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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission Registrant; State of Incorporation; IRS Employer
File Number Address; and Telephone Number Identification No.
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1-9513 CMS ENERGY CORPORATION 38-2726431
(A Michigan Corporation)
Fairlane Plaza South, Suite 1100
330 Town Center Drive, Dearborn, Michigan 48126
(313)436-9200
1-5611 CONSUMERS ENERGY COMPANY 38-0442310
(A Michigan Corporation)
212 West Michigan Avenue, Jackson, Michigan 49201
(517)788-0550
1-2921 PANHANDLE EASTERN PIPE LINE COMPANY 44-0382470
(A Delaware Corporation)
5444 Westheimer Road, P.O. Box 4967, Houston, Texas 77210-4967
(713)989-7000
Indicate by check mark whether the Registrants (1) have filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrants were required to file such reports), and (2) have been subject to
such filing requirements for the past 90 days. Yes X No
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Panhandle Eastern Pipe Line Company meets the conditions set forth in General
Instructions H(1)(a) and (b) of Form 10-Q and is therefore filing this Form 10-Q
with the reduced disclosure format. In accordance with Instruction H, Part I,
Item 2 has been reduced and Part II, Items 2, 3 and 4 have been omitted.
Number of shares outstanding of each of the issuer's classes of common stock at
April 30, 2001:
CMS ENERGY CORPORATION:
CMS Energy Common Stock, $.01 par value 131,989,846
CMS Energy Class G Common Stock, no par value 0
CONSUMERS ENERGY COMPANY, $10 par value, privately held by CMS Energy 84,108,789
PANHANDLE EASTERN PIPE LINE COMPANY, no par value,
indirectly privately held by CMS Energy 1,000
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CMS ENERGY CORPORATION
AND
CONSUMERS ENERGY COMPANY
AND
PANHANDLE EASTERN PIPE LINE COMPANY
QUARTERLY REPORTS ON FORM 10-Q TO THE SECURITIES AND EXCHANGE COMMISSION
FOR THE QUARTER ENDED MARCH 31, 2001
This combined Form 10-Q is separately filed by each of CMS Energy Corporation,
Consumers Energy Company and Panhandle Eastern Pipe Line Company. Information
contained herein relating to each individual registrant is filed by such
registrant on its own behalf. Accordingly, except for their respective
subsidiaries, Consumers Energy Company and Panhandle Eastern Pipe Line Company
make no representation as to information relating to any other companies
affiliated with CMS Energy Corporation.
TABLE OF CONTENTS
Page
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Glossary.................................................................................................. 3
PART I:
CMS Energy Corporation
Management's Discussion and Analysis................................................................. CMS-1
Consolidated Statements of Income.................................................................... CMS-13
Consolidated Statements of Cash Flows................................................................ CMS-14
Consolidated Balance Sheets.......................................................................... CMS-16
Consolidated Statements of Common Stockholders' Equity............................................... CMS-18
Condensed Notes to Consolidated Financial Statements................................................. CMS-19
Report of Independent Public Accountants............................................................. CMS-38
Consumers Energy Company
Management's Discussion and Analysis................................................................. CE-1
Consolidated Statements of Income.................................................................... CE-10
Consolidated Statements of Cash Flows................................................................ CE-11
Consolidated Balance Sheets.......................................................................... CE-12
Consolidated Statements of Common Stockholder's Equity............................................... CE-14
Condensed Notes to Consolidated Financial Statements................................................. CE-15
Report of Independent Public Accountants............................................................. CE-27
Panhandle Eastern Pipe Line Company
Management's Discussion and Analysis................................................................. PE-1
Consolidated Statements of Income.................................................................... PE-4
Consolidated Statements of Cash Flows................................................................ PE-5
Consolidated Balance Sheets.......................................................................... PE-6
Consolidated Statements of Common Stockholder's Equity............................................... PE-8
Condensed Notes to Consolidated Financial Statements................................................. PE-9
Report of Independent Public Accountants............................................................. PE-13
Quantitative and Qualitative Disclosures about Market Risk................................................ CO-1
PART II:
Item 1. Legal Proceedings............................................................................ CO-1
Item 6. Exhibits and Reports on Form 8-K............................................................. CO-1
Signatures................................................................................................ CO-3
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GLOSSARY
Certain terms used in the text and financial statements are defined below.
ABATE.................................... Association of Businesses Advocating Tariff Equity
ALJ...................................... Administrative Law Judge
APB...................................... Accounting Principles Board
Alliance................................. Alliance Regional Transmission Organization
Anadarko................................. Anadarko Petroleum Corporation, a non-affiliated company
Articles................................. Articles of Incorporation
Attorney General......................... Michigan Attorney General
bcf...................................... Billion cubic feet
Big Rock................................. Big Rock Point nuclear power plant, owned by Consumers
Board of Directors....................... Board of Directors of CMS Energy
Btu...................................... British thermal unit
Clean Air Act............................ Federal Clean Air Act, as amended
CMS Capital.............................. CMS Capital Corporation, a subsidiary of Enterprises
CMS Electric and Gas..................... CMS Electric and Gas Company, a subsidiary of Enterprises
CMS Energy............................... CMS Energy Corporation, the parent of Consumers and Enterprises
CMS Energy Common Stock.................. Common stock of CMS Energy, par value $.01 per share
CMS Gas Transmission..................... CMS Gas Transmission Company, a subsidiary of Enterprises
CMS Generation........................... CMS Generation Company, a subsidiary of Enterprises
CMS Holdings............................. CMS Midland Holdings Company, a subsidiary of Consumers
CMS Midland.............................. CMS Midland Inc., a subsidiary of Consumers
CMS MST.................................. CMS Marketing, Services and Trading Company, a subsidiary of Enterprises
CMS Oil and Gas ......................... CMS Oil and Gas Company, a subsidiary of Enterprises
CMS Panhandle Holding ................... CMS Panhandle Holding Company, a subsidiary of CMS Gas Transmission
Common Stock............................. All classes of Common Stock of CMS Energy and each of its subsidiaries, or any of them
individually, at the time of an award or grant under the Performance Incentive Stock Plan
Consumers................................ Consumers Energy Company, a subsidiary of CMS Energy
Consumers Gas Group...................... The gas distribution, storage and transportation businesses currently conducted by
Consumers and Michigan Gas Storage
Court of Appeals......................... Michigan Court of Appeals
Customer Choice Act...................... Customer Choice and Electricity Reliability Act, a Michigan statute enacted in June 2000
that allows all retail customers choice of alternative electric suppliers no later than
January 1, 2002, provides for full recovery of net stranded costs and implementation
costs, establishes a five percent reduction in residential rates, establishes rate
freeze and rate cap, and allows for Securitization
Detroit Edison........................... The Detroit Edison Company, a non-affiliated company
DOE...................................... U.S. Department of Energy
Dow...................................... The Dow Chemical Company, a non-affiliated company
Duke Energy.............................. Duke Energy Corporation, a non-affiliated company
EITF..................................... Emerging Issues Task Force
Enterprises.............................. CMS Enterprises Company, a subsidiary of CMS Energy
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EPA...................................... U.S. Environmental Protection Agency
EPS...................................... Earnings per share
FASB..................................... Financial Accounting Standards Board
FERC..................................... Federal Energy Regulatory Commission
FMLP..................................... First Midland Limited Partnership, a partnership which holds a lessor interest in the
MCV facility
FTC...................................... Federal Trade Commission
GCR...................................... Gas cost recovery
GTNs..................................... CMS Energy General Term Notes(R), $250 million Series A, $125 million Series B, $150
million Series C, $200 million Series D, $400 million Series E and $72 million Series F
INGAA.................................... Interstate Natural Gas Association of America
Jorf Lasfar.............................. The 1,356 MW coal-fueled power plant in Morocco, jointly owned by CMS Generation and ABB
Energy Venture, Inc.
kWh...................................... Kilowatt-hour
Loy Yang................................. The 2,000 MW brown coal fueled Loy Yang A power plant and an associated coal mine in
Victoria, Australia, in which CMS Generation holds a 50 percent ownership interest
LNG...................................... Liquefied natural gas
Ludington................................ Ludington pumped storage plant, jointly owned by Consumers and Detroit Edison
mcf...................................... Thousand cubic feet
MCV Facility............................. A natural gas-fueled, combined-cycle cogeneration facility operated by the MCV
Partnership
MCV Partnership.......................... Midland Cogeneration Venture Limited Partnership in which Consumers has a 49 percent
interest through CMS Midland
MD&A..................................... Management's Discussion and Analysis
MEPCC.................................... Michigan Electric Power Coordination Center
Michigan Gas Storage..................... Michigan Gas Storage Company, a subsidiary of Consumers
Michigan Transco......................... Michigan Electric Transmission Company, a subsidiary of Consumers Energy
MMBtu.................................... Million British thermal unit
MPSC..................................... Michigan Public Service Commission
MW....................................... Megawatts
NEIL..................................... Nuclear Electric Insurance Limited, an industry mutual insurance company owned by member
utility companies
NMC...................................... Nuclear Management Company, a Wisconsin company, formed in 1999 by Northern States Power
Company (now Xcel Energy Inc.), Alliant Energy, Wisconsin Electric Power Company, and
Wisconsin Public Service Company to operate and manage nuclear capacity owned by the
four utilities.
NOx...................................... Nitrogen Oxide
NRC...................................... Nuclear Regulatory Commission
NYMEX.................................... New York Mercantile Exchange
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Palisades................................ Palisades nuclear power plant, owned by Consumers
Pan Gas Storage.......................... Pan Gas Storage Company, a subsidiary of Panhandle Eastern Pipe Line Company
Panhandle................................ Panhandle Eastern Pipe Line Company, including its subsidiaries Trunkline, Pan Gas
Storage, Panhandle Storage, and Trunkline LNG. Panhandle is a wholly owned subsidiary
of CMS Gas Transmission
Panhandle Eastern Pipe Line.............. Panhandle Eastern Pipe Line Company, a wholly owned subsidiary of CMS Gas Transmission
Panhandle Storage........................ CMS Panhandle Storage Company, a subsidiary of Panhandle Eastern Pipe Line Company
PCBs..................................... Poly chlorinated biphenyls
PPA...................................... The Power Purchase Agreement between Consumers and the MCV Partnership with a 35-year
term commencing in March 1990
PSCR..................................... Power supply cost recovery
PUHCA.................................... Public Utility Holding Company Act of 1935
RTO...................................... Regional Transmission Organization
SAB...................................... Staff Accounting Bulletin
Sea Robin................................ Sea Robin Pipeline Company
SEC...................................... U.S. Securities and Exchange Commission
Securitization........................... A financing authorized by statute in which a MPSC approved flow of revenues from a
portion of the rates charged by a utility to its customers is set aside and pledged as
security for the repayment of Securitization bonds issued by a special purpose entity
affiliated with such utility.
Senior Credit Facility................... $1 billion one-year revolving credit facility maturing in June 2001
SFAS..................................... Statement of Financial Accounting Standards
SIPS..................................... State Implementation Plans
SOP...................................... Statement of Position
Stranded Costs........................... Costs incurred by utilities in order to serve their customers in a regulated monopoly
environment, but which may not be recoverable in a competitive environment because of
customers leaving their systems and ceasing to pay for their costs. These costs could
include owned and purchased generation and regulatory assets.
Superfund................................ Comprehensive Environmental Response, Compensation and Liability Act
TBtu..................................... Trillion british thermal unit
Transition Costs......................... Stranded Costs, as defined, plus the costs incurred in the transition to competition.
Trunkline................................ Trunkline Gas Company, a subsidiary of Panhandle Eastern Pipe Line Company
Trunkline LNG............................ Trunkline LNG Company, a subsidiary of Panhandle Eastern Pipe Line Company
Trust Preferred Securities............... Securities representing an undivided beneficial interest in the assets of statutory
business trusts, which interests have a preference with respect to certain trust
distributions over the interests of either CMS Energy or Consumers, as applicable, as
owner of the common beneficial interests of the trusts
Union.................................... Utility Workers of America, AFL-CIO
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CMS ENERGY CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
CMS Energy is the parent holding company of Consumers and Enterprises. Consumers
is a combination electric and gas utility company serving the Lower Peninsula of
Michigan. Enterprises, through subsidiaries, including Panhandle and its
subsidiaries, is engaged in several domestic and international diversified
energy businesses including: natural gas transmission, storage and processing;
independent power production; oil and gas exploration and production; energy
marketing, services and trading; and international energy distribution.
The MD&A of this Form 10-Q should be read along with the MD&A and other parts of
CMS Energy's 2000 Form 10-K. This MD&A refers to, and in some sections
specifically incorporates by reference, CMS Energy's Condensed Notes to
Consolidated Financial Statements and should be read in conjunction with such
Consolidated Financial Statements and Notes. This report and other written and
oral statements that CMS Energy may make contain forward-looking statements as
defined by the Private Securities Litigation Reform Act of 1995. CMS Energy's
intentions with the use of the words "anticipates," "believes," "estimates,"
"expects," "intends," and "plans," and variations of such words and similar
expressions, are solely to identify forward-looking statements that involve risk
and uncertainty. These forward-looking statements are subject to various factors
that could cause CMS Energy's actual results to differ materially from the
results anticipated in such statements. CMS Energy has no obligation to update
or revise forward-looking statements regardless of whether new information,
future events or any other factors affect the information contained in such
statements. CMS Energy does, however, discuss certain risk factors,
uncertainties and assumptions in this MD&A and in Item 1 of the 2000 Form 10-K
in the section entitled "Forward-Looking Statements Cautionary Factors and
Uncertainties" and in various public filings it periodically makes with the SEC.
CMS Energy designed this discussion of potential risks and uncertainties, which
is by no means comprehensive, to highlight important factors that may impact CMS
Energy's outlook. This report also describes material contingencies in CMS
Energy's Condensed Notes to Consolidated Financial Statements, and CMS Energy
encourages its readers to review these Notes.
RESULTS OF OPERATIONS
CMS ENERGY CONSOLIDATED EARNINGS
In Millions, Except Per Share Amounts
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Three months ended March 31, 2001 2000(a) Change
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Consolidated Net Income $ 109 $ 75 $ 34
Earnings Per Average Common Share:
Basic .87 .66 .21
Diluted .85 .65 .20
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(a) Includes the cumulative effect of an accounting change for crude oil
inventories, which decreased net income by $5 million, or $.04 per basic and
diluted share.
For the three months ended March 31, 2001, the increase in consolidated net
income as compared to the same period in 2000 resulted from increased earnings
from CMS Energy's utility and diversified energy businesses.
For further information, see the individual results of operations for each CMS
Energy business segment in this MD&A.
CMS-1
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CONSUMERS' ELECTRIC UTILITY RESULTS OF OPERATIONS
ELECTRIC PRETAX OPERATING INCOME: For the three months ended March 31, 2001,
electric utility pretax operating income increased $20 million from the
comparable period in 2000. The earnings increase primarily reflects reduced
power costs in part from increased internal generation that reduced the need for
higher cost purchased power and increased sales to the company's higher-margin
customers. Partially offsetting the increased operating income benefit was
higher operations and maintenance costs. The following table quantifies these
impacts on pretax operating income:
In Millions
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Three Months
Ended March 31
Change Compared to Prior Year 2001 vs 2000
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Electric deliveries $ 3
Power supply costs and related revenue 3
Intersystem sales 26
Rate decrease (13)
Non-commodity revenue 5
Operation and maintenance expense (26)
General taxes and depreciation expense 22
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Total change $ 20
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ELECTRIC DELIVERIES: For the three months ended March 31, 2001, electric
deliveries were 10.0 billion kWh, an increase of 0.3 billion kWh or 3.1 percent
compared to the first quarter of 2000. Total electric deliveries increased to
residential and commercial customers and intersystem sales, partially offset by
reduced industrial usage reflecting the economic slowdown impacting the
automotive business.
POWER SUPPLY COSTS:
In Millions
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March 31 2001 2000 Change
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Three months ended $ 301 $ 301 $ -
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For the three months ended March 31, 2001, power supply costs remained unchanged
compared to the first quarter of 2000. Increased internal generation reduced the
need for higher cost purchased power.
CONSUMERS' GAS UTILITY RESULTS OF OPERATIONS
GAS PRETAX OPERATING INCOME: For the three months ended March 31, 2001, gas
pretax operating income increased $1 million from the comparable period in 2000.
The earnings increase primarily reflects increased revenue from higher
deliveries to residential and commercial customers due to colder temperatures in
2001. See Note 2, Uncertainties, for more detailed information on this matter.
The following table quantifies these impacts on Pretax Operating Income.
CMS-2
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In Millions
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Three Months
Ended March 31
Change Compared to Prior Year 2001 vs 2000
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Gas deliveries $ 10
Gas commodity costs and related revenue (3)
Gas wholesale and retail services 3
Operation and maintenance expense (5)
General taxes and depreciation expense (4)
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Total change $ 1
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GAS DELIVERIES: For the three months ended March 31, 2001, gas system deliveries
to ultimate customers were 114 bcf, an increase of 9 bcf compared to the first
quarter of 2000. Total deliveries including miscellaneous transportation,
totaled 160 bcf, a decrease of 1 bcf or 1 percent compared to the first quarter
of 2000.
COST OF GAS SOLD:
In Millions
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March 31 2001 2000 Change
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Three months ended $ 349 $ 295 $ 54
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For the three months ended March 31, 2001, the cost of gas sold increased by $54
million from the comparable period in 2000 due to higher gas prices and
increased gas sales to our ultimate customers due to colder temperatures during
the first quarter of 2001 compared to the first quarter of 2000.
NATURAL GAS TRANSMISSION RESULTS OF OPERATIONS
PRETAX OPERATING INCOME: For the three months ended March 31, 2001, pretax
operating income increased $15 million (19 percent) from the comparable period
in 2000. The increase reflects earnings associated with a 200 percent increase
in LNG shipments compared to 2000 (15 shipments compared to 5 shipments).
Additional increases resulted from domestic gas gathering and processing
operations due to higher natural gas liquid prices. These increases were
partially offset by higher operating expenses and lower transportation revenues.
INDEPENDENT POWER PRODUCTION RESULTS OF OPERATIONS
PRETAX OPERATING INCOME: For the three months ended March 31, 2001, pretax
operating income increased $7 million (41 percent) from the comparable period in
2000. The increase reflects the earnings benefits from the expansion of the Jorf
Lasfar facility, the operation of additional units at the Takoradi facility in
Africa, increased earnings from the MCV Facility, and the absence of operating
losses in 2001 from the investment in Loy Yang, which was written off in the
fourth quarter of 2000. These increases were partially offset by decreased
earnings from domestic plants due to the sale of a cogeneration plant and a
hydro plant in 2000, and construction delays at the Dearborn Industrial
Generation plant which led to increased costs for steam generation.
OIL AND GAS EXPLORATION AND PRODUCTION RESULTS OF OPERATIONS
PRETAX OPERATING INCOME: For the three months ended March 31, 2001, pretax
operating income increased $9 million (225 percent) from the comparable period
in 2000. The increase reflects higher realized commodity prices and lower
operating expenses due to the sales in 2000 of gas and oil producing properties
in Michigan
CMS-3
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and Ecuador. This increase was partially offset by increased general and
administrative and exploration expenses and reduced production due to the sale
of the Michigan and Ecuador properties.
MARKETING, SERVICES AND TRADING RESULTS OF OPERATIONS
PRETAX OPERATING INCOME: For the three months ended March 31, 2001, pretax
operating income increased $4 million (133 percent) from the comparable period
in 2000. The increase reflects additional earnings from wholesale gas trading
and increased LNG sales. The physical volumes of marketed and managed natural
gas and power traded increased 17 percent and 1,383 percent, respectively, due
largely to significantly increased lower-margin energy marketing and trading
transactions.
INTERNATIONAL ENERGY DISTRIBUTION RESULTS OF OPERATIONS
PRETAX OPERATING INCOME: For the three months ended March 31, 2001, pretax
operating income decreased $4 million (67 percent) from the comparable period in
2000. The decrease primarily reflects the reduced ownership interest in an
Argentine electric distribution utility.
MARKET RISK INFORMATION
CMS Energy is exposed to market risks including, but not limited to, changes in
interest rates, currency exchange rates, and certain commodity and equity
security prices. CMS Energy's derivative activities are subject to the direction
of the Executive Oversight Committee, consisting of certain members of CMS
Energy's senior management, and its Risk Committee, consisting of CMS Energy
business unit managers. The goal of the risk management policy is to measure and
limit CMS Energy's overall energy commodity risk by implementing an
enterprise-wide policy across all CMS Energy business units. This allows CMS
Energy to maximize the use of hedges among its business units before utilizing
derivatives with external parties. The role of the Risk Committee is to review
the corporate commodity position and ensure that net corporate exposures are
within the economic risk tolerance levels established by the Board of Directors.
Management employs established policies and procedures to manage its risks
associated with market fluctuations, including the use of various derivative
instruments such as futures, swaps, options and forward contracts. Management
believes that any losses incurred on derivative instruments used to hedge risk
would be offset by an opposite movement of the value of the hedged risk. For
further information on CMS Energy's use of derivative instruments to manage
risks, see Note 5, Risk Management Activities and Financial Instruments,
incorporated by reference herein.
CMS Energy has performed sensitivity analyses to assess the potential loss in
fair value, cash flows and earnings based upon hypothetical 10 percent increases
and decreases in market exposures. Management does not believe that sensitivity
analyses alone provide an accurate or reliable method for monitoring and
controlling risks; therefore, CMS Energy and its subsidiaries rely on the
experience and judgment of senior management and traders to revise strategies
and adjust positions as they deem necessary. Losses in excess of the amounts
determined in the sensitivity analyses could occur if market rates or prices
exceed the 10 percent shift used for the analyses.
COMMODITY PRICE RISK: CMS Energy is exposed to market fluctuations in the price
of natural gas, oil, electricity, coal and natural gas liquids. CMS Energy
employs established policies and procedures to manage these risks using various
commodity derivatives, including futures contracts, options and swaps (which
require a net cash payment for the difference between a fixed and variable
price.) The prices of these energy commodities can fluctuate because of, among
other things, changes in the supply of and demand for those commodities. To
minimize adverse price changes, CMS Energy also hedges certain inventory and
purchases and sales contracts. Based on a sensitivity analysis, CMS Energy
estimates that if energy commodity prices average 10 percent higher or lower,
pretax operating income for the remainder of 2001 would increase or decrease by
$21 million and $18 million, respectively. These hypothetical 10 percent shifts
in quoted
CMS-4
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commodity prices would not have had a material impact on CMS Energy's
consolidated financial position or cash flows as of March 31, 2001. The analysis
does not quantify short-term exposure to hypothetically adverse price
fluctuations in inventories.
Consumers enters into, for purposes other than trading, electricity and gas call
options and swap contracts to protect against risk due to fluctuations in the
market price of these commodities and to ensure a reliable source of capacity to
meet its customers' electric needs.
At March 31, 2001 the fair value based on quoted future market prices of
electricity-related option and swap contracts was $97 million. Assuming a
hypothetical 10 percent adverse change in market prices, the potential reduction
in fair value associated with these contracts would be $14 million. As of March
31, 2001, Consumers had an asset of $104 million as a result of premiums
incurred for electricity call option contracts. Consumers' maximum exposure
associated with the call option contracts is limited to the premiums paid.
INTEREST RATE RISK: CMS Energy is exposed to interest rate risk resulting from
the issuance of fixed-rate and variable-rate debt, including that associated
with trust preferred securities, and from interest rate swaps and interest rate
lock agreements. CMS Energy uses a combination of fixed-rate and variable-rate
debt, as well as interest rate swaps and rate locks to manage and mitigate
interest rate risk exposure when deemed appropriate, based upon market
conditions. CMS Energy employs these strategies to attempt to provide and
maintain the lowest cost of capital. At March 31, 2001, the carrying amounts of
long-term debt and trust preferred securities were $7.1 billion and $1.1
billion, respectively, with corresponding fair values of $7.0 billion and $1.0
billion, respectively. The fair value of CMS Energy's interest rate swaps at
March 31, 2001, with a notional amount of $1.069 billion, was $15 million,
representing the amount CMS Energy would pay upon settlement. Based on a
sensitivity analysis at March 31, 2001, CMS Energy estimates that if market
interest rates average 10 percent higher or lower, earnings before income taxes
for the subsequent 12 months would not have a material impact on CMS Energy's
consolidated financial position or cash flows. In addition, based on a 10
percent adverse shift in market rates, CMS Energy would have an exposure of
approximately $388 million to the fair value of its long-term debt and trust
preferred securities if it had to refinance all of its long-term fixed-rate debt
and trust preferred securities. CMS Energy does not intend to refinance its
fixed-rate debt and trust preferred securities in the near term and believes
that any adverse change in interest rates would not have a material effect on
CMS Energy's consolidated financial position as of March 31, 2001.
CURRENCY EXCHANGE RISK: CMS Energy is exposed to currency exchange risk that
arises from net investments in foreign operations as well as various
international projects that CMS Energy has an equity interest in that have debt
denominated in the US dollar. CMS Energy uses forward exchange and option
contracts to hedge these currency exchange risks. At March 31, 2001, CMS
Energy's primary currency exchange rate exposures were the Brazilian real, the
Argentine peso and the Australian dollar. The impact of the hedges of the net
investments in foreign operations is reflected in other comprehensive income as
a component of the foreign currency translation adjustment. For the first
quarter of 2001, the adjustment for hedging was immaterial even though the net
foreign currency translation adjustment was $(30) million. Due to favorable
exchange rates, CMS Energy recognized approximately $4 million in earnings as a
result of hedges for US dollar denominated debt that do not qualify as net
investment hedges, and consequently, are marked-to-market through earnings
currently. This gain appears on the Consolidated Statements of Income in Other
Income (Deductions).
Based on a sensitivity analysis at March 31, 2001, a 10 percent adverse shift in
currency exchange rates would not have a material effect on CMS Energy's
consolidated financial position or results of operations as of March 31, 2001,
but would result in a net cash settlement of approximately $2 million. The
estimated fair value of the foreign exchange and option contracts at March 31,
2001 was $4 million, representing the amount CMS Energy would receive upon
settlement.
CMS-5
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EQUITY SECURITY PRICE RISK: CMS Energy and certain of its subsidiaries have
equity investments in companies in which they hold less than a 20 percent
interest. A hypothetical 10 percent adverse shift in equity security prices
would not have a material effect on CMS Energy's consolidated financial
position, results of operations or cash flows as of March 31, 2001.
For a discussion of accounting policies related to derivative transactions, see
Note 5, Risk Management Activities and Financial Instruments, incorporated by
reference herein.
CAPITAL RESOURCES AND LIQUIDITY
CASH POSITION, INVESTING AND FINANCING
CMS Energy's primary ongoing source of cash is dividends and other distributions
from subsidiaries. During the first quarter of 2001, Consumers paid $66 million
in common dividends and Enterprises paid $78 million in common dividends and
other distributions to CMS Energy. In April 2001, Consumers declared a $30
million common dividend to CMS Energy, payable in May 2001. CMS Energy's
consolidated cash requirements are met by its operating and financing
activities.
OPERATING ACTIVITIES: CMS Energy's consolidated net cash provided by operating
activities is derived mainly from the processing, storage, transportation and
sale of natural gas; the generation, transmission, distribution and sale of
electricity; and the sale of oil. For the first three months of 2001 and 2000,
consolidated cash from operations totaled $361 million and $114 million,
respectively. The $247 million increase resulted primarily from an increase in
cash earnings and the timing of cash receipts and payments related to working
capital items. CMS Energy uses its cash derived from operating activities
primarily to maintain and expand its international and domestic businesses, to
maintain and expand electric and gas systems of Consumers, to pay interest on
and retire portions of its long-term debt, and to pay dividends.
INVESTING ACTIVITIES: For the first three months of 2001 and 2000, CMS Energy's
consolidated net cash used in investing activities totaled $332 million and $26
million, respectively. The increase of $306 million primarily reflects a $305
million decrease in proceeds from the sales of assets in 2000. CMS Energy's
expenditures (excluding acquisitions) during the first three months of 2001 for
its utility and diversified energy businesses were $195 million and $121
million, respectively, compared to $120 million and $131 million, respectively,
during the comparable period in 2000.
FINANCING ACTIVITIES: For the first three months of 2001, CMS Energy's net cash
provided by financing activities totaled $11 million, while net cash used in
financing activities totaled $12 million for the first three months of 2000. The
increase of $23 million resulted primarily from an increase in the issuance of
common stock ($313 million) and a decrease in the repurchase of common stock
($102 million), partially offset by an increase in the retirement of bonds and
other long-term debt ($223 million) and an increase in the retirement of notes
payable ($191 million). The following table summarizes securities issued during
the first three months of 2001:
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In Millions
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Distribution/ Principal
Month Issued Maturity Interest Rate Amount Use of Proceeds
- -------------------------------------------------------------------------------------------------------------------
CMS ENERGY
GTNs Series F (1) (1) 8.54% $ 61 General corporate purposes
Common Stock February n/a 10.0 shares 296 Repay debt and general
corporate purposes
Senior Notes March 2011 8.50% 350 Repay debt and general
----- corporate purposes
Total $ 707
=====
===================================================================================================================
(1) GTNs are issued from time to time with varying maturity dates. The rate
shown herein is a weighted average interest rate.
In the first quarter of 2001, CMS Energy declared and paid $45 million in cash
dividends to holders of CMS Energy Common Stock. In April 2001, the Board of
Directors declared a quarterly dividend of $.365 per share on CMS Energy Common
Stock, payable in May 2001.
OTHER INVESTING AND FINANCING MATTERS: At March 31, 2001, the book value per
share of CMS Energy Common Stock was $20.49.
At May 1, 2001, CMS Energy had an aggregate $1.6 billion in securities
registered for future issuance.
CMS Energy's Senior Credit Facility consists of a $1 billion one-year revolving
credit facility maturing in June 2001. CMS Energy also has unsecured lines of
credit as anticipated sources of funds to finance working capital requirements
and to pay for capital expenditures between long-term financings. At March 31,
2001, the total amount available under the Senior Credit Facility and the
unsecured lines of credit were $1 billion and $38 million, respectively. For
detailed information, see Note 3, Short-Term and Long-Term Financings, and
Capitalization, incorporated by reference herein.
Consumers has credit facilities, lines of credit and a trade receivable sale
program in place as anticipated sources of funds to fulfill its currently
expected capital expenditures. For detailed information about this source of
funds, see Note 3, Short-Term and Long-Term Financings, and Capitalization,
incorporated by reference herein.
In 2000, an impairment loss of $329 million ($268 million after-tax) was
realized on the carrying amount of the Loy Yang investment. This loss does not
include cumulative net foreign currency losses of $164 million due to
unfavorable changes in the exchange rates, which, in accordance with SFAS No.
52, Foreign Currency Translation, will not be realized until there has been a
sale or full liquidation of CMS Energy's investment. CMS Energy is continuing to
review its business alternatives for its investment in Loy Yang, including
future financing and operating alternatives, the nature and extent of CMS
Energy's future involvement and the potential for an ultimate sale of its
interest in the future. CMS Energy has not established a deadline for any of
these alternatives.
CMS Energy currently intends to sell assets resulting in cash proceeds and
associated reduction of consolidated project debt in the total amount of
approximately $450 million, as more fully discussed in the Outlook - Financial
Improvement Plan section below.
CMS-7
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CAPITAL EXPENDITURES
CMS Energy estimates that capital expenditures, including new lease commitments
and investments in new business developments through partnerships and
unconsolidated subsidiaries, will total $3.9 billion during 2001 through 2003.
These estimates are prepared for planning purposes and are subject to revision.
CMS Energy expects to satisfy a substantial portion of the capital expenditures
with cash from operations. CMS Energy will continue to evaluate capital markets
in 2001 as a potential source for financing its subsidiaries' investing
activities. CMS Energy estimates capital expenditures by business segment over
the next three years as follows:
In Millions
- -------------------------------------------------------------------------------------------------------------------
Years Ending December 31 2001 2002 2003
- -------------------------------------------------------------------------------------------------------------------
Consumers electric operations (a) (b) $ 555 $ 555 $ 355
Consumers gas operations (a) 145 145 135
Natural gas transmission 220 215 280
Independent power production 65 150 240
Oil and gas exploration and production 200 235 245
Marketing, services and trading 5 5 5
International energy distribution 60 5 5
Other 35 25 5
--------------------------------------------
$ 1,285 $ 1,335 $ 1,270
===================================================================================================================
(a) These amounts include an attributed portion of Consumers' anticipated
capital expenditures for plant and equipment common to both the electric and gas
utility businesses.
(b) These amounts include estimates for capital expenditures possibly required
to comply with recently revised national air quality standards under the Clean
Air Act. For further information see Note 2, Uncertainties - Electric
Environmental Matters.
CMS Energy currently plans investments in the years 2001 through 2003 in focused
markets, which include: North and South America; the Middle East; and West
Africa. Investments will be made in market segments which align with CMS
Energy's varied business units' skills with a focus on optimization and
integration of existing assets, as further discussed in Outlook section below.
OUTLOOK
FINANCIAL IMPROVEMENT PLAN
In October 2000, CMS Energy announced a plan to strengthen its balance sheet
using proceeds from equity offerings and asset sales to repay debt. As a part of
that plan, CMS Energy sold approximately $600 million of CMS Energy Common Stock
through offerings in October 2000 and February 2001, and applied the proceeds to
repay debt.
CMS Energy intends to enhance long-term growth through a portfolio management
program that entails the ongoing sale of assets. Towards this goal, CMS Energy
currently intends to sell assets, potentially including Consumers' electric
transmission facilities, that it anticipates will result in cash proceeds and
associated reduction of consolidated project debt in the total amount of
approximately $450 million. There are no assurances that CMS Energy will achieve
this level of asset sales and associated debt reduction in 2001 as planned.
Also, CMS Energy is reviewing its options regarding assets performing below
prior expectations, including certain assets in Argentina and Australia.
CMS-8
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GENERAL OUTLOOK
CMS Energy's vision is to be an integrated energy company with a strong asset
base, supplemented with an active marketing, services and trading capability.
CMS Energy intends to integrate the skills and assets of its business units to
obtain optimal returns and to provide expansion opportunities for its multiple
existing businesses.
CMS Energy continues to sharpen its geographic focus on key growth areas where
it already has significant investments and opportunities. As a result, CMS
Energy's primary development focus shifted to North America, particularly in the
United States' central corridor. In addition, CMS Energy will focus its
international activities on select high-growth regions, particularly in the
Middle East, Latin America and West Africa.
CMS Energy is currently evaluating longer-term growth initiatives, including:
natural gas acquisitions and joint ventures in North America; marketing
acquisitions; expanded and new North American LNG regasification terminals; and
various corporate and financial repositioning options, including possible
separation of its utility and non-utility businesses.
DIVERSIFIED ENERGY OUTLOOK
NATURAL GAS TRANSMISSION AND PANHANDLE OUTLOOK: CMS Energy seeks to build on
Panhandle's position as a leading United States interstate natural gas pipeline
system and the nation's largest operating LNG receiving terminal through
expansion and better utilization of its existing facilities and construction of
new facilities. The growth strategy around Panhandle includes enhancing the
opportunities for other CMS Energy businesses involved in electric power
generation and distribution, mid-stream activities (gathering and processing),
and exploration and production. By providing additional transportation, storage
and other asset-based value-added services to customers such as new gas-fueled
power plants, local distribution companies, industrial and end-users, marketers
and others, CMS Energy expects to expand its natural gas pipeline business. CMS
Energy also plans to convert certain Panhandle pipeline facilities through a
joint venture to permit the throughput of liquid products, and to build a
150-mile natural gas pipeline from Illinois to Wisconsin to meet the needs of
those significantly growing markets. CMS Energy seeks to capitalize on its West
Africa oil and gas reserves by using the gas from an onshore processing facility
in a methanol-producing plant in West Africa in which the natural gas
transmission business has an ownership interest.
INDEPENDENT POWER PRODUCTION OUTLOOK: CMS Energy's independent power production
business plans to continue its growth by addressing the increasing demand for
electricity in selected markets, primarily in the United States and the Middle
East. These plans include commencing operations of projects that are at or near
the end of construction, such as a 407 MW facility in the United Arab Emirates,
a 710 MW project in Michigan, and the expansion of a facility in Morocco from
660 MW to 1,356 MW.
OIL AND GAS EXPLORATION AND PRODUCTION OUTLOOK: CMS Energy seeks to accelerate
natural gas exploration, development and production in North America through the
significant natural gas potential in its existing properties in West Texas,
Wyoming and Montana. CMS Energy also seeks to explore for or acquire natural gas
reserves in North America where integrated development opportunities exist with
other CMS businesses involved in gathering, processing and pipeline activities.
Another important part of the CMS Energy growth plan is to continue an
accelerated development program to increase gas/condensate production in
Equatorial Guinea. Finally, CMS Energy plans to further develop its oil and gas
assets in the Republic of Congo, Tunisia, Cameroon, Colombia and Venezuela.
MARKETING, SERVICES AND TRADING OUTLOOK: CMS Energy intends to use its
marketing, services and trading business to focus on wholesale customers such as
municipals, cooperatives and large industrial customers in
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the central United States where CMS Energy's existing assets are concentrated.
CMS Energy's marketing, services and trading business also intends to contract
for use of significant gas transportation and storage assets in the central
United States to provide a platform for wholesale marketing, trading, and
physical arbitrage. CMS Energy also seeks to continue developing importing and
marketing opportunities for LNG. CMS Energy plans to capitalize on favorable
market conditions for energy performance contracting through expanding its
services business in selected markets.
INTERNATIONAL ENERGY DISTRIBUTION OUTLOOK: Through its international energy
distribution business, CMS Energy will continue focusing on areas of high growth
and opportunity to expand the range of energy-related services, including
commercial and technical service. At its existing distribution facilities in
Venezuela and Brazil, CMS Energy intends to continue operational improvements to
improve their financial results.
UNCERTAINTIES: The results of operations and financial position of CMS Energy's
diversified energy businesses may be affected by a number of trends or
uncertainties that have, or CMS Energy reasonably expects could have, a material
impact on income from continuing operations and cash flows. Such trends and
uncertainties include: 1) the ability to sell assets and achieve balance sheet
and credit improvement in accordance with our financial plan; 2) the
international monetary fluctuations, particularly in Argentina, Brazil and
Australia, 3) changes in foreign governmental and regulatory policies that may
significantly reduce the tariffs charged and revenues recognized by certain
foreign projects; 4) the imposition of stamp taxes on certain South American
contracts that may significantly increase project expenses; 5) the increased
competition in the market for transmission of natural gas to the Midwest causing
pressure on prices charged by Panhandle, and 6) the expected increase in
competition for LNG terminalling services, and the volatility in natural gas
prices, creating volatility in LNG terminalling revenues.
CONSUMERS' ELECTRIC UTILITY BUSINESS OUTLOOK
GROWTH: Over the next five years, Consumers expects electric system deliveries
to grow an average of approximately two percent per year based primarily on a
steadily growing customer base. This growth rate does not take into account the
impact of electric industry restructuring, including the impact of the Customer
Choice Act that allows all customers to choose their electricity supplier
beginning January 1, 2002, or of changing regulation. Abnormal weather, changing
economic conditions or the developing competitive market for electricity may
affect actual electric deliveries by Consumers in future periods.
COMPETITION AND REGULATORY RESTRUCTURING: The Customer Choice Act, passed by the
Michigan Legislature, as a result of repeated efforts to enact electric utility
restructuring legislation, became effective June 2000.
The intent of the Customer Choice Act is to move the retail electric businesses
in Michigan to competition. Several years prior to the enactment of the Customer
Choice Act, in response to industry restructuring efforts, Consumers entered
into multi-year electric supply contracts with some of its largest industrial
customers to provide power to some of their facilities. The MPSC approved those
contracts as part of its phased introduction to competition. During the period
from 2001 through 2005, either Consumers or these industrial customers can
terminate or restructure some of these contracts. These contracts involve
approximately 600 MW of customer power supply requirements. CMS Energy cannot
predict the ultimate financial impact of changes related to these power supply
contracts.
Uncertainty exists with respect to the enactment of federal electric industry
restructuring legislation. A variety of bills introduced in Congress in recent
years have sought to change existing federal regulation of the industry. These
federal bills could potentially affect or supercede state regulation; however,
none have been enacted.
In part because of certain policy pronouncements by the FERC, Consumers joined
the Alliance RTO. In
CMS-10
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January 2001, the FERC granted Consumers' application to transfer ownership and
control of its transmission facilities to a wholly owned subsidiary, Michigan
Transco. Consumers transferred the transmission facilities to Michigan Transco
on April 1, 2001. This represents a major step in Consumers' plan to transfer
control of or to divest itself of ownership, operation and control of its
transmission assets.
CMS Energy cannot predict the outcome of these electric industry-restructuring
issues on its financial position, liquidity, or results of operations.
RATE MATTERS: Prior to the enactment of the Customer Choice Act, there were
several pending rate issues that could have affected Consumers' electric
business. As a result of the passage of this legislation, the MPSC dismissed
certain rate proceedings and a complaint filed by ABATE seeking a reduction in
rates. ABATE filed a petition for rehearing with the MPSC.
For further information and material changes relating to the rate matters and
restructuring of the electric utility industry, see Note 1, Corporate Structure
and Basis of Presentation - Utility Matters, and Note 2, Uncertainties -
Consumers' Electric Utility Rate Matters, incorporated by reference herein.
NUCLEAR MATTERS: There are a number of issues related to nuclear matters that
may affect Consumers' business. For further information and material changes
relating to nuclear matters, see Note 2, Uncertainties - Nuclear Matters,
incorporated by reference herein.
UNCERTAINTIES: Several electric business trends or uncertainties may affect CMS
Energy's financial results and condition. These trends or uncertainties have, or
CMS Energy reasonably expects could have, a material impact on net sales,
revenues, or income from continuing electric operations. Such trends and
uncertainties include: 1) capital expenditures and increased operating expenses
for compliance with the Clean Air Act; 2) environmental liabilities arising from
various federal, state and local environmental laws and regulations, including
potential liability or expenses relating to the Michigan Natural Resources and
Environmental Protection Acts and Superfund; 3) uncertainties relating to the
storage and ultimate disposal of spent nuclear fuel and the successful operation
of NMC; and 4) electric industry restructuring, including: a) how the MPSC
ultimately calculates the amount of Stranded Costs and the related true-up
adjustments and the manner in which the true-up operates; b) the ability to
recover fully the cost of doing business under the rate caps; c) obtaining a
resolution of the pending appeal by the Attorney General that allows a
successful sale of Securitization bonds on a timely basis; d) the ability to
meet peak electric demand requirements at a reasonable cost and without market
disruption and initiatives undertaken to reduce exposure to energy price
increases; e) the restructuring of the MEPCC and the termination of joint
merchant operations with Detroit Edison; and f) the effect of the transfer of
Consumers transmission facilities to Michigan Transco and its successful
disposition or integration into an RTO. For detailed information about these
trends or uncertainties, see Note 2, Uncertainties, incorporated by reference
herein.
CONSUMERS' GAS UTILITY BUSINESS OUTLOOK
GROWTH: Over the next five years, Consumers anticipates gas deliveries,
including gas customer choice deliveries (excluding transportation to the MCV
Facility and off-system deliveries), to grow at an average of about one percent
per year based primarily on a steadily growing customer base. Actual gas
deliveries in future periods may be affected by abnormal weather, alternative
energy costs, changes in competitive conditions, and the level of natural gas
consumption per customer.
During the spring and summer months of 2001, Consumers will purchase natural gas
for inventory to meet anticipated future customer needs during the winter
heating season. Consumers anticipates that it will incur financing costs on
these natural gas purchases that are higher than are being recovered in current
rates.
CMS-11
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UNCERTAINTIES: Several gas business trends or uncertainties may affect CMS
Energy's financial results and conditions. These trends or uncertainties have,
or CMS Energy reasonably expects could have, a material impact on net sales,
revenues, or income from continuing gas operations. Such trends and
uncertainties include: 1) potential environmental costs at a number of sites,
including sites formerly housing manufactured gas plant facilities; 2) future
gas industry restructuring initiatives; 3) implementation of the permanent gas
customer choice program; 4) reintroduction of the GCR clause and any initiatives
undertaken to protect against gas price increases; and 5) market and regulation
responses to increases in gas costs. For detailed information about these
uncertainties, see Note 2, Uncertainties, incorporated by reference herein.
CONSUMERS' OTHER OUTLOOK
Consumers offers a variety of energy-related services to electric and gas
customers that focus on appliance maintenance, home safety, commodity choice and
assistance to customers purchasing heating, ventilation and air conditioning
equipment. Consumers continues to look for additional growth opportunities in
energy-related services for Consumers' customers.
OTHER MATTERS
FOREIGN CURRENCY TRANSLATION
CMS Energy adjusts common stockholders' equity to reflect foreign currency
translation adjustments for the operation of long-term investments in foreign
countries. The adjustment is primarily due to the exchange rate fluctuations
between the United States dollar and each of the Australian dollar, Brazilian
real and Argentine peso. During the first quarter of 2001, the change in the
foreign currency translation adjustment decreased equity by $30 million, net of
after-tax hedging proceeds. Although management currently believes that the
currency exchange rate fluctuations over the long term will not have a material
adverse affect on CMS Energy's financial position, liquidity or results of
operations, CMS Energy has hedged its exposure to the Australian dollar, the
Brazilian real and the Argentine peso. CMS Energy uses forward exchange and
option contracts to hedge certain receivables, payables, long-term debt and
equity value relating to foreign investments. The notional amount of the
outstanding foreign exchange contracts was $824 million at March 31, 2001, which
includes $21 million, $25 million and $778 million for Australian, Brazilian and
Argentine foreign exchange contracts, respectively. The estimated fair value of
the foreign exchange and option contracts at March 31, 2001 was $4 million,
representing the amount CMS Energy would receive upon settlement.
CMS-12
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CMS ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31 2001 2000
- -----------------------------------------------------------------------------------------------------------------
In Millions, Except Per Share Amounts
OPERATING REVENUE
Electric utility $ 665 $ 640
Gas utility 540 475
Natural gas transmission 386 178
Independent power production 108 81
Oil and gas exploration and production 41 33
Marketing, services and trading 2,344 351
International energy distribution 37 62
Other 5 8
-------------------------
4,126 1,828
- -----------------------------------------------------------------------------------------------------------------
OPERATING EXPENSES
Operation
Fuel for electric generation 83 78
Purchased and interchange power - Marketing, services and trading 1,444 40
Purchased and interchange power 134 128
Purchased power - related parties 118 146
Cost of gas sold - Marketing, services and trading 782 291
Cost of gas sold 580 300
Other operating expenses 359 230
-------------------------
3,500 1,213
Maintenance 66 76
Depreciation, depletion and amortization 153 176
General taxes 76 71
-------------------------
3,795 1,536
- -----------------------------------------------------------------------------------------------------------------
PRETAX OPERATING INCOME (LOSS)
Electric utility 135 115
Gas utility 65 64
Natural gas transmission 93 78
Independent power production 24 17
Oil and gas exploration and production 13 4
Marketing, services and trading 7 3
International energy distribution 2 6
Other (8) 5
-------------------------
331 292
- -----------------------------------------------------------------------------------------------------------------
OTHER INCOME (DEDUCTIONS)
Accretion income - 1
Accretion expense (9) (9)
Gain on asset sales, net of foreign currency translation losses of $25 in 2000 - 8
Other, net 13 2
-------------------------
4 2
- -----------------------------------------------------------------------------------------------------------------
FIXED CHARGES
Interest on long-term debt 145 148
Other interest 12 -
Capitalized interest (14) (10)
Preferred securities distributions 23 23
-------------------------
166 161
- -----------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES AND MINORITY INTERESTS 169 133
INCOME TAXES 59 52
MINORITY INTERESTS 1 1
-------------------------
CONSOLIDATED NET INCOME BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE 109 80
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING FOR TREATMENT OF INVENTORY,
NET OF TAX BENEFIT OF $(2) - (5)
-------------------------
CONSOLIDATED NET INCOME $ 109 $ 75
=================================================================================================================
AVERAGE COMMON SHARES OUTSTANDING 125 113
=================================================================================================================
BASIC EARNINGS PER AVERAGE COMMON SHARE $ .87 $ .66
=================================================================================================================
DILUTED EARNINGS PER AVERAGE COMMON SHARE $ .85 $ .65
=================================================================================================================
DIVIDENDS DECLARED PER COMMON SHARE $ .365 $ .365
=================================================================================================================
THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
CMS-13
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CMS ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31 2001 2000
- ----------------------------------------------------------------------------------------------------------
In millions
CASH FLOWS FROM OPERATING ACTIVITIES
Consolidated net income $ 109 $ 75
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation, depletion and amortization (includes nuclear
decommissioning of $10 and $10, respectively) 153 176
Deferred income taxes and investment tax credit 31 (68)
Capital lease and debt discount amortization 9 7
Accretion expense 9 9
Accretion income - abandoned Midland project - (1)
MCV power purchases (3) (14)
Undistributed earnings of related parties (32) (28)
Cumulative effect of accounting change - 7
Gain on the sale od assets, net of foreign currency translation losses - (8)
Changes in other assets and liabilities:
Decrease (increase) in accounts receivable (678) 34
Decrease in inventories 125 154
Increase (decrease) in accounts payable and accrued expenses 687 (175)
Regulatory obligation - gas choice (16) -
Changes in other assets and liabilities (33) (54)
---------------------
Net cash provided by operating activities 361 114
- ----------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (excludes assets placed under capital lease) (273) (209)
Acquisition of companies, net of cash acquired - (74)
Investments in partnerships and unconsolidated subsidiaries (31) (31)
Cost to retire property, net (26) (21)
Proceeds from sale of property - 305
Other (2) 4
---------------------
Net cash (used in) investing activities (332) (26)
- ----------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from notes, bonds, and other long-term debt 373 343
Issuance of common stock 316 3
Retirement of bonds and other long-term debt (389) (166)
Repurchase of common stock - (102)
Decrease in notes payable, net (233) (42)
Payment of common stock dividends (45) (42)
Payment of capital lease obligations (8) (6)
Other financing (3) -
---------------------
Net cash provided by (used in) financing activities 11 (12)
- ----------------------------------------------------------------------------------------------------------
NET INCREASE IN CASH AND TEMPORARY CASH INVESTMENTS 40 76
CASH AND TEMPORARY CASH INVESTMENTS, BEGINNING OF PERIOD 182 132
---------------------
CASH AND TEMPORARY CASH INVESTMENTS, END OF PERIOD $ 222 $ 208
==========================================================================================================
CMS-14
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OTHER CASH FLOW ACTIVITIES AND NON-CASH INVESTING AND FINANCING ACTIVITIES WERE:
CASH TRANSACTIONS
Interest paid (net of amounts capitalized) $ 166 $ 162
Income taxes paid (net of refunds) (6) -
NON-CASH TRANSACTIONS
Nuclear fuel placed under capital lease $ 2 $ 2
Other assets placed under capital leases 7 3
==================================================================================
All highly liquid investments with an original maturity of three months or less
are considered cash equivalents.
THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
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CMS ENERGY CORPORATION
CONSOLIDATED BALANCE SHEETS
ASSETS MARCH 31 MARCH 31
2001 DECEMBER 31 2000
(UNAUDITED) 2000 (UNAUDITED)
- --------------------------------------------------------------------------------------------------------------------------
PLANT AND PROPERTY (AT COST)
Electric utility $ 7,298 $ 7,241 $ 7,026
Gas utility 2,524 2,503 2,478
Natural gas transmission 2,193 2,191 2,066
Oil and gas properties (successful efforts method) 660 630 606
Independent power production 395 398 976
International energy distribution 229 258 481
Other 105 105 77
---------------------------------------------
13,404 13,326 13,710
Less accumulated depreciation, depletion and amortization 6,317 6,252 6,246
---------------------------------------------
7,087 7,074 7,464
Construction work-in-progress 905 761 717
---------------------------------------------
7,992 7,835 8,181
- --------------------------------------------------------------------------------------------------------------------------
INVESTMENTS
Independent power production 1,002 924 965
Natural gas transmission 457 436 357
International energy distribution 29 63 40
Midland Cogeneration Venture Limited Partnership 302 290 253
First Midland Limited Partnership 248 245 243
Other 46 58 52
---------------------------------------------
2,084 2,016 1,910
- --------------------------------------------------------------------------------------------------------------------------
CURRENT ASSETS
Cash and temporary cash investments at cost, which approximates market 222 182 208
Accounts receivable, notes receivable and accrued revenue, less
allowances of $20, $18 and $19, respectively 2,109 1,440 937
Inventories at average cost
Gas in underground storage 150 297 78
Materials and supplies 142 124 141
Generating plant fuel stock 50 46 47
Deferred income taxes 41 39 25
Prepayments and other 290 321 220
---------------------------------------------
3,004 2,449 1,656
- --------------------------------------------------------------------------------------------------------------------------
NON-CURRENT ASSETS
Regulatory Assets
Securitization costs 709 709 -
Postretirement benefits 226 232 333
Abandoned Midland project 15 22 41
Unamortized nuclear costs - 6 504
Other 84 87 123
Goodwill, net 880 891 913
Nuclear decommissioning trust funds 585 611 615
Notes receivable - related parties 161 155 254
Notes receivable 151 150 41
Other 733 688 696
---------------------------------------------
3,544 3,551 3,520
---------------------------------------------
TOTAL ASSETS $ 16,624 $15,851 $ 15,267
==========================================================================================================================
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STOCKHOLDERS' INVESTMENT AND LIABILITIES MARCH 31 MARCH 31
2001 DECEMBER 31 2000
(UNAUDITED) 2000 (UNAUDITED)
- ------------------------------------------------------------------------------------------------------------------------
CAPITALIZATION
Common stockholders' equity $ 2,703 $ 2,361 $ 2,369
Preferred stock of subsidiary 44 44 44
Company-obligated mandatorily redeemable preferred securities of:
Consumers Power Company Financing I (a) 100 100 100
Consumers Energy Company Financing II (a) 120 120 120
Consumers Energy Company Financing III (a) 175 175 175
Company-obligated convertible Trust Preferred Securities of:
CMS Energy Trust I (a) 173 173 173
CMS Energy Trust II (a) 301 301 301
CMS Energy Trust III (a) 220 220 -
Company-obligated Trust Preferred Securities of CMS RHINOS Trust (a) - - 250
Long-term debt 7,150 6,770 6,533
Non-current portion of capital leases 58 54 88
---------------------------------------------
11,044 10,318 10,153
- ------------------------------------------------------------------------------------------------------------------------
MINORITY INTERESTS 86 88 222
- ------------------------------------------------------------------------------------------------------------------------
CURRENT LIABILITIES
Current portion of long-term debt and capital leases 302 707 1,182
Notes payable 170 403 188
Accounts payable 1,747 1,024 673
Accrued taxes 288 309 337
Accrued interest 133 159 119
Accounts payable - related parties 69 70 68
Other 560 530 370
---------------------------------------------
3,269 3,202 2,937
- ------------------------------------------------------------------------------------------------------------------------
NON-CURRENT LIABILITIES
Deferred income taxes 758 749 615
Postretirement benefits 404 437 476
Deferred investment tax credit 108 110 123
Regulatory liabilities for income taxes, net 260 246 75
Other 695 701 666
---------------------------------------------
2,225 2,243 1,955
- ------------------------------------------------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES (Notes 1 and 2)
TOTAL STOCKHOLDERS' INVESTMENT AND LIABILITIES $ 16,624 $ 15,851 $ 15,267
========================================================================================================================
(a) For further discussion, see Note 3 of the Condensed Notes to Consolidated
Financial Statements.
THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
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CMS ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS' EQUITY
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31 2001 2000
- -----------------------------------------------------------------------------------------------------------------------------
In Millions
COMMON STOCK
At beginning and end of period $ 1 $ 1
- -----------------------------------------------------------------------------------------------------------------------------
OTHER PAID-IN CAPITAL
At beginning of period 2,936 2,749
Common stock repurchased - (102)
Common stock reissued - 3
Common stock issued 316 3
------------------------
At end of period 3,252 2,653
- -----------------------------------------------------------------------------------------------------------------------------
REVALUATION CAPITAL
Investments
At beginning of period (2) 3
Unrealized gain (loss) on investments (a) (1) -
------------------------
At end of period (3) 3
------------------------
Derivative Instruments
At beginning of period (b) 13 -
Unrealized gain (loss) on derivative instruments (a) (14) -
Reclassification adjustments included in consolidated net income (a) (6) -
------------------------
At end of period (7) -
- -----------------------------------------------------------------------------------------------------------------------------
FOREIGN CURRENCY TRANSLATION
At beginning of period (254) (108)
Change in foreign currency translation realized from asset sale (a) - 25
Change in foreign currency translation (a) (30) (49)
------------------------
At end of period (284) (132)
- -----------------------------------------------------------------------------------------------------------------------------
RETAINED EARNINGS (DEFICIT)
At beginning of period (320) (189)
Consolidated net income (a) 109 75
Common stock dividends declared (45) (42)
------------------------
At end of period (256) (156)
------------------------
TOTAL COMMON STOCKHOLDERS' EQUITY $ 2,703 $ 2,369
=============================================================================================================================
(a) Disclosure of Consolidated Comprehensive Income:
Revaluation capital
Investments
Unrealized gain (loss) on investments, net of tax of
$- and $-, respectively $ (1) $ -
Derivative Instruments
Unrealized gain (loss) on derivative instruments,
net of tax of $10 and $-, respectively (14) -
Reclassification adjustments included in consolidated net income,
net of tax of $4 and $-, respectively (6) -
Foreign currency translation, net (30) (24)
Consolidated net income 109 75
------------------------
Total Consolidated Comprehensive Income $ 58 $ 51
========================
(b) Cumulative effect of change in accounting principle, net of $(11) tax
(Note 5)
THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
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CMS ENERGY CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
These interim Consolidated Financial Statements have been prepared by CMS Energy
and reviewed by the independent public accountant in accordance with SEC rules
and regulations. As such, certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted. Certain prior year amounts
have been reclassified to conform to the presentation in the current year. In
management's opinion, the unaudited information contained in this report
reflects all adjustments necessary to assure the fair presentation of financial
position, results of operations and cash flows for the periods presented. The
Condensed Notes to Consolidated Financial Statements and the related
Consolidated Financial Statements should be read in conjunction with the
Consolidated Financial Statements and Notes to Consolidated Financial Statements
contained in CMS Energy's Form 10-K for the year ended December 31, 2000, which
includes the Reports of Independent Public Accountants. Due to the seasonal
nature of CMS Energy's operations, the results as presented for this interim
period are not necessarily indicative of results to be achieved for the fiscal
year.
1: CORPORATE STRUCTURE AND BASIS OF PRESENTATION
CORPORATE STRUCTURE AND BASIS OF PRESENTATION
CMS Energy is the parent holding company of Consumers and Enterprises.
Consumers, a combination electric and gas utility company serving the Lower
Peninsula of Michigan, is a subsidiary of CMS Energy. Enterprises, through
subsidiaries, is engaged in several domestic and international diversified
energy businesses including: natural gas transmission, storage and processing;
independent power production; oil and gas exploration and production; energy
marketing, services and trading; and international energy distribution.
The consolidated financial statements include the accounts of CMS Energy,
Consumers and Enterprises and their majority-owned subsidiaries. Investments in
affiliated companies where CMS Energy has the ability to exercise significant
influence, but not control, are accounted for using the equity method. For the
three months ended March 31, 2001 and March 31, 2000, undistributed equity
earnings were $32 million and $28 million, respectively. Intercompany
transactions and balances have been eliminated. The preparation of financial
statements in conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
CMS Energy's subsidiaries and affiliates whose functional currency is other than
the U.S. dollar translate their assets and liabilities into U.S. dollars at the
current exchange rates in effect at the end of the fiscal period. The revenue
and expense accounts of such subsidiaries and affiliates are translated into
U.S. dollars at the average exchange rates that prevailed during the period. The
gains or losses that result from this process, and gains and losses on
intercompany foreign currency transactions that are long-term in nature, and
which CMS Energy does not intend to settle in the foreseeable future, are shown
in the stockholders' equity section of the balance sheet. For subsidiaries
operating in highly inflationary economies, the U.S. dollar is considered to be
the functional currency, and transaction gains and losses are included in
determining net income. Gains and losses that arise from exchange rate
fluctuations on transactions denominated in a currency other than the functional
currency, except those that are hedged, are included in determining net income.
During the first quarter of 2001, the
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change in the foreign currency translation adjustment decreased equity by $30
million, net of after-tax hedging proceeds.
OIL AND GAS PROPERTIES
CMS Oil and Gas follows the successful efforts method of accounting for its
investments in oil and gas properties. CMS Oil and Gas capitalizes, as incurred,
the costs of property acquisitions, successful exploratory wells, all
development costs, and support equipment and facilities. It expenses
unsuccessful exploratory wells when they are determined to be non-productive.
CMS Oil and Gas also charges to expense, as incurred, production costs,
overhead, and all exploration costs other than exploratory drilling. CMS Oil and
Gas determines depreciation, depletion and amortization of proved oil and gas
properties on a field-by-field basis using the units-of-production method over
the life of the remaining proved reserves.
UTILITY REGULATION
Consumers accounts for the effects of regulation based on the regulated utility
accounting standard SFAS No. 71, Accounting for the Effects of Certain Types of
Regulation. As a result, the actions of regulators affect when Consumers
recognizes revenues, expenses, assets and liabilities.
In March 1999, Consumers received MPSC electric restructuring orders. Consistent
with these orders, Consumers discontinued application of SFAS No. 71 for the
energy supply portion of its business in the first quarter of 1999 because
Consumers expected to implement retail open access for its electric customers in
September 1999. Discontinuation of SFAS No. 71 for the energy supply portion of
Consumers' business resulted in Consumers reducing the carrying value of its
Palisades plant-related assets by approximately $535 million and establishing a
regulatory asset for a corresponding amount. According to current accounting
standards, Consumers can continue to carry its energy supply-related regulatory
assets if legislation or an MPSC rate order allows the collection of cash flows
to recover these regulatory assets from its regulated transmission and
distribution customers. As of March 31, 2001, Consumers had a net investment in
energy supply facilities of $1.218 billion included in electric plant and
property. See Note 2, Uncertainties.
2: UNCERTAINTIES
CONSUMERS' ELECTRIC UTILITY CONTINGENCIES
ELECTRIC ENVIRONMENTAL MATTERS: The Clean Air Act limits emissions of sulfur
dioxide and NOx and requires emissions and air quality monitoring. Consumers
currently operates within these limits and meets current emission requirements.
The Clean Air Act requires the EPA to review periodically the effectiveness of
the national air quality standards in preventing adverse health effects.
1997 EPA Revised NOx and Small Particulate Emissions Standards - In 1997, the
EPA revised these standards to impose further limitations on NOx and small
particulate-related emissions. The United States Supreme Court recently found
that the EPA has power to revise the standards but found that the EPA's
implementation plan was not lawful. While this case has been pending in federal
courts, and while continuing through the lower federal courts as ordered by the
Supreme Court, the EPA suspended the 1997 standards and reinstated the pre-1997
standards.
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1998 EPA Plan for NOx Emissions - In 1998, based in part upon the 1997
standards, the EPA issued final regulations requiring the State of Michigan to
further limit NOx emissions. Consumers anticipates a reduction in NOx emissions
by 2004 to only 32 percent of levels allowed for the year 2000.
Section 126 Petitions - In December 1999, the EPA issued a revised final rule
under Section 126 of the Clean Air Act. The rule requires some electric utility
generators, including some of Consumers' electric generating facilities, to
achieve the same emission rate as that required by the 1998 plan for NOx
emissions. Under the revised Section 126 rule, the emission rate will become
effective on May 1, 2003 and apply for the ozone season in 2003 and during each
subsequent year. Various parties' petitions challenging the EPA's rule have been
filed.
Until all air quality targets are conclusively established, the estimated cost
of compliance discussed below is subject to revision.
Cost of Environmental Law Compliance - To meet the EPA's 1998 rule and/or the
Section 126 NOx emission rules, the estimated cost to Consumers will be between
$450 million and $500 million. Consumers anticipates that it will incur these
capital expenditures between 2000 and either 2003 or 2004 depending upon whether
the EPA prevails in the Section 126 litigation. In addition, Consumers expects
to incur cost of removal related to this effort, but is unable to predict the
amount at this time.
Consumers may need an additional amount of between $290 million and $500 million
of capital expenditures to comply with the new small particulate standards
sometime after 2004.
Consumers' coal-fueled electric generating units burn low-sulfur coal and are
currently operating at or near the sulfur dioxide emission limits. Beginning in
1992 and continuing into 2001, Consumers incurred capital expenditures totaling
$72 million to install equipment at certain generating units to comply with the
acid rain provisions of the Clean Air Act. Management believes that these
expenditures will not materially affect Consumers' annual operating costs.
Cleanup and Solid Waste - Under the Michigan Natural Resources and Environmental
Protection Act, Consumers expects that it will ultimately incur investigation
and remedial action costs at a number of sites. Nevertheless, it believes that
these costs are recoverable in rates under current ratemaking policies.
Consumers is a potentially responsible party at several contaminated sites
administered under Superfund. Superfund liability is joint and several. Along
with Consumers, many other creditworthy, potentially responsible parties with
substantial assets cooperate with respect to the individual sites. Based upon
past negotiations, Consumers estimates that its share of the total liability for
the known Superfund sites will be between $2 million and $9 million. As of March
31, 2001, Consumers had accrued the minimum amount of the range for its
estimated Superfund liability.
During routine maintenance activities, Consumers identified PCB as a component
in certain paint, grout and sealant materials at the Ludington Pumped Storage
Facility. Consumers removed and replaced part of the PCB material. Consumers has
proposed a plan to deal with the remaining materials and is awaiting a response
from the EPA.
CONSUMERS' ELECTRIC UTILITY RATE MATTERS
ELECTRIC RESTRUCTURING: In June 2000, the Michigan Legislature passed electric
utility restructuring legislation
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known as the Customer Choice Act. This act: 1) permits all customers to exercise
choice of electric generation suppliers by January 1, 2002; 2) cuts residential
electric rates by five percent; 3) freezes all electric rates through December
31, 2003, and establishes a rate cap for residential customers through at least
December 31, 2005, and a rate cap for small commercial and industrial customers
through at least December 31, 2004; 4) allows for the use of Securitization to
refinance Stranded Costs as a means of offsetting the earnings impact of the
five percent residential rate reduction; 5) establishes a market power test
which may require the transfer of control of a portion of generation resources
in excess of that required to serve firm retail sales requirements (a
requirement with which Consumers is in compliance); 6) requires Michigan
utilities to join a FERC-approved RTO or divest their interest in transmission
facilities to an independent transmission owner; 7) requires the joint expansion
of available transmission capability by Consumers, Detroit Edison and American
Electric Power by at least 2,000 MW by June 5 of 2002; 8) allows for the
deferred recovery of an annual return of and on capital expenditures in excess
of depreciation levels incurred during and before the rate cap period; and 9)
allows for the recovery of Stranded Costs and implementation costs incurred as a
result of the passage of the act. Consumers is highly confident that it will
meet the conditions of items 5 and 7 above, prior to the earliest rate cap
termination dates specified in the act. Failure to do so would result in an
extension of the rate caps to as late as December 31, 2013. As of December 2000,
Consumers spent $13 million on the required expansion of transmission
capabilities. Consumers anticipates it will spend an additional $24 million in
2001 and 2002, unless Consumers transfers its transmission facilities to a
FERC-approved RTO or to an independent transmission owner.
In July 2000, in accordance with the Customer Choice Act, Consumers filed an
application with the MPSC to begin the Securitization process. Securitization
typically involves the issuance of asset backed bonds with a higher credit
rating than conventional utility corporate financing. In October 2000 and
January 2001, the MPSC issued a financing order and a final order, respectively,
authorizing Securitization of approximately $470 million in qualified costs,
which were primarily regulatory assets plus recovery of the expenses of the
Securitization. Cost savings from Securitization depend upon the level of debt
or equity securities ultimately retired, the amortization schedule for the
securitized qualified costs and the interest rates of the retired debt
securities and the Securitization bonds. These savings will only be determined
once the Securitization bonds are issued and will offset substantially all of
the revenue impact of the five percent residential rate reduction, $51 million
on an annual basis, that Consumers was required to implement by the Customer
Choice Act. The order directs Consumers to apply any cost savings in excess of
the five percent residential rate reduction to rate reductions for
non-residential and retail open access customers after the bonds are sold. In a
subsequent order, the MPSC confirmed that Consumers could recover the five
percent residential rate reduction's effect on revenues lost from the date of
the financing order. Consumers estimates that the disallowed portion of revenue
recovery relating to the year 2000 five percent residential rate reduction
reduced its operating earnings by $22 million in 2000. Consumers, and its
special purpose subsidiary that will issue the bonds, will recover the repayment
of principal, interest and other expenses relating to the issuance of the bonds
through a Securitization charge and a tax charge. These charges are subject to
an annual true-up until one year prior to the last expected maturity date of the
Securitization bonds and no more than quarterly thereafter. The MPSC's order
will not increase current electric rates for any of Consumers' tariff customers.
In January 2001, Consumers accepted the MPSC's final financing order. The final
financing order has been appealed by the Attorney General of Michigan. Consumers
cannot predict the outcome of the appeal or its effect on the schedule for
issuance of Securitization bonds. Beginning January 1, 2001, and continuing
during the appeal period, the amortization of the approved regulatory assets
being securitized as qualified costs is being deferred which effectively offsets
the loss in revenue resulting from the five percent residential rate reduction.
The amortization will be reestablished later, after the Securitization bond
sale, based on a schedule that is the same as the recovery of the principal
amounts of the securitized qualified costs. Ultimately, sale of
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Securitization bonds will be required to offset substantially all of the revenue
impact of the rate reduction over the term of the bonds.
In September 1999, Consumers began implementing a plan for electric retail
customer open access. Consumers submitted this plan to the MPSC in 1998, and in
March 1999 the MPSC issued orders that generally supported the plan. The
Customer Choice Act states that orders issued by the MPSC before the date of
this act that 1) allow electric customers to choose their supplier, 2) authorize
recovery of net stranded costs and implementation costs, and 3) confirm any
voluntary commitments of electric utilities, are in compliance with this act and
enforceable by the MPSC. In September 2000, as required by the MPSC, Consumers
filed tariffs governing its retail open access program and addressed revisions
appropriate to comply with the Customer Choice Act. Consumers cannot predict how
the MPSC will modify the tariff or enforce the existing restructuring orders.
In a pending case before the Court of Appeals, ABATE and the Attorney General
each appealed an August 1999 order in which the MPSC found that it had
jurisdiction to approve rates, terms and conditions for electric retail
wheeling, also known as electric customer choice, if a utility voluntarily
chooses to offer that service. Consumers believes that the Customer Choice Act
has rendered the issue moot, but cannot predict how the Court of Appeals will
resolve the issue.
POWER COSTS: During periods when electric demand is high, the cost of purchasing
energy on the spot market can be substantial. To reduce Consumers' exposure to
the fluctuating cost of electricity, and to ensure adequate supply to meet
demand, Consumers intends to maintain sufficient generation and to purchase
electricity from others to create a power reserve, also called a reserve margin,
of approximately 15 percent. The reserve margin provides Consumers with
additional power above its anticipated peak power demands. It also allows
Consumers to provide reliable service to its electric service customers and to
protect itself against unscheduled plant outages and unanticipated demand. For
the summers 2001, 2002, and 2003, Consumers is planning for a reserve margin of
15 percent. The actual reserve margin needed will depend primarily on summer
weather conditions, the level of retail open access requirements being served by
others during the summer, and any unscheduled plant outages. The existing retail
open access plan allows other electric service providers with the opportunity to
serve up to 750 MW of nominal retail open access requirements. As of April 2001,
alternative electric service providers are providing service to 73 MW of retail
open access requirements.
To reduce the risk of high energy prices during peak demand periods and to
achieve its reserve margin target, Consumers employs a strategy of purchasing
future electricity call option contracts for the physical delivery of
electricity during the months of June through September. As of March 31, 2001,
Consumers had purchased or had commitments to purchase electricity call option
contracts covering the estimated reserve margin requirements for summer 2001,
and partially covering the estimated reserve margin requirements for summers
2002 through 2005, at a recognized cost of $104 million, of which $60 million
pertains to 2001.
In 1996, as a result of efforts to move the electric industry in Michigan to
competition, Detroit Edison gave Consumers the required four-year contractual
notice of its intent to terminate the agreements under which the companies
jointly operate the MEPCC. Detroit Edison and Consumers negotiated to
restructure and continue certain parts of the MEPCC control area and joint
transmission operations, but expressly excluded any merchant operations
(electricity purchasing, sales, and dispatch operations). The former joint
merchant operations began operating independently on April 1, 2001. The
termination of joint merchant operations with Detroit Edison will open Detroit
Edison and Consumers to wholesale market competition as individual companies.
Consumers cannot predict the financial impact of terminating these joint
merchant operations.
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Prior to 1998, the PSCR process provided for the reconciliation of actual power
supply costs with power supply revenues. This process assured recovery of all
reasonable and prudent power supply costs actually incurred by Consumers,
including the actual cost of fuel, interchange power and purchased power. In
1998, as part of the electric restructuring efforts, the MPSC suspended the PSCR
process through December 31, 2001. Under the suspension, the MPSC would not
grant adjustment of customer rates through 2001. As a result of the rate freeze
imposed by the Customer Choice Act, the current rates will remain in effect
until at least December 31, 2003. Therefore, changes in power supply costs as a
result of fluctuating energy prices will not be reflected in rates during the
rate freeze period.
TRANSMISSION ASSETS: In 1999, the FERC issued Order No. 2000, which describes
the characteristics the FERC would find acceptable in a model RTO. In this
order, the FERC declined to mandate that utilities join RTOs, but did order
utilities to make filings in October 2000 and January 2001 declaring their
intentions with respect to RTO membership.
In 1999, Consumers and four other electric utility companies joined together to
form a coalition known as the Alliance Companies for the purpose of creating a
FERC-approved RTO. As the FERC has not made a final disposition of the Alliance
RTO, Consumers is uncertain about the outcome of the Alliance matter before the
FERC and its continued participation in the Alliance RTO.
In January 2001, the FERC granted Consumers' application to transfer ownership
and control of its transmission facilities to a wholly owned subsidiary,
Michigan Transco. Consumers transferred the transmission facilities to Michigan
Transco on April 1, 2001. This represents a major step in Consumers' plan to
either divest its transmission business to a third party or to transfer control
of or to sell it to an RTO. In either event, Consumers' current plan is to
remain in the business of generating and distributing electric power to retail
customers. In addition, in response to an application that Consumers filed with
the MPSC, the MPSC issued an order that stated in part that, if Consumers sells
its transmission facilities in the manner described in its application, it would
be in compliance with applicable requirements of the Customer Choice Act.
ELECTRIC PROCEEDINGS: In 1997, ABATE filed a complaint with the MPSC. The
complaint alleged that Consumers' electric earnings are more than its authorized
rate of return and sought an immediate reduction in Consumers' electric rates
that approximated $189 million annually. As a result of the rate freeze imposed
by the Customer Choice Act, the MPSC issued an order in June 2000 dismissing the
ABATE complaint. In July 2000, ABATE filed a rehearing petition with the MPSC.
Consumers cannot predict the outcome of the rehearing process.
In March 2000 and 2001, Consumers filed applications with the MPSC for the
recovery of electric utility restructuring implementation costs of $31 million
and $25 million, incurred in 1999 and 2000, respectively. Consumers expects a
final order for the 1999 costs in the first half of 2001 and for the 2000 cost
in early 2002. Consumers believes these costs are fully recoverable in
accordance with the Customer Choice Act; however, Consumers cannot predict the
amounts the MPSC will approve as recoverable costs.
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OTHER CONSUMERS' ELECTRIC UTILITY UNCERTAINTIES
THE MIDLAND COGENERATION VENTURE: The MCV Partnership, which leases and operates
the MCV Facility, contracted to sell electricity to Consumers for a 35-year
period beginning in 1990 and to supply electricity and steam to Dow. Consumers,
through two wholly owned subsidiaries, holds the following assets related to the
MCV Partnership and MCV Facility: 1) CMS Midland owns a 49 percent general
partnership interest in the MCV Partnership; and 2) CMS Holdings holds, through
FMLP, a 35 percent lessor interest in the MCV Facility.
Summarized Statements of Income for CMS Midland and CMS Holdings
In Millions
- ------------------------------------------------------------------------------------------------------------------
Three Months Ended
March 31 2001 2000
- ------------------------------------------------------------------------------------------------------------------
Pretax operating income $13 $9
Income taxes and other 4 3
- ------------------------------------------------------------------------------------------------------------------
Net income $9 $6
==================================================================================================================
Power Purchases from the MCV Partnership - Consumers' annual obligation to
purchase capacity from the MCV Partnership is 1,240 MW through the termination
of the PPA in 2025. The PPA provides that Consumers is to pay, based on the MCV
Facility's availability, a levelized average capacity charge of 3.77 cents per
kWh, a fixed energy charge, and a variable energy charge based primarily on
Consumers' average cost of coal consumed for all kWh delivered. Since January 1,
1993, the MPSC has permitted Consumers to recover capacity charges averaging
3.62 cents per kWh for 915 MW, plus a substantial portion of the fixed and
variable energy charges. Since January 1, 1996, the MPSC has also permitted
Consumers to recover capacity charges for the remaining 325 MW of contract
capacity with an initial average charge of 2.86 cents per kWh increasing
periodically to an eventual 3.62 cents per kWh by 2004 and thereafter. However,
due to the current freeze of Consumers' retail rates that the Customer Choice
Act requires, the capacity charge for the 325 MW is now frozen at 3.17 cents per
kWh. After September 2007, the PPA's terms require Consumers to pay the MCV
Partnership capacity and energy charges that the MPSC has authorized for
recovery from electric customers.
Consumers recognized a loss in 1992 for the present value of the estimated
future underrecoveries of power costs under the PPA based on MPSC cost recovery
orders. At March 31, 2001 and March 31, 2000, the remaining after-tax present
value of the estimated future PPA liability associated with the 1992 loss
totaled $43 million and $71 million, respectively. In March 1999, Consumers and
the MCV Partnership reached an agreement effective January 1, 1999, that capped
availability payments to the MCV Partnership at 98.5 percent. If the MCV
Facility generates electricity at the maximum 98.5 percent level during the next
five years, Consumers' after-tax cash underrecoveries associated with the PPA
could be as follows:
In Millions
- ------------------------------------------------------------------------------------------------------------------
2001 2002 2003 2004 2005
- ------------------------------------------------------------------------------------------------------------------
Estimated cash underrecoveries at 98.5%, net of tax $38 $38 $37 $36 $35
==================================================================================================================
Consumers continually evaluates the adequacy of the PPA liability. These
evaluations consider management's
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assessment of operating levels at the MCV Facility through 2007, along with
certain other factors including MCV related costs that are included in
Consumers' frozen retail rates. Should future results differ from management's
assessments, Consumers may have to make additional charges for a given year of
up to $33 million, after tax. Management believes that the PPA liability is
adequate at this time. For further discussion on the impact of the frozen PSCR,
see "Electric Utility Rate Matters" in this Note.
NUCLEAR FUEL COST: Consumers amortizes nuclear fuel cost to fuel expense based
on the quantity of heat produced for electric generation. Consumers expenses
interest on leased nuclear fuel as it is incurred. Under current federal law, as
a federal court decision confirmed, the DOE was to begin accepting deliveries of
spent nuclear fuel for disposal by January 31, 1998. For fuel used after April
6, 1983, Consumers charges disposal costs to nuclear fuel expense, recovers
these costs through electric rates, and then remits them to the DOE quarterly.
Consumers elected to defer payment for disposal of spent nuclear fuel burned
before April 7, 1983. As of March 31, 2001, Consumers has a recorded liability
to the DOE of $132 million, including interest, which is payable upon the first
delivery of spent nuclear fuel to the DOE. Consumers recovered through electric
rates the amount of this liability, excluding a portion of interest. In 1997,
the DOE declared that it would not begin to accept spent nuclear fuel deliveries
in 1998. Also in 1997, a federal court affirmed the DOE's duty to take delivery
of spent fuel. Subsequent litigation in which Consumers and certain other
utilities participated has not been successful in producing more specific relief
for the DOE's failure to comply.
In July 2000, the DOE reached a settlement agreement with another utility to
address the DOE's delay in accepting spent fuel. The DOE may use that settlement
agreement as a framework that it could apply to other nuclear power plants;
however, certain other utilities are challenging the validity of such
settlement. Consumers is evaluating this matter further. Additionally, there are
two court decisions that support the right of utilities to pursue damage claims
in the United States Court of Claims against the DOE for failure to take
delivery of spent fuel. Consumers is evaluating those rulings and their
applicability to its contracts with the DOE.
NUCLEAR MATTERS: In March 2000, Palisades received its annual performance review
in which the NRC stated that no significant performance issues existed during
the assessment period in the reactor safety, radiation safety, and safeguards
strategic performance areas. In November 2000, Palisades received its
mid-refueling cycle performance review and inspection plan in which the NRC
noted that plant performance for the third quarter of 2000 included one
performance criteria requiring regulatory response. At the end of 2000, this one
performance criteria returned to a condition requiring no regulatory response.
Except for one supplemental inspection, the NRC plans to conduct only routine
baseline inspections at Palisades.
The amount of spent nuclear fuel discharged from the reactor to date exceeds
Palisades' temporary on-site storage pool capacity. Consequently, Consumers is
using NRC-approved steel and concrete vaults, commonly known as "dry casks", for
temporary on-site storage. As of March 31, 2001, Consumers had loaded 18 dry
storage casks with spent nuclear fuel at Palisades. Palisades will need to load
additional casks by 2004 in order to continue operation. Palisades currently has
three additional empty storage-only casks on-site, with storage pad capacity for
up to seven additional loaded casks. Consumers anticipates, however, that
licensed transportable casks, for additional storage, will be available prior to
2004.
Consumers maintains insurance against property damage, debris removal, personal
injury liability and other risks that are present at its nuclear facilities.
Consumers also maintains coverage for replacement power costs during prolonged
accidental outages at Palisades. Insurance would not cover such costs during the
first 12 weeks of any outage, but would cover most of such costs during the next
52 weeks of the outage, followed by reduced coverage to 80 percent for 110
additional weeks. If certain covered losses occur at its own or other
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nuclear plants similarly insured, Consumers could be required to pay maximum
assessments of $12.8 million in any one year to NEIL; $88 million per occurrence
under the nuclear liability secondary financial protection program, limited to
$10 million per occurrence in any year; and $6 million if nuclear workers claim
bodily injury from radiation exposure. Consumers considers the possibility of
these assessments to be remote.
In February 2000, Consumers submitted an analysis to the NRC that shows that the
NRC's screening criteria for reactor vessel embrittlement at Palisades will not
be reached until 2014. On December 14, 2000, the NRC issued an amendment
revising the operating license for Palisades extending the expiration date to
March 2011, with no restrictions related to reactor vessel embrittlement.
In April 2001, Consumers received approval from the NRC to amend the license of
the Palisades nuclear plant to transfer plant operating authority to NMC. The
formal operating authority transfer from Consumers to NMC is expected by July
2001. Consumers will retain ownership of Palisades, its 789 MW output, the spent
fuel on site, and ultimate responsibility for the safe operation, maintenance
and decommissioning of the plant. Under this agreement, salaried Palisades'
employees will become NMC employees by mid-year 2001. Union employees will work
under the supervision of NMC pursuant to their existing labor contract as
Consumers employees. Consumers will benefit by consolidating expertise and
controlling costs and resources among all of the nuclear plants being operated
on behalf of the five NMC member companies. With Consumers as a partner, NMC
will have responsibility for operating eight units with 4,500 MW of generating
capacity in Wisconsin, Minnesota, Iowa and Michigan. The ultimate financial
impact is uncertain.
CONSUMERS' GAS UTILITY CONTINGENCIES
GAS ENVIRONMENTAL MATTERS: Under the Michigan Natural Resources and
Environmental Protection Act, Consumers expects that it will ultimately incur
investigation and remedial action costs at a number of sites. These include 23
sites that formerly housed manufactured gas plant facilities, even those in
which it has a partial or no current ownership interest. Consumers has completed
initial investigations at the 23 sites. On sites where Consumers has received
site-wide study plan approvals, it will continue to implement these plans. It
will also work toward closure of environmental issues at sites as studies are
completed. Consumers has estimated its costs related to further investigation
and remedial action for all 23 sites using the Gas Research
Institute-Manufactured Gas Plant Probabilistic Cost Model. Using this model,
Consumers estimates the costs to be between $66 million and $118 million. These
estimates are based on undiscounted 1999 costs. As of March 31, 2001, Consumers
has an accrued liability of $55 million, (net of expenditures incurred to date
and net of any insurance recoveries), and a regulatory asset of $62 million. Any
significant change in assumptions, such as remediation techniques, nature and
extent of contamination, and legal and regulatory requirements, could affect the
estimate of remedial action costs for the sites. Consumers defers and amortizes,
over a period of ten years, environmental cleanup costs above the amount
currently being recovered in rates. Rate recognition of amortization expense
cannot begin until after a prudence review in a future general gas rate case.
The MPSC allows Consumers to recover $1 million annually.
CONSUMERS' GAS UTILITY RATE MATTERS
GAS RESTRUCTURING: On April 1, 1998, Consumers began an experimental gas
customer choice pilot program that ended March 31, 2001. Under this program, gas
distribution rates were frozen through March 31, 2001. On April 1, 2001 a
permanent gas customer choice program commenced and under this program Consumers
returned to a GCR mechanism that allows it to recover from its customers all
prudently incurred costs to purchase the natural gas commodity and transport it
to Consumers' facilities.
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PANHANDLE MATTERS
REGULATORY MATTERS: Effective August 1996, Trunkline placed into effect a
general rate increase, subject to refund. On September 16, 1999, Trunkline filed
a FERC settlement agreement to resolve certain issues in this proceeding. FERC
approved this settlement February 1, 2000 and required refunds of approximately
$2 million that were made in April 2000, with supplemental refunds of $1.3
million in June 2000. On January 29, 2001, Trunkline filed a settlement that
included the remaining issues in this proceeding. On April 12, 2001, the FERC
approved Trunkline's uncontested settlement, without modification. As part of
the settlement, Trunkline will reduce its maximum rates and make refunds.
Management believes that reserves for refund established are adequate and there
will not be a material adverse effect on consolidated results of operations or
financial position.
In conjunction with a FERC order issued in September 1997, FERC required certain
natural gas producers to refund previously collected Kansas ad-valorem taxes to
interstate natural gas pipelines, including Panhandle. FERC ordered these
pipelines to refund these amounts to their customers. The pipelines must make
all payments in compliance with prescribed FERC requirements. At March 31, 2001
and December 31, 2000, Panhandle's Accounts Receivable included $60 million and
$59 million, respectively, due from natural gas producers, and Other Current
Liabilities included $60 million and $59 million, respectively, for related
obligations.
On March 28, 2001, Trunkline received FERC approval to abandon 720 miles of its
26-inch diameter pipeline that extends from Longville, Louisiana to Bourbon,
Illinois. This filing is in conjunction with a plan for Centennnial Pipeline to
convert the line from natural gas transmission service to a refined products
pipeline by January 2002. Panhandle owns a one-third interest in the venture
along with TEPPCO Partners L.P. and Marathon Ashland Petroleum L.L.C. As of
March 31, 2001, Panhandle had made a $8 million cash investment in the
Centennial project, which was reimbursed by Centennial on May 4, 2001 upon the
closing of Centennial's construction financing.
ENVIRONMENTAL MATTERS: Panhandle is subject to federal, state and local
regulations regarding air and water quality, hazardous and solid waste disposal
and other environmental matters. Panhandle has identified environmental
contamination at certain sites on its systems and has undertaken cleanup
programs at these sites. The contamination resulted from the past use of
lubricants in compressed air systems containing PCBs and the prior use of
wastewater collection facilities and other on-site disposal areas. Panhandle
communicated with the EPA and appropriate state regulatory agencies on these
matters. Under the terms of the sale of Panhandle to CMS Energy, a subsidiary of
Duke Energy is obligated to complete the Panhandle clean-up programs at certain
agreed-upon sites and to indemnify against certain future environmental
litigation and claims. Panhandle expects these cleanup programs to continue
through 2001. The Illinois EPA included Panhandle Eastern Pipe Line and
Trunkline, together with other non-affiliated parties, in a cleanup of former
waste oil disposal sites in Illinois. Prior to a partial cleanup by the EPA, a
preliminary study estimated the cleanup costs at one of the sites to be between
$5 million and $15 million. The State of Illinois contends that Panhandle
Eastern Pipe Line's and Trunkline's share for the costs of assessment and
remediation of the sites, based on the volume of waste sent to the facilities,
is 17.32 percent. Management believes that the costs of cleanup, if any, will
not have a material adverse impact on Panhandle's financial position, liquidity,
or results of operations.
OTHER UNCERTAINTIES
CMS GENERATION-OXFORD TIRE RECYCLING: In a 1999 administrative order, the
California Regional Water Control Board of the State of California named CMS
Generation as a potentially responsible party for the
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cleanup of the waste from a fire that occurred in September 1999 at the Filbin
tire pile. The tire pile was maintained as fuel for an adjacent power plant
owned by Modesto Energy Limited Partnership. Oxford Tire Recycling of Northern
California, Inc., a subsidiary of CMS Generation until 1995, owned the Filbin
tire pile. CMS Generation has not owned an interest in Oxford Tire Recycling of
Northern California, Inc. or Modesto Energy Limited Partnership since 1995. In
April 2000, the California Attorney General filed a complaint against the
potentially responsible parties for cleanup of the site and assessed penalties
for violation of the California Regional Water Control Board order. The
complaint alleges $20 million of cleanup costs to be shared among all the
potentially responsible parties. CMS Generation and all relevant State agencies
have reached a settlement.
Also in connection with this same fire, several class action lawsuits were filed
claiming that the fire resulted in damage to the class and that management of
the site caused the fire. CMS Generation believes these cases are without merit
and intends to vigorously defend against them. CMS Generation's primary
insurance carrier has agreed to pay a portion of the cleanup costs and legal
fees under an existing policy.
DEARBORN INDUSTRIAL GENERATION: Duke/Fluor Daniel (DFD) has asserted change
order claims against Dearborn Industrial Generation, L.L.C. (DIG), a
wholly-owned subsidiary of CMS Generation, in excess of $65 million for
additional time and cost relating to the construction by DFD of the DIG
electrical generation facility in Dearborn, Michigan. DIG rejected the change
orders, tendered change orders indicating cost deductions to DFD relating to
work that DIG was required to take over from DFD, and assessed DFD schedule
liquidated damages. Neither DFD nor DIG have initiated a formal dispute
resolution regarding this matter yet, and construction of the electrical
generation facility continues.
CMS OIL AND GAS: In 1999, a former subsidiary of CMS Oil and Gas, Terra Energy
Ltd., was sued by Star Energy, Inc. and White Pines Enterprises LLC in the 13th
Judicial Circuit Court in Antrim County, Michigan, on grounds, among others,
that Terra violated oil and gas lease and other agreements by failing to drill
wells it had committed to drill. Among the defenses asserted by Terra were that
the wells were not required to be drilled and the claimant's sole remedy was
termination of the oil and gas lease. During the trial, the judge declared the
lease terminated in favor of White Pines. The jury then awarded Star Energy and
White Pines $7.6 million in damages. Terra has filed an appeal. CMS Energy
believes Terra has meritorious grounds for either reversal of the judgment or
reduction of damages. CMS Energy has an indemnification obligation in favor of
the purchaser of its Michigan properties with respect to this litigation.
OTHER: CMS Energy and Enterprises have guaranteed repayment of debt, through
letters of credit and surety bonds, of unconsolidated affiliates and related
parties approximating $418 million as of March 31, 2001.
Additionally, Enterprises, in the ordinary course of business, has guarantees in
place for contracts of CMS MST in the maximum amount of $741 million at March
31, 2001, which contain certain schedule and performance requirements. As of
March 31, 2001, the actual amount of financial exposure covered by these
guarantees was $452 million. These amounts exclude the guarantees associated
with CMS MST's natural gas sales arrangements totaling $339 million, which are
recorded as liabilities on the Consolidated Balance Sheet at March 31, 2001.
Management monitors and approves these obligations and believes it is unlikely
that CMS Energy or Enterprises would be required to perform or otherwise incur
any material losses associated with the above obligations.
Certain CMS Gas Transmission and CMS Generation affiliates in Argentina received
notice from various Argentine provinces claiming stamp taxes and associated
penalties and interest arising from various gas
CMS-29
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transportation transactions. Although these claims total approximately $75
million, the affiliates and CMS Energy believe the claims are without merit and
will vigorously contest them.
In March 2000, Adams Affiliates, Inc. and Cottonwood Partnership (prior majority
owners of Continental Natural Gas) initiated arbitration proceedings through the
American Arbitration Association against CMS Energy. The plaintiffs claim, in
connection with an Agreement and Plan of Merger among CMS Energy, CMS Merging
Corporation, Continental Natural Gas and the plaintiffs, damages for breach of
warranty, implied duty of good faith, violation of the Michigan Uniform
Securities Act, and common law fraud and negligent misrepresentation. The
plaintiffs allege $13 million of compensatory damages and $26 million in
exemplary damages. CMS Energy filed a response denying all the claims made by
the plaintiffs and asserting several counterclaims. CMS Energy believes the
claims against it are without merit and will vigorously defend against them, but
cannot predict the outcome of this matter.
CMS Generation does not currently expect to incur significant capital costs at
its power facilities for compliance with current environmental regulatory
standards.
In addition to the matters disclosed in this Note, Consumers, Panhandle and
certain other subsidiaries of CMS Energy are parties to certain lawsuits and
administrative proceedings before various courts and governmental agencies
arising from the ordinary course of business. These lawsuits and proceedings may
involve personal injury, property damage, contractual matters, environmental
issues, federal and state taxes, rates, licensing and other matters.
CMS Energy has accrued estimated losses for certain contingencies discussed in
this Note. Resolution of these contingencies is not expected to have a material
adverse impact on CMS Energy's financial position, liquidity, or results of
operations.
CAPITAL EXPENDITURES: CMS Energy estimates capital expenditures, including
investments in unconsolidated subsidiaries and new lease commitments, of $1.285
billion for 2001, $1.335 billion for 2002 and $1.270 billion for 2003. For
further information, see Capital Resources and Liquidity-Capital Expenditures in
the MD&A.
3: SHORT-TERM AND LONG-TERM FINANCINGS, AND CAPITALIZATION
CMS ENERGY: CMS Energy's Senior Credit Facility consists of a $1 billion
one-year revolving credit facility maturing in June 2001. Additionally, CMS
Energy has unsecured lines of credit in an aggregate amount of $38 million. As
of March 31, 2001, no amounts were outstanding under the Senior Credit Facility
or the unsecured lines of credit.
At March 31, 2001, CMS Energy had $110 million of Series A GTNs, $106 million of
Series B GTNs, $127 million of Series C GTNs, $183 million Series D GTNs, $397
million Series E GTNs and $72 million of Series F GTNs issued and outstanding
with weighted average interest rates of 7.9 percent, 8.1 percent, 7.9 percent,
7.0 percent, 7.8 percent and 8.5 percent, respectively.
In February 2001, CMS Energy sold 10 million shares of CMS Energy Common Stock.
CMS Energy used the net proceeds of approximately $296 million to repay
borrowings under the Senior Credit Facility.
In March 2001, CMS Energy sold $350 million aggregate principal amount of 8.50
percent senior notes due 2011. Net proceeds from the sale were approximately
$337 million. CMS Energy used the net proceeds to reduce borrowings under the
Senior Credit Facility and for general corporate purposes.
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MANDATORILY REDEEMABLE PREFERRED SECURITIES: CMS Energy and Consumers each have
wholly-owned statutory business trusts that are consolidated with the respective
parent company. CMS Energy and Consumers created their respective trusts for the
sole purpose of issuing Trust Preferred Securities. In each case, the primary
asset of the trust is a note or debenture of the parent company. The terms of
the Trust Preferred Security parallel the terms of the related parent company
note or debenture. The terms, rights and obligations of the Trust Preferred
Security and related note or debenture are also defined in the related indenture
through which the note or debenture was issued, the parent guarantee of the
related Trust Preferred Security and the declaration of trust for the particular
trust. All of these documents together with their related note or debenture and
Trust Preferred Security constitute a full and unconditional guarantee by the
parent company of the trust's obligations under the Trust Preferred Security. In
addition to the similar provisions previously discussed, specific terms of the
securities follow:
CMS Energy Trust and Securities In Millions
- ----------------------------------------------------------------------------------------------------------------------
Amount
Outstanding Earliest
March 31 Rate 2001 2000 Maturity Redemption
- ----------------------------------------------------------------------------------------------------------------------
CMS Energy Trust I, Convertible,
Quarterly Income Preferred Securities (a) 7.75% $173 $173 2027 2001
CMS Energy Trust II, Adjustable Convertible
Preferred Securities 8.75%(b) 301 301 2004 -
CMS Energy Trust III, Premium Equity
Participating Security Units (c) 7.25% 220 - 2004 -
CMS RHINOS Trust LIBOR + 1.75% - 250 - (d)
(a) Convertible into 1.2255 shares of CMS Energy Common Stock (equivalent to a
conversion price of $40.80). CMS Energy may cause conversion rights to expire on
or after July 2001.
(b) Includes 0.125% annual contract payments for the stock purchase contract
that obligates the holder to purchase not more than 1.2121 and not less than
.7830 shares of CMS Energy Common Stock in July 2002.
(c) Holders are obligated to purchase a variable number of shares of CMS Energy
Common Stock by August 2003.
(d) Redeemed in August 2000.
Consumers Energy Trust and Securities In Millions
- --------------------------------------------------------------------------------------------------------------
Amount
Outstanding Earliest
March 31 Rate 2001 2000 Maturity Redemption
- --------------------------------------------------------------------------------------------------------------
Consumers Power Company Financing I,
Trust Originated Preferred Securities 8.36% $100 $100 2015 2000
Consumers Energy Company Financing II,
Trust Originated Preferred Securities 8.20% 120 120 2027 2002
Consumers Energy Company Financing III,
Trust Originated Preferred Securities 9.25% 175 175 2029 2004
- --------------------------------------------------------------------------------------------------------------
CONSUMERS: At March 31, 2001, Consumers had FERC authorization to issue or
guarantee through June 2002, up to $900 million of short-term securities
outstanding at any one time. Consumers also had remaining FERC authorization to
issue through June 2002 up to $25 million and $800 million of long-term
securities for refinancing or refunding purposes and for general corporate
purposes, respectively. Additionally, Consumers
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had remaining FERC authorization to issue $275 million of first mortgage bonds
to be issued solely as security for the long-term securities mentioned above.
Consumers has an unsecured $300 million credit facility maturing in July 2002
and unsecured lines of credit aggregating $170 million. These facilities are
available to finance seasonal working capital requirements and to pay for
capital expenditures between long-term financings. At March 31, 2001, a total of
$170 million was outstanding at a weighted average interest rate of 6.0 percent,
compared with $151 million outstanding at March 31, 2000, at a weighted average
interest rate of 7.1 percent.
Consumers currently has in place a $500 million trade receivables sale program,
up from $325 million at March 31, 2000. At March 31, 2001 and 2000, receivables
sold under the program totaled $432 million and $325 million, respectively.
Accounts receivable and accrued revenue in the Consolidated Balance Sheets have
been reduced to reflect receivables sold.
Under the provisions of its Articles of Incorporation, Consumers had $405
million of unrestricted retained earnings available to pay common dividends at
March 31, 2001. In January 2001, Consumers declared a $66 million common
dividend that was paid in February 2001 and in April 2001, Consumers declared a
$30 million common dividend payable in May 2001.
CMS OIL AND GAS: CMS Oil and Gas has a $225 million floating rate revolving
credit facility that matures in May 2002. At March 31, 2001, the amount utilized
under the credit facility was $95 million.
4: EARNINGS PER SHARE AND DIVIDENDS
Basic and diluted earnings per share are based on the weighted average number of
shares of common stock and potential common stock outstanding during the period.
Potential common stock, for purposes of determining diluted earnings per share,
includes the effects of dilutive stock options and convertible securities. The
effect of such potential common stock is computed using the treasury stock
method or the if-converted method, as applicable.
The following table presents a reconciliation of the numerators and denominators
of the basic and diluted earnings per share computations.
COMPUTATION OF EARNINGS PER SHARE:
In Millions, Except Per Share Amounts
- --------------------------------------------------------------------------------------------------
Three Months Ended March 31 2001 2000(a)
- --------------------------------------------------------------------------------------------------
NET INCOME APPLICABLE TO BASIC AND DILUTED EPS
Consolidated Net Income $ 109 $ 75
====================================
Net Income Attributable to Common Stock:
CMS Energy - Basic $ 109 $ 75
Add conversion of 7.75% Trust
Preferred Securities (net of tax) 2 2
------------------------------------
CMS Energy - Diluted $ 111 $ 77
====================================
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AVERAGE COMMON SHARES OUTSTANDING
APPLICABLE TO BASIC AND DILUTED EPS
CMS Energy:
Average Shares - Basic 125.4 113.5
Add conversion of 7.75% Trust
Preferred Securities 4.2 4.2
Options-Treasury Shares .3 .2
------------------------------------
Average Shares - Diluted 129.9 117.9
====================================
EARNINGS PER AVERAGE COMMON SHARE
Basic $ .87 $ .66
Diluted $ .85 $ .65
==================================================================================================
(a) Includes the cumulative effect of an accounting change for inventories,
which decreased net income by $5 million, or $.04 per basic and diluted share.
In February 2001, CMS Energy paid dividends of $.365 per share on CMS Energy
Common Stock. In April 2001, the Board of Directors declared a quarterly
dividend of $.365 per share on CMS Energy Common Stock, payable in May 2001.
5: RISK MANAGEMENT ACTIVITIES AND FINANCIAL INSTRUMENTS
The overall goal of the CMS Energy risk management policy is to analyze and
manage individual business unit commodity exposures to take advantage of the
presence of internal hedge opportunities within its diversified business units.
CMS Energy and its subsidiaries, primarily through CMS MST, utilize a variety of
derivative instruments (derivatives) for both trading and non-trading purposes.
These derivatives include futures contracts, swaps, options and forward
contracts with external parties to manage exposure to fluctuations in commodity
prices, interest rates and foreign exchange rates. To qualify for hedge
accounting, derivatives must meet the following criteria: i) the item to be
hedged exposes the enterprise to price, interest or exchange rate risk; and ii)
the derivative reduces that exposure and is designated as a hedge.
Derivative instruments contain credit risk if the counterparties, including
financial institutions and energy marketers, fail to perform under the
agreements. CMS Energy minimizes such risk by performing financial credit
reviews using, among other things, publicly available credit ratings of such
counterparties. No material nonperformance is expected.
IMPLEMENTATION OF SFAS NO. 133: Effective January 1, 2001, CMS Energy adopted
SFAS No. 133. CMS Energy reflected the difference between the fair market value
of the derivative instruments and the recorded book value of the derivative
instruments as a cumulative effect type adjustment to accumulated other
comprehensive income. CMS Energy will reclassify the gains and losses on the
derivative instruments that are reported in accumulated other comprehensive
income as earnings in the periods in which earnings are impacted by the
variability of the cash flows of the hedged item. The ineffective portion, if
any, of all hedges will be recognized in current period earnings. CMS Energy
determines fair market value based upon mathematical models using current and
historical pricing data.
CMS-33
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CMS Energy believes that the majority of its non-trading derivative contracts,
power purchase agreements and gas transportation contracts qualify for the
normal purchases and sales exception of SFAS No. 133 and therefore would not be
recognized at fair value on the balance sheet. CMS Energy does, however, use
certain derivative instruments to limit its exposures to commodity price risk,
interest rate risk, and currency exchange risk. The interest rate and foreign
exchange contracts meet the requirements for hedge accounting under SFAS No. 133
and CMS Energy recorded the changes in the fair value of these contracts in
accumulated other comprehensive income on the balance sheet.
The financial statement impact of recording the SFAS No. 133 transition
adjustment on January 1, 2001 is as follows:
In Millions
- --------------------------------------------------------------------------------
Fair value of derivative assets $35
Fair value of derivative liabilities 14
Increase in accumulated other comprehensive income, net of tax 13
- --------------------------------------------------------------------------------
Upon initial adoption of the standard, CMS Energy recorded a $13 million, net of
tax, cumulative effect adjustment to accumulated other comprehensive income.
This adjustment relates to the difference between the fair value and recorded
book value of contracts related to gas options, gas fuel swap contracts, and
interest rate swap contracts that qualified for cash flow hedge accounting prior
to the initial adoption of SFAS No. 133 and Consumers' proportionate share of
the effects of adopting SFAS No. 133 related to its equity investment in the MCV
Partnership. This amount will reduce, or be charged to cost of gas, cost of
power, interest expense, or other operating revenue respectively, when the
related hedged transaction occurs. Based on the pretax amount recorded in
accumulated other comprehensive income on the January 1, 2001 transition date,
Consumers recorded $11 million as a reduction to cost of gas and CMS Energy
recorded $1 million as additional interest expense during the first quarter of
2001. Consumers expects to record $2 million as a reduction to cost of power, if
the fair value of the related derivative asset is sustained. The ultimate fair
value of these derivative assets is dependent upon market conditions related to
the derivative instruments.
Derivative and hedge accounting, however, for certain utility industry
contracts, particularly electric call option contracts and option-like contracts
and contracts subject to bookouts remains uncertain. Consumers is currently
accounting for these types of contracts as derivatives that qualify for the
normal purchase exception of SFAS No. 133, and has, therefore, not recorded
these contracts on the balance sheet at fair value. The ultimate initial
financial statement impact of adopting SFAS No. 133 depends upon resolution of
these industry-specific issues with the FASB and could be materially different
than stated above. Additionally, if Consumers is required to record such
contracts at fair value on the balance sheet, any changes in fair value could
potentially be required to be reported directly in earnings, and could cause
earnings volatility.
COMMODITY DERIVATIVES (NON-TRADING): CMS Energy accounts for its non-trading
activities as cash flow hedges and, as such, defers any changes in market value
and gains and losses resulting from settlements until the hedged transaction is
complete. If there was a material lack of correlation between the changes in the
market value of the commodity price contracts and the market price ultimately
received for the hedged item, the open commodity price contracts would be
marked-to-market and gains and losses would be recognized in the income
statement currently. At March 31, 2001, these commodity derivatives extended for
periods up to 5 years.
CMS Energy had unrealized net losses of $7 million at March 31, 2001, related to
non-trading activities. The determination of unrealized net gains and losses
represents management's best estimate of prices including the use of exchange
and other third party quotes, time value and volatility factors in estimating
fair
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value. Accordingly, the unrealized net gains (losses) at March 31, 2001 are not
necessarily indicative of the amounts CMS Energy could realize in the current
market.
Consumers uses purchased call option contracts to purchase electric power and
gas fuel for generation, and uses commodity price swap agreements, to protect
against risk due to fluctuations in the market price of these commodities and to
ensure a reliable source of capacity to meet its customers' electric needs.
Consumers' electric business purchases electric call option contracts to meet
its regulatory obligation to serve, which requires providing a physical supply
of energy to customers, and to manage energy cost and to ensure a reliable
source of capacity during periods of peak demand. While management intends to
take delivery of the commodity, if Consumers' daily capacity exceeds its needs,
in rare instances, the options, if marketable, are sold. Consumers believes that
these contracts currently qualify for the normal purchase and sales exception of
SFAS No. 133; therefore, Consumers has not recorded the fair value of these
contracts on the balance sheet. At January 1, 2001 and March 31, 2001, Consumers
had a deferred asset of $86 million and $104 million, respectively, associated
with premiums for these contracts. As of January 1, 2001 and March 31, 2001,
these contracts had a fair value of $123 million and $95 million, respectively,
and expire between 2001 and 2005.
Consumers' electric business also purchases gas call option contracts and uses
gas swap contracts to hedge against price risk due to the fluctuations in the
market price of gas used as fuel for generation of electricity. These contracts
are financial contracts that will be used to offset increases in the price of
probable forecasted gas purchases. These contracts are designated as cash flow
hedges, and therefore, Consumers will record any change in the fair value of
these contracts in other comprehensive income until the forecasted transaction
occurs. Once the forecasted gas purchases occurs, the net gain or loss on these
contracts will be reclassified to earnings and recorded as part of the cost of
power. These contracts have been highly effective in achieving offsetting cash
flows of future gas purchases, and no component of the gain or loss was excluded
from the assessment of the hedge's effectiveness. As a result, no net gain or
loss has been recognized in earnings as a result of hedge ineffectiveness as of
March 31, 2001. At March 31, 2001, Consumers had a derivative asset with a fair
value of $2 million, which includes $1 million of premiums paid for these
contracts. These contracts expire in 2001, and Consumers expects to reclassify
the $1 million increase in fair value to earnings as a reduction of power costs
in 2001, if this fair value is sustained. The ultimate fair value of these
derivative assets is dependent upon market conditions related to the derivative
instruments.
COMMODITY DERIVATIVES (TRADING): CMS Energy, through its subsidiary CMS MST,
engages in trading activities. CMS MST manages any open positions within certain
guidelines which limit its exposure to market risk and requires timely reporting
to management of potential financial exposure. These guidelines include
statistical risk tolerance limits using historical price movements to calculate
daily value at risk measurements.
CMS MST's trading activities are accounted for in accordance with EITF 98-10
that calls for energy trading contracts to be marked-to-market. Under the
mark-to-market method of accounting, transactions are recorded at market value,
net of estimated future transactional reserves, and changes in these positions
are recognized as gains and losses in the Consolidated Statement of Income.
Changes result from cash settlement of existing positions, new positions and the
change in value of the outstanding positions.
INTEREST RATE DERIVATIVES: CMS Energy and its subsidiaries enter into interest
rate swap agreements to exchange variable rate interest payments to fixed rate
interest payments without exchanging the underlying notional amounts. These
agreements convert variable rate debt to fixed rate debt to reduce the impact of
interest rate fluctuations. Notional amounts reflect the volume of transactions
but do not represent the amount
CMS-35
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exchanged by the parties to the financial instruments. Accordingly, notional
amounts do not necessarily reflect CMS Energy's exposure to credit or market
risks. The difference between the amounts paid and received under the swaps is
accrued and recorded as an adjustment to interest expense over the life of the
hedged agreement. As of March 31, 2001, the weighted average interest rate
associated with outstanding swaps was approximately 6.4 percent.
In Millions
- -----------------------------------------------------------------------------------------------------------
Notional Maturity Fair Unrealized
Interest Rate Swaps Amount Date Value Gain (Loss)
- -----------------------------------------------------------------------------------------------------------
March 31, 2001 $1,069 2001 - 06 $ (15) $ (7)
March 31, 2000 $2,143 2000 - 08 $ (5) $ (5)
FOREIGN EXCHANGE DERIVATIVES: CMS Energy uses forward exchange and option
contracts to hedge certain receivables, payables, long-term debt and equity
value relating to foreign investments. The purpose of CMS Energy's foreign
currency hedging activities is to protect the company from the risk that U.S.
dollar net cash flows resulting from sales to foreign customers and purchases
from foreign suppliers and the repayment of non-U.S. dollar borrowings as well
as equity reported on the company's balance sheet, may be adversely affected by
changes in exchange rates. These contracts do not subject CMS Energy to risk
from exchange rate movements because gains and losses on such contracts offset
losses and gains, respectively, on assets and liabilities being hedged. The
estimated fair value of the foreign exchange and option contracts at March 31,
2001 and 2000 was $4 million and $(30) million, respectively; representing the
amount CMS Energy would receive or (pay) upon settlement. The impacts of the
hedges of the net investments in foreign operations are reflected in other
comprehensive income as a component of the foreign currency translation
adjustment. For the first quarter of 2001, the adjustment for hedging was
immaterial even though the net foreign currency translation adjustment was $(30)
million. Due to favorable exchange rates, CMS Energy recognized approximately $4
million in earnings as a result of hedges for US dollar denominated debt that do
not qualify as net investment hedges, and consequently, are marked-to-market
through earnings currently. This gain appears on the Consolidated Statements of
Income in Other Income (Deductions).
Foreign exchange contracts outstanding as of March 31, 2001 had a total notional
amount of $824 million. Of this amount, $778 million was related to CMS Energy's
investment in Argentina. The Argentine contracts have a weighted average rate of
1.042 and mature at various times during 2001 and 2002. In addition, $25 million
of the foreign exchange contracts are related to investments in Brazil. The
Brazilian contracts mature in June 2001 with a transaction rate of 1.995. The
contracts for the Australian investments have a notional amount of $21 million,
maturing in July 2001, and have transaction rates that range from .520 to .538.
The notional amount of the outstanding foreign exchange contracts at March 31,
2000 was $1.714 billion consisting of $369 million, $200 million and $1.145
billion for Australian, Brazilian and Argentine, respectively.
FINANCIAL INSTRUMENTS: The carrying amounts of cash, short-term investments and
current liabilities approximate their fair values due to their short-term
nature. The estimated fair values of long-term investments are based on quoted
market prices or, in the absence of specific market prices, on quoted market
prices of similar investments or other valuation techniques. Judgment may also
be required to interpret market data to develop certain estimates of fair value.
Accordingly, the estimates determined as of March 31, 2001 and 2000 are not
necessarily indicative of the amounts that may be realized in current market
exchanges. The carrying amounts of all long-term investments in financial
instruments, except as shown below, approximate fair value.
CMS-36
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In Millions
- ------------------------------------------------------------------------------------------------------------------
As of March 31 2001 2000
- ------------------------------------------------------------------------------------------------------------------
Carrying Fair Unrealized Carrying Fair Unrealized
Cost Value Gain(Loss) Cost Value Gain (Loss)
- ------------------------------------------------------------------------------------------------------------------
Long-Term Debt (a) $7,150 $7,016 $(134) $7,118 $6,831 $(287)
Preferred Stock and
Trust Preferred Securities $1,133 $1,075 $(58) $1,163 $1,051 $(112)
(a) Settlement of long-term debt is generally not expected until maturity.
6: REPORTABLE SEGMENTS
CMS Energy operates principally in the following seven reportable segments:
electric utility; gas utility; independent power production; oil and gas
exploration and production; natural gas transmission; marketing, services and
trading; and international energy distribution.
The electric utility segment consists of regulated activities associated with
the generation, transmission and distribution of electricity in the state of
Michigan. The gas utility segment consists of regulated activities associated
with the transportation, storage and distribution of natural gas in the state of
Michigan. The other reportable segments consist of the development and
management of electric, gas and other energy-related projects in the United
States and internationally, including energy trading and marketing. CMS Energy's
reportable segments are strategic business units organized and managed by the
nature of the products and services each provides. The accounting policies of
each reportable segment are the same as those described in the summary of
significant accounting policies. CMS Energy's management evaluates performance
based on pretax operating income. Intersegment sales and transfers are accounted
for at current market prices and are eliminated in consolidated pretax operating
income by segment.
The Consolidated Statements of Income show operating revenue and pretax
operating income by reportable segment. Revenues from a land development
business fall below the quantitative thresholds for reporting, and has never met
any of the quantitative thresholds for determining reportable segments.
CMS-37
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Report of Independent Public Accountants
To CMS Energy Corporation:
We have reviewed the accompanying consolidated balance sheets of CMS ENERGY
CORPORATION (a Michigan corporation) and subsidiaries as of March 31, 2001 and
2000, and the related consolidated statements of income, cash flows, and common
stockholders' equity for the three-month periods then ended. These financial
statements are the responsibility of the Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with auditing standards generally accepted in the United States, the objective
of which is the expression of an opinion regarding the financial statements
taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the financial statements referred to above for them to be in
conformity with accounting principles generally accepted in the United States.
We have previously audited, in accordance with auditing standards generally
accepted in the United States, the consolidated balance sheet of CMS Energy
Corporation and subsidiaries as of December 31, 2000, and, in our report dated
February 2, 2001, we expressed an unqualified opinion on that statement. In our
opinion, the information set forth in the accompanying consolidated balance
sheet as of December 31, 2000, is fairly stated, in all material respects, in
relation to the consolidated balance sheet from which it has been derived.
/s/ Arthur Andersen LLP
Detroit, Michigan,
April 27, 2001.
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CONSUMERS ENERGY COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS
Consumers, a subsidiary of CMS Energy, a holding company, is an electric and gas
utility company that provides service to customers in Michigan's Lower
Peninsula. Consumers' customer base includes a mix of residential, commercial
and diversified industrial customers, the largest segment of which is the
automotive industry.
This MD&A refers to, and in some sections specifically incorporates by
reference, Consumers' Condensed Notes to Consolidated Financial Statements and
should be read in conjunction with such Consolidated Financial Statements and
Notes. This Form 10-Q and other written and oral statements that Consumers may
make contain forward-looking statements as defined by the Private Securities
Litigation Reform Act of 1995. Consumers' intentions with the use of the words,
"anticipates," "believes," "estimates," "expects," "intends," and "plans," and
variations of such words and similar expressions, are solely to identify
forward-looking statements that involve risk and uncertainty. These
forward-looking statements are subject to various factors that could cause
Consumers' actual results to differ materially from the results anticipated in
such statements. Consumers has no obligation to update or revise forward-looking
statements regardless of whether new information, future events or any other
factors affect the information contained in such statements. Consumers does,
however discuss certain risk factors, uncertainties and assumptions in this
Management's Discussion and Analysis in the section entitled "CMS Energy,
Consumers and Panhandle Forward-Looking Statements Cautionary Factors" in
Consumers' 2000 Form 10-K Item 1 and in various public filings it periodically
makes with the SEC. Consumers designed this discussion of potential risks and
uncertainties, which is by no means comprehensive, to highlight important
factors that may impact Consumers' outlook. This Form 10-Q also describes
material contingencies in Consumers Notes to Consolidated Financial Statements,
and Consumers encourages its readers to review these Notes.
RESULTS OF OPERATIONS
Consumers Consolidated Earnings
In Millions
- ----------------------------------------------------------------------------------------------------------------
March 31 2001 2000 Change
- ----------------------------------------------------------------------------------------------------------------
Three months ended $ 98 $ 85 $ 13
================================================================================================================
For the three months ended March 31, 2001, net income available to the common
stockholder increased by $13 million over the 2000 level. The earnings increase
primarily reflects increased revenue from higher gas deliveries to ultimate
customers due to colder temperatures during the first quarter of 2001 and lower
electric power costs compared to the first quarter of 2000. For further
information, see the Electric and Gas Utility Results of Operations sections and
Note 2, Uncertainties.
CE-1
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ELECTRIC UTILITY RESULTS OF OPERATIONS
ELECTRIC PRETAX OPERATING INCOME:
In Millions
- ----------------------------------------------------------------------------------------------------------------
March 31 2001 2000 Change
- ----------------------------------------------------------------------------------------------------------------
Three months ended $ 135 $ 115 $ 20
================================================================================================================
For the three months ended March 31, 2001, electric utility pretax operating
income increased $20 million from the comparable period in 2000. The earnings
increase primarily reflects reduced power costs in part from increased internal
generation that reduced the need for higher cost purchased power and increased
sales to Consumers' higher-margin customers. Partially offsetting the
increased operating income benefit was higher operations and maintenance costs.
The following table quantifies these impacts on pretax operating income:
In Millions
- ----------------------------------------------------------------------------------------------------------------
Three Months
Ended March 31
Change Compared to Prior Year 2001 vs 2000
- ----------------------------------------------------------------------------------------------------------------
Electric deliveries $ 3
Power supply costs and related revenue 3
Intersystem sales 26
Rate decrease (13)
Non-commodity revenue 5
Operation and maintenance expense (26)
General taxes and depreciation expense 22
-------
Total change $ 20
================================================================================================================
ELECTRIC DELIVERIES: For the three months ended March 31, 2001, electric
deliveries were 10.0 billion kWh, an increase of 0.3 billion kWh or 3.1 percent
compared to the first quarter of 2000. Total electric deliveries increased to
residential and commercial customers and intersystem sales, partially offset by
reduced industrial usage reflecting the economic slowdown impacting the
automotive business.
POWER SUPPLY COSTS:
In Millions
- ------------------------------------------------------------------------------------------------
March 31 2001 2000 Change
- ------------------------------------------------------------------------------------------------
Three months ended $ 301 $ 301 $ -
================================================================================================
For the three months ended March 31, 2001, power supply costs remained unchanged
compared to the first quarter of 2000. Increased internal generation reduced the
need for higher cost purchased power.
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GAS UTILITY RESULTS OF OPERATIONS
GAS PRETAX OPERATING INCOME:
In Millions
- ----------------------------------------------------------------------------------------------------------------
March 31 2001 2000 Change
- ----------------------------------------------------------------------------------------------------------------
Three months ended $ 65 $ 64 $ 1
================================================================================================================
For the three months ended March 31, 2001, gas pretax operating income increased
$1 million from the comparable period in 2000. The earnings increase primarily
reflects increased revenue from higher deliveries to residential and commercial
customers due to colder temperatures in 2001. See Note 2, Uncertainties, "Gas
Rate Matters - Gas Restructuring", for more detailed information on this matter.
The following table quantifies these impacts on Pretax Operating Income.
In Millions
- -----------------------------------------------------------------------------------------------------------------
Three Months
Ended March 31
CHANGE COMPARED TO PRIOR YEAR 2001 VS 2000
- -----------------------------------------------------------------------------------------------------------------
Gas deliveries $ 10
Gas commodity costs and related revenue (3)
Gas wholesale and retail services 3
Operation and maintenance expense (5)
General taxes and depreciation expense (4)
----
Total change $ 1
=================================================================================================================
GAS DELIVERIES: For the three months ended March 31, 2001, gas system deliveries
to ultimate customers were 114 bcf, an increase of 9 bcf compared to the first
quarter of 2000. Total deliveries including miscellaneous transportation,
totaled 160 bcf, a decrease of 1 bcf or 1 percent compared to the first quarter
of 2000.
COST OF GAS SOLD:
In Millions
- ----------------------------------------------------------------------------------------------------------------
March 31 2001 2000 Change
- ----------------------------------------------------------------------------------------------------------------
Three months ended $ 349 $ 295 $ 54
================================================================================================================
For the three months ended March 31, 2001, the cost of gas sold increased by $54
million from the comparable period in 2000 due to higher gas prices and
increased gas sales to our ultimate customers due to colder temperatures during
the first quarter of 2001 compared to the first quarter of 2000.
CAPITAL RESOURCES AND LIQUIDITY
CASH POSITION, INVESTING AND FINANCING
OPERATING ACTIVITIES: Consumers derives cash from operating activities involving
the sale and transportation of natural gas and the generation, transmission,
distribution and sale of electricity. Cash from operations totaled $479 million
and $293 million for the first three months of 2001 and 2000, respectively. The
$186 million increase resulted primarily from a $200 million increase in cash
collected from customer sales offset by $21 million of additional expenditures
for inventories. Consumers primarily uses cash derived from operating
CE-3
47
activities to maintain and expand electric and gas systems, to retire portions
of long-term debt, and to pay dividends.
INVESTING ACTIVITIES: Cash used for investing activities totaled $204 million
and $138 million for the first three months of 2001 and 2000, respectively. The
change of $66 million is primarily the result of a $74 million increase in
capital expenditures offset by an $8 million decrease in the investment in
nuclear decommissioning trust fund.
FINANCING ACTIVITIES: Cash used in financing activities totaled $286 million and
$158 million for the first three months of 2001 and 2000, respectively. The
change of $128 million is primarily the result of a $139 million net decrease in
notes payable and the reduction of $13 million in the payment of common stock
dividends.
OTHER INVESTING AND FINANCING MATTERS: Consumers has credit facilities, lines of
credit and a trade receivable sale program in place as anticipated sources of
funds to fulfill its currently expected capital expenditures. For detailed
information about these source of funds, see Note 3, Short-Term Financing and
Capitalization.
OUTLOOK
CAPITAL EXPENDITURES OUTLOOK
Consumers estimates the following capital expenditures, including new lease
commitments, by expenditure type and by business segments over the next three
years. Consumers prepares these estimates for planning purposes and may revise
them.
In Millions
- ----------------------------------------------------------------------------------------------------------------
Years Ended December 31 2001 2002 2003
- ----------------------------------------------------------------------------------------------------------------
Construction $653 $650 $466
Nuclear fuel lease 16 26 -
Capital leases other than nuclear fuel 31 24 24
-------------------------------
$700 $700 $490
================================================================================================================
Electric utility operations (a)(b) $555 $555 $355
Gas utility operations (a) 145 145 135
-------------------------------
$700 $700 490
================================================================================================================
(a) These amounts include an attributed portion of Consumers' anticipated
capital expenditures for plant and equipment common to both the electric and gas
utility businesses.
(b) These amounts include estimates for capital expenditures that may be
required by recent revisions to the Clean Air Act's national air quality
standards. For further information see Note 2, Uncertainties.
CE-4
48
ELECTRIC BUSINESS OUTLOOK
GROWTH: Over the next five years, Consumers expects electric system deliveries
to grow an average of approximately two percent per year based primarily on a
steadily growing customer base. This growth rate does not take into account the
impact of electric industry restructuring, including the impact of the Customer
Choice Act that allows all customers to choose their electricity supplier
beginning January 1, 2002, or of changing regulation. Abnormal weather, changing
economic conditions or the developing competitive market for electricity may
affect actual electric deliveries by Consumers in future periods.
COMPETITION AND REGULATORY RESTRUCTURING: The Customer Choice Act, passed by the
Michigan Legislature, as a result of repeated efforts to enact electric utility
restructuring legislation, became effective June 2000.
The intent of the Customer Choice Act is to move the retail electric businesses
in Michigan to competition. Several years prior to the enactment of the Customer
Choice Act, in response to industry restructuring efforts, Consumers entered
into multi-year electric supply contracts with some of its largest industrial
customers to provide power to some of their facilities. The MPSC approved those
contracts as part of its phased introduction to competition. During the period
from 2001 through 2005, either Consumers or these industrial customers can
terminate or restructure some of these contracts. These contracts involve
approximately 600 MW of customer power supply requirements. Consumers cannot
predict the ultimate financial impact of changes related to these power supply
contracts.
Uncertainty exists with respect to the enactment of federal electric industry
restructuring legislation. A variety of bills introduced in Congress in recent
years have sought to change existing federal regulation of the industry. These
federal bills could potentially affect or supercede state regulation; however,
none have been enacted.
In part because of certain policy pronouncements by the FERC, Consumers joined
the Alliance RTO. In January 2001, the FERC granted Consumers' application to
transfer ownership and control of its transmission facilities to a wholly owned
subsidiary, Michigan Transco. Consumers transferred the transmission facilities
to Michigan Transco on April 1, 2001. This represents a major step in Consumers'
plan to transfer control of or to divest itself of ownership, operation and
control of its transmission assets.
Consumers cannot predict the outcome of these electric industry-restructuring
issues on its financial position, liquidity, or results of operations.
RATE MATTERS: Prior to the enactment of the Customer Choice Act, there were
several pending rate issues that could have affected Consumers' electric
business. As a result of the passage of this legislation, the MPSC dismissed
certain rate proceedings and a complaint filed by ABATE seeking a reduction in
rates. ABATE filed a petition for rehearing with the MPSC.
For further information and material changes relating to the rate matters and
restructuring of the electric utility industry, see Note 1, Corporate Structure
and Summary of Significant Accounting Policies, and Note 2, Uncertainties,
"Electric Rate Matters - Electric Restructuring" and "Electric Rate Matters -
Electric Proceedings," incorporated by reference herein.
NUCLEAR MATTERS: There are a number of issues related to nuclear matters that
may affect Consumers' business. For further information and material changes
relating to nuclear matters, see Note 2, Uncertainties, "Other Electric
Uncertainties - Nuclear Matters."
UNCERTAINTIES: Several electric business trends or uncertainties may affect
Consumers' financial results and condition. These trends or uncertainties have,
or Consumers reasonably expects could have, a material impact
CE-5
49
on net sales, revenues, or income from continuing electric operations. Such
trends and uncertainties include: 1) capital expenditures and increased
operating expenses for compliance with the Clean Air Act; 2) environmental
liabilities arising from various federal, state and local environmental laws and
regulations, including potential liability or expenses relating to the Michigan
Natural Resources and Environmental Protection Acts and Superfund; 3)
uncertainties relating to the storage and ultimate disposal of spent nuclear
fuel and the successful operation of NMC; and 4) electric industry
restructuring, including: a) how the MPSC ultimately calculates the amount of
Stranded Costs and the related true-up adjustments and the manner in which the
true-up operates; b) the ability to recover fully the cost of doing business
under the rate caps; c) obtaining a resolution of the pending appeal by the
Attorney General that allows a successful sale of Securitization bonds on a
timely basis; d) the ability to meet peak electric demand requirements at a
reasonable cost and without market disruption and initiatives undertaken to
reduce exposure to energy price increases; e) the restructuring of the MEPCC and
the termination of joint merchant operations with Detroit Edison; and f) the
effect of the transfer of Consumers transmission facilities to Michigan Transco
and its successful disposition or integration into an RTO. For detailed
information about these trends or uncertainties, see Note 2, Uncertainties,
incorporated by reference herein.
GAS BUSINESS OUTLOOK
GROWTH: Over the next five years, Consumers anticipates gas deliveries,
including gas customer choice deliveries (excluding transportation to the MCV
Facility and off-system deliveries), to grow at an average of about one percent
per year based primarily on a steadily growing customer base. Actual gas
deliveries in future periods may be affected by abnormal weather, alternative
energy costs, changes in competitive conditions, and the level of natural gas
consumption per customer.
During the spring and summer months of 2001, Consumers will purchase natural gas
for inventory to meet anticipated future customer needs during the winter
heating season. Consumers anticipates that it will incur financing costs on
these natural gas purchases that are higher than are being recovered in current
rates.
UNCERTAINTIES: Several gas business trends or uncertainties may affect
Consumers' financial results and conditions. These trends or uncertainties have,
or Consumers reasonably expects could have, a material impact on net sales,
revenues, or income from continuing gas operations. Such trends and
uncertainties include: 1) potential environmental costs at a number of sites,
including sites formerly housing manufactured gas plant facilities; 2) future
gas industry restructuring initiatives; 3) implementation of the permanent gas
customer choice program; 4) reintroduction of the GCR clause and any initiatives
undertaken to protect against gas price increases; and 5) market and regulation
responses to increases in gas costs. For detailed information about these
uncertainties, see Note 2, Uncertainties, incorporated by reference herein.
OTHER OUTLOOK
Consumers offers a variety of energy-related services to electric and gas
customers that focus on appliance maintenance, home safety, commodity choice and
assistance to customers purchasing heating, ventilation and air conditioning
equipment. Consumers continues to look for additional growth opportunities in
energy-related services for Consumers' customers.
CE-6
50
OTHER MATTERS
DERIVATIVES AND HEDGES
MARKET RISK INFORMATION: Consumers is exposed to market risks including, but not
limited to, changes in interest rates, commodity prices, and equity security
prices in which Consumers holds less than a 20 percent interest. Consumers'
derivative activities are subject to the direction of an executive oversight
committee consisting of designated members of senior management and a risk
committee, consisting of business unit managers. The goal of the risk management
policy is to measure and limit overall energy commodity risk by implementing an
enterprise-wide policy across all business units. This allows the use of hedges
between business units before utilizing derivatives with external third parties.
The role of the risk committee is to review the corporate commodity position and
ensure that net corporate exposures are within the economic risk tolerance
levels established by the Board of Directors. Management employs established
policies and procedures to manage its risks associated with market fluctuations,
including the use of various derivative instruments such as futures, swaps,
options and forward contracts. Management believes that an opposite movement of
the value of the hedged risk would offset any losses incurred on derivative
instruments used to hedge that risk. Consumers enters into all derivative
financial instruments for purposes other than trading.
In accordance with SEC disclosure requirements, Consumers performs sensitivity
analyses to assess the potential loss in fair value, cash flows and earnings
based upon a hypothetical 10 percent adverse change in market rates or prices.
Consumers determines fair value based upon mathematical models using current and
historical pricing data. Management does not believe that sensitivity analyses
alone provides an accurate or reliable method for monitoring and controlling
risks. Therefore, Consumers relies on the experience and judgment of senior
management and traders to revise strategies and adjust positions, as they deem
necessary. Losses in excess of the amounts determined in sensitivity analyses
could occur if market rates or prices exceed the ten percent shift used for the
analyses.
EQUITY SECURITY PRICE RISK: Consumers has a less than 20 percent equity
investment in CMS Energy. At March 31, 2001 and 2000 a hypothetical 10 percent
adverse change in market price would have resulted in a $10 million and $8
million change in its equity investment, respectively. This instrument is
currently marked-to-market through equity. Consumers believes that such an
adverse change would not have a material effect on its consolidated financial
position, results of operation or cash flows.
INTEREST RATE RISK: Consumers is exposed to interest rate risk resulting from
the issuance of fixed-rate debt and variable-rate debt, and from interest rate
swap and rate lock agreements. Consumers uses a combination of fixed-rate and
variable-rate debt, as well as interest rate swaps and rate locks to manage and
mitigate interest rate risk exposure when deemed appropriate, based upon market
conditions. These strategies attempt to provide and maintain the lowest cost of
capital. As of March 31, 2001 and 2000 Consumers had outstanding $719 million
and $891 million of variable-rate debt, respectively. Assuming a hypothetical 10
percent adverse change in market interest rates, Consumers exposure to earnings,
before tax, would be $4 million and $6 million at March 31, 2001 and 2000,
respectively. As of March 31, 2001 Consumers had entered into floating-to-fixed
interest rate swap agreements for a total notional amount of $300 million. These
swaps exchange variable-rate interest payment obligations to fixed-rate
obligations to minimize the impact of potential adverse interest rate changes.
As of March 31, 2001 and 2000, Consumers had outstanding long-term fixed-rate
debt including fixed-rate swaps of $2.583 billion and $2.062 billion,
respectively, with a fair value of $2.531 billion and $1.928 billion,
respectively. As of March 31, 2001 and 2000, assuming a hypothetical 10 percent
adverse change in market rates, Consumers would have an exposure of $131 million
to the fair value of these instruments, each year, respectively, if it had to
refinance all of its long-term fixed-rate debt. Consumers does not intend to
refinance its fixed-rate debt in the near term and believes that any adverse
change in debt price and interest rates would not have a material effect on
either its consolidated financial position, results of
CE-7
51
operation or, cash flows. For further discussion Note 3, Short-Term Financings
and Capitalization, "Derivative Activities"
COMMODITY MARKET RISK: Consumers enters into, for purposes other than trading,
electricity and gas call options and swap contracts to protect against risk due
to fluctuations in the market price of these commodities and to ensure a
reliable source of capacity to meet its customers' electric needs.
At March 31, 2001 the fair value based on quoted future market prices of
electricity-related option and swap contracts was $97 million. Assuming a
hypothetical 10 percent adverse change in market prices, the potential reduction
in fair value associated with these contracts would be $14 million. As of March
31, 2001, Consumers had an asset of $104 million as a result of premiums
incurred for electricity call option contracts. Consumers' maximum exposure
associated with the call option contracts is limited to the premiums paid. For
further discussion on commodity derivatives see "Derivative Activities" under
Note 2, Uncertainties, Other Electric Uncertainties and Other Gas Uncertainties.
CE-8
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CONSUMERS ENERGY COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31 2001 2000
- ----------------------------------------------------------------------------------------------------------------
In Millions
OPERATING REVENUE
Electric $ 665 $ 640
Gas 540 475
Other 14 11
--------------------
1,219 1,126
- ----------------------------------------------------------------------------------------------------------------
OPERATING EXPENSES
Operation
Fuel for electric generation 71 62
Purchased power - related parties 118 146
Purchased and interchange power 112 93
Cost of gas sold 349 295
Other 141 117
-------------------
791 713
Maintenance 55 48
Depreciation, depletion and amortization 105 123
General taxes 55 55
-------------------
1,006 939
- ----------------------------------------------------------------------------------------------------------------
PRETAX OPERATING INCOME
Electric 135 115
Gas 65 64
Other 13 8
--------------------
213 187
- ----------------------------------------------------------------------------------------------------------------
OTHER INCOME (DEDUCTIONS)
Dividends and interest from affiliates 2 2
Accretion income - 1
Accretion expense (2) (2)
Other, net 2 1
-------------------
2 2
- ----------------------------------------------------------------------------------------------------------------
INTEREST CHARGES
Interest on long-term debt 38 34
Other interest 10 8
Capitalized interest (1) -
-------------------
47 42
- ----------------------------------------------------------------------------------------------------------------
NET INCOME BEFORE INCOME TAXES 168 147
INCOME TAXES 61 53
-------------------
NET INCOME 107 94
PREFERRED STOCK DIVIDENDS - -
PREFERRED SECURITIES DISTRIBUTIONS 9 9
--------------------
NET INCOME AVAILABLE TO COMMON STOCKHOLDER $ 98 $ 85
================================================================================================================
THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
CE-10
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CONSUMERS ENERGY COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31 2001 2000
- ----------------------------------------------------------------------------------------------------------------
In Millions
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 107 $ 94
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation, depletion and amortization (includes nuclear
decommissioning of $2 and $10 respectively) 105 123
Accounts receivable 223 23
Inventories 123 144
Deferred income taxes and investment tax credit 13 (7)
Capital Lease and other amortization 8 7
Accretion expense 2 2
Accretion income - abandoned Midland project - (1)
MCV power purchases (3) (14)
Undistributed earnings of related parties (13) (9)
Regulatory liability - gas choice (16) -
Changes in other assets and liabilities (70) (69)
------------------
Net cash provided by operating activities 479 293
- -----------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (excludes assets placed under capital lease) (183) (109)
Cost to retire property, net (26) (21)
Investment in Electric Restructuring Implementation Plan (3) (6)
Investments in nuclear decommissioning trust funds (2) (10)
Proceeds from nuclear decommissioning trust funds 10 8
------------------
Net cash used in investing activities (204) (138)
- -----------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase (decrease) in notes payable, net (203) (64)
Payment of common stock dividends (66) (79)
Preferred securities distributions (9) (9)
Payment of capital lease obligations (8) (6)
-------------------
Net cash provided by (used in) financing activities (286) (158)
- -----------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND TEMPORARY CASH INVESTMENTS (11) (3)
CASH AND TEMPORARY CASH INVESTMENTS, BEGINNING OF PERIOD 21 18
------------------
CASH AND TEMPORARY CASH INVESTMENTS, END OF PERIOD $ 10 $ 15
================================================================================================================
Other cash flow activities and non-cash investing and financing activities were:
Cash transactions
Interest paid (net of amounts capitalized) $ 47 $ 45
Income taxes paid (net of refunds) - -
Non-cash transactions
Nuclear fuel placed under capital lease $ 2 $ 2
Other assets placed under capital leases 7 3
================================================================================================================
All highly liquid investments with an original maturity of three months or less
are considered cash equivalents.
The accompanying condensed notes are an integral part of these statements.
CE-11
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CONSUMERS ENERGY COMPANY
CONSOLIDATED BALANCE SHEETS
ASSETS MARCH 31 MARCH 31
2001 DECEMBER 31 2000
(UNAUDITED) 2000 (UNAUDITED)
- ---------------------------------------------------------------------------------------------------------------
In Millions
PLANT (AT ORIGINAL COST)
Electric $7,298 $7,241 $7,026
Gas 2,524 2,503 2,478
Other 21 23 24
----------------------------------------
9,843 9,767 9,528
Less accumulated depreciation, depletion and amortization 5,802 5,768 5,733
---------------------------------------
4,041 3,999 3,795
Construction work-in-progress 391 279 245
----------------------------------------
4,432 4,278 4,040
- ----------------------------------------------------------------------------------------------------------------
INVESTMENTS
Stock of affiliates 80 86 100
First Midland Limited Partnership 248 245 243
Midland Cogeneration Venture Limited Partnership 302 290 253
---------------------------------------
630 621 596
- ----------------------------------------------------------------------------------------------------------------
CURRENT ASSETS
Cash and temporary cash investments at cost, which approximates market 10 21 15
Accounts receivable and accrued revenue, less allowances
of $3, $3 and $4, respectively 46 225 77
Accounts receivable - related parties 66 111 65
Inventories at average cost
Gas in underground storage 143 271 71
Materials and supplies 67 66 61
Generating plant fuel stock 50 46 47
Prepaid property taxes 113 136 99
Regulatory assets 19 19 30
Deferred income taxes - 2 4
Other 24 13 11
---------------------------------------
538 910 480
- ----------------------------------------------------------------------------------------------------------------
NON-CURRENT ASSETS
Regulatory assets
Securitization costs 709 709 -
Postretirement benefits 226 232 333
Abandoned Midland Project 15 22 41
Unamortized nuclear costs - 6 504
Other 84 87 123
Nuclear decommissioning trust funds 585 611 615
Other 297 297 205
----------------------------------------
1,916 1,964 1,821
- ----------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $7,516 $7,773 $6,937
================================================================================================================
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STOCKHOLDERS' INVESTMENT AND LIABILITIES MARCH 31 MARCH 31
2001 DECEMBER 31 2000
(UNAUDITED) 2000 (UNAUDITED)
- ---------------------------------------------------------------------------------------------------------------
In Millions
CAPITALIZATION
Common stockholder's equity
Common stock $ 841 $ 841 $ 841
Paid-in capital 646 646 645
Revaluation capital 29 33 12
Retained earnings since December 31, 1992 538 506 491
----------------------------------------
2,054 2,026 1,989
Preferred stock 44 44 44
Company-obligated mandatorily redeemable preferred securities of:
Consumers Power Company Financing I (a) 100 100 100
Consumers Energy Company Financing II (a) 120 120 120
Consumers Energy Company Financing III (a) 175 175 175
Long-term debt 2,097 2,110 2,007
Non-current portion of capital leases 51 49 86
----------------------------------------
4,641 4,624 4,521
- ----------------------------------------------------------------------------------------------------------------
CURRENT LIABILITIES
Current portion of long-term debt and capital leases 243 231 88
Notes payable 200 403 151
Accounts payable 242 254 160
Accrued taxes 216 247 207
Accounts payable - related parties 69 67 83
Other 235 253 210
---------------------------------------
1,205 1,455 899
- ----------------------------------------------------------------------------------------------------------------
NON-CURRENT LIABILITIES
Deferred income taxes 713 716 667
Postretirement benefits 354 366 411
Regulatory liabilities for income taxes, net 260 246 75
Deferred investment tax credit 107 109 123
Other 236 257 241
---------------------------------------
1,670 1,694 1,517
- ----------------------------------------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES (Notes 1 and 2)
TOTAL STOCKHOLDERS' INVESTMENT AND LIABILITIES $ 7,516 $ 7,773 $ 6,937
================================================================================================================
(a) See Note 3, Short-Term Financings and Capitalization.
THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE BALANCE SHEETS.
CE-13
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CONSUMERS ENERGY COMPANY
CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDER'S EQUITY
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31 2001 2000
- ----------------------------------------------------------------------------------------------------------------
In Millions
COMMON STOCK
At beginning and end of period (a) $ 841 $ 841
- ----------------------------------------------------------------------------------------------------------------
OTHER PAID-IN CAPITAL
At beginning and end of period 646 645
- ----------------------------------------------------------------------------------------------------------------
REVALUATION CAPITAL
Investments
At beginning of period 33 37
Unrealized gain (loss) on investments (b) (5) (25)
---------------------
At end of period 28 12
---------------------
Derivative Instruments
At beginning of period (c) 21 -
Unrealized gain (loss) on derivative instruments (b) (13) -
Reclassification adjustments included in net income (b) (7) -
---------------------
At end of period 1 -
- ----------------------------------------------------------------------------------------------------------------
RETAINED EARNINGS
At beginning of period 506 485
Net income (b) 107 94
Cash dividends declared- Common Stock (66) (79)
Cash dividends declared- Preferred Stock - -
Preferred securities distributions (9) (9)
----------------------
At end of period 538 491
- ----------------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCKHOLDER'S EQUITY $ 2,054 $ 1,989
================================================================================================================
(a) Number of shares of common stock outstanding was 84,108,789 for all periods presented.
(b) Disclosure of Comprehensive Income:
Revaluation capital
Investments
Unrealized gain (loss) on investments, net of tax of
$3 and $13, respectively $ (5) $ (25)
Derivative Instruments
Unrealized gain (loss) on derivative instruments,
net of tax of $7 and $- , respectively (13) -
Reclassification adjustments included in net income,
net of tax of $4 and $- , respectively (7) -
Net income 107 94
--------------------
Total Comprehensive Income $ 82 $ 69
====================
(c) Cumulative effect of change in accounting principle, net of $(11) tax (Note 1)
THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
CE-14
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CONSUMERS ENERGY COMPANY
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
These interim Consolidated Financial Statements have been prepared by Consumers
and reviewed by the independent public accountant in accordance with SEC rules
and regulations. As such, certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted. Certain prior year amounts
have been reclassified to conform to the presentation in the current year. In
management's opinion, the unaudited information contained in this report
reflects all adjustments necessary to assure the fair presentation of financial
position, results of operations and cash flows for the periods presented. The
Condensed Notes to Consolidated Financial Statements and the related
Consolidated Financial Statements should be read in conjunction with the
Consolidated Financial Statements and Notes to Consolidated Financial Statements
contained in the Consumers Form 10-K for the year ended December 31, 2000, which
includes the Reports of Independent Public Accountants. Due to the seasonal
nature of Consumers operations, the results as presented for this interim period
are not necessarily indicative of results to be achieved for the fiscal year.
1: CORPORATE STRUCTURE AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CORPORATE STRUCTURE: Consumers, a subsidiary of CMS Energy, a holding company,
is an electric and gas utility company that provides service to customers in
Michigan's Lower Peninsula. Consumers' customer base includes a mix of
residential, commercial and diversified industrial customers, the largest
segment of which is the automotive industry.
UTILITY REGULATION: Consumers accounts for the effects of regulation based on
the regulated utility accounting standard SFAS No. 71, Accounting for the
Effects of Certain Types of Regulation. As a result, the actions of regulators
affect when Consumers recognizes revenues, expenses, assets and liabilities.
In March 1999, Consumers received MPSC electric restructuring orders. Consistent
with these orders, Consumers discontinued application of SFAS No. 71 for the
energy supply portion of its business in the first quarter of 1999 because
Consumers expected to implement retail open access for its electric customers in
September 1999. Discontinuation of SFAS No. 71 for the energy supply portion of
Consumers' business resulted in Consumers reducing the carrying value of its
Palisades plant-related assets by approximately $535 million and establishing a
regulatory asset for a corresponding amount. According to current accounting
standards, Consumers can continue to carry its energy supply-related regulatory
assets if legislation or an MPSC rate order allows the collection of cash flows
to recover these regulatory assets from its regulated transmission and
distribution customers. As of March 31, 2001, Consumers had a net investment in
energy supply facilities of $1.218 billion included in electric plant and
property. See Note 2, Uncertainties, "Electric Rate Matters - Electric
Restructuring."
REPORTABLE SEGMENTS: Consumers has two reportable segments: electric and gas.
The electric segment consists of activities associated with the generation,
transmission and distribution of electricity. The gas segment consists of
activities associated with the transportation, storage and distribution of
natural gas. Consumers' reportable segments are domestic strategic business
units organized and managed by the nature of the product and service each
provides. The accounting policies of the segments are the same as those
described in Consumers' 2000 Form 10-K. Consumers' management evaluates
performance based on pretax operating income. The Consolidated Statements of
Income show operating revenue and pretax operating income by reportable segment.
Intersegment sales and transfers are accounted for at current market prices and
are eliminated in consolidated pretax operating income by segment.
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RISK MANAGEMENT ACTIVITIES AND DERIVATIVES TRANSACTIONS: Consumers and its
subsidiaries use derivative instruments, including swaps and options, to manage
exposure to fluctuations in interest rates and commodity prices. To qualify for
hedge accounting, derivatives must meet the following criteria: 1) the hedged
item must expose the enterprise to price and interest rate risk; and 2) the
derivative must reduce that exposure and must be designated as a hedge.
Derivative instruments contain credit risk if the counterparties, including
financial institutions and energy marketers, fail to perform under the
agreements. Consumers minimizes such risk by performing financial credit reviews
using, among other things, publicly available credit ratings of such
counterparties. Consumers considers the risk of nonperformance by the
counterparties remote.
Consumers enters into interest rate swap agreements to exchange variable-rate
interest payment obligations for fixed-rate obligations without exchanging the
underlying notional amounts. These agreements convert variable-rate debt to
fixed-rate debt in order to reduce the impact of interest rate fluctuations. The
notional amounts parallel the underlying debt levels and are used to measure
interest to be paid or received and do not represent the exposure to credit
loss. For further discussion see Note 3, Short-Term Financing and
Capitalization, "Derivative Activities".
Consumers uses purchased call option contracts to purchase electric power and
gas fuel for generation, and uses commodity price swap agreements, to protect
against risk due to fluctuations in the market price of these commodities and to
ensure a reliable source of capacity to meet its customers' electric needs. For
further discussion on commodity derivatives see "Derivative Activities" under
Note 2, Uncertainties, Other Electric Uncertainties and Other Gas Uncertainties.
IMPLEMENTATION OF NEW ACCOUNTING STANDARDS: Effective January 1, 2001, Consumers
adopted SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities as amended and interpreted. SFAS No. 133 requires Consumers to
recognize at fair value, all contracts that meet the definition of a derivative
instrument, on the balance sheet as either assets or liabilities. This standard
also requires Consumers to record all changes in fair value directly in
earnings, or other comprehensive income if the derivative meets certain
qualifying hedge criteria. Consumers determines fair value based upon
mathematical models using current and historical pricing data.
Consumers believes that the majority of its contracts qualify for the normal
purchases and sales exception under the standard and are, therefore, not subject
to derivative accounting. Consumers does, however, use certain contracts that
qualify as derivative instruments to limit its exposure to gas commodity price
risk and interest rate risk.
Upon initial adoption of the standard, Consumers recorded a $21 million, net of
tax, cumulative effect adjustment to accumulated other comprehensive income.
This adjustment relates to the difference between the current fair value and
recorded book value of contracts related to gas options, gas fuel swap
contracts, and interest rate swap contracts that qualified for cash flow hedge
accounting prior to the initial adoption of SFAS No. 133 and Consumers'
proportionate share of the effects of adopting SFAS No. 133 related to its
equity investment in the MCV Partnership. This amount will reduce, or be charged
to cost of gas, cost of power, interest expense, or other operating revenue
respectively, when the related hedged transaction occurs. Based on the pretax
amount recorded in accumulated other comprehensive income on the January 1, 2001
transition date, Consumers recorded $11 million as a reduction to cost of gas
during the first quarter of 2001, and expects to record $2 million as a
reduction to cost of power, if the fair value of the related derivative asset is
sustained. The ultimate fair value of these derivative assets is dependent upon
market conditions related to the derivative instruments.
Derivative and hedge accounting, however, for certain utility industry
contracts, particularly electric call option
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contracts and option-like contracts, and contracts subject to bookouts remains
uncertain. Consumers is currently accounting for these types of contracts as
derivatives that qualify for the normal purchase exception of SFAS No. 133, and
has, therefore, not recorded these contracts on the balance sheet at fair value.
The ultimate initial financial statement impact of adopting SFAS No. 133 depends
upon resolution of these industry-specific issues with the FASB and could be
materially different than stated above. Additionally, if Consumers is required
to record such contracts at fair value on the balance sheet, any changes in fair
value could potentially be required to be reported directly in earnings, and
could cause earnings volatility.
For further discussion of derivative activities, see "Derivative Activities"
under Note 2, Uncertainties, Other Electric Uncertainties and Other Gas
Uncertainties and Note 3, Short-Term Financings and Capitalization.
2: UNCERTAINTIES
ELECTRIC CONTINGENCIES
ELECTRIC ENVIRONMENTAL MATTERS: The Clean Air Act limits emissions of sulfur
dioxide and NOx and requires emissions and air quality monitoring. Consumers
currently operates within these limits and meets current emission requirements.
The Clean Air Act requires the EPA to review periodically the effectiveness of
the national air quality standards in preventing adverse health effects.
1997 EPA Revised NOx and Small Particulate Emissions Standards - In 1997, the
EPA revised these standards to impose further limitations on NOx and small
particulate-related emissions. The United States Supreme Court recently found
that the EPA has power to revise the standards but found that the EPA's
implementation plan was not lawful. While this case has been pending in federal
courts, and while continuing through the lower federal courts as ordered by the
Supreme Court, the EPA suspended the 1997 standards and reinstated the pre-1997
standards.
1998 EPA Plan for NOx Emissions - In 1998, based in part upon the 1997
standards, the EPA issued final regulations requiring the State of Michigan to
further limit NOx emissions. Consumers anticipates a reduction in NOx emissions
by 2004 to only 32 percent of levels allowed for the year 2000.
Section 126 Petitions - In December 1999, the EPA issued a revised final rule
under Section 126 of the Clean Air Act. The rule requires some electric utility
generators, including some of Consumers' electric generating facilities, to
achieve the same emission rate as that required by the 1998 plan for NOx
emissions. Under the revised Section 126 rule, the emission rate will become
effective on May 1, 2003 and apply for the ozone season in 2003 and during each
subsequent year. Various parties' petitions challenging the EPA's rule have been
filed.
Until all air quality targets are conclusively established, the estimated cost
of compliance discussed below is subject to revision.
Cost of Environmental Law Compliance - To meet the EPA's 1998 rule and/or the
Section 126 NOx emission rules, the estimated cost to Consumers will be between
$450 million and $500 million. Consumers anticipates that it will incur these
capital expenditures between 2000 and either 2003 or 2004 depending upon whether
the EPA prevails in the Section 126 litigation. In addition, Consumers expects
to incur cost of removal related to this effort, but is unable to predict the
amount at this time.
Consumers may need an additional amount of between $290 million and $500 million
of capital expenditures to comply with the new small particulate standards
sometime after 2004.
Consumers' coal-fueled electric generating units burn low-sulfur coal and are
currently operating at or near the
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sulfur dioxide emission limits. Beginning in 1992 and continuing into 2001,
Consumers incurred capital expenditures totaling $72 million to install
equipment at certain generating units to comply with the acid rain provisions of
the Clean Air Act. Management believes that these expenditures will not
materially affect Consumers' annual operating costs.
Cleanup and Solid Waste - Under the Michigan Natural Resources and Environmental
Protection Act, Consumers expects that it will ultimately incur investigation
and remedial action costs at a number of sites. Nevertheless, it believes that
these costs are recoverable in rates under current ratemaking policies.
Consumers is a potentially responsible party at several contaminated sites
administered under Superfund. Superfund liability is joint and several. Along
with Consumers, many other creditworthy, potentially responsible parties with
substantial assets cooperate with respect to the individual sites. Based upon
past negotiations, Consumers estimates that its share of the total liability for
the known Superfund sites will be between $2 million and $9 million. As of March
31, 2001, Consumers had accrued the minimum amount of the range for its
estimated Superfund liability.
During routine maintenance activities, Consumers identified PCB as a component
in certain paint, grout and sealant materials at the Ludington Pumped Storage
Facility. Consumers removed and replaced part of the PCB material. Consumers has
proposed a plan to deal with the remaining materials and is awaiting a response
from the EPA.
ELECTRIC RATE MATTERS
ELECTRIC RESTRUCTURING: In June 2000, the Michigan Legislature passed electric
utility restructuring legislation known as the Customer Choice Act. This act: 1)
permits all customers to exercise choice of electric generation suppliers by
January 1, 2002; 2) cuts residential electric rates by five percent; 3) freezes
all electric rates through December 31, 2003, and establishes a rate cap for
residential customers through at least December 31, 2005, and a rate cap for
small commercial and industrial customers through at least December 31, 2004; 4)
allows for the use of Securitization to refinance Stranded Costs as a means of
offsetting the earnings impact of the five percent residential rate reduction;
5) establishes a market power test which may require the transfer of control of
a portion of generation resources in excess of that required to serve firm
retail sales requirements (a requirement with which Consumers is in compliance);
6) requires Michigan utilities to join a FERC-approved RTO or divest their
interest in transmission facilities to an independent transmission owner; 7)
requires the joint expansion of available transmission capability by Consumers,
Detroit Edison and American Electric Power by at least 2,000 MW by June 5 of
2002; 8)allows for the deferred recovery of an annual return of and on capital
expenditures in excess of depreciation levels incurred during and before the
rate cap period; and 9) allows for the recovery of Stranded Costs and
implementation costs incurred as a result of the passage of the act. Consumers
is highly confident that it will meet the conditions of items 5 and 7 above,
prior to the earliest rate cap termination dates specified in the act. Failure
to do so would result in an extension of the rate caps to as late as December
31, 2013. As of December 2000, Consumers spent $13 million on the required
expansion of transmission capabilities. Consumers anticipates it will spend an
additional $24 million in 2001 and 2002, unless Consumers transfers its
transmission facilities to a FERC-approved RTO or to an independent transmission
owner.
In July 2000, in accordance with the Customer Choice Act, Consumers filed an
application with the MPSC to begin the Securitization process. Securitization
typically involves the issuance of asset backed bonds with a higher credit
rating than conventional utility corporate financing. In October 2000 and
January 2001, the MPSC issued a financing order and a final order, respectively,
authorizing Securitization of approximately $470 million in qualified costs,
which were primarily regulatory assets plus recovery of the expenses of the
Securitization. Cost savings from Securitization depend upon the level of debt
or equity securities ultimately retired, the amortization schedule for the
securitized qualified costs and the interest rates of the retired debt
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securities and the Securitization bonds. These savings will only be determined
once the Securitization bonds are issued and will offset the majority of the
revenue impact of the five percent residential rate reduction, $51 million on an
annual basis, that Consumers was required to implement by the Customer Choice
Act. The order directs Consumers to apply any cost savings in excess of the five
percent residential rate reduction to rate reductions for non-residential and
retail open access customers after the bonds are sold. In a subsequent order,
the MPSC confirmed that Consumers could recover the five percent residential
rate reduction's effect on revenues lost from the date of the financing order.
Consumers estimates that the disallowed portion of revenue recovery relating to
the year 2000 five percent residential rate reduction reduced its operating
earnings by $22 million in 2000. Consumers, and its special purpose subsidiary
that will issue the bonds, will recover the repayment of principal, interest and
other expenses relating to the issuance of the bonds through a Securitization
charge and a tax charge. These charges are subject to an annual true-up until
one year prior to the last expected maturity date of the Securitization bonds
and no more than quarterly thereafter. The MPSC's order will not increase
current electric rates for any of Consumers' tariff customers.
In January 2001, Consumers accepted the MPSC's final financing order. The final
financing order has been appealed by the Attorney General of Michigan. Consumers
cannot predict the outcome of the appeal or its effect on the schedule for
issuance of Securitization bonds. Beginning January 1, 2001, and continuing
during the appeal period, the amortization of the approved regulatory assets
being securitized as qualified costs is being deferred which effectively offsets
the loss in revenue resulting from the five percent residential rate reduction.
The amortization will be reestablished later, after the Securitization bond
sale, based on a schedule that is the same as the recovery of the principal
amounts of the securitized qualified costs. Ultimately, sale of Securitization
bonds will be required to offset the majority of the revenue impact of the rate
reduction over the term of the bonds.
In September 1999, Consumers began implementing a plan for electric retail
customer open access. Consumers submitted this plan to the MPSC in 1998, and in
March 1999 the MPSC issued orders that generally supported the plan. The
Customer Choice Act states that orders issued by the MPSC before the date of
this act that 1) allow electric customers to choose their supplier, 2) authorize
recovery of net stranded costs and implementation costs, and 3) confirm any
voluntary commitments of electric utilities, are in compliance with this act and
enforceable by the MPSC. In September 2000, as required by the MPSC, Consumers
filed tariffs governing its retail open access program and addressed revisions
appropriate to comply with the Customer Choice Act. Consumers cannot predict how
the MPSC will modify the tariff or enforce the existing restructuring orders.
In a pending case before the Court of Appeals, ABATE and the Attorney General
each appealed an August 1999 order in which the MPSC found that it had
jurisdiction to approve rates, terms and conditions for electric retail
wheeling, also known as electric customer choice, if a utility voluntarily
chooses to offer that service. Consumers believes that the Customer Choice Act
has rendered the issue moot, but cannot predict how the Court of Appeals will
resolve the issue.
POWER COSTS: During periods when electric demand is high, the cost of purchasing
energy on the spot market can be substantial. To reduce Consumers' exposure to
the fluctuating cost of electricity, and to ensure adequate supply to meet
demand, Consumers intends to maintain sufficient generation and to purchase
electricity from others to create a power reserve, also called a reserve margin,
of approximately 15 percent. The reserve margin provides Consumers with
additional power above its anticipated peak power demands. It also allows
Consumers to provide reliable service to its electric service customers and to
protect itself against unscheduled plant outages and unanticipated demand. For
the summers 2001, 2002, and 2003, Consumers is planning for a reserve margin of
15 percent. The actual reserve margin needed will depend primarily on summer
weather conditions, the level of retail open access requirements being served by
others during the summer, and any unscheduled plant outages. The existing retail
open access plan allows other electric service providers with the opportunity to
serve up to 750 MW of nominal retail open access requirements. As of April
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2001, alternative electric service providers are providing service to 73 MW of
retail open access requirements.
To reduce the risk of high energy prices during peak demand periods and to
achieve its reserve margin target, Consumers employs a strategy of purchasing
future electricity call option contracts for the physical delivery of
electricity during the months of June through September. As of March 31, 2001,
Consumers had purchased or had commitments to purchase electricity call option
contracts covering the estimated reserve margin requirements for summer 2001,
and partially covering the estimated reserve margin requirements for summers
2002 through 2005, at a recognized cost of $104 million, of which $60 million
pertains to 2001.
In 1996, as a result of efforts to move the electric industry in Michigan to
competition, Detroit Edison gave Consumers the required four-year contractual
notice of its intent to terminate the agreements under which the companies
jointly operate the MEPCC. Detroit Edison and Consumers negotiated to
restructure and continue certain parts of the MEPCC control area and joint
transmission operations, but expressly excluded any merchant operations
(electricity purchasing, sales, and dispatch operations). The former joint
merchant operations began operating independently on April 1, 2001. The
termination of joint merchant operations with Detroit Edison will open Detroit
Edison and Consumers to wholesale market competition as individual companies.
Consumers cannot predict the financial impact of terminating these joint
merchant operations.
Prior to 1998, the PSCR process provided for the reconciliation of actual power
supply costs with power supply revenues. This process assured recovery of all
reasonable and prudent power supply costs actually incurred by Consumers,
including the actual cost of fuel, interchange power and purchased power. In
1998, as part of the electric restructuring efforts, the MPSC suspended the PSCR
process through December 31, 2001. Under the suspension, the MPSC would not
grant adjustment of customer rates through 2001. As a result of the rate freeze
imposed by the Customer Choice Act, the current rates will remain in effect
until at least December 31, 2003. Therefore, changes in power supply costs as a
result of fluctuating energy prices will not be reflected in rates during the
rate freeze period.
TRANSMISSION ASSETS: In 1999, the FERC issued Order No. 2000, which describes
the characteristics the FERC would find acceptable in a model RTO. In this
order, the FERC declined to mandate that utilities join RTOs, but did order
utilities to make filings in October 2000 and January 2001 declaring their
intentions with respect to RTO membership.
In 1999, Consumers and four other electric utility companies joined together to
form a coalition known as the Alliance Companies for the purpose of creating a
FERC-approved RTO. As the FERC has not made a final disposition of the Alliance
RTO, Consumers is uncertain about the outcome of the Alliance matter before the
FERC and its continued participation in the Alliance RTO.
In January 2001, the FERC granted Consumers' application to transfer ownership
and control of its transmission facilities to a wholly owned subsidiary,
Michigan Transco. Consumers transferred the transmission facilities to Michigan
Transco on April 1, 2001. This represents a major step in Consumers' plan to
either divest its transmission business to a third party or to transfer control
of or to sell it to an RTO. In either event, Consumers' current plan is to
remain in the business of generating and distributing electric power to retail
customers. In addition, in response to an application that Consumers filed with
the MPSC, the MPSC issued an order that stated in part that, if Consumers sells
its transmission facilities in the manner described in its application, it would
be in compliance with applicable requirements of the Customer Choice Act.
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ELECTRIC PROCEEDINGS: In 1997, ABATE filed a complaint with the MPSC. The
complaint alleged that Consumers' electric earnings are more than its authorized
rate of return and sought an immediate reduction in Consumers' electric rates
that approximated $189 million annually. As a result of the rate freeze imposed
by the Customer Choice Act, the MPSC issued an order in June 2000 dismissing the
ABATE complaint. In July 2000, ABATE filed a rehearing petition with the MPSC.
Consumers cannot predict the outcome of the rehearing process.
In March 2000 and 2001, Consumers filed applications with the MPSC for the
recovery of electric utility restructuring implementation costs of $31 million
and $25 million, incurred in 1999 and 2000, respectively. Consumers expects a
final order for the 1999 costs in the first half of 2001 and for the 2000 cost
in early 2002. Consumers believes these costs are fully recoverable in
accordance with the Customer Choice Act; however, Consumers cannot predict the
amounts the MPSC will approve as recoverable costs.
OTHER ELECTRIC UNCERTAINTIES
THE MIDLAND COGENERATION VENTURE: The MCV Partnership, which leases and operates
the MCV Facility, contracted to sell electricity to Consumers for a 35-year
period beginning in 1990 and to supply electricity and steam to Dow. Consumers,
through two wholly owned subsidiaries, holds the following assets related to the
MCV Partnership and MCV Facility: 1) CMS Midland owns a 49 percent general
partnership interest in the MCV Partnership; and 2) CMS Holdings holds, through
FMLP, a 35 percent lessor interest in the MCV Facility.
Summarized Statements of Income for CMS Midland and CMS Holdings
In Millions
- ------------------------------------------------------------------------------------------------------------------
Three Months Ended
March 31 2001 2000
- ------------------------------------------------------------------------------------------------------------------
Pretax operating income $13 $9
Income taxes and other 4 3
- ------------------------------------------------------------------------------------------------------------------
Net income $9 $6
==================================================================================================================
Power Purchases from the MCV Partnership - Consumers' annual obligation to
purchase capacity from the MCV Partnership is 1,240 MW through the termination
of the PPA in 2025. The PPA provides that Consumers is to pay, based on the MCV
Facility's availability, a levelized average capacity charge of 3.77 cents per
kWh, a fixed energy charge, and a variable energy charge based primarily on
Consumers' average cost of coal consumed for all kWh delivered. Since January 1,
1993, the MPSC has permitted Consumers to recover capacity charges averaging
3.62 cents per kWh for 915 MW, plus a substantial portion of the fixed and
variable energy charges. Since January 1, 1996, the MPSC has also permitted
Consumers to recover capacity charges for the remaining 325 MW of contract
capacity with an initial average charge of 2.86 cents per kWh increasing
periodically to an eventual 3.62 cents per kWh by 2004 and thereafter. However,
due to the current freeze of Consumers' retail rates that the Customer Choice
Act requires, the capacity charge for the 325 MW is now frozen at 3.17 cents per
kWh. After September 2007, the PPA's terms require Consumers to pay the MCV
Partnership capacity and energy charges that the MPSC has authorized for
recovery from electric customers.
Consumers recognized a loss in 1992 for the present value of the estimated
future underrecoveries of power costs under the PPA based on MPSC cost recovery
orders. At March 31, 2001 and March 31, 2000, the remaining after-tax present
value of the estimated future PPA liability associated with the 1992 loss
totaled $43 million and $71 million, respectively. In March 1999, Consumers and
the MCV Partnership reached an
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agreement effective January 1, 1999, that capped availability payments to the
MCV Partnership at 98.5 percent. If the MCV Facility generates electricity at
the maximum 98.5 percent level during the next five years, Consumers' after-tax
cash underrecoveries associated with the PPA could be as follows:
In Millions
- ------------------------------------------------------------------------------------------------------------------
2001 2002 2003 2004 2005
- ------------------------------------------------------------------------------------------------------------------
Estimated cash underrecoveries at 98.5%, net of tax $38 $38 $37 $36 $35
==================================================================================================================
Consumers continually evaluates the adequacy of the PPA liability. These
evaluations consider management's assessment of operating levels at the MCV
Facility through 2007, along with certain other factors including MCV related
costs that are included in Consumers' frozen retail rates. Should future results
differ from management's assessments, Consumers may have to make additional
charges for a given year of up to $33 million, after tax. Management believes
that the PPA liability is adequate at this time. For further discussion on the
impact of the frozen PSCR, see "Electric Rate Matters" in this Note.
NUCLEAR FUEL COST: Consumers amortizes nuclear fuel cost to fuel expense based
on the quantity of heat produced for electric generation. Consumers expenses
interest on leased nuclear fuel as it is incurred. Under current federal law, as
a federal court decision confirmed, the DOE was to begin accepting deliveries of
spent nuclear fuel for disposal by January 31, 1998. For fuel used after April
6, 1983, Consumers charges disposal costs to nuclear fuel expense, recovers
these costs through electric rates, and then remits them to the DOE quarterly.
Consumers elected to defer payment for disposal of spent nuclear fuel burned
before April 7, 1983. As of March 31, 2001, Consumers has a recorded liability
to the DOE of $132 million, including interest, which is payable upon the first
delivery of spent nuclear fuel to the DOE. Consumers recovered through electric
rates the amount of this liability, excluding a portion of interest. In 1997,
the DOE declared that it would not begin to accept spent nuclear fuel deliveries
in 1998. Also in 1997, a federal court affirmed the DOE's duty to take delivery
of spent fuel. Subsequent litigation in which Consumers and certain other
utilities participated has not been successful in producing more specific relief
for the DOE's failure to comply.
In July 2000, the DOE reached a settlement agreement with another utility to
address the DOE's delay in accepting spent fuel. The DOE may use that settlement
agreement as a framework that it could apply to other nuclear power plants;
however, certain other utilities are challenging the validity of such
settlement. Consumers is evaluating this matter further. Additionally, there are
two court decisions that support the right of utilities to pursue damage claims
in the United States Court of Claims against the DOE for failure to take
delivery of spent fuel. Consumers is evaluating those rulings and their
applicability to its contracts with the DOE.
NUCLEAR MATTERS: In March 2000, Palisades received its annual performance review
in which the NRC stated that no significant performance issues existed during
the assessment period in the reactor safety, radiation safety, and safeguards
strategic performance areas. In November 2000, Palisades received its
mid-refueling cycle performance review and inspection plan in which the NRC
noted that plant performance for the third quarter of 2000 included one
performance criteria requiring regulatory response. At the end of 2000, this one
performance criteria returned to a condition requiring no regulatory response.
Except for one supplemental inspection, the NRC plans to conduct only routine
baseline inspections at Palisades.
The amount of spent nuclear fuel discharged from the reactor to date exceeds
Palisades' temporary on-site storage pool capacity. Consequently, Consumers is
using NRC-approved steel and concrete vaults, commonly known as "dry casks", for
temporary on-site storage. As of March 31, 2001, Consumers had loaded 18 dry
storage casks with spent nuclear fuel at Palisades. Palisades will need to load
additional casks by 2004 in order to continue operation. Palisades currently has
three additional empty storage-only casks on-site, with storage pad capacity for
up to seven additional loaded casks. Consumers anticipates, however, that
licensed transportable casks, for additional storage, will be available prior to
2004.
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Consumers maintains insurance against property damage, debris removal, personal
injury liability and other risks that are present at its nuclear facilities.
Consumers also maintains coverage for replacement power costs during prolonged
accidental outages at Palisades. Insurance would not cover such costs during the
first 12 weeks of any outage, but would cover most of such costs during the next
52 weeks of the outage, followed by reduced coverage to 80 percent for 110
additional weeks. If certain covered losses occur at its own or other nuclear
plants similarly insured, Consumers could be required to pay maximum assessments
of $12.8 million in any one year to NEIL; $88 million per occurrence under the
nuclear liability secondary financial protection program, limited to $10 million
per occurrence in any year; and $6 million if nuclear workers claim bodily
injury from radiation exposure. Consumers considers the possibility of these
assessments to be remote.
In February 2000, Consumers submitted an analysis to the NRC that shows that the
NRC's screening criteria for reactor vessel embrittlement at Palisades will not
be reached until 2014. On December 14, 2000, the NRC issued an amendment
revising the operating license for Palisades extending the expiration date to
March 2011, with no restrictions related to reactor vessel embrittlement.
In April 2001, Consumers received approval from the NRC to amend the license of
the Palisades nuclear plant to transfer plant operating authority to NMC. The
formal operating authority transfer from Consumers to NMC is expected by July
2001. Consumers will retain ownership of Palisades, its 789 MW output, the spent
fuel on site, and ultimate responsibility for the safe operation, maintenance
and decommissioning of the plant. Under this agreement, salaried Palisades'
employees will become NMC employees by mid-year 2001. Union employees will work
under the supervision of NMC pursuant to their existing labor contract as
Consumers employees. Consumers will benefit by consolidating expertise and
controlling costs and resources among all of the nuclear plants being operated
on behalf of the five NMC member companies. With Consumers as a partner, NMC
will have responsibility for operating eight units with 4,500 MW of generating
capacity in Wisconsin, Minnesota, Iowa and Michigan. The ultimate financial
impact is uncertain.
CAPITAL EXPENDITURES: Consumers estimates electric capital expenditures,
including new lease commitments and environmental costs under the Clean Air Act,
of $555 million for 2001, $555 million for 2002, and $355 million for 2003. For
further information, see the Capital Expenditures Outlook section in the MD&A.
DERIVATIVE ACTIVITIES: Consumers' electric business uses purchased electric call
option contracts to meet its regulatory obligation to serve, which requires
providing a physical supply of energy to customers, and to manage energy cost
and to ensure a reliable source of capacity during periods of peak demand. While
management intends to take delivery of the commodity, if Consumers' daily
capacity exceeds its needs, in rare instances, the options, if marketable, are
sold. Consumers believes that these contracts currently qualify for the normal
purchase and sales exception of SFAS No. 133; therefore, Consumers has not
recorded the fair value of these contracts on the balance sheet. At January 1,
2001 and March 31, 2001, Consumers had a deferred asset of $86 million and $104
million, respectively, associated with premiums for these contracts. As of
January 1, 2001 and March 31, 2001, these contracts had a fair value of $123
million and $95 million, respectively, and expire between 2001 and 2005.
Consumers' electric business also uses purchased gas call option and gas swap
contracts to hedge against price risk due to the fluctuations in the market
price of gas used as fuel for generation of electricity. These contracts are
financial contracts that will be used to offset increases in the price of
probable forecasted gas purchases. These contracts are designated as cash flow
hedges, and therefore, Consumers will record any change in the fair value of
these contracts in other comprehensive income until the forecasted transaction
occurs. Once the forecasted gas purchases occurs, the net gain or loss on these
contracts will be reclassified to earnings and recorded as part of the cost of
power. These contracts have been highly effective in achieving offsetting cash
flows of future gas purchases, and no component of the gain or loss was excluded
from the assessment of the
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hedge's effectiveness. As a result, no net gain or loss has been recognized in
earnings as a result of hedge ineffectiveness as of March 31, 2001. At March 31,
2001, Consumers had a derivative asset with a fair value of $2 million, which
includes $1 million of premiums paid for these contracts. These contracts expire
in 2001, and Consumers expects to reclassify the $1 million increase in fair
value to earnings as a reduction of power costs in 2001, if this fair value is
sustained. The ultimate fair value of these derivative assets is dependent upon
market conditions related to the derivative instruments.
GAS CONTINGENCIES
GAS ENVIRONMENTAL MATTERS: Under the Michigan Natural Resources and
Environmental Protection Act, Consumers expects that it will ultimately incur
investigation and remedial action costs at a number of sites. These include 23
sites that formerly housed manufactured gas plant facilities, even those in
which it has a partial or no current ownership interest. Consumers has completed
initial investigations at the 23 sites. On sites where Consumers has received
site-wide study plan approvals, it will continue to implement these plans. It
will also work toward closure of environmental issues at sites as studies are
completed. Consumers has estimated its costs related to further investigation
and remedial action for all 23 sites using the Gas Research
Institute-Manufactured Gas Plant Probabilistic Cost Model. Using this model,
Consumers estimates the costs to be between $66 million and $118 million. These
estimates are based on undiscounted 1999 costs. As of March 31, 2001, Consumers
has an accrued liability of $55 million, (net of expenditures incurred to date
and net of any insurance recoveries), and a regulatory asset of $62 million. Any
significant change in assumptions, such as remediation techniques, nature and
extent of contamination, and legal and regulatory requirements, could affect the
estimate of remedial action costs for the sites. Consumers defers and amortizes,
over a period of ten years, environmental clean-up costs above the amount
currently being recovered in rates. Rate recognition of amortization expense
cannot begin until after a prudence review in a future general gas rate case.
The MPSC allows Consumers to recover $1 million annually.
GAS RATE MATTERS
GAS RESTRUCTURING: On April 1, 1998, Consumers began an experimental gas
customer choice pilot program that ended March 31, 2001. Under this program, gas
distribution rates were frozen through March 31, 2001. On April 1, 2001 a
permanent gas customer choice program commenced and under this program Consumers
returned to a GCR mechanism that allows it to recover from its customers all
prudently incurred costs to purchase the natural gas commodity and transport it
to Consumers' facilities.
OTHER GAS UNCERTAINTIES
CAPITAL EXPENDITURES: Consumers estimates gas capital expenditures, including
new lease commitments, of $145 million for 2001, $145 million for 2002, and $135
million for 2003. For further information, see the Capital Expenditures Outlook
section in the MD&A.
COMMITMENTS FOR GAS SUPPLIES: Consumers contracts to purchase gas and
transportation from various suppliers for its natural gas business. These
contracts have expiration dates that range from 2001 to 2004. Consumers' 2000
gas requirements totaled 210 bcf at a cost of $608 million, 40 percent of which
was under long-term contracts for one year or more. As of the end of 2000,
Consumers had 27 percent of its 2001 gas requirements under such long-term
contracts, and will supplement them with additional long-term and short-term
contracts and spot-market purchases.
OTHER UNCERTAINTIES
In addition to the matters disclosed in this note, Consumers and certain of its
subsidiaries are parties to certain lawsuits and administrative proceedings
before various courts and governmental agencies arising from the
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ordinary course of business. These lawsuits and proceedings may involve personal
injury, property damage, contractual matters, environmental issues, federal and
state taxes, rates, licensing and other matters.
Consumers has accrued estimated losses for certain contingencies discussed in
this note. Resolution of these contingencies is not expected to have a material
adverse impact on Consumers' financial position, liquidity, or results of
operations.
3: SHORT-TERM FINANCINGS AND CAPITALIZATION
AUTHORIZATION: At March 31, 2001, Consumers had FERC authorization to issue or
guarantee through June 2002, up to $900 million of short-term securities
outstanding at any one time. Consumers also had remaining FERC authorization to
issue through June 2002 up to $25 million and $800 million of long-term
securities for refinancing or refunding purposes and for general corporate
purposes, respectively. Additionally, Consumers had remaining FERC authorization
to issue $275 million of first mortgage bonds to be issued solely as security
for the long-term securities mentioned above.
SHORT-TERM FINANCINGS: Consumers has an unsecured $300 million credit facility
maturing in July 2002 and unsecured lines of credit aggregating $170 million.
These facilities are available to finance seasonal working capital requirements
and to pay for capital expenditures between long-term financings. At March 31,
2001, a total of $170 million was outstanding at a weighted average interest
rate of 6.0 percent, compared with $151 million outstanding at March 31, 2000,
at a weighted average interest rate of 7.1 percent.
Consumers currently has in place a $500 million trade receivables sale program,
up from $325 million at March 31, 2000. At March 31, 2001 and 2000, receivables
sold under the program totaled $432 million and $325 million, respectively.
Accounts receivable and accrued revenue in the Consolidated Balance Sheets have
been reduced to reflect receivables sold.
MANDATORILY REDEEMABLE PREFERRED SECURITIES: Consumers has wholly-owned
statutory business trusts that are consolidated within its financial statements.
Consumers created these trusts for the sole purpose of issuing Trust Preferred
Securities. The primary asset of the trusts is a note or debenture of Consumers.
The terms of the Trust Preferred Security parallel the terms of the related
Consumers' note or debenture. The term, rights and obligations of the Trust
Preferred Security and related note or debenture are also defined in the related
indenture through which the note or debenture was issued, Consumers' guarantee
of the related Trust Preferred Security and the declaration of trust for the
particular trust. All of these documents together with their related note or
debenture and Trust Preferred Security constitute a full and unconditional
guarantee by Consumers of the trust's obligations under the Trust Preferred
Security. In addition to the similar provisions previously discussed, specific
terms of the securities follow:
In Millions
- ------------------------------------------------------------------------------------------------------------------
Amount Earliest
Trust and Securities Rate Outstanding Maturity Redemption
- ------------------------------------------------------------------------------------------------------------------
2000 1999
- ------------------------------------------------------------------------------------------------------------------
Consumers Power Company Financing I,
Trust Originated Preferred Securities 8.36% $100 $100 2015 2000
Consumers Energy Company Financing II,
Trust Originated Preferred Securities 8.20% $120 $120 2027 2002
Consumers Energy Company Financing III,
Trust Originated Preferred Securities 9.25% $175 $175 2029 2004
- ------------------------------------------------------------------------------------------------------------------
OTHER: Under the provisions of its Articles of Incorporation, Consumers had $405
million of unrestricted retained earnings available to pay common dividends at
March 31, 2001. In January 2001, Consumers declared
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a $66 million common dividend that was paid in February 2001 and in April 2001,
Consumers declared a $30 million common dividend payable in May 2001.
DERIVATIVE ACTIVITIES: Consumers uses interest-rate swaps to hedge the risk
associated with forecasted interest payments on variable rate debt. These
interest rate swaps are designated as a cash flow hedges. As such, Consumers
will record any change in the fair value of these contracts in other
comprehensive income unless the swap is sold. These swaps fix the interest rate
on $300 million of variable rate debt, and expire at varying times from June
through December 2001. As of March 31, 2001, these interest rate swaps had a
negative fair value of $4 million.
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Report of Independent Public Accountants
To Consumers Energy Company:
We have reviewed the accompanying consolidated balance sheets of CONSUMERS
ENERGY COMPANY (a Michigan corporation and wholly owned subsidiary of CMS Energy
Corporation) and subsidiaries as of March 31, 2001 and 2000, and the related
consolidated statements of income, cash flows, and common stockholder's equity
for the three-month periods then ended. These financial statements are the
responsibility of the Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with auditing standards generally accepted in the United States, the objective
of which is the expression of an opinion regarding the financial statements
taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the financial statements referred to above for them to be in
conformity with accounting principles generally accepted in the United States.
We have previously audited, in accordance with auditing standards generally
accepted in the United States, the consolidated balance sheet of Consumers
Energy Company and subsidiaries as of December 31, 2000, and, in our report
dated February 2, 2001, we expressed an unqualified opinion on that statement.
In our opinion, the information set forth in the accompanying consolidated
balance sheet as of December 31, 2000, is fairly stated, in all material
respects, in relation to the consolidated balance sheet from which it has been
derived.
/s/ Arthur Andersen LLP
Detroit, Michigan,
April 27, 2001.
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71
PANHANDLE EASTERN PIPE LINE COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS
Panhandle is primarily engaged in the interstate transportation and storage of
natural gas. Panhandle also owns a LNG regasification plant and related
facilities. The rates and conditions of service of interstate natural gas
transmission, storage and LNG operations of Panhandle are subject to the rules
and regulations of the FERC.
The MD&A of this Form 10-Q should be read along with the MD&A and other parts of
Panhandle's 2000 Form 10-K. This MD&A also refers to, and in some sections
specifically incorporates by reference, Panhandle's Condensed Notes to
Consolidated Financial Statements and should be read in conjunction with such
Statements and Notes. This report and other written and oral statements made by
Panhandle from time to time contain forward-looking statements, as defined by
the Private Securities Litigation Reform Act of 1995. The words "anticipates,"
"believes," "estimates," "expects," "intends," and "plans" and variations of
such words and similar expressions, are intended to identify forward-looking
statements that involve risk and uncertainty. These forward-looking statements
are subject to various factors, which could cause Panhandle's actual results to
differ materially from those anticipated in such statements. Panhandle has no
obligation to update or revise forward-looking statements regardless of whether
new information, future events or any other factor affects the information
contained in such statements. Panhandle does, however discuss certain risk
factors, uncertainties and assumptions in this MD&A and particularly in the
section entitled "CMS Energy, Consumers, and Panhandle Forward-Looking
Statements Cautionary Factors" in CMS Energy's 2000 Form 10-K, Item 1 and
periodically in various public filings it makes with the SEC. Panhandle designed
this discussion of potential risks and uncertainties which is by no means
comprehensive, to highlight important factors that may impact Panhandle's
outlook. This report also describes material contingencies in the Condensed
Notes to Consolidated Financial Statements and the readers are encouraged to
read such Notes.
The following information is provided to facilitate increased understanding of
the consolidated financial statements and accompanying Notes of Panhandle and
should be read in conjunction with these financial statements. Because all of
the outstanding common stock of Panhandle Eastern Pipe Line is owned by a
wholly-owned subsidiary of CMS Energy, the following discussion uses the reduced
disclosure format permitted by Form 10-Q for issuers that are wholly-owned
subsidiaries of reporting companies.
RESULTS OF OPERATIONS
NET INCOME:
IN MILLIONS
- -----------------------------------------------------------------------------------------------------------------
March 31 2001 2000 Change
- -----------------------------------------------------------------------------------------------------------------
Three Months Ended $37 $32 $5
=================================================================================================================
For the three months ended March 31, 2001, net income was $37 million, up $5
million from the same period in 2000. Total natural gas transportation volumes
delivered for the three months ended March 31, 2001 increased 8 percent from
2000 primarily due to the addition of Sea Robin.
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Revenues for the three months ended March 31, 2001 increased $19 million from
the corresponding period in 2000 due primarily to increased LNG terminalling
revenues and commodity revenues, partially offset by lower reservation revenues
in 2001.
Operating expenses for the three months ended March 31, 2001 increased $9
million from the corresponding period in 2000 due primarily to increased
expenses for a full quarter in 2001 for Sea Robin versus one month in 2000 and
higher fuel costs and general taxes.
Interest on long-term debt for the three months ended March 31, 2001 increased
$2 million from the corresponding period in 2000 primarily due to interest on
the additional debt incurred by Panhandle at the end of the first quarter of
2000.
PRETAX OPERATING INCOME:
In Millions
- -------------------------------------------------------------------------------------------------------------------
Three Months
Ended March 31
Change Compared to Prior Year 2001 vs 2000
- -------------------------------------------------------------------------------------------------------------------
Reservation revenue $(11)
LNG terminalling revenue 25
Commodity revenue 6
Other revenue (1)
Operation and maintenance (6)
Depreciation and amortization (1)
General taxes (2)
--------------------------------------------------
Total Change $ 10
==================================================================================================================
OUTLOOK
CMS Energy intends to build on Panhandle's position as a leading United States
interstate gas pipeline system and the nation's largest operating LNG receiving
terminal through expansion and better utilization of its existing facilities and
construction of new facilities. The growth strategy around Panhandle includes
enhancing the opportunities for other CMS Energy businesses involved in electric
power generation and distribution, mid-stream activities (gathering and
processing), and exploration and production. By providing additional
transportation, storage and other asset-based value-added services to customers
such as new gas-fueled power plants, local distribution companies, industrial
and end-users, marketers and others, CMS Energy expects to expand its natural
gas pipeline business. CMS Energy also plans to convert certain Panhandle
pipeline facilities through a joint venture to permit the throughput of liquid
products. For further information, see Note 2, Regulatory Matters, incorporated
by reference herein. Panhandle continues to attempt to maximize revenues from
existing assets and to advance acquisition opportunities and development
projects that provide expanded services to meet the specific needs of customers.
In March 2000, Trunkline refiled its abandonment application with the FERC
regarding its 26-inch pipeline with a planned conversion of the line from
natural gas service to a refined products pipeline. Panhandle owns a one-third
interest in the Centennial Pipeline venture. FERC approved the abandonment of
the 26-inch pipeline in March 2001. In April 2001, Trunkline removed the 26-inch
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pipeline from service representing approximately 255,000 mcf per day of natural
gas transmission capacity which had been generating revenue, but at the most
heavily discounted rates for Trunkline's capacity. The Centennial Pipeline is
planned to go into service in January 2002 at which time Panhandle expects to
begin realizing earnings from the joint venture. For further information, see
Note 2, Regulatory Matters, incorporated by reference herein.
In February 2001, Trunkline LNG received responses to an open season for
long-term LNG terminalling capacity which reflected significant customer
interest.
UNCERTAINTIES: Panhandle's results of operations and financial position may be
affected by a number of trends or uncertainties that have, or Panhandle
reasonably expects could have, a material impact on income from continuing
operations and cashflows. Such trends and uncertainties include: 1) the
increased competition in the market for transmission of natural gas to the
Midwest causing pressure on prices charged by Panhandle; 2) the current market
conditions causing more contracts to be shorter duration, which may increase
revenue volatility; 3) the expected increase in competition for LNG terminalling
services, and the volatility in natural gas prices, creating volatility for LNG
terminalling revenues; 4) the impact of future rate cases, if any, for any of
Panhandle's regulated operations; 5) current initiatives for additional federal
rules and legislation regarding pipeline safety; 6) capital spending
requirements for safety, environmental or regulatory requirements that could
result in depreciation expense increases not covered by additional revenues;
and 7) construction and market risks associated with Panhandle's investment in
the liquids pipeline business via the Centennial Pipeline venture.
OTHER MATTERS
ENVIRONMENTAL MATTERS
PCB (POLYCHLORINATED BIPHENYL) ASSESSMENT AND CLEAN-UP PROGRAMS: Panhandle
previously identified environmental contamination at certain sites on its
systems and undertook clean-up programs at these sites. For further
information, see Note 4, Commitments and Contingencies - Environmental Matters,
incorporated by reference herein.
AIR QUALITY CONTROL: In 1998, the EPA issued a final rule on regional ozone
control that requires revised SIPS for 22 states, including five states in which
Panhandle operates. For further information, see Note 4, Commitments and
Contingencies - Air Quality Control, incorporated by reference herein.
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PANHANDLE EASTERN PIPE LINE COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(IN MILLIONS)
Three Months Ended March 31
2001 2000
---- ----
OPERATING REVENUE
Transportation and storage of natural gas $120 $125
LNG terminalling revenue 28 3
Other 7 8
---- ----
Total operating revenue 155 136
---- ----
OPERATING EXPENSES
Operation and maintenance 50 44
Depreciation and amortization 17 16
General taxes 8 6
---- ----
Total operating expenses 75 66
---- ----
PRETAX OPERATING INCOME 80 70
OTHER INCOME, NET 2 1
INTEREST CHARGES
Interest on Long-term debt 21 19
---- ----
NET INCOME BEFORE INCOME TAXES 61 52
INCOME TAXES 24 20
---- ----
CONSOLIDATED NET INCOME $ 37 $ 32
==== ====
The accompanying condensed notes are an integral part of these statements.
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PANHANDLE EASTERN PIPE LINE COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN MILLIONS)
Three Months Ended March 31
2001 2000
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 37 $ 32
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 17 16
Deferred income taxes 15 13
Changes in current assets and liabilities (43) (29)
Other, net (3) -
---- -----
Net cash provided by operating activities 23 32
---- -----
CASH FLOWS FROM INVESTING ACTIVITIES
Capital and investment expenditures (18) (77)
---- -----
Net cash used in investing activities (18) (77)
---- -----
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from senior notes - 99
Net (increase)/decrease in note receivable - CMS Capital 24 (24)
Dividends paid (29) (30)
---- -----
Net cash provided by/(used by) financing activities (5) 45
---- -----
Net Increase (Decrease) in Cash and Temporary Cash Investments - -
CASH AND TEMPORARY CASH INVESTMENTS, BEGINNING OF PERIOD - -
---- -----
CASH AND TEMPORARY CASH INVESTMENTS, END OF PERIOD $ - $ -
==== =====
OTHER CASH FLOW ACTIVITIES WERE:
Interest paid (net of amounts capitalized) $ 38 $ 38
Income taxes paid (net of refunds) - -
The accompanying condensed notes are an integral part of these statements.
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PANHANDLE EASTERN PIPE LINE COMPANY
CONSOLIDATED BALANCE SHEETS
(IN MILLIONS)
March 31,
2001 December 31,
(Unaudited) 2000
----------- ------------
ASSETS
PROPERTY, PLANT AND EQUIPMENT
Cost $1,680 $1,679
Less accumulated depreciation and amortization 111 99
------ ------
Sub-total 1,569 1,580
Construction work-in-progress 18 20
------ ------
Net property, plant and equipment 1,587 1,600
------ ------
INVESTMENTS 10 7
------ ------
CURRENT ASSETS
Accounts Receivable, less allowances of $2 as of March 31, 2001 155 140
and $1 as of Dec. 31, 2000
Gas Imbalances - Receivable 63 71
Inventory and supplies 32 21
Deferred income taxes 16 12
Note receivable - CMS Capital 138 162
Other 18 21
------ ------
Total current assets 422 427
------ ------
NON-CURRENT ASSETS
Goodwill, net 749 753
Debt issuance cost 11 11
Other 10 8
------ ------
Total non-current assets 770 772
------ ------
TOTAL ASSETS $2,789 $2,806
====== ======
The accompanying condensed notes are an integral part of these statements.
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PANHANDLE EASTERN PIPE LINE COMPANY
CONSOLIDATED BALANCE SHEETS
(IN MILLIONS)
March 31,
2001 December 31,
(Unaudited) 2000
----------- ------------
COMMON STOCKHOLDER'S EQUITY AND LIABILITIES
CAPITALIZATION
Common stockholder's equity
Common stock, no par, 1,000 shares authorized, issued and outstanding $ 1 $ 1
Paid-in capital 1,127 1,127
Retained earnings 2 (6)
------- -------
Total common stockholder's equity 1,130 1,122
Long-term debt 1,193 1,193
------- -------
Total capitalization 2,323 2,315
------- -------
CURRENT LIABILITIES
Accounts payable 40 32
Gas Imbalances - Payable 44 56
Accrued taxes 9 3
Accrued interest 15 31
Accrued liabilities 23 45
Other 98 104
------- -------
Total current liabilities 229 271
------- -------
NON-CURRENT LIABILITIES
Deferred income taxes 152 134
Other 85 86
------- -------
Total non-current liabilities 237 220
------- -------
TOTAL COMMON STOCKHOLDER'S EQUITY AND LIABILITIES $ 2,789 $ 2,806
======= =======
The accompanying condensed notes are an integral part of these statements.
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PANHANDLE EASTERN PIPE LINE COMPANY
CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDER'S EQUITY
(UNAUDITED)
(IN MILLIONS)
March 31, March 31,
2001 2000
--------- ---------
COMMON STOCK
At beginning and end of period $ 1 $ 1
------- -------
ADDITIONAL PAID-IN CAPITAL
At beginning and end of period 1,127 1,127
RETAINED EARNINGS
At beginning of period (6) -
Net income 37 32
Common stock dividends (29) (30)
------- -------
At end of period 2 2
------- -------
TOTAL COMMON STOCKHOLDER'S EQUITY $ 1,130 $ 1,130
======= =======
The accompanying condensed notes are an integral part of these statements.
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PANHANDLE EASTERN PIPE LINE COMPANY
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
These interim Consolidated Financial Statements have been prepared by Panhandle
and reviewed by the independent public accountant in accordance with SEC rules
and regulations. As such, certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted. Certain prior year amounts
have been reclassified to conform to the presentation in the current year. In
management's opinion, the unaudited information contained in this report
reflects all adjustments necessary to assure the fair presentation of financial
position, results of operations and cash flows for the periods presented. The
Condensed Notes to Consolidated Financial Statements and the related
Consolidated Financial Statements contained within should be read in conjunction
with the Consolidated Financial Statements and Notes to Consolidated Financial
Statements contained in Panhandle's Form 10-K for the year ended December 31,
2000, which includes the Reports of Independent Public Accountants. Due to the
seasonal nature of Panhandle's operations, the results as presented for this
interim period are not necessarily indicative of results to be achieved for the
fiscal year.
1. CORPORATE STRUCTURE
Panhandle is a wholly owned subsidiary of CMS Gas Transmission. Panhandle
Eastern Pipe Line Company was incorporated in Delaware in 1929. Panhandle is
engaged primarily in interstate transportation and storage of natural gas, and
is subject to the rules and regulations of the FERC.
In March 2000, Trunkline, a subsidiary of Panhandle Eastern Pipe Line, acquired
the Sea Robin pipeline from El Paso Energy Corporation for cash of approximately
$74 million and certain other consideration. Sea Robin is a 1 bcf per day
capacity pipeline system located in the Gulf of Mexico.
2. REGULATORY MATTERS
Effective August 1996, Trunkline placed into effect a general rate increase,
subject to refund. On September 16, 1999, Trunkline filed a FERC settlement
agreement to resolve certain issues in this proceeding. FERC approved this
settlement February 1, 2000 and required refunds of approximately $2 million
that were made in April 2000, with supplemental refunds of $1.3 million in June
2000. On January 29, 2001, Trunkline filed a settlement that included the
remaining issues in this proceeding. On April 12, 2001, the FERC approved
Trunkline's uncontested settlement, without modification. As part of the
settlement, Trunkline will reduce its maximum rates and make refunds. Management
believes that reserves for refund established are adequate and there will not be
a material adverse effect on consolidated results of operations or financial
position.
In conjunction with a FERC order issued in September 1997, FERC required certain
natural gas producers to refund previously collected Kansas ad-valorem taxes to
interstate natural gas pipelines, including Panhandle. FERC ordered these
pipelines to refund these amounts to their customers. The pipelines must make
all payments in compliance with prescribed FERC requirements. At March 31, 2001
and December 31, 2000, Panhandle's Accounts Receivable included $60 million and
$59 million, respectively, due from natural gas producers, and Other Current
Liabilities included $60 million and $59 million, respectively, for related
obligations.
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On March 28, 2001, Trunkline received FERC approval to abandon 720 miles of its
26-inch diameter pipeline that extends from Longville, Louisiana to Bourbon,
Illinois. This filing is in conjunction with a plan for Centennnial Pipeline to
convert the line from natural gas transmission service to a refined products
pipeline by January 2002. Panhandle owns a one-third interest in the venture
along with TEPPCO Partners L.P. and Marathon Ashland Petroleum L.L.C. As of
March 31, 2001, Panhandle had made a $8 million cash investment in the
Centennial project, which was reimbursed by Centennial on May 4, 2001 upon the
closing of Centennial's construction financing.
3. RELATED PARTY TRANSACTIONS
Other income includes $2 million for the three months ended March 31, 2001 for
interest on Note Receivable from CMS Capital.
A summary of certain balances due to or due from related parties included in the
Consolidated Balance Sheets is as follows:
In Millions
- -----------------------------------------------------------------------
March 31, December 31,
2001 2000
-------------------- --------------------
Receivables $53 $ 48
Accounts payable 26 27
- ----------------------------- -------------------- --------------------
4. COMMITMENTS AND CONTINGENCIES
CAPITAL EXPENDITURES: Panhandle currently estimates capital expenditures and
investments, including allowance for funds used during construction, to be $83
million in 2001 and $70 million in both 2002 and 2003. Panhandle prepared these
estimates for planning purposes and they are subject to revision. Panhandle
satisfies capital expenditures using cash from operations.
LITIGATION: Under the terms of the sale of Panhandle to CMS Energy, subsidiaries
of Duke Energy indemnified CMS Energy and its affiliates from losses resulting
from certain legal and tax liabilities of Panhandle, including the matter
specifically discussed below.
In May 1997, Anadarko filed suits against Panhandle and prior PanEnergy Corp
affiliates, as defendants, both in the United States District Court for the
Southern District of Texas and State District Court of Harris County, Texas.
Pursuing only the federal court claim, Anadarko claims that it was effectively
indemnified by the defendants against any responsibility for refunds of Kansas
ad valorem taxes that are due from purchasers of gas from Anadarko, retroactive
to 1983. In October 1998 and January 1999, the FERC issued orders on ad valorem
tax issues, finding that first sellers of gas were primarily liable for refunds;
Panhandle was not a first seller of gas. The FERC also noted that claims for
indemnity or reimbursement among the parties would be better addressed by the
United States District Court for the Southern District of Texas. Panhandle
believes the resolution of this matter will not have a material adverse effect
on consolidated results of operations or financial position.
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Panhandle is also involved in other legal, tax and regulatory proceedings before
various courts, regulatory commissions and governmental agencies regarding
matters arising in the ordinary course of business, some of which involve
substantial amounts. Where appropriate, Panhandle has made accruals in
accordance with SFAS 5, Accounting for Contingencies, in order to provide for
such matters. Management believes the final disposition of these proceedings
will not have a material adverse effect on consolidated results of operations or
financial position.
ENVIRONMENTAL MATTERS: Panhandle is subject to federal, state and local
regulations regarding air and water quality, hazardous and solid waste disposal
and other environmental matters. Panhandle has identified environmental
contamination at certain sites on its systems and has undertaken clean-up
programs at these sites. The contamination resulted from the past use of
lubricants in compressed air systems containing PCBs and the prior use of
wastewater collection facilities and other on-site disposal areas. Panhandle
communicated with the EPA and appropriate state regulatory agencies on these
matters. Under the terms of the sale of Panhandle to CMS Energy, a subsidiary of
Duke Energy is obligated to complete the Panhandle clean-up programs at certain
agreed-upon sites and to indemnify against certain future environmental
litigation and claims. Panhandle expects these clean-up programs to continue
through 2001. The Illinois EPA included Panhandle Eastern Pipe Line and
Trunkline, together with other non-affiliated parties, in a cleanup of former
waste oil disposal sites in Illinois. Prior to a partial cleanup by the EPA, a
preliminary study estimated the cleanup costs at one of the sites to be between
$5 million and $15 million. The State of Illinois contends that Panhandle
Eastern Pipe Line's and Trunkline's share for the costs of assessment and
remediation of the sites, based on the volume of waste sent to the facilities,
is 17.32 percent. Management believes that the costs of cleanup, if any, will
not have a material adverse impact on Panhandle's financial position, liquidity,
or results of operations.
AIR QUALITY CONTROL: In 1998, the EPA issued a final rule on regional ozone
control that requires revised SIPS for 22 states, including five states in which
Panhandle operates. This EPA ruling was challenged in court by various states,
industry and other interests, including the INGAA, an industry group to which
Panhandle belongs. In March 2000, the court upheld most aspects of the EPA's
rule, but agreed with INGAA's position and remanded to the EPA the sections of
the rule that affected Panhandle. Based on the court's decision, most of the
states subject to the rule submitted their SIP revisions in October 2000.
However, the EPA must revise the section of the rule that affected Panhandle's
facilities. Panhandle expects the EPA to make this section of the rule effective
in 2001 and expects the future costs to range from $13 million to $29 million
for capital improvements to comply.
OTHER COMMITMENTS AND CONTINGENCIES: In 1993, the U.S. Department of the
Interior announced its intention to seek additional royalties from gas producers
as a result of payments received by such producers in connection with past
take-or-pay settlements, and buyouts and buydowns of gas sales contracts with
natural gas pipelines. Panhandle's pipelines, with respect to certain producer
contract settlements, may be contractually required to reimburse or, in some
instances, to indemnify producers against such royalty claims. The potential
liability of the producers to the government and of the pipelines to the
producers involves complex issues of law and fact that are likely to take
substantial time to resolve. If required to reimburse or indemnify the
producers, Panhandle's pipelines will file with FERC to recover a portion of
these costs from pipeline customers. Management believes these commitments and
contingencies will not have a material adverse effect on consolidated results of
operations or financial position.
Under the terms of a settlement related to a transportation agreement between
Panhandle and Northern Border Pipeline Company, Panhandle guarantees payment to
Northern Border Pipeline Company under a transportation agreement held by a
third party. The transportation agreement requires estimated total
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payments of $10 million through October 2001. Management believes the
probability that Panhandle will be required to perform under this guarantee is
remote.
In conjunction with the Centennial Pipeline project, Panhandle has provided a
guaranty related to project financing in an amount up to $50 million during the
construction and initial operating period of the project. The guaranty will be
released when Centennial reaches certain operational and financial targets (See
Note 2).
5. IMPLEMENTATION OF SFAS NO. 133
Panhandle adopted SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities as amended, effective January 1, 2001. SFAS No. 133 requires
companies to recognize all derivative instruments as assets or liabilities on
the Balance Sheet and to measure those instruments at fair value.
As of March 31, 2001 Panhandle believes its contracts qualify for the normal
purchase and sales exception of SFAS No. 133, and therefore no impact has been
reflected in the financial statements.
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REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Panhandle Eastern Pipe Line Company:
We have reviewed the accompanying consolidated balance sheet of Panhandle
Eastern Pipe Line Company (a Delaware corporation) and subsidiaries as of March
31, 2001, and the related consolidated statements of income, common
stockholder's equity and cash flows for the three-month periods ended March 31,
2001 and 2000. These financial statements are the responsibility of the
company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with auditing standards generally accepted in the United States, the objective
of which is the expression of an opinion regarding the financial statements
taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the consolidated financial statements referred to above for them to
be in conformity with accounting principles generally accepted in the United
States.
We have previously audited, in accordance with auditing standards generally
accepted in the United States, the consolidated balance sheet of Panhandle
Eastern Pipe Line Company and subsidiaries as of December 31, 2000, and, in our
report dated March 6, 2001, we expressed an unqualified opinion on that
statement. In our opinion, the information set forth in the accompanying
consolidated balance sheet as of December 31, 2000, is fairly stated, in all
material respects, in relation to the consolidated balance sheet from which it
has been derived.
/s/ Arthur Andersen LLP
Houston, Texas
May 3, 2001
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QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
CMS ENERGY
Quantitative and Qualitative Disclosures about Market Risk is contained in PART
I: CMS ENERGY CORPORATION'S MANAGEMENT'S DISCUSSION AND ANALYSIS, which is
incorporated by reference herein.
CONSUMERS
Quantitative and Qualitative Disclosures about Market Risk is contained in PART
I: CONSUMERS' ENERGY COMPANY'S MANAGEMENT'S DISCUSSION AND ANALYSIS, which is
incorporated by reference herein.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The discussion below is limited to an update of developments that have occurred
in various judicial and administrative proceedings, many of which are more fully
described in CMS Energy's, Consumers' and Panhandle's Form 10-K for the year
ended December 31, 2000. Reference is made to the CONDENSED NOTES TO THE
CONSOLIDATED FINANCIAL STATEMENTS, in particular Note 2 - Uncertainties for CMS
Energy and Consumers, and Note 8 - Commitments and Contingencies for Panhandle,
included herein for additional information regarding various pending
administrative and judicial proceedings involving rate, operating, regulatory
and environmental matters.
CMS ENERGY, CONSUMERS AND PANHANDLE
ENVIRONMENTAL MATTERS: CMS Energy, Consumers, Panhandle and their subsidiaries
and affiliates are subject to various federal, state and local laws and
regulations relating to the environment. Several of these companies have been
named parties to various actions involving environmental issues. Based on their
present knowledge and subject to future legal and factual developments, CMS
Energy, Consumers and Panhandle believe that it is unlikely that these actions,
individually or in total, will have a material adverse effect on their financial
condition. See CMS Energy's, Consumers' and Panhandle's MANAGEMENT'S DISCUSSION
AND ANALYSIS; and CMS Energy's, Consumers' and Panhandle's CONDENSED NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) LIST OF EXHIBITS
(12) - CMS Energy: Statements regarding computation of Ratio of
Earnings to Fixed Charges
(15)(a) - CMS Energy: Letter of Independent Public Accountant
(15)(b) - Consumers: Letter of Independent Public Accountant
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85
(b) REPORTS ON FORM 8-K
CMS ENERGY
Current Report filed February 23, 2001 covering matters pursuant to ITEM 5.
OTHER EVENTS.
CONSUMERS
Current Report filed February 23, 2001 covering matters pursuant to ITEM 5.
OTHER EVENTS.
PANHANDLE
No Current Reports on Form 8-K filed during the second quarter.
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86
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, each
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized. The signature for each undersigned
company shall be deemed to relate only to matters having reference to such
company or its subsidiary.
CMS ENERGY CORPORATION
----------------------------------------------
(Registrant)
Dated: May 11, 2001 By: /s/ A.M. Wright
-------------------------------------------
Alan M. Wright
Executive Vice President
Chief Financial Officer and
Chief Administrative Officer
CONSUMERS ENERGY COMPANY
----------------------------------------------
(Registrant)
Dated: May 11, 2001 By: /s/ A.M. Wright
-------------------------------------------
Alan M. Wright
Executive Vice President
Chief Financial Officer and
Chief Administrative Officer
PANHANDLE EASTERN PIPE LINE COMPANY
----------------------------------------------
(Registrant)
Dated: May 11, 2001 By: /s/ A.M. Wright
-------------------------------------------
Alan M. Wright
Senior Vice President,
Chief Financial Officer and Treasurer
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87
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
CMS ENERGY CORPORATION,
CONSUMERS ENERGY COMPANY
AND
PANHANDLE EASTERN PIPE LINE COMPANY
FORM 10-Q
EXHIBITS
FOR QUARTER ENDED MARCH 31, 2001
88
Exhibit
Number Description
- ----------------------------------------------------------------------------------------------------------
(12) - CMS Energy: Statements regarding computation of Ratio of Earnings to Fixed Charges
(15)(a) - CMS Energy: Letter of Independent Public Accountant
(15)(b) - Consumers: Letter of Independent Public Accountant
1
EXHIBIT (12)
2
Exhibit (12)
CMS ENERGY CORPORATION
Ratio of Earnings to Fixed Charges and Preferred
Securities Dividends and Distributions
(Millions of Dollars)
Three Months
Ended Years Ended December 31 -
March 31, 2001 2000 1999 1998 1997 1996
-----------------------------------------------------------
(b) (c)
Earnings as defined (a)
Consolidated net income $ 109 $ 36 $ 277 $ 242 $ 244 $ 224
Income taxes 59 60 64 100 108 137
Exclude equity basis subsidiaries (32) (171) (84) (92) (80) (85)
Fixed charges as defined, adjusted to
exclude capitalized interest of $14, $49,
$41, $29, $13, and $5 million for the three
months ended March 31, 2001, and the
years ended December 31, 2000, 1999,
1998, 1997, and 1996, respectively 173 744 588 395 360 313
---------------------------------------------------
Earnings as defined $ 309 $ 669 $ 845 $ 645 $ 632 $ 589
===================================================
Fixed charges as defined (a)
Interest on long-term debt $ 145 $ 591 $ 502 $ 319 $ 273 $ 230
Estimated interest portion of lease rental 2 7 7 8 8 10
Other interest charges 12 48 57 48 49 43
Preferred securities dividends and
distributions 28 147 96 77 67 54
---------------------------------------------------
Fixed charges as defined $ 187 $ 793 $ 662 $ 452 $ 397 $ 337
===================================================
Ratio of earnings to fixed charges and
preferred securities dividends and distributions 1.65 - 1.28 1.43 1.59 1.75
===================================================
NOTES:
(a) Earnings and fixed charges as defined in instructions for Item 503 of
Regulation S-K.
(b) For the year ended December 31, 2000, fixed charges exceeded earnings by
$124 million. Earnings as defined include a $329 million pretax impairment loss
on the Loy Yang investment. The ratio of earnings to fixed charges and preferred
securities dividends and distributions would have been 1.26 excluding this
amount.
(c) Excludes a cumulative effect of change in accounting after-tax gain of $43
million.
1
EXHIBIT (15)(a)
2
Exhibit (15)(a)
April 27, 2001
CMS Energy Corporation:
We are aware that CMS Energy Corporation has incorporated by reference in its
Registration Statements No. 33-55805, No. 33-60007, No. 333-27849, No.
333-32229, No. 333-37241, No. 333-45556, No. 333-47464, No. 333-51932, No.
333-52560, No. 333-58686, and No. 333-76347 in its Form 10-Q for the quarter
ended March 31, 2001, which includes our report dated April 27, 2001 covering
the unaudited interim financial information contained therein. Pursuant to
Regulation C of the Securities Act of 1933, that report is not considered a part
of the registration statement prepared or certified by our firm or a report
prepared or certified by our firm within the meaning of Sections 7 and 11 of the
Act.
Very truly yours,
/s/ Arthur Andersen LLP
1
EXHIBIT (15)(b)
2
Exhibit (15)(b)
April 27, 2001
Consumers Energy Company:
We are aware that Consumers Energy Company has incorporated by reference in its
Registration Statements No. 333-89363 its Form 10-Q for the quarter ended March
31, 2001, which includes our report dated April 27, 2001 covering the unaudited
interim financial information contained therein. Pursuant to Regulation C of the
Securities Act of 1933, that report is not considered a part of the registration
statement prepared or certified by our firm or a report prepared or certified by
our firm within the meaning of Sections 7 and 11 of the Act.
Very truly yours,
/s/ Arthur Andersen LLP
