ML20207R904

CPC 1986 Annual Rept

ML20207R904
Person / Time
Site:	Palisades, Big Rock Point, Midland, 05000000
Issue date:	12/31/1986
From:	Mccormick W, Mcnish T CONSUMERS ENERGY CO. (FORMERLY CONSUMERS POWER CO.)
To:	Harold Denton Office of Nuclear Reactor Regulation
References
NUDOCS 8703180282
Download: ML20207R904 (41)

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ABOUT THE COVER CONTENTS Consumers Power Companyis proud of Bame will be extinguished and moved 2 Letter to shareholders its important contributions to the into the Capitol museum as a permanent 4 Midland Cogeneration Venture 6 Electric Operations development of Michigan,which is exhibit.

8 celebrating its 150th year of statehood in A plaque on the monument reads: The 30 ECO 1987. For the last 100 of those 150 years, 3fichigan Sesquicentennial Flame is a 12 Communications and Employee Relations Consumers Power has provided much of symbol of the hfe and tbe bope that tras 14 Preparing for the Future the energy that powered Michigan's present reitbin thepeople ofthis state 16 Management's Discussion and Analysis 20 Consolidated statement of Income progress. Iland-in-hand, they grew into trben tre entered the Union 150 years 21 o i tement d Changes in the eighth-largest state and one of the ago. It represents thefeelings, optimism country's largest combination natural gas and tbe spirit the citizens experienced on 22 Consolidated Balance sheet and electric utilities. Serving 6 million of becoming a state in 1837. Since then the 23 Consolidated statement of Capitalization the state's 9 million residents, the fre still burns bright, ever kindled by the 24 Consolidated statement of Common Company will continue playing an dreams ofa better tomorrorr. Designed stockholders' Equity 24 Notes to Consolidated Financial statements important role in the progress of anddonated by Consumers Porter Michigan. Compa"Ifor thepeople of3ficb San.

34 "'P " # '"d'P'"d'* *' ^""***

35 selected Financialinformation To commemorate that relationship .

35 Quanerly Financial and Common stock between energy and Michigan's Information economic growth, Consumers Power has _Q b '%y - 36 Directors and OHicers presented the state with the 'Nr sesquicentennial monument shown on the cover. Atop the monument is a gas-burning torch, particularly appropriate because Consumers Power is the eighth-largest gas distribution company in the U.S. The torch will light the Capitol lawn in Lansing throughout 1987.Then the THE COMPANY 1987 ANNUAL MEETING Consumers Power Companyis The annual meeting will be held a* 10 Michigan's largest public utility. The a.m. Jackson time on Wednesday, May 6, j Company traces its origin to the Jackson 1987, at the George E. Potter Center, Electric Light Works, founded in 1886 in Jackson, Mich., where the Company still Jackson Community College,2111 Emmons Road, Jackson, Mich. A notice of

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maintains its headquarters.

The Company provides electric and/or meeting, proxy statement and proxy will be mailed to shareholders in March 1987.

V D natural gas service in 67 of the 68 The prompt return of signed proxies will counties in Michigan's Lower Peninsula be appreciated.

l and serves some 6 million people-two of every three Michigan residents.

The Company has two major subsidiaries Northern Mkhigan / [

Exploration Company (NOMECO) explores for, acquires and sells od and consumers rou er company serres almost 6 natural gas, and has both U.S. and foreign million of the 9 million residents in Michigan's I operations. Michigan Gas Storage Lou er Peninsula. Its service area (shadeJJ Company purchases gas from interstate uretcheuntoanbut neofav6scoununinioun Michigan pipelines, stores and transports gas, and sells gas to Consumers Power.

___A__-_________________________________________

- Consumers Power Company and Subsidiaries l OPERATING HIGHLIGHTS (3fillions ofDollars, Except Per Share Data) 1986 1985 1984 1983 1982 Net income (loss) $178 $(270) $221 $348 $281 Net income (loss) available to common shareholders $65 $(390) $100 $248 $203 Earnings (loss) per average common share $.74 $(4.42) $1.14 $3.12 $3.16 Operating revenue $3,108 $3.298 $3,236 $2,974 $2,731 Funds from operations $538 $i03 $272 $218 $217 Average number of common shares outstanding (thousands) 88,005 88,065 87,884 79,470 64.210 Capital expenditures (including AFUDC) $191 $206 $690 $973 $921 Return on assets 6.7% 2.1% 6.5% 7.6% 7.4%

Return on average common equity 3.4% (17.2%) 4.3% 11.9% 11.5 %

Electricstatistics Sales (millions of kWh) 27,977 27,486 26,920 25,767 24,612 Customers (thousands) 1,400 1,383 1,367 1,355 1,344 Average sales rate 4/kWh) 6.29 6.12 6.09 5.78 5.79 Gas statistics Deliveries (Bcf) 268 279 277 273 292 Customers (thousands) 1,251 1,221 1,198 1,181 1,168 Average sales rate ($/Mcf) 5.21 5.71 5.36 5.04 4.11 Exploiation statistics Sales (net equiv MMbbl) 3.8 3.4 3.3 3.2 3.3 Proven reserves (net equiv MMbbl) 19.9 19.1 17.6 17.6 17.1 Proven reserves added (net equiv MMbbl) 4.6 4.9 3.3 3.6 2.8 Finding cost ($ per net equiv bbl) 7.09 13.27 17.58 11.65 16.50 ASSET MIX at Dec 31,1986 EARNINGS [1053) PER Assets $8 6 BJ:si AVERAGE COMMON SHARE t=4m 498___ _ _ _ _

CASM FLOW FROM OPERATIONS a to a it sas113%

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T0 00R SHAREHOLDERS One word captures 1986 for Consumers preference dividends by $65 million from The recovery of the balance of the l Power Company: progress in earnings, in 1985 levels. Company s Midland investment is still at l operations, in improving financial health Midland Moves Forward issue. The Michigan Public Service I and in resolving the Midland issue, there The substantial financial progress was Commission is holding hearings on the was substantial and encouraging surpassed by even more important Company's request for recovery of $2.1 progress. shareholders benefited greatly developments involving the idled billion of Midland assets that are not from our progress; Consumers Power's Midland project. During 1986 the usable in the Midland conversion. Based common stock was the 17th best Company achieved broad public upon the pace of the hearings to date, a performing stock out of 1,575 issues decision on interim rate relief could traded on the New York Stock Exchange come during mid-1987, with a final for 1986, and the best performing utility jg gfggfggg gs gggffgy decision in the seccnd half of 1988. The stock, increasing in value by 108.3 BCOROMy CO#finUBS f0 outcome of these deliberations will be percent. expand, il WE// depend imponant to the Company.

The Company reversed its large earnings eyen 30fe UpOn the Relations Improve -

loss of 1985 with net income after Much of our success with the Midland energy We pf0 Fide.

preferred and preference dividends of Cogeneration Venture can be credited to

$65 million, or 7e per average common improved communications and to share. The turnaround reflected higher acceptance of its proposal to conven the rebuilding relations with many important electricity sales and success in lowering Midland nuclear plant into a natural gas-groups: customers, regulators, political both operating expenses, and debt and fueled, combinedgcle cogeneration leaders, business, labor, investors and other senior capital costs. facility. An important impetus to that employees. This has been and continues Our financial strategy to restructure the support was the agreement reached with to be particularly important because Company's balance sheet has been The Dow Chemical Company to become

' t provides a foundation for working panicularly successful. During 1986 the a panner in the project, which will be bener with those we serve, and for Company reduced its debt and preferred known as the Midland Cogeneration finding cooperative solutions that and preference stock by $455 million. Venture. This project puts to use $1.5

' benefit all panies.

That, plus the refinancing of high-cost billion of Midland assets that previously As M chigan's healthy economy debt and falling interest rates, reduced were non-performing continues to expand, it will depend even interest costs and preferred and more upon the energy we provide. In 1986,219 new plants and businesses opened in our service territory, while

. y . x,, -y _,- ,,,

~mm.C._dh - ~ 4E -. a , another 86 enlarged their operations.

p . This growth created nearly 14,000 jobs.

((Y ]j Sales Set Record e Panly as a result of this growth,1986 was

/ 4 k ^j the third consecutive year in which b~O e.d/ Consumers Power set a record for

h. j 1

electricity sales. Our customers used 28 billion kilowatt hours of electricity in (77 7 1986, a 1.8 percent increase over 1985.

) Over the last four years, sales have

increased nearly 14 percent. In 1986 j requests for new electricity hookups

! increased a healthy 18 percent over 1985.

i William T. MtCormickJr.

2 u.

? a 74C per share  :

earnings The number of requests for new gas a Aggressire- The tremendous economic and hcokupsincreased even more,by 22 f f8E888Cl#g a competitive pressures buffeting our percent over 1985. Ilowever, natural gas j industry threaten those companies deliveries were down from 1985 levels. mAfidland unwilling to prepare for the changing, The Company has encouraged its larger C0generaf/0# -

increasingly competitive times. Ilowever, indostria! and commercial customers to E F##fure )) history shows that during periods of purchase their own gas supplies to take [ d structural change in an industry, there are advantage of less costly gas on the spot ,

.a ##W Corporate . d significant opportunities for companies market. The result has been a trend g ggggggfg Il Bexible enough to take advantage of toward increasing natural gas ;i ^j them. I believe that CMS Energy transportation volumes and lower sales b u w h a.J %d Corporation can provide the structure to volumes. take advantage of those opportunities.

large utility producing its own power. In Management Changes Also at the annual meeting,one new Ct0slNG PftlCE OF COMMON STOCK 1986 Consumers Power served 241

• • utside nominee for the board of customers per employee, far better than directors will be presented to a the U.S. industry average. Also in 1986, the National Safety Council honored shareholders. Frank Merlotti is president

n. Consumers Power for having the best and chief operating officer of Steelcase,

" Inc. His experience in Michigan business safety record of any large combination gas

"' will help us continue our fmancial and electric utility in the U.S.

" These accomplishments marked strong feCUVefY-

^ Finally, I would like to acknowledge the progress for a company that stood near Company's loyal and dedicated I

i bankruptcy after halting Midland construction in 1984. But as encouraging employees, who have been instrumental in the Company's progress during these as they are, these improvements are only milestones on the road to full recovery.' di8icult times. Thanks are also due to a m a

" '" '" those valued officers who retired in 1986.

Meeting the Challenge Jim Falahee was a 36-year veteran of the We are positioning ourselves to operate Company and most recently its vice Consumers Power also took advantage of in a dramatically changing industry that chairman; Walt Boris was executive vice excess gas supplies in the marketplace by will be far more competitive than ever president of fmance and corporate affairs; augmenting its long term sources of before. At our May 6,1987, annual 1.arry I.indemer was senior vice president supply with lower cost spot market meeting, shareholders will be asked to and general counsel.

purchases to help reduce gas costs for our help the Company prepare for these WeI k to 1987 with anticipation and customers. challenges and opportunities by c nfidence that we will contmue our Rates are Competitive approving formation of a holding steady path to full financial recovery.

The Company successfully maintained company called CMS Energy Corporation competitive rates for natural gas and (about which detailed information electricity. Our continuing ability to do appears later in this report).

so will be a key ingredient of a successful The holding company will provide a S*.C'ffl' Y future in a more competitive marketplace.

TheCompanyhad the highest employee corporate structure more appropriate to an increasingly competitive environment cy g g g productivity level in the nation of any in the utility industry. The new structure W 11 am T. McCormick Jr.

will enhance the company's financial Chairman of the Board and flexibility and facilitate investment Chief Executive Officer opportunities in its existing business as well as in non-regulated, energy related Feb.28,1987 industries.

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ElDLAND COGENERATION VENTURE pd/andinPestinent 2  ;

.ts put to work 3

. 1 The Company achieved a breakthrough Legal Dispute Ends i- .

last year in its efforts to make productive The partnership agreement signed by use ciits Midland assets. On Sept.17 the Companyand Dowmarkedtheendof I( 1.'se/Energy utis #, supply: 4 Consumers Power and The Dow the lengthy legal dispute between the f' .. ,.

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Chemical Company announced an two corporations stemming from the [ m End to legalj ,

q agreement in principle to work together project's unsuccessful nuclear phase. dispute- S to complete the facility as a natural gas-fueled, combinedgcle cogeneration Consumers Power will contribute $1.5 hillion of its useful Midland assets in ( ' Pswres techsedsgy g -.-

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facility. The Michigan Public Service Commission (MPSC) removed obstacles exchange for equity panicipation and interest bearing notes totaling $1.27

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to the Company's plan on Oct. 22. The billion. Almost all of the estimated $600 a <uu _ d  !

two corporations executed closing million needed to convert Midland is documents for the plan in January 1987, expected to come from construction debt Consumers Power will be both an equity owner and a lender to the venture. A financing and equity cash investments made in the pannership.

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Consumers Power subsidiary will own 49 Design and engineering are scheduled w percent of the project, with a Dow for completion in 1987, with construction use _ _ _ _

Chemical subsidiary and other as yet targeted to begin in 1988. Current plans unnamed equity partners holding the call for 1,300 megawatts (MW) to be , ai.e remaining interest. Consumers Power placed in service in late 1990. The ,7 will purchase about 80 percent of the converted plant's maximum output will , p i plant's energy output for resale to its be sufficient to power a city of

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customers. The plant also will supply 900,000 people. , ri steam and electricity to Dow Chemical's use - ~

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Michigan division facilities, located adjacent to the Midland plant.

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Engineering and Fluor Daniel of Chicago

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g g4-MP and construction of the cogeneration an.my , -

facility. It s anticipated that the proven i technology to be ut!!ized and the short

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construction period required will allow FMf lhe niidland r neuenenes Cogeneratirn '

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Venture.

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i the venture to be completed with fixed demand for electricity output during the Company's alreadyinadequate cost and performance guarantees by the 1986, which dropped its reserve margin reserve margin.

contractor, so that there will be minimal to 16 percent of peak demand. That is Studies Show Need construction risks assumed by the venture well below the 20 to 25 percent level A number of research studies during the partners. generally accepted as prudent by the past three years have found evidence of Much-Needed Energy utility industry and the MPSC. an increasing need for electric power in The Midland plant will provide much. Michigan's expanding economy. Studies needed generating capacity to power Midland W/// PTOFid, by Consumers Power, the Michigan Michigan's economic growth. Current Public Ser ice Commission staff the fyggg,gggggg market demand for electricity is already state's Energy Administration, the Rand straining the Company's existing ge#BralingCapacityla Corporatien,'the Michigan Electric Power generating system. 90Wer uici,igan's Conference and the Michigan State Peak demand on the Consumers Power BCO#0/#icgf0Wlh. Chamber of Commerce have all system has risen about 1,000 megawatts- concluded that the state will need about 2 percent annually-during the . substantial new supplies of electricity in Consumers Power projects that its peak period 1975 to 1986. The increases in the coming decade. The Midland demand will continue to grow at about 2 demand occurred despite generally rising gener non \. enture is the most percent annually into the early 1990s.

energy prices, substantial conservation ec n mic 1 way to meet that need.

Failure to add new generating capacity to cfforts and two major recessions. The i o h would further reduce Company established an all-time peak n n.w w . , _

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ELECTRIC OPERATIONS -

In 1986 Consumers Power experienced requests were 26 and 19 percent ahead of Eucincsans snowru a third consecutive year of record 1985, respectively. Four-year growth 1982-1986 s 13 8% or 3.3%/yt electricity sales within its service area, "*"~#"'

The Company maintained its and all indications point to continued competitiveness in electric rates during a gromh in Michigan's demand for power. 1986, both in cost and through innovative ,w The Company's electric operations, price structures for certain agricultural n_ '" _ ns _ _ _ _

which serve 1.4 million customers in 61 and industrial uses. As 1987 began, of Michigan's Lower Peninsula counties, Consumers Power's industrial rates were generated $1.8 billion in revenue during

- - - - - ~

13 percent below those ofits largest 1986. competitor in Michigan,while its The Company's sales for the entire year residential rates were 17 percent lower. " - - - - - -

totaled 28 billion kilowatt-hours, up 1.8 Consumers Power's residential rates were percent from 1985. In addition, peak below the average rates for the United w _ _ _ _ _

demand reached a new record onJuly 17, States, the East North Central Region and when Consumers Power delivered an Michigan.

- ~ ~ ~ ~ -

average of 5,127 megawatts during a one- High Efficiency hour period,6 percent higher than the Consumers Power runs one of the most previous record set in 1985. A record winter peak of 4,582 megawatts was e$cient generating operations in the electric industry.11ased on 1985 data, its

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experienced Dec.10. * " * "

fossil-fuel generating plants ranked second-most e6cient in the U.S.,

ines maantirnonu according to the 1986 survey of the Clean-Air Program eectrc 280 Boon wm country's 100 largest electric utilities Consumers Power is seeking low-cost, conducted by Electric Light and Potter e6cient technology to minimize pollution emissions. Campbell Unit 1 is the site of a major pollution-control

-m 1986 was the third

. expenment designed to remove COnsecut/Fe year or poiiot,nts me,e e$cien,iy f,em ,he sue

.. rec 0rd Biectricity gases of coai cembu tion. The project, c sales, andrequests for which began in September 1986 and will

. . + #eW h00kups rose. c ntinue through mid 1987,is being y-y conducted under a $2 million contract

_,, from the U.S. Department of Energy's magazine. The Company's fossil-unit heat T~'. Pittsburgh Energy Technology Center.

rate has ranked among the top four in If successful, the system could be each of the last four years. Ileat rate is a f

1 expanded to serve entire power plants.

measure of the amount of thermal energy The experimental system requires less required to produce a given amount of water, produces less residue and allows cm n. m power. The lower the heat rate, the more lower anti pollution equipment costs l- e6cient the generating unit. than other pollution removal methods.

Consumers Power's total generating Ultimately, it could save utilities and Hookups Soar Requests for new hookups totaled spem,indu ng two nuclear plants, their customers millions of dollars.

ranked ninth nationally m fuel efficiency 18,135, an 18 percent increase from 1985.

in the 1986 survey. The Company s Some of the greatest growth in demand Campbell complex at Port Sheldon on occurred in the south central and western 12ke Michigan was ranked fifth among areas of Michigan, where new senice individual fossil fuel facihues.

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a R:cGrd annual sales Big Rock Record . .

endangered. Consumers Power personnel The Company's Big Rock Point nuclear i a ## W AO# fly pf2k., di at the dams worked under extremely plant gained distinction for setting a new  !' q hazardous conditions during the record output in 1986. The facility's 1986 * -a Sff0#g C#Sf0Nier a emergency to regulate the water How and output of 505,740 megawatt. hours broke { #f0pth - j save the dams.

its 1967 record of 501,168 megawatt.  ! .. ,

j hours. In addition to record output employees achieved the best radiation t-

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wwmumcuma e safety performance in Big Rock Point's {. '

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24-year history. [. '"'J "

One record the Company encountered kmahmh .d - iun _

during 1986 was unanticipated and unwanted. IIeasy rains during mid- Ibe extremely heavy and September and the resulting Goods '""

unprecedented flooding,at levels caused widespread damage in Michigan's ( alculated to occur only once every 200 Lower Peninsula. In addition, Consumers years, threatened to breach the liardy and un _ __ _ _ ___

Power's hydroelectnc facilities on the Croton dams. If the dams had failed, Muskegon River were endangered by downriver communities would have been -"" - - - -

high water for several dap at the peak of the storms.

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NATURAL GAS OPERATIONS Consumers Power is the country's Diversified Supplies The agreements allow Consumers Power eighth. largest gas distribution company, The Company also took advantage of to take funher advantage of spot market as measured by the number of customers declining natural gas wellhead prices last purchases from ANR Pipeline as well as served. The Company's suburban Detroit year by making judicious spot market the Company's traditional suppliers, i Metro Region,if viewed as a separate purchases and lining up additional long. Panhandle Eastern Corporation and

'j unit, would be the 21st-largest gas term supplies of low-cost gas. Thirteen Trunkline Gas Company.

distribution company, with 620,000 percent of the Company's system supply Price reductions announced by ,

customers. was purchased on the spot market in Consumers Power's suppliers throughout )

1986. the year contributed to savings projected

, ,,g In November Consumers Power signed Natural Gas 268 Bd (Wo new pipeline contracts to diversify its The C0mpany iS sources of supply. Consumers Power contracted with Michigan Consolidated jgg7gggjg0jfS

, ~, Gas Company for firm pipeline capacity of ifa#Sp0flaflon Of gas 125 million cubic feet of natural gas per (Of CUSTOMERS Who day to be delivered via the ANR Pipeline purchage gjfBClly On Company. An additional 125 million ggg gpgf gg7ggg, g cubic feet per day of pipeline capacity is 1 . available on an interruptible basis under this transportation agreement. to total $182 million for the 12 months The Company also arranged with ANR beginning Sept.1,1986. Those savings Pipeline Company to connect directly to translate into an estimated 12-month

^ reduction of $89 on the average its pipeline system near IIolland, Mich.,

providing approximately 100 million residential gas space heating customer's I. cubic feet per day more of bill.

i interconnection capacity. Rates Competif.lve l

The Company's ability to take advantage of the currently favorable natural gas prices helped keep its rates competitive.

Consumers Power provides natural gas

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in 40 of the Lower Peninsula's 68 7 _ , . ,

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counties, an area of 13,000 square miles with a population of 3.8 million. [. bietecesafe z. YThe ~[

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q1 The Company operates more than 1,400 [ 81 festitete,1 -

miles of high pressure transmission ,[ j pipeline, plus more than 16,000 miles of  : jjfff,, : - 3 { _

! individual service lines and some 18,000 Lresearch! j ,  !

miles of distribution mains. centeris!. ] .. _

Deregulation of the natural gas pipeline fj 1988(Is part l ]'

industry has provided Consumers Power of e Aerse.

and other distribution companies with p##['*#

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opportunities to develop alternative gas b

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hold down costs and minimize rates for the Company's more than 1.2 million gas !

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typical residential bill was 8 percent [ gyppjj,g ' '_j Requests for new %pdn M below that charged by its largest [ -

- j totaled 21,880, up 22 percent from 1985.

• i This brisk gromh is increasing as we hiichigan competitor. Its typical EE - .

l m Compellt/Fe r#feSi '_ j industrial bill was 15 percent lower. The move into 1987.

Company's rates also compare favorably L . . . . . , Consumers Power's strategy to maximize to those charged by other utilities Lin G8Sfr##S#0ftSS/#S' -.. ," the utilization of its assets has found throughout the nation. E';gr0W5 '

application at its hlarysville facility. The Consumers Power directly sold its I <

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Company's wholly owned subsidiary, customers 238 billion cubic feet (bcf) of E -

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IIuron liydrocarbons, Inc., entered into a natural gas during 1986, down 9.9 percent b e a--

pannership to expand the capacity of from the previous year's total of 265 bcf. seven of its nine underground caverns at hiuch of the sales decrease in 1986 was htarvsville for commercial storage of Gas delivered to customers-the total of due to large customers purchasing gas liqu'id hydrocarbons. The facility's storage g s transponed for others and gas sold directly from producers, with Consumers capac ty was expanded from 1.8 million directly-decreased 3.9 percent in 1986 Power becoming the transporter rather barrels to 5 million barrels.

due to warmer weather and the loss of than the seller of the gas. The Company is In addition, plans call for the Company some dual fuelindustrial customers economically indifferent to whether it and Polysar Ilydrocarbons Inc., a because of lower oil prices.

sells gas or transpons gas for its Canadian firm,to use a ponion of the customers. Starysville fractionating equipment to The decline in sales volume was largely process liquid hydrocarbons Polysar will offset byincreased volume from store in the facility's caverns.

Consumers Power's expansion of gas transponation-moving natural gas for customers who purchase on the spot PWam

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market from other sources. l'nder 285 g'g -

separate transponation and storage  ;  !* x *;  %'

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contracts, Consumers Power transported

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30 bcf of natural gas during 1986, up 106 > l' '

percent from its 1985 volume. The y ~ ~ "

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Company transponed an additional 32 bcf ( , _ _ ,

of gas for three other hiichigan utilities.

Transportation volume during 1987 is anticipated to continue to grow. 9

NORTHERN MICHIGAN EXPLORATION COMPANY Northern hiichigan Exploration RESEM RNOME COSTS equivalent barrels, equating 6 thousand Company (N0hiECO),the Company's **~ cubic feet of gas to one barrel of oil. Oil largest subsidiary, drills for and produces n. and condensate reserves declined 9 oil and natural gas in hiichigan and 11 percent to 6.9 million barrels; natural gas other states, plus Canada, Australia, New , reserves increased 13 percent to 78.2 Zealand, Colombia and Ecuador. During billion cubic feet. During the same 1986 the company was particularly sus period, total capital expenditures successful in adding U.S. reserves in -

, declined to $33 million, about 50 percent California, Texas, Louisiana and ii, below the 1985 level. This resulted in a hiichigan. it _ _ _

finding cost of $7.09 per equivalent In New Zealand, N0h!ECO saw positive ,, barrel,which is low byindustry results from its joint venture with the 1 _

experience.

government of New Zealand, that 011 Prices Fall country's national oil company, and five A worldwide oversupply contribu ted to a 1 - - -

New Zealand and Australian firms.

, , . ,. fall of oil prices from $28 a barrel in early N0htECO's first discovery well in New 1986 to a lowof about $10. At year-end, Zealand was tested at 29 million cubic prices were in the range of $15. In feet per day and 1,400 barrels per day of 191 the previous year. But the company addition, natural gas prices declined condensate. A second discovery was had its best results in seven years as on average about 15 percent last year.

awaiting completion at year end. measured on afinding costbasis-a As a result of lower oil and gas prices, in calculation of the reserves added Good Results 1986 N0h!ECO experienced a net loss of Per dollar of exploration and The company had very positive results in $1 million after 14 consecutive years of development cost.

its limited exploration and development . profitable operations. Total revenue During 1986, N0hlECO increased its eforts. N0hlECO drilled substantially declined to $71.3 million,21 percent total reserves 4 percent to 19.9 million fewer wells during 1986-73 versus below the 1985 level of $89.8 million.

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Gas prices The magnitude of NOMECO's loss was market forced NOMECO to cut operating

costs during 1986, and its reduced capital minimized by rigorous cost-cutting ,gg ,

measures, conservative fmancing r;

.; spending allowed the company to utilize

?- 1 cash Bow to decrease its $18 million debt practices and a favorable reserve base. As -

a result, the loss was concentrated in the ,

• EfIIII8I.888888888 j to $11 million by year-end 1986.

first half of the year. NOMECO returned b , _' '

j As it enters its 20th year, NOMECO to profitability in the second half of 1986, d plans to continue to control its spending k[ a ####fF## #ffW~ >

a performance that is expected to .

d while putting emphasis on areas where it continue in 1987. F l has a proven track record. In addition to

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Gas Sales Grow [*, its exploration eforts, the company will The exploration company experienced a RA e :-- - -

a attempt to increase reserves through 26 percent increase in its natural gas sales attractive acquisitions.

in 1986, with production totaling 11.3 billion cubic feet. Oil and condensate NOMECO's cost-cutting helped restore sales rose 2 percent to 1.9 million barrels.

pf0litability /# seCOnd hall Of f 986.

The adverse conditions of the energy llIGIILIGIITS Thousands ofDollars, Except Per Share Data 1986 1985 1984 Total revenues $71,298 $89,771 $90,107

$(976) $13,445 $10,569 Net income (loss)

$6,161 $5,000 $1,500 Ca.sh dividends paid Earnings (k>ss) per share $(.07) $.92 $.72 Return on equity (7.5)% 10% 9%

Return on capital .6% 10% 9%

internal cash flow $47,906 $57,086 $57,830 Capital expenditures $32,888 $64,998 $58,013 Total assets $200,993 $216,531 $181,111 Sales 11,273 8,937 9,017 Gas (mmc 0 1,897 1,855 1,756 Oil and condensate (Mbbl)

Natural gas liquids (Mbbl) 297 320 331 Average prices Gas ($/Mc0 3.26 3.84 3.63 Oil ($/ Bbl) 15.42 26.50 28fA Resenes Gas (Bc0 78.2 69.1 57.1 Oil and conden< ate (MMbbl) 6.9 7.6 8.1 73 191 168 Tells drilled Success ratio 33% 49% 43%

Gross acreage 66,176,000 32,824,000 23,733,000 Net acreage 4.363.000 3.682.000 2.6U.mo 11

COMMUNICATIONS AND EMPLOYEE RELATIONS A public utility must communicate The access gained and the issues As 51ichigan began preparing for its effectively wit h many constituencies to do discussed with the3e audiences were part 150th year of statehood, which it its business. This is especially true of of the implementation of the Company's celebrates in 1987, the basic message Consumers Power, because it is first ever, comprehensive Company employees carried was this:

Stichigan's largest utility and because it communications plan. The plan was Consumers Power is the state's largest faces public policy challenges that will designed to suppon the Company's utility and has powered hiichigan's have vital impacts on the future energy primary goals of restoring its fmancial progress for 100 of the state's first 150 needs of Alichigan. health and positively resolving the years. This century-long pannership Although the Company has always Slidland issue as soon as practicable. needs to be maintained so that Stichigan strived to maintain an open line of can . 9 continued economic gromh; a communications with various audiences, ManageMe#f "hBS stror.  ! hy Consumers Power is 1986 saw renewed etions to reach out to esser . s a strong, healthy Alichigan.

all w ho would listen.

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. "Pc,xting hiichigan's Progress" has Communications Expand the 0#Ce-wideSNfead been added to the corporate logo to The newConsumers Power management h0Sfil/ly Of underscore the Company's commitment had a difficult communications challenge 90Fef#Me#t Off/Cla/S to promoting economic growth in our in 1986, but also had an extraordinary ggg gjggjpgg state. This is the job Consumers Power communications opponunity because it has done for the past 100 of 51ichigan's was staning with a clean slate of programs feS/denfS 10 ward the 150 years, and will do m the future.

and plans. A diverse group of important Company,"-new r0fu 1his message wa, deiive,ed to se,vice opinion leaders were informed of the T/MBS. clubs, retirees, h> cal government officials, imponance of puning 51idland to work customer groups and other audiences.

i for Stichigan and the Company's plan to A key component of the plan was the 5tanagement briefmgs of key business do so, in addition to other issues of and political leaders throughout l nelusion of a number of the Company's mutual concern. At the same time, the Stichigan and in Washington were employees in the communications l Company moved to greatly improve effort-something employees at all levels supplemented by other Company officials communications with its more traditional responded to enthusiastically. meeting with their counterpans in ,

audiences. business and labor throughout the state.

51eanwhile, vinually every Stichigan H , . - ., .

media outlet was personally briefed on

- m,S-m.. n . k the Company's problems, plans and i

l programs; reponers and editors were penodically updated on the Company's progress toward resolution of the f' '~ '

Slidland issue.

>. . , . .  : Consensus Forms ELECTRIC E Mr.J ~ This comprehensive effort to make the c sefonest ringtheCompany'sfinancial UTILITIES i  !

health and puning slidland to work for

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y j ,.- 11 j hiichigan has resulted in a clear

! & , O consensus among the state's business, ZiEl~.Mi.d ,L political and labor leaders to move

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l forward. Store than 120 supponive E Cr E E U35P E E h .

) editorials, including editorials in all the I1l Ef25${.555fp { -O state's major daily newspapers, appeared

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in 1986 endorsing the Slidland

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achieve high levels ofindividual But muchwork remains tobe done.The 7 , q Company will continue its new I 9 performance, thereby assisting in the communications commitment across the kl achievement of Company shareholder full scope of its operations. Our kb *N 8888 UNI 88 ' h '

and customer objectives.

To conserve cash, the base salaries of customers and government leaders-and - ,

especially our shareholders-must ff eT88888888 ISD - our employees were reduced in October understand the Company's plans and W NidBAd ' ~ , ~ 1984 and receipt of subsequent raises programs in order to support them. M ,

- iP < deferred. As a result, our salaried Much of the Company's success can be +' C< employees sacrificed in-pocket salary credited to our skilled and dedicated 'q increases for almost three years. As employees. In spite of the economic previously scheduled, all salaries and constraints on the Company, our raises were restored to full levels effective employees have performed efficiently, Incentive Compensation Plan by Jan.1,1987, and deferred salaries are serving more customers than ever, w hile increasing the number of key employees, being returned to employees.

employee levels decreased from 10,813 at with rewards linked to net income, rate New I. abor Pact year-end 1985 to 10,618 at year end 1986. relationships with other utilities and The Company also negotiated a new Employee Steps Taken individual performance goals. This three-year contract with the Utility our employees are a vah'able asset. provides incentives for the participants to During 1986 we initiated a number of programs that will enhance our ability to .3e E

perform as a Company through the efforts [.

of our employees.  ; C'msumers-Dow plan is ingenious Action was taken to reinforce the pay- 1 .

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for performance concept. For example, &Q@@;~;,, ,,,,;s. 5,,,,;,;^,?, t,,,,, ,,,,,,,,,,

we expanded the Annual Executive 888 H NFM COMMENTG M W RTMIk wi mm., m.nw menc. .ea=

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cyy,mq Vs g Workers Union of America ( AFl<CIO) cowring 4,200 operations, maintenance 4 and construction employees. We were

, . pleased to resolve the matter quickly to

- the mutual benefit of the Company and our unionized employees. The contract J' was overwhelmingly ratified in June and went into effect Sept.1.

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1. - In our continuing effort to ensure the

,o* safe operation of our nuclear facilities, a j k # #[ Fitness for Duty program was initiated that provides for periodic drug testing of all employee 3 who have unescorted

$3# g*V 3 y$ access to nuclear facilities. This is in 6 addition to an existing program that s

allows drug testing of current employees

< for cause and of new job applicants.

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g + -xm a w . , +  ? ;- a PREPARING FOR THE FUTURE V a Reduc 6fdebt4sts: -

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,- 3 m increased cash Economic and competitive forces are Standard & Poor's, Moody's Investors dramatically changing the utility industry. Service and Duff & Phelps all upgraded t "jg g j

Consumers Power is reshaping itself both their ratings of Consumers Power debt {? "7 O1= b  ; D, Q

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financially and structurally so it can during the second half of the year. 9 respond rapidly and innovatively to the The improvements brought Consumers

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industry changes, and take advantage of Power substantially closer to having new opportunities that it anticipates will investment grade ratings for its securities, f

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occur in a restructured industry. and provide an opportunity to issue future debt at lower interest rates. M(. y*:

upact w Tu - Good Cash Flow c mTEust ANo Cash How from operations totaled $538 NRMED/MRmNCE DM0ENos million in 1986, with $191 million spent j[ , on construction. Cash How is expected to with investors. The results have been an w_gu improve further in 1987 and consolidated increased understanding of Company

,- construction expenditures have been strategies and a better appreciation of

, budgeted at about $183 million. Consumers Power as an investment Consumers Power was able during 1986 opponunity.

"- to reduce its long-term debt by $282 This effort was highlighted by the million, or about 8 percent, and Company's presentation to the New York

= subsidiaries reduced their long-term debt Society of Security Analysts, a prestigious by $7 million. In addition, the Company Wall Street professional organization,

,-~ retired $173 million in high cost Oct. 29 in New York City. Company

~

preferred and preference stock. These officers had an opportunity to inform an

,, ,, refinancing efforts, which benefited from audience of approximately 200

'"- } q the decline in interest rates during 1986, members-the second-largest audience j j also produced a net reduction of $58 to attend a utility presentation in the e 1 .c.2 million in the Company's interest costs Society's history-of the strategies that Consumers Power plans to implement.

CMS Energy Corp. w/// Their remarks were also available to Consumers Power is restructuring its investors across the country on cable pf0F/de an Operaf/#9 balance sheet by implementing a television and teleconferencing fmancial program to replace high-cost SifuClure 20fe networks.

debt and preference stock with lower cost Sullable la a Ohang/#g Structural Change debt, mtv' . , individuals refmance ul///fy env/fonment, in the spring of 1987, the Company will their hme mongages. This has had a recommend to shareholders formation of posit e impact on net income and cash holding company named CMS Energy for the year. Preferred and preference 809 and has resulted m upgraded debt Corporation, which will provide an dividends decreased $7 million.

tai ngs and a perception of fmancial operanng sWcture mom snaW to a Current plans call for Consumers Power

m. provement by the Gnancial community. changing utility environment.

to refmance and redeem additional Stockholders will be asked to approve the securities during 198,,.

change at the annual meeting on May 6.

Investor Prograrn The Company expanded its investor relations program during 1986 with a full-  ;

Redged effort to improve communications 14

=

If the proposalis approved by Pact RANGE OF COMMON STOCK stockholders, Consumers Power would a'= t" *"

become the largest subsidiary of the se __ __ __. .__ ._._ _ ___ _ _._

parent holding company. The principal -

in, priority within the new corporate ,, ,, ,, ,,,

~

.J~~ -

~~ ~ ~~ ~ ~

structure would be to continue to provide reliable electric and gas service to our _. E utility cu stomers as efficiently as possible. --

%-g-g 7 These utilin activities would continue to 1 -

be regulated by the Slichigan Public .s _A _W W W Service Commission. 44 T lloiders of Consumers Power common ,

~

stock would become holders of CalS me . . men m an me , manca m an me Energy common stock on a share-for- ,

share exchange basis. liolders of Consumers Power preferred and preference stock would continue to hold that stock. It is anticipated that the <

holding company would retain the ticker E A, symbol "ChtS" that currently represents i g,*

Consumers Power on the New York and r39 cus ENERsT cmRamN Alidwest stock exchanges. Oe The holding company would establish a i "

second subsidiary to manage the Non-utility Businesses Company's non-utility businesses. -..

C'"*""*y* ',' C',"[',,*"' '"**'

LONS-TERM DEBT AND PREFERRED / b PREFERENCE ST0cK OUTSTANOING .

E Lang te'm dent Q Pewed & Peence Stort

.Wevas eg4& Am IE .r 4E _. . . . _ . _ _ . . _ _ _ _ 5 w F 3

,==i L .* :*, .

h 1.s i

• m p) . i)6. .1(*! _ __ _

=

L Jl].} j4:

j []l e

. The separation of utility from non-utility Potential diversification of non-utility E businesses would provide opportunities activities would be concentrated in

[

I~ jp i:t 'r - ; to structure the Company's assets to meet energy-related areas that utilize expertise j an increasingly competitive environment currently existing within Consumers 1 {[ij^[] F4 and to enhance shareholder value. It also Power.

(,I would offer the potential for improving the corporation's financial flexibility, and

• would provide non utility operations the w, ,,, ,s,,j" ,'" use of a wider variety of financing techniques than is suitahle for utility operations.

15

Consumers Power Company and Subsidiaries MANAGEMENT'S DISCUSSION AND ANALYSIS

/

RESULTS OF OPERATIONS Electric Utility Operations Gas Utility Operations Overview in 1986 net operating income increased in 1986 net operating income decreased The Company had net income in E"**'.ily due to increased sales. Net primarily due to lower gas deliveries. Net peratmg mcome decreased in 1985 primarily operatmg mcome increased 33 percent m 1986 of $178 million. Net income after because of higher income taxes. Income taxes 1983, pnmanly because of revenue resulting dividends on preferred and preference stock tncreased in 1985 due to mcreased operating from a 6nal rate order issued in August 1984.

oas $65 million, or 8.74 per average common DC me e DC me e5 2n e S Cas Retenue and Sales share. Earniags in 1986 re8ect increased the slidland interest expense deductions electricity sales, improved control of Components of operating revenue variances which are now reaected as part of Other oprating expenses, reduced pension income (Deductions)" on the Consolidated expnse, decreased interest expense and increase (Decrease) From Prior Year g ggg decreased preference stock dividends, (Dollars m stillions) partially olfset by reduced gas deliveries and a Electric Revenue andSales 86/85 85/84 net loss from an oil and gas exploration Components of operating revenue variances j

subsidiarv. The Company reduced pension were: Mes $(28) (1 @ b -% .

Increase (Decrease) From Prior Year Transpona-expnse by applying in 1986 a new (Dollars in stillions) I"05 I accounting standard on employers accounting for pension costs, w hich improved 86/85 85/84 g3 earaings by $.08 per average common share.

sales $38 48% $27 70 % recovery (234) (95) (21) (44) in 1985 the Company had a net loss after Tariff rates - -

93 238 Other 7 3 (10) (40) dividends on preferred and preference stock  ;

of $390 million, or $4.42 per average common cos[re n '

41 52 (79) (203) share. The net loss resulted from the Other - -

(2) (5) Natural gas sales decreased 9.9 percent in following items: (1) a write down of certain 1986 and 4.5 percent in 1985, primarily due to Slidland nuclear fuel and certain slidland $79 100% $39 100 %

p ,

facilities of $331 million after tax ($3.76 Sales increased 1.8 percent in 1986 and 2.1 (FERC) decision that allows customers to per share); (2) a $65 million increase in percent in 1985. Commercial sales increased purchase gas directly from suppliers. The afidland related deferred taxes ($.73 per 41 percent in 1986 and 3.4 percent in 1985. FERC decision, however, has resulted in an share); (3) a write down of uranium assets by An August 1981 interim order granted rate increase in transportation gas volumes. Gas Plseau Resources I.imited (Plateau), a reliefin the annual amount of $137 million. delivered to customers, which includes gas subsidiary, of $21 million after tax ($ 23 per Pouer Costs transported for end users, decreased 3.9 share); and (4) net earnings of $27 million An increase of $37 million in 1986 power percent in 1986 and increased .7 percent in

($.30 per share).

costs included a $29 million increase due to 1985. The 1986 decrease was due to warmer The 1984 earnings of $1.14 per average increased prices and an 18 million increase weather and the loss of some customers common share included $149 million of having dual fuel capability because of lower due to increased sales. The average variable slidland related allowance for funds used oil prices. The decrease in tariff rate revenue cost per kilowatt hour ikWh) generated during construction recorded prior to theJuly increased to 1.83 cents from 1.67 cents. The in 1986 resulted from a reduction in rates of 199 shutdown of the slidland project, $16 million over the 12 month period increase wauhe result of a mix of more fossil partully offset by a li6 million after tax w ate beginning Sept.1,1986. The increase in tariff and less nuclear generation due to the down of Plateau's uranium assets' extended outage at the lower cost Palisades rate revenue in 1985 resulted from a fmal rate nuclear plant. The average cost per kWh order in August 1984 granting an addaional purchased decreased to 2.60 cents from 3.01 increase in the annual amount of $751 cents due to the availability of lower cost n"Ili n-purchased power on the spot market. In 1985 tout power costs decreased $63 million due to the increased operation of the lower cost Palisades plant, partially offset by increased sales l

l 16

Cost ofGas SoM Interest Charges (Excluding AFUDC) re6nancings and its debt and preference stock The 1986 decrease of $230 million was the The interest expense decrease in 1986 reduction program. In 1986 a major use of the result of a $133 million decrease due to primarily redects reduced interest of $28 Company's internal cash was to reduce its i reduced unit costs and a 197 million decrease million on the restructured bank debt due to debt and preference stock outstanding. l due to lower sales. Reduced unit costs are the repayments and lower interest rates, reduced in addition to improved internal cash How. I result of lower prices from major suppliers interest of $21 million for smaller reserves for inJanuary 1987 the Company took a major and the increased use of spot market customer refunds, and reduced interest of $ 18 step toward regaining its 6nancial health by purchases. In 1985 the cost of gas sold million due to first mongage bond entering into a pannership with The Dow decreased due to lower sales, panially offset redemptions. The decrease was partially ofset Chemical Company (Dow) intended to by higher supplier prices. by interest on first mongage bonds issued in conven a ponion of the Company's hiidland October 1986. nuclear project into a gas fueled, combined- ,

Interest expense in 1985 increased because cycle cogeneration facility, the Slidland of 6rst mongage bonds issued in October Cogeneration Venture (SICV). The m_ aial 1984, larger reserves for customer refunds and AICV arrangements involve approximately financing costs on slidland nuclear fuel 81.5 billion of the Company's existing an capitalized prior toJuly 198 . The increase investment in the Slidland project. Recovery was panially offset by a decliae in shon term of the Company's remaining investment in am ~~ ~

hiidland will be determined in hearings an interest rates and payments of the restructured bank debt. before the Stichigan Public Service Dividends on Preferred and Commission (51PSC),which began in September 1986.

Preference Stock m_ _ _ _ Preferred and preference stock dividends Internal Cash Flow decreased $7 million in 1986. The decrease Rates was primarily due to the Company's The amount of additional cash from electric

,, ~ - -

redemption of some ofits high cost rates depends largely upon the level of preference stock during the last half of 1986. recovery of the Company's abandoned l to ._ _ _ 5tidiand investment. in August 1985, after the FINANCIAL CONDITION Company had met certain conditions imposed by the SIPSC, fmancial stabilization rate relief

! tm___ _ - Overview of 1986 for six years became effective. Continuation of in 1986 operating activities continued to this rate relief, in the current annual amount a__ _ _

provide the major source of cash for the of $91 m liion, is contingent upon continued Company. Internal cash Bow improved compliance with the conditiens. One primary considerably due to continued Enancial condition requires the Company to repay $1.9 stabilization rate relief, reduced financing billion of its Exed obligations over six years.

costs, increased electncity sales and internal The financial stabilization rate orders cash savings (including the improved control anticipate that the Company will generate i Oth:r Operating Income of operating costs). The reduced financing internal cash savings of approximately $575 I

The 1986 decrease redects reduced costs resulted from the Company's 1986 million over six years. The Company's 1986 operating income of Nonhern Stichigan annual filing demonstrating compliance with Exploration Comp.tny (N05tECO), an oil and the conditions in 1985 was approved by the gas exploration subsidiary, due to the general StPSC.

decline in oil and gas prices and additional depletion expense of f10 2 million ($5.5 million after taxes) for write-downs of cenain

, foreign assets.

in 1985 other operating income increased l due to a decrease in depletion expenses of NO\lECO. The decrease resulted from 1981 expenses of $9 9 million related to the write-l downs of cenain foreign assets.

17 l

Consumers Power Company and Subsidiaries MANAGEMENT'S DISCUSSION AND ANALYSIS In September 1986 the MPSC began and certain preference stock with $178 $1 billion. The Tax Reform Act of 1986 (TRA) hearings on the Company's request to recover million of lower cost bonds. The Company includes several provisions that will affect the over 15 years its abandoned Slidland also used internally generated funds to Company's future tax position, including a investment of $2.1 billion, and a return on purchase some of its outstanding long term reduction in the corporate income tax rate, that investment at the weighted cost rate for debt and preference stock. In 1986 the repeal of the investment tax credit (lTC), a debt and preferred and preference stock with Company repaid $168 million of its new depreciation system, a reduction in ITC no return on the common equity portion. The restructured bank debt; redeemed at par $68 carr> forwards, a new corporate alternative Company believes that the Midland project million ofits 12.10% 6rst mortgage bonds due minimum tax, an increase in the depreciable was planned responsibly and costs were in, anuary 1987 and its $75 million issue of lives of utility property and changes in tax incurred prudently, reasonably and in good 16% 6rst mortgage bonds due in 1992; accounting for various items, including the faith. The Company is seeking partial and redeemed long term debt and preference and taxation of unbilled revenue, immediate rate relief in the additional annual preferred stock to satisfy sinking fund The MPSC recently issued an order that amount of $85.9 million and fmal rate reliefin requirements of $15 million; redeemed 3 calls for hearings to determine the impact of the additional annual amount of $94.1 million shares or $80 million of its $ 4.40 the TRA on all Michigan utilities, including million. The total rate relief redects an preference stock: and made other the Company. The Company's revenues reflect 1 increase of 10.4 percent above existing miscellaneous net reductions of $19 mHlion. current and deferred tax amounts at a 46 electric rates. The Company expects that a The total net reductions of long term debt, percent rate. Because the Company is not decision by the MPSC on the Company's preference stock and preferred stock were currently paying federal income taxes, any 4 request for partial rate relief may be made in $282 million, $161 million and $12 million, revenue reduction ordered by the MPSC to mid 1987, and that a decision on 6nal rate respectively. The subsidiaries reduced long- reHect the elTects of the TRA would not relief may be made in the second half of 1988. term debt an additional $7 million. In 1987 correspond to a reduced tax obligation. It Wholly owned subsidiaries of the Company the Compa ny plans to continue its program to would, however, reduce the amount of cash -- - I have received general partnership interests in refmance or reduce a substantial amount of its available for Company operations. Financial J

the MCV, and will receive cash up to $102 high cost securities. stabilization rate relief (see " Rates" section) ,

million and notes and/or a special limited Sales assumed the Company would minimize its partnership interest in the McV, for the future tax obligations. Accordingly, the A sustained growth in electricity sales over transfer of $1.5 billion of Midland assets. A Company will argue that any revenue the past several years has contributed to the subsidiary of Dow has contributed $115 reduction should be offset by a corresponding Company's improved cash Sow position.

million in cash to the MCV to receive a increase in fmancial stabilization revenue in Electricitv sales in 1986 established a new minority interest as a limited partner. At rder to maintain the same internal cash flow.

record, an increase of 1.8 percent over 1985, commercial operation, a wholly owned and new electric hookup requests increased If reRected in rates, the TRA s reduction in the corporate tax rate would also reduce g

subsidiary of the Company is expected to own 18 percent. The Company projects electricity g 49 percent of the project,with Dow and other future levels of deferred tax amounts. Because sales to grow at a 1.6 percent annual growth' partners holding the remaining interest- rate over the next five years due to increases deferred tax amounts have provided a

~

Construction of the facility is anticipated to be signif cant source of zero cost funds for the n residential and commercial sales.

completed in 1990 at an additional cost of Company, any reduction in deferred tax Gas deliveries in 1986 decreased 3.9 percent approximately $600 million. amounts uill cause a shift in the Company's from 1985 due primarily to warmer weather The Company agreed to a settlement with mix of funds for capital expenditures from and lower oil prices, wh.le new gas hookup the MPSC staff w hich reduced gas rates by $ 16 zero cost funds to more expensive sources of requests increased 22 percent. Gas deliveries million over the 12 month period beginning funds are expected to grow at a 1.2 percent annual Sept.1,1986. The reduction was due to the l'nder a proposed accounting standard, growth rate over the next five years due to MPSC staff's concern that the Company's deferred taxes would be recorded based on growth in all sectors and the return of some earnings level was higher than that authorized the tax rate expected during the period m.en dual fuel customers.

in the Company's last gas rate proceeding. the taxes become payable. l:nder this Ten The Michigan attorney general is seeking an approach, existing deferred tax amounts As a result of the abandonment by the would be adjusted at the time changes are additional reduction in gas rates of $32 Company of its unusable Miciland investment, made in tax rates. llowever, for public utilities million.

the Company wiu not pay any federal income that have existing deferred tax amounts financial Restructuring The Company decreased its fmancing costs ng f ar Iapp imatelv -

TRA requires that the adjustment be made in 1986 primarily by refmancing high con ver the remaming life of the property.

securities and reducing its outstanding Certain other deferred tax amounts of a public capital. In 1986 the Company took adsantage utihty are required to be reduced effective of improied market conditions by replacing with the reduction in the tax rate contained in -

$100 million of 18% tirst mangage bonds 18 ,

l l

the TRA. Should this teduction be re8ected in Proceeds from the Company's October 1986 Michigan and the anticipated Midland rates, it would have a negative efect on cash issue of $178 million of 10W first mortgage conversion, the Company's 6nancial position 80w. bonds were used to redeem $100 million of is expected to continue to improve in 1987.

The efect of the TRA on the Company will 18% 6rst mortgage bonds, all of the Moreover, the Company believes that the not be known until the MPSC hearings are Company's ILOO preference stock and part of same forces that produced deregulation in the concluded and fmal orders have been issued. its $3.98 preference stock. The Company has gas industry are now active in the electric Final orders are expected by the third quarter received authority from the MPSC to issue in industry. The Company plans to agg~ssively of 1987 1987 and 1988 not more than $500 million of compete in this ch.nging utility environment otherInternal cash Sarings long term debt to be used only to purchase and is well positioned to do so. As part of its and retire the Company's higher cost plan to remain competitive, the Company will As a result of the 6nancial stabilization rate securities. The Company is considering a sale recommend to its shareholders that the orders, the Company has reduced its and leaseback of a generating plant that, if Company be reorganized into a holding operation and maiatenance expenses and its c mpleted,wouid provide an alternative company. This restructuring would increase construction expenditures to essential source of funds to make some or all of these the Company's 6nancial Bexibility and activities. Further, the satisfactory resolution purchases. The Company is also considering segregate its utility and non utility of the costly litigation with Dow concerning restructuring its present obligations under the businesses.

the Midland plant will reduce legal expenses Restructuring Credit Agreement (RCA). No The continued receipt of fmancial in 1987.

new equity 6nancings are anticipated in 1987 stabilization rate relief and the timing and or 1988. amount of the recovery through rates of $2.1 less SouncES AND USES OF Various provisions in the Company's First billion of its abandoned Midland investment FUNOS MON OMADONS Mortg3ge Bond Indenture, Restated Articles continue to be ofimportance to the Company.

$538 meon-$611 per common share of Incorporation, RCA and Michigan law However, the efects of these could be

~#

restrict the Company's ability to sell reduced to the extent that the Company is

" - ------ - securities. The Company currently anticipates successful in recovering portions of its Sg ", that it could issue 6rst mortgage bonds in investment from contractors involved in the 1987 or 1988 under its authority from the Midland project. Also ofimportance are the MPSC without violating these restrictions. rate treatment of the TRA and the efect of a Construction Expenditures new accounting standard that the Company emm O amn-Construction expenditures of the Company believes will require the write down in 1988 f its abandoned Midland investment to the "L and its subsidiaries (exclusive of nuclear fuel')

presem value of its probable future revenue.

= ___ are estimated at $183 million for 1987 and Although the write-down will not afect cash

$187 million for 1988. The two-vear estimate

"""' 8 w,it may prevent the payment of cash

" for nuclear fuel is $22 million. these dividends on preference and common stock estimates redect only essential activities, such and restrict the Company's 6nancial oexibility.

as providing safe service, meeting new m 'sE e _ _ _ _ _ _ _ _

customer requests and keeping existing In addition, although the Company has entered into the MCV arrangements, recovery

[

$ ce=

generating plants operating properly. The Company plans to fund these expenditures f the $1.5 billion in Midland assets

' c nnected with the MCV arrangements is with internally generated funds. In addition, under the fmancial stabilization rate orders, dependent on a number of significant matters, s me of which are not within the Company's External Financings the Company is permitted to spend up to $50 c mrol. These include regulatory approvals, million on the MCV' The Company and Michigan Gas Storage long term natural gas supply arrangements, Outlook Company, a subsidiary, have a six year, short. Mod o obble avoided cost term revohing credit and acceptance facility Because of the Company's successful eforts rate and construction 6nancing arrangements.

agreement (RCAFA) that was executed in to reduce its cost of capital, its cost control As described in the notes to the consolidated August 1985. Debt capacity under the RCAFA program, the sales growth potential in fmancial statements, these matters and other was increased to $ ;00 million in 1986. The contingencies could have a material adverse RCAFA provides the Gexible credit needed to effect on the Company's 6nancial condition, 6 nance seasonal gas and fuel inventories and long term liquiday and fmancial 8exibility.

for other werking capital needs. During 1986 the maimum amount borrowed under the RCAFA was approximately $290 million.

19

Consumers Power Company and subsidiaries CONSOLIDATED STATEMENT OF INCOME Years Ended December 31 Thousands, Except PerWre Amounts 1986 1985 1984 OPERATING REVENUE Electric utility $1,775,912 $1,697,243 $1,658,465 Gas utility 1,287,125 1,533,256 1,508,114 Other 45,377 67,829 68,991 Total operating revenue $3,108,414 $3,298,328 $3,235,570 OPERATING EXPENSES AND TAXES Fuel for electric generation $ 361,879 $ 372,226 $ 357,872 Purchased and interchange power 266,723 219,397 296,619 Cost of gas sold 801,388 1,031,183 1,053,093 Other 425,988 435,754 430,443 Total operation expenses $1,855,978 $2,058,560 $2,138,057 Maintenance 142,566 145,929 134,463 Depreciation, depletion and amonization 214,067 201,333 206,444 General taxes 172,639 166,855 158,280 Income taxes 244,994 235,929 105,847 Total operating expenses and taxes $2,630,244 $2,808,606 $2,743,091 NET OPERATING INCOME (LOSS)

Electric utility $ 358,311 $ 340,928 $ 379,333 Gas utility 120,557 136,454 102,979 Other (698) 12,340 10,167 Total net operating income $ 478,170 $ 489,722 $ 492,479 OTilER INCOME (DEDUCTIONS)

Non operating income uxes, net $ 94,409 $ 219,558 $ 76,633 Trite down of Midland nuclear project costs - (487,737) -

Write down of uranium assets - (38,300) (84,574)

Allowance for other funds used during construction - -

67,822 Other,nr 3,650 3,594 24,589 Total other income (deductions) $ 98,059 $ (302,885) $ 84,470 INTEREST CIIARGES Interest on long term debt $ 376,969 $ 405,450 $ 380,187 Other 22,011 53,759 59,914 Allowance for borrowed funds used during construction (595) (2,600) (84,210)

Net interest charges $ 398,385 $ 456,609 8 355,891 BIET INCOME (LOSS) $ 177,844 $ (269,772) $ 221,058 DIVIDENDS ON PREFERRED AND PREFERENCE STOCK 112,792 119,776 121,214 NFT INCOME (l.OSS) AFTER DIVIDENDS ON PREFERRED AND PREFERENCE STOCK $ 65,052 8 (389.548) $ 99,814 AVERAGE NUMBER OF COMMON SilARES OUTSTANDING 88,005 88,065 8',884 EARNINGS (LOSS) PER AVERAGE COMMON SIIARE $,74 $(4.42) $1.14 The accompanying notes are an integral part of this statement.

20 m,. ... -

Consumen Power Company and Subsidiaries CONSOLIDATED STATEMENT OF CHANGES IN FINANCIAL POSIT 10N'

, 4 3

Years Ended December 31 Tbousands ofDollars ,

1986 1985 1984 CASil PROVIDED BY Operations Net income (loss) \ $ 177,844 $(269,772) $ 221,058 Depreciation, depletion and amortization 227,209 218,880 213,174 Deferred income taxes, net 195,165 1,939 41,503 Defened investment tax credit, net (7,306) (23,538) 14,356 Allonnce for other funds used during construction

- - (67,822)

Trite down of Midland nuclear project costs - 487,737 -

Write down of uranium assets - 38,300 _ &l,574

$ 592,912 $ 453,546 $ %o,80 Working Capital Sources (Uses)

Accounts receivable $ 5,818 $ (8.592) $ 32,997 Accrued revenues 57,876 (71,134) 42,920 Gas in underground storage (20,978) 56,046 (72,223) s Generating plant fuel stock 9,937 (3,610) (665)

Accounts payable (10,884) (7,517) 9,491 Accrued taxes 6,616 614 (708)

Deferred income taxes (39,326) 42,435 (29,690)

Revenue reserved for refund 22,042 (65,217) 22,051 Other, net (16,808) 124,802 46,466

$ 14,293 $ 67,827 $ 49,739 Financing Activities Common stock $ -

$ 13,472 Preference stock 53,000 First mortgage bonds 178,000 - 185,000 Notes payable 340,871 166,607 256,939 Bank loans - 15,350 -

Capital! eases 5,716 (228) 30,263 Sale and leaseback of nuclear fuel .

- 11,794 3,295 other 3,455 5,330 41,338

$ 528,042 8 201,853 $ 583,307 Financial Stabilization Revenue Reserved $ 94,693 $ 29,693 $ -

Other, Net _

$ 27,581 $ (73,431) $ (15,413)

Total cash provided $1,257,521 $ 679,485 $1,124,476 CAS11 USED FOR s Reduction of notes payable w $ 217,664 $ 240,000 $ 92,975 Retirement of debt and equity securities 667,843 228,055 104,418 Treasury stock 752 - -

Dividends 112,792 119,776 215,628 Construction expenditures (after deducting allowance for ether tunds used during construction) 190,695 205.839 622,428 Total cash used $1,189,746 $ 793,670 $1,035,419 Increase (decrease) in cash and temporary cash investments $ 67,775 $(114.185) $ 89.027 The a(companying notes are an integral part of this 3tatement.

21

Consumers Power Company and Subsidiaries CONSOLIDATED BALANCE SHEET Decemher 31 Thousands ofDollan 1986 1985 ASSETS Plant (At Original Cost)

Electric utility $4,163,990 $1,056,118 Gas utility 1,432,139 1,404,609 Other 520,465 487,% 9 .

$6,116,594 $5,948,696 Less provision for accumulated depreciation 2,436,332 2,254,742 ..

$3,680,262 $3,693,954 k Construction work in progress 83,303 118,536  ; ;

$3,763,565 $3,812,490 l .

Midland Project (See Notes 2 and 7) $3,674,278 $3,673,950 .

Current Assets

$ 11,259 $ 11,594

(

Cash .. .

Temporary cash investments at cost, which approximates market 70,666 2,556 .

Accounts receivable,less reserves of $4,709 in 1986 and $5,857 in 1985 267,416 273,234 Accrued revenues 206,939 264,815 .,

Gas in underground storage, at average cost 245,211 224,233 Generating plant fuel stock, at average cost 63,102 73,039 Materials and supplies, at average cost 87,151 91,883 Prepayments and other 183,164 128,340

$1,134,908 $1,069,694 Deferred Debits and Non current Assets $ 57,992 8 58,460 Tota! assets $8,630,743 $8,614,591 STOCKIIOLDERS' INVESTMENT AND LIABILITIES Capitalization Common stockholders' equity $1,936,005 $1,893,642 Preference stock 466,820 627,700 Preferred stock 444,634 456,834 Long term debt 3,253,472 3,576,745 Non current obligations under capital leases 31,927 29,915 ,

$6,132,858 $6,584,836 Current Liabili ties Current portion of long term debt and capital leases $ 263,483 $ 225,663 Accounts payable 217,274 228,158 l Notes payable 289,814 166,607 Accrued taxes 204,869 198,253 Deferred income taxes 125,6 % 165,022 l Accrued interest 115,645 132,191 Revenue reserved for refund 61,779 39,737 Other 120,870 10R,860

$1,399,430 $1,26 6,491 Deferred Credits and Non-current Liabilities Deferred income taxes $ 720,695 $ 525,530 Deferred investment tax credit 116,225 123,531 Financial stabilization revenue re. served 124,386 29,693 Other 137,149 86,513

$1,098,455 $ 765,267 Construction commitmer.:s, %gation and other continger.cies (Notes 2,3,6,7 and 11)

Total stockholders' investment and .iabilities $8,630,743 $8.614,594 The accompanying notes are an integr< 1 trt oi chis stvement.

Consumers Power Company and Subsidiaries CONSOLIDATED STATEMENT OF CAPITALIZATION December 31 1986 1985 1986 1985 kres outstanding Thousands ofDollars COMMON STOCKIIOLDERS' EQUITY 88,006,786 88,065,039 $1,936,005 $1,893.662 PREFERENCE STOCK-Cumulative, $1 par value, authorized 40,000,0m shares With mandatory redemption: $85 00 $1,000 stated value 7,200 10,800 $ 7,200 $ 10,800 3 85 27.50 stated value 1,800,000 1,800,000 49,500 49,500 4.02 27,50 stated value 2,000,000 2,000,000 55,000 55.000 3.78 27.50 stated value 2,000,000 2,000,000 55,000 55,000 3.98 26 stated value 870,000 1,900,000 22,620 49,400 4 00 25 stated value - 2,000,000 - 50,000

$ 189,320 $ 269,700 Tithout mandatory redemption: $2.43 $25 stated value 2,000,000 2,000,000 $ 50,000 $ 50,000 2.23 25 stated value 2,000,000 2,000,000 50,000 50,000 2.50 25 stated value 1,600,000 1,600,000 40,000 40,000 3.60 27.50 stated value 3,000,000 3/00,000 82,500 82,500 4.40 27.50 stited valur 2,000,000 3,000,000 55,000 82,500 4 40 26.50 stated value - 2,000,000 - 53,000

$ 277,500 $ 358,000 PREFERRED STOCK-Cumulative, $100 par value, authorized 7,500,000 shares Wiin mandatory redemption. $ 1.52 75,550 79,550 $ 7,555 $ 7.955 E 9.25 240,000 256,000 24,000 25,600 9 00 400,000 425,000 40,000 42,500 9.70 95,000 100,000 9,500 10,000 8 625 288,000 360,000 28,800 36,0fo

$ 109,855 $ 122,055 Tithout mandatory redemption: $1.50 547,788 547,788 $ 54,779 $ 54,779 4.16 100,000 100/00 10,000 10,0(0 7.45 700,000 700,000 70,000 70,0m 7.72 700,000 700,000 70,000 70,000 7.'6 750,000 750,000 75,000 75,000 7.68 550,000 550,000 55,000 55,000

$ 334,779 8 334,779 LONG 1T.RM DEBT First mangage bonds $2,402,738 $2,515,594 Restructured bank debt 824,737 992,786 Installment sales contracts, average interest rate 8.2% 179,370 183,685 4% sinking Fund Debentures due 1996 29,200 29,800 Other 80,497 84,140

$3,516,542 $3,806,005 Less: Current maturities of first mongage bonds 69,047 23,928 Sinking fund for first mongage bonds and debentures 20,924 23,592 Current maturities of restructured bank debt 156,231 166,492 Current maturities of installment sales contracts 4,315 4,315 Other current maturities 2.215 289 Unamonized net debt discount 10,338 10,644

$3,253,472 $3,576,745 GBLIGATIONS UNDER CAPITAL LEASES $ 42,678 $ 36,962 Less: Current ponion of capitalleases 10,751 7,047

$ 31,927 $ 29,915 Total capitalization $6,132,858 $6,584,836 The accompanying notes are an integral pan of this statement. 23

Consumers Power Company and Subsidiaries CONSOLIDATED STATEMENT OF COMMON STOCKHOLDERS' EQUITY Other Treasury Number of Common Paid in Retained Stock, Thor 4 sands ofDollars Shares Stock Capital Earnings at Cost Total BALANCE ATJANUARY 1,1984 86,915,196 1869,152 $769,541 $ 624,801 12.263,497 Net income 221,058 221,058 Cash dividends declared:

Preferred (34,656) (31,656)

Preference (86,588) (86,588)

Common (94,384) (94,384) stock issued for:

Dividend Reinvestment and Common Stock Purchase Plan 979,143 9,791 1,819 11,640 Employee Stock Ownership Plan 31,200 312 20 332 Employees' Savings Plan 139,500 1,395 104 1,499 q

Net gain on reacquired stock 625 625 Expenses of issuing additional stock (687) (687)

BALANCE AT DECEMBER 31,1984 88,065,039 $880,650 $771,452 $ 630,234 $2.282,336 Net loss (269,772) (269,772) l Cash dividends declared:

l Preferred (31,270) (34,270)

Preference (85,506) (85,506)

Net gain on reacquired stock 854 854

{

l BALANCE AT DECEMBER 31,1985 88,065,039 $880,650 1772,306 $ 240,686 $ $1,893,642 Net income 177,844 177,844 Cash dividends declared.

Preferred (33,204) (33,241)

Preference (79,588) (79,588)

Net gain (loss) on reacquired stock 1,905 (23,812) (21,937)

Treasury stock reacquired (82,287) (1,061) (1,061)

Tresury stock reissued through Executive Stock Option Plan 26,034 309 309 BALANCE AT DECEMBER 31,1986 88,006,786 $880,650 $774,211 $ 281,896 $ (752) $1,936,005 The accompanying notes are an integral part of this statement. -

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS t -

1, Significant Accounting Policies Retenues utility plant cost. The corresponding credit is Consolidation Policy The Company accrues revenues for services added to other income (equity funds) and rendered to customers but not billed at month deducted from interest charges (borrowed The accompanying consolidated fmancial statements include the accounts of end. Revenues include the recovery of funds) on the Consolidated Statement of Consumers Power Company (the Company) electric power supply costs and gas costs, Income. On July 16,1984. the company and its subsidiary companies, s hich are all subject to annual reconciliation hearings discontinued capitalizing AFUDC and wholly owned.The Company and its conducted by the SIPSC. Any over recovery or fmancing costs on the Slidland project.

subsidiaries are referred to as "the under recovery of these costs is recorded as a Maintenance, Depreciation and Companies." These statements exclude all current liability cr asset until such time as the Depletion -

intercompany amounts, except intercompany costs are refunded or billed to customers- The Company charges repairs and minor profits in gas inventory, w hich are allowed by Allouancefor Funds Used During property replacements to maintenance ,

the ratemaking policies of the hiichigan Construction (AFCDC) expense. Property retired or disposed of in Public Service Commission (hlPSC). Under utility regulatory practices, the cost the normal course of business is charged to of 6nancing construction projects is added to 26

the provision for accumulated depreciation, level that would have been attained if the The Company studied various options for less net salvage credits. Salvage received from accumulation of funds had started at the the Midland project and, in April 1986, l

sales of any abandoned Midland assets beginning of the plant's life. The Company recommended that Midland Unit I be reduces the Company's investment in believes that any additional, unfunded convened to a natural gas fueled, combined

! Midland. decommissioning costs, which could be cycle generating plant. In June 1986 the l Depreciation provisions for utdity plant are significant, would be recoverable through Company abandoned the components of the -

baseCan straight line and units of production adjustnients of rates charged to its customers. Midland project that would be unusable in rates approved by the MPSC. The composite Nuclear Fuel Cost the gas conversion. Of the $3.7 billion 7, depreciation rate in 1986,1985 and 1984 was Midland investment currently reflected on the Nuclear fuel cost is amonized to fuel j 3.0 percent for electric utility plant. Company's books, the Company is seeking to i expense on the basis of the quantity of heat Composite depreciation rates for gas utility rec ver $2.1 billion ofits investment in _

produced for electric generation. Under the plant w ere 3 8 percent in 1986 and 10 percent Nuclear Taste Policy Act of 1982 (Act), the abandoned facilities from its retail electric in 1985 and 1984. customers in a pending rate case (see Note 7).

Department of Energy (DOE) has the Nonhern Michigan Exploration Company The Company plans to seek recovery of $63 responsibility for the storage and disposal of -

(NOMECO), an oil and gas exploration million of its abandoned investment from its spent nuclear fuel. The principal amount of '--

subsidiary, follows the full cost method of wholesale electric customers. The Company's the Company's liability for spent nuclear fuel accounting. Capitalized oil and gas management is unable at this time to predict burned prior'to April 7,1983, is $ R3 million.

exnloration and development costs are of this amount, fio.6 million has been either the level of any amounts of its abandoned depleted on the units of production method recovered froni customers or is being Midland investment that may be recovered w hile other plant is depreciated using recovered under MPSC authorization, and the through electric rates including whether a straight line rates. The composite rates for return may be aHowea. But the Company +

remaining $3.7 million has been requested "

NOMECO's plant, the Company's common from the MPSC. For fuel burned after April 7, expects that a decision by the MPSC on the plant, and other subsidiaries' plant were Company's request for partial and immediate 1983, the Ad provides for an assessment of approximately 8.9 percent in 1986, T 3 rate relief may be made in the middle d 1987, one mill per kilowatt hour of net nuclear percent in 1985 and H.5 percent in 1984. and that a decision on fmal rate relief may be

generation. This amount is charged to nuclear _

= These rates reflect NOMECO's write downs of made in the second half of 1988.

fuel expense and recovered through electric In January 1987 the Company and Dow

[

foreign investments of $10 2 million. i.9 million and $9.9 million in 1986, ;985 and rates.

- In vstment Erclauledfrom Rate Base litigation between the two companies and had 1984, respectivelv.

E in April 1983 the MPsc excluded the entered into a partnership intended to convert in management s opinion, the Companies, b Marysville gas reforming plant from rate base, a portion of the Midland plant into a natural provision for accumulatut depreciation is but ordered that the investment be carried in gas fueled, combined cycle cogeneration reasonablv adequate to cover depreciation on

" plant held for future use" and permitted

.i facility, the Midland Cogeneration Venture the origin'al cost of plant.

" U" P S

( MCV). The new facility, expected to qualify m Nuclear Plant Decommissioning Costs

over

pproximately 10 years. At Dec.31,1986, under the Federal Public l'tilities Regulatory since 1980 the c,ompany has not been the net investment was $62 million. Pol c) Act as a cogeneration facility, could

~

recovenng nuclear plant decommissioning g 2.The Midland Project provide aPProximately 1,300 megawatts of costs in its retail electric rates. Beginning Jan.

2 The Midland plant was originally designed electric capacity and is expected to begin 1,1987, the Company has been authorized by 5 as a nuclear facility to provide 1,357 generating electricity and steam by late 1990 the MPSC to collect decommissioning costs -

megawatts of capacity for the Company's The new facility would supply the electric and through a monthly surcharge on customers.

electric system and to furnish process steam steam requirements of Dow's Michigan bills. These funds w ill be deposited in trust as service t The Dow Chemical Company division Midland plant and electricity to the required by the MPSC order authorizing the W w). OnJuly 16,1986, the board of Company's customers. As part of the surcharge. The surcharge is based upon directors authorized management to shut pannership arrangements, w holly owned estimated decommissioning costs in 1987 down the Midland project. In December 1985 subsidiaries of the Company have received dollars of $50 million and $ 100 mi' lion for the -

N the Company charged earnings for a portion general partnership interests in the MCV, and Big Rock Point and Palisades plants, of its investment in certain Midland nuclear will receive cash up to $ 102 million and notes I respectively, and is based upon certain fuel and cenain Midland facilities. The pretax and/or a special limited partnership interest kf assumptions as to remaining plant life, in the MCV, for the transfer of $1.5 billion of b inflation and fund earnings.

write down was $ 488 milhon. The after tax write down was $331 million or $3.76 per Midland assets.

k A Nuclear Regulatory Commission proposal average common share. Completion of the new facility is contingent _

would require a utility to aumulate a upon the satisfactory resolution of a number decommissioning fund either within five years < -

f significant matters, some of which are not .

or one third of a plant's remaining operating within the Company's control These include license period, w hicheter is greater, to the 25

Consumers Power Company and Subsidiaries NOU.S TO CONSOLIDATED FINANCIAL STATEMENTS my .

fuel supply arrangements, regulatory million. Making the same assumptions except August 1985 the Company, Michigan Gas approvals, arrangements of 6nancing for the that no return is allowed, the Company Storage Company (Gas Storage), u hich is a MCV, the continuation of a reasonable estimates its loss, after tax, would be $ 480 subsidiary, and 13 banks executed a six-year, avoided cost rate, and release byJune 1,1987, million. short term revolving credit and acceptance of the $1.5 billion of Midland assets from the Additional losses, when probable and facility agreement (RCAFA) that is used to tien of the Company's First Mortgage Bond reasonably estimable, would be recognized if fmance seasonal gas and fuel inventories and indenture (Indenture). To complete the either disallowances of ponions of the for other working capital requirements.

facility, approximately $600 million of new abandoned Midland investment occur and/or During 1986 the RCAFA was amended and funds is expected to come from construction ponions of the Midland investment currently provides a credit limit of $400 debt fmancing by the MCV and from transferred to the MCV are not placed in million. Bank borrowings and bankers' additional panners. Undo the existing commercial operation. Ilowever, if the acceptances under the RCAFA are limited to a financial stabilization rate orders, the Company is successful in recovering ponions borrowing base which equals the sum of 85 Company must limit its cash expenditures for of its investment from contractors involved in percent of" eligible" accounts receivable plus the facility to no more than $50 million and the Midland project, the losses could be 75 percent of " eligible" inventories. The must obtain the cash from other than reduced. borrowings under this agreement are secured ratepayer funds. At commercial operation, a If significant portions of the Midla..d by a first priority security interest in the wholly owned subsidiary of the Company is investment are not recovered through the receivables and natural gas, coal and oil expected to own 49 percent of the project, ratemaking process, through the MCV or inventories of the Company and Gas Storage.

with Dow and other panners holding the otherwise, the adverse effect on the Under the RCAFA, the Company guarantees remaining interest. Company's fmancial position and results of Gas Storage's obligations. At Dec. 31,1986, in October 1986 the DOE issued an order operations could be significant (see Note 5). outstanding obligations under this agreement granting the Company a permanent 3. Capital Requirements were $290 million at an average interest rate exemption from certain prohibitions of the f 7 2% See Note 5 for cenain other terms and The Company and its subsidiaries estimate Powerplant and Industrial fuels Use Act. This c nditions of the RCAFA.

their construction expendiaes at $975 exemption permits the MCV to fuel the new 5. Capitalization million (exclusive of $105 million for nuclear facility at Midland with natural gas.

fuel) for the period 1987-1991, ofwhich $183 If significant ponions of the Midland In December 1986 the Financial Accounting million is for 1987. The Company's ponion is investment are not recovered (see Notes 22nd Standards Board issued Sutement of Financial $795 million for the period 198f-1991, of 7) or if substantial losses are incurred in Accounting Standards (SFAS) 90, which $147 mi1! ion is for 1987. The connection with other contingencies, the Regidated Enterprises-Accountingfor Company's ponjon reflects essential activities Company's fmancial integrity could be Ahandonments and Disallorcances oflYant only and' assumes no new generating plant threatened. This could produce such Costs, an amendment of SFAS 71. SFAS 90 construction, and no major life extension of consequences as a significant restriction on or requires a utility to recognize the present ex sting units. In addition, under the fmancial elimination of the Company's ability to issue value of those future revenues expected i stabilization rate orders, the Company is

~

debt or to pay cash dividends to its result from the regulators' inclusion of the permitted to spend up to $50 million on the shareholders. a requirement to immediately cost of a plant in allowable costs for rate MCV. repay the Company's restructured debt, and purposes when abandonment becomes Various provisions in the Company's the impairment of the Company's ability to probable. If the carrying amount of the Indenture, Restated Anicles of incorporation provide adequate service to customers in the abandoned plant exceeds that present value, a

( Articles), the Restructuring Credit future.

loss would be recognized. SFAS 90 is effective Agreement (RCA) and Michigan law restrict Common Stock m 1988 unless a company is actively seekmg the Company's ability to sell securities. I'nder ,

modifications to existing agreements that the most restrictive Provision, which is value, and 123 million shares are authonzed.

contain a restrictis.e clause that w.ould be contained in the RCA' at Dec. 31,1986 the violated by the application of SFAS 90. In that The Company has not paid a cash dividend on Company wmid be pennined to iuue $b, case, a company may elect to delay common stock since the third quarter of 1984.

milh.on pnncipal amount of first mortgage The financial stabilization rate orders prohibit e ctiveness r one 3 ear. bonds for purposes other than refundmgs.

the Payment of cash dividends on common Applying SFAS 90 to the Company in 1988,

4. Short-Term Borrowings stock until at least 1988, and permit only and assuming full recoverv of the Company's abandoned ponion of its $lidland investment The Company has authorization from the " token" dividends thereafter until $ 1.9 billion over 15 years and a return on this investment Federal Energy Regulatory Commission of the Company's fixed obligations is repaid at the weighted cost rate for debt and (FERC) to issue up to $500 million of short and the Company has returned to " financial term debt on or before Dec. 31,1981 In heahh." Under the RCA and the RCAFA. the preferred and preference stock, the Company -

estimates its loss, after tax, would be $190 Company may not declare cash dividends on common stock earlier than Jan.1,1988 (unless the MP5C has authorized an earlier 26

l payment), and only after the principal amount preference stock. Under Michigan law, cash Long-Term Debt of the restructured debt has been reduced by dividends on preferred stock may be paid out First Mongage Bonds

$500 million. Until the principal amount has of " surplus," which at Dec. 31,1986, was $1.5 First mortgage bonds are secured by a been reduced by an addi.ional $250 million, billion. mongage and lien on substantially all the Company may only declare such At the Company's option, all or part of its property of the Company. In 1986 the dividends to the extent of $1 for each $3 of preference and preferred stock may be Company redeemed, at a 3 percent premium, additional debt paid. Under the most redeemed, either at a fixed price or at $100 million ofits 184% first mongage bonds.

restrictive provision of the Company's Anicles progressively decreasing prices. Cenain issues are subject to restrictions that prohibit First Mortgage Bonds December 31 and its Indenture, at Dec. 31,1986, retained earnings of $56 million out of total retained redemptions with funds raised from the Series (%) Due 198 earnings of $282 million could not be issuance of securities ranking prior to or on 8 8 distnbuted as cash dividends on common stock, parity with the repurchased stcck and having a lower interest or dividend rate.

h 7 12h6 68,342 12 % 1987 -

At Dec. 31,1986, approximately 5 million in August 1986 the Company redeemed 3 4% 1988 27,243 27,243 million shares or $80.5 million of its $4.40 13 % 1988 24,500 24,500 shares of common stock were reserved for 13 6 various stock plans. The Company did not preference stock for $95.7 million. In issue new shares in 1986 or 1985 for any of November and December 1986, the Company 16.02 1989 80l000 80l000 these plans. redeemed l,030,000 shares or $26.8 million of 16.32 1989 50,000 50,000 its $3.98 preference stock for $28.9 million, 184 1989 - 100,000 Preference and Pnferred Stock 20,755 20,755 and 2 million shares or $50 million ofits $4.00 34 1990 Under the Company's Anicles, at Dec. 31, 1986, retained earnings of $41 million out of preference stock for $54.8 million. Included p in the redemptions of the $3.98 and $4.00 I total retained earnings of $282 million could 15 1991 38,479 38,479 preference stock were 1986 mandatory 13.40 1992 50,000 50,000 not be distributed as cash dividends on redemptions amounting to $5.1 million. 16% 1992 - 75,000 Preference and Preferred Stock 1 99 000 000 Repurchase and Redemption Features 15 1994 85,000 85,000

% 199 100, 1 ,000 Repurchases at Company's Option Mandatory Redemptions Price Price 9% 1996 46,750 51,400 Annual (Excluding 10 % 1996 178,000 -

(Excludinp Restrictions Accrued Efective in Efect Number Accrued First 9'

Dividends) Through Through of Shares Dividends) Redemption 6% 1998 46,159 46l159 6% 1998 43,444 43,444 Preference:

9% 1998 20,020 21,680

$85.00 $1,025.00 Sept.1987 None 3,600 $1,000.00 Oct.1984 7% 1999 47,455 47,455 3.85 30.15 April 1990 April 1990 100,000 27.50 May 1985 84 1999 54,599 54,599 100,000 26.00 Nov.1985 10% 1999 67,600 72,800 3.98 28.75 Oct.1990 None Aug.1987 100,000 Sept.1987 2M 4.02 31.52 Aug.1987 27.50 3.78 31.28 Sept.1987 Sept.1987 100,000 27.50 Oct.1987 7% 2001 57,164 57,164 2.43 26.00 Aug.1991 None 8% 2001 57,413 57,413 2.23 26.50 Oct.1937 None 7% 2002 62,398 62,398 7% 2002 43,393 43,393 2.50 26.75 July 1988 None 8% 2003 75,000 75,000 3.60 31.10 Dec.1987 Dec.1987 60,000 60,000 9 2006 430 31.90 Nov.1988 Nov.1988 9K 2006 60,000 60,000 8% 2007 100,000 100,000 Preferred:

8% 2007 85,000 85,000

$4.52 $ 104.725 None None 4,000 $ 102.725 April 1952 9 2008 75,000 75,000 9 25 107.00 March 1987 March 1987 16,000 100.00 April 1982 10 4 2009 100,000 100,000 25,000 100.00 April 1983 12 % 2010 75,000 75,000 9.00 107.00 March 1988 March 1988 5,000 100.00 1 0 100,000 107.00 Dec.1989 Dec.1989 9.70 Jan.1986 ( 10 8.625 103.00 Dec.1987 None 72,000 100.00 Jan.1986 80,000 80,000 12 % 2013 4.50 110.00 None None F rst mongage 4.16 103.25 None None bonds $2,412,154 $2,522,344 7.45 101.00 None None 1.ess bonds 7.72 103.00 June 1987 None reacquired for May 1988 None sinking fund 9,416 6,750 7.76 105.31 7.68 103.00 Oct.1988 None $2,402,738 $2.515.594

_ Consumers Power Company and Subsidiaries I

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Additional 6rst mcngage bonds secure $25 of the bank related debt have not been Company used $37 million received from the l million of the Company's obligations under increased. At Dec. 31,1986, $289 million of disposal of slidland nuclear fuel to prepay I its installment sales contracts and $71 million the restructured debt had a 6xed interest rate obligations under the RCA.

I of the Company's obligations under the RCA. averaging 13.3%, and $536 milhon had The Company is considering restructuring l To satisfy the 1985 " maintenance Boating interest rates ranging from 6.7% to its present obligations under the RCA, which

• deficiency" incurred under the Company's 8%, with an average rate of 7.5% may result in different terms and conditions.

$ Indenture, the Company deposited $64 The restructured bank related debt is Other 0 million with the first mortgage bond trustee secured by a second mongage on assets in June 1983 the Company contracted to p (Trustee). The cash was used to partially subject to the lien of the Indenture; a second have the DOE dispose of nuclear fuel burned

[ redeem at par the 16% first mongage bonds. lien on the receivables and natural gas, coal prior to April 7,1983, and later agreed to k At Dec. 31,1986, the Company had a and oil inventories of the Company and Gas make a single lump sum payment to the DOE  :

j

" maintenance deficiency" of $56 million, Storage; and the pledge of $71 million of 6rst for such disposal before delivering the fuel to

which will be used to panially redeem at par mortgage bonds of the Company and the it. Delivery is expected to begin no earlier

! in 1987 the 124% 6rst mongage bonds due in outstanding shares of common stock of than 1998 and the payment will be equal to 2013, using the same procedure. The N051ECO. All restructured debt that was the original liability of $44.3 million plus s

! Company has also announced that it plans to previously secured continues to be secured by accrued interest from April 7,1983,

~~

e redeem at par approximately $26 million of the same property.

- compounded quanerly thereafter at the .

~

the 15% Grst mongage bonds due in 1991. The RCA and the RCAFA contain terms and prevailing 13 week Treasury Bill rates. At Under its Indenture, the Company has conditions that require the Company to Dec. 31,1986, the Company's liability was certain sinking fund obligations, including an maintain sufficient cash Bow to meet all cash $60 million and the founh quaner's prevailing

_ obligation to deposit with the Trustee by requirements and that limit the incurrence of rate was 5.34%  :

Oct. I of each year through 1988 cash and/or new debt, the payment of cash dividends, the At Dec. 31,1986, N051ECO owed I11.3

~

(

bonds equal to 1 pacent of the total principal sale or disposal of assets and the making of million 2:8% interest under a $50 million ._

amount of all 6rst mongage bonds investments. Both the RCA and the RCAFA loan agreement with several banks secured by authenticated before the precedingJan.1, include, among other default provisions, a cenain domestic oil and gas propenies. The F except refunding series. In 1989 the amount provision whereby the lender could require maximum amount available under the g of the obligation changes to an amount equal immediate payment of the restructured debt, agreement ($29.5 million at Dec. 31,1986) ..

to 1 percent of the principal amount of all first interest and other amounts payable, if certain varies based upon oil and gas reserves and g -

mongage bonds outstanding on the events occur which,in the reasonable opinion prices. On June 30,1987, the revolving credit precedingJan. I that have such a of the " majority banks," would likely (1) loans conven to term loans that are payable in requirement. In addition, a $600,000 sinking cause the revenues available to the Company 36 monthly installments through June 30, 4

g fund deposit is due for the 4% sinking fund to be insu0icient to assure its ongoing 1990. I'nder the terms of the agreement, debentures by Sept.1 of each year. Gnancial viability, (2) result in the Company yearly cash dividend payments to the The Company has received authority from being unable to repay borrowings when due, Company are restricted to the greater of 60 the 51PSC to issue in 1987 and 1988 not more or (3) result in the Company being unable to percent of net profits for the four preceding than f 500 million of long term debt to be perform, or the banks being unable to quarters or $10 million (limited to 100 used to redeem other higher cost securities of enforce, any loan document. The RCA also percent of net profits). Net profits, as defired

}

j '

the Company- requires prepayments from the net proceeds in the agreement, are not reduced by Restructured Debt of the sale of certain assets and the issuance of expenses for the 6rst quarter 1986 write-Under the RCA, which became effective in certain debt. Through December 1986, the downs of Australian oil and gas interests, or by i August 1985, the Company restructured its non cash prediscovery foreign expenditures.

t bank related debt of approximately $1.2 for 1986 the Company received $6.2 million j billion for repayment over a period of six from 5051ECO as cash dividends. This was j years. Quanerly principal payments under the the maximum amount permitted by the net =

j RCA range from $38 million to $47 million profits restriction of the agreement.

and are scheduled through July 1991. I'nder p;

the RCA, the interest rate options and margins t

5 r u b

=

28 i

~

[ ~^ .

g_,,,

= .

1 Five-Year Maturities and Annual Sinking Fund Requirements of Long-term Debt Certain of tne Company's capital lease and Redeemable Preference and Preferred Stock, including Mandatory obligations have been accounted for as Redemptions operating leases. If these leases had been December 31,1986 capitalized, the efect on expense would not Thousands ofDollars Sinking be material. Additional leased assets (net of Pestructured Other Preference Preferred Maturities Fund Stock Stock Total accumulated amortization) that would have Bank Debt been recorded at Dec. 31,1986 and 1985, 1987 $156,231 8 75,576 $30,940 $14,450 $12,211 $289,408 were $40.2 million and $49.2 million, 1988 168,524 67,570 30,940 14,450 12,211 293,695 respectively. The related long term liabilities 1989 173,758 156,638 35,520 10,850 12,211 388,977 recorded would have been $32.9 million and 1990 188,000 40,874 35,520 10,850 12,211 287,455

$40.2 million, respectively, and the related 1991 138.224 84,713 25.520 10,850 5.011 264.318 current obligations would have been $7.3 In 198619.4 million of 6rst mortgage bonds and 8.6 million of debentures were purchased to million and $9.0 million, respectively. As partially satisfy 1987 requirements. required by an accounting standard, in

6. Capital and Operating Leases The Company charges lease payments for January 1987 the Company recognized these obligations under capital or operating leases leases as capitalleases.

The Companies have various leasing arrangements for a nuclear training center, 'to operating expense. Operating lease 7. Rate Matters vehicles, construction equipment, computer payments, net of sublease rentals and The Company's electric rate case requesting equipment, buildings and other assets. including charges to clearing and other recovery of its investment in the abandoned The Company leases two ofits general of6ce accounts, were $33 million,167 million and portion of the Midland plant, pending before buildings. The initial terms of the leases $54 million for the years ended Dec. 31,1986, the MPSC, was separated into two phases in expire in 2003; there are two Sve year renewal 1985 and 1984, respectively, of which $24 September 1984: a fmancial stabilization options subject to escalation clauses and a million in 1985 and $5 million in 1984 were phase and a prudency phase. On Aug. 24, third five year renewal option at the then fair contingent upon usage. 1985, fmancial stabilization rate relief in the market rental value. At the expiration of the Capital lease payments for the years ended annual amount of $94 million for a period of basic or any renewal term, the Company has Dec. 31 consist of the following: six years became effective, subject to certain the option to purchase the buildings at their HousandsofDollars conditions that the Company must continue then fair market value. The annual rentals are 1986 1985 to meet. As contemplated by the orders subjec to quadrennial escalation and $ 9,745 $ 6,642 authorizing fmancial stabilization rate relief, Amortization expense currently approximate $3 million. The Interest expense 5,926 18,682 in March 1986 ine MPSC reduced the fmancial Company is required to pay taxes, stabilization rate relief to 191 million to maintenance, insurance and other operating Total capitallease re8ect the receipt of net proceeds from the expense $15,671 $25,324 costs. disposition of Midland nuclear fuel. The Mmimum rental commitments under non. Company must apply to the M PSC for approval cancelable leases at Dec. 31,1986, are: P operties under capital leases at Dec. 31 as to the appropriate disposition of other net are: proceeds from the sale or salvage of the HousandsofDollars Housands ofDollars Midland plant and from litigation related to its Capital Operating Leases 1986 1985 construction.

Leases in October 1986 the MPSC found tha, the Gross assets 198' $15 776 $ 26 06) Company had complied during 1985 with the Electric utility $23,576 $20,315 1988 14 056 c nditions of the fmancial stabilization rate 1989 $'O 8 879 Gas utility 12,651 11,561 rders. Future hearmgs will be held on the 30,393 1990 8[560 6 943 17[749 186 Other 17,136 annual compliance reports that the Company 1991 4,828 16,405 Total gross assets $66,620 $49,012 must continue to file. If the MP5C determines 1992 and thereafter 8,499 103.233 Less: Accumula:ed that the Company has failed to remain in amortization Total minimum lease compliance with the Snancial stabilization

$58,662 $202,514 Electric utility 7,037 3,945 rate orders, then by the terms of the MPSC payments Gas utility 2,456 1,461 orders the rate increase would terminate. In ther 14,449 6444 that event, the effect on the Company's re e n interest 15,984

$42,678 $36.962 Net assets fmancial condition would be materially Present value of net adverse. At Dec. 31,1986, fmancial minimum lease stabilization rate relief of $124 million was payments $12,6'8 resened until 6nal Midland rate relief is Less: Current portion 10,751 determined in the prudency phase.

Noncurrent portion $31.927 29

Consumers Power Company and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ilearings began in September 1986 in the calls for hearings to determine the impact of Other information on the Plan follows:

prudency phase of the pending electric rate the TRA on all Michigan utilities, including Number Price Range _"

case addressing Midland. In that phase, the the Company. of Shares per Share Company now requests partial and immediate For 15 years, the attorney general has Outstanding at rate relief in the additional annual amount of appealed vinually every MPSC rate order afecting the Company. More recently, other 1986 W5

$85.9 million and fmal rate relief in the additional annual amount of $94.1 million. intervening parties have also appealed such Granted M[000$8.50- $16.00 378 000 Exercised (21.034) $7.125-18.50 l The reque>ted rate relief reflects a recovery rate orders. Consequently, many appeals of over 15 years of its $2.1 billion abandoned MPSC orders are pending in the Ingham outstanding at Midland investment, together with a return County Circuit Court, the Michigan Court of Dec. 31,1986 553.966 during the amonization period at the Appeals and the Michigan Supreme Court.

9. Retirement Benefits weighted cost rate for debt and preferred and These include litigation involving, among The Companies provide certain health care preference stock with no return on the other things: the Snancial stabilization rate and life insurance benefits for their retired common equity ponion. The total rate relief orders; alleged overcollections under the fuel employees. These benefits are provided of ects an increase of 10.4 percent above cost adjustment clause m the Company's through insurance companies whose emnng electric rates. tarifs until 1982; replacement power costs premiums are based on bene 6ts paid. The The Michigan attorney general is attempting attributable to Palisades nuclear plant outages Companies recognMe the costs of these to appeal the administrative law judge's extending beyond 90 days; alleged imprudent benefits by expensing the premiums as paid.

denial of a motion to dismiss the proceedings, operation and unlawful pass through in 1978 The amounts expensed for 1986,1985 and on the grounds that recovery of any and 1979 of costs of Marysville gas reforming 198 were $7.9 million, $8.4 million and $8.8 .

'=

investment in a project that has never been plant feedstock and operating costs; the milliongaidy used and usefulis precluded by law.

In August 1986 the MPSC approved a gas September 1983 and August 1934 orders authorizing the Company to increase its gas The Companies hbe a trusteed non-contributory de6ned benefit pension plan f

D-rate settlement agreement entered into by the rates; the April 1982 and August 1984 orders (Pension Plan) covering substantially all Company and the MPSC staff that has lowered authorizing the Company to increase its employees. The Pension Plan provid'es the Company s natural gas rates. The electric rates; and the rate design aspect of benefits based on the employees' years of agreement was the result of discussions various orders. The Company is vigorously accredited service and earninr,s during the l arising from the MPSC sta8's concern that the pursuing these matters.

o s'6dighesyearsofearnings.The Company's natural gas distribution earnings Because of the present Midland related Company's funding policy has been to fund level was above that authonzed in the uncertainties, management cannot predict amounts' accrued for pension expense for the Company's last gas rate proceeding what effect the ultimate resolution of these '

year. In 1986 the Company changed its concluded in August 1984. During the 12- matters will have upon ine Company s l interest rate assumption to 8% for funding month period beginning Sept.1,1986, the fmancial position or results of operauons.

purposes. As a result of this change and Company s gas rates were decreased $16 8. Executive Stock Option and Stock favorable investment gromh, Pension Plan million. The attorney general has filed a Appreciation Rights Plan assets are sufficient to cover all accrued complaint with the MPSC seeking a reduction in April 1986 the Company's shareholders benefits for both active and retired employees.

m the Company's gas rates in the annual rpproved an Executive Stock Option and The Company is currently operating u nder the amount of $18 million in lieu of the $16 Stock Appreciation Rights Plan (Plan) for key full funding limitation of the Internal million reduction, and hearings are being management employees. Awards under the Revenue Code. Therefore, the Company did held on the attorney general s complaint-Plan are in the form of common stock options not make a contribution for plan year 1985 in October 1986 the attorney general filed with associated stock appreciation rights. The and does not plan to make a contribution for complaints uith the MPSC asking that orders Plan provides that up to 900,000 shares of the plan vear 1986.

be issued reducing the Company's gas and Company's conr.:on stock may be issued The Company also has a supplemental electric rates to redect the effect. commencing under the Plan over the period 1985-1995. Executive Retirement Plan (SERP) for certain Jan.1,1987, of the Ta; Peform Act of 1986 '

The exercise price on each grant date equals management emplovees. ilene6ts are based (TRA) on the Company s gas and electnc '

the market price on the date of grant. At Dec. on the employees' service and earnings as revenue requirements. The complaints allege 31,1986,58,253 shares of reacquired stock defmed in the SERP. The SERP is a non-that the efect will be to reduce the annual gas were reserved for the Plan. In January 1987 qualified plan under the Internal Revenue and electric revenue requirements by the Company purchased an additional 62.100 Code and has no advanced funding. Benefit approximately $27.2 million and $68 milh.on, '

shares of its common stock for the Plan. payments are made directly by the Company respectively. The complaints have not been to retired employees or their bene 6ciaries. At scheduled for hearing. In December 1986 the e , , eprojected benefit obligation MPSC issued an order on its own motion that was approximately i4 million.

30

During the third quarter of 1986, the 10. Income Tax Expense of that NOLwill be used to offset 1984 taxable Company adopted the new accountin8 The Companies 61e a consolidated federal income and will result in a refund of standard for employers' accounting for income tax return. For income tax purposes, approximately $250,000. The remaining NOL pensions for both plans, retroactive to Jan.1, the Companies use liberalized depreciation will be carried forward for up to 15 years and 1986, ahich had the impact of increasing net methods that include the class life asset will be recognized as it is used. The actual income by $.08 per average common share. depreciation range system and the accelerated 1985 tax net operating loss was carried 'oack to Applying the new accounting standard in the cost recovery system. offset 1984 tauble income and resulted in a third quaner required the restatement of the The Companies have a tax net operating loss refund of $3.3 million.

The non-operating income tax credits result

.g consolidated fmancial statements for the 6rst (NOL) carryforward for 1986 of approximately tw quaners of 1986. primarily fr m interest deductions relating to

$1 billion as a result of the attandonment of Net pension cost for 1986 includes the the Midland project, the 1985 write down of the unusable Midland investment. A portion following components (in thousands): the Midland investment, and the 1985 and 8 13,937 1984 write-downs of uranium assets.

Service cost Components of Income Tax Expense Interest cost 47,907 Thousands ofDollars Actual return on plan assets Net amortization and deferral (84,629) 26,067 Years Ended December 31 1986

$ 2,052 1985

$ (4,465) $ 3,045 1984 g Federalincome taxes (credit)

Net pension cost i 3.282 Deferred income taxes:

Current-Accrued revenues $(25,768) $ 39,149 $(25,711)

Certain assumptions used to calculate Speci i c mpensation (13,117) - -

pension components were:

Other, net (441) 3,286 (3,979)

Discount rate 7.5%

Rate of compensation increase 5.5%

$(39,326) $ 42,435 $(29,690)

Expected long term rate of return Non current-on assets 8.5% Accelerated depreciation, depletion and Pension expense for 1985 and 1984 was amortization-

$23.3 million and $35.8 million, respectively. Deferred in current year $ 40,062 $ 38,845 $ 43,094 In 1985 changes in actuarial assumptions Reversal of prior years' deferrals (22,694) (22,979) (15,532) reRecting an assumed increase in the rate of Net operating losses 5,180 (5,180) 55,709 investment return and a reduced work force Midland plant, net 212,705 (23,194) -

decreased net pension expense by $9.1 Midland nuclear fuel disposal 60 41,936 -

million. The 1986 pension expense re8ects Trite-down of uranium assets -

(17,615) (38,904) the assumptions and cost method required by Financial stabilization (43,559) (13,659) -

the new accounting standard. Unsuccessful exploration costs 8,729 10,672 4,299 Special compensation (1,637) (6,865) (997)

At Jan.1,1985, using a 7.5% assumed rate of Other, net (3,681) (22) (6,166) return, the actuarially computed present values of vested accumulated benefits were $195,165 $ 1,939 $ 41,503

$424 6 million and non vested accumulated Deferred investment tax credit, net $ (7,306) $(23,538) $ 14,356 benefus were $ 47.3 million.The plan assets at Totalincome tax expense $150,585 8 16,371 1 29.214 Jan.1,1985, were $595.8 million.

The funded status and amounts recognized Operating $244,994 $235,929 $105,847 in the Consolidated Balance Sheet at Dec. 31, Non operating (94,409) (219,558) (76,633) 1986, are (in thousands): Total income tax expense $150,585 $ 16.371 $ 29.214 Actuarial present value of benefit obligations:

Accumulated vested ( $ 18@n0) and non vested benefit obligations $ 542,000 Projected benefit obligation $ 673,035 Plan assets at fair value (primarily stocks and bonds including 428 million in common stock of the Compmy) 707,900 Plan assets greater than projected bene 6t obligation $ 34,865 IJnrecognized net loss resulting from current year experience different from that assumed 46,691 Remaining unrecognized net gain from applying the standard in 1986 (143,573)

Pension liability recognized in the Consolidated Balance Sheet $ (62.017) 31

Consumers Power Company and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Statutory Federal Incorne Tax Rate Reconciled to the Effective Income Tax Rates that it consider the claims in their prior 1986 1985 1984 complaint. In November 1986 the board of directors unanimously determined that the Statutory federalincome tax rate 46.0% (46.0)% 46.0%

1. * ' * " "

• the best interests of Increase (decrease) in taxes from:

AFUDC and other indirect, capitalized construction costs (.7) (1.3) (37.2)

1. "U"I' ' # '### '"

Capitalized overhtads previously dowed through Differences in book and tax depreciation and amonization, not 52.0 -

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5" previously deferred 1.5 3.7 1.8 Other, net (.9) (1.9) 1.1 dh Mw Ai%M Panhandle Eastern Corporation (Panhandle),

Effective income tax rates 45.9% 6.5% 11.7 % is the principal supplier of natural gas to the Company. The Company is the ultimate purcha,er of approximately one half of all gas investment tax credit (!TC) used to reduce Union Carbide. The Company has sold bv Trunkline, and Trunkline provides current income taxes payable is deferred and successfully asserted the alPSC order as a e thr directly or indirectly more than 60 amonized over the life of the related propeny, force majeure defense in the Union Carbide percent of the Company's requirements.

except that for cenain subsidiaries, ITC is a federal court suit. The Stichigan Supreme Trunkline had contracted to purchase all of reduction to income tax expense in the year Court has granted applications for leave t the gas of another Panhandle subsidiarv, in which it is used. At Dec. 31,1986, the total appeal the Coun of Appeals action filed by the Trunkline LNG Company, which had iri turn amount of unused ITC was $249 million, of Company and Union Carbide.

contracted to purchase from Sonatrach (the which $84 million relates to 51idland. Of A number of shareholders who purchased national oil and gas company of Algeria) the these amounts, under the provisions of the the Company's common, preference and liquefied natural gas (LNG) equivalent of 2.3 TRA, $232 million is subject to reductions of preferred stock during 1982 and 1983 have trillion cubic feet of natural ga over a 20 year 17.5 percent in each of the years 1987 and filed class action suits against the Company, perioct The re8ection in Trunkline's rates of 1988, if not used in 1987. The balance will cenain of the Company's directors and others the LNG costs, after the LNG began arriving in expire during 199t2001. who panicipated in public offerings of the December 1982, caused the Company's cost At Dec. 31,1986, the net amount of Company's stock and in connec' ion with the of gas to increase substantially, and the cumulative income tax timing differences for Company's Dividend Reinvestment and Company and others instituted proceedings which deferred income taxes have not been Common Stock Purchase Plan. Some of the kfore the FERC and the DOE asking that provided is $827 million. suits also name Bechtel Power Corporation Trunkline's license to import the LNG be

11. Litigation and Other ( Bechtel), t he Company's principal contractor revoked.

Contingencies for the Slidland project, as a defendant. The In December 1983 Trunkline LNG Company complaims allege, generally, that the in 1980 the Company entered into a long- suspended its purchases of the Algerian LNG.

Company anificially iaSved the market price term contract for residual fuel oil with Union As a consequence, Sonatrach and the LNG Carbide Corporation. A dispute arose between ofits publicly traded u my by transponers invoked arbitration proceedings withholdinginformat 4 4 7 disseminating the parties as to their respective obligations against Trunkline LNG for breach of contract.

misleadmg mformano, , urjing the inJuly 1986 Panhandle announced under the contract. In Juiv 1982 Union slidland pLmt and the Company's fmancial Carbide instituted suit in federal court and agreements to settle all claims pending in the condinon m registranon statements, claimed damages in an unspecified amount ubimion proceedings. The settlements pmspectuses and other documents and, m exceeding $162.5 million for breach of resulted in the recognition by Panhandle of a s me f the suits, that Bechtel aided and contract. In August 1982 Union Carbide net after tax charge to its earnings in the abetted the allegedly wrongful conduct of the notified the Company that it was canceling the second quaner of 1986 of $468 million.

Company. The Company believes that each of contract and resening its remedies for breach Trunkline has notified its customers that it the complaints against it is without ment and of the contract. In its answer to the complaint, believes $196 million of the settlement intends to wage a vigorous defense. Other amounts are subject to recoverv in future amongother things, the Company denied that shareholders filed derivative suits against the it is in breach of the contract. Rulings on Trunkline rates. It is the position of the Company and certain directors, alleging pretrial motions have reduced the issues to be Company and other Trunkiine customers in a generally that the directors breached their presented at trial and limited the damages pending Trunkline rate case before the FERC duties to the Company and its shareholders by Union Carbide is entitled to claim. In a that Trunkline should not be permitted to cenain acts of mismanagement invoking the separate but related action, the Stichigan pass on to them any awards resulting from the slidland project. In July 1986 these suits were Coun of Appeah has upheld a 1982 order of arbitranon proceedings.

dismiwed without prejudice due to plainatfs' the stPSC directing the Company to cease The Palisades nuclear plant has been out of fadure m first demand that the Company taking deliveries under the contract with sen ice for maintenance since stay 1986.

consider the claims. In August 1986 plaintiffs served a demand on the board of directors 32

The recovery of the replacement uncertainties, management cannot predict adverse ellect on the Company.

power costs attributable to this outage is what effect the ultimate resolution of these 12. Segments of Business expected to be challenged in a future 51PSC matters will have upon the Company's The Consolidated statement of Income case. The Company is unable to predict the fmancial position or results of operations. If shows Operating Revenue and Net Operating amount of costs that may be disallowed. substantial losses are incurred in connection incorae by segments. Cenain other segment in September 1985 the Company filed with with these matters, there could be a material information is as follows.

the 51Psc its application for approval of a Gas Cost Recovery ( GCR ) Plan and proposed GCR N"Sdd5 0M00d5 Years Ended December 31 1986 1985 1984 factors for 1986. As permitted by law, in the absence of an 51PSC order, the Company Depreciation, depletion and amortization billed its retail customers for its expected Electric utility $ 113,255 $ 111,147 $ 110,632 1986 gas costs. In January 198' the 51PSC Gas utility 54,335 54,760 54,435 issued an opinion and order on the Other 46,477 35,426 41,377 Company's GCR Plan for 1986. Despite having $ 214,067 $ 201.333 $ 206.444 approved some intrastate gas supply costs in Operating income taxesf a) other proceedings, in its opinion and order Electric utility $ 184,007 $ 161,322 8 55,299 the 51PSC has taken the position that the Gas utility 63,676 64,758 46,058 Company failed to demonstrate reasonable Other (2,689) 6,849 4,490 actions taken to renegotiate its intrastate supply contracts to obtain lower prices. The $ 244,994 $ 235.929 $ 105.847 Company expects to appeal the order and Identifuble assets believes that its 1986 gas costs were $2,979,471 $2,865,900 $2,845,099 Electric utilitt reasonably and prudently incurred and should Gas utility 1,146,805 1,030,002 1,102.259 he fully recoverable. It will also advance that Other(b) 4,504,467 4,718.692 5,270,886 position in the 1986 reconciliation, a

$8.630,743 $8.614.594 $9.218.244 proceeding in w hich actual costs (rather than projections) are reviewed for reasonableness. Construction expenditures llowever, if the Company does not prevailin 5!idland nuclear project $ -

$ 475,472 this matter, the Company's loss could be Electric uillity 99,228 98.276 114,860 substantial but currently is not determinable. Gas utihty 47,217 40,854 41,152 Plateau Resources Limited (Plateau), a Other 44,250 66,709 58,766 wholly owned subsidiar), was organized for $ 190,695 $ 205,839 $ 690,250 the acquisition, exploration and development less: AFL'DC-other - -

67.822 of propenie3 for the mining, milling and sale of uranium. In 1984 Plateau suspended

$ 190.695 $ 205.839 $ 622.428 operations because of the depressed market reincome taxes (and other corporate expenses) of the Company are alk)cated to segments in for uranium concentrates and the shutdown of act irdance with the accounting requirements of the 51PSC and the FERC.

the slidland project. As a result, Plateau's (b)lncludes $1' billion for 1986 and 1985 and $1.2 billion for 1981 for the Slidland project.

uranium assets were written down to $10 million. Ahhough uncenainty still exists, management belieses that th'e carrying value 13. Jointly Owned Utility Plants Operating expenses of the plants are shared The Company's ponions at Dec. 31,1986 by the Company and the co-owners in the of these assets does not materially exceed their net realizable value, and 1985 are: same ratio as the ownership interests.

Operating expemes on the Consolidated In addition to the maners disclosed in these Ludington Statement of income include the Company's notes, the Company is party to cenain lawsuits Pumped Campbell share of these expenses.

and administrative pmceedings arising in the Storage L' nit 3 ordinary course of business before various L.'ndivided couns and governmental agencies invohing.

ownership interest 51.n% 93.3 %

for example, claims for personal injury and Net nvestment m)h property damages. contractual mauers, 39g, g;3 g g g yggg environmental issues, income taxes. rates 1985 13'.3 6 458.6'6 (including the recos erv of replacement power Accumulated costs attributable to the Palisades outage in depreciation m00L 1984 ). licensing and other mauers. g9g, , y;ggg.

9-Because of the present Slidlind rel.ited g 9;fg9 3935 33

AnTuun ANDEnSEN & CO.

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS D m oir, m c -

To Consumers Power Company:

We have examined the consolidated balance from its electric retail customers and intends the Company's long term viability, including sheet and statement of capitalization of to seek recovery of the remaining abandoned the amount of rate relief associated with the CONSUMERS POTER COMPANY (a costs from its wholesale electric customers. abandoned components of the Company's Michigan corporation) and subsidiaries as of Also as discussed in Note 2, a recently Midland project and exposure to loss December 31,1986 and 1985, and the related released fmancial accounting standard will contingencies which could result in a consolidated statements of income, common require a write down in the carrying value of significant restriction on or elimination of the stockholders' equity and changes in fmancial the abandoned portion of the Midland project Company's ability to issue debt or to pay cash position for each of the three years in the when the standard becomes effective in 1988. dividends to its shareholders or a requirement period ended December 31,1986. Our if significant portions of the Midland to immediately repay the Company's examinations were made in accordance with investment are not recovered through the restructured debt. The accompanying generally accepted auditing standards and, ratemaking process, through the MCV or fmancial statements do not include any accordingly, included such tests of the otherwise, the adverse ef'ect on the adjustments relating to the recoverability of accounting records and such other auditing Company's 6nancial position and results of recorded asset amounts or the amounts and procedures as we considered necessary in the operations could be signi6 cant. classification of liabilities that might be circumstances. As discussed in Notes 7 and 11, the necessary should the Company be unable to At December 31,1986, the balance sheet Company is involved in numerous legal meet scheduled debt payments or continue includes an asset of approximately $3.7 proceedings before various courts and operating in the normal course.

billion relating to the Company's Midland governmental agencies, relating to contractual in our opinion, subject to the efect of such project. As discussed in Notes 2 and 7, disputes, shareholders' suits, rate issues, adjustments, if any, as might have been construction of the project was stopped in income taxes and other matters. Management required if the outcome of the uncertainties 19M. In April 1986, after studying its options, cannot predict what effect the ultimate discussed in the preceding paragraphs were the Company recommended that a ponion of resolution of these matters will have upon the known, the fmancial statements referred to the project be convened to a natural gas- Company's 6nancial position or results of above present fairly the fmancial position of fueled, combined cycle generating plant. In operations. If substantial losses are incurred Consumers Power Company and subsidiaries June 1986, the Company abandoned in connection with these matters, there could as of December 31,1986 and 1985, and the components of the Midland project that be a material adverse effect on the Company, results of their operations and changes in would be unusable in the gas conversion As discussed in Notes 2,5 and 7, during fmancial position for each of the three years in option. In January 1987, the Company and 1985 the Company was granted rate relief the period ended December 31,1986, in The Dow Chemical Company announced that under the fmancial stabilization phase of its conformity with generally accepted they had entered into an agreement to Midland rate case, and bank related debt of accounting principles which (except for the complete the natural gas fueled, combined approximately $1.2 billion was restructured change with which we concur, in accounting cycle generating plant as a cogeneration for repayment over six years. By continuing to for pension cost as discussed in Note 9) were facility. As part of the arrangements, the receive Gnancial stabilization rate relief and applied on a consistent basis.

Company will transfer $1.5 billion of Midland achieving forecasted results, the Company assets to the Midland Cogeneration Venture should have suflicient cash Bow to meet its short term fmancial needs. Ilowever, g g~jfa ~

[(

(MCV). The Company is seeking to recover

$2.1 billion ofits investment in the signi6 cant uncertainties still exist regarding February 4,1987 abandoned portion of the Midland project 34

\ _ -- _ -

Consumers Power Company and Subsidiaries SELECTED FINANCIAL INFORMATION Thousands ofDollars, Except Per Share Amounts 1986 1985 19M 1983 1982 Total operating revenue $3,108,414 $3,298,328 $3,235,570 $2,973,691 $2,731,081 Net income (loss) $177,844 $(269,772) $221,058 $347,764 $280,549 Net income (loss) after dividends on preferred and preference stock $65,052 $(389,548) $99,814 $248,140 $202,785 Earnings (loss) per average common share $.74 $(4.42) $1.14 $3.12 $3.16 Total assets $8,630,743 $8,614,594 $9.218,244 $8,487,709 $7,595,323 Long term debt, excluding current maturities $3,253,472 $3,576,745 $3,389,010 $3,275,406 $2,904,986 g Non current obligations under capital leases $31,927 $29,915 $297,395 $11,825 -

M Preferred and preference stock with mandatory redemption $299,175 $391,755 $405,840 $416,055 $420,555 Cash dividends paid per common share - -

$1.08 $2.46 $2A4 Book value per coinmon share $22.00 $21.50 $25.92 $26.M $26.87 QUARTERLY FINANCIAL AND COMMON STOCK INFORMATION Quarters Ended 1986(Unaudited) 1985(Unaudited)

March 31 June 30 Sept. 30 Dec. 31 March 31 June 30 Sept. 30 Dec. 31 Total operating revenue (000) 81,027,900 $612,166 $596,063 $872,285 $1,098,386 $635,737 $632,459 8 931,746 Total net operating income (000) $113,329 $101,794 $111,102 $121,945 $145,548 193,370 $111,137 $ 139,667 Net income (loss) (000) $64,212 $25,270 $37,223 $51,139 $63,679 $7,725 $22,929 $(364,105)

Net ncome (loss)afterdividendson preferred and preference stock (000) $34,560 f(4,290) $8,785 $25,997 $33,582 $(22,250) $(6,949) $(393,931)

Earnings (loss) per average common share $.39 $(.05) $.10 $.30 $.38 $(.25) $(.08) $(4.47)

Common stockprices(a) liigh $14 $14 $14% $17% $7 $8% $8% $8%

Inw $7% $11% $9% $12% $4% $6% $6K $6%

(a) Based on NYSE-Composite Transactions The common stock of the Company is listed on the New York and Midwest stock exchanges. The Company had approximately 130,000 common shareholders of record as of Dec. 31,1986.

Availability of Reports Stockholders may obtain without charge, and exclusive of exhibits, several reports prepared by the Company. These include:

the 1986 Form 10-K Annual Report filed with the Securities and Exchange Commission; a Financial and Statistical Supplement to the 1986 Annual Report covering 1976-1986, and a cassette recording of the 1986 Annual Report text for shareholders with impaired vision.

Please address all requests for these reports to Thomas A. McNish, Secretary, Consumers Power Company,212 West Michigan Avenue, Jackson, Mich. 49201.

35

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E Officers Northern Michigan General Offices

Charles F. Brown,61 Exploration 212 West Michigan Avenue 7

> Vice President, Customer Senices Company Officers Jackson, Mich.49201 E I and Marketing Richard J. Burgess,55 Telephone (517) 788 0550 M Frederick W. Buckman,40 President and Chief Executive @

"""4 1 Vice President, Nuclear Operations Oflicer k Russell B. DeWitt,63 R. John P. Doran,40 Stock Listing Consumers Power Company stock

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g Vice President, Energy Supply Vice President, Australia.

New Zealand is listedon the New York and 33 Senices Blake O. Fisher Jr.,43 Robert A.Dunn,40 Midwest stock exchanges under the symbol CMS.

g g Vice President, Finance Vice President, Exploration VictorJ. Fryling,39 Paul E. Geiger,44 h Vice President, Secretary and -?

Vice President, Planning and f Transfer Agent f I Investor Relations Treasurer Richard M. Griswold,55 William T. McCormick Jr.,42 Chairman of the Board

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Vice President and Treasurer Consumers Power Company Gordon L lleins,57 William II. Stephens III,37 Vice President, Land and Irgal 212 West Michigan Avenue 5 M

j Vice President, Fossil and flydro Jackson, Mich.49201 Gordon I Wright,44 "*41 i Operations M!

) Raynard C. Lincoln Jr.,52 Vice President, Distribution Vice President, Operations Registrar '<

Operations Common, Preference and l-:

i Thomas A.McNish,49 Michigan Gas Preferred Stock _ _

Secretary Storage Company Comerica Bank-Jackson, N.A. -q David A.Mikelonis,38 Officers 245 West Michigan Avenue -j 1

Vice President and General Richard M. Griswold,55 - Jackson, Mich. 49201 g i Attorney Treasurer and Assistant Secretary 9 i Robert J. Odlevak,53 William T. McCormick Jr.,42 Trustees ggg Vice President, Gas Chairman of the Board

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nt rigage Bonds Transmission / Fuel Supply Thomas A.McNish,49 f Ilamilton M. Robichaud,50 Secretary and Assistant Treasurer g

,"' "*" **' *** Y J Vice President,liuman Resources Robert J. Odlevak,53 600 Fifth Avenue M I[ II.B.W. Schroeder,39 Vice President New York, N.Y.10020 -5

- Vice President, Governmental O. K. Petersen, 58 Staking Fund Debentures N Affairs General Counsel Uiiited States Trust Company of E n;

Samuel N. Spring,59 Jack W. Reynolds,64 New York  %

Vice President and Controller President 45 Tall Street j Roy A. Wells,51 Samuel N. Spring,59 New York, N.Y.10005

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? National Bank of Detroit I PO Box 1774 3 Detroit. Mich. 48232 M

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Bulk Rate C00 Sum 2IS U.S. Postage POWtr Pals powrmNs Ceasemers MKNNANs pnosatss Power Compsey Consumers Power Company,212 West Michigan Avenue, Jackson, Michigan 49201

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Consumers Power T A McNish MMg Secretary AIENIEAN5 MESSEE55 General Offices: 212 West Michigan Avenue, Jackson, MI 49201 (517) 788-1030 March 12, 1987 Dockets No. 50-155, 50-255 50-329, 50-330 Nuclear Regulatory Commission Att: Mr. Harold R. Denton Director of the Office of Nuclear Reactor Regulation Washington, DC 20555 1986 ANNUAL REPORTS Gentlemen:

In conformity with the requirements of Paragraph 50.71(b) of 10 CFR Part 50, enclosed are 10 copies of the Consumers Power Company 1986 annual financial report.

S erely,

,d- 7 Thomas A. McNish l TAM /mf i

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go0 OC0386-0009A-EX03

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