1
================================================================================
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 SEPTEMBER 30, 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.
- -----------------------------------------------------------------------------------------------------------------
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
---
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
October 31, 2000:
CMS ENERGY CORPORATION:
CMS Energy Common Stock, $.01 par value 120,876,752
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
================================================================================
2
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 SEPTEMBER 30, 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
Glossary................................................................. 3
PART I:
CMS Energy Corporation
Management's Discussion and Analysis................................ CMS-1
Consolidated Statements of Income................................... CMS-18
Consolidated Statements of Cash Flows............................... CMS-20
Consolidated Balance Sheets......................................... CMS-22
Consolidated Statements of Common Stockholders' Equity.............. CMS-24
Condensed Notes to Consolidated Financial Statements................ CMS-25
Report of Independent Public Accountants............................ CMS-44
Consumers Energy Company
Management's Discussion and Analysis................................ CE-1
Consolidated Statements of Income................................... CE-12
Consolidated Statements of Cash Flows............................... CE-13
Consolidated Balance Sheets......................................... CE-14
Consolidated Statements of Common Stockholder's Equity.............. CE-16
Condensed Notes to Consolidated Financial Statements................ CE-17
Report of Independent Public Accountants............................ CE-29
Panhandle Eastern Pipe Line Company
Management's Discussion and Analysis................................ PE-1
Consolidated Statements of Income................................... PE-6
Consolidated Statements of Cash Flows............................... PE-7
Consolidated Balance Sheets......................................... PE-8
Consolidated Statements of Common Stockholder's Equity.............. PE-10
Condensed Notes to Consolidated Financial Statements................ PE-11
Report of Independent Public Accountants............................ PE-16
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
2
3
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 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
Customer Choice Act............. Customer Choice and Electricity Reliability
Act, a Michigan statute enacted in June 2000
that allows all retail customers choice of
alternative electric suppliers no later than
January 1, 2002, provides for full recovery of
net stranded costs and implementation costs,
establishes a five percent reduction in
residential rates, establishes rate freeze and
rate cap, and allows for securitization
Detroit Edison.................. The Detroit Edison Company, a non-affiliated
company
DOE............................. U.S. Department of Energy
Dow............................. The Dow Chemical Company, a non-affiliated
company
Duke Energy..................... Duke Energy Corporation, a non-affiliated
company
3
4
EITF............................ Emerging Issues Task Force
Enterprises..................... CMS Enterprises Company, a subsidiary of CMS
Energy
EPA............................. Environmental Protection Agency
EPS............................. Earnings per share
FASB............................ Financial Accounting Standards Board
FERC............................ Federal Energy Regulatory Commission
FMLP............................ First Midland Limited Partnership, a
partnership which holds a 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
Michigan Transco................ Michigan Electric Transmission Company
MMBtu........................... Million British thermal unit
MPSC............................ Michigan Public Service Commission
MW.............................. Megawatts
NEIL............................ Nuclear Electric Insurance Limited, an industry
mutual insurance company owned by member
utility companies
NMC............................. Nuclear Management Company, formed in 1999 by
Northern States Power Company (now Xcel Energy
Inc.), Alliant Energy, Wisconsin Electric Power
Company, and Wisconsin Public Service Company
to operate and manage nuclear capacity owned by
the four utilities.
NOx............................. Nitrogen Oxide
NRC............................. Nuclear Regulatory Commission
NYMEX........................... New York Mercantile Exchange
Outstanding Shares.............. Outstanding shares of Class G Common Stock
4
5
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
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
SAB............................. Staff Accounting Bulletin
SEC............................. U.S. 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 Facility.......... $1 billion one-year revolving credit facility
maturing in June 2001
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
5
6
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
- ---------------------------------------------------------------------------------------------
Three months ended September 30, 2000 1999 Change
- ---------------------------------------------------------------------------------------------
Consolidated Net Income $ 55 $ 83 $ (28)
Net Income Attributable to Common Stocks:
CMS Energy 55 86 (31)
Class G - (3) 3
Earnings Per Average Common Share:
CMS Energy
Basic .51 .79 (.28)
Diluted .51 .78 (.27)
Class G
Basic and Diluted - (.38) .38
===========================================================================================
CMS-1
7
In Millions, Except Per Share Amounts
- ------------------------------------------------------------------------------------------------
Nine months ended September 30, 2000 1999 Change
- ------------------------------------------------------------------------------------------------
Consolidated Net Income $ 216 $ 256 $ (40)
Net Income Attributable to Common Stocks:
CMS Energy 216 248 (32)
Class G - 8 (8)
Earnings Per Average Common Share:
CMS Energy
Basic 1.95 2.29 (.34)
Diluted 1.93 2.25 (.32)
Class G
Basic and Diluted - .90 (.90)
==================================================================================================
The decrease in consolidated net income for the third quarter 2000 over the
comparable period in 1999 resulted from decreased earnings from the electric
utility, independent power production and marketing, services and trading
businesses, coupled with higher interest expense. Partially offsetting these
decreases were increased earnings from the gas utility business and from CMS
Energy's other diversified energy businesses, including the natural gas
transmission business, the oil and gas exploration and production business, and
the international energy distribution business, as well as gains on the sale of
non-strategic assets. CMS Energy's recurring asset optimization program is
expected to generate $50 million of pre-tax gains, or approximately $.30 per
diluted share, from asset sales annually. Third quarter 2000 results include
approximately $5 million, or $.04 per diluted share, of after-tax gains from
major asset sales, all of which exceeds the amount CMS Energy expects to sustain
in future years.
The decrease in consolidated net income for the nine months ended September 30,
2000 over the comparable period in 1999 resulted from decreased earnings from
the electric and gas utilities, coupled with higher interest expense principally
related to the Panhandle acquisition. Partially offsetting these decreases were
increased earnings from CMS Energy's diversified energy businesses, including
the natural gas transmission business primarily reflecting ownership of
Panhandle for the entire first nine months of 2000 versus only the second and
third quarters of 1999, the independent power production business, the oil and
gas exploration and production business, the international energy distribution
business, and the marketing, services and trading business, as well as gains on
the sale of non-strategic assets. The nine months ended September 30, 2000
results include approximately $55 million, or $.47 per diluted share, of
after-tax gains from major asset sales. Approximately $.17 per diluted share of
after-tax gains exceeds the amount CMS Energy expects to sustain in future years
as part of its recurring asset optimization program.
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: For the three months ended September 30, 2000,
electric pretax operating income decreased $50 million from the comparable
period in 1999. The earnings decrease reflects lower temperature-related
electric revenues, the purchase of electricity options, which were not needed
due to the milder-than-expected summer temperatures, and the passage of the
Customer Choice Act in Michigan, partially offset by decreased operating
expenses. The Customer Choice Act required an immediate five percent electric
rate reduction for residential customers, while commercial and industrial
CMS-2
8
rates remain unchanged. Power costs increased significantly due to higher
purchased electricity options costs in anticipation of a predicted hot summer
that did not materialize and due to additional purchased power as a result of
unscheduled outages at Consumers' internal generating facilities. For the nine
months ended September 30, 2000, electric pretax operating income decreased $83
million from the comparable period in 1999. The earnings decrease reflects the
increased cost of power and electricity options and the impact of the electric
rate reduction, partially offset by increased electric sales revenue and
decreased operations expenses. During the current year, Consumers needed
additional purchased power to meet customer requirements due to scheduled and
unscheduled outages at Consumers' internal generating facilities. Consumers also
had higher costs to purchase electricity options this year to ensure an adequate
supply of power for its customers for a predicted hotter-than-normal summer.
Current-year operating expenses also reflect benefits of $11 million related to
reductions in employee paid absence cost. The following table quantifies these
impacts on pretax operating income:
In Millions
- ------------------------------------------------------------------------------------------------
Three Months Nine Months
Ended September 30 Ended September 30
Change Compared to Prior Year 2000 vs 1999 2000 vs 1999
- ------------------------------------------------------------------------------------------------
Electric deliveries $ (7) $ 5
Power supply costs and related revenue (45) (70)
Rate decrease (14) (19)
Non-commodity revenue 7 3
Operation and maintenance expense 11 2
General taxes and depreciation expense (2) (4)
------------------------------
Total change $ (50) $ (83)
===============================================================================================
ELECTRIC DELIVERIES: Electric deliveries were 10.7 billion kWh for the three
months ended September 30, 2000, slightly less than the third quarter of 1999.
Electric deliveries were 30.4 billion kWh for the nine months ended September
30, 2000, again a slight decrease from the corresponding 1999 period. Total
electric deliveries decreased due to lower intersystem sales, and less usage by
residential and industrial customers.
POWER SUPPLY COSTS:
In Millions
- ----------------------------------------------------------------------------------
September 30 2000 1999 Change
- ----------------------------------------------------------------------------------
Three months ended $ 355 $ 335 $ 20
Nine months ended 949 906 43
==================================================================================
Power supply costs increased for the three months ended September 30, 2000 from
the comparable period in 1999 and also increased for the nine-month period,
primarily due to higher interchange power costs and electricity options costs.
Consumers had to purchase more, higher-priced external power because of
decreased internal generation resulting from scheduled and unscheduled outages.
Consumers also incurred higher electricity options costs to reserve the
availability of extra power in 2000 due to a predicted hotter-than-normal
summer.
CMS-3
9
CONSUMERS' GAS UTILITY RESULTS OF OPERATIONS
GAS PRETAX OPERATING INCOME: Gas pretax operating income increased by $15
million in the three months ended September 30, 2000. The earnings increase
reflects higher gas deliveries due to cooler temperatures in the three months
ended September 30, 2000, lower operating costs and the absence of a 1999
regulatory disallowance of $7 million. Gas pretax operating income decreased in
the nine months ended September 30, 2000 by $43 million. The earnings decrease
primarily reflects the recording of a $45 million regulatory obligation related
to gas prices, which are significantly above the gas commodity rate that is
frozen through March 31, 2001. This frozen commodity rate relates to a
three-year experimental gas choice pilot program, which provides Consumers the
opportunity to benefit or lose from changes in commodity gas prices. See Note 2,
Uncertainties, "Gas Rate Matters -- Gas Restructuring", for more detailed
information on this matter. The earnings decrease also reflects decreased gas
deliveries in the nine months ended September 30, 2000 due to warmer
temperatures during the first quarter of 2000. Partially offsetting these
decreases were increased gas wholesale and retail services revenue and lower
operating costs including benefits of $5 million related to reductions in
employee paid absence cost. The following table quantifies these impacts on
Pretax Operating Income.
In Millions
- -------------------------------------------------------------------------------------------
Three Months Nine Months
Ended September 30 Ended September 30
Change Compared to Prior Year 2000 vs 1999 2000 vs 1999
- -------------------------------------------------------------------------------------------
Gas deliveries $ 5 $ (2)
Gas commodity costs and related revenue 8 (52)
Gas wholesale and retail services 1 5
Operation and maintenance expense 4 7
General taxes and depreciation expense (3) (1)
----- ------
Total change $ 15 $ (43)
===========================================================================================
GAS DELIVERIES: Gas system deliveries for the three months ended September 30,
2000, including miscellaneous transportation, totaled 45 bcf, an increase of 1
bcf or 3 percent from the comparable period in 1999. The increased deliveries
reflect cooler temperatures during the third quarter of 2000. Gas system
deliveries for the nine months ended September 30, 2000, including miscellaneous
transportation, totaled 273 bcf, an increase of 1 bcf or .1 percent from the
comparable period in 1999.
COST OF GAS SOLD:
In Millions
- -------------------------------------------------------------------------------------
September 30 2000 1999 Change
- -------------------------------------------------------------------------------------
Three months ended $ 60 $ 44 $ 16
Nine months ended 450 428 22
=====================================================================================
The cost of gas sold increased for the three months ended September 30, 2000 due
to higher gas prices and increased gas deliveries due to cooler than normal
temperature. Higher gas prices also impacted the cost of gas sold for the nine
months ended September 30, 2000. These higher gas costs were partially offset by
decreased sales from warmer-than-normal temperatures during the first quarter of
2000.
CMS-4
10
NATURAL GAS TRANSMISSION RESULTS OF OPERATIONS
PRETAX OPERATING INCOME: Pretax operating income for the three months ended
September 30, 2000 increased $2 million (4 percent) from the comparable period
in 1999. The increase reflects increased earnings primarily from a more than 100
percent increase in LNG shipments over the comparable period in 1999, partially
offset by decreased earnings from international operations. Pretax operating
income for the nine months ended September 30, 2000 increased $80 million (87
percent) from the comparable period in 1999. The increase reflects earnings from
Panhandle and Sea Robin, which CMS Energy acquired in March 1999 and March 2000,
respectively, as well as increased earnings from other international and
domestic operations and lower operating expenses.
INDEPENDENT POWER PRODUCTION RESULTS OF OPERATIONS
PRETAX OPERATING INCOME: Pretax operating income for the three months ended
September 30, 2000 decreased $3 million (6 percent) from the comparable period
in 1999. The decrease primarily reflects decreased domestic plant earnings,
primarily resulting from the sale of the Lakewood plant in May 2000, and higher
operating expenses. Partially offsetting these decreases were the earnings
benefits from a new facility in Africa and increased earnings from other
international plant operations. Pretax operating income for the nine months
ended September 30, 2000 increased $16 million (13 percent) from the comparable
period in 1999. The increase is attributable to earnings from the new African
facility and an Asian facility that commenced operations in the third quarter of
1999, the restructuring of a power supply contract and increased earnings from
other international plant operations. Partially offsetting these increases were
decreased earnings from domestic plants primarily due to the sale of the
Lakewood plant in May 2000 and lower earnings from the MCV Facility, a scheduled
reduction in operating fees and higher operating expenses.
OIL AND GAS EXPLORATION AND PRODUCTION RESULTS OF OPERATIONS
PRETAX OPERATING INCOME: Pretax operating income for the three months ended
September 30, 2000 increased $9 million (225 percent) from the comparable period
in 1999 as a result of higher realized commodity prices, increased production
from Venezuelan properties, and increased production from new core areas,
including West Texas and Powder River properties, and decreased exploration,
depreciation, depletion and amortization expenses. This increase was partially
offset by increased general and administrative expenses and reduced earnings
from northern Michigan and Ecuador properties, which were sold in March 2000 and
June 2000, respectively. Pretax operating income for the nine months ended
September 30, 2000 increased $12 million (109 percent) from the comparable
period in 1999 as a result of higher realized commodity prices, increased
production from Venezuelan properties, increased production from new core areas,
including West Texas and Powder River properties, and decreased depreciation,
depletion and amortization expenses due to the sale of the Michigan and Ecuador
properties, partially offset by lower production as a result of the
aforementioned sales and higher operating, general and administrative, and
exploration costs.
MARKETING, SERVICES AND TRADING RESULTS OF OPERATIONS
PRETAX OPERATING INCOME: Pretax operating income for the three months ended
September 30, 2000 decreased $2 million from the comparable period in 1999. The
decrease primarily reflects decreased earnings from power trading activities,
primarily due to cooler than normal summer weather in Michigan, partially offset
by increased earnings from wholesale gas activities, which benefited from
natural gas market price increases. The volumes of marketed natural gas and
power traded increased 72 percent and over 1,000 percent, respectively. Pretax
operating income for the nine months ended September 30, 2000
CMS-5
11
increased $2 million from the comparable period in 1999 as a result of increased
wholesale gas earnings due to capturing gains from natural gas price market
volatility, increased LNG sales and earnings benefits from an energy management
services acquisition made in late 1999. The volumes of marketed natural gas and
power traded increased 65 percent and 546 percent, respectively. Partially
offsetting these increases were decreased earnings from power trading
activities, primarily due to cooler than normal summer weather in Michigan.
INTERNATIONAL ENERGY DISTRIBUTION RESULTS OF OPERATIONS
PRETAX OPERATING INCOME: Pretax operating income for the three months ended
September 30, 2000 increased $8 million from the comparable period in 1999. The
increase primarily reflects earnings from new investments in a Brazilian
electric distribution utility, increased earnings from Argentine and Venezuelan
electric distribution utilities, and lower operating expenses. Pretax operating
income for the nine months ended September 30, 2000 increased $22 million from
the comparable period in 1999. The increase is the result of increased earnings
from new investments in a Brazilian electric distribution utility, increased
earnings from Argentine and Venezuelan electric distribution utilities, and
lower operating expenses.
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: CMS Energy, through its subsidiaries, is exposed to market
fluctuations in the price of natural gas, oil, electricity and natural gas
liquids. CMS Energy employs established policies and procedures to manage these
risks using various commodity derivatives, including futures contracts, options
and swaps (which require a net cash payment for the difference between a fixed
and variable price.) The prices of these energy commodities can fluctuate, among
other things, because of changes in the supply of and demand for those
commodities. To minimize adverse price changes, CMS Energy also hedges certain
inventory and purchases and sales contracts. Based on a sensitivity analysis,
CMS Energy estimates that if energy commodity prices average 10 percent higher
or lower, pretax operating income for the subsequent twelve months would
increase or decrease, respectively, by approximately $17 million. These
hypothetical 10 percent shifts in quoted commodity prices would not have had a
material impact on CMS Energy's consolidated financial position or cash flows as
of September 30, 2000. The analysis assumes that the maximum exposure associated
with purchased options is premiums paid for the options. The analysis also does
not quantify short-term exposure to hypothetically adverse price fluctuations in
commodity inventories.
INTEREST RATE RISK: CMS Energy is exposed to interest rate risk resulting from
the issuance of fixed-rate
CMS-6
12
debt, variable-rate debt and trust preferred securities, and interest rate
swaps and interest rate lock agreements. CMS Energy uses a combination of
fixed-rate and variable-rate debt, as well as interest rate swaps and rate locks
to manage and mitigate interest rate risk exposure when deemed appropriate,
based upon market conditions. CMS Energy employs these strategies to attempt to
provide and maintain the lowest cost of capital. In August 2000, CMS Energy
entered into floating-to-fixed interest rate swap agreements for a total
notional amount of $1.0 billion to exchange variable rate interest payment
obligations to fixed rate obligations to minimize potential adverse interest
rate changes. At September 30, 2000 the carrying amounts of long-term debt and
trust preferred securities were $7.2 billion and $1.1 billion, respectively,
with corresponding fair values of $7.0 billion and $1.0 billion, respectively.
The fair value of CMS Energy's interest rate swaps at September 30, 2000, with a
notional amount of $1.7 billion, was $4 million, representing the amount CMS
Energy would pay upon settlement. Based on a sensitivity analysis at September
30, 2000, CMS Energy estimates that if market interest rates average 10 percent
higher or lower, pretax operating income for the subsequent twelve months would
decrease or increase, respectively, by approximately $7 million. In addition,
based on a 10 percent adverse shift in market rates, CMS Energy would have an
exposure of approximately $365 million to the fair value of its long-term debt
and trust preferred securities if it had to refinance all of its long-term
fixed-rate debt and trust preferred securities. CMS Energy does not intend to
refinance its fixed-rate debt and trust preferred securities in the near term
and believes that any adverse change in interest rates would not have a material
effect on CMS Energy's consolidated financial position or cash flows as of
September 30, 2000.
CURRENCY EXCHANGE RISK: CMS Energy is exposed to foreign currency risk that
arises from investments in foreign operations. CMS Energy uses forward exchange
and option contracts to hedge certain investments in foreign operations. At
September 30, 2000, CMS Energy's primary foreign currency exchange rate
exposures were the Brazilian real, the Argentine peso and the Australian dollar.
Based on a sensitivity analysis at September 30, 2000, a 10 percent adverse
shift in currency exchange rates would not have a material effect on CMS
Energy's consolidated financial position or results of operations as of
September 30, 2000, but would result in a net cash settlement of approximately
$26 million. The estimated fair value of the foreign exchange and option
contracts at September 30, 2000 was $24 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 September 30, 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 nine months of 2000, Consumers paid $126 million
in common dividends and Enterprises paid $481 million in common dividends and
distributions to CMS Energy. In October 2000, Consumers declared a $61 million
dividend payable in November 2000 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 $163
CMS-7
13
million and $440 million for the first nine months of 2000 and 1999,
respectively. The $277 million decrease resulted primarily from a decrease in
earnings, excluding gains from asset sales, primarily resulting from gas
purchase prices that were significantly higher than the frozen gas customer rate
and the electric rate reduction required by the customer choice legislation
enacted in June 2000, and the timing of cash receipts and payments related to
working capital items. CMS Energy uses its cash derived from operating
activities primarily to maintain and expand its international and domestic
businesses, to maintain and expand electric and gas systems of Consumers, to pay
interest on and retire portions of its long-term debt, and to pay dividends.
INVESTING ACTIVITIES: CMS Energy's consolidated net cash used in investing
activities totaled $372 million and $2.718 billion for the first nine months of
2000 and 1999, respectively. The decrease of $2.346 billion primarily reflects
the acquisition of Panhandle in March 1999 for $1.9 billion and a $555 million
increase in proceeds from the sales of assets. CMS Energy's expenditures
(excluding acquisitions) during the first nine months of 2000 for its utility
and diversified energy businesses were $357 million and $436 million,
respectively, compared to $304 million and $479 million, respectively, during
the comparable period in 1999.
FINANCING ACTIVITIES: CMS Energy's net cash provided by financing activities
totaled $358 million and $2.411 billion for the first nine months of 2000 and
1999, respectively. Net cash provided in 1999 primarily related to funding the
approximately $1.9 billion Panhandle acquisition in March 1999. The decrease of
$2.053 billion in net cash provided by financing activities resulted from a
decrease of $1.988 billion in the issuance of new securities (see table below
for securities issued in first nine months of 2000), an increase in the
retirement of bonds, other long-term debt and trust preferred securities ($346
million), an increase in the repurchase of common stock ($129 million), and a
decrease in the issuance of common stock ($69 million), partially offset by
decreases in the retirement of notes payable ($239 million) and preferred stock
($194 million).
In Millions
- -------------------------------------------------------------------------------------------------------------------
Distribution/ Principal
Month Issued Maturity Interest Rate Amount Use of Proceeds
- -------------------------------------------------------------------------------------------------------------------
CMS ENERGY
GTNs Series E (1) (1) 9.00%(1) $102 General corporate purposes
Trust Preferred
Securities (2) August 2004 7.25% 220 To redeem the Trust
Preferred Securities
of CMS RHINOS Trust
-----------
322
PANHANDLE
Senior Notes March 2010 8.25% 100 To fund acquisition of
Sea Robin and general
corporate purposes
-----------
100
-----------
Total $422
====================================================================================================================
CMS-8
14
(1) GTNs are issued from time to time with varying maturity dates. The rate
shown herein is a weighted average interest rate.
(2) Refer to Note 3 for further information regarding these securities.
For the first nine months of 2000, CMS Energy declared and paid $122 million in
cash dividends to holders of CMS Energy Common Stock. In October 2000, the Board
of Directors declared a quarterly dividend of $.365 per share on CMS Energy
Common Stock, payable in November 2000.
OTHER INVESTING AND FINANCING MATTERS: At September 30, 2000, the book value per
share of CMS Energy Common Stock was $21.02.
At November 1, 2000, CMS Energy had an aggregate $646 million in securities
registered for future issuance.
CMS Energy's Senior Credit Facility consists of a $1 billion one-year revolving
credit facility maturing in June 2001. Additionally, CMS Energy has unsecured
lines of credit as anticipated sources of funds to finance working capital
requirements and to pay for capital expenditures between long-term financings.
At September 30, 2000, the total amount available under the Senior Credit
Facility was $60 million, and under the unsecured lines of credit was $63
million. Subsequent to the October 2000 senior note and equity issuances
described below, the total amounts available at November 1, 2000 under the
Senior Credit Facility and unsecured lines of credit were $900 million and $63
million, respectively. 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.
In October 2000, CMS Energy sold $500 million aggregate principal amount of
9.875 percent senior notes due 2007. Net proceeds from the sale were
approximately $489 million. CMS Energy will ultimately use the net proceeds from
this offering to repay $300 million aggregate principal amount of 7.375 percent
unsecured notes due November 15, 2000 and to reduce the outstanding balance
under the Senior Credit Facility. Pending application of the net proceeds to the
repayment at maturity of these unsecured notes later in 2000, CMS Energy used
the proceeds to reduce the outstanding balance under the Senior Credit Facility.
In October 2000, as part of its financial plan to strengthen the balance sheet
as discussed further in the Outlook-Financial Plan section below, CMS Energy
sold 11 million shares of CMS Energy Common Stock. CMS Energy
used the net proceeds of approximately $305 million primarily to repay
borrowings under the Senior Credit Facility. CMS Energy used the remaining
amounts to repay various lines of credit.
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. From
December 1999 through October 31, 2000, CMS Energy had sold or had reached
agreements to sell $689 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 and gas
properties, its ownership interest in the Lakewood Cogeneration plant located in
Lakewood, New Jersey, and all of its ownership interest in certain oil reserves
located in Ecuador. These asset sales have resulted in total cash proceeds and
associated reduction of consolidated
CMS-9
15
project debt of approximately $870 million. CMS Energy plans to continue to sell
additional 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 50
percent 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 as an asset on the balance sheet. CMS
Energy, however, continues to evaluate various financial and accounting
alternatives for Loy Yang by year-end, including continuing the sale process.
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
- ---------------------------------------------------------------------------------------------
Years Ending December 31 2000 2001 2002
- ---------------------------------------------------------------------------------------------
Consumers electric operations (a) (b) $ 440 $ 580 $ 545
Consumers gas operations (a) 115 140 145
Natural gas transmission 305 130 260
Independent power production 430 200 215
Oil and gas exploration and production 158 160 165
Marketing, services and trading 32 30 5
International energy distribution 133 25 -
Other 17 25 25
---------------------------------------------
$ 1,630 $ 1,290 $ 1,360
=============================================================================================
(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; 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.
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 regional
diversified energy company developing energy
CMS-10
16
facilities and marketing energy-related services in the United States and
selected world growth markets. The key elements of the strategy to achieve this
objective are as follows:
- Effectively implement the Michigan electric utility restructuring
legislation and gas utility customer choice program;
- Use the natural gas pipeline business for growth opportunities
across other CMS Energy businesses;
- Expand the range of energy-related services;
- Expand CMS Energy's presence in select high-growth international
markets through the diversified energy businesses;
- Grow the marketing, services and trading activities to optimize
and leverage gas and electric assets in the United States; and
- Continued management of the asset portfolio.
FINANCIAL PLAN
In October 2000, CMS Energy announced a program to strengthen its balance sheet
while maintaining its forecasted $2.37 sustainable earnings per share guidance
for the year 2000, $2.75 sustainable earnings per share guidance for 2001 and
its forecasted 10 percent annual growth rate thereafter. As a part of that
program, CMS Energy issued $305 million of CMS Energy Common Stock in October
2000. In addition, CMS Energy intends to execute an initial public offering of
up to 49 percent of its ownership interest in CMS Oil and Gas in the first
quarter of 2001. CMS Energy anticipates that the combined actions will raise
approximately $800 million of cash and generate about $450 million of equity.
CMS Energy intends to use the $800 million of proceeds to reduce debt and
supplement the $1.4 billion asset sale program currently underway. While there
is no assurance that this forecasted level of earnings and growth will be
achieved, this guidance and growth assumes, among other things, normal weather
conditions for the utility business and successful implementation of
Securitization.
Under the asset sale program, CMS Energy identified for possible sale certain
assets expected to contribute little or no earnings benefit in the short to
medium terms. With the sale of certain of these assets, CMS intends to generate
approximately $1 billion of asset sale proceeds and $400 million of consolidated
project debt eliminations from asset sales by early 2001. As of October 31,
2000, CMS Energy sold assets resulting in approximately $870 million of cash
proceeds and associated debt reduction of consolidated project debt. There are
no assurances that CMS Energy can sell an additional $530 million of assets by
early 2001 as planned.
CMS Energy also intends to enhance long-term growth through a portfolio
management program that entails the ongoing sale of assets. CMS Energy expects
to reinvest the proceeds from this program in assets having greater potential
for synergies with its existing or planned assets. In particular, CMS Energy is
reviewing its options regarding certain assets performing below prior
expectations, including generating assets in Argentina. Under the program, CMS
Energy continues to seek improvement in the operating efficiency and
profitability of all assets retained in its portfolio.
The Board of Directors has approved the repurchase of up to 10 million shares of
CMS Energy Common Stock, from time to time, in open market or private
transactions. From February through April 2000,
CMS-11
17
CMS Energy repurchased approximately 6.6 million shares at a total cost of $129
million. CMS Energy does not anticipate repurchase of additional shares in the
near-term while strengthening its balance sheet.
DIVERSIFIED ENERGY OUTLOOK
CMS Energy continues to sharpen its geographic focus on key growth areas where
it already has significant business concentrations and opportunities. These
markets are India, the Middle East, North America, South America and, for CMS
Oil and Gas, West Africa. In pursuing global growth, CMS Energy intends to make
energy investments that provide expansion opportunities for multiple existing
businesses. For example, CMS Energy seeks to capitalize on its West Africa oil
and gas reserves by expanding the undersea pipeline and onshore processing
facilities in this area. CMS Energy intends to use the gas from the processing
plant in a new methanol-producing plant and in a gas-fired power plant in West
Africa. CMS Energy is extending the gas pipelines in South America to carry fuel
for power plants in that area. In addition, a CMS Energy subsidiary is a partner
in the first independent power and water project in the United Arab Emirates,
and another subsidiary is building CMS Energy's third power plant in India.
These growth plans are subject to political and economic factors over which CMS
Energy has no control, such as changes in foreign governmental and regulatory
policies (including changes in industrial regulation and control and changes in
taxation), changing political conditions and international monetary
fluctuations.
In the United States, CMS Energy also intends to grow its oil and gas
exploration and production business by aggressively developing the West Texas
and Powder River gas reserves.
CMS Energy intends to use its marketing, services and trading business to
improve the return on other CMS Energy businesses. CMS Energy plans to continue
centralizing the marketing of energy products produced by various CMS Energy
non-utility businesses. Other strategies include expanding the industrial and
commercial energy services to enhance CMS Energy's commodity marketing 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 2005
based on a steadily growing customer base. This growth rate does not take into
account the impact of electric industry restructuring, including the impact of
the Customer Choice Act that allows customers to choose their electricity
supplier, 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: Since 1997, there have been repeated
efforts made in the Michigan Legislature to enact electric utility restructuring
legislation. These efforts resulted in the passage of the Customer Choice Act,
which became effective June 5, 2000.
Generally, electric utility restructuring is the regulatory and legislative
attempt to introduce competition to the electric industry by allowing customers
to choose their supplier of electricity generation. Such competition affects,
and will continue to affect, Consumers' retail electric business. Several years
ago, prior to the enactment of the Customer Choice Act, Consumers had entered
multi-year electric supply contracts with a number of its largest industrial
customers to provide power to some of their facilities and the MPSC approved
these contracts as part of its phased introduction to competition. During the
period from 2000 through 2005, some of these contracts can be terminated or
restructured. These contracts involve approximately 600 MW of customer power
supply requirements. The ultimate
CMS-12
18
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, effective January 1, 2001,
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 restructure and continue
certain parts of the MEPCC control area and joint transmission operations, but
expressly exclude any merchant operations (electricity purchasing, sales, and
dispatch operations). Consumers is unable to predict the outcome of these
negotiations, but does not anticipate any adverse impacts caused by
restructuring of the MEPCC. In the interim, Detroit Edison negotiated with
Consumers a one-month extension of the current agreement's termination effective
date to February 1, 2001. Consumers is in the process of establishing systems
and procedures to perform independent merchant operations, which are expected to
be in place by February 1, 2001. The termination of joint merchant operations
with Detroit Edison will open Detroit Edison and Consumers to wholesale market
competition as individual companies. Consumers can not predict the financial
impact of terminating these joint operations.
In part, because of certain policy pronouncements by the FERC, Consumers joined
the Alliance RTO and recently filed an application with the FERC to transfer
ownership and control of its transmission facilities to a wholly owned
subsidiary, Michigan Transco. This represents the first step in Consumers' plan
to transfer control of or to divest itself of ownership, operation and control
of its transmission assets.
Uncertainty exists with respect to the enactment of federal electric industry
restructuring legislation. A variety of bills introduced in Congress in recent
years have sought to change existing federal regulation of the industry. These
federal bills could potentially affect or supercede state regulation; however,
none have been enacted.
CMS Energy cannot predict the outcome of these electric industry-restructuring
issues on its financial position, liquidity, or results of operations.
RATE MATTERS: Prior to June 5, 2000 there were several pending rate issues that
could have affected Consumers' electric business. As a result of the passage of
the Customer Choice Act, certain MPSC rate proceedings and a complaint by ABATE
seeking a reduction in rates have been dismissed.
For further information and material changes relating to the rate matters and
restructuring of the electric utility industry, see Note 1 and Note 2,
incorporated by reference herein.
NUCLEAR MATTERS: Subsequent to quarter end, Consumers has signed an agreement to
become a full partner in NMC, acquiring a financial interest in NMC and a
position on the NMC Board of Directors. Consumers will transfer responsibility
for the operation of its Palisades nuclear plant to NMC. NMC was formed by four
upper Midwest utilities in February 1999 to operate seven nuclear units at five
plant sites in Wisconsin, Minnesota and Iowa. With Consumers as a partner, NMC
will have responsibility for operating eight units with 4,500 megawatts of
generating capacity.
Consumers will retain ownership of the plant, its 789 MW output, the spent fuel
on site, and ultimate responsibility for the safe operation, maintenance and
decommissioning of the plant. Approval will be sought from the NRC for an
amendment to Palisades' operating license designating NMC as the plant's
operator. Under this agreement, salaried Palisades employees will become NMC
employees in approximately mid 2001. Union employees will work under NMC
supervision pursuant to their existing labor contract as Consumers employees.
This agreement will benefit Consumers by consolidating expertise and controlling
costs and resources among all of the nuclear plants being operated by the five
NMC member companies. The ultimate financial impact is uncertain.
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
CMS-13
19
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) electric
industry restructuring, how the MPSC ultimately calculates the amount of
Stranded Costs and the related true-up adjustments and the manner in which the
true-up operates, and the ability to recover fully the cost of doing business
under the rate caps; 4) the successful sale of Securitization bonds on a timely
basis; 5)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; 6) the transfer of Consumers transmission facilities to
Michigan Transco and its successful disposition or integration into an RTO and
7) ongoing issues relating to the storage of spent nuclear fuel and the
operating life of Palisades and the successful operation of NMC. For detailed
information about these trends or uncertainties, see Note 2, Uncertainties,
incorporated by reference herein.
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.
GAS RESTRUCTURING: In December 1997, the MPSC approved Consumers' application to
implement a gas customer choice pilot program. The program was designed to
encourage Consumers to minimize its purchased natural gas commodity costs while
providing rate stability for its customers. This pilot program became effective
on April 1, 1998. The pilot program ends on March 31, 2001. The program allows
up to 300,000 residential, commercial and industrial retail gas sales customers
to choose an alternative gas commodity supplier in direct competition with
Consumers. As of September 30, 2000, more than 155,000 customers chose
alternative gas suppliers, representing approximately 39 bcf of gas load.
Customers who had voluntarily chosen to remain as sales customers of Consumers
will not see a rate change in their gas rates. This three-year program: 1)
freezes gas distribution rates through March 31, 2001, establishing a delivered
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. The Michigan appellate courts have affirmed the pilot
program in its entirety the December 1997 MPSC order. On October 13, 2000, the
MPSC adopted model terms and conditions for permanent gas customer choice
programs. On October 24, 2000, the MPSC approved Consumers' voluntary
application to establish a permanent customer choice program in its service
territory beginning April 1, 2001 after the pilot program expires. Beginning
April 1, 2001, Consumers will no longer be subject to a frozen gas commodity
cost. Consumers will then return to a gas cost recovery mechanism such that it
will recover all prudently incurred natural gas commodity costs from it
customers. Under the permanent gas customer choice program, up to 600,000 of
Consumers' natural gas customers will be eligible to participate in the program
beginning April 1, 2001. By April 1, 2002, up to 900,000 gas customers will be
eligible to participate. All of Consumers' gas customers will be eligible to
select an alternate natural gas supplier beginning April 1, 2003. Consumers
would continue to transport and distribute gas to these customers.
Recent significant increases in gas prices have exposed Consumers to gas
commodity losses during the last year of the pilot program. Additional exposure
to losses could occur if the cost of purchased gas exceeds $7.00 per mcf or
abnormal weather causes additional gas purchases. Consumers recorded a
regulatory
CMS-14
20
liability of $45 million in the second quarter 2000 to reflect estimated losses
due to increases in natural gas commodity prices. On October 24, 2000, the MPSC
approved Consumers' application to reclassify recoverable, low-cost, base gas in
Consumers' gas storage reservoirs. The MPSC allowed Consumers to begin
immediately to include the cost of its recoverable base gas with higher cost
purchased gas. The gas accounting order is expected to eliminate the need for
Consumers to recognize any further losses related to gas commodity cost
under-recoveries.
UNCERTAINTIES: CMS Energy's 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) successful implementation of the new
expanded gas customer choice program beginning in April 2001; 3) permanent gas
industry restructuring; and 4) implementation of the GCR mechanism in April 2001
and the success or failure of initiatives undertaken to protect against gas
commodity price increases. For further detailed information about these
uncertainties, see Note 2.
CONSUMERS' OTHER OUTLOOK
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 growth in the United
States and derive added value through expansion opportunities for multiple CMS
Energy businesses. The growth strategy around Panhandle includes enhancing the
opportunities for other CMS Energy businesses involved in electric power
generation and distribution, mid-stream activities (gathering and processing),
and exploration and production. By providing additional transportation, storage
and other asset-based value-added services to customers such as gas-fueled power
plants, local distribution companies, industrial and end-users, marketers and
others, CMS Energy expects to expand its natural gas pipeline business. CMS
Energy also plans to convert certain Panhandle pipeline facilities through a
joint-venture (See Note 2). Panhandle, however, continues to attempt to maximize
revenues from existing assets and to advance acquisition opportunities and
development projects that provide expanded services to meet the specific needs
of customers.
UNCERTAINTIES: Panhandle's results of operations and financial position may be
affected by a number of trends or uncertainties that have, or Panhandle
reasonably expects could have, a material impact on income from continuing
operations and cashflows. Such trends and uncertainties include: 1) the
increased competition in the market for transmission of natural gas to the
Midwest causing pressure on prices charged by Panhandle and the potential for
the increasing necessity by Panhandle to discount prices (reducing revenues); 2)
the current market conditions causing more contracts to be of shorter duration,
which may increase revenue volatility; 3) the effects of a January 2000 FERC
order that could, if approved without modification upon rehearing, reduce
Trunkline's tariff rates and future revenue levels; 4) the expected increase in
competition for LNG terminalling services, and the volatility in natural gas
prices, creating volatility for LNG terminalling revenues; 5) the impact of
future rate cases, if any, for any of Panhandle's regulated operations; and 6)
current initiatives for additional federal rules and legislation regarding
pipeline safety.
REGULATORY MATTERS: For detailed information about Panhandle's regulatory
uncertainties see Note 2, Uncertainties -- Panhandle Matters, incorporated by
reference herein.
CMS-15
21
OTHER MATTERS
NEW ACCOUNTING RULES
In June 1998, the FASB issued SFAS 133, Accounting for Derivative Instruments
and Hedging Activities, which has been deferred by SFAS 137, Accounting for
Derivative Instruments and Hedging Activities - Deferral of the Effective Date
of FASB Statement No. 133, and amended by the issuance in June 2000 of SFAS 138,
Accounting for Certain Derivative Instruments and Certain Hedging Activities, an
amendment of FASB Statement No. 133. SFAS 133 requires that every derivative
instrument be recorded on the balance sheet as an asset or liability measured at
its fair value and that changes in the fair value of derivative instruments be
recognized currently in earnings unless specific hedge accounting criteria are
met. SFAS 133 is effective for fiscal years beginning after June 15, 2000.
In order to implement SFAS 133 by January 1, 2001, CMS Energy has established
various cross-functional project teams to identify all derivative instruments,
measure the fair value of those derivative instruments, designate and document
various hedge relationships, and evaluate the effectiveness of those hedge
relationships. As of November 2000, CMS Energy has completed the process of
identifying all derivative instruments and is currently in the process of
establishing appropriate fair value measurements of those derivative
instruments. In addition, CMS Energy is also in the process of designating and
documenting all hedging relationships anew and establishing tests and
methodologies for evaluating the hedge effectiveness of its hedging
relationships.
CMS Energy believes that the majority of its non-trading derivative contracts,
power purchase agreements and gas transportation contracts, qualify
for the normal purchases and sales exception of the new standard, and therefore
would not be required to be recognized at fair value. However, CMS Energy
anticipates that its electric and gas option contracts, interest rate swap
agreements and foreign currency exchange contracts will be required to be
recorded on its balance sheet at fair value. CMS Energy believes that these
contracts will meet specific hedge criteria; accordingly, changes in the fair
value of these contracts will be recorded in other comprehensive income on the
balance sheet. However, derivative and hedge accounting for utility industry
option contracts remains uncertain and the financial impact is dependent upon
resolution of certain industry issues with the FASB. If the standards are not
amended to allow option contracts to be classified as either normal purchases or
cash flow hedges, changes in the fair value of these contracts will be recorded
in earnings, and could cause earnings volatility. The potential financial impact
to earnings is unknown at this time, but CMS Energy continues to quantify the
effects of adoption on its financial statements.
In December 1999, the SEC released Staff Accounting Bulletin No. 101 (SAB 101)
summarizing the SEC staff's views on revenue recognition policies based upon
existing generally accepted accounting principles. The SEC staff has deferred
the implementation date of SAB 101 until no later than the fourth quarter of
fiscal years beginning after December 15, 1999. CMS Energy has adopted the
provisions of SAB 101 as of October 1, 2000. The impact of adopting SAB 101 is
not material to CMS Energy's consolidated results of operations or financial
position.
OTHER
The Union represents Consumers' operating, maintenance and construction
employees. Consumers and the Union negotiated a new collective bargaining
agreement that became effective as of June 1, 2000. By its terms, that agreement
will continue in full force and effect until June 1, 2005. Consumers does not
CMS-16
22
anticipate any material adverse financial effects on its financial position,
liquidity, or results of operations as a result of changes to this agreement.
During the first and third quarters of 2000, Consumers implemented the results
of a change in its paid personal absences plan, in part due to provisions of a
new union labor contract. The change resulted in employees receiving the benefit
of paid personal absence immediately at the beginning of each fiscal year,
rather than earning it in the previous year. The change for non-union employees
affected the first quarter of 2000. The change for union employees affected the
third quarter of 2000. The cumulative effect of these one-time changes decreased
operating expenses by $16 million collectively, and increased earnings, net of
tax, by $6 million in the first quarter and $4 million in the third quarter.
FOREIGN CURRENCY TRANSLATION
CMS Energy adjusts common stockholders equity to reflect foreign currency
translation adjustments for the operation of long-term investments in foreign
countries. The adjustment is primarily due to the exchange rate fluctuations
between the United States dollar and each of the Australian dollar, Brazilian
real and Argentine peso. From January 1, 2000 through September 30, 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 $138 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 $601 million
at September 30, 2000, which includes $1 million, $150 million and $450 million
for Australian, Brazilian and Argentine foreign exchange contracts,
respectively. The estimated fair value of the foreign exchange and option
contracts at September 30, 2000 was $24 million, representing the amount CMS
Energy would pay upon settlement.
CMS-17
23
CMS ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 2000 1999 2000 1999
- -------------------------------------------------------------------------------------------------------------------------------
In Millions, Except Per Share Amounts
OPERATING REVENUE
Electric utility $ 715 $ 753 $ 2,002 $ 2,052
Gas utility 142 112 765 792
Natural gas transmission 249 211 604 501
Independent power production 143 103 355 261
Oil and gas exploration and production 36 25 101 69
Marketing, services and trading 1,034 216 1,776 520
International energy distribution 70 40 198 124
Other 6 6 20 16
-----------------------------------------
2,395 1,466 5,821 4,335
- --------------------------------------------------------------------------------------------------------------------------------
OPERATING EXPENSES
Operation
Fuel for electric generation 104 116 286 315
Purchased and interchange power 740 151 1,071 357
Purchased power - related parties 141 140 438 418
Cost of gas sold 604 285 1,625 1,034
Other 270 247 759 706
-----------------------------------------
1,859 939 4,179 2,830
Maintenance 68 53 217 141
Depreciation, depletion and amortization 152 141 470 429
General taxes 69 60 210 186
-----------------------------------------
2,148 1,193 5,076 3,586
- --------------------------------------------------------------------------------------------------------------------------------
PRETAX OPERATING INCOME (LOSS)
Electric utility 118 168 342 425
Gas utility 9 (6) 44 87
Natural gas transmission 48 46 172 92
Independent power production 50 53 135 119
Oil and gas exploration and production 13 4 23 11
Marketing, services and trading (2) -- 2 --
International energy distribution 7 (1) 17 (5)
Other 4 9 10 20
-----------------------------------------
247 273 745 749
- --------------------------------------------------------------------------------------------------------------------------------
OTHER INCOME (DEDUCTIONS)
Accretion income -- 1 2 3
Accretion expense (8) (9) (25) (19)
Gain on asset sales, net of foreign currency translation losses of $25 in 2000 7 -- 76 9
Other, net 5 5 14 21
-----------------------------------------
4 (3) 67 14
- --------------------------------------------------------------------------------------------------------------------------------
FIXED CHARGES
Interest on long-term debt 152 135 443 365
Other interest 13 21 25 44
Capitalized interest (14) (11) (35) (34)
Preferred dividends -- -- 1 6
Preferred securities distributions 24 18 71 35
-----------------------------------------
175 163 505 416
- --------------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES AND MINORITY INTERESTS 76 107 307 347
INCOME TAXES 20 24 88 91
MINORITY INTERESTS 1 -- 3 --
-----------------------------------------
CONSOLIDATED NET INCOME $ 55 $ 83 $ 216 $ 256
================================================================================================================================
CMS-18
24
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 2000 1999 2000 1999
- ---------------------------------------------------------------------------------------------------------------------------------
In Millions, Except Per Share Amounts
NET INCOME ATTRIBUTABLE TO COMMON STOCKS CMS ENERGY $ 55 $ 86 $ 216 $ 248
CLASS G -- $ (3) -- $ 8
- ---------------------------------------------------------------------------------------------------------------------------------
AVERAGE COMMON SHARES OUTSTANDING CMS ENERGY 110 109 111 109
CLASS G -- 9 -- 9
- ---------------------------------------------------------------------------------------------------------------------------------
BASIC EARNINGS PER AVERAGE COMMON SHARE CMS ENERGY $ .51 $ .79 $ 1.95 $ 2.29
CLASS G -- $(.38) -- $ .90
- ---------------------------------------------------------------------------------------------------------------------------------
DILUTED EARNINGS PER AVERAGE COMMON SHARE CMS ENERGY $ .51 $ .78 $ 1.93 $ 2.25
CLASS G -- $(.38) -- $ .90
- ---------------------------------------------------------------------------------------------------------------------------------
DIVIDENDS DECLARED PER COMMON SHARE CMS ENERGY $.365 $.365 $1.095 $1.025
CLASS G -- $ .34 -- $ .99
=================================================================================================================================
THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
CMS-19
25
CMS ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months Ended
September 30 2000 1999
- -----------------------------------------------------------------------------------------------------------------
In Millions
CASH FLOWS FROM OPERATING ACTIVITIES
Consolidated net income $ 216 $ 256
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation, depletion and amortization (includes nuclear
decommissioning of $29 and $38, respectively) 470 429
Capital lease and debt discount amortization 25 36
Accretion expense 25 19
Accretion income - abandoned Midland project (2) (3)
MCV power purchases (42) (45)
Undistributed earnings of related parties (125) (70)
Gain on the sale of assets, net of foreign currency translation losses (76) (9)
Changes in assets and liabilities:
Increase in accounts receivable (592) (192)
Increase in inventories (143) (114)
Increase in accounts payable and accrued expenses 454 211
Increase in Regulatory obligation - gas choice 27 --
Increase (decrease) in deferred income taxes and investment tax credit (2) 16
Changes in other assets and liabilities (72) (94)
------------------------
Net cash provided by operating activities 163 440
- -----------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of companies, net of cash acquired (74) (1,899)
Capital expenditures (excludes assets placed under capital lease) (732) (479)
Investments in partnerships and unconsolidated subsidiaries (48) (291)
Cost to retire property, net (68) (62)
Proceeds from sale of property 583 28
Other (33) (15)
------------------------
Net cash used in investing activities (372) (2,718)
- -----------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from bank loans, notes and bonds 758 2,415
Proceeds from trust preferred securities 220 551
Issuance of common stock 3 72
Retirement of bonds and other long-term debt (328) (232)
Retirement of trust preferred securities (250) --
Increase (decrease) in notes payable, net 228 (11)
Repurchase of common stock (129) --
Payment of common stock dividends (122) (162)
Payment of capital lease obligations (22) (28)
Retirement of preferred stock -- (194)
------------------------
Net cash provided by financing activities 358 2,411
- -----------------------------------------------------------------------------------------------------------------
NET INCREASE IN CASH AND TEMPORARY CASH INVESTMENTS 149 133
CASH AND TEMPORARY CASH INVESTMENTS, BEGINNING OF PERIOD 132 101
------------------------
CASH AND TEMPORARY CASH INVESTMENTS, END OF PERIOD $ 281 $ 234
=================================================================================================================
CMS-20
26
OTHER CASH FLOW ACTIVITIES AND NON-CASH INVESTING AND FINANCING ACTIVITIES WERE:
CASH TRANSACTIONS
Interest paid (net of amounts capitalized) $ 423 $ 311
Income taxes paid (net of refunds) 24 54
NON-CASH TRANSACTIONS
Nuclear fuel placed under capital lease $ 3 $ 2
Other assets placed under capital leases 10 11
Assumption of debt - 305
================================================================================================================
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-21
27
CMS ENERGY CORPORATION
CONSOLIDATED BALANCE SHEETS
ASSETS SEPTEMBER 30 SEPTEMBER 30
2000 DECEMBER 31 1999
(UNAUDITED) 1999 (UNAUDITED)
- -------------------------------------------------------------------------------------------------------------------------------
In Millions
PLANT AND PROPERTY (AT COST)
Electric utility $ 7,146 $ 6,981 $ 6,920
Gas utility 2,529 2,461 2,427
Natural gas transmission 2,119 1,934 1,912
Independent power production 736 974 593
Oil and gas properties (successful efforts method) 577 817 725
International energy distribution 460 445 372
Other 99 62 50
-----------------------------------------------
13,666 13,674 12,999
Less accumulated depreciation, depletion and amortization 6,315 6,157 6,018
-----------------------------------------------
7,351 7,517 6,981
Construction work-in-progress 817 604 413
-----------------------------------------------
8,168 8,121 7,394
- -------------------------------------------------------------------------------------------------------------------------------
INVESTMENTS
Independent power production 959 950 1,019
Natural gas transmission 410 369 564
International energy distribution 29 150 133
Midland Cogeneration Venture Limited Partnership 273 247 240
First Midland Limited Partnership 241 240 238
Other 40 40 34
-----------------------------------------------
1,952 1,996 2,228
- -------------------------------------------------------------------------------------------------------------------------------
CURRENT ASSETS
Cash and temporary cash investments at cost, which approximates market 281 132 234
Accounts receivable, notes receivable and accrued revenue, less
allowances of $22, $12 and $12, respectively 1,578 959 1,023
Inventories at average cost
Gas in underground storage 334 225 288
Materials and supplies 186 158 144
Generating plant fuel stock 48 47 37
Deferred income taxes 28 33 13
Prepayments and other 238 263 222
-----------------------------------------------
2,693 1,817 1,961
- -------------------------------------------------------------------------------------------------------------------------------
NON-CURRENT ASSETS
Goodwill, net 903 891 717
Nuclear decommissioning trust funds 617 602 572
Unamortized nuclear costs 476 519 506
Postretirement benefits 326 348 351
Notes receivable - related party 180 251 15
Abandoned Midland Project 28 48 53
Other 912 869 797
-----------------------------------------------
3,442 3,528 3,011
-----------------------------------------------
TOTAL ASSETS $ 16,255 $ 15,462 $ 14,594
===============================================================================================================================
CMS-22
28
STOCKHOLDERS' INVESTMENT AND LIABILITIES SEPTEMBER 30 SEPTEMBER 30
2000 DECEMBER 31 1999
(UNAUDITED) 1999 (UNAUDITED)
- --------------------------------------------------------------------------------------------------------------------------------
In Millions
CAPITALIZATION
Common stockholders' equity $ 2,309 $ 2,456 $ 2,393
Preferred stock of subsidiary 44 44 44
Company-obligated mandatorily redeemable preferred securities of:
Consumers Power Company Financing I (a) 100 100 100
Consumers Energy Company Financing II (a) 120 120 120
Consumers Energy Company Financing III (a) 175 175 --
Company-obligated convertible Trust Preferred Securities of:
CMS Energy Trust I (b) 173 173 173
CMS Energy Trust II (b) 301 301 301
CMS Energy Trust III (b) 220 -- --
Company-obligated Trust Preferred Securities of CMS RHINOS Trust (c) -- 250 250
Long-term debt 7,246 6,987 7,092
Non-current portion of capital leases 81 88 89
------------------------------------------------
10,769 10,694 10,562
- --------------------------------------------------------------------------------------------------------------------------------
MINORITY INTERESTS 221 222 153
- --------------------------------------------------------------------------------------------------------------------------------
CURRENT LIABILITIES
Current portion of long-term debt and capital leases 542 552 308
Notes payable 432 230 317
Accounts payable 1,355 775 466
Accrued taxes 276 320 215
Accrued interest 145 148 114
Accounts payable - related parties 67 61 58
Power purchases - MCV Partnership 47 47 47
Accrued refunds 1 11 19
Other 467 363 407
------------------------------------------------
3,332 2,507 1,951
- --------------------------------------------------------------------------------------------------------------------------------
NON-CURRENT LIABILITIES
Deferred income taxes 644 702 646
Postretirement benefits 450 485 479
Deferred investment tax credit 119 126 129
Regulatory liabilities for income taxes, net 86 64 121
Power purchases - MCV Partnership 37 73 87
Other 597 589 466
------------------------------------------------
1,933 2,039 1,928
- --------------------------------------------------------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES (NOTES 1 AND 2)
TOTAL STOCKHOLDERS' INVESTMENT AND LIABILITIES $ 16,255 $ 15,462 $ 14,594
================================================================================================================================
(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. The primary asset of CMS Energy Trust III is $226
million of 7.25 percent subordinated deferrable notes due August 2004 from CMS
Energy. For further discussion, see Note 7 contained in CMS Energy's 1999 Form
10-K and Note 3 to the Consolidated Financial Statements.
(c) As described in Note 7 contained in CMS Energy's 1999 Form 10-K and Note 3,
the primary asset of CMS RHINOS Trust was $258 million principal amount of LIBOR
plus 1.75 percent subordinated deferrable interest debentures, which were
redeemed in August 2000.
THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
CMS-23
29
CMS ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS' EQUITY
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 2000 1999 2000 1999
In Millions
- ------------------------------------------------------------------------------------------------------------------------------
COMMON STOCK
At beginning and end of period $ 1 $ 1 $ 1 $ 1
- ------------------------------------------------------------------------------------------------------------------------------
OTHER PAID-IN CAPITAL
At beginning of period 2,626 2,643 2,749 2,594
Redemption of affiliate's preferred stock -- -- -- (2)
Common stock repurchased -- -- (129) --
Common stock reacquired (14) -- (14) --
Common stock reissued 8 2 11 2
Common stock issued:
CMS Energy 3 20 6 67
Class G -- 1 -- 5
-----------------------------------------------
At end of period 2,623 2,666 2,623 2,666
- ------------------------------------------------------------------------------------------------------------------------------
REVALUATION CAPITAL
At beginning of period 1 10 3 (9)
Change in unrealized investments-gain (loss) (a) -- (7) (2) 12
-----------------------------------------------
At end of period 1 3 1 3
- ------------------------------------------------------------------------------------------------------------------------------
FOREIGN CURRENCY TRANSLATION
At beginning of period (173) (126) (108) (136)
Change in foreign currency translation realized from asset sale (a) -- -- 25 --
Change in foreign currency translation (a) (48) (11) (138) (1)
-----------------------------------------------
At end of period (221) (137) (221) (137)
- ------------------------------------------------------------------------------------------------------------------------------
RETAINED EARNINGS (DEFICIT)
At beginning of period (110) (138) (189) (234)
Consolidated net income (a) 55 83 216 256
Common stock dividends declared:
CMS Energy (40) (82) (122) (153)
Class G -- (3) -- (9)
-----------------------------------------------
At end of period (95) (140) (95) (140)
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCKHOLDERS' EQUITY $ 2,309 $ 2,393 $ 2,309 $ 2,393
==============================================================================================================================
(a) DISCLOSURE OF COMPREHENSIVE INCOME:
Revaluation capital
Unrealized investments-gain (loss), net of tax of
$-, $4, $1 and $(6), respectively $ -- $ (7) $ (2) $ 12
Foreign currency translation, net (48) (11) (113) (1)
Consolidated net income 55 83 216 256
- ------------------------------------------------------------------------------------------------------------------------------
Total Consolidated Comprehensive Income $ 7 $ 65 $ 101 $ 267
==============================================================================================================================
THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
CMS-24
30
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 and nine months ended
September 30, 2000, undistributed equity earnings were $24 million and $125
million, respectively compared to $24 million and $70 million for the three and
nine months ended September 30, 1999, 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 September 30, 2000, the
foreign currency translation amount realized from assets sales increased equity
by $25 million and the change in the foreign currency translation adjustment
decreased equity by $138 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.
CMS-25
31
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. 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. According to current accounting standards,
Consumers can continue to carry its energy supply-related regulatory assets if
legislation or an MPSC rate order allows the collection of cash flows to recover
these regulatory assets from its regulated transmission and distribution
customers. As of September 30, 2000, Consumers had a net investment in energy
supply facilities of $1.048 billion included in electric plant and property. See
Note 2, Uncertainties.
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.
In Millions, except per share amounts
- ---------------------------------------------------------------------------------------------------------------
Nine Months Ended September 30, 2000 1999
- ---------------------------------------------------------------------------------------------------------------
Operating revenue $ 5,821 $ 4,448
Consolidated net income $ 216 $ 267
Basic earnings per share $ 1.95 $ 2.38
Diluted earnings per share $ 1.93 $ 2.35
===============================================================================================================
CMS-26
32
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.
1997 EPA Revised NOx and Small Particulate Emissions Standards - In 1997, the
EPA revised these standards to impose further limitations on nitrogen oxide and
small particulate-related emissions. After a United States Court of Appeals
found the revision an unconstitutional delegation of legislative power, the EPA
suspended the standards under the 1997 rule and reinstated the pre-1997
standards. In January 2000, the Department of Justice, on behalf of the EPA,
filed a petition for the United States Supreme Court to review the case. In May
2000, the Supreme Court agreed to hear the appeal.
1998 EPA Plan for NOx Emissions - In September 1998, based in part upon the 1997
standards, the EPA Administrator issued final regulations requiring the state of
Michigan to further limit 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. However, in early 2000, the United States Court of Appeals
then upheld the EPA's final regulations. The state of Michigan has filed a
petition with the United States Supreme Court appealing this ruling. During this
time period, the state of Michigan established alternative, less stringent
nitrogen oxide emission reduction requirements. At this time the state of
Michigan has decided to draft new rules to comply with the more stringent EPA
requirements while continuing to pursue its appeal to the United States Supreme
Court. In August 2000, the United States Court of Appeals extended the time to
comply with the 1998 EPA final rule until May 2004.
Section 126 Petitions - 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 for nitrous oxide emissions. Under the
revised Section 126 rule, the emission rate will become effective on May 1, 2003
and apply for the ozone season in 2003 and during each subsequent year. Various
parties' petitions challenging the EPA's rule have been filed.
Until all air quality targets are conclusively established, the estimated cost
of compliance discussed below is subject to revision.
Cost of Environmental Law Compliance - The preliminary estimates of capital
expenditures to reduce nitrogen oxide-related emissions to the initial level
originally proposed by the state of Michigan for Consumers' fossil-fueled
generating units range from $150 million to $290 million, calculated in year
2000 dollars. If Consumers has to meet the EPA's 1998 and/or Section 126
petition requirements, the estimated cost to Consumers would be between $290
million and $500 million, calculated in year 2000 dollars. In both cases the
lower estimate represents the capital expenditure level that would
satisfactorily meet the
CMS-27
33
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
$72 million to install equipment at certain generating units to comply with the
acid rain provisions of the Clean Air Act. Management believes that these
expenditures will not materially affect Consumers' annual operating costs.
Cleanup and Solid Waste - Under the Michigan Natural Resources and Environmental
Protection Act, Consumers expects that it will ultimately incur investigation
and remedial action costs at a number of sites. Nevertheless, it believes that
these costs are recoverable in rates under current ratemaking policies.
Consumers is a potentially responsible party at several contaminated sites
administered under Superfund. Superfund liability is joint and several. Along
with Consumers, many other creditworthy, potentially responsible parties with
substantial assets cooperate with respect to the individual sites. Based upon
past negotiations, Consumers estimates that its share of the total liability for
the known Superfund sites will be between $2 million and $9 million. As of
September 30, 2000, Consumers had accrued the minimum amount of the range for
its estimated Superfund liability.
During routine maintenance activities, Consumers identified PCB as a component
in certain paint, grout and sealant materials at the Ludington Pumped Storage
Facility. Consumers removed and replaced part of the PCB material. Consumers 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. In March 1999, the court
issued an opinion and order granting Consumers' motion for summary judgment,
resulting in the dismissal of the case. The plaintiffs appealed this decision.
The 6th Circuit Court of Appeals in Cincinnati unanimously dismissed the appeal
of the antitrust case against Consumers, but the parties have filed a petition
for rehearing.
CONSUMERS' ELECTRIC UTILITY RATE MATTERS
ELECTRIC RESTRUCTURING: Since 1997, there have been repeated efforts made in the
Michigan Legislature to enact electric restructuring legislation. On June 3,
2000, these efforts resulted in the passage of the Customer Choice Act and
related Securitization laws, which became effective June 5, 2000.
The Customer Choice Act: 1) permits all customers to exercise choice of electric
generation suppliers by January 1, 2002; 2) cuts residential electric rates by
five percent; 3) freezes all electric rates through
CMS-28
34
December 31, 2003, and establishes a rate cap for residential customers through
at least December 31, 2005, and a rate cap for small commercial and industrial
customers through at least December 31, 2004; 4) allows for the use of
Securitization to refinance stranded costs as a means of offsetting the earnings
impact of the five percent residential rate reduction; 5) establishes a market
power test which may require the transfer of control of a portion of generation
resources in excess of that required to serve firm retail sales load (a
requirement that Consumers is in compliance with); 6) requires Michigan
utilities to join a FERC approved RTO or divest their interest in transmission
facilities to an independent transmission owner; 7) requires the joint expansion
of available transmission capability by Consumers, Detroit Edison and American
Electric Power by at least 2,000 MW by June 5 of 2002; and 8) allows for the
recovery of stranded costs and implementation costs incurred as a result of the
passage of the act. Consumers is highly confident that it will meet the
conditions of items 5 and 7 above, prior to the earliest rate cap termination
dates specified in the act. Failure to do so would result in an extension of the
rate caps to as late as December 31, 2013.
In accordance with the Securitization law, Consumers filed an application with
the MPSC in July 2000, to begin the Securitization process. Securitization
typically involves the issuance of asset backed bonds with a higher credit
rating than conventional utility corporate financing. The MPSC issued a
financing order on October 24, 2000 authorizing Securitization of approximately
$470 million in qualified costs (primarily electric utility stranded generation
costs) plus recovery of the expenses of the Securitization. Approximately $50
million of annual cost savings effects from Securitization will offset,
prospectively, the earnings impact of the five percent residential rate
reduction required by the Customer Choice Act. The order permits Consumers to
apply the cost savings in excess of the five percent residential rate reduction
to rate reductions for non-residential and retail open access customers after
the bonds are sold. Consumers will seek on a priority basis to recover the five
residential rate reduction's effect on revenues lost from the date of the
financing order. Consumers estimates that the disallowed portion of revenue
recovery relating to the year 2000 five percent residential rate reduction may
reduce its operating earnings by $24 million in 2000. Consumers, and its special
purpose subsidiary that will issue the bonds, will recover the repayment of
principal, interest and other expenses relating to the issuance of the bonds
through a Securitization charge and a tax charge. These charges are subject to
an annual true-up until one year prior to the last expected maturity date of the
Securitization bonds, and no more than quarterly thereafter. The MPSC's order
will not increase current electric rates for any of Consumers' tariff customers.
Consumers has accepted the MPSC's financing order with clarifications needing
confirmation by the MPSC that will permit its special purpose subsidiary to
issue Securitization bonds during the first quarter of 2001. As with other
significant MPSC orders, the financing order is subject to appeal by any party
to the MPSC proceeding. During the appeal, the amortization of the approved
regulatory assets being securitized as qualified costs would be suspended and
effectively offset the loss in revenue resulting from the five percent
residential rate reduction. The amortization would be reestablished later, after
the bond sale, based on a schedule that is the same as the recovery of the
principal amounts of the securitized qualified costs. Ultimately, sale of
Securitization bonds will be required for the full rate reduction offset to
continue over the term of the bonds.
In September 1999, Consumers began implementing a plan for electric retail
customer open access. Consumers submitted this plan to the MPSC in 1998, and the
MPSC issued orders in March 1999 that generally supported the plan. The Customer
Choice Act states that orders issued by the MPSC before the date of this act
that 1) allow electric customers to choose their supplier, 2) authorize recovery
of net stranded costs and implementation costs, and 3) confirm any voluntary
commitments of electric utilities, are
CMS-29
35
in compliance with this act and enforceable by the MPSC. As required by the
MPSC, on September 20, 2000, Consumers filed tariffs governing its retail open
access program and addressed revisions appropriate to comply with the Customer
Choice Act. Consumers cannot predict how the MPSC will modify the tariff or
enforce the existing restructuring orders.
In June 2000, the Court of Appeals issued an opinion relating to a number of
consolidated MPSC restructuring orders. The opinion primarily involved issues
that the Customer Choice Act has rendered moot. In a separate pending case,
ABATE and the Attorney General each appealed an August 1999 order in which the
MPSC found that it had jurisdiction to approve rates, terms and conditions for
electric retail wheeling (also known as electric customer choice) if a utility
voluntarily chooses to offer that service. Consumers believes that the Customer
Choice Act has rendered the issue moot, but cannot predict how the Court of
Appeals will resolve the issue.
During periods when electric demand is high, the cost of purchasing energy on
the spot market can be substantial. To reduce Consumers' exposure to the
fluctuating cost of electricity, and to ensure adequate supply to meet demand,
Consumers intends to maintain sufficient generation and to purchase electricity
from others to create a power reserve (also called a reserve margin) of
approximately 15 percent. The reserve margin provides Consumers with additional
power above its anticipated peak power demands. It also allows Consumers to
provide reliable service to its electric service customers and to protect itself
against unscheduled plant outages and unanticipated demand. Consumers is
planning for a reserve margin for the summers 2001, 2002, and 2003, of 15
percent. The actual reserve margin needed will depend primarily on summer
weather conditions, the level of retail open access load being served by others
during the summer, and any unscheduled plant outages. The existing retail open
access plan allows other electric service providers with the opportunity to
serve up to 750 MW of nominal retail open access load. As of October 2000, only
one electric service provider has initiated service to retail open access load.
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 electricity call option contracts for the physical delivery of
electricity during the months of June through September. The cost of these
electricity call option contracts for summer 2000 was approximately $51 million.
Consumers expects to use a similar strategy in the future, but cannot predict
the cost of this strategy at this time. As of September 30, 2000, Consumers had
purchased or had commitments to purchase electricity call option contracts
covering the estimated reserve margin requirements for summer 2001, and
partially covering the estimated reserve margin requirements for summers 2002
and 2003, at a cost of $77 million, of which $39 million pertains to 2001.
In 1999, the FERC issued Order No. 2000, which describes the characteristics the
FERC would find acceptable in a model RTO. In this order, the FERC declined to
mandate that utilities join RTOs, but did order utilities to make filings in
October 2000 and January 2001 declaring their intentions with respect to RTO
membership.
In 1999, Consumers and four other electric utility companies joined together to
form a coalition known as the Alliance Companies for the purpose of creating a
FERC approved RTO. Both the Alliance Companies and Consumers have separately
filed proposed alternative governance structures for the formation of an RTO.
Neither of these proposals has been approved by the FERC.
CMS-30
36
On October 13, 2000, Consumers filed an application with the FERC to transfer
ownership and control of its transmission facilities to a wholly owned
subsidiary, Michigan Transco. In that application, Consumers and Michigan
Transco stated that the filing represented the first step in Consumers' plan to
transfer control of or to divest itself of ownership, operation and control of
its transmission business to an independent third party. Whether Consumers
chooses to divest its transmission business or to transfer control of it to an
RTO, Consumers' current plan is to remain in the business of generating and
distributing electric energy to retail customers.
On October 16, 2000, Consumers made an informational filing in compliance with
the FERC's Order No. 2000. In that filing Consumers responded to the FERC's
request for information about the RTO membership. In that filing Consumers said
it was a member of Alliance and intended to continue its membership for the near
future, but that it was also exploring other RTO options, as well as divestiture
of its transmission assets. While Consumers said it had not finally decided on a
specific end result, it nevertheless intended to comply with the Customer Choice
Act, which among other things, requires electric utilities like Consumers to
either join a FERC approved multistate RTO or divest its interest in
transmission facilities by December 31, 2001. Consumers anticipates that it will
make a decision regarding the transfer of its transmission assets to an RTO by
January 2001.
Consumers is uncertain about the outcome of the Alliance matter before the FERC
and its continued participation in Alliance.
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
CMS-31
37
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
June 2000, the Michigan Supreme Court denied the application for leave to
appeal. This case is now closed.
In 1997, ABATE filed a complaint with the MPSC. The complaint alleged that
Consumers' electric earnings are more than its authorized rate of return and
sought an immediate reduction in Consumers' electric rates that approximated
$189 million annually. As a result of the rate freeze imposed by the Customer
Choice Act, the MPSC issued an order in June 2000 dismissing the ABATE
complaint. In July 2000 ABATE filed a rehearing petition with the MPSC.
Consumers cannot predict the outcome of the rehearing process.
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 would not grant
adjustment of customer rates through 2001. As a result of the rate freeze
imposed by the Customer Choice Act, the current rates will remain in effect
until at least December 31, 2003.
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
- ------------------------------------------------------------------------------------------------------------------
Nine Months Ended
September 30 2000 1999
- ------------------------------------------------------------------------------------------------------------------
Pretax operating income $35 $39
Income taxes and other 11 12
- ------------------------------------------------------------------------------------------------------------------
Net income $24 $27
==================================================================================================================
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
CMS-32
38
portion of the fixed and variable energy charges. Since January 1, 1996, the
MPSC has also permitted Consumers to recover capacity charges for the remaining
325 MW of contract capacity with an initial average charge of 2.86 cents per kWh
increasing periodically to an eventual 3.62 cents per kWh by 2004 and
thereafter. However, due to the current freeze of Consumers' retail rates that
was required by Public Act 141, the capacity charge for the 325 MW is now frozen
at 3.17 cents per kWh. 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.
Consumers recognized a loss in 1992 for the present value of the estimated
future underrecoveries of power costs under the PPA based on MPSC cost recovery
orders. At September 30, 2000 and September 30, 1999, the remaining after-tax
present value of the estimated future PPA liability associated with the 1992
loss totaled $55 million and $87 million, respectively. In March 1999, Consumers
and the MCV Partnership reached an agreement effective January 1, 1999 that
capped availability payments to the MCV Partnership at 98.5 percent. If the MCV
Facility generates electricity at the maximum 98.5 percent level during the next
five years, Consumers' after-tax cash underrecoveries associated with the PPA
could be as follows:
In Millions
- ------------------------------------------------------------------------------------------------------------------
2000 2001 2002 2003 2004
- ------------------------------------------------------------------------------------------------------------------
Estimated cash underrecoveries at 98.5%, net of tax $37 $39 $38 $37 $36
==================================================================================================================
Consumers continually evaluates the adequacy of the PPA liability. These
evaluations consider management's assessment of operating levels at the MCV
Facility through 2007, along with certain other factors including MCV related
costs that are included in Consumers' frozen retail rates. Should future results
be different than management's assessments, additional charges for a given year
of up to $33 million may be necessary. Management believes that the PPA
liability is adequate at this time. For further discussion on the impact of the
frozen PSCR, see "Electric Rate Matters" in this Note.
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 was contingent upon regulatory treatment
satisfactory to Consumers. Given uncertainties associated with the electric
restructuring legislation in Michigan, Consumers and PECO entered into an
interim arrangement for the sale of 125 MW of PPA capacity and associated energy
to PECO during 2000 until the regulatory treatment was determined. The requested
regulatory treatment was not received. Consequently, in August 2000, Consumers
advised PECO of its intention to terminate the long-term power sales agreement
prior to it becoming effective. The interim arrangement will be completed in
2000. Its completion will not affect the termination of the long-term agreement.
CMS-33
39
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 in March
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, in
April 2000. As part of that process, Palisades submitted required NRC
performance data in April 2000 that indicated that Consumers was within the
limits of acceptable performance for which no NRC response is required.
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 September
30, 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 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 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.
CMS-34
40
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. In February 2000, Consumers submitted an analysis to
the NRC that 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. As of
September 30, 2000, Consumers had a recorded liability to the DOE of $128
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 July 2000, the DOE announced that an agreement had been reached with another
utility to address the DOE's delay in accepting spent fuel. The DOE stated that
the agreement, which is in the form of a contract amendment, is intended to be a
framework that can be applied to other nuclear power plants. Consumers is
evaluating this matter further. In addition, two recent court decisions support
the right of utilities to pursue damage claims in the U. S. Court of Claims
against the DOE for failure to take delivery of spent fuel. Consumers is also
evaluating those rulings and their applicability to its contracts with DOE.
CONSUMERS' GAS UTILITY CONTINGENCIES
GAS ENVIRONMENTAL MATTERS: Under the Michigan Natural Resources and
Environmental Protection Act, Consumers expects that it will ultimately incur
investigation and remedial action costs at a number of sites. These include 23
sites that formerly housed manufactured gas plant facilities, even those in
which it has a partial or no current ownership interest. Consumers has completed
initial investigations at the 23 sites. On sites where Consumers has received
site-wide study plan approvals, it will continue to implement these plans. It
will also work toward closure of environmental issues at sites as studies are
completed. Consumers has estimated its costs related to further investigation
and remedial action for all 23 sites using the Gas Research
Institute-Manufactured Gas Plant Probabilistic Cost Model. Using this model,
Consumers estimates the costs to be between $66 million and $118 million. These
estimates are based on
CMS-35
41
undiscounted 1999 costs. As of September 30, 2000, after consideration of prior
years' expenses, Consumers has a remaining accrued liability of $59 million and
a regulatory asset of $64 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 a gas customer choice pilot program. The program was designed to
encourage Consumers to minimize its purchased natural gas commodity costs while
providing rate stability for its customers. This pilot program became effective
on April 1, 1998. The pilot program ends on March 31, 2001. The program allows
up to 300,000 residential, commercial and industrial retail gas sales customers
to choose an alternative gas commodity supplier in direct competition with
Consumers. As of September 30, 2000, more than 155,000 customers chose
alternative gas suppliers, representing approximately 39 bcf of gas load.
Customers who had voluntarily chosen to remain as sales customers of Consumers
will not see a rate change in their gas rates. This three-year program: 1)
freezes gas distribution rates through March 31, 2001, establishing a delivered
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. The Michigan appellate courts have affirmed the pilot
program in its entirety the December 1997 MPSC order. On October 13, 2000, the
MPSC adopted model terms and conditions for permanent gas customer choice
programs. On October 24, 2000, the MPSC approved Consumers' voluntary
application to establish a permanent customer choice program in its service
territory beginning April 1, 2001 after the pilot program expires. Beginning
April 1, 2001, Consumers will no longer be subject to a frozen gas commodity
cost. Consumers will then return to a gas cost recovery mechanism such that it
will recover all prudently incurred natural gas commodity costs from it
customers. Under the permanent gas customer choice program, up to 600,000 of
Consumers' natural gas customers will be eligible to participate in the program
beginning April 1, 2001. By April 1, 2002, up to 900,000 gas customers will be
eligible to participate. All of Consumers' gas customers will be eligible to
select an alternate natural gas supplier beginning April 1, 2003. Consumers
would continue to transport and distribute gas to these customers.
Recent significant increases in gas prices have exposed Consumers to gas
commodity losses during the last year of the pilot program. Additional exposure
to losses could occur if the cost of purchased gas exceeds $7.00 per mcf or
abnormal weather causes additional gas purchases. Consumers recorded a
regulatory liability of $45 million in the second quarter 2000 to reflect
estimated losses due to increases in natural gas commodity prices. On October
24, 2000, the MPSC approved Consumers' application to reclassify recoverable,
low-cost, base gas in Consumers' gas storage reservoirs. The MPSC allowed
Consumers to begin immediately to include the cost of its recoverable base gas
with higher cost purchased gas. The gas accounting order is expected to
eliminate the need for Consumers to recognize any further losses related to gas
commodity cost under-recoveries.
CMS-36
42
PANHANDLE MATTERS
REGULATORY MATTERS: Effective August 1996, Trunkline placed into effect a
general rate increase, subject to refund. On September 16, 1999, Trunkline filed
a FERC settlement agreement to resolve certain issues in this proceeding. FERC
approved this settlement February 1, 2000 and required refunds of approximately
$2 million that were made in April 2000, with supplemental refunds of $1.3
million in June 2000. On January 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 and would require refunds.
Management believes that reserves for refund established are adequate and there
will not be a material adverse effect on consolidated results of operations or
financial position. 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, including Panhandle. FERC ordered these
pipelines to refund these amounts to their customers. The pipelines must make
all payments in compliance with prescribed FERC requirements. At September 30,
2000 and December 31, 1999, Panhandle's Accounts Receivable included $57 million
and $54 million, respectively, due from natural gas producers, and Other Current
Liabilities included $58 million and $54 million, respectively, for related
obligations.
On March 9, 2000, Trunkline filed an abandonment application with FERC seeking
to abandon 720 miles of its 26-inch diameter pipeline that extends from
Longville, Louisiana to Bourbon, Illinois. This filing is in conjunction with a
plan for 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.
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 UNCERTAINTIES
CMS GENERATION - LOY YANG: At September 30, 2000, CMS Energy has an
approximately $500 million investment in Loy Yang. In February 2000, CMS Energy
announced its intention to sell its 50 percent interest in Loy Yang. The amount
CMS Energy ultimately realizes from the sale of Loy Yang could differ
CMS-37
43
materially in the near term from the amount currently reflected as an asset on
the balance sheet. CMS Energy, however, continues to evaluate various financial
and accounting alternatives for Loy Yang by year-end, including continuing the
sale process.
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 $1.63
billion for 2000, $1.29 billion for 2001, and $1.36 billion for 2002. For
further information, see Capital Resources and Liquidity-Capital Expenditures in
the MD&A.
OTHER: As of September 30, 2000, CMS Energy and Enterprises guaranteed up to
$602 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, implied duty of good faith, violation of the Michigan Uniform
Securities Act, and common law fraud and negligent misrepresentation. The
plaintiffs allege $13 million of compensatory damages and $26 million in
exemplary damages. CMS Energy filed a response denying all the claims made by
the plaintiffs and asserting several counterclaims. CMS Energy believes 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 Facility consists of a $1 billion
one-year revolving credit facility maturing in June 2001. Additionally, CMS
Energy has unsecured lines of credit in an aggregate amount of $63 million. As
of September 30, 2000, the total amount utilized under the Senior Credit
Facility and the unsecured lines of credit were $940 million and zero,
respectively, and the amounts available under the Senior Credit Facility and the
unsecured lines of credit were $60 million and $63 million, respectively.
At September 30, 2000, CMS Energy had $110 million of Series A GTNs, $107
million of Series B GTNs, $127 million of Series C GTNs, $196 million Series D
GTNs, and $379 million Series E GTNs issued and
CMS-38
44
outstanding with weighted average interest rates of 7.9 percent, 8.1 percent,
7.9 percent, 7.0 percent and 7.7 percent, respectively.
In February 2000, the Board of Directors approved a stock repurchase program
whereby CMS Energy could reacquire up to 10 million shares of CMS Energy Common
Stock. From February through April 2000, CMS Energy repurchased approximately
6.6 million shares for $129 million. CMS Energy does not anticipate repurchase
of additional shares in the near term while strengthening its balance sheet.
Subsequently, in October 2000, CMS Energy sold 11 million new shares of CMS
Energy Common Stock which previously had been planned for mid-year 2001. CMS
Energy used the net proceeds of approximately $305 million primarily to repay
borrowings under the Senior Credit Facility. CMS Energy used the remaining
amounts to repay various lines of credit.
CMS Energy is currently implementing a financial plan to strengthen its balance
sheet, reduce fixed expenses and enhance earnings per share growth. In
conjunction with this plan, CMS Energy has identified for possible sale certain
non-strategic assets which are expected to contribute little or no earnings
benefits in the short to medium term. In addition, this plan will allow CMS
Energy to achieve more geographic and business focus, thereby allowing CMS
Energy to concentrate on its most profitable and growing ventures. From December
1999 through September 30, 2000, CMS Energy has received $673 million of
proceeds from the sale 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 and gas properties, its
ownership interest in the Lakewood Cogeneration plant located in Lakewood, New
Jersey, and all of its ownership interest in certain oil reserves located in
Ecuador.
In August 2000, CMS Energy and CMS Energy Trust III, a Delaware statutory
business trust established by CMS Energy, sold 8.8 million units of 7.25 percent
Premium Equity Participating Securities. Each security consists of a trust
preferred security of CMS Energy Trust III maturing in four years and a contract
requiring the purchase, no later than August 2003, of CMS Energy Common Stock at
a rate that adjusts for the market price at the time of conversion. Net proceeds
from the sale totaled $213 million. CMS Energy used the net proceeds, along with
$37 million from the Senior Credit Facility, to redeem the Trust Preferred
Securities of the CMS RHINOS Trust.
CONSUMERS: At September 30, 2000, Consumers had FERC authorization to issue or
guarantee through June 2002, up to $900 million of short-term securities
outstanding at any one time. Consumers also had remaining FERC authorization to
issue through June 2002 up to $250 million and $800 million of long-term
securities for refinancing or refunding purposes and for general corporate
purposes, respectively. Additionally, Consumers had FERC authorization to issue
$500 million of first mortgage bonds to be issued solely as security for the
long-term securities mentioned above.
Consumers has an unsecured $300 million credit facility and unsecured lines of
credit aggregating $190 million. These facilities are available to finance
seasonal working capital requirements and to pay for capital expenditures
between long-term financings. At September 30, 2000, a total of $430 million was
outstanding at a weighted average interest rate of 7.4 percent, compared with
$317 million outstanding at September 30, 1999, at a weighted average interest
rate of 6.1 percent. In August 2000, Consumers entered into variable-to-fixed
interest rate swaps totaling $300 million in order to reduce the impact of
interest rate fluctuations.
CMS-39
45
Consumers currently has in place a $325 million trade receivables sale program.
At September 30, 2000 and 1999, receivables sold under the program totaled $307
million and $314 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 $404
million of unrestricted retained earnings available to pay common dividends at
September 30, 2000. In January 2000, Consumers declared and paid a $79 million
common dividend; in April 2000, Consumers declared a $30 million common dividend
which was paid in May 2000; and in July 2000, Consumers declared a $17 million
common dividend, which was paid in August 2000. In October 2000, Consumers
declared a $61 million common dividend payable in November 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 September 30, 2000, the
amount utilized under the credit facility was $65 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.
Earnings per share attributable to Common Stock for the three and nine months
ended September 30, 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.
CMS-40
46
COMPUTATION OF EPS:
In Millions, Except Per Share Amounts
- -------------------------------------------------------------------------------------------------------------------
Three Months Nine Months
Ended September 30, Ended September 30,
2000 1999 2000 1999
- -------------------------------------------------------------------------------------------------------------------
NET INCOME APPLICABLE TO BASIC AND DILUTED EPS
Consolidated Net Income $ 55 $ 83 $ 216 $ 256
======================================
Net Income Attributable to Common Stocks:
CMS Energy - Basic EPS $ 55 $ 86 $ 216 $ 248
Add conversion of 7.75% Trust
Preferred Securities (net of tax) 2 2 7 6
--------------------------------------
CMS Energy - Diluted EPS $ 57 $ 88 $ 223 $ 254
======================================
Class G:
Basic and Diluted EPS $ -(a) $ (3) $ -(a) $ 8
======================================
AVERAGE COMMON SHARES OUTSTANDING
APPLICABLE TO BASIC AND DILUTED EPS
CMS Energy:
Average Shares - Basic 109.9 109.3 111.1 108.8
Add conversion of 7.75% Trust
Preferred Securities 4.2 4.2 4.2 4.2
Options-Treasury Shares .3 .3 .2 .3
--------------------------------------
Average Shares - Diluted 114.4 113.8 115.5 113.3
======================================
Class G:
Average Shares
Basic and Diluted -(a) 8.7 -(a) 8.6
======================================
EARNINGS PER AVERAGE COMMON SHARE
CMS Energy:
Basic $ .51 $ .79 $ 1.95 $ 2.29
Diluted $ .51 $ .78 $ 1.93 $ 2.25
Class G:
Basic and Diluted $ -(a) $ (.38) $ -(a) $ .90
===================================================================================================================
(a) All of the outstanding shares of Class G Common Stock were exchanged for
CMS Energy Common Stock on October 25, 1999.
In February, May and August 2000, CMS Energy paid dividends of $.365 per share
on CMS Energy Common Stock. In October 2000, the Board of Directors declared a
quarterly dividend of $.365 per share on CMS Energy Common Stock, payable in
November 2000.
CMS-41
47
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 call 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. As of September 30, 2000, Consumers has a deferred
asset of $55 million for electricity call option contracts, and commitments to
purchase additional call options in the amount of $22 million.
A CMS Energy subsidiary has a swap agreement which fixes the prices that it will
pay for gas sold to the MCV Facility for the years 2001 through 2006. The
subsidiary pays fixed prices and receives floating prices under the agreement.
The settlement periods are each a one-year period ending December 31, 2001
through 2006 on 3.65 million MMBtu. Since June 30, 2000, the agreement has been
classified as a trading activity and correspondingly, has been marked-to-market.
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. In August 2000, CMS
Energy entered into floating-to-fixed interest rate swap agreements with a total
notional amount of $1.0 billion. The notional amount of CMS Energy's and its
subsidiaries' interest rate swaps was $1.7 billion at September 30, 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.
CMS-42
48
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 $601 million at September 30,
2000, which includes $1 million, $150 million and $450 million for Australian,
Brazilian and Argentine foreign exchange contracts, respectively. The estimated
fair value of the foreign exchange and option contracts at September 30, 2000
was $24 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-43
49
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 September 30, 2000
and 1999, the related consolidated statements of income and common stockholders'
equity for the three-month and nine-month periods then ended and the related
consolidated statements of cash flows for the nine-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, 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,
October 27, 2000.
CMS-44
50
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
- ------------------------------------------------------------------------------
September 30 2000 1999 Change
- ------------------------------------------------------------------------------
Three months ended $ 63 $ 88 $ (25)
Nine months ended 172 265 (93)
==============================================================================
Net income available to the common stockholder decreased $25 million from the
1999 level for the three months ended September 30, 2000. The earnings decrease
was primarily due to lower temperature-related electric revenues and the
purchase of electricity options, which were not needed due to the
milder-than-expected summer temperatures. In addition, earnings decreased by $13
million due to the passing of the Customer Choice Act in Michigan, which
required an immediate five percent electric rate reduction for residential
customers, while commercial and industrial rates remain unchanged. Partially
offsetting these decreases were benefits from increased gas revenues and lower
operating costs, including a reduction in employee paid absence cost due to a
change in the labor contract with the union. Net income for the nine months
ended September 30, 2000 decreased $93 million from the comparable period in
1999. The earnings decrease primarily reflects the recording of a $45 million
regulatory obligation related to gas prices which are significantly above the
frozen gas commodity rate, purchased electricity options described above, lower
gas deliveries, and the electric rate reduction required by the Customer Choice
Act enacted in Michigan. Partially offsetting these decreases were lower
operating costs including the benefits related to reductions in employee
CE-1
51
paid absence cost. For further information, see the Electric and Gas Utility
Results of Operations sections and Note 2, Uncertainties.
ELECTRIC UTILITY RESULTS OF OPERATIONS
ELECTRIC PRETAX OPERATING INCOME:
In Millions
- -----------------------------------------------------------------------------
September 30 2000 1999 Change
- -----------------------------------------------------------------------------
Three months ended $ 118 $ 168 $ (50)
Nine months ended 342 425 (83)
=============================================================================
For the three months ended September 30, 2000, electric pretax operating income
decreased $50 million from the comparable period in 1999. The earnings decrease
reflects lower temperature-related electric revenues, the purchase of
electricity options, which were not needed due to the milder-than-expected
summer temperatures, and the passage of the Customer Choice Act in Michigan,
partially offset by decreased operating expenses. The Customer Choice Act
required an immediate five percent electric rate reduction for residential
customers, while commercial and industrial rates remain unchanged. Power costs
increased significantly due to higher purchased electricity options costs in
anticipation of a predicted hot summer that did not materialize and due to
additional purchased power as a result of unscheduled outages at Consumers'
internal generating facilities. For the nine months ended September 30, 2000,
electric pretax operating income decreased $83 million from the comparable
period in 1999. The earnings decrease reflects the increased cost of power and
electricity options and the impact of the electric rate reduction, partially
offset by increased electric sales revenue and decreased operations expenses.
During the current year, Consumers needed additional purchased power to meet
customer requirements due to scheduled and unscheduled outages at Consumers'
internal generating facilities. Consumers also had higher costs to purchase
electricity options this year to ensure an adequate supply of power for its
customers for a predicted hotter-than-normal summer. Current-year operating
expenses also reflect benefits of $11 million related to reductions in employee
paid absence cost. The following table quantifies these impacts on pretax
operating income:
In Millions
- ------------------------------------------------------------------------------------------------
Three Months Nine Months
Ended September 30 Ended September 30
Change Compared to Prior Year 2000 vs 1999 2000 vs 1999
- ------------------------------------------------------------------------------------------------
Electric deliveries $ (7) $ 5
Power supply costs and related revenue (45) (70)
Rate decrease (14) (19)
Non-commodity revenue 7 3
Operation and maintenance expense 11 2
General taxes and depreciation expense (2) (4)
------------------------------
Total change $ (50) $ (83)
===============================================================================================
ELECTRIC DELIVERIES: Electric deliveries were 10.7 billion kWh for the three
months ended September 30, 2000, slightly less than the third quarter of 1999.
Electric deliveries were 30.4 billion kWh for the nine months ended September
30, 2000, again a slight decrease from the corresponding 1999 period. Total
electric deliveries decreased due to lower intersystem sales, and less usage by
residential and industrial customers.
CE-2
52
POWER SUPPLY COSTS:
In Millions
- --------------------------------------------------------------------------------
September 30 2000 1999 Change
- --------------------------------------------------------------------------------
Three months ended $ 355 $ 335 $ 20
Nine months ended 949 906 43
================================================================================
Power supply costs increased for the three months ended September 30, 2000 from
the comparable period in 1999 and also increased for the nine-month period,
primarily due to higher interchange power costs and electricity options costs.
Consumers had to purchase more, higher-priced external power because of
decreased internal generation resulting from scheduled and unscheduled outages.
Consumers also incurred higher electricity options costs to reserve the
availability of extra power in 2000 due to a predicted hotter-than-normal
summer.
GAS UTILITY RESULTS OF OPERATIONS
GAS PRETAX OPERATING INCOME:
In Millions
- ---------------------------------------------------------------------------
September 30 2000 1999 Change
- ---------------------------------------------------------------------------
Three months ended $ 9 $ (6) $ 15
Nine months ended 44 87 (43)
===========================================================================
Gas pretax operating income increased by $15 million in the three months ended
September 30, 2000. The earnings increase reflects higher gas deliveries due to
cooler temperatures in the three months ended September 30, 2000, lower
operating costs and the absence of a 1999 regulatory disallowance of $7 million.
Gas pretax operating income decreased in the nine months ended September 30,
2000 by $43 million. The earnings decrease primarily reflects the recording of a
$45 million regulatory obligation related to gas prices, which are significantly
above the gas commodity rate that is frozen through March 31, 2001. This frozen
commodity rate relates to a three-year experimental gas choice pilot program,
which provides Consumers the opportunity to benefit or lose from changes in
commodity gas prices. See Note 2, Uncertainties, "Gas Rate Matters - Gas
Restructuring", for more detailed information on this matter. The earnings
decrease also reflects decreased gas deliveries in the nine months ended
September 30, 2000 due to warmer temperatures during the first quarter of 2000.
Partially offsetting these decreases were increased gas wholesale and retail
services revenue and lower operating costs including benefits of $5 million
related to reductions in employee paid absence cost. The following table
quantifies these impacts on Pretax Operating Income.
In Millions
- -----------------------------------------------------------------------------------------
Three Months Nine Months
Ended September 30 Ended September 30
Change Compared to Prior Year 2000 vs 1999 2000 vs 1999
- -----------------------------------------------------------------------------------------
Gas deliveries $ 5 $ (2)
Gas commodity costs and related revenue 8 (52)
Gas wholesale and retail services 1 5
Operation and maintenance expense 4 7
General taxes and depreciation expense (3) (1)
--- -----
Total change $15 $ (43)
==========================================================================================
CE-3
53
GAS DELIVERIES: Gas system deliveries for the three months ended September 30,
2000, including miscellaneous transportation, totaled 45 bcf, an increase of 1
bcf or 3 percent from the comparable period in 1999. The increased deliveries
reflect cooler temperatures during the third quarter of 2000. Gas system
deliveries for the nine months ended September 30, 2000, including miscellaneous
transportation, totaled 273 bcf, an increase of 1 bcf or .1 percent from the
comparable period in 1999.
COST OF GAS SOLD:
In Millions
- ------------------------------------------------------------------------------
September 30 2000 1999 Change
- ------------------------------------------------------------------------------
Three months ended $ 60 $ 44 $ 16
Nine months ended 450 428 22
==============================================================================
The cost of gas sold increased for the three months ended September 30, 2000 due
to higher gas prices and increased gas deliveries due to cooler than normal
temperature. Higher gas prices also impacted the cost of gas sold for the nine
months ended September 30, 2000. These higher gas costs were partially offset by
decreased sales from warmer-than-normal temperatures during the first quarter of
2000.
CAPITAL RESOURCES AND LIQUIDITY
CASH POSITION, INVESTING AND FINANCING
OPERATING ACTIVITIES: Consumers derives cash from operating activities involving
the sale and transportation of natural gas and the generation, transmission,
distribution and sale of electricity. Cash from operations totaled $352 million
and $544 million for the first nine months of 2000 and 1999, respectively. The
$192 million decrease was primarily due to gas purchase prices which are
significantly above the frozen gas commodity rate, purchased electricity
options, lower gas deliveries and the electric rate reduction required by the
Customer Choice Act as discussed in the results of operations. The decrease in
cash was also affected by an $85 million increase in gas inventories and other
temporary changes in working capital items due to timing of cash receipts and
payments. Consumers primarily uses cash derived from operating activities to
maintain and expand electric and gas systems, to retire portions of long-term
debt, and to pay dividends.
INVESTING ACTIVITIES: Cash used for investing activities totaled $394 million
and $335 million for the first nine months of 2000 and 1999, respectively. The
change of $59 million is primarily the result of a $53 million increase in
capital expenditures and a $16 million increase in the cost to retire property,
predominately related to the Clean Air Act. Offsetting these costs was a $9
million decrease in investment in nuclear decommissioning trust funds.
FINANCING ACTIVITIES: Cash provided by financing activities totaled $33 million
for the first nine months of 2000 compared to $215 million used in the first
nine months of 1999. The change of $248 million is primarily the result of the
absence of $200 million retirement of preferred stock and the absence of $150
million capital contribution from Consumers' common stockholder. The change was
also affected by an increase of $114 million in notes payable and $82 million
reduction 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 sources of funds, see Note 3, Short-Term Financing and
Capitalization.
CE-4
54
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 $529 $669 $639
Nuclear fuel lease 3 26 26
Capital leases other than nuclear fuel 23 25 25
-------------------------------
$555 $720 $690
===========================================================================
Electric utility operations (a)(b) $440 $580 $545
Gas utility operations (a) 115 140 145
-------------------------------
$555 $720 $690
===========================================================================
(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
for compliance with recently revised national air quality standards under the
Clean Air Act. For further information see Note 2, Uncertainties.
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 2005
based on a steadily growing customer base. This growth rate does not take into
account the impact of electric industry restructuring, including the impact of
the Customer Choice Act that allows customers to choose their electricity
supplier, 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: Since 1997, there have been repeated
efforts made in the Michigan Legislature to enact electric utility restructuring
legislation. These efforts resulted in the passage of the Customer Choice Act,
which became effective June 5, 2000.
Generally, electric utility restructuring is the regulatory and legislative
attempt to introduce competition to the electric industry by allowing customers
to choose their supplier of electricity generation. Such competition
affects, and will continue to affect, Consumers' retail electric business.
Several years ago, prior to the enactment of the Customer Choice Act, Consumers
had entered multi-year electric supply contracts with a number of its largest
industrial customers to provide power to some of their facilities and the MPSC
approved these contracts as part of its phased introduction to competition.
During the period from 2000 through 2005, some of these contracts can be
terminated or restructured. These contracts involve 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.
CE-5
55
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, effective January 1, 2001,
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 restructure and continue
certain parts of the MEPCC control area and joint transmission operations, but
expressly exclude any merchant operations (electricity purchasing, sales, and
dispatch operations). Consumers is unable to predict the outcome of these
negotiations, but does not anticipate any adverse impacts caused by
restructuring of the MEPCC. In the interim, Detroit Edison negotiated with
Consumers a one-month extension of the current agreement's termination effective
date to February 1, 2001. Consumers is in the process of establishing systems
and procedures to perform independent merchant operations, which are expected to
be in place by February 1, 2001. The termination of joint merchant operations
with Detroit Edison will open Detroit Edison and Consumers to wholesale market
competition as individual companies. Consumers can not predict the financial
impact of terminating these joint operations.
In part, because of certain policy pronouncements by the FERC, Consumers joined
the Alliance RTO and recently filed an application with the FERC to transfer
ownership and control of its transmission facilities to a wholly owned
subsidiary, Michigan Transco. This represents the first step in Consumers' plan
to transfer control of or to divest itself of ownership, operation and control
of its transmission assets.
Uncertainty exists with respect to the enactment of federal electric industry
restructuring legislation. A variety of bills introduced in Congress in recent
years have sought to change existing federal regulation of the industry. These
federal bills could potentially affect or supercede state regulation; however,
none have been enacted.
Consumers cannot predict the outcome of these electric industry-restructuring
issues on its financial position, liquidity, or results of operations.
RATE MATTERS: Prior to June 5, 2000 there were several pending rate issues that
could have affected Consumers' electric business. As a result of the passage of
the Customer Choice Act, certain MPSC rate proceedings and a complaint by ABATE
seeking a reduction in rates have been dismissed.
For further information and material changes relating to the rate matters and
restructuring of the electric utility industry, see Note 1, Corporate Structure
and Summary of Significant Accounting Policies, and Note 2, Uncertainties,
"Electric Rate Matters - Electric Restructuring" and "Electric Rate Matters -
Electric Proceedings," incorporated by reference herein.
NUCLEAR MATTERS: Subsequent to quarter end, Consumers has signed an agreement
to become a full partner in NMC, acquiring a financial interest in NMC and a
position on the NMC Board of Directors. Consumers will transfer responsibility
for the operation of its Palisades nuclear plant to NMC. NMC was formed by four
upper Midwest utilities in February 1999 to operate seven nuclear units at five
plant sites in Wisconsin, Minnesota and Iowa. With Consumers as a partner, NMC
will have responsibility for operating eight units with 4,500 megawatts of
generating capacity.
Consumers will retain ownership of the plant, its 789 MW output, the spent fuel
on site, and ultimate responsibility for the safe operation, maintenance and
decommissioning of the plant. Approval will be sought from the NRC for an
amendment to Palisades' operating license designating NMC as the plant's
operator. Under this agreement, salaried Palisades employees will become NMC
employees in approximately mid 2001. Union employees will work under NMC
supervision pursuant to their existing labor contract as Consumer employees.
This agreement will benefit Consumers by consolidating expertise and
controlling costs and resources among all of the nuclear plants being operated
by the five NMC member companies. The ultimate financial impact is uncertain.
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
CE-6
56
Superfund; 3) electric industry restructuring, how the MPSC ultimately
calculates the amount of Stranded Costs and the related true-up adjustments and
the manner in which the true-up operates, and the ability to recover fully the
cost of doing business under the rate caps; 4) the successful sale of
Securitization bonds on a timely basis; 5)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; 6) the transfer of
Consumers transmission facilities to Michigan Transco and its successful
disposition or integration into an RTO and 7) ongoing issues relating to the
storage of spent nuclear fuel and the operating life of Palisades and the
successful operation of NMC. 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.
GAS RESTRUCTURING: In December 1997, the MPSC approved Consumers' application to
implement a gas customer choice pilot program. The program was designed to
encourage Consumers to minimize its purchased natural gas commodity costs while
providing rate stability for its customers. This pilot program became effective
on April 1, 1998. The pilot program ends on March 31, 2001. The program allows
up to 300,000 residential, commercial and industrial retail gas sales customers
to choose an alternative gas commodity supplier in direct competition with
Consumers. As of September 30, 2000, more than 155,000 customers chose
alternative gas suppliers, representing approximately 39 bcf of gas load.
Customers who had voluntarily chosen to remain as sales customers of Consumers
will not see a rate change in their gas rates. This three-year program: 1)
freezes gas distribution rates through March 31, 2001, establishing a delivered
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. The Michigan appellate courts have affirmed the pilot
program in its entirety the December 1997 MPSC order. On October 13, 2000, the
MPSC adopted model terms and conditions for permanent gas customer choice
programs. On October 24, 2000, the MPSC approved Consumers' voluntary
application to establish a permanent customer choice program in its service
territory beginning April 1, 2001 after the pilot program expires. Beginning
April 1, 2001, Consumers will no longer be subject to a frozen gas commodity
cost. Consumers will then return to a gas cost recovery mechanism such that it
will recover all prudently incurred natural gas commodity costs from it
customers. Under the permanent gas customer choice program, up to 600,000 of
Consumers' natural gas customers will be eligible to participate in the program
beginning April 1, 2001. By April 1, 2002, up to 900,000 gas customers will be
eligible to participate. All of Consumers' gas customers will be eligible to
select an alternate natural gas supplier beginning April 1, 2003. Consumers
would continue to transport and distribute gas to these customers.
Recent significant increases in gas prices have exposed Consumers to gas
commodity losses during the last year of the pilot program. Additional exposure
to losses could occur if the cost of purchased gas exceeds $7.00 per mcf or
abnormal weather causes additional gas purchases. Consumers recorded a
regulatory liability of $45 million in the second quarter 2000 to reflect
estimated losses due to increases in natural gas commodity prices. On
October 24, 2000, the MPSC approved Consumers' application to reclassify
recoverable, low-cost, base gas in Consumers' gas storage reservoirs. The MPSC
allowed Consumers to begin immediately to include the cost of its recoverable
base gas with higher cost purchased gas. The gas accounting order is expected to
eliminate the need for Consumers to recognize any further losses related to gas
commodity cost under-recoveries.
CE-7
57
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) successful implementation of the new
expanded gas customer choice program beginning in April 2001; 3) permanent gas
industry restructuring; and 4) implementation of the GCR mechanism in April 2001
and the success or failure of initiatives undertaken to protect against gas
commodity price increases. For further detailed information about these
uncertainties, see Note 2.
OTHER OUTLOOK
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
Since 1998, the FASB has issued three accounting standards regarding accounting
for derivative instruments and hedging activities, effective January 1, 2001.
These standards require that Consumers recognize all derivative contracts on the
balance sheet as either assets or liabilities and measure the derivative
contracts at fair value. Consumers must recognize changes in fair value in
either earnings or other comprehensive income depending on the intended use of
the derivative.
Consumers believes that the majority of its derivatives contracts qualify for
the normal purchases and sales exception and therefore, in accordance with this
new accounting standard, would not be required to be recognized at fair value.
However, Consumers currently anticipates that it will be required to record
electricity and gas option contracts, and interest rate swaps on its balance
sheet at fair value. It is anticipated that changes in the fair value of these
contracts will be recorded in other comprehensive income. Derivative and hedge
accounting for utility industry option contracts, however, remains uncertain and
the financial impact is dependent upon resolution of certain industry issues
with the FASB. If the standard is not amended to allow option contracts to be
treated as normal purchases or cash flow hedges, changes in the fair value of
these contracts will be recorded in earnings, and could cause earnings
volatility. The financial impact to earnings is unknown at this time, but
Consumers continues to quantify the effects of adoption on its financial
statements.
In December 1999, the SEC released SAB No. 101 summarizing the SEC staff's views
on revenue recognition policies based upon existing generally accepted
accounting principles. The SEC staff has deferred the implementation date of SAB
No. 101 until no later than the fourth quarter of fiscal years beginning after
December 15, 1999. Consumers has adopted the provisions of SAB No. 101 as of
October 1, 2000. The impact of adopting SAB No. 101 is not material to Consumers
consolidated results of operations or financial position.
CE-8
58
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 a less than 20 percent equity
investment in CMS Energy. A hypothetical 10 percent adverse change in market
price would result in a $10 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 September 30, 2000, Consumers had outstanding $851 million of
variable-rate debt. In order to minimize adverse interest-rate changes,
Consumers entered into fixed interest-rate swaps for a notional amount of $300
million. Assuming a hypothetical 10 percent adverse change in market interest
rates, Consumers' exposure to earnings is limited to $6 million. As of
September 30, 2000, Consumers had outstanding long-term fixed-rate debt
including fixed-rate swaps of $2.360 billion with a fair value of $2.262
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.
OTHER
The Union represents Consumers' operating, maintenance and construction
employees. Consumers and the Union negotiated a new collective bargaining
agreement that became effective as of June 1, 2000. By its terms, that agreement
will continue in full force and effect until June 1, 2005. Consumers does not
anticipate any material adverse financial effects on its financial position,
liquidity, or results of operations as a result of changes to this agreement.
During the first and third quarters of 2000, Consumers implemented the results
of a change in its paid personal absences plan, in part due to provisions of a
new union labor contract. The change resulted in employees receiving the benefit
of paid personal absence immediately at the beginning of each fiscal year,
rather than earning it in the previous year. The change for non-union employees
affected the first quarter of 2000. The
CE-9
59
change for union employees affected the third quarter of 2000. The cumulative
effect of these one-time changes decreased operating expenses by $16 million
collectively, and increased earnings, net of tax, by $6 million in the first
quarter and $4 million in the third quarter.
CE-10
60
(This page intentionally left blank)
CE-11
61
CONSUMERS ENERGY COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 2000 1999 2000 1999
- ----------------------------------------------------------------------------------------------------------------
In Millions
OPERATING REVENUE
Electric $ 715 $ 753 $2,002 $2,052
Gas 142 112 765 792
Other 17 13 41 41
--------------------------------------------
874 878 2,808 2,885
- ----------------------------------------------------------------------------------------------------------------
OPERATING EXPENSES
Operation
Fuel for electric generation 94 98 240 262
Purchased power - related parties 127 140 417 418
Purchased and interchange power 134 97 292 226
Cost of gas sold 60 44 450 428
Other 134 143 398 423
--------------------------------------------
549 522 1,797 1,757
Maintenance 38 43 130 122
Depreciation, depletion and amortization 96 94 312 307
General taxes 49 44 148 148
--------------------------------------------
732 703 2,387 2,334
- ----------------------------------------------------------------------------------------------------------------
PRETAX OPERATING INCOME
Electric 118 168 342 425
Gas 9 (6) 44 87
Other 15 13 35 39
--------------------------------------------
142 175 421 551
- ----------------------------------------------------------------------------------------------------------------
OTHER INCOME (DEDUCTIONS)
Dividends and interest from affiliates 2 4 7 10
Accretion income - 1 2 3
Accretion expense (2) (4) (6) (11)
Other, net 1 1 3 10
--------------------------------------------
1 2 6 12
- ----------------------------------------------------------------------------------------------------------------
INTEREST CHARGES
Interest on long-term debt 35 35 105 105
Other interest 12 12 29 29
Capitalized interest (2) - (2) -
--------------------------------------------
45 47 132 134
- ----------------------------------------------------------------------------------------------------------------
NET INCOME BEFORE INCOME TAXES 98 130 295 429
INCOME TAXES 26 37 96 144
--------------------------------------------
NET INCOME 72 93 199 285
PREFERRED STOCK DIVIDENDS - - 1 6
PREFERRED SECURITIES DISTRIBUTIONS 9 5 26 14
--------------------------------------------
NET INCOME AVAILABLE TO COMMON STOCKHOLDER $ 63 $ 88 $ 172 $ 265
================================================================================================================
THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
CE-12
62
CONSUMERS ENERGY COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30 2000 1999
- ----------------------------------------------------------------------------------------------------------------
IN MILLIONS
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 199 $ 285
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation, depletion and amortization (includes nuclear
decommissioning of $29 and $38 respectively) 312 307
Capital lease and other amortization 23 28
Accretion expense 6 11
Accretion income - abandoned Midland project (2) (3)
Undistributed earnings of related parties (net
of $8 and $10 dividends respectively) (28) (30)
Deferred income taxes and investment tax credit (22) (7)
MCV power purchases (42) (45)
Regulatory obligation - gas choice 27 -
Changes in other assets and liabilities (121) (2)
-----------------------
Net cash provided by operating activities 352 544
- ----------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (excludes assets placed under capital lease) (344) (291)
Cost to retire property, net (78) (62)
Investments in nuclear decommissioning trust funds (29) (38)
Investment in Electric Restructuring Implementation Plan (20) (24)
Proceeds from nuclear decommissioning trust funds 28 29
Associated company preferred stock redemption 49 50
Other - 1
-----------------------
Net cash used in investing activities (394) (335)
- ----------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Payment of common stock dividends (126) (208)
Preferred securities distributions (26) (14)
Payment of capital lease obligations (23) (28)
Payment of preferred stock dividends (1) (9)
Retirement of bonds and other long-term debt (7) (23)
Increase in notes payable, net 216 102
Retirement of preferred stock - (200)
Contribution from stockholder - 150
Proceeds from bank loans - 15
-----------------------
Net cash provided by (used in) financing activities 33 (215)
- -----------------------------------------------------------------------------------------------------------------
NET DECREASE IN CASH AND TEMPORARY CASH INVESTMENTS (9) (6)
CASH AND TEMPORARY CASH INVESTMENTS, BEGINNING OF PERIOD 18 25
-----------------------
CASH AND TEMPORARY CASH INVESTMENTS, END OF PERIOD $ 9 $ 19
================================================================================================================
Other cash flow activities and non-cash investing and financing activities were:
Cash transactions
Interest paid (net of amounts capitalized) $ 122 $ 131
Income taxes paid (net of refunds) 110 155
Non-cash transactions
Nuclear fuel placed under capital lease $ 3 $ 2
Other assets placed under capital leases 10 11
================================================================================================================
All highly liquid investments with an original maturity of three months or less
are considered cash equivalents.
THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
CE-13
63
CONSUMERS ENERGY COMPANY
CONSOLIDATED BALANCE SHEETS
ASSETS SEPTEMBER 30 SEPTEMBER 30
2000 DECEMBER 31 1999
(UNAUDITED) 1999 (UNAUDITED)
- ----------------------------------------------------------------------------------------------------------------
In Millions
PLANT (AT ORIGINAL COST)
Electric $7,146 $6,981 $6,920
Gas 2,529 2,461 2,427
Other 25 25 25
--------------------------------------
9,700 9,467 9,372
Less accumulated depreciation, depletion and amortization 5,818 5,643 5,558
--------------------------------------
3,882 3,824 3,814
Construction work-in-progress 294 199 179
--------------------------------------
4,176 4,023 3,993
- ----------------------------------------------------------------------------------------------------------------
INVESTMENTS
Stock of affiliates 73 139 147
First Midland Limited Partnership 241 240 238
Midland Cogeneration Venture Limited Partnership 273 247 240
--------------------------------------
587 626 625
- ----------------------------------------------------------------------------------------------------------------
CURRENT ASSETS
Cash and temporary cash investments at cost, which
approximates market 9 18 19
Accounts receivable and accrued revenue, less allowances
of $3, $4 and $4, respectively 4 98 22
Accounts receivable - related parties 66 67 62
Inventories at average cost
Gas in underground storage 301 216 288
Materials and supplies 64 62 58
Generating plant fuel stock 48 46 37
Postretirement benefits 25 25 25
Deferred income taxes 2 8 -
Prepaid property taxes and other 98 159 85
--------------------------------------
617 699 596
- ----------------------------------------------------------------------------------------------------------------
NON-CURRENT ASSETS
Regulatory assets
Unamortized nuclear costs 476 519 506
Postretirement benefits 317 341 349
Abandoned Midland Project 28 48 53
Other 116 125 128
Nuclear decommissioning trust funds 617 602 572
Other 198 187 167
--------------------------------------
1,752 1,822 1,775
- ----------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $7,132 $7,170 $6,989
================================================================================================================
CE-14
64
STOCKHOLDERS' INVESTMENT AND LIABILITIES SEPTEMBER 30 SEPTEMBER 30
2000 DECEMBER 31 1999
(UNAUDITED) 1999 (UNAUDITED)
- ---------------------------------------------------------------------------------------------------------------
In Millions
CAPITALIZATION
Common stockholder's equity
Common stock $ 841 $ 841 $ 841
Paid-in capital 646 645 645
Revaluation capital 26 37 41
Retained earnings since December 31, 1992 531 485 437
---------------------------------------
2,044 2,008 1,964
Preferred stock 44 44 44
Company-obligated mandatorily redeemable preferred securities of:
Consumers Power Company Financing I (a) 100 100 100
Consumers Energy Company Financing II (a) 120 120 120
Consumers Energy Company Financing III (a) 175 175 -
Long-term debt 2,009 2,006 2,009
Non-current portion of capital leases 81 85 84
---------------------------------------
4,573 4,538 4,321
- ----------------------------------------------------------------------------------------------------------------
CURRENT LIABILITIES
Current portion of long-term debt and capital leases 80 90 148
Notes payable 430 214 317
Accounts payable 186 224 156
Accrued taxes 106 232 89
Accounts payable - related parties 61 82 81
Power purchases - MCV Partnership 47 47 47
Accrued interest 39 37 31
Deferred income taxes - - 5
Accrued refunds 1 11 19
Other 148 139 206
---------------------------------------
1,098 1,076 1,099
- ----------------------------------------------------------------------------------------------------------------
NON-CURRENT LIABILITIES
Deferred income taxes 651 700 620
Postretirement benefits 385 420 425
Power purchases - MCV Partnership 37 73 87
Deferred investment tax credit 119 125 127
Regulatory liabilities for income taxes, net 86 64 121
Other 183 174 189
---------------------------------------
1,461 1,556 1,569
- ----------------------------------------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES (Notes 1 and 2)
TOTAL STOCKHOLDERS' INVESTMENT AND LIABILITIES $ 7,132 $ 7,170 $ 6,989
================================================================================================================
(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.
CE-15
65
CONSUMERS ENERGY COMPANY
CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDER'S EQUITY
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 2000 1999 2000 1999
- ----------------------------------------------------------------------------------------------------------------
In Millions
COMMON STOCK
at beginning and end of period (a) $ 841 $ 841 $ 841 $ 841
- ----------------------------------------------------------------------------------------------------------------
OTHER PAID-IN CAPITAL
At beginning of period 645 645 645 502
Stockholder's contribution - - - 150
Capital stock expense - - - (7)
Miscellaneous 1 - 1 -
------------------------------------------------
at end of period 646 645 646 645
- ----------------------------------------------------------------------------------------------------------------
REVALUATION CAPITAL
At beginning of period 19 57 37 68
Change in unrealized investment-gain (loss) (b) 7 (16) (11) (27)
------------------------------------------------
At end of period 26 41 26 41
- ----------------------------------------------------------------------------------------------------------------
RETAINED EARNINGS
At beginning of period 485 438 485 434
Net income 72 93 199 285
Cash dividends declared- Common Stock (17) (89) (126) (262)
Cash dividends declared- Preferred Stock - - (1) (6)
Preferred securities distributions (9) (5) (26) (14)
-----------------------------------------------
At end of period 531 437 531 437
------------------------------------------------
TOTAL COMMON STOCKHOLDER'S EQUITY $2,044 $1,964 $2,044 $1,964
================================================================================================================
(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
$4, $(9), $(6) and $(15), respectively $ 7 $ (16) $ (11) $ (27)
Net income 72 93 199 285
------------------------------------------------
Total Comprehensive Income $ 79 $ 77 $ 188 $ 258
================================================
THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
CE-16
66
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. 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. According to current accounting standards,
Consumers can continue to carry its energy supply-related regulatory assets if
legislation or an MPSC rate order allows the collection of cash flows to recover
these regulatory assets from its regulated transmission and distribution
customers. As of September 30, 2000, Consumers had a net investment in energy
supply facilities of $1.048 billion included in electric plant and property. See
Note 2, Uncertainties, "Electric Rate Matters - Electric Restructuring.
REPORTABLE SEGMENTS: Consumers has two reportable segments: electric and gas.
The electric segment consists of activities associated with the generation,
transmission and distribution of electricity. The gas segment consists of
activities associated with the production, transportation, storage and
distribution of natural gas. Consumers' reportable segments are domestic
strategic business units organized and managed by the nature of the product and
service each provides. The accounting policies of the segments are the same as
those described in Consumers' 1999 Form 10-K. Consumers' management evaluates
performance based on pretax operating income. The Consolidated Statements of
Income show operating revenue and pretax operating income by reportable segment.
Intersegment sales and transfers are accounted for at current market prices and
are eliminated in consolidated pretax operating income by segment.
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
CE-17
67
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 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 call 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. As of September 30, 2000, Consumers has a deferred
asset of $55 million for electricity call option contracts, and commitments to
purchase additional call options in the amount of $22 million.
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.
1997 EPA Revised NOx and Small Particulate Emissions Standards - In 1997, the
EPA revised these standards to impose further limitations on nitrogen oxide and
small particulate-related emissions. After a United States Court of Appeals
found the revision an unconstitutional delegation of legislative power, the EPA
suspended the standards under the 1997 rule and reinstated the pre-1997
standards. In January 2000, the Department of Justice, on behalf of the EPA,
filed a petition for the United States Supreme Court to review the case. In May
2000, the Supreme Court agreed to hear the appeal.
1998 EPA Plan for NOx Emissions - In September 1998, based in part upon the 1997
standards, the EPA Administrator issued final regulations requiring the state of
Michigan to further limit 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. However, in early 2000, the United States Court of Appeals
then upheld the EPA's final regulations. The state of Michigan has filed a
petition with the United States Supreme Court appealing this ruling. During this
time period, the state of Michigan established alternative, less stringent
nitrogen oxide emission reduction requirements. At this time the state of
Michigan has decided to draft new rules to comply with the more stringent EPA
requirements while continuing to pursue its appeal to the United States Supreme
Court. In August 2000, the United States Court of Appeals extended the time to
comply with the 1998 EPA final rule until May 2004.
Section 126 Petitions - 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 for nitrous oxide emissions. Under the
revised Section 126 rule, the emission
CE-18
68
rate will become effective on May 1, 2003 and apply for the ozone season in 2003
and during each subsequent year. Various parties' petitions challenging the
EPA's rule have been filed.
Until all air quality targets are conclusively established, the estimated cost
of compliance discussed below is subject to revision.
Cost of Environmental Law Compliance - The preliminary estimates of capital
expenditures to reduce nitrogen oxide-related emissions to the initial level
originally proposed by the state of Michigan for Consumers' fossil-fueled
generating units range from $150 million to $290 million, calculated in year
2000 dollars. If Consumers has to meet the EPA's 1998 and/or Section 126
petition requirements, the estimated cost to Consumers would be between $290
million and $500 million, calculated in year 2000 dollars. In both 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
$72 million to install equipment at certain generating units to comply with the
acid rain provisions of the Clean Air Act. Management believes that these
expenditures will not materially affect Consumers' annual operating costs.
Cleanup and Solid Waste - Under the Michigan Natural Resources and Environmental
Protection Act, Consumers expects that it will ultimately incur investigation
and remedial action costs at a number of sites. Nevertheless, it believes that
these costs are recoverable in rates under current ratemaking policies.
Consumers is a potentially responsible party at several contaminated sites
administered under Superfund. Superfund liability is joint and several. Along
with Consumers, many other creditworthy, potentially responsible parties with
substantial assets cooperate with respect to the individual sites. Based upon
past negotiations, Consumers estimates that its share of the total liability for
the known Superfund sites will be between $2 million and $9 million. As of
September 30, 2000, Consumers had accrued the minimum amount of the range for
its estimated Superfund liability.
During routine maintenance activities, Consumers identified PCB as a component
in certain paint, grout and sealant materials at the Ludington Pumped Storage
Facility. Consumers removed and replaced part of the PCB material. Consumers 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. In March 1999, the court
issued an opinion and order granting Consumers' motion for summary judgment,
resulting in the dismissal of the case. The plaintiffs appealed this decision.
The 6th Circuit Court of Appeals in Cincinnati unanimously dismissed the appeal
of the antitrust case against Consumers, but the parties have filed a petition
for rehearing.
CE-19
69
ELECTRIC RATE MATTERS
ELECTRIC RESTRUCTURING: Since 1997, there have been repeated efforts made in the
Michigan Legislature to enact electric restructuring legislation. On June 3,
2000, these efforts resulted in the passage of the Customer Choice Act and
related Securitization laws, which became effective June 5, 2000.
The Customer Choice Act: 1) permits all customers to exercise choice of electric
generation suppliers by January 1, 2002; 2) cuts residential electric rates by
five percent; 3) freezes all electric rates through December 31, 2003, and
establishes a rate cap for residential customers through at least December 31,
2005, and a rate cap for small commercial and industrial customers through at
least December 31, 2004; 4) allows for the use of Securitization to refinance
stranded costs as a means of offsetting the earnings impact of the five percent
residential rate reduction; 5) establishes a market power test which may require
the transfer of control of a portion of generation resources in excess of that
required to serve firm retail sales load (a requirement that Consumers is in
compliance with); 6) requires Michigan utilities to join a FERC approved RTO or
divest their interest in transmission facilities to an independent transmission
owner; 7) requires the joint expansion of available transmission capability by
Consumers, Detroit Edison and American Electric Power by at least 2,000 MW by
June 5 of 2002; and 8) allows for the recovery of stranded costs and
implementation costs incurred as a result of the passage of the act. Consumers
is highly confident that it will meet the conditions of items 5 and 7 above,
prior to the earliest rate cap termination dates specified in the act. Failure
to do so would result in an extension of the rate caps to as late as December
31, 2013.
In accordance with the Securitization law, Consumers filed an application with
the MPSC in July 2000, to begin the Securitization process. Securitization
typically involves the issuance of asset backed bonds with a higher credit
rating than conventional utility corporate financing. The MPSC issued a
financing order on October 24, 2000 authorizing Securitization of approximately
$470 million in qualified costs (primarily electric utility stranded generation
costs) plus recovery of the expenses of the Securitization. Approximately $50
million of annual cost savings effects from Securitization will offset,
prospectively, the earnings impact of the five percent residential rate
reduction required by the Customer Choice Act. The order permits Consumers to
apply the cost savings in excess of the five percent residential rate reduction
to rate reductions for non-residential and retail open access customers after
the bonds are sold. Consumers has sought on a priority basis to recover the five
percent residential rate reduction's effect on revenues lost from the date of
the financing order. Consumers estimates that the disallowed portion of revenue
recovery relating to the year 2000 five percent residential rate reduction may
reduce its operating earnings by $24 million in 2000. Consumers, and its special
purpose subsidiary that will issue the bonds, will recover the repayment of
principal, interest and other expenses relating to the issuance of the bonds
through a Securitization charge and a tax charge. These charges are subject to
an annual true-up until one year prior to the last expected maturity date of the
Securitization bonds, and no more than quarterly thereafter. The MPSC's order
will not increase current electric rates for any of Consumers' tariff customers.
Consumers has accepted the MPSC's financing order with clarifications needing
confirmation by the MPSC that will permit its special purpose subsidiary to
issue Securitization bonds during the first quarter of 2001. As with other
significant MPSC orders, the financing order is subject to appeal by any party
to the MPSC proceeding. During the appeal, the amortization of the approved
regulatory assets being securitized as qualified costs would be suspended and
effectively offset the loss in revenue resulting from the five percent
residential rate reduction. The amortization would be reestablished later, after
the bond sale, based on a schedule that is the same as the recovery of the
principal amounts of the securitized qualified costs. Ultimately, sale of
Securitization bonds will be required for the full rate reduction offset to
continue over the term of the bonds.
In September 1999, Consumers began implementing a plan for electric retail
customer open access. Consumers submitted this plan to the MPSC in 1998, and the
MPSC issued orders in March 1999 that generally supported the plan. The Customer
Choice Act states that orders issued by the MPSC before the date of this act
that 1) allow electric customers to choose their supplier, 2) authorize recovery
of net stranded costs
CE-20
70
and implementation costs, and 3) confirm any voluntary commitments of electric
utilities, are in compliance with this act and enforceable by the MPSC. As
required by the MPSC, on September 20, 2000, Consumers filed tariffs governing
its retail open access program and addressed revisions appropriate to comply
with the Customer Choice Act. Consumers cannot predict how the MPSC will modify
the tariff or enforce the existing restructuring orders.
In June 2000, the Court of Appeals issued an opinion relating to a number of
consolidated MPSC restructuring orders. The opinion primarily involved issues
that the Customer Choice Act has rendered moot. In a separate pending case,
ABATE and the Attorney General each appealed an August 1999 order in which the
MPSC found that it had jurisdiction to approve rates, terms and conditions for
electric retail wheeling (also known as electric customer choice) if a utility
voluntarily chooses to offer that service. Consumers believes that the Customer
Choice Act has rendered the issue moot, but cannot predict how the Court of
Appeals will resolve the issue.
During periods when electric demand is high, the cost of purchasing energy on
the spot market can be substantial. To reduce Consumers' exposure to the
fluctuating cost of electricity, and to ensure adequate supply to meet demand,
Consumers intends to maintain sufficient generation and to purchase electricity
from others to create a power reserve (also called a reserve margin) of
approximately 15 percent. The reserve margin provides Consumers with additional
power above its anticipated peak power demands. It also allows Consumers to
provide reliable service to its electric service customers and to protect itself
against unscheduled plant outages and unanticipated demand. Consumers is
planning for a reserve margin for the summers 2001, 2002, and 2003, of 15
percent. The actual reserve margin needed will depend primarily on summer
weather conditions, the level of retail open access load being served by others
during the summer, and any unscheduled plant outages. The existing retail open
access plan allows other electric service providers with the opportunity to
serve up to 750 MW of nominal retail open access load. As of October 2000, only
one electric service provider has initiated service to retail open access load.
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 electricity call option contracts for the physical delivery of
electricity during the months of June through September. The cost of these
electricity call option contracts for summer 2000 was approximately $51 million.
Consumers expects to use a similar strategy in the future, but cannot predict
the cost of this strategy at this time. As of September 30, 2000, Consumers had
purchased or had commitments to purchase electricity call option contracts
covering the estimated reserve margin requirements for summer 2001, and
partially covering the estimated reserve margin requirements for summers 2002
and 2003, at a cost of $77 million, of which $39 million pertains to 2001.
In 1999, the FERC issued Order No. 2000, which describes the characteristics the
FERC would find acceptable in a model RTO. In this order, the FERC declined to
mandate that utilities join RTOs, but did order utilities to make filings in
October 2000 and January 2001 declaring their intentions with respect to RTO
membership.
In 1999, Consumers and four other electric utility companies joined together to
form a coalition known as the Alliance Companies for the purpose of creating a
FERC approved RTO. Both the Alliance Companies and Consumers have separately
filed proposed alternative governance structures for the formation of an RTO.
Neither of these proposals has been approved by the FERC.
CE-21
71
On October 13, 2000, Consumers filed an application with the FERC to transfer
ownership and control of its transmission facilities to a wholly owned
subsidiary, Michigan Transco. In that application, Consumers and Michigan
Transco stated that the filing represented the first step in Consumers' plan to
transfer control of or to divest itself of ownership, operation and control of
its transmission business to an independent third party. Whether Consumers
chooses to divest its transmission business or to transfer control of it to an
RTO, Consumers' current plan is to remain in the business of generating and
distributing electric energy to retail customers.
On October 16, 2000, Consumers made an informational filing in compliance with
the FERC's Order No. 2000. In that filing Consumers responded to the FERC's
request for information about the RTO membership. In that filing Consumers said
it was a member of Alliance and intended to continue its membership for the near
future, but that it was also exploring other RTO options, as well as divestiture
of its transmission assets. While Consumers said it had not finally decided on a
specific end result, it nevertheless intended to comply with the Customer Choice
Act, which among other things, requires electric utilities like Consumers to
either join a FERC approved multistate RTO or divest its interest in
transmission facilities by December 31, 2001. Consumers anticipates that it will
make a decision regarding the transfer of its transmission assets to an RTO by
January 2001.
Consumers is uncertain about the outcome of the Alliance matter before the FERC
and its continued participation in Alliance.
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 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 June 2000, the Michigan Supreme Court
denied the application for leave to appeal. This case is now closed.
In 1997, ABATE filed a complaint with the MPSC. The complaint alleged that
Consumers' electric earnings are more than its authorized rate of return and
sought an immediate reduction in Consumers' electric rates that approximated
$189 million annually. As a result of the rate freeze imposed by the Customer
Choice Act, the
CE-22
72
MPSC issued an order in June 2000 dismissing the ABATE complaint. In July 2000
ABATE filed a rehearing petition with the MPSC. Consumers cannot predict the
outcome of the rehearing process.
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 would not grant
adjustment of customer rates through 2001. As a result of the rate freeze
imposed by the Customer Choice Act, the current rates will remain in effect
until at least December 31, 2003.
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
- ----------------------------------------------------------------------------------------------------------------
Nine Months Ended
September 30 2000 1999
- ----------------------------------------------------------------------------------------------------------------
Pretax operating income $35 $39
Income taxes and other 11 12
- ----------------------------------------------------------------------------------------------------------------
Net income $24 $27
================================================================================================================
Power Purchases from the MCV Partnership - Consumers' annual obligation to
purchase capacity from the MCV Partnership is 1,240 MW through the termination
of the PPA in 2025. The PPA provides that Consumers is to pay, based on the MCV
Facility's availability, a levelized average capacity charge of 3.77 cents per
kWh, a fixed energy charge, and a variable energy charge based primarily on
Consumers' average cost of coal consumed for all kWh delivered. Since January 1,
1993, the MPSC has permitted Consumers to recover capacity charges averaging
3.62 cents per kWh for 915 MW, plus a substantial portion of the fixed and
variable energy charges. Since January 1, 1996, the MPSC has also permitted
Consumers to recover capacity charges for the remaining 325 MW of contract
capacity with an initial average charge of 2.86 cents per kWh increasing
periodically to an eventual 3.62 cents per kWh by 2004 and thereafter. However,
due to the current freeze of Consumers' retail rates that was required by Public
Act 141, the capacity charge for the 325 MW is now frozen at 3.17 cents per kWh.
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.
Consumers recognized a loss in 1992 for the present value of the estimated
future underrecoveries of power costs under the PPA based on MPSC cost recovery
orders. At September 30, 2000 and September 30, 1999, the remaining after-tax
present value of the estimated future PPA liability associated with the 1992
loss totaled $55 million and $87 million, respectively. In March 1999, Consumers
and the MCV Partnership reached an agreement effective January 1, 1999 that
capped availability
CE-23
73
payments to the MCV Partnership at 98.5 percent. If the MCV Facility generates
electricity at the maximum 98.5 percent level during the next five years,
Consumers' after-tax cash underrecoveries associated with the PPA could be as
follows:
In Millions
- ------------------------------------------------------------------------------------------------------------------
2000 2001 2002 2003 2004
- ------------------------------------------------------------------------------------------------------------------
Estimated cash underrecoveries at 98.5%, net of tax $37 $39 $38 $37 $36
==================================================================================================================
Consumers continually evaluates the adequacy of the PPA liability. These
evaluations consider management's assessment of operating levels at the MCV
Facility through 2007, along with certain other factors including MCV related
costs that are included in Consumers' frozen retail rates. Should future results
be different than management's assessments, additional charges for a given year
of up to $33 million may be necessary. Management believes that the PPA
liability is adequate at this time. For further discussion on the impact of the
frozen PSCR, see "Electric Rate Matters" in this Note.
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 was contingent upon regulatory treatment
satisfactory to Consumers. Given uncertainties associated with the electric
restructuring legislation in Michigan, Consumers and PECO entered into an
interim arrangement for the sale of 125 MW of PPA capacity and associated energy
to PECO during 2000 until the regulatory treatment was determined. The requested
regulatory treatment was not received. Consequently, in August 2000, Consumers
advised PECO of its intention to terminate the long-term power sales agreement
prior to it becoming effective. The interim arrangement will be completed in
2000. Its completion will not affect the termination of the long-term agreement.
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 in March
2000 in which the NRC stated that no significant performance issues existed
during the assessment period in the reactor safety, radiation safety, and
safeguards
CE-24
74
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, in April 2000.
As part of that process, Palisades submitted required NRC performance data in
April 2000 that indicated that Consumers was within the limits of acceptable
performance for which no NRC response is required.
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 September
30, 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 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 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. In February 2000, Consumers submitted an analysis to
the NRC that 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. As of
September 30, 2000, Consumers had a recorded liability to the DOE of $128
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.
CE-25
75
In July 2000, the DOE announced that an agreement had been reached with another
utility to address the DOE's delay in accepting spent fuel. The DOE stated that
the agreement, which is in the form of a contract amendment, is intended to be a
framework that can be applied to other nuclear power plants. Consumers is
evaluating this matter further. In addition, two recent court decisions support
the right of utilities to pursue damage claims in the U. S. Court of Claims
against the DOE for failure to take delivery of spent fuel. Consumers is also
evaluating those rulings and their applicability to its contracts with the DOE.
CAPITAL EXPENDITURES: Consumers estimates electric capital expenditures,
including new lease commitments and environmental costs under the Clean Air Act,
of $440 million for 2000, $580 million for 2001, and $545 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 September 30, 2000, after
consideration of prior years' expenses, Consumers has a remaining accrued
liability of $59 million and a regulatory asset of $64 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.
GAS RATE MATTERS
GAS RESTRUCTURING: In December 1997, the MPSC approved Consumers' application to
implement a gas customer choice pilot program. The program was designed to
encourage Consumers to minimize its purchased natural gas commodity costs while
providing rate stability for its customers. This pilot program became effective
on April 1, 1998. The pilot program ends on March 31, 2001. The program allows
up to 300,000 residential, commercial and industrial retail gas sales customers
to choose an alternative gas commodity supplier in direct competition with
Consumers. As of September 30, 2000, more than 155,000 customers chose
alternative gas suppliers, representing approximately 39 bcf of gas load.
Customers who had voluntarily chosen to remain as sales customers of Consumers
will not see a rate change in their gas rates. This three-year program: 1)
freezes gas distribution rates through March 31, 2001, establishing a delivered
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. The Michigan appellate courts have affirmed the pilot
program in its entirety the December 1997 MPSC order. On October 13, 2000, the
MPSC adopted model terms and conditions for permanent gas customer choice
programs. On October 24, 2000, the MPSC approved Consumers' voluntary
application to establish a permanent customer choice program in its service
territory beginning April 1, 2001 after the pilot program expires. Beginning
April 1, 2001, Consumers will no longer be subject to a frozen gas commodity
cost. Consumers will then return to a gas cost recovery mechanism such that it
will recover all prudently incurred natural gas commodity costs from it
customers. Under the permanent
CE-26
76
gas customer choice program, up to 600,000 of Consumers' natural gas customers
will be eligible to participate in the program beginning April 1, 2001. By April
1, 2002, up to 900,000 gas customers will be eligible to participate. All of
Consumers' gas customers will be eligible to select an alternate natural gas
supplier beginning April 1, 2003. Consumers would continue to transport and
distribute gas to these customers.
Recent significant increases in gas prices have exposed Consumers to gas
commodity losses during the last year of the pilot program. Additional exposure
to losses could occur if the cost of purchased gas exceeds $7.00 per mcf or
abnormal weather causes additional gas purchases. Consumers recorded a
regulatory liability of $45 million in the second quarter 2000 to reflect
estimated losses due to increases in natural gas commodity prices. On October
24, 2000, the MPSC approved Consumers' application to reclassify recoverable,
low-cost, base gas in Consumers' gas storage reservoirs. The MPSC allowed
Consumers to begin immediately to include the cost of its recoverable base gas
with higher cost purchased gas. The gas accounting order is expected to
eliminate the need for Consumers to recognize any further losses related to gas
commodity cost under-recoveries.
OTHER GAS UNCERTAINTIES
CAPITAL EXPENDITURES: Consumers estimates gas capital expenditures, including
new lease commitments, of $115 million for 2000, $140 million for 2001, and $145
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.
3: SHORT-TERM FINANCING AND CAPITALIZATION
AUTHORIZATION: At September 30, 2000, Consumers had FERC authorization to issue
or guarantee through June 2002, up to $900 million of short-term securities
outstanding at any one time. Consumers also had remaining FERC authorization to
issue through June 2002 up to $250 million and $800 million of long-term
securities for refinancing or refunding purposes and for general corporate
purposes, respectively. Additionally, Consumers had FERC authorization to issue
$500 million of first mortgage bonds to be issued solely as security for the
long-term securities mentioned above.
SHORT-TERM FINANCING: Consumers has an unsecured $300 million credit facility
and unsecured lines of credit aggregating $190 million. These facilities are
available to finance seasonal working capital requirements and to pay for
capital expenditures between long-term financings. At September 30, 2000, a
total of $430 million was outstanding at a weighted average interest rate of 7.4
percent, compared with $317 million outstanding at September 30, 1999, at a
weighted average interest rate of 6.1 percent. In August 2000, Consumers entered
into variable-to-fixed interest rate swaps totaling $300 million in order to
reduce the impact of interest rate fluctuations.
CE-27
77
Consumers currently has in place a $325 million trade receivables sale program.
At September 30, 2000 and 1999, receivables sold under the program totaled $307
million and $314 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 $404
million of unrestricted retained earnings available to pay common dividends at
September 30, 2000. In January 2000, Consumers declared and paid a $79 million
common dividend; in April 2000, Consumers declared a $30 million common dividend
which was paid in May 2000; and in July 2000, Consumers declared a $17 million
common dividend, which was paid in August 2000. In October 2000, Consumers
declared a $61 million common dividend payable in November 2000.
CE-28
78
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 September 30, 2000 and 1999, the related
consolidated statements of income and common stockholders' equity for the
three-month and nine-month periods then ended and the related consolidated
statements of cash flows for the nine-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,
October 27, 2000.
CE-29
79
(This page intentionally left blank)
CE-30
80
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,
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 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 cash 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
81
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
- --------------------------------------------------------------------------------
September 30 2000 1999 Change
- --------------------------------------------------------------------------------
Three Months Ended $14 $14 $-
Nine Months Ended 55 62 (7)
================================================================================
For the three months ended September 30, 2000, net income was $14 million; no
change from the same period in 1999. For the nine months ended September 30,
2000, net income was $55 million, a decrease of $7 million from the
corresponding period in 1999 due primarily to lower reservation revenues, higher
benefit costs and corporate charges in 2000, partially offset by higher LNG
terminalling revenues in 2000. Total natural gas transportation volumes
delivered for the nine months ended September 30, 2000 increased 21 percent from
1999 primarily due to the addition of Sea Robin.
Revenues for the three months and the nine months ended September 30, 2000
increased $7 million and $11 million respectively, from the corresponding
periods in 1999 due primarily to increased LNG terminalling revenues and
revenues from Sea Robin in 2000, partially offset by lower reservation revenues
in 2000.
Operating expenses for the three months and the nine months ended September 30,
2000 increased $6 million and $19 million respectively, from the corresponding
period in 1999 due primarily to increased benefits, corporate charges and the
acquisition of Sea Robin.
Other income for the three months ended September 30, 2000 increased $2 million
from the corresponding period in 1999 due to interest income on a related party
Note Receivable. For the nine months ended September 30, 2000 other income
increased $1 million due to interest income on a higher related party Note
Receivable balance, partially offset by a non-recurring transition surcharge
recovery recorded in 1999.
Interest on long-term debt for the three months and the nine months ended
September 30, 2000 increased $3 million and $18 million respectively, from the
corresponding period in 1999 primarily due to interest on the additional debt
incurred by Panhandle in 2000 and 1999 (See Note 1 and Note 6). Other interest
decreased $13 million for the nine months ended September 30, 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
82
PRETAX OPERATING INCOME:
In Millions
- --------------------------------------------------------------------------------
Three Months Nine Months
Ended September 30 Ended September 30
Change Compared to Prior Year 2000 vs 1999 2000 vs 1999
- --------------------------------------------------------------------------------
Reservation revenue $(9) $(23)
LNG terminalling revenue 10 20
Commodity revenue 5 12
Other revenue 1 2
Operations and maintenance (5) (17)
Depreciation and amortization (2) (5)
General taxes 1 3
----------------------------------------------
Total Change $1 $ (8)
================================================================================
OUTLOOK
CMS Energy intends to use Panhandle as a platform for growth in the United
States and derive added value through expansion opportunities for multiple CMS
Energy businesses. The growth strategy around Panhandle includes enhancing the
opportunities for other CMS Energy businesses involved in electric power
generation and distribution, mid-stream activities (gathering and processing),
and exploration and production. By providing additional transportation, storage
and other asset-based value-added services to customers such as new gas-fueled
power plants, local distribution companies, industrial and end-users, marketers
and others, CMS Energy expects to expand its natural gas pipeline business. CMS
Energy also plans to convert certain Panhandle pipeline facilities through a
joint-venture (See Note 2). Panhandle, however, continues to attempt to maximize
revenues from existing assets and to advance acquisition opportunities and
development projects that provide expanded services to meet the specific needs
of customers.
UNCERTAINTIES: Panhandle's results of operations and financial position may be
affected by a number of trends or uncertainties that have, or Panhandle
reasonably expects could have, a material impact on income from continuing
operations and cashflows. Such trends and uncertainties include: 1) the
increased competition in the market for transmission of natural gas to the
Midwest causing pressure on prices charged by Panhandle and the potential for
the increasing necessity by Panhandle to discount prices (reducing revenues); 2)
the current market conditions causing more contracts to be of shorter duration,
which may increase revenue volatility; 3) the effects of a January 2000 FERC
order that could, if approved without modification upon rehearing, reduce
Trunkline's tariff rates and future revenue levels; 4) the expected increase in
competition for LNG terminalling services, and the volatility in natural gas
prices, creating volatility for LNG terminalling revenues; 5) the impact of
future rate cases, if any, for any of Panhandle's regulated operations; and 6)
current initiatives for additional federal rules and legislation regarding
pipeline safety.
PE-3
83
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.
NEW ACCOUNTING RULES
In June 1998, the FASB issued SFAS 133, Accounting for Derivative Instruments
and Hedging Activities, which has been deferred by SFAS 137, Accounting for
Derivative Instruments and Hedging Activities - Deferral of the Effective Date
of FASB Statement No. 133, and amended by the issuance in June 2000 of SFAS 138,
Accounting for Certain Derivative Instruments and Certain Hedging Activities, an
amendment of FASB Statement No. 133. SFAS 133 requires that every derivative
instrument be recorded on the balance sheet as an asset or liability measured at
its fair value and that changes in the fair value of derivative instruments be
recognized currently in earnings unless specific hedge accounting criteria are
met. SFAS 133 is effective for fiscal years beginning after June 15, 2000.
Panhandle will implement SFAS 133 effective January 1, 2001.
Panhandle continues to evaluate the impact of SFAS 133 on its financial
statements. Based on a preliminary assessment of its contracts, Panhandle
believes that implementation will not have a material impact on consolidated
results of operations or financial position.
In December 1999, the SEC released Staff Accounting Bulletin No. 101 (SAB 101)
summarizing the SEC staff's views on revenue recognition policies based upon
existing generally accepted accounting principles. The SEC staff has deferred
the implementation date of SAB 101 until no later than the fourth quarter of
fiscal years beginning after December 15, 1999. Panhandle has adopted the
provisions of SAB 101 as of October 1, 2000. The impact of adopting SAB 101 is
not material to Panhandle's consolidated results of operation or financial
position.
PE-4
84
(This page intentionally left blank)
PE-5
85
PANHANDLE EASTERN PIPE LINE COMPANY
CONSOLIDATED STATEMENT OF INCOME
(IN MILLIONS)
(UNAUDITED)
Three Months Ended
September 30 Nine Months Ended March 29 - January 1 -
--------------------------- September 30, September 30, March 28,
2000 1999 2000 1999 1999
-------------- ----------- ------------- ----------- ------------
OPERATING REVENUE
Transportation and storage of natural gas $ 94 $ 98 $ 311 $ 199 $ 123
Other 20 9 44 17 5
-------------- ----------- ------------- ----------- ------------
Total operating revenue 114 107 355 216 128
-------------- ----------- ------------- ----------- ------------
OPERATING EXPENSES
Operation and maintenance 49 44 142 85 40
Depreciation and amortization 17 15 49 30 14
General taxes 6 7 18 14 7
-------------- ----------- ------------- ----------- ------------
Total operating expenses 72 66 209 129 61
-------------- ----------- ------------- ----------- ------------
PRETAX OPERATING INCOME 42 41 146 87 67
OTHER INCOME/(EXPENSE), NET 2 - 5 - 4
INTEREST CHARGES
Interest on long-term debt 21 18 62 39 5
Other interest - - - - 13
-------------- ----------- ------------- ----------- ------------
Total interest charges 21 18 62 39 18
-------------- ----------- ------------- ----------- ------------
NET INCOME BEFORE INCOME TAXES 23 23 89 48 53
INCOME TAXES 9 9 34 19 20
-------------- ----------- ------------- ----------- ------------
CONSOLIDATED NET INCOME $ 14 $ 14 $ 55 $ 29 $ 33
============== =========== ============= =========== ============
The accompanying condensed notes are an integral part of these statements.
PE-6
86
PANHANDLE EASTERN PIPE LINE COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
(Unaudited)
Nine Months Ended March 29 - January 1 -
September 30, September March 28,
2000 30, 1999 1999
----------------- ---------- -----------
Cash Flows From Operating Activities
Net income $ 55 $ 29 $ 33
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 49 30 14
Deferred income taxes 47 14 -
Changes in current assets and liabilities (48) 35 (29)
Other, net (10) (7) 3
----------------- ---------- ------------
Net cash provided by operating activities 93 101 21
----------------- ---------- ------------
Cash Flows From Investing Activities
Acquisition of Panhandle - (1,900) -
Capital and investment expenditures (110) (27) (4)
Net increase in advances receivable - PanEnergy - - (17)
----------------- ---------- ------------
Net cash used in investing activities (110) (1,927) (21)
----------------- ---------- ------------
Cash Flows From Financing Activities
Contribution from parent - 1,116 -
Proceeds from senior notes 99 785 -
Net increase in note receivable - CMS Capital (28) (46) -
Dividends paid (54) (29) -
----------------- ---------- ------------
Net cash provided by financing activities 17 1,826 -
----------------- ---------- ------------
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) $ 75 $ 30 $ 12
Income taxes paid (net of refunds) 6 5 37
The accompanying condensed notes are an integral part of these statements.
PE-7
87
PANHANDLE EASTERN PIPE LINE COMPANY
CONSOLIDATED BALANCE SHEETS
(In millions)
(Unaudited)
September 30, December 31,
2000 1999
------------- -------------
ASSETS
PROPERTY, PLANT AND EQUIPMENT
Cost $ 1,622 $ 1,492
Less accumulated depreciation and amortization 87 37
------------- -------------
Sub-total 1,535 1,455
Construction work-in-progress 51 45
------------- -------------
Net property, plant and equipment 1,586 1,500
------------- -------------
INVESTMENTS
Investment in affiliates 2 2
------------- -------------
Total investments and other assets 2 2
------------- -------------
CURRENT ASSETS
Receivables, less allowances of $1 as of September 30, 2000 and Dec. 31, 1999 128 112
Inventory and supplies 56 34
Deferred income taxes 13 11
Note receivable - CMS Capital 113 85
Other 66 30
------------- -------------
Total current assets 376 272
------------- -------------
NON-CURRENT ASSETS
Goodwill, net 758 774
Debt issuance cost 11 11
Other 8 1
------------- -------------
Total non-current assets 777 786
------------- -------------
TOTAL ASSETS $ 2,741 $ 2,560
============= =============
The accompanying condensed notes are an integral part of these statements.
PE-8
88
PANHANDLE EASTERN PIPE LINE COMPANY
CONSOLIDATED BALANCE SHEETS
(IN MILLIONS)
(UNAUDITED)
September 30, December 31,
2000 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 1 -
--------------- --------------
Total common stockholder's equity 1,129 1,128
Long-term debt 1,193 1,094
--------------- --------------
Total capitalization 2,322 2,222
--------------- --------------
CURRENT LIABILITIES
Accounts payable 14 28
Accrued taxes 12 8
Accrued interest 15 29
Other 203 139
--------------- --------------
Total current liabilities 244 204
--------------- --------------
NON-CURRENT LIABILITIES
Deferred income taxes 94 45
Other 81 89
--------------- --------------
Total non-current liabilities 175 134
--------------- --------------
TOTAL COMMON STOCKHOLDER'S EQUITY AND LIABILITIES $ 2,741 $ 2,560
=============== ==============
The accompanying condensed notes are an integral part of these statements.
PE-9
89
PANHANDLE EASTERN PIPE LINE COMPANY
CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDER'S EQUITY
(IN MILLIONS)
(UNAUDITED)
Nine Months Ended March 29 - January 1 -
September 30, September 30, March 28,
2000 1999 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 55 29 33
Assumption of net liability by PanEnergy - - 57
Common stock dividends (54) (29) (81)
----------------- ------------- -----------
At end of period 1 - 101
----------------- ------------- -----------
TOTAL COMMON STOCKHOLDER'S EQUITY $ 1,129 $ 1,128 $ 568
================= ============= ===========
The accompanying condensed notes are an integral part of these statements.
PE-10
90
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-11
91
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
=============================================================
In March 2000, Trunkline, a subsidiary of Panhandle, acquired the Sea Robin
pipeline from El Paso Energy Corporation for cash 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
that were made in April 2000, with supplemental refunds of $1.3 million in June
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 and would require refunds.
Management believes that reserves for refund established are adequate and there
will not be a material adverse effect on consolidated results of operations or
financial position. 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, including Panhandle. FERC ordered these
pipelines to refund these amounts to their customers. The pipelines must make
all payments in compliance with prescribed FERC requirements. At September 30,
2000 and December 31, 1999, Panhandle's Accounts Receivable included $57 million
and $54 million, respectively, due from natural gas producers, and Other Current
Liabilities included $58 million and $54 million, respectively, for related
obligations.
PE-12
92
On March 9, 2000, Trunkline filed an abandonment application with FERC seeking
to abandon 720 miles of its 26-inch diameter pipeline that extends from
Longville, Louisiana to Bourbon, Illinois. This filing is in conjunction with a
plan for 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.
3. RELATED PARTY TRANSACTIONS
Interest charges include $13 million for the nine months ended September 30,
1999 for interest associated with notes payable to a subsidiary of Duke Energy.
Other income includes $5 million for the nine months ended September 30, 2000
for interest on Note Receivable from CMS Capital.
A summary of certain balances due to or due from related parties included in the
Consolidated Balance Sheets is as follows:
In Millions
- ----------------------------------------------------------------------
September 30, December 31,
2000 1999
----------------------------------------
Receivables $37 $8
Accounts payable 5 16
- ----------------------------------------------------------------------
4. GAS IMBALANCES
The Consolidated Balance Sheets include in-kind balances as a result of
differences in gas volumes received and delivered. At September 30, 2000 and
December 31, 1999, other current assets included $52 million and $22 million,
respectively, and other current liabilities included $54 million and $30
million, respectively, related to gas imbalances. 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). In July, these notes were exchanged for substantially
identical SEC registered notes.
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
PE-13
93
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. 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
in 1999, the remaining net regulatory assets of approximately $15 million were
eliminated in purchase accounting (See Note 1).
8. COMMITMENTS AND CONTINGENCIES
CAPITAL EXPENDITURES: Panhandle estimates capital expenditures and investments,
including allowance for funds used during construction, to be $90 million in
2001 and $62 million in 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.
PE-14
94
Management believes the final disposition of these proceedings will not have a
material adverse effect on consolidated results of operations or financial
position.
ENVIRONMENTAL MATTERS: Panhandle is subject to federal, state and local
regulations regarding air and water quality, hazardous and solid waste disposal
and other environmental matters. Panhandle has identified environmental
contamination at certain sites on its systems and has undertaken clean-up
programs at these sites. The contamination resulted from the past use of
lubricants in compressed air systems containing PCBs and the prior use of
wastewater collection facilities and other on-site disposal areas. 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
$20 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.
In conjunction with the Centennial Pipeline project, Panhandle intends to
provide a guaranty related to project financing in an amount up to $50 million
during the construction and initial operating period of the project. The
guaranty will be released when Centennial reaches certain operational and
financial targets (See Note 2).
PE-15
95
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
September 30, 2000, and the related consolidated statements of income, common
stockholder's equity and cash flows for the three-month and nine-month periods
ended September 30, 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
November 7, 2000
PE-16
96
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, and in their Form 10-Q for the quarters ended March 31,
2000 and June 30, 2000. Reference is made to the Condensed Notes to the
Consolidated Financial Statements, in particular Note 2 - Uncertainties for CMS
Energy and Consumers, and Note 8 - Commitments and Contingencies for Panhandle,
included herein for additional information regarding various pending
administrative and judicial proceedings involving rate, operating, regulatory
and environmental matters.
CONSUMERS
ANTITRUST LITIGATION: For a discussion of Consumers' antitrust litigation see
Note 2 subsection "Antitrust" of the Condensed Notes to the Consolidated
Financial Statements in Part I of this Report, incorporated by reference herein.
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.
CO-1
97
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) LIST OF EXHIBITS
(4) Sixth Supplemental Indenture dated as of November 9, 2000
between CMS Energy and The Chase Manhattan Bank, as Trustee.
(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 July 6, 2000, August 15, 2000, October 2, 2000, October
13, 2000 and November 1, 2000 covering matters pursuant to ITEM 5. OTHER EVENTS.
CONSUMERS
Current Reports filed July 6, 2000, October 2, 2000 and November 1, 2000
covering matters pursuant to ITEM 5. OTHER EVENTS.
PANHANDLE
No Current Reports on Form 8-K filed during the third quarter.
CO-2
98
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: November 14, 2000 By: /s/ A.M. Wright
------------------------------------
Alan M. Wright
Senior Vice President and
Chief Financial Officer
CONSUMERS ENERGY CORPORATION
----------------------------------
(Registrant)
Dated: November 14, 2000 By: /s/ A.M. Wright
-------------------------------------
Alan M. Wright
Senior Vice President and
Chief Financial Officer
PANHANDLE EASTERN PIPE LINE COMPANY
----------------------------------
(Registrant)
Dated: November 14, 2000 By: /s/ A.M. Wright
-------------------------------------
Alan M. Wright
Senior Vice President and
Chief Financial Officer and Treasurer
CO-3
99
(This page intentionally left blank)
CO-4
100
Exhibit
Number Description
- --------------------------------------------------------------------------------
(4) Sixth Supplemental Indenture dated as of November 9, 2000
between CMS Energy and The Chase Manhattan Bank, as Trustee.
(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 (4)
SIXTH SUPPLEMENTAL INDENTURE
DATED AS OF
NOVEMBER 9, 2000
This Sixth Supplemental Indenture, dated as of the 9th day of November
2000 between CMS Energy Corporation, a corporation duly organized and existing
under the laws of the State of Michigan (hereinafter called the "Company") and
having its principal office at Fairlane Plaza South, 330 Town Center Drive,
Suite 1100, Dearborn, Michigan 48126, and The Chase Manhattan Bank, a New York
banking corporation (hereinafter called the "Trustee") and having its principal
Corporate Trust Office at 450 West 33rd Street, 15th Floor, New York, New York
10001.
WITNESSETH:
WHEREAS, the Company and the Trustee entered into an Indenture, dated
as of January 15, 1994 (the "Original Indenture"), pursuant to which one or more
series of debt securities of the Company (the "Securities") may be issued from
time to time; and
WHEREAS, Section 301 of the Original Indenture permits the terms of any
series of Securities to be established in an indenture supplemental to the
Original Indenture; and
WHEREAS, Section 901(7) of the Original Indenture provides that a
supplemental indenture may be entered into by the Company and the Trustee
without the consent of any Holders of the Securities to establish the form and
terms of the Securities of any series; and
2
WHEREAS, the Company has requested the Trustee to join with it in the
execution and delivery of this Sixth Supplemental Indenture in order to
supplement and amend the Original Indenture by, among other things, establishing
the form and terms of a series of Securities to be known as the Company's
"General Term Notes(R), Series F (the "General Term Notes"), providing for the
issuance of the General Term Notes and amending and adding certain provisions
thereof for the benefit of the Holders of the General Term Notes; and
WHEREAS, the Company and the Trustee desire to enter into this Sixth
Supplemental Indenture for the purposes set forth in Sections 301 and 901(7) of
the Original Indenture as referred to above; and
WHEREAS, all things necessary to make this Sixth Supplemental Indenture
a valid agreement of the Company and the Trustee and a valid supplement to the
Original Indenture have been done,
- ---------------------------
(R) Registered servicemark of J. W. Korth & Company
2
3
NOW, THEREFORE, THIS SIXTH SUPPLEMENTAL INDENTURE
WITNESSETH:
For and in consideration of the premises and the purchase of the
General Term Notes to be issued hereunder by holders thereof, the Company and
the Trustee mutually covenant and agree, for the equal and proportionate benefit
of the respective holders from time to time of the General Term Notes, as
follows:
ARTICLE I
STANDARD PROVISIONS; DEFINITIONS
SECTION 101. Standard Provisions. The Original Indenture together with
this Sixth Supplemental Indenture and all indentures supplemental thereto
entered into pursuant to the applicable terms thereof are hereinafter sometimes
collectively referred to as the "Indenture." All of the terms, conditions,
covenants and provisions contained in the Original Indenture as heretofore
supplemented are incorporated herein by reference in their entirety and, except
as specifically noted herein or unless the context otherwise requires, shall be
deemed to be a part hereof to the same extent as if such provisions had been set
forth in full herein. All capitalized terms which are used herein and not
otherwise defined herein are defined in the Indenture and are used herein with
the same meanings as in the Indenture.
SECTION 102. Definitions. Section 101 of the Indenture is amended to
insert the new definitions applicable to the General Term Notes, in the
appropriate alphabetical sequence, as follows:
"Amortization Expense" means, for any period, amounts recognized during
such period as amortization of capital leases, depletion, nuclear fuel, goodwill
and assets classified as intangible assets in accordance with generally accepted
accounting principles.
3
4
"Average Life" means, as of the date of determination, with respect to
any Indebtedness, the quotient obtained by dividing (i) the sum of the products
of (x) the number of years from the date of determination to the dates of each
successive scheduled principal payment of such Indebtedness and (y) the amount
of such principal payment by (ii) the sum of all such principal payments.
"Capital Lease Obligation" of a Person means any obligation that is
required to be classified and accounted for as a capital lease on the face of a
balance sheet of such Person prepared in accordance with generally accepted
accounting principles; the amount of such obligation shall be the capitalized
amount thereof, determined in accordance with generally accepted accounting
principles; the stated maturity thereof shall be the date of the last payment of
rent or any other amount due under such lease prior to the first date upon which
such lease may be terminated by the lessee without payment of a penalty; and
such obligation shall be deemed secured by a Lien on any property or assets to
which such lease relates.
"Capital Stock" means any and all shares, interests, rights to
purchase, warrants, options, participations or other equivalents of or interests
in (however designated) corporate stock, including any Preferred Stock or Letter
Stock; provided that Hybrid Preferred Securities shall not be considered Capital
Stock for purposes of this definition.
"Change in Control" means an event or series of events by which (i) the
Company ceases to own beneficially, directly or indirectly, at least 80% of the
total voting power of all classes of Capital Stock then outstanding of Consumers
(whether arising from issuance of securities of the Company or Consumers, any
direct or indirect transfer of securities by the Company or Consumers, any
merger, consolidation, liquidation or dissolution of the Company or Consumers or
otherwise); (ii) any "person" or "group" (as such terms are used in Sections
4
5
13(d) and 14(d) of the Exchange Act) becomes the "beneficial owner" (as such
term is used in Rules 13d-3 and 13d-5 under the Exchange Act, except that a
person or group shall be deemed to have "beneficial ownership" of all shares
that such person or group has the right to acquire, whether such right is
exercisable immediately or only after the passage of time), directly or
indirectly, of more than 30% of the Voting Stock of the Company; or (iii) the
Company consolidates with or merges into another corporation or directly or
indirectly conveys, transfers or leases all or substantially all of its assets
to any Person, or any corporation consolidates with or merges into the Company,
in either event pursuant to a transaction in which the outstanding Voting Stock
of the Company is changed into or exchanged for cash, securities, or other
property, other than any such transaction in which (A) the outstanding Voting
Stock of the Company is changed into or exchanged for Voting Stock of the
surviving corporation and (B) the holders of the Voting Stock of the Company
immediately prior to such transaction retain, directly or indirectly,
substantially proportionate ownership of the Voting Stock of the surviving
corporation immediately after such transaction.
"CMS Oil & Gas Co. means, CMS Oil & Gas Company., a Michigan
corporation and wholly-owned subsidiary of the Company.
"Consolidated Assets" means, at any date of determination, the
aggregate assets of the Company and its Consolidated Subsidiaries determined on
a consolidated basis in accordance with generally accepted accounting
principles.
"Consolidated Capital" means, at any date of determination, the sum of
(a) Consolidated Indebtedness, (b) consolidated equity of the common
stockholders of the Company and the Consolidated Subsidiaries, (c) consolidated
equity of the preference stockholders of the Company and the Consolidated
Subsidiaries (d) consolidated equity of the preferred stockholders of the
Company and the Consolidated Subsidiaries and (e) the aggregate amount of all
Hybrid Preferred
5
6
Securities, in each case determined at such date in accordance with generally
accepted accounting principles.
"Consolidated Coverage Ratio" with respect to any period means the
ratio of (i) the aggregate amount of Operating Cash Flow for such period to (ii)
the aggregate amount of Consolidated Interest Expense for such period.
"Consolidated Indebtedness" means, at any date of determination, the
aggregate Indebtedness of the Company and its Consolidated Subsidiaries
determined on a consolidated basis in accordance with generally accepted
accounting principles provided, however that Consolidated Indebtedness shall not
include any subordinated debt owned by any Hybrid Preferred Securities
Subsidiary.
"Consolidated Interest Expense" means, for any period, the total
interest expense in respect of Consolidated Indebtedness of the Company and its
Consolidated Subsidiaries, including, without duplication, (i) interest expense
attributable to capital leases, (ii) amortization of debt discount, (iii)
capitalized interest, (iv) cash and noncash interest payments, (v) commissions,
discounts and other fees and charges owed with respect to letters of credit and
bankers' acceptance financing, (vi) net costs under Interest Rate Protection
Agreements (including amortization of discount) and (vii) interest expense in
respect of obligations of other Persons deemed to be Indebtedness of the Company
or any Consolidated Subsidiaries under clause (v) or (vi) of the definition of
Indebtedness, provided, however, that Consolidated Interest Expense shall
exclude any costs otherwise included in interest expense recognized on early
retirement of debt.
"Consolidated Leverage Ratio" means, at any date of determination, the
ratio of Consolidated Indebtedness to Consolidated Capital.
6
7
"Consolidated Net Income" means, for any period, the net income of the
Company and its Consolidated Subsidiaries determined on a consolidated basis in
accordance with generally accepted accounting principles; provided, however,
that there shall not be included in such Consolidated Net Income:
(i) any net income of any Person if such Person is not a Subsidiary,
except that (A) the Company's equity in the net income of any such Person
for such period shall be included in such Consolidated Net Income up to the
aggregate amount of cash actually distributed by such Person during such
period to the Company or a Consolidated Subsidiary as a dividend or other
distribution and (B) the Company's equity in a net loss of any such Person
for such period shall be included in determining such Consolidated Net
Income;
(ii) any net income of any Person acquired by the Company or a
Subsidiary in a pooling of interests transaction for any period prior to the
date of such acquisition; and
(iii) any gain or loss realized upon the sale or other disposition of
any property, plant or equipment of the Company or its Consolidated
Subsidiaries which is not sold or otherwise disposed of in the ordinary
course of business and any gain or loss realized upon the sale or other
disposition of any Capital Stock of any Person.
"Consolidated Net Worth" of any Person means the total of the amounts
shown on the consolidated balance sheet of such Person and its consolidated
subsidiaries, determined on a consolidated basis in accordance with generally
accepted accounting principles, as of any date selected by such Person not more
than 90 days prior to the taking of any action for the purpose of which the
determination is being made (and adjusted for any material events since such
7
8
date), as (i) the par or stated value of all outstanding Capital Stock plus (ii)
paid-in capital or capital surplus relating to such Capital Stock plus (iii) any
retained earnings or earned surplus less (A) any accumulated deficit, (B) any
amounts attributable to Redeemable Stock and (C) any amounts attributable to
Exchangeable Stock.
"Consolidated Subsidiary" means, any Subsidiary whose accounts are or
are required to be consolidated with the accounts of the Company in accordance
with generally accepted accounting principles.
"Consumers" means Consumers Energy Company, a Michigan corporation, all
of whose common stock is on the date hereof owned by the Company.
"Enterprises" means CMS Enterprises Company, a Michigan corporation.
"Event of Default" with respect to the General Term Notes has the
meaning specified in Article VI of this Sixth Supplemental Indenture.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Exchangeable Stock" means any Capital Stock of a corporation that is
exchangeable or convertible into another security (other than Capital Stock of
such corporation that is neither Exchangeable Stock, or Redeemable Stock).
"Hybrid Preferred Securities" means any preferred securities issued by
a Hybrid Preferred Securities Subsidiary, where such preferred securities have
the following characteristics:
(i) such Hybrid Preferred Securities Subsidiary lends substantially
all of the proceeds from the issuance of such preferred
securities to the Company or Consumers in exchange for
subordinated debt issued by the Company or Consumers,
respectively;
8
9
(ii) such preferred securities contain terms providing for the
deferral of distributions corresponding to provisions providing
for the deferral of interest payments on such subordinated debt;
and
(iii) the Company or Consumers (as the case may be) makes periodic
interest payments on such subordinated debt, which interest
payments are in turn used by the Hybrid Preferred Securities
Subsidiary to make corresponding payments to the holders of the
Hybrid Preferred Securities.
"Hybrid Preferred Securities Subsidiary" means any business trust (or
similar entity)(i) all of the common equity interest of which is owned (either
directly or indirectly through one or more wholly-owned Subsidiaries of the
Company or Consumers)at all times by the Company or Consumers, (ii) that has
been formed for the purpose of issuing Hybrid Preferred Securities and (iii)
substantially all of the assets of which consist at all times solely of
subordinated debt issued by the Company or Consumers (as the case may be) and
payments made from time to time on such subordinated debt.
"Indebtedness" of any Person means, without duplication,
(i) the principal of and premium (if any) in respect of (A)
indebtedness of such Person for money borrowed and (B) indebtedness
evidenced by notes, debentures, bonds or other similar instruments for the
payment of which such Person is responsible or liable;
(ii) all Capital Lease Obligations of such Person;
(iii) all obligations of such Person issued or assumed as the deferred
purchase price of property, all conditional sale obligations and all
obligations under any title retention agreement (but excluding trade
accounts payable arising in the ordinary course of business);
9
10
(iv) all obligations of such Person for the reimbursement of any
obligor on any letter of credit, bankers' acceptance or similar credit
transaction (other than obligations with respect to letters of credit
securing obligations (other than obligations described in clauses (i)
through (iii) above) entered into in the ordinary course of business of
such Person to the extent such letters of credit are not drawn upon or, if
and to the extent drawn upon, such drawing is reimbursed no later than the
third Business Day following receipt by such Person of a demand for
reimbursement following payment on the letter of credit);
(v) all obligations of the type referred to in clauses (i) through
(iv) of other Persons and all dividends of other Persons for the payment of
which, in either case, such Person is responsible or liable as obligor,
guarantor or otherwise; and
(vi) all obligations of the type referred to in clauses (i) through (v)
of other Persons secured by any Lien on any property or asset of such
Person (whether or not such obligation is assumed by such Person), the
amount of such obligation being deemed to be the lesser of the value of
such property or assets or the amount of the obligation so secured.
"Interest Rate Protection Agreement" means any interest rate swap
agreement, interest rate cap agreement or other financial agreement or
arrangement designed to protect the Company or any Subsidiary against
fluctuations in interest rates.
"Letter Stock", as applied to the Capital Stock of any corporation,
means Capital Stock of any class or classes (however designated) which is
intended to reflect the separate performance of certain of the businesses or
operations conducted by such corporation or any of its subsidiaries.
10
11
"Lien" means any lien, mortgage, pledge, security interest, conditional
sale, title retention agreement or other charge or encumbrance of any kind.
"Net Proceeds" means, with respect to any issuance or sale or
contribution in respect of Capital Stock, the aggregate proceeds of such
issuance, sale or contribution, including the fair market value (as determined
by the Board of Directors and net of any associated debt and of any
consideration other than Capital Stock received in return) of property other
than cash, received by the Company, net of attorneys' fees, accountants' fees,
underwriters' or placement agents' fees, discounts, or commissions and
brokerage, consultant and other fees actually incurred in connection with such
issuance or sale and net of taxes paid or payable as a result thereof, provided,
however, that if such fair market value as determined by the Board of Directors
of property other than cash is greater than $25 million, the value thereof shall
be based upon an opinion from an independent nationally recognized firm
experienced in the appraisal or similar review of similar types of transactions.
"Non-Convertible Capital Stock" means, with respect to any corporation,
any non-convertible Capital Stock of such corporation and any Capital Stock of
such corporation convertible solely into non-convertible Capital Stock other
than Preferred Stock of such corporation; provided, however, that
Non-Convertible Capital Stock shall not include any Redeemable Stock or
Exchangeable Stock.
"Operating Cash Flow" means, for any period, with respect to the
Company and its Consolidated Subsidiaries, the aggregate amount of Consolidated
Net Income after adding thereto Consolidated Interest Expense (adjusted to
include costs recognized on early retirement of debt), income taxes,
depreciation expense, Amortization Expense and any noncash amortization of debt
issuance costs, any nonrecurring, noncash charges to earnings and any negative
accretion recognition.
11
12
"Other Rating Agency" means any of Fitch IBCA, Duff & Phelps or Moody's
Investors Service, Inc., and any successor to any of these organizations which
is a nationally recognized statistical rating organization.
"Preferred Stock", as applied to the Capital Stock of any corporation,
means Capital Stock of any class or classes (however designated) that is
preferred as to the payment of dividends, or as to the distribution of assets
upon any voluntary or involuntary liquidation or dissolution of such
corporation, over shares of Capital Stock of any other class of such
corporation; provided that Hybrid Preferred Securities shall not be considered
"Preferred Stock" for purposes of this definition.
"Redeemable Stock" means any Capital Stock that by its terms or
otherwise is required to be redeemed prior to the first anniversary of the
Maturity of any Outstanding General Term Notes or is redeemable at the option of
the holder thereof at any time prior to the first anniversary of the Maturity of
any Outstanding General Term Notes.
"Restricted Subsidiary" means any Subsidiary (other than Consumers and
its subsidiaries) of the Company which, as of the date of the Company's most
recent quarterly consolidated balance sheet, constituted at least 10% of the
total Consolidated Assets of the Company and its Consolidated Subsidiaries and
any other Subsidiary which from time to time is designated a Restricted
Subsidiary by the Board of Directors provided that no Subsidiary may be
designated a Restricted Subsidiary if, immediately after giving effect thereto,
an Event of Default or event that, with the lapse of time or giving of notice or
both, would constitute an Event of Default would exist or the Company and its
Restricted Subsidiaries could not incur at least $1 of additional Indebtedness
under Section 510, and (i) any such Subsidiary so designated as a Restricted
Subsidiary must be organized under the laws of the United States or any State
12
13
thereof, (ii) more than 80% of the Voting Stock of such Subsidiary must be owned
of record and beneficially by the Company or a Restricted Subsidiary, (iii) such
Restricted Subsidiary must be a Consolidated Subsidiary, and (iv) such
Subsidiary must not theretofore have been designated as a Restricted Subsidiary.
"Standard & Poor's" shall mean Standard & Poor's Ratings Group, a
division of McGraw Hill Inc., and any successor thereto which is a nationally
recognized statistical rating organization, or if such entity shall cease to
rate the General Term Notes or shall cease to exist and there shall be no such
successor thereto, any other nationally recognized statistical rating
organization selected by the Company which is acceptable to the Trustee.
"Support Obligations" means, for any person, without duplication, any
financial obligation, contingent or otherwise, of such person guaranteeing or
otherwise supporting any debt or other obligation of any other person in any
manner, whether directly or indirectly, and including, without limitation, any
obligation of such person, direct or indirect, (i) to purchase or pay (or
advance or supply funds for the purchase or payment of) such debt or to purchase
(or to advance or supply funds for the purchase of) any security for the payment
of such debt, (ii) to purchase property, securities or services for the purpose
of assuring the owner of such debt of the payment of such debt, (iii) to
maintain working capital, equity capital, available cash or other financial
statement condition of the primary obligor so as to enable the primary obligor
to pay such debt, (iv) to provide equity capital under or in respect of equity
subscription arrangements (to the extent that such obligation to provide equity
capital does not otherwise constitute debt), or (v) to perform, or arrange for
the performance of, any non-monetary obligations or non-funded debt payment
obligations of the primary obligor.
"Tax-Sharing Agreement" means the Amended and Restated Agreement for
the Allocation of Income Tax Liabilities and Benefits, dated January 1, 1994, as
13
14
amended or supplemented from time to time, by and among Company, each of the
members of the Consolidated Group (as defined therein), and each of the
corporations that become members of the Consolidated Group.
Certain terms, used principally in Articles Three, Four and Seven of
this Sixth Supplemental Indenture, are defined in those Articles.
ARTICLE II
DESIGNATION AND TERMS OF THE GENERAL TERM NOTES; FORMS
SECTION 201. Establishment of Series. There is hereby created a series
of Securities to be known and designated as the "General Term Notes(R), Series F
and limited in aggregate principal amount (except as contemplated in Section
301(2) of the Indenture) to $300,000,000.
Each General Term Note will be dated and issued as of the date of its
authentication by the Trustee. Each General Term Note shall also bear an
Original Issue Date (as hereinafter defined) which, with respect to any General
Term Note (or any portion thereof), shall mean the date of its original issue,
as specified in such General Term Note (the "Original Issue Date"), and such
Original Issue Date shall remain the same if such General Term Note is
subsequently issued upon transfer, exchange, or substitution of such General
Term Note regardless of its date of authentication. Principal on any General
Term Note shall become due and payable from nine months to twenty-five years
from the Original Issue Date of such General Term Note, as specified on such
General Term Note.
Each General Term Note will bear interest from the Original Issue Date,
or from the most recent date to which interest has been paid or duly provided
for, at the rate per annum stated therein until the principal thereof is paid or
made available for payment. Interest will be payable either monthly, quarterly
14
15
or semi-annually on each Interest Payment Date and at Maturity, as specified
below and in each General Term Note. Interest will be payable to the person in
whose name a General Term Note is registered at the close of business on the
Regular Record Date next preceding each Interest Payment Date; provided,
however, interest payable at Maturity will be payable to the person to whom
principal shall be payable. Interest on the General Term Notes will be computed
on the basis of a 360-day year of twelve 30-day months.
The Interest Payment Dates for a General Term Note that provides for
monthly interest payments shall be the fifteenth day of each calendar month;
provided, however, that in the case of a General Term Note issued between the
first and fifteenth day of a calendar month, interest otherwise payable on the
fifteenth day of such calendar month will be payable on the fifteenth day of the
next succeeding calendar month. In the case of a General Term Note that provides
for quarterly interest payments, the Interest Payment Dates shall be the
fifteenth day of each of the months specified in such General Term Note,
commencing on the day that is three months from (i) the day on which such
General Term Note is issued, if such General Term Note is issued on the
fifteenth day of a calendar month, or (ii) the fifteenth day of the calendar
month immediately preceding the calendar month in which such General Term Note
is issued, if such General Term Note is issued prior to the fifteenth day of a
calendar month, or (iii) the fifteenth day of the calendar month in which such
General Term Note is issued, if such General Term Note is issued after the
fifteenth day of a calendar month. In the case of a General Term Note that
provides for semi-annual interest payments, the Interest Payment Dates shall be
the fifteenth day of each of the months specified in such General Term Note,
commencing on the day that is six months from (i) the day on which such General
Term Note is issued, if such General Term Note is issued on the fifteenth day of
a calendar month, or (ii) the fifteenth day of the calendar month immediately
preceding the calendar month in which such General Term Note is issued, if such
General Term Note is issued prior to the fifteenth day of a calendar month, or
(iii) the fifteenth day of the
15
16
calendar month in which such General Term Note is issued, if such General Term
Note is issued after the fifteenth day of a calendar month.
Payment of principal of the General Term Notes (and premium, if any)
and, unless otherwise paid as hereinafter provided, any interest thereon will be
made at the office or agency of the Company in New York, New York; provided,
however, that payment of interest (other than interest at Maturity) may be made
at the option of the Company by check or draft mailed to the Person entitled
thereto at such Person's address appearing in the Security Register or by wire
transfer to an account designated by such Person not later than ten days prior
to the date of such payment.
The Regular Record Date referred to in Section 301 of the Indenture for
the payment of the interest on any General Term Note payable on any Interest
Payment Date (other than at Maturity) shall be the first day (whether or not a
Business Day) of the calendar month in which such Interest Payment Date occurs
as is specified in such General Term Note, and, in the case of interest payable
at Maturity, the Regular Record Date shall be the date of Maturity. Unless
otherwise specified in such General Term Notes, the cities of New York, New York
and Chicago, Illinois shall be the reference cities for determining a Business
Day.
The General Term Notes may be issued only as registered notes, without
coupons, in denominations of $1,000 and any larger denomination which is in an
integral multiple of $1,000.
Upon the execution of this Sixth Supplemental Indenture, or from time
to time thereafter, General Term Notes may be executed by the Company and
delivered to the Trustee for authentication, and the Trustee shall thereupon
authenticate and deliver said General Term Notes in accordance with the
procedures set forth in or upon a Company Order complying with Sections 301 and
303 of the Indenture.
16
17
SECTION 202. Forms Generally. The General Term Notes shall be in
substantially the form set forth in this Article, with such appropriate
insertions, omissions, substitutions and other variations as are required or
permitted by the Indenture, and may have such letters, numbers or other marks of
identification and such legends or endorsements placed thereon as may be
required to comply with the rules of any securities exchange or as may,
consistently herewith, be determined by the officers executing such General Term
Notes, as evidenced by their execution thereof.
The definitive General Term Notes shall be printed, lithographed or
engraved on steel engraved borders or may be produced in any other manner, all
as determined by the officers executing such General Term Notes, as evidenced by
their execution thereof.
SECTION 203. Form of Face of General Term Note.
[Insert any legend required by the Internal Revenue
Code and the regulations thereunder.]
CMS ENERGY CORPORATION
GENERAL TERM NOTE(R), SERIES F
No. ________ $__________
[Initial Redemption Date]
17
18
CMS Energy Corporation, a corporation duly organized and existing under
the laws of the State of Michigan (herein called the "Company", which term
includes any successor Person under the Indenture hereinafter referred to), for
value received, hereby promises to pay to _________________________________, or
registered assigns, the principal sum of ____________________ Dollars on
__________________________ and to pay interest thereon from _____________ (the
"Original Issue Date") or from the most recent Interest Payment Date to which
interest has been paid or duly provided for, [choose one of the following --
monthly/quarterly/semi-annually [insert as applicable -- on ___________
[________, ____________] and _________ in each [year/month], commencing
______________, and at Maturity at the rate of ____% per annum, until the
principal hereof is paid or made available for payment [if applicable, insert
- --, and at the rate of ___% per annum on any overdue principal and premium and
on any overdue installment of interest]. The interest so payable, and punctually
paid or duly provided for, on any Interest Payment Date will, as provided in
such Indenture, be paid to the Person in whose name this General Term Note (or
one or more Predecessor Securities) is registered at the close of business on
the Regular Record Date for such interest, which shall be the first day of the
calendar month in which such Interest Payment Date occurs (whether or not a
Business Day) next preceding such Interest Payment Date except that the Regular
Record Date for interest payable at Maturity shall be the date of Maturity. Any
such interest not so punctually paid or duly provided for will forthwith cease
to be payable to the Holder on such Regular Record Date and may either be paid
to the Person in whose name this General Term Note (or one or more Predecessor
Securities) is registered at the close of business on a Special Record Date for
the payment of such Defaulted Interest to be fixed by the Trustee, notice
whereof shall be given to Holders of General Term Notes not less than 10 days
prior to such Special Record Date, or be paid at any time in any other lawful
manner not inconsistent with the requirements of any securities exchange on
which the General Term Notes may be listed, and upon such notice as may be
required by such exchange, all as more fully provided in said Indenture.
18
19
[If the General Term Note is not to bear interest prior to Maturity,
insert -- The principal of this General Term Note shall not bear interest except
in the case of a default in payment of principal upon acceleration, upon
redemption or at Stated Maturity and in such case the overdue principal of this
General Term Note shall bear interest at the rate of ___% per annum, which shall
accrue from the date of such default in payment to the date payment of such
principal has been made or duly provided for. Interest on any overdue principal
shall be payable on demand. Any such interest on any overdue principal that is
not so paid on demand shall bear interest at the rate of ____% per annum, which
shall accrue from the date of such demand for payment to the date payment of
such interest has been made or duly provided for, and such interest shall also
be payable on demand.]
Payment of the principal of (and premium, if any) and interest, if any,
on this General Term Note will be made at the office or agency of the Company
maintained for that purpose in New York, New York (the "Place of Payment"), in
such coin or currency of the United States of America as at the time of payment
is legal tender for payment of public and private debts; provided, however, that
at the option of the Company payment of interest (other than interest payable at
Maturity) may be made by check mailed to the address of the Person entitled
thereto as such address shall appear in the Security Register or by wire
transfer to an account designated by such Person not later than ten days prior
to the date of such payment.
Reference is hereby made to the further provisions of this General Term
Note set forth on the reverse hereof, which further provisions shall for all
purposes have the same effect as if set forth at this place.
Unless the certificate of authentication hereon has been executed by
the Trustee referred to on the reverse hereof by manual signature, this General
Term Note shall not be entitled to any benefit under the Indenture or be valid
or obligatory for any purpose.
19
20
IN WITNESS WHEREOF, the Company has caused this instrument to be duly
executed under its corporate seal.
Dated:
CMS ENERGY CORPORATION
By______________________________
Attest:
_________________________
SECTION 204. Form of Reverse of General Term Note.
This General Term Note(R), Series F is one of a duly authorized issue
of securities of the Company (herein called the "General Term Notes"), issued
and to be issued in one or more series under an Indenture, dated as of January
15, 1994, as supplemented by certain supplemental indentures, including the
Sixth Supplemental Indenture, dated as of November 9, 2000 (herein collectively
referred to as the "Indenture"), between the Company and The Chase Manhattan
Bank, a New York banking corporation, as Trustee (herein called the "Trustee",
which term includes any successor trustee under the Indenture), to which
Indenture and all indentures supplemental thereto reference is hereby made for a
statement of the respective rights, limitations of rights, duties and immunities
thereunder of the Company, the Trustee, the Holders of the General Term Notes
and of the terms upon which the General Term Notes are, and are to be,
authenticated and delivered. This General Term Note is one of the series
designated on the face hereof, limited in aggregate principal amount to
$300,000,000.
[If applicable, insert -- The General Term Notes of this series are
subject to redemption upon not more than 60 nor less than 30 days' notice as
provided in the Indenture, at any time [on or after __________, _____,] as a
whole or in part from time to time, at the election of the Company, at the
following
20
21
Redemption Prices (expressed as percentages of the principal amount): If
redeemed [on or before , %, and if redeemed] during the 12-month
period beginning of the years indicated,
Redemption Redemption
Year Price Year Price
- ---- ---------- ---- ----------
and thereafter at a Redemption Price equal to % of the principal amount,
together in the case of any such redemption with accrued interest to the
Redemption Date, but interest installments whose Stated Maturity is on or prior
to such Redemption Date will be payable to the Holders of such General Term
Notes, or one or more Predecessor Securities, of record at the close of business
on the relevant Record Dates referred to on the face hereof, all as provided in
the Indenture.]
[Notwithstanding the foregoing, the Company may not, prior to
, redeem this General Term Note as a part of, or in anticipation of,
any refunding operation by the application, directly or indirectly, of moneys
borrowed having an effective interest cost to the Company (calculated in
accordance with generally accepted financial practice) of less than the
effective interest cost to the Company (similarly calculated) of this General
Term Note.]
[If the General Term Note is subject to redemption, insert -- In the
event of redemption of this General Term Note in part only, a new General Term
Note or Notes of this series and of like tenor for the unredeemed portion hereof
will be issued in the name of the Holder hereof upon the cancellation hereof.]
If a Change in Control occurs, the Company shall notify the Holder of
this General Term Note of such occurrence and such Holder shall have the right
to require the Company to make a Required Repurchase of all or any part of this
21
22
General Term Note at a Change in Control Purchase Price equal to 101% of the
principal amount of this General Term Note to be so purchased as more fully
provided in the Indenture and subject to the terms and conditions set forth
therein. In the event of a Required Repurchase of only a portion of this General
Term Note, a new General Term Note or Notes for the unrepurchased portion hereof
will be issued in the name of the Holder hereof upon the cancellation hereof.
[If this General Term Note is subject to redemption upon exercising a
Survivor's Option, insert -- As more fully provided in the Indenture and subject
to the terms and conditions set forth therein, the Company will repay this
General Term Note (or portion thereof) properly tendered for repayment by or on
behalf of the person (the "Representative") that has authority to act on behalf
of a deceased owner of the beneficial interest in this General Term Note under
the laws of the appropriate jurisdiction (including, without limitation, the
trustee of a personal trust, the personal representative, executor, surviving
joint tenant or surviving tenant by the entirety of such deceased beneficial
owner) at a price equal to 100% of the principal amount hereof plus accrued
interest to the date of such repayment. In order for a Holder to exercise the
Survivor's Option, the deceased beneficial owner or his or her Representative
must have individually or collectively held the General Term Note for 120 days.
The Company may, in its sole discretion, limit the aggregate principal amount of
all outstanding General Term Notes as to which exercises of this option (the
"Survivor's Option") will be accepted in any calendar year to one percent (1%)
of the outstanding principal amount of all General Term Notes as of the end of
the most recent fiscal year, but not less than $500,000 in any such calendar
year, or such greater amount as the Company in its sole discretion may determine
for any calendar year, and may limit to $100,000, or such greater amount as the
Company in its sole discretion may determine for any calendar year, the
aggregate principal amount of General Term Notes (or portions thereof) as to
which exercise of the Survivor's Option will be accepted in such calendar year
with respect to any individual deceased owner of beneficial interests in such
General Term Notes.
22
23
[If the General Term Note is not an Original Issue Discount Security,
insert -- If an Event of Default with respect to this General Term Note shall
occur and be continuing, the principal of this General Term Note may be declared
due and payable in the manner and with the effect provided in the Indenture.]
In any case where any Interest Payment Date, Redemption Date, Repayment
Date, Stated Maturity or Maturity of any General Term Note shall not be a
Business Day at any Place of Payment, then (notwithstanding any other provision
of the Indenture or this General Term Note), payment of interest or principal
(and premium, if any) need not be made at such Place of Payment on such date,
but may be made on the next succeeding Business Day at such Place of Payment
with the same force and effect as if made on the Interest Payment Date,
Redemption Date or Repayment Date or at the Stated Maturity or Maturity;
provided that no interest shall accrue on the amount so payable for the period
from and after such Interest Payment Date, Redemption Date, Repayment Date,
Stated Maturity or Maturity, as the case may be, to such Business Day.
The Indenture permits, with certain exceptions as therein provided, the
amendment thereof and the modification of the rights and obligations of the
Company and the rights of the Holders of all Outstanding Securities under the
Indenture at any time by the Company and the Trustee with the consent of the
Holders of not less than a majority in principal amount of all Outstanding
Securities affected. The Indenture also contains provisions permitting the
Holders of specified percentages in principal amount of all Outstanding
Securities, on behalf of the Holders of all Outstanding Securities, to waive
compliance by the Company with certain provisions of the Indenture. Any such
consent or waiver by the Holder of this General Term Note shall be conclusive
and binding upon such Holder and upon all future Holders of this General Term
Note and of any General Term Note issued upon the registration of transfer
hereof or in exchange herefor or in lieu hereof, whether or not notation of such
consent or waiver is made upon this General Term Note.
23
24
The Indenture permits the Holders of not less than a majority in
principal amount of all Outstanding Securities of any series thereunder to waive
on behalf of the Holders of all Outstanding Securities of such series any past
default by the Company, provided that no such waiver may be made with respect to
a default in the payment of the principal of or premium, if any, or the interest
on any Security of such series or the default by the Company in respect of
certain covenants or provisions of the Indenture, the modification or amendment
of which must be consented to by the Holder of each Outstanding Security of each
series affected.
As set forth in, and subject to, the provisions of the Indenture, no
Holder of any General Term Note will have any right to institute any proceeding
with respect to the Indenture or for any remedy thereunder, unless such Holder
shall have previously given to the Trustee written notice of a continuing Event
of Default, the Holders of not less than 25% in principal amount of the
Outstanding General Term Notes shall have made written request, and offered
satisfactory indemnity, to the Trustee to institute such proceeding as trustee,
and the Trustee shall not have received from the Holders of a majority in
principal amount of the Outstanding General Term Notes a direction inconsistent
with such request and shall have failed to institute such proceeding within 60
days; provided, however, that such limitations do not apply to a suit instituted
by the Holder hereof for the enforcement of payment of the principal of (and
premium, if any) or any interest on this General Term Note on or after the
respective due dates expressed herein.
No reference herein to the Indenture and no provision of this General
Term Note or of the Indenture shall alter or impair the obligation of the
Company, which is absolute and unconditional, to pay the principal of and any
premium and interest on this General Term Note at the times, place and rate, and
in the coin or currency, herein prescribed.
24
25
As provided in the Indenture and subject to certain limitations therein
set forth, the transfer of this General Term Note is registerable in the
Security Register, upon surrender of this General Term Note for registration of
transfer at the office or agency of the Company in any place where the principal
of and any premium and interest on this General Term Note are payable, duly
endorsed by, or accompanied by a written instrument of transfer in form
satisfactory to the Company and the Security Registrar duly executed by, the
Holder hereof or his attorney duly authorized in writing, and thereupon one or
more new General Term Notes of this series and of like tenor, of authorized
denominations and for the same aggregate principal amount, will be issued to the
designated transferee or transferees.
The General Term Notes of this series are issuable only in registered
form without coupons in denominations of $1,000 and any integral multiple
thereof. As provided in the Indenture and subject to certain limitations therein
set forth, General Term Notes of this series are exchangeable for a like
aggregate principal amount of General Term Notes of this series and of like
tenor of a different authorized denomination, as requested by the Holder
surrendering the same.
No service charge shall be made for any such registration of transfer
or exchange, but the Company may require payment of a sum sufficient to cover
any tax or other governmental charge payable in connection therewith.
[If this General Term Note is redeemable at the option of the Company,
insert -- The Company shall not be required (i) to issue, register the transfer
of or exchange this General Term Note if this General Term Note may be among
those selected for redemption during a period beginning at the opening of
business 15 days before selection of the General Term Notes to be redeemed under
Section 1103 of the Indenture and ending at the close of business on the day of
the mailing of the relevant notice of redemption, (ii) to register the transfer
of or exchange any General Term Note so selected for redemption in whole or in
part, except, in the case of any General Term Note to be redeemed in part, the
portion thereof not to be
25
26
redeemed, or (iii) to issue, register the transfer of or exchange any General
Term Note which has been surrendered for repayment at the option of the Holder,
except the portion, if any, of such General Term Note not to be so repaid.]
Prior to due presentment of this General Term Note for registration of
transfer, the Company, the Trustee and any agent of the Company or the Trustee
may treat the Person in whose name this General Term Note is registered as the
owner hereof for all purposes, whether or not this General Term Note be overdue,
and neither the Company, the Trustee nor any such agent shall be affected by
notice to the contrary.
All terms used in this General Term Note without definition which are
defined in the Indenture shall have the meanings assigned to them in the
Indenture.
- ------------------------------
(R) Registered servicemark of J. W. Korth & Company
SECTION 205. Form of Legend for Global Notes. Any Global Note (as
defined in Article VII below) authenticated and delivered hereunder shall bear a
legend in substantially the following form:
"This Security is a Global Note within the meaning of the Indenture
hereinafter referred to and is registered in the name of a Depositary or a
nominee of a Depositary. This General Term Note is not exchangeable for
General Term Notes registered in the name of a Person other than the
Depositary or its nominee except in the limited circumstances described in
the Indenture, and no transfer of this General Term Note (other than a
transfer of this General Term Note as a whole by the Depositary to a nominee
of the Depositary or by a nominee of the Depositary to the Depositary or
another nominee of the Depositary) may be registered except in the limited
circumstances described in the Indenture."
SECTION 206. Form of Trustee's Certificate of Authentication. The
Trustee's certificates of authentication shall be in substantially the following
form:
26
27
This is one of the General Term Notes of the series designated therein
referred to in the within-mentioned Indenture.
_______________________________________,
as Trustee
By______________________________________
Authorized Officer
ARTICLE III
REDEMPTION OF GENERAL TERM NOTES; CHANGE OF CONTROL
SECTION 301. Redemption of General Term Notes. (a) Each General Term
Note may be redeemed by the Company in whole or in part if so provided in, and
in accordance with, the terms of such General Term Note issued by the Company.
The Company may redeem any General Term Note which by its terms is redeemable
prior to Stated Maturity without also redeeming any other General Term Note
which is redeemable prior to Stated Maturity.
(b) Change of Control. Upon the occurrence of a Change in Control (the
effective date of such Change in Control being the "Change in Control Date"),
each Holder of a General Term Note shall have the right to require that the
Company repurchase (a "Required Repurchase") all or any part of such Holder's
General Term Note at a repurchase price payable in cash equal to 101% of the
principal amount of such General Term Note plus accrued interest to the Purchase
Date (the "Change in Control Purchase Price").
(1) Within 30 days following the Change in Control Date, the Company
shall mail a notice (the "Required Repurchase Notice") to each Holder with a
copy to the Trustee stating:
27
28
(i) that a Change in Control has occurred and that such Holder
has the right to require the Company to repurchase all or any part of
such Holder's General Term Notes at the Change of Control Purchase
Price;
(ii) the Change of Control Purchase Price;
(iii) the date on which any Required Repurchase shall be made
(which shall be no earlier than 60 days nor later than 90 days from the
date such notice is mailed) (the "Purchase Date");
(iv) the name and address of the Paying Agent; and
(v) the procedures that Holders must follow to cause the General
Term Notes to be repurchased, which shall be consistent with this
Section and the Indenture.
(2) Holders electing to have a General Term Note repurchased must
deliver a written notice (the "Change in Control Purchase Notice") to the
Paying Agent (initially the Trustee) at its office in The City of New York,
or any other office of the Paying Agent maintained for such purposes, not
later than 30 days prior to the Purchase Date. The Change in Control
Purchase Notice shall state: (i) the portion of the principal amount of any
General Term Notes to be repurchased, which portion must be $1,000 or an
integral multiple thereof; (ii) that such General Term Notes are to be
repurchased by the Company pursuant to the change in control provisions of
the Indenture; and (iii) unless the General Term Notes are represented by
one or more Global Notes, the certificate numbers of the General Term Notes
to be delivered by the Holder thereof for repurchase by the Company. Any
Change in Control Purchase Notice may be withdrawn by the Holder by a
written notice of withdrawal delivered to the Paying Agent not later than
three Business Days prior to the Purchase Date. The notice of withdrawal
shall state the
28
29
principal amount and, if applicable, the certificate numbers of the General
Term Notes as to which the withdrawal notice relates and the principal
amount of such General Term Notes, if any, which remains subject to a Change
in Control Purchase Notice.
If a General Term Note is represented by a Global Note (as described in
Article VII below), the Depositary or its nominee will be the Holder of such
General Term Note and therefore will be the only entity that can elect a
Required Repurchase of such General Term Note. To obtain repayment pursuant
to this Section 301(b) with respect to such General Term Note, the
beneficial owner of such General Term Note must provide to the broker or
other entity through which it holds the beneficial interest in such General
Term Note (i) the Change in Control Purchase Notice signed by such
beneficial owner, and such signature must be guaranteed by a member firm of
a registered national securities exchange or of the National Association of
Securities Dealers, Inc. or a commercial bank or trust company having an
office or correspondent in the United States, and (ii) instructions to such
broker or other entity to notify the Depositary of such beneficial owner's
desire to obtain repayment pursuant to this Section 301(b). Such broker or
other entity will provide to the Paying Agent (i) the Change of Control
Purchase Notice received from such beneficial owner and (ii) a certificate
satisfactory to the Paying Agent from such broker or other entity stating
that it represents such beneficial owner. Such broker or other entity will
be responsible for disbursing any payments it receives pursuant to this
Section 301(b) to such beneficial owner.
(3) Payment of the Change of Control Purchase Price for a General Term
Note for which a Change in Control Purchase Notice has been delivered and
not withdrawn is conditioned (except in the case of a General Term Note
represented by one or more Global Notes) upon delivery of such General Term
Note (together with necessary endorsements) to the Paying Agent at its
office in The City of New York, or any other office of the Paying Agent
maintained
29
30
for such purpose, at any time (whether prior to, on or after the Purchase
Date) after the delivery of such Change in Control Purchase Notice. Payment
of the Change of Control Purchase Price for such General Term Note will be
made promptly following the later of the Purchase Date or the time of
delivery of such General Term Note. If the Paying Agent holds, in accordance
with the terms of the Indenture, money sufficient to pay the Change in
Control Purchase Price of such General Term Note on the Business Day
following the Purchase Date, then, on and after such date, interest will
cease accruing, and, if applicable, amounts will no longer accrue on any
such General Term Note that is an Original Issue Discount Security, whether
or not such General Term Note is delivered to the Paying Agent, and all
other rights of the Holder shall terminate (other than the right to receive
the Change of Control Purchase Price upon delivery of the General Term
Note).
(4) The Company shall comply with the provisions of Rule 13e-4 and any
other tender offer rules under the Exchange Act, which may then be
applicable and shall file Schedule 13E-4 or any other schedule required
thereunder in connection with any offer by the Company to repurchase General
Term Notes at the option of Holders upon a Change in Control.
(5) No General Term Note may be repurchased by the Company as a result
of a Change in Control if there has occurred and is continuing an Event of
Default (other than a default in the Payment of the Change in Control
Purchase Price with respect to the General Term Notes).
ARTICLE IV
REPAYMENT UPON DEATH
If so specified in any General Term Note, the Holder of such General
Term Note will have the option (the "Survivor's Option") to elect repayment of
such General Term Note prior to its Stated Maturity in the event of the death of
the beneficial owner of such General Term Note.
30
31
Pursuant to exercise of the Survivor's Option, if applicable, the
Company will repay any General Term Note (or portion thereof) properly tendered
for repayment by or on behalf of the person (the "Representative") that has
authority to act on behalf of the deceased beneficial owner of such General Term
Note under the laws of the appropriate jurisdiction (including, without
limitation, the trustee of a personal trust, the personal representative,
executor, surviving joint tenant or surviving tenant by the entirety of such
deceased beneficial owner) at a price equal to one-hundred percent (100%) of the
principal amount of the beneficial interest of the deceased owner of such
General Term Note plus accrued interest to the date of such payment, subject to
the limitations below. In order for a Holder to exercise the Survivor's Option,
the deceased beneficial owner or his or her Representative must have
individually or collectively held the General Term Note for 120 days. The
Company may, in its sole discretion, limit the aggregate principal amount of
General Term Notes as to which exercises of the Survivor's Option will be
accepted in any calendar year (the "Annual Put Limitation") to one percent (1%)
of the outstanding principal amount of the General Term Notes as of the end of
the most recent fiscal year, but not less than $500,000 in any such calendar
year, or such greater amount as the Company in its sole discretion may determine
for any calendar year, and may limit to $100,000, or such greater amount as the
Company in its sole discretion may determine for any calendar year, the
aggregate principal amount of General Term Notes (or portions thereof) as to
which exercise of the Survivor's Option will be accepted in such calendar year
with respect to any individual deceased owner of beneficial interests in such
General Term Notes (the "Individual Put Limitation"). Moreover, the Company will
not make principal repayments pursuant to exercise of the Survivor's Option in
amounts that are less that $1,000, and, in the event that the limitations
described in the preceding sentence would result in the partial repayment of any
General Term Note, the principal amount of such General Term Note remaining
outstanding after repayment must be at least $1,000 (the minimum authorized
denomination of the General Term Notes). Any General Term Note (or portion
thereof) tendered pursuant
31
32
to exercise of the Survivor's Option may be withdrawn by a written request of
its Holder received by the Trustee prior to its repayment.
Each General Term Note (or portion thereof) that is tendered
pursuant to a valid exercise of the Survivor's Option will be accepted promptly
in the order all such General Term Notes are tendered, except for any General
Term Note (or portion thereof) the acceptance of which would contravene (i) the
Annual Put Limitation, if applied, or (ii) the Individual Put Limitation, if
applied, with respect to the relevant individual deceased owner of beneficial
interests therein. If, as of the end of any calendar year, the aggregate
principal amount of General Term Notes (or portions thereof) that have been
accepted pursuant to exercise of the Survivor's Option for such year has not
exceeded the Annual Put Limitation, if applied, for such year, any exercise(s)
of the Survivor's Option with respect to General Term Notes (or portions
thereof) not accepted during such calendar year because such acceptance would
have contravened the Individual Put Limitation, if applied, with respect to an
individual deceased owner of beneficial interests therein will be accepted in
the order all such General Term Notes (or portions thereof) were tendered, to
the extent that any such exercise would not exceed the Annual Put Limitation, if
applied, for such calendar year. Any General Term Note (or portion thereof)
accepted for repayment pursuant to exercise of the Survivor's Option will be
repaid no later than the first Interest Payment Date that occurs 20 or more
calendar days after the date of such acceptance. Each General Term Note (or any
portion thereof) tendered for repayment that is not accepted in any calendar
year because of the application of the Annual Put Limitation will be deemed to
be tendered in the following calendar year in the order in which all such
General Term Notes (or portions thereof) were originally tendered, unless any
such General Term Note (or portion thereof) is withdrawn by the Representative
for the deceased owner prior to its repayment. In the event that a General Term
Note (or any portion thereof) tendered for repayment pursuant to valid exercise
of the Survivor's Option is not accepted, the Trustee will deliver a notice by
first-class mail to the registered Holder thereof at its last known address as
indicated in the
32
33
Security Register or, alternatively to the applicable Representative that states
the reasons such General Term Note (or portion thereof) has not been accepted
for repayment.
Subject to the foregoing, in order for a Survivor's Option to be
validly exercised with respect to any General Term Note (or portion thereof),
the Trustee must receive from the Representative of the individual deceased
owner of beneficial interests therein (i) a written request for payment signed
by the Representative, and such signature must be guaranteed by a member firm of
a registered national securities exchange or of the National Association of
Securities Dealers, Inc. or a commercial bank or trust company having an office
or correspondent in the United States, (ii) if any such General Term Note is not
represented by a Global Note (as described in Article VII below), tender of the
General Term Note (or portion thereof) to be repaid, (iii) appropriate evidence
satisfactory to the Company and the Trustee that (A) the Representative has
authority to act on behalf of the individual deceased beneficial owner, (B) the
death of such beneficial owner has occurred and (C) the deceased individual was
the owner of a beneficial interest in such General Term Note at the time of
death, (iv) if applicable, a properly executed assignment or endorsement, and
(v) if the beneficial interest in such General Term Note is held by a nominee of
the deceased beneficial owner, a certificate satisfactory to the Trustee from
such nominee attesting to the deceased's ownership of a beneficial interest in
such General Term Note. All questions as to the eligibility or validity of any
exercise of the Survivor's Option will be determined by the Company, in its sole
discretion, which determinations will be final and binding on all parties.
If a General Term Note is represented by a Global Note (as
described in Article VII below), the Depositary or its nominee will be the
Holder of such General Term Note and therefore will be the only entity that can
exercise the Survivor's Option for such General Term Note. To obtain repayment
pursuant to exercise of the Survivor's Option with respect to such General Term
Note, the
33
34
Representative must provide to the broker or other entity through which the
beneficial interest in such General Term Note is held by the deceased owner (i)
the documents described in clauses (i) and (iii) of the preceding paragraph and
(ii) instructions to such broker or other entity to notify the Depositary of
such Representative's desire to obtain repayment pursuant to exercise of the
Survivor's Option. Such broker or other entity shall provide to the Trustee (i)
the documents received from the Representative referred to in clause (i) of the
preceding sentence and (ii) a certificate satisfactory to the Trustee from such
broker or other entity stating that it represents the deceased beneficial owner
and that such deceased beneficial owner or such deceased beneficial owner's
Representative individually or collectively held such General Term Note for at
lease 120 days. Such broker or other entity will be responsible for disbursing
any payments it receives pursuant to exercise of the Survivor's Option to the
appropriate Representative.
ARTICLE V
ADDITIONAL COVENANTS OF THE COMPANY
WITH RESPECT TO THE GENERAL TERM NOTES
SECTION 501. Statement by Officers as to Default. (a) The Company
will deliver to the Trustee, within 120 days after the end of each fiscal year a
brief certificate from the principal executive officer, principal financial
officer or principal accounting officer as to his or her knowledge of the
Company's compliance with all conditions and covenants under this Sixth
Supplemental Indenture. For such purposes, such compliance shall be determined
without regard to any period of grace or requirement of notice provided
hereunder and, if the Company shall be in default, specifying all such defaults
and the nature and status thereof of which they may have knowledge.
(b) The Company shall deliver to the Trustee, as soon as possible
and in any event within 10 days after the Company becomes aware of the
occurrence of an
34
35
Event of Default or an event which, with notice or the lapse of time or both,
would constitute an Event of Default, an Officers' Certificate setting forth the
details of such Event of Default or default, and the action which the Company
proposes to take with respect thereto.
SECTION 502. Existence. So long as any of the General Term Notes
are Outstanding, subject to Article 8 of the Indenture, the Company will do or
cause to be done all things necessary to preserve and keep in full force and
effect its corporate existence and all rights (charter and statutory) and
franchises other than rights or franchises the loss of which would not be
disadvantageous in any material respect to the Holders of the General Term
Notes.
SECTION 503. Maintenance of Properties. So long as any of the
General Term Notes are Outstanding, the Company will cause all properties used
or useful in the conduct of its business to be maintained and kept in good
condition, repair and working order and supplied with all necessary equipment
and will cause to be made all necessary repairs, renewals, replacements,
betterments and improvements thereof, all as in the judgment of the Company may
be necessary so that the business carried on in connection therewith may be
properly and advantageously conducted at all times; provided, however, that
nothing in this Section shall prevent the Company from discontinuing the
operation or maintenance of any of such properties if such discontinuance is, in
the judgment of the Company, desirable in the conduct of its business and not
disadvantageous in any material respect to the Holders.
SECTION 504. Payment of Taxes and Other Claims. So long as any of
the General Term Notes are Outstanding, the Company will pay or discharge or
cause to be paid or discharged, before the same shall become delinquent, (1) all
taxes, assessments and governmental charges levied or imposed upon the Company
or any Subsidiary or upon the income, profits or property of the Company or any
Subsidiary, and (2) all lawful claims for labor, materials and supplies which,
35
36
if unpaid, might by law become a Lien upon the property of the Company or any
Subsidiary; provided, however, that the Company shall not be required to pay or
discharge or cause to be paid or discharged any such tax, assessment, charge or
claim the amount of which, applicability or validity is being contested in good
faith by appropriate proceedings.
SECTION 505. Insurance. So long as any of the General Term Notes
are Outstanding, the Company shall, and each of its Restricted Subsidiaries and
Consumers shall, keep insured by financially sound and reputable insurers all
property of a character usually insured by entities engaged in the same or
similar businesses similarly situated against loss or damage of the kinds and in
the amounts customarily insured against by such entities and carry such amounts
of other insurance as is usually carried by such entities.
SECTION 506. Compliance with Laws. So long as any of the General
Term Notes are Outstanding, the Company shall, and each of its Restricted
Subsidiaries and Consumers shall, comply in all material respects with all laws
applicable to the Company or such Restricted Subsidiary or Consumers, as the
case may be, its respective business and properties.
SECTION 508. Limitation on Certain Liens. (a) So long as any of
the General Term Notes are outstanding, the Company shall not create, incur,
assume or suffer to exist any Lien or any other type of arrangement intended or
having the effect of conferring upon a creditor of the Company or any Subsidiary
a preferential interest (hereinafter in this Section referred to as a "Lien")
upon or with respect to the Capital Stock of Consumers, Enterprises or CMS Oil &
Gas Co. without making effective provision whereby the General Term Notes shall
(so long as any such other creditor shall be so secured) be equally and ratably
secured (along with any other creditor similarly entitled to be secured) by a
direct Lien on all property subject to such Lien, provided, however, that the
foregoing restrictions shall not apply to:
36
37
(i) Liens for taxes, assessments or governmental charges or levies to
the extent not past due;
(ii) pledges or deposits to secure (a) obligations under workmen's
compensation laws or similar legislation, (b) statutory obligations of the
Company or (c) Support Obligations not to exceed $30 million at any one time
outstanding;
(iii) Liens imposed by law, such as materialmen's, mechanics',
carriers', workmen's and repairmen's Liens and other similar Liens arising in
the ordinary course of business securing obligations which are not overdue or
which have been fully bonded and are being contested in good faith;
(iv) purchase money Liens upon or in property acquired and held by the
Company in the ordinary course of business to secure the purchase price of such
property or to secure Indebtedness incurred solely for the purpose of financing
the acquisition of any such property to be subject to such Liens, or Liens
existing on any such property at the time of acquisition, or extensions,
renewals or replacements of any of the foregoing for the same or a lesser
amount, provided that no such Lien shall extend to or cover any property other
than the property being acquired and no such extension, renewal or replacement
shall extend to or cover property not theretofore subject to the Lien being
extended, renewed or replaced, and provided, further, that the aggregate
principal amount of the Indebtedness at any one time outstanding secured by
Liens permitted by this clause (iv) shall not exceed $10,000,000; and
(v) Liens not otherwise permitted by clauses (i) through (iv) of this
Section securing Indebtedness of the Company; provided that on the date such
Liens are created, and after giving effect to such Indebtedness, the aggregate
principal amount at maturity of all of the secured Indebtedness of the Company
at such date shall not exceed 10% of Consolidated Assets at such date.
37
38
SECTION 509. Limitation on Consolidation, Merger, Sale or
Conveyance. In addition to the limitations set forth in Article 8 of the
Indenture, so long as the General Term Notes are Outstanding and until the
General Term Notes are rated BBB- or above (or an equivalent rating) by Standard
& Poor's and one Other Rating Agency (or if Standard & Poor's shall change its
rating system, an equivalent of such rating then employed by such organization)
at which time the Company shall be permanently released from the following
provisions, the Company shall not consolidate with or merge into any other
Person or sell, lease or convey the property of the Company in the entirety or
substantially as an entirety unless (i) immediately after giving effect to such
transaction the Consolidated Net Worth of the surviving entity is at least equal
to the Consolidated Net Worth of the Company immediately prior to the
transaction, and (ii) after giving effect to such transaction, the surviving
entity would be entitled to incur at least one dollar of additional Indebtedness
(other than revolving Indebtedness to banks) without violation of the
limitations in Section 510 hereof.
SECTION 510. Limitation on Consolidated Indebtedness. (a) So long
as any of the General Term Notes are Outstanding and until the General Term
Notes are rated BBB- or above (or an equivalent rating) by Standard & Poor's and
one Other Rating Agency (or if Standard & Poor's shall change its rating system,
an equivalent of such rating then employed by such organization) at which time
the Company shall be permanently released from the provision of this Section
510, the Company shall not, and shall not permit any Restricted Subsidiary of
the Company to, issue, create, assume, guarantee, incur or otherwise become
liable for (collectively, "issue"), directly or indirectly, any Indebtedness
unless (i) the Consolidated Coverage Ratio of the Company and its Consolidated
Subsidiaries for the four consecutive fiscal quarters immediately preceding the
issuance of such Indebtedness (as shown by a pro forma consolidated income
statement of the Company and its Consolidated Subsidiaries for the four most
recent fiscal quarters ending at least 30 days prior to the issuance of such
Indebtedness after giving effect to (i) the
38
39
issuance of such Indebtedness and (if applicable) the application of the net
proceeds thereof to refinance other Indebtedness as if such Indebtedness was
issued at the beginning of the period, (ii) the issuance and retirement of any
other Indebtedness since the first day of the period as if such Indebtedness was
issued or retired at the beginning of the period and (iii) the acquisition of
any company or business acquired by the Company or any Subsidiary since the
first day of the period (including giving effect to the pro forma historical
earnings of such company or business), including any acquisition which will be
consummated contemporaneously with the issuance of such Indebtedness, as if in
each case such acquisition occurred at the beginning of the period) exceeds a
ratio of 1.6 to 1.0 and (ii), immediately after giving effect to the issuance of
such Indebtedness and (if applicable) the application of the net proceeds
thereof to refinance other Indebtedness, the Consolidated Leverage Ratio is
equal to or less than a ratio of 0.75 to 1.0.
(b) Notwithstanding the foregoing paragraph, the Company or any
Restricted Subsidiary may issue, directly or indirectly, the following
Indebtedness:
(1) Revolving Indebtedness to banks not to exceed $1,000,000,000
in the aggregate outstanding principal amount at any time;
(2) Indebtedness (other than Indebtedness described in clause
(1) of this Subsection) outstanding on the date of the original
Indenture, as set forth on Schedule 510(b)(2) attached hereto and made
a part hereof, and Indebtedness issued in exchange for, or the
proceeds of which are used to refund or refinance, any Indebtedness
permitted by this clause (2); provided, however, that (i) the
principal amount (or accreted value in the case of Indebtedness issued
at a discount) of the Indebtedness so issued shall not exceed the
principal amount (or accreted value in the case of Indebtedness issued
at a discount) of, premium, if any, and accrued but unpaid interest
39
40
on, the Indebtedness so exchanged, refunded or refinanced and (ii) the
Indebtedness so issued (A) shall not mature prior to the stated
maturity of the Indebtedness so exchanged, refunded or refinanced, (B)
shall have an Average Life equal to or greater than the remaining
Average Life of the Indebtedness so exchanged, refunded or refinanced
and (C) if the Indebtedness to be exchanged, refunded or refinanced is
subordinated to the General Term Notes, the Indebtedness is
subordinated to the General Term Notes in right of payment;
(3) Indebtedness of the Company owed to and held by a Subsidiary
and Indebtedness of a Subsidiary owed to and held by the Company;
provided, however, that, in the case of Indebtedness of the Company
owed to and held by a Subsidiary, (i) any subsequent issuance or
transfer of any Capital Stock that results in any such Subsidiary
ceasing to be a Subsidiary or (ii) any transfer of such Indebtedness
(except to the Company or a Subsidiary) shall be deemed for the
purposes of this Subsection to constitute the issuance of such
Indebtedness by the Company;
(4) Indebtedness of the Company issued in exchange for, or the
proceeds of which are used to refund or refinance, Indebtedness of the
Company issued in accordance with Subsection (a) of this Section,
provided that (i) the principal amount (or accreted value in the case
of Indebtedness issued at a discount) of the Indebtedness so issued
shall not exceed the principal amount (or accreted value in the case
of Indebtedness issued at a discount) of, premium, if any, and accrued
but unpaid interest on, the Indebtedness so exchanged, refunded or
refinanced and (ii) the Indebtedness so issued (A) shall not mature
prior to the stated maturity of the Indebtedness so exchanged,
refunded or refinanced, (B) shall have an Average Life equal to or
greater than the remaining Average Life of the Indebtedness so
exchanged, refunded or refinanced and (C) if the Indebtedness to be
exchanged, refunded
40
41
or refinanced is subordinated to the General Term Notes, the
Indebtedness so issued is subordinated to the General Term Notes in
right of payment; and
(5) Indebtedness of a Restricted Subsidiary issued in exchange
for, or the proceeds of which are used to refund or refinance,
Indebtedness of a Restricted Subsidiary issued in accordance with
Subsection (a) of this Section, provided that (i) the principal amount
(or accreted value in the case of Indebtedness issued at a discount)
of the Indebtedness so issued shall not exceed the principal amount
(or accreted value in the case of Indebtedness issued at a discount)
of, premium, if any, and accrued but unpaid interest on, the
Indebtedness so exchanged, refunded or refinanced and (ii) the
Indebtedness so issued (A) shall not mature prior to the stated
maturity of the Indebtedness so exchanged, refunded or refinanced and
(B) shall have an Average Life equal to or greater than the remaining
Average Life of the Indebtedness so exchanged, refunded or refinanced.
SECTION 511. Limitation on Restricted Payments. (a) So long as
the General Term Notes are Outstanding and until the General Term Notes are
rated BBB- or above (or an equivalent rating) by Standard & Poor's and one Other
Rating Agency (or if Standard & Poor's shall change its rating system, an
equivalent of such rating then employed by such organization) at which time the
Company shall be permanently released from the provision of this Section 511,
the Company shall not, and shall not permit any Restricted Subsidiary of the
Company, directly or indirectly, to (i) declare or pay any dividend or make any
distribution on the Capital Stock of the Company to the direct or indirect
holders of the Capital Stock of the Company (except dividends or distributions
payable solely in Non-Convertible Capital Stock of the Company or in options,
warrants or other rights to purchase such Non-Convertible Capital Stock and
except dividends or distributions payable to the Company or a Subsidiary), (ii)
purchase, redeem or otherwise acquire or retire for value any Capital Stock of
the Company (any such dividend, distribution, purchase, redemption, other
acquisition or retirement being hereinafter referred to
41
42
as a "Restricted Payment") if at the time the Company or such Subsidiary makes
such Restricted Payment:
(1) an Event of Default, or an event that with the lapse of time
or the giving of notice or both would constitute an Event of Default,
shall have occurred and be continuing (or would result therefrom); or
(2) the aggregate amount of such Restricted Payment and all
other Restricted Payments made since September 30, 1993, would exceed
the sum of:
(A) $120,000,000;
(B) 100% of Consolidated Net Income, accrued during the period
(treated as one accounting period) from September 30, 1993 to the end
of the most recent fiscal quarter ending at least 45 days prior to the
date of such Restricted Payment (or, in case such sum shall be a
deficit, minus 100% of the deficit); and
(C) the aggregate Net Proceeds received by the Company from the
issue or sale of or contribution with respect to its Capital Stock
subsequent to September 30, 1993.
For the purpose of determining the amount of any Restricted Payment not in the
form of cash, the amount shall be the fair value of such Restricted Payment as
determined in good faith by the Board of Directors, provided that if the value
of the non-cash portion of such Restricted Payment as determined by the Board of
Directors is in excess of $25 million, such value shall be based on the opinion
from a nationally recognized firm experienced in the appraisal of similar types
of transactions.
(b) The provisions of Section 511(a) shall not prohibit:
42
43
(i) any purchase or redemption of Capital Stock of the
Company made by exchange for, or out of the proceeds of the
substantially concurrent sale of, Capital Stock of the Company
(other than Redeemable Stock or Exchangeable Stock); provided,
however, that such purchase or redemption shall be excluded from
the calculation of the amount of Restricted Payments;
(ii) dividends or other distributions paid in respect of
any class of the Company's Capital Stock issued in respect of the
acquisition of any business or assets by the Company or a
Restricted Subsidiary if the dividends or other distributions
with respect to such Capital Stock are payable solely from the
net earnings of such business or assets;
(iii) dividends paid within 60 days after the date of
declaration thereof if at such date of declaration such dividend
would have complied with this Section; provided, however, that at
the time of payment of such dividend, no Event of Default shall
have occurred and be continuing (or result therefrom), and
provided further, however, that such dividends shall be included
(without duplication) in the calculation of the amount of
Restricted Payments; or
(iv) payments pursuant to the Tax-Sharing Agreement.
SECTION 512. Limitation on Transactions with Affiliates. So long
as any of the General Term Notes are Outstanding, the Company shall not directly
or indirectly, conduct any business or enter into any transaction or series of
related transactions (including the purchase, sale, lease or exchange of any
property or the rendering of any service) with an Affiliate unless the terms of
such business, transaction or series of transactions are as favorable to the
Company as terms that could be obtainable at the time for a comparable
transaction or series of related
43
44
transactions in arm's-length dealings with an unrelated third Person. This
Section shall not apply to (x) compensation paid to officers and directors of
the Company which has been approved by the Board of Directors of the Company or
(y) loans to the Company or an Affiliate pursuant to a global cash management
program, which loans mature within one year from the date thereof.
ARTICLE VI
ADDITIONAL EVENTS OF DEFAULT
WITH RESPECT TO THE GENERAL TERM NOTES
SECTION 601. Definition. All of the events specified in Section
501 of the Indenture and the events specified in Section 602 of this Article
shall be "Events of Default" with respect to the General Term Notes.
SECTION 602. Additional Events of Default. As contemplated by
Sections 301(15) and 501(7) of the Indenture, any one of the following events
(whatever the reason for such Event of Default and whether or not it shall be
voluntary or involuntary or be effected by operation of law or pursuant to any
judgment, decree or order of any court or any order, rule or regulation of any
administrative or governmental body) shall be an Event of Default with respect
to the General Term Notes for all purposes of the Indenture:
(a) a default or event of default in respect of any Indebtedness
of the Company having an aggregate outstanding principal amount at the time of
such default in excess of $25,000,000 shall occur which results in the
acceleration of such Indebtedness or Indebtedness of the Company having an
outstanding principal amount at maturity in excess of $25,000,000 shall not be
paid at maturity thereof, which default shall not have been waived by the holder
or holders of such Indebtedness within 30 days of such default; or
44
45
(b) the entry of a final judgment or judgments against the
Company aggregating in excess of $25,000,000 which remain undischarged or
unbonded for a period (during which execution shall not be effectively stayed)
of 60 days.
ARTICLE VII
GLOBAL NOTES
The General Term Notes will be issued initially in the form of
Global Notes. "Global Note" means a registered General Term Note evidencing one
or more General Term Notes issued to a depositary (the "Depositary") or its
nominee, in accordance with this Article and bearing the legend prescribed in
this Article. A single Global Note will represent all General Term Notes issued
on the same date and having the same terms, including, but not limited to, the
same Interest Payment Dates, rate of interest, Stated Maturity, and redemption
provisions (if any). The Company shall execute and the Trustee shall, in
accordance with this Article and the Company Order with respect to the General
Term Notes, authenticate and deliver one or more Global Notes in temporary or
permanent form that (i) shall represent and shall be denominated in an aggregate
amount equal to the aggregate principal amount of the General Term Notes to be
represented by such Global Note or Notes, (ii) shall be registered in the name
of the Depositary for such Global Note or Notes or the nominee of such
Depositary, (iii) shall be delivered by the Trustee to such Depositary or
pursuant to such Depositary's instructions and (iv) shall bear a legend
substantially to the following effect: "Unless this Global Note is presented by
an authorized representative of the Depositary to the Company or its agent for
registration of transfer, exchange or payment, and any Note issued is registered
in the name of the Depositary or in such other name as is requested by the
Depositary, any transfer, pledge or other use hereof for value or otherwise by
or to any person shall be wrongful inasmuch as the registered owner hereof, the
Depositary, has an interest herein."
45
46
Notwithstanding Section 305 of the Indenture, unless and until it
is exchanged in whole or in part for General Term Notes in definitive form, a
Global Note representing one or more General Term Notes may not be transferred
except as a whole by the Depositary, to a nominee of such Depositary or by a
nominee of such Depositary to such Depositary or another nominee of such
Depositary or by such Depositary or any such nominee to a successor Depositary
for General Term Notes or a nominee of such successor Depositary.
If at any time the Depositary for the General Term Notes is
unwilling or unable to continue as Depositary for the General Term Notes, the
Company shall appoint a successor Depositary with respect to the General Term
Notes. If a successor Depositary for the General Term Notes is not appointed by
the Company by the earlier of (i) 90 days from the date the Company receives
notice to the effect that the Depositary is unwilling or unable to act, or the
Company determines that the Depositary is unable to act or (ii) the
effectiveness of the Depositary's resignation or failure to fulfill its duties
as Depositary, the Company will execute, and the Trustee, upon receipt of a
Company Order for the authentication and delivery of definitive General Term
Notes, will authenticate and deliver General Term Notes in definitive form in an
aggregate principal amount equal to the principal amount of the Global Note or
Notes representing such General Term Notes in exchange for such Global Note or
Notes.
The Company may at any time and in its sole discretion determine
that the General Term Notes issued in the form of one or more Global Notes shall
no longer be represented by such Global Note or Notes. In such event the Company
will execute, and the Trustee, upon receipt of a Company Order for the
authentication and delivery of definitive General Term Notes, will authenticate
and deliver General Term Notes in definitive form in an aggregate principal
amount equal to the principal amount of the Global Note or Notes representing
such General Term Notes in exchange for such Global Note or Notes.
46
47
The Depositary for such General Term Notes may surrender a Global
Note or Notes for such General Term Notes in exchange in whole or in part for
General Term Notes in definitive form on such terms as are acceptable to the
Company and such Depositary. Thereupon, the Company shall execute, and the
Trustee shall authenticate and deliver, without service charge:
(i) to each Person specified by such Depositary a new General
Term Note or Notes, of any authorized denomination as requested
by such Person in aggregate principal amount equal to and in
exchange for such Person's beneficial interest in the Global
Note; and
(ii) to such Depositary a new Global Note in a denomination
equal to the difference, if any, between the principal amount of
the surrendered Global Note and the aggregate principal amount of
General Term Notes in definitive form delivered to Holders
thereof.
In any exchange provided for in this Article, the Company will
execute and the Trustee will authenticate and deliver General Term Notes in
definitive registered form in authorized denominations.
Upon the exchange of a Global Note for General Term Notes in
definitive form, such Global Note shall be canceled by the Trustee. General Term
Notes in definitive form issued in exchange for a Global Note pursuant to this
Article shall be registered in such names and in such authorized denominations
as the Depositary for such Global Note, pursuant to instructions from its direct
or indirect participants or otherwise, shall instruct the Trustee or Security
Registrar. The Trustee shall deliver such General Term Notes to the persons in
whose names such General Term Notes are so registered.
47
48
ARTICLE VIII
DEFEASANCE
All of the provisions of Article Fourteen of the Original
Indenture shall be applicable to the General Term Notes. Upon satisfaction by
the Company of the requirements of Section 1404 of the Indenture, in connection
with any covenant defeasance (as provided in Section 1403 of the Indenture), the
Company shall be released from its obligations under Article Eight of the
Original Indenture and under Articles III and V of this Sixth Supplemental
Indenture with respect to the General Term Notes.
ARTICLE IX
SUPPLEMENTAL INDENTURES
This Sixth Supplemental Indenture is a supplement to the Original
Indenture. As supplemented by this Sixth Supplemental Indenture, the Original
Indenture is in all respects ratified, approved and confirmed, and the Original
Indenture and this Sixth Supplemental Indenture shall together constitute one
and the same instrument.
The Company may, by supplemental indenture, amend this Sixth
Supplemental Indenture to provide for additional definitions, terms and
provisions relating to General Term Notes. Any such supplemental indenture shall
not adversely affect the rights and privileges of Holders of General Term Notes
issued prior to such supplemental indenture. Any such supplemental indenture may
include, but is not limited to including, additional provisions permitting
payment of General Term Notes prior to Stated Maturity at the option of the
Holders, issuance of General Term Notes in currencies other than Dollars, and
special provisions relating to interest rate provisions.
48
49
TESTIMONIUM
This Sixth Supplemental Indenture may be executed in any number
of counterparts, each of which so executed shall be deemed to be an original,
but all such counterparts shall together constitute but one and the same
instrument.
IN WITNESS WHEREOF, the parties hereto have caused this Sixth
Supplemental Indenture to be duly executed and their respective corporate seals
to be hereunto affixed and attested, all as of the day and year first written
above.
CMS ENERGY CORPORATION
By:
--------------------------------
Name: Alan M. Wright
Title: Senior Vice President and
Chief Financial Officer
Attest:
(Corporate Seal)
- -------------------------
Name: Thomas A McNish
Title: Vice President and Secretary
THE CHASE MANHATTAN BANK
as Trustee
By:
Attest:
(Corporate Seal)
- -----------------
49
50
Schedule 510(b)(2)
------------------
Indebtedness of CMS Energy Corporation outstanding on January 20, 1994:
1. $146,000,000 of Series A Senior Deferred Coupon Notes due 1997; and
2. $248,000,000 of Series B Senior Deferred Coupon Notes due 1999.
50
1
EXHIBIT (12)
CMS ENERGY CORPORATION
Ratio of Earnings to Fixed Charges and Preferred
Securities Dividends and Distributions
(Millions of Dollars)
Nine Months
Ended
September 30 Years Ended December 31 -
2000 1999 1998 1997 1996 1995
-------------------------------------------------------------
(b)
Earnings as defined (a)
Consolidated net income $ 216 $ 277 $ 242 $ 244 $ 224 $ 195
Income taxes 88 64 100 108 137 113
Exclude equity basis subsidiaries (125) (84) (92) (80) (85) (57)
Fixed charges as defined, adjusted to exclude
capitalized interest of $35, $41, $29, $13, $5
and $4 million for the nine months ended
September 30, 2000 and for the years ended
December 31, 1999, 1998, 1997, 1996 and 1995,
respectively 550 588 395 360 313 299
-------------------------------------------------------------
Earnings as defined $ 729 $ 845 $ 645 $ 632 $ 589 $ 550
=============================================================
Fixed charges as defined (a)
Interest on long-term debt $ 443 $ 502 $ 319 $ 273 $ 230 $ 224
Estimated interest portion of lease rental 6 7 8 8 10 9
Other interest charges 24 57 48 49 43 42
Preferred securities dividends and
distributions 111 96 77 67 54 42
-------------------------------------------------------------
Fixed charges as defined $ 584 $ 662 $ 452 $ 397 $ 337 $ 317
=============================================================
Ratio of earnings to fixed charges and
preferred securities dividends and distributions 1.25 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)
October 27, 2000
CMS Energy Corporation:
We are aware that CMS Energy Corporation has incorporated by reference in its
Registration Statements No. 33-55805, No. 33-60007, No. 33-61595, No. 333-27849,
No. 333-32229, No. 333-37241, No. 333-45556, No. 333-47464, No. 333-68937, No.
333-75805, and No. 333-76347 its Form 10-Q for the quarter ended September 30,
2000, which includes our report dated October 27, 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)
October 27, 2000
Consumers Energy Company:
We are aware that CMS Energy Corporation has incorporated by reference in its
Registration Statement No. 333-89363 its Form 10-Q for the quarter ended
September 30, 2000, which includes our report dated October 27, 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
9-MOS
DEC-31-2000
JAN-01-2000
SEP-30-2000
PER-BOOK
4,157
5,963
2,693
3,442
0
16,255
1
2,623
(95)
2,309
1,089
44
1,819
432
5,427
0
510
0
81
32
4,292
16,255
5,821
88
5,076
5,164
657
64
721
433
288
72
216
122
0
163
1.95
1.93
UT
0000201533
CONSUMERS ENERGY COMPANY
1,000,000
9-MOS
DEC-31-2000
JAN-01-2000
SEP-30-2000
PER-BOOK
4,157
606
617
1,752
0
7,132
841
646
531
2,018
395
44
810
430
1,199
0
50
0
81
30
2,075
7,132
2,808
96
2,387
2,483
325
6
331
132
199
27
172
126
0
352
0
0
5
0000076063
PANHANDLE EASTERN PIPE LINE COMPANY
1,000
9-MOS
SEP-30-2000
SEP-30-2000
0
0
128,000
0
56,000
376,000
1,673,000
87,000
2,741,000
244,000
1,193,000
0
0
1,000
1,128,000
2,741,000
0
355,000
0
142,000
67,000
0
62,000
146,000
34,000
55,000
0
0
0
55,000
0
0
NOT MEANINGFUL SINCE PANHANDLE EASTERN PIPE LINE COMPANY IS A WHOLLY-OWNED
SUBSIDIARY.
