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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, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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, 2000:
CMS ENERGY CORPORATION:
CMS Energy Common Stock, $.01 par value 109,748,598
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, 2000
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-14
Consolidated Statements of Cash Flows................................................................ CMS-16
Consolidated Balance Sheets.......................................................................... CMS-18
Consolidated Statements of Common Stockholders' Equity............................................... CMS-20
Condensed Notes to Consolidated Financial Statements................................................. CMS-21
Report of Independent Public Accountants............................................................. CMS-38
Consumers Energy Company
Management's Discussion and Analysis................................................................. CE-1
Consolidated Statements of Income.................................................................... CE-9
Consolidated Statements of Cash Flows................................................................ CE-10
Consolidated Balance Sheets.......................................................................... CE-11
Consolidated Statements of Common Stockholder's Equity............................................... CE-13
Condensed Notes to Consolidated Financial Statements................................................. CE-14
Report of Independent Public Accountants............................................................. CE-25
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-15
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-2
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
Alliance.................................. Alliance Regional Transmission
Organization
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
Class G Common Stock...................... One of two classes of common stock of
CMS Energy, no par value, which
reflects the separate performance of
the Consumers Gas Group, redeemed in
October 1999.
Clean Air Act............................. Federal Clean Air Act, as amended
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................... One of two classes of common stock of
CMS Energy, par value $.01 per share
CMS Gas Transmission...................... CMS Gas Transmission and Storage
Company, a subsidiary of Enterprises
CMS Generation............................ CMS Generation Co., 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
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
EPA....................................... Environmental Protection Agency
EPS....................................... Earnings per share
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FASB...................................... Financial Accounting Standards Board
FERC...................................... Federal Energy Regulatory Commission
FMLP...................................... First Midland Limited Partnership, a
partnership which holds a 75.5%
lessor interest in the Midland
Cogeneration Venture 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 and $400 million
Series E
Huron..................................... Huron Hydrocarbons, Inc., a
subsidiary of Consumers
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 State Utility
Workers Council......................... The executive board and negotiating
body for local chapters of the Union
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
NRC....................................... Nuclear Regulatory Commission
NYMEX..................................... New York Mercantile Exchange
Outstanding Shares........................ Outstanding shares of Class G Common
Stock
Palisades................................. Palisades nuclear power plant, owned
by Consumers
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
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5
Panhandle Storage......................... CMS Panhandle Storage Company, a
subsidiary of Panhandle Eastern Pipe
Line Company
PCBs...................................... Poly chlorinated biphenyls
PECO...................................... PECO Energy Company, a non-affiliated
company
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
RTO....................................... Regional Transmission Organization
Sea Robin................................. Sea Robin Pipeline Company
SEC....................................... Securities and Exchange Commission
Securitization............................ A financing authorized by statute in
which the statutorily assured 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 rate reduction
bonds issued by a special purpose
entity affiliated with such utility.
Senior Credit Facilities.................. $725 million senior credit facilities
consisting of a $600 million
three-year revolving credit facility
and a five-year $125 million term
loan facility
SFAS...................................... Statement of Financial Accounting
Standards
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, 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. On March 29, 1999, CMS Energy completed the acquisition of
Panhandle, as further discussed in the Capital Resources and Liquidity section
of this MD&A and Note 1. Panhandle is primarily engaged in the interstate
transportation and storage of natural gas.
The MD&A of this Form 10-Q should be read along with the MD&A and other parts of
CMS Energy's 1999 Form 10-K. This MD&A also 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
Statements and Notes. This report and other written and oral statements made by
CMS Energy 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 CMS Energy's actual results to
differ materially from those anticipated in such statements. CMS Energy
disclaims any obligation to update or revise forward-looking statements, whether
from new information, future events or otherwise. CMS Energy details 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 1999 Form 10-K Item 1 and periodically in
various public filings it makes with the SEC. This discussion of potential risks
and uncertainties is by no means complete but is designed to highlight important
factors that may impact CMS Energy's outlook. This report also describes
material contingencies in the Condensed Notes to Consolidated Financial
Statements and readers are encouraged to read such Notes.
RESULTS OF OPERATIONS
CMS ENERGY CONSOLIDATED EARNINGS
In Millions, Except Per Share Amounts
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Three months ended March 31, 2000 1999 Change
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Consolidated Net Income $ 80 $ 98 $ (18)
Net Income Attributable to Common Stocks:
CMS Energy 80 88 (8)
Class G - 10 (10)
Earnings Per Average Common Share:
CMS Energy
Basic .71 .82 (.11)
Diluted .70 .80 (.10)
Class G
Basic and Diluted - 1.19 (1.19)
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CMS-1
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The decrease in consolidated net income for the first quarter 2000 over the
comparable period in 1999 resulted from decreased earnings from the electric and
gas utilities and the independent power production business, coupled with higher
interest expense principally related to the Panhandle acquisition. Partially
offsetting these decreases were increased earnings from the natural gas
transmission, storage and processing business, primarily as a result of the
Panhandle acquisition, the oil and gas exploration and production business and
the international energy distribution business. First quarter 2000 results do
not include any after-tax gains from major asset sales.
For further information, see the individual results of operations for each CMS
Energy business segment in this MD&A.
CONSUMERS' ELECTRIC UTILITY RESULTS OF OPERATIONS
ELECTRIC PRETAX OPERATING INCOME:
In Millions
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Three Months
Ended March 31
Change Compared to Prior Year 2000 vs 1999
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Electric Deliveries $ 8
Power supply costs and related revenue (21)
Net energy option costs (1)
Non-commodity revenue (3)
Operation and maintenance expense -
General taxes and depreciation expense (2)
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Total change $ (19)
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ELECTRIC DELIVERIES: Electric deliveries were 9.7 billion kWh for the three
months ended March 31, 2000, a decrease of 0.3 billion kWh or 3.3 percent
compared with 1999. Total electric deliveries decreased due to lower intersystem
sales, less usage by industrial customers, and lower residential space heating.
POWER SUPPLY COSTS:
In Millions
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March 31 2000 1999 Change
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Three months ended $ 301 $ 279 $ 22
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Power supply costs increased for the three months ended March 31, 2000,
primarily due to higher interchange power costs. Consumers had to purchase more
external power because internal generation decreased due to scheduled and
unscheduled outages.
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CONSUMERS' GAS UTILITY RESULTS OF OPERATIONS
In Millions
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Three Months
Ended March 31
Change Compared to Prior Year 2000 vs 1999
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Gas deliveries $ (10)
Gas commodity costs and related revenue (10)
Gas wholesale and retail services 3
Operation and maintenance expense 1
General taxes and depreciation expense 2
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Total change $ (14)
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GAS DELIVERIES: Gas system deliveries for the three months period ended March
31, 2000, including miscellaneous transportation, totaled 161 bcf, a decrease of
5 bcf or 3 percent compared with 1999. The decreased deliveries reflect warmer
temperatures during the first quarter of 2000.
COST OF GAS SOLD:
In Millions
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March 31 2000 1999 Change
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Three months ended $ 295 $ 306 $ (11)
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The cost of gas sold decreased for the three months ending March 31, 2000 due to
decreased sales from warmer than normal temperatures during the first quarter of
2000. Higher gas prices partially offset the effect of decreased sales.
NATURAL GAS TRANSMISSION, STORAGE AND PROCESSING RESULTS OF OPERATIONS
PRETAX OPERATING INCOME: Pretax operating income for the three months ended
March 31, 2000 increased $75 million from the comparable period in 1999. The
increase reflects earnings from Panhandle, which CMS Energy acquired near the
end of March 1999, and increased earnings from other international and domestic
operations.
INDEPENDENT POWER PRODUCTION RESULTS OF OPERATIONS
PRETAX OPERATING INCOME: Pretax operating income for the three months ended
March 31, 2000 decreased $10 million (37 percent) from the comparable period in
1999. This decrease primarily reflects decreased earnings from domestic plants
and the MCV Facility, a scheduled reduction in operating fees, and higher
operating expenses. Partially offsetting these decreases were increased
international plant earnings and the prior year settlement of a legal
proceeding.
OIL AND GAS EXPLORATION AND PRODUCTION RESULTS OF OPERATIONS
PRETAX OPERATING INCOME: Pretax operating income for the three months ended
March 31, 2000 increased $3 million (150 percent) from the comparable period in
1999 as a result of higher realized commodity
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prices and increased oil and natural gas production. Partially offsetting these
increases were higher operating, general and administrative, and exploration
expenses.
MARKETING, SERVICES AND TRADING RESULTS OF OPERATIONS
PRETAX OPERATING INCOME: Excluding the one-time effect of the 1999 change to
mark-to-market accounting for trading contracts, pretax operating income for the
three months ended March 31, 2000 increased $2 million from the comparable
period in 1999. The increase is the result of additional wholesale gas sales and
an energy management services acquisition, partially offset by additional
operating costs.
INTERNATIONAL ENERGY DISTRIBUTION RESULTS OF OPERATIONS
PRETAX OPERATING INCOME: Pretax operating income for the three months ended
March 31, 2000 increased $12 million from the comparable period in 1999, and
represented this segment's first profitable quarter. The increase in pretax
operating income primarily reflects earnings from new investments in a Brazilian
electric distribution utility, the absence of operating losses from a second
Brazilian electric distribution utility which was sold in January 2000, and
increased earnings from the investment 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. Management employs established policies and procedures to
manage its risks associated with these 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 item.
In accordance with SEC disclosure requirements, 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: Management uses commodity futures contracts, options and
swaps (which require a net cash payment for the difference between a fixed and
variable price) to manage commodity price risk. The prices of energy
commodities, such as gas, oil, electric and natural gas liquids, fluctuate due
to changes in the supply of and demand for those commodities. To reduce price
risk caused by these market fluctuations, CMS Energy hedges certain inventory
and purchases and sales contracts. A hypothetical 10 percent adverse shift in
quoted commodity prices in the near term would not have had a material impact on
CMS Energy's consolidated financial position, results of operations or cash
flows as of March 31, 2000. The analysis assumes that the maximum exposure
associated with purchased options is limited to prices paid. The analysis also
does not quantify short-term exposure to hypothetically adverse price
fluctuations in inventories.
INTEREST RATE RISK: Management uses a combination of fixed-rate and
variable-rate debt to reduce interest rate exposure. Interest rate swaps and
rate locks may be used to adjust exposure when deemed appropriate, based upon
market conditions. These strategies attempt to provide and maintain the lowest
cost of capital. The carrying amount of long-term debt was $7.1 billion at March
31, 2000 with a fair value of $6.7 billion.
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The fair value of CMS Energy's interest rate swaps at March 31, 2000, with a
notional amount of $2.1 billion, was $4.9 million, representing the amount CMS
Energy would pay upon settlement. A hypothetical 10 percent adverse shift in
interest rates in the near term would not have a material effect on CMS Energy's
consolidated financial position, results of operations or cash flows as of March
31, 2000.
CURRENCY EXCHANGE RISK: Management uses forward exchange and option contracts to
hedge certain investments in foreign operations. A hypothetical 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, 2000, but would result in a net cash settlement of approximately $33
million. The estimated fair value of the foreign exchange and option contracts
at March 31, 2000 was $30 million, representing the amount CMS Energy would pay
upon settlement.
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, 2000.
For a discussion of accounting policies related to derivative transactions, see
Note 5.
CAPITAL RESOURCES AND LIQUIDITY
CASH POSITION, INVESTING AND FINANCING
CMS Energy's primary ongoing source of cash is dividends and distributions from
subsidiaries. During the first quarter of 2000, Consumers paid $79 million in
common dividends and Enterprises paid $294 million in common dividends and
distributions to CMS Energy. 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. Consolidated cash from operations totaled $114
million and $321 million for the first quarter of 2000 and 1999, respectively.
The $207 million decrease resulted primarily from the timing of cash receipts
and payments related to working capital items, a decrease in deferred taxes, and
an increase in undistributed equity earnings of unconsolidated subsidiaries. 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: CMS Energy's consolidated net cash used in investing
activities totaled $26 million and $2.235 billion for the first quarter of 2000
and 1999, respectively. The decrease of $2.209 billion primarily reflects the
acquisition of Panhandle in March 1999 for $1.9 billion and an increase in
proceeds from the sales of assets. CMS Energy's expenditures (excluding
acquisitions) during 2000 for its utility and diversified energy businesses
were $114 million and $131 million, respectively, compared to $95 million and
$266 million, respectively, during the comparable period in 1999.
FINANCING ACTIVITIES: CMS Energy's net cash used in financing activities totaled
$12 million in 2000, while net cash provided by financing activities totaled
$1.917 billion in 1999. Net cash provided in 1999 primarily related to funding
the approximately $1.9 billion Panhandle acquisition in March 1999. The decrease
of $1.929 billion in net cash provided by financing activities resulted from a
decrease of $1.799 billion in the issuance of new securities (see table below
for securities issued in first quarter 2000), an
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increase in the retirement of bonds and other long-term debt ($154 million), and
an increase in the repurchase of common stock ($102 million), partially offset
by a decrease in the retirement of notes payable ($147 million).
In Millions
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Distribution/ Principal
Month Issued Maturity Interest Rate Amount Use of Proceeds
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CMS ENERGY
GTNs Series E (1) (1) 8.4%(1) $ 28 General corporate purposes
---------
$ 28
PANHANDLE
Senior Notes March 2010 8.25% $100 To fund acquisition of
Sea Robin and general
corporate purposes
---------
$100
---------
Total $128
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(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 2000, CMS Energy declared and paid $42 million in cash
dividends to holders of CMS Energy Common Stock. In April 2000, the Board of
Directors declared a quarterly dividend of $.365 per share on CMS Energy Common
Stock, payable in May 2000.
OTHER INVESTING AND FINANCING MATTERS: At March 31, 2000, the book value per
share of CMS Energy Common Stock was $21.33.
At May 1, 2000, CMS Energy had an aggregate $1.6 billion in securities
registered for future issuance.
CMS Energy's Senior Credit Facilities consist of a $600 million three-year
revolving credit facility and a five-year $125 million term loan facility,
unsecured lines of credit and letters 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, 2000, the total amount available
under the Senior Credit Facilities was $39 million, and under the unsecured
lines of credit and letters of credit was $343 million. For detailed
information, see Note 3, 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 these sources of
funds, see Note 3, incorporated by reference herein.
CMS Energy has identified for possible sale certain assets that are expected to
contribute little or no earnings benefit in the short to medium term. As of May
1, 2000, CMS Energy had sold or had reached agreements to sell $470 million of
these assets, including a partial interest in its Northern Header gathering
system, all of its ownership interest in a Brazilian distribution system,
all of its northern Michigan oil
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and gas properties and its ownership interest in the Lakewood Cogeneration plant
located in Lakewood, New Jersey. CMS Energy expects that these sales of assets
will result in total cash proceeds and associated reduction of consolidated
project debt of approximately $665 million. CMS Energy plans to continue to sell
an additional $700 million of assets resulting in cash proceeds and associated
reduction of consolidated project debt, as more fully discussed in the
Outlook-Financial Plan section below.
In addition, in February 2000, CMS Energy announced its intention to sell its
interest in Loy Yang. The amount CMS Energy ultimately realizes from the sale of
Loy Yang could differ materially from the approximately $500 million investment
amount currently reflected in the financial statements.
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 $4.3 billion during 2000 through 2002.
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 2000 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
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Years Ended December 31 2000 2001 2002
- -------------------------------------------------------------------------------------------------------------------
Consumers electric operations (a) (b) $ 441 $ 575 $ 558
Consumers gas operations (a) 114 130 127
Natural gas transmission, storage and processing 234 208 255
Independent power production 586 215 292
Oil and gas exploration and production 155 140 141
Marketing, services and trading 32 12 12
International energy distribution 66 - -
Other 17 - -
--------------------------------------------
$ 1,645 $1,280 $1,385
===================================================================================================================
(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.
CMS Energy currently plans investments in the years 2000 through 2002 in focused
markets, which include: North and South America; West and North Africa; the
Middle East and India. 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.
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OUTLOOK
As the deregulation and privatization of the energy industry takes place in
global energy markets, CMS Energy has positioned itself to be a leading
international integrated energy company acquiring, developing and operating
energy facilities and providing energy services in major world growth markets.
CMS Energy provides a complete range of international energy expertise from
energy production to consumption. CMS Energy intends to pursue its global growth
by making energy investments that provide expansion opportunities for multiple
CMS Energy businesses.
CMS Energy also enhances its growth strategy through an active portfolio
management program (the ongoing sale of non-strategic assets), with proceeds
reinvested in assets with greater potential for synergies with existing or
planned assets. In particular, CMS Energy is reviewing its options regarding
certain assets performing below prior expectations, including Argentine
generating assets. CMS Energy also continues to seek improvement in the
profitability of all assets retained in its portfolio.
FINANCIAL PLAN
In February 2000, CMS Energy announced a financial plan to strengthen
significantly its balance sheet, to reduce fixed charges and to enhance earnings
per share growth through an initial public offering of approximately $600
million of a tracking stock representing 20 percent of the financial interest in
its electric and gas utility. On May 1, 2000, CMS Energy announced that it will
not proceed with the offering of a tracking stock. Alternatively, CMS Energy
plans to raise funds from an additional $700 million of cash proceeds and reduce
consolidated project debt from asset sales by year-end 2000. These anticipated
sales are in addition to the approximately $665 million of cash proceeds and
associated debt reduction of consolidated project debt from asset sales
completed or announced as of May 1, 2000. As a result of not pursuing the
issuance of the tracking stock, CMS Energy intends to maintain the CMS Energy
Common Stock dividend at its current annual level of $1.46 per share.
CMS Energy management believes that the sale of specific assets to interested
industry buyers will bring considerably more value to its shareholders than
issuance of equity given the recent low stock market valuations in the utility
industry. In addition, it will allow CMS Energy to achieve more geographic and
business focus thereby permitting CMS Energy to concentrate on its most
profitable and growing ventures. CMS Energy will continue to evaluate
alternatives to strengthen its balance sheet and to enhance shareholder value.
These actions are expected to make further issuance of CMS Energy Common Stock
unnecessary in the foreseeable future, except for issuances in connection with
existing convertible securities, a major acquisition, employee benefit plans and
the stock purchase plan.
The Board of Directors approved the repurchase of up to 10 million shares of CMS
Energy Common Stock, from time to time, in open market or private transactions.
As of May 1, 2000, CMS Energy had repurchased approximately 6.6 million shares.
CMS-8
14
DIVERSIFIED ENERGY OUTLOOK
CMS Energy expects to grow its diversified energy businesses (all businesses
except for Consumers and Panhandle) by focusing on acquisitions and greenfield
(new construction) projects in the United States, as well as high-growth markets
in India, South America and the Middle East. Additionally, the growth strategy
includes exploiting its West Africa oil and gas reserves, further developing
markets for the fuel and methanol product derived in West Africa, and
investigating expansion opportunities for its existing independent power project
in West Africa. CMS Energy seeks to minimize operational and financial risks
when operating internationally by utilizing multilateral financing institutions,
procuring political risk insurance and hedging foreign currency exposure where
appropriate.
CMS Energy intends to use its marketing, services and trading business to
improve the return on CMS Energy's other business assets. One method to achieve
this goal is to use marketing and trading to enhance performance of assets, such
as gas reserves and power plants. Other strategies include expanding CMS
Energy's industrial and commercial energy services to enhance our commodity
marketing business, using CMS Energy's gas production as a hedge to commodity
risk in other areas of our business, and developing risk management products
that address customer needs.
CONSUMERS' ELECTRIC UTILITY OUTLOOK
GROWTH: Consumers expects average annual growth of approximately two and one
half percent per year in electric system deliveries for the years 2000 to 2004.
This growth rate does not take into account the possible impact on the industry
of restructuring or 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: Generally, electric restructuring is
the regulatory and legislative attempt to introduce competition to the electric
industry by allowing customers to choose their electric generation supplier,
while the transmission and distribution services remain regulated. As a result,
electric generation suppliers ultimately compete in a less regulated
environment. Competition affects, and will continue to affect, Consumers' retail
electric business. To remain competitive, Consumers has multi-year electric
supply contracts with some of its largest industrial customers to provide power
to some of their facilities. The MPSC approved these contracts as part of its
phased introduction to competition. Beginning in 2000 through 2005, some
customers, depending on future business and regulatory circumstances, can
terminate or restructure their contracts. The termination or restructuring of
these contracts could affect approximately 600 MW of customer power supply
requirements. The ultimate financial impact of changes related to these power
supply contracts is not known at this time.
As a result of a transition of the wholesale and retail electric businesses in
Michigan to competition, Detroit Edison, in December 1996, gave Consumers the
required four-year notice of its intent to terminate the current agreements
under which the companies jointly operate the MEPCC. At the same time, Detroit
Edison filed with the FERC seeking early termination of the agreements. The FERC
has not acted on Detroit Edison's application. Detroit Edison and Consumers are
currently in negotiations to terminate or restructure the MEPCC operations. CMS
Energy is unable to predict the outcome of these negotiations, but does not
anticipate any adverse impacts caused by termination or restructuring of the
MEPCC.
CMS-9
15
In the first part of the year 2000, a large coalition of businesses was unable
to agree upon proposed electric restructuring legislation for Michigan. In May
2000, Michigan's Governor unveiled an alternative legislative proposal which has
been introduced into the Michigan Legislature. The Governor intends to seek a
vote before the start of the Legislature's summer recess in early June 2000. The
legislation: 1) permits all customers to exercise choice of electric suppliers
by January 1, 2002; 2) requires electric utilities to shed control of generation
resources in excess of 30 percent of the total generating capacity available to
serve specified market areas; 3) cuts residential electric rates by 5 percent
and freezes them until December 31, 2003; 4) provides for a residential rate cap
until at least January 1, 2006 with the cap remaining in place until the earlier
of December 31, 2013 or the satisfaction of a market power test and completion
of required transmission expansion; 5) freezes commercial and industrial rates
at their May 1, 2000 level until December 31, 2003; 6) requires Michigan
utilities to join a FERC approved Regional Multi-State Transmission System
Organization by December 31, 2001 or divest its interest in transmission
facilities to an independent transmission owner; and 7) requires the expansion
of available transmission capability by at least 2,000 MW over the next several
years. The bill contemplates the use of Securitization to refinance stranded
assets as a means of funding the 5 percent residential rate reduction. CMS
Energy cannot predict the timing or outcome of legislative efforts in Michigan.
Uncertainty exists with respect to the enactment of federal legislation
restructuring the electric power industry. A variety of bills introduced in
Congress in recent years seek to change existing federal regulation of the
industry. These federal bills could potentially affect or supercede state
regulation; however, none have been enacted. CMS Energy cannot predict the
outcome of electric restructuring on its financial position, liquidity, or
results of operations.
RATE MATTERS: There are several pending rate issues that could affect Consumers'
electric business. These matters include MPSC rate proceedings and electric
restructuring orders and a complaint by ABATE alleging excess revenues.
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, and Note 2, Uncertainties, "Consumers' Electric
Utility Rate Matters - Electric Proceedings" and "Consumers' Electric Utility
Rate Matters - Electric Restructuring," 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 for compliance with the Clean Air
Act; 2) environmental liabilities arising from compliance with various federal,
state and local environmental laws and regulations, including potential
liability or expenses relating to the Michigan Natural Resources and
Environmental Protection Act and Superfund; 3) cost recovery relating to the MCV
Partnership; 4) an ABATE rate complaint; 5) an application to reinstate the PSCR
process; 6) electric industry restructuring; 7) the ability to meet peak
electric demand loads at a reasonable cost and without market disruption and
initiatives undertaken to reduce exposure to energy price increases; and 8)
ongoing issues relating to the storage of spent nuclear fuel and the operating
life of Palisades. For detailed information about these trends or uncertainties,
see Note 2, Uncertainties, incorporated by reference herein.
CMS-10
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CONSUMERS GAS UTILITY BUSINESS OUTLOOK
GROWTH: Consumers currently anticipates gas deliveries, including gas customer
choice deliveries (excluding transportation to the MCV Facility and off-system
deliveries), to grow at an average annual rate of between one and two percent
over the next five years based primarily on a steadily growing customer base.
Actual gas deliveries in future periods may be affected by abnormal weather,
alternative energy prices, changes in competitive conditions, and the level of
natural gas consumption per customer.
REGULATORY RESTRUCTURING: In December 1999, several bills related to gas
industry restructuring were introduced into the Michigan Legislature. Combined,
these bills constitute the "gas choice program." Consumers is participating in
the legislative process involving these bills. They provide for 1) a phased-in
approach to gas choice requiring 40 percent of the customers to be allowed
choice by April 2002, 60 percent by April 2003 and all customers by April 2004;
2) a market-based, unregulated pricing mechanism for gas commodity for customers
who exercise choice; and 3) a new "safe haven" pricing mechanism for customers
who do not exercise choice under which NYMEX pricing would be used to establish
a statutory cap on gas commodity prices that could be charged by gas utilities
instead of traditional cost of service regulation. The proposed bills also
provide for a gas distribution service rate freeze until December 31, 2005, a
code of conduct governing business relationships with affiliated gas suppliers
and the MPSC licensing of all gas suppliers doing business in Michigan and
imposes financial penalties for noncompliance. They also provide customer
protection by preventing "slamming", the switching of a customer's gas supplier
without consent, and "cramming", the inclusion of optional products and services
without the customer's authorization. The bills establishing the gas choice
program have become the subject of extensive legislative hearings during which
there will undoubtedly be various amendments offered by many parties, including
Consumers. CMS Energy cannot predict the timing or outcome of this legislative
process.
Consumers contracts to purchase gas to limit its risk associated with gas price
increases. Management's intent is to take physical delivery of the commodity and
failure could result in a significant penalty for nonperformance. At March 31,
2000, Consumers had an exposure to gas price increases if the ultimate cost of
gas was to exceed $2.84 per mcf for the following volumes: 45 percent of its
remaining 2000 requirements; and 50 percent of its first quarter 2001
requirements. Based on the expected cost of gas by a consensus of financial
analysts' forecasts, Consumers estimates its exposure to gas prices, for gas
that has not been purchased for year 2000, could be significant. Using these
same year 2000 gas price forecasts, Consumers estimates its exposure to
gas prices, for gas that has not been purchased for the first quarter 2001,
could be significant. Additional contract coverage is currently under review. As
of March 31, 2000, the gas purchase contracts currently in place were
consummated at an average price of less than $2.84 per mcf. Consumers uses gas
purchase contracts to protect against gas price increases in a three-year
experimental gas program where Consumers is recovering from its customers $2.84
per mcf for gas. Consumers cannot predict the ultimate loss, if any, incurred as
a result of gas price increases. For further detailed information about these
uncertainties see Note 2, Uncertainties, incorporated by reference herein.
UNCERTAINTIES: CMS Energy's financial results and position may be affected by a
number of trends or uncertainties that have, or CMS Energy reasonably expects
could have, a material impact on net sales or 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) a statewide experimental gas industry
restructuring program; 3) permanent gas industry restructuring; and 4)
implementation of a suspended GCR and the success or failure of initiatives
undertaken to protect against gas commodity price increases.
CMS-11
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CONSUMERS' OTHER OUTLOOK
The Union represents Consumers' operating, maintenance and construction
employees. Consumers and the Union negotiated a collective bargaining agreement
that became effective as of June 1, 1995. By its terms, that agreement will
continues in full force and effect until June 1, 2000. Consumers and the Union
reached a new collective bargaining agreement that, subject to ratification by
Union members, they expect to become effective on June 1, 2000. The Michigan
State Utility Workers Council recommends that the Union members ratify the
agreement. Consumers is unable to predict the outcome of the ratification vote.
Consumers offers a variety of energy-related services to electric and gas
customers focused upon 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.
PANHANDLE OUTLOOK
CMS Energy intends to use Panhandle as a platform for expansion in the United
States. Panhandle plays an important role in the growth strategy by providing
services for the development of gas wells, production and throughput of gas to
the market. The market for transmission of natural gas to the Midwest is
increasingly competitive, however, and may become more so in light of projects
recently completed or in progress to increase Midwest transmission capacity for
gas originating in Canada and the Rocky Mountain region. As a result, there
continues to be pressure on prices charged by Panhandle and an increasing
necessity to discount the prices charged from the legal maximum, which reduces
revenues. New contracts in the current market conditions tend to be of shorter
duration than the expiring contracts being replaced, which will also increase
revenue volatility. In addition, Trunkline in 1996 filed with FERC and placed
into effect a general rate increase; however, a subsequent January 2000 FERC
order could, if approved without modification upon rehearing, reduce Trunkline's
tariff rates and future revenue levels by up to 3% of Panhandle's consolidated
revenues. Panhandle continues to be selective in offering discounts to maximize
revenues from existing capacity and to advance projects that provide expanded
services to meet the specific needs of customers. In addition, Panhandle will
continue to evaluate opportunities to acquire synergistic operations such as the
Sea Robin pipeline system and attempt to maximize the use and value of its
existing assets, such as the proposed conversion of Trunkline's 26 inch pipeline
to a liquid products pipeline.
REGULATORY MATTERS: For detailed information about Panhandle's regulatory
uncertainties see Note 2, Uncertainties - Panhandle Matters, incorporated by
reference herein.
OTHER MATTERS
NEW ACCOUNTING RULES
In 1999, the FASB issued SFAS 137, Accounting for Derivative Instruments and
Hedging Activities Deferral of the Effective Date of FASB Statement No.133. SFAS
137 defers the effective date of SFAS 133, Accounting for Derivative Instruments
and Hedging Activities, to January 1, 2001. CMS Energy is currently studying
SFAS 133 and plans to adopt SFAS 133 as of January 1, 2001, but has yet to
quantify the effects of adoption on its financial statements.
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
CMS-12
18
exchange rate fluctuations between the United States dollar and each of the
Australian dollar, Brazilian real and Argentine peso. From January 1, 2000
through March 31, 2000, the foreign currency translation amount realized from
asset sales increased equity by $25 million and the change in the foreign
currency translation adjustment decreased equity by $49 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 $1.7 billion at March 31, 2000, which
includes $369 million, $200 million and $1.1 billion for Australian, Brazilian
and Argentine foreign exchange contracts, respectively. The estimated fair value
of the foreign exchange and option contracts at March 31, 2000 was $30 million,
representing the amount CMS Energy would pay upon settlement.
CMS - 13
19
CMS ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
THREE MONTHS ENDED
March 31 2000 1999
- ----------------------------------------------------------------------------------------------------------
In Millions, Except
Per Share Amounts
OPERATING REVENUE
Electric utility $ 640 $ 636
Gas utility 475 506
Natural gas transmission, storage and processing 178 104
Independent power production 81 72
Oil and gas exploration and production 32 19
Marketing, services and trading 351 158
International energy distribution 63 38
Other 7 4
-------------------------
1,827 1,537
- -----------------------------------------------------------------------------------------------------------
OPERATING EXPENSES
Operation
Fuel for electric generation 78 93
Purchased power - related parties 146 139
Purchased and interchange power 168 103
Cost of gas sold 591 496
Other 228 206
-------------------------
1,211 1,037
Maintenance 76 39
Depreciation, depletion and amortization 176 150
General taxes 71 66
-------------------------
1,534 1,292
- -----------------------------------------------------------------------------------------------------------
PRETAX OPERATING INCOME (LOSS)
Electric utility 115 134
Gas utility 64 78
Natural gas transmission, storage and processing 78 3
Independent power production 17 27
Oil and gas exploration and production 5 2
Marketing, services and trading 3 4
International energy distribution 6 (6)
Other 5 3
-------------------------
293 245
- -----------------------------------------------------------------------------------------------------------
OTHER INCOME (DEDUCTIONS)
Accretion income 1 1
Accretion expense (2) (4)
Gain on asset sales, net of foreign currency translation losses of $25 in 2000 8 2
Other, net (5) 3
-------------------------
2 2
- -----------------------------------------------------------------------------------------------------------
FIXED CHARGES
Interest on long-term debt 148 96
Other interest - 13
Capitalized interest (10) (10)
Preferred dividends - 5
Preferred securities distributions 23 8
-------------------------
161 112
- -----------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES AND MINORITY INTERESTS 134 135
INCOME TAXES 53 37
MINORITY INTERESTS 1 -
-------------------------
CONSOLIDATED NET INCOME $ 80 $ 98
===========================================================================================================
CMS-14
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THREE MONTHS ENDED
MARCH 31 2000 1999
- ----------------------------------------------------------------------------------------------------------------------
In Millions, Except Per Share Amounts
NET INCOME ATTRIBUTABLE TO COMMON STOCKS CMS ENERGY $ 80 $ 88
CLASS G - $ 10
- ----------------------------------------------------------------------------------------------------------------------
AVERAGE COMMON SHARES OUTSTANDING CMS ENERGY 113 108
CLASS G - 8
- ----------------------------------------------------------------------------------------------------------------------
BASIC EARNINGS PER AVERAGE COMMON SHARE CMS ENERGY $ .71 $ .82
CLASS G - $ 1.19
- ----------------------------------------------------------------------------------------------------------------------
DILUTED EARNINGS PER AVERAGE COMMON SHARE CMS ENERGY $ .70 $ .80
CLASS G - $ 1.19
- ----------------------------------------------------------------------------------------------------------------------
DIVIDENDS DECLARED PER COMMON SHARE CMS ENERGY $ .365 $ .33
CLASS G - $ .325
======================================================================================================================
THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
CMS-15
21
CMS ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31 2000 1999
- --------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Consolidated net income $ 80 $ 98
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation, depletion and amortization (includes nuclear
decommissioning of $10 and $13, respectively) 176 150
Capital lease and debt discount amortization 7 9
Accretion expense 1 4
Accretion income - abandoned Midland project (1) (1)
MCV power purchases (14) (14)
Undistributed earnings of related parties (28) (16)
Deferred income taxes and investment tax credit (68) (2)
Gain on the sale of assets, net of foreign currency translation losses (8) (2)
Changes in other assets and liabilities (31) 95
---------------------
Net cash provided by operating activities 114 321
- --------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of companies, net of cash acquired (74) (1,899)
Capital expenditures (excludes assets placed under capital lease) (209) (157)
Investments in partnerships and unconsolidated subsidiaries (31) (202)
Cost to retire property, net (21) (21)
Proceeds from sale of property 305 20
Other 4 24
---------------------
Net cash used in investing activities (26) (2,235)
- --------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from bank loans, notes and bonds 343 2,142
Issuance of common stock 3 27
Retirement of bonds and other long-term debt (166) (12)
Repurchase of common stock (102) -
Increase (decrease) in notes payable, net (42) (189)
Payment of common stock dividends (42) (38)
Payment of capital lease obligations (6) (11)
Retirement of preferred stock - (2)
---------------------
Net cash provided by (used in) financing activities (12) 1,917
- --------------------------------------------------------------------------------------------------------------
NET INCREASE IN CASH AND TEMPORARY CASH INVESTMENTS 76 3
CASH AND TEMPORARY CASH INVESTMENTS, BEGINNING OF PERIOD 132 101
---------------------
CASH AND TEMPORARY CASH INVESTMENTS, END OF PERIOD $ 208 $ 104
==============================================================================================================
CMS-16
22
OTHER CASH FLOW ACTIVITIES AND NON-CASH INVESTING AND FINANCING ACTIVITIES WERE:
CASH TRANSACTIONS
Interest paid (net of amounts capitalized) $ 162 $ 82
Income taxes paid (net of refunds) - 2
NON-CASH TRANSACTIONS
Nuclear fuel placed under capital lease $ 2 $ -
Other assets placed under capital leases 3 2
Assumption of debt - 318
===========================================================================================================================
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.
CMS-17
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CMS ENERGY CORPORATION
CONSOLIDATED BALANCE SHEETS
ASSETS MARCH 31 MARCH 31
2000 DECEMBER 31 1999
(UNAUDITED) 1999 (UNAUDITED)
- -------------------------------------------------------------------------------------------------------------------------------
In Millions
PLANT AND PROPERTY (AT COST)
Electric utility $ 7,026 $ 6,981 $ 6,772
Gas utility 2,478 2,461 2,374
Natural gas transmission, storage and processing 2,066 1,934 1,825
Independent power production 976 974 520
Oil and gas properties (successful efforts method) 606 817 679
International energy distribution 481 445 343
Other 77 62 49
--------------------------------------------------
13,710 13,674 12,562
Less accumulated depreciation, depletion and amortization 6,246 6,157 5,803
--------------------------------------------------
7,464 7,517 6,759
Construction work-in-progress 717 604 330
--------------------------------------------------
8,181 8,121 7,089
- --------------------------------------------------------------------------------------------------------------------------------
INVESTMENTS
Independent power production 965 950 991
Natural gas transmission, storage and processing 357 369 563
International energy distribution 40 150 146
Midland Cogeneration Venture Limited Partnership 253 247 220
First Midland Limited Partnership 243 240 236
Other 52 40 33
--------------------------------------------------
1,910 1,996 2,189
- --------------------------------------------------------------------------------------------------------------------------------
CURRENT ASSETS
Cash and temporary cash investments at cost, which approximates market 208 132 104
Accounts receivable, notes receivable and accrued revenue, less
allowances of $19, $12 and $17, respectively 937 959 859
Inventories at average cost
Gas in underground storage 78 225 82
Materials and supplies 149 158 140
Generating plant fuel stock 47 47 33
Deferred income taxes 25 33 -
Prepayments and other 220 263 188
--------------------------------------------------
1,664 1,817 1,406
- --------------------------------------------------------------------------------------------------------------------------------
NON-CURRENT ASSETS
Goodwill, net 913 891 726
Nuclear decommissioning trust funds 615 602 565
Unamortized nuclear costs 504 519 535
Postretirement benefits 341 348 366
Notes receivable - related party 254 251 20
Abandoned Midland project 41 48 66
Other 852 869 805
--------------------------------------------------
3,520 3,528 3,083
--------------------------------------------------
TOTAL ASSETS $ 15,275 $ 15,462 $ 13,767
================================================================================================================================
CMS-18
24
STOCKHOLDERS' INVESTMENT AND LIABILITIES MARCH 31 MARCH 31
2000 DECEMBER 31 1999
(UNAUDITED) 1999 (UNAUDITED)
- ------------------------------------------------------------------------------------------------------------------------------------
IN MILLIONS
CAPITALIZATION
Common stockholders' equity $ 2,374 $ 2,456 $ 2,292
Preferred stock of subsidiary 44 44 244
Company-obligated mandatorily redeemable Trust 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 -
Company-obligated convertible Trust Preferred Securities of:
CMS Energy Trust I (b) 173 173 173
CMS Energy Trust II (b) 301 301 -
Company-obligated Trust Preferred Securities of CMS RHINOS Trust (c) 250 250 -
Long-term debt 7,118 6,987 7,258
Non-current portion of capital leases 88 88 99
----------------------------------------------------
10,743 10,694 10,286
- ------------------------------------------------------------------------------------------------------------------------------------
MINORITY INTERESTS 222 222 153
- ------------------------------------------------------------------------------------------------------------------------------------
CURRENT LIABILITIES
Current portion of long-term debt and capital leases 597 552 300
Notes payable 188 230 139
Accounts payable 673 775 419
Accrued taxes 337 320 278
Accrued interest 119 148 78
Accounts payable - related parties 68 61 79
Power purchases - MCV Partnership 47 47 47
Accrued refunds 12 11 13
Other 311 363 287
----------------------------------------------------
2,352 2,507 1,640
- ------------------------------------------------------------------------------------------------------------------------------------
NON-CURRENT LIABILITIES
Deferred income taxes 618 703 630
Postretirement benefits 476 485 480
Deferred investment tax credit 123 125 133
Regulatory liabilities for income taxes, net 75 64 108
Power purchases - MCV Partnership 61 73 111
Other 605 589 226
----------------------------------------------------
1,958 2,039 1,688
- ------------------------------------------------------------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES (Notes 1 and 2)
TOTAL STOCKHOLDERS' INVESTMENT AND LIABILITIES $ 15,275 $ 15,462 $ 13,767
====================================================================================================================================
(a) The primary asset of Consumers Power Company Financing I is $103 million
principal amount of 8.36 percent subordinated deferrable interest notes due 2015
from Consumers. The primary asset of Consumers Energy Company Financing II is
$124 million principal amount of 8.20 percent subordinated deferrable interest
notes due 2027 from Consumers. The primary asset of Consumers Energy Company
Financing III is $180 million principal amount of 9.25 percent subordinated
deferrable interest notes due 2029 from Consumers. For further discussion, see
Note 7 to the Consolidated Financial Statements contained in CMS Energy's
1999 Form 10-K.
(b) The primary asset of CMS Energy Trust I is $178 million principal amount of
7.75 percent convertible subordinated deferrable interest debentures due 2027
from CMS Energy. The primary asset of CMS Energy Trust II is $310 million
principal amount of 8.625 percent convertible junior subordinated debentures due
July 2004 from CMS Energy. For further discussion, see Note 7 contained in CMS
Energy's 1999 Form 10-K.
(c) As described in Note 7 contained in CMS Energy's 1999 Form 10-K, the
primary asset of CMS RHINOS Trust is $258 million principal amount of LIBOR plus
1.75 percent subordinated deferrable interest debentures due September 2001 from
CMS Energy.
THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
CMS-19
25
CMS ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS' EQUITY
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31 2000 1999
- --------------------------------------------------------------------------------------------------------------
In Millions
COMMON STOCK
At beginning and end of period $ 1 $ 1
- --------------------------------------------------------------------------------------------------------------
OTHER PAID-IN CAPITAL
At the beginning of period 2,749 2,594
Redemption of affiliate's preferred stock - (2)
Common stock repurchased (102) -
Common stock reissued 3 -
Common stock issued:
CMS Energy 3 26
Class G - 1
-----------------------
At end of period 2,653 2,619
- --------------------------------------------------------------------------------------------------------------
REVALUATION CAPITAL
At the beginning of period 3 (9)
Change in unrealized investments-gain (loss) (a) - (4)
-----------------------
At end of period 3 (13)
- --------------------------------------------------------------------------------------------------------------
FOREIGN CURRENCY TRANSLATION
At beginning or period (108) (136)
Change in foreign currency translation realized from asset sale (a) 25 -
Change in foreign currency translation (a) (49) (5)
-----------------------
At end of period (132) (141)
- --------------------------------------------------------------------------------------------------------------
RETAINED EARNINGS (DEFICIT)
At beginning of period (189) (234)
Consolidated net income (a) 80 98
Common stock dividends declared:
CMS Energy (42) (35)
Class G - (3)
-----------------------
At end of period (151) (174)
-----------------------
TOTAL COMMON STOCKHOLDERS' EQUITY $2,374 $2,292
==============================================================================================================
(a) DISCLOSURE OF COMPREHENSIVE INCOME:
Revaluation capital
Unrealized investments-gain, net of tax of
$- and $2, respectively $ - $ (4)
Foreign currency translation, net (24) (5)
Consolidated net income 80 98
------------------------
Total Consolidated Comprehensive Income $ 56 $ 89
========================
THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
CMS-20
26
CMS ENERGY CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
These Condensed Notes and their related Consolidated Financial Statements should
be read along with the Consolidated Financial Statements and Notes contained in
the 1999 Form 10-K of CMS Energy, which includes the Reports of Independent
Public Accountants. Certain prior year amounts have been reclassified to conform
with the presentation in the current year. In the opinion of management, the
unaudited information herein reflects all adjustments necessary to assure the
fair presentation of financial position, results of operations and cash flows
for the periods presented.
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 CMS Energy, Consumers and
Enterprises and their majority owned subsidiaries. The financial statements are
prepared in conformity with generally accepted accounting principles and use
management's estimates where appropriate. Affiliated companies (where CMS Energy
has more than 20 percent but less than a majority ownership interest) are
accounted for by the equity method. For the three months ended March 31, 2000
and March 31, 1999, undistributed equity earnings were $28 million and $16
million, respectively.
Foreign currency translation adjustments relating to the operation of CMS
Energy's long-term investments in foreign countries are included in common
stockholders' equity. From January 1, 2000 through March 31, 2000, the foreign
currency translation amount realized from asset sales increased equity by $25
million and the change in the foreign currency translation adjustment
decreased equity by $49 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.
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UTILITY REGULATION
Consumers accounts for the effects of regulation based on the regulated utility
accounting standard SFAS 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 which,
among other things, identified the terms and timing for implementing electric
restructuring in Michigan. Consistent with these orders, Consumers discontinued
application of SFAS 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 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. The
regulatory asset is collectible as part of the Transition Costs which are
recoverable through the regulated transmission and distribution portion of
Consumers' business as approved by an MPSC order in 1998. This order also
allowed Consumers to recover any energy supply-related regulatory assets, plus a
return on any unamortized balance of those assets, from its transmission and
distribution customers. 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. At
March 31, 2000, Consumers had a net investment in energy supply facilities of
$988 million included in electric plant and property.
ACQUISITION
In March 1999, CMS Energy, through a subsidiary, acquired Panhandle from Duke
Energy for a cash payment of $1.9 billion and existing Panhandle debt of $300
million. CMS Energy used the purchase method of accounting to account for the
acquisition and, accordingly, included the results of operations of Panhandle
for the period from March 29, 1999 in the accompanying consolidated financial
statements. Assets acquired and liabilities assumed are recorded at their fair
values. CMS Energy allocated the excess purchase price over the fair value of
net assets acquired of approximately $800 million to goodwill and amortizes this
amount on a straight-line basis over 40 years.
The following unaudited pro forma amounts for operating revenue, consolidated
net income, basic earnings per share and diluted earnings per share, as if the
acquisition had occurred on January 1, 1999, illustrate the effects of: (1)
various restructuring, realignment, and elimination of activities between
Panhandle and Duke Energy prior to the closing of the acquisition by CMS Energy;
(2) the adjustments resulting from the acquisition by CMS Energy; and (3)
financing transactions which include the public issuance of $800 million of
senior notes by Panhandle, $850 million of senior notes by CMS Energy, and the
private sale of $250 million of Trust Preferred Securities by CMS Energy.
CMS-22
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In Millions, except per share amounts
- -----------------------------------------------------------------------------------------------------------------
Three Months Ended March 31, 2000 1999
- -----------------------------------------------------------------------------------------------------------------
Operating revenue $ 1,827 $ 1,650
Consolidated net income $ 80 $ 111
Basic earnings per share $ .71 $ .93
Diluted earnings per share $ .70 $ .92
=================================================================================================================
2: UNCERTAINTIES
CONSUMERS' ELECTRIC UTILITY CONTINGENCIES
ELECTRIC ENVIRONMENTAL MATTERS: The Clean Air Act limits emissions of sulfur
dioxide and nitrogen oxides 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. In 1997, the EPA revised these standards to impose further limitations
on nitrogen oxide and small particulate-related emissions. In May 1999, a United
States Court of Appeals ruled that the grant of authority to the EPA, to revise
the standards as the EPA did, would amount to an unconstitutional delegation of
legislative power. As a result of that Court's ruling and a later denial of the
EPA's request for rehearing, the EPA proposed an indefinite stay for the
standards under the 1997 rule and proposed to reinstate the pre-1997 standards.
In January 2000, the Department of Justice filed a petition for the United
States Supreme Court to review the case.
In September 1998, based in part upon the 1997 standards, the EPA Administrator
issued final regulations requiring the state of Michigan to limit further
nitrogen oxide emissions. Consumers anticipates a reduction in nitrogen oxide
emissions by 2003 to only 32 percent of levels allowed for the year 2000. The
state of Michigan had one year to submit an implementation plan. The state of
Michigan filed a lawsuit objecting to the extent of the required emission
reductions and requesting an extension of the submission date. In May 1999, the
United States Court of Appeals granted an indefinite stay of the submission date
for the state of Michigan's implementation plan. In early 2000, the United
States Court of Appeals upheld the EPA's final regulations. The state of
Michigan appealed this ruling. Until the appeal is decided, it is unlikely that
the state of Michigan will establish Consumers' nitrogen oxide emissions
reduction target. In December 1999, the EPA Administrator signed 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 currently challenged
September 1998 EPA final rule. Under the revised Section 126 rule, the emission
rate will become effective on May 1, 2003 and apply during the ozone season in
2003 and during each subsequent year. Various parties' petitions challenging the
EPA's rule have been filed. Until these targets are lawfully established, the
estimated cost of compliance discussed below is subject to revision.
The preliminary estimates of capital expenditures to reduce nitrogen
oxide-related emissions to the level proposed by the state of Michigan for
Consumers' fossil-fueled generating units range from $150 million to $290
million, calculated in 2000 dollars. If Consumers had to meet the EPA's 1997
proposed
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requirements, the estimated cost to Consumers would be between $290 million and
$500 million, calculated in 2000 dollars. In both these cases the lower estimate
represents the capital expenditure level that would satisfactorily meet the
proposed emissions limits but would result in higher operating expense. The
higher estimate in the range includes expenditures that result in lower
operating costs while complying with the proposed emissions limit. Consumers
anticipates that it will incur these capital expenditures between 2000 and 2004,
or between 2000 and 2003 if the EPA ultimately imposes its limits. 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 equivalent amount of capital expenditures to comply with
the new small particulate standards sometime after 2004 if those standards
become effective.
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 2000, Consumers incurred capital expenditures totaling
$67 million to install equipment at certain generating units to comply with the
Clean Air Act. Consumers estimates an additional $5 million of capital
expenditures for ongoing and proposed modifications at the remaining coal-fueled
units to meet year 2000 requirements. Management believes that these
expenditures will not materially affect Consumers' annual operating costs.
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. At March
31, 2000, Consumers has accrued the minimum amount of the range for its
estimated Superfund liability.
While decommissioning Big Rock, Consumers found that some areas of the plant
have coatings that contain both metals and PCBs. Consumers believes it now has
viable disposal options for these materials. It estimates the additional cost
associated with PCB waste at $1.5 million. The cost of removal and disposal will
constitute part of the cost to decommission the plant and will be paid from the
decommissioning fund.
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
is studying the remaining materials and determining options and their related
costs.
ANTITRUST: In October 1997, two independent power producers sued Consumers in a
federal court. The suit alleged antitrust violations relating to contracts which
Consumers entered into with some of its customers, and interference with
contract claims relating to proposed power facilities. On March 31, 1999, the
court issued an opinion and order granting Consumers' motion for summary
judgment, resulting in the dismissal of the case. The plaintiffs have appealed
this decision. Consumers cannot predict the outcome of this appeal.
CONSUMERS ELECTRIC UTILITY RATE MATTERS
ELECTRIC PROCEEDINGS: In 1996, the MPSC issued a final order that authorized
Consumers to recover costs
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associated with the purchase of the additional 325 MW of MCV Facility capacity
(see "Power Purchases from the MCV Partnership" in this Note). In addition, the
order allowed Consumers to recover its nuclear plant investment by increasing
prospective annual nuclear plant depreciation expense by $18 million, with a
corresponding decrease in fossil-fueled generating plant depreciation expense.
The order also established an experimental direct-access program. The Attorney
General, ABATE, the MCV Partnership and other parties filed appeals with the
Court of Appeals challenging the MPSC's 1996 order. In 1999, the Court of
Appeals affirmed the MPSC's 1996 order in all respects. The Attorney General,
however, filed an application for leave to appeal this decision to the Michigan
Supreme Court.
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. In testimony
subsequently filed in this case, ABATE claimed that Consumers received
approximately $189 million in excess revenues for 1998. In its testimony, the
MPSC staff stated that 1998 financial results show excess revenues of $118
million compared to the previously authorized electric return on equity. The
MPSC staff offered several alternatives for the MPSC to consider. These
alternatives involve several different refunds or reductions that the MPSC could
consider separately or in combination, but if made, would not result in a
permanent future reduction in electric rates in the amount being sought by
ABATE. Consumers filed testimony showing that after ratemaking adjustments and
normalizations, there is a revenue deficiency of approximately $3 million. ABATE
and other interveners bear the burden of convincing the MPSC to reduce electric
rates, which will otherwise remain unchanged. Consumers believes that ABATE has
not met its burden of proving that a reduction in rates is required. Consumers
also believes that ABATE's request for refunds from 1995 to present is
inappropriate and unlawful; no such retroactive rate adjustment has ever been
granted by the MPSC. In December 1999, in anticipation of electric restructuring
legislation being introduced in the Michigan Legislature, ABATE and Consumers
jointly filed a request with the MPSC to suspend ABATE's electric rate complaint
to allow for consideration of the proposed legislation. The MPSC granted a
temporary suspension for 120 days (expiring in April 2000), subject to its
authority to withdraw the suspension at any time. In January 2000, the proposed
legislation was introduced into the Michigan Legislature. As part of the
suspension, Consumers agreed that, if the case is resumed and a rate reduction
is ultimately ordered by the MPSC, it would implement the rate reduction
retroactively for a period equal to the length of the suspension authorized by
the MPSC. In April 2000, Consumers and ABATE agreed that it was unlikely that
the proposed legislation would be enacted during the period of the suspension,
and therefore reactivated the complaint. Hearings to complete the proceeding are
scheduled for the middle of May 2000. CMS Energy is unable to predict the
outcome of this matter.
Before 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, such
as 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 will not grant
adjustment of customer rates through 2001. In March 2000, Consumers filed an
application with the MPSC which requests reinstatement of the PSCR clause,
approval of a PSCR plan, and authorization of monthly PSCR factors from July
2000 through June 2001. Consumers requested reinstatement of the PSCR clause
because the original suspension period anticipated that retail open access would
be implemented by late 1998. Consumers also anticipated much more retail open
access demand by mid-2000 and thereafter than is currently reasonable to expect.
Consumers believes that, over the next several years, fewer customers will
actually switch to alternative electric suppliers than previously anticipated.
As a result, Consumers must provide generation service to
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considerably more customers than expected when the PSCR suspension was proposed
by Consumers and adopted by the MPSC. CMS Energy is unable to predict the
outcome of this matter.
ELECTRIC RESTRUCTURING: As part of ongoing proceedings relating to the
restructuring of the electric utility industry in Michigan, the MPSC issued
numerous orders since 1997 proposing that Consumers transmit and distribute
energy for competing power suppliers to retail customers (also known as "retail
open access"). The restructuring orders provide for: 1) recovery of estimated
Stranded Costs of $1.755 billion through a charge to all customers purchasing
their power from other sources until the end of the transition period in 2007,
subject to an adjustment through a true-up mechanism; 2) commencement of the
phase-in of retail open access beginning September 1999; 3) suspension of the
PSCR clause as discussed above; and 4) the right of all customers to choose
their power suppliers commencing January 1, 2002. The recovery of costs for
implementing a retail open access program, preliminarily estimated at an
additional $200 million, will be reviewed for prudence by the MPSC and recovered
via a charge approved by the MPSC. Consumers will also continue to collect
nuclear decommissioning costs through a separate surcharge to all customers.
Consumers submitted its plan for implementing retail open access to the MPSC in
1998. The primary issues addressed in the plan are: 1) the implementation
schedule; 2) the retail open access service options available to customers and
suppliers; 3) the process and requirements for customers and others to obtain
retail open access service; and 4) the roles and responsibilities for Consumers,
customers and suppliers. In March 1999, Consumers received MPSC electric
restructuring orders, which generally supported Consumers' implementation plan.
Consumers began implementing the plan for electric retail customer open access
in September 1999, and will extend the opportunity for open access to 750 MW of
Consumers' retail market by 2001. The current plan provides for all of
Consumers' electric customers to have the right to choose generation suppliers
commencing January 1, 2002. As of March 31, 2000, no customer service has been
taken under this program.
Numerous appeals are pending at the Court of Appeals relating to the MPSC's
restructuring orders. Because of a June 1999 Michigan Supreme Court decision
finding that the MPSC does not have statutory authority to order a utility to
provide a mandatory retail wheeling service, Consumers believes that the MPSC
lacks statutory authority to mandate industry restructuring. The MPSC ultimately
issued an order in August 1999 finding that it has jurisdiction to approve
rates, terms, and conditions for electricity retail wheeling (also known as
electric customer choice) if a utility voluntarily chooses to offer that
service. ABATE and the Attorney General each appealed the August 1999 order to
the Court of Appeals. Consumers is unable to predict how the issues raised by
the MPSC's August 1999 order will, in the absence of legislation addressing
electric restructuring issues, be resolved by the regulatory process or the
appellate courts.
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 is planning to maintain sufficient generation and to purchase
electricity from others to create a power reserve (also called a reserve
margin). Consumers plans 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. Consumers estimates the actual reserve margin
is in the range of 13 percent to 16 percent. The ultimate reserve margin will
depend on summer weather conditions and on the level of retail open access
load being served by others this summer. (Consumers will offer other service
providers with the opportunity to serve up to 600 MW of nominal retail open
access load prior to summer 2000.) To reduce the risk of high energy prices
during peak demand periods and to achieve its reserve margin target,
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Consumers has employed a strategy of purchasing electric call option
contracts for the physical delivery of electricity during the months of June
through September. Consumers expects to use a similar strategy in the future. As
of March 31, 2000, Consumers had commitments to purchase electric call option
contracts at a cost of approximately $25 million. In March 2000, Consumers
filed an application with the MPSC to reinstate the PSCR process, which affects
power costs. For more information on the PSCR process see "Electric
Proceedings" above.
In June 1999, Consumers and four other electric utility companies sought
approval from the FERC to form the Alliance RTO. The proposed structure provided
for the creation of a transmission entity that would control, operate and own
transmission facilities of one or more of the member companies, and would
control and operate, but not necessarily own, the transmission facilities of
other companies. The proposal was structured to give the member companies the
flexibility to maintain or divest ownership of their transmission facilities
while ensuring independent operation of the regional transmission system. In
December 1999, the FERC conditionally approved formation of Alliance, but asked
the applicants to make a number of changes in the proposal and to provide
additional information. Among other things, the FERC expressed concern about the
proposed governance of Alliance, its rates and its geographic configuration.
Consumers and the Alliance companies sought rehearing of the Alliance order.
Additionally, in a February 2000 compliance filing, the Alliance companies
addressed some of the concerns expressed in the December 1999 Alliance order.
Consumers is uncertain about the outcome of the Alliance matter before the FERC
and its continued participation in Alliance.
On the same day as the December 1999 Alliance order, the FERC issued Order No.
2000, which describes the characteristics the FERC would find acceptable in an
RTO. In Order No. 2000, 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.
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 (unaudited)
In Millions
- ------------------------------------------------------------------------------------------------------------------
Three Months Ended
March 31 2000 1999
- ------------------------------------------------------------------------------------------------------------------
Pretax operating income $9 $14
Income taxes and other 3 4
- ------------------------------------------------------------------------------------------------------------------
Net income $6 $10
==================================================================================================================
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
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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. Because the MPSC has already approved recovery
of these capacity costs, Consumers expects to recover these increases through
some combination of PSCR factors (if the PSCR clause is reinstated),
adjustments to the currently frozen PSCR factor or the Transition Cost true-up
process. After September 2007, under the terms of the PPA, Consumers will only
be required to pay the MCV Partnership capacity and energy charges that the MPSC
has authorized for recovery from electric customers.
In March 1999, Consumers signed a long-term power sales agreement to resell to
PECO its capacity and energy purchases under the PPA until September 2007.
Implementation of the agreement is contingent upon regulatory treatment
satisfactory to Consumers. Such treatment is not yet assured. Under the terms of
the agreement, after a three-year transition period during which 100 to 150 MW
will be sold to PECO, beginning in 2002 Consumers will sell all 1,240 MW of PPA
capacity and associated energy to PECO. In March 1999, Consumers also filed an
application with the MPSC for accounting and ratemaking approvals related to the
PECO agreement. If used as an offset to electric customers' Transition Cost
responsibility, Consumers estimates that there could be a reduction of as much
as $58 million (on a net present value basis) of Transition Cost related to the
MCV PPA. In an order issued in April 1999, the MPSC conditionally approved the
requests for accounting and rate-making treatment to the extent that customer
rates are not increased from the current level absent the agreement and as
modified by the order. In response to Consumers' and other parties' requests for
clarification and rehearing, in an August 1999 opinion, the MPSC partially
granted the relief Consumers requested on rehearing and attached certain
additional conditions to its approval. Those conditions relate to Consumers
continued decision to carry out the electricity customer choice program (which
Consumers has affirmed as discussed above) and a determination to file for
approval of a revised capacity solicitation process (which Consumers filed). The
August opinion is a companion order to a power supply cost reconciliation order
issued on the same date in another case. This order affects the level of frozen
power supply costs recoverable in rates during future years when the transaction
with PECO would be taking place. Consumers filed a motion for clarification of
the order relating to the PECO agreement, which is still pending. Due to the
pending electric industry restructuring legislation in Michigan and the overall
uncertainty that exists concerning restructuring, Consumers and PECO entered
into an interim arrangement for the sale of 125 MW of PPA capacity and
associated energy to PECO during 2000. Prices in the interim arrangement are
identical to the March 1999 power sales agreement.
Consumers recognized a loss in 1992 for the present value of the estimated
future underrecoveries of power costs under the PPA based on MPSC recovery
orders. At March 31, 2000 and March 31, 1999, the remaining after-tax present
value of the estimated future PPA liability associated with the 1992 loss
totaled $71 million and $103 million, respectively. The annual after-tax cash
underrecoveries are based on the assumption that the MCV Facility would be
available to generate electricity 91.5 percent of the time over its expected
life. Historically the MCV Facility has operated above the 91.5 percent level.
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. Because the MCV Facility operated above the 91.5 percent level in 1999
and in 2000, Consumers has an accumulated unrecovered after-tax shortfall
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of $31 million as of March 31, 2000. Consumers believes that this shortfall has
the potential to be resolved in the context of the electric restructuring
effort. 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
- ---------------------------------------------------------------------------------------------------------
2000 2001 2002 2003 2004
- ---------------------------------------------------------------------------------------------------------
Estimated cash underrecoveries, net of tax at 98.5 percent $36 $39 $38 $37 $36
=========================================================================================================
If the MCV Facility operates at availability levels above management's 91.5
percent estimate made in 1992 for the remainder of the PPA and expected
shortfalls are not resolved in the context of the electric restructuring effort,
the estimated PPA liability would be deficient and Consumers will need to
recognize additional losses for accumulated and future underrecoveries. For
further discussion on the impact of the frozen PSCR, see "Electric
Restructuring" in this Note. Management is evaluating the adequacy of the
contract loss liability considering actual MCV Facility operations, and
resolution of the electric restructuring effort.
In February 1998, the MCV Partnership filed a claim of appeal from the January
1998 and February 1998 MPSC orders related to electric utility industry
restructuring. At the same time, the MCV Partnership filed suit in the United
States District Court seeking a declaration that the MPSC's failure to provide
Consumers and the MCV Partnership a certain source of recovery of capacity
payments after 2007 deprived the MCV Partnership of its rights under the Public
Utilities Regulatory Policies Act of 1978. In July 1999, the United States
District Court issued an order granting the MCV Partnership's motion for summary
judgment. The order permanently prohibits enforcement of the restructuring
orders in any manner which denies any utility the ability to recover amounts
paid to qualifying facilities such as the MCV Facility or which precludes the
MCV Partnership from recovering the avoided cost rate. The MPSC appealed the
United States District Court order. Consumers cannot predict the outcome of this
litigation.
NUCLEAR MATTERS: In January 1997, the NRC issued its Systematic Assessment of
Licensee Performance report for Palisades. The report rated all areas as good.
The NRC suspended this assessment process for all licensees in 1998. Until the
NRC completes its review of processes for assessing performance at nuclear power
plants, the NRC uses the Plant Performance Review to provide an assessment of
licensee performance. Palisades received its annual performance review dated
March 31, 2000 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. The NRC stated that Palisades
continues to operate in a safe manner. Further, it stated that the NRC plans to
conduct only routine inspections at Palisades over the next year. The NRC
implemented the revised reactor oversight process industry-wide, including for
Palisades, on April 2, 2000.
Palisades' temporary on-site storage pool for spent nuclear fuel is at 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,
2000, Consumers had loaded 18 dry storage casks with spent nuclear fuel at
Palisades. Palisades will need to load more casks by 2004 in order to continue
operation. Palisades only has three additional storage-only casks available for
loading. Consumers anticipates, however, that licensed transportable casks will
be available prior to 2004.
Consumers maintains insurance against property damage, debris removal, personal
injury liability and other
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risks that are present at its nuclear generating 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
$15.5 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.
The NRC requires Consumers to make certain calculations and report on the
continuing ability of the Palisades reactor vessel to withstand postulated
pressurized thermal shock events during its remaining license life, considering
the embrittlement of reactor materials. In December 1996, Consumers received an
interim Safety Evaluation Report from the NRC indicating that the reactor vessel
can be safely operated through 2003 before reaching the NRC's screening criteria
for reactor embrittlement. On February 21, 2000, Consumers submitted an analysis
to the NRC which shows that the NRC's screening criteria will not be reached
until 2014. Accordingly, Consumers believes that with fuel management designed
to minimize embrittlement, it can operate Palisades to the end of its license
life in the year 2007 without annealing the reactor vessel. Nevertheless,
Consumers will continue to monitor the matter.
In May 2000, Consumers requested that the NRC modify the operating license for
the Palisades nuclear plant to recapture the four year construction period. This
modification would extend the plant's operation to March of 2011 and allow a
full 40 year operating period, consistent with current NRC practice.
NUCLEAR FUEL COST: Consumers amortizes nuclear fuel cost to fuel expense based
on the quantity of heat produced for electric generation. Interest on leased
nuclear fuel is expensed as incurred. Under current federal law, as confirmed by
court decision, 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 them 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. At March
31, 2000, Consumers had a recorded liability to the DOE of $124 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 January 1997, in response to the
DOE's declaration that it would not begin to accept spent nuclear fuel
deliveries in 1998, Consumers and other utilities filed suit in federal court.
The court issued a decision in late 1997 affirming the DOE's duty to take
delivery of spent fuel, but was not specific as to the relief available for
failure of the DOE to comply. Further litigation brought by Consumers and others
in 1998, intended to produce specific relief for the DOE's failure to comply,
has not been successful to date. In April 2000, the U.S. Senate and House of
Representatives approved federal legislation which would advance the cause of
moving nuclear waste to a permanent repository. The President of the United
States vetoed this legislation.
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
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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, 2000, after
consideration of prior years expenses, Consumers has a remaining accrued
liability of $62 million and a regulatory asset of $65 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. Consumers is
allowed current recovery of $1 million annually. Consumers has initiated
lawsuits against certain insurance companies regarding coverage for some or all
of the costs that it may incur for these sites.
CONSUMERS GAS UTILITY MATTERS
GAS RESTRUCTURING: In December 1997, the MPSC approved Consumers' application to
implement an experimental gas transportation program. The program allows 300,000
residential, commercial and industrial retail gas sales customers to choose an
alternative gas commodity supplier in direct competition with Consumers. Unless
some other arrangements are made, when this program ends on March 31, 2001,
these customers will again become Consumers' customers. The program is voluntary
and participating natural gas customers are selected on a first-come,
first-served basis, up to a limit of 100,000 per year. As of March 31, 2000,
more than 170,000 customers chose alternative gas suppliers, representing
approximately 40.4 bcf of gas load. Customers choosing to remain as sales
customers of Consumers will not see a rate change in their natural gas rates.
This three-year program: 1) freezes gas distribution rates through March 31,
2001, establishing a gas commodity cost at a fixed rate of $2.84 per mcf; 2)
establishes an earnings sharing mechanism with customers if Consumers' earnings
exceed certain pre-determined levels; and 3) establishes a gas transportation
code of conduct that addresses the relationship between Consumers and marketers,
including its affiliated marketers. In December 1999, the Court of Appeals
affirmed in its entirety the December 1997 MPSC Order. The Attorney General
filed with the Michigan Supreme Court an application for leave to appeal the
Court of Appeals' decision.
Consumers contracts to purchase gas to limit its risk associated with gas price
increases. Management's intent is to take physical delivery of the commodity and
failure could result in a significant penalty for nonperformance. At March 31,
2000, Consumers had an exposure to gas price increases if the ultimate cost of
gas was to exceed $2.84 per mcf for the following volumes: 45 percent of its
remaining 2000 requirements; and 50 percent of its first quarter 2001
requirements. Based on the expected cost of gas by a consensus of financial
analysts' forecasts, Consumers estimates its exposure to gas prices, for gas
that has not been purchased for year 2000, could be significant. Using these
same year 2000 gas price forecasts, Consumers estimates its exposure to
gas prices, for gas that has not been purchased for the first quarter 2001,
could be significant. Additional contract coverage is currently under review. As
of March 31, 2000, the gas purchase contracts currently in place were
consummated at an average price of less than $2.84 per mcf. Consumers uses gas
purchase contracts to protect against gas price increases in a three-year
experimental gas program where Consumers is recovering from its customers $2.84
per mcf for gas. Consumers cannot predict the ultimate loss, if any, incurred as
a result of gas price increases.
PANHANDLE MATTERS
REGULATORY MATTERS: Effective August 1996, Trunkline placed into effect a
general rate increase, subject
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to refund. On September 16, 1999, Trunkline filed a FERC settlement agreement to
resolve certain issues in this proceeding. FERC approved this settlement on
February 1, 2000 and required refunds of approximately $2 million which were
made in April 2000, with supplemental refunds expected in July 2000. On January
12, 2000, FERC issued an order on the remainder of the rate proceeding which, if
approved without modification, would result in a substantial reduction to
Trunkline's tariff rates which would impact future revenues and require refunds.
Trunkline has requested rehearing of certain matters in this order.
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. 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, 2000 and December 31, 1999,
Accounts Receivable included $55 million and $54 million, respectively, due from
natural gas producers, and Other Current Liabilities included $55 million and
$54 million, respectively, for related obligations.
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. 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. The Illinois EPA included Panhandle 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 United States 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
Company'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 CMS Energy's financial position, liquidity, or
results of operations.
OTHER UNCERTAINTIES
CMS GENERATION ENVIRONMENTAL MATTERS: CMS Generation does not currently expect
to incur significant capital costs at its power facilities for compliance with
current environmental regulatory standards.
CAPITAL EXPENDITURES: CMS Energy estimates capital expenditures, including
investments in unconsolidated subsidiaries and new lease commitments, of $1.645
billion for 2000, $1.280 billion for 2001, and $1.385 billion for 2002. For
further information, see Capital Resources and Liquidity-Capital Expenditures in
the MD&A.
OTHER: As of March 31, 2000, CMS Energy and Enterprises guaranteed up to $516
million in contingent obligations of unconsolidated affiliates and related
parties.
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,
CMS-32
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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
believes this lawsuit is without merit and will vigorously defend against it,
but cannot predict the outcome of this matter.
In addition to the matters disclosed in this Note, Consumers 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.
3: SHORT-TERM AND LONG-TERM FINANCINGS, AND CAPITALIZATION
CMS ENERGY: CMS Energy's Senior Credit Facilities consist of a $600 million
three-year revolving credit facility and a five-year $125 million term loan
facility. Additionally, CMS Energy has unsecured lines of credit and letters of
credit in an aggregate amount of $488 million. At March 31, 2000, the total
amount utilized under the Senior Credit Facilities was $686 million, including
$41 million of contingent obligations, and under the unsecured lines of credit
and letters of credit was $145 million.
At March 31, 2000, CMS Energy had $112 million of Series A GTNs, $107 million of
Series B GTNs, $143 million of Series C GTNs, $199 million Series D GTNs, and
$306 million Series E GTNs issued and outstanding with weighted average interest
rates of 7.9 percent, 8.1 percent, 7.8 percent, 7.0 percent and 7.5 percent,
respectively.
As a result of the recent market value of CMS Energy Common Stock, the Board of
Directors approved a stock repurchase program whereby CMS Energy could reacquire
up to 10 million shares of CMS Energy Common Stock. As of March 31, 2000, CMS
Energy had reacquired approximately 5.1 million shares. During April 2000, CMS
Energy reacquired an additional 1.5 million shares, bringing the total to 6.6
million shares reacquired through May 1, 2000.
In late 1999, CMS Energy identified for possible sale certain non-strategic
assets which were expected to contribute little or no earnings benefits in the
short to medium term. As of March 31, 2000, CMS Energy had sold approximately
$370 million of these assets, including a partial interest in its Northern
Header gathering system, all of its ownership interest in a Brazilian
distribution system and all of its northern Michigan oil and gas properties.
CONSUMERS: At March 31, 2000, Consumers had FERC authorization to issue or
guarantee through June 2000, up to $900 million of short-term securities
outstanding at any one time. Consumers also had remaining FERC authorization to
issue through June 2000, up to $275 million and $365 million of long-term
securities with maturities up to 30 years for refinancing purposes and for
general corporate purposes, respectively.
CMS-33
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Consumers has an unsecured $300 million credit facility and unsecured lines of
credit aggregating $145 million. These facilities are available to finance
seasonal working capital requirements and to pay for capital expenditures
between long-term financings. At March 31, 2000, a total of $151 million was
outstanding at a weighted average interest rate of 7.1 percent, compared with
$221 million outstanding at March 31, 1999, at a weighted average interest rate
of 5.6 percent.
Consumers currently has in place a $325 million trade receivables sale program,
down from $500 million at March 31, 1999. At March 31, 2000 and 1999,
receivables sold under the program totaled $325 million and $344 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 $366
million of unrestricted retained earnings available to pay common dividends at
March 31, 2000. In January 2000, Consumers declared and paid a $79 million
common dividend, in April 2000, Consumers declared a $30 million common dividend
payable in May 2000.
PANHANDLE: In March 2000, Panhandle received net proceeds of $99 million from
the sale of $100 million 8.25 percent senior notes, due April 2010. Proceeds
from this offering were used to fund the acquisition of Sea Robin, a 1 bcf per
day natural gas and condensate pipeline in the Gulf of Mexico offshore Louisiana
west of Trunkline's existing Terrebonne system.
CMS OIL AND GAS: CMS Oil and Gas has a three-year $225 million floating rate
revolving credit facility which matures in May 2002. At March 31, 2000, the
amount utilized under the credit facility was $30 million.
4: EARNINGS PER SHARE AND DIVIDENDS
On October 25, 1999, CMS Energy exchanged approximately 6.1 million shares of
CMS Energy Common Stock for all of the approximately 8.7 million issued and
outstanding shares of Class G Common Stock in a tax-free exchange for United
States federal income tax purposes. Correspondingly, Class G Common Stock was
not outstanding for any period subsequent to October 25, 1999.
Earnings per share attributable to Common Stock for the three months ended March
31, 1999 reflect the performance of Consumers Gas Group. The allocation of
earnings attributable to each class of Common Stock and the related amounts per
share are computed by considering the weighted average number of shares
outstanding.
Earnings attributable to the Outstanding Shares are equal to Consumers Gas Group
net income multiplied by a fraction; the numerator is the weighted average
number of Outstanding Shares during the period and the denominator is the
weighted average number of Outstanding Shares and authorized but unissued shares
of Class G Common Stock not held by holders of the Outstanding Shares during the
period.
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COMPUTATION OF EPS:
In Millions, Except Per Share Amounts
- ------------------------------------------------------------------------------------------------------------------
Three Months Ended March 31, 2000 1999
- ------------------------------------------------------------------------------------------------------------------
NET INCOME APPLICABLE TO BASIC AND DILUTED EPS
Consolidated Net Income $ 80 $ 98
====================================
Net Income Attributable to Common Stocks:
CMS Energy - Basic EPS $ 80 $ 88
Add conversion of 7.75% Trust
Preferred Securities (net of tax) 2 2
------------------------------------
CMS Energy - Diluted EPS $ 82 $ 90
====================================
Class G:
Basic and Diluted EPS $ - (a) $ 10
====================================
AVERAGE COMMON SHARES OUTSTANDING
APPLICABLE TO BASIC AND DILUTED EPS
CMS Energy:
Average Shares - Basic 113.5 108.2
Add conversion of 7.75% Trust
Preferred Securities 4.2 4.2
Options-Treasury Shares .2 .4
-----------------------------------
Average Shares - Diluted 117.9 112.8
===================================
Class G:
Average Shares
Basic and Diluted - (a) 8.5
===================================
EARNINGS PER AVERAGE COMMON SHARE
CMS Energy:
Basic $ .71 $ .82
Diluted $ .70 $ .80
Class G:
Basic and Diluted $ - (a) $1.19
=================================================================================================================
(a) All of the outstanding shares of Class G Common Stock were exchanged for
CMS Energy Common Stock on October 25, 1999.
In February 2000, CMS Energy paid dividends of $.365 per share on CMS Energy
Common Stock. In April 2000, the Board of Directors declared a quarterly
dividend of $.365 per share on CMS Energy Common Stock, payable in May 2000.
CMS-35
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5: RISK MANAGEMENT ACTIVITIES AND DERIVATIVES TRANSACTIONS
CMS Energy and its subsidiaries use a variety of derivative instruments
(derivatives), including futures contracts, swaps, options and forward
contracts, 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. Nonperformance by counterparties is not expected to have a
material adverse impact on CMS Energy's financial position, liquidity, or
results of operations.
COMMODITY PRICE HEDGES: CMS Energy engages in both energy trading and
non-trading activities as defined by EITF 98-10, Accounting for Energy Trading
and Risk Management Activities. CMS Energy accounts for its non-trading
commodity price derivatives as 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, open commodity price contracts
would be marked-to-market and gains and losses would be recognized in the income
statement currently. Consumers enters into electric option contracts to ensure a
reliable source of capacity to meet its customers' electric requirements and to
limit its risk associated with electricity price increases. It is management's
intent to take physical delivery of the commodity. Consumers continuously
evaluates its daily capacity needs and sells the option contracts, if
marketable, when it has excess daily capacity. Consumers' maximum exposure
associated with these options is limited to the price paid.
A CMS Energy subsidiary has one arrangement which is used to fix the prices that
it will pay for gas supplied to the MCV Facility for the years 2001 through 2006
by purchasing the economic equivalent of 10,000 MMBtu per day at a fixed price,
escalating at 8 percent per year thereafter, starting at $2.82 per MMBtu in
2001. The settlement periods are each a one-year period ending December 31, 2001
through 2006 on 3.65 million MMBtu. If the floating price, essentially the
then-current Gulf Coast spot price, for a period is higher than the fixed price,
the seller pays the CMS Energy subsidiary the difference, and vice versa.
The contract with the seller provides a calculation of exposure for the purpose
of requiring an exposed party to post a standby letter of credit. Under this
calculation, if a party's exposure at any time exceeds $5 million, that party is
required to obtain a letter of credit in favor of the other party for the excess
over $5 million and up to $10 million. At March 31, 2000, a letter of credit was
posted to the benefit of the CMS Energy subsidiary for $3 million. The letter of
credit obligation does not necessarily bear any relation to the market value of
the contract. As of March 31, 2000, the fair value of this contract is $14
million, representing the amount the CMS Energy subsidiary would be required to
pay to the counterparty at settlement if settled at this date.
CMS-36
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INTEREST RATE HEDGES: CMS Energy and some of its subsidiaries enter into
interest rate swap agreements to exchange variable rate interest payment
obligations to fixed rate obligations without exchanging the underlying notional
amounts. These agreements convert variable rate debt to fixed rate debt 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. The notional amount
of CMS Energy's and its subsidiaries' interest rate swaps was $2.1 billion at
March 31, 2000. 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.
FOREIGN EXCHANGE HEDGES: 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 notional amount
of the outstanding foreign exchange contracts was $1.7 billion at March 31,
2000, which includes $369 million, $200 million and $1.1 billion for Australian,
Brazilian and Argentine foreign exchange contracts, respectively. The estimated
fair value of the foreign exchange and option contracts at March 31, 2000 was
$30 million, representing the amount CMS Energy would pay upon settlement.
6: REPORTABLE SEGMENTS
CMS Energy operates principally in the following six reportable segments:
electric utility; gas utility; independent power production; oil and gas
exploration and production; natural gas transmission, storage and processing;
and energy marketing, services and trading.
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 an international energy
distribution business and a land development business fall below the
quantitative thresholds for reporting. Neither of these segments has ever 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, 2000 and
1999, and the related consolidated statements of income, common stockholders'
equity and cash flows 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 4, 2000, 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, 1999, 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,
May 4, 2000.
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CONSUMERS ENERGY COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS
Consumers is a combination electric and gas utility company serving the Lower
Peninsula of Michigan and is a subsidiary of CMS Energy, a holding company.
Consumers' customer base includes a mix of residential, commercial and
diversified industrial customers, the largest segment of which is the automotive
industry.
The MD&A of this Form 10-Q should be read along with the MD&A and other parts of
Consumers' 1999 Form 10-K. This MD&A also 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
Statements and Notes.
This report and other written and oral statements made by Consumers 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 that could cause Consumers' actual results to differ materially from
those anticipated in such statements. Consumers disclaims any obligation to
update or revise forward-looking statements, whether from new information,
future events or otherwise. Consumers details 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 Consumers' 1999 Form 10-K Item 1 and periodically in
various public filings it makes with the SEC. This discussion of potential risks
and uncertainties is by no means complete, but is designed to highlight
important factors that may impact Consumers' outlook. This report also describes
material contingencies in Consumers' Condensed Notes to Consolidated Financial
Statements and readers are encouraged to read such Notes.
RESULTS OF OPERATIONS
CONSUMERS CONSOLIDATED EARNINGS
In Millions
- --------------------------------------------------------------------------------------------------------------------
March 31 2000 1999 Change
- --------------------------------------------------------------------------------------------------------------------
Three months ended $ 85 $ 109 $ (24)
====================================================================================================================
Net income available to the common stockholder decreased by $24 million over the
1999 level for the three months ended March 31, 2000. The earnings decrease was
due to lower gas deliveries as a result of significantly warmer than normal
temperatures, higher gas commodity costs, and higher electric power costs. The
warmer temperatures adversely affected gas revenues and caused a 6 percent
loss in direct customer deliveries. Electricity purchased from external sources
increased from 1999 because of scheduled and unscheduled generating plant
outages at Consumers. For further information, see the Electric and Gas Utility
Results of Operations sections and Note 2, Uncertainties.
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ELECTRIC UTILITY RESULTS OF OPERATIONS
ELECTRIC PRETAX OPERATING INCOME:
In Millions
- ----------------------------------------------------------------------------------------------------------------
March 31 2000 1999 Change
- ----------------------------------------------------------------------------------------------------------------
Three months ended $ 115 $ 134 $ (19)
================================================================================================================
For the three months ended March 31, 2000, electric pretax operating income
decreased $19 million from the comparable period in 1999. The earnings decrease
reflects the increased cost of the purchased power partially offset by increased
electric sales to customers. Due to changes in regulation, since 1998,
differences in power supply costs now impact Consumers' earnings. In the past,
such cost changes did not impact electric pretax operating income because
Consumers' passed the cost of electric power on to electric customers. During
the current year first quarter, Consumers needed additional purchased electric
power to meet customer requirements due to scheduled and unscheduled outages at
Consumers' internal generators. In addition to increased purchased power
volumes, the cost per kWh for the replacement of internal generation was 15
percent higher than the previous year. The following table quantifies these
impacts on pretax operating income:
In Millions
- ----------------------------------------------------------------------------------------------------------------
Three Months
Ended March 31
Change Compared to Prior Year 2000 vs 1999
- ----------------------------------------------------------------------------------------------------------------
Electric Deliveries $ 8
Power supply costs and related revenue (21)
Net energy option costs (1)
Non-commodity revenue (3)
Operation and maintenance expense -
General taxes and depreciation expense (2)
--------
Total change $(19)
=================================================================================================================
ELECTRIC DELIVERIES: Electric deliveries were 9.7 billion kWh for the three
months ended March 31, 2000, a decrease of 0.3 billion kWh or 3.3 percent
compared with 1999. Total electric deliveries decreased due to lower intersystem
sales, less usage by industrial customers, and lower residential space heating.
POWER SUPPLY COSTS:
In Millions
- ----------------------------------------------------------------------------------------------------------------
March 31 2000 1999 Change
- ----------------------------------------------------------------------------------------------------------------
Three months ended $ 301 $ 279 $ 22
================================================================================================================
Power supply costs increased for the three months ended March 31, 2000,
primarily due to higher interchange power costs. Consumers had to purchase more
external power because internal generation decreased due to scheduled and
unscheduled outages.
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GAS UTILITY RESULTS OF OPERATIONS
GAS PRETAX OPERATING INCOME:
In Millions
- ----------------------------------------------------------------------------------------------------------------
March 31 2000 1999 Change
- ----------------------------------------------------------------------------------------------------------------
Three months ended $ 64 $ 78 $ (14)
================================================================================================================
Gas pretax operating income decreased in the three months ended March 31, 2000
by $14 million. The earnings decrease primarily reflects decreased gas
deliveries due to warmer temperatures in 2000 and increased gas costs per mcf.
Due to a temporary change in regulation, differences in gas costs directly
impact Consumers' earnings. This change in regulation relates to the gas
industry restructuring initiatives, which provide Consumers the opportunity to
temporarily benefit or lose from changes in gas commodity prices. 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 2000 vs 1999
- ----------------------------------------------------------------------------------------------------------------
Gas deliveries $ (10)
Gas commodity costs and related revenue (10)
Gas wholesale and retail services 3
Operation and maintenance expense 1
General taxes and depreciation expense 2
----
Total change $ (14)
=================================================================================================================
GAS DELIVERIES: Gas system deliveries for the three months period ended March
31, 2000, including miscellaneous transportation, totaled 161 bcf, a decrease of
5 bcf or 3 percent compared with 1999. The decreased deliveries reflect warmer
temperatures during the first quarter of 2000.
COST OF GAS SOLD:
In Millions
- ----------------------------------------------------------------------------------------------------------------
March 31 2000 1999 Change
- ----------------------------------------------------------------------------------------------------------------
Three months ended $ 295 $ 306 $ (11)
================================================================================================================
The cost of gas sold decreased for the three months ending March 31, 2000 due to
decreased sales from warmer than normal temperatures during the first quarter of
2000. Higher gas prices partially offset the effect of decreased sales.
CAPITAL RESOURCES AND LIQUIDITY
CASH POSITION, INVESTING AND FINANCING
OPERATING ACTIVITIES: Consumers derives cash from operating activities from the
sale and transportation of natural gas and from the generation, transmission,
distribution and sale of electricity. Cash from operations totaled $293 million
and $386 million for the first three months of 2000 and 1999, respectively.
CE-3
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The $93 million decrease resulted primarily from reduced gas deliveries, higher
gas prices and higher electric power costs along with a $38 million decrease in
the sale of accounts receivable and other temporary changes in working capital
items due to timing of cash receipts and payments.
INVESTING ACTIVITIES: Cash used for investing activities totaled $138 million
and $113 million for the first three months of 2000 and 1999, respectively. The
change of $25 million is primarily the result of a $16 million increase in
capital expenditures and the absence of $7 million of proceeds from the FMLP.
FINANCING ACTIVITIES: Cash used in financing activities totaled $158 million and
$271 million for the first three months of 2000 and 1999, respectively. The
change of $113 million is primarily the result of a $90 million increase in debt
and the reduction of $18 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. These estimates are prepared for planning purposes and are subject to
revision.
In Millions
- ----------------------------------------------------------------------------------------------------------------
Years Ended December 31 2000 2001 2002
- ----------------------------------------------------------------------------------------------------------------
Construction $528 $663 $632
Nuclear fuel lease 3 19 28
Capital leases other than nuclear fuel 24 23 25
-------------------------------
$555 $705 $685
================================================================================================================
Electric utility operations (a)(b) $441 $575 $558
Gas utility operations (a) 114 130 127
-------------------------------
$555 $705 $685
================================================================================================================
(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.
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ELECTRIC BUSINESS OUTLOOK
GROWTH: Consumers expects average annual growth of approximately two and one
half percent per year in electric system deliveries for the years 2000 to 2004.
This growth rate does not take into account the possible impact on the industry
of restructuring or 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: Generally, electric restructuring is
the regulatory and legislative attempt to introduce competition to the electric
industry by allowing customers to choose their electric generation supplier,
while the transmission and distribution services remain regulated. As a result,
electric generation suppliers ultimately compete in a less regulated
environment. Competition affects, and will continue to affect, Consumers' retail
electric business. To remain competitive, Consumers has multi-year electric
supply contracts with some of its largest industrial customers to provide power
to some of their facilities. The MPSC approved these contracts as part of its
phased introduction to competition. Beginning in 2000 through 2005, some
customers, depending on future business and regulatory circumstances, can
terminate or restructure their contracts. The termination or restructuring of
these contracts could affect approximately 600 MW of customer power supply
requirements. The ultimate financial impact of changes related to these power
supply contracts is not known at this time.
As a result of a transition of the wholesale and retail electric businesses in
Michigan to competition, Detroit Edison, in December 1996, gave Consumers the
required four-year notice of its intent to terminate the current agreements
under which the companies jointly operate the MEPCC. At the same time, Detroit
Edison filed with the FERC seeking early termination of the agreements. The FERC
has not acted on Detroit Edison's application. Detroit Edison and Consumers are
currently in negotiations to terminate or restructure the MEPCC operations.
Consumers is unable to predict the outcome of these negotiations, but does not
anticipate any adverse impacts caused by termination or restructuring of the
MEPCC.
In the first part of the year 2000, a large coalition of businesses was unable
to agree upon proposed electric restructuring legislation for Michigan. In May
2000, Michigan's Governor unveiled an alternative legislative proposal which has
been introduced into the Michigan Legislature. The Governor intends to seek a
vote before the start of the Legislature's summer recess in early June 2000. The
legislation: 1) permits all customers to exercise choice of electric suppliers
by January 1, 2002; 2) requires electric utilities to shed control of generation
resources in excess of 30 percent of the total generating capacity available to
serve choice customers in specified market areas; 3) cuts residential electric
rates by 5 percent and freezes them until December 31, 2003; 4) provides for a
residential rate cap until at least January 1, 2006 with the cap remaining in
place until the earlier of December 31, 2013 or the satisfaction of a market
power test and completion of required transmission expansion; 5) freezes
commercial and industrial rates at their May 1, 2000 level until December 31,
2003; 6) requires Michigan utilities to join a FERC approved Regional
Multi-State Transmission System Organization by December 31, 2001 or divest its
interest in transmission facilities to an independent transmission owner; and 7)
requires the expansion of available transmission capability by at least 2,000 MW
over the next several years. The bill contemplates the use of Securitization to
refinance stranded assets as a means of funding the 5 percent residential rate
reduction. Consumers cannot predict the timing or outcome of legislative efforts
in Michigan.
Uncertainty exists with respect to the enactment of federal legislation
restructuring the electric power industry. A variety of bills introduced in
Congress in recent years seek to change existing federal
CE-5
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regulation of the industry. These federal bills could potentially affect or
supercede state regulation; however, none have been enacted. Consumers cannot
predict the outcome of electric restructuring on its financial position,
liquidity, or results of operations.
RATE MATTERS: There are several pending rate issues that could affect Consumers'
electric business. These matters include MPSC rate proceedings and electric
restructuring orders and a complaint by ABATE alleging excess revenues.
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 Proceedings" and "Electric Rate Matters -
Electric Restructuring," incorporated by reference herein.
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 on net sales,
revenues, or income from continuing electric operations. Such trends and
uncertainties include: 1) capital expenditures for compliance with the Clean Air
Act; 2) environmental liabilities arising from compliance with various federal,
state and local environmental laws and regulations, including potential
liability or expenses relating to the Michigan Natural Resources and
Environmental Protection Act and Superfund; 3) cost recovery relating to the MCV
Partnership; 4) an ABATE rate complaint; 5) an application to reinstate the PSCR
process; 6) electric industry restructuring; 7) the ability to meet peak
electric demand loads at a reasonable cost and without market disruption and
initiatives undertaken to reduce exposure to energy price increases; and 8)
ongoing issues relating to the storage of spent nuclear fuel and the operating
life of Palisades. For detailed information about these trends or
uncertainties, see Note 2, Uncertainties, incorporated by reference herein.
GAS BUSINESS OUTLOOK
GROWTH: Consumers currently anticipates gas deliveries, including gas customer
choice deliveries (excluding transportation to the MCV Facility and off-system
deliveries), to grow at an average annual rate of between one and two percent
over the next five years based primarily on a steadily growing customer base.
Actual gas deliveries in future periods may be affected by abnormal weather,
alternative energy prices, changes in competitive conditions, and the level of
natural gas consumption per customer.
REGULATORY RESTRUCTURING: In December 1999, several bills related to gas
industry restructuring were introduced into the Michigan Legislature. Combined,
these bills constitute the "gas choice program." Consumers is participating in
the legislative process involving these bills. They provide for 1) a phased-in
approach to gas choice requiring 40 percent of the customers to be allowed
choice by April 2002, 60 percent by April 2003 and all customers by April 2004;
2) a market-based, unregulated pricing mechanism for gas commodity for
customers who exercise choice; and 3) a new "safe haven" pricing mechanism for
customers who do not exercise choice under which NYMEX pricing would be used
to establish a statutory cap on gas commodity prices that could be charged by
gas utilities instead of traditional cost of service regulation. The proposed
bills also provide for a gas distribution service rate freeze until
December 31, 2005, a code of conduct governing business relationships with
affiliated gas suppliers and the MPSC licensing of all gas suppliers doing
business in Michigan and imposes financial penalties for noncompliance. They
also provide customer protection by preventing "slamming", the switching of a
customer's gas supplier without consent, and "cramming", the inclusion of
optional products and services without the customer's authorization. The bills
establishing the gas choice program have become the subject of extensive
legislative hearings during which there will undoubtedly be various amendments
CE-6
50
offered by many parties, including Consumers. Consumers cannot predict the
timing or outcome of this legislative process.
Consumers contracts to purchase gas to limit its risk associated with gas price
increases. Management's intent is to take physical delivery of the commodity and
failure could result in a significant penalty for nonperformance. At March 31,
2000, Consumers had an exposure to gas price increases if the ultimate cost of
gas was to exceed $2.84 per mcf for the following volumes: 45 percent of its
remaining 2000 requirements; and 50 percent of its first quarter 2001
requirements. Based on the expected cost of gas by a consensus of financial
analysts' forecasts, Consumers estimates its exposure to gas prices, for gas
that has not been purchased for year 2000, could be significant. Using these
same year 2000 gas price forecasts, Consumers estimates its exposure to gas
prices, for gas that has not been purchased for the first quarter 2001, could be
significant. Additional contract coverage is currently under review. As of March
31, 2000, the gas purchase contracts currently in place were consummated at an
average price of less than $2.84 per mcf. Consumers uses gas purchase contracts
to protect against gas price increases in a three-year experimental gas program
where Consumers is recovering from its customers $2.84 per mcf for gas.
Consumers cannot predict the ultimate loss, if any, incurred as a result of gas
price increases. For further detailed information about these uncertainties see
Note 2, Uncertainties, incorporated by reference herein.
UNCERTAINTIES: Consumers' financial results and position may be affected by a
number of trends or uncertainties that have, or Consumers reasonably expects
could have, a material impact on net sales or 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) a statewide experimental gas industry
restructuring program; 3) permanent gas industry restructuring; and 4)
implementation of a suspended GCR and the success or failure of initiatives
undertaken to protect against gas commodity price increases.
OTHER OUTLOOK
The Union represents Consumers' operating, maintenance and construction
employees. Consumers and the Union negotiated a collective bargaining agreement
that became effective as of June 1, 1995. By its terms, that agreement will
continue in full force and effect until June 1, 2000. Consumers and the Union
reached a new collective bargaining agreement that, subject to ratification by
Union members, they expect to become effective on June 1, 2000. The Michigan
State Utility Workers Council recommends that the Union members ratify the
agreement. Consumers is unable to predict the outcome of the ratification vote.
Consumers offers a variety of energy-related services to electric and gas
customers focused upon 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
NEW ACCOUNTING STANDARDS
In 1999, the FASB issued SFAS 137, Accounting for Derivative Instruments and
Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133.
SFAS 137 defers the effective date of SFAS 133, Accounting for Derivative
Instruments and Hedging Activities to January 1, 2001. Consumers will adopt the
standard on January 1, 2001 and is currently analyzing the effects of adoption
on its financial statements.
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DERIVATIVES AND HEDGES
MARKET RISK INFORMATION: Consumers' exposure to market risk sensitive
instruments and positions include, but are not limited to, changes in interest
rates, debt prices and equity prices in which Consumers holds less than a 20
percent interest. In accordance with the SEC's disclosure requirements,
Consumers performed a 10 percent sensitivity analysis on its derivative and
non-derivative financial instruments. The analysis measures the change in the
net present values based on a hypothetical 10 percent adverse change in the
market rates to determine the potential loss in fair values, cash flows and
earnings. Losses in excess of the amounts determined could occur if market rates
or prices exceed the 10 percent change used for the analysis. Management does
not believe that a sensitivity analysis alone provides an accurate or reliable
method for monitoring and controlling risk. Therefore, Consumers relies on the
experience and judgment of senior management to revise strategies and adjust
positions, as they deem necessary.
For purposes of the analysis below, Consumers has not quantified short-term
exposures to hypothetically adverse changes in the price or nominal amounts
associated with inventories or trade receivables and payables. Furthermore,
Consumers enters into all derivative financial instruments for purposes other
than trading. In the case of hedges, management believes that gains or losses
incurred on derivative instruments used as a hedge would be offset by the
opposite movement of the underlying hedged item.
EQUITY SECURITY PRICE RISK: Consumers has equity investments in companies in
which it holds less than a 20 percent interest in the entity. A hypothetical 10
percent adverse change in market price would result in a $8 million change in
its investment and equity since this equity 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.
DEBT PRICE AND INTEREST RATE RISK: Management uses a combination of fixed-rate
and variable-rate debt to reduce interest rate exposure. Interest rate swaps and
rate locks may be used to adjust exposure when deemed appropriate, based upon
market conditions. These strategies attempt to provide and maintain the lowest
cost of capital.
As of March 31, 2000, Consumers had outstanding $891 million of variable-rate
debt. Assuming a hypothetical 10 percent adverse change in market interest
rates, Consumers' exposure to earnings is limited to $6 million. As of March 31,
2000, Consumers has outstanding long-term fixed-rate debt of $2.062 billion with
a fair value of $1.928 billion. Assuming a hypothetical 10 percent adverse
change in market rates, Consumers would have an exposure of $131 million to its
fair value if it had to refinance all of its long-term fixed-rate debt.
Consumers believes that any adverse change in debt price and interest rates
would not have a material effect on its consolidated financial position, results
of operation or cash flows.
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CONSUMERS ENERGY COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31 2000 1999
- ----------------------------------------------------------------------------------------------------------------
In Millions
OPERATING REVENUE
Electric $ 640 $ 636
Gas 475 506
Other 11 14
-------------------
1,126 1,156
- ----------------------------------------------------------------------------------------------------------------
OPERATING EXPENSES
Operation
Fuel for electric generation 62 77
Purchased power - related parties 146 139
Purchased and interchange power 93 63
Cost of gas sold 295 306
Other 117 127
-------------------
713 712
Maintenance 48 38
Depreciation, depletion and amortization 123 121
General taxes 55 58
-------------------
939 929
- ----------------------------------------------------------------------------------------------------------------
PRETAX OPERATING INCOME
Electric 115 134
Gas 64 78
Other 8 15
-------------------
187 227
- ----------------------------------------------------------------------------------------------------------------
OTHER INCOME (DEDUCTIONS)
Dividends and interest from affiliates 2 3
Accretion income 1 1
Accretion expense (2) (4)
Other, net 1 3
-------------------
2 3
- ----------------------------------------------------------------------------------------------------------------
INTEREST CHARGES
Interest on long-term debt 34 35
Other interest 8 8
-------------------
42 43
- ----------------------------------------------------------------------------------------------------------------
NET INCOME BEFORE INCOME TAXES 147 187
INCOME TAXES 53 68
-------------------
NET INCOME 94 119
PREFERRED STOCK DIVIDENDS - 5
PREFERRED SECURITIES DISTRIBUTIONS 9 5
-------------------
NET INCOME AVAILABLE TO COMMON STOCKHOLDER $ 85 $ 109
================================================================================================================
THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
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CONSUMERS ENERGY COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31 2000 1999
- ----------------------------------------------------------------------------------------------------------------
In Millions
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 94 $ 119
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation, depletion and amortization (includes nuclear
decommissioning of $10 and $13 respectively) 123 121
Capital lease and other amortization 7 11
Accretion expense 2 4
Accretion income - abandoned Midland project (1) (1)
Deferred income taxes and investment tax credit (7) (3)
Undistributed earnings of related parties (9) (14)
MCV power purchases (14) (14)
Changes in other assets and liabilities 98 163
-----------------
Net cash provided by operating activities 293 386
- ----------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (excludes assets placed under capital lease) (109) (93)
Cost to retire property, net (21) (21)
Investments in nuclear decommissioning trust funds (10) (13)
Investment in Electric Restructuring Implementation Plan (6) (5)
Proceeds from nuclear decommissioning trust funds 8 12
Proceeds from FMLP - 7
-----------------
Net cash used in investing activities (138) (113)
- ----------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase (decrease) in notes payable, net (64) (169)
Payment of common stock dividends (79) (97)
Payment of capital lease obligations (6) (9)
Payment of preferred stock dividends - (5)
Preferred securities distributions (9) (5)
Retirement of bonds and other long-term debt - (1)
Proceeds from bank loans - 15
-----------------
Net cash provided by (used in) financing activities (158) (271)
- ----------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND TEMPORARY CASH INVESTMENTS (3) 2
CASH AND TEMPORARY CASH INVESTMENTS, BEGINNING OF PERIOD 18 25
-----------------
CASH AND TEMPORARY CASH INVESTMENTS, END OF PERIOD $ 15 $ 27
================================================================================================================
Other cash flow activities and non-cash investing and financing activities were:
Cash transactions
Interest paid (net of amounts capitalized) $ 45 $ 49
Income taxes paid (net of refunds) - -
Non-cash transactions
Nuclear fuel placed under capital lease $ 2 $ -
Other assets placed under capital leases 3 2
================================================================================================================
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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CONSUMERS ENERGY COMPANY
CONSOLIDATED BALANCE SHEETS
ASSETS MARCH 31 MARCH 31
2000 DECEMBER 31 1999
(UNAUDITED) 1999 (UNAUDITED)
- ----------------------------------------------------------------------------------------------------------------
In Millions
PLANT (AT ORIGINAL COST)
Electric $7,026 $6,981 $6,772
Gas 2,478 2,461 2,374
Other 24 25 26
---------------------------------------
9,528 9,467 9,172
Less accumulated depreciation, depletion and amortization 5,733 5,643 5,430
---------------------------------------
3,795 3,824 3,742
Construction work-in-progress 245 199 161
---------------------------------------
4,040 4,023 3,903
- ----------------------------------------------------------------------------------------------------------------
INVESTMENTS
Stock of affiliates 100 139 217
First Midland Limited Partnership 243 240 236
Midland Cogeneration Venture Limited Partnership 253 247 220
---------------------------------------
596 626 673
- ----------------------------------------------------------------------------------------------------------------
CURRENT ASSETS
Cash and temporary cash investments at cost, which approximates market 15 18 27
Accounts receivable and accrued revenue, less allowances
of $4, $4 and $5, respectively 77 98 106
Accounts receivable - related parties 65 67 65
Inventories at average cost
Gas in underground storage 71 216 82
Materials and supplies 61 62 50
Generating plant fuel stock 47 46 33
Postretirement benefits 25 25 25
Deferred income taxes 4 8 -
Prepaid property taxes and other 115 159 116
---------------------------------------
480 699 504
- ----------------------------------------------------------------------------------------------------------------
NON-CURRENT ASSETS
Regulatory assets
Unamortized nuclear costs 504 519 535
Postretirement benefits 333 341 364
Abandoned Midland Project 41 48 66
Other 123 125 130
Nuclear decommissioning trust funds 615 602 565
Other 205 187 194
---------------------------------------
1,821 1,822 1,854
---------------------------------------
TOTAL ASSETS $6,937 $7,170 $6,934
================================================================================================================
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STOCKHOLDERS' INVESTMENT AND LIABILITIES MARCH 31 MARCH 31
2000 DECEMBER 31 1999
(UNAUDITED) 1999 (UNAUDITED)
- ----------------------------------------------------------------------------------------------------------------
In Millions
CAPITALIZATION
Common stockholder's equity
Common stock $ 841 $ 841 $ 841
Paid-in capital 645 645 495
Revaluation capital 12 37 54
Retained earnings since December 31, 1992 491 485 446
----------------------------------------
1,989 2,008 1,836
Preferred stock 44 44 244
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 -
Long-term debt 2,007 2,006 2,023
Non-current portion of capital leases 86 85 94
----------------------------------------
4,521 4,538 4,417
- ----------------------------------------------------------------------------------------------------------------
CURRENT LIABILITIES
Current portion of long-term debt and capital leases 88 90 153
Notes payable 151 214 46
Accounts payable 160 224 148
Accrued taxes 207 232 229
Accounts payable - related parties 83 82 87
Power purchases - MCV Partnership 47 47 47
Accrued interest 29 37 27
Deferred income taxes - - 6
Accrued refunds 12 11 13
Other 122 139 144
---------------------------------------
899 1,076 900
- ----------------------------------------------------------------------------------------------------------------
NON-CURRENT LIABILITIES
Deferred income taxes 667 700 638
Postretirement benefits 411 420 446
Power purchases - MCV Partnership 61 73 111
Deferred investment tax credit 123 125 131
Regulatory liabilities for income taxes, net 75 64 108
Other 180 174 183
---------------------------------------
1,517 1,556 1,617
---------------------------------------
COMMITMENTS AND CONTINGENCIES (Notes 1 and 2)
TOTAL STOCKHOLDERS' INVESTMENT AND LIABILITIES $6,937 $7,170 $6,934
================================================================================================================
(a) The primary asset of Consumers Power Company Financing I is $103 million
principal amount of 8.36% subordinated deferrable interest notes due 2015 from
Consumers. The primary asset of Consumers Energy Company Financing II is $124
million principal amount of 8.20% subordinated deferrable interest notes due
2027 from Consumers. The primary asset of Consumers Energy Company Financing III
is $180 million principal amount of 9.25% subordinated deferrable interest notes
due 2029 from Consumers. For further discussion, see Note 3 contained in
Consumers' 1999 Form 10-K.
THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE BALANCE SHEETS.
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CONSUMERS ENERGY COMPANY
CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDER'S EQUITY
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31 2000 1999
- ----------------------------------------------------------------------------------------------------------------
In Millions
COMMON STOCK
At beginning and end of period (a) $ 841 $ 841
- ----------------------------------------------------------------------------------------------------------------
OTHER PAID-IN CAPITAL
At beginning of period 645 502
Capital stock expense - (7)
----------------------
At end of period 645 495
- ----------------------------------------------------------------------------------------------------------------
REVALUATION CAPITAL
At beginning of period 37 68
Change in unrealized investment-gain (loss) (b) (25) (14)
----------------------
At end of period 12 54
- ----------------------------------------------------------------------------------------------------------------
RETAINED EARNINGS
At beginning of period 485 434
Net income 94 119
Cash dividends declared- Common Stock (79) (97)
Cash dividends declared- Preferred Stock - (5)
Preferred securities distributions (9) (5)
----------------------
At end of period 491 446
----------------------
TOTAL COMMON STOCKHOLDER'S EQUITY $ 1,989 $ 1,836
================================================================================================================
(a) Number of shares of common stock outstanding was 84,108,789 for all periods presented.
(b) Disclosure of Comprehensive Income:
Revaluation capital
Unrealized investment-gain (loss), net of tax of
$(13) and $(8), respectively $ (25) $ (14)
Net income 94 119
---------------------
Total Comprehensive Income $ 69 $ 105
=====================
THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
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CONSUMERS ENERGY COMPANY
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
These Condensed Notes and their related Consolidated Financial Statements should
be read along with the Consolidated Financial Statements and Notes contained in
the Consumers 1999 Form 10-K that includes the Report of Independent Public
Accountants. In the opinion of management, the unaudited information herein
reflects all adjustments necessary to assure the fair presentation of financial
position, results of operations and cash flows for the periods presented.
1: CORPORATE STRUCTURE AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CORPORATE STRUCTURE: Consumers is a combination electric and gas utility company
serving the Lower Peninsula of Michigan and is a subsidiary of CMS Energy, a
holding company. 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 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 which,
among other things, identified the terms and timing for implementing electric
restructuring in Michigan. Consistent with these orders, Consumers discontinued
application of SFAS 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 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. The
regulatory asset is collectible as part of the Transition Costs which are
recoverable through the regulated transmission and distribution portion of
Consumers' business as approved by an MPSC order in 1998. This order also
allowed Consumers to recover any energy supply-related regulatory assets, plus a
return on any unamortized balance of those assets, from its transmission and
distribution customers. 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. At
March 31, 2000, Consumers had a net investment in energy supply facilities of
$988 million included in electric plant and property.
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, respectively.
To qualify for hedge accounting, derivatives must meet the following criteria:
1) the item to be hedged exposes the enterprise to price and interest rate risk;
and 2) 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. Consumers minimizes such risk by performing financial credit reviews
using, among other things, publicly available credit ratings of such
counterparties. The risk of nonperformance by the counterparties is considered
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
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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.
Consumers enters into electric option contracts to ensure a reliable source of
capacity to meet its customers' electric requirements and to limit its risk
associated with electricity price increases. It is management's intent to take
physical delivery of the commodity. Consumers continuously evaluates its daily
capacity needs and sells the option contracts, if marketable, when it has excess
daily capacity. Consumers' maximum exposure associated with these options is
limited to the price paid.
2: UNCERTAINTIES
ELECTRIC CONTINGENCIES
ELECTRIC ENVIRONMENTAL MATTERS: The Clean Air Act limits emissions of sulfur
dioxide and nitrogen oxides 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. In 1997, the EPA revised these standards to impose further limitations
on nitrogen oxide and small particulate-related emissions. In May 1999, a United
States Court of Appeals ruled that the grant of authority to the EPA, to revise
the standards as the EPA did, would amount to an unconstitutional delegation of
legislative power. As a result of that Court's ruling and a later denial of the
EPA's request for rehearing, the EPA proposed an indefinite stay for the
standards under the 1997 rule and proposed to reinstate the pre-1997 standards.
In January 2000, the Department of Justice filed a petition for the United
States Supreme Court to review the case.
In September 1998, based in part upon the 1997 standards, the EPA Administrator
issued final regulations requiring the state of Michigan to limit further
nitrogen oxide emissions. Consumers anticipates a reduction in nitrogen oxide
emissions by 2003 to only 32 percent of levels allowed for the year 2000. The
state of Michigan had one year to submit an implementation plan. The state of
Michigan filed a lawsuit objecting to the extent of the required emission
reductions and requesting an extension of the submission date. In May 1999, the
United States Court of Appeals granted an indefinite stay of the submission date
for the state of Michigan's implementation plan. In early 2000, the United
States Court of Appeals upheld the EPA's final regulations. The state of
Michigan appealed this ruling. Until the appeal is decided, it is unlikely that
the state of Michigan will establish Consumers' nitrogen oxide emissions
reduction target. In December 1999, the EPA Administrator signed 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 currently challenged
September 1998 EPA final rule. Under the revised Section 126 rule, the emission
rate will become effective on May 1, 2003 and apply during the ozone season in
2003 and during each subsequent year. Various parties' petitions challenging the
EPA's rule have been filed. Until these targets are lawfully established, the
estimated cost of compliance discussed below is subject to revision.
The preliminary estimates of capital expenditures to reduce nitrogen
oxide-related emissions to the level proposed by the state of Michigan for
Consumers' fossil-fueled generating units range from $150 million to $290
million, calculated in 2000 dollars. If Consumers had to meet the EPA's 1997
proposed requirements, the estimated cost to Consumers would be between $290
million and $500 million, calculated in 2000 dollars. In both these cases the
lower estimate represents the capital expenditure level that would
satisfactorily meet the proposed emissions limits but would result in higher
operating expense. The higher estimate in the range includes expenditures that
result in lower operating
CE-15
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costs while complying with the proposed emissions limit. Consumers anticipates
that it will incur these capital expenditures between 2000 and 2004, or between
2000 and 2003 if the EPA ultimately imposes its limits. 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 equivalent amount of capital expenditures to comply with
the new small particulate standards sometime after 2004 if those standards
become effective.
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 2000, Consumers incurred capital expenditures totaling
$67 million to install equipment at certain generating units to comply with the
Clean Air Act. Consumers estimates an additional $5 million of capital
expenditures for ongoing and proposed modifications at the remaining coal-fueled
units to meet year 2000 requirements. Management believes that these
expenditures will not materially affect Consumers' annual operating costs.
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. At March
31, 2000, Consumers has accrued the minimum amount of the range for its
estimated Superfund liability.
While decommissioning Big Rock, Consumers found that some areas of the plant
have coatings that contain both metals and PCBs. Consumers believes it now has
viable disposal options for these materials. It estimates the additional cost
associated with PCB waste at $1.5 million. The cost of removal and disposal will
constitute part of the cost to decommission the plant and will be paid from the
decommissioning fund.
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 is
studying the remaining materials and determining options and their related
costs.
ANTITRUST: In October 1997, two independent power producers sued Consumers in a
federal court. The suit alleged antitrust violations relating to contracts which
Consumers entered into with some of its customers, and interference with
contract claims relating to proposed power facilities. On March 31, 1999, the
court issued an opinion and order granting Consumers' motion for summary
judgment, resulting in the dismissal of the case. The plaintiffs have appealed
this decision. Consumers cannot predict the outcome of this appeal.
ELECTRIC RATE MATTERS
ELECTRIC PROCEEDINGS: In 1996, the MPSC issued a final order that authorized
Consumers to recover costs associated with the purchase of the additional 325 MW
of MCV Facility capacity (see "Power Purchases from the MCV Partnership" in this
Note). In addition, the order allowed Consumers to recover its nuclear plant
investment by increasing prospective annual nuclear plant depreciation expense
by $18 million, with a corresponding decrease in fossil-fueled generating plant
depreciation expense. The order also established an experimental direct-access
program. The Attorney General, ABATE, the MCV Partnership and other
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parties filed appeals with the Court of Appeals challenging the MPSC's 1996
order. In 1999, the Court of Appeals affirmed the MPSC's 1996 order in all
respects. The Attorney General, however, filed an application for leave to
appeal this decision to the Michigan Supreme Court.
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. In testimony
subsequently filed in this case, ABATE claimed that Consumers received
approximately $189 million in excess revenues for 1998. In its testimony, the
MPSC staff stated that 1998 financial results show excess revenues of $118
million compared to the previously authorized electric return on equity. The
MPSC staff offered several alternatives for the MPSC to consider. These
alternatives involve several different refunds or reductions that the MPSC could
consider separately or in combination, but if made, would not result in a
permanent future reduction in electric rates in the amount being sought by
ABATE. Consumers filed testimony showing that after ratemaking adjustments and
normalizations, there is a revenue deficiency of approximately $3 million. ABATE
and other interveners bear the burden of convincing the MPSC to reduce electric
rates, which will otherwise remain unchanged. Consumers believes that ABATE has
not met its burden of proving that a reduction in rates is required. Consumers
also believes that ABATE's request for refunds from 1995 to present is
inappropriate and unlawful; no such retroactive rate adjustment has ever been
granted by the MPSC. In December 1999, in anticipation of electric restructuring
legislation being introduced in the Michigan Legislature, ABATE and Consumers
jointly filed a request with the MPSC to suspend ABATE's electric rate complaint
to allow for consideration of the proposed legislation. The MPSC granted a
temporary suspension for 120 days (expiring in April 2000), subject to its
authority to withdraw the suspension at any time. In January 2000, the proposed
legislation was introduced into the Michigan Legislature. As part of the
suspension, Consumers agreed that, if the case is resumed and a rate reduction
is ultimately ordered by the MPSC, it would implement the rate reduction
retroactively for a period equal to the length of the suspension authorized by
the MPSC. In April 2000, Consumers and ABATE agreed that it was unlikely that
the proposed legislation would be enacted during the period of the suspension,
and therefore reactivated the complaint. Hearings to complete the proceeding are
scheduled for the middle of May 2000. Consumers is unable to predict the outcome
of this matter.
Before 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, such
as 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 will not grant
adjustment of customer rates through 2001. In March 2000, Consumers filed an
application with the MPSC which requests reinstatement of the PSCR clause,
approval of a PSCR plan, and authorization of monthly PSCR factors from July
2000 through June 2001. Consumers requested reinstatement of the PSCR clause
because the original suspension period anticipated that retail open access would
be implemented by late 1998. Consumers also anticipated much more retail open
access demand by mid-2000 and thereafter than is currently reasonable to expect.
Consumers believes that, over the next several years, fewer customers will
actually switch to alternative electric suppliers than previously anticipated.
As a result, Consumers must provide generation service to considerably more
customers than expected when the PSCR suspension was proposed by Consumers and
adopted by the MPSC. Consumers is unable to predict the outcome of this matter.
ELECTRIC RESTRUCTURING: As part of ongoing proceedings relating to the
restructuring of the electric utility industry in Michigan, the MPSC issued
numerous orders since 1997 proposing that Consumers transmit and distribute
energy for competing power suppliers to retail customers (also known as "retail
open access"). The restructuring orders provide for: 1) recovery of estimated
Stranded Costs of $1.755 billion through a charge to all customers purchasing
their power from other sources until the end of the transition
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period in 2007, subject to an adjustment through a true-up mechanism; 2)
commencement of the phase-in of retail open access beginning September 1999; 3)
suspension of the PSCR clause as discussed above; and 4) the right of all
customers to choose their power suppliers commencing January 1, 2002. The
recovery of costs for implementing a retail open access program, preliminarily
estimated at an additional $200 million, will be reviewed for prudence by the
MPSC and recovered via a charge approved by the MPSC. Consumers will also
continue to collect nuclear decommissioning costs through a separate surcharge
to all customers.
Consumers submitted its plan for implementing retail open access to the MPSC in
1998. The primary issues addressed in the plan are: 1) the implementation
schedule; 2) the retail open access service options available to customers and
suppliers; 3) the process and requirements for customers and others to obtain
retail open access service; and 4) the roles and responsibilities for Consumers,
customers and suppliers. In March 1999, Consumers received MPSC electric
restructuring orders, which generally supported Consumers' implementation plan.
Consumers began implementing the plan for electric retail customer open access
in September 1999, and will extend the opportunity for open access to 750 MW of
Consumers' retail market by 2001. The current plan provides for all of
Consumers' electric customers to have the right to choose generation suppliers
commencing January 1, 2002. As of March 31, 2000, no customer service has been
taken under this program.
Numerous appeals are pending at the Court of Appeals relating to the MPSC's
restructuring orders. Because of a June 1999 Michigan Supreme Court decision
finding that the MPSC does not have statutory authority to order a utility to
provide a mandatory retail wheeling service, Consumers believes that the MPSC
lacks statutory authority to mandate industry restructuring. The MPSC ultimately
issued an order in August 1999 finding that it has jurisdiction to approve
rates, terms, and conditions for electricity retail wheeling (also known as
electric customer choice) if a utility voluntarily chooses to offer that
service. ABATE and the Attorney General each appealed the August 1999 order to
the Court of Appeals. Consumers is unable to predict how the issues raised by
the MPSC's August 1999 order will, in the absence of legislation addressing
electric restructuring issues, be resolved by the regulatory process or the
appellate courts.
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 is planning to maintain sufficient generation and to purchase
electricity from others to create a power reserve (also called a reserve
margin). Consumers plans a reserve margin of approximately 15%. 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. Consumers estimates the actual reserve margin is in the
range of 13% to 16%. The ultimate reserve margin will depend on summer weather
conditions and on the level of retail open access load being served by others
this summer. (Consumers will offer other service providers with the opportunity
to serve up to 600 MW of nominal retail open access load prior to summer 2000.)
To reduce the risk of high energy prices during peak demand periods and to
achieve its reserve margin target, Consumers has employed a strategy of
purchasing electric call option contracts for the physical delivery of
electricity during the months of June through September. Consumers expects to
use a similar strategy in the future. As of March 31, 2000, Consumers had
commitments to purchase electric call option contracts at a cost of
approximately $25 million. In March 2000, Consumers filed an application with
the MPSC to reinstate the PSCR process, which affects power costs. For more
information on the PSCR process see "Electric Proceedings" above.
In June 1999, Consumers and four other electric utility companies sought
approval from the FERC to form the Alliance RTO. The proposed structure provided
for the creation of a transmission entity that would control, operate and own
transmission facilities of one or more of the member companies, and
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would control and operate, but not necessarily own, the transmission facilities
of other companies. The proposal was structured to give the member companies the
flexibility to maintain or divest ownership of their transmission facilities
while ensuring independent operation of the regional transmission system. In
December 1999, the FERC conditionally approved formation of Alliance, but asked
the applicants to make a number of changes in the proposal and to provide
additional information. Among other things, the FERC expressed concern about the
proposed governance of Alliance, its rates and its geographic configuration.
Consumers and the Alliance companies sought rehearing of the Alliance order.
Additionally, in a February 2000 compliance filing, the Alliance companies
addressed some of the concerns expressed in the December 1999 Alliance order.
Consumers is uncertain about the outcome of the Alliance matter before the FERC
and its continued participation in Alliance.
On the same day as the December 1999 Alliance order, the FERC issued Order No.
2000, which describes the characteristics the FERC would find acceptable in an
RTO. In Order No. 2000, 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.
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 (unaudited)
In Millions
- ---------------------------------------------------------------------------------------------------------------
Three Months Ended
March 31 2000 1999
- ---------------------------------------------------------------------------------------------------------------
Pretax operating income $9 $14
Income taxes and other 3 4
- ---------------------------------------------------------------------------------------------------------------
Net income $6 $10
===============================================================================================================
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. Because
the MPSC has already approved recovery of these capacity costs, Consumers
expects to recover these increases through some combination of PSCR factors (if
the PSCR clause is reinstated), adjustments to the currently frozen PSCR factor
or the Transition Cost true-up process. After September 2007, under the terms of
the PPA, Consumers will only be required to pay the MCV Partnership capacity and
energy charges that the MPSC has authorized for recovery from electric
customers.
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In March 1999, Consumers signed a long-term power sales agreement to resell to
PECO its capacity and energy purchases under the PPA until September 2007.
Implementation of the agreement is contingent upon regulatory treatment
satisfactory to Consumers. Such treatment is not yet assured. Under the terms of
the agreement, after a three-year transition period during which 100 to 150 MW
will be sold to PECO, beginning in 2002 Consumers will sell all 1,240 MW of PPA
capacity and associated energy to PECO. In March 1999, Consumers also filed an
application with the MPSC for accounting and ratemaking approvals related to the
PECO agreement. If used as an offset to electric customers' Transition Cost
responsibility, Consumers estimates that there could be a reduction of as much
as $58 million (on a net present value basis) of Transition Cost related to the
MCV PPA. In an order issued in April 1999, the MPSC conditionally approved the
requests for accounting and rate-making treatment to the extent that customer
rates are not increased from the current level absent the agreement and as
modified by the order. In response to Consumers' and other parties' requests for
clarification and rehearing, in an August 1999 opinion, the MPSC partially
granted the relief Consumers requested on rehearing and attached certain
additional conditions to its approval. Those conditions relate to Consumers
continued decision to carry out the electricity customer choice program (which
Consumers has affirmed as discussed above) and a determination to file for
approval of a revised capacity solicitation process (which Consumers filed). The
August opinion is a companion order to a power supply cost reconciliation order
issued on the same date in another case. This order affects the level of frozen
power supply costs recoverable in rates during future years when the transaction
with PECO would be taking place. Consumers filed a motion for clarification of
the order relating to the PECO agreement, which is still pending. Due to the
pending electric industry restructuring legislation in Michigan and the overall
uncertainty that exists concerning restructuring, Consumers and PECO entered
into an interim arrangement for the sale of 125 MW of PPA capacity and
associated energy to PECO during 2000. Prices in the interim arrangement are
identical to the March 1999 power sales agreement.
Consumers recognized a loss in 1992 for the present value of the estimated
future underrecoveries of power costs under the PPA based on MPSC recovery
orders. At March 31, 2000 and March 31, 1999, the remaining after-tax present
value of the estimated future PPA liability associated with the 1992 loss
totaled $71 million and $103 million, respectively. The annual after-tax cash
underrecoveries are based on the assumption that the MCV Facility would be
available to generate electricity 91.5 percent of the time over its expected
life. Historically the MCV Facility has operated above the 91.5 percent level.
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. Because the MCV Facility operated above the 91.5 percent level in 1999
and in 2000, Consumers has an accumulated unrecovered after-tax shortfall of $31
million as of March 31, 2000. Consumers believes that this shortfall has the
potential to be resolved in the context of the electric restructuring effort. 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
- ------------------------------------------------------------------------------------------------------------------
2000 2001 2002 2003 2004
- ------------------------------------------------------------------------------------------------------------------
Estimated cash underrecoveries, net of tax at 98.5% $36 $39 $38 $37 $36
==================================================================================================================
If the MCV Facility operates at availability levels above management's 91.5
percent estimate made in 1992 for the remainder of the PPA and expected
shortfalls are not resolved in the context of the electric restructuring effort,
the estimated PPA liability would be deficient and Consumers will need to
recognize
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additional losses for accumulated and future underrecoveries. For further
discussion on the impact of the frozen PSCR, see "Electric Restructuring" in
this Note. Management is evaluating the adequacy of the contract loss liability
considering actual MCV Facility operations, and resolution of the electric
restructuring effort.
In February 1998, the MCV Partnership filed a claim of appeal from the January
1998 and February 1998 MPSC orders related to electric utility industry
restructuring. At the same time, the MCV Partnership filed suit in the United
States District Court seeking a declaration that the MPSC's failure to provide
Consumers and the MCV Partnership a certain source of recovery of capacity
payments after 2007 deprived the MCV Partnership of its rights under the Public
Utilities Regulatory Policies Act of 1978. In July 1999, the United States
District Court issued an order granting the MCV Partnership's motion for summary
judgment. The order permanently prohibits enforcement of the restructuring
orders in any manner which denies any utility the ability to recover amounts
paid to qualifying facilities such as the MCV Facility or which precludes the
MCV Partnership from recovering the avoided cost rate. The MPSC appealed the
United States District Court order. Consumers cannot predict the outcome of this
litigation.
NUCLEAR MATTERS: In January 1997, the NRC issued its Systematic Assessment of
Licensee Performance report for Palisades. The report rated all areas as good.
The NRC suspended this assessment process for all licensees in 1998. Until the
NRC completes its review of processes for assessing performance at nuclear power
plants, the NRC uses the Plant Performance Review to provide an assessment of
licensee performance. Palisades received its annual performance review dated
March 31, 2000 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. The NRC stated that Palisades
continues to operate in a safe manner. Further, it stated that the NRC plans to
conduct only routine inspections at Palisades over the next year. The NRC
implemented the revised reactor oversight process industry-wide, including for
Palisades, on April 2, 2000.
Palisades' temporary on-site storage pool for spent nuclear fuel is at 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,
2000, Consumers had loaded 18 dry storage casks with spent nuclear fuel at
Palisades. Palisades will need to load more casks by 2004 in order to continue
operation. Palisades only has three additional storage-only casks available for
loading. Consumers anticipates, however, that licensed transportable casks 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 generating
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 $15.5 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.
The NRC requires Consumers to make certain calculations and report on the
continuing ability of the Palisades reactor vessel to withstand postulated
pressurized thermal shock events during its remaining license life, considering
the embrittlement of reactor materials. In December 1996, Consumers received an
interim Safety Evaluation Report from the NRC indicating that the reactor vessel
can be safely operated through 2003 before reaching the NRC's screening criteria
for reactor embrittlement. On February 21, 2000, Consumers submitted an analysis
to the NRC which shows that the NRC's screening criteria will not
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be reached until 2014. Accordingly, Consumers believes that with fuel management
designed to minimize embrittlement, it can operate Palisades to the end of its
license life in the year 2007 without annealing the reactor vessel.
Nevertheless, Consumers will continue to monitor the matter.
In May 2000, Consumers requested that the NRC modify the operating license for
the Palisades nuclear plant to recapture the four year construction period. This
modification would extend the plant's operation to March of 2011 and allow a
full 40 year operating period, consistent with current NRC practice.
NUCLEAR FUEL COST: Consumers amortizes nuclear fuel cost to fuel expense based
on the quantity of heat produced for electric generation. Interest on leased
nuclear fuel is expensed as incurred. Under current federal law, as confirmed by
court decision, 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 them 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. At March
31, 2000, Consumers had a recorded liability to the DOE of $124 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 January 1997, in response to the
DOE's declaration that it would not begin to accept spent nuclear fuel
deliveries in 1998, Consumers and other utilities filed suit in federal court.
The court issued a decision in late 1997 affirming the DOE?s duty to take
delivery of spent fuel, but was not specific as to the relief available for
failure of the DOE to comply. Further litigation brought by Consumers and others
in 1998, intended to produce specific relief for the DOE's failure to comply,
has not been successful to date. In April 2000, the U.S. Senate and House of
Representatives approved federal legislation which would advance the cause of
moving nuclear waste to a permanent repository. The President of the United
States vetoed this legislation.
CAPITAL EXPENDITURES: Consumers estimates electric capital expenditures,
including new lease commitments and environmental costs under the Clean Air Act,
of $441 million for 2000, $575 million for 2001, and $558 million for 2002. For
further information, see the Capital Expenditures Outlook section in the MD&A.
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, 2000, after
consideration of prior years' expenses, Consumers has a remaining accrued
liability of $62 million and a regulatory asset of $65 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. Consumers is
allowed current recovery of $1 million annually. Consumers has initiated
lawsuits against certain insurance companies regarding coverage for some or all
of the costs that it may incur for these sites.
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GAS RATE MATTERS
GAS RESTRUCTURING: In December 1997, the MPSC approved Consumers' application to
implement an experimental gas transportation program. The program allows 300,000
residential, commercial and industrial retail gas sales customers to choose an
alternative gas commodity supplier in direct competition with Consumers. Unless
some other arrangements are made, when this program ends on March 31, 2001,
these customers will again become Consumers' customers. The program is voluntary
and participating natural gas customers are selected on a first-come,
first-served basis, up to a limit of 100,000 per year. As of March 31, 2000,
more than 170,000 customers chose alternative gas suppliers, representing
approximately 40.4 bcf of gas load. Customers choosing to remain as sales
customers of Consumers will not see a rate change in their natural gas rates.
This three-year program: 1) freezes gas distribution rates through March 31,
2001, establishing a gas commodity cost at a fixed rate of $2.84 per mcf; 2)
establishes an earnings sharing mechanism with customers if Consumers' earnings
exceed certain pre-determined levels; and 3) establishes a gas transportation
code of conduct that addresses the relationship between Consumers and marketers,
including its affiliated marketers. In December 1999, the Court of Appeals
affirmed in its entirety the December 1997 MPSC Order. The Attorney General
filed with the Michigan Supreme Court an application for leave to appeal the
Court of Appeals' decision.
Consumers contracts to purchase gas to limit its risk associated with gas price
increases. Management's intent is to take physical delivery of the commodity and
failure could result in a significant penalty for nonperformance. At March 31,
2000, Consumers had an exposure to gas price increases if the ultimate cost of
gas was to exceed $2.84 per mcf for the following volumes: 45 percent of its
remaining 2000 requirements; and 50 percent of its first quarter 2001
requirements. Based on the expected cost of gas by a consensus of financial
analysts' forecasts, Consumers estimates its exposure to gas prices, for gas
that has not been purchased for year 2000, could be significant. Using these
same year 2000 gas price forecasts, Consumers estimates its exposure to
gas prices, for gas that has not been purchased for the first quarter 2001,
could be significant. Additional contract coverage is currently under review. As
of March 31, 2000, the gas purchase contracts currently in place were
consummated at an average price of less than $2.84 per mcf. Consumers uses gas
purchase contracts to protect against gas price increases in a three-year
experimental gas program where Consumers is recovering from its customers $2.84
per mcf for gas. Consumers cannot predict the ultimate loss, if any, incurred as
a result of gas price increases.
OTHER GAS UNCERTAINTIES
CAPITAL EXPENDITURES: Consumers estimates gas capital expenditures, including
new lease commitments, of $114 million for 2000, $130 million for 2001, and $127
million for 2002. For further information, see the Capital Expenditures Outlook
section in the MD&A.
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 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.
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3: SHORT-TERM FINANCING AND CAPITALIZATION
AUTHORIZATION: At March 31, 2000, Consumers had FERC authorization to issue or
guarantee through June 2000, up to $900 million of short-term securities
outstanding at any one time. Consumers also had remaining FERC authorization to
issue through June 2000, up to $275 million and $365 million of long-term
securities with maturities up to 30 years for refinancing purposes and for
general corporate purposes, respectively.
SHORT-TERM FINANCING: Consumers has an unsecured $300 million credit facility
and unsecured lines of credit aggregating $145 million. These facilities are
available to finance seasonal working capital requirements and to pay for
capital expenditures between long-term financings. At March 31, 2000, a total of
$151 million was outstanding at a weighted average interest rate of 7.1 percent,
compared with $221 million outstanding at March 31, 1999, at a weighted average
interest rate of 5.6 percent.
Consumers currently has in place a $325 million trade receivables sale program,
down from $500 million at March 31, 1999. At March 31, 2000 and 1999,
receivables sold under the program totaled $325 million and $344 million,
respectively. Accounts receivable and accrued revenue in the Consolidated
Balance Sheets have been reduced to reflect receivables sold.
OTHER: Under the provisions of its Articles of Incorporation, Consumers had $366
million of unrestricted retained earnings available to pay common dividends at
March 31, 2000. In January 2000, Consumers declared and paid a $79 million
common dividend, in April 2000, Consumers declared a $30 million common dividend
payable in May 2000.
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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, 2000 and 1999, and the related
consolidated statements of income, common stockholder's equity and cash flows
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, 1999, and, in our report
dated February 4, 2000, 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, 1999, 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,
May 4, 2000.
CE-25
69
PANHANDLE EASTERN PIPE LINE COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS
Panhandle is primarily engaged in the interstate transportation and storage of
natural gas. Panhandle owns a LNG regasification plant, related tanker port
unloading facilities and LNG and gas storage 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 1999 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 disclaims
any obligation to update or revise forward-looking statements, whether from new
information, future events or otherwise. Panhandle details certain risk factors,
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 1999 Form 10-K, Item 1 and periodically in various public
filings it makes with the SEC. This discussion of potential risks and
uncertainties is by no means complete but is designed 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.
In March 2000, Trunkline, a subsidiary of Panhandle, acquired the Sea Robin
pipeline from El Paso Energy Corporation for a total cash price, including
certain transaction costs, of approximately $74 million. Sea Robin is a 1 bcf
per day capacity pipeline system located in the Gulf of Mexico. On March 27,
2000, Panhandle issued $100 million of 8.25 percent senior notes due 2010.
Panhandle used the funds primarily to finance the purchase of Sea Robin (See
Note 1).
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 will own one-third
interest in the project, called the Centennial Pipeline, which if approved is
planned to go into service at the end of 2001 (See Note 2).
The acquisition of Panhandle by CMS Panhandle Holding in March 1999 was
accounted for using the purchase method of accounting in accordance with
generally accepted accounting principles. Panhandle allocated the purchase price
paid by CMS Panhandle Holding to Panhandle's net assets as of the acquisition
date based on an appraisal completed in December 1999. Accordingly, the
post-acquisition financial statements reflect a new basis of accounting.
Pre-acquisition period and post-acquisition period financial results (separated
by a heavy black line) are presented but are not comparable (See Note 1).
PE-1
70
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 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 2000 1999 Change
- --------------------------------------------------------------------------------------------------------------------
Three Months Ended $32 $34 $ (2)
====================================================================================================================
For the three months ending March 31, 2000, net income was $32 million, down $2
million from the corresponding period in 1999 due primarily to decreased
reservation revenues, additional depreciation and amortization expenses in 2000,
and certain non-recurring other income in 1999, partially offset by higher
liquefied natural gas terminalling revenues in 2000. Total natural gas
transportation volumes for the three months ending March 31, 2000 decreased one
percent from 1999 primarily due to warmer weather.
Revenues for the three months ended March 31, 2000 increased $3 million from the
corresponding period in 1999 due primarily to increased liquefied natural gas
terminalling revenues from Trunkline LNG in 2000, partially offset by lower
reservation revenues in 2000.
Operating expenses for the three months ended March 31, 2000 increased $2
million from the corresponding period in 1999 due primarily to additional
depreciation and amortization expenses related to excess purchase cost from the
acquisition (See Note 1).
Other income for the three months ended March 31, 2000 decreased $4 million from
the corresponding period in 1999 primarily due to non-recurring transition
surcharge recoveries recorded in 1999.
Interest on long-term debt for the three months ended March 31, 2000 increased
$13 million from the corresponding period in 1999 primarily due to interest on
the additional debt incurred by Panhandle in 1999 (See Note 1 and 6). Other
interest decreased $13 million for the three months ended March 31, 2000 from
the corresponding period in 1999 primarily due to interest on the intercompany
note with PanEnergy. The note was eliminated with the sale of Panhandle to CMS
Panhandle Holding (See Note 1 and Note 3).
PE-2
71
PRETAX OPERATING INCOME:
In Millions
- --------------------------------------------------------------------------------------------------------------------
Three Months
Ended March 31
Change Compared to Prior Year 2000 vs 1999
- --------------------------------------------------------------------------------------------------------------------
LNG terminalling revenues $3
Commodity revenue 2
Reservation and other revenues (2)
Operations and maintenance (1)
Depreciation and amortization (2)
General taxes 1
--------------------------
Total Change $ 1
====================================================================================================================
OUTLOOK
CMS Energy intends to use Panhandle as a platform for expansion in the United
States. Panhandle plays an important role in the growth strategy by providing
services for the development of gas wells, production and throughput of gas to
the market. The market for transmission of natural gas to the Midwest is
increasingly competitive, however, and may become more so in light of projects
recently completed or in progress to increase Midwest transmission capacity for
gas originating in Canada and the Rocky Mountain region. As a result, there
continues to be pressure on prices charged by Panhandle and an increasing
necessity to discount the prices charged from the legal maximum, which reduces
revenues. New contracts in the current market conditions tend to be of shorter
duration than the expiring contracts being replaced, which will also increase
revenue volatility. In addition, Trunkline in 1996 filed with FERC and placed
into effect a general rate increase; however, a subsequent January 2000 FERC
order could, if approved without modification upon rehearing, reduce Trunkline's
tariff rates and future revenue levels by up to 3% of Panhandle's consolidated
revenues. Panhandle continues to be selective in offering discounts to maximize
revenues from existing capacity and to advance projects that provide expanded
services to meet the specific needs of customers. In addition, Panhandle will
continue to evaluate opportunities to acquire synergistic operations such as the
Sea Robin pipeline system (See Note 1) and attempt to maximize the use and value
of its existing assets, such as the proposed conversion of Trunkline's 26 inch
pipeline to a liquid products pipeline (See Note 2).
OTHER MATTERS
ENVIRONMENTAL MATTERS
PCB (POLYCHLORINATED BIPHENYL) ASSESSMENT AND CLEAN-UP PROGRAMS: Panhandle
identified environmental contamination at certain sites on its systems and
undertook clean-up programs at these sites. The contamination was caused by the
past use of lubricants containing PCB's in compressed air systems and resulted
in contamination of the on-site air systems, wastewater collection facilities
and on-site disposal areas. Soil and sediment testing to date detected no
significant off-site contamination. Panhandle communicated with the EPA and
appropriate state regulatory agencies on these matters. Under the terms of the
sale of Panhandle to CMS Energy (See Note 1), a subsidiary of Duke Energy is
obligated to complete the Panhandle clean-up programs at certain agreed-upon
sites and to defend and indemnify Panhandle against certain future environmental
litigation and claims. Panhandle expects these clean-up programs to continue
through 2001.
PE-3
72
PANHANDLE EASTERN PIPE LINE COMPANY
CONSOLIDATED STATEMENT OF INCOME
(Unaudited)
(IN MILLIONS)
Three Months Ended Mar 29 - Jan. 1 -
March 31, 2000 Mar. 31, 1999 Mar. 28, 1999
------------------ ------------- -------------
OPERATING REVENUE
Transportation and storage of natural gas $125 $ 4 $123
Other 11 1 5
---- ---- ----
Total operating revenue 136 5 128
---- ---- ----
OPERATING EXPENSES
Operation and maintenance 44 3 40
Depreciation and amortization 16 -- 14
General taxes 6 -- 7
---- ---- ----
Total operating expenses 66 3 61
---- ---- ----
PRETAX OPERATING INCOME 70 2 67
OTHER INCOME, NET 1 1 4
INTEREST CHARGES
Interest on long-term debt 19 1 5
Other interest -- -- 13
---- ---- ----
Total interest charges 19 1 18
---- ---- ----
NET INCOME BEFORE INCOME TAXES 52 2 53
INCOME TAXES 20 1 20
---- ---- ----
CONSOLIDATED NET INCOME $ 32 $ 1 $ 33
==== ==== ====
The accompanying condensed notes are an integral part of these statements.
PE-4
73
PANHANDLE EASTERN PIPE LINE COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(IN MILLIONS)
Three Months Ended Mar. 29 - Jan. 1 -
March 31, 2000 Mar. 31, 1999 Mar. 28, 1999
------------------- ------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 32 $ 1 $ 33
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 16 -- 14
Deferred income taxes 13 -- --
Changes in current assets and liabilities (29) (2) (29)
Other, net -- -- 3
------- ------- -------
Net cash provided by operating activities 32 (1) 21
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of Panhandle -- (1,900) --
Capital and investment expenditures (77) -- (4)
Net increase in advances receivable - PanEnergy -- -- (17)
------- ------- -------
Net cash used in investing activities (77) (1,900) (21)
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Contribution from parent -- 1,116 --
Proceeds from senior notes 99 785 --
Net increase in note receivable - CMS (24) -- --
Dividends paid (30) -- --
------- ------- -------
Net cash provided by financing activities 45 1,901 --
------- ------- -------
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 $ 13 $ 12
Income taxes paid (net of refunds) -- -- 37
The accompanying condensed notes are an integral part of these statements
PE-5
74
PANHANDLE EASTERN PIPE LINE COMPANY
CONSOLIDATED BALANCE SHEETS
(IN MILLIONS)
March 31,
2000 December 31,
(Unaudited) 1999
----------- ------------
ASSETS
PROPERTY, PLANT AND EQUIPMENT
Cost $1,618 $1,492
Less accumulated depreciation and amortization 67 37
------ ------
Sub-total 1,551 1,455
Construction work-in-progress 22 45
------ ------
Net property, plant and equipment 1,573 1,500
------ ------
INVESTMENTS
Investment in affiliates 2 2
------ ------
Total investments 2 2
------ ------
CURRENT ASSETS
Receivables, less allowances of $1 as of March 31, 2000 and Dec. 31, 1999 99 112
Inventory and supplies 23 34
Deferred income taxes 6 11
Note receivable - CMS Capital 109 85
Other 22 30
------ ------
Total current assets 259 272
------ ------
NON-CURRENT ASSETS
Goodwill, net 768 774
Debt issuance cost 11 11
Other 2 1
------ ------
Total non-current assets 781 786
------ ------
TOTAL ASSETS $2,615 $2,560
====== ======
The accompanying condensed notes are an integral part of these statements.
PE-6
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PANHANDLE EASTERN PIPE LINE COMPANY
CONSOLIDATED BALANCE SHEETS
(IN MILLIONS)
March 31,
2000 December 31,
(Unaudited) 1999
------------ ------------
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 --
------ ------
Total common stockholder's equity 1,130 1,128
Long-term debt 1,193 1,094
------ ------
Total capitalization 2,323 2,222
------ ------
CURRENT LIABILITIES
Accounts payable 9 28
Accrued taxes 3 8
Accrued interest 11 29
Other 115 139
------ ------
Total current liabilities 138 204
------ ------
NON-CURRENT LIABILITIES
Deferred income taxes 53 45
Other 101 89
------ ------
Total non-current liabilities 154 134
------ ------
TOTAL COMMON STOCKHOLDER'S EQUITY AND LIABILITIES $2,615 $2,560
====== ======
The accompanying condensed notes are an integral part of these statements.
PE-7
76
PANHANDLE EASTERN PIPE LINE COMPANY
CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDER'S EQUITY
(UNAUDITED)
(IN MILLIONS)
Three Months Ended
March 31, Mar. 29 - Jan. 1 -
2000 Mar. 31, 1999 Mar. 28, 1999
------------------ ------------- -------------
COMMON STOCK
At beginning and end of period $ 1 $ 1 $ 1
------- ------- -------
OTHER PAID-IN CAPITAL
At beginning of period 1,127 466 466
Acquisition adjustment to eliminate original
paid-in capital -- (466) --
Capital contribution of acquisition costs by parent -- 11 --
Cash capital contribution by parent -- 1,116 --
------- ------- -------
At end of period 1,127 1,127 466
------- ------- -------
RETAINED EARNINGS
At beginning of period -- 101 92
Acquisition adjustment to eliminate original
retained earnings -- (101) --
Net Income 32 1 33
Assumption of net liability by PanEnergy -- -- 57
Common stock dividends (30) -- (81)
------- ------- -------
At end of period 2 1 101
------- ------- -------
TOTAL COMMON STOCKHOLDER'S EQUITY $ 1,130 $ 1,129 $ 568
======= ======= =======
The accompanying condensed notes are an integral part of these statements.
PE-8
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PANHANDLE EASTERN PIPE LINE COMPANY
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
These Condensed Notes and their related Consolidated Financial Statements should
be read along with the Consolidated Financial Statements and Notes contained in
the 1999 Form 10-K of Panhandle, which include the Reports of Independent Public
Accountants. Certain prior year amounts have been reclassified to conform with
the presentation in the current year. In the opinion of management, the
unaudited information herein reflects all adjustments necessary to assure the
fair presentation of financial position, results of operations and cash flows
for the periods presented.
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.
On March 29, 1999, Panhandle Eastern Pipe Line Company and its principal
consolidated subsidiaries, Trunkline and Pan Gas Storage, as well as its
affiliates, Trunkline LNG and Panhandle Storage, were acquired from subsidiaries
of Duke Energy by CMS Panhandle Holding for $1.9 billion in cash and assumption
of existing Panhandle debt of $300 million. Immediately following the
acquisition, CMS Panhandle Holding contributed the stock of Trunkline LNG and
Panhandle Storage to Panhandle Eastern Pipe Line Company. As a result, Trunkline
LNG and Panhandle Storage became wholly owned subsidiaries of Panhandle Eastern
Pipe Line Company.
In conjunction with the acquisition, Panhandle's interests in Northern Border
Pipeline Company, Panhandle Field Services Company, Panhandle Gathering Company,
and certain other assets, including the Houston corporate headquarters building,
were transferred to other subsidiaries of Duke Energy; all intercompany accounts
and notes between Panhandle and Duke Energy subsidiaries were eliminated; and
with respect to certain other liabilities, including tax, environmental and
legal matters, CMS Energy and its affiliates are indemnified for any resulting
losses. In addition, Duke Energy agreed to continue its environmental clean-up
program at certain properties and to defend and indemnify Panhandle against
certain future environmental litigation and claims with respect to certain
agreed-upon sites or matters.
CMS Panhandle Holding privately placed $800 million of senior unsecured notes
and received a $1.1 billion initial capital contribution from CMS Energy to fund
the acquisition of Panhandle. On June 15, 1999, CMS Panhandle Holding was merged
into Panhandle, at which point the CMS Panhandle Holding notes became direct
obligations of Panhandle. In September 1999, Panhandle completed an exchange
offer which replaced the $800 million of notes originally issued by CMS
Panhandle Holding with substantially identical SEC-registered notes.
The acquisition by CMS Panhandle Holding was accounted for using the purchase
method of accounting in accordance with generally accepted accounting
principles. Panhandle allocated the purchase price paid by CMS Panhandle Holding
to Panhandle's net assets as of the acquisition date based on an appraisal
completed December 1999. Accordingly, the post-acquisition financial statements
reflect a new basis of accounting. Pre-acquisition period and post-acquisition
period financial results (separated by a heavy black line) are presented but are
not comparable.
PE-9
78
Assets acquired and liabilities assumed are recorded at their fair values.
Panhandle allocated the excess purchase price over the fair value of net assets
acquired of approximately $800 million to goodwill and is amortizing this amount
on a straight-line basis over forty years. The amortization of the excess
purchase price over 40 years reflects the nature of the industry in which
Panhandle competes as well as the long-lived nature of Panhandle's assets. As a
result of regulation, high replacement costs, and competition, entry into the
natural gas transmission and storage business requires a significant investment.
The excess purchase price over the prior carrying amount of Panhandle's net
assets as of March 29, 1999 totaled $1.3 billion, and was allocated as follows:
In Millions
- -------------------------------------------------------------
Property, plant and equipment $ 633
Accounts receivable 3
Inventory (9)
Goodwill 788
Regulatory assets, net (15)
Liabilities (72)
Long-term debt (6)
Other (16)
- -------------------------------------------------------------
Total $ 1,306
=============================================================
Pro forma results of operations for the first quarter 1999 as though Panhandle
had been acquired and purchase accounting applied at the beginning of 1999 are
as follows:
In Millions
- -------------------------------------------------------------
Quarter Ended
March 31, 1999
(Unaudited)
- -------------------------------------------------------------
Revenues $ 128
Net income 27
=============================================================
In March 2000, Trunkline, a subsidiary of Panhandle, acquired the Sea Robin
pipeline from El Paso Energy Corporation for a total cash price, including
certain transaction costs, of approximately $74 million (See Note 6). 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
which were made in April 2000, with supplemental refunds expected in July 2000.
On January 12, 2000, FERC issued an order on the remainder of the rate
proceeding which, if approved without modification, would result in a
substantial reduction to Trunkline's tariff rates which would impact future
revenues and require refunds. Trunkline has requested rehearing of certain
matters in this order.
PE-10
79
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. 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, 2000 and December 31, 1999,
Accounts Receivable included $55 million and $54 million, respectively, due from
natural gas producers, and Other Current Liabilities included $55 million and
$54 million, respectively, for related obligations.
In June 1998, Trunkline filed a petition with the FERC to abandon 720 miles of
its 26-inch diameter pipeline that extends from Longville, Louisiana to Bourbon,
Illinois. Trunkline requested permission to transfer the pipeline to an
affiliate, which entered into an option agreement with Aux Sable for potential
conversion of the line to allow transportation of hydrocarbon vapors. Trunkline
requested FERC to grant the abandonment authorization in time to separate the
pipeline from existing facilities and allow Aux Sable to convert the pipeline to
hydrocarbon vapor service by October 1, 2000, if the option was exercised. The
option expired on July 1, 1999 and was not renewed by Aux Sable. On November 8,
1999, the FERC issued a letter order dismissing Trunkline's filing without
prejudice to refiling the abandonment to reflect changed circumstances. On March
9, 2000, Trunkline refiled its abandonment application with FERC. This filing is
in conjunction with a plan for a limited liability corporation to convert the
line from natural gas transmission service to a refined products pipeline,
called Centennial Pipeline, by the end of 2001. Panhandle will own a one third
interest in the venture along with TEPPCO Partners L.P and Marathon Ashland
Petroleum LLC.
On May 19, 1999, Trunkline and Trunkline LNG submitted a compliance filing
advising the FERC that the acquisition by CMS Energy of Trunkline LNG triggered
certain provisions of a 1992 settlement. The settlement resolved issues related
to minimum bill provisions of the Trunkline LNG Rate Schedule PLNG-1, as well as
pending rate matters for Trunkline and refund matters for Trunkline LNG.
Specifically, the settlement provisions required Trunkline LNG, and Trunkline in
turn, to make refunds to customers, including Panhandle Eastern Pipe Line
Company and Consumers, who were parties to the settlement, if the ownership of
all or a portion of the LNG terminal was transferred to an unaffiliated entity.
The Commission approved the LNG settlement to be effective April 1, 1999.
Trunkline's refunds, which were made in April 2000, included $12 million to
Consumers Energy, $4 million to Panhandle Eastern Pipe Line Company, and $1
million to other Trunkline customers. In conjunction with the acquisition of
Panhandle by CMS Energy, Duke Energy indemnified Panhandle for this refund
obligation and reimbursed Trunkline for the refunds in April 2000. On May 1,
2000, Panhandle Eastern Pipe Line Company filed to flow through its portion of
the settlement amounts to its customers.
3. RELATED PARTY TRANSACTIONS
Amounts for 1999 reflect only related party transactions with CMS Energy and its
subsidiaries for the period after the sale of Panhandle to CMS Energy.
Intercompany interest expenses for the three months ended March 31, 2000 were
zero. Interest charges include $13 million for the three months ended March 31,
1999 for interest associated with notes payable to a subsidiary of Duke Energy.
Other income includes $1 million for the period ended March 31, 2000 for
interest on note receivable from CMS Capital.
PE-11
80
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,
- -------------------------------------------------------------------
2000 1999
----------- -------------
Receivables $ 9 $ 8
Accounts payable 1 16
- -------------------------------------------------------------------
4. GAS IMBALANCES
The Consolidated Balance Sheets include in-kind balances as a result of
differences in gas volumes received and delivered. Panhandle values gas
imbalances at the lower of cost or market.
5. INCOME TAXES
As described in Note 1, CMS Panhandle Holding acquired the stock of Panhandle
from subsidiaries of Duke Energy for a total of $2.2 billion in cash and
acquired debt. Panhandle treated the acquisition as an asset acquisition for tax
purposes, which eliminated Panhandle's deferred tax liability and gave rise to a
new tax basis in Panhandle's assets equal to the purchase price.
6. LONG TERM DEBT
On March 27, 2000, Panhandle issued $100 million of 8.25 percent senior notes
due 2010. Panhandle used the funds primarily to finance the purchase of Sea
Robin (See Note 1).
On March 29, 1999, CMS Panhandle Holding privately placed $800 million of senior
notes (See Note 1) including: $300 million of 6.125 percent senior notes due
2004; $200 million of 6.5 percent senior notes due 2009; and $300 million of 7.0
percent senior notes due 2029. On June 15, 1999, CMS Panhandle Holding merged
into Panhandle and Panhandle assumed the obligations of CMS Panhandle Holding
under the notes and the indenture. In September 1999, Panhandle completed an
exchange offer which replaced the $800 million of notes originally issued by CMS
Panhandle Holding with substantially identical SEC-registered notes.
In conjunction with the application of purchase accounting, Panhandle revalued
its existing notes totaling $300 million. This resulted in a net premium
recorded of approximately $5 million.
7. INVESTMENT IN AFFILIATES
LEE 8 STORAGE. Panhandle, through its subsidiary Panhandle Storage, owns a 40
percent interest in the Lee 8 partnership, which operates a 1.4 bcf natural gas
storage facility in Michigan. This interest results from the contribution of the
stock of Panhandle Storage to Panhandle Eastern Pipe Line Company by CMS
Panhandle Holding on March 29, 1999.
PE-12
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NORTHERN BORDER PARTNERS, L.P. Northern Border Partners, L.P. is a master
limited partnership that owns 70 percent of Northern Border Pipeline Company, a
partnership operating a pipeline transporting natural gas from Canada to the
Midwest area of the United States. In conjunction with the acquisition of
Panhandle by CMS Panhandle Holding, Panhandle transferred its interest in
Northern Border to a subsidiary of Duke Energy in the first quarter of 1999.
WESTANA GATHERING COMPANY. Westana Gathering Company is a joint venture that
provides gathering, processing and marketing services for natural gas producers
in Oklahoma. In conjunction with the acquisition of Panhandle by CMS Panhandle
Holding, Panhandle's interest in Westana Gathering Company was transferred to a
subsidiary of Duke Energy in the first quarter of 1999.
8. SFAS 71
As a result of Panhandle's new cost basis resulting from the merger with CMS
Panhandle Holding, which includes costs not likely to be considered for
regulatory recovery, in addition to the level of discounting being experienced
by Panhandle, it no longer meets the criteria of SFAS 71 and has discontinued
application of SFAS 71. Accordingly, upon acquisition by CMS Panhandle Holding,
the remaining net regulatory assets of approximately $15 million were eliminated
in purchase accounting (See Note 1).
9. COMMITMENTS AND CONTINGENCIES
CAPITAL EXPENDITURES: Panhandle estimates capital expenditures and investments,
including allowance for funds used during construction, to be approximately $60
million in 2001 and 2002. 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 discussed in
Note 1 to the Consolidated Financial Statements, 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 other PanEnergy
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 which 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.
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.
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.
PE-13
82
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. 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. The Illinois EPA included Panhandle 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 United States 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
Company'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 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 which 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 payments of
$29 million for the remainder of 2000 through the third quarter of 2001.
Management believes the probability that Panhandle will be required to perform
under this guarantee is remote.
PE-14
83
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, 2000, and the related consolidated statements of income, common
stockholder's equity and cash flows for the three-month periods ended March 31,
2000 and 1999. 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, 1999, and, in our
report dated February 25, 2000, 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, 1999, 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 10, 2000
PE-15
84
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, 1999. Reference is made to the Condensed Notes to the
Consolidated Financial Statements, in particular Note 2 - Uncertainties for CMS
Energy and Consumers, and Note 9 - 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
OXFORD TIRE RECYCLING: In an administrative order dated October 14, 1999, the
California Regional Water Control Board of the State of California named CMS
Generation as a potentially responsible party for the clean up of the waste from
the combustion of the Filbin Tire Pile owned by Oxford Tire Recycling of
Northern California, Inc. ("Oxford"). CMS Generation has not owned an interest
in Oxford since 1995. On April 3, 2000, in the Supreme Court of California for
the County of Stanislaus, the California Attorney General filed a complaint
against the potentially responsible parties for clean up of the site and
assessed penalties for violation of the California Regional Water Control Board
order. The complaint alleges $20 million of clean up costs to be shared among
all the potentially responsible parties.
CO-1
85
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
(4) (a) - 2nd Supplemental Indenture dated as of March 27, 2000, among
Panhandle, as Issuer and Bank One Trust Company, National
Association, as Trustee. Pursuant to Item 601(b)(4)(iii) of
Regulation S-K, in lieu of filing a copy of such agreement,
Panhandle agrees to furnish a copy of such agreement to the
Commission upon request.
(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
(27)(a) - CMS Energy: Financial Data Schedule
(27)(b) - Consumers: Financial Data Schedule
(27)(c) - Panhandle: Financial Data Schedule
(B) REPORTS ON FORM 8-K
CMS ENERGY
Current Reports filed February 1, 2000 and May 1, 2000 covering matters pursuant
to ITEM 5. OTHER EVENTS.
CONSUMERS
Current Reports filed February 1, 2000 and May 1, 2000 covering matters pursuant
to ITEM 5. OTHER EVENTS.
PANHANDLE
Current Report filed March 16, 2000 covering matters pursuant to ITEM 5. OTHER
EVENTS.
CO-2
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 15, 2000 By: /s/ A.M. Wright
---------------------------------------------
Alan M. Wright
Senior Vice President and
Chief Financial Officer
CONSUMERS ENERGY COMPANY
------------------------------------------------
(Registrant)
Dated: May 15, 2000 By: /s/ A.M. Wright
---------------------------------------------
Alan M. Wright
Senior Vice President and
Chief Financial Officer
PANHANDLE EASTERN PIPE LINE COMPANY
------------------------------------------------
(Registrant)
Dated: May 15, 2000 By: /s/ A.M. Wright
---------------------------------------------
Alan M. Wright
Senior Vice President,
Chief Financial Officer and Treasurer
CO-3
87
Exhibit Index
-------------
Exhibit No. Description
- ----------- -----------
(4) (a) - 2nd Supplemental Indenture dated as of March 27, 2000,
among Panhandle, as Issuer and Bank One Trust Company, National
Association, as Trustee. Pursuant to Item 601(b)(4)(iii) of
Regulation S-K, in lieu of filing a copy of such agreement,
Panhandle agrees to furnish a copy of such agreement to the
Commission upon request.
(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
(27)(a) - CMS Energy: Financial Data Schedule
(27)(b) - Consumers: Financial Data Schedule
(27)(c) - Panhandle: Financial Data Schedule
1
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, 2000 1999 1998 1997 1996 1995
--------------------------------------------------------------------
(b)
Earnings as defined (a)
- -----------------------
Consolidated net income $ 80 $ 277 $ 242 $ 244 $ 224 $ 195
Income taxes 53 64 100 108 137 113
Exclude equity basis subsidiaries (36) (84) (92) (80) (85) (57)
Fixed charges as defined, adjusted to
exclude capitalized interest of $10, $42, $28,
$13, $5 and $4 million for the three months
ended March 31, 2000 and for the years ended
December 31, 1999, 1998, 1997, 1996 and 1995,
respectively 188 395 395 360 313 299
-------------------------------------------------------------
Earnings as defined $ 285 $ 845 $ 645 $ 632 $ 589 $ 550
=============================================================
Fixed charges as defined (a)
- ----------------------------
Interest on long-term debt $ 148 $ 507 $ 319 $ 273 $ 230 $ 224
Estimated interest portion of lease rental 2 7 8 8 10 9
Other interest charges - 57 48 49 43 42
Preferred securities dividends and
distributions 35 96 77 67 54 42
---------------------------------------------------------------
Fixed charges as defined $ 185 $ 662 $ 452 $ 397 $ 337 $ 317
=============================================================
Ratio of earnings to fixed charges and
preferred securities dividends and distributions 1.54 1.28 1.43 1.59 1.75 1.74
============================================================
NOTES:
(a) Earnings and fixed charges as defined in instructions for Item 503 of
Regulation S-K.
(b) Excludes a cumulative effect of change in accounting after-tax gain of $43
million.
1
EXHIBIT (15)(a)
May 4, 2000
CMS Energy Corporation:
We are aware that CMS Energy Corporation has incorporated by reference in its
Registration Statements No. 33-47629, No. 33-60007, No. 33-61595, No. 33-62573,
No. 333-32229, No. 333-60795, No. 333-63229, No. 333-68937 and No. 333-76347 its
Form 10-Q for the quarter ended March 31, 2000, which includes our report dated
May 4, 2000 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)
May 4, 2000
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, 2000, which includes our report dated May 4, 2000 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
UT
0000811156
CMS ENERGY CORPORATION
1,000,000
3-MOS
DEC-31-2000
JAN-01-2000
MAR-31-2000
PER-BOOK
4,021
6,070
1,664
3,520
0
15,275
1
2,653
(151)
2,374
1,119
44
2,209
188
4,909
0
563
0
88
34
3,618
15,275
1,827
53
1,534
1,587
240
1
241
138
103
23
80
42
0
114
.71
.70
UT
0000201533
CONSUMERS ENERGY COMPANY
1,000,000
3-MOS
DEC-31-2000
JAN-01-2000
MAR-31-2000
PER-BOOK
4,021
615
480
1,821
0
6,937
841
645
491
1,977
395
44
806
151
1,201
0
55
0
86
33
2,189
6,937
1,126
53
939
992
134
2
136
42
94
9
85
79
0
293
0
0
5
0000076063
PANHANDLE EASTERN PIPE LINE COMPANY
1,000
3-MOS
DEC-31-2000
MAR-31-2000
0
0
99000
0
23000
259000
1640000
67000
2615000
138000
1193000
0
0
1000
1129000
2615000
0
136000
0
44000
22000
0
19000
70000
20000
32000
0
0
0
32000
0
0
Not meaningful since Panhandle Eastern Pipe Line Company is a wholly-owned
subsidiary.
