 183,800 $ 65,052 $ (389,548) Earnings (loss) per aserage common share before cumulatise effect or change in accounting for income taxes. 82.19 $.74 $(4.42) Cumulatise effect of thange in accounting for income taxes. (,04) Earnings (Loss) Per Average Common Share. $ 2,15 $.74 $(4.42) Av: rage Number of Common Shares Outstanding. 85,371 88.005 88,065 See Corporate Restructuring and Summary of Significant Accounting Policies, and Notes to Consolidated Financial Statements.

'lhousands of Dollars Years Ended December 31 1987 1986 1985 Cash from Operating Activities Net income (loss). S 183,800 $ 65.052 $(389.548) Cumulatise effect of change in accounting for income taxes 3,070 Depreciation, depletion and amortiration. 238,111 227,209 218,880 Deferred income taxes, net. 202,695 195,165 1,939 Deferred investment tax credit, net (5,356) (7,306) (23.538) Capitaliied interest.. (139,678) (595) (2.600) Financial stabilization resenue.. 96,228 91.693 29,693 Write-down of.\\fidland nuclear project costs. 487.737 Write-down of uranium assets. 38,300 578,870 574,218 360,863 Changes in working capital Accounts receivable. 50,528 5.818 (8.592) Accrued res enues... 32,369 57,876 (71,134) Gas in underground storage (4,656) (20,978) 56.016 Generating plant fuel stock. 12,208 9,937 (3,610) Accounts payable. (6,515) (10.881) (7,517) Accrued taxes. 8,716 6,616 614 Deferred income taxes. (89,790) (39,326) 42,435 Resenue resersed for refund. (1,475) 22.012 (65,217) Other. net 17,159 (18.204) 124,802 21 Total cash from operating actisities. 597,414 587.115 428,690 Financing Activities First mortgage trends. 250,000 178.000 Notes payable 1,015,593 340,871 166.607 Ilank loans. 819,300 15.350 Sale ofinstalhnent sales contra (t 19,000 Sale and leaseba(L of nuclear fuel. 14.791 Sale of minority interest 115,312 Sale of reteisables 100,000 Other. 3,774 9,469 5.102 2,322,979 528.340 201.853 Other, net. (75,342) 28.977 (73.431) 1otal cash prosided. 82,845,051 $ 1,14 4.432 $ 557.109 @Csh Used to Reduce notes payable. S 862.133 $ 217.661 $ 240,000 Retire debt 1,165,198 471,217 213.970 Retire preferer.ce and preferred sto(L 467,499 196.921 14,085 Acquire plant and property (less capitalized interest) 269,341 190.100 203.239 Reacquire preferred and common stock. 47,915 752 Total cash used 82,812,086 $ 1,076,657 $ 671,291 increase (Decrease)In Cash and Temporary Cash Investments S 32,965 $ 67,775 $(114.185) i See Corporate Restructuring and Summary of Significant Accounting l'olicies, and Notes to Consolidated Financial Statements.

Thousands of Dollars December 31 1987 1986 Asseta Plant and Property (At Cost) Electric.. $4,2 5 5,004 $4,170.371 Gas. 1,477,162 1,433,615 Oil and gas properties. 461,078 424.824 Other.. 131,345 126.229 6,324,589 G,155.039 Less accumulated depreciation, depletion and amortization. 2,635,004 2.436.501 3,689,585 3,718,538 Construction work.in progress Afidland Cogeneration Venture. 1,666,585 Other.. 78,162 83,303 5,434,352 3,801.841 Abandoned Midland Project 2,207,969 3,674,278 Current Assets Cash and temporary cash insestments at cost, which approximato market. 114,890 81.925 Accounts receisable and accrued revenues, less reserves of $4.756 in 1987 and $ 1,709 in 1986 291,458 474,355 Gas in underground storage, at aserage cost. 249,867 245,211 22 Generating plant fuel stock, at average cost.. 50,894 63,102 Niateriali and supplies, at aserage cost 74,755 87.151 124,069 183.161 Prepayments and other. 905,933 1.134.908 Non current Assets Accrued resenues. 728,090 Other. 79,114 58.486 807,204 58.486 Total Assets. $9,3 5 5,4 58 $8.669.513 Stockholders' investment and Liabilities Capitalization Common stockholders' equity $1,998,66 7 $ 1.936.005 Prefereme and preferred stock 401,283 911,454 long. term debt. 3,209,257 3.255.312 Non-cunent portion of rapital leases. 59,667 62.251 5,668,874 0.165.025 Minority Interest 115,913 Current Llabilitles Notes payable 443,274 289.814 Current por: ion oflong-term debt and capitalleases. 241,924 270.073 Accounts payable 210,759 217.274 4 Accrued taxes.. 213,585 201.869 Called preference stock. 82,500 i Deferred income taxes. 35,906 125,696 Accrued interest 96,799 115.658 Resenue resened for refund 60,304 61.779 Other., 132,546 120,870 1,517,597 1.406.033 Mon-current Lladlitleo Deferred income taxes. 1,459,766 720.695 Deferred insestment tax credit. 278,293 116.225 Financial stabilization resenue. 220,614 124.386 i Other. 94,401 137.149 2,053,074 1,098.455 Commitments, litigation and other contingencies (Notes 1. 2,4,6,11 and 12) Total stockholders' investment and Liabilities. $9,3 5 5,4 5 8 $8,669.513 See Corporate Restnuturing and Summary of Signifwant Accounting Policies, and Notes to Consolidated Financial Statements.

Numbei of Shares ' thousands of I)ollars December 31 1C87 1986 1987 1986 Preference Stock Cumulatise, $1 par value, authorised 40,000,000 shares With mandatory redemption $85.00. 7,200 $ 7,200 3.85,, !,800,000 49,500 4.02. 2,000,000 55.000 3.78. 2,000,000 55,000 3.98, 870,000 22,620 189,320 Without mandatory redemption $ C.43. 2,(R)0,000 50,000 2.23. 2,000.000 50,(XR) 2.50, 1.600,000 10,000 3 f>0, 3,000,000 82,5(X) 4.40. 2,000,000 55,000 277,500 Preferred Stock Cumulatise, $100 par salue, authorized 7,500,000 shares With mandatort redemption $ 4.52. 71,550 75,550 7,155 7,555 9.25. 210,000 21,000 23 9.00. 367,500 400,000 36,750 40,(KX) 9.70. 90,000 95/X)0 9,000 9,500 8.625. 216,000 288,000 21,600 28,800 74,505 109.855 Without mandatory redemption $ 1.50. 547,788 517,788 54,779 51,779 4.16. 100,000 100,000 10,000 10,000 7.45. 700,000 700,000 70,000 70,0(M) 7.72. 700,000 700,(X)0 70,000 70,0(X) 7.76. 750,000 750,000 75,000 75,000 7.68. 550,000 550.000 55,000 53,000 334,779 331.779 1.eu stod held by subsidiary, at cost $ 1.50 1,500 72 4.16. 700 31 7.45. 21,200 1,576 7.72, 12,870 959 7.76. 46,555 3,569 7.68. 23,885 1,794 8,001 Total Preference and Preferred Stock $401,283 $911,4 51 PREFERRED STOCK REDEMPTION FEATURES AND REQUIREMENTS Standator) M mdatory Redemption Optional Redemption Features Redemption Features Requir ements Price Price (Euluding Rest ris tions Annual (F.u ludmg Acc rued Ellec tis e in Effect Number Accrued 't housands Series Disidends) % rough nrough ofShares Disidends) Year of Dollars $ 1.52 $ 101.725 None None 4.000 $ 102.725 1988 $ 10,611 9.00 107.00 Stanh 1938 Stanh 1988 25,000 100.00 1989 10.61I 9.70 107.00 Dec.1989 Dec.1989 5,000 100.00 1990 10.61I 8 625 101.00 None None 72.00() 100.00 1991 3,4 I I 1.50 110.00 None None 1992 3,111 l.16 103.25 None None 7.45 101.00 None Nonc I 7.72 101.00 None None 7.76 105.31 Slay 1988 Nonc 7.68 103 00 Oct.I988 None See Corporate Restructuring and Summary of Sigmficant Anounting Polities, and Notes to Consolidated Financial Statementi.

O. 'Ihe total amounts of first mortgage bonds, their interest ~!housands of Dollara ' thousands of Dollars Dec ember 31 1987 1986 December 31 1987 1986 First mortgage bonds 82,337,630 $2.402.733 Nf aturing through 1992 Refinanced bank debt 783,000 824,737 3%%, due 1987.. S 12,576 Installment sales contracts. 174,055 179.370 4 %%. due 1988. 27,243 27.213 l Nuclear fuel disposal... 63,854 60.080 13%%, due 1988.. 24,500 21,500 ( 4%% debentures. 28,600 29.200 13%%, due 1988. 7,000 7,000 llank loans. 47,600 11.300 4%%. due 1989. 18,969 18,969 Other. 10,573 11.021 16.02%. due 1989..... 80,000 80,000 f, 'due 9. Principal amount outstanding. 3,445,321 3.518.416 u, 5 Current amounts 4 %%. due 1990... 13,932 13,932 First mortgage bonds. (196,263) (59.971) 4%%. due 1991 18,084 18.084 Refinanced bank debt. (156.231) 15%, duc 1991. 38,479 38.479 Installment sales contracts. (29,515) (4.315) 9%, due 1992... 150,000 Other... (376) (2.279) 13.40%, due 1992. 50.000 hiaturing 1993 through 1997 ( (228,154) (252,796) 5%% to 165/% 578,279 588,471 Net unamortired discount (9,910) (10.338) hiaturing 1998 through 2002 3 h ',gf7 580,398 W,M Total long.tenn debt. 83,209,257 $3.255,312 g 1. First mortgage bonds are secured by a mortgage and lien Statur i r ugh 2013 24 on substanuall) all of Consumers' property. Additional g, to 14 % 350,000 480.000 first mortgage bonds secure $2i milhon of Lonsumers obligations under its installment sales contracts and $lg3 2,337,639 2.412.151 million of its obligations under the refmanced debt lxn bonds teacquired for sinking fund. 9.416, agt eement, Total first mortgay,e bonds i2,337,639 $2,102,738 2. Installment sales tontra(ts are outstanding at sarious interest rates. At Dec. 31.1987 the weighted aserage interest rate for these obligations was 8.1 percent. \\ 3. ~lhe table below shown the amount of sinking fund obligations for (etlain first mortgage bonds and the $6001KM) annual sinking fund deposit for the 4%% sinking fund debentures. ~Ihe 1988 sinking fund requirement for debentures was satisfied in 1987. l Debt Maturities and Annual Sinking Fund Floquirements i 'lhousands of Dollars l Refmanced Sinling Dec ember 31.1987 Debt Fund Other Total 1989.. $68,464 $ 157.690 $226.154 1989. 52.120 154,971 207,091 1990. 97.875 52,120 43.137 193,132 1991. 195,750 42,120 88.Mi 326.734 1992. 195.750 42.120 176.027 113,897 See Corporate Restructuring and Summar) of Significant Accounting Policies, and Notes to Consolidated l'inancial Statements.

l Other Treasury Number of Common Paid-in Retained St o( L', 'Ihousands of Dollars Shares Sto(L Capital Earnings at Cost Total Balance at January 1,1985.. 88.665,039 $380,650 $ 77 I.-152 $ 630.231 $2.282,336 Net loss. (389,548) (389,518) Net gain on retind sto(L 85-1 851 Balance at December 31,1985... 88,065,039 880,650 772.306 210,686 1,893,612 Net income. 65,052 65,052 Net loss on retired sto(L. 1,905 (23,812) (21,937) Sto(L reacquired. (82.287) (1.061) (1,061) Stock reissued. 21.031 309 309 Balance nt December 31,1986, 88,006,786 880,650 774,211 231,896 (752) 1,936,005 Net income.. 183.800 183,800 Transfer due to holding company formation (879,769) 879,769 Net loss on retired stock. 18.615 (-18.182) (29.567) Sto(L reacquired. (6.515.516) (91.688) (91,688) Sto(L reissued. 8,000 117 117 Balance at December 31,1987 81,469,240 881 $1,67 2,5 9 5 8 417.514 $(9 2,3 23) $1.998,667 See Cotporate Restructuring and Summary of.iignificant Accounting Policies, and Notes to Comolidated Financial Statements. n, ~ .n s

2. 4 *_ _ _,

,., ' ;? * ".) 0,' , _' a *.F ' ~ ' ' ^ V _ ; ; s ;., _.; ; ?.. 25 .r_ _,) g__ 1. The Midland Assets incurred, but became it is unable to reasonably estimate the The Slidland plant was originall> designed as a nudear amount of any such disallowances it has anumed full reonery facility to prmide Com uners Power Company (Comumen) of its imestment in the calculation of the write-down. At Dec, 1,357 megawatts of capacity for its electric spiem and to 31.1987, the net effect of appl >ing this rule was to reduce furnish process steam senice to lhe Dow Chemical Compam retained earnings by approximately $616 million. During the (Dow ). On July 16,1981. Comumen' board of directors rec mety period, Comumers will aurue a non cash acturn on authoriicd manacement to shut down the Slidland project. In the unamortired imestment. December 1985 Comumen charged earnings for a portion of its imestment in (ertain Slidland nuclear fuel and (ettain 'I he impaa of this renoac tise change was as follows: Niidland facilities. The pretax write-down was $188 million. i The af ter tas w rite-dow n was $331 million or $3.76 per aserage 1987 1986 common share. Comumen studied sarious optiom for the slidland I"["* C I"' " " 'i' C' g 3 g project and. in Apnl 1946. (onduded that the preferable opuon After-tax ellec t (000). 59,364 (675,912) was comenion of certain of the N!idland facihties into a natural gas fueled, combined.cule genciating plant. In June 1986 Net income (loss) after write. Comumen abandoned the components of the Niidland pn, jeu dow n (000). 3 243,164 $(610,890) that would be unmable in the gas comenion and took an arn ngs per e befme we abandonment lou for tax purposes. In a pending clearic rate case. Comumen is seeking to reoner $2.1 billion of its M [r i E cffeu (7 ) N!idland imestment in abandoned f atihties hom its retail cleuric (mtomers (see Note -1). A decision by the Nin higan Earnings (lou) per share after w ni own. 2.85 E91) Pubhc Senice Comminion (NIPSC) on the request for rate rehef is esprued no earlier than the last half of 1989. 'the Retained earnings restated at Federal Energ3 Regulatory Comminion WERC) has recenth December 31 (000) $(199,064) $(391,016) inued an order which seu forth a policy regarding the sharing of all prudent imestment (induding a return on the unamortised imestment for whi(b re(mer) is allowed) in Additional loues will be recognized if disallowances of abandoned plants under itsjurisdiction equally between a portiom of the abandoned Niidland imestment occur or when utih'y and its customen. 'lhe FERC order is subjeu to pouible future loues are probable and reasonably estimable. If rehearing requests as well as subsequent comt appeals. Consumers is suaeufulin reunering po,tions ofits Comumen has $61 million ofits abandoned imestment which imestment from (ontrauors imohed in the original Slidland is subject to recmcry under the FERCjmisdation. proje t. the loues o uld be reduced (see Note 3). InJanuary 1988, undet a recent auounting rule. Comumen wrote down, retroauise toJune 30,19x6, in 2. The Midland Cogeneration Venture abandoned N!idland imestment as a result of Comumers' inJanuary 19M7 Comumers and Dow announced that aucument that no retmn will be allowed on the unamortiicd thes had resohed alllitigation between the two companics imesonent mer the reonery petiod. Comumers beheses that it (om eining the Nmiland plant and that subsidiaries of the two is probable that mme cmt will be dnallowed as imprudem13 (ompanics had entered into a partnenhip, the Niidland

Cogeneration Venture 1.imited Partnership (htCV Partnership), 3. The PaHsado; Nuclear Plant I' to comert a portion of the N!idland plant into a natural gas-Consumers and liec htel Power Corporation (15cc htel), fueled, combined-cycle togeneration facility, the Slidland the principal contractor for the former Niidland project, base Cogeneration Venture (NICV). 'I bc facility will prmide 1,370 tentatisely agreed to form a new genciating company to own megawatts of electric capacits at full power and is espetied to and operate the Palisades plant as part of an arrangement that begin generating cle(inut) and steam in 1990. It would supply wouhl scille (laims arising out oflic(hters work on the former the elettric and steam icquirements of Dow's h!ichigan 1)hision Afidland projec t. L'nder the tentathe agreement, the plant is N!idland plant and cle(tricity to Consumers for resale to its salued at $550 million. Iloweser, this tenn of the tentathe untomer s. agreement, along with other terms,is being resiewed as As part of the partnciship arrangements, w holly owned deu rihed below. When the sale and settlement agreements aic subsidiaries of Consumers base veccised general partnership exc(uted, Consumers will reccise $50 million f rom lle(hiel, interests of 90 percent in the AtCV Partnership, with the option subject to refutuiif the sale is not templeted and Comumers of recching cash up to $102 million and notes of the N!CV decides to file suit imicad. If the sale is completed, following Partnership, for the tramfer of $1.5 billion of Nfidland assets to receipt of necesur) regulaim) apprmals, Comumers will the partnership.11) no later than the initial operation of the come) the plant to the new generating (ompan) for (ash and/ faciht), the partnership interests of Comumere wholly owned or notes and an equits interest in the generating company. sulnidiaries will be reduced to 19 perc ent. The notes to be licc htel, or lic(htel amt other imestors, won'.d ow n the issued by the N!CV Partnership for the tramfer of Alid!and remaining equit) interests. At 1)cc. 31,1987, the plant had a auets mmt be sohl approximatch two to three )cais alter the book sahic of appt(nimately $320 nullion. initial operation of the fauht) to persom unalhhated with ~l he tentatise agiccment omtemplates that when the Comumer s. prmisiom of the sale and settlement agreements base been in Starth 1957 the FF.RC ruled that the NICV will be a carried out, all outstanding iuucs and disputed (laims between 26 quahhing cogennauon latiht) under the federal Pubhc l'tility Comumers and lic(htel relating to tric former Slidland projc(t Regulator) Policies Ac t, ellet tise af ter the f acilitis imtial would be resobed. 'lhe target date for transferring ownership operation date. of the plant is late 1948. Consumers or an athliate would in Augmt 1987 a group of banks signed a u>mmitment operate the Palisades plant for a period of at least three to f ar letter with the NICV Partnership in pimide up to $675 milhon scars under a omtra(t with the new generating unnpany. oisenior bank debt to hnam e (ompletion of the 51CV. In Comumers would enter into a long trim (outrat t to pun base addition to the equit) (ontnbutions f rom subsiduries of the output of the plant. Comumers is currently resiewing the Consumcis and flow, equity (onumtments base been re(ch ed henchts to it and its ( miomers of the tentatise agicement and from other partners that total approximatel) $210 milhon. In the asailabihts of aucptable fmaming for the new generating adthlion, the \\fCY P,utnenhip has obtained (omnutments from compam. As a result of this resiew, the terms of the tentathe gas supphers to supph approximatch 80 penent of the N!C\\"s agterment ma) he mmbhed or the agreement terminated. If the initial amnul requirements and hom intet state pipel nc tentatise agirement is terminated, Comumers' claims will be tramt>oiters for long trim hrm namportatum sent picsened anti aucited through other settlement negotiations, In September 1987 the StCV Partnenhip requested or if net cuan, legal ac tion. \\1PSC appimal of a propmed ascrage (ap uits rate of 1.15 The terms of the sariom agicements remain to be (ents per Ldow ilt haut (ontained in a Power Punhase negotuted and appimed b) the boards of diretlors of the Agreement that (ontratis for the sale of cletirkits to par tiet ~1 ne tramat tion is subjc(t to the saikfa(tory resolution Comum. *s from the NICV. In irsponse lo the requesi, the of a number of other sigmh(ant matters, some of whid are not StPSC ordered a comprehemne heanng on the apph(ation. In within Consumer v (ontrol, imluding f eder al amt staic par t, the heating will examine how the t apacits rate shouhl be regulaton) approcah and sati f a(tos) fmaming, contra (tual and determined. In addition, the $1P5C authoriicd parties to the other arrangcinents pro (cedmg to present positions on, among other things: the need for (apants on Comumers'sptem; whether (apacits 4. Rate Matters needs are best met h) the $1CV or other souncs and how the Dcctric Rate Case need for (apatits allects the determination of the asoided cmt I he elet tric rite case pendmg befme the NtPSC, in s ate. In Jannan 1988 the N!PNC comohdated the pro (ceding whic h Comumers sects re(mer) of its imestment in the with a number of other (ogeneration.related matters m sescral abandoned pmiion of the Niidland plant, was separated into oiber do(Lets in an ellort to ircat all suucs and desclopers of two phases in September 1981: a fmamial stabihiation phase togeneration projetis fairly and qui (Lh. and a prudem) phase. On Aug. 28,1985, haamial stabilization Full rc(men hs the S!CV Partnership of in imestment rate rclici in the annual amount of $91 million for a period of prinunh depends on the capauts rate that it can (harge sis 3can became elletihe, subjc(t to (criain (onditions that Comumen for the cic(tri<in Comumen puuhues and the Comumen mu t continue to meet.,k (ontemplated by ihe extent to w hit h it (an sell capatity not pun ha cd in onien authorizing hnan(ial stabilization raie relief, in.\\ tan h Comumen. Il the probable futme resennes of the AICV 1986 and Apnl 1987 the.\\tPhC reduced the Imam ial Paitnenhip do not support full iconen of its imesiment, a stabilitation rate relief to $91 mdhon and $90 million, lou woubt he recogniicd. In addition, full icon (n bs respc(tisch, to reflect the re(cipt of net prmoeds from the Comumen of its imestment in the SICV Parinenhip depends disposition of Niidland nmicar fuel and the iedm tion m on the amount of prm reds f rom the sale of notes to be espcmes from the termination of nmicar luel contracts. inched from the NICY Partnenhip for the tramict of 5tidland Comumen has applied to the StP5C for apprmal of the aucts. appropriate dispmition of other net prmceds from the sale or sahage of the Alidland plant.

In October 1986 the AIPSC found that Consumers had related interest, under bond and subject to refund with interest, complied during 1985 with the conditions of the financial pending comp etion of Step 3B of the electric rate case. In its l stabilization rate orders. Future hearings will be he:d on the Step 3B testimony, the h!PSC staff has recommended that this annual compliance reports that Consumers must continue to $21.7 million reduction be refunded to customera. file. If the AIPSC determines that Consumers has failed to Application for a stay of the Orders and for a preliminary remain in compliance with the IMancial stabilization rate orders, injunction was denied. 'Ihe required rate reductions and then by the terms of the h!PS(, orders the rate increase would refunds were first reflected in Consumers' 1987 third-quarter terminate. In that esent, the effect on the financial condition of billings.The appeal on the merits remains pending before the ChtS Energy Corporation (the Company) would be materially Court of Appeals, adverse. At Dec. 31,1987, financial stabilization rate relief resenues of $221 million were resened, as required, during Cas Cost Recorcry (GCR) Plan and Pactors continuation of the prudency phase. In September 1985 Consumers filed with the SIPSC an llearings began in September 1986 in the prudency application for apprmal of a GCR Plan and proposed GCR phase of the pending electric rate case addressing Alidland in factors for 1986. As permitted by law,in the absence of an that phase, Consumers is requesting fmal rate reliefin the SIPSC order, Consumers billed its retail customers for its additional annual amount of $14 4.1 million. 'Ihe requested expected 1986 gas costs. InJanuary 1987 the SIPSC issued an fmal rate relief reflects a recovery oser 15 years ofits $2.1 opinion and order on the GCR Plan for 1986. Despite hasing billion abandoned Slidland imestment, together with a return presiously apprmed certain imrastate gas supply costs in other during the amortiration period at the weighted cost rate for proceedings, the h!PSC took the position that Consumers failed debt and preferred and preference stock and no return on to demonstrate reasonable actions to renegotiate its intrastate common equity. The SIPSC staff has recommended recmery of supply contracts to obtain lower prices. Comumers has $1.3 billion of the hiidland imestment mer 10 years with no appealed the order and belieses that its 1986 gas cmts were return on the unamortired imestment. Other intenenors hase reasonably and prudently incurred and should be fully p fded testimony with various positions ranging from no recmen recoverable. Consumers has also advanced that imition in the and refund of fmancial stabilization rate relief resenues to 1986 reconciliation, a proceeding in w hich actual costs (rather recosery of $733 million. than projections) are resiewed for reasonableness. If 'Ihe Stichigan attorney general is auempting to appeal Consumers does not prevailin this proceeding, the pretax loss the administratise lawjudge's denial of a motion to dismiss the could range from approximately $2 million to $10 million. 'Ihe proceedings on the grounds that recmery of any imestment in same issues base arisen in an application for the 1987 GCR a project that has neser been u ed and usefulis precluded by Plan, and the SIPSC has taken the same position as it did in the Alichigan law. order on the GCR Plan for 1986. If C(msumers does not prevail InJuly 1987 the SIPSC inued a fmal order in in this proceeding, the pretax loss could range from Consumers' general electric rate case that reduced Con umers' approximately $1 million to $16 mdlion. hianagement is unable electric rates by $21.8 million annually from the rates set in the to predict the amount of costs that may ultimately be SIPSC's Aug. 17,1981, interim order. The SIPSC aho ordered disallow ed. Consumers to refund the "excess resenues" (with interest) collected as a resuh of the Aug. 17.1981, order. 'lhe amount Power Supply Cost Reem ery refunded was appmximately $76 million and the efTect on net The Palisades plant was out of senice for maintenance income was a reduction of approximate!) $28 million for the from hla) 1986 until April 1987. Recmery of certain first half of 1987. Application for rehearing was denied. replacement power costs incurred during this outage (approximately $4.5 million per month) is being challenged Gas Rate Case in the 1986 power supply cost reconciliation currently pending in August 1986 the alPSC apprmed a gas rate seulement before the SIPSC. 'Ihe SIPSC staff proposes to disallow agreement entered into by Comumers and the h!PSC staff that $15.5 million for 1986. Other intenenors are proposing lowered Consumers' natural gas rates by $16 million for a 12 disallowances ranging from $40 million to $17 million. month period beginning September 1986 and ending August Af anagement is unable to predict the amount of costs that may 1907. Subsequently, the attorney general fded a complaint ultimately be disallowed. before the SIPSC secting a reduaion in Consumers' gas rates in an annual amount of $69 million (inclusise of the $16 million Other reduaion). On July 16,1987, the h!PSC dismined the attornet For more than 15 years, the attorney general has general's complain't, but ordered Cemumers to file a general ' appealed sirtually esen h!PSC rate order affeuing Consumers. gas rate case. which was fded on Nov 13,1987, seeking a ga, Alore recently, other intenening parties also hase appealed rate increase in the annual amount of $2.2 million. such rate orders. Consequently, many appeals of AIPSC orders are pending in the Ingham County Circuit Court, the Niichigan Tax Reform Act (TRA) Proceeding Court of Appeals and the hiichigan Supreme Court. 'Ihese 'Ihe AIPSC issued orders Ohe Orders) that recuired appeals imoh e, among other things: the fmancial stabilization Comumers. efTectisc Aug. 5,1987, to reduce its gas and rate orders; alleged mercollections under the fuel cost clearic rates by $23.1 million per year and $73.5 million per adjustment clause in tarills unt41982; replacement power (osts year, respectisely, and to refund "excess" deferred taxes in the attributable to Palisades nuclear plant outages extending aggregate amount of $22 million in 1987 and an additional beyond 90 days; alleged imprudent operation and unlawful $16.1 million by July 1,1988, to reflect lower federal income pasi.through in 1978 and 1979 of costs of Alarynille gas tax rates. With respect to the $73.5 million annual reduction in its electric rates, the h!PSC allowed C<msumers to continue to collect $21.7 million of that amount anociated with Alidland.

reforming plant feedstock and operating costs; the December s. Tames 1983 and August 1981 orders authorizing Consumer 9 to lhe Company and its subsidiaries fde a concolidated increase its gas rates; the April 1982. Alay 1983 and Augmt federal income tax return. Income taxes are generally allocated 1981 orders authorizing Consumers to increase its electric to each subsidiary company based on their separate taxable { I rates; and the rate design aspect of various orders. Consumers amount. is sigorously pursuing these matters. 'lhe Company has a tax net operating loss (NOI.) Because of the present Slidland-related uncertainties, carr> forward of approximately $702 million at Dec. 31,1987. management cannot predict whether or not the ultimate This amount will be used to offset future taxable income. 'lhe resolution of these matters will hase a significant impact on the NOI. carr> forward expires in the year 2001. Company's fmancial position or resuhs of operations. 'Ihe components ofincome tax expense for 1987,1986 and 1985 were: 1housands of Dollars Years Ended December 31 1987 1986 1985 Federal income taxes (credit).... S s,714 $ 2.052 $ (4.465) Deferred income taxes Accrued resenues (9,995) (25,768) 39.149 Auelerated depreciation, depletion and amortization Deferred in current > car. 32,769 40.062 38.845 28 Reversal of prior years' deferrals...... (17,581) (22.694) (22,979) Slidiand plant. net. 113,241 212.765 18.742 htCV interest during construction............ 47,399 Contributions in aid of construction.. (12,381) (2.758) (2.319) Pension costs.. 4,401 (10.926) 897 Write-down of uranium assets... (17,615) Financial stabilliation resenue. (39,750) (43.559) (13,659) Unsuuessful exploration costs. 4,s07 8.729 10.672 Special compensation.. 2, ass (14,754) (6.865) Other, net. (11,410) 14,742 (491) 128,468 155.839 44,374 Deferred imestmer.t tax credit (ITC) net.. (5,350) (7,306) (23.538) Cumulative efic(t of accounting change. 3,070 Total income tax expense 8127,096 $ 150.585 $ 16.371 81st,373 $245.287 $ 235,5 Operating Non. operating (38,347) (94,702) (219.558) Total income tax expense... $134,024 $ 150,585 $ 16,371 'Ihe non. operating income tax nedits result primarily ITC used to reduce current income taxes payable is from interest deductions relating to the Midland project, deferred and amortized mer the life of the related property, reduced deferred taxes on Midland.related items, the 1985 except that for certain subddiaries. II'C is a reduction to write-down of the Midland imestment ar.d the 1985 income tax expense in the 3 ear in which it is used. At Dec. 31, write-down of uranium assets. 1987, the total amount of unused frC was $163 million. of which $53 million relates to Midland. These amounts reflect reductions under the prmisions of the TRA and will expire during 1991 2002. ( l

io He actual income tax provisions differ from amounts l computed by applying the statutory federalincome tax rates to income before income taxes for the following reasons: Housands of Do:lars Years Ended December 31 1987 1986 1985 Net income (loss) before preference and preferred disidends.. 8241,704 $177.814 $(269.772) Total income tax pros isions.......... 124,026 150,585 16,371 Income (loss) before income taxes.. 3e 8,732 328,429 (253,401) Statutory federat income tax rates.......................... x 40.0% x46.0% X46.0% Expected income tax prmisions 154,293 151,077 (116.561) Increase (decrease) in taxes from Capitalized merheads presiously flowed through... 131.791 Differences in book and tax depreciation and amortisation not preuously deferred 4,963 9,446 Impact of tax rate reduction... (25,(31) Other. net...... (4,sas) (5.455) (8.302) Actual income tax provisiom.. 8124,026 $150.585 $ 16,371 6. Capital Requirements S. Capitalisation Estimated expenditures for properties, plant and nudear If significant portions of the abandoned Slidland project fuel (exduding hlCV expenditures) are $1.4 billion for the are net recmered through the ratemaking process or otherwise. U period 19881992, of which $262 million is for 1988. or if probable future resenues do not support the h!CV Consumers' portion is $1.1 bdlion for the period 1988 1992. of imestment or proceeds from the sale of the AICV notes are which $181 million is for 1988. The SICV Partnership expects significantly less than their carrying amount, or if substantial to incur approximately $d50 million of direct construction costs losses are incurred in connection with other contingencies (see and to accrue approximately $100 mi!! ion of capitalized interest Notes 1. 2,4 and 12), the result could be a significant by 19(K). Under the fmancial stabiliiation rate orders, restriction on or climination of the Comp.ny's and Comumers' Comumers is permitted to spend up to $50 million on the ability to issue debt or to pay cash dhidends, a requirement to h!CV. immediately repay Comumers' refinanced debt and the impairment of Consumers' ability to proside adequate sersice 7. Short.7erm Financings to its customers in the future. Consumers has apprmal from the FERC to issue or guarantee up to $x00 million of short term debt on or before The Company Dec. 31.1988. Daring 1987 Comumers and its subsidiary, '!he Companis Artides ofIncorporation permit it to Sfichigan Gas Storage Co;npany (Gas Storage), amended their inue 255 million shares of stock. of which 250 million shares short. term resohing credit and acceptance facility agreement are designated common stock. $.01 par salue and 5 million (RCAFA). Curtently the RCAFA prmides for a credit limit of shares are designated preferred simL, $.01 par salue. up to $100 million and expires in 1991. Ilank borrowings and bankers' acceptances under the RCAFA are limited to a Consumers borrowing base that equah the sum of 90 percent of"eligib!c" While the fmandal stabilisation rate order is in effect, the accounts receisable plus 85 peicent of "eligible" imentories, order permiti Consumers to pay only "token" dhidends on "the borrowings under this agreement are secured by a first common stml until $1.9 billion ofits fixed obligations are priority security interest in the receivables and natural gas, cual repaid and Consumers has reimned to "financial health." and oil imentmies of Comumers and Gas Storage. Under the Consumers' Restated Artides ofincorporation (Artides) and RCAFA. Consumers guaranices Gas Storage's obligations. At First Stortgage liond Indenture (Indenture) restrict the amount Dec. 31.1987, amounts outstanding under this agreement were of retained earnings that can be distributed as cash dhidends. $227 million at a weighted aserage interest rate of 8.5 percent. The write.down recognited for financial reporting See Note 8 for certain other terms and conditions of purposes (see Note 1) will result in a deficit in retained the RCAFA. earnings. This deficit. among other things, will present At Dec. 31.1987. Comumers had borrowed $25 million Comumers from dedating cash dhidends on common stock. under a $50 million line of credit. An additional $135 million Comumers expects, howeser that the retained earnings deficit was outstanding under direct bank borrowings. The weighted may be eliminated by late 1988. aserage interest rate of these borrowings was 8.5 percent. OnJan.1.1988. Comumers redeemed 3 million shares Consumers has a European commercial paper program of its $340 preference simk for $90 million; this was the last which has no termination date. At Dec. 31.1987. $56 million outstanding series ofits preference stock. was outstanding under this program at a weighted aserage Cash dhidends on Consumers' preferred stock may be interest rate of 8.9 percent. paid out of"surplus." which at Dec. 31.1987 was $1.3 billion. Under purchase and sales agreements, Consumers may Comumen s does not expect the write.down (see Note 1) to sell up to $100 million of certain ofits receivables at any one present it from paying cash disidends on its preferred stock in time outstanding. Consumers has receised $100 mdlion under 1988 thic agreement.

At Consumers' option, all or part ofits remaining Dec. 31,1987, was 8.9 percent; approximately $35 million R preferred stock may be redeemed at a premium, either at a was outstanding. fixed price or at progressisely decreasing prices. Certain issues are subject to restrictions that prohibit redemptions with funds Northern Michig:n Explorrtion Company (NOMECO) i raised from the issuance of securities ranking prior to or on NOhf ECO has a $25 million bank loan agreement parity with the repurchased stock and hasing a lower interest or secured by certain domestic oil and gas properties. The dividend rate. borrowings are revohing credit loans that comert to a term loan onJune 30,1989.1he term loan is payable in 36 m nthly Mnt.Vortgage Bonds installments beginningJuly 31,1989. At Dec. 31,1987, the loan Various provisions in Consumers' Articles, Indenture had an interest rate of 8% percent; approximately $12 million and hiichigan law restrict its ability to sell securities. 'the most was outstanding. restrictise provision, at Dec. 31,1987, permits Consumers to Under the terms of the agreement, yearly cash disidend issue $271 million principal amount of first mortgage bonds for payments are restricted to the greater of 60 percent of the purposes other than refundings. At Dec. 31,1987, under a aggregate of the "net profits" for the four oreceding quarters prosision ofits Articles, Consumers cannot issue long term or $10 million (limited to 100 percent of"net profits"). In 1987 deh other than first mortgage bonds unless the debt is secured NOhiECO paid $7.2 million carcash disidends on its by first mortgage bonds. wmmon stock At Dec. 31,1987, Consumers had a "maintenance deficiency" of approximately $53 million which it intends to use e. Emeoutive Steek Option snel Steek Appreciation to partially redeem at par in 1988 its 12%*' first mortgage Rights Plen bonds due in 2010, Under the Executise Stock Option and Stock Apprecia-tion Rights Plan (Plan) for Le> management employees, awards /k/nanud Debt are made in the form of common stock options with associated g Under a new credit agreement, Consumers refmanced stock appreciation rights.1he exercise price on each grant date $783 million ofits bank debt in 1987.'lhe new agreement equals the market price on the date of grant. Options are reduces interest costs and prosides for a repa> ment schedule of exercisable upon grant and expire 10 years from date of grant 16 equal quartedy principal payments starting in August 1990. 'Ihe Plan prosides that up to 900,000 shares of the Company's At Dec. 31,1987, the weighted average interest rate was 10.1 common stock may be issued under the Plan through 1995. At percent. Dec. 31,1987, options for 49,000 shares remain to be granted The debt is secured by a second mortgage on property under the Plan,814,966 shares of reacquired stock were subject to the lien of the Indenture and the pledge of $185 resened for the Plan. milhon of zero interest rate first mortgage bonds of Consumers. Number Range of Exercisc 'Ihe second mortgage will be released if Consume:s has a bond of Shares Prices per Share rating of BBB or higher (from Standard & Poor's Corporation) Outstanding at Jan.1,1987 553.966 $7.125 $16.00 and Baa2 or higher (from hfoody's imestors Senice, Inc.) on (; ranted... 273.000 $ 13.00-$ 17.50 or after the date six months from the final SIPSC orda issued Exercised. (31,000) $ 8.50 $12.50 under the prudency phase rate request (see Note 4). Iloweser-Outstanding atJan. I,1988 795,966 $ 7,125.$ 17.50 if the bond rating drops to either BB+ or Bal any time after such release, then upon demand of the "majority banks" l Crnsumers would be required to reinstitute the 10. Retirement Benefits second mortgage. The Company prmides health care and life insurance Both the credit agreement and the RCAFA contaia terms benefits for its retirees. These benefus are prmided through and conditions which include, among other default prmisions, insurance companies whose premiums are based on benefits a prmision whereby the "majorit) banks" could require paid.1he Company recognires the costs of these benefits by immediate payment of the refinanced debt, interest and other expensing the premiums as paid. The amounts expensed for i amounts payable, if certain esents ouur that, in the reasonable 1987,1986 and 1985 were $11.8 million, $7.9 million and $8.4 opinion of the "majority banks." would likeh (1) cause the million, respect h ely. resenues asailable to Consumers to be insufficient to assure its A trusteed non contributory defined benefit pension plan ongoing fmancial siability, (2) resuh in Consumers being (Pension Plan) cmers substantially all employees.1he Pension unable to repay borrowings when due, or (3) result in Plan provides benefits based on the employees' years of Consumers being unable te peiform, or the banks being unable accredited senice and earnings during the employees' fue to enforce, any loan document. Iloweser, this default prmision highest years of earnings. Generally, accrued pemion expeme is not applicable during any period of time that Comumers has has been funded on an annual basis. Iloweser, the Company a bond rating of BBB-or Baa3 or higher and maintains a currently operates under the full funding limitation of the specific debt to capital ratio. At Dec. 31,1987, this prmision internal Resenue Code. Therefore, the Company did not make was not applicable, a contribution for plan year 1986 and does not plan to make a contribution for plan year 1987. EITectheJan.1,1986, the CMS Enterprises Company (Enterprises) Company applied a new acwunting standard, which had the Enterprises has a revohing credit agreement under impact ofincreasing net income by $.08 per aserage common which it can borrow up to $50 million for the primary purpose share for 1986, of purchasing the Company's common stock and Comumers' 1he Company also has a Supplemental Executne ) preferred stock.1he Company guarantees the payment of Retirement Plan (SERP) for certain management emplo>ces. Enterprises

• obligation. Ihe weighted aserage interest rate at Benefits are based on the emplo>ces'senice and earnings as defined in the SERP. 'the SERP is a non-quahlied plan under j

the Internal Resenue Code and has no advanced funding. option to purchase the buildings at their then fair ma:Let value. Benefit payments are made directly by the Company to retired 'lhe annual rentals are subject to escalation esery four years employees or their beneficiaries. At Dec. St 1987 and 1986, and cmrently approximate $3 million. Consumers payo the the projected benent obligation was approximately $6.2 million taxes, maintenance, insurance and other operating coats on and $6 million, respectivelv. these buildings. In 1987 certain c'.igible employees auepted early lieforeJanuary 1987 certain capitalleases were treated as retirement incentises. 'Ihe early retirement incentises consist of operating leases for regulatory purposes. InJanuary 1987, as lump-sum cash payments and future pension paymems. 'Ihe required by an accounting rule, these leases were recognized as pre. tax cost of the early retirement incentises was capital leases for financial reporting purposes. 'Iherefore, prior approximately $29 million. years' amounts base been restated for comparatise purposes. In 1987 a portion of the pension obligation was settled. 'lhere was no effect on net income for this restatement. '!he settlement resulted in a pre tas gain of approximately $39 million. Minimum rental commitments under non-cancelable leases at Dec. 31.1987, w ere: Assumptions used to calculau pension anmunts wcre: '!housands of Dollars its7 1986 Capital Operating

l. cases lxases Discount rate..

s.5 % .,. 5 % Rate of compensation increase. 5.5 % 5.5% 1988.. $ 24.279 $ 14.125 Expected long-term rate of return 1989. 17.306 13.235 on assets.. 9.0 % 8.5% 1990. 14,747 11,934 1991. 12.200 11,187 i Net pension cost for 1987 and 1986 consisted of: 1992. 10.183 10,6G1 j ' thousands of Dollars 1993 and thereafter... 37,Gli 40.951 31 1987 1986 Total minimum lease Sersit e cost $16,794 $ 13,937 payments. I16.359 $102.096 i Interest cost. 49,259 47.907 Actual return on plan assets.. (56,929) (81.029) lxss: Imputed interest. 40,922 Net amortiration and deferral. (e,487) 26.067 Present value of net minimum Net pension cost. S 2,637 $ 3.282 lease pay ments.. 75.437 i.ess: Current portion. 15.770 Non-current portion. $ $9.667 'the funded status reconciled to the unfunded pension liabih.ty recorded at December 31 was: Consumers charges payments for its capital and operating .i. ands of Dc. leases to operating expense. Operating lease charges, including Actuarial present ulue of <harges to clearing and other accounts were $14 million. $20 million and $52 million for the scars ended Dec. 31.1987, estimated benc6t' 1986 and 1985, respectisely, of hhich $21 million in 1985 was ) Vest ed. S 359,528 $ 185.000 contingent upon usage. Accumulated.. 401,710 T 42,000 Projected. 533,741 673.035 Capitallease expenses for the > cars ended Decembei 31 were: Plan aucts (primaril3 sto(Li and 'lhousands of Dollars bonds, imluding $25 million in ges7 1986 common sto(L of the Compam) I Arnoniiation. $18,503 $ 17.741 l at fair value 633,303 707.900 Intercit.. 10,300 11.506 1 Amount by which plan ancis ex. (eed future estimated benehts. 99,562 31.865 Total (apital lease expeme. 828,803 $29.250 l'nrecognized net (gain)/ loss resuhing from current year experience different from Capitallease amounts at December 31 were: that auumed.. (27,362) 46.691 lhomands of Dollars Remammg unrecogm,ied net gain 99,7 393g i from scars prior to 1986.. (111,091) (113.573) Recorded pension liability (3s,891) (62,017) Gross anets Elect ric. S 51,793 $ 52.299 Gas 27,793 21.030 11. Leases Other. 78,112 73.274 'the Company leases various auets,imluding a nuclear training center, schicles. comtruction equipment. (omputer Total grou aucts. 157,49s i16,603 equipment and buildings. less: Auumulated amortization IC' '"C ' (.,a s. 88',848 29'.3 D ... Consumers leases two ofits general ofhce buildings. 'the 11 912 9 359 imtial terms of the leases expire in 2003: there are two 6se.> car Other... 36,507 28,334 renewal options subject to escalation (lames and a third fne. year renewal option at the then fair market rental value. At the Net auets.. S 75,437 $ 79.531 expiration of the basic or any renewal term. Comumers has the

12. Litigation and Other Contingenciel Edison Company (19 percent). Various pleadings are pending llecause of the p esent Slidland-related un(crtainties before the FERC with respect to the operation of the management cannot predict whether or not the ultimate 1.udington plant. In 1983 the National Wildhfe Federation resolution of any of these matters will base a ugmficant impact (NWF) filtd suit agaimt Consumers in the t'nited States District upon the Company's financial pmition or resula of operations. Court for the Western l>istrict of Stichigan. uruler the federal Clean Water Act. The suit claims that the turbine genciator Union Carbide Corporation w.uct released Inun the plant mntaim dead Ihh ami other In !!HO Comumen entered into a long-icrm contract for organisms and comtitutes the diuharge of pollutants whit h is residual f uel oil f rom l'nion Car bide Coiln> ration (l'nion not auilmriicd by Consumers' National Pollutant I)inharge j Carbide). A dispute arme between the parties as to their Elimination Spiem (NPDE$i) permit. The suit seeks an respc(the ohhgations under the contrac t. InJuly 1982 l'nion injum tion and damages of $10.(MM) per das for Carbide imtituted suit agaimt Consumers in federal court and alleged siolationt (laimed damages in an unspecified amount cureding $lti2.5 In Nian h 1987 the omri granted NWi"s motion for milhon f or breac h of omtrac t. ~lhe federal suit was settled in partial summary judgment and, among other things ordered Niarch 1987. Comumcis has agreed to pay l'nion Caibide Comimien to apph to the Slithigan Water Resounes approsirnatch $39 million. The Sin higan Court of Appeah Coimniuion ( AlWRC) for an NPI)ES permit authorizing the upheld the authority of the SIPSC to requiie Comumen t" release of the turhine generating water from the plant. (ease taking (criain deliseries under the omtrac t and dire (t Comumers has appealed 'he decision and order of the lhstrict Comumen to operate its Karn 3 and I g(ncrating units in Court to the 115. Court of Appeak for the Sixth Circ uit hut, in ec onomic order. The Stic higan Supicme Couri has iuued an onnphan(c with the court order, has hied an application with order graniing lease to appeal the latter r uhng, but hmhng that ilie SlWRC for an NPDES permit. the inue with respc(t to the c ontr.u t is moot. In September 19Mi the attorney general fded a law suit 32 on hehu of die uate of Mgan in the Q(uh Comt W Shareholders Ingham County. sceling damages from Consumen and Detroit A number of shareholden w ho pun h.ned Comumeri Ediuin for alleged injuries to inhen reu>un es as a result of (omimm. prefere u e arul preferr ed so.< L during 1982 and 19WI operation of tiie plant. ihe state seeks $117.9 million (ded (lau at tion suin agamst Comumers (criain of (iruluding $li8 million ofintercu) foi past injuries and Comumeri thrnton and othen who panicipated in pubhc appumm.neh $899K) per day for future injuries, with the ollenngs of Comumeri situk amt in (ormection wiih latter amount io be adjmted upon imtallation of "adequate" Comumeri Dnidend Rennestment and Common Sim L Inh banien ami other < hanged conditiom. An amwer to the Pun base Plan. Some of the suits a so named liet hiel as a lawsuit w.n bled wnh the usuit on behalf of both defendants on defendant. I he complainn allege, generath, that Conunnen Sept. D. I!Ni. he parties are presently engaged in aroluialh inflaird the maiket prit e of its publich traded diuuuior.s whic h (nuld resuh in a settlement of this suit and a securitics in withlmhhng infonnation and dnseminatinE related unaplanu in the case of Stic higan priuhng before misicadmg information regardmg the Nialland nmicar plant the il RC. and Comumeri huanual comhoon m regiuration staicment% in Nmember 194 the anor nes general filed a set ond prmpntmes and other dmumenn and,in some of the suit' law suit in the Cin uit Couri for Ingham Counn agaimt that licc hiel anled and abelied the allegedh wrongful (onduct Coinmnen and Detroit Ednon. Ihis soit alleges ih.a the of Comumen. Conunners behrses that cat h of the (omplaina onnpanics h.nc hic.n hed a Ic.nc agicement with icspec t to agaun' t is without merit and iniemh to wage a sig"rous (enain honom lands on or near the ute of the plant bname deleme. Other shareholden bled dernainc suin a ain" the alleged ;nimics umcasonahh inter fere with public use of Comumen and (crt.dn diret tors alleging gencialh iLi A adpu ent waten and bn ause the c ompanics h.nc siolated dnn ton Inc.u hed their dulics to Comumen and '" (enain laws and regulations unludmg the planfs FI'RC shareholden in (citain a(n of miunanagement inohmg ihr la eme. Ihc c omplaini.nks the t ourt to dnlare the lease soid. Siniland nmicar projn t. In juh !!Ni these suin were 1 he oimpanics base amwcred the unnplaint and wdi fde a dnmiued wohout prejudite due to plainotti f.nlure to hnt nunion to onnolidate this suit with the suit dcunbed in the demand that Consumers onnider the clainn. In Augmt HNi pin cding paragraph. plainnih sened a demand on Comumcii board ol dun ton that ii conuder the dainn in their prior oimplaint. In Other Nmember !!Ni the board of dunton unanimoush determined I lateau Remun es 1.imited (Plateau), a subsidiary of that punuit of the danm wouhi not be in the best intercsn of Comumers was organized to autuire, explore and deselop Conunnen, and denied she requeu. In l'ebruary 19C the properties for the mining, nuihng and sale of uranium. In 1981 plaintilh fded a dernathe complaint cuentialh sinular in the Plateau smpended all operations bn ame of the depreued picsiomh hied suits in Nmember 19M an order was entered mar ket for us amum omt entrates and she shutdow n of the that denieti(hnnumCri and ibe nHinHblal delcndJnti nHHHW blid!aml l>rojn t. I he (Lunpans N management belieses that the to dhmiu the pendmg o.mplaint and permitted p'ainnik (arnmg ulue of Plateau % aucts does not materialh euced limited dnun en.n to the good fanh. independent e and their net reabiable ulue. thoroughneu of the boardi da ision in icin t in addnion to the manen dndosed in these notes plainolli acqueu. Comumen is pany to (citain lawsuits and adminiurathe proc eedmgs a:hing in the ordinar y coune of busincu before /.udington l' umped Storage l'/ ant uriom usuin and gmernmental agemics imohing, for Oser the years there has been a lou of inh through the example, dainn for perumal injury and propera damage, opetation of the Ianhngton Pumped Storage Plant whic h n < oniraunal mancis emironmental innes imome taxes rates jointh owned by Conunnen 01 peu eno and t he Detroit lu cming and other matten.

13, Reportable Se9ments The Consolidated Statement of Income shows operating resenue and net operating income by segments. Other information follown Thousands of Dollars Years Ended December 31 1987 1986 1985 Depreciation, depletten and amortiention Elec t ric. $ 125,296 $ 113,255 $ 111.147 Gas. 56,639 51.335 51.760 Oil and gas exploration and production. 34,102 46,243 31.315 Other. 226 234 1.111 8 216,263 $ 214.067 $ 201.333 Operating income taxes a) Elect ric. 5 109,274 $ 181.007 $ 161,322 Gas. 50,934 63.676 61,758 Oil and gas exploration and production. 3,200 (1,600) 10.100 Other. (1,035) (796) (3.251) 8 162,373 $ 245.287 $ 235.929 Identifiable assets 4) Elect ric. 82,899,326 $2.985.852 $2.876.092 Gas. 1,138,856 1.148.281 1.032.735 33 Oil and gas properties 200,752 195.247 212,917 Cogeneratian. 1,751,681 Otherf r). 3,364,843 4.310.133 4.537,702 $9,3 5 5,4 5 8 $8.669.513 $8.659,146 Con'.truction expenditures (less capitallaed interest) Electric. $ 116,649 $ 98.633 $ 95.676 Gas. 49,788 47.217 40.854 Oil and gas properties 37,597 32.888 61,650 Otherf dJ. 65,267 11.362 2.059 $ 269,341 $ 190.100 $ 203.239 (a) Income taxes and other expenses of Consumers are allocated to segments in auordan(e with the accounting requirements of G e MPSC and the FERC. (b) includes capitaliied leased auets presiously regmrted as operating leases. (c) Includes $2.2 billion for 1987, and $3.7 bdlion for 1986 and 1985 of Midland project costs. (d) includes $52 millian in 1987 consuuction expenditures for cogeneration fmanced by minorit) interest. 10. Jointly Owned Utility Plants 'I he Consolidated Statement of Income includes Consumers' share thased on its ownership ratio) of the corresponding operating expenses. Campbell l December 31 1.udin g t on t' nit 3 l'ndisided ownership interest. 51.0 % 93.3 % Net ins estment (000) 1987. $ 130.818 $ 125,129 19N6. 134.118 112.2o0 Accumulated depreciation (000) 1987. $ 48.074 $ 124.798 1986. 11.797 108.247

TJ CMS Energy Corporation: As discussed in Notes 4 and 12, the Company is imohed We hase examined the consolidated balance sheet and in numerous legal and administrathe proceedingi before consolidated statements oflong-term debt and preference and various courts and gosernmental agencies induding the N!PSC. preferred stock of CNIS ENERGY CORPORATION (a 5fichigan llecause of the present Slidland related uncertainties, corporation) and subsidiaries as of December 31,1987 and management cannot predict whether or not the ultimate 1986 and the related consolidated statements ofincome, resolution of these matters will base a significant impact upon common stockholders

• equity and changes in financial position the Company's fmancial position or results of operations. If for each of the three years in the period ended December 31, substantial losses are incurred in connection with these matters.

1987. Our examinations were made in accordance with there could be a material adserse effect on the Compan). generally accepted auditing standards and, accordingly, As discmsed abme,if significant portions of the included such tests of the accounting records and such other abandoned Niidland project are not recmcred through the auditing procedures as we considered necessary in the ratemaking process or otherwise or if probable future resenues circumstances. do not support the SICV imestment or proceeds from the sale The balance sheet as of December 31,1987 includes an of the NICV notes to be reccised by Consumers are significantly imestment of approximately $2.2 billion relating to Comumers less than their carrying amount or if substantial losses are Power Company's (Consumers) abandoned Slidland project. As incurred in (onnection with other contingencies, the resulting discussed in Notes I and 4, the Company, after studying its loues could result in a significant restriction on or elimination optic,ns, recommended comenion of certain of the Slidland of the Company's ability to issue debt or to pay cash disidends facilities in'o a natural gas-fueled, combined-c)(le generating or a requirement to inunediately repay $783 million of plant and abandoned the components of the project that would refinanced debt. the accompanying financial statements do not be unmable in the gas comersion. Comumers is seeking to include any adjustments relating to the recmerability of recmer $2.1 billion ofits imestment in the abandoned facilities recorded auet amounts or the amounts and classification of 34 from electnc retail cmtomers and plam to seek recmen of the habilities that might be necessar), should the Company be remaining abandoned costs from wholesale electric cmtomers. unable to continue operating in the normal counc. Amounts sought b) Consumers are substantially in cuess of in our opinion, subject to the etic (t of such adjustments, amounts recommended by the Alichigan Public Senice if any, as might have been required had the ourcome of the Comminion (NIPSC) stafl. Although some prudency uncertainties discuued in the preceding paragraphs been disallowance is probable, the Company is unable at this time to known, the hnancial statements referred to abme present fairly reasonably estimate the amount of such lou. Further, the the financial position of Cats Energ3 Corporation and its Company belieses it is probable that no return wdl be allowed subsidiaries as of December 31,1987 and 1986 and the results on the abandoned (mts. InJanuary 1988, the Company of their operatiom and changes in financial pmition for ea(h of adopted, retroactisely, a recent fman(ial accounting standard the three years in the period ended December 31,1987,in that required a write-down in the carrying amount of the conformity with generally au(pted auounting principles abandoned imestment as a result of the uompany's aucument comistently applied dming the period cuept for the changes, that no return will be allowed during the recmer) period. The with whic h we con ur,in auounting for pcmion (mts and net eilect of apphing this standard was to reduce the imome taxes made as ofjanuan I,1986 andJanuary 1,1987 Company's imestment and retained earnings bs $616 milhon. respedi cly, as divuued in Note 10 and the Summary of Additional touci would be recogniicd when they are probable Signinc ant Auounting Pohcies, respecincl). and estimable and are not otherwise re(merable. As din uued in Note 2, in Januan (987, Comumen and [ 't he Dow Chemit al Compam entered into a limited ~'"- a, "7 partnenhip, the Alidland Cogeneration Venture ( AfCV), w hi(h would comtrmt and operate the combined 49 e plant as a 1 A O"' A"*"C" E C"- cogeneration faciht). As of De(ember 31,1987, the Compam's Denoit, E higan, imestment in the NICV is approximatch $1.7 billion. Full I'h'"d" 3'39#* recmery of the imesiment depends primarily on the amount the SIPSC will allow the NICV Partnership to charge Comumers and in turn Comumers to charge its (miomers; the extent to whi(h capacity not med bs Comumers can be sold to others; and the ability of Comumers to sell the notes to be receised from the SICV Partnenhip, for the transfer of N!idland auets, at an amount at least equal to the carning amount of thme notes. If the probable futute resenues, reonerable from Comumers' ontomers and the sale of capacity to others, do not support full recmen of the NICV, or if the prmeeds from the sale of the NICV notes to be re(cised bs Con umen are leu than the carrying amount of the notes, then a lou would be recogniicd, whic h (ould be significant.

1987(Unaudited)(a.b) IW6(Unaudited)(c) Quarters Ended afarch 31 June 30 Sept.30 Dec.31 Alarch 31 June 30 Sept.30 Dec. 31 l Operating revenue (063).. $872.027 $552.422 $514.181 $801.910 $ 1,027.9C3 $612,166 $$96.063 $872.622 Net operating income (000).................. $104.239 $98.551 $113.941 $131.194 $143.329 $101.794 $111.102 $12 4,989 Net income (loss) before cumulatise effect of change in acrounting for income taxes (000). $24,119 $33,466

• 60.562

$68,723 $34.560 $(4.290) $8.785 $25.997 Cumulctise effect of change in accounting for income taxes (000) $(3.070) Net income (loss) (000) $21.049 $33.466 $60.562 - $68.723 $34.560 $(4,290) $8.785 $25.997 Earnings per aserage common share before cumulatise effect of change in accounting for income taxes..... $.28 $.38 $.70 $.83 $.39 $(.05) $.10 ' $.30 Cumulatise ef5t of change in accounting for income taxes........ $(.04) Earnings (loss) per aserage common share.. 5.24 $.38 $.70 $.83 $.39 $(.05) $.10 $.30 s Common stock prices (d) $20 $19% $19 $17 $14 $14 $14% $17% liigh........ 2 ' Im..... $15% $17% $15% $10% $7% $11% $9% $12% (a)1he first quarter of 1987 was restated for the effect of a reduction in electric rates set in August 1984, (b)1he first three quarters of 1987 mere restated because in the fourth quarter the Company adopted the new accounting standard on income taxes, retroactise toJan.1.1987. (c)1he first two quarters reflect the effect of adopting the new accounting standard on pension expense. (d) Based on NYSE-Composite fransactions lhe common stock of the Company is listed on the New York Stock Exchange.1he Company had approximately iI 7.000 common 35 shareholders of record as of Dec. 31.1987. Avellebinty of Reports Stockholders may obtain without charge, and exclusise of exhibits, seseral reports prepared by the Company. These include: the 1987 Form 10.K Annual Report filed with the I Securities and Exchange Commission; a Financial and Statistical Supplement to the 1987 Annual Report; and an audio cassette i recording of the 1987 Annual Report text for sh;reholders with impaired sision. Please address all requests for these reports to Thomas A. NicNisis Secretary, ChtS Energy Corporation. 212 West 51ichigan Asenue.JacLson Stich. 49201. i ) l 1 l, 4 9 1 i l l i i t l yy-.,,.7-n,.,eq ,w9 c.,g-,-& -yg.,-7,.9m y,c ,.,-.9 ya,., ---r--y.--e3m+yry y --i y.y yq T N v ur--*9Y-T

( .g e. Bc4.rd of Directors I % ilh.un I \\h( < u mn L li ii ( han nian .I t tw 10,ar.i. uni ( tm t t u, in n r < >th. ri of ihr (. inp un l.u k u,n \\lo h J s kuinw snuih I i nr( hau ma n <, t he Ib i.u d a n<l (.rri< i al ( <,unul<.1the ( < anpam la< L u.o \\tn h < r., pn i l' < p u h ,4 l'i, ui b n t..! r hr ( < im pa m [o L o.n \\tn h e 4 '.hn \\1 t h no h I'h 11 64 l'r < n ' m \\ l.n o huu o s insun a r.I l e i h n.,h ie (.unbruler \\f m k <,' < t i i I h w an o' l..t un r ( h " m m. l :he IL,.n e l m<l ( lu ! I u i uin e ( Hin i i h m ui( < ir ; *< o o n.n t h t r < or \\ln h n R n haul \\1 ( olh i hl ( h.m m.m..t i he IL,.u a a ibl hem i m.u n i d (. o p< r u n 'n (o uni R spols \\lo h ~ % ilh.un N lli,hb u d li \\l 11 n= llu e i n o uni li i on i Pr i s ul< in I h, I p p.h n ( <.m p.u n k a l.u n.v. > \\1 h I..n \\ l ut. i Ph li ho Po tv m o (. l b e <.1 l i m o m I. 4. o \\ln hwan siate I on ri un i.nr'.mson \\1o h o 11<.n I Al. k. o n ho ( han inan..I t he it to il Irunaa(.o p o ain m \\1aumre t sho > lii l i.u.L l l \\h r I,r n

• ni l's s o b ni.u o l ( h ;. t t s p< r.u u ns a lth. r M e e h asr lin

( r unt Rapols Wh Ii l' ud s \\to ir,o. . Ihre n o tm ss (. o p< o.u n o, l onni ( h m inan ' t he ib iar tin e t i < iiri d \\l.g ol t. r p< o.u n m t h tii,o Wt )$ R..l.. r i 11 l ut tle h.' t h.m m.ui.,1th } Lou <l unl( ha. Fu unr i Hin i r se ah i l'. > w e r (. o ; < o.u n m \\1 nke e n \\lo ti + . J. = ly y s o /. 9,. q ja

g 7 -

- n %9p}.'p,,". .; ^ *%. ' . x;7={ .y j, *- -: .E ' y. + b,j : ; ,? }% l.-.. -J~,V

( % e.

,b Q;.(R 'u , g' '. *. '_ a -f.. '. V' ~ fly. + ? y. y k, ^ .<p r- .... y. p. 1 J. 3 r..

[.,.

.. ;.j

'a 't .. ;..,, #,. JE 5 J. ?, - 4. .,,, ' - p; 4 .3,,'., , 7;,,..,. 1 Enscutive Officers i - 5,,, ?.- h' V. pt, % 4 ) p., o , oi.n -g. 'q q \\ 11 e i s,, \\. x a 'p 1 I ~ J < n!,, ~ ^ i q 1 Ml' l \\1 i

• l' 4

( ' t is F! l s t . g e i ii n g i + 1 m. n. r < , m,. g 2.~ ' f - i,,, i ei i i, .I 'f i I { r i i );, ~ i l ,3 ../ - A,. ',Q i _4. I. i.- 4I s. \\, .'.,._+ ...'t , i Ut )- + <>f 6, n , Wr s e s ( j 'q j 4 9, ?- '. - '., '.y j-N hir i N \\ ( l ii t f s t-o a ,.< q, s - c3 t., v -W lc c4 4 2 m,,,,', i. , i. w, mi i .n-s. \\, .+ x . e w p* c, - ,p..-i 1 - - >) i t i.,., w~ 7 2, s.. ' I* i \\is i, u r. 1 '? ~ i pi. l i, si.t.n i i pi

Other CPCe Offloors Blake O. Fisher Jr...... 44, Vke President. Robert J. Nk holson' . 48, Yke President, Finance Energy Supply Rkhard M. Griswold.. .56. Vice President, Senices Treasurer and RobertJ. Odlesak. . 54, Vice President. Assistant Snretan Gas Transmission / Gordon 1 Ileins. .58, Vke President, Fuel Supply Fossil and Ilydro llamilton kl. Robkhaud. 51, Yke President, Operations iluman Resources K.E. McGram' .55, Yke President, 11 B.W. Schroeder. .40. Vice President, Customer Senices Gosernmental Affairs and Marketing Samuel N. Spring., .fo. Yke President Thoma A. McNish. ,50. Suretary and aad Controller Assistant Treasurer Dasid V. Voigt*. .52, Yke President, Dasid A. Mikelonis.... 39, Vice President Distribution and General Operations Attorney Roy A. Wells. .52, Vue President. Corporate Senken my,r,,wm.,.m ., m n-py.mm.~ mm,--nn-w~m m.,gm,,mm., ,n k hhrA2,a# h Northern Michigan Exploration WithamT.McCormickJr. 43. Chairman of General Offices Comp ny Officers the Board 212 West Michigan Asenue Rkhard J. Burgess. .56. President and Jac kson, Mkh. 49201 Chief Esecutise Telephone (517) 788-0550 Offic er Robert A. Dunn. .41, Yke President. Stock Listing Esploration CMS Energs Corporation common sto(k is Pnul E. Geiger .4 5, Vue President, hsted on the New York Stock Esthange Snretary and under the symbol CMS. Treasurer Wdham II. Stephens !!!. 38, Vue President, Transfer Arant and land and legal Registrar Gordon I. Wright. .45 Yke President, Common Stock Operations CMS Energ3 Corporation 212 West Michigan Asenue Jackson. Muh 49201 Trustees First Mortgage Bonds M*""I'(turen llanosn Trun Cidcnd Cogeneration Venture Wilham T. McCormk k Jr. 4 3. Chairman Limitsd Partnership Officers Rmincy E. Boulanger'..47. President and '"p,'h P" Chief Esnutisc (4g% Ownership) New York, N.Y.10020 Offker i James A. Mooney '. .47. Yke President Sinking Fund Debentures " ed ta s Tn2n C<nnpany f[7 a t t k>n 4 5 Wall Street l New Yo:L. N.Y.10005 l l Transfer Agent and Paying Agent C55 Generation Company WilhamT. M(Cormic k Jr. 43. Chairman of First Mortgage Bonds Offictre the Ibard National Bank of Detroit Tern A. Ferrar* .42. President PO 1%s 1774 PaulI Bance!" .43, Yke President, Detr<nt. Mu h. 4 A232 Buuness Deselopment Thoma A.McNnh. .50, Snretary and Treasurer Assumed curreut position during 1987 Assumed cunent position dunng 19M ) l

- = CMS Energy Corporation 11ulk Rate 212 West N!ichigan Avenue f,g,'g3S P""'K" Jackson, Stichigan 19201 CMS Energy Corporation l l

g-f a Thomes A McNish ' Secretary & Treasurer March 9, 1988 Dockets No. 50-155, 50-255 50-329, 50-330 Nuclear Regulatory Commission Atte Mr. Harold R. Denton Director of the Office of Nuclear Reactor Regulation Washington, DC 20555 1987 ANNUAL REPORTS Centlement In conformity with the requirements of Paragraph 50.71(b) of 10 CFR Part 50, enclosed are 10 copies of the CMS Energy Corporation 1987 annual financial report. inderely. F a l Thomas A. McNish TAM /mf l i i I N '\\o OC0386-0009A-EX03 212 West Michigan Awnue Jackson, MI 49201 (517) M810M}}