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FORM 10-Q================================================================================
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington,WASHINGTON, DC 20549
[ X ]QUARTERLYFORM 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, 1998FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1999
OR
[ ]TRANSITION] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission Registrant; State of Incorporation; IRS Employer
File Number Address; and Telephone Number Identification No.
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1-9513 CMS ENERGY CORPORATION 38-2726431
(A Michigan Corporation)
Fairlane Plaza South, Suite 1100
330 Town Center Drive, Dearborn, Michigan 48126
(313)436-9200
1-5611 CONSUMERS ENERGY COMPANY 38-0442310
(A Michigan Corporation)
212 West Michigan Avenue,Jackson, Michigan 49201
(517)788-0550
1-2921 PANHANDLE EASTERN PIPE LINE COMPANY 44-0382470
(A Delaware Corporation)
5400 Westheimer Court, P.O. Box 4967, Houston, Texas 77210-4967
(713)627-5400
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
OctoberApril 30, 1999:
CMS ENERGY CORPORATION:
CMS Energy Common Stock, $.01 par value 108,724,689
CMS Energy Class G Common Stock, no par value 8,570,285
CONSUMERS ENERGY COMPANY, $10 par value, privately held
by CMS Energy 84,108,789
PANHANDLE EASTERN PIPE LINE COMPANY, no par value,
indirectly privately held by CMS Energy 1,000
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CMS ENERGY CORPORATION
AND
CONSUMERS ENERGY COMPANY
AND
PANHANDLE EASTERN PIPE LINE COMPANY
QUARTERLY REPORTS ON FORM 10-Q TO THE SECURITIES AND EXCHANGE COMMISSION
FOR THE QUARTER ENDED MARCH 31, 1998:
CMS Energy Corporation:
CMS Energy Common Stock, $.01 par value 103,437,840
CMS Energy Class G Common Stock, no par value 8,411,559
Consumers Energy Company, $10 par value,
privately held by CMS Energy 84,108,789
CMS Energy Corporation
and
Consumers Energy Company
Quarterly reports on Form 10-Q to the Securities and Exchange Commission
for the Quarter Ended September 30, 19981999
This combined Form 10-Q is separately filed by each of CMS Energy Corporation,
and
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 itstheir respective
subsidiaries, Consumers Energy Company makesand 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
GlossaryGlossary................................................................. 3
PART I:
CMS Energy Corporation
Management's Discussion and Analysis 8Analysis................................ 6
Consolidated Statements of Income 25
Consolidated Balance Sheets 27Income................................... 21
Consolidated Statements of Cash Flows 29Flows............................... 23
Consolidated Balance Sheets......................................... 25
Consolidated Statements of Common Stockholders' Equity 30Equity.............. 27
Condensed Notes to Consolidated Financial Statements 31Statements................ 28
Report of Independent Public Accountants 48Accountants............................ 44
Consumers Energy Company
Management's Discussion and Analysis 50Analysis................................ 46
Consolidated Statements of Income 60Income................................... 56
Consolidated Statements of Cash Flows 61Flows............................... 57
Consolidated Balance Sheets 63Sheets......................................... 59
Consolidated Statements of Common Stockholder's Equity 65Equity.............. 61
Condensed Notes to Consolidated Financial Statements 66Statements................ 62
Report of Independent Public Accountants 77Accountants............................ 71
Panhandle Eastern Pipe Line Company
Management's Discussion and Analysis................................ 73
Consolidated Statements of Income................................... 79
Consolidated Statements of Cash Flows............................... 80
Consolidated Balance Sheets......................................... 81
Consolidated Statements of Common Stockholder's Equity.............. 83
Condensed Notes to Consolidated Financial Statements................ 84
Report of Independent Public Accountants............................ 89
Quantitative and Qualitative Disclosures about Market Risk 78Risk............... 90
PART II:
Item 1.1 Legal Proceedings 78......................................... 90
Item 6.6 Exhibits and Reports on Form 8-K 79.......................... 91
Signatures 80
............................................................. 92
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GLOSSARY
Certain terms used in the text and financial statements are defined below.
ABATE . . . . . . . . . . . . . . . . . . . Association of Businesses
Advocating Tariff Equity
ALJ . . . . . . . . . . . . . . . . . . . . Administrative Law Judge
Ames. . . . . . . . . . . . . . . . . . . . Crescent and Ames gas
gathering systems and
processing plant in Oklahoma
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
CFLCL . . . . . . . . . . . . . . . . . . . Companhia Forcia e Luz
Cataguazes-Leopoldina, a
Brazilian utility
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
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
CMS Energy Common Stock . . . . . . . . . . One of two classes of common
stock of CMS Energy, par
value $.01 per share
CMS Gas Marketing . . . . . . . . . . . . . CMS Gas Marketing Company, a
subsidiary of Enterprises
CMS Gas Transmission. . . . . . . . . . . . CMS Gas Transmission and
Storage Company, a
subsidiary of Enterprises
CMS Generation. . . . . . . . . . . . . . . CMS Generation Co., a
subsidiary of Enterprises
CMS Holdings. . . . . . . . . . . . . . . . CMS Midland Holdings
Company, a subsidiary of
Consumers
CMS Midland . . . . . . . . . . . . . . . . CMS Midland Inc., a
subsidiary of Consumers
CMS MST . . . . . . . . . . . . . . . . . . CMS Marketing, Services and
Trading Company, a
subsidiary of Enterprises
CMS Oil and Gas . . . . . . . . . . . . . . CMS Oil and Gas Company, a
subsidiary of Enterprises
Common Stock. . . . . . . . . . . . . . . . CMS Energy Common Stock and
Class G Common Stock
Consumers . . . . . . . . . . . . . . . . . Consumers Energy Company, a
subsidiary of CMS Energy
Consumers Gas Group . . . . . . . . . . . . The gas distribution,
storage and transportation
businesses currently
conducted by Consumers and
Michigan Gas Storage
Court of Appeals. . . . . . . . . . . . . . Michigan Court of Appeals
Detroit Edison. . . . . . . . . . . . . . . The Detroit Edison Company
DOE . . . . . . . . . . . . . . . . . . . . U.S. Department of Energy
Dow . . . . . . . . . . . . . . . . . . . . The Dow Chemical Company
DSM . . . . . . . . . . . . . . . . . . . . Demand-side management
Enterprises . . . . . . . . . . . . . . . . CMS Enterprises Company, a
subsidiary of CMS Energy
EPA . . . . . . . . . . . . . . . . . . . . Environmental Protection
Agency
EPS . . . . . . . . . . . . . . . . . . . . Earning per share
FASB. . . . . . . . . . . . . . . . . . . . Financial Accounting
Standards Board
FERC. . . . . . . . . . . . . . . . . . . . Federal Energy Regulatory
Commission
FMLP. . . . . . . . . . . . . . . . . . . . First Midland Limited
Partnership
GCR . . . . . . . . . . . . . . . . . . . . Gas cost recovery
Grand Lacs partnership. . . . . . . . . . . Grand Lacs Limited
Partnership, a marketing
center for natural gas
GTNs. . . . . . . . . . . . . . . . . . . . CMS Energy General Term
Notes, $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
Jorf Lasfar . . . . . . . . . . . . . . . . A 1,320 MW coal-fueled power
plant in Morocco, Africa,
jointly owned by
CMS Generation and ABB
Energy Venture, Inc.
kWh . . . . . . . . . . . . . . . . . . . . Kilowatt-hour
LIHEAP. . . . . . . . . . . . . . . . . . . Low Income Home Energy
Assistance Program
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
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
MichCon . . . . . . . . . . . . . . . . . . Michigan Consolidated Gas
Company
Michigan Gas Storage. . . . . . . . . . . .
ABATE....................... Association of Businesses Advocating Tariff Equity
ALJ......................... Administrative Law Judge
Anadarko.................... Anadarko Petroleum Corporation, a non-affiliated company
Articles.................... Articles of Incorporation
Attorney General............ Michigan Attorney General
Aux Sable................... Aux Sable Liquids Products, L.P., a non-affiliated company
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
Clean Air Act............... Federal Clean Air Act, as amended
CMS Energy.................. CMS Energy Corporation, the parent of Consumers and
Enterprises
CMS Energy Common Stock..... One of two classes of common stock of CMS Energy, par value
$.01 per share
CMS Gas Transmission........ CMS Gas Transmission and Storage Company, a subsidiary of
Enterprises
CMS Generation.............. CMS Generation Co., a subsidiary of Enterprises
CMS Holdings................ CMS Midland Holdings Company, a subsidiary of Consumers
CMS Midland................. CMS Midland Inc., a subsidiary of Consumers
CMS MST..................... CMS Marketing, Services and Trading Company, a subsidiary of
Enterprises
CMS Oil and Gas ............ CMS Oil and Gas Company, a subsidiary of Enterprises
CMS Panhandle Holding ...... CMS Panhandle Holding Company, a subsidiary of CMS Gas
Transmission
Common Stock................ CMS Energy Common Stock and Class G Common Stock
Consumers................... Consumers Energy Company, a subsidiary of CMS Energy
Consumers Gas Group......... The gas distribution, storage and transportation businesses
currently conducted by Consumers and Michigan Gas Storage
Court of Appeals............ Michigan Court of Appeals
Detroit Edison.............. The Detroit Edison Company, a non-affiliated company
Dow......................... The Dow Chemical Company, a non-affiliated company
Duke Energy................. Duke Energy Corporation, a non-affiliated company
Enterprises................. CMS Enterprises Company, a subsidiary of CMS Energy
EPA......................... Environmental Protection Agency
EPS......................... Earning per share
EITF........................ Emerging Issues Task Force
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4
FASB........................ Financial Accounting Standards Board
FERC........................ Federal Energy Regulatory Commission
FMLP........................ First Midland Limited Partnership, a partnership which operates a
marketing center for natural gas
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
IT.......................... Information technology
Jorf Lasfar................. A 1,356 MW (660 MW in operation and 696 MW under
construction) coal-fueled power plant in Morocco, jointly owned
by CMS Generation and ABB Energy Venture, Inc.
kWh......................... Kilowatt-hour
Loy Yang.................... A 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
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
Mdth/d...................... Million dekatherms per day
MichCon..................... Michigan Consolidated Gas Company, a non-affiliated company
Michigan Gas Storage........ Michigan Gas Storage Company, a subsidiary of Consumers
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
NOI......................... Notice of inquiry
NOPR........................ Notice of proposed rulemaking
Northern Border............. Northern Border Pipeline Company
NRC......................... Nuclear Regulatory Commission
Order 888 and Order 889..... FERC final rules issued on April 24, 1996
Outstanding Shares.......... Outstanding shares of Class G Common Stock
Palisades................... Palisades nuclear power plant, owned by Consumers
PanEnergy................... PanEnergy Corporation, a non-affiliated company
Pan Gas Storage............. Pan Gas Storage Company, a subsidiary of
Consumers
Mbbls . . . . . . . . . . . . . . . . . . . Thousand barrels
MMbbls. . . . . . . . . . . . . . . . . . . Million barrels
MMBtu . . . . . . . . . . . . . . . . . . . Million British thermal unit
MMcf. . . . . . . . . . . . . . . . . . . . Million cubic feet
Moss Bluff. . . . . . . . . . . . . . . . . Moss Bluff Gas Storage
Systems, a partnership that
owns a gas storage facility
MPSC. . . . . . . . . . . . . . . . . . . . Michigan Public Service
Commission
MW. . . . . . . . . . . . . . . . . . . . . Megawatts
Natural Gas Act . . . . . . . . . . . . . . Federal Natural Gas Act
NGL . . . . . . . . . . . . . . . . . . . . Natural gas liquids
Nitrotec. . . . . . . . . . . . . . . . . . Nitrotec Corporation, a
propriety gas technology
company in which CMS Gas
Transmission owns an equity
interest
NRC . . . . . . . . . . . . . . . . . . . . Nuclear Regulatory
Commission
Order 888 and Order 889 . . . . . . . . . . FERC final rules issued on
April 24, 1996
Outstanding Shares. . . . . . . . . . . . . Outstanding shares of Class
G Common Stock
Palisades . . . . . . . . . . . . . . . . . Palisades nuclear power
plant, owned by Consumers
Panhandle Companies . . . . . . . . . . . . Panhandle Eastern Pipe
Line Company
and its principal
subsidiaries, Trunkline Gas
Company and Pan Gas Storage
Company, as well as
Panhandle Storage Company
and Trunkline LNG Company
PCBs. . . . . . . . . . . . . . . . . . . . Poly chlorinated biphenyls
Pension Plan. . . . . . . . . . . . . . . . The trusteed, non-
contributory, defined
benefit pension plan of
Consumers and CMS Energy
PPA . . . . . . . . . . . . . . . . . . . . The Power Purchase Agreement
between Consumers and the
MCV Partnership with a 35-
year term commencing in
March 1990
ppm . . . . . . . . . . . . . . . . . . . . Parts per million
PSCR. . . . . . . . . . . . . . . . . . . . Power supply cost recovery
PUHCA . . . . . . . . . . . . . . . . . . . Public Utility Holding
Company Act of 1935
Qualifying Facility . . . . . . . . . . . . A facility that produces
electricity or steam and
electricity and meets the
ownership and technical
requirements of PURPA
Retained Interest Shares. . . . . . . . . . Authorized but unissued
shares of Class G Common
Stock not held by holders of
the Outstanding Shares and
attributable to the Retained
Interest
SEC . . . . . . . . . . . . . . . . . . . . Securities and Exchange
Commission
Securitization. . . . . . . . . . . . . . . A financing authorized by
statute in which the
statutorily assured flow of
revenues from a portion of
the rates charged by a
utility to its customers is
set aside and pledged as
security for the repayment
of rate reduction bonds
issued by a special purpose
entity affiliated with such
utility
SERP. . . . . . . . . . . . . . . . . . . . Supplemental Executive
Retirement Plan
Senior Credit Facilities. . . . . . . . . . $725 million senior credit
facilities consisting of a
$600 million three-year
revolving credit facility
and a five-year $125 million
term loan facility
SFAS. . . . . . . . . . . . . . . . . . . . Statement of Financial
Accounting Standards
Superfund . . . . . . . . . . . . . . . . . Comprehensive Environmental
Response, Compensation and
Liability Act
TGN . . . . . . . . . . . . . . . . . . . . Transportadora de Gas del
Norte S. A., a natural gas
pipeline located in
Argentina
Transition 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,
regulatory assets, and costs
incurred in the transition
to competition.
Trust Preferred Securities. . . . . . . . .
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Panhandle................................ Panhandle Eastern Pipe Line Company, a subsidiary of CMS
Panhandle Holding, including Panhandle Eastern Pipe Line
Company subsidiaries Trunkline, Pan Gas Storage, Panhandle
Storage, and Trunkline LNG
Panhandle Storage........................ 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
SEC...................................... Securities and Exchange Commission
Senior Credit Facilities................. $725 million senior credit facilities consisting of a $600 million
three-year revolving credit facility and a five-year $125 million
term loan facility
SFAS..................................... Statement of Financial Accounting Standards
SOP...................................... Statement of position
Superfund................................ Comprehensive Environmental Response, Compensation and
Liability Act
Transition 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, regulatory
assets, and 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............... Undivided beneficial interest in the assets of statutory business
trusts, these 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
UST . . . . . . . . . . . . . . . . . . . . Underground storage tanks
Voluntary Employee Beneficiary
Association . . . . . . . . . . . . . . . A legal entity, established
under guidelines of the
Internal Revenue Code,
through which the company
can provide certain benefits
for its employees or
retirees
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CMS ENERGY CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
CMS Energy Corporation
Management's Discussionis the parent holding company of Consumers and AnalysisEnterprises. Consumers
is a combination electric and gas utility company serving the Lower Peninsula of
Michigan and is the principal subsidiary of CMS Energy. Enterprises, through
subsidiaries, is engaged in several domestic and international energy-related
businesses including: natural gas transmission, interstate transportation,
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 from Duke Energy, 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, storage and processing 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 19971998 Form 10-K and the restated financial
information in a Form 8-K dated July 30, 1998.10-K. This MD&A also refers to, and in some sections
specifically incorporates by reference, from, CMS Energy's Condensed Notes to
Consolidated Financial Statements and should be read in conjunction with such
Statements and Notes. This report contains forward-looking statements, as
defined by the Private Securities Litigation Reform Act of 1995,1995. While
forward-looking statements are based on assumptions and such assumptions are
believed to be reasonable and are made in good faith, CMS Energy cautions that
include without limitation,
discussions as to expectations, beliefs, plans, objectivesassumed results almost always vary from actual results and future
financial performance, ordifferences between
assumed and actual results can be material. The type of assumptions underlying or concerning mattersthat could
materially affect the actual results are discussed in this report. Refer to the Forward-Looking
InformationStatements section ofin this MD&A for some important&A. More specific risk factors that could cause actual
results or outcomes to differ materially from those addressedare contained in
various public filings made by CMS Energy with the SEC. This report also
describes material contingencies in the forward-looking discussions.
CMS Energy isNotes to Consolidated Financial
Statements and the parent holding company of Consumers and Enterprises.
Consumers is a combination electric and gas utility company serving the
Lower Peninsula of Michigan and is the principal subsidiary of CMS Energy.
Consumers' customer base includes a mix of residential, commercial and
diversified industrial customers, the largest segment of which is the
automotive industry. Enterprises is engaged in several domestic and
international energy-related businesses including: acquisition,
development and operation of independent power production facilities; oil
and gas exploration and production; storage, transmission and processing
of natural gas; energy marketing, services and trading; and international
energy distribution.readers are encouraged to read such Notes.
RESULTS OF OPERATIONS
CMS Energy Consolidated Earnings
. . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . In Millions, Except Per Share Amounts
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September 30. . . . . . . . . . . . . . . . . 1998 1997(b) Change
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Three months ended
Consolidated Net Income . . . . . . . . . . $ 81 $ 60 $ 21ENERGY CONSOLIDATED EARNINGS
In Millions, Except Per Share Amounts
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March 31 1999 1998(a) Change
- --------------------------------------------------------------------------------
THREE MONTHS ENDED
Consolidated Net Income $ 98 $ 88 $ 10
Net Income Attributable to Common Stocks:
CMS Energy 88 79 9
Class G 10 9 1
Earnings Per Average Common Share:
CMS Energy
Basic .82 .79 .03
Diluted .80 .77 .03
Class G
Basic and Diluted 1.19 1.09 .10
TWELVE MONTHS ENDED
Consolidated Net Income $295 $254 $ 41
Net Income Attributable to Common Stocks:
CMS Energy . . . . . . . . . . . . . . . 83 62 21
Class G. . . . . . . . . . . . . . . . . (2) (2) -
. . . . . . . . . . . . . . . . . . . . . .
Earnings Per Average
Common Share:
CMS Energy
Basic . . . . . . . . . . . . . . . .81 .64 .17
Diluted . . . . . . . . . . . . . . .80 .63 .17
Class G. . . . . . . . . . . . . . . . .
Basic and Diluted . . . . . . . . . (.16) (.21) .05
Nine months ended . . . . . . . . . . . . . . (a)
Consolidated Net Income . . . . . . . . . . $234 $185 $ 49
Net Income Attributable
to Common Stocks:
CMS Energy . . . . . . . . . . . . . . . 226 176 50
Class G. . . . . . . . . . . . . . . . . 8 9 (1)
Earnings Per Average
Common Share:
CMS Energy
Basic . . . . . . . . . . . . . . . 2.23 1.85 .38
Diluted . . . . . . . . . . . . . . 2.19 1.83 .36
Class G
Basic and Diluted . . . . . . . . . 1.04 1.13 (.09)
Twelve months ended . . . . . . . . . . . . (a)
Consolidated Net Income . . . . . . . . . . $293 $ 223 $ 70
Net Income Attributable
to Common Stocks:
CMS Energy . . . . . . . . . . . . . . . 279 210 69
Class G. . . . . . . . . . . . . . . . . 14 13 1
Earnings Per Average
Common Share:
CMS Energy . . . . . . . . . . . . . . .
Basic . . . . . . . . . . . . . . . 2.77 2.22 .55
Diluted . . . . . . . . . . . . . . 2.73 2.20 .53
Class G
Basic and Diluted . . . . . . . . . 1.73 1.57 .16
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7
CMS Energy 281 239 42
Class G 14 15 (1)
Earnings Per Average Common Share:
CMS Energy
Basic 2.69 2.45 .24
Diluted 2.66 2.44 .22
Class G
Basic and Diluted 1.68 1.76 (.08)
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(a) Includes the cumulative effect of an accounting change for property taxes
which increased net income attributable to CMS Energy Common Stockby $43 million ($.40or $.40 per share - basic and diluted) and Class Gdiluted
- - for CMS Energy Common Stock and $12 million ($.36or $.36 per share - basic and
diluted). Refer to the discussion
belowdiluted - for further information.
(b) Restated as a result of changeClass G Common Stock.
The increase in method of accounting for investments
in oil and gas properties. Refer to the discussion below and Note 1 for
further information.
The combined effects of the changes in accounting for oil and gas
investments resulted in decreases toconsolidated net income of $6 million ($.06 per
share), $19 million ($.19 per share) and $25 million ($.26 per share) for the three months, nine months and twelve months ended September 30, 1997,
respectively. The following discussion of earnings variations compares
the results of this year's periods to the restated results of last year's
periods.
CMS Energy's earnings for the thirdfirst quarter of 1998 increased from1999 over the
comparable period in 1997 as a result of (1) an increase in1998 resulted from increased earnings from internationalthe electric and
gas utilities; independent power production plant operationsproduction; and gains onmarketing, services and trading
businesses, and the salesrecognition in 1998 of a biomass$37 million loss ($24 million
after-tax) for the underrecovery of power purchase agreement and plant assets and (2)
Consumers' increased electric sales and gas deliveries.costs under the PPA. Partially
offsetting these increases were (1) lower oil prices and the gain in the
prior periodearnings from the sale of oil and gas properties in the oil and gas
exploration and production business and (2) increased interest on long-
term debt due to higher amounts of debt outstanding.
CMS Energy's earnings for the nine months ended September 30, 1998
increased from the comparable period in 1997 as a result of (1)
Consumers' one-time change in accounting for the recognition of property
tax expense from a calendar-year basis to a fiscal-year basis which
resulted in a benefit of $66 million ($43 million after-tax), (2)
Consumers' increased electric sales partially offset by an increase in
general taxes and depreciation, (3) a gain on the sale of Petal Gas
Storage Company by thenatural gas
transmission, storage, and processing business, (4) increased incomewhich had a $9 million gain from
an asset sale in 1998, lower earnings from the international independent power productionenergy distribution
business, gains on the sale of two biomass project power purchase
agreements, and gains on the sale of two biomass plants and (5) an
increase in oil production and a decrease in exploration expenses and
depreciation, depletion and amortization expenses. Partially offsetting
these increases were (1) Consumers' decreased gas deliveries due to warmer
temperatures during the winter heating season, (2) an increased provision
for underrecoveries under the PPA of $37 million ($24 million after-tax)
due to higher than expected plant availability1998 cumulative effect of the MCV Facility, (3)
lower earnings from international energy distribution businesses, (4)
lower oil pricesaccounting change for property
taxes, and the gain in the prior period from the sale of oil and
gas properties in the oil and gas exploration and production business and
(5) increasedhigher interest on long-term debt due to higher amounts of debt
outstanding. For further information on past and future underrecoveries
under the PPA, see Power Purchases from the MCV Partnership in Note 2.expense.
The increase in consolidated net income for the twelve months ended September 30,March 31,
1999 over the comparable 1998 compared to the same period in 1997 reflects (1)
Consumers' change in accounting for property taxes as discussed above and
a $9 million adjustment of Consumers' prior years' income taxes associated
with non-taxableincreased earnings on nuclear decommissioning trust funds, (2)
Consumers' increased electric sales and lower operation and maintenance
expenses partially offset by increased general taxes and depreciation, (3)
an increase in international plants earnings and operating fees from the
electric and gas utilities; independent power production business, gains onproduction; and marketing,
services and trading businesses. Partially offsetting these increases were lower
earnings from the sale of two biomass
project power purchase agreements, and gains on the sale of two biomass
plants, (4) a gain on the sale of Petal Gas Storage Company and a gain on
the sale of Australian gas reserves in thenatural gas transmission, storage and processing business and (5) an increase in oil production and a decrease
in exploration expenses and depreciation, depletion and amortization
expenses. Partially offsetting these increases were the (1) recognition
of Consumers' after-tax loss associated with the underrecovery of power
costs under the PPA as discussed above, (2) Consumers' decreased gas
deliveries due to warmer weather during the first nine months of 1998, (3)
lower oil prices in the oil and gas
exploration and production business,
(4) a scheduled decrease in the industry expertise service fee income
earned in connectionbusinesses coupled with Loy Yang, (5) lower earnings from international
energy distribution businesses and (6) increasedhigher interest on long-term
debt due to higher amounts of debt outstanding.expense.
For further information, see the individual results of operations for each CMS
Energy business segment in this MD&A.
Consumers' Electric Business Unit Results of Operations
Electric Pretax Operating Income:
. . . . . . . . . . . . . . . . . . . . . . . In Millions
- ----------------------------------------------------------------------------
. . . . . . . . . . . . Three Months Nine Months Twelve Months
. . . . . . . . . . . . Ended Sept. 30 Ended Sept. 30 Ended Sept. 30
Change Compared to Prior Year. 1998 vs 1997 1998 vs 1997 1998 vs 1997
- -----------------------------------------------------------------------------
Deliveries (including
special contract discounts) . . . . . $ 38 $ 50 $ 51
Other non-commodity revenue . . . . . . (1) (2) (3)
Operations and maintenance . . . . . (11) (1) 15
General taxes, depreciation
and other . . . . . . . . . .. . . . (5) (11) (18)
. . . . . . . . . . . . . . . . . ----------------------------------------
Total change. . . . . . . . . . . . . . $ 21 $ 36 $ 45
. . . . . ========================================
Electric Deliveries:CONSUMERS' ELECTRIC UTILITY RESULTS OF OPERATIONS
ELECTRIC PRETAX OPERATING INCOME:
7
8
In Millions
- ---------------------------------------------------------------------------------------------------
Three Months Twelve Months
Ended March 31 Ended March 31
Change Compared to Prior Year 1999 vs 1998 1999 vs 1998
- ---------------------------------------------------------------------------------------------------
Electric Deliveries $ 8 $ 42
Power supply costs 5 24
Rate increases and other non-commodity revenue 2 2
Operations and maintenance 2 (11)
General taxes and depreciation (2) (10)
---------------------------
Total change $ 15 $ 47
===================================================================================================
ELECTRIC DELIVERIES: Total electric deliveries increased 10.1 percentwere 10 billion kwh for the three
months ended September 30, 1998 overMarch 31, 1999, an increase of 4.0 percent resulting primarily from
higher electric deliveries to ultimate customers in the same periodresidential and
commercial sectors. Electric deliveries were 40.4 billion kwh for the twelve
months ended March 31, 1999, an increase of 5.1 percent which also reflects an
increase in 1997.
The increase includes a 5.8 percent increase inelectric deliveries to ultimate customers, primarily withinin the
residential and commercial classes, and an
increase in sales intersystem and wholesale customer deliveries. Forsectors.
POWER COSTS:
In Millions
- ----------------------------------------------------------------------------------------------------------------
March 31 1999 1998 Change
- ----------------------------------------------------------------------------------------------------------------
Three months ended $ 279 $ 270 $ 9
Twelve months ended 1,183 1,128 55
================================================================================================================
Power costs increased for the ninethree months period ended September 30,March 31, 1999 compared
to the same 1998 total electric deliveriesperiod as a result of increased 8.2 percent over the comparable 1997 period. Deliveries to ultimate
customers were up 3.4 percent, with the remaining change attributable to
an increase in sales between utility systems and wholesale deliveries.
Forsales. Power costs also
increased for the twelve months ended September 30, 1998, total electric deliveries
increased 8.0 percent over the comparable 1997 period. The increase is
primarily attributable to an increase in sales between utility systems and
a 2.7 percent increase in deliveries to ultimate customers.
Power Costs:
. . . . . . . . . . . . . . . . . . . . . . . In Millions
- ------------------------------------------------------------------------
September 30. . . . . . . . . . . . . . . . . 1998 1997 Change
- ------------------------------------------------------------------------
Three months ended. . . . . . . . . . . . . . $ 315 $ 296 $ 19
Nine months ended . . . . . . . . . . . . . . 899 847 52
Twelve months ended . . . . . . . . . . . . . 1,190 1,132 58
=========================================================================
Power costs increased for all the reported periods ended September 30,
1998March 31, 1999 compared to 1997.the same period
in 1998 for the same reason. Both internal generation and power purchases from
outside sources increased during these periodsthis period to meet the increased deliveries.
Uncertainties:demand.
UNCERTAINTIES: CMS Energy's financial position may be affected by a number of
trends or uncertainties that have, had, or CMS Energy reasonably expects willcould have,
a materially favorable or unfavorablematerial impact on net sales, revenues, or income from continuing electric
operations. Such uncertainties are: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; 2) capital
expenditures for compliance with the Clean Air Act; 3) suits by various
parties relating to the effect of so-called stray voltage on certain
livestock; 4) suits by two independent power producers alleging antitrust
violations and economic losses due to special electric contracts signed by
Consumers; 5) cost recovery relating to the MCV
Facility and nuclear plant
investments and an experimental direct-access program; 6)Facility; 4) electric industry restructuring; 7) after-tax cash5) implementation of a frozen PSCR
and initiatives to be undertaken to reduce exposure to high energy prices; 6)
underrecoveries associated with power purchases from the MCV Partnership; and 8) Big Rock7)
decommissioning issues and ongoing issues relating to the storage of spent fuel
and the operating life of Palisades. For detailed information about these trends
or uncertainties, see Note 2, "Consumers' Electric Business Unit
Contingencies-Electric Environmental Matters," "Consumers' Electric
Business Unit Contingencies-Stray Voltage," "Consumers' Electric Business
Unit Contingencies-Anti-Trust," "Consumers' Electric Business Unit Rate
Matters-Electric Restructuring," and "Other Consumers' Electric Business
Unit Uncertainties-Nuclear Matters,"Uncertainties, incorporated by reference herein.
For information about Consumers' electricity option contracts see Note 5,
"Risk Management and Derivatives Transactions-Commodity Price Hedges",
incorporated by reference herein.
Consumers Gas Group Results Of Operations
. . . . . . . . . . . . . . . . . . . . . . . In Millions
- ---------------------------------------------------------------------------
. . . . . . .. . . . . . . Three Months Nine Months Twelve Months
. . . . . . . . . . . . . Ended Sept. 30 Ended Sept. 30 Ended Sept. 30
Change Compared to Prior Year. 1998 vs 1997 1998 vs 1997 1998 vs 1997
- ----------------------------------------------------------------------------
Gas deliveries. . . . . . . . . . . $ 5 $(14) $(15)
Gas wholesale and retail
service activities . . . . . . . . 3 - (2)
Operations and maintenance. . . . .. 1 (8) 6
General taxes, depreciation
and other . . . . . . . . . . . (2) 3 3
- ---------------------------------------------------------------------------
Total change. . . . . . . . . . . . $ 7 $(19) $(8)
===========================================================================
Gas Deliveries:CONSUMERS GAS GROUP RESULTS OF OPERATIONS
GAS PRETAX OPERATING INCOME:
8
9
In Millions
- ----------------------------------------------------------------------------------------------------------------
Three Months Twelve Months
Ended March 31 Ended March 31
Change Compared to Prior Year 1999 vs 1998 1999 vs 1998
- ----------------------------------------------------------------------------------------------------------------
Sales $ 19 $ (4)
Reduced gas cost per mcf 14 33
Gas wholesale and retail services activities 1 4
Operation and maintenance -- 7
General taxes, depreciation and other (10) (20)
------------------------------------------
Total increase(decrease) in pretax operating income $ 24 $ 20
=================================================================================================================
GAS DELIVERIES: System deliveries for the three month period ended September 30, 1998, excludingMarch 31,
1999, including miscellaneous transportation, totaled 31were 166 bcf ancompared to 146 bcf
for the same 1998 period. This increase of 120 bcf or 314 percent comparedwas primarily
due to colder temperatures during the three month period
ended September 30, 1997. Deliveries for the nine month period ended
September 30, 1998, excluding miscellaneous transportation, totaled 203
bcf, a decrease of 29 bcf or 13 percent compared to the nine month period
ended September 30, 1997. For the twelve month period ended September 30,
1998, deliveries excluding miscellaneous transportation, totaled 311 bcf,
a decrease of 31 bcf or 9 percent compared to the twelve month period
ended September 30, 1997. The decreased deliveries for the nine month and
twelve month periods reflect warmer temperatures primarily for the first
quarter of 1998. Miscellaneous transportation deliveries for the three
month period ended September 30, 1998 totaled 11 bcf, a decrease of 8 bcf,
or 40 percent compared to the three month period ended September 30, 1997.
Miscellaneous transportation deliveries for the nine month period ended
September 30, 1998 totaled 47 bcf, a decrease of 14 bcf, or 23 percent
compared to the nine month period ended September 30, 1997. Miscellaneous
transportation1999 heating season. System deliveries for
the twelve month period ended September 30,March 31, 1999, including miscellaneous
transportation, were 380 bcf compared to 399 bcf for the same 1998 totaled 65 bcf, aperiod. This
decrease of 1819 bcf or 225 percent comparedwas primarily the result of warmer temperatures
for the most recent twelve month period.
COST OF GAS SOLD:
In Millions
- ----------------------------------------------------------------------------------------------------------------
March 31 1999 1998 Change
- ----------------------------------------------------------------------------------------------------------------
Three months ended $306 $264 $42
Twelve months ended 606 645 (39)
================================================================================================================
The cost increases for the three month period ended March 31, 1999 was the
result of increased gas deliveries due to colder temperatures during the 1999
winter heating season. The cost decrease for the twelve month period ended September 30, 1997.
Cost of Gas Sold:
. . . . . . . . . . . . . . . . . . . . . . . In Millions
- ------------------------------------------------------------------------
September 30. . . . . . . . . .. . . . . 1998 1997 Change
- ------------------------------------------------------------------------
Three months ended. . . . . . . . . . . $ 39 $ 39 $ -
Nine Months ended . . . . . . . . . . . 377 472 (95)
Twelve months ended . . . . . . . . . . 600 718 (118)
==========================================================================
The cost decreases for the nine month and twelve month periods ended
September 30, 1998 wereMarch
31, 1999 was the result of decreased sales and lower gas costs
reflectingdue to warmer temperatures during the winter heating season.
Uncertainties:overall temperatures.
UNCERTAINTIES: CMS Energy's financial position may be affected by a number of
trends or uncertainties that have, had, or CMS Energy reasonably expects willcould have,
a materially favorable or unfavorablematerial impact on net sales or revenues or income from continuing gas utility
operations. Such uncertainties are:include: 1) potential environmental costs at a
number of sites, including sites formerly housing manufactured gas plant
facilities, and 2) a statewide experimental gas transportation pilot program.restructuring program, and 3)
implementation of a frozen GCR and initiatives undertaken to protect against gas
price increases. For detailed information about these uncertainties see Note 2,
"Consumers' Gas Group
Contingencies-Gas Environmental Matters," and "Consumers' Gas Group
Matters-Gas Restructuring,"Uncertainties, incorporated by reference herein.
For information about Consumers' gas forward contracts, see Note 5, "Risk
Management Activities and Derivatives Transactions-Commodity Price
Hedges", incorporated by reference herein.
Independent Power Production Results of Operations
Pretax Operating Income:INDEPENDENT POWER PRODUCTION RESULTS OF OPERATIONS
PRETAX OPERATING INCOME: Pretax operating income for the three months ended
September 30, 1998March 31, 1999 increased $25$12 million (78(75 percent) overfrom the comparable period in
1997.1998. This increase primarily reflects increased operating income from
international plantsplant earnings and fees, a $14
million gain onincreased electricity sales by the sale of a biomass project power purchase agreement,MCV
Facility, and a $9$4 million gain on the sale of two biomass plants,operating bonus earned in connection with Jorf
Lasfar, partially offset by higher net operating expenses and decreased earnings from the MCV
Partnership due to a 1997 property tax adjustment.cash payment in
settlement of a legal proceeding. Pretax operating income for the ninetwelve months
ended September 30, 1998March 31, 1999 increased $56$54 million (84(53 percent) overfrom the comparable
period in 1997,1998, primarily reflecting an
increase inincreased international plantsand domestic
earnings and operating fees, a $26
million gaingains
9
10
on the sale of two biomass projectplant assets and biomass power purchase agreements, and
a $9 million gain onhigher electricity sales by the sale of two biomass plants,MCV Facility, partially offset by higher
net operating expenses, the settlement of a legal proceeding obligation and lowera
scheduled reduction of the industry expertise service fee income earned in
connection with Loy Yang.
Pretax operating income for
the twelve months ended September 30, 1998 increased $79 million (108
percent) from the comparable period in 1997, primarily reflecting
increased operating income resulting from increased international and
domestic earnings, construction management fees earned in connection with
Jorf Lasfar, a $26 million gain on the sale of two biomass project power
purchase agreements, and a $9 million gain on the sale of two biomass
plants, partially offset by lower industry expertise service fee income
earned in connection with Loy Yang and higher operating expenses.
Oil and Gas Exploration and Production Results of Operations
In October 1998, CMS Energy Corporation changed the name of its oil and
gas exploration and production business to CMS Oil and Gas Company,
formerly known as CMS NOMECO Oil & Gas Co.
Pretax Operating Income:OIL AND GAS EXPLORATION AND PRODUCTION RESULTS OF OPERATIONS
PRETAX OPERATING INCOME: Pretax operating income for the three months ended
September 30, 1998 decreased $11 million (85 percent)March 31, 1999 was unchanged from the comparable period in 1997. This decrease is the1998 as a result of
lowerhigher oil prices and the gain in the prior period from the sale of the entire
interest in oil and gas properties in Yemen, partiallylower exploration expenses, offset by an
increase in oil production and a decrease in depreciation, depletion and
amortization charges. Pretax operating income for the nine months ended
September 30, 1998 decreased $4 million (25 percent) over the comparable
period in 1997 due to lower oilgas prices and
the gain in the prior period
from the sale of the entire interest in oil and gas properties in Yemen,
partially offset by increased oil production, decreased exploration
expenses, and decreased depreciation, depletion and amortization expenses. Pretax operating
income for the twelve months ended September 30, 1998 was
unchangedMarch 31, 1999 decreased $22 million (79
percent) from the comparable period in 1997, primarily due to1998 as a result of lower oil and gas
prices offset by decreased exploration expenses and depreciation,
depletion and amortization expenses, and increased oil volumes.a gain in the prior period from the sale of CMS Oil and Gas changed its method of accounting effective January 1, 1998
forGas' entire
interest in oil and gas operations from the full cost method to the successful
efforts method. CMS Oilproperties in Yemen, partially offset by lower operating
and Gas believes that the successful efforts
method will minimize asset write-offs caused by periodic price swings,
which may not be representative of overall or long-term markets, and will
allow its results of operations to be more easily compared to other oil
and gas companies. Nitrotec, in which CMS Gas Transmission has an equity
investment, also elected to convert effective January 1, 1998 from the
full cost method of accounting to the successful efforts method of
accounting. All prior period financial statements have been restated to
conform with successful efforts accounting. The effect, after tax, of the
change in accounting method as of December 31, 1997, was a reduction to
retained earnings of $175 million for CMS Oil and Gas and $15 million for
CMS Gas Transmission, primarily attributable to a decrease in net plant
and property and deferred tax liability of $270 million and $95 million,
respectively, for CMS Oil and Gas and a $15 million decrease in CMS Gas
Transmission's equity investment in Nitrotec.
Natural Gas Transmission, Storage and Processing Results of Operations
Pretax Operating Income:exploration expenses.
NATURAL GAS TRANSMISSION, STORAGE AND PROCESSING RESULTS OF OPERATIONS
PRETAX OPERATING INCOME: Pretax operating income for the three months ended
September 30, 1998 was unchangedMarch 31, 1999 decreased $10 million (77 percent) from the comparable period in
1997,
primarily as a result of a1998. The decrease in earnings from international
operations and higher operating expenses, offset by an increase in
earnings from domestic operations. Pretax operating income for the nine
months ended September 30, 1998 increased $6 million (27 percent) over the
comparable 1997 period primarily reflectingreflects a gain in the first quarter of
1998prior period on the sale of Petal Gas
Storage Company and lower earnings from domestic operations primarily due to
depressed natural gas liquids prices, partially offset by increased earnings
from international operations and earnings from Panhandle, which was acquired on
March 29, 1999. Pretax operating income for the twelve months ended March 31,
1999 decreased $8 million (26 percent) from the comparable period in 1998. The
decrease primarily reflects a gain in the prior period on the sale of Petal Gas
Storage Company and decreased domestic and international earnings, partially
offset by a gain on the sale of Australian gas reserves, earnings attributable
to Panhandle and lowerdecreased operating expenses, partially offsetexpenses.
UNCERTAINTIES: CMS Energy's financial position may be affected by a gainnumber of
trends or uncertainties that have, or CMS Energy reasonably expects could have,
a material impact on net sales or revenues or income from continuing gas
operations. For detailed information about Panhandle's regulatory uncertainties
see Note 2, Uncertainties - Panhandle Regulatory Matters, incorporated by
reference herein.
MARKETING, SERVICES AND TRADING RESULTS OF OPERATIONS
PRETAX OPERATING INCOME: Pretax operating income for the three months ended
March 31, 1999 increased $6 million from the comparable period in 1998. The
increase is the first quarterresult of 1997 onimproved commodity margins and the saleeffect of a portionan
accounting change that recognizes currently the fair market value of the Ames
gas gathering system and a decrease in earnings from international
operations.trading
contracts. Pretax operating income for the twelve months ended September
30, 1998March 31, 1999
increased $6 million (22 percent) over the comparable period in
1997, reflecting a gain on the sale of Petal Gas Storage Company and a
gain on the sale of Australian gas reserves, partially offset by the gain
in the first quarter of 1997 on the sale of a portion of the Ames gas
gathering system.
Marketing, Services and Trading Results of Operations
Pretax Operating Income: Pretax operating income for the three months
ended September 30, 1998 increased $2$17 million from the comparable period in 1997. This1998. The increase is thea
result of improved margins on electricityelectric and gas sales, combined with increased electric sales volumes
and the market value of trading contracts, partially offset by higher operating costs. Pretax operating income for the twelve months
ended September 30, 1998 decreased $5 million from the comparable period
in 1997, primarily reflecting lower gas marginsincreased
expenses related to growth objectives. Gas managed and higher costs
reflecting management's continuing commitment to future electric and
energy management growth, partially offset by higher electric sales
volumes. Electric marketing volumes reached 6.4 million MW for the nine
months ended September 30, 1998 compared to .3 million for the comparable
period in 1997. Gas marketed for end users
totaled 22399 bcf and 14491 bcf for the ninethree months ended September 30,March 31, 1999 and 1998,
and 1997, respectively.
Energy management service revenues for the nine months ended September 30,
1998 increased 67 percent over the comparable 1997 period.
Market Risk InformationMARKET RISK INFORMATION
CMS Energy is exposed to market riskrisks including, but not limited to, changes in
interest rates, currency exchange rates, and certain commodity and equity
prices. DerivativeManagement employs established policies and procedures to manage its
risks associated with these market fluctuations including the use of various
derivative instruments including, but not limited to,such as futures, contracts, swaps, options and forward contracts may be used to
manage these exposures. Derivatives are principally used as hedges and
not for trading purposes. During the third quarter of 1998, trading
activities were immaterial. Regarding hedges, managementcontracts.
Management believes that
10
11
any losses incurred on derivative instruments used as ato
hedge risk would be offset by thean opposite movement of the underlyingvalue of the hedged
item.
In accordance with SEC disclosure requirements, CMS Energy has performed
sensitivity analyses to assess the potential loss in fair value, cash flows and
earnings based upon hypothetical 10 percent increases and decreases in market
exposures. Management does not believe that sensitivity analyses alone provide
an accurate or reliable method for monitoring and controlling risks. Therefore,
CMS Energy and its subsidiaries rely on the experience and judgment of senior
management and traders to revise strategies and adjust positions as they deem
necessary. Losses in excess of the amounts determined in the sensitivity
analyses could occur if market rates or prices exceed the 10 percent shift used
for the analyses.
COMMODITY PRICE RISK: Management uses commodity futures contracts, options and
swaps (which require a net cash payment for the difference between a fixed and
variable price) and oil swaps to manage commodity price risk. They also use
forward exchange contractsThe prices of energy commodities
fluctuate due to hedge certain receivables, payableschanges in the supply of and long-term debt relating to foreign investments. Management also uses
equity investments in whichdemand for those commodities. To
reduce price risk caused by these market fluctuations, CMS Energy hedges certain
inventory and purchases and sales contracts. A hypothetical 10 percent adverse
shift in quoted commodity prices in the near term would not have a material
impact on CMS Energy's consolidated financial position, results of operations or
its subsidiaries hold less than
a 20 percent interest. These commodity, financial and equity instruments
docash flows as of March 31, 1999. The analysis assumes that the maximum exposure
associated with purchased options is limited to premiums paid. The analysis also
does not expose CMS Energyquantify short-term exposure to material market risk.
Interest Rate Risk:hypothetically adverse price
fluctuations in inventories.
INTEREST RATE RISK: Management uses a combination of fixed-rate and
variable-rate debt to reduce interest rate exposure. Interest rate swaps and
rate locks may be used to adjust exposure when deemed appropriate, based upon
market conditions. These strategies attempt to provide and maintain the lowest
cost of capital. The carrying amount of long-term debt (including current maturities) was $4.4$7.3 billion at September 30,
1998March
31, 1999 with a fair value (including current maturities) of $4.5$7.3 billion. The fair value of CMS Energy's
financial derivative instruments at September 30, 1998,March 31, 1999, with a notional amount of
$923$658 million, was $26$10 million, representing the amount that CMS Energy would have paid to
terminate these agreements on September 30, 1998. In October 1998,
Consumers unwound an interest rate guarantee of $145 million associated
with the issuance of $150 million senior notes. The effective rate of the
debt is 7 percent taking into consideration the issuance costs, interest
rate guarantee and insurance costs. In accordance with SEC disclosure
requirements, CMS Energy performed a sensitivity analysis. The analysis
assesses the potential loss in fair value, cash flows and earnings basedpay upon
hypothetical increases and decreases in market interest rates.settlement. A hypothetical 10 percent adverse shift in marketinterest rates in the
near term would not have a material impacteffect on CMS Energy's consolidated
financial position, results of operations or cash flows as of September 30, 1998.
LimitationsMarch 31, 1999.
CURRENCY EXCHANGE RISK: Management uses forward exchange and option contracts to
hedge certain net investments in foreign operations. A hypothetical 10 percent
adverse shift in currency exchange rates would not have a material effect on CMS
Energy's consolidated financial position or results of operations as of March
31, 1999, but would result in a net cash settlement of approximately $54
million. The estimated fair value of the Sensitivity Model: Management does not believe that a
sensitivity analysis alone provides an accurate or reliable method for
monitoringforeign exchange and controlling risk. Therefore,option contracts
at March 31, 1999 was $10 million, representing the amount CMS Energy would
receive upon settlement.
EQUITY SECURITY PRICE RISK: CMS Energy and its subsidiaries rely on the experience and judgement of senior management and
traders to revise strategies and adjust positions ashave equity
investments in which they deem necessary.
Losses in excess of the amounts determined could occur if market rates or
prices exceed thehold less than a 20 percent interest. A hypothetical
10 percent adverse shift used for the analysis. The model
assumes that the maximum exposure associated with purchased options is
limited to premiums paid. The model assumes that the Trust Preferred
Securities arein equity security prices would not converted intohave a material
effect on CMS Energy Common Stock. If the
conversion occurred, the $173 millionEnergy's consolidated financial position, results of Trust Preferred Securities would
be discharged through the issuanceoperations or
cash flows as of 4.2 million shares of CMS Energy
Common Stock. The model also does not quantify short-term exposure to
hypothetically adverse price fluctuations in inventories.March 31, 1999.
For a discussion of accounting policies related to derivative transactions, see
Note 5.
11
12
CAPITAL RESOURCES AND LIQUIDITY
Cash Position, Investing and FinancingCASH POSITION, INVESTING AND FINANCING
CMS Energy's primary ongoing source of operating cash is dividends and
distributions from subsidiaries. During the nine months ended September 30, 1998,first quarter of 1999, Consumers
paid $94$80 million in common dividends to CMS Energy. In October 1998,
Consumers declared a $68 million common dividend to be paid in November
1998. During 1998,and Enterprises paid $19 million in common
dividends and other
distributions of $76 million to CMS Energy. CMS Energy's consolidated operating cash requirements
are met by its operating and financing activities.
Operating Activities:OPERATING ACTIVITIES: CMS Energy's consolidated net cash provided by operating
activities is derived mainly from the saleprocessing, storage, transportation and
transportationsale of natural gas by Consumers;gas; the generation, transmission and sale of electricity by Consumers;electricity; and
the sale of oil and natural gas by CMS Oil and
Gas; the transportation, storage and processing of natural gas by CMS Gas
Transmission; and the production and sale of electricity by other
affiliates.oil. Consolidated cash from operations totaled $386$321 million and $334$243
million for the first nine monthsquarter of 19981999 and 1997,1998, respectively. The $52$78 million
increase resulted from increases in consolidated net incomeincreased earnings and deferred income taxes. These increases were partially offset byhigher depreciation, coupled with
a $29 million net decrease reflectingincrease due to the cumulative effectabsence of the 1998 accounting change for
property taxes and an increased provision for underrecoveries under the PPA, both of which are noncash items.PPA. CMS
Energy uses its operating cash primarily to 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:INVESTING ACTIVITIES: CMS Energy's consolidated net cash used in investing
activities totaled $690 million$2.235 billion and $1,141$242 million for the first nine monthsquarter of 19981999
and 1997,1998, respectively. The decreaseincrease of $451 million$1.993 billion primarily reflects decreased investmentsthe
acquisition of Panhandle in international projects (1997
included an approximately $500 million investment in Loy Yang).March 1999. CMS Energy's 19981999 expenditures for its
utility and international businesses were $290$95 million and $424 million,$2.2 billion,
respectively, compared to $269$81 million and $837$162 million, respectively, during
1997.
Financing Activities:1998.
FINANCING ACTIVITIES: CMS Energy's consolidated net cash provided by financing activities
totaled $336 million$1.917 billion and $885$2 million for the first nine monthsquarter of 19981999 and 1997,1998,
respectively. The decreaseincrease of $549 million$1.915 billion in net cash provided by financing
activities resulted from an increase of $524 million$2.281 billion in the issuance of new
securities (see table below), offset
by increasesand a decrease in the retirement of bonds and other long-term debt
($548357 million) and, partially offset by an increase in the repayment of bank loans
($488667 million).
. . . . . . . . . . . . . . . . . . . . . . . In Millions
- ------------------------------------------------------------------------------
. . . . . . . .. . . . . . . . . . Distribution/ Principal
Month Issued Maturity Interest Rate Amount Use of Proceeds
- ------------------------------------------------------------------------------
CMS Energy
GTNs
Series D . . . . (1) (1) 6.8% (1) $119 General
corporate
purposes
Extendible Tenor
Rate Adjusted
Securities . . January 2005 7.0% 180 Pay down
. . . . . . . . . . . . . borrowings
. . . . . . . . . . . . . . . . . . . . . . . ------
. . . . . . . . . . . . . . . . . . . . . . . $299
Consumers
Senior Notes (2) February.. . . . 2008. 6.375% $250 Pay down
First
. . . . . . . . . . . . . . . . . . . . . . . Mortgage Bonds
and general
. . . . . . . . . . . . . . . . . . . corporate
purposes
Senior Notes (2) March. . . . 2018. 6.875% 225 Pay down First
. . . . . . . . . . . . . . . . . . . . Mortgage Bonds
and pay down
. . . . . . . . . . . . . . . . . . . . borrowings
under credit
. . . . . . . . . . . . . . . . . . . facilities
Senior Notes (2). . .May . 2008 6.2%(3) 250 Pay down First
. . . . . . . . . . . . . . . . . . . .Mortgage Bonds,
long-term bank
debt and
general
corporate
purposes
Senior Notes (2). . June. 2018 6.5%(4) 200 Pay down First
. . . . . . . . . . . . . . . . . . . . Mortgage Bonds
and general
corporate
purposes
Long-Term Bank Debt May 2001-2003. 6.05%(5) 225 Pay down long-
term bank debt
Senior Notes (2). October 2028. 6.5% 150 Pay down long-
term bank debt
and general
. . . . . . . . . . . . . . . . . corporate
purposes
. . . . . . . . . . . . . . . . . . . . . . . --------
Total . . . . . . . . . . . . . . . . . . . . $1,599
===============================================================================12
13
In Millions
- ----------------------------------------------------------------------------------------------------------------
Distribution/ Principal
Month Issued Maturity Interest Rate Amount Use of Proceeds
- ----------------------------------------------------------------------------------------------------------------
CMS ENERGY
GTNs
Series E (1) (1) 6.9%(1) $ 45 General corporate purposes
Senior Notes January 2009 7.5% $ 480 Repay debt and general
corporate purposes
Senior Notes February 2004 6.75% $ 300 Repay debt and general
corporate purposes
------
Subtotal $ 825
PANHANDLE
Senior Notes (2) March 2004 6.125% $ 300 To fund acquisition of
Panhandle
Senior Notes (2) March 2009 6.5% $ 200 To fund acquisition of
Panhandle
Senior Notes (2) March 2029 7.0% $ 300 To fund acquisition of
Panhandle
------
Subtotal $ 800
------
Total $1,625
(1) GTNs are issued from time to time with various maturities.varying maturity dates. The rate
shown herein is a weighted average interest rate.
(2) The Senior Notes are securedThese notes were issued by Consumers' First Mortgage Bonds issued
contemporaneouslyCMS Panhandle Holding on March 29, 1999, with an
irrevocable and unconditional guarantee by Panhandle. CMS Energy intends to
merge CMS Panhandle Holding with Panhandle in the second quarter of 1999,
at which point the notes will become senior unsecured obligations of
Panhandle.
In the first quarter of 1999, CMS Energy paid $36 million in cash dividends to
holders of CMS Energy Common Stock and $3 million in cash dividends to holders
of Class G Common Stock. In April 1999, the Board of Directors declared a
similar amount.
(3) The interest rate may be resetquarterly dividend of $.33 per share on CMS Energy Common Stock and $.325 per
share on Class G Common Stock, payable in May 2003.
(4) The interest rate will be reset in June 2005.
(5) The interest rate is variable; weighted average interest rate upon
original issuance1999.
OTHER INVESTING AND FINANCING MATTERS: At March 31, 1999, the book value per
share of CMS Energy Common Stock and Class G Common Stock was 6.05 percent.
As of September 30, 1998,$20.22 and $11.27,
respectively.
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14
At March 31, 1999, CMS Energy had an aggregate $684 million$1.9 billion in securities
registered for future issuance and sale. In April 1999, CMS Energy filed a shelf
registration statement for the issuance of $375 million of senior and
subordinated debt securities.
CMS Energy also has Senior Credit Facilities, unsecured lines of credit and
letters of credit as sources of funds needed to fulfill, in whole or in part,
material commitments for capital expenditures. For detailed information, see
"Short-Term and Long-Term Financing, and Capitalization-CMS Energy" in
Note 3, incorporated by reference herein.
CMS Energy's Senior Credit Facilities consist of a $600 million three-year
revolving credit facility and a five-year $125 million term loan facility.
Additionally, CMS Energy has unsecured lines of credit and letters of credit in
an aggregate amount of $361 million. These credit facilities are available to
finance working capital requirements and to pay for capital expenditures between
long-term financings. At March 31, 1999, the total amount utilized under the
Senior Credit Facilities was $687 million, including $47 million of contingent
obligations, and under the unsecured lines of credit and letters of credit was
$94 million. Of the $687 million outstanding at March 31, 1999, approximately
$500 million was utilized to fund the acquisition of Panhandle as discussed
below.
Consumers hasis authorized by FERC authorization to issue securities and guarantees. Consumers
has a credit facility,facilities, lines of credit and a trade receivable sale program in
place as anticipated sources of funds needed to fulfill, in whole or in part,
material commitments for capital expenditures asexpenditures. On April 1, 1999, Consumers
redeemed all of September 30, 1998.its eight million outstanding shares of the $2.08 preferred
stock at $25.00 per share. For detailed information about these sources of
funds, see "Short-Term and Long-
Term Financings, and Capitalization-Consumers" in Note 3, incorporated by
reference herein.
During the nine months ended September 30, 1998,3.
On March 29, 1999, CMS Energy declared and
paid $94 million in cash dividends to holders of CMS Energy Common Stock
and $8 million in cash dividends to holders of Class G Common Stock. In
October 1998, the Board of Directors declared quarterly dividends of $.33
per share on CMS Energy Common Stock and $.325 per share on Class G Common
Stock, payable in November 1998.
In August 1998, CMS Energy filed a shelf registration statement with the
SEC pursuant to Rule 415 of the Securities Act, for the issuance and the
sale of $400 million of GTNs Series E.
On November 10, 1998, CMS Energy sold 4.5 million new shares of CMS Energy
Common Stock in a block trade. The net proceeds of approximately $208
million will be used for general corporate purposes.
Other Investing and Financing Matters: At September 30, 1998, the book
value per share of CMS Energy Common Stock and Class G Common Stock was
$17.98 and $10.57, respectively.
CMS Energy's $400 million, 364-day revolving credit facility expired June
30, 1998, and was not renewed, thus reducing the aggregate amount of the
Senior Credit Facilitiesacquired Panhandle from $1.125 billion to $725 million.
In October 1998, CMS Energy exchanged 1.4 million shares of CMS Energy
Common Stock for 100% of the outstanding common stock of Continental
Natural Gas, Inc. ("CNG"), an energy company engaged in gathering,
processing, purchasing and marketing natural gas and natural gas liquids
in Oklahoma and Texas. The acquisition of CNG will be accounted for as a
pooling of interests, and all consolidated financial data for the periods
subsequent to December 31, 1997 will be restated to include the financial
data of CNG. The financial data of the pooled companies prior to January
1, 1998 will not be materially different from that previously reported by
CMS Energy, and thus will not be restated.
On November 2, 1998, CMS Energy announced the execution of a definitive
Stock Purchase Agreement (the "Agreement") with PanEnergy Corp
("PanEnergy") and certain other wholly-owned subsidiaries of Duke Energy
Company to acquire all of the stock of the Panhandle Companies for a cash
payment of $1.9 billion and existing Panhandle Companies debt of $300 million. ClosingThe
acquisition of the transaction is subject to Hart-Scott-Rodino pre-merger
notification clearance.Panhandle initially was financed in part with bridge loan and
revolving credit facilities negotiated with domestic banks and in part with
approximately $800 million of debt securities issued by CMS Panhandle Holding.
The Agreement is subject to termination upon
failure of$600 million CMS Energy to satisfy its financing contingency. The Agreement
also provides that if, asbridge loan has a resultweighted-average interest rate of
CMS's Energy's continuing due
diligence investigation, CMS Energy learns6.02 percent and a term of material facts not
previously disclosed or inconsistent with representations and warranties
made in the Agreement, CMS Energy may, on or prior to November 23, 1998,
notify PanEnergy of its intent to terminate the Agreement and the Agreement
will terminate unless PanEnergy corrects the asserted misrepresentations
within 30 days.six months. CMS Energy expects to have $1.9 billion of bridge financing commitments
available to fund the purchase price and it anticipates permanent
financing offinance permanently
the acquisition at or near closing with approximately $900
million fromexisting arrangements as well as the sale of common stockapproximately
$600 million of CMS Energy Common Stock and/or securities convertible into
common stock byother CMS Energy and approximately $1 billion from the issuance
of debt securities by the Panhandle Companies.
The following discussions contain forward-looking statements. See the
Forward-Looking Information section of this MD&A for some important
factors that could cause actual results or outcomes to differ materially
from those discussed herein.
Capital Expenditures
Looking forward,securities.
CAPITAL EXPENDITURES
CMS Energy estimates that capital expenditures, including new lease commitments
and investments in partnerships and unconsolidated subsidiaries, will total $6.3$6.4
billion over the next three years. These estimates are prepared for planning
purposes and are subject to revision. This total includes approximately $2.2
billion for the pending acquisition of the Panhandle Companies as discussed more fully in Note 6, Subsequent
Event. Payment for the purchase of the Panhandle Companies is expected
to be financed as described above. A substantial
portion of the remaining capital expenditures is expected to be satisfied by
cash from operations. Nevertheless, CMS Energy will continue to also evaluate capital markets
in 19981999 as a potential source of financing its subsidiaries' investing
activities. CMS Energy estimates capital expenditures by business segment over
the next three years as follows:
In Millions
- ------------------------------------------------------------------------
Years Ended December 31 1998 1999 2000
- ------------------------------------------------------------------------
Consumers electric operations (a) (b) $ 341 $ 380 $ 385
Consumers gas operations (a) 117 125 125
Independent power production 308 410 435
Oil and gas exploration and production 140 165 165
Natural gas transmission and storage 270 2,350(c) 165
International energy distribution 163 150 100
Marketing, services and trading 1 5
In Millions
- -------------------------------------------------------------------------------------------------------------------
Years Ended December 31 1999 2000 2001
- -------------------------------------------------------------------------------------------------------------------
Consumers electric operations (a) (b) $ 382 $ 392 $ 395
Consumers gas operations (a) 123 123 120
Independent power production 395 400 171
Oil and gas exploration and production 135 152 158
Natural gas transmission and storage 2,435(c) 299 198
International energy distribution 150 197 151
14
15
- ------------------------------------------------------------------------
$1,340 $3,585 $1,390
========================================================================
Marketing, services and trading 5 12 12
Other 10 -- --
--------------------------------------------
$3,635 $1,575 $1,205
===================================================================================================================
(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 do not include preliminary 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 2.2, Uncertainties.
(c) IncludesThis amount includes approximately $2.2 billion for pendingthe acquisition of
the
Panhandle Companies.Panhandle.
CMS Energy currently plans investments from 19981999 to 2000: (1) for2001: i) in oil and gas
exploration and production operations, primarily in North and South America,
offshore West Africa and North Africa; (2) forii) in independent power production
operations to pursue acquisitions and development of electric generating plants
in the United States, Latin America, Asia, Australia, the Pacific Rim region,
North Africa and the Middle East; (3)iii) to continue development of non-utilitynonutility
natural gas storage, gathering and pipeline operations of CMS Gas Transmission
both domesticin North and international; (4)South America, Australia and Africa; iv) to acquire, develop and
expand international energy distribution businesses; and (5)v) to provide gas,
electric, oil and coal marketing, risk management and energy management services
throughout the United States and eventually worldwide.
These estimates are prepared for planning purposes and are subject to
revision.
OUTLOOK
As the deregulation and privatization of the energy industry takes place in the
United States and internationally, CMS Energy has positioned itself to be a
leading international diversified energy infrastructure company acquiring, developing and
operating energy facilities and providing energy services in major world growth
markets. CMS Energy provides a complete range of international energy expertise
from energy production to consumption.
Beyond 1998 it
intends to continue to grow its businesses by finding opportunities to
invest in additional energy infrastructures and to capitalize on being a
major, full-service energy company. CMS Energy will seek to increase its
involvement in energy projects by pursuing opportunities in oil and gas
exploration and production projects, natural gas pipelines, storage and
processing facilities, power generation, and electric and gas distribution
systems around the world. In addition, CMS Energy will focus more on
marketing energy services and trading to take advantage of continued
growth opportunities in both the domestic and international markets.
International Operations OutlookINTERNATIONAL OPERATIONS OUTLOOK
CMS Energy will continue to grow internationally by investing in multiple
projects in several countries as well as by developing synergistic projects
across its lines of business. CMS Energy believes these integrated projects will
create more opportunities and greater value than individual investments. Also,
CMS Energy will achieve this growth through strategic partnering where
appropriate.
To improve the focus of its international energy businesses, CMS Energy has separated its development efforts from the operations of its assets.
CMS Energy conducts its development efforts from offices in four regions
of the world: Dearborn, Michigan for The Americas - Northern Hemisphere;
Buenos Aires for The Americas - Southern Hemisphere; London for Africa and
the Middle East; and Singapore for Asia.
CMS Energy's development efforts will focus on countries where there are
multiple investment opportunities across its businesses, high energy
growth expectations, defined legal and regulatory structures, and economic
policies that support private investment. CMS Energy will continue to
create value by using the extensive knowledge and experience it has gained
in the United States over the past century, to gain competitive positions
in these countries.
CMS Energy structures its investmentsseeks to minimize operational and financial risks. These risks are mitigated when operating
internationally by working with local partners, utilizing multi-lateralmultilateral financing
institutions, procuring political risk insurance and hedging foreign currency
exposure where appropriate.
Consumers' Electric Business Unit Outlook
Growth:CONSUMERS' ELECTRIC UTILITY OUTLOOK
GROWTH: Consumers expects average annual growth of two and one-half2.4 percent per year in
electric system deliveries over the next five years, absent the impact of
restructuring on the industry and its regulation in Michigan. Abnormal weather,
changing economic conditions, or the developing competitive market for
electricity may affect actual electric sales in future periods.
Electric Restructuring:15
16
RESTRUCTURING: Consumers' retail electric business is affected by competition.
To meet its challenges, Consumers entered into multi-year contracts with some of
its largest industrial customers to serve certain facilities. The MPSC has
approved these contracts as part of its phased introduction to competition.
Certain customers have the option of terminating their contracts early.
FERC Orders 888 and 889, as amended, require utilities to provide direct access
to the interstate transmission grid for wholesale transactions. Consumers and
Detroit Edison disagree on the effect of the orders on the Michigan Electric
Power Coordination Center pool. Consumers proposes to maintain the benefits of
the pool through at least December 2000, while Detroit Edison contends that the
pool agreement should be terminated immediately. Among Consumers' alternatives
in the event of the pool being terminated would be joining an independent system
operator. FERC has indicated this preference for structuring the operations of
the electric transmission grid.
As discussed in the Form 10-K, since June 1997 several orders have been
issued and numerous appeals are pending at the Court of Appeals relating
to the restructuring of the electric utility industry. Consumers cannot
predict the outcome or timing of these matters. For material changes relating to the restructuring of the electric utility
industry, see "Electric Business UnitNote 1, Corporate Structure and Basis of Presentation, "Utility
Regulation" and Note 2, Uncertainties," Consumers' Electric Utility Rate Matters
- - Electric Restructuring" in Note 2,, incorporated by reference herein.
Electric Application of SFAS 71: Consumers appliesRATE MATTERS: In November 1997, ABATE filed a complaint with the utility accounting
standard, SFAS 71,MPSC alleging
that recognizes the economic effects of rate regulation
and, accordingly, has recorded regulatory assets and liabilities related
to the generation, transmission and distribution operationsConsumers' earnings are in excess of its businessauthorized rate of return and
seeking an immediate reduction in its financial statements. Consumers believesConsumers' electric rates. The MPSC staff
conducted an investigation and concluded in an April 1998 report that no formal
rate proceeding was warranted at that time. The MPSC has now set the complaint
for hearing, but the presiding ALJ has restricted the scope of the hearing so
that the generation segment of its business is still subjectmost favorable relief available to rate regulation
based upon its present obligation to continue providing generation service
to its customers, and the lack of definitive deregulation orders. If rate
recovery of generation-related costs becomes unlikely or uncertain,
whether due to competition or regulatory action, this accounting standard
may no longer apply to the generation segment of Consumers' business.
According to Emerging Issues Task Force Issue 97-4, Deregulation of the
Pricing of Electricity - Issues Related to the Application of FASB
Statements No. 71 and 101, Consumers can continue to carry its generation-
related regulatory assets or liabilities for the part of the business
being deregulated if deregulatory legislation orABATE would be an MPSC rate order allows
the collection of cash flows from its regulated transmission and
distribution customers to recover these specific costs or settle
obligations. Because the February 1998 MPSC order allowsdirection for
Consumers to fully recover its transition costs, Consumers believes that even if it wasfile an electric rate case. Various procedural issues relating to
discontinue application of SFAS 71 forthis complaint, including the generation segment of its
business, its regulatory assets, including those related to generation,
are probable of future recovery from the regulated portion of the
business. At September 30, 1998, Consumers had $251 million of
generation-related net regulatory assets recordedALJ's ruling on its balance sheet,
and a net investment in generation facilitiesscope, are currently on appeal
at the MPSC. Consumers is unable to predict the outcome of $1.3 billion included in
electric plant and property. For further information regarding electric
restructuring, see "Electric Restructuring" above.
Consumers' Gas Group Outlook
Growth:this matter.
CONSUMERS GAS GROUP OUTLOOK
GROWTH: Consumers currently anticipates gas deliveries, including gas customer
choice deliveries, (excludingexcluding transportation to the MCV Facility and off-system
deliveries),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.
AbnormalActual gas deliveries in future periods may be affected by abnormal weather,
alternative energy prices, changes in competitive conditions, particularly as a
result of industry restructuring, and the level of natural gas consumption may affect actual gas deliveries in future periods.consumption.
Consumers is also offeringoffers a variety of energy-related services to its customers
focused upon appliance maintenance, home safety, commodity choice and assistance
to customers purchasing heating, ventilation and air conditioning equipment.
RESTRUCTURING: In December 1997, LIHEAP provided approximately $64 million in heating assistancethe MPSC approved Consumers' application to
about 312,000 Michigan households, with approximately 13 percentimplement a statewide three-year experimental gas transportation program,
eventually allowing 300,000 residential, commercial and industrial retail gas
sales customers to choose their gas supplier. For further information, regarding
restructuring of the funds goingGas Business, see Note 2, Uncertainties, "Consumers Gas
Group Matters-Gas Restructuring," incorporated by reference herein.
PANHANDLE OUTLOOK
GROWTH: The market for transmission of natural gas to Consumers'the Midwest is
increasingly competitive and may become more so in light of projects in progress
to increase Midwest transmission capacity for gas originating in Canada and the
Rocky Mountain region. As a result, there continues to be pressure on prices
charged by Panhandle and an increasing necessity to discount the prices charged
from the legal maximum. Panhandle continues to be selective in offering
discounts to maximize revenues from existing capacity and
16
17
to advance projects that provide expanded services to meet the specific needs of
customers. Congress provided approximately $54
millionManagement is evaluating the continued applicability of SFAS 71,
particularly in funding for Michigan for 1998. In October 1998, Congress
approved funding for fiscal year 1999 of approximately $59 million for
the state of Michigan. Consumers' expects presidential approvallight of the funding.
Gas Applicationacquisition and the new cost basis of SFAS 71: Based on a regulated utility accounting
standard, SFAS 71, Consumers may defer certain costs toPanhandle
which will result from the future and
recordpending merger of CMS Panhandle Holding with
Panhandle.
REGULATORY MATTERS: For detailed information about Panhandle's regulatory
assets, based on the recoverability of those costs
through the MPSC's approval. Consumers has evaluated its regulatory
assets related to its gas business, and believes that sufficient
regulatory assurance exists to provide for the recovery of these deferred
costs.
Otheruncertainties see Note 2, Uncertainties - Panhandle Regulatory Matters,
New Accounting Standardsincorporated by reference herein.
OTHER MATTERS
NEW ACCOUNTING RULES
In 1998, the FASB issued SFAS 132, Employers' Disclosures about Pensions
and Other Postretirement Benefits. This standard requires expanded
disclosure effective for 1998. Also in 1998, the American Institute of Certified Public Accountants issued Statement
of Position 98-1, Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use, which will beand Statement of Position 98-5, Reporting on the
Costs of Start-Up Activities. These statements became effective forin 1999.
CMS Energy does not expect the
applicationApplication of these standards to materially affect itshas not had a material effect on CMS Energy's
financial position, liquidity, or results of operations. In addition,Effective January 1,
1999, CMS Energy adopted Emerging Issues Task Force Issue 98-10, Accounting for
Energy Trading and Risk Management Activities, which requires mark-to-market
accounting for energy contracts entered into for trading purposes. Under
mark-to-market accounting, gains and losses resulting from changes in 1998,market
prices on contracts entered into for trading purposes are reflected in current
earnings. The after-tax mark-to-market adjustment resulting from the FASB issuedadoption of
EITF 98-10 had an immaterial effect on CMS Energy's consolidated financial
position, results of operations and cash flows as of March 31, 1999. For energy
contracts that are hedges of non-trading activities, CMS Energy will continue to
use accrual accounting until it adopts SFAS 133, Accounting for Derivative
Instruments and Hedging Activities, which requires that every derivative instrument (including
certain derivative instruments embedded in other contracts)will be recorded in
the balance sheet as either an asset or liability measured at its fair
value. The statement requires that changes in the derivative's fair value
be recognizedeffective January 1, 2000. CMS
Energy is currently in earnings unless specific hedge accounting
criteria are met. Special accounting for qualifying hedges allows a
derivative's gains and losses to offset related results on the hedged item
in the income statement, and requires that a company must formally
document, designate, and assess the effectiveness of transactions that
receive hedge accounting.studying SFAS 133 is effective for fiscal years
beginning after June 15, 1999. CMS Energyand has not yet quantified the impacts of
adopting SFAS 133adoption on its financial statements and has not determined the timing of or
method of adoption of SFAS 133. However, SFAS
133 could increase volatility in earnings and other comprehensive income.
Yearadoption.
YEAR 2000 Computer ModificationsCOMPUTER MODIFICATIONS
CMS Energy uses software and related technologies throughout its domestic and
international businesses that the year 2000 date change willcould affect and, if
uncorrected, could cause CMS Energy to, among other things, delay issuance of
bills or reports, issue inaccurate bills, report inaccurate data, incur
generating plant outages, or create energy delivery uncertainties. In 1995, CMS
Energy established a Year 2000 Program to ensure the continued operation of the companyits
businesses at the turn of the century. CMS Energy's efforts included dividing
the programs requiring modification between critical and noncritical programs. A
formal methodology was established to identify critical business functions and
risk scenarios, to correct problems identified, to develop test plans and
expected results, and execute tests.to test the corrections made. CMS Energy's Year 2000
Program involves an aggressive, comprehensive four-phase approach, including
impact analysis, remediation, compliance review, and monitoring/contingency
planning.
The impact analysis phase includes the analysis, inventory, prioritization and
remediation plan development for all technology essential to core business
processes. The remediation phase involves testing and implementation of
remediationremediated technology. A mainframe test environment was established in 1997 and
a test environment for network servers and stand-alone personal computers was
established in mid-1998. All essential corporate business systems have been, or
will be, tested in these test environments. The compliance review phase includes
the assembling of compliance documentation for each technology component as
remediation efforts are completed, and additional verification testing of
essential technology where necessary. The monitoring/contingency planning phase
includes compliance monitoring to ensure
17
18
that year 2000 problems are not reintroduced into remediated technology, as well
as the development of contingency plans to address reasonably likely risk
scenarios.
StateOn March 29, 1999, CMS Energy acquired Panhandle. As part of Readiness:CMS Energy's
acquisition due diligence, CMS Energy evaluated Panhandle's year 2000 compliance
program, which had been initiated in 1996. Management believes Panhandle is
devoting the necessary resources to achieve year 2000 readiness in a timely
manner. The status of Panhandle's Year 2000 Program by phase as of March 31,
1999, with target dates for completion and current percentage complete, are
included within the data presented for natural gas transmission.
STATE OF READINESS: CMS Energy is managing traditional information
technologyInformation Technology
(IT), which consists of essential business systems such as payroll, billing and
purchasing,purchasing; and infrastructure, including mainframe, wide area network, local
area networks, personal computers, radios and telephone systems. CMS Energy is
also managing process control computers and embedded systems contained in
buildings, equipment and energy supply and delivery systems.
Essential goods and services for CMS Energy are electric fuel supply, gas fuel
supply, independent electric power supplies, facilities, electronic commerce,
telecommunications network carriers, financial institutions, purchasing vendors,
and software and hardware technology vendors. CMS Energy is addressing the
preparedness of these businesses and their risk through readiness assessment
questionnaires.
The status of CMS Energy's Year 2000 Program by phase, with target dates for
completion and current percentage complete based upon software and hardware
inventory counts as of September 30, 1998,March 31, 1999, is as follows:
Monitoring/
Impact Compliance Contingency
Analysis Remediation Review Planning
- ------------------------------------------------------------------------
(a) (b) (a) (b) (a) (b) (a) (b)
Electric utility 3/98 100% 6/99 53% 6/99 22% 6/99 10%
Gas utility 3/98 100% 6/99 66% 6/99 3% 6/99 10%
Independent power
production 12/98 55% 9/99 17% 9/99 0% 9/99 10%
Oil and gas 12/98 79% 9/99 60% 9/99 0% 9/99 50%
Natural gas
transmission 12/98 45% 9/99 50% 9/99 0% 9/99 5%
Marketing, services
and trading 12/98 77% 9/99 50% 9/99 50% 9/99 10%
Essential goods
and services 6/99 35% N/A 9/99 0% 6/99 10%
==========================================================================
Monitoring/
Impact Compliance Contingency
Analysis Remediation Review Planning
- ---------------------------------------------------------------------------------------------------------------------------
(a) (b) (a) (b) (a) (b) (a) (b)
Electric utility 3/98 100% 6/99 93% 6/99 91% 6/99 75%
Gas utility 3/98 100% 6/99 91% 6/99 91% 6/99 75%
Independent power production 6/99 86% 9/99 78% 9/99 74% 9/99 10%
Oil and gas 6/99 97% 9/99 94% 9/99 84% 9/99 10%
Natural gas transmission 6/99 99% 9/99 98% 9/99 98% 9/99 10%
Marketing, services and trading 6/99 62% 9/99 61% 9/99 17% 9/99 10%
Essential goods and services 6/99 56% N/A N/A (c)
===========================================================================================================================
(a) Target date for completion.
(b) Current percentage complete.
Cost of Remediation:(c) Contingency planning for essential goods and services is incorporated into
contingency planning for each segment presented.
COST OF REMEDIATION: CMS Energy will expense anticipatedexpenses spending for software modifications as
incurred, while capitalizing and amortizingcapitalizes and amortizes the cost for new software and equipment
over its useful life. The total estimated cost of the Year 2000 Program is
approximately $30 million. Costs incurred through September 30, 1998 areMarch 31, 1999 were
approximately $15$20 million. CMS Energy's annual Year 2000 Program costs have
represented
18
19
approximately 2%2 percent to 10%10 percent of CMS Energy's annual IT budget through
1998 and are expected to represent approximately 25%25 percent of CMS Energy's
annual IT budget in 1999. Year 2000 compliance work is being funded primarily
from operations. The devotionTo date, the commitment of CMS Energy resources to the year
2000 problemissue has not deferred any material IT projects which could have a material
adverse affect on CMS Energy's financial position, liquidity or results of
operations.
Risk Assessment:RISK ASSESSMENT: CMS Energy considers the most reasonably likely worst-
caseworst-case
scenarios to be: (1)i) a lack of communications to dispatch crews to electric or
gas emergencies, (2)emergencies; ii) a lack of communications to contact
generating units to balance
electrical load, (3)load; iii) power shortages due to the lack of stability of the
electric gridgrid; and (4)iv) a failure of fuel suppliers to deliver fuel to generating
facilities. These scenarios could result in CMS Energy not being able to
generate or distribute enough energy to meet customer demand for a period of
time, which could result in lost sales and profits.profits, as well as legal liability.
Year 2000 remediation and testing efforts are concentrating on these risk areas
and will continue through the end of 1999. Contingency plans will be revised and
executed to further mitigate the risks associated with these scenarios.
Contingency Plans:CONTINGENCY PLANS: Contingency planning efforts are currently underway for all
business systems and providers of essential goods and services. Extensive
contingency plans are already in place in many locations and are currently being
revised for reasonably likely worst-case scenarios related to year 2000 issues.
In many cases, Consumers already has arrangements with multiple vendors of
similar goods and services so that in the event that one cannot meet its
commitments, others can.may be able to. Current contingency plans provide for manual
dispatching of crews and manual coordination of electrical load balancing and
are being revised to provide for radio or satellite communications. Coordinated
contingency planning efforts are in progress with third parties to minimize risk
to electric generation, transmission and distribution systems.
Expectations:EXPECTATIONS: CMS Energy does not expect that the cost of these modifications
will materially affect its financial position, liquidity, or results of
operations. There can be no guarantee, however, that these costs, plans or time
estimates will be achieved, and actual results could differ materially.
Because of the integrated nature of CMS Energy's business with other energy
companies, utilities, jointly owned facilities operated by other entities, and
business conducted with suppliers and large customers, CMS Energy may be
indirectly affected by year 2000 compliance complications.
At this time, CMS Energy is unable to anticipate the magnitude of the
operational or financial impact on CMS Energy of year 2000 issues.
Foreign Currency TranslationFOREIGN CURRENCY TRANSLATION
CMS Energy adjusts common stockholders' equity to reflect foreign currency
translation adjustments for the operation of long-term investments in foreign
countries. As of September 30, 1998 the cumulative foreign
currency translation adjustment was $132 million. The adjustment is primarily due to the exchange rate fluctuations
between the U.S. dollar and each of the Australian dollar, Brazilian real and
Brazilian real.Argentine peso. From January 1, 19981999 through September 30, 1998,March 31, 1999, the change in the
foreign currency translation adjustment totaled $36 million.$5 million, net of after-tax
hedging proceeds. Although management currently believes that the currency
exchange rate fluctuations over the long term will not materially adverselyhave 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 Brazilian real.Argentine peso. CMS Energy uses forward exchange contracts and collared
options 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 $845
million$1.2 billion at September 30, 1998,March 31, 1999, which includes $550$716
million, $250 million and $250$220 million for Australian, Brazilian and BrazilianArgentine
foreign exchange contracts, respectively. Forward-Looking Information
Forward-looking information is included throughout this report.The estimated fair value of the
foreign exchange and option contracts at March 31, 1999 was $10 million,
representing the amount CMS Energy would receive upon settlement.
19
20
FORWARD-LOOKING STATEMENTS
This report also describes material contingencies incontains forward-looking statements as defined by the NotesPrivate
Securities Litigation Reform Act of 1995. The words "anticipates," "believes,"
"estimates," "expects," "intends," and "plans," as well as variations of such
words and similar expressions, are intended to identify forward-looking
statements that involve risk and uncertainty. These statements are necessarily
based upon various assumptions involving judgements with respect to the Consolidated Financial Statementsfuture
including, among others, the ability to achieve operating synergies and shouldrevenue
enhancements; international, national, regional and local economic, competitive
and regulatory conditions and developments; capital and financial market
conditions, including currency exchange controls and interest rates; weather
conditions and other natural phenomena; adverse regulatory or legal decisions,
including environmental laws and regulations; the pace of deregulation of the
natural gas and electric industries; energy markets, including the timing and
extent of changes in commodity prices for oil, coal, natural gas, natural gas
liquids, electricity and certain related products; the timing and success of
business development efforts; potential disruption, expropriation or
interruption of facilities or operations due to accidents or political events;
nuclear power and other technological developments; the effect of changes in
accounting policies; year 2000 readiness; and other uncertainties, all of which
are difficult to predict and many of which are beyond the control of CMS Energy.
Accordingly, while CMS Energy believes that the assumed results are reasonable,
there can be read accordingly.
Some importantno assurance that they will approximate actual results. CMS Energy
disclaims any obligation to update or revise forward-looking statements, whether
as a result of new information, future events or otherwise. Certain risk factors
that could cause actual results or outcomesare detailed from time to differ are set forthtime in various public filings made by CMS Energy's 1997 Form 10-K, "Management's
Discussion and Analysis-Forward-Looking Information."Energy with
the SEC.
20
2521
CMS ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
CMS Energy Corporation
Consolidated Statements of Income
(Unaudited)
Three Months Ended Nine Months Ended Twelve Months Ended
September 30 1998 1997* 1998 1997* 1998 1997*THREE MONTHS ENDED TWELVE MONTHS ENDED
MARCH 31 1999 1998* 1999 1998*
- ----------------------------------------------------------------------------------------------------------------
In Millions, Except Per Share Amounts
Operating RevenueOPERATING REVENUE
Electric utility $ 729636 $ 670 $1,990 $1,888 $2,617612 $2,630 $2,507
Gas utility 117 110 716 828 1,092 1,230
Independent power production 95 45 214 116 266 148506 429 1,128 1,135
Natural gas transmission, storage and processing 20 19 69 71 94 90104 27 237 97
Independent power production 73 44 306 183
Oil and gas exploration and production 15 30 46 67 72 10319 12 70 88
Marketing, services and trading 305 153 748 366 1,074 433158 247 850 840
Other 542 3 9 11 11 16
------ ------ ------ ------ ------ ------
1,286 1,030 3,792 3,347 5,226 4,527
------ ------ ------ ------ ------ ------
Operating Expenses84 10
-------------------------------------------------
1,538 1,374 5,305 4,860
- ----------------------------------------------------------------------------------------------------------------
OPERATING EXPENSES
Operation
Fuel for electric generation 109 85 273 234 359 31693 80 372 325
Purchased power - related parties 143 151 433 447 585 600139 145 567 594
Purchased and interchange power 77 65 220 180 282 235103 85 602 287
Cost of gas sold 154 164 799 785 1,325 1,100496 463 1,245 1,375
Other 371 191 830 540 1,031 753
------ ------ ------ ------ ------ ------
854 656 2,555 2,186 3,582 3,004207 181 789 724
------------------------------------------------
1,038 954 3,575 3,305
Maintenance 49 40 128 122 180 18039 37 178 170
Depreciation, depletion and amortization 112 108 347 342 472 458150 128 506 468
General taxes 49 48 155 157 209 209
------ ------ ------ ------ ------ ------
1,064 852 3,185 2,807 4,443 3,851
------ ------ ------ ------ ------ ------
Pretax Operating Income (Loss)66 58 223 208
-------------------------------------------------
1,293 1,177 4,482 4,151
- ----------------------------------------------------------------------------------------------------------------
PRETAX OPERATING INCOME (LOSS)
Electric utility 153 132 378 342 468 423134 119 491 444
Gas utility 6 (1) 81 100 134 14278 54 150 130
Independent power production 57 32 123 67 152 7328 16 156 102
Natural gas transmission, storage and processing 6 6 28 22 33 273 13 23 31
Oil and gas exploration and production 2 13 12 16 22 222 6 28
Marketing, services and trading 5 (1) 10 (7)
Other (5) (6) (13) (19)
-------------------------------------------------
245 197 823 709
- ----------------------------------------------------------------------------------------------------------------
OTHER INCOME (DEDUCTIONS)
Accretion income 1 2 - 2 1 (4) 1
Other6 7
Accretion expense (4) (4) (15) (17) (8) (22) (12)
------ ------ ------ ------ ------ ------
222 178 607 540 783 676
------ ------ ------ ------ ------ ------
Other Income (Deductions)
Loss on MCV power purchases - --- (37) --- (37) -
Accretion income 1 2 5 6 7 8
Accretion expense (4) (4) (12) (13) (16) (14)
Other, net (3)4 3 2 5 (6) 2
------ ------ ------ ------ ------ ------
(6)-- 1
(42) (2) (52) (4)
------ ------ ------ ------ ------ ------
Fixed Charges--------------------------------------------------
1 (36) (9) (46)
- -----------------------------------------------------------------------------------------------------------------
FIXED CHARGES
Interest on long-term debt 79 71 234 198 309 25496 76 338 289
Other interest 8 12 33 34 4812 47 51
Capitalized interest (6) (3) (17) (9) (21) (11)(10) (4) (35) (15)
Preferred dividends 5 6 14 205 19 2723
Preferred securities distributions 8 68 32 24
11 31 13
------ ------ ------ ------ ------ ------
94 92 288-------------------------------------------------
111 97 401 372
- ----------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 135 64 413 291
INCOME TAXES 37 19 118 80
-------------------------------------------------
CONSOLIDATED NET INCOME BEFORE CUMULATIVE EFFECT OF CHANGE
IN ACCOUNTING PRINCIPLE 98 45 295 211
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING FOR PROPERTY TAXES,
NET OF $23 TAX -- 43 -- 43
--------------------------------------------------
CONSOLIDATED NET INCOME $ 98 $ 88 $ 295 $ 254
386 330
------ ------ ------ ------ ------ ------
Income Before Income Taxes 122 87 277 284 345 342
Income Taxes 41 27 86 99 95 119
------ ------ ------ ------ ------ ------
Consolidated Net Income before cumulative
effect of change in accounting principle 81 60 191 185 250 223
Cumulative effect of change in accounting
for property taxes, net of $23 tax (Note 1) - - 43 - 43 -
------ ------ ------ ------ ------ ------
Consolidated Net Income $ 81 $ 60 $ 234 $ 185 $ 293 $ 223
====== ====== ====== ====== ====== ======================================================================================================================
21
2622
Three Months Ended Nine Months Ended Twelve Months Ended
September 30 1998 1997* 1998 1997* 1998 1997*THREE MONTHS ENDED TWELVE MONTHS ENDED
MARCH 31 1999 1998* 1999 1998*
- -----------------------------------------------------------------------------------------------------------
In Millions, Except Per Share Amounts
Net Income (Loss) Attributable to
Common StocksNET INCOME ATTRIBUTABLE TO COMMON STOCKS CMS EnergyENERGY $ 8388 $ 6279 $ 226281 $ 176 $ 279 $ 210
Class239
CLASS G $ (2) $ (2) $ 810 $ 9 $ 14 $ 13
------ ------ ------ ------ ------ ------
Average Common Shares Outstanding15
- -----------------------------------------------------------------------------------------------------------
AVERAGE COMMON SHARES OUTSTANDING CMS Energy 102 96ENERGY 108 101 95 101 95
Class104 98
CLASS G 8 8 8 8
8 8
------ ------ ------ ------ ------ ------
Basic Earnings (Loss) Per Average
Common Share Before Change in
Accounting Principle- -----------------------------------------------------------------------------------------------------------
BASIC EARNINGS PER AVERAGE COMMON SHARE CMS EnergyENERGY $ .81.82 $ .64.39 $ 1.832.69 $ 1.85 $ 2.37 $ 2.22
Class2.05
BEFORE CHANGE IN ACCOUNTING PRINCIPLE CLASS G $ (.16)1.19 $ (.21).73 $ .681.68 $ 1.131.40
- -----------------------------------------------------------------------------------------------------------
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE, NET OF TAX, PER AVERAGE CMS ENERGY $ 1.37 $ 1.57
------ ------ ------ ------ ------ ------
Cumulative Effect of Change in Accounting
Principle, Net of Tax, Per Average
Common Share
CMS Energy $ - $ --- $ .40 $ --- $ .40
$ -
ClassCOMMON SHARE CLASS G $ - $ --- $ .36 $ --- $ .36
- -----------------------------------------------------------------------------------------------------------
BASIC EARNINGS PER AVERAGE COMMON SHARE CMS ENERGY $ -
------ ------ ------ ------ ------ ------
Basic Earnings (Loss) Per Average
Common Share
CMS Energy.82 $ .81.79 $ .642.69 $ 2.23 $ 1.85 $ 2.77 $ 2.22
Class2.45
CLASS G $ (.16)1.19 $ (.21)1.09 $ 1.041.68 $ 1.13 $ 1.73 $ 1.57
------ ------ ------ ------ ------ ------
Diluted Earnings (Loss) Per Average
Common Share1.76
- -----------------------------------------------------------------------------------------------------------
DILUTED EARNINGS PER AVERAGE COMMON SHARE CMS EnergyENERGY $ .80 $ .63.77 $ 2.192.66 $ 1.83 $ 2.73 $ 2.20
Class2.44
CLASS G $ (.16)1.19 $ (.21)1.09 $ 1.041.68 $ 1.13 $ 1.73 $ 1.57
------ ------ ------ ------ ------ ------
Dividends Declared Per Common Share1.76
- -----------------------------------------------------------------------------------------------------------
DIVIDENDS DECLARED PER COMMON SHARE CMS EnergyENERGY $ .33 $ .30 $ .931.29 $ .84 $ 1.23 $ 1.11
Class1.17
CLASS G $ .325 $ .31 $ .945 $ .90 $ 1.255 $1.195
------ ------ ------ ------ ------ ------
* Restated, see Note 1.
The accompanying condensed notes are an integral part of these statements.1.285 $1.225
===========================================================================================================
* RESTATED FOR CHANGE IN METHOD OF ACCOUNTING FOR OIL AND GAS OPERATIONS FROM
FULL COST METHOD TO SUCCESSFUL EFFORTS METHOD. THE ACCOMPANYING CONDENSED NOTES
ARE AN INTEGRAL PART OF THESE STATEMENTS.
22
2723
CMS ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
CMS Energy Corporation
Consolidated Balance Sheets
ASSETS September 30 September 30
1998 DecemberTHREE MONTHS ENDED TWELVE MONTHS ENDED
MARCH 31 1997*
(Unaudited) 1997* (Unaudited)1999 1998* 1999 1998*
- -------------------------------------------------------------------------------------------------------------------
In Millions
Plant
CASH FLOWS FROM OPERATING ACTIVITIES
Consolidated net income $ 98 $ 88 $ 295 $ 254
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation, depletion and Property (At Cost)amortization (includes nuclear
decommissioning of $13, $13, $52 and $50, respectively) 150 128 506 468
Loss on MCV power purchases -- 37 -- 37
Capital lease and debt discount amortization 9 11 49 47
Accretion expense 4 4 15 17
Accretion income - abandoned Midland project (1) (2) (6) (7)
Cumulative effect of accounting change -- (66) -- (66)
MCV power purchases (14) (17) (61) (65)
Undistributed earnings of related parties (16) (17) (94) (62)
Deferred income taxes and investment tax credit (2) (8) 60 16
Other (1) (8) 13 (16)
Changes in other assets and liabilities 94 93 (183) (123)
----------------------------------------------------
Net cash provided by operating activities 321 243 594 500
- -------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Aquisition of companies net of cash acquired (1,899) -- (1,899) --
Capital expenditures (excludes assets placed under capital lease) (157) (124) (1,328) (683)
Investments in partnerships and unconsolidated subsidiaries (202) (112) (435) (930)
Cost to retire property, net (21) (17) (88) (41)
Other 44 (7) 94 (59)
Proceeds from sale of property -- 28 29 64
---------------------------------------------------
Net cash used in investing activities (2,235) (242) (3,627) (1,649)
- -------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from bank loans, notes and bonds 3,131 850 4,629 1,994
Issuance of common stock 27 20 276 227
Retirement of bonds and other long-term debt (12) (369) (304) (890)
Repayment of bank loans (989) (322) (1,241) (324)
Increase (decrease) in notes payable, net (189) (137) (105) 157
Payment of common stock dividends (38) (33) (145) (124)
Payment of capital lease obligations (11) (7) (40) (43)
Retirement of preferred stock (2) -- (2) (120)
Retirement of common stock -- -- (3) (2)
Proceeds from preferred securities -- -- -- 286
----------------------------------------------------
Net cash provided by financing activities 1,917 2 3,065 1,161
- -------------------------------------------------------------------------------------------------------------------
NET INCREASE IN CASH AND TEMPORARY CASH INVESTMENTS 3 3 32 12
CASH AND TEMPORARY CASH INVESTMENTS, BEGINNING OF PERIOD 101 69 72 60
----------------------------------------------------
CASH AND TEMPORARY CASH INVESTMENTS, END OF PERIOD $ 104 $ 72 $ 104 $ 72
===================================================================================================================
23
24
OTHER CASH FLOW ACTIVITIES AND NON-CASH INVESTING AND FINANCING ACTIVITIES WERE:
CASH TRANSACTIONS
Interest paid (net of amounts capitalized) $ 82 $ 75 $ 320 $305
Income taxes paid (net of refunds) 2 19 47 86
NON-CASH TRANSACTIONS
Nuclear fuel placed under capital lease $ -- $ 5 $ 42 $ 6
Other assets placed under capital leases 2 2 14 7
Common stock issued to acquire companies -- -- 61 --
Assumption of debt 318 -- 406 --
================================================================================================================
All highly liquid investments with an original maturity of three months or less
are considered cash equivalents.
* RESTATED FOR CHANGE IN METHOD OF ACCOUNTING FOR OIL AND GAS OPERATIONS FROM
FULL COST METHOD TO SUCCESSFUL EFFORTS METHOD.
THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
24
25
CMS ENERGY CORPORATION
CONSOLIDATED BALANCE SHEETS
ASSETS MARCH 31 MARCH 31
1999 DECEMBER 31 1998*
(UNAUDITED) 1998 (UNAUDITED)
- ----------------------------------------------------------------------------------------------------------------
In Millions
PLANT AND PROPERTY (AT COST)
Electric utility $ 6,6416,772 $ 6,4916,720 $ 6,4476,547
Gas 2,498 2,528 2,502utility 2,374 2,360 2,346
Natural gas transmission, storage and processing 1,825 341 186
Oil and gas properties (successful efforts method) 637 566 533679 670 571
Independent power production 520 518 124
Other 320 168 100
------- ------- -------
10,096 9,753 9,582392 373 47
-----------------------------------------
12,562 10,982 9,821
Less accumulated depreciation, depletion and amortization 5,052 4,870 4,784
------- ------- -------
5,044 4,883 4,7985,803 5,213 4,979
-----------------------------------------
6,759 5,769 4,842
Construction work-in-progress 226 261 332
------- ------- -------
5,270 5,144 5,130
------- ------- -------
Investments330 271 272
-----------------------------------------
7,089 6,040 5,114
- ----------------------------------------------------------------------------------------------------------------
INVESTMENTS
Independent power production 868 792 819991 888 884
Natural gas transmission, storage and processing 341 241 236563 494 264
International energy distribution 272 255 65146 209 266
First Midland Limited Partnership (Note 2) 237 242 239236 240 244
Midland Cogeneration Venture Limited Partnership (Note 2) 199 171 163220 209 179
Other 35 45 46
------- ------- -------
1,952 1,746 1,568
------- ------- -------
Current Assets33 33 42
-----------------------------------------
2,189 2,073 1,879
- ----------------------------------------------------------------------------------------------------------------
CURRENT ASSETS
Cash and temporary cash investments at cost, which approximates market 104 101 69 13672
Accounts receivable, notes receivable and accrued revenue, less
allowances of $8, $7$17, $13 and $7, respectively (Note 3) 457 495 401859 720 467
Inventories at average cost
Gas in underground storage 276 197 25382 219 79
Materials and supplies 91 87 95140 99 90
Generating plant fuel stock 29 35 2633 43 39
Deferred income taxes 14 38 18-- -- 28
Prepayments and other 170 235 108
------- ------- -------
1,138 1,156 1,037
------- ------- -------
Non-current Assets188 225 248
-----------------------------------------
1,406 1,407 1,023
- ----------------------------------------------------------------------------------------------------------------
NON-CURRENT ASSETS
Nuclear decommissioning trust funds 510 486 478565 557 518
Nuclear plant - related assets 535 -- --
Postretirement benefits 381 404 411366 373 396
Abandoned Midland Project 77 93 98project 66 71 88
Other 602 479 499
------- ------- -------
1,570 1,462 1,486
------- ------- -------
Total Assets1,551 789 487
----------------------------------------
3,083 1,790 1,489
----------------------------------------
TOTAL ASSETS $13,767 $11,310 $ 9,930 $ 9,508 $ 9,221
======= ======= =======9,505
================================================================================================================
25
2826
STOCKHOLDERS' INVESTMENT AND LIABILITIES September 30 September 30MARCH 31 MARCH 31
1999 DECEMBER 31 1998*
(UNAUDITED) 1998 December 31 1997*
(Unaudited) 1997* (Unaudited)(UNAUDITED)
- ----------------------------------------------------------------------------------------------------------------
In Millions
CapitalizationCAPITALIZATION
Common stockholders' equity $ 1,9222,292 $ 1,7872,216 $ 1,6491,867
Preferred stock of subsidiary 238244 238 238
Company-obligated mandatorily redeemable Trust Preferred
Securities of:
Consumers Power Company Financing I (a) 100 100 100
Consumers Energy Company Financing II (a) 120 120 120
Company-obligated convertible Trust Preferred Securities of
CMS Energy Trust I (b) 173 173 173
Long-term debt 4,248 3,272 3,0607,258 4,726 3,755
Non-current portion of capital leases 77 75 82
------- ------- -------
6,878 5,765 5,422
------- ------- -------
Current Liabilities99 105 74
------------------------------------------
10,286 7,678 6,327
- ----------------------------------------------------------------------------------------------------------------
CURRENT LIABILITIES
Current portion of long-term debt and capital leases 171 643 911300 293 318
Notes payable 302 382 394139 328 245
Accounts payable 309 398 326419 501 330
Accrued taxes 144278 272 146235
Accounts payable - related parties 90 80 7079 79 82
Accrued interest 64 51 6178 65 56
Power purchases (Note 2) 47 47 47
Accrued refunds 12 12 713 11 11
Other 189 190 191
------- ------- -------
1,328 2,075 2,153
------- ------- -------
Non-current Liabilities287 214 182
-----------------------------------------
1,640 1,810 1,506
- ----------------------------------------------------------------------------------------------------------------
NON-CURRENT LIABILITIES
Deferred income taxes 654 648 581630 649 626
Postretirement benefits 499 514 520480 489 510
Power purchases 111 121 157
Deferred investment tax credit 144 151 154
Power purchases (Note 2) 134 133 144135 148
Regulatory liabilities for income taxes, net 83 54 86108 87 61
Other 210 168 161
------- ------- -------
1,724 1,668 1,646
------- ------- -------
Commitments379 341 170
-----------------------------------------
1,841 1,822 1,672
-----------------------------------------
COMMITMENTS AND CONTINGENCIES (Notes 1 and Contingencies (Note 2)
Total Stockholders' Investment and LiabilitiesTOTAL STOCKHOLDERS' INVESTMENT AND LIABILITIES $13,767 $11,310 $ 9,930 $ 9,508 $ 9,221
======= ======= =======
(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.
(b) The primary asset of CMS Energy Trust I is $178 million principal amount of 7.75 percent convertible subordinated
debentures due 2027 from CMS Energy.
* Restated, see Note 1.
The accompanying condensed notes are an integral part of these statements.9,505
- ----------------------------------------------------------------------------------------------------------------
(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. For further discussion, see Note 3 to the
Consolidated Financial Statements.
(b) As described in Note 3, the primary asset of CMS Energy Trust I is $178
million principal amount of 7.75 percent convertible subordinated debentures due
2027 from CMS Energy.
* RESTATED FOR CHANGE IN METHOD OF ACCOUNTING FOR OIL AND
GAS OPERATIONS FROM FULL COST METHOD TO SUCCESSFUL EFFORTS METHOD. THE
ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
26
2927
CMS ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS' EQUITY
(UNAUDITED)
CMS Energy Corporation
Consolidated Statements of Cash Flows
(Unaudited)
Nine Months Ended Twelve Months Ended
September 30 1998 1997* 1998 1997*THREE MONTHS ENDED TWELVE MONTHS ENDED
MARCH 31 1999 1998* 1999 1998*
- ----------------------------------------------------------------------------------------------------------------
In Millions
Cash Flows from Operating Activities
Consolidated net income $ 234 $ 185 $ 293 $ 223
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation, depletion and amortization (includes
nuclear decommissioning of $38, $37, $51 and $49,
respectively) 347 342 472 458
Deferred income taxes and investment tax credit 61 11 74 30
Loss on MCV power purchases 37 - 37 -
Capital lease and debt discount amortization 29 36 37 44
Accretion expense 12 13 16 14
Accretion income - abandoned Midland project (5) (6) (7) (8)
Undistributed earnings of related parties (36) (40) (54) (47)
MCV power purchases (48) (47) (63) (67)
Cumulative effect of accounting change for property taxes (66) - (66) -
Other (8) (10) (7) 7
Changes in other assets and liabilities (171) (150) (56) (179)
------- ------- ------- -------
Net cash provided by operating activities 386 334 676 475
------- ------- ------- -------
Cash Flows from Investing Activities
Capital expenditures (excludes assets placed under
capital lease) (448) (509) (617) (740)
Investments in partnerships and unconsolidated subsidiaries (234) (588) (476) (604)
Cost to retire property, net (65) (26) (68) (37)
Investments in nuclear decommissioning trust funds (38) (37) (51) (49)
Investment in Electric Restructuring Implementation Plan (9) - (10) -
Other (7) (27) 8 (23)
Proceeds from sale of property 56 46 59 91
Proceeds from nuclear decommissioning trust funds 43 - 43 -
Proceeds from FMLP 12 - 12 -
------- ------- ------- -------
Net cash used in investing activities (690) (1,141) (1,100) (1,362)
------- ------- ------- -------
Cash Flows from Financing Activities
Proceeds from bank loans, notes and bonds 1,636 827 2,023 875
Issuance of common stock 49 60 213 126
Retirement of bonds and other long-term debt (621) (73) (1,069) (73)
Repayment of bank loans (520) (32) (517) (24)
Payment of common stock dividends (102) (87) (134) (115)
Increase (decrease) in notes payable, net (80) 61 (92) 53
Payment of capital lease obligations (26) (35) (35) (42)
Proceeds from preferred securities - 286 - 286
Retirement of preferred stock - (120) - (120)
Retirement of common stock - (2) - (2)
------- ------- ------- -------
Net cash provided by financing activities 336 885 389 964
------- ------- ------- -------
Net Increase (Decrease) in Cash and Temporary Cash Investments 32 78 (35) 77
Cash and Temporary Cash Investments, Beginning of Period 69 58 136 59
------- ------- ------- -------
Cash and Temporary Cash Investments, End of Period $ 101 $ 136 $ 101 $ 136
======= ======= ======= =======
Other cash flow activities and non-cash investing and financing activities were:
Cash transactions
Interest paid (net of amounts capitalized) $ 229 $ 201 $ 321 $ 267
Income taxes paid (net of refunds) 51 57 61 78
Non-cash transactions
Nuclear fuel placed under capital lease $ 21 $ 4 $ 21 $ 24
Other assets placed under capital leases 11 5 12 6
======= ======= ======= =======
All highly liquid investments with an original maturity of three months or less are considered cash equivalents.
*Restated, see Note 1.
The accompanying condensed notes are an integral part of these statements.
30
CMS Energy Corporation
Consolidated Statements of Common Stockholders' Equity
(Unaudited)
Three Months Ended Nine Months Ended Twelve Months Ended
September 30 1998 1997* 1998 1997* 1998 1997*
In Millions
Common StockCOMMON STOCK
At beginning and end of period $ 1 $ 1 $ 1 $ 1
$ 1 $ 1
------ ------ ------ ------ ----- ------
Other Paid-in Capital- ----------------------------------------------------------------------------------------------------------------
OTHER PAID-IN CAPITAL
At beginning of period 2,297 2,0752,594 2,267 2,045 2,103 1,9792,287 2,062
Redemption of affiliate's preferred stock (2) -- (2) --
Common stock reacquired - (2) - (2) --- -- (3) (2)
Common stock issued:
CMS Energy 26 18 28 45 56 206 120332 219
Class G 1 2 4 4 7 6
------ ------ ------ ------ ------ ------5 8
--------------------------------------------------
At end of period 2,316 2,103 2,316 2,103 2,316 2,103
------ ------ ------ ------ ------ ------
Revaluation Capital2,619 2,287 2,619 2,287
- ----------------------------------------------------------------------------------------------------------------
REVALUATION CAPITAL
At beginning of period (9) (6) (3) (6) (6) (6) (4) (7)
Change in unrealized investment-gain (loss) (a) (4) 3 (10) 2 (10) 2 (12) 3
------ ------ ------ ------ ------ --------------------------------------------------------
At end of period (16) (4) (16) (4) (16) (4)
------ ------ ------ ------ ------ ------
Foreign Currency Translation(13) (3) (13) (3)
- ----------------------------------------------------------------------------------------------------------------
FOREIGN CURRENCY TRANSLATION
At beginning of period (123) -(136) (96) - (45) -(94) --
Change in foreign currency translation (a) (9) (45) (36) (45) (87) (45)
------ ------ ------ ------ ------ ------(5) 2 (47) (94)
--------------------------------------------------
At end of period (132) (45) (132) (45) (132) (45)
------ ------ ------ ------ ------ ------
Retained Earnings (Deficit)(141) (94) (141) (94)
- ----------------------------------------------------------------------------------------------------------------
RETAINED EARNINGS (DEFICIT)
At beginning of period (292) (435)(234) (379) (504) (406) (514)(324) (454)
Consolidated net income (a) 81 60 234 185 293 22398 88 295 254
Common stock dividends declared:
CMS Energy (33) (28) (94) (80) (123) (105)(35) (30) (134) (113)
Class G (3) (3) (8) (7) (11) (10)
------ ------ ------ ------ ------ ------(11)
--------------------------------------------------
At end of period (247) (406) (247) (406) (247) (406)
------ ------ ------ ------ ------ ------
Total Common Stockholders' Equity $1,922 $1,649 $1,922 $1,649 $1,922 $1,649
====== ====== ====== ====== ====== ======(174) (324) (174) (324)
--------------------------------------------------
TOTAL COMMON STOCKHOLDERS' EQUITY $2,292 $1,867 $2,292 $1,867
================================================================================================================
(a) Disclosure of Comprehensive Income:DISCLOSURE OF COMPREHENSIVE INCOME:
Revaluation capital
Unrealized investment-gain (loss), net of tax of
$5, $-$2, $(1), $5 $-, $6 and $(1)$(2), respectively $ (10)(4) $ 23 $ (10) $ 2 $ (12) $ 3
Foreign currency translation (9) (45) (36) (45) (87) (45)(5) 2 (47) (94)
Consolidated net income 81 60 234 185 293 223
------ ------ ------ ------ ------ ------98 88 295 254
-------------------------------------------------
Total Consolidated Comprehensive Income $ 6289 $ 1793 $ 188238 $ 142 $ 194 $ 181
====== ====== ====== ====== ====== ======
* Restated, see Note 1.
The accompanying condensed notes are an integral part of these statements.163
=================================================
* RESTATED FOR CHANGE IN METHOD OF ACCOUNTING FOR OIL AND GAS OPERATIONS FROM
FULL COST METHOD TO SUCCESSFUL EFFORTS METHOD. THE ACCOMPANYING CONDENSED NOTES
ARE AN INTEGRAL PART OF THESE STATEMENTS.
27
3128
CMS Energy CorporationENERGY CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
These Condensed Notes to Consolidated Financial Statements
These Consolidated Financial Statements and their related Condensed NotesConsolidated Financial Statements should
be read along with the Consolidated Financial Statements and Notes contained in
the 19971998 Form 10-K and the restated financial information in
a Form 8-K dated July 30, 1998 of CMS Energy, 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, Basis of Presentation And Changes of Significant
Accounting Policies
Corporate Structure and Basis of PresentationCORPORATE STRUCTURE AND BASIS OF PRESENTATION
CORPORATE STRUCTURE AND BASIS OF PRESENTATION
CMS Energy Corporation is the parent holding company of Consumers and
Enterprises. Consumers, is a combination electric and gas utility company serving
the Lower Peninsula of Michigan, and is the principal subsidiary of CMS Energy.
Consumers' customer base includes a mix of residential, commercial and
diversified industrial customers, the largest segment of which is the
automotive industry. Enterprises, through subsidiaries, is engaged in several domestic and
international energy-related businesses including: acquisition,
developmentnatural gas transmission,
interstate transportation, storage and operation ofprocessing; independent power production facilities;production;
oil and gas exploration and production; transmission, storage, and processing
of natural gas; energy marketing, services and trading;
and international energy distribution. On March 29, 1999, CMS Energy usescompleted
the equity methodacquisition of Panhandle from Duke Energy, as discussed further below.
Panhandle is primarily engaged in the interstate transportation, storage and
processing of natural gas.
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 for investments inprinciples and use
management's estimates where appropriate. Affiliated companies and partnerships where it(where CMS Energy
has more than a 20 percent but less than a majority ownership interest and includes these results in operating
income.interest) are
accounted for by the equity method. For the three nine and twelve monthtwelve-month periods ended
September 30,
1998,March 31, 1999, undistributed equity earnings were $2 million, $36$16 million and $54$94 million,
respectively, compared to $19 million, $40$17 million and $47$62 million for the three nine and
twelve monthtwelve-month periods ended September 30,
1997.March 31, 1998.
Foreign currency translation adjustments relating to the operation of CMS
Energy's long-term investments in foreign countries are included in common
stockholders' equity. As of September 30, 1998 the cumulative foreign
currency translation adjustment was $132 million relating primarily to the
U.S. and Australian dollar exchange rate fluctuations related to Loy Yang.
From January 1, 19981999 through September 30, 1998,March 31, 1999, the change in
the foreign currency translation adjustment totaled $36 million.$5 million, net of after-tax
hedging proceeds.
NEW ACCOUNTING RULES
In October 1998,1999, CMS Energy changedimplemented SOP 98-1, Accounting for the nameCosts of its oilComputer
Software Developed for Internal Use, and gas
explorationSOP 98-5, Reporting on the Costs of
Start-Up Activities. Application of these standards has not had a material
effect on CMS Energy's financial position, liquidity, or results of operations.
Effective January 1, 1999, CMS Energy adopted EITF Issue 98-10, Accounting for
Energy Trading and production businessRisk Management Activities, which requires mark-to-market
accounting for energy contracts
28
29
entered into for trading purposes. Under mark-to-market accounting, gains and
losses resulting from changes in market prices on contracts entered into for
trading purposes are reflected in current earnings. The after-tax mark-to-market
adjustment resulting from the adoption of EITF 98-10 had an immaterial effect on
CMS Energy's consolidated financial position, results of operations and cash
flows as of March 31, 1999. For energy contracts that are hedges of non-trading
activities, CMS Energy will continue to use accrual accounting until it adopts
SFAS 133, Accounting for Derivative Instruments and Hedging Activities, which
will be effective January 1, 2000.
OIL AND GAS PROPERTIES
CMS Oil and Gas Company, formerly
known as CMS NOMECO Oil & Gas Co.
In 1997, the FASB issued SFAS 130, Reporting Comprehensive Income. This
statement, which is effective for 1998 financial statement reporting,
establishes standards for reporting and display of comprehensive income
and its components. Equity adjustments related to unrealized investment
gains and losses (net of tax) and foreign currency translation, along with
consolidated net income, comprise comprehensive income.
Change in Method of Accounting for Property Taxes
During the first quarter of 1998, Consumers implemented a change in the
method of accounting for property taxes so that such taxes are recognized
during the fiscal period of the taxing authority for which the taxes are
levied. This change provides a better matching of property tax expense
with the services provided by the taxing authorities, and is considered
the most acceptable basis of recording property taxes. Prior to 1998,
Consumers recorded property taxes monthly during the year following the
assessment date (December 31). The cumulative effect of this one-time
change in accounting increased other income by $66 million, and earnings,
net of tax, by $43 million or $.40 per share. The pro forma effect on
prior years' consolidated net income of retroactively recording property
taxes as if the new method of accounting had been in effect for all
periods presented is not material.
Change in Method of Accounting For Investments in Oil and Gas Properties
CMS Oil and Gas elected to convert effective January 1, 1998 from the full
cost method to the successful efforts method of accounting for its
investments in oil and gas properties. CMS Oil and Gas believes this
accounting change will more accurately present the results of its
exploration and development activities and minimize asset write-offs
caused by periodic price swings, which may not be representative of
overall or long-term markets. In addition, the FASB has stated a
preference for the use of successful efforts accounting. Nitrotec, in
which CMS Gas Transmission has an equity investment, also elected to
convert effective January 1, 1998 from the full cost method of accounting
to the successful efforts method of accounting. Accordingly, all prior
period financial statements have been restated to conform with successful
efforts accounting. The effect, after tax, of the change in accounting
method as of December 31, 1997, was a reduction to retained earnings of
$175 million for CMS Oil and Gas and $15 million for CMS Gas
Transmission, primarily attributable to a decrease in net plant and
property and deferred tax liability of $270 million and $95 million,
respectively, for CMS Oil and Gas and a $15 million decrease in CMS Gas
Transmission's equity investment in Nitrotec. For the three, nine and
twelve months ended September 30, 1997, the combined effects of the
changes in accounting method resulted in decreases to net income of $6
million ($.06 per share), $19 million ($.19 per share), and $25 million
($.26 per share), respectively.
Oil and Gas Properties
CMS Oil and Gas utilizesfollows the successful efforts method of accounting for its
investments in oil and gas properties. CMS Oil and Gas capitalizes the costs of
property acquisitions, successful exploratory wells, all development costs, and
support equipment and facilities when incurred. It expenses unsuccessful
exploratory wells when they are determined to be non-productive. CMS Oil and Gas
also charges to expense production costs, overhead, and all exploration costs
other than exploratory drilling as incurred. Depreciation, depletion and
amortization of proved oil and gas properties is determined on a field-by-field
basis using the unit-of-
productionunits-of-production method over the life of the remaining proved
reserves.
Business CombinationUTILITY REGULATION
Consumers accounts for the effects of regulation based on a regulated utility
accounting standard (SFAS 71). As a result, the actions of regulators affect
when revenues, expenses, assets and liabilities are recognized.
In October 1998,March 1999, Consumers received MPSC electric restructuring orders which,
among other things, identified the terms and timing for implementing electric
restructuring in Michigan. Based upon these orders, Consumers expects to
implement retail open access for its electric customers in September 1999, and
therefore, Consumers discontinued application of SFAS 71 for the energy supply
portion of its business in the first quarter of 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 established a regulatory asset for a
corresponding amount. The regulatory asset is collectible as part of the
Transition Costs which are recoverable through the regulated transmission and
distribution portion of Consumers' business as approved by an MPSC order in
1998. This order also allowed Consumers to recover any energy supply related
regulatory assets, plus a return on any unamortized balance of those assets,
from its transmission and distribution customers. According to current
accounting standards, Consumers can continue to carry its energy supply related
regulatory assets or liabilities for the part of the business subject to
regulatory change if legislation or an MPSC rate order allows the collection of
cash flows, to recover specific costs or to settle obligations, from its
regulated transmission and distribution customers. At March 31, 1999, Consumers
had a net investment in energy supply facilities of $839 million included in
electric plant and property.
ACQUISITION
In March 1999, CMS Energy exchanged 1.4 million sharescompleted the acquisition of CMSPanhandle from Duke
Energy Common Stock for 100%a cash payment of the outstanding common stock$1.9 billion and existing Panhandle debt of Continental
Natural Gas, Inc. ("CNG"), an energy company engaged in gathering,
processing, purchasing and marketing natural gas and natural gas liquids
in Oklahoma and Texas.$300
million. The acquisition of CNG will behas been accounted for using the purchase method of
accounting. Accordingly, the purchase price has been preliminarily allocated to
the assets purchased and the liabilities assumed based upon the fair values at
the date of
29
30
acquisition, with the tentative excess purchase price of approximately $700
million classified as goodwill to be amortized on a poolingstraight-line basis over a
period of interests,forty years.
Unaudited pro forma amounts for operating revenue, consolidated net income,
basic earnings per share and all consolidated financial data fortotal assets, as if the periods
subsequent to December 31, 1997 will be restated to include the financial
data of CNG. The financial data of the pooled companies prior toacquisition had occurred on
January 1, 1998, will not be materially different from that previously reported by
CMS Energy, and thus will not be restated.are as follows:
In Millions, except per share amounts
- ----------------------------------------------------------------------------------------------------------------
Year ended
Three Months Ended March 31, December 31,
1999 1998 1998
- ----------------------------------------------------------------------------------------------------------------
Operating revenue $ 1,650 $ 1,494 $ 5,566
Consolidated net income 109 105 320
Basic earnings per share .90 .92 2.66
Diluted earnings per share .88 .90 2.63
- ----------------------------------------------------------------------------------------------------------------
March 31, December 31,
1999 1998 1998
- ----------------------------------------------------------------------------------------------------------------
Total assets $13,767 $11,974 $13,784
- ----------------------------------------------------------------------------------------------------------------
2: Uncertainties
Consumers' Electric Business Unit Contingencies
Electric Environmental Matters: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 periodically review the
effectiveness of the national air quality standards in preventing adverse health
effects, and in 1997 the EPA revised these standards. It is probable that the
1997 standards will result in further limitations on small particulate- related
emissions.
In September 1998, based upon the 1997 standards, the EPA Administrator signed
final regulations requiring the State of Michigan to further limit nitrogen
oxide emissions. Fossil-fueled emitters, such as Consumers' generating units,
can anticipate a reduction in nitrogen oxide emissions by 2003 to only 32
percent of levels allowed for the year 2000. The State of Michigan has one year
to submit an implementation plan. The State of Michigan has filed a lawsuit
objecting to the extent of the required emission reductions. It is unlikely that
the State of Michigan will establish Consumers' nitrogen oxide emissions
reduction target until mid-to-late 1999. Until this target is established, the
estimated cost of compliance discussed below is subject to revision. If a court
were to order the EPA to adopt the State of Michigan's position, compliance
costs could be less than the preliminary estimated amounts.
The preliminary estimate of capital expenditures to reduce nitrogen
oxide-related emissions for Consumers' fossil-fueled generating units is
approximately $290 million, plus $10 million per year for operation and
maintenance costs. Consumers anticipates that these capital expenditures will be
incurred between 1999
30
31
and 2003. Consumers may need an equivalent amount of capital expenditures and
operation and maintenance costs to comply with the new small particulate
standards.
Consumers' coal-fueled electric generating units burn low-sulfur coal and are
currently operating at or near the sulfur dioxide emission limits that will be
effective in the year 2000. During the past few years, in order to comply with
the Clean Air Act, Consumers incurred capital expenditures totaling $46$55 million
to install equipment at certain generating units. Consumers estimates an
additional $16 million of capital expenditures for ongoing and proposed
modifications at otherthe remaining coal-fueled units to be an additional $26 million by themeet year 2000.2000 requirements.
Management believes that these expenditures will not materially affect
Consumers' annual operating costs.
Consumers currently operates within all Clean Air Act requirements and
meets current emission limits. The Act requires the EPA to review,
periodically, the effectiveness of the national air quality standards in
preventing adverse health affects. In 1997 the EPA revised these
standards. Monitoring for the new standards is reasonably likely to
result in further limitations on small particulate and ozone related
emissions.
Following completion of the Ozone Transport Assessment Group process and
requests by several Northeastern states, in September 1998, the EPA
Administrator signed final regulations requiring the State of Michigan to
further limit nitrogen oxide emissions. Fossil-fueled emitters, such as
Consumers' generating units, can anticipate reduction in nitrogen oxide
emissions by 2003 to only 32 percent of levels allowed for the year 2000.
The State of Michigan has one year to submit an implementation plan. It
is unlikely that the State of Michigan will establish Consumers' nitrogen
oxide emissions reduction target until mid-to-late 1999. Until this
target is established, the estimated cost of compliance is subject to
significant revision.
The preliminary estimate of capital costs to reduce nitrogen oxide-related
emissions for Consumers' fossil-fueled generating units is approximately
$290 million, plus an additional amount totaling $10 million per year for
operation and maintenance costs. Consumers may need an equivalent amount
of capital expenditures and operation and maintenance costs to comply with
the new small particulate standards. The State of Michigan has objected
to the extent of the required EPA emission reductions. If a court were to
order the EPA to adopt the State of Michigan's position, costs could be
less than the current estimated amounts.
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 properly
recoverable in rates under current ratemaking policies.
Consumers is a so-called 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 $3$2 million and $9
million. At September 30, 1998,March 31, 1999, Consumers has accrued $3 millionthe minimum amount of the
range for its estimated Superfund liability.
While decommissioning Big Rock, Consumers found that some areas of the plant
have coatings that contain both metals and PCBs. Consumers does not
believe that any facility in the United States currently accepts the
radioactive portion of that waste. The cost of removal and
disposal of these materials is currently unknown. These costs wouldThere may be some radioactive
portion of these materials which no facility in the United States will currently
accept. The cost of removal and disposal will constitute part of the cost to
decommission the plant, and will be paid from the decommissioning fund.
Consumers is studying the extent of the contamination and reviewing options.
Stray Voltage: Various parties have sued Consumers relating to the effect
of so-called stray voltage on certain livestock. Claimants contend that
stray voltage results when low-level electrical currents present in
grounded electrical systems are diverted from their intended path.
Consumers maintains a policy of investigating all customer calls regarding
stray voltage and working with customers to address their concerns. It
also has an ongoing mitigation program to modify the service of all
customers with livestock.
In December 1997, the Michigan Supreme Court remanded for further
proceedings a 1994 Michigan trial court decision that refused to allow the
claims of over 200 named plaintiffs to be joined in a single action. The
trial court dismissed all of the plaintiffs except the first-named
plaintiff, allowing the others to re-file separate actions. Of the
original plaintiffs, only 49 re-filed separate cases. All of those 49
cases have been resolved. The Michigan Supreme Court remanded the matter,
finding that the proper remedy for misjoinder was not dismissal, but to
automatically allow each case to go forward separately. Consumers filed a
motion for reconsideration with the Michigan Supreme Court, which was
denied. As a result, 21 individual plaintiffs elected to exercise their
right to proceed with separate actions. Consumers has now resolved all 21
of those cases. As of November 3, 1998, Consumers had 3 individual stray
voltage lawsuits awaiting trial court action, down from 12 cases as
reported at year end 1997.
Anti-Trust:ANTITRUST: In October 1997, two independent power producers sued Consumers and CMS Energy in a
federal court. The suit allegesalleged antitrust violations relating to contracts which
Consumers entered into with some of its customers and claims relating to power
facilities. The plaintiffs
claim damages of $100 million (which a court can treble in antitrust cases
as provided by law). In September 1998,On March 31, 1999, the court issued an opinion and order granting
CMS Energy's motion to dismiss. The court has not yet
ruled on Consumers' motion to dismiss. Consumers believesfor summary judgement, resulting in the lawsuit is
without merit and will vigorously defend against it, but cannot predictdismissal of the outcome ofcase.
The plaintiffs are appealing this matter.
Consumers' Electric Business Unit Rate Matters
Electric Proceedings:decision.
CONSUMERS' ELECTRIC UTILITY RATE MATTERS
ELECTRIC PROCEEDINGS: In 1996, the MPSC issued a final order that authorized
Consumers to recover costs associated with the purchase of the additional 325 MW
of MCV Facility capacity (see "Power Purchases from the MCV Partnership" in this
Note) and 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. It also
established an experimental direct-access program. Customers having a maximum
demand of at least 2 MW or greater are eligible to purchase generation services directly
from any eligible third-party power supplier and Consumers wouldwill transmit the
power for a fee. The direct-access program is limited to 134 MW of load. In
accordance with the MPSC order, Consumers held a lottery in April 1997 to select
the customers to participate in the direct-access program.
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Subsequently, direct access for a portion of this 134 MW began in late 1997. Consumers
expectsThe
program was substantially filled by the remaining amountend of direct access to begin later in 1998.March 1999.
In January 1998, the Court of Appeals affirmed an MPSC conclusion that the MPSC
has statutory authority to authorize an experimental electric retail wheeling
program. By its terms, noNo retail wheeling has yet occurred pursuant to that program. In
October 1998, the Michigan Supreme Court issued an order granting Consumers'
application for leave to appeal. A decision by the Michigan Supreme Court in
this matter is expectedmay be issued in mid-
1999.
For information on other orders, see the Electric Restructuring section
below.
Electric Restructuring:mid-1999.
ELECTRIC RESTRUCTURING: As part of ongoing proceedings relating to the
restructuring of the electric utility industry in Michigan, the MPSC in June
1997
the MPSC issued an order proposing that beginning January 1, 1998 Consumers transmit
and distribute energy on behalf of competing power suppliers to serve retail
customers. Subsequent to the June 1997 order, the MPSC issued furtherFurther restructuring orders issued in Octoberlate 1997 and in January and February 1998. These ordersearly 1998
provide for: 1) the recovery of estimated Transition Costs of $1.755 billion through
a charge to all direct-access customers purchasing their power from other sources until the
end of the transition period in 2007, subject to an adjustment through a true-up
mechanism; 2) the commencement of the phase-in of direct-accessretail open access in 1998; 3)
the suspension of the power supply cost recovery clause;PSCR clause as discussed below; and 4) all customers to be free to choose
their power suppliers on January 1, 2002. See
"Other Electric Uncertainties" below for further information regarding the
effect of the PSCR suspension on the recovery of MCV Facility capacity
charges. Consumers believes that the Transition Cost surcharge will apply
to all customers beginning in 2002. The recovery of prudent costs of implementing
a direct-accessretail open access program, preliminarily estimated at an additional $200
million, would be reviewed for prudence and recovered via a charge approved by
the MPSC. Nuclear decommissioning costs will also continue to be collected
through a separate surcharge to all customers.
In June 1998, Consumers expects Michigan legislative considerationsubmitted its plan for implementing retail open access
to the MPSC. The primary issues addressed in the plan are: 1) the implementation
schedule; 2) the retail open access service options available to customers and
suppliers; 3) the process and requirements for customers and others to obtain
retail open access service; and 4) the roles and responsibilities for Consumers,
customers and suppliers. In the plan, Consumers proposed to phase in 750 MW of
retail customer load to customers purchasing their power from other sources over
the entire subject1998-2001 period. In March 1999, Consumers received MPSC electric
restructuring orders which generally supported Consumers' implementation plan.
Accordingly, Consumers is in the process of implementing electric industry restructuring in 1998. To be acceptable to Consumers,
the legislation would have to provide for full recovery of Transition
Costs. Consumers expects the legislature to review all of the policy
choices made by the MPSC during the restructuring proceedings to assure
that they are in accord with those that the legislature believes should be
paramount.customer
retail open access.
There are numerous appeals pending at the Court of Appeals relating to the
MPSC's restructuring orders, including appeals by Consumers and Detroit
Edison.Consumers. Consumers believes
that the MPSC lacks statutory authority to mandate industry restructuring, and
its appeal generally is limited to this jurisdictional issue. As a result of an informal process involving consultations with MPSC staff
and other interested parties, as directed in the MPSC's February 1998
order, Consumers submitted to the MPSC in June 1998 its plan for
implementing direct access. The primary issues addressed in the plan are:
1) the implementation schedule; 2) the direct-access service options
available to customers and suppliers; 3) the process and requirements for
customers and others to obtain direct-access service; and 4) the roles and
responsibilities for Consumers, customers and suppliers. Under the
schedule in the plan, Consumers will, over the 1998-2001 period, phase-in
750 MW of retail customer load to direct-access customers. At one time,
300 MW of direct-access load was to be opened for bidding in 1998, and an
additional 150 MW each year from 1999 to 2001. This plan is consistent
with the previous orders regarding the phase-in process. Due to the time
required for the MPSC to review the plan, Consumers does not believe
direct access will commence prior to the first quarter of 1999. For
further information regarding the effects of the restructuring on
accounting methods, see Consumers' Electric Business Unit Outlook -
Electric Application of SFAS 71 in the MD&A. CMS Energy cannot
predict the outcome or timing of electric restructuring on CMS Energy's financial
position, liquidity, or results of operations.
On October 2,As a result of a 1998 MPSC order in connection with the electric restructuring
program, the PSCR process was suspended. Under this program, customers buying
electricity from Consumers initiatedas traditional customers will not have their rates
adjusted to reflect the actual costs of fuel and purchased and interchanged
power during the 1998-2001 period. In prior years, any change in power supply
costs was passed through to such customers. In order to reduce the risk of
high energy prices during peak demand periods, Consumers is purchasing
electricity options and contracting to buy electricity during the months of June
through September 1999. Consumers is planning to have sufficient generation and
purchased capacity for a process for16 percent reserve margin in order to provide reliable
service to its electric service customers and to protect itself against
unscheduled plant outages. Under certain circumstances, the solicitationcost of bids to acquire Consumers' rights to 1,240 MW of contractpurchasing
capacity and associated energy under its PPA withon the MCV Partnership. Consumers'
rights to the 1,240 MW of contract capacity and associated energy are
being offered in one 1,240 MW block or in two 620 MW pieces, for the
period from the effective date in 1999 through either September 2007 or
March 2025.
Consumers has reserved the right at any time, in its sole discretion, to
terminate the bidding process or to reject any or all bids. Consumers
will not consummate a transaction unless important customer benefits flow
from that transaction. Any such transaction wouldspot market could be subject to the
approval of Consumers' Board of Directors and obtaining satisfactory rate
making and accounting treatment from the MPSC and the FERC with respect to
the definitive agreements, including any necessary approval by FERC of the
transfer of the 1,240 MW of contract capacity and associated energy.
In an order issued October 12, 1998, the MPSC delayed its consideration of
the auction process until the definitive agreements with the winning
bidder(s) are presented for review, but stated that Consumers' approach
offers a legitimate way to utilize independent market forces to determine
the above-market or stranded portion of Consumers' obligations under the
PPA with the MCV Partnership. Consumers anticipates that such definitive
agreements, if any, will be negotiated by early February 1999 and
appropriate filings will be made with MPSC for consideration during the
first quarter of 1999.
Other Consumers' Electric Business Unit Uncertainties
The Midland Cogeneration Venture:substantial.
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33
OTHER CONSUMERS' ELECTRIC UTILITY UNCERTAINTIES
THE MIDLAND COGENERATION VENTURE: The MCV Partnership, which leases and operates
the MCV Facility, contracted to sell electricity to Consumers for a 35-year
period beginning in 1990 and to supply electricity and steam to Dow. Consumers,
through two wholly owned subsidiaries, holds the following assets related to the
MCV Partnership and MCV Facility: 1) CMS Midland owns a 49 percent general
partnership interest in the MCV Partnership; and 2) CMS Holdings holds, through
FMLP, a 35 percent lessor interest in the MCV Facility.
Summarized Statements of Income for CMS Midland and CMS Holdings-
In Millions
- --------------------------------------------------------------------------
Three Months Ended Nine Months Ended Twelve Months Ended
September 30 1998 1997 1998 1997 1998 1997
- --------------------------------------------------------------------------
Pretax operating
income $13 $18 $36 $36 $46 $45
Income taxes
and other 4 6 11 11 14 13
- -------------------------------------------------------------------------
Net income $ 9 $12 $25 $25 $32 $32
=========================================================================
In Millions
Three Months Ended Twelve Months Ended
March 31 1999 1998 1999 1998
- ------------------------------------------------------------------------------------------------------------------
Pretax operating income $14 $10 $53 $47
Income taxes and other 4 3 16 14
- ------------------------------------------------------------------------------------------------------------------
Net income $10 $ 7 $37 $33
==================================================================================================================
Power Purchases from the MCV Partnership- After September 2007, pursuant
to the terms of the PPA and related undertakings, Consumers will only be
required to pay the MCV Partnership the capacity charge and energy charge
amounts authorized for recovery from electric customers by the MPSC.
Currently, 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
PartnershipFacility's availability, a levelized average capacity charge of 3.77 cents per
kWh and a fixed energy charge and a variable energy charge, based primarily on
Consumers' average cost of coal consumed. The MPSC has, sinceconsumed for all kWh delivered. Since January 1,
1993, Consumers has been permitted Consumersby the MPSC to recover capacity charges
averaging 3.62 cents per kWh for 915 MW, plus a substantial portion of the fixed
and variable energy charges. BeginningSince January 1, 1996, the MPSCConsumers also has alsobeen
permitted Consumers to recover capacity charges for the remaining 325 MW of MCV Facility contract
capacity. The
order approving such recovery indicated that the recoverable capacity charge for the 325 MW would gradually increase fromwith an initial average charge of 2.86 cents per kWh increasing
periodically to an average charge ofeventual 3.62 cents per kWh by 2004 which latter would be collectedand thereafter. Because
the MPSC suspended the PSCR process as parthas already approved recovery of the electric industry restructuring
order (see "Electric Restructuring" in this Note),capacity, Consumers expects to
recover the futurethese increases approved for the 325 MW capacity through an adjustment to the currently frozen PSCR level; this adjustmentlevel
which is currently under consideration by the MPSC. After September 2007, under
the terms of the PPA, Consumers will only be required to pay the MCV Partnership
capacity and energy charges that the MPSC has authorized for recovery from
electric customers.
In March 1999, Consumers signed a long-term power sales agreement to supply PECO
with electric generating capacity under the PPA until September 2007. After a
three-year transition period during which 100 to 150 MW will be sold to PECO,
beginning in 2002 Consumers will sell all 1,240 MW of PPA capacity and
associated energy to PECO. In March 1999, Consumers also filed an application
with the MPSC for accounting and rate-making approvals related to the
transaction. In an order issued on April 30, 1999, the MPSC conditionally
approved the requests for accounting and rate-making treatment to the extent
that customer rates are not increased from their level absent the agreement and
as modified by the order. Consumers is currently studying the conditions
attached to the approval to determine whether there is any need for
clarification of how the conditions would operate under various future scenarios
and whether the conditional approval is acceptable to Consumers.
33
34
Consumers recognized a loss in 1992 for the present value of the estimated
future underrecoveries of power costs under the PPA.PPA based on MPSC recovery
orders. At September 30,March 31, 1999 and March 31, 1998, and December 31,1997, the remaining after-tax present
value of the estimated future PPA liability associated with the 1992 loss
totaled $118$103 million and $117$133 million, respectively. The
increase inAt March 31, 1999, the liability since December 31, 1997 reflects an additional
$37 million accrual ($24 million after-tax) for higher than anticipated
MCV Facility availability levels experienced in prior periods and an
after-tax accretion expense of $8 million, partially offset by after-tax
cash underrecoveries of $31 million. The
undiscounted after-tax amount associated with thethis liability totaled $170 million at September 30, 1998.
The$159
million. These after-tax cash underrecoveries are currently based on the assumption that
the MCV Facility willwould be available to generate electricity 91.5 percent of the
time over its expected life. For the first nine months of
1998Historically the MCV Facility was available 99.3has operated above
the 91.5 percent level. Accordingly, in 1998, Consumers increased its PPA
liability by $37 million. Because the MCV Facility operated above the 91.5
percent level in 1998 and thus far in 1999, Consumers has an accumulated
unrecovered after-tax shortfall of $13 million as of March 31, 1999. If the time, resulting in
$14 million over anticipated after-tax cash underrecoveries. Consumers
believes it will continue to experienceMCV
Facility generates electricity at the 91.5 percent level during the next five
years, Consumers' after-tax cash underrecoveries associated with the PPA in amounts comparable to those shown below.
In Millions
- ----------------------------------------------------------------------
1998 1999 2000 2001 2002
- ----------------------------------------------------------------------
Estimated cash underrecoveries,
net of tax $37 $22 $21 $20 $19
======================================================================
Consumers bases the above estimated underrecoveries, in part, on an
estimate of the future availability of the MCV Facility.would
be as follows.
In Millions
- ------------------------------------------------------------------------------------------------------------------
1999 2000 2001 2002 2003
- ------------------------------------------------------------------------------------------------------------------
Estimated cash underrecoveries, net of tax $26 $21 $20 $19 $18
==================================================================================================================
If the MCV Facility operates at availability levels above management's 91.5
percent estimate overmade in 1992 for the remainder of the PPA, Consumers will need
to recognize additional losses for future underrecoveries larger than amounts previously recorded. Therefore,underrecoveries. In March 1999,
Consumers would experience larger amountsand the MCV Partnership reached an agreement effective January 1, 1999
that will cap availability payments to the MCV Partnership at 98.5 percent. For
further discussion on the impact of cash underrecoveries than
originally anticipated.the frozen PSCR, see "Electric
Restructuring" in this Note. Management will continue to evaluateis evaluating the adequacy of the
accruedcontract loss liability considering actual MCV Facility operations.operations and any other
relevant circumstances.
In February 1998, the MCV Partnership filed a claim of appeal from the January
1998 and February 1998 MPSC orders in the electric utility industry
restructuring. At the same time, the MCV Partnership filed suit in the U.S.
District Court seeking a declaration that the MPSC's failure to provide
Consumers and the MCV Partnership a certain source of recovery of capacity
payments after 2007 deprived the MCV Partnership of its rights under the Public
Utilities Regulatory Policies Act of 1978. The MCV Partnership is seeking to
prohibit the MPSC from implementing portions of the order.
PSCR Matters Related to Power Purchases from the MCV Partnership- As part
of a 1995 decision in the 1993 PSCR reconciliation case, the MPSC
disallowed a portion of the costs related to purchases from the MCV
Partnership and instead assumed recovery of those costs from wholesale
customers. Consumers believed this was contrary to the terms of an
earlier 1993 settlement order and appealed. The MCV Partnership and ABATE
also filed separate appeals of this order. In November 1996, the Court of
Appeals affirmed the MPSC's 1995 decision. The MCV Partnership filed an
application for leave to appeal with the Michigan Supreme Court which was
denied in January 1998. This matter is now closed.
Nuclear Matters: Consumers filed updated decommissioning information with
the MPSC in 1995 that estimated decommissioning costs for Big Rock and
Palisades. In April 1996, the MPSC issued an order in Consumers' nuclear
decommissioning case, which fully supported Consumers' request and did not
change the overall surcharge revenues collected from retail customers.
The MPSC ordered Consumers to file a report on the adequacy of the
surcharge revenues with the MPSC at three-year intervals beginning in
1998. On March 31, 1998, Consumers filed with the MPSC a new
decommissioning cost estimate for Big Rock and Palisades of $294 million
and $518 million (in 1997 dollars) respectively. The estimated
decommissioning costs decreased from previous estimates primarily due to a
decrease in offsite burial costs. Consumers recommended a reallocation of
its existing surcharge between the two plants on January 1, 1999 to
provide additional funds to decommission Big Rock. Consumers filed a
revision to its Post Shutdown Activities Report (formerly decommissioning
report) with the NRC to reflect the shutdown of Big Rock.
Big Rock is being decommissioned. It was closed permanently on August 29,
1997 because management determined that it would be uneconomical to
operate in an increasingly competitive environment. Consumers had
originally scheduled the plant to close May 31, 2000, at the end of the
plant's operating license. Plant decommissioning began in September 1997
and may take five to ten years to return the site to its original
condition.orders.
NUCLEAR MATTERS: In January 1997, the NRC issued its Systematic Assessment of
Licensee Performance report for Palisades. The report rated all areas as good,
unchanged from the previous assessment.good.
The NRC suspended the Systematic
Assessment of Licensee Performancethis same assessment process for all licensees.licensees in 1998. Until
such time as the NRC completes its review of processes for assessing performance
at nuclear power plants, the Plant Performance Review is being used to provide
an assessment of licensee performance. Palisades received its performance review
dated March 26, 1999 in which the NRC stated that the overall performance at
Palisades was to have been reevaluated in September 1998.acceptable.
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, 1998March 31,
1999 Consumers had loaded 13 dry storage casks with spent nuclear fuel at
Palisades. ConsumersPalisades and plans to load five additional casks at Palisades in 1999 pending approval by
the NRC. In June 1997, the NRC approved Consumers' process for unloading spent
fuel from a cask at
Palisades previously discovered to have minor weld flaws. Consumers
intends to transfer the spent fuel to a new transportable cask when one is
available.
A planned outage34
35
Consumers maintains insurance coverage against property damage, debris removal,
personal injury liability and other risks that are present at its nuclear
generating facilities. Consumers also maintains coverage for refueling and maintenancereplacement power
costs during prolonged accidental outages at Palisades was completed
June 7, 1998. Consumers replaced 60 nuclear fuel assemblies in the
plant's reactorPalisades. Insurance would not
cover such costs during the outage.first 17 weeks of any outage, but would cover most
of such costs during the next 58 weeks of the outage, followed by reduced
coverage to 80 percent for two additional years. If certain covered losses occur
at its own or other nuclear plants similarly insured, Consumers could be
required to pay maximum assessments of $15 million in any one year to NEIL under
the nuclear liability secondary protection program; $88 million per occurrence,
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 to it 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 vessel materials over time
due to operation in a radioactive environment. Based on continuing
analysis of data inmaterials. 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. 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.
NUCLEAR PLANT DECOMMISSIONING: Consumers Gas Group Contingencies
Gas Environmental Matters:collected $51 million in 1998 from its
electric customers for decommissioning of its two nuclear plants. Amounts
collected from electric retail customers and deposited in trusts (including
trust earnings) are credited to accumulated depreciation. On March 22, 1999,
Consumers received a decommissioning order from the MPSC that estimated
decommissioning costs for Big Rock and Palisades to be $304 million and $541
million (in 1998 dollars), respectively. Consumers' site-specific
decommissioning cost estimates for Big Rock and Palisades assume that each plant
site will eventually be restored to conform with the adjacent landscape, and all
contaminated equipment will be disassembled and disposed of in a licensed burial
facility. The MPSC order also reduced annual decommissioning surcharges by $4
million a year and required Consumers to file revised decommissioning surcharges
for Palisades that incorporate a gradual reduction in the decommission trust's
equity investments following the plant's retirement. On April 21, 1999,
Consumers filed with the MPSC a revised decommissioning surcharge for Palisades
and anticipates a revised MPSC order in late 1999 or early 2000. If approved,
the annual decommissioning surcharges for Palisades would be reduced by an
additional $3 million a year. After retirement of Palisades, Consumers plans to
maintain the facility in protective storage if radioactive waste disposal
facilities are not available. Consumers will incur most of the Palisades
decommissioning costs after the plant's NRC operating license expires. When the
Palisades' NRC license expires in 2007, the trust funds are currently estimated
to have accumulated $677 million. Consumers estimates that at the time Palisades
is fully decommissioned in the year 2046, the trust funds will have provided
$1.9 billion, including trust earnings, over this decommissioning period. At
March 31, 1999, Consumers had an investment in nuclear decommissioning trust
funds of $386 million for Palisades and $179 million for Big Rock.
Big Rock was closed permanently in 1997 because management determined that it
would be uneconomical to operate in an increasingly competitive environment. The
plant was originally scheduled to close on May 31, 2000, at the end of the
plant's operating license. The MPSC has allowed Consumers to continue collecting
decommissioning surcharges through December 31, 2000. Plant decommissioning
began in 1997 and may take five to ten years to return the site to its original
condition. For the first three months of 1999, Consumers spent $14 million for
the decommissioning and withdrew $12 million from the Big Rock nuclear
35
36
decommissioning trust fund. In total, Consumers has spent $88 million for the
decommissioning and withdrew $81 million from the Big Rock nuclear
decommissioning trust fund. These activities had no impact on net income.
CONSUMERS GAS GROUP 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, including some 23
sites that formerly housed manufactured gas plant facilities, even those in
which it has a partial or no current ownership interest. In 1998By late 1999, Consumers
plansexpects to study indoor air issues at
residences on somehave completed sufficient investigation of the 23 sites to make a
more accurate estimate of remediation methods and ground water impacts or surface soil impacts
at other sites.costs. 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. Data available to Consumers andestimates its continued internal review
have resulted in an estimate for all costs related to
investigation and remedial action for all 23 sites of between $48 million and $98
million, of which Consumers accrued a liability for $48 million. These estimates
are based on undiscounted 1998 costs. As of September 30,1998,March 31, 1999, Consumers has a remainingan
accrued liability of $46$48 million and a regulatory asset for approximately the
same amount. 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.
According to an MPSC rate order issued in
1996, Consumers will deferdefers and amortize,amortizes over a period of ten years, environmental
clean-up costs above the amount currently being recovered in rates. Rate
recognition of amortization expense will not begin until after a prudence review
in a general rate case. The order authorizesConsumers is allowed current recovery of $1 million
annually. Consumers has initiated a
lawsuitlawsuits against certain insurance companies
regarding coverage for some or all of the costs that it may incur for these
sites.
Consumers Gas Group Matters
Gas Restructuring:CONSUMERS GAS GROUP MATTERS
GAS RESTRUCTURING: In December 1997, the MPSC approved Consumers' application to
implement a statewidean experimental gas transportation pilot
program. Consumers' expanded experimental program, which will extend over a
three-year period, eventually allowing 300,000 residential, commercial and
industrial retail gas sales customers to choose their gas commodity supplier.
The program is voluntary forand participating natural gas customers. Participating customers are being selected on
a first-come, first-served basis, up to a limit of 100,000 customers beginning April 1, 1998.per year. As of October 23, 1998,April
19,1999, more than 80,000142,000 customers chose alternative gas suppliers,
representing approximately 2434 bcf of gas load. Of these alternative gas suppliers, one
was a CMS Energy affiliate. UpUnder traditional regulation,
Consumers had not been allowed to 100,000 more customers may be added
beginning April 1 of eachbenefit from reducing its cost of the
next two years.commodity supplied to its customers, so the loss of commodity sales to these
customers will not have any impact on net income. Customers choosing to remain
as sales customers of Consumers will not see a rate change in their natural gas
rates. The order allowing the implementation of thisThis three-year program: 1) suspends Consumers' gas cost recoveryGCR clause, effective
April 1, 1998,
for a three-year period, establishing a gas commodity cost at a fixed rate of $2.84 per
mcf;mcf, allowing Consumers the opportunity to benefit by reducing its cost of the
commodity; 2) establishes an earnings sharing mechanism that will
provide for refunds towith customers if
Consumers' earnings during the three-
year term of the program exceed certain pre-determined levels; and 3) establishes a
gas transportation code of conduct that addresses concerns
about the relationship between
Consumers and marketers, including its affiliated marketers. This experimental program will allow competing gas
suppliers, including marketers and brokers, to market natural gas to a
large number of retail customers in direct competition with Consumers. In January 1998,
the Attorney General, ABATE and other parties filed claims of appeal regarding
the program with the Court of Appeals.
For further
information regardingConsumers uses gas purchase contracts to limit its risk associated with
increases in its gas price above the effects$2.84 per mcf during the three-year
experimental gas program. It is management's intent to take physical delivery of
the restructuringcommodity and failure could result in a significant penalty for
nonperformance. At March 31, 1999, Consumers had an exposure to gas price
increases if the ultimate cost of gas was to exceed $2.84
36
37
per mcf for the following volumes: 7 percent of its 1999 requirements; 55
percent of its 2000 requirements; and 55 percent of its first quarter 2001
requirements. Additional contract coverage is currently under review. The gas
purchase contracts currently in place were consummated at prices less than $2.84
per mcf. The gas purchase contracts are being used to protect against gas price
increases in a three-year experimental gas program where Consumers is recovering
from its customers $2.84 per mcf for gas.
PANHANDLE REGULATORY MATTERS
Effective August 1996, Trunkline placed into effect a general rate increase,
subject to refund. Hearings were completed in October of 1997 and initial
decisions by a FERC ALJ were issued on accounting
methods, see Consumers' Gas Group Outlook - Applicationcertain matters in May 1998 and on the
remainder of SFAS 71the rate proceedings in November 1998. Responses to the MD&A.
Other Uncertainitiesinitial
decisions were provided by Trunkline to FERC following the issuance of the
initial decisions. In May 1999, FERC issued an order remanding certain matters
back to the ALJ for further proceedings.
In conjunction with a FERC order issued in September 1997, certain natural gas
producers were required to refund previously collected Kansas ad-valorem taxes
to interstate natural gas pipelines. These pipelines were ordered to refund
these amounts to their customers. All payments are to be made in compliance with
prescribed FERC requirements. At March 31, 1999 and December 31, 1998, accounts
receivable included $51 million and $50 million, respectively, due from natural
gas producers, and other current liabilities included $51 million and $50
million, respectively, for related obligations.
In June 1998, Trunkline filed a petition with the FERC to abandon 720 miles of
its 26-inch diameter pipeline that extends from Longville, Louisiana to Bourbon,
Illinois. Trunkline requested permission to transfer the pipeline to an
affiliate, which has entered into an option agreement with Aux Sable for
potential conversion of the line to allow transportation of hydrocarbon vapors.
Trunkline has requested FERC to grant the abandonment authorization in time to
separate the pipeline from existing facilities and allow Aux Sable to convert
the pipeline to hydrocarbon vapor service by October 1, 2000, if the option is
exercised. The abandonment would reduce Trunkline's certificated capacity from
the current level of 1,810 Mdth/d to 1,555 Mdth/d, but will have no adverse
effect on Trunkline's ability to meet all of its firm service obligations. The
filing is pending FERC action.
OTHER UNCERTAINTIES
CMS Generation Environmental Matters:GENERATION ENVIRONMENTAL MATTERS: CMS Generation does not currently expect
to incur significant capital costs if any, at its power facilities to comply with
current environmental regulatory standards.
Capital Expenditures:CAPITAL EXPENDITURES: CMS Energy estimates capital expenditures, including
investments in unconsolidated subsidiaries and new lease commitments, of $1.340 billion for 1998, $3.585$3.635
billion for 1999, (whichwhich includes approximately $2.2 billion for pendingthe acquisition
of the
Panhandle, Companies), and $1.390$1.575 billion for 2000.2000, and $1.205 billion for 2001. For further
information, see the Capital Resources and Liquidity-Capital Expenditures in the
MD&A.
Other:OTHER: As of September 30,December 31, 1998, CMS Energy and Enterprises have guaranteed up to
$415$539 million in contingent obligations of unconsolidated affiliates and related
parties.
37
38
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 CapitalizationSHORT-TERM AND LONG-TERM FINANCINGS, AND CAPITALIZATION
CMS Energy:ENERGY: CMS Energy's Senior Credit Facilities consist of a $600 million
three-year revolving credit facility and a five-year $125 million term loan
facility. Additionally, CMS Energy has unsecured lines of credit and letters of
credit in an aggregate amount of $167$361 million. At September 30, 1998,March 31, 1999, the total
amount utilized under the Senior Credit Facilities was $407$687 million, including
$47 million of contingent obligations, and under the unsecured lines of credit
and letters of credit was $51$94 million. Of the $687 million outstanding at March
31, 1999, approximately $500 million was utilized to fund the acquisition of
Panhandle.
At September 30, 1998March 31, 1999, CMS Energy had utilized $600 million of a bridge loan
facility to partially fund the acquisition of Panhandle. The bridge loan has $123a
weighted-average interest rate of 5.94 percent and a term of six months.
In January 1999, CMS Energy received net proceeds of approximately $473 million
from the sale of $480 million of senior notes. In February 1999, CMS Energy
received net proceeds of approximately $296 million from the sale of $300
million of senior notes. Proceeds from these offerings were used to repay debt
and for general corporate purposes.
At March 31, 1999, CMS Energy had $116 million of Series A GTNs, $125$123 million of
Series B GTNs, $150 million of Series C GTNs, and $198$200 million of Series D GTNs, and
$79 million of Series E GTNs issued and outstanding with weighted average
interest rates of 7.87.9 percent, 7.9 percent, 7.7 percent, 7.0 percent, and 7.06.9
percent, respectively.
In January 1998, a Delaware statutory business trust established by CMS
Energy sold $180 million of certificates due January 15, 2005 in a public
offering. In exchange for those proceeds, CMS Energy sold to the trust
$180 million aggregate principal amount of 7 percent Extendible Tenor Rate
Adjusted Securities due January 15, 2005. Net proceeds to CMS Energy from
the sale totaled $176 million.
In March 1998, CMS Energy and an affiliated business trust filed a shelf
registration statement with the SEC pursuant to Rule 415 of the Securities
Act, for the issuance and the sale of an additional $200 million of CMS
Energy Common Stock, Class G Common Stock, subordinated debentures, stock
purchase contracts, stock purchase units, and Trust Preferred Securities.
In August 1998,April 1999, CMS Energy filed a shelf registration statement with the
SEC pursuant to Rule 415 of the Securities Act, for the issuance
and the
sale of $400$375 million of General Term Notes Series E.
On November 10, 1998, CMS Energy sold 4.5 million new shares of CMS Energy
Common Stock in a block trade. The net proceeds of aproximately $208
million will be used for general corporate purposes.
The primary asset of CMS Energy Trust I is $178 million principal amount
of 7.75 percent convertiblesenior and subordinated debentures due 2027 from CMS
Energy.
Consumers:debt securities.
CONSUMERS: At November 1, 1998,March 31, 1999, Consumers had remaining FERC authorization to: 1)to issue or
guarantee, through June 2000, up to $900 million of short-term securities
outstanding at any one time; 2)time and to guarantee, through 1999, up to $25 million in
loans made by others to residents of Michigan for making energy-related home
improvements; and 3)improvements. Consumers also had remaining FERC authorization to issue, through
June 2000, up to $900$475 million and $425 million of long-term securities with
maturities up to 30 years for refinancing purposes.purposes and for general corporate
purposes, respectively.
38
39
Consumers has an unsecured $425 million credit facility and unsecured lines of
credit aggregating $130 million. These facilities are available to finance
seasonal working capital requirements and to pay for capital expenditures
between long-term financings. At September 30, 1998,March 31, 1999, a total of $302$221 million was
outstanding at a weighted average interest rate of 6.35.6 percent, compared with
$389$245 million outstanding at September 30, 1997,March 31, 1998, at a weighted average interest rate
of 6.2 percent. In January 1998,1999, Consumers entered intorenegotiated a variable-to-fixed
interest rate swapsswap totaling $300 million. These
swap arrangements have had an immaterial effect on$175 million in order to reduce the impact of
interest expense.rate fluctuations.
Consumers also has in place a $500 million trade receivables sale program. At
September 30,March 31, 1999 and 1998, and 1997, receivables sold under the program totaled $307$344 million
and $250$340 million, respectively. Accounts receivable and accrued revenue in the
Consolidated Balance Sheets have been reduced to reflect receivables sold.
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 following table describes the new issuances of long-term financings
which have occurred during 1998 through early November 1998.
In
Millions
- -------------------------------------------------------------------------
Month Interest Principal
Issued Maturity Rate (%) Amount Use of Proceeds
- -------------------------------------------------------------------------
Senior Notes (a) February 2008 6.375 $ 250 Pay down First
Mortgage Bonds
and general
corporate purposes
Senior Notes (a) March 2018 6.875 225 Pay down First
Mortgage Bonds and
other long-term debt
Senior Notes (a) May 2008 6.2 (b) 250 Pay down First
Mortgage Bonds,issued long-term bank debt and general corporate
purposes
Long-Term
Bank Debt May 2001-2003 6.05 (d) 225 Pay down long-term
bank debt and general
corporate purposes
Senior Notes (a) June 2018 6.5 (c) 200 Pay down First Mortgage
Bonds and general
corporate purposes
Senior Notes (e) October 2028 6.5 150 Pay down long-term
bank debt and
general corporate
purposes
- ------------------------------------------------------------------------
Total $1,300
========================================================================
(a) The Senior Notes are secured by Consumers First Mortgage Bonds issued
contemporaneouslyof $15 million in a similar amount.
(b) The interest rate may be resetFebruary 1999, maturing
in 2003.
(c) The interest rate will be reset in June 2005.
(d) The interest rate is variable; weighted average interest rate upon
original issuance was 6.05 percent.
(e) The Senior Notes are secured by Consumers First Mortgage Bonds issued
contemporaneously in a similar amount and are insured for full debt
service.
The following table describes the retirements of long-term financings
which have occurred during 1998 through early November 1998.
In
Millions
- ----------------------------------------------------------------------
Month Interest Principal
Retired Maturity Rate (%) Amount
- ----------------------------------------------------------------------
First Mortgage Bonds February 1998 8.75 $248
Long-Term Bank Debt February 1998 6.4 (a) 50
First Mortgage Bonds March 2001-2002 7.5 119
First Mortgage Bonds April 2023 7.375 36
First Mortgage Bonds May 1998 6.875 43
Long-Term Bank Debt May 1998-1999 6.3 (b) 350
First Mortgage Bonds July 1999 8.875 136
First Mortgage Bonds October 1998 6.625 45
Long-Term Bank Debt November 2001-2003 6.05 50
- ----------------------------------------------------------------------
Total $1,077
======================================================================
(a) The interest rate was variable; weighted average interest rate at
December 31, 1997 was 6.4 percent.
(b) The interest rate was variable; weighted average interest rate at
March 31, 1998 was 6.3 percent.
Consumers had unsecured, variable rate long-term bank debt with an
outstanding balance at September 30, 1998 and 1997 of $225 million and
$400 million, respectively. At September 30, 1998 and 1997 the debt
carried weighted average interest rates of 6.1 percent and 6.3 percent,
respectively. In February 1998, Consumers retired $50 million of its $400
million unsecured long-term bank debt. In May 1998, Consumers refinanced
the remaining $350 million unsecured long-term bank debt, in part with
$225 million unsecured long-term bank debt. To cover the remaining $125
million of bank debt refinancing, in May 1998 Consumers issued $250
million of senior notes due 2008,2002, at an initial interest rate of 6.25.3 percent. The
$125 million balance of senior notes due 2008 wasProceeds from this
issuance were used for repurchasing
$36 million of 7.375 percent First Mortgage Bonds and for general corporate purposes.
On April 1, 1999, Consumers redeemed all of its eight million outstanding shares
of the $2.08 preferred stock at $25.00 per share.
Under the provisions of its Articles of Incorporation, at September 30,
1998, Consumers had $295$308
million of unrestricted retained earnings available to pay common dividends.dividends at
March 31, 1999. In October 1998,January 1999, Consumers declared and paid a $68$97 million
common dividenddividend.
PANHANDLE: In March 1999, CMS Energy, through its subsidiary CMS Panhandle
Holding, received net proceeds of approximately $789 million from the sale of
$800 million of senior notes issued by CMS Panhandle Holding. Proceeds from this
offering were used to be paid in November 1998.fund the acquisition of Panhandle.
CMS OIL AND GAS: CMS Oil and Gas has a $225 million revolving credit facility
which was originally scheduled to convert to term loans maturing from March 1999
through March 2003. However, CMS Oil and Gas and the banks are currently
negotiating the maturity and other terms of the facility. CMS Oil and Gas
anticipates a mutually satisfactory conclusion of the negotiations prior to the
presently stipulated termination date of the extended revolving credit facility
on May 31, 1999.
4: Earnings Per Share and DividendsEARNINGS PER SHARE AND DIVIDENDS
Earnings per share attributable to Common Stock for the three nine and twelve month periodsmonths
ended September 30, 1998March 31, 1999 reflect the performance of the Consumers Gas Group. The
Class G Common Stock has participated in
earnings and dividends from its original issue date in July 1995. The
allocation of earnings attributable to each class of common stockCommon 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 Retained Interestauthorized but unissued shares
of Class G Common Stock not held by holders of the Outstanding Shares during the
period. The earnings attributable to Class G Common Stock on a per share basis
for the ninethree months ended September 30,March 31, 1999
39
40
and 1998
and 1997 are based on 25.3825.62 percent and 24.6525.16 percent, respectively, of the
income of Consumers Gas Group.
Computation of Earnings Per Share:
In Millions, Except Per Share Amounts
- ------------------------------------------------------------------------------
Three Months Nine Months Twelve Months
Ended Ended Ended
September 30 September 30 September 30
1998 1997 1998 1997 1998 1997
- ------------------------------------------------------------------------------
(b) (a) (b) (a) (b)
Net Income Applicable
to Basic and
Diluted EPS
Consolidated
Net Income $ 81 $ 60 $234 $185 $293 $223
==================================================
Net Income
Attributable to
Common Stocks:
CMS Energy -
Basic EPS $ 83 $ 62 $226 $176 $279 $210
Add conversion of
7.75% Trust
Preferred
Securities
(net of tax) 2 2 6 2 9 2
----------------------------------------------------
CMS Energy -
Diluted EPS $ 85 $ 64 $232 $178 $288 $212
====================================================
Class G:
Basic and
Diluted EPS $ (2) $ (2) $ 8 $ 9 $ 14 $ 13
====================================================
Average Common Shares
Outstanding Applicable
to Basic and
Diluted EPS
CMS Energy:
Average Shares -
Basic 102 96 101 95 101 95
Add conversion
of 7.75% Trust
Preferred
Securities 4 4 4 1 4 1
Options-Treasury
Shares 1 1 1 1 1 1
----------------------------------------------------
Average Shares -
Diluted 107 101 106 97 106 97
====================================================
Class G:
Average Shares
Basic and
Diluted 8 8 8 8 8 8
====================================================
Earnings Per Average
Common Share
CMS Energy:
Basic $ .81 $ .64 $ 2.23 $1.85 $2.77 $2.22
Diluted $ .80 $ .63 $ 2.19 $1.83 $2.73 $2.20
Class G:
Basic and
Diluted $(.16) $(.21) $1.04 $1.13 $1.73 $1.57
================================================================================COMPUTATION OF EARNINGS PER SHARE:
In Millions, Except Per Share Amounts
- ---------------------------------------------------------------------------------------------------------------------------
Three Months Ended Twelve Months Ended
- ---------------------------------------------------------------------------------------------------------------------------
1999 1998 1999 1998
(a) (a)
NET INCOME APPLICABLE TO BASIC AND DILUTED EPS
Consolidated Net Income $98 $88 $295 $254
==================================================
Net Income Attributable to Common Stocks:
CMS Energy - Basic Income $88 $79 $281 $239
Add conversion of 7.75% Trust
Preferred Securities (net of tax) 2 2 9 7
--------------------------------------------------
CMS Energy - Diluted Income $90 $81 $290 $246
==================================================
Class G:
Basic and Diluted Income $10 $ 9 $ 14 $ 15
==================================================
AVERAGE COMMON SHARES OUTSTANDING
APPLICABLE TO BASIC AND DILUTED EARNINGS PER SHARE
CMS Energy:
Average Shares - Basic 108.2 100.9 104.3 97.6
Add conversion of 7.75% Trust
Preferred Securities 4.2 4.2 4.2 3.3
Options-Treasury Shares .4 .6 .4 .4
--------------------------------------------------
Average Shares - Diluted 112.8 105.7 108.9 101.3
==================================================
Class G:
Average Shares
Basic and Diluted 8.5 8.2 8.4 8.1
==================================================
EARNINGS PER AVERAGE COMMON SHARE
CMS Energy:
Basic $ .82 $ .79 $ 2.69 $2.45
Diluted $ .80 $ .77 $ 2.66 $2.44
Class G:
Basic and Diluted $ 1.19 $ 1.09 $ 1.68 $1.76
===========================================================================================================================
(a) Includes the cumulative effect of an accounting change in the first quarter
of 1998 which increased net income attributible to CMS Energy Common Stock $43
million ($.40 per share - basic and diluted) and Class G Common Stock $12
million ($.36 per share - basic and diluted).
(b) Restated; see Note 1.
In February and May 1998,1999, CMS Energy paid dividends of $.30 per share on
CMS Energy Common Stockdeclared and $.31 per share on Class G Common Stock. In
August 1998, CMS Energy paid dividends of $.33 per share on
CMS Energy Common Stock and $.325 per share on Class G Common Stock. In October 1998,April
1999, the Board of Directors declared a
40
41
quarterly dividend of $.33 per share on CMS Energy Common Stock and $ .325$.325 per
share on Class G Common Stock, to be
paidpayable in November 1998.May 1999.
5: Risk Management Activities and Derivatives TransactionsRISK 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: (1)i) the item to be hedged exposes the
enterprise to price, interest or exchange rate risk; and (2)ii) the derivative
reduces that exposure and is designated as a hedge.
Derivative instruments contain credit risk if the counter parties, 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
counter parties. Nonperformance by counter parties is not expected to have a
material adverse impact on CMS Energy's financial position, liquidity, or
results of operations.
Commodity Price Hedges:COMMODITY PRICE HEDGES: CMS Energy engages in commodity price risk management
activities for 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 as defined above, 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 loss of
correlation between the changes in (1)i) the market value of the commodity price
contracts and (2)ii) the market price ultimately received for the hedged item, and
the impact was material, the open commodity price contracts would be
marked to marketmarked-to-market and gains and losses would be recognized in the income
statement currently. Effective January 1, 1999, CMS Energy adopted
mark-to-market accounting for energy trading contracts in accordance with EITF
98-10. Mark-to-market accounting requires gains and losses resulting from
changes in market prices on contracts entered into for trading purposes to be
reflected in earnings currently. The after-tax mark-to-market adjustment
resulting from the adoption of EITF 98-10 had an immaterial effect on CMS
Energy's financial position, results of operations and cash flows as of March
31, 1999.
Consumers uses gas forward contractshas entered into and electricitywill enter into electric option contracts to
limit its risk associated with gas and electricity price increases. In
both the gas forward contracts and the electricity option contracts, it is
management's intent to take physical delivery of the commodities. For gas
forward contracts, Consumers is obligated to take physical delivery of the
gas and would incur a significant penalty for nonperformance. At
September 30, 1998, Consumers had an exposure to gas price increases if
the cost was to exceed $2.84 per mcf for the following volumes: 5 percent
of its 1998 requirements; 40 percent of its 1999 requirements; and 65
percent of its 2000 requirements. Additional forward contract coverage is
currently under review. The gas forward contracts currently in place were
consummated at prices less than $2.84 per mcf. The contracts are being
used to protect against gas price increases in a three-year experimental
gas program where Consumers is recovering from its customers $2.84 per mcf
for gas delivered.
Consumers enters into electricity option contracts to insureensure a reliable source of capacity to meet its customers' electricity
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 premiums paid.
Consumers purchased $5 million of options to insure a reliable source of
capacity during the summer months of 1998. As a result of weather
conditions and fluctuations in the price of electricity, some options were
sold to third parties for $11 million during June, July, and August 1998.
As of September 30, 1998, all of the remaining options had expired. The
costs relating to the expired options and income received from the sale of
options were reflected as purchased power costs.
CMS Oil and Gas has one arrangement which is used to fix the prices that CMS Oil
and Gas will pay to supplyfor gas supplied to the MCV Facility for the years 2001 through
2006 by purchasing the economic equivalent of 10,000 MMBtu per day at a fixed
price, escalating at 8 percent per year thereafter, starting at $2.82 per MMBtu
in 2001. The settlement periods are each a one-year period ending December 31,
2001 through 2006 on 3.65 million MMBtu. If the floating price, essentially the
then-current Gulf Coast spot price, for a period is higher than the fixed price,
the seller pays CMS Oil and Gas the difference, and vice versa.
IfThe contract with the seller provides a calculation of exposure for the purpose
of requiring an exposed party to post a standby letter of credit. Under this
calculation, if a party's exposure at any time exceeds
41
42
$5 million, that party is required to obtain a letter of credit in favor of the
other party for the excess over $5 million and up to $10 million. At September 30, 1998, noMarch 31,
1999, the seller posted a letter of credit was posted by either
partyin an amount approximating $300,000.
The letter of credit obligation does not necessarily bear any relation to the
agreement. Asmarket value of September 30, 1998,the contract. At March 31, 1999, the fair value of this contract
reflected payment due from CMS Oil and Gas ofwas $13 million.
A subsidiary of CMS MSTGas Transmission uses natural gas futures contracts and CMS
Marketing, Services and Trading Company uses natural gas and oil futures
contracts, options and swaps (which require a net cash payment for the
difference between a fixed and variable price).
Interest Rate Hedges:INTEREST RATE HEDGES: CMS Energy and some of its subsidiaries enter into
interest rate swap agreements to exchange variable rate interest payment
obligations to fixed rate obligations without exchanging the underlying notional
amounts. These agreements convert variable rate debt to fixed rate debt to
reduce the impact of interest rate fluctuations. The notional amounts parallel
the underlying debt levels and are used to measure interest to be paid or
received and do not represent the exposure to credit loss. The notional amount
of CMS Energy's and its subsidiaries' interest rate swaps was $923$658 million at
September 30, 1998. In October
1998, Consumers unwound an interest rate guarantee of $145 million
associated with the issuance of $150 million senior notes. The effective
rate of the debt is 7 percent taking into consideration the issuance
costs, interest rate guarantee and insurance costs.March 31, 1999. The difference between the amounts paid and received under the
swaps is accrued and recorded as an adjustment to interest expense over the life
of the hedged agreement.
Foreign Exchange Hedges:FOREIGN EXCHANGE HEDGES: CMS Energy uses forward exchange contracts and collared
options 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 $845 million$1.2 billion at September 30, 1998,March 31,
1999, which includes $550$716 million, $250 million and $250$220 million for Australian,
Brazilian and BrazilianArgentine foreign exchange contracts, respectively. 6: Subsequent Event
On November 2, 1998,The estimated
fair value of the foreign exchange and option contracts at March 31, 1999 was
$10 million, representing the amount CMS Energy announcedwould receive upon settlement.
6: REPORTABLE SEGMENTS
CMS Energy operates principally in the executionfollowing 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 a definitive
Stock Purchase Agreement (the "Agreement")regulated activities associated with
PanEnergy Corp
("PanEnergy")the generation, transmission and certaindistribution of electricity in the State of
Michigan. The gas utility segment consists of regulated activities associated
with the production, transportation, storage and distribution of natural gas in
the State of Michigan. The other wholly-owned subsidiaries of Duke Energy
Company to acquire allreportable segments consist of the stockdevelopment
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 Panhandle Companies for a cash
paymentproducts and services each provides. The accounting policies of
$1.9 billioneach reportable segment are the same as those described in the summary of
significant accounting policies. CMS Energy's management
42
43
evaluates performance based on pretax operating income. Intersegment sales and
existing Panhandle Companies debt of $300
million. This transaction will betransfers are accounted for underat 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
purchase methodquantitative thresholds for reporting. Neither of accounting.
Thethese segments has ever met
any of the quantitative thresholds for determining reportable segments. Amounts
shown for the natural gas transmission, storage and processing segment include
Panhandle, Companieswhich was acquired on March 29, 1999. Other financial data for
reportable segments are primarily engaged in the interstate
transportationas follows:
Reportable Segments
In Millions
- ------------------------------------------------------------------------------------------------
March 31, December 31,
1999 1998
- ------------------------------------------------------------------------------------------------
Identifiable Assets
Electric utility (a) $ 4,525 $ 4,640
Gas utility (a) 1,654 1,726
Independent power production 2,444 2,252
Oil and gas exploration and production 556 547
Natural gas transmission, storage and processing 3,417 971
Marketing, services and trading 158 152
Other 1,013 1,022
---------------------------------------------------------
$13,767 $11,310
================================================================================================
(a) Amounts include an attributed portion of natural gas. TheConsumers' other common assets to
be acquired
include 1,400 miles of mainlineboth the electric and gas pipeline extending from the Texas Gulf
Coast to Michigan and 1,300 miles of mainline gas pipeline extending from
the Kansas/Oklahoma mid-continent to Michigan, 340 miles of pipeline in
the offshore Gulf of Mexico, 70 billion cubic feet of underground gas
storage facilities, a liquified natural gas port, and unloading and
regasification facilities.
Closing of the transaction is subject to Hart-Scott-Rodino pre-merger
notification clearance. The Agreement is subject to termination upon
failure of CMS Energy to satisfy its financing contingency. The Agreement
also provides that if, as a result of CMS Energy's continuing due
diligence investigation, CMS Energy learns of material facts not
previously disclosed or inconsistent with representations and warranties
made in the Agreement, CMS Energy may, on or prior to November 23, 1998,
notify PanEnergy of its intent to terminate the Agreement and the
Agreement will terminate unless PanEnergy corrects the asserted
misrepresentations within 30 days.
CMS Energy expects to have $1.9 billion of bridge financing commitments
available to fund the purchase price and it anticipates permanent
financing of the acquisition at or near closing with approximately $900
million from the sale of common stock and/or securities convertible into
common stock by CMS Energy and approximately $1 billion from the issuance
of debt securities by the Panhandle Companies. If CMS Energy is unable to
provide the appropriate financing commitments by November 23, 1998 or is
unable to close the purchase when it otherwise would be obligated to
close, it must pay PanEnergy a $75 million termination fee. The closing
is scheduled for January 4, 1999, but may be delayed by mutual agreement.utility businesses.
43
4844
ARTHUR ANDERSEN LLP
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,March 31, 1999 and
1998, and 1997, the related consolidated statements of income, and common stockholders'
equity for the three-month, nine-month, and
twelve-month periods then ended, and the related consolidated statements
of cash flows for the nine-monththree-month and twelve-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 generally accepted auditing standards, 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 generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet and consolidated statement of
preferred stock of CMS Energy Corporation and subsidiaries as of December 31,
1997,1998, and the related consolidated statements of income, common stockholders'
equity and cash flows for the year then ended (not presented herein), and, in
our report dated July 27, 1998,January 26, 1999 (except with respect to the matters disclosed
in Note 3, "Consumers' Electric Utility Rate Matters", and Note 19, as to which
the date is March 29, 1999), we expressed an unqualified opinion on those
statements. In our opinion, the information set forth in the accompanying
consolidated balance sheet as of December 31, 1997,1998, 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,
November 10, 1998.May 11, 1999.
44
50
Consumers Energy Company
Management's Discussion and Analysis
The MD&A of this Form 10-Q should be read along with the MD&A and other
parts of Consumers' 1997 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 contains forward-
looking statements, as defined by the Private Securities Litigation Reform
Act of 1995, that include without limitation, discussions as to
expectations, beliefs, plans, objectives and future financial performance,
or assumptions underlying or concerning matters discussed in this report.
Refer to the Forward-Looking Information section of this MD&A for some
important factors that could cause actual results or outcomes to differ
materially from those addressed in the forward-looking discussions.45
[This page intentionally left blank]
45
46
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 the principal 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.
ResultsThe MD&A of Operations
In Millions
September 30this Form 10-Q should be read along with the MD&A and other parts of
Consumers' 1998 1997 Change
----- ----- ------
Three months ended $ 77 $ 71 $ 6
Nine months ended 239 212 27
Twelve months ended 311 269 42Form 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 contains forward-looking statements, as defined by the Private
Securities Litigation Reform Act of 1995. While forward-looking statements are
based upon assumptions and such assumptions are believed to be reasonable and
are made in good faith, Consumers cautions that assumed results almost always
vary from actual results and the difference between assumed and actual results
can be material. The type of assumptions that could materially affect the actual
results are discussed in the Forward-Looking Statements section in this MD&A.
More specific risk factors are contained in various public filings made by
Consumers with the SEC. This report also describes material contingencies in the
Notes to Consolidated Financial Statements and the readers are encouraged to
read such Notes.
RESULTS OF OPERATIONS
In Millions
March 31 1999 1998 Change
- ----------------------------------------------------------------------------------------------------------------
Three months ended $109 $102 $ 7
Twelve months ended 319 299 20
================================================================================================================
Net income available to the common stockholdersstockholder was $77$109 million for the third
quarter of 1998three
months ended March 31, 1999 compared with $71to $102 million for the same 1997 period. The
improved net income reflects increased electric and gas deliveries, the
operation of the gas customer choice program (see note 2, Gas Rate
Matters), along with increased revenues from gas retail and wholesale
services activities. Net income available to common stockholders after
the cumulative effect of a change in accounting for property taxes was
$239 million for the first nine months of 1998 compared with $212 million
for the same 1997 period.
The increase in earnings forof $7 million was due to higher electric and gas
deliveries as a result of more normal winter temperatures as compared to 1998,
the first nine
monthsresult of 1998 reflects revisedchanges in regulation which allow Consumers the opportunity to
benefit from lower electric power supply costs and reduced gas costs, and
improved earnings from the MCV Partnership. These increases were partially
offset by higher operating costs related to increased gas deliveries and the
absence of an accounting to recognize property tax
expense on the fiscal year basis of the taxing units instead of on a
calendar year basis. This one-time change in accounting for property taxes which occurred in 1998. The
accounting change resulted in a benefit of $66 million ($43 million after-tax).
Earnings for the first nine months of 1998 also reflect
that was partially offset by the recognition of a $37 million dollar loss ($24
million after tax) for the underrecovery of power costs under the PPA. Net
income available to the common stockholdersshareholder was $311$319 million for the twelve
months ended September 30,1998March 31, 1999 compared with $269to $299 million for the same 1997 period.period in
1998. The increase in earnings forof $20 million is primarily due to increased
electric deliveries and the result of the changes in regulation which allowed
Consumers the opportunity to benefit from lower electric power supply costs and
reduced gas costs. Partially offsetting this twelve months reflectsincrease in earnings was reduced
gas deliveries, increased operating expenses, and the absence of the 1998 change
in accounting for property taxes implemented during the first half of 1998 as discussed above. In
addition, the improved net income for the twelve months ended
September 30, 1998 reflects an adjustment of prior years' income taxes
associated with non-taxable earnings on nuclear decommissioning trust
funds of $9 million. Partially offsetting these increases were the
recognition, in the first half of 1998, ofand the loss associated with the
underrecovery of power costs underfrom the PPA as discussed above, and
decreased gas deliveries due to warmer weather during the first half of
1998. The first nine months of 1998 were the fourth warmest since 1864.above.
For further information, concerning results of operations, see the Electric and Gas Utility Results of Operations
sections of this MD&A and Power
Purchases from the MCV Partnership in Note 2.
46
47
ELECTRIC UTILITY RESULTS OF OPERATIONS
Electric Pretax Operating Income:
In Millions
September 30 1998 1997 Change
----- ----- ------
Three months ended $ 153 $ 132 $ 21
Nine months ended 378 342 36
Twelve months ended 468 423 45ELECTRIC PRETAX OPERATING INCOME:
In Millions
March 31 1999 1998 Change
- ----------------------------------------------------------------------------------------------------------------
Three months ended $ 134 $ 119 $ 15
Twelve months ended 491 444 47
================================================================================================================
Electric pretax operating income for all the above periods ended September
30, 1998 benefitted from increased deliveries compared to the same periods
in 1997. These increases were partly offset by increased general taxes
and depreciation associated with additional plant investment. Electric
pretax operating incomewas $134 million for the three months ended
March 31, 1999 compared to $119 million for the same period in 1998. The
increase in earnings of $15 million resulted from increased electric deliveries
and changes in regulation which provides Consumers the opportunity to benefit
from reduced power supply costs. In the past, reductions to power costs would
have had increased operation
and maintenance costs whileno impact on net income because power cost savings were passed onto
Consumers' electric customers. Electric pretax operating income was $491 million
for the twelve months ended September 30, 1998
benefitedMarch 31, 1999 compared to $444 million for the same
period of 1998. This increase of $47 million also resulted from controlling operationincreased
electric deliveries and changes in regulation which provided benefits from
reduced power supply costs in 1999 partially offset by increased operating
expenses. The following table quantifies these impacts on pretax operating income.
In Millions
Three Months Nine Months Twelve Months
Ended Sept. 30 Ended Sept. 30 Ended Sept. 30
Change Compared to
Prior Year 1998 vs 1997 1998 vs 1997 1998 vs 1997
------- ------- -------
Deliveries (including special
contract discounts) $ 38 $ 50 $ 51
Other non-commodity revenue (1) (2) (3)
Operations and maintenance (11) (1) 15
General taxes, depreciation
and other (5) (11) (18)
------ ------ ------
Total change $ 21 $ 36 $ 45
====== ====== ======
Electric Deliveries:Pretax Operating
Income:
In Millions
Three Months Twelve Months
Ended March 31 Ended March 31
Change Compared to Prior Year 1999 vs 1998 1999 vs 1998
- ----------------------------------------------------------------------------------------------------------------
Electric Deliveries $ 8 $ 42
Power supply costs 5 24
Rate increases and other non-commodity revenue 2 2
Operations and maintenance 2 (11)
General taxes and depreciation (2) (10)
---------------------------------
Total change $ 15 $ 47
================================================================================================================
ELECTRIC DELIVERIES: Total electric deliveries increased 10.1 percentwere 10 billion kwh for the three
months ended September 30, 1998 overMarch 31, 1999, an increase of 4.0 percent resulting primarily from
higher electric deliveries to ultimate customers in the same periodresidential and
commercial sectors. Electric deliveries were 40.4 billion kwh for the twelve
months ended March 31, 1999, an increase of 5.1 percent which also reflects an
increase in 1997.
The increase includes a 5.8 percent increase inelectric deliveries to ultimate customers, primarily withinin the
residential and commercial classes and an
increase in sales between utility systems and wholesale customer
deliveries. Forsectors.
POWER COSTS:
In Millions
March 31 1999 1998 Change
- ----------------------------------------------------------------------------------------------------------------
Three months ended $ 279 $ 270 $ 9
Twelve months ended 1,183 1,128 55
================================================================================================================
47
48
Power costs increased for the ninethree months period ended September 30,March 31, 1999 compared
to the same 1998 total electric
deliveriesperiod as a result of increased 8.2 percent over the comparable 1997 period.
Deliveries to ultimate customers were up 3.4 percent, with the remaining
change attributable to an increase in sales between utility systems and
wholesale deliveries. Forsales. Power costs also
increased for the twelve months ended September 30, 1998,
total electric deliveries increased 8.0 percent over the comparable 1997
period. The increase is primarily attributable to an increase in sales
between utility systems and a 2.7 percent increase in deliveries to
ultimate customers.
Power Costs:
In Millions
September 30 1998 1997 Change
----- ----- ------
Three months ended $ 315 $ 296 $ 19
Nine months ended 899 847 52
Twelve months ended 1,190 1,132 58
Power costs increased for all the reported periods ended September 30,
1998March 31, 1999 compared to 1997.the same period
in 1998 for the same reason. Both internal generation and power purchases from
outside sources increased during these periodsthis period to meet the increased deliveries.
Uncertainties:demand.
UNCERTAINTIES: Consumers' financial position may be affected by a number of
trends or uncertainties that have, had, or Consumers reasonably expects willcould have, a
materially favorable or unfavorablematerial impact on net sales, revenues, or income from continuing electric
operations. Such uncertainties are: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; 2) capital
expenditures for compliance with the Clean Air Act; 3) suits by various
parties relating to the effect of so-called stray voltage on certain
livestock; 4) suits by two independent power producers alleging antitrust
violations and economic losses due to special electric contracts signed by
Consumers; 5) cost recovery
relating to the MCV Facility and nuclear plant
investments and an experimental direct-access program; 6)Facility; 4) electric industry restructuring; 7) after-tax cash5)
implementation of a frozen PSCR and initiatives to be undertaken to reduce
exposure to high energy prices; 6) underrecoveries associated with power
purchases from the MCV Partnership; and 8) Big Rock7) decommissioning issues and ongoing
issues relating to the storage of spent fuel and the operating life of
Palisades. For detailed information about these trends or uncertainties, see
Note 2, Uncertainties, "Electric Contingencies-
Electric Environmental Matters," "Electric Contingencies-Stray Voltage,"
"Electric Contingencies-Anti-Trust," "Electric Rate Matters-Electric
Proceedings," "Electric Rate Matters-Electric Restructuring," "Other
Electric Uncertainties-The Midland Cogeneration Venture-Power Purchases
from the MCV Partnership," and "Other Electric Uncertainties-Nuclear
Matters," incorporated by reference herein.
Consumers enters into electricity option contracts to insure a reliable
source of capacity to meet its customers' electricity 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 premiums
paid.
Consumers purchased $5 million of options to insure a reliable source of
capacity during the summer months of 1998. As a result of weather
conditions and fluctuations in the price of electricity, some options were
sold to third parties for $11 million during June, July, and August 1998.
As of September 30, 1998, all of the remaining options had expired. The
costs relating to the expired options and income received from the sale of
options were reflected as purchased power costs.
GAS UTILITY RESULTS OF OPERATIONS
Gas Pretax Operating Income:
In Millions
September 30 1998 1997 Change
----- ----- ------
Three months ended $ 6 $ (1) $ 7
Nine months ended 81 100 (19)
Twelve months ended 134 142 (8)GAS PRETAX OPERATING INCOME:
In Millions
- ----------------------------------------------------------------------------------------------------------------
March 31 1999 1998 Change
- ----------------------------------------------------------------------------------------------------------------
Three months ended $ 78 $ 54 $24
Twelve months ended 150 130 20
================================================================================================================
Gas pretax operating income increased inwas $78 million for the three monthmonths ended March 31,
1999 compared to $54 million for the same period ended
September 30, 1998 as ain 1998. The increase of $24
million is the result of increased gas deliveries operation of
the gas customer choice program (see note 2, Gas Rate Matters) and
increased revenues from gas retail and wholesale services. The change in
general taxes and depreciation for the three month period ended
September 30, 1998 is primarily a timing issue. Warmerdue to colder temperatures
during the winter1999 heating seasons resultedseason and changes in reduced gas deliveriesregulation which decreasedsuspended
Consumers' GCR clause in mid-1998. This suspension provided Consumers the
opportunity to benefit from lower gas prices. In the past reductions in gas
costs would have had no impact on gas pretax operating income in the nine monthbecause any gas
cost savings were passed on to Consumers' gas customers. This increase was
partially offset by increased depreciation and twelve month
periods ended September 30,1998. The decreased gas pretax operating
income for the nine month period ended September 30, 1998 also reflects
higher operations expense. In part, the higher operationsgeneral tax expense reflects the absence of 1997 non-recurring expense reductions for
uncollectible accounts and injuries and damages reserves.associated
with additional plant expansion. Gas pretax operating income for the three month and twelve month periods ended
September 30, 1998 benefited from controlling operations and maintenance
expenses. Gas wholesale and retail service revenues were downwas $150 million
for the twelve month period ended September 30,March 31, 1999 compared to $130 million for
the same period in 1998. The increase of $20 million results from the suspension
of Consumers' GCR clause during 1998 as discussed above and lower operation and
maintenance costs due to the elimination of
surcharges related to past conservation programs. The benefit to gas
pretax operating income from reduced costs in general taxes and
depreciation for the nine month and twelve month periods ended
September 30, 1998 is primarily a timing issue.cost controls. The following table quantifies these
impacts on pretax operating income.
In Millions
Three Months Nine Months Twelve Months
Ended Sept. 30 Ended Sept. 30 Ended Sept. 30
Change Compared to
Prior Year 1998 vs 1997 1998 vs 1997 1998 vs 1997
----------- ----------- ------------
Gas deliveries $ 5 $(14) $(15)
Gas wholesale and retail
service activities 3 - (2)
Operations and maintenance 1 (8) 6
General taxes, depreciation
and other (2) 3 3
---- ---- ----
Total change $ 7 $(19) $(8)
==== ==== ====
Gas Deliveries:Pretax Operating Income:
48
49
In Millions
- ----------------------------------------------------------------------------------------------------------------
Three Months Twelve Months
Ended March 31 Ended March 31
Change Compared to Prior Year 1999 vs 1998 1999 vs 1998
- ----------------------------------------------------------------------------------------------------------------
Sales $ 19 $ (4)
Reduced gas cost per mcf 14 33
Gas wholesale and retail services activities 1 4
Operation and maintenance - 7
General taxes, depreciation and other (10) (20)
-----------------------------
Total increase(decrease) in pretax operating income $ 24 $ 20
================================================================================================================
GAS DELIVERIES: System deliveries for the three month period ended September 30, 1998, excludingMarch 31,
1999, including miscellaneous transportation, totaled 31were 166 bcf ancompared to 146 bcf
for the same 1998 period. This increase of 120 bcf or 314 percent comparedwas primarily
due to colder temperatures during the three month period
ended September 30, 1997. Deliveries for the nine month period ended
September 30, 1998, excluding miscellaneous transportation, totaled 203
bcf, a decrease of 29 bcf or 13 percent compared to the nine month period
ended September 30, 1997. For the twelve month period ended September 30,
1998, deliveries excluding miscellaneous transportation, totaled 311 bcf,
a decrease of 31 bcf or 9 percent compared to the twelve month period
ended September 30, 1997. The decreased deliveries for the nine month and
twelve month periods reflect warmer temperatures primarily for the first
quarter of 1998. Miscellaneous transportation deliveries for the three
month period ended September 30, 1998 totaled 11 bcf, a decrease of 8 bcf
or 40 percent compared to the three month period ended September 30, 1997.
Miscellaneous transportation deliveries for the nine month period ended
September 30, 1998, totaled 47 bcf, a decrease of 14 bcf or 23 percent
compared to the nine month period ended September 30, 1997. Miscellaneous
transportation1999 heating season. System deliveries for
the twelve month period ended September 30,March 31, 1999, including miscellaneous
transportation, were 380 bcf compared to 399 bcf for the same 1998 totaled 65 bcf, aperiod. This
decrease of 1819 bcf or 225 percent comparedwas primarily the result of warmer temperatures
for the most recent twelve month period.
COST OF GAS SOLD:
In Millions
- ----------------------------------------------------------------------------------------------------------------
March 31 1999 1998 Change
- ----------------------------------------------------------------------------------------------------------------
Three months ended $306 $264 $42
Twelve months ended 606 645 (39)
================================================================================================================
The cost increases for the three month period ended March 31, 1999 was the
result of increased gas deliveries due to colder temperatures during the 1999
winter heating season. The cost decrease for the twelve month period ended September 30, 1997.
Cost of Gas Sold:
In Millions
September 30 1998 1997 Change
---- ---- ----
Three months ended $ 39 $ 39 $ -
Nine Months ended 377 472 (95)
Twelve months ended 600 718 (118)
The cost decreases for the nine month and twelve month periods ended
September 30, 1998 wereMarch
31, 1999 was the result of decreased sales and lower gas costs
reflectingdue to warmer temperatures during the winter heating season.
Uncertainties:overall temperatures.
UNCERTAINTIES: Consumers' financial position may be affected by a number of
trends or uncertainties that have, had, or Consumers reasonably expects willcould have, a
materially favorable or unfavorablematerial impact on net sales or revenues or income from continuing gas
operations. Such uncertainties are:include: 1) potential environmental costs at a
number of sites, including sites formerly housing manufactured gas plant
facilities, and 2) a statewide experimental gas transportation pilot program.restructuring program, and 3)
implementation of a frozen GCR and initiatives undertaken to protect against gas
price increases. For detailed information about these uncertainties see Note 2,
Uncertainties, "Gas
Contingencies-Gas Environmental Matters," and "Gas Rate Matters-Gas
Restructuring," incorporated by reference herein.
Consumers uses gas forward contracts to limit its risk associated with gas
price increases. It is management's intent to take physical delivery of
the commodity. For gas forward contracts, Consumers is obligated to take
physical delivery of the gas and would incur a significant penalty for
nonperformance. At September 30, 1998, Consumers had an exposure to gas
price increases if the cost was to exceed $2.84 per mcf for the following
volumes: 5 percent of its 1998 requirements; 40 percent of its 1999
requirements; and 65 percent of its 2000 requirements. Additional forward
contract coverage is currently under review. The gas forward contracts
currently in place were consummated at prices less than $2.84 per mcf.
The contracts are being used to protect against gas price increases in a
three-year experimental gas program where Consumers is recovering from its
customers $2.84 per mcf for gas delivered.
Capital Resources and LiquidityCAPITAL RESOURCES AND LIQUIDITY
CASH POSITION, INVESTING AND FINANCING
Operating Activities:OPERATING ACTIVITIES: Consumers derives cash from operations, from the sale and
transportation of natural gas and the generation, transmission and sale of
electricity. Cash from operations totaled $452$386 million and $458$275 million for the
first ninethree months of 19981999 and 1997,1998, respectively. The $6$111 million increase
resulted
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50
primarily from higher electric and gas sales and a $32 million decrease resulted primarily from the timing of cash payments related to
normal operations. Other items included in income but which had no effect
on cash flow were a one-time change in accounting for property taxes
resulting in a $66 million ($43 million after-tax) gaingas
and the
recognition of a $37 million loss ($24 million after-tax) for the
underrecovery of power costs under the PPA.coal inventories. Consumers uses operating cash primarily to maintain and
expand electric and gas systems, to retire portions of long-term debt, and to
pay dividends.
Investing Activities:INVESTING ACTIVITIES: Cash used in investing activities totaled $(235)$(113) million
and $(277)$(88) million for the first ninethree months of 19981999 and 1997,1998, respectively. The
change of $(42)$25 million was primarily the result of receiving $27a $19 million from the sale of two partnerships, $12increase in
capital expenditures and a $5 million distribution from FMLP and $43 million from the nuclear decommissioning
trust funds previously collected fromincrease in electric customers for
decommissioning Big Rock, offset by the payment of $39 million in cost of
plant retired.
Financing Activities:restructuring
implementation plan expenditures.
FINANCING ACTIVITIES: Cash used in financing activities totaled $(196)$(271) and
$(176)$(178) million for the first ninethree months of 19981999 and 1997,1998, respectively. The
change of $20$93 million is primarily the result of athe net increase in cashproceeds of
$79$74 million due tofrom the refinancing and issuance of Consumers' debt in 1998 and $8 million decrease in capital lease payments.
Offsetting this increase was a
$60$17 million increase in the payment of common stock dividends and a $50 million return of paid in capital to
Consumers' common stockholder.1999.
OTHER INVESTING AND FINANCING MATTERS: Consumers hasis authorized by FERC authorization to issue
securities and guarantees. Consumers has a credit facility,facilities, lines of credit and
a trade receivable sale program in place as anticipated sources of funds needed
to fulfill, in whole or in part, material commitments for capital expenditures.
On April 1, 1999, Consumers redeemed all of its eight million outstanding shares
of the $2.08 preferred stock at $25.00 per share. For detailed information about
these sourcesources of funds, see "Authorization"Note 3, Short-Term Financings and "Short-Term Financings" in Note 3.
Outlook
The following discussions contain forward-looking statements. See the
Forward-Looking Information section of this MD&A for some important
factors that could cause actual results or outcomes to differ materially
from those discussed herein.Capitalization.
OUTLOOK
CAPITAL EXPENDITURES OUTLOOK
Consumers estimates the following capital expenditures, including new lease
commitments, by companytype and by business segment over the next three years. These
estimates are prepared for planning purposes and are subject to revision.
In Millions
Years Ended December 31 1998(b) 1999 2000
---- ---- ----
Consumers
Construction $388 $465 $490
Nuclear fuel lease 54 20 -
Capital leases other
than nuclear fuel 13 17 17
Michigan Gas Storage 3 3 3
---- ---- ----
$458 $505 $510
==== ==== ====
Electric utility operations (a) $341 $380 $385
Gas utility operations (a) 117 125 125
---- ---- ----
$458 $505 $510
==== ==== ====
In Millions
- ----------------------------------------------------------------------------------------------------------------
Years Ended December 31 1999 2000 2001
- ----------------------------------------------------------------------------------------------------------------
Construction $476 $499 $482
Nuclear fuel lease 11 - 16
Capital leases other than nuclear fuel 18 16 17
----------------------------------------
$505 $515 $515
================================================================================================================
Electric utility operations (a)(b) $382 $392 $395
Gas utility operations (a) 123 123 120
----------------------------------------
$505 $515 $515
================================================================================================================
(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) Includes actualThese amounts incurred duringdo not include preliminary estimates for capital expenditures
possibly required to comply with recently revised national air quality standards
under the first three quarters and
estimate for fourth quarter.Clean Air Act. For further information see Note 2, Uncertainties.
50
51
ELECTRIC BUSINESS OUTLOOK
Growth:GROWTH: Consumers expects average annual growth of two and one-half2.4 percent per year in
electric system deliveries over the next five years, absent the impact of
restructuring on the industry and its regulation in Michigan. Abnormal weather,
changing economic conditions, or the developing competitive market for
electricity may affect actual electric sales in future periods.
Restructuring:RESTRUCTURING: Consumers' retail electric business is affected by competition.
To meet its challenges, Consumers entered into multi-year contracts with some of
its largest industrial customers to serve certain facilities. The MPSC has
approved these contracts as part of its phased introduction to competition.
Certain customers have the option of terminating their contracts early.
FERC Orders 888 and 889, as amended, require utilities to provide direct access
to the interstate transmission grid for wholesale transactions. Consumers and
Detroit Edison disagree on the effect of the orders on the Michigan Electric
Power Coordination Center pool. Consumers proposes to maintain the benefits of
the pool through at least December 2000, while Detroit Edison contends that the
pool agreement should be terminated immediately. Among Consumers' alternatives
in the event of the pool being terminated would be joining an independent system
operator. FERC has indicated this preference for structuring the operations of
the electric transmission grid.
As discussed in the Form 10-K, since June 1997 several orders have been
issued and numerous appeals are pending at the Court of Appeals relating
to the restructuring of the electric utility industry. Consumers cannot
predict the outcome or timing of these matters. For material changes relating to the restructuring of the electric utility
industry, see "ElectricNote 1, Corporate Structure and Summary of Significant Accounting
Policies, "Utility Regulation" and Note 2, Uncertainties,"Electric Rate Matters
- - Electric Restructuring" in Note 2,, incorporated by reference herein.
Electric Application of SFAS 71: Consumers appliesRATE MATTERS: In November 1997, ABATE filed a complaint with the utility accounting
standard, SFAS 71,MPSC alleging
that recognizes the economic effects of rate regulation
and, accordingly, has recorded regulatory assets and liabilities related
to the generation, transmission and distribution operationsConsumers' earnings are in excess of its businessauthorized rate of return and
seeking an immediate reduction in its financial statements. Consumers believesConsumers' electric rates. The MPSC staff
conducted an investigation and concluded in an April 1998 report that no formal
rate proceeding was warranted at that time. The MPSC has now set the complaint
for hearing, but the presiding ALJ has restricted the scope of the hearing so
that the generation segment of its business is still subjectmost favorable relief available to rate regulation
based upon its present obligation to continue providing generation service
to its customers, and the lack of definitive deregulation orders. If rate
recovery of generation-related costs becomes unlikely or uncertain,
whether due to competition or regulatory action, this accounting standard
may no longer apply to the generation segment of Consumers' business.
According to Emerging Issues Task Force Issue 97-4, Deregulation of the
Pricing of Electricity - Issues Related to the Application of FASB
Statements No. 71 and 101, Consumers can continue to carry its generation-
related regulatory assets or liabilities for the part of the business
being deregulated if deregulatory legislation orABATE would be an MPSC rate order allows
the collection of cash flows from its regulated transmission and
distribution customers to recover these specific costs or settle
obligations. Because the February 1998 MPSC order allowsdirection for
Consumers to fully recover its transition costs, Consumers believes that even if it wasfile an electric rate case. Various procedural issues relating to
discontinue application of SFAS 71 forthis complaint, including the generation segment of its
business, its regulatory assets, including those related to generation,
are probable of future recovery from the regulated portion of the
business. At September 30, 1998, Consumers had $251 million of
generation-related net regulatory assets recordedALJ's ruling on its balance sheet,
and a net investment in generation facilitiesscope, are currently on appeal
at the MPSC. Consumers is unable to predict the outcome of $1.3 billion included in
electric plant and property. For further information regarding electric
restructuring, see "Restructuring" above.this matter.
GAS BUSINESS OUTLOOK
Growth:GROWTH: Consumers currently anticipates gas deliveries, including gas customer
choice deliveries, (excludingexcluding transportation to the MCV Facility and off-system
deliveries),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.
AbnormalActual gas deliveries in future periods may be affected by abnormal weather,
alternative energy prices, changes in competitive conditions, particularly as a
result of industry restructuring, and the level of natural gas consumption may affect actual gas deliveries in future periods.consumption.
Consumers is also offeringoffers a variety of energy-related services to its customers
focused upon appliance maintenance, home safety, commodity choice and assistance
to customers purchasing heating, ventilation and air conditioning equipment.
RESTRUCTURING: In December 1997, LIHEAP provided approximately $64 million in heating assistancethe MPSC approved Consumers' application to
about 312,000 Michigan households, with approximately 13 percentimplement a statewide three-year experimental gas transportation program,
eventually allowing 300,000 residential, commercial and industrial retail gas
sales customers to choose their gas supplier. For further information, regarding
restructuring of the funds going to Consumers' customers. Congress provided approximately $54
million in funding for Michigan for 1998. In October 1998, Congress
approved funding for fiscal year 1999 of approximately $59 million for
the state of Michigan. Consumers' expects presidential approval of the
funding.
Gas Application of SFAS 71: Based on a regulated utility accounting
standard, SFAS 71, Consumers may defer certain costs to the future and
record regulatory assets, based on the recoverability of those costs
through the MPSC's approval. Consumers has evaluated its regulatory
assets related to its gas business, and believes that sufficient
regulatory assurance exists to provide for the recovery of these deferred
costs.
Other Matters
NEW ACCOUNTING STANDARDS
In 1998, the FASB issued SFAS 132, Employers' Disclosures about Pensions
and Other Postretirement Benefits. This standard requires expanded
disclosure effective for 1998. Also in 1998, the American Institute of
Certified Public Accountants issued Statement of Position 98-1, Accounting
for the Costs of Computer Software Developed or Obtained for Internal Use,
which will be effective for 1999. Consumers does not expect the
application of these standards to materially affect its financial
position, liquidity or results of operations. In addition, in 1998, the
FASB issued SFAS 133, Accounting for Derivative Instruments and Hedging
Activities, which requires that every derivative instrument be recorded in
the balance sheet as either an asset or liability measured at its fair
value. The statement requires that changes in the derivative's fair value
be recognized currently in earnings unless specific hedge accounting
criteria are met. Special accounting for qualifying hedges allows a
derivative's gains and losses to offset related results on the hedged item
in the income statement, and requires that a company must formally
document, designate, and assess the effectiveness of transactions that
receive hedge accounting. SFAS 133 is effective for fiscal years
beginning after June 15, 1999. Consumers has not yet quantified the
impacts of adopting SFAS 133 on its financial statements and has not
determined the timing of or method of adoption.Business, see Note 2, Uncertainties, "Gas Rate
Matters-Gas Restructuring," incorporated by reference herein.
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OTHER MATTERS
YEAR 2000 COMPUTER MODIFICATIONS
Consumers uses software and related technologies throughout its businesses that
the year 2000 date change willcould affect and, if uncorrected, could cause
Consumers to, among other things, delay issuance of bills or reports, issue
inaccurate bills, report inaccurate data, incur generating plant outages, or
create energy delivery uncertainties. In 1995, Consumers established a Year 2000
Program to ensure the continued operation of the companyits businesses at the turn of the
century. ConsumersConsumers' efforts included dividing the programs requiring
modification between critical and noncritical programs. A formal methodology was
established to identify critical business functions and risk scenarios, to
correct problems identified, to develop test plans and expected results, and execute tests. Consumersto
test the corrections made. Consumers' Year 2000 Program involves an aggressive,
comprehensive four-phase approach, including impact analysis, remediation,
compliance review, and monitoring/contingency planning.
The impact analysis phase includes the analysis, inventory, prioritization and
remediation plan development for all technology essential to core business
processes. The remediation phase involves testing and implementation of
remediationremediated technology. A mainframe test environment was established in 1997 and
a test environment for network servers and stand-alone personal computers was
established in mid-1998. All essential corporate business systems have been, or
will be, tested in thisthese test environment.environments. The compliance review phase includes
the assembling of compliance documentation for each technology component as
remediation efforts are completed, and additional verification testing of
essential technology where necessary. The monitoring/contingency planning phase
includes compliance monitoring to ensure that year 2000 problems are not
reintroduced into remediated technology, as well as the development of
contingency plans to address reasonably likely risk scenarios.
State of Readiness: Year 2000 issues are being managed by the major
departments of Consumers. TraditionalSTATE OF READINESS: Consumers is managing traditional information technology,
which consists of essential business systems such(such as payroll, billing and
purchasing,purchasing) and infrastructure including(including mainframe, wide area network, local
area networks, personal computers, radios and telephone systems. Processsystems). Consumers is
also managing process control computers and embedded systems contained in
buildings, equipment and energy supply and delivery systems are also being managed.
Essentialsystems.
Additionally, Consumers is managing essential goods and services, for Consumers arewhich include
electric fuel supply, gas fuel supply, independent electric power supplies,
buildings and other facilities, electronic commerce, telecommunications network
carriers, financial institutions, purchasing vendors, and software and hardware
technology vendors. Consumers is addressing the preparedness of these businesses
and their risk through readiness assessment questionnaires.
The status of ConsumersConsumers' Year 2000 Program by phase, with target dates for
completion and current percentage complete based upon software and hardware
inventory counts as of September 30, 1998,March 31, 1999, is as follows:
Monitoring/
Impact Compliance Contingency
Analysis Remediation Review Planning
---------- ----------- ---------- ----------
Business System (a) (b) (a) (b) (a) (b) (a) (b)
Electric 3/98 100% 6/99 53% 6/99 22% 6/99 10%
Gas 3/98 100% 6/99 66% 6/99 3% 6/99 10%
Corporate 3/98 100% 6/99 62% 6/99 3% 6/99 10%
Operating
Services 3/98 100% 6/99 63% 6/99 40% 6/99 10%
Essential Goods
& Services 6/99 35% NA 9/99 0% 6/99 10%
MONITORING/
IMPACT COMPLIANCE CONTINGENCY
ANALYSIS REMEDIATION REVIEW PLANNING
------------ ----------- ------------ -----------
SYSTEMS (a) (b) (a) (b) (a) (b) (a) (b)
- -------
Electric 3/98 100% 6/99 93% 6/99 91% 6/99 75%
Gas 3/98 100% 6/99 91% 6/99 91% 6/99 75%
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Corporate 3/98 100% 6/99 85% 6/99 81% 6/99 75%
Operating Services 3/98 100% 6/99 94% 6/99 90% 6/99 75%
Information Technology 3/98 100% 6/99 75% 6/99 70% 6/99 75%
Essential Goods
& Services 6/99 60% N/A N/A (c)
(a) Target date for completion.
(b) Current percentage complete.
Cost of Remediation:(c) Contingency planning for essential goods and services is incorporated into
contingency planning for each major system presented.
COST OF REMEDIATION: Consumers will expense anticipated spendingexpenses cost for software modifications as
incurred, while capitalizing and amortizingcapitalizes and amortizes the cost for new software and equipment
over its useful life. The total estimated cost of the Year 2000 Program is approximately $22
million. Costs incurred through September 30, 1998 are $14March 31, 1999 were $17 million. ConsumersConsumers'
annual Year 2000 Program costs represent approximately 1% to 10% of a typical
ConsumersConsumers' annual information technology budget. Year 2000 compliance work is
being funded primarily from operations. The devotionTo date, the commitment of Consumers
resources to the year 2000 problemissue has not deferred any material information technology
projects which could have a material adverse affect on ConsumersConsumers' financial
position, liquidity or results of operations.
Risk Assessment:RISK ASSESSMENT: Consumers considers the most reasonably likely worst-
caseworst-case
scenarios to be: (1) a lack of communications to dispatch crews to electric or
gas emergencies,emergencies; (2) a lack of communications to contact
generating units to balance
electrical load,load; and (3) power shortages due to the lack of stability of the
regional or national electric grid. These scenarios could result in Consumers
not being able to generate or distribute enough energy to meet customer demand
for a period of time, which could result in lost sales and profits.profits, as well as
legal liability. Year 2000 remediation and testing efforts are concentrating on
these risk areas and will continue through the end of 1999. Contingency plans
will be revised and executed to further mitigate the risks associated with these
scenarios.
Contingency Plans:CONTINGENCY PLANS: Contingency planning efforts are currently underway for all business
systems and providers of essential goods and services. Extensive contingency
plans are already in place in many locations and are currently being revised for
reasonably likely worst-case scenarios related to year 2000 issues. In many
cases, Consumers already has arrangements with multiple vendors of similar goods
and services so that in the event that one cannot meet its commitments, others
can.may be able to. Current contingency plans provide for manual dispatching of
crews and manual coordination of electrical load balancing and are being revised
to provide for radio or satellite communications. Coordinated contingency
planning efforts are in progress with the North American Electric Reliability
Council and its Regional Reliability Councils to minimize risk to electric
generation, transmission and distribution systems.
Expectations:EXPECTATIONS: Consumers does not expect that the cost of these modifications
will materially affect its financial position, liquidity, or results of
operations. There can be no guarantee, however, that these costs, plans or time
estimates will be achieved, and actual results could differ materially.
Because of the integrated nature of ConsumersConsumers' business with other energy
companies, utilities, jointly owned facilities operated by other entities, and
business conducted with suppliers and large customers, Consumers may be
indirectly affected by year 2000 compliance complications.
At this
time,53
54
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 is unableholds 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 anticipatedetermine the magnitudepotential loss in fair values, cash flows and
earnings. Losses in excess of the operationalamounts 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, all
derivative financial impactinstruments are entered into for purposes other than
trading. In the case of hedges, management believes that any 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 an equity investment in which it holds
less than a 20 percent interest in the entity. A hypothetical 10 percent adverse
change in market price would result in a $14 million change in its investment
and equity since this equity instrument is currently marked-to-market through
equity. Consumers believes that such an adverse change would not have a material
effect on its consolidated financial position, results of operation or cash
flows.
DEBT PRICE AND INTEREST RATE RISK: Management uses a combination of fixed-rate
and variable-rate debt to reduce interest rate exposure. Interest rate swaps and
rate locks may be used to adjust exposure when deemed appropriate, based upon
market conditions. These strategies attempt to provide and maintain the lowest
cost of capital.
As of March 31, 1999, Consumers had outstanding $819 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 $190 million. Assuming a
hypothetical 10 percent adverse change in market interest rates, Consumers'
exposure to earnings is limited to $3 million. As of March 31, 1999, Consumers
has outstanding fixed-rate debt including fixed-rate swaps of $2.143 billion
with a fair value of $2.145 billion. Assuming a hypothetical 10 percent adverse
change in market rates, Consumers would have an exposure of $122 million to its
fair value. 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.
FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements as defined by the Private
Securities Litigation Reform Act of 1995. The words "anticipates," "believes,"
"estimates," "expects," "intends," and "plans," as well as variations of such
words and similar expressions, are intended to identify forward-looking
statements that involve risk and uncertainty. These statements are based upon
various assumptions involving judgements with respect to the future including,
among others, the ability to achieve revenue enhancements; national, regional,
and local economic competitive and regulatory conditions and developments;
capital and financial market conditions including interest rates; weather
conditions and other natural phenomena; adverse
54
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regulatory or legal decisions, including environmental laws and regulations; the
pace of deregulation of the natural gas and electric industries; energy markets,
including the timing and extent of changes in commodity prices for oil, coal,
natural gas, natural gas liquids, electricity and certain related products; the
timing and success of business development efforts; potential disruption or
interruption of facilities or operations due to accidents or political events;
nuclear power and other technological developments; the effect of changes in
accounting policies; year 2000 issues.
Forward-Looking Information
Forward-lookingreadiness; and other uncertainties, all of which
are difficult to predict and many of which are beyond the control of Consumers.
Accordingly, while Consumers believes that the assumed results are reasonable,
there can be no assurance that they will approximate actual results. Consumers
disclaims any obligation to update or revise forward-looking statements, whether
as a result of new information, is included throughout this report. This
report also describes material contingenciesfuture events or otherwise. Certain risk factors
are detailed from time to time in various public filings made by Consumers with
the Notes to the
Consolidated Financial Statements and should be read accordingly.
Important factors that could cause actual results or outcomes to differ
are set forth in Consumers' 1997 Form 10-K, "Management's Discussion and
Analysis-Forward-Looking Information."SEC.
55
6056
CONSUMERS ENERGY COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
Consumers Energy Company
Consolidated Statements of Income
(Unaudited)
Three Months Ended Nine Months Ended Twelve Months Ended
September 30THREE MONTHS ENDED TWELVE MONTHS ENDED
MARCH 31 1999 1998 19971999 1998
1997 1998 1997- ----------------------------------------------------------------------------------------------------------------
In Millions
Operating RevenueOPERATING REVENUE
Electric $ 729636 $ 670 $1,990 $1,888 $2,617612 $2,630 $2,507
Gas 117 110 716 828 1,092 1,230506 429 1,128 1,135
Other 14 19 37 39 48 49
------ ------ ------ ------ ------ ------
860 799 2,743 2,755 3,757 3,786
------ ------ ------ ------ ------ ------
Operating Expenses11 55 51
-------------------------------------------------
1,156 1,052 3,813 3,693
- ----------------------------------------------------------------------------------------------------------------
OPERATING EXPENSES
Operation
Fuel for electric generation 95 80 246 220 323 29777 71 322 300
Purchased power - related parties 143 151 433 447 585 600139 145 567 594
Purchased and interchange power 77 65 220 180 282 23563 54 294 234
Cost of gas sold 39 39 377 472 600 718306 264 606 645
Other 147 144 409 404 548 566
------ ------ ------ ------ ------ ------
501 479 1,685 1,723 2,338 2,416127 133 540 544
------------------------------------------------
712 667 2,329 2,317
Maintenance 48 38 126 119 177 17637 174 166
Depreciation, depletion and amortization 93 88 291 286 395 384121 110 413 389
General taxes 47 45 146 148 19958 55 204 198
------ ------ ------ ------ ------ ------
689 650 2,248 2,276 3,109 3,174
------ ------ ------ ------ ------ ------
Pretax Operating Income-------------------------------------------------
929 869 3,120 3,070
- ----------------------------------------------------------------------------------------------------------------
PRETAX OPERATING INCOME
Electric 153 132 378 342 468 423134 119 491 444
Gas 6 (1) 81 100 134 14278 54 150 130
Other 12 18 36 37 46 47
------ ------ ------ ------ ------ ------
171 149 495 479 648 612
------ ------ ------ ------ ------ ------
Other Income (Deductions)15 10 52 49
-------------------------------------------------
227 183 693 623
- ----------------------------------------------------------------------------------------------------------------
OTHER INCOME (DEDUCTIONS)
Loss on MCV power purchases - - (37) - (37) -
Dividends and interest from affiliates 3 4 11 11 20 15 2413 23
Accretion income 1 2 5 6 7 8
Accretion expense (4) (4) (12) (13) (16) (14)(15) (17)
Other, net 1 1 3 1 (2) 1
--------------------------------------------------
3 (34) 2 (23)
- (3)
------ ------ ------ ------ ------ ------
2 10 (30) 14 (31) 15
------ ------ ------ ------ ------ ------
Interest Charges----------------------------------------------------------------------------------------------------------------
INTEREST CHARGES
Interest on long-term debt 35 34 103 103139 137 138
Other interest 9 9 28 25 39 338 10 36 38
Capitalized interest - - (2) (1)
---------------------------------------------------
43 44 173 174
- - (1) -
------ ------ ------ ------ ------ ------
44 43 131 128 175 171
------ ------ ------ ------ ------ ------
Net Income Before Income Taxes 129 116 334 365 442 456
Income Taxes 43----------------------------------------------------------------------------------------------------------------
NET INCOME BEFORE INCOME TAXES 187 105 522 426
INCOME TAXES 68 36 111 126 137 151
------ ------ ------ ------ ------ ------
Net Income before cumulative effect of change
in accounting principle 86 80 223 239 305 305
Cumulative effect of change in accounting for
property taxes, net of166 133
-------------------------------------------------
NET INCOME BEFORE CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE 119 69 356 293
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING FOR
PROPERTY TAXES, NET OF $23 tax (Note 1) -TAX - 43 - 43
--------------------------------------------------
NET INCOME 119 112 356 336
PREFERRED STOCK DIVIDENDS 5 5 19 23
PREFERRED SECURITIES DISTRIBUTIONS 5 5 18 14
--------------------------------------------------
NET INCOME AVAILABLE TO COMMON STOCKHOLDER $ 109 $ 102 $ 319 $ 299
================================================================================================================
THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
56
57
CONSUMERS ENERGY COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
THREE MONTHS ENDED TWELVE MONTHS ENDED
MARCH 31 1999 1998 1999 1998
- ------ ------ ------ ------ ------ ------
Net Income 86 80 266 239 348 305
Preferred Stock Dividends 5 6 14 20 19 27
Preferred Securities Distributions 4 3 13 7 18 9
------ ------ ------ ------ ------ ------
Net Income Available to Common Stockholder $ 77 $ 71 $ 239 $ 212 $ 311 $ 269
====== ====== ====== ====== ====== ======
The accompanying condensed notes are an integral part of these statements.
61
Consumers Energy Company
Consolidated Statements of Cash Flows
(Unaudited)
Nine Months Ended Twelve Months Ended
September 30 1998 1997 1998 1997
---- ---- ---- --------------------------------------------------------------------------------------------------------------------
In Millions
Cash Flows from Operating ActivitiesCASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 266 $239119 $ 348112 $ 305356 $ 336
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation, depletion and amortization (includes nuclear
decommissioning of $38, $37, $51$13, $13, $52 and $49,$50, respectively) 291 286 395 384121 110 413 389
Loss on MCV power purchases - 37 - 37 -
Capital lease and other amortization 27 35 36 4211 8 38 43
Accretion expense 4 4 15 17
Accretion income - abandoned Midland project (1) (2) (6) (7)
Deferred income taxes and investment tax credit 21 11 24 32
Accretion expense 12 13 16 14
Accretion income - abandoned Midland project (5) (6) (7) (8)(3) (10) 28 3
Undistributed earnings of related parties (37) (35)(14) (11) (55) (48) (45)
MCV power purchases (48) (47) (63) (67)(14) (17) (61) (65)
Cumulative effect of accounting change - (66) - (66) -
Changes in other assets and liabilities (46) (38) 81163 110 (3) 13
---- ---- ---- ---------------------------------------------------
Net cash provided by operating activities 452 458 753 670
---- ---- ---- ----
Cash Flows from Investing Activities386 275 725 652
- ----------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (excludes assets placed under capital lease) (258) (260) (358) (371)
Associated company preferred stock redemption 50 50 50 50(93) (74) (388) (357)
Cost to retire property, net (21) (17) (88) (41)
Investments in nuclear decommissioning trust funds (13) (13) (52) (50)
Investment in Electric Restructuring Implementation Plan (5) - (22) (3)
Proceeds from nuclear decommissioning trust funds 4312 12 64 29
Proceeds from FMLP 7 - 4319 -
Proceeds from the sale of two partnerships 27- - 27 -
Proceeds from FMLP 12Associated company preferred stock redemption - 12 - Investment in Electric Restructuring Implementatioin Plan (9)50 -
(10)Other - Investments in nuclear decommissioning trust funds (38) (37) (51) (49)
Cost to retire property, net (65) (26) (68) (37)
Other 3 (4) 4 (4)
---- ---- ---- ----2 54
-------------------------------------------------
Net cash used in investing activities (235) (277) (351) (411)
---- ---- ---- ----
Cash Flows from Financing Activities
Proceeds from senior(113) (88) (388) (368)
- ----------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase (decrease) in notes 914 - 914 -payable, net (169) (132) (199) 157
Payment of common stock dividends (97) (80) (258) (298)
Payment of capital lease obligations (9) (7) (37) (43)
Payment of preferred stock dividends (5) (5) (19) (27)
Preferred securities distributions (5) (5) (18) (14)
Retirement of bonds and other long-term debt (759) (51) (759) (51)
Payment of common stock dividends (173) (113) (278) (199)
Increase (decrease) in(1) (418) (437) (470)
Proceeds from bank loans 15 - 15 -
Proceeds from senior notes payable, net (75) 56 (87) 49- 469 577 469
Contribution from (return of equity to) stockholder (50) - (100) - Payment of capital lease obligations (26) (34) (36) (42)
Payment of preferred stock dividends (14) (23) (19) (29)
Preferred securities distributions (13) (7) (18) (9)
Retirement of preferred stock - (120) - (120)50 (50)
Proceeds from Trust Preferred Securities - 116- - 116
Proceeds from bank loansRetirement of preferred stock - - - 23
---- ---- ---- ----(120)
-------------------------------------------------
Net cash provided by (used in) financing activities (196) (176) (383) (262)
---- ---- ---- ----
Net Increase (Decrease) in Cash and Temporary Cash Investments 21 5 19 (4)
Cash and Temporary Cash Investments, Beginning of Period(271) (178) (326) (280)
- -----------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND TEMPORARY CASH INVESTMENTS 2 9 11 14
CASH AND TEMPORARY CASH INVESTMENTS, BEGINNING OF PERIOD 25 7 4 9 13
---- ---- ---- ----
Cash and Temporary Cash Investments, End of Period16 12
--------------------------------------------------
CASH AND TEMPORARY CASH INVESTMENTS, END OF PERIOD $ 2827 $ 916 $ 2827 $ 9
==== ==== ==== ====
Nine Months Ended Twelve Months Ended
September 3016
================================================================================================================
57
58
THREE MONTHS ENDED TWELVE MONTHS ENDED
MARCH 31 1999 1998 19971999 1998
1997
---- ---- ---- ----- ----------------------------------------------------------------------------------------------------------------
In Millions
Other cash flow activities and non-cash investing and financing activities were:
Cash transactionsOTHER CASH FLOW ACTIVITIES AND NON-CASH INVESTING AND FINANCING ACTIVITIES WERE:
CASH TRANSACTIONS
Interest paid (net of amounts capitalized) $ 12849 $ 12953 $ 165157 $ 164170
Income taxes paid (net of refunds) 113 122 108 135
Non-cash transactions- 3 149 119
NON-CASH TRANSACTIONS
Nuclear fuel placed under capital lease $ 21- $ 45 $ 2142 $ 246
Other assets placed under capital leases 11 5 12 6
==== ==== ==== ====
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.2 2 14 7
================================================================================================================
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.
58
6359
CONSUMERS ENERGY COMPANY
CONSOLIDATED BALANCE SHEETS
Consumers Energy Company
Consolidated Balance Sheets
ASSETS September 30 September 30MARCH 31 MARCH 31
1999 DECEMBER 31 1998
December 31 1997
(Unaudited) 1997 (Unaudited)(UNAUDITED) 1998 (UNAUDITED)
- ----------------------------------------------------------------------------------------------------------------
In Millions
PLANT (AT ORIGINAL COST)
Plant (At original cost)
Electric $6,641 $6,491 $6,447$6,772 $6,720 $6,547
Gas 2,328 2,322 2,2922,374 2,360 2,346
Other 26 25 24
25
------ ------ ------
8,995 8,837 8,764--------------------------------------
9,172 9,105 8,917
Less accumulated depreciation, depletion and amortization 4,748 4,603 4,540
------ ------ ------
4,247 4,234 4,2245,430 4,862 4,722
--------------------------------------
3,742 4,243 4,195
Construction work-in-progress 161 165 145 146
------ ------ ------
4,412 4,379 4,370
------ ------ ------
Investments144
--------------------------------------
3,903 4,408 4,339
- ----------------------------------------------------------------------------------------------------------------
INVESTMENTS
Stock of affiliates 227 278 258217 241 287
First Midland Limited Partnership (Note 2) 237 242 239236 240 244
Midland Cogeneration Venture Limited Partnership (Note 2) 199 171 163220 209 179
Other - - 7
7
------ ------ ------
663 698 667
------ ------ ------
Current Assets--------------------------------------
673 690 717
- ----------------------------------------------------------------------------------------------------------------
CURRENT ASSETS
Cash and temporary cash investments at cost, which approximates market 28 7 927 25 16
Accounts receivable and accrued revenue, less allowances
of $5, $6$5 and $6, respectively (Note 3) - 82 47106 114 52
Accounts receivable - related parties 77 62 8765 63 71
Inventories at average cost
Gas in underground storage 276 197 25382 219 79
Materials and supplies 65 63 6950 67 64
Generating plant fuel stock 29 35 2633 43 39
Postretirement benefits 25 25 25
Deferred income taxes - 22 9
Prepayments- 13
Prepaid property taxes and other 124 161 51
------ ------ ------
624 654 576
------ ------ ------
Non-current Assets116 162 182
--------------------------------------
504 718 541
- ----------------------------------------------------------------------------------------------------------------
NON-CURRENT ASSETS
Nuclear decommissioning trust funds 510 486 478565 557 518
Nuclear plant-related assets 535 - -
Postretirement benefits 380 404 411364 372 395
Abandoned Midland Project 77 93 9866 71 88
Other 250324 347 235
238
------ ------ ------
1,217 1,218 1,225
------ ------ ------
Total Assets $6,916 $6,949 $6,838
====== ====== ======--------------------------------------
1,854 1,347 1,236
--------------------------------------
TOTAL ASSETS $6,934 $7,163 $6,833
================================================================================================================
59
60
STOCKHOLDERS' INVESTMENT AND LIABILITIES September 30 September 30MARCH 31 MARCH 31
1999 DECEMBER 31 1998
December 31 1997
(Unaudited) 1997 (Unaudited)(UNAUDITED) 1998 (UNAUDITED)
- ----------------------------------------------------------------------------------------------------------------
In Millions
CapitalizationCAPITALIZATION
Common stockholder's equity
Common stock $ 841 $ 841 $ 841
Paid-in capital 402495 502 452 502
Revaluation capital 57 58 4554 68 65
Retained earnings since December 31, 1992 429 363 396
------ ------ ------
1,729 1,714 1,784446 434 385
--------------------------------------
1,836 1,845 1,743
Preferred stock 238244 238 238
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
Long-term debt 1,977 1,369 1,4622,023 2,007 1,722
Non-current portion of capital leases 77 74 82
------ ------ ------
4,241 3,615 3,786
------ ------ ------
Current Liabilities94 100 73
--------------------------------------
4,417 4,410 3,996
- ----------------------------------------------------------------------------------------------------------------
CURRENT LIABILITIES
Current portion of long-term debt and capital leases 146 579 483153 152 284
Notes payable 302 377 38946 215 245
Accrued taxes 229 238 232
Accounts payable 160 171 140
Accrued taxes 109 244 97148 190 128
Accounts payable - related parties 7287 79 7582
Power purchases (Note 2) 47 47 47
Accrued interest 26 32 25
Accrued refunds 12 12 727 36 20
Deferred income taxes 46 9 -
Accrued refunds 13 11 11
Other 144 138 132
--------------------------------------
900 1,115 1,181
- Other 143 136 139
------ ------ ------
1,021 1,677 1,402
------ ------ ------
Non-current Liabilities----------------------------------------------------------------------------------------------------------------
NON-CURRENT LIABILITIES
Deferred income taxes 661 688 630638 666 668
Postretirement benefits 467 489 495446 456 480
Power purchases (Note 2) 134 133 144111 121 157
Deferred investment tax credit 142 149 152131 134 147
Regulatory liabilities for income taxes, net 83 54 86108 87 61
Other 167 144183 174 143
------ ------ ------
1,654 1,657 1,650
------ ------ ------
Commitments and Contingencies (Note--------------------------------------
1,617 1,638 1,656
--------------------------------------
COMMITMENTS AND CONTINGENCIES (NOTES 1 AND 2)
Total Stockholders' Investment and Liabilities $6,916 $6,949 $6,838
====== ====== ======
(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 accompanying condensed notes are an integral part of these statements.$6,934 $7,163 $6,833
================================================================================================================
(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 ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE BALANCE SHEETS .
60
6561
CONSUMERS ENERGY COMPANY
CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDER'S EQUITY
(UNAUDITED)
Consumers Energy Company
Consolidated Statements of Common Stockholder's Equity
(Unaudited)
Three Months Ended Nine Months Ended Twelve Months Ended
September 30THREE MONTHS ENDED TWELVE MONTHS ENDED
MARCH 31 1999 1998 19971999 1998
1997 1998 1997- ----------------------------------------------------------------------------------------------------------------
In Millions
Common StockCOMMON STOCK
At beginning and end of period $ 841 $ 841 $ 841 $ 841
$ 841 $ 841
------- ------- ------- ------- ------- -------
Other Paid-in Capital- ----------------------------------------------------------------------------------------------------------------
OTHER PAID-IN CAPITAL
At beginning of period 502 452 452 504
452 504 502 504Preferred stock reaquired - - - (2)
Stockholder's contribution - - 100 -
Return of stockholder's contribution (50)- - (50) (50)
Capital stock expense (7) - (100)(7) -
Preferred stock reacquired - (2) - (2) - (2)
------- ------- ------- ------- ------- ---------------------------------------------------------
At end of period 402 502 402 502 402 502
------- ------- ------- ------- ------- -------
Revaluation Capital495 452 495 452
- ----------------------------------------------------------------------------------------------------------------
REVALUATION CAPITAL
At beginning of period 59 4168 58 37 45 3065 36
Change in unrealized investment -
gaininvestment-gain (loss) (a) (2) 4 (1) 8 12 15
------- ------- ------- ------- ------- -------(14) 7 (11) 29
--------------------------------------------------
At end of period 57 45 57 45 57 45
------- ------- ------- ------- ------- -------
Retained Earnings54 65 54 65
- ----------------------------------------------------------------------------------------------------------------
RETAINED EARNINGS
At beginning of period 396 368434 363 297 396 326385 385
Net income (a) 86 80 266 239 348 305119 112 356 336
Cash dividends declared- Common stockStock (97) (80) (258) (299)
Cash dividends declared (44) (43) (173) (113) (278) (199)declared- Preferred stock dividends declaredStock (5) (6) (14) (20)(5) (19) (27)(23)
Preferred securities distributions (4) (3) (13) (7)(5) (5) (18) (9)
------- ------- ------- ------- ------- -------(14)
--------------------------------------------------
At end of period 429 396 429 396 429 396
------- ------- ------- ------- ------- -------
Total Common Stockholder's Equity $1,729 $1,784 $1,729 $1,784 $1,729 $1,784
======= ======= ======= ======= ======= =======446 385 446 385
-------------------------------------------------
TOTAL COMMON STOCKHOLDER'S EQUITY $1,836 $1,743 $1,836 $1,743
================================================================================================================
(a) Disclosure of Comprehensive Income:DISCLOSURE OF COMPREHENSIVE INCOME:
Revaluation capital
Unrealized investment - gaininvestment-gain (loss), net of tax of
$(1), $2, $-$(8), $4, $7$(6) and $8,$16, respectively $ (2)(14) $ 47 $ (1)(11) $ 8 $ 12 $ 1529
Net income 86 80 266 239 348 305
------- ------- ------- ------- ------- -------119 112 356 336
------------------------------------------------
Total Comprehensive Income $ 84105 $ 84119 $ 265345 $ 247 $ 360 $ 320
======= ======= ======= ======= ======= =======
The accompanying condensed notes are an integral part of these statements.365
===============================================
THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
61
66
Consumers Energy Company62
CONSUMERS ENERGY COMPANY
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
These Condensed Notes to Consolidated Financial Statements
These Consolidated Financial Statements and their related Condensed NotesConsolidated Financial Statements should
be read along with the Consolidated Financial Statements and Notes contained in
Consumers' 1997the Consumers 1998 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 Change of Significant Accounting Policies
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 the principal 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.
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 counter parties, including
financial institutions and energy marketers, fail to perform under the
agreements. Consumers minimizes such risk by performing financial credit reviews
using, among other things, publicly available credit ratings of such counter
parties. The risk of nonperformance by the counter parties 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 has entered into and will enter into electric option contracts to
ensure a reliable source of capacity to meet its customers' electricity
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 premiums paid.
UTILITY REGULATION: Consumers accounts for the effects of regulation based on a
regulated utility accounting standard (SFAS 71). As a result, the actions of
regulators affect when revenues, expenses, assets and liabilities are
recognized.
In March 1999, Consumers received MPSC electric restructuring orders which,
among other things, identified the terms and timing for implementing electric
restructuring in Michigan. Based upon these orders, Consumers expects to
implement retail open access for its electric customers in September 1999, and
therefore, Consumers discontinued application of SFAS 71 for the energy supply
portion of its business
62
63
in the first quarter of 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
established a regulatory asset for a corresponding amount. The regulatory asset
is collectible as part of the Transition Costs which are recoverable through the
regulated transmission and distribution portion of Consumers' business as
approved by an MPSC order in 1998. This order also allowed Consumers to recover
any energy supply related regulatory assets, plus a return on any unamortized
balance of those assets, from its transmission and distribution customers.
According to current accounting standards, Consumers can continue to carry its
energy supply related regulatory assets or liabilities for the part of the
business subject to regulatory change if legislation or an MPSC rate order
allows the collection of cash flows, to recover specific costs or to settle
obligations, from its regulated transmission and distribution customers. At
March 31, 1999, Consumers had a net investment in energy supply facilities of
$839 million included in electric plant and property.
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' Form 10-K for year ending December 31, 1998.
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.
IMPLEMENTATION OF NEW ACCOUNTING STANDARDSTANDARDS: In 1997,1998, the FASBAmerican Institute of
Certified Public Accountants issued SFAS 130,Statement of Position 98-1, Accounting for
the Costs of Computer Software Developed or Obtained for Internal Use, and
Statement of Position 98-5, Reporting Comprehensive Income. This
statement, whichon the Costs of Start-Up Activities. Also
in 1998, the Emerging Issues Task Force published Issue 98-10, Accounting for
Energy Trading and Risk Management Activities. Each of these statements is
effective for 19981999. Application of these standards has not had a material affect
on Consumers' financial statement reporting,
establishes standards for reporting and displayposition, liquidity or results of comprehensive income
and its components. Equity adjustments related to unrealized investment
gains and losses (net of tax), along with consolidated net income,
comprise comprehensive income.
CHANGE IN METHOD OF ACCOUNTING FOR PROPERTY TAXES
During the first quarter of 1998, Consumers implemented a change in the
method of accounting for property taxes so that such taxes are recognized
during the fiscal period of the taxing authority for which the taxes are
levied. This change provides a better matching of property tax expense
with the services provided by the taxing authorities, and is considered
the most acceptable basis of recording property taxes. Prior to 1998,
Consumers recorded property taxes monthly during the year following the
assessment date (December 31). The cumulative effect of this one-time
change in accounting increased other income by $66 million, and earnings,
net of tax, by $43 million. The pro forma effect on prior years'
consolidated net income of retroactively recording property taxes as if
the new method of accounting had been in effect for all periods presented
is not material.operations.
2: UncertaintiesUNCERTAINTIES
ELECTRIC CONTINGENCIES
Electric Environmental Matters: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 periodically review the
effectiveness of the national air quality standards in preventing adverse health
effects, and in 1997 the EPA revised these standards. It is probable that the
1997 standards will result in further limitations on small particulate-related
emissions.
In September 1998, based upon the 1997 standards, the EPA Administrator signed
final regulations requiring the State of Michigan to further limit nitrogen
oxide emissions. Fossil-fueled emitters, such as Consumers' generating units,
can anticipate a reduction in nitrogen oxide emissions by 2003 to only 32
percent of levels allowed for the year 2000. The State of Michigan has one year
to submit an implementation plan. The State of Michigan has filed a lawsuit
objecting to the extent of the required emission reductions. It is unlikely that
the State of Michigan will establish Consumers' nitrogen oxide
63
64
emissions reduction target until mid-to-late 1999. Until this target is
established, the estimated cost of compliance discussed below is subject to
revision. If a court were to order the EPA to adopt the State of Michigan's
position, compliance costs could be less than the preliminary estimated amounts.
The preliminary estimate of capital expenditures to reduce nitrogen
oxide-related emissions for Consumers' fossil-fueled generating units is
approximately $290 million, plus $10 million per year for operation and
maintenance costs. Consumers anticipates that these capital expenditures will be
incurred between 1999 and 2003. Consumers may need an equivalent amount of
capital expenditures and operation and maintenance costs to comply with the new
small particulate standards.
Consumers' coal-fueled electric generating units burn low-sulfur coal and are
currently operating at or near the sulfur dioxide emission limits that will be
effective in the year 2000. During the past few years, in order to comply with
the Clean Air Act, Consumers incurred capital expenditures totaling $46$55 million
to install equipment at certain generating units. Consumers estimates an
additional $16 million of capital expenditures for ongoing and proposed
modifications at otherthe remaining coal-fueled units to be an additional $26 million by themeet year 2000.2000 requirements.
Management believes that these expenditures will not materially affect
Consumers' annual operating costs.
Consumers currently operates within all Clean Air Act requirements and
meets current emission limits. The Act requires the EPA to review,
periodically, the effectiveness of the national air quality standards in
preventing adverse health affects. In 1997 the EPA revised these
standards. Monitoring for the new standards is reasonably likely to
result in further limitations on small particulate and ozone related
emissions.
Following completion of the Ozone Transport Assessment Group process and
requests by several Northeastern states, in September 1998, the EPA
Administrator signed final regulations requiring the State of Michigan to
further limit nitrogen oxide emissions. Fossil-fueled emitters, such as
Consumers' generating units, can anticipate reduction in nitrogen oxide
emissions by 2003 to only 32 percent of levels allowed for the year 2000.
The State of Michigan has one year to submit an implementation plan. It
is unlikely that the State of Michigan will establish Consumers' nitrogen
oxide emissions reduction target until mid-to-late 1999. Until this
target is established, the estimated cost of compliance is subject to
significant revision.
The preliminary estimate of capital costs to reduce nitrogen oxide-related
emissions for Consumers' fossil-fueled generating units is approximately
$290 million, plus an additional amount totaling $10 million per year for
operation and maintenance costs. Consumers may need an equivalent amount
of capital expenditures and operation and maintenance costs to comply with
the new small particulate standards. The State of Michigan has objected
to the extent of the required EPA emission reductions. If a court were to
order the EPA to adopt the State of Michigan's position, costs could be
less than the current estimated amounts.
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 properly
recoverable in rates under current ratemaking policies.
Consumers is a so-called 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 $3$2 million and $9
million. At September 30, 1998,March 31, 1999, Consumers has accrued $3 millionthe minimum amount of the
range for its estimated Superfund liability.
While decommissioning Big Rock, Consumers found that some areas of the plant
have coatings that contain both metals and PCBs. Consumers does not
believe that any facility in the United States currently accepts the
radioactive portion of that waste. The cost of removal and
disposal of these materials is currently unknown. These costs wouldThere may be some radioactive
portion of these materials which no facility in the United States will currently
accept. The cost of removal and disposal will constitute part of the cost to
decommission the plant, and will be paid from the decommissioning fund.
Consumers is studying the extent of the contamination and reviewing options.
Stray Voltage: Various parties have sued Consumers relating to the effect
of so-called stray voltage on certain livestock. Claimants contend that
stray voltage results when low-level electrical currents present in
grounded electrical systems are diverted from their intended path.
Consumers maintains a policy of investigating all customer calls regarding
stray voltage and working with customers to address their concerns. It
also has an ongoing mitigation program to modify the service of all
customers with livestock.
In December 1997, the Michigan Supreme Court remanded for further
proceedings a 1994 Michigan trial court decision that refused to allow the
claims of over 200 named plaintiffs to be joined in a single action. The
trial court dismissed all of the plaintiffs except the first-named
plaintiff, allowing the others to re-file separate actions. Of the
original plaintiffs, only 49 re-filed separate cases. All of those 49
cases have been resolved. The Michigan Supreme Court remanded the matter,
finding that the proper remedy for misjoinder was not dismissal, but to
automatically allow each case to go forward separately. Consumers filed a
motion for reconsideration with the Michigan Supreme Court, which was
denied. As a result, 21 individual plaintiffs elected to exercise their
right to proceed with separate actions. Consumers has now resolved all 21
of those cases. As of November 3, 1998, Consumers had 3 individual stray
voltage lawsuits awaiting trial court action, down from 12 cases as
reported at year end 1997.
Anti-Trust:ANTITRUST: In October 1997, two independent power producers sued Consumers and CMS Energy in a
federal court. The suit allegesalleged antitrust violations relating to contracts which
Consumers entered into with some of its customers and claims relating to power
facilities. The plaintiffs
claim damages of $100 million (which a court can treble in antitrust cases
as provided by law). In September 1998,On March 31, 1999, the court issued an opinion and order granting
CMS Energy's motion to dismiss. The court has not yet
ruled on Consumers' motion to dismiss. Consumers believesfor summary judgement, resulting in the lawsuit is
without merit and will vigorously defend against it, but cannot predictdismissal of the outcome ofcase.
The plaintiffs are appealing this matter.decision.
ELECTRIC RATE MATTERS
Electric Proceedings: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) and 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. It also
established an experimental direct-access program. Customers having a maximum
demand of at least 2 MW or greater are eligible to purchase generation
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services directly from any eligible third-party power supplier and Consumers
wouldwill transmit the power for a fee. The direct-access program is limited to 134
MW of load. In accordance with the MPSC order, Consumers held a lottery in April
1997 to select the customers to participate in the direct-access program.
Subsequently, direct access for a portion of this 134 MW began in late 1997. Consumers
expectsThe
program was substantially filled by the remaining amountend of direct access to begin later in 1998.March 1999.
In January 1998, the Court of Appeals affirmed an MPSC conclusion that the MPSC
has statutory authority to authorize an experimental electric retail wheeling
program. By its terms, noNo retail wheeling has yet occurred pursuant to that program. In
October 1998, the Michigan Supreme Court issued an order granting Consumers'
application for leave to appeal. A decision by the Michigan Supreme Court in
this matter is expectedmay be issued in mid-
1999.
For information on other orders, see the Electric Restructuring section
below.
Electric Restructuring:mid-1999.
ELECTRIC RESTRUCTURING: As part of ongoing proceedings relating to the
restructuring of the electric utility industry in Michigan, the MPSC in June
1997
the MPSC issued an order proposing that beginning January 1, 1998 Consumers transmit
and distribute energy on behalf of competing power suppliers to serve retail
customers. Subsequent to the June 1997 order, the MPSC issued furtherFurther restructuring orders issued in Octoberlate 1997 and in January and February 1998. These ordersearly 1998
provide for: 1) the recovery of estimated Transition Costs of $1.755 billion through
a charge to all direct-access customers purchasing their power from other sources until the
end of the transition period in 2007, subject to an adjustment through a true-up
mechanism; 2) the commencement of the phase-in of direct-accessretail open access in 1998; 3)
the suspension of the power supply cost recovery clause;PSCR clause as discussed below; and 4) all customers to be free to choose
their power suppliers on January 1, 2002. See
"Other Electric Uncertainties" below for further information regarding the
effect of the PSCR suspension on the recovery of MCV Facility capacity
charges. Consumers believes that the Transition Cost surcharge will apply
to all customers beginning in 2002. The recovery of prudent costs of implementing
a direct-accessretail open access program, preliminarily estimated at an additional $200
million, would be reviewed for prudence and recovered via a charge approved by
the MPSC. Nuclear decommissioning costs will also continue to be collected
through a separate surcharge to all customers.
In June 1998, Consumers expects Michigan legislative considerationsubmitted its plan for implementing retail open access
to the MPSC. The primary issues addressed in the plan are: 1) the implementation
schedule; 2) the retail open access service options available to customers and
suppliers; 3) the process and requirements for customers and others to obtain
retail open access service; and 4) the roles and responsibilities for Consumers,
customers and suppliers. In the plan, Consumers proposed to phase in 750 MW of
retail customer load to customers purchasing their power from other sources over
the entire subject1998-2001 period. In March 1999, Consumers received MPSC electric
restructuring orders which generally supported Consumers' implementation plan.
Accordingly, Consumers is in the process of implementing electric industry restructuring in 1998. To be acceptable to Consumers,
the legislation would have to provide for full recovery of Transition
Costs. Consumers expects the legislature to review all of the policy
choices made by the MPSC during the restructuring proceedings to assure
that they are in accord with those that the legislature believes should be
paramount.customer
retail open access.
There are numerous appeals pending at the Court of Appeals relating to the
MPSC's restructuring orders, including appeals by Consumers and Detroit
Edison.Consumers. Consumers believes
that the MPSC lacks statutory authority to mandate industry restructuring, and
its appeal generally is limited to this jurisdictional issue. As a result of an informal process involving consultations with MPSC staff
and other interested parties, as directed in the MPSC's February 1998
order, Consumers submitted to the MPSC in June 1998 its plan for
implementing direct access. The primary issues addressed in the plan are:
1) the implementation schedule; 2) the direct-access service options
available to customers and suppliers; 3) the process and requirements for
customers and others to obtain direct-access service; and 4) the roles and
responsibilities for Consumers, customers and suppliers. Under the
schedule in the plan, Consumers will, over the 1998-2001 period, phase in
750 MW of retail customer load to direct-access customers. At one time,
300 MW of direct-access load was to be opened for bidding in 1998, and an
additional 150 MW each year from 1999 to 2001. This plan is consistent
with the previous orders regarding the phase-in process. Due to the time
required for the MPSC to review the plan, Consumers does not believe
direct access will commence prior to the first quarter of 1999. For
further information regarding the effects of the restructuring on
accounting methods, see Electric Business Outlook - Electric Application
of SFAS 71 in the MD&A. Consumers cannot
predict the outcome or timing of electric restructuring on Consumers' financial position,
liquidity, or results of operations.
On October 2,As a result of a 1998 MPSC order in connection with the electric restructuring
program, the PSCR process was suspended. Under this program, customers buying
electricity from Consumers initiatedas traditional customers will not have their rates
adjusted to reflect the actual costs of fuel and purchased and interchanged
power during the 1998-2001 period. In prior years, any change in power supply
costs was passed through to such customers. In order to reduce the risk of
high energy prices during peak demand periods, Consumers is purchasing
electricity options and contracting to buy electricity during the months of June
through September 1999. Consumers is planning to have sufficient generation and
purchased capacity for a process for16 percent reserve margin in order to provide reliable
service to its electric service customers and to protect itself against
unscheduled plant outages. Under certain circumstances, the solicitationcost of bids to acquire Consumers' rights to 1,240 MW of contractpurchasing
capacity and associated energy under its PPA withon the MCV Partnership. Consumers'
rights to the 1,240 MW of contract capacity and associated energy are
being offered in one 1,240 MW block or in two 620 MW pieces, for the
period from the effective date in 1999 through either September 2007 or
March 2025.
Consumers has reserved the right at any time, in its sole discretion, to
terminate the bidding process or to reject any or all bids. Consumers
will not consummate a transaction unless important customer benefits flow
from that transaction. Any such transaction wouldspot market could be subject to the
approval of Consumers' Board of Directors and obtaining satisfactory rate
making and accounting treatment from the MPSC and the FERC with respect to
the definitive agreements, including any necessary approval by FERC of the
transfer of the 1,240 MW of contract capacity and associated energy.
In an order issued October 12, 1998, the MPSC delayed its consideration of
the auction process until the definitive agreements with the winning
bidder(s) are presented for review, but stated that Consumers' approach
offers a legitimate way to utilize independent market forces to determine
the above-market or stranded portion of Consumers' obligations under the
PPA with the MCV Partnership. Consumers anticipates that such definitive
agreements, if any, will be negotiated by early February 1999 and
appropriate filings will be made with MPSC for consideration during the
first quarter of 1999.substantial.
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OTHER ELECTRIC UNCERTAINTIES
The Midland Cogeneration Venture:THE MIDLAND COGENERATION VENTURE: The MCV Partnership, which leases and operates
the MCV Facility, contracted to sell electricity to Consumers for a 35-year
period beginning in 1990 and to supply electricity and steam to Dow. Consumers,
through two wholly owned subsidiaries, holds the following assets related to the
MCV Partnership and MCV Facility: 1) CMS Midland owns a 49 percent general
partnership interest in the MCV Partnership; and 2) CMS Holdings holds, through
FMLP, a 35 percent lessor interest in the MCV Facility.
Summarized Statements of Income for CMS Midland and CMS Holdings-
In Millions
Three Months Ended Nine Months Ended Twelve Months Ended
September 30 1998 1997 1998 1997 1998 1997
---- ---- ---- ---- ---- ----
Pretax operating
income $13 $18 $36 $36 $46 $45
Income taxes
and other 4 6 11 11 14 13
---- ---- ---- ---- ---- ----
Net income $ 9 $12 $25 $25 $32 $32
==== ==== ==== ==== ==== ====
In Millions
- ------------------------------------------------------------------------------------------------
Three Months Ended Twelve Months Ended
March 31 1999 1998 1999 1998
- ------------------------------------------------------------------------------------------------
Pretax operating income $14 $10 $53 $47
Income taxes and other 4 3 16 14
- ------------------------------------------------------------------------------------------------
Net income $10 $7 $37 $33
================================================================================================
Power Purchases from the MCV Partnership- After September 2007, pursuant
to the terms of the PPA and related undertakings, Consumers will only be
required to pay the MCV Partnership the capacity charge and energy charge
amounts authorized for recovery from electric customers by the MPSC.
Currently, 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
PartnershipFacility's availability, a levelized average capacity charge of 3.77 cents per
kWh and a fixed energy charge and a variable energy charge, based primarily on
Consumers' average cost of coal consumed. The MPSC has, sinceconsumed for all kWh delivered. Since January 1,
1993, Consumers has been permitted Consumersby the MPSC to recover capacity charges
averaging 3.62 cents per kWh for 915 MW, plus a substantial portion of the fixed
and variable energy charges. BeginningSince January 1, 1996, the MPSCConsumers also has alsobeen
permitted Consumers to recover capacity charges for the remaining 325 MW of MCV Facility contract
capacity. The
order approving such recovery indicated that the recoverable capacity charge for the 325 MW would gradually increase fromwith an initial average charge of 2.86 cents per kWh increasing
periodically to an average charge ofeventual 3.62 cents per kWh by 2004 which latter amount would be collectedand thereafter. Because
the MPSC suspended the PSCR process as parthas already approved recovery of the electric industry restructuring
order (see "Electric Restructuring" in this Note),capacity, Consumers expects to
recover the futurethese increases approved for the 325 MW capacity through an adjustment to the currently frozen PSCR level; this adjustmentlevel
which is currently under consideration by the MPSC. After September 2007, under
the terms of the PPA, Consumers will only be required to pay the MCV Partnership
capacity and energy charges that the MPSC has authorized for recovery from
electric customers.
In March 1999, Consumers signed a long-term power sales agreement to supply PECO
with electric generating capacity under the PPA until September 2007. After a
three-year transition period during which 100 to 150 MW will be sold to PECO,
beginning in 2002 Consumers will sell all 1,240 MW of PPA capacity and
associated energy to PECO. In March 1999, Consumers also filed an application
with the MPSC for accounting and rate-making approvals related to the
transaction. In an order issued on April 30, 1999, the MPSC conditionally
approved the requests for accounting and rate-making treatment to the extent
that customer rates are not increased from their level absent the agreement and
as modified by the order. Consumers is currently studying the conditions
attached to the approval to determine whether there is any need for
clarification of how the conditions would operate under various future scenarios
and whether the conditional approval is acceptable to Consumers.
Consumers recognized a loss in 1992 for the present value of the estimated
future underrecoveries of power costs under the PPA.PPA based on MPSC recovery
orders. At September 30,March 31, 1999 and March 31, 1998, and December 31,1997, the
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remaining after-tax present value of the estimated future PPA liability
associated with the 1992 loss totaled $118$103 million and $117$133 million,
respectively. The
increase inAt March 31, 1999, the liability since December 31, 1997 reflects an additional
$37 million accrual ($24 million after-tax) for higher than anticipated
MCV Facility availability levels experienced in prior periods and an
after-tax accretion expense of $8 million, partially offset by after-tax
cash underrecoveries of $31 million. The undiscounted after-tax amount associated
with thethis liability totaled $170 million at September 30, 1998.
The$159 million. These after-tax cash underrecoveries
are currently based on the assumption that the MCV Facility willwould be available to generate
electricity 91.5 percent of the time over its expected life. For the first nine months of
1998Historically the
MCV Facility was available 99.3has operated above the 91.5 percent level. Accordingly, in 1998,
Consumers increased its PPA liability by $37 million. Because the MCV Facility
operated above the 91.5 percent level in 1998 and thus far in 1999, Consumers
has an accumulated unrecovered after-tax shortfall of $13 million as of March
31, 1999. If the time, resulting in
$14 million over anticipated after-tax cash underrecoveries. Consumers
believes it will continue to experienceMCV Facility generates electricity at the 91.5 percent level
during the next five years, Consumers' after-tax cash underrecoveries associated
with the PPA in amounts comparable to those shown below.
In Millions
1998 1999 2000 2001 2002
Estimated cash
underrecoveries,
net of tax $37 $22 $21 $20 $19
Consumers bases the above estimated underrecoveries, in part, on an
estimate of the future availability of the MCV Facility.would be as follows.
In Millions
- ------------------------------------------------------------------------------------------------------------------
1999 2000 2001 2002 2003
- ------------------------------------------------------------------------------------------------------------------
Estimated cash underrecoveries, net of tax $26 $21 $20 $19 $18
==================================================================================================================
If the MCV Facility operates at availability levels above management's 91.5
percent estimate overmade in 1992 for the remainder of the PPA, Consumers will need
to recognize additional losses for future underrecoveries larger than amounts previously recorded. Therefore,underrecoveries. In March 1999,
Consumers would experience larger amountsand the MCV Partnership reached an agreement effective January 1, 1999
that will cap availability payments to the MCV Partnership at 98.5 percent. For
further discussion on the impact of cash underrecoveries than
originally anticipated.the frozen PSCR, see "Electric
Restructuring" in this Note. Management will continue to evaluateis evaluating the adequacy of the
accruedcontract loss liability considering actual MCV Facility operations.operations and any other
relevant circumstances.
In February 1998, the MCV Partnership filed a claim of appeal from the January
1998 and February 1998 MPSC orders in the electric utility industry
restructuring. At the same time, the MCV Partnership filed suit in the U.S.
District Court seeking a declaration that the MPSC's failure to provide
Consumers and the MCV Partnership a certain source of recovery of capacity
payments after 2007 deprived the MCV Partnership of its rights under the Public
Utilities Regulatory Policies Act of 1978. The MCV Partnership is seeking to
prohibit the MPSC from implementing portions of the order.
PSCR Matters Related to Power Purchases from the MCV Partnership- As part
of a 1995 decision in the 1993 PSCR reconciliation case, the MPSC
disallowed a portion of the costs related to purchases from the MCV
Partnership and instead assumed recovery of those costs from wholesale
customers. Consumers believed this was contrary to the terms of an
earlier 1993 settlement order and appealed. The MCV Partnership and ABATE
also filed separate appeals of this order. In November 1996, the Court of
Appeals affirmed the MPSC's 1995 decision. The MCV Partnership filed an
application for leave to appeal with the Michigan Supreme Court which was
denied in January 1998. This matter is now closed.
Nuclear Matters: Consumers filed updated decommissioning information with
the MPSC in 1995 that estimated decommissioning costs for Big Rock and
Palisades. In April 1996, the MPSC issued an order in Consumers' nuclear
decommissioning case, which fully supported Consumers' request and did not
change the overall surcharge revenues collected from retail customers.
The MPSC ordered Consumers to file a report on the adequacy of the
surcharge revenues with the MPSC at three-year intervals beginning in
1998. On March 31, 1998, Consumers filed with the MPSC a new
decommissioning cost estimate for Big Rock and Palisades of $294 million
and $518 million (in 1997 dollars) respectively. The estimated
decommissioning costs decreased from previous estimates primarily due to a
decrease in offsite burial costs. Consumers recommended a reallocation of
its existing surcharge between the two plants on January 1, 1999 to
provide additional funds to decommission Big Rock. Consumers filed a
revision to its Post Shutdown Activities Report (formerly decommissioning
report) with the NRC to reflect the shutdown of Big Rock.
Big Rock is being decommissioned. It was closed permanently on August 29,
1997 because management determined that it would be uneconomical to
operate in an increasingly competitive environment. Consumers had
originally scheduled the plant to close May 31, 2000, at the end of the
plant's operating license. Plant decommissioning began in September 1997
and may take five to ten years to return the site to its original
condition.orders.
NUCLEAR MATTERS: In January 1997, the NRC issued its Systematic Assessment of
Licensee Performance report for Palisades. The report rated all areas as good,
unchanged from the previous assessment.good.
The NRC suspended the Systematic
Assessment of Licensee Performancethis same assessment process for all licensees.licensees in 1998. Until
such time as the NRC completes its review of processes for assessing performance
at nuclear power plants, the Plant Performance Review is being used to provide
an assessment of licensee performance. Palisades received its performance review
dated March 26, 1999 in which the NRC stated that the overall performance at
Palisades was to have been reevaluated in September 1998.acceptable.
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, 1998March 31,
1999 Consumers had loaded 13 dry storage casks with spent nuclear fuel at
Palisades. ConsumersPalisades and plans to load five additional casks at Palisades in 1999 pending approval by
the NRC. In June 1997, the NRC approved Consumers' process for unloading spent
fuel from a cask at
Palisades previously discovered to have minor weld flaws. Consumers
intends to transfer the spent fuel to a new transportable cask when one is
available.
A planned outageConsumers maintains insurance coverage against property damage, debris removal,
personal injury liability and other risks that are present at its nuclear
generating facilities. Consumers also maintains coverage for refueling and maintenancereplacement power
costs during prolonged accidental outages at Palisades was completed
June 7, 1998. Consumers replaced 60 nuclear fuel assemblies in the
plant's reactorPalisades. Insurance would not
cover such costs during the outage.first 17 weeks of any outage, but would cover most
of such costs during the next 58 weeks
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of the outage, followed by reduced coverage to 80 percent for two additional
years. If certain covered losses occur at its own or other nuclear plants
similarly insured, Consumers could be required to pay maximum assessments of $15
million in any one year to NEIL under the nuclear liability secondary protection
program; $88 million per occurrence, 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 to it 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 vessel materials over time
due to operation in a radioactive environment. Based on continuing
analysis of data inmaterials. 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. 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.
Capital Expenditures:NUCLEAR PLANT DECOMMISSIONING: Consumers collected $51 million in 1998 from its
electric customers for decommissioning of its two nuclear plants. Amounts
collected from electric retail customers and deposited in trusts (including
trust earnings) are credited to accumulated depreciation. On March 22, 1999,
Consumers received a decommissioning order from the MPSC that estimated
decommissioning costs for Big Rock and Palisades to be $304 million and $541
million (in 1998 dollars), respectively. Consumers' site-specific
decommissioning cost estimates for Big Rock and Palisades assume that each plant
site will eventually be restored to conform with the adjacent landscape, and all
contaminated equipment will be disassembled and disposed of in a licensed burial
facility. The MPSC order also reduced annual decommissioning surcharges by $4
million a year and required Consumers to file revised decommissioning surcharges
for Palisades that incorporate a gradual reduction in the decommission trust's
equity investments following the plant's retirement. On April 21, 1999,
Consumers filed with the MPSC a revised decommissioning surcharge for Palisades
and anticipates a revised MPSC order in late 1999 or early 2000. If approved,
the annual decommissioning surcharges for Palisades would be reduced by an
additional $3 million a year. After retirement of Palisades, Consumers plans to
maintain the facility in protective storage if radioactive waste disposal
facilities are not available. Consumers will incur most of the Palisades
decommissioning costs after the plant's NRC operating license expires. When the
Palisades' NRC license expires in 2007, the trust funds are currently estimated
to have accumulated $677 million. Consumers estimates that at the time Palisades
is fully decommissioned in the year 2046, the trust funds will have provided
$1.9 billion, including trust earnings, over this decommissioning period. At
March 31, 1999, Consumers had an investment in nuclear decommissioning trust
funds of $386 million for Palisades and $179 million for Big Rock.
Big Rock was closed permanently in 1997 because management determined that it
would be uneconomical to operate in an increasingly competitive environment. The
plant was originally scheduled to close on May 31, 2000, at the end of the
plant's operating license. The MPSC has allowed Consumers to continue collecting
decommissioning surcharges through December 31, 2000. Plant decommissioning
began in 1997 and may take five to ten years to return the site to its original
condition. For the first three months of 1999, Consumers spent $14 million for
the decommissioning and withdrew $12 million from the Big Rock nuclear
decommissioning trust fund. In total, Consumers has spent $88 million for the
decommissioning and withdrew $81 million from the Big Rock nuclear
decommissioning trust fund. These activities had no impact on net income.
CAPITAL EXPENDITURES: Consumers estimates electric capital expenditures,
including new lease commitments, of $341 million for 1998, $380$382 million for 1999, and $385$392 million for
2000.2000, and $395 million for 2001. For further information, see the Capital
Expenditures Outlook section in the MD&A.
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GAS CONTINGENCIES
Gas Environmental Matters: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, including some 23
sites that formerly housed manufactured gas plant facilities, even those in
which it has a partial or no current ownership interest. In 1998By late 1999, Consumers
plansexpects to study indoor air issues at
residences on somehave completed sufficient investigation of the 23 sites to make a
more accurate estimate of remediation methods and ground water impacts or surface soil impacts
at other sites.costs. 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. Data available to Consumers andestimates its continued internal review
have resulted in an estimate for all costs related to
investigation and remedial action for all 23 sites of between $48 million and $98
million, of which Consumers accrued a liability for $48 million. These estimates
are based on undiscounted 1998 costs. As of September 30,1998,March 31, 1999, Consumers has a remainingan
accrued liability of $46$48 million and a regulatory asset for approximately the
same amount. 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.
According to an MPSC rate order issued in
1996, Consumers will deferdefers and amortize,amortizes over a period of ten years, environmental
clean-up costs above the amount currently being recovered in rates. Rate
recognition of amortization expense will not begin until after a prudence review
in a general rate case. The order authorizesConsumers is allowed current recovery of $1 million
annually. Consumers has initiated a
lawsuitlawsuits 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:GAS RESTRUCTURING: In December 1997, the MPSC approved Consumers' application to
implement a statewidean experimental gas transportation pilot
program. Consumers' expanded experimental program, which will extend over a
three-year period, eventually allowing 300,000 residential, commercial and
industrial retail gas sales customers to choose their gas commodity supplier.
The program is voluntary forand participating natural gas customers. Participating customers are being selected on
a first-come, first-served basis, up to a limit of 100,000 customers beginning April 1, 1998.per year. As of October 23, 1998,April
19,1999, more than 80,000142,000 customers chose alternative gas suppliers,
representing approximately 2434 bcf of gas load. Of these alternative gas suppliers, one
was a CMS Energy affiliate. UpUnder traditional regulation,
Consumers had not been allowed to 100,000 more customers may be added
beginning April 1 of eachbenefit from reducing its cost of the
next two years.commodity supplied to its customers, so the loss of commodity sales to these
customers will not have any impact on net income. Customers choosing to remain
as sales customers of Consumers will not see a rate change in their natural gas
rates. The order allowing the implementation of thisThis three-year program: 1) suspends Consumers' gas cost recoveryGCR clause, effective
April 1, 1998,
for a three-year period, establishing a gas commodity cost at a fixed rate of $2.84 per
mcf;mcf, allowing Consumers the opportunity to benefit by reducing its cost of the
commodity; 2) establishes an earnings sharing mechanism that will
provide for refunds towith customers if
Consumers' earnings during the three-
year term of the program exceed certain pre-determined levels; and 3) establishes a
gas transportation code of conduct that addresses concerns
about the relationship between
Consumers and marketers, including its affiliated marketers. This experimental program will allow competing gas
suppliers, including marketers and brokers, to market natural gas to a
large number of retail customers in direct competition with Consumers. In January 1998,
the Attorney General, ABATE and other parties filed claims of appeal regarding
the program with the Court of Appeals.
Consumers uses gas purchase contracts to limit its risk associated with
increases in its gas price above the $2.84 per mcf during the three-year
experimental gas program. It is management's intent to take physical delivery of
the commodity and failure could result in a significant penalty for
nonperformance. At September
30, 1998,March 31, 1999, Consumers had an exposure to gas price
increases if the ultimate cost of gas was to exceed $2.84 per mcf for the
following volumes: 5 percent of its 1998
requirements; 407 percent of its 1999 requirements; and 6555 percent of its 2000
requirements; and 55 percent of its first quarter 2001 requirements. Additional
forwardcontract coverage is currently under review. The forwardgas purchase contracts
currently in place were consummated at prices less than $2.84 per mcf. The gas
purchase contracts are being used to manage Consumers'
exposure toprotect against gas commodity costprice increases in a
three-year experimental gas program. For further information regarding the effects of the
restructuring on accounting methods, see Gas Business Outlook -
Application of SFAS 71 in the MD&A.program where Consumers is recovering from its
customers $2.84 per mcf for gas.
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OTHER GAS UNCERTAINTIES
Capital Expenditures:CAPITAL EXPENDITURES: Consumers estimates gas capital expenditures, including
new lease commitments, of $117$123 million for 1998, $125each of 1999 and 2000, and $120
million for 1999, and $125 million for 2000.2001. For further information, see the Capital Expenditures Outlook
section in the MD&A.
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 Financings and Capitalization
Authorization:SHORT-TERM FINANCINGS AND CAPITALIZATION
AUTHORIZATION: At November 1, 1998,March 31, 1999, Consumers had remaining FERC authorization to: 1)to issue or
guarantee, through June 2000, up to $900 million of short-term securities
outstanding at any one time; 2)time and to guarantee, through 1999, up to $25 million in
loans made by others to residents of Michigan for making energy-related home
improvements; and 3)improvements. Consumers also had remaining FERC authorization to issue, through
June 2000, up to $900$475 million and $425 million of long-term securities with
maturities up to 30 years for refinancing purposes.
Short-Term Financings:purposes and for general corporate
purposes, respectively.
SHORT-TERM FINANCINGS: Consumers has an unsecured $425 million credit facility
and unsecured lines of credit aggregating $130 million. These facilities are
available to finance seasonal working capital requirements and to pay for
capital expenditures between long-term financings. At September 30, 1998,March 31, 1999, a total of
$302$221 million was outstanding at a weighted average interest rate of 6.35.6 percent,
compared with $389$245 million outstanding at September 30, 1997,March 31, 1998, at a weighted average
interest rate of 6.2 percent. In January 1998,1999, Consumers entered intorenegotiated a
variable-to-fixed interest rate swapsswap totaling $300 million. These swap arrangements have had an immaterial
effect on$175 million in order to reduce
the impact of interest expense.rate fluctuations.
Consumers also has in place a $500 million trade receivables sale program. At
September 30,March 31, 1999 and 1998, and 1997, receivables sold under the program totaled $307$344 million
and $250$340 million, respectively. Accounts receivable and accrued revenue in the
Consolidated Balance Sheets have been reduced to reflect receivables sold.
Capital Stock: The primary asset ofLONG-TERM FINANCINGS: 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.
Long-Term Financings: The following table describes the new issuances of
long-term financings which have occurred during 1998 through early
November 1998.
In Millions
Month Interest Principal
Issued Maturity Rate (%) Amount Use of Proceeds
- ---------------- ------ -------- ------- --------- ---------------------------
Senior Notes (a) February 2008 6.375 $ 250 Pay down First Mortgage Bonds
and general corporate purposes
Senior Notes (a) March 2018 6.875 225 Pay down First Mortgage Bonds
and other long-term debt
Senior Notes (a) May 2008 6.2 (b) 250 Pay down First Mortgage Bonds,
long-term bank debt and
general corporate purposes
Long-Term
Bank Debt May 2001-2003 6.05 (d) 225 Pay down long-term bank debt
and general corporate purposes
Senior Notes (a) June 2018 6.5 (c) 200 Pay down First Mortgage Bonds and
general corporate purposes
Senior Notes (e) October 2028 6.5 150 Pay down long-term bank debt
and general corporate purposes
-------
Total $1,300
(a) The Senior Notes are secured by Consumers First Mortgage Bonds issued
contemporaneously in a similar amount.
(b) The interest rate may be reset in 2003.
(c) The interest rate will be reset in June 2005.
(d) The interest rate is variable; weighted average interest rate upon
original issuance was 6.05 percent.
(e) The Senior Notes are secured by Consumers First Mortgage Bonds issued
contemporaneously in a similar amount and are insured for full debt
service.
In October 1998, Consumers unwound an interest rate guarantee of $145
million associated with the issuance of $150 million senior notes. The
effective rate of the debt is 7 percent taking into consideration the
issuance costs, interest rate guarantee and insurance costs.
The following table describes the retirements of long-term financings
which have occurred during 1998 through early November 1998.
In Millions
Month Interest Principal
Retired Maturity Rate (%) Amount
------- ------- ------- ----------
First Mortgage Bonds February 1998 8.75 $248
Long-Term Bank Debt February 1998 6.4 (a) 50
First Mortgage Bonds March 2001-2002 7.5 119
First Mortgage Bonds April 2023 7.375 36
First Mortgage Bonds May 1998 6.875 43
Long-Term Bank Debt May 1998-1999 6.3 (b) 350
First Mortgage Bonds July 1999 8.875 136
First Mortgage Bonds October 1998 6.625 45
Long-Term Bank Debt November 2001-2003 6.05 50
-----
Total $1,077
=====
(a) The interest rate was variable; weighted average interest rate at
December 31, 1997 was 6.4 percent.
(b) The interest rate was variable; weighted average interest rate at
March 31, 1998 was 6.3 percent.
Consumers had unsecured, variable rate long-term bank debt withof $15 million in
February 1999, maturing in February 2002, at an outstanding balance at September 30, 1998 and 1997 of $225 million and
$400 million, respectively. At September 30, 1998 and 1997 the debt
carried weighted average interest rates of 6.1 percent and 6.3 percent,
respectively. In February 1998, Consumers retired $50 million of its $400
million unsecured long-term bank debt. In May 1998, Consumers refinanced
the remaining $350 million unsecured long-term bank debt, in part with
$225 million unsecured long-term bank debt. To cover the remaining $125
million of bank debt refinancing, in May 1998 Consumers issued $250
million of senior notes due 2008, at aninitial interest rate of 6.25.3
percent. The
$125 million balance of senior notes due 2008 wasProceeds from this issuance were used for repurchasing
$36 million of 7.375 percent First Mortgage Bonds and for general corporate purposes.
On April 1, 1999, Consumers redeemed all of its eight million outstanding shares
of the $2.08 preferred stock at $25.00 per share.
Under the provisions of its Articles of Incorporation, at September 30,
1998, Consumers had $295$308
million of unrestricted retained earnings available to pay common dividends.dividends at
March 31, 1999. In October 1998,January 1999, Consumers declared and paid a $68$97 million
common dividend to be paid in November 1998.dividend.
70
7771
ARTHUR ANDERSEN LLP
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,March 31, 1999 and 1998, and
1997, the related
consolidated statements of income, and common stockholder's equity for the three-month, nine-month, and twelve-month
periods then ended, and the related consolidated statements of cash flows
for the nine-monththree-month and twelve-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 generally accepted auditing standards, 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 generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet and consolidated statements of
long-term debt and preferred stock of Consumers Energy Company and subsidiaries
as of December 31, 1997,1998, and the related consolidated statements of income,
common stockholder's equity and cash flows for the year then ended (not
presented herein), and, in our report dated January 26, 1998,1999 (except with
respect to the matter disclosed in Note 2, "Electric Rate Matters", as to which
the date is March 29, 1999), we expressed an unqualified opinion on those
statements. In our opinion, the information set forth in the accompanying
consolidated balance sheet as of December 31, 1997,1998, 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,
November 10,May 11, 1999.
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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 an LNG regasification plant and 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 1998 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 contains forward-looking statements, as
defined by the Private Securities Litigation Reform Act of 1995. While
forward-looking statements are based on assumptions and such assumptions are
believed to be reasonable and are made in good faith, Panhandle cautions that
assumed results almost always vary from actual results and differences between
assumed and actual results can be material. The type of assumptions that could
materially affect the actual results are discussed in the Forward-Looking
Information section in this MD&A. More specific risk factors are contained in
various public filings made by Panhandle with the SEC. This report also
describes material contingencies in the Notes to Consolidated Financial
Statements and the readers are encouraged to read such Notes.
On March 29, 1999, Panhandle Eastern Pipe Line Company and its principal
consolidated subsidiaries, Trunkline and Pan Gas Storage, as well as Panhandle
Eastern Pipe Line Company's affiliates, Trunkline LNG and Panhandle Storage,
were acquired by CMS Panhandle Holding, which is an indirect wholly owned
subsidiary of CMS Energy. Immediately following the acquisition, Trunkline LNG
and Panhandle Storage became direct wholly owned subsidiaries of Panhandle
Eastern Pipe Line Company.
Prior to 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; certain 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 was 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 issued $800 million of senior unsecured notes and received
a $1.1 billion capital contribution from CMS Energy to fund the acquisition of
Panhandle. The CMS Panhandle Holding senior notes are guaranteed by Panhandle
Eastern Pipe Line Company. CMS Panhandle Holding intends to merge into Panhandle
Eastern Pipe Line Company during the second quarter of 1999, at which time the
purchase accounting impact of CMS Panhandle Holding's acquisition of Panhandle,
including the additional debt, equity and related allocation of fair value to
assets acquired and liabilities assumed, will be reflected in Panhandle's
consolidated financial statements. As of March 31, 1999, Panhandle's financial
statements reflect the assets and liabilities of Panhandle on a historical
basis.
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RESULTS OF OPERATIONS
NET INCOME:
In Millions
- -------------------------------------------------------------------------------
March 31 1999 1998 Change
- -------------------------------------------------------------------------------
Three Months Ended $ 34 $ 35 $ (1)
===============================================================================
For the three months ended March 31, 1999, net income was $34 million, down $1
million from the comparable period in 1998. Total natural gas transportation
volumes for the three months ended March 31, 1999 decreased one percent from the
same period in 1998.
Revenues for the three months ended March 31, 1999 decreased $6 million from the
comparable period in 1998 due primarily to decreased reservation revenues and
lower transportation volumes in 1999.
Operating expenses for the three months ended March 31, 1999 decreased $5
million from the prior year comparable period, primarily as a result of lower
benefit costs.
PRETAX OPERATING INCOME:
In Millions
- --------------------------------------------------------------------------------
Three Months
Ended March 31
Change Compared to Prior Year 1999 vs. 1998
- --------------------------------------------------------------------------------
Deliveries (including special contract discounts) $(5)
Other non-commodity revenue (1)
Operations and maintenance 5
------------------
Total Change $(1)
================================================================================
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CASH POSITION AND INVESTING
OPERATING ACTIVITIES: Panhandle's consolidated net cash provided by operating
activities is derived mainly from the transportation and storage of natural gas.
Consolidated cash from operations totaled $21 million and $19 million for the
first three months of 1999 and 1998, respectively. Panhandle uses operating cash
primarily to maintain and expand its gas systems.
INVESTING ACTIVITIES: Panhandle's consolidated net cash used in investing
activities totaled $21 million and $19 million for the first three months of
1999 and 1998, respectively. The increase of $2 million primarily reflects an
increase in advances to subsidiaries of Duke Energy, partially offset by
decreased capital expenditures due to the 1998 expenditures related to the
Terrebonne expansion project in the Gulf of Mexico.
CAPITAL EXPENDITURES
Panhandle estimates capital expenditures and investments, including allowance
for funds used during construction, for the next three years to be approximately
$60 million for each year. These estimates are prepared for planning purposes
and are subject to revision. Capital expenditures for 1999 are expected to be
satisfied by cash from operations.
OUTLOOK
The market for transmission of natural gas to the Midwest is increasingly
competitive and may become more so in light of projects in progress to increase
Midwest transmission capacity for gas originating in Canada and the Rocky
Mountain region. As a result, there continues to be pressure on prices charged
by Panhandle and an increasing necessity to discount the prices charged from the
legal maximum. Panhandle continues to be selective in offering discounts to
maximize revenues from existing capacity and to advance projects that provide
expanded services to meet the specific needs of customers. Management is
evaluating the continued applicability of SFAS 71, particularly in light of the
acquisition by CMS Panhandle Holding and the new cost basis of Panhandle which
will result from the pending merger of CMS Panhandle Holding with Panhandle.
OTHER MATTERS
REGULATORY MATTERS
The interstate natural gas transmission industry currently is regulated on a
basis designed to recover the costs (including depreciation and return on
investment) of providing services to customers. In July 1998, the FERC issued a
NOPR on short-term interstate natural gas transportation services, which
proposed an integrated package of revisions to its regulations governing such
services. "Short term" has been defined in the NOPR as all transactions of less
than one year. Under the proposed approach, cost-based regulation would be
eliminated for short-term transportation and replaced by regulatory policies
intended to maximize competition in the short-term transportation market,
mitigate the ability of companies to exercise residual monopoly power and
provide opportunities for greater flexibility providing pipeline services. The
proposed changes include initiatives to revise pipeline scheduling procedures,
receipt and delivery point policies and penalty policies, and require pipelines
to auction short-term capacity. Other
75
76
proposed changes would improve the FERC's reporting requirements, permit
pipelines to negotiate rates and terms of services, and revise certain rate and
certificate policies that affect competition.
In conjunction with the NOPR, the FERC also issued a NOI on its pricing policies
for the long-term markets. The NOI seeks comments on whether FERC's policies are
biased toward either short-term or long-term service, provide accurate price
signals and the right incentives for pipelines to provide optimal transportation
services and construct facilities that meet future demand, and do not result in
over-building and excess capacity.
Comments on the NOPR and NOI were filed in April 1999. Because these notices are
at a very early stage and ultimate resolution is unknown, management cannot
estimate the effects of these matters on future consolidated results of
operations or financial position.
For detailed information about other uncertainties, see Note 2, Regulatory
Matters, incorporated by reference herein.
NEW ACCOUNTING RULES
In 1998, SFAS 133, Accounting for Derivative Instruments and Hedging Activities,
was issued., Panhandle is required to adopt this standard by January 1, 2000.
SFAS 133 requires that all derivatives be recognized as either assets or
liabilities and measured at fair value, and it defines the accounting for
changes in the fair value of the derivatives depending on the intended use of
the derivative. Panhandle is currently reviewing the expected impact of SFAS 133
on its financial statements and has not yet determined the timing of or method
of adoption.
YEAR 2000 COMPUTER MODIFICATIONS
STATE OF READINESS: In 1996, Panhandle initiated its Year 2000 Readiness Program
and began a formal review of computer-based systems and devices that are used in
its business operations. These systems and devices include customer information,
financial, materials management and personnel systems, as well as components of
natural gas production, gathering, processing and transmission.
Panhandle is using a three-phase approach to address year 2000 issues: 1)
inventory and preliminary assessment of computer systems, equipment and devices;
2) detailed assessment and remediation planning; and 3) conversion, testing and
contingency planning. Panhandle is employing a combination of systems repair and
planned systems replacement activities to achieve year 2000 readiness for its
business and process control systems, equipment and devices. Panhandle has
substantially completed the first two phases throughout its business operations,
and is in various stages of the third and final phase. Panhandle's goal is to
have its critical systems, equipment and devices year 2000 ready by mid-1999.
Business acquisitions routinely involve an analysis of year 2000 readiness and
are incorporated into Panhandle's overall program as necessary.
Panhandle is actively evaluating and tracking year 2000 readiness of external
third parties with which it has a significant relationship. Such third parties
include vendors, customers, governmental agencies and other business associates.
While the year 2000 readiness of third parties cannot be controlled, Panhandle
is attempting to assess the readiness of third parties and any potential
implications to its operations. Alternative suppliers of critical products,
goods and services are being identified, where necessary.
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77
COSTS: Management believes it is devoting the resources necessary to achieve
year 2000 readiness in a timely manner. Current estimates for total costs of the
program, including internal labor as well as consulting and contract costs, are
approximately $1 million. The costs exclude replacement systems that, in
addition to being year 2000 ready, provide significantly enhanced capabilities
which will benefit operations in future periods.
RISKS: Management believes it has an effective program in place to manage the
risks associated with the year 2000 issue in a timely manner. Nevertheless,
since it is not possible to anticipate all future outcomes, especially when
third parties are involved, there could be circumstances in which Panhandle
would temporarily be unable to deliver services to its customers. Management
believes that the most reasonably likely worst case scenario would be minor,
localized interruptions of service, which likely would be rapidly restored. In
addition, there could be a temporary reduction in the service needs of customers
due to their own year 2000 problems. In the event that such a scenario occurs,
it is not expected to have a material adverse impact on results of operations or
financial position.
CONTINGENCY PLANS: Year 2000 contingency planning is currently underway to
assure continuity of business operations for all periods during which year 2000
impacts may occur. Panhandle intends to complete its year 2000 contingency plans
by mid-1999. These plans address various year 2000 risk scenarios that cross
departmental, business unit and industry lines as well as specific risks from
various internal and external sources, including supplier readiness.
Based on assessments completed to date and compliance plans in process,
management believes that year 2000 issues, including the cost of making critical
systems, equipment and devices ready, will not have a material adverse effect on
Panhandle's business operation, results of operations or financial position.
Nevertheless, achieving year 2000 readiness is subject to risks and
uncertainties, including those described above. While management believes the
possibility is remote, if Panhandle's internal systems, or the internal systems
of external parties with which it has a significant relationship, fail to
achieve year 2000 readiness in a timely manner, Panhandle's business operation,
results of operations or financial position could be adversely affected.
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QuantitativeFORWARD-LOOKING INFORMATION
From time to time, Panhandle may make statements regarding its assumptions,
projections, expectations, intentions or beliefs about future events. These
statements are intended as "forward-looking statements" under the Private
Securities Litigation Reform Act of 1995. Panhandle cautions that assumptions,
projections, expectations, intentions or beliefs about future events may and
Qualitative
Disclosures about Market Riskoften do vary from actual results and the differences between assumptions,
projections, expectations, intentions or beliefs and actual results can be
material. Accordingly, there can be no assurance that actual results will not
differ materially from those expressed or implied by the forward-looking
statements. The following are some of the factors that could cause actual
achievements and events to differ materially from those expressed or implied in
such forward-looking statements: entry of competing pipelines into Panhandle's
markets and competitive strategies of competing pipelines, including rate and
other pricing practices; state and federal legislative and regulatory
initiatives that affect cost and investment recovery, have an impact on rate
structures, and affect the speed and degree to which competition enters the
natural gas industry; the weather and other natural phenomena; the timing and
extent of changes in prices of commodities (primarily natural gas and competing
fuels) and interest rates; changes in environmental and other laws and
regulations to which Panhandle is subject to or other external factors over
which Panhandle has no control; the results of financing efforts; expansion and
other growth opportunities; year 2000 readiness; and the effect of Panhandle's
accounting policies issued periodically by accounting standard-setting bodies.
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PANHANDLE EASTERN PIPE LINE COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(IN MILLIONS)
Three Months Ended
March 31,
----------------------
1999 1998
------- -------
OPERATING REVENUE
Transportation and storage of natural gas $127 $132
Other 6 7
---- ----
Total operating revenue 133 139
---- ----
OPERATING EXPENSES
Operation and maintenance 43 48
Depreciation and amortization 14 14
General taxes 7 7
---- ----
Total operating expenses 64 69
---- ----
PRETAX OPERATING INCOME 69 70
OTHER INCOME 5 6
---- ----
EARNINGS BEFORE INTEREST AND TAXES 74 76
---- ----
INTEREST CHARGES
Interest on long-term debt 6 6
Other interest 13 13
---- ----
19 19
NET INCOME BEFORE INCOME TAXES 55 57
INCOME TAXES 21 22
---- ----
CONSOLIDATED NET INCOME $ 34 $ 35
==== ====
The accompanying condensed notes are an integral part of these statements.
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PANHANDLE EASTERN PIPE LINE COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN MILLIONS)
Three Months Ended
March 31,
--------------------------
1999 1998
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 34 $ 35
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 15 15
Deferred income taxes -- (1)
Changes in current assets and liabilites (31) (31)
Other, net 3 1
---- ----
Net cash provided by operating activities 21 19
---- ----
CASH FLOWS FROM INVESTING ACTIVITIES
Capital and investment expenditures (4) (18)
Net decrease (increase) in advances receivable - PanEnergy (17) 1
Retirements and other -- (2)
---- ----
Net cash used in investing activities (21) (19)
---- ----
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) $ 25 $ 25
Income taxes paid (net of refunds) 37 55
The accompanying condensed notes are an integral part of these statements.
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PANHANDLE EASTERN PIPE LINE COMPANY
CONSOLIDATED BALANCE SHEETS
(IN MILLIONS, EXCEPT SHARE AMOUNTS)
March 31,
1999 December 31,
(Unaudited) 1998
------------- --------------
ASSETS
PROPERTY, PLANT AND EQUIPMENT
Cost $2,478 $2,760
Less accumulated depreciation and amortization 1,652 1,798
------ ------
Sub-total 826 962
Construction work-in-progress 12 17
------ ------
Net property, plant and equipment 838 979
------ ------
INVESTMENTS
Advances and note receivable - PanEnergy -- 738
Investment in affiliates 1 44
Other 7 6
------ ------
Total investments and other assets 8 788
------ ------
CURRENT ASSETS
Receivables 88 94
Inventory and supplies 56 55
Deferred income tax 8 2
Current portion of regulatory assets -- 6
Other 29 23
------ ------
Total current assets 181 180
------ ------
NON-CURRENT ASSETS
Deferred income taxes 469 --
Debt expense 11 11
Other 16 15
------ ------
Total non-current assets 496 26
------ ------
TOTAL ASSETS $1,523 $1,973
====== ======
The accompanying condensed notes are an integral part of these statements.
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March 31,
1999 December 31,
(Unaudited) 1998
------------ ------------
STOCKHOLDER'S INVESTMENT AND LIABILITIES
CAPITALIZATION
Common stockholder's equity
Common stock, no par, 1,000 shares authorized, issued and outstanding $ 1 $ 1
Paid-in capital 966 466
Retained earnings 102 91
------ ------
Total common stockholder's equity 1,069 558
Long-term debt 299 299
------ ------
Total capitalization 1,368 857
------ ------
CURRENT LIABILITIES
Notes payable - PanEnergy -- 675
Accounts payable 8 56
Accrued taxes 1 58
Accrued interest 2 8
Other 110 117
------ ------
Total current liabilities 121 914
------ ------
NON-CURRENT LIABILITIES
Deferred income taxes -- 99
Other 34 103
------ ------
Total deferred credits and other liabilities 34 202
------ ------
COMMITMENTS AND CONTINGENCIES (NOTES 6 AND 7)
TOTAL STOCKHOLDER'S INVESTMENT AND LIABILITIES $1,523 $1,973
====== ======
The accompanying condensed notes are an integral part of these statements.
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PANHANDLE EASTERN PIPE LINE COMPANY
CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDER'S EQUITY
(UNAUDITED)
(IN MILLIONS)
Three Months Ended
March 31,
------------------------
1999 1998
------- -------
COMMON STOCK
At beginning and end of period $ 1 $ 1
------- -------
OTHER PAID-IN CAPITAL
At beginning of period 466 466
Contributions from CMS Panhandle Holding 500 --
------- -------
At end of period 966 466
------- -------
RETAINED EARNINGS
At beginning of period 91 34
Net Income 34 35
Contributions to PanEnergy 57 --
Common stock dividends (80) (2)
------- -------
At end of period 102 67
------- -------
TOTAL COMMON STOCKHOLDER'S EQUITY $ 1,069 $ 534
======= =======
The accompanying condensed notes are an integral part of these statements.
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PANHANDLE EASTERN PIPE LINE COMPANY
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
These Condensed Notes and their related Consolidated Financial Statements should
be read along with the Consolidated Financial Statements and Notes contained in
the 1998 Form 10-K of Panhandle Eastern Pipe Line Company, 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 Eastern Pipe Line Company is a wholly owned subsidiary of CMS
Panhandle Holding, which is an indirect wholly owned subsidiary of CMS Energy.
Panhandle Eastern Pipe Line Company was incorporated in Delaware in 1929.
Panhandle is primarily engaged in the interstate transportation and storage of
natural gas. The interstate natural gas transmission and storage operations of
Panhandle are 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 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, at March 31, 1999,
Trunkline LNG and Panhandle Storage were wholly owned subsidiaries of Panhandle
Eastern Pipe Line Company.
Prior to 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; certain 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 was 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 issued $800 million of senior unsecured notes and received
a $1.1 billion capital contribution from CMS Energy to fund the acquisition of
Panhandle. The CMS Panhandle Holding senior notes are guaranteed by Panhandle
Eastern Pipe Line Company. CMS Panhandle Holding intends to merge into Panhandle
Eastern Pipe Line Company during the second quarter of 1999, at which time the
purchase accounting impact of CMS Panhandle Holding's acquisition of Panhandle,
including the additional debt, equity and related allocation of fair value to
assets and liabilities acquired, will be reflected in Panhandle's consolidated
financial statements. As of March 31, 1999, Panhandle's financial statements
reflect the assets and liabilities of Panhandle on a historical basis. If the
acquisition and the merger of CMS Panhandle Holding into Panhandle Eastern Pipe
Line Company had occurred on January 1, 1999, the unaudited March 31, 1999 pro
forma amounts for operating revenue, net income and total assets would have been
$128 million, $27 million and $2.5 billion, respectively.
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2. REGULATORY MATTERS
Effective August 1996, Trunkline placed into effect a general rate increase,
subject to refund. Hearings were completed in October of 1997 and initial
decisions by a FERC ALJ were issued on certain matters in May 1998 and on the
remainder of the rate proceedings in November 1998. Responses to the initial
decisions were provided by Trunkline to FERC following the issuance of the
initial decisions. In May 1999, FERC issued an order remanding certain matters
back to the ALJ for further proceedings.
In conjunction with a FERC order issued in September 1997, certain natural gas
producers were required to refund previously collected Kansas ad-valorem taxes
to interstate natural gas pipelines. These pipelines were ordered to refund
these amounts to their customers. All payments are to be made in compliance with
prescribed FERC requirements. At March 31, 1999 and December 31, 1998, accounts
receivable included $51 million and $50 million, respectively, due from natural
gas producers, and other current liabilities included $51 million and $50
million, respectively, for related obligations.
In June 1998, Trunkline filed a petition with the FERC to abandon 720 miles of
its 26-inch diameter pipeline that extends from Longville, Louisiana to Bourbon,
Illinois. Trunkline requested permission to transfer the pipeline to an
affiliate, which has entered into an option agreement with Aux Sable for
potential conversion of the line to allow transportation of hydrocarbon vapors.
Trunkline has requested FERC to grant the abandonment authorization in time to
separate the pipeline from existing facilities and allow Aux Sable to convert
the pipeline to hydrocarbon vapor service by October 1, 2000, if the option is
exercised. The abandonment would reduce Trunkline's certificated capacity from
the current level of 1,810 Mdth/d to 1,555 Mdth/d, but will have no adverse
effect on Trunkline's ability to meet all of its firm service obligations. The
filing is pending FERC action.
3. RELATED PARTY TRANSACTIONS
A summary of certain balances due to or due from related parties included in the
Consolidated Balance Sheets is as follows:
Millions
- -------------------------------------------------------------------------
March 31, December 31,
1999 1998
- -------------------------------------------------------------------------
Receivables $ 1 $ 2
Accounts payable - 46
Taxes accrued 1 35
- -------------------------------------------------------------------------
Interest charges included $13 million and $14 million for the three months ended
March 31, 1999 and 1998, respectively, for interest associated with notes
payable to a subsidiary of Duke Energy.
In conjunction with the acquisition, all intercompany advance and note balances
between Panhandle and subsidiaries of Duke Energy were eliminated. Transactions
with prior affiliates before the acquisition are now reflected as receivables on
the Consolidated Balance Sheets.
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4. GAS IMBALANCES
The Consolidated Balance Sheets include in-kind balances as a result of
differences in gas volumes received and delivered. At March 31, 1999 and
December 31, 1998, other current assets included $24 million and $20 million,
respectively, and other current liabilities included $24 million and $22
million, respectively, related to gas imbalances.
5. INVESTMENT IN AFFILIATES
NORTHERN BORDER PARTNERS, L.P. Northern Border Partners, L.P. is a master
limited partnership that owns 70 percent of Northern Border Pipeline Company, a
partnership operating a pipeline transporting natural gas from Canada to the
Midwest area of the United States. At December 31, 1998, Panhandle held a 7.0
percent limited partnership interest in Northern Border Partners, L.P., and
thus, an indirect 4.9 percent ownership interest in Northern Border Pipeline
Company. In conjunction with the acquisition of Panhandle by CMS Energy,
Panhandle transferred its interest in Northern Border to a subsidiary of Duke
Energy in the first quarter of 1999.
WESTANA GATHERING COMPANY. Westana Gathering Company is a joint venture that
provides gathering, processing and marketing services for natural gas producers
in Oklahoma. In conjunction with the acquisition of Panhandle by CMS Energy,
Panhandle's interest in Westana Gathering Company was transferred to a
subsidiary of Duke Energy in the first quarter of 1999.
LEE 8 STORAGE. Panhandle, through its subsidiary Panhandle Storage, owns a 40
percent interest in the Lee 8 partnership, which operates a 1.4 bcf natural gas
storage facility in Michigan. This interest results from the contribution of the
stock of Panhandle Storage to Panhandle Eastern Pipe Line Company by CMS
Panhandle Holding on March 29, 1999.
6. COMMITMENTS AND CONTINGENCIES
CONTINGENT INDEBTEDNESS: On March 29, 1999, CMS Panhandle Holding issued $800
million of senior unsecured notes which were guaranteed by Panhandle: $300
million of 6.125 percent senior notes due 2004; $200 million of 6.5 percent
senior notes due 2009; and $300 million of 7.0 percent senior notes due 2029.
CMS Panhandle Holding intends to merge into Panhandle during the second quarter
of 1999, at which point Panhandle will become the direct obligor on these notes.
CAPITAL EXPENDITURES: Panhandle estimates capital expenditures and investments,
including allowance for funds used during construction, for the next three years
to be approximately $60 million for each year. These estimates are prepared for
planning purposes and are subject to revision. Capital expenditures for 1999 are
expected to be satisfied by 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 from losses resulting from certain legal and tax
liabilities of Panhandle, including the matters specifically discussed below:
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In April 1997, a group of affiliated plaintiffs that own and/or operate various
pipeline and marketing companies and partnerships primarily in Kansas filed suit
against Panhandle in the United States District Court for the Western District
of Missouri. The plaintiffs alleged that Panhandle has engaged in unlawful and
anti-competitive conduct with regard to requests for interconnects with the
Panhandle system for service to the Kansas City area. This matter was resolved
between the parties in March 1999 and did not have a material adverse effect on
consolidated results of operations or financial position.
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 purchasers of gas from Anadarko, retroactive to
1983. In October 1998 and January 1999, the FERC issued orders on ad valorem tax
issues, finding that first sellers of gas were primarily liable for refunds. The
FERC also noted that claims for indemnity or reimbursement among the parties
would be better addressed by the United States District Court for the Southern
District of Texas. Panhandle believes the resolution of this matter will not
have a material adverse effect on consolidated results of operations or
financial position.
Panhandle is also involved in other legal, tax and regulatory proceedings before
various courts, regulatory commissions and governmental agencies regarding
matters arising in the ordinary course of business, some of which involve
substantial amounts. Where appropriate, Panhandle has made accruals in
accordance with SFAS 5, Accounting for Contingencies, in order to provide for
such matters. Management believes the final disposition of these proceedings
will not have a material adverse effect on consolidated results of operations or
financial position.
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 an
affiliate of Pan-Alberta Gas Limited. The transportation agreement requires
estimated total payments of $53 million for the remainder of 1999 through 2001.
Management believes the probability that Panhandle will be required to perform
under this guarantee is remote.
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7. 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. Soil and sediment testing, to date, has detected no significant
off-site contamination. Panhandle has communicated with the EPA and appropriate
state regulatory agencies on these matters. Under the terms of the sale of
Panhandle to CMS Energy, as discussed in Note 1 to the Consolidated Financial
Statements, 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. These
clean-up programs are expected to continue until 2001.
8. BENEFIT PLANS
RETIREMENT PLAN: Following the acquisition of Panhandle by CMS Energy described
in Note 1, Panhandle now participates in CMS Energy's non-contributory defined
benefit retirement plan covering most employees with a minimum of one year
vesting service.
Under the terms of the acquisition of Panhandle by CMS Energy, benefit
obligations related to active employees and certain plan assets were transferred
to CMS Energy. Benefit obligations related to existing retired employees and
remaining plan assets were retained by a subsidiary of Duke Energy.
OTHER POSTRETIREMENT BENEFITS: Panhandle, in conjunction with CMS Energy,
provides certain health care and life insurance benefits for retired employees
on a contributory and noncontributory basis. Substantially all employees may
become eligible for these benefits if they have met certain age and service
requirements as defined in the plans.
Under the terms of the acquisition of Panhandle by CMS Energy as discussed in
Note 1 to the Consolidated Financial Statements, benefit obligations related to
active employees were transferred to CMS Energy, and benefit obligations related
to existing retired employees and plan assets were retained by a subsidiary of
Duke Energy.
9. TAXES
As described in Note 1, the stock of Panhandle was acquired from subsidiaries of
Duke Energy by CMS Panhandle Holding for a total of $2.2 billion in cash and
acquired debt. The acquisition was treated 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. This tax basis
in excess of Panhandle's current book basis creates deferred tax assets and
associated paid-in-capital of approximately $477 million. When CMS Panhandle
Holding is merged with Panhandle, approximately $462 million of Panhandle's
deferred tax assets will be eliminated.
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ARTHUR ANDERSEN LLP
Report of Independent Public Accountants
To Panhandle Eastern Pipe Line Company:
We have reviewed the accompanying consolidated balance sheet of Panhandle
Eastern Pipe Line Company (a Delaware corporation) and subsidiaries as of March
31, 1999, and the related consolidated statements of income, common
stockholder's equity and cash flows for the three-month period then ended.
These financial statements are the responsibility of the Company's management.
The consolidated financial statements of Panhandle Eastern Pipe Line Company as
of December 31, 1998, were audited by other auditors whose report dated
February 12, 1999, expressed an unqualified opinion on those statements.
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 generally accepted auditing standards, 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 generally accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
Houston, Texas,
May 11, 1999.
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QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
CMS ENERGY
Quantitative and Qualitative Disclosures About Market Risk is contained in PART
I: CMS Energy Corporation Management's DiscussionENERGY CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS which is
incorporated by reference herein.
CONSUMERS
Quantitative and AnalysisQualitative Disclosures About Market Risk is contained in PART
I: CONSUMERS ENERGY COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS which is
incorporated by reference herein.
PART II. OTHER INFORMATION
ItemITEM 1. Legal ProceedingsLEGAL 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 Consumers'Panhandle Eastern Pipe Line Company's
Form 10-K for the year ended December 31, 1997, and in their Form 10-Q for the quarters
ended March 31, and June 30, 1998. Reference is made to the Notes
to the Consolidated Financial Statements included herein for additional
information regarding various pending administrative and judicial proceedings
involving rate, operating, regulatory and environmental matters.
Consumers Stray Voltage LitigationCONSUMERS
ANTITRUST LITIGATION
For a discussion of Consumers' stray voltageantitrust litigation see Note 2 subsection
"Stray Voltage""Antitrust" of the Condensed Notes to the Consolidated Financial Statements in
Part I of this Report, incorporated by reference herein.
CMS Energy and Consumers Antitrust LitigationPANHANDLE
REGULATORY MATTERS
For a discussion of CMS Energy's and Consumers' antitrust litigationcertain Panhandle regulatory matters see Note 2 subsection "Anti-Trust""Regulatory
Matters" of the Condensed Notes to the Consolidated Financial Statements in Part
I of this Report, incorporated by reference herein.
CMS Energy Independent Power Production Project Litigation
In August 1995, William R. Williams and twoOTHER MATTERS
For a discussion of his corporations, Altresco
Philippines, Inc. and WRW Corporation (formerly Altresco International,
Inc.), filed a lawsuit against CMS GenerationPanhandle's other litigation matters see Note 6 subsection
"Litigation" of the Condensed Notes to the Consolidated Financial Statements in
connection with a project
to be developed in the PhilippinesPart I of this Report, incorporated by Luzon Power Associates, Inc. in
which CMS Generation owned a 50 percent interest. The plaintiffs' claims
primarily relate to a confidentiality agreement between the parties and
CMS Generation's alleged violation of a restrictive covenant in the
confidentiality agreement. The plaintiffs claimed direct damages of
approximately $85 million and indirect damages in a like amount from loss
of future business, plus punitive damages, interest, and attorney's fees.
Arbitration was completed in June 1998 and a decision by the International
Chamber of Commerce ("ICC"), International Court of Arbitration was
rendered in September 1998. The ICC ruled that the plaintiffs are entitled
to a sum of $3 million in direct damages together with interest thereon at
7 percent per annum, plus a total of $3.7 million in attorneys fees and
costs. Related litigation in Denver Federal District Court remains
pending, with a trial scheduled for April 1999.reference herein.
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ITEM 6. Exhibits and Reports on FormEXHIBITS AND REPORTS ON FORM 8-K
(a) List of Exhibits
(4)(a) - Consumers: Third Supplemental Indenture dated as of
October 29, 1998, between Consumers and The
Chase Manhattan Bank, as Trustee
(4)(b) - Consumers: Seventy-fourth Supplemental Indenture dated as
of October 29, 1998, between Consumers and The
Chase Manhattan(A) LIST OF EXHIBITS
(4)(a) - Panhandle: Indenture dated as of March 29, 1999, among CMS Panhandle Holding Company,
Panhandle Eastern Pipe Line Company and NBD Bank, as Trustee
(4)(b) - Panhandle: First Supplemental Indenture dated as of March 29, 1999, among CMS Panhandle
Holding Company, Panhandle Eastern Pipe Line Company and NBD Bank, as Trustee,
including a form of Guarantee by Panhandle Eastern Pipe Line Company of the
obligations of CMS Panhandle Holding Company
(10)(a) - Panhandle: Purchase Agreement between the Underwriters named therein and CMS Panhandle
Holding Company dated March 23, 1999
(12) - CMS Energy: Statements regarding computation of Ratio of Earnings to Fixed Charges
(15)(a) - Consumers: Letter of Independent Public Accountant
(15)(b) - CMS Energy: Letter of Independent Public Accountant
(27)(a) - CMS Energy: Financial Data Schedule
(27)(b) - Consumers: Financial Data Schedule
(27)(c) - Panhandle: Financial Data Schedule
(99) - CMS Energy: Consumers Gas Group Financials
(b) Reports on Form
(B) REPORTS ON FORM 8-K
A Current Report on Form 8-K dated October 2, 1998 was filed by each of
CMS Energy and Consumers, andfiled Current Reports on Form 8-K dated June 23,
July 30, October 2, and November 3, 1998 were filed by CMS Energy, allon January 20, 1999 covering
matters pursuant to "Item 5. Other Events.Events" and on April 6, 1999 covering matters
pursuant to "Item 2. Acquisition of Assets" and "Item 7. Exhibits."
Panhandle Eastern Pipe Line Company filed Current Reports on Form 8-K on January
26, 1999 covering matters pursuant to "Item 5. Other Events" and on April 5,
1999 covering matters pursuant to "Item 2. Disposition of Assets", "Item 4.
Changes in Registrant's Certifying Accountant" and "Item 7. Exhibits."
Consumers did not file any Current Reports on Form 8-K since filing its Annual
Report on Form 10-K for the year ended December 31, 1998.
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8092
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 12, 1998 By_____________________May 13, 1999 By: /s/ A.M. Wright
----------------------------------------------
Alan M. Wright
Senior Vice President and
Chief Financial Officer
CONSUMERS ENERGY COMPANY
(Registrant)
Dated: November 12, 1998 By_____________________May 13, 1999 By: /s/ A.M. Wright
----------------------------------------------
Alan M. Wright
Senior Vice President and
Chief Financial Officer
PANHANDLE EASTERN PIPE LINE COMPANY
--------------------------------------------------
(Registrant)
Dated: May 13, 1999 By: /s/ A.M. Wright
----------------------------------------------
Alan M. Wright
Senior Vice President and
Chief Financial Officer
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
CMS ENERGY CORPORATION
AND
CONSUMERS ENERGY COMPANY
FORM 10-Q93
LIST OF EXHIBITS
FOR QUARTER ENDED SEPTEMBER 30, 1998
EXHIBIT INDEX
Exhibit
Numbers Description
(4)(a) Consumers: Third Supplemental Indenture dated as of October
29, 1998, between Consumers and The Chase Manhattan
(4)(a) - Panhandle: Indenture dated as of March 29, 1999, among CMS Panhandle Holding Company,
Panhandle Eastern Pipe Line Company and NBD Bank, as Trustee
(4)(b) Consumers: Seventy-fourth Supplemental Indenture dated as of
October 29, 1998, between Consumers and The Chase Manhattan
Bank, as Trustee
(12) CMS Energy: Statements regarding computation of Ratio
of Earnings to Fixed Charges
(15)(a) Consumers: Letter of Independent Public Accountant
(15)(b) - Panhandle: First Supplemental Indenture dated as of March 29, 1999, among CMS Panhandle
Holding Company, Panhandle Eastern Pipe Line Company and NBD Bank, as Trustee,
including a form of Guarantee by Panhandle Eastern Pipe Line Company of the
obligations of CMS Panhandle Holding Company
(10)(a) - Panhandle: Purchase Agreement between the Underwriters named therein and CMS Panhandle
Holding Company dated March 23, 1999
(12) - CMS Energy: Statements regarding computation of Ratio of Earnings to Fixed Charges
(15)(a) - CMS Energy: Letter of Independent Public Accountant
(27)(a) - CMS Energy: Financial Data Schedule
(27)(b) - Consumers: Financial Data Schedule
(27)(c) - Panhandle: Financial Data Schedule
(99) - CMS Energy: Consumers Gas Group Financials
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