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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q/A
AMENDMENT NO. 1
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2002MARCH 31, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission Registrant; State of Incorporation; IRS Employer
File Number Address; and Telephone Number Identification No.
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1-5611 CONSUMERS ENERGY COMPANY 38-0442310
(A Michigan Corporation)
212 West Michigan Avenue,
Commission Registrant; State of Incorporation; IRS Employer
File Number Address; and Telephone Number Identification No.
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1-5611 CONSUMERS ENERGY COMPANY 38-0442310
(A Michigan Corporation)
One Energy Plaza, Jackson, Michigan 49201
(517)788-0550
Indicate by check mark whether the RegistrantsRegistrant (1) havehas 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 wereRegistrant was
required to file such reports), and (2) havehas been subject to such filing
requirements for the past 90 days. Yes X[X] No --- ----[ ]
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
Number of shares outstanding of each of the issuer's classes of common stock at
October 31, 2002:
May 1, 2003:
CONSUMERS ENERGY COMPANY, $10 par value, privately held by CMS Energy 84,108,789
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Consumers Energy CompanyCONSUMERS ENERGY COMPANY
QUARTERLY REPORT ON FORM 10-Q/A TO THE UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2002MARCH 31, 2003
EXPLANATORY NOTE
This Form 10-Q/A amends Consumers' quarterly report on Form 10-Q for the
quarterly period ended September 30, 2002,March 31, 2003, which was filed with the SEC on NovemberMay 14,
2002.2003. As discussed below, Consumers' consolidated financial
statementsConsolidated Balance Sheets and
Consolidated Statements of Common Stockholder's Equity for the quarterly period
ending September 30, 2002March 31, 2003 have been restated pursuant to audit adjustments resulting from the re-audit of the
consolidated financial statements for the years 2001 and 2000, as well as,
reviews of the quarterly periods of 2002 of CMS Energy, Consumers' parent
company, which included audit and review work at Consumers.reflect a March 2003 common dividend
declaration.
In April 2002, Consumers'March 2003, Consumers Board of Directors upondeclared a $31 million common
dividend to CMS Energy, payable in May 2003. Consumers' Consolidated Balance
Sheets and Consolidated Statements of Common Stockholder's Equity filed in the
recommendation of the
Audit Committee of the Board, voted to discontinue using Arthur Andersen to
audit Consumers' financial statementsForm 10-Q for the year ending December 31, 2002.
Consumers had previously retained Arthur Andersen to review its financial
statements for the quarterquarterly period ended March 31, 2002. In May 2002, Consumers' Board2003 did not reflect this
dividend declaration. Therefore, Consumers has restated its March 31, 2003
Consolidated Balance Sheets and Consolidated Statements of Directors engaged Ernst & YoungCommon Stockholder's
Equity to audit its financial statements forreflect this dividend declaration.
There is no impact on the
year ending December 31, 2002.
In May 2002, as a result of certain financial reporting issues surrounding
round-trip trading transactions at CMS MST, Arthur Andersen notified CMS Energy that Arthur Andersen's historical opinions on CMS Energy's financial statements
for the fiscal years ended December 31, 2001 and December 31, 2000 could not be
relied upon. As a result, Ernst & Young began the process of re-auditing CMS
Energy's consolidated financial statements for each of the fiscal years ended
December 31, 2001 and December 31, 2000. Although Arthur Andersen's notification
did not apply to separate, audited financial statements of Consumers for the
applicable years, the re-audit did include audit work at Consumers for these
years.
In connection with Ernst & Young's re-audit of the fiscal years ended December
31, 2001 and December 31, 2000, Consumers has made, in consultation with Ernst &
Young, certain adjustments to its consolidated financial statements for the
fiscal years ended December 31, 2001 and December 31, 2000, which affect the
results of the quarterly periods within 2001 and 2002. Therefore, the
consolidated financial statements for the four quarters of 2001, the years ended
December 31, 2001 and 2000, and the subsequent three quarters of 2002 have been
restated from amounts previously reported. The three primary restated items: 1)
adjust the timing of the recognition of Consumers' losses for underrecoveries of
power costs on power purchases from the MCV, 2) account for Consumers' new
headquarters building as a capital lease and 3) as of September 30, 2002,
recognize a $29 million federal income tax sharing allocation from CMS Energy as
a dividend to be paid by Consumers to CMS Energy instead of income tax expense.
A summary of the principal effects of the restatement on Consumers' consolidated
financial statementsCorporation or Panhandle Eastern Pipeline
Company Form 10-Q for the quarterly periodsperiod ended September 30, 2002March 31, 2003 regarding this
issue and September 30, 2001 is contained in Note 4, Restatement, and unaudited restated
financial statements for the first and second quarters of 2002, with comparable
restated
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periods for 2001,they are contained in Note 6, Restated Financial Statements for
First and Second Quarters, in the notes to the consolidated financial
statements.
Each item of the September 30, 2002 Form 10-Q that is affected by the
restatement has been amended and restated. Generally, nonot being amended.
No attempt has been made in this Form 10-Q/A to modify or update other
disclosures as presented in the September 30, 2002March 31, 2003 Form 10-Q except as required to
reflect the effects of the restatement.
However, material subsequent events have been reported in a
separate section of the MD&A, entitled "Subsequent Events", and in Note 5,
Subsequent Events, in the notes to the consolidated financial statements. In
addition, certain financial information from the first and second quarters of
2002 and 2001 has been included in the Results of Operations and Capital
Resources and Liquidity sections of the MD&A, and restated financial statements
for March 31, 2002 and 2001 and June 30, 2002 and 2001 have been included in
Note 6, Restated Financial Statements for First and Second Quarters, in the
notes to the consolidated financial statements. For further information about
Consumers' restated financial statements for December 31, 2001 and December 31,
2000, see Consumers' Form 10-K/A for the fiscal year ended December 31, 2001,
which was filed with the SEC on February 21, 2003.
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CONSUMERS ENERGY COMPANY
QUARTERLY REPORT ON FORM 10-Q/A TO THE
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
FOR THE QUARTER ENDED SEPTEMBER 30, 2002MARCH 31, 2003
TABLE OF CONTENTS
Page
----
Page
Glossary................................................................................................ 5Glossary......................................................................................... 4
PART I: FINANCIAL INFORMATION
Management's Discussion and Analysis
Change in Auditors and Restatements............................................................9
Forward-Looking Statements and Risk Factors...................................................10Factors............................................ CE - 1
Critical Accounting Policies..................................................................12Policies........................................................... CE - 1
Results of Operations.........................................................................20Operations.................................................................. CE - 9
Capital Resources and Liquidity...............................................................27
Outlook.......................................................................................30Liquidity........................................................ CE - 11
Outlook................................................................................ CE - 13
Other Matters.................................................................................39
Subsequent Events.............................................................................39Matters.......................................................................... CE - 22
Consolidated Financial Statements
-- As Restated
Consolidated Statements of Income.............................................................45Income...................................................... CE - 24
Consolidated Statements of Cash Flows.........................................................46Flows.................................................. CE - 25
Consolidated Balance Sheets................................................................47-48Sheets............................................................ CE - 26
Consolidated Statements of Common Stockholder's Equity........................................49Equity................................. CE - 28
Condensed Notes to Consolidated Financial Statements:
1. Corporate Structure and Summary of Significant Accounting Policies.......................51Policies................. CE - 31
2. Uncertainties............................................................................54Uncertainties...................................................................... CE - 33
3. Short-Term Financings and Capitalization.................................................69Capitalization...................................................... CE - 45
4. Restatement..............................................................................72Financial and Derivative Instruments............................................... CE - 48
5. Subsequent Events........................................................................81Implementation of New Accounting Standards......................................... CE - 51
6. Restated Quarterly Financial Data (Unaudited)............................................86Restatement........................................................................ CE - 53
Quantitative and Qualitative Disclosures about Market Risk..............................................96Risk....................................... CO - 1
PART II: OTHER INFORMATION
Item 1. Legal Proceedings..........................................................................96Proceedings................................................................... CO - 1
Item 5. Other Information................................................................... CO - 2
Item 6. Exhibits and Reports on Form 8-K...........................................................97
Signatures..............................................................................................988-K.................................................... CO - 3
Signatures.................................................................................. CO - 5
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GLOSSARY
Certain terms used in the text and financial statements are defined below.
ABATE......................................Association of Businesses Advocating Tariff Equity
AEP........................................American Electric Power Company
ALJ....................................... Administrative Law Judge
AMT....................................... Alternative Minimum Tax
APB....................................... Accounting Principles Board
APB Opinion No. 18....................... APB Opinion No. 18, "The Equity Method of Accounting for
Investments in Common Stock"
APB Opinion No. 20........................ APB Opinion No. 20, "Accounting Changes"
APB Opinion No. 30........................ APB Opinion No. 30, "Reporting Results of Operations--Operations --
Reporting the Effects of Disposal of a Segment of a Business"
Accumulated Benefit Obligation............ The liabilities of a pension plan based on service and pay to
date. This differs from the Projected Benefit Obligation that
is typically disclosed in that it does not reflect expected
future salary increases
Alliance.................................. Alliance Regional Transmission Organization
Arthur Andersen........................... Arthur Andersen LLP
Articles.................................. Articles of Incorporation
Attorney General.......................... Michigan Attorney GeneralARO....................................... Asset Retirement Obligation
bcf....................................... Billion cubic feet
BG LNG Services........................... BG LNG Services, Inc., a subsidiary of BG Group of the United
Kingdom
Big Rock.................................. Big Rock Point nuclear power plant, owned by Consumers
Board of Directors........................ Board of Directors of CMS Energy
Bookouts.................................. Unplanned netting of transactions from multiple contracts
CEO........................................ChiefCentennial................................ Centennial Pipeline, LLC, in which Panhandle owns a one-third
interest
CEO....................................... Chief Executive Officer
CFO....................................... Chief Financial Officer
Clean Air Act............................. Federal Clean Air Act, as amended
CMS Capital............................... CMS Capital Corp., a subsidiary of Enterprises
CMS Electric and Gas...................... CMS Electric and Gas Company, a subsidiary of Enterprises
CMS Energy................................ CMS Energy Corporation, the parent of Consumers and
Enterprises
CMS Energy Common Stock................... Common stock of CMS Energy, par value $.01 per share
CMS Gas Transmission...................... CMS Gas Transmission Company, a subsidiary of Enterprises
CMS Generation............................ CMS Generation 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
Consumers..................................ConsumersCMS Oil and Gas .......................... CMS Oil and Gas Company, a subsidiary of Enterprises
CMS Viron................................. CMS Viron Energy Services, a wholly owned subsidiary of CMS
MST
Consumers................................. Consumers Energy Company, a subsidiary of CMS Energy
Consumers Campus Holdings..................Consumers Campus Holdings, L.L.C., a wholly owned subsidiary of Consumers
Consumers Receivables Funding............. Consumers Receivables Funding,, L.L.C., a wholly owned subsidiary of Consumers
Court of Appeals.......................... Michigan Court of Appeals
Customer Choice Act....................... Customer Choice and Electricity Reliability Act, a Michigan
statute enacted in June 2000 that allows all retail customers
choice of alternative electric suppliers as of January 1,
2002, provides for full recovery of net stranded costs and
implementation costs, establishes a five percent reduction
in residential rates, establishes rate freeze and rate cap,
and allows for Securitization
Detroit Edison.............................TheEdison............................ The Detroit Edison Company, a non-affiliated company
DIG....................................... Dearborn Industrial Generation, L.L.C., a wholly owned
subsidiary of CMS Generation
4
DOE....................................... U.S. Department of Energy
Dow....................................... The Dow Chemical Company, a non-affiliated company
Duke Energy............................... Duke Energy Michigan...........................Corporation, a non-affiliated company
EITF...................................... Emerging Issues Task Force
Enterprises............................... CMS Enterprises Company, a subsidiary of CMS Energy
Michigan is a trade association for the cogeneration, independent power
and waste to energy industries in Michigan.
Enterprises............................... CMS Enterprises Company, a subsidiary of CMS Energy
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EPA....................................... U. S.U.S. Environmental Protection Agency
EPS....................................... Earnings per share
ERISA..................................... Employee Retirement Income Security Act
Ernst & Young............................. Ernst & Young LLP
FASB...................................... Financial Accounting Standards Board
FERC...................................... Federal Energy Regulatory Commission
FMB....................................... First Mortgage Bonds
FMLP...................................... First Midland Limited Partnership, a partnership that holds a
lessor interest in the MCV facility
GCR........................................GasFTC....................................... Federal Trade Commission
GCR....................................... Gas cost recovery
GWh....................................... Gigawatt-hourGTNs...................................... CMS Energy General Term Notes(R), $200 million Series D, $400
million Series E and $300 million Series F
Guardian ................................. Guardian Pipeline, LLC, in which Panhandle owns a one-third
interest
Health Care Plan.......................... The medical, dental, and prescription drug programs offered
to eligible employees of Panhandle, Consumers and CMS Energy
IPP........................................IndependentINGAA .................................... Interstate Natural Gas Association of America
IPP....................................... Independent Power Producer
ISO........................................Independent System Operator
kWh........................................Kilowatt-hour
LIBOR......................................LondonJorf Lasfar............................... The 1,356 MW coal-fueled power plant in Morocco, jointly
owned by CMS Generation and ABB Energy Venture, Inc.
kWh....................................... Kilowatt-hour
LIBOR..................................... London Inter-Bank Offered Rate
Loy Yang.................................. The 2,000 MW brown coal fueled Loy Yang A power plant and an
associated coal mine in Victoria, Australia, in which CMS
Generation holds a 50 percent ownership interest
LNG....................................... Liquefied natural gas
LNG Holdings.............................. CMS Trunkline LNG Holdings, LLC, jointly owned by CMS
Panhandle Holdings, LLC and Dekatherm Investor Trust
Ludington................................. Ludington pumped storage plant, jointly owned by Consumers
and Detroit Edison
MACT.......................................Maximum Achievable Control Technology
MAPL...................................... Marathon Ashland Petroleum, LLC, partner in Centennial
mcf....................................... Thousand cubic feet
MCV Facility.............................. A natural gas-fueled, combined-cycle cogeneration facility
operated by the MCV Facility.............................. A natural gas-fueled, combined-cycle cogeneration facility operated by thePartnership
MCV Partnership........................... Midland Cogeneration Venture Limited Partnership MCV Partnership...........................in which
Consumers has a 49 percent interest through CMS Midland
Cogeneration Venture Limited Partnership in which Consumers has a 49
percent interest through CMS Midland
MD&A...................................... Management's Discussion and Analysis
MEPCC..................................... Michigan Electric Power Coordination CenterMD&A...................................... Management's Discussion and Analysis
5
METC...................................... Michigan Electric Transmission Company, formally a subsidiary
of Consumers Energy and now an indirect subsidiary of
Trans-Elect
Michigan Gas Storage...................... Michigan Gas Storage Company, a subsidiary of Consumers
MISO...................................... Midwest Independent System Operator
Moody's .................................. Moody's Investors Service, Inc.
MPSC...................................... Michigan Public Service Commission
MTH....................................... Michigan Transco Holdings, Limited Partnership
MW........................................ Megawatts
NEIL...................................... Nuclear Electric Insurance Limited, an industry mutual
insurance company owned by member utility companies
NMC........................................NuclearNMC....................................... Nuclear Management Company, LLC, formed in 1999 by Northern
States Power Company (now Xcel Energy Inc.), Alliant Energy,
Wisconsin Electric Power Company, and Wisconsin Public
Service Company to operate and manage nuclear generating
facilities owned by the four utilities
NRC........................................NuclearNOPR...................................... Notice of Proposed Rulemaking
NRC....................................... Nuclear Regulatory Commission
OATT.......................................OpenOATT...................................... Open Access Transmission Tariff
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OPEB...................................... Postretirement benefit plans other than pensions for retired
employees
Palisades..................................PalisadesPalisades................................. Palisades nuclear power plant, which is owned by Consumers
Panhandle................................. Panhandle Eastern Pipe Line Company, including its
subsidiaries Trunkline, Pan Gas Storage, Panhandle Storage,
and Panhandle Holdings. Panhandle is a wholly owned
subsidiary of CMS Gas Transmission
Panhandle Eastern Pipe Line............... Panhandle Eastern Pipe Line Company, a wholly owned subsidiary
of CMS Gas Transmission
PCB....................................... Polychlorinated biphenyl
Pension Plan.............................. The trusteed, non-contributory, defined benefit pension plan
of Panhandle, Consumers and CMS Energy
PJM........................................Pennsylvania-Jersey-MarylandPowder River.............................. CMS Oil & Gas previously owned a significant interest in
coalbed methane fields or projects developed within the
Powder River Basin which spans the border between Wyoming and
Montana. The Powder River properties have been sold and
reported as a discontinued operation for the three months
ended March 31, 2002
PPA....................................... The Power Purchase Agreement between Consumers and the MCV
Partnership with a 35-year term commencing in March 1990
Price-AndersonPrice Anderson Act........................ Price-AndersonPrice Anderson Act, enacted in 1957 as an amendment to the
Atomic Energy Act of 1954, as revised and extended over the
years. This act stipulates between nuclear licensees and the
U.S. government the insurance, financial responsibility, and
legal liability for nuclear accidents
PSCR.......................................PowerPSCR...................................... Power supply cost recovery
PUHCA..................................... Public Utility Holding Company Act of 1935
PURPA..................................... Public Utility Regulatory Policies Act of 1978
RTO....................................... Regional Transmission Organization
SEC....................................... U.S. Securities and Exchange Commission
6
Securitization............................ A financing method authorized by statute and approved by the MPSC
which allows a utility to set aside and pledge a portion of the
rate payments received by its customers for the repayment of
Securitization bonds issued by a special purpose entity affiliated
with such utility
SERP...................................... Supplemental Executive Retirement Plan
SFAS...................................... Statement of Financial Accounting Standards
SFAS No. 5................................ SFAS No. 5, "Accounting for Contingencies"
SFAS No. 13...............................34............................... SFAS No. 13 "Accounting for Leases"34, "Capitalization of Interest Cost"
SFAS No. 52............................... SFAS No. 52, "Foreign Currency Translation"
SFAS No. 71............................... SFAS No. 71, "Accounting for the Effects of Certain Types of
Regulation"
SFAS No. 87............................... SFAS No. 87, "Employers' Accounting for Pensions"
SFAS No. 106.............................. SFAS No. 106, "Employers' Accounting for Postretirement
Benefits Other Than Pensions"
SFAS No. 115.............................. SFAS No. 115, "Accounting for Certain Investments in Debt and
Equity Securities"
SFAS No. 121..............................123.............................. SFAS No. 121,123, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of"Stock-Based Compensation"
SFAS No. 133.............................. SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities, as amended and interpreted"
SFAS No. 142.............................. SFAS No. 142, "Goodwill and Other Intangible Assets"
SFAS No. 143.............................. SFAS No. 143, "Accounting for Asset Retirement Obligations"
SFAS No. 144.............................. SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets"
SFAS No. 145.............................. SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and
64, Amendment of FASB Statement No. 13, and Technical
Corrections"
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SFAS No. 146.............................. SFAS No. 146, "Accounting for Costs Associated with Exit or
Disposal Activities"
SFAS No. 147..............................148.............................. SFAS No. 147, "Acquisitions of Certain Financial Institutions"148, "Accounting for Stock-Based Compensation --
Transition and Disclosure"
SIPS...................................... State Implementation Plans
Southern Union............................ Southern Union Company, a non-affiliated company
Special Committee......................... A special committee of independent directors, established by
CMS Energy's Board of Directors, to investigate matters
surrounding round-trip trading
Stranded Costs............................ Costs incurred by utilities in order to serve their customers
in a regulated monopoly environment, which may not be
recoverable in a competitive environment because of customers
leaving their systems and ceasing to pay for their costs.
These costs could include owned and purchased generation and
regulatory assets
Superfund................................. Comprehensive Environmental Response, Compensation and
Liability Act
Transition Costs.......................... Stranded Costs, as defined, plus the costs incurredTEPPCO.................................... TE Products Pipeline Company, Limited Partnership, partner in
the transition to
competitionCentennial
Trunkline ................................ Trunkline Gas Company, LLC, a subsidiary of CMS Panhandle
Holdings, LLC
Trunkline LNG ............................ Trunkline LNG Company, LLC, a subsidiary of LNG Holdings, LLC
Trust Preferred Securities................ Securities representing an undivided beneficial interest in the
assets of statutory business trusts, the interests of which 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
7
VEBA Trusts............................... VEBA (voluntary employees' beneficiary association) Trusts
are tax-exempt accounts established to specifically set aside
employer contributed assets to pay for future expenses of the
OPEB plan
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Consumers Energy Company
CONSUMERS ENERGY COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS
CHANGE IN AUDITORS AND RESTATEMENT
Consumers' consolidated financial statements for the quarterly period ended
September 30, 2002 have been restated, pursuant to audit adjustments resulting
from the re-audit of the consolidated financial statements for the years 2001
and 2000, as well as, reviews of the quarterly periods of 2002 of CMS Energy,
Consumers' parent company, which included audit and review work at Consumers.
In April 2002, Consumers' Board of Directors, upon the recommendation of the
Audit Committee of the Board, voted to discontinue using Arthur Andersen to
audit Consumers' financial statements for the year ending December 31, 2002.
Consumers had previously retained Arthur Andersen to review its financial
statements for the quarter ended March 31, 2002. In May 2002, Consumers' Board
of Directors engaged Ernst & Young to audit its financial statements for the
year ending December 31, 2002.
In May 2002, as a result of certain financial reporting issues surrounding
round-trip trading transactions at CMS MST, Arthur Andersen notified CMS Energy
that Arthur Andersen's historical opinions on CMS Energy's financial statements
for the fiscal years ended December 31, 2001 and December 31, 2000 could not be
relied upon. As a result, Ernst & Young began the process of re-auditing CMS
Energy's consolidated financial statements for each of the fiscal years ended
December 31, 2001 and December 31, 2000. Although Arthur Andersen's notification
did not apply to separate, audited financial statements of Consumers for the
applicable years, the re-audit did include audit work at Consumers for these
years.
In connection with Ernst & Young's re-audit of the fiscal years ended December
31, 2001 and December 31, 2000, Consumers has made, in consultation with Ernst &
Young, certain adjustments to its consolidated financial statements for the
fiscal years ended December 31, 2001 and December 31, 2000, which affect the
results of the quarterly periods within 2001 and 2002. Therefore, the
consolidated financial statements for the four quarters of 2001, the years ended
December 31, 2001 and 2000, and the subsequent three quarters of 2002 have been
restated from amounts previously reported. At the time it adopted the accounting
treatment for these items, Consumers believed that such accounting was
appropriate under generally accepted accounting principles and Arthur Andersen
concurred.
The audit adjustments: 1) change the accounting associated with the PPA reserve,
which results in: the reversal of the 2001 increase to the PPA reserve of $126
million; the reversal of a net $12 million charged to operating expenses
associated with the PPA in 2001; and the reversal of $29 million of the amount
charged to the PPA reserve in 2000; and 2) recognize Consumers' new headquarters
lease as a capital lease, instead of an operating lease, and record the lease
obligation and capitalize costs incurred. Each of these transactions involved
estimates, assumptions, and judgment based on the best information available at
the time the transactions occurred. The audit adjustments reflect current
judgment on these matters. In addition, the audit adjustments recognize
immaterial reconciling adjustments to advertising costs, Consumers' OPEB
liability and related party receivables and payables. Consumers has also made an
additional adjustment associated with its financial statements as of September
30, 2002. This additional adjustment by Consumers recognizes the $29 million
federal income tax sharing allocation from CMS Energy as a dividend to be paid
by Consumers to CMS Energy instead of income tax expense as originally recorded
in September 2002. A summary of the principal effects of the restatement on
Consumers' consolidated financial statements for the quarterly period ended
September 30, 2002 and September 30, 2001 is contained in Note 4, Restatement,
and unaudited restated financial statements for the first and second
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Consumers Energy Company
quarters of 2002, with comparable restated periods for 2001 are contained in
Note 6, Restated Financial Statements for First and Second Quarters, in the
notes to the consolidated financial statements. In addition, certain financial
information from the first and second quarters of 2002 and 2001 has been
included in the Results of Operations and Capital Resources and Liquidity
sections of this MD&A. For further information about Consumers' restated
financial statements for December 31, 2001 and December 31, 2000, see Consumers'
Form 10-K/A for the fiscal year ended December 31, 2001, which was filed with
the SEC on February 21, 2003.
MODIFIED MANAGEMENT'S DISCUSSION AND ANALYSIS
The following discussion and analysis has been modified for the restatement,
including the first and second quarters of 2002 and 2001, and should be read in
combination with Consumers' consolidated financial statements and notes to those
statements included in this Form 10-Q/A, and Consumers' 2001 Form 10-K/A that
was previously filed with the SEC on February 21, 2003. All note references
within this MD&A refer to the notes to Consumers' consolidated financial
statements.
Consumers, a subsidiary of CMS Energy, a holding company, is an electric and gas
utility company that provides service to customers in Michigan's Lower
Peninsula. Consumers' customer base includes a mix of residential, commercial
and diversified industrial customers, the largest segment of which is the
automotive industry.
FORWARD-LOOKING STATEMENTS AND RISK FACTORS
The MD&A of this Form 10-Q/A should be read along with the MD&A and other parts
of Consumers' 2001 Form 10-K/A. This MD&A refers to, and in some sections specifically incorporates by
reference, Consumers' Condensed Notes to Consolidated Financial Statements and should be
read in conjunction with such Consolidated Financial Statements and Notes. This
Form 10-Q/A10-Q and other written and oral statements that Consumers may make contain
forward-looking statements as defined by the Private Securities Litigation
Reform Act of 1995. Consumers' intentions with the use of the words,
"anticipates," "believes," "estimates," "expects," "intends," and "plans," and
variations of such words and similar expressions, are solely to identify
forward-looking statements that involve risk and uncertainty. These
forward-looking statements are subject to various factors that could cause
Consumers' actual results to differ materially from the results anticipated in
such statements. Consumers has no obligation to update or revise forward-looking
statements regardless of whether new information, future events or any other
factors affect the information contained in such statements. Consumers does,
however, discuss certain risk factors, uncertainties and assumptions in this
MD&A and in Item 1 of the 20012002 Form 10-K/A10-K in the section entitled
"Consumers Forward-Looking"Forward-Looking Statements Cautionary Factors and
Uncertainties"Factors" and in various public filings it
periodically makes with the SEC.
In addition to any assumptions and other factors referred to specifically in
connection with such forward-looking statements, there are numerous factors that
could cause our actual results to differ materially from those contemplated in
any forward-looking statements. Such factors include our inability to predict
and/or control:
- - Ability to successfully access the capital markets;
- - Achievement of operating synergies and revenue enhancements;
- - Capital and financial market conditions, including current price of CMS
Energy's Common Stock, interest rates and availability of financing to
CMS Energy, Consumers, Panhandle or any of their affiliates and the
energy industry;
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Consumers Energy Company
- - CMS Energy, Consumers, Panhandle or any of their affiliates' securities
ratings;
- - Market perception of the energy industry, CMS Energy, Consumers,
Panhandle or any of their affiliates;
- - Factors affecting utility and diversified energy operations such as
unusual weather conditions, catastrophic weather-related damage,
unscheduled generation outages, maintenance or repairs, unanticipated
changes to fossil fuel, nuclear fuel or gas supply costs or
availability due to higher demand, shortages, transportation problems
or other developments, environmental incidents, or electric
transmissions or gas pipeline system constraints;
- - National, regional and local economic, competitive and regulatory
conditions and developments;
- - Adverse regulatory or legal decisions, including environmental laws and
regulations;
- - Federal regulation of electric sales and transmission of electricity
including re-examination by Federal regulators of the market-based
sales authorizations by which Consumers and its affiliates participate
in wholesale power markets without price restrictions and proposals by
FERC to change the way it currently lets Consumers and other public
utilities and natural gas companies interact with each other;
- - Energy markets, including the timing and extent of unanticipated
changes in commodity prices for oil, coal, natural gas liquids,
electricity and certain related products due to lower or higher demand,
shortages, transportation problems or other developments;
- - Nuclear power plant performance, decommissioning, policies, security,
procedures, incidents, and regulation, including the availability of
spent nuclear fuel storage;
- - Technological developments in energy production, delivery and usage;
- - Changes in financial or regulatory accounting principles or policies;
- - Outcome, cost and other effects of legal and administrative
proceedings, settlements, investigations and claims;
- - Disruptions in the normal commercial insurance and surety bond markets
that may increase costs or reduce traditional insurance coverage,
particularly terrorism and sabotage insurance and performance bonds.
- - Other business or investment considerations that may be disclosed from
time to time in CMS Energy's, Consumers' or Panhandle's SEC filings or
in other publicly disseminated written documents, which are difficult
to predict and many of which are beyond our control. Consumers designed this discussion of potential
risks and uncertainties, which is by no means comprehensive, to highlight
important factors that may impact Consumers' business and financial outlook.
This Form 10-Q/A10-Q also describes material contingencies in ConsumersConsumers' Condensed
Notes to Consolidated Financial Statements, and Consumers encourages its readers
to review these Notes. -11-
Consumers Energy Company
COMPLIANCE WITH THE SARBANES-OXLEY ACT OF 2002
In July 2002, the Sarbanes-Oxley Act of 2002 was enacted and requires companies
to: 1) make certain certifications relatedAll note references within this MD&A refer to their Form 10-Q's, including
financial statements, disclosure controls and procedures and internal controls;
and 2) make certain disclosures about its disclosure controls and procedures,
and internal controls as follows:
CEO AND CFO CERTIFICATIONS
The Sarbanes-Oxley Act of 2002 requires CEOs and CFOs of public companiesConsumers'
Notes to make certain certifications relating to their Form 10-Q's, including the
financial statements. The certifications required by the Sarbanes-Oxley Act of
2002 relating to this Form 10-Q/A for the period ended September 30, 2002 are
filed herewith.
DISCLOSURE CONTROLS AND PROCEDURES
Consumers' CEO and CFO are responsible for establishing and maintaining
Consumers' disclosure controls and procedures. Management, under the direction
of Consumers' principal executive and financial officers, has evaluated the
effectiveness of Consumers' disclosure controls and procedures as of February
17, 2003. Based on this evaluation, Consumers' CEO and CFO have concluded that
Consumers' disclosure controls and procedures are effective to ensure that
material information was presented to them, particularly during the third
quarter of 2002. There have been no significant changes in Consumers' internal
controls or in other factors that could significantly affect internal controls
subsequent to February 17, 2003.Consolidated Financial Statements.
CRITICAL ACCOUNTING POLICIES
Presenting financial statements in accordance with accounting principles
generally accepted in the United States requires using estimates, assumptions,
and accounting methods that are often subject to judgment. Presented below, are
the accounting policies and assumptions that Consumers believes are most
critical to both the presentation and understanding of its financial statements.
Applying these accounting policies to financial statements can involve very
complex judgments. Accordingly, applying different judgments, estimates or
assumptions could result in a different financial presentation.
USE OF ESTIMATES IN ACCOUNTING FOR CONTINGENCIES
The principles in SFAS No. 5 guide the recording of estimated liabilities for
contingencies within the financial statements. SFAS No. 5 requires a company to
record estimated liabilities in the financial statements when it is probable that a current event
will causehas caused a probable future loss payment andof an amount that loss amount can be reasonably
estimated. Consumers has used this accounting principle to record or disclose estimated
liabilities for the following significant events.
ELECTRIC ENVIRONMENTAL ESTIMATES: Consumers is subject to costly and
increasingly stringent environmental regulations. Consumers expects to incur
significant costs for future environmental compliance, especially compliance
with clean air laws.
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Consumers Energy Company
The EPA has issued final regulations regarding nitrogen oxide emissions from certain
generators, including some of Consumers' electric generating facilities. These
regulations will require Consumers to make significant capital expenditures estimated
to be $770 million. As of September 2002,March 31, 2003, Consumers has incurred $372$420 million in
capital expenditures to comply with these regulations and anticipates that the
remaining capital expenditures will be incurred between the remainder of 20022003 and 2009.
Additionally, Consumers will
-12-
Consumers Energy Companyexpects to supplement its compliance plan with the
purchase of nitrogen oxide emissions credits in the years 2005 through 2008. The
cost of these credits based on the current market is estimated to be an average of $6
million per year,year; however, the market for nitrogen oxide emissions credits is volatile and
the price couldtheir cost can change significantly. At some point, if new environmental
standards become effective, Consumers may need additional capital expenditures
to comply with the standards. These and other required environmental expenditures, if not recovered
in Consumers' rates, may have a material adverse effect upon Consumers'
financial condition and results of operations. For further information see Note 2, Uncertainties,
"Electric Contingencies - Electric Environmental Matters."
GAS ENVIRONMENTAL ESTIMATES: Under the Michigan Natural Resources and
Environmental Protection Act, Consumers expects that it will incur investigation
and remedial action costs at a number of sites. Consumers estimates the costs
for 23 former Manufactured Gas Plantmanufactured gas plant sites will be between $82 million and $113
million, using the Gas Research Institute-Manufactured Gas Plant Probabilistic
Cost Model. These estimates are based on discounted 2001 costs and follow EPA
recommended use of discount rates between 3three and 7seven percent. Consumers
expects to recover a significant portion of these costs through MPSC-approved
rates charged to its customers. Any significant change in assumptions, such as
remediation techniques, nature and extent of contamination, and legal and
regulatory requirements, could change the remedial action costs for the sites.
For further information see Note 2, Uncertainties, "Gas Contingencies -Gas- Gas
Environmental Matters."
MCV UNDERRECOVERIES: 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 a 49 percent partnership interest in the
MCV Partnership, and a 35 percent lessor interest in the MCV Facility.
Consumers' annual obligation to purchase capacity from the MCV Partnership is
1,240 MW through the terminationterm of the PPA ending in 2025. The PPA requires Consumers
to pay, based on the MCV Facility's availability, a levelized average capacity
charge of 3.77 cents per kWh and a fixed energy charge, and also to pay a
variable energy charge based primarily on Consumers' average cost of coal
consumed for all kWh delivered. Consumers has not been allowed full recovery of
the capacity and fixed energy charges in rates. After September 2007, the PPA's
regulatory out terms obligate Consumers to pay the MCV Partnership only those
capacity and energy charges that the MPSC has authorized for recovery from
electric customers.
In 1992, Consumers recognized a loss and established a PPA liability for the
present value of the estimated future underrecoveries of power supply costs
under the PPA based on MPSC cost recovery orders. The lossPrimarily as a result of the
MCV Facility's actual availability being greater than management's original
estimates, the PPA liability has been recorded inreduced at a faster rate than originally
anticipated. At March 31, 2003 and 2002, the income statementremaining after-tax present value
of the estimated future PPA liability associated with the loss totaled $30
million and as a non-current liability on the balance sheet.$46 million, respectively. The PPA liability is expected to be
depleted in late 2004.
In March 1999, Consumers and the MCV Partnership reached ana settlement agreement
effective January 1, 1999, that addressed, among other things, the ability of
the MCV Partnership to count modifications increasing the capacity of the
existing MCV Facility for purposes of computing the availability of contract
capacity under the PPA for billing purposes. That settlement agreement capped
payments made on the basis of availability payments tothat may be billed by the MCV
Partnership at 98.5 percent. If the MCV Facility's generating availability remains at thea maximum 98.5 percent level duringavailability level.
When Consumers returns, as expected, to unfrozen rates beginning in 2004,
Consumers will recover from customers capacity and fixed energy charges on the
next six years, Consumers' after-tax cash
underrecoveries associated withbasis of availability, to the PPA could be as follows:
In Millions
- ---------------------------------------------------------------------------------------------------------------------
2002 2003 2004 2005 2006 2007
- ---------------------------------------------------------------------------------------------------------------------
Estimated cash underrecoveries at 98.5% net of tax $38 $37 $36 $36 $36 $25
=====================================================================================================================
It is currently estimatedextent that availability does
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Consumers Energy Company
not exceed 88.7 percent availability established in previous MPSC orders. For
capacity and energy payments billed by the MCV Partnership after September 15,
2007, and not recovered from customers, Consumers would expect to claim a
regulatory out under the PPA. The regulatory out provision relieves Consumers of
the obligation to pay more for capacity and energy payments than the MPSC allows
Consumers to collect from its customers. Consumers estimates that 51 percent of
the actual cash underrecoveries for the years 2002 through2003 and 2004 will be charged to
the PPA liability, with the remaining portion charged to operating expense as a
result of
-13-
Consumers Energy Company Consumers' 49 percent ownership in the MCV Partnership. All cash
underrecoveries will be expensed directly to income once the PPA liability is
depleted. In 1992, Consumers originally accounted for lossesIf the MCV Facility's generating availability remains at the maximum
98.5 percent level during the next five years, Consumers' after-tax cash
underrecoveries associated with the PPA by
establishing a reserve for the difference between the amount that Consumers was
paying for power in accordance with the terms of the PPA, and the amount that
Consumers was ultimately allowed by the MPSC to recover from electric customers.
At that time, the reserve did not take into account earnings Consumers would
receive from its 49 percent interest incould be as follows:
In Millions
- ------------------------------------------------------------------------------------------------------------
2003 2004 2005 2006 2007
- ------------------------------------------------------------------------------------------------------------
Estimated cash underrecoveries at 98.5%, net of tax $37 $36 $36 $36 $25
Amount to be charged to operating expense, net of tax $18 $18 36 $36 $25
Amount to be charged to PPA liability, net of tax $19 $18 $-- $-- $--
============================================================================================================
In February 1998, the MCV Partnership dueappealed the January 1998 and February
1998 MPSC orders related to uncertainties
withelectric utility restructuring. At the levelsame time,
MCV Partnership filed suit in the United States District Court in Grand Rapids
seeking a declaration that the MPSC's failure to provide Consumers and MCV
Partnership a certain source of performancerecovery of capacity payments after 2007
deprived MCV Partnership of its rights under the Public Utilities Regulatory
Policies Act of 1978. In July 1999, the District Court granted MCV Partnership's
motion for summary judgment. The Court permanently prohibited enforcement of the
facility.
In 2000, Consumers reviewed its estimate ofrestructuring orders in any manner that denies any utility the economic losses it would
experience with respectability to
recover amounts paid to qualifying facilities such as the MCV Facility or that
precludes the MCV Partnership from recovering the avoided cost rate. The MPSC
appealed the Court's order to the PPA6th Circuit Court of Appeals in Cincinnati. In
June 2001, the 6th Circuit overturned the lower court's order and re-evaluated all ofdismissed the
current facts and
circumstances used to calculatecase against the disallowance reserve, including earnings
from its 49 percent interest in the MCV Partnership. Consumers concluded that no
adjustment to the reserve was required in 2000. However, as conditions
surrounding MCV Partnership operations evolved in 2001, Consumers concluded that
it needed to increase the reserve by $126 million (pre-tax) in the third quarter
of 2001, and did so.
In connection with the re-audit of CMS Energy's consolidated financial
statements for the fiscal years 2000 and 2001, Consumers reviewed its 2000 and
2001 PPA accounting and related assumptions, andMPSC. The appellate court determined that the reserve
balance as of January 1, 2000 did appropriately reflect Consumers' probable
losses as ofcase was
premature and concluded that date. However, as a result of reconsideration of all
subsidiary accounting effects, the re-evaluation ofqualifying facilities needed to wait until 2008
for an actual factual record to develop before bringing claims against the PPA accounting did
resultMPSC
in an increase to operating expenses associated with the PPA of $29
million in 2000, a net reduction of operating expenses associated with the PPA
of $12 million for 2001, the reversal of the $126 million increase to the
reserve originally recorded in 2001, and immaterial adjustments to accretion
expense for both years.
The following table reflects the audit adjustments associated with the MCV PPA
accounting and the related net income effects for the periods ended December 31,
2001 and December 31, 2000:
- -------------------------------------------------------------------------------------------------------------------------
In Millions 2001 2000
- -------------------------------------------------------------------------------------------------------------------------
Income Increase/(Decrease)
- -------------------------------------------------------------------------------------------------------------------------
Reverse the original operating charge associated with
continuing losses on the MCV PPA $39 $-
Charge 49 percent of annual capacity losses associated with
the MCV PPA to operating expense instead of to the reserve (27) (29)
---- -----
Net operating expense decrease/(increase) 12 (29)
Reverse the 2001 increase to the MCV PPA reserve 126 -
Accretion Expense - (2)
---- -----
Pre-tax effect of adjustments 138 (31)
Income tax effect (48) 11
---- -----
Net income impact of MCV PPA adjustments $90 ($20)
- -------------------------------------------------------------------------------------------------------------------------
federal court.
For further information see "Change in Auditors and Restatement" above, Note 2, Uncertainties, "Other Electric Uncertainties
- - The Midland Cogeneration Venture,Venture."
and Note 4, "Restatement" for additional detail.
ACCOUNTING FOR DERIVATIVE AND FINANCIAL INSTRUMENTS AND MARKET RISK INFORMATION
DERIVATIVE INSTRUMENTS: Consumers uses the criteria in SFAS No. 133, criteriaas amended
and interpreted, to determine whichif certain contracts must be accounted for as
derivative instruments. TheseThe rules however,for determining whether a contract meets the
criteria for derivative accounting are numerous and complex. As a result,
significant judgment is required to determine whether a contract requires
derivative accounting, and similar contracts can sometimes be accounted for
differently.
Consumers currently accounts for the following contracts as derivative
instruments: interest rate swaps, -14-
Consumers Energy Company
certain electric call options, and fixed priced gas supply contracts with
embedded put options, gas fuel swaps, fixed priced
weather-based gas supply call options and fixed price gas supply put options.
Consumers does not account for the following contracts as derivative
instruments: electric capacity and energy contracts, gas supply contracts
without embedded options, coal and nuclear fuel supply contracts, and purchase
orders for numerous supply items.
Consumers believes that certain of its electric capacity and energy contracts
are not derivatives due to the lack of an active energy market in the state of
Michigan, as defined by SFAS No. 133, and the transportation cost
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Consumers Energy Company
to deliver the power under the contracts to the closest active energy market at
the Cinergy hub in Ohio. If a market develops in the future, Consumers may be
required to account for these contracts as derivatives. The mark-to-market
impact on earnings related to these contracts, particularly related to the PPA,
could be material to the financial statements.
If a contract is accounted for as a derivative instrument, it is recorded in the
financial statements as an asset or a liability, at the fair value of the
contract. Any difference between the recorded book value and the fair value is
reported either in earnings or other comprehensive income, depending on certain
qualifying criteria. The recorded fair value of the contract is then adjusted
quarterly to reflect any change in the market value of the contract.
In order to determine the fair value theof contracts that are accounted for as
derivative instruments, Consumers uses a combination of quoted market quoted prices and
mathematical models. Option models require various inputs, including forward
prices, volatilities, interest rates and exercise periods. Changes in forward
prices or volatilities could significantly change the calculated fair value of
the call option contracts. At September 30, 2002,March 31, 2003, Consumers assumed a market-based
interest rate of 4.5 percent and a volatility rate of 107.5 percent in
calculating the fair value of its electric call options.
In order for derivative instruments to qualify for hedge accounting under SFAS
No. 133, the hedging relationship must be formally documented at inception and
be highly effective in achieving offsetting cash flows or offsetting changes in
fair value, attributable to the risk being hedged. If hedging a forecasted
transaction, the forecasted transaction must be probable. If a derivative
instrument, used as a cash flow hedge, is terminated early because it is
probable that a forecasted transaction will not occur, any gain or loss as of
such date is immediately recognized in earnings. If a derivative instrument,
used as a cash flow hedge, is terminated early for other economic reasons, any
gain or loss as of the termination date is deferred and recorded when the
forecasted transaction affects earnings.
FINANCIAL INSTRUMENTS: Consumers accounts for its debt and equity investment
securities in accordance with SFAS No. 115. As such, debt and equity securities
can be classified into one of three categories: held-to-maturity, trading, or
available-for-sale securities. Consumers' investments in equity securities,
including its investment in CMS Energy Common Stock, are classified as
available-for-sale securities. They are reported at fair value, with any
unrealized gains or losses from changes in fair value reported in equity as part
of other comprehensive income and excluded from earnings.earnings unless such changes in
fair value are other than temporary. In 2002, Consumers determined that the
decline in value related to its investment in CMS Energy Common Stock was other
than temporary as the fair value was below the cost basis for a period greater
than six months. As a result, Consumers recognized a loss on its investment in
CMS Energy Common Stock through earnings of $12 million in the fourth quarter of
2002, and an additional $12 million in the first quarter of 2003. As of March
31, 2003, Consumers held 2.4 million shares of CMS Energy Common Stock with a
fair value of $10 million. Unrealized gains or losses from changes in the fair
value of Consumers' nuclear decommissioning investments are reported in accumulated depreciation.as
regulatory liabilities. The fair value of these investments is determined from
quoted market prices.
MARKET RISK INFORMATION: Consumers is exposed to market risks including, but not
limited to, changes in interest rates, commodity prices, and equity security
prices. Consumers' market risk, and activities designed to minimize this risk,
are subject to the direction of an executive oversight committee consisting of
designated members of senior management and a risk committee, consisting of
certain business unit managers. The role of the risk committee's rolecommittee is to review the
corporate commodity position and ensure that net corporate exposures are within
the economic risk tolerance levels established by Consumers' Board of Directors.
Established policies and procedures are used to manage the risks associated with
market fluctuations.
-15-
Consumers Energy Company
Consumers uses various contracts, including swaps, options, and forward
contracts to manage its risks
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Consumers Energy Company
associated with the variability in expected future cash flows attributable to
fluctuations in interest rates and commodity prices. When management uses these
instruments, it intends that an opposite movement in the value of the at-risk
item would offset any losses incurred on the contracts. Contracts used to manage
interest rate and commodity price risk may be considered derivative instruments
that are subject to derivative and hedge accounting pursuant to SFAS No. 133.
AllConsumers enters into all risk management contracts are entered
to for purposes other than
trading.
These instruments contain credit risk if the counterparties, including financial
institutions and energy marketers, fail to perform under the agreements.
Consumers minimizes such risk by performing financial credit reviews using,
among other things, publicly available credit ratings of such counterparties.
In accordance with SEC disclosure requirements, Consumers performs sensitivity
analyses to assess the potential loss in fair value, cash flows and earnings
based upon a hypothetical 10 percent adverse change in market rates or prices.
Management does not believe that sensitivity analyses alone provide an accurate
or reliable method for monitoring and controlling risks. Therefore, Consumers
relies on the experience and judgment of its senior management to revise
strategies and adjust positions, as it deems necessary. Losses in excess of the
amounts determined in sensitivity analyses could occur if market rates or prices
exceed the 10 percent shift used for the analyses.
INTEREST RATE RISK: Consumers is exposed to interest rate risk resulting from
the issuance of fixed-rate debtfinancing and variable-rate debt,financing, and from
interest rate swap agreements. Consumers uses a combination of these instruments
to manage and mitigate interest rate risk exposure when it deems it appropriate,
based upon market conditions. These strategies attempt to provide and maintain
the lowest cost of capital. As of September 30,March 31, 2003 and 2002, Consumers had
outstanding $1.202$1.324 billion and $1.329 billion of variable-rate debt,financing,
respectively, including variable ratevariable-rate swaps and fixed-rate swaps. At September 30,March 31,
2003 and 2002, assuming a hypothetical 10 percent adverse change in market
interest rates, Consumers' before tax earnings exposure on its variable rate debtvariable-rate
financing would be $2 million.million and $3 million, respectively. As of September 30,March 31, 2003
and 2002, Consumers had entered into a floating-to-fixed interest rate swap
agreementsagreement for a notional amount of $75 million, and as of March 31, 2002 a
variable-to-fixed interest rate swap agreement for a notional of $300 million.
These swaps exchange variable-rate interest payment obligations for fixed-rate
interest payment obligations, or fixed-rate interest payment obligations for
variable-rate interest payment obligations in order to minimize the impact of
potential adverse interest rate changes. As of September 30,March 31, 2003 and 2002,
Consumers had outstanding long-term fixed-rate debt,financing, including fixed-ratefixed and
variable-rate swaps, of $2.768$2.756 billion and $2.477 billion, respectively, with a
fair value of $2.702 billion.$2.690 billion and $2.769 billion, respectively. As of September 30,March 31,
2003 and 2002, assuming a hypothetical 10 percent adverse change in market
rates, Consumers would have an exposure of $136$131 million and $144 million,
respectively, to the fair value of these instruments if it had to refinance all
of its long-termfixed-rate financing. As discussed below in Electric Business Outlook -
Securitization, Consumers has filed an application with the MPSC to securitize
certain costs. If approved, Consumers will use the proceeds from the
securitization for refinancing or retirement of debt, which could include a
portion of its current fixed-rate debt. Consumers does not intend to
refinance its fixed-rate debt in the near term and believesbelieve that any
adverse change in debt price and interest rates would not have a material adverse
effect on either its consolidated financial position, results of operation or
cash flows.
COMMODITY MARKET RISK: For purposes other than trading, Consumers enters into
electric call options, gas fuel for generation call options and swap contracts, fixed price gas supply contracts containing embedded put
options, fixed priced weather-based gas supply call options and fixed priced gas
supply put options. The electric call options are used to protect against risk
due to fluctuations in the market price of electricity and to ensure a reliable
source of capacity to meet customers' electric needs. The gas fuel for generation call options and
swap contracts are used to protect generation activities against risk due to
fluctuations in the market price of natural gas. The gas supply contracts
containing embedded put options, the weather-based gas supply call options, and
the gas supply put options are used to purchase reasonably priced gas supply.
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Consumers Energy Company
As of September 30,March 31, 2003 and 2002, the fair value based on quoted future market
prices of electricity-related call option and swap contracts was $8 million.$10 million and
$19 million, respectively. At September
30,March 31, 2003 and 2002, assuming a hypothetical
10 percent adverse change in market prices, the potential reduction in fair
value associated with these contracts would be $2 million.million and $4 million
respectively. As of September 30,March 31, 2003 and 2002, Consumers had an asset of $30$28
million and $48 million, respectively, related to premiums incurred for electric
call option contracts. Consumers' maximum exposure associated with the call
option contracts is limited to the premiums incurred. As of September 30,March 31, 2003,
Consumers did not have any gas supply-related call or put option contracts. As
of March 31, 2002, the fair value based on quoted future market -16-
Consumers Energy Company
prices of gas
supply-related call andsupply contracts containing embedded put option contractsoptions was $1$4 million. At September 30,March 31,
2002, assuming a hypothetical 10 percent adverse change in market prices the potential reduction in fair value associated with these contracts
would be $300 thousand.was immaterial.
EQUITY SECURITY PRICE RISK: Consumers owns less than 20 percent of the
outstanding shares of CMS Energy Common Stock. At September 30,Consumers recognized a loss on
this investment through earnings of $12 million in the fourth quarter of 2002
and an additional $12 million loss in the first quarter of 2003, because the
loss was other than temporary as the fair value was below the cost basis for a
hypothetical 10 percentperiod greater than six months. As of March 31, 2003, Consumers held 2.4 million
shares of CMS Energy Common stock at a fair value of $10 million. Consumers
believes that any further adverse change in the market price would have resulted in a
$4 million change in its investment. Thisof this investment 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.
For further information on market risk and derivative activities, see Note 1,
Corporate Structure and Summary of Significant Accounting Policies, "Risk
Management Activities4,
Financial and Derivative Transactions" and "Implementation of New
Accounting Standards", Note 2, Uncertainties, "Other Electric Uncertainties -
Derivative Activities", "Other Gas Uncertainties - Derivative Activities", and
Note 3, Short-Term Financings and Capitalization, "Derivative Activities."
ACCOUNTING FOR LEASES
Consumers uses SFAS No. 13 to account for any leases to which it may be a party.
Depending upon satisfaction of certain criteria, they are classified as
operating leases or capital leases. Under an operating lease, payments are
expensed as incurred, and there is no recognition of an asset or liability on
the balance sheet. Capital leases, on the other hand, require that an asset and
liability be recorded on the balance sheet at the inception of the lease for the
present value of the minimum lease payments required during the term of the
lease.
To determine whether to classify a lease as operating or capital under SFAS No.
13 and related statements, Consumers must use judgment. A lease must be
evaluated for transfer of ownership, provision for bargain purchase option, the
lease term relative to the estimated economic life of the leased property, and
the present value of the minimum lease payments at the beginning of the lease
term. Judgment is required for leases involving special purpose entities such as
trusts, sales and leasebacks and when the lessee is involved in the construction
of the property it will lease. Different financial presentations of leases could
result if different judgment, estimates or assumptions are made.
Consumers is party to a number of leases, the most significant are the leases
associated with its service vehicles, its new headquarters building, and its
railroad coal cars. For further information see "Contractual Obligations and
Commercial Commitments" in the Capital Resources and Liquidity section and Note
1, Corporate Structure and Summary of Significant Accounting Policies,
"Accounting for Headquarters Building Lease".Instruments.
ACCOUNTING FOR THE EFFECTS OF INDUSTRY REGULATION
Because Consumers is involved in a regulated industry, regulatory decisions
affect the timing and recognition of revenues and expenses. Consumers uses SFAS
No. 71 to account for the effects of these regulatory decisions. As a result,
Consumers may defer or recognize revenues and expenses differently than a
non-regulated entity.
For example, items that a non-regulated entity would normally expense, Consumers
may capitalize as regulatory assets if the actions of the regulator indicate
such expenses will be recovered in future rates. Conversely, items that
non-regulated entities may normally recognize as revenues, Consumers may record
as regulatory liabilities if the actions of the regulator indicate they will
require such revenues to later be refunded to customers. Judgment is required to
discern the recoverability of items recorded as regulatory assets and
-17-
Consumers Energy Company
liabilities. As of September 30, 2002,March 31, 2003, Consumers had $1.104$1.121 billion recorded as
regulatory assets and $301$463 million recorded as regulatory liabilities.
In March 1999, Consumers received MPSC electric restructuring orders, which,
among other things, identified the terms and timing for implementing electric
restructuring in Michigan. Consistent with these orders and EITF No. 97-4,
Consumers discontinued the application of SFAS No. 71 for the energy supply
portion of its business because Consumers expected to implement retail open
access at competitive market-based rates for its electric customers. Since 1999,
there has been a significant legislative and regulatory change in Michigan that
has resulted in: 1) electric supply customers of utilities remaining on
cost-based rates and 2) utilities being given the ability to recover Stranded
Costs associated with electric restructuring, from customers who choose an
alternative electric supplier. During 2002, Consumers re-evaluated the criteria
used to determine if an entity or a segment of an entity meets the requirements
to apply regulated utility accounting, and determined that the energy supply
portion of its business could meet the criteria if certain regulatory events
occurred. In December 2002, Consumers received a MPSC Stranded Cost order that
allowed Consumers to re-apply regulatory accounting standard SFAS No. 71 to the
energy supply portion of its business. Re-application of SFAS No. 71 had no
effect on the prior discontinuation accounting, but will allow Consumers to
apply regulatory accounting treatment to the energy supply portion of its
business
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Consumers Energy Company
beginning in the fourth quarter of 2002, including regulatory accounting
treatment of costs required to be recognized in accordance with SFAS No. 143.
ACCOUNTING FOR PENSION AND OPEB
Consumers provides postretirement benefits under its Pension Plan, and
postretirement health and life benefits under its OPEB plans to substantially
all its retired employees. Consumers uses SFAS No. 87 to account for pension
costs and uses SFAS No. 106 to account for other postretirement benefit costs.
These statements require liabilities to be recorded on the balance sheet at the
present value of these future obligations to employees net of any plan assets.
The calculation of these liabilities and associated expenses require the
expertise of actuaries and are subject to many assumptions including life
expectancies, present value discount rates, expected long-term rate of return on
plan assets, rate of compensation increase and anticipated health care costs.
Any change in these assumptions can significantly change the liability and
associated expenses recognized in any given year. As of January 2002, OPEB plan
claims are paid from the VEBA Trusts.The Pension and OPEB plan assets, net of contributions, have been reduced in value
from the previous year due to the downturn in the equities market, and a
decrease in the pricePlan includes
amounts for employees of CMS Energy Common Stock. Asand non-utility affiliates, including
Panhandle, which were not distinguishable from the Pension Plan's total assets.
On December 21, 2002, a result, Consumers expectsdefinitive agreement was executed to see an increasesell Panhandle. The
sale is expected to close in pension and OPEB expense levels over the next several
years unless market performance of plan assets improves. Consumers anticipates
pension expense and OPEB expense to rise in 2002 by approximately $8 million and
$20 million, respectively, over 2001 expenses. For pension expense, this
increase is due to a downturn in value of pension assets during the past two
years, forecasted increases in pay and added service, decline in the interest
rate used to value the liability of the plan, and expiration of the transition
gain amortization. For OPEB expense, the increase is due to the trend of rising
health care costs, the market return on plan assets being below expected levels,
and a lower discount rate, based on recent economic conditions, used to compute
the benefit obligation. Under the OPEB plans' assumptions, health care costs
increase at a slower rate from current levels through 2009; however, Consumers
cannot predict the impact that future health care costs and interest rates or
market returns will have on pension and OPEB expense in the future.
The recent significant downturn in the equities markets has affected the value2003. No portion of the Pension Plan assets. If the plan's Accumulated Benefit Obligation exceeds
the value of these assets at December 31, 2002, Consumers Energy will be
required to recognize an additional minimum liability for this excess in
accordancetransferred with SFAS No. 87. Consumers cannot predict the future fair valuesale of Panhandle. At the closing of the plan's assets but it is probable, without significant appreciationsale, none of the
employees of Panhandle will be eligible to accrue additional benefits. The
Pension Plan will retain pension payment obligations for Panhandle employees
that are vested under the Pension Plan. Consumers does not expect the impact to
be material.
Consumers estimates pension expense will approximate $36 million, $42 million
and $48 million in fiscal 2003, fiscal 2004 and fiscal 2005, respectively.
Future actual pension expense will depend on future investment performance,
changes in future discount rates and various other factors related to the
populations participating in the plan's assets, thatPension Plan.
Consumers will need to book an additional minimum liability
through a charge to other comprehensive income. The value of the Plan assets and
the Accumulated Benefit Obligation are determined by the Plan's actuary in the
fourth quarter of each year.
In January 2002, Consumers contributed $62 million to the Plans' trust accounts.
This amount represents $47 million of pension related benefits and $15 million
of postretirement health care and life insurance benefits. In June 2002 and
September 2002, Consumers made additional contributions, in the amount of $21
million and $18 million, respectively, for postretirement health care and life
insurance benefits. Consumers expects to make an additional contributionhas announced changes to the Pension PlanPlan. Employees hired on or after
July 1, 2003 will be covered by the cash balance plan section of approximately $187 million in the third quartercurrent
plan. Under the cash balance section, an employee's retirement account is
credited annually with a percentage of 2003.their salary and any amounts that are
vested are portable when an employee leaves the company. In addition, the method
used to convert an employee's benefit to a lump sum payment is being changed.
Employees who elect the lump sum payment option will not earn an additional
early retirement subsidy. As a result, employees who choose the lump sum payment
option, and retire before age 65, will receive lower lump sum payments.
In order to keep health care benefits and costs competitive, Consumers has
announced several changes to the Health Care Plan. These changes arewere effective
January 1, 2003. The most significant change is that Consumers' future increases
in health care costs will be shared with salaried employees. ConsumersThe salaried
retirees health care plan has also provides retirementbeen amended. Pre-Medicare retirees now elect
coverage from four different levels of coverage, with the two best coverage
options requiring premium contributions. These plans also coordinate benefits
under a defined contribution 401(k)
plan. Consumers previously offered an employer's contribution matchmaintenance of 50
percent of the employee's contribution upbenefits provision to six percent (three percent
maximum), as well as an incentive match in years when Consumers' financial
performance exceeded
-18-
Consumers Energy Company
targeted levels. Effective September 1, 2002, the employer's match was suspended
until January 1, 2005, and the incentive match was permanently eliminated.
Amounts charged to expensereduce claim costs for the employer's match and incentive match during
2001 were $12 million and $8 million, respectively.Consumers.
Mail-order prescription copays have also been increased for all salaried
retirees.
ACCOUNTING FOR NUCLEAR DECOMMISSIONING COSTS
Consumers' decommissioning cost estimates for the Big Rock and Palisades plants
assume that each plant site will eventually be restored to conform to the
adjacent landscape with all contaminated equipment and material removed and
disposed of in a licensed burial facility and the site released for unrestricted
use. A March 1999 MPSC order provided for fully funding the decommissioning
trust funds for both sites. The order set the annual decommissioning surcharge
for the Palisades decommissioning at $6 million a year. Consumers estimates that
at the time of the decommissioning of Palisades, its decommissioning trust fund
will also be fully funded. Earnings assumptions are that the trust funds are invested
in equities and fixed income investments,
that are thenCE-7
Consumers Energy Company
equities will be converted to fixed income investments during decommissioning
and fixed income investments are converted to cash before expenditures are made.as needed. Decommissioning
costs have been developed, in part, by independent contractors with expertise in
decommissioning. These costs estimates use various inflation rates for labor,
non-labor, and contaminated equipment disposal costs.
On December 31, 2000, the Big Rock trust fund was considered fully funded. A
portion of its current decommissioning cost is due to the failure of the DOE to
remove fuel from the site. These costs, and similar costs incurred at Palisades,
would not be necessary but for the failure of the DOE to take possession of the
spent fuel as required by the Nuclear Waste Policy Act of 1982. A number of
utilities have commenced litigation in the Court of Claims, including Consumers,
which filed its complaint in December 2002. The Chief Judge of the Court of
Claims identified six lead cases to be used as vehicles for resolving
dispositive motions. Consumers' case is not a lead case. It is unclear what
impact this decision by the Chief Judge will have on the outcome of Consumers'
litigation. If the litigation that was commenced in the fourth quarter of 2002,
against the DOE is successful, Consumers anticipates future recoveries from the
DOE after litigation that has yet to be
commenced and successfully concluded, to defray the significant costs it will incur for the storage of spent fuel
until the DOE takes possession as required by law.
On March 26, 2003, the Michigan Environmental Council, the Public Interest
Research Group in Michigan, and the Michigan Consumer Federation submitted a
complaint to the MPSC, which was served on Consumers by the MPSC on April 18,
2003. The complaint asks the MPSC to commence a generic investigation and
contested case to review all facts and issues concerning costs associated with
spent nuclear fuel storage and disposal. The complaint seeks a variety of relief
with respect to Consumers Energy, The Detroit Edison Company, Indiana & Michigan
Electric Company, Wisconsin Electric Power Company and Wisconsin Public Service
Corporation including establishing external trusts to which amounts collected in
electric rates for spent nuclear fuel storage and disposal should be
transferred, and the adoption of additional measures related to the storage and
disposal of spent nuclear fuel. Consumers is reviewing the complaint. Consumers
is unable to predict the outcome of this matter.
The funds provided by the trusts and added toadditional funds from DOE litigation are
expected to fully fund the decommissioning costs. Variance from trust earnings,
a lesser recovery of costs from the DOE, changes in decommissioning technology,
regulations, estimates or assumptions could affect the cost of decommissioning
these sites.sites and the adequacy of the decommissioning trust funds.
RELATED PARTY TRANSACTIONS
Consumers enters into a number of significant transactions with related parties.
These transactions include the purchase of capacity and energy from the MCV
Partnership and from affiliates of Enterprises, the purchase of electricity and
gas supply from CMS MST, the sale of electricity to CMS MST, the purchase of gas
transportation from CMS Bay Area Pipeline, L.L.C., the purchase of gas
transportation from Trunkline, a subsidiary of Panhandle, the payment of parent
company overhead costs to CMS Energy, the sale, storage and transportation of
natural gas and other services to the MCV Partnership, certain transactions
involving derivative instruments with CMS MST, and an investment in CMS
Energy Common Stock.
Transactions involving CMS Energy and its affiliates and the sale, storage and
transportation of natural gas and other services to the MCV Partnership are
generally based on regulated prices, market prices or competitive bidding.
Transactions involving the power supply purchases from the MCV Partnership, and
certain affiliates of CMS Enterprises, are based upon avoided costs under PURPA and
competitive bidding; and the payment of parent company overhead costs to CMS
Energy are based upon use or accepted industry allocation methodologies.
In 2002, Consumers also sold its transmission facilities to MTH, a
non-affiliated limited partnership whose general partner is a subsidiary of
Trans-Elect, Inc., an independent company, whose management includes former
executive employees of Consumers. The transaction was based on competitive
bidding. Additionally, Consumers continues to use the transmission facilities
now owned by MTH, and a director of Consumers is currently a stockholder of
Trans-Elect, Inc.
CE-8
Consumers Energy Company
For detailed information about related party transactions see Note 2,
Uncertainties, "Electric Rate Matters - Transmission", and "Other Electric
Uncertainties - The Midland Cogeneration Venture".
-19-
Consumers Energy Company
RESULTS OF OPERATIONS
CONSUMERS CONSOLIDATED EARNINGS
In Millions
- ------------------------------------------------------------------------------
September 30-------------------------------------------------------------------------------------------------------------------
March 31 2003 2002 Restated 2001 Restated Change
- -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Three months ended $ 74 $11 $63
Nine months ended 267 145 122
==============================================================================$99 $81 $18
===================================================================================================================
20022003 COMPARED TO 2001:2002: For the three months ended September 30, 2002,March 31, 2003, Consumers' net
income available to the common stockholder totaled $74$99 million, an increase of
$63$18 million from the comparable period in 2001. The earnings increase
reflects the after-tax benefit of decreased electric power costs of $65 million
from the comparable period in 2001.previous year. This reduction in power costs was primarily
due to higher replacement power supply costs in 2001, resulting from an outage
at Palisades in the third quarter of 2001 along with the lower volume and lower
cost of power options and dispatchable capacity contracts purchased for 2002.
Increased electric deliveries to the higher-margin residential and commercial
sectors also contributed to the earnings increase. Offsetting these increases is
a $9 million decrease resulting from the recognition of a 4 bcf loss of natural
gas from inventory along with increased other operating expenses for the period.
This loss recognition results from Consumers' refinement of its inventory
measurement techniques.
For the nine months ended September 30, 2002, Consumers' net income available to
the common stockholder totaled $267 million, an increase of $122 million from
the comparable period in 2001. The earnings increase reflects the after-tax
benefit of decreased electric power costs of $73 million from the comparable
period in 2001. This reduction in power costs was primarily due to the need to
purchase higher replacement power resulting from a refueling outage and an
unscheduled forced outage at Palisades in 2001. This reduction in power costs
also can be attributed to the lower price of power options and dispatchable
capacity contracts purchased for 2002. The increase in earnings reflects the $26an
after-tax benefit of $30 million gain from the May 2002 sale of Consumers'due to increased electric transmission system
to MTH.and gas deliveries.
Also contributing to the earnings increase is a $22the after-tax benefit of $12
million due to the final gas rate order issued in 2002 authorizing Consumers to
increase its gas tariff rates. This increase in the fair value of certain long-term gas contracts held by the MCV Partnership.
The fair value of these contracts is adjusted, through earnings onalso reflects an $8
million after-tax benefit primarily from increased intersystem revenues along
with a quarterly
basis in accordance with SFAS No. 133. For further information on SFAS No. 133,
see Note 2, Uncertainties. Increased$5 million benefit from increased electric deliveries to the higher-margin
residential and commercial sectors also contributed to the earnings increase.miscellaneous service
revenues. Offsetting these increases is a $9$12 million decrease resulting from the
recognition ofcharge to non-utility
expense in order to recognize a 4 bcf loss of natural gas from inventory along with increased
other operating expenses. This loss recognition results from Consumers'
refinement of its inventory measurement techniques.
In Millions
- ---------------------------------------------------------------------------
June 30 2002 Restated 2001 Restated Change
- ---------------------------------------------------------------------------
Three months ended $113 $ 35 $78
Six months ended 193 134 59
===========================================================================
2002 COMPARED TO 2001: For the three months ended June 30, 2002, Consumers' net
income available to the common stockholder totaled $113 million, an increase of
$78 million from the comparable perioddecline in 2001. The earnings increase reflects
the after-tax benefit of decreased electric power costs of $22 million from the
comparable period in 2001. This reduction in power costs was primarily due to
higher replacement power supply costs in 2001, resulting from outages at
Palisades in the second quarter of 2001. The increase in earnings also reflects
a $26 million gain from the May 2002, sale of Consumers' electric transmission
facilities to MTH, a non-affiliated limited partnership whose general partner is
a subsidiary of Trans-Elect Inc. Also contributing to the earnings increase is a
$22 million increase in the fairmarket value of certain long-term gas
-20-
ConsumersCMS Energy Company
contractsStock held
by the MCV Partnership. The fair value of these contracts is
adjusted, throughConsumers and increased electric and gas operating expenses that reduced
earnings on a quarterly basis in accordance with SFAS No.
133.by $24 million after-tax.
For further information, on SFAS No. 133, see Note 2, Uncertainties. Also
contributing to this increase in earnings are reduced fixed charges due to
declining interest rates.
For the six months ended June 30, 2002, Consumers' net income available to the
common stockholder totaled $193 million, an increase of $59 million from the
comparable period in 2001. This increase includes the same items identified for
the second quarter and also reflects the benefit of an increase in gas
distribution tariff rates because of an interim rate increase, partially offset
by increased operating costs and higher replacement power costs resulting from a
plant outage at Palisades in early 2002.
In Millions
- -----------------------------------------------------------------------------------------------------------------
March 31 2002 Restated 2001 Restated Change
- -----------------------------------------------------------------------------------------------------------------
Three months ended $ 81 $ 99 $ (18)
=================================================================================================================
2002 COMPARED TO 2001: For the three months ended March 31, 2002, Consumers' net
income available to the common stockholder totaled $81 million, a decrease of
$18 million from the comparable period in 2001. The earnings decrease reflects
reduced electric and gas deliveries due to milder winter temperatures, the
continued economic downturn, and increased electric operating expense in 2002,
primarily for replacement power supply costs related to an unscheduled plant
outage. These decreases to net income are partially offset by the interim gas
rate increase granted in December of 2001.
For further information, see "Change in Auditors and Restatement" at the
beginning of this MD&A, the Electric and Gas Utility Results of Operations
sections and Note 2, Uncertainties.
ELECTRIC UTILITY RESULTS OF OPERATIONS
In Millions
- ----------------------------------------------------------------------------------------------------------------
September 30-------------------------------------------------------------------------------------------------------------------
March 31 2003 2002 Restated 2001 Restated Change
- -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Three months ended $ 89 $16 $73
Nine months ended 223 111 112
================================================================================================================
- ----------------------------------------------------------------------------------------------------------------
Three Months Nine Months
Ended September 30 Ended September 30
Reasons for change 2002 vs 2001 Restated 2002 vs 2001 Restated
- ----------------------------------------------------------------------------------------------------------------$51 $50 $1
===================================================================================================================
Reasons for the change:
Electric deliveries $ 25 $ 30$13
Power supply costs and related revenue 100 11313
Other operating expenses and non-commodity revenue (16) (28)
Gain on asset sales -- 38(22)
Fixed charges 4 12
Income taxes (40) (53)
-------------------------------------------(3)
-------
Total change $ 73 $ 112
================================================================================================================1
===================================================================================================================
ELECTRIC DELIVERIES: For the three months ended September 30, 2002,March 31, 2003, electric
delivery revenues increased by $25$13 million from the 2001 level.previous year. Electric
deliveries, including transactions with other wholesale market participants and
other electric utilities, were 10.99.7 billion kWh, a decreasean increase of 0.10.5 billion kWh
or 0.95.6 percent -21-
Consumers Energy Company
from the comparable period in 2001.2002. This reduction in electric deliveriesincrease is primarily due to reduced transactions with other utilities and the expirationresult of
wholesale power sales contracts with certain Michigan municipal utilities.
Although total deliveries were below the 2001 level, increased
deliveries to the higher-marginhigher margin residential and commercial sectors, along with
the growth in retail deliveries, more than offset the impact of reductions to the lower-margin
customers. Even though deliveries were below the 2001 level, Consumers set an
all-time monthly sendout record during the month of July, and a monthly hourly
peak demand record of 7,312 MW was set on September 9, 2002.
For the nine months ended September 30, 2002, electric delivery revenues
increased by $30 million from the 2001 level. Electric deliveries, including
transactions with other wholesale market participants and other electric
utilities, were 29.5 billion kWh, a decrease of 0.7 billion kWh, or 2.5 percent
from the comparable period in 2001. Again, this reduction in electric deliveries
is primarily due to reduced transactions with other utilities and the expiration
of wholesale power sales contracts with certain Michigan municipal utilities.
Even though total deliveries were below the 2001 level, increased deliveries to
the higher-margin residential and commercial sectors, along with growth in
retail deliveries, more than offset the impact of reductions to the lower-margin
customers. For the year, Consumers has set an all-time monthly sendout record
during the month of July, and monthly hourly peak demand records were set on
April 16, 2002, June 25, 2002, and September 9, 2002.deliveries.
POWER SUPPLY COSTS AND RELATED REVENUE: For the three months ended September 30,
2002,March 31,
2003, power supply costs and related revenues increased electric net income by
$100$13 million from the
comparable period in 2001. This net increase was primarily due to reduced
purchased power costs resulting from the Palisades plant being returned to
service in 2002. In 2001, Consumers purchased higher cost replacement power
during the unscheduled forced outage at Palisades that began in June of 2001.
Also contributing to the overall decrease in power costs was the lower volume
and lower priced power options and dispatchable capacity contracts that were
purchased for 2002.
For the nine months ended September 30, 2002, power supply costs and related
revenues increased by a total of $113 million from the comparable period in
2001. This net increase was primarily due to reduced purchased power costs
resulting from the Palisades plant being returned to service in 2002. In 2001,
Consumers purchased higher cost replacement power during the refueling outage
that began in March and ended in May and the unscheduled forced outage at
Palisades that began in June and ended in January 2002. Also contributing to
this decrease is lower-priced power options and dispatchable capacity contracts
that were purchased for 2002.
OTHER OPERATING EXPENSES AND NON-COMMODITY REVENUES: For the three and nine
months ended September 30, 2002, other operating expenses increased $16 million
and $28 million, respectively, from the comparable period in 2001. Both of these
increases are attributed to higher amortization of securitized assets, higher
depreciation expense resulting from higher plant in service along with increased
operating costs resulting from higher health care and storm restoration
expenses.
GAIN ON ASSET SALES: For the nine months ended September 30, 2002, asset sales
increased as a result of the $31 million pretax gain associated with the May
2002 sale of Consumers' electric transmission system and a $7 million pretax
gain on the sale of nuclear equipment from the cancelled Midland project.
INCOME TAXES: For the three and nine months ended September 30, 2002, income tax
expense increased due to increased earnings by the electric utility. Income
taxes associated with the transmission system sale reflect a $5 million benefit
due to the recognition of the remaining unutilized investment tax credit related
to the assets sold.
-22-
Consumers Energy Company
In Millions
- ----------------------------------------------------------------------------------------------------------------
June 30 2002 Restated 2001 Restated Change
- ----------------------------------------------------------------------------------------------------------------
Three months ended $ 84 $32 $52
Six months ended 134 95 39
================================================================================================================
- ----------------------------------------------------------------------------------------------------------------
Three Months Six Months
Ended June 30 Ended June 30
Reasons for change 2002 vs 2001 Restated 2002 vs 2001 Restated
- ----------------------------------------------------------------------------------------------------------------
Electric deliveries $ 10 $ 6
Power supply costs and related revenue 34 18
Other operating expenses and non-commodity revenue (14) (18)
Gain on asset sales 38 38
Fixed charges 6 8
Income taxes (22) (13)
-------------------------------------------
Total change $ 52 39
================================================================================================================
ELECTRIC DELIVERIES: For the three months ended June 30, 2002, electric delivery
revenues increased by $10 million from the 2001 level. Electric deliveries,
including transactions with other electric utilities, were 9.4 billion kWh, an
increase of 0.1 billion kWh, or 1.4 percent from the comparable period in 2001.
The increase in total electric deliveries was primarily due to higher
residential usage resulting from warmer June 2002 temperatures.
For the six months ended June 30, 2002, electric delivery revenues increased by
$6 million from the 2001 level. Electric deliveries, including transactions with
other electric utilities, were 18.6 billion kWh, a decrease of 0.7 billion kWh,
or 3.4 percent from the comparable period in 2001. This decrease is the result
of reduced first quarter industrial usage due to the economic downturn.
POWER SUPPLY COSTS AND RELATED REVENUE: For the three months ended June 30,
2002, power supply costs and related revenues increased by $34 million from the
comparable period in 2001. This increase is primarily the result of decreased
power costs in 2002 due to the higher availability of the lower priced Palisades
Nuclear Plant. In the 2001 period,increased
intersystem revenues.
CE-9
Consumers was required to purchase greater
quantities of higher-priced power to offset the loss of internal generation
resulting from outages at Palisades.
For the six months ended June 30, 2002, power supply costs and related revenues
increased by a total of $18 million from the comparable period in 2001. This
decrease was also the result of the Palisades outage described for the current
quarter partially offset by a plant outage at Palisades in early 2002.Energy Company
OTHER OPERATING EXPENSES AND NON-COMMODITY REVENUES:REVENUE: For the three months ended
2002, otherMarch 31, 2003, operating expenses increased $14 millioncompared to 2002. This increase can
be attributed to a scheduled refueling outage at Palisades that began in March
and higher transmission costs due to higher amortizationthe loss of securitized assets,a financial return on the sold
Consumers transmission system asset in May 2002. Slightly offsetting these
increased depreciation expense resulting from higher
plant in service along with a decrease in miscellaneous revenues. For the six
months ended 2002, other operating expenses are increased $18 million due to higher
amortization of securitized assets, increased depreciation expense resulting
from higher plant in service along with a decrease in miscellaneous revenues.
GAIN ON ASSET SALES: For the three and six months ended 2002, asset sales
increased as a result of the $31 million pre-tax gainnon-commodity revenues associated
with the May
2002 sale of Consumers' electric transmission system and a $7 million pre-tax
gain on the sale of unused nuclear equipment from the cancelled Midland project.
-23-
Consumers Energy Companymiscellaneous service revenues.
INCOME TAXES: For the three and six months ended June 30, 2002,March 31, 2003, income tax expense
increased dueremained relatively flat compared to increased earnings by the electric utility. Income
taxes associated with the transmission system sale reflect a $5 million benefit
due to the recognition of the remaining unutilized investment tax credit related
to the assets sold.
In Millions
- -------------------------------------------------------------------------
March 31 2002 Restated 2001 Restated Change
- -------------------------------------------------------------------------
Three months ended $50 $63 $(13)
=========================================================================
Reasons for the change:
Electric deliveries $ (4)
Power supply costs and related revenue (16)
Other operating expenses and non-commodity revenue (4)
Fixed charges 2
Income taxes 9
----
Total change $(13)
=========================================================================
ELECTRIC DELIVERIES: For the period ending March 31, 2002, electric delivery
revenues decreased by $4 million from the 2001 level. Electric deliveries,
including transactions with other electric utilities, were 9.2 billion kWh, a
decrease of 0.8 billion kWh or 7.9 percent from the comparable period in 2001.
Total electric deliveries decreased primarily due to lower industrial usage
driven by the economic downturn.
POWER SUPPLY COSTS AND RELATED REVENUE: For the period ending March 31, 2002,
electric net income was adversely affected by lower power cost related revenues.
Additionally, the average power supply cost increased due to the need to
purchase greater quantities of higher-priced power to offset the loss of
internal generation resulting from the unscheduled Palisades outage.
OTHER OPERATING EXPENSES: For the period ending March 31, 2002, other operating
expenses decreased by $4 million from the comparable period in 2001 due to lower
operating and maintenance costs resulting from cost controls throughout the
business unit.
-24-
Consumers Energy Company2002.
GAS UTILITY RESULTS OF OPERATIONS
In Millions
- -----------------------------------------------------------------------------------------------
September 30-------------------------------------------------------------------------------------------------------------------
March 31 2003 2002 Restated 2001 Restated Change
- ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Three months ended $ (18) $ (10) $(8)
Nine months ended 13 19 (6)
===============================================================================================
Three Months Nine Months
Ended September 30 Ended September 30
Reasons for change 2002 vs 2001 Restated 2002 vs 2001 Restated
- -----------------------------------------------------------------------------------------------
Gas deliveries $ (2) $ (2)
Gas rate increase 1 10
Gas wholesale and retail services 3 3
Operation and maintenance (17) (17)
Other operating expenses 3 (2)
Income taxes 4 2
-----------------------------------
Total change $ (8) $ (6)
===============================================================================================
For the three months ended September 30, 2002, gas revenues decreased due to
warmer temperatures compared to the third quarter 2001. Gas wholesale and retail
service revenues increased principally due to growth in the appliance service
plan. Operation and maintenance cost increases reflect recognition of gas
storage inventory losses, and additional expenditures on customer reliability
and service. System deliveries, including miscellaneous transportation volumes,
totaled 40.1 bcf, a decrease of 1.7 bcf or 4.1 percent compared with 2001.
For the nine months ended September 30, 2002, gas revenues increased due to an
interim gas rate increase granted in December of 2001, partially offset by a
decrease in gas delivery revenue due to warmer temperatures and less economic
demand. Operation and maintenance cost increases reflect recognition of gas
storage inventory losses, and additional expenditures on customer reliability
and service. System deliveries, including miscellaneous transportation volumes,
totaled 254.7 bcf, a decrease of 3.7 bcf or 1.4 percent compared with 2001.
-25-
Consumers Energy Company
In Millions
- -----------------------------------------------------------------------------
June 30 2002 Restated 2001 Restated Change
- -----------------------------------------------------------------------------
Three months ended $ 3 $ 1 $2
Six months ended 31 29 2
=============================================================================
- -----------------------------------------------------------------------------
Three Months Six Months
Ended June 30 Ended June 30
Reasons for change 2002 vs 2001 Restated 2002 vs 2001 Restated
- -----------------------------------------------------------------------------
Gas deliveries $ 9 $ -
Gas rate increase 2 9
Gas wholesale and retail services 1 -
Operation and maintenance (4) -
Other operating expenses (4) (5)
Income taxes (2) (2)
-------------------------------
Total change $ 2 $ 2
==============================================================================
For the three months ended June 30, 2002, gas revenues increased due to colder
temperatures compared to the second quarter 2001. Operation and maintenance cost
increases reflect additional expenditures on customer reliability and service.
System deliveries, including miscellaneous transportation volumes, totaled 65.3
bcf, an increase of 8.3 bcf or 14.7 percent compared with 2001.
For the six months ended June 30, 2002, gas revenues increased due to an interim
gas rate increase granted in December of 2001. System deliveries, including
miscellaneous transportation volumes, totaled 214.5 bcf, a decrease of 2 bcf or
..9 percent compared with 2001.
In Millions
- -----------------------------------------------------------------------------
March 31 2002 Restated 2001 Restated Change
- -----------------------------------------------------------------------------
Three months ended$54 $28 $28 $-
=============================================================================$26
===================================================================================================================
Reasons for the change:
Gas deliveries $(9)
Rate$33
Gas rate increase 7
Other operating expenses19
Gas wholesales and non-commodity revenue 2retail services 3
Operation and maintenance (10)
General taxes, depreciation, and other income (5)
Fixed charges 1(1)
Income taxes (1)(13)
----------
Total change $-
=============================================================================$ 26
===================================================================================================================
GAS DELIVERIES: For the period endingthree months ended March 31, 2002,2003, gas delivery revenues
decreased due to
significantly milder temperatures duringincreased by $33 million from the first quarter of 2002. This
decrease was significantly offset by an interim gas rate increase granted in
December of 2001.previous year. System deliveries, including
miscellaneous transportation, volumes, totaled 149174 bcf, a decreasean increase of 1025 bcf or 6.516.4
percent compared with 2001.
-26-
2002. This increase is primarily due to colder weather
that resulted in increased deliveries to the residential and commercial sectors
in 2003.
GAS RATE INCREASE: In November 2002, the MPSC issued a final gas rate order
authorizing a $56 million annual increase in Consumers Energy Companygas tariff rates. As a
result of this order, Consumers recognized increased gas revenues of $19
million.
OPERATION AND MAINTENANCE: For the three months ended March 31, 2003, operation
and maintenance expenses increased $10 million compared to 2002. This increase
reflects the recognition of additional expenditures on safety, reliability and
customer service due to the colder temperatures for the quarter, compared to the
same period in 2002
INCOME TAXES: For the three months ended March 31, 2003, income tax expense
increased primarily due to improved earnings of the gas utility.
CAPITAL RESOURCES AND LIQUIDITY
CASH POSITION, INVESTING AND FINANCING
OPERATING ACTIVITIES: Consumers' principal source of liquidity is from cash
derived from operating activities involving the sale and transportation of
natural gas and the generation, delivery and sale of electricity. Cash
CE-10
Consumers Energy Company
from operations totaled $420$387 million and $321 million for the first nine months of
2002 and 2001, respectively. The $99 million increase resulted primarily from an
increase in cash due to lower expenditures for natural gas and lower electric
power purchase costs as a result of Palisades return to service, partially
offset by a decrease in cash collected from customers and related parties.
Cash from operations totaled $435 million and $379 million for the first six
months of 2002 and 2001, respectively. The $56 million increase resulted
primarily from a $223 million increase in cash due to fewer expenditures for
natural gas inventories, partially offset by $144 million decrease in cash
collected from customers and related parties.
Cash from operations totaled $270 million and $479 million for the first three months
of 20022003 and 2001,2002, respectively. The $209 million decrease resulted
primarily from a $168 million decrease in cash collected from customers and
related parties and a $115 million decrease in sale of accounts receivable,
partially offset by a $70$117 million increase resulted from an
increase in cashelectric and gas deliveries, a gas rate increase and changes in
working capital items due to fewer expenditures for
natural gas inventories.the timing of cash receipts and payments. Consumers
primarily uses cash derived from operating activities to operate, maintain,
expand and construct its electric and gas systems, to retire portions of
long-term debt, and to pay dividends. A decrease in cash from operations could
reduce the availability of funds and result in additional short-term financings,
see Note 3, Short-Term Financings and Capitalization for additional details about this
source of funds.
INVESTING ACTIVITIES: Cash used for investing activities totaled $144$117 million
and $511$154 million for the first ninethree months of 20022003 and 2001,2002, respectively. The
change of $367$37 million is primarily the result of $298due to a $16 million cashdecrease from the sale2002
level of METC and other assets, and fewer capital expenditures to comply with the Clean Air Act than the first nine months of 2001.and a $12 million
decrease in gas supply system additions and improvements.
FINANCING ACTIVITIES: Cash used for investingfinancing activities totaled $7$51 million and
$395 million for the
first six months of 2002 and 2001, respectively. The change of $388 million is
primarily the result of $293 million cash from the sale of METC and other
assets, and fewer capital expenditures to comply with the Clean Air Act than the
first six months of 2001.
Cash used for investing activities totaled $154 million and $204$105 million for the first three months of 20022003 and 2001,2002, respectively. The
change of $50$54 million is primarily the resultdue to a decrease of fewer capital expenditures to comply with the Clean Air
Act than the first three months of 2001.
FINANCING ACTIVITIES: Cash used by financing activities totaled $168$309 million for
the first nine months of 2002 compared to $193 million provided in the first
nine months of 2001, respectively. The change of $361 million is primarily the
result of $407 million retirementretirements
of bonds and other long-term debt, $100partially offset by $96 million decrease in stockholder's contributionadditional
payments of notes payable and the absence of $121 million
proceeds from preferred securities, offset by $250 million of net proceeds from
issuance of senior notes.
Cash used by financing activities totaled $393 million for the first six months
of 2002 compared to $9 million provided in the first six months of 2001,
respectively. The change of $402 million is primarily the result of $371 million
retirement of bonds and other long-term debt, $178 million net decrease in notes
payable, the absence of $121 million proceeds from preferred securities and an
acceleration of $58 million in the payment of common stock dividends, offset by
$304 million of net proceeds from issuance of senior notes.
-27-
Consumers Energy Company
Cash used in financing activities totaled $105 million and $286 million for the
first three months of 2002 and 2001, respectively. The change of $181 million is
primarily the result of a $150 million cash infusion from CMS
Energy, $298
million net proceeds from issuance of senior notes, and $94 million net increase
in notes payable, offset by a $344 million retirement of bonds and other
long-term debt.
OFF-BALANCE SHEET ARRANGEMENTS: Consumers' use of long-term contracts for the
purchase of commodities and services, the sale of its accounts receivables, and
operating leases are considered to be off-balance sheet arrangements. Consumers
has responsibility for the collectability of the accounts receivables sold, and
the full obligation of its leases become due in case of lease payment default.
Consumers uses these off-balance sheet arrangements in its normal business
operations.Energy.
CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS: The following schedule of
material contractual obligations and commercial commitments is provided to
aggregate information in a single location so that a picture of liquidity and
capital resources is readily available. For further information see Note 2,
Uncertainties, and Note 3, Short-Term Financings and Capitalization.
Contractual Obligations In Millions
- --------------------------------------------------------------------------------------------------------------
Payments Due
------------------------------------------------------------
September 302008 and
March 31 Total 2002 2003 2004 2005 2006 and2007 beyond
- --------------------------------------------------------------------------------------------------------------
On-balance sheet:
Long-term debt $ 2,9122,724 $ 144- $228 $470 $512 $ 33331 $ 328 $470 $ 1,6371,483
Current portion of long-
term debt 277 277 - - - - -
Notes payable 235252 252 - 235- - - -
Capital lease obligations (a) 138 50 21153 14 19 18 3017 16 69
Off-balance sheet:
Headquarters building lease (a) 20 7 13 - - -
Operating leases 83 579 10 12 9 8 498 6 35
Non-recourse debt of FMLP 276 65208 8 54 41 10826 13 66
Sale of accounts receivable 325 325 - - - - -
Unconditional purchase
Obligations 18,049 956 1,175 929 860 14,129obligations 18,888 1,843 1,386 1,119 874 742 12,924
==============================================================================================================
(a) The headquarters building capital lease is estimatedREGULATORY AUTHORIZATION FOR FINANCINGS: At March 31, 2003, Consumers had FERC
authorization to issue or guarantee through June 2004, up to $1.1 billion of
short-term securities outstanding at any one time. Consumers also had remaining
FERC authorization to issue through June 2004 up to $500 million of long-term
securities for refinancing or refunding purposes, $381 million for general
corporate purposes, and $610 million of first mortgage bonds to be $65issued solely
as collateral for the long-term securities. On April 30, 2003, Consumers sold
$625 million principal amount of first mortgage bonds, described below. Its
remaining FERC authorization after this issue is (1) $250 million of long-term
securities for refinancing or refunding purposes, (2) $6 million for general
corporate purposes, and (3) $610 million remaining first mortgage bonds
available to be issued solely as collateral for the long-term securities.
Consumers anticipates applying in the second quarter of 2003 for an increase in
FERC authorization to issue new long-term securities for
CE-11
Consumers Energy Company
refinancing or refunding and for general corporate purposes. On October 10,
2002, FERC granted a waiver of its competitive bid/negotiated placement
requirements applicable to the remaining long-term securities authorization
indicated above.
LONG TERM DEBT: In March 2003, Consumers entered into a $140 million term loan
secured by first mortgage bonds with a private investor bank. This loan has a
term of six years at a cost of LIBOR plus 475 basis points. Proceeds from this
loan were used for general corporate purposes.
In March 2003, Consumers entered into a $150 million term loan secured by first
mortgage bonds. This term loan has a three-year maturity expiring in March 2006;
the loan has a cost of LIBOR plus 450 basis points. Proceeds from this loan were
used for general corporate purposes.
In April 2003, Consumers sold $625 million principal amount of first mortgage
bonds in a private offering to institutional investors ; $250 million were
issued at 4.25 percent, maturing on April 15, 2008, and net proceeds were
approximately $248 million, $375 million were issued at 5.38 percent, maturing
on April 15, 2013, and net proceeds were approximately $371 million. Consumers
used the net proceeds to replace a $250 million senior reset put bond that
matured in May 2003, to pay an associated $32 million option call payment, and
for general corporate purposes that may include paying down additional debt.
Consumers has agreed to file a registration statement with the SEC to permit
holders of these first mortgage bonds to exchange the bonds for new bonds that
will be registered under the Securities Act of 1933. Consumers has agreed to
file this registration statement by December 31, 2003.
Consumers' current portion of long-term debt maturing in 2003 is $277 million.
Refer to Outlook, "Liquidity and Capital Resources" below for information about
Consumers strategic measures addressing its future liquidity and capital
requirements.
SHORT TERM FINANCINGS: In March 2003, Consumers obtained a replacement revolving
credit facility in the amount of $250 million secured by first mortgage bonds.
The cost of the facility is LIBOR plus 350 basis points. The new credit facility
matures in March 2004 with two annual extensions at Consumers' option, which
would extend the maturity to March 2006. The prior facility was due to expire in
July 2003.
Pursuant to restrictive covenants in debt facilities, Consumers is limited to
common stock dividend payments that will not exceed $300 million in any calendar
year. Consumers paid common stock dividends of $231 million in 2002 and $190
million in 2001 to CMS Energy. In January 2003, Consumers declared and paid a
$45$78 million constructioncommon dividend. In March 2003, Consumers declared a $31 million
common dividend payable in May 2003.
LEASES: Consumers' capital leases are predominately for leased service vehicles
and the new headquarters building. Operating leases are predominately for
railroad coal cars.
OFF-BALANCE SHEET ARRANGEMENTS: Consumers' use of long-term contracts for the
purchase of commodities and services, the sale of its accounts receivable, and
operating leases are considered to be off-balance sheet arrangements. Consumers
has responsibility for the collectability of the accounts receivable sold, and
the full obligation hasof its leases become due in case of lease payment default.
Consumers uses these off-balance sheet arrangements in its normal business
operations.
SALE OF ACCOUNTS RECEIVABLE: At March 31, 2003, Consumers had, through its
wholly owned subsidiary Consumers Receivables Funding, a $325 million trade
receivable sale program in place as an anticipated source of funds for general
corporate purposes. At March 31, 2003 and 2002, the receivables sold totaled
$325 million for each year; the average annual discount rate was 1.57 percent
and 2.15 percent, respectively. Accounts receivable and accrued revenue in the
Consolidated Balance Sheets have been incurredreduced to reflect receivables sold. On
April 30, 2003, Consumers ended its trade receivable sale program with its then
existing purchaser and recorded on
Consumers' balance sheet.anticipates that a new trade receivable program will be
in place with a new purchaser in May 2003.
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Consumers Energy Company
UNCONDITIONAL PURCHASE OBLIGATIONS: Unconditional purchase obligations include
natural gas, electricity, and coal purchase contracts and their associated cost
of transportation. These obligations represent normal business operating
contracts used to assure adequate supply and to minimize exposure to market
price fluctuations.
Operating
leasesIncluded in unconditional purchase obligations are predominately railroad coal car leases, and capital leases are
predominately for leased service vehicles. Consumers has long-term power purchase
agreements with various generating plants including the MCV Facility. These
contracts require monthly capacity payments based on the plants' availability or
deliverability. These payments are approximately $45$47 million per month for year 2002, which includes $33the
remaining nine months of 2003, including $34 million related to the MCV
Facility. IfFor the period that a plant is not available to deliver electricity to
Consumers, then Consumers wouldis not be obligated to make the capacity payment whilepayments to the
plant is
unavailable to deliver.plant. See Electric Utility Results of Operations above and Note 2,
Uncertainties, "Electric Rate Matters - Power Supply Costs" and "Other Electric
Uncertainties - The Midland Cogeneration Venture" for further information
concerning power supply costs.
-28-
Consumers Energy Company
Commercial Commitments In Millions
- --------------------------------------------------------------------------------------------------------------
Commitment Expiration
- --------------------------------------------------------------------------------------------------------------
September 30-----------------------------------------------------------
2008 and
March 31 Total 2002 2003 2004 2005 2006 and2007 beyond
- --------------------------------------------------------------------------------------------------------------
Off-balance sheet:
Indemnities 16$8 $- - - - - 16$8
Letters of Creditcredit 7 7 - - - - -
==============================================================================================================
Indemnities are three-party agreements usedby Consumers to assurereimburse other companies, such as an
insurance company, if those companies have to complete Consumers' performance
of contracts
by Consumers.involving a third party contract. Letters of credit are issued by banksa bank on
behalf of Consumers, guaranteeing Consumers'
payment to a third party. Letters of its drafts. Drafts are for a stated amount and for a specified
period; theycredit
substitute the bank's credit for Consumers' and eliminate thereduce credit risk for the other party.
Asthird
party beneficiary. The amount and time period for drawing on a letter of September 2002, Consumers had a $250 million credit
facility of which $235
million is outstandinglimited.
OUTLOOK
LIQUIDITY AND CAPITAL RESOURCES
Consumers' liquidity and a $225 million term loan of which approximately $84
million is outstanding. In addition, Consumers has, through its wholly owned
subsidiary Consumers Receivables Funding, a $325 million trade receivable sale
program in place as anticipated sources of funds for general corporate purposes
and currently expected capital expenditures. At September 30, 2002 and 2001, the
receivables sold totaled $325 million for each year. During 2002, $248 million
cash proceeds were received under the trade receivables sale program. Accounts
receivable and accrued revenue in the Consolidated Balance Sheets have been
reduced to reflect receivables sold.
In July 2002, the credit rating of the publicly traded securities of Consumers
was downgraded by the major rating agencies. The rating downgrade is purported
to be largelyrequirements generally are a function of its
results of operations, capital expenditures, contractual obligations, debt
maturities, working capital needs and collateral requirements. During the uncertainties associated with CMS Energy's
financial conditionsummer
months, Consumers purchases natural gas and stores it for resale primarily
during the winter heating season. Recently, the market price for natural gas has
increased. If continued, this price increase could impose liquidity pending resolutionneeds beyond
what is anticipated for 2003. Although Consumers' natural gas purchases are
recoverable from its customers, the amount paid for natural gas stored as
inventory could require additional liquidity due to the timing of the round-trip trading
investigations and lawsuits, the special board committee investigation,
restatement and re-audit of 2000 and 2001 financial statements, and uncertain
future access to the capital markets.
As a result ofcost
recoveries. In addition, certain of these downgrades, a few commodity suppliers to Consumers have requested
advance payments or other forms of assurances in connection with maintenance of
ongoing deliveries of gas and electricity.
Consumers is addressing these issues as required.
In July 2002, Consumers reached agreement with its lenders on two credit
facilities as follows: a $250 million revolving credit facility maturing July
11, 2003 and a $300 million term loan maturing July 11, 2003. In September 2002,
the term loan maturity was extended by one year at Consumers' option and now has
a maturity date of July 11, 2004. These two facilities aggregating $550 million
replace a $300 million revolving credit facility that matured July 14, 2002, as
well as various credit lines aggregating $200 million. The prior credit
facilities and lines were unsecured. The two new credit facilities are secured
with Consumers first mortgage bonds.
Consumers' $250 million revolving credit facility has an interest rate of LIBOR
plus 200 basis points, although the rate may fluctuate depending on the rating
of Consumers' first mortgage bonds, and the interest rate on the $300 million
term loan is LIBOR plus 450 basis points which may also fluctuate depending on
the rating of Consumers' first mortgage bonds. Consumers' bank and legal fees
associated with arranging the facilities were $6 million. The term loan was
issued at a 4 percent discount.
-29-CE-13
Consumers Energy Company
The credit facilities have contractual restrictions that require Consumers to
maintain, as of the last day of each fiscal quarter, the following:
Required Ratio Limitation Ratio at September 30, 2002
- ---------------------------------------------------------------------------------------------------------------------
(Restated)
Debt to Capital Ratio (a) Not more than 0.65 to 1.00 0.52 to 1.00
Interest Coverage Ratio (a) Not less than 2.0 to 1.0 3.38 to 1.0
======================================================================================================================
(a) Violation of this ratio would constitute an event of default under the
facility which provides the lender, among other remedies, the right to declare
the principal and interest immediately due and payable.
Also pursuant to restrictive covenants in the new facilities, Consumers is
limited to dividend payments that will not exceed $300 million in any calendar
year. In 2001, Consumers paid $189 million in common stock dividends to CMS
Energy. Consumers' common dividend was $183 million and Consumers paid $154
million through September 2002.
In October 2002, Consumers entered into a new Term Loan Agreement collateralized
by First Mortgage Bonds and simultaneously, a new Gas Inventory Term Loan
Agreement collateralized by Consumers' natural gas in storage. These agreements
contain complementary collateral packages that provide Consumers, as additional
first mortgage bonds become available, borrowing capacity of up to $225 million.
Consumers drew $220 million of the capacity upon execution of the Agreements and
is expected to be in a position to draw the full $225 million by mid-November of
2002. The interest rate under the Agreements is currently LIBOR plus 300 basis
points, but will increase by 100 basis points for any period after December 1,
2002 during which the banks thereunder have not yet received, among other
deliveries, certified restated financial statements for CMS Energy's 2000 and
2001 fiscal years. The bank and legal fees associated with the Agreement were $2
million. The first net amortization payment under these Agreements currently is
scheduled to occur at the end of 2002 with monthly amortization scheduled until
full repayment is completed in mid-April of 2003. This financing should
eliminate the need for Consumers to access the capital markets for the remainder
of 2002.
Consumers' debt maturities for 2003 includes $333 million of long-term debt, a
$250 million revolving credit agreement and an estimated remaining balance of
$207 million on the new Gas Inventory Term Loan Agreement. At a minimum, $500
million is expected to be refinanced. In addition, Consumers expects to put in
place a new gas inventory facility. Replacing this debt with new financing is
subject, in part, to capital market acceptance and receptivity to utility
industry securities in general and to Consumers securities issuance in
particular. Consumers cannot predict the capital market's acceptance of its
securities or the impact of its restatement of its consolidated financial
statements and is exploring other financing options.
For further information, see Note 3, Short-Term Financings and Capitalization.
OUTLOOK
LIQUIDITY AND CAPITAL RESOURCES
Consumers' liquidity and capital requirements are generally a function of its
results of operations, capital expenditures, contractual obligations, working
capital needs and collateral requirements.
Consumers has historically met its consolidated cash needs through its operating
and financing activities throughand access to bank financing and the capital markets.
As discussed above, for the
remainder of year 2002 and duringIn 2003, Consumers has contractual obligations and planned capital expenditures
that would require substantial amounts of cash. Consumers also has approximately $800 million of publicly issued and credit
facility debt maturing in 2003, including the Consumers' credit facilities
described above. In addition, Consumers may also become
subject to liquidity demands pursuant to commercial commitments under
guarantees, indemnities and letters of credit as indicated above. -30-
Consumers
Energy Company
Consumers is addressingplans to meet its near-to-mid-term liquidity and capital requirements primarilyin 2003 through a
combination of approximately $290 million from operations, $1.290 billion from
borrowings, including $563 million of new debt and $727 million from refinancing
of existing debt, reduced capital expenditures.expenditures, cost reductions and other
measures. The following table is a summary of Consumers' debt financing plan and
actual borrowings for 2003:
Debt Financing in 2003 In Millions
- ----------------------------------------------------------------------------------------------------------------
Financing Actual Retired or
Financing Plan Borrowing Type Issued Date Maturity Collateral
- ----------------------------------------------------------------------------------------------------------------
Anticipated Maturities:
Revolving credit
facility $ 250 $ 250 Refinanced March 2003 March 2004 (a) FMB
Senior note 250 250 Refunded (b) April 2003 April 2008 -
Gas Inventory
facility 227 - Retired (c) March 2003 - -
------ ------
Subtotal $ 727 $ 500
------ ------
New Financings:
Bank loan 140 140 New issue March 2003 March 2009 FMB (e)
Term loan 150 150 New issue March 2003 March 2006 FMB (e)
First mortgage bonds 250 375 New issue April 2003 April 2013 -
Additional gas
Inventory facility 23 - (d)- - - -
------- ------
Subtotal $ 563 $ 665
------- ------
Total $1,290 $1,165
================================================================================================================
(a) This facility has two annual extensions at Consumers' option, which would
extend the maturity to March 2006.
(b) Refunded and replaced with FMB.
(c) Includes a gas inventory facility of $207 million retired in March 2003 and
anticipated new gas inventory facility pay down of $20 million expected to
occur in December 2003. See footnote (d).
(d) Consumers will seek to arrange a $125 million gas inventory loan in the
third quarter 2003 and thus complete the $1.290 billion financing plan.
(e) Refer to Capital Resources and Liquidity, "Regulatory Authorization for
Financings" above for information about Consumers' remaining FERC debt
authorization.
Consumers believes that its current level of cash and borrowing capacity, along
with anticipated cash flows from operating and investing activities, will be
sufficient to meet its liquidity needs through 2003, including the approximate $800 million of debt maturities
in 2003. On November 26, 2002, Consumers' various bank groups waived delivery of
financial statementsIn addition to executing the debt financing plan for 2003 as discussed
above, the period ended September 30, 2002 until February 28,following activities also have been initiated by Consumers to enhance
further its liquidity beyond 2003:
CE-14
Consumers Energy Company
o Consumers filed a general rate case for its gas utility business
on March 14, 2003. Consumers providedrequested rate relief in the banksamount
of approximately $156 million. In its filing, Consumers requested
immediate interim relief. If interim relief of $156 million were
granted, Consumers expects that it will be in place by the fourth
quarter of 2003.
o Consumers filed an application in March 2003, with the required financial statements beforeMPSC
seeking authorization to issue $1.084 billion of Securitization
bonds. These bonds would provide liquidity to Consumers at
interest rates reflective of high quality credit. Consumers would
utilize these proceeds to retire higher cost debt and in turn
would realize significant interest expense savings over the waivers expired.life
of the bonds. If the MPSC approves a financing in the amount
requested, and there are no rehearing or court appeals and no
other delays in the offering process, Consumers anticipates that
bonds could be issued by year-end 2003.
There is no assurance that the pending Securitization bond issuance transaction
noted above will be completed, nor is there assurance that the MPSC will grant
either interim or final gas utility rate relief.
SEC AND OTHER INVESTIGATIONS
As a result of the impact of the restatement, ratings downgrades and related
changes in its financial situation, Consumers' access to bank financing and the
capital markets and its ability to incur additional indebtedness may be
restricted. In the event Consumers is unable to access bank financing or the
capital markets to incur or refinance indebtedness it could have a material
adverse effect on Consumers' liquidity and operations. In such event, it would
be required to consider the full range of strategic measures available to
companies in similar circumstances.
SEC INVESTIGATION: As a result of the round-trip trading transactions at CMS MST, CMS Energy's Board of
Directors established a Special Committee of independent directors to
investigate matters surrounding the transactions and retained outside counsel to
assist in the investigation. The Special Committee completed its investigation
and reported its findings to the Board of Directors in October 2002. The special committeeSpecial
Committee concluded, based on an extensive investigation, that the round-trip
trades were undertaken to raise CMS MST's profile as an energy marketer with the
goal of enhancing its ability to promote its services to new customers. The
committeeSpecial Committee found no apparent effort to manipulate the price of CMS Energy
Common Stock or affect energy prices. The special committeeSpecial Committee also made
recommendations designed to prevent any reoccurrence of this practice, somemost of
which have already been implemented, including the
termination of theimplemented. Previously, CMS Energy terminated its
speculative trading business and revisions to CMS Energy'srevised its risk management policy. The Board
of Directors adopted, and CMS Energy has begun implementing, the remaining
recommendations of the special committee.Special Committee.
CMS Energy is cooperating with other investigations concerning round-trip
trading, including an investigation by the SEC regarding round-trip trades and
the
CMS Energy's financial statements, accounting policies and controls, and
investigations by the United States Department of Justice, the Commodity Futures
Trading Commission and the FERC. The FERC issued an order on April 30, 2003
directing eight companies, including CMS Energy has also received subpoenas fromMST, to submit written demonstrations
within forty-five days that they have taken certain specified remedial measures
with respect to the United States Attorney's Office forreporting of natural gas trading data to publications that
compile and publish price indices. CMS MST intends to make a written submission
within the Southern District of New York and fromspecified time period demonstrating compliance with the United States Attorney's Office in Houston regarding investigations of these
trades and has received a number of shareholder class action lawsuits.FERC's
directives. Other than the FERC investigation, CMS Energy is unable to predict
the outcome of these matters, and Consumers is unable to predict what effect, if
any, these investigations will have on its business.
-31-
Consumers Energy Company
SECURITIES CLASS ACTION LAWSUITS: Beginning on May 17, 2002, a number of
securities class action complaints have beenwere filed against CMS Energy, Consumers, and
certain officers and directors of CMS Energy and its affiliates. The complaints
have beenwere filed as purported class actions in the United States District Court for
the Eastern District of Michigan asMichigan. The cases were consolidated into a single
lawsuit and an amended and consolidated class action complaint was filed on May
1, 2003. The defendants named in the amended and consolidated class action
complaint consist of CMS Energy, Consumers, and certain officers and directors
of CMS Energy and its affiliates, and certain underwriters of CMS Energy
securities. The purported class actions by individuals who
allege that they purchased CMS Energy's securities during a purportedperiod is from May 1, 2000 through and including
March 31, 2003. The amended and consolidated class period. At least two of the complaints contain purported class periods beginning
on August 3, 2000 and running through May 10, 2002 or May 14, 2002. These
complaints generally seekaction complaint seeks
unspecified damages based on allegations that the defendants violated United
States securities laws and regulations by making allegedly false and misleading
statements about the company'sCMS Energy's business and financial condition. CMS Energy believes that additional suits might be
commenced against it and
that all such suits against it will eventually be
consolidated. Consumers intendsintend to vigorously defend against these actions.
Consumersthis action, but cannot predict
the outcome of this litigation.
ERISA CASES: Consumers is a named defendant, along with CMS Energy, CMS MST and
certain named
CE-15
Consumers Energy Company
and unnamed officers and directors, in two lawsuits brought as purported class
actions on behalf of participants and beneficiaries of the 401(k) Plan.plan. The two
cases, filed in July 2002 in the United States District Court for the Eastern
District of Michigan, were consolidated by the trial judge.judge and an amended and
consolidated complaint has been filed. Plaintiffs allege breaches of fiduciary
duties under the ERISA and seek restitution on behalf of the Planplan with respect to a
decline in value of the shares of CMS Energy Common Stock held in the Plan.plan.
Plaintiffs also seek other equitable relief and legal fees. These cases will be
vigorously defended. Consumers cannot predict the outcome of this litigation.
CAPITAL EXPENDITURES OUTLOOK
Consumers estimates the following capital expenditures, including new lease
commitments, by expenditure type and by business segments during 2002 through
2004. Consumers prepares these estimates for planning purposes and may revise
them.
In Millions
- -------------------------------------------------------------------------
Years Ended December 31 2002 2003 2004
Restated Restated
- -------------------------------------------------------------------------
Construction $583 $432 $511
Nuclear fuel 9 33 32
Other capital leases 89 38 32
-------------------------------
$681 $503 $575
=========================================================================
Electric utility operations (a)(b) $474 $352 $410
Gas utility operations (a) 207 151 165
-------------------------------
$681 $503 $575
=========================================================================
(a) These amounts include an attributed portion of Consumers' anticipated
capital expenditures for plant and equipment common to both the electric and gas
utility businesses.
(b) These amounts include estimates for capital expenditures that may be
required by recent revisions to the Clean Air Act's national air quality
standards.
ELECTRIC BUSINESS OUTLOOK
GROWTH: Over the next five years, Consumers expects electric deliveries
(including both full service sales and delivery service to customers who choose
to buy generation service from an alternative electric supplier, but excluding
transactions with other wholesale market participants including other electric
utilities) to grow at an
-32-
Consumers Energy Company average rate of approximately two percent per year
based primarily on a steadily growing customer base. This growth rate reflects a
long-range expected trend of growth. Growth from year to year may vary from this
trend due to customer response to abnormal weather conditions and changes in
economic conditions including, utilization and expansion of manufacturing
facilities. Consumers has experienced much stronger than expected growth in 2002
as a result of warmer than normal summer weather. Assuming that normal weather
conditions will occur in the remaining three quarters of 2003, electric
deliveries are expected to grow less than one percent over the strong 2002
electric deliveries.
COMPETITION AND REGULATORY RESTRUCTURING: The enactment in 2000 of Michigan's
Customer Choice Act and other developments will continue to result in increased
competition in the electric business. Generally, increased competition can
reduce profitability and threatens Consumers' market share for generation
services. The Customer Choice Act allowed all of the company's electric
customers to buy electric generation service from Consumers or from an
alternative electric supplier as of January 1, 2002. As a result, alternative
electric suppliers for generation services have entered Consumers' market. As of
November 2002, 446early May 2003, alternative electric suppliers are providing 571 MW of
generation services were being provided by such
suppliers.supply to customers. To the extent Consumers experiences "net"
Stranded Costs as determined by the MPSC, the Customer Choice Act allows for the
company to recover such "net" Stranded Costs by collecting a transition
surcharge from those customers who switch to an alternative electric supplier.
Consumers cannot predict the total amount of electric supply load that may be
lost to competitor suppliers, nor whether the stranded cost recovery method
adopted by the MPSC will be applied in a manner that will fully offset any
associated margin loss.
Stranded and Implementation Costs: The Customer Choice Act allows electric
utilities to recover the act's implementation costs and "net" Stranded Costs
(without defining the term). The act directs the MPSC to establish a method of
calculating "net" Stranded Costs and of conducting related true-up adjustments.
In December 2001, the MPSC adopted a methodology which calculated "net" Stranded
Costs as the shortfall between: (a) the revenue required to cover the costs
associated with fixed generation assets, generation-related regulatory assets,
and capacity payments associated with purchase power agreements, and (b) the
revenues received from customers under existing rates available to cover the
revenue requirement. The MPSC authorized Consumers to use deferred accounting to
recognize the future recovery of costs determined to be stranded. Consumers has
initiated an appeal at the Michigan Court of Appeals related to the MPSC's
December 2001 "net" Stranded Cost order, as a
result of the uncertainty associated with the outcome of the proceeding
described in the following paragraph.order.
According to the MPSC, "net" Stranded Costs arewere to be recovered from retail
open access customers through a Stranded Cost transition charge. Even though the MPSC
set Consumers' Stranded Cost transition charge at zero for calendar year 2000,
those costs for 2000 will be subject to further review in the context of the
MPSC's subsequent determinations of "net" Stranded Costs for 2001 and later
years. The MPSC authorized Consumers to use deferred accounting to recognize the
future recovery of costs determined to be stranded. In April 2002,
Consumers made "net" Stranded Cost filings with the MPSC for $22 million for
2000 and $43 million for 2000 and 2001, respectively.2001. In the same filing, Consumers estimated that it
would experience "net" Stranded Costs of $126 million for 2002. After a series
of appeals and hearings, Consumers, in
its hearing brief, filed in August 2002, revised its request for "net" Stranded
Costs to $7 million and $4 million for 2000 and 2001, respectively, and an
estimated $73 million for 2002. The single largest reason for the difference in the filing was
the
CE-16
Consumers Energy Company
exclusion, as ordered by the MPSC, of all costs associated with expenditures
required by the Clean Air Act.
In December 2002, the MPSC issued an order finding that Consumers experienced
zero "net" Stranded Costs in 2000 and 2001, but declined to establish a separate filing, requested regulatory asset accounting treatmentdefined
methodology that would allow a reliable prediction of the level of Stranded
Costs for its2002 and future years. In January 2003, Consumers filed a petition for
rehearing of the December 2002 Stranded Cost order in which it asked the MPSC to
grant rehearing and revise certain features of the order. Several other parties
also filed rehearing petitions with the MPSC. As discussed below, Consumers has
filed a request with the MPSC for authority to issue securitization bonds that
would allow recovery of the Clean Air Act expenditures through 2003. The outcome of these proceedings beforethat were excluded from
the Stranded Cost calculation and post-2000 Palisades expenditures.
On March 4, 2003, Consumers filed an application with the MPSC seeking approval
of "net" Stranded Costs incurred in 2002, and for approval of a "net" Stranded
Cost recovery charge. In the application, Consumers indicated that if Consumers'
proposal to securitize Clean Air Act expenditures and post-2000 Palisades
expenditures were approved as proposed in its securitization case as discussed
below, then Consumers' "net" Stranded Costs incurred in 2002 are approximately
$35 million. If the proposal to securitize those costs is uncertain atnot approved, then
Consumers indicated that the costs would be properly included in the 2002 "net"
Stranded Cost calculation, which would increase Consumers' 2002 "net" Stranded
Costs to approximately $103 million. Consumers cannot predict the recoverability
of Stranded Costs, and therefore has not recorded any regulatory assets to
recognize the future recovery of such costs.
The MPSC staff has scheduled a collaborative process to discuss Stranded Costs
and related issues and to identify and make recommendations to the MPSC.
Consumers is participating in this time.collaborative process.
Since 1997, Consumers has incurred significant electric utility restructuring
implementation costs. The following table outlines the applications filed by
Consumers with the MPSC and the status of recovery for these costs.
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Consumers Energy Company
In Millions
- --------------------------------------------------------------------------------------------------------------
Year Filed Year Incurred Requested Pending Allowed Disallowed
- --------------------------------------------------------------------------------------------------------------
1999 1997 & 1998 $20 $ - $15 $5
2000 1999 30 - 25 5
2001 2000 25 - 20 5
2002 2001 8 8 - -Pending Pending
2003 2002 2 2 Pending Pending
==============================================================================================================
The MPSC disallowed certain costs based upon a conclusion that these amounts did
not represent costs incremental to costs already reflected in electric rates. In
the orders received for the years 1997 through 2000, the MPSC also reserved the
right to review again the total implementation costs depending upon the progress
and success of the retail open access program, and ruled that due to the rate
freeze imposed by the Customer Choice Act, it was premature to establish a cost
recovery method for the allowable implementation costs. In addition to the
amounts shown above, as of September 2002,March 31, 2003, Consumers incurred and deferred as a
regulatory asset, $3$2 million of additional implementation costs and has also
recorded as a regulatory asset $13$14 million for the cost of money associated with
total implementation costs. Consumers believes the implementation costs and the
associated cost of money are fully recoverable in accordance with the Customer
Choice Act. Cash recovery from customers will probably begin after the rate
freeze or rate cap period has expired. As discussed below, Consumers has asked
to include implementation costs through December 31, 2003 in the pending
securitization case. If approved, the sale of Securitization bonds will allow
for the recovery of these costs. Consumers cannot predict the amounts the MPSC
will approve as allowable costs.
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Consumers Energy Company
Consumers is also pursuing recovery, throughauthorization at the FERC for MISO ofto reimburse
Consumers for approximately $7$8 million in certain electric utility restructuring
implementation costs related to its former participation in the development of
the Alliance RTO.RTO, a portion of which has been expensed. However, Consumers
cannot predict the amounts itamount the FERC will ultimately order to be reimbursed by the
MISO.
Securitization: In March 2003, Consumers filed an application with the MPSC
seeking approval to issue Securitization bonds in the amount of approximately
$1.084 billion. If approved, this would allow the recovery of costs and reduce
interest rates associated with financing Clean Air Act expenditures, post-2000
Palisades expenditures, and retail open access implementation costs through
December 31, 2003, and certain pension fund expenses, and expenses associated
with the issuance of the bonds.
Rate Caps: The Customer Choice Act imposes certain limitations on electric rates
that could result in Consumers being unable to collect from electric customers
its full cost of conducting business. Some of these costs are beyond Consumers'
control. In particular, if Consumers needs to purchase power supply from
wholesale suppliers while retail rates are frozen or capped, the rate
restrictions may make it impossible for Consumers to fully recover purchased
power and associated transmission costs from its customers. As a result,
Consumers may be unable to maintain its profit margins in its electric utility
business during the rate freeze or rate cap periods. The rate freeze is in
effect through December 31, 2003. The rate caps are in effect through at least
December 31, 2004 for small commercial and industrial customers, and at least
through December 31, 2005 for residential customers.
Industrial Contracts: In response to industry restructuring efforts, in 1995 and
1996, Consumers entered into multi-year electric supply contracts with certain
large industrial customers to provide electricity at specially negotiated
prices, usually at a discount from tariff prices. The MPSC approved these
special contracts as part of its phased introduction to competition. Unless
terminated or restructured, the majority of these contracts are in effect
through 2005. As of September 2002, some contracts
have expired, butMarch 31, 2003, outstanding contracts involve approximately
500513 MW. Consumers cannot predict the ultimate financial impact of changes
related to these power supply contracts, or whether additional contracts will be
necessary or advisable. However, of the original special contracts that have
terminated, contracts for 52MW have gone to an alternative electric supplier
and contracts for 129MW have returned to bundled tariff rates.
Code of Conduct: In December 2000, as a result of the passage of the Customer
Choice Act, the MPSC issued a new code of conduct that applies to electric
utilities and alternative electric suppliers. The code of conduct seeks to
prevent cross-subsidization, information sharing, and preferential treatment
between a utility's regulated and unregulated services. The new code of conduct
is broadly written, and as a result, could affect Consumers' retail gas
business, the marketing of unregulated services and equipment to Michigan
customers, and internal transfer pricing between Consumers' departments and
affiliates. In October 2001, the new code of conduct was reaffirmed by the MPSC
without substantial modification. Consumers appealed the MPSC orders related to
the code of conduct and sought a stay of the orders until the appeal was
complete; however, the request for a
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Consumers Energy Company stay was denied. Consumers filed a
compliance plan in accordance with the code of conduct. It also sought waivers
to the code of conduct in order to continue utility activities that provide
approximately $50 million in annual electric and gas revenues. In October 2002,
the MPSC denied waivers for three programs that provideprovided approximately $32
million in revenues.gas revenues in 2001, of which $30 million relates to the appliance
service plan. The waivers denied included all waivers associated with the
appliance service plan program that has been offered by Consumers for many
years. Consumers filed a renewed motion for a stay of the effectiveness of the
code of conduct and an appeal of the waiver denials with the Michigan Court of
Appeals. On November 8, 2002, the Michigan Court of Appeals denied Consumers'
request for a stay. Consumers is continuingfiled an application for leave to explore
its options which may include seeking an appeal ofwith the
Michigan Supreme Court with respect to the Michigan Court of Appeals' ruling.November
ruling denying the stay. In February 2003, the Michigan Supreme Court denied the
application. In December 2002, Consumers filed a renewed request with the MPSC
for a temporary waiver until April 2004 for the appliance service plan, which
generated $33 million in gas revenues in 2002. In February 2003, the MPSC
granted an extension of the temporary waiver until December 31, 2003. The full
impact of the new code of conduct on Consumers' business will remain uncertain
until the
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Consumers Energy Company
appellate courts issue definitive rulings. Recently, in an appeal involving
affiliate pricing guidelines, the Michigan Court of Appeals struck the
guidelines down because of a procedurally defective manner of enactment by the
MPSC. A similar procedure was used by the MPSC in enacting the new code of
conduct. Consumers is also exploring seeking legislative clarification of the
scope of the code of conduct.
Energy Policy: Uncertainty exists regarding the enactment of a national
comprehensive energy policy, specifically federal electric industry
restructuring legislation. A variety of bills introduced in the United States
Congress in recent years aimed to change existing federal regulation of the
industry. If the federal government enacts a comprehensive energy policy or
electric restructuring legislation, then that legislation could potentially
affect company operations and financial requirements.
Transmission: In 1999, the FERC issued Order No. 2000, strongly encouraging
electric utilities to transfer operating control of their electric transmission
system to an RTO, or sell the facilities to an independent company. In addition,
in June 2000, the Michigan legislature passed Michigan's Customer Choice Act,
which also requires utilities to divest or transfer the operating authority of
transmission facilities to an independent company. Consumers chose to offer its
electric transmission system for sale rather than own and invest in an asset it
could not control. In May 2002, Consumers sold its electric transmission system
for approximately $290 million in cash to MTH, a
non-affiliated limited partnership whose general partner is a subsidiary of
Trans-Elect, Inc.
Trans-Elect, Inc. submitted the winning bid through a competitive bidding
process, and various federal agencies approved the transaction. Consumers did
not provide any financial or credit support to Trans-Elect, Inc. Certain of
Trans-Elect's officers and directors are former officers and directors of CMS
Energy, Consumers and their subsidiaries. None of them were employed by CMS
Energy, Consumers, or their affiliates when the transaction was discussed
internally and negotiated with purchasers. As a result of the sale, Consumers anticipates that its after-tax earnings will increasebe
decreased by $15 million in 2003, and decrease by approximately $17$14 million
in 2002,annually for the next three years due to the recognition of a $26 million one time gain on the
sale of the electric transmission system. This one time gain is offset by a loss
of revenue from wholesale and retail open access customers who will buy services
directly from MTH, including the loss of a return on the sold electric
transmission system. Consumers anticipates that the future impact of the loss of revenue from wholesale and
retail open access customers who will buy services directly from MTH and the
loss of a return on the sold electric transmission system on its after-tax earnings will be a decrease of $15 million in 2003, and
a decrease of approximately $14 million annually for the next three years.system.
Under thean agreement with MTH, and subject to certain additional RTO surcharges,
contract transmission rates charged to Consumers will beare fixed by contract at current levels
through December 31, 2005, and subject to FERC ratemaking thereafter. MTH will
completehas
completed the capital program to expand the transmission system's capability to
import electricity into Michigan, as required by the Customer Choice Act, and
Consumers will continue to maintain the system under a five-year contract with
MTH.
Consumers is a customer of AEP, holding 300 MW of long-term transmission service
reservations through the AEP transmission system. Effective April 30, 2002,June 1, 2003,
Consumers will have an additional 100 MW of long-term transmission, resulting in
a total of 400 MW of long-term transmission for summer 2003, reserved through
the AEP transmission system. AEP has indicated its intent, and METC withdrewhas received
preliminary FERC approval, to turn control of its transmission system over to
the PJM RTO. This will require current AEP wholesale transmission customers to
become members of, and resubmit reservation requests to, PJM. Due to legislation
recently enacted in Virginia, which precludes Virginia utilities (including AEP)
from joining an RTO until at least July 2004, as well as uncertainty associated
with state approvals AEP is seeking from various state regulatory bodies, the
Alliance
RTO. For further information, see Note 2, Uncertainties, "Electric Rate Matters
- - Transmission."
In July 2002,timing of AEP's membership in PJM is currently in some doubt. Upon completion of
the steps necessary for the integration of AEP into PJM, Consumers will complete
the application process to join PJM as a transmission customer.
There are multiple proceedings and a proposed rulemaking pending before the FERC
issued a 600-page notice of proposed rulemaking onregarding transmission pricing mechanisms and standard market design for
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Consumers Energy Company
bulk power markets and transmission. Its stated purpose is to remedy undue
discrimination in the use of the interstate transmission system and give the
nation the benefits of a competitive bulk power system. The proposal is subject
to public comment until November 15, 2002 and January 10, 2003 for certain
standard market design issues. Consumers is currently studying the effects of
the proposed rulemaking and intends to file comments with the FERC. The proposed
rulemaking is primarily designed to correct perceived problems in the electric
transmission industry. Consumers sold its electric transmission system in 2002,
but is a transmission customer. The financial impact to Consumers is uncertain,
but the final standard market design rules could significantly increase
delivered power costs to Consumers and the retail electric customers it serves.
There are multiple proceedings pending before the FERC regarding transitional
transmission pricing mechanisms intended to mitigate the revenue impact on
transmission owners resulting from the elimination of "Rate Pancaking". "Rate
Pancaking" represents the application of the transmission rate of each
individual transmission owner whose system is utilized on the scheduled path of
an energy delivery and its elimination could result in "lost revenues" for
transmission owners. It is unknown what mechanism(s) may result from the
proceedings currently pending before the FERC, and as such, it is not possible
at this time to identify the specific effect on Consumers. It should be noted,
however, that Consumers believes the results of these proceedings
and proposed rulemaking could also
significantly affect the trend of transmission
costs and increase the delivered power costs to Consumers and the retail
electric customers it serves.
Similarly, other proceedings before the FERC involving rates of transmission
providers of Consumers could increase Consumers' cost of transmitting power to
its customers in Michigan. As RTOs develop and mature in Consumers' area of
electrical operation, and those RTOs respond to FERC initiatives concerning the
services they must provide and the systems they maintain, Consumers believes
that there is likely to be an upward cost trend in transmission used by
Consumers, ultimately increasing the delivered cost of power to Consumers and the retail
electric customers it serves. The specific financial impact on Consumers of such
proceedings, rulemaking and trends are not currently quantifiable.
Wholesale Market Competition: In 1996, Detroit Edison gaveaddition, Consumers its
four-year notice to terminate their joint operating agreements foris evaluating whether or not there may be impacts on
electric reliability associated with the MEPCC.
Detroit Edison and Consumers restructured and continued certain partsoutcomes of the
MEPCC control area and jointthese various transmission
operations, but expressly excluded any
merchant operations (electricity purchasing, sales, and dispatch operations). On
April 1, 2001, Detroit Edison and Consumers began separate merchant operations.
This opened Detroit Edison and Consumers to wholesale market competition as
individual companies. Consumers has successfully operated its independent
merchant system since April 1, 2001. Althoughrelated proceedings. Consumers cannot predict the
long-term financial impact of terminating these joint merchant operations, this
change places Consumers in the same competitive position asassure that all other wholesale
market participants.
Wholesale Market Pricing: The FERC authorizes Consumersrisks to sell electricity at
wholesale market prices. In authorizing sales at market prices, the FERC
considers the seller's level of "market power," due to the seller's dominance of
generation resources and surplus generation resources in adjacent wholesale
markets. To continue its authorization to sell at market prices, Consumers filed
a traditional market dominance analysis and indicated its compliance therewith
in October 2001. In November 2001, the FERC issued an order modifying the
traditional method of determining market power. In September 2002, a Consumers'
affiliate, CMS MST, was required by the FERC to file an updated market power
study to determine if CMS MST or any of its affiliates, including Consumers, had
market power. The study, using FERC's modified method, found that neither CMS
MST nor its affiliates possess market power.reliability can
be avoided.
Consumers cannot predict the impact of these electric industry-restructuring
issues on its financial position, liquidity, or results of operations.
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Consumers Energy Company
PERFORMANCE STANDARDS: In July 2001, the MPSC proposed electric distribution
performance standards for Consumers and other Michigan electric distribution
utilities. The proposal would establish standards related to restoration after
an outage, safety, and customer relations. Failure to meet the standards would
result in customer bill credits. Consumers submitted comments to the MPSC. In
December 2001, the MPSC issued an order stating its intent to initiate a formal
rulemaking proceeding to develop and adopt performance standards. OnIn November 7,
2002, the MPSC issued an order initiating the formal rulemaking proceeding.
Consumers has filed comments on the proposed rules and will continue to
participate in this process. Consumers cannot predict the nature of the proposed
standards or the likely effect, if any, on Consumers.
For further information and material changes relating to the rate matters and
restructuring of the electric utility industry, see Note 1, Corporate Structure
and Summary of Significant Accounting Policies, and Note 2, Uncertainties,
"Electric Rate Matters - Electric Restructuring" and "Electric Rate Matters -
Electric Proceedings."
UNCERTAINTIES: Several electric business trends or uncertainties may affect
Consumers' financial results and condition. These trends or uncertainties have,
or Consumers reasonably expects could have, a material impact on net sales,
revenues, or income from continuing electric operations. Such trends and
uncertainties include: 1) pending litigation and government investigations; 2)
the need to make additional capital expenditures and increase operating expenses
for Clean Air Act compliance; 2)3) environmental liabilities arising from various
federal, state and local environmental laws and regulations, including potential
liability or expenses relating to the Michigan Natural Resources and
Environmental Protection Acts and Superfund; 3)4) uncertainties relating to the
storage and ultimate disposal of spent nuclear fuel and the successful operation of Palisades by NMC; 4)fuel; 5) electric industry
restructuring issues, including those described above; 5)6) Consumers' ability to
meet peak electric demand requirements at a reasonable cost, without market
disruption, and successfully implement initiatives to reduce exposure to
purchased power price increases; 6)7) the recovery of electric restructuring
implementation costs; 7)8) Consumers new status as an electric transmission
customer and not as an electric transmission owner/operator; 8)9) sufficient
reserves for OATT rate refunds; 9)10) the effects of derivative accounting and
potential earnings volatility,volatility; 11) increased costs for safety and 10) Consumers' continuing abilityhomeland
security initiatives that are not recoverable on a timely basis from customers;
and 12) potentially rising pension costs due to raise
funds at reasonable ratesmarket losses (as discussed
above in order to meet the cash requirements of its electric
business.Accounting for Pension and OPEB). For further information about these
trends or uncertainties, see Note 2, Uncertainties.
GAS BUSINESS OUTLOOK
GROWTH: Over the next five years, Consumers expects gas deliveries, including
gas full service and customer choice deliveries (excluding transportation to the
MCV Facility and off-system deliveries), to grow at an average rate of approximatelyless than
one percent per year based primarily on a steadily growing customer base. This growth rate
reflects a long-range expected trend of growth. Growth from year to yearActual
gas deliveries in future periods may vary from this trend due to customer response tobe affected by abnormal weather, conditions, use of gas
by independent power producers, changes in competitive and economic conditions,
and the level of natural gas consumption per customer.
2001 GAS RATE CASE: In June 2001, Consumers filed an application with the MPSC
seeking a $140 million distribution service rate increase. Contemporaneously
with this filing, Consumers requested partial and immediate relief in the annual
amount of $33 million. In October 2001, Consumers revised its filing to reflect
lower operating costs and requested a $133 million annual distribution service
rate increase. In December 2001, the MPSC authorized a $15 million annual
interim increase in distribution service revenues. In February 2002, Consumers
revised its filing to reflect lower estimated gas inventory prices and revised
depreciation expense and requested a $105 million distribution service rate increase. On November 7, 2002, the MPSC
issued a final order approving a $56 million annual distribution service rate increase, which includes the $15
million interim increase, with an 11.4 percent authorized return on equity, for
service effective November 8, 2002. See Note 2, Uncertainties "Gas Rate Matters
- - Gas Rate Case" for further information.
UNBUNDLING STUDY: In July 2001, the MPSC directed gas utilities under its
jurisdiction to prepare and file an
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Consumers Energy Company
unbundled cost of service study. The purpose of the study is to allow parties to
advocate or oppose the unbundling of the following services: metering, billing
information, transmission, balancing, storage, backup and peaking, and customer
turn-on and turn-off services. Unbundled services could be separately priced in
the future and made subject to competition by other providers. The subject is
likely to remain the topic of further study by the utilities in 2002 and 2003
and further consideration by the MPSC. Consumers cannot predict the outcome of
unbundling costs on its financial results and conditions.
In September 2002, the FERC issued an order rejecting a filing by Consumers to
assess certain rates for non-physical gas title tracking services offered by
Consumers. Despite Consumers' arguments to the contrary, the Commission asserted
jurisdiction over such activities and allowed Consumers to refile and justify a
title transfer fee not based on volumes as Consumers proposed. Because the order
was issued 6 years after Consumers made its original filing initiating the
proceeding, over $3 million in non-title transfer tracking fees had been
collected. No refunds have been ordered, and Consumers sought rehearing of the
September order. Consumers has made no reservations for refunds in this matter.
If refunds were ordered they may include interest which would increase the
refund liability to more than the $3 million collected. Consumers is unable to
say with certainty what the final outcome of this proceeding might be.
UNCERTAINTIES: Several gas business trends or uncertainties may affect
Consumers' financial results and conditions. These trends or uncertainties have,
or Consumers reasonably expects could have, a material impact on net sales,
revenues, or income from continuing gas operations. Such trends and
uncertainties include: 1) potential environmental costs at a number of sites,
including sites formerly housing manufactured gas plant facilities; 2) future
gas industry restructuring initiatives; 3) any initiatives undertaken to protect
customers against gas price increases; 4) an inadequate regulatory response to
applications for requested rate increases; 5) market and regulatory responses to
increases in gas costs, including a reduced average use per residential
customer; 6) increased costs for pipeline integrity and safety and homeland
security initiatives that are not recoverable on a timely basis from customers;
and 7) Consumers' continuing ability to raise funds at reasonable rates in order
to meet the cash requirements of its gas business. For further information about
these uncertainties, see Note 2, Uncertainties.
OTHER OUTLOOK
See Outlook, "Pending Restatement", "Liquidity & Capital Resources", "SEC
Investigation", "Securities Class Action Lawsuits", and "ERISA Cases" above.
TAX LOSS ALLOCATIONS: The Job Creation and Worker Assistance Act of 2002
provided to corporate taxpayers a 5-year carryback of tax losses incurred in
2001 and 2002. As a result of this legislation, CMS Energy was able to carry
back a consolidated 2001 tax loss to tax years 1996 through 1999 and obtain
refunds of prior years tax payments totaling $217 million. The tax loss
carryback, however, resulted in a reduction in AMT credit carryforwards that
previously had been recorded by CMS Energy as deferred tax assets in the amount
of $41 million. This one-time non-cash reduction in AMT credit carryforwards was
originally reflected in the tax provisions of CMS Energy and each of its
consolidated subsidiaries as of September 2002, according to their contributions
to the consolidated CMS Energy tax loss, of which $29 million was allocated to
Consumers under the CMS Energy tax sharing agreement. As of September 30, 2002,
the $29 million tax sharing allocation has been restated for financial reporting
purposes and reflected as a dividend to be paid by Consumers to CMS Energy. In
December 2002, Consumers' estimated $29 million dividend was adjusted to $25
million upon calculation of the final tax allocation.
TERRORIST ATTACKS: Since the September 11, 2001 terrorist attacks in the United
States, Consumers has increased security at all facilities and over its
infrastructure, and will continue to evaluate security on an ongoing basis.
Consumers may be required to comply with federal and state regulatory security
measures promulgated
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Consumers Energy Company
in the future. As a result, Consumers anticipates increased operating costs for
security that could be significant. Consumers would try to recover these costs
from customers.
ENERGY-RELATED SERVICES: Consumers offers a variety of energy-related services
to retail customers that focus on appliance maintenance, home safety, commodity
choice, and assistance to customers purchasing heating, ventilation and air
conditioning equipment. Consumers continues to look for additional growth
opportunities in providing energy-related services to its customers. The ability
to offer all or some of these services and other utility related
revenue-generating services, which provide approximately $50 million in annual
revenues, may be restricted by the new code of conduct issued by the MPSC, as
discussed above in Electric Business Outlook, "Competition and Regulatory
Restructuring - Code of Conduct."
OTHER MATTERS
NEW ACCOUNTING STANDARDS
SFAS NO. 143, ACCOUNTING FOR ASSET RETIREMENT OBLIGATIONS: Beginning January 1,
2003, companies must comply with SFAS No. 143. The standard requires companies
to record the fair value of the legal obligations related to an asset retirement
in the period in which it is incurred. When the liability is initially recorded,
the company would capitalize an offsetting amount by increasing the carrying
amount of the related long-lived asset. Over time, the initial liability is
accreted to its present value each period and the capitalized cost is
depreciated over the related asset's useful life. Consumers is currently
inventorying assets that may have a retirement obligation and consulting with
counsel to determine if a legal retirement obligation exists. If one exists, any
removal cost estimate will be determined based on fair value cost estimates as
required by the new standard. The present value of the legal retirement
obligations will be used to quantify the effects of adoption of this standard.
SFAS NO. 145, RESCISSION OF FASB STATEMENTS NO. 4, 44, AND 64, AMENDMENT OF FASB
STATEMENT NO. 13, AND TECHNICAL CORRECTIONS: Issued by the FASB in April 2002,
this standard rescinds SFAS No. 4, Reporting Gains and Losses from
Extinguishment of Debt, and SFAS No. 64, Extinguishment of Debt Made to Satisfy
Sinking-Fund Requirements. As a result, any gain or loss on extinguishment of
debt should be classified as an extraordinary item only if it meets the criteria
set forth in APB Opinion No. 30. The provisions of this section are applicable
to fiscal years beginning 2003. SFAS No. 145 amends SFAS No. 13, Accounting for
Leases, to require sale-leaseback accounting for certain lease modifications
that have similar economic impacts to sale-leaseback transactions. This
provision is effective for transactions occurring after May 15, 2002. Finally,
SFAS No. 145 amends other existing authoritative pronouncements to make various
technical corrections and rescinds SFAS No. 44, Accounting for Intangible Assets
of Motor Carriers. These provisions are effective for financial statements
issued on or after May 15, 2002. Consumers believes there will be no impact on
its financial statements upon adoption of the standard.
SFAS NO. 146, ACCOUNTING FOR COSTS ASSOCIATED WITH EXIT OR DISPOSAL ACTIVITIES:
Issued by the FASB in July 2002, this standard requires companies to recognize
costs associated with exit or disposal activities when they are incurred rather
than at the date of a commitment to an exit or disposal plan. This standard is
effective for exit or disposal activities initiated after December 31, 2002.
Consumers believes there will be no impact on its financial statements upon
adoption of the standard.
SUBSEQUENT EVENTS
Subsequent to November 14, 2002, the date of filing Consumers' Form 10-Q for the
third quarter 2002, a number of material events have occurred. Below is a
summary of these events:
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Consumers Energy Company
CHANGE IN EXECUTIVE OFFICERS
Subsequent to March 1, 2002, certain changes have occurred in Consumers'
executive officers. On May 24, 2002, the Board of Directors of Consumers elected
Kenneth Whipple as Chairman of the Board and Chief Executive Officer; on June
27, 2002, S. Kinnie Smith, Jr. was elected Vice Chairman of the Board; on July
22, 2002, Thomas J. Webb was elected Executive Vice President and Chief
Financial Officer; on August 2, 2002, John F. Drake was elected Senior Vice
President and on December 6, 2002, Michael T. Monahan and Joseph F. Paquette,
Jr. joined the Board of Directors of Consumers.
LIQUIDITY AND CAPITAL RESOURCES
During the summer months, Consumers purchases natural gas and stores it for
resale primarily during the winter heating season. Recently the market price for
natural gas has increased. If continued, this price increase could impose
liquidity needs beyond what was previously anticipated for 2003. Although
Consumers' natural gas purchases are recoverable from its customers, the amount
paid for natural gas stored as inventory could require additional liquidity due
to the timing of when those costs are recovered.
DIVIDENDS: Consumers paid $233 million in common stock dividends in 2002,
including the $25 million tax sharing allocation from CMS Energy.
FINANCING: In October 2002, Consumers simultaneously entered into a new term
loan agreement collateralized by first mortgage bonds and a new gas inventory
term loan agreement collateralized by Consumers' natural gas in storage. These
agreements contain complementary collateral packages that provide Consumers, as
additional first mortgage bonds become available, borrowing capacity of up to
$225 million. Consumers drew $220 million of the capacity upon execution of the
agreements. In November 2002, Consumers paid $80 million on the gas inventory
loan and drew $85 million under the term loan agreement. The bank and legal fees
associated with the agreements were $2 million. The first amortization payment
under these agreements occurred in December 2002 with monthly amortization
payments scheduled until full repayment is completed in mid-April of 2003. This
financing eliminated the need for Consumers to access the capital markets for
the remainder of 2002.
As of December 31, 2002, Consumers' debt maturities for 2003 include $305
million of long-term debt, the $250 million revolving credit facility and an
estimated remaining balance of $207 million on the new gas inventory term loan
agreement. Consumers expects to borrow approximately $1.1 billion in total in
2003, which includes an amount to refinance the majority of the maturing debt
described above. Replacing maturing debt with new financing is subject, in part,
to capital market acceptance and receptivity to utility industry securities in
general and to Consumers' securities issuances in particular. Consumers cannot
guarantee the capital market's acceptance of its securities or predict the
impact of the restatement of its consolidated financial statements on such
acceptance and is exploring other financing options which may include, but are
not limited to, first mortgage bond collateralized bank term loans and inventory
collateralized bank term loans.
ACCOUNTING FOR PENSION AND OPEB
The Pension Plan includes amounts for employees of CMS Energy and non-utility
affiliates, including Panhandle, which were not distinguishable from the Pension
Plan's total assets. On December 21, 2002, a definitive agreement was executed
to sell Panhandle. The sale is expected to close in 2003. No portion of the
Pension Plan will be transferred with the sale of Panhandle. At the closing of
the sale, all employees of Panhandle will no longer be eligible to accrue
additional benefits. The Pension Plan will retain pension payment obligations
under the Pension Plan for Panhandle employees who are vested under the Pension
Plan.
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Consumers Energy Company
The recent significant downturn in the equities markets has affected the value
of the Pension Plan's assets. The estimated fair value of the Pension Plan's
assets at December 31, 2002 was $607 million. The Accumulated Benefit Obligation
was estimated at $1.055 billion. The Pension Plan's Accumulated Benefit
Obligation exceeded the value of these assets at December 31, 2002, and as a
result, Consumers and the other participants of the plan were required to
recognize an additional minimum liability for this excess in accordance with
SFAS No. 87. As of December 31, 2002, the additional minimum liability allocated
to Consumers was $325 million, of which $40 million was recorded as an
intangible asset, and $285 million was charged to other comprehensive income
($185 million after-tax).
As of December 31, 2001, the balance of Pension Plan and OPEB plan assets was
$845 million and $475 million, respectively. These amounts consisted primarily
of stocks and bonds, including CMS Energy Common Stock of $126 million in the
Pension Plan's assets and $3 million in the OPEB plan's assets at December 31,
2001. As of January 31, 2003, the market value of CMS Energy Common Stock in
these plans was $30 million in the Pension Plan and $1 million in the OPEB plan.
In January 2002, Consumers' portion of contributions made to the plans' trust
accounts was $62 million. This amount represents $47 million for pension related
benefits and $15 million for postretirement health care and life insurance
benefits. In June 2002, September 2002, and December 2002, Consumers made
additional contributions, in the amount of $22 million, $18 million, and $18
million respectively, for postretirement health care and life insurance
benefits. Consumers expects similar contributions for postretirement health care
and life insurance benefits will be made in 2003, 2004, and 2005. Consumers
expects its share of additional contributions to the Pension Plan to be
approximately $158 million in the third quarter of 2003, $209 million in 2004,
and $24 million in 2005.
CAPITAL EXPENDITURES OUTLOOK
Consumers estimates the following revised capital expenditures, including new
lease commitments, as of December 31, 2002 by expenditure type and by business
segments during 2002 through 2004. Consumers prepares these estimates for
planning purposes and may revise them.
In Millions
- --------------------------------------------------------------------------------
Years Ended December 31 2002 2003 2004
- --------------------------------------------------------------------------------
Construction $561 $424 $520
Nuclear fuel 1 33 32
Other capital leases 55 28 23
-------------------------------
$617 $485 $575
================================================================================
Electric utility operations (a)(b) $436 $341 $408
Gas utility operations (a) 181 144 167
-------------------------------
$617 $485 $575
================================================================================
(a) These amounts include an attributed portion of Consumers' anticipated
capital expenditures for plant and equipment common to both the electric and gas
utility businesses.
(b) These amounts include estimates for capital expenditures that may be
required by recent revisions to the Clean Air Act's national air quality
standards. For further information see Note 2, Uncertainties.
-41-
Consumers Energy Company
ELECTRIC OUTLOOK
STRANDED AND IMPLEMENTATION COSTS: In December 2002, the MPSC issued an order
finding that Consumers experienced zero "net" Stranded Costs in 2000 and 2001,
but declined to establish a defined methodology that would allow a reliable
prediction of the level of stranded costs for 2002 and future years. In January
2003, Consumers filed a petition for rehearing of the December 2002 stranded
cost order in which it asked the MPSC to grant a rehearing and revise certain
features of the order. Several other parties also filed rehearing petitions with
the MPSC. The request for regulatory asset accounting treatment for Clean Air
Act expenditures remains pending before the MPSC.
On March 4, 2003, Consumers filed an application with the MPSC seeking approval
of net stranded costs incurred in 2002, and for approval of a net stranded cost
recovery charge. In the application, Consumers indicated that if Consumers'
proposal to securitize Clean Air Act expenditures and post-2000 Palisades
expenditures were approved as proposed in its securitization case as discussed
below, then Consumers' net stranded costs incurred in 2002 are approximately $35
million. If the proposal to securitize those costs is not approved, then
Consumers indicated that the costs would be properly included in the 2002 net
stranded cost calculation, which would increase Consumers' 2002 net stranded
costs to approximately $103 million.
SECURITIZATION: On March 4, 2003, Consumers filed an application with the MPSC
seeking approval to issue additional securitization bonds in the amount of
approximately $1.084 billion. If approved, this would allow the recovery of
costs associated with Clean Air Act expenditures, post-2000 Palisades
expenditures, retail open access implementation costs, electric pension fund
costs, and expenses associated with the issuance of the bonds and the retirement
of existing Consumers' debt. Consumers will use the proceeds from securitization
for refinancing or retirement of debt.
CODE OF CONDUCT: In December 2002, Consumers filed a renewed request with the
MPSC for a temporary waiver until April 2004 for the appliance service plan,
which, in February 2003, was granted only until December 2003. The MPSC has
issued a notice inviting comments on this request. The full impact of the new
code of conduct on Consumers' business will remain uncertain until the appellate
courts issue definitive rulings.
TRANSMISSION: Consumers is a customer of AEP, holding 500 MW of transmission
service reservations through the AEP transmission system. AEP recently indicated
its intent to turn control of its transmission system over to the PJM RTO and
become part of the PJM market sometime after May 1, 2003, which requires
approval by FERC. This will require current AEP customers to become members
of, and resubmit reservation requests to, PJM. Consumers filed an intervention
requesting clarification in January 2003. Upon FERC's approval of this transfer,
Consumers will complete the application process to join PJM.
In addition to the potential cost impacts identified in the section entitled
"Electric Business Outlook - Transmission" in the original text above, and in
"Transmission" directly above, Consumers is evaluating whether or not there may
be impacts on electric reliability associated with the outcomes of the various
transmission related proceedings identified. Consumers cannot assure that all
risks to reliability can be avoided.
GAS OUTLOOK
GAS RATE CASE: On November 7, 2002, the MPSC issued a final order approving a
$56 million annual gas distribution service rate
increase, which includes the $15 million interim increase, with an 11.4 percent
authorized return on equity, for service effective November 8, 2002. As part of
this order, the MPSC approved Consumers' proposal to absorb the assets and
liabilities of Michigan Gas Storage Company into Consumers' rate base and rates.
This has occurred through a statutory merger of Michigan Gas Storage Company
into Consumers and this is not expected to have an impact on Consumers'
consolidated financial statements.
-42-
Consumers Energy Company2003 GAS RATE CASE: On March 14, 2003, Consumers filed an application with the
MPSC seeking ana $156 million increase in its gas delivery and transportation
rates, which includes a 13.5 percent authorized return on
CE-20
Consumers Energy Company
equity, based on a 2004 test year. If approved, the request would add about
$6.40 per month, or about 9 percent, to the typical residential customers'customer's
average monthly distribution bill. Consumers
is seeking a 13.5 percent authorized return on equity along with a $156 million
revenue deficiency. ContemproaneouslyContemporaneously with this filing, Consumers has
requested interim rate relief in the same amount.
In September 2002, the FERC issued an order rejecting a filing by Consumers to
assess certain rates for non-physical gas title tracking services offered by
Consumers. Despite Consumers' arguments to the contrary, the FERC asserted
jurisdiction over such activities and allowed Consumers to refile and justify a
title transfer fee not based on volumes as Consumers proposed. Because the order
was issued six years after Consumers made its original filing initiating the
proceeding, over $3 million in non-title transfer tracking fees had been
collected. No refunds have been ordered, and Consumers sought rehearing of the
September order. If refunds were ordered they may include interest which would
increase the refund liability to more than the $3 million collected. In December
2002, Consumers established a $3.6 million reserve related to this matter.
Consumers is unable to say with certainty what the final outcome of this
proceeding might be.
ENERGY-RELATED SERVICES: Consumers offers a variety of energy-related services
to retail customers that focus on appliance maintenance, home safety, commodity
choice, and assistance to customers purchasing heating, ventilation and air
conditioning equipment. Consumers continues to look for additional growth
opportunities in providing energy-related services to its customers. The ability
to offer all or some of these services and other utility related
revenue-generating services, which provide approximately $36 million in annual
gas revenues, may be restricted by the new code of conduct issued by the MPSC,
as discussed above in Electric Business Outlook, "Competition and Regulatory
Restructuring - Code of Conduct."
UNCERTAINTIES: Several gas business trends or uncertainties may affect
Consumers' financial results and conditions. These trends or uncertainties have,
or Consumers reasonably expects could have, a material impact on net sales,
revenues, or income from continuing gas operations. Such trends and
uncertainties include: 1) pending litigation and government investigations; 2)
potential environmental costs at a number of sites, including sites formerly
housing manufactured gas plant facilities; 3) future gas industry restructuring
initiatives; 4) any initiatives undertaken to protect customers against gas
price increases; 5) an inadequate regulatory response to applications for
requested rate increases; 6) market and regulatory responses to increases in gas
costs, including a reduced average use per residential customer; 7) increased
costs for pipeline integrity and safety and homeland security initiatives that
are not recoverable on a timely basis from customers; and 8) potentially rising
pension costs due to market losses (as discussed above in Accounting for Pension
and OPEB). For further information about these uncertainties, see Note 2,
Uncertainties.
OTHER OUTLOOK
TERRORIST ATTACKS:See Outlook, "Liquidity and Capital Resources," "SEC and Other Investigations,"
"Securities Class Action Lawsuits," and "ERISA Cases" above.
SECURITY COSTS: Since the September 11, 2001 terrorist attacks in the United
States, Consumers has increased security at all critical facilities and over its
critical infrastructure, and will continue to evaluate security on an ongoing
basis. Consumers may be required to comply with federal and state regulatory
security measures promulgated in the future. Through December 31, 2002,
Consumers has incurred approximately $4 million in incremental security costs,
including operating, capital, and decommissioning and removal costs. Consumers
estimates it may incur additional incremental security costs in 2003 of
approximately $6 million. Consumers will attempt to seek recovery of these costs
from its customers. In December 2002, the Michigan legislature passed, and the
governor signed, a bill that would allow Consumers to seek recovery of
additional nuclear electric division security costs incurred during the rate
freeze and cap periods imposed by the Customer Choice Act. Of the $4 million in
incremental security costs incurred through December 31, 2002, approximately $3
million related to nuclear security costs. Of the estimated $6 million for
incremental
CE-21
Consumers Energy Company
security costs expected to be incurred in 2003, $4 million relates to nuclear
security costs. On February 5, 2003, the MPSC adopted filing requirements for
the recovery of enhanced security costs.
OTHER MATTERS
DISCLOSURE AND INTERNAL CONTROLS
Consumers' CEO and CFO are responsible for establishing and maintaining
Consumers' disclosure controls and procedures. Management, under the direction
of Consumers' principal executive and financial officers, has evaluated the
effectiveness of Consumers' disclosure controls and procedures as of a date
within 90 days prior to this filing. Based on this evaluation, Consumers' CEO
and CFO have concluded that Consumers' disclosure controls and procedures are
effective to ensure that material information was presented to them. There have
been no significant changes in Consumers' internal controls or in other factors
that could significantly affect internal controls subsequent to such evaluation.
NEW ACCOUNTING STANDARDS
SFAS NO. 143, ACCOUNTING FOR ASSET RETIREMENT OBLIGATIONS: Beginning January 1,
2003, companies must comply with SFAS No. 143. The standard requires companies
to record the fair value of the legal obligations related to an asset retirement
in the period in which it is incurred. When the liability is initially recorded,
the company would capitalize an offsetting amount by increasing the carrying
amount of the related long-lived asset. Over time, the initial liability is
accreted to its present value each period and the capitalized cost is
depreciated over the related asset's useful life. Consumers has determined that
it has some legal asset retirement obligations, particularly in regard to its
nuclear plants, but has not as yet finalized its assessment of the obligation.
Once Consumers' assessment is finalized, its removal cost estimate will be
determined based on fair value cost estimates as required by the new standard.
The fair value of the legal retirement obligations will be present valued and
used to quantify the effects of adoption of this standard.
SFAS NO. 148, ACCOUNTING FOR STOCK-BASED COMPENSATION - TRANSITION AND
DISCLOSURE: Issued by the FASB in December 2002, this standard provides for
alternative methods of transition for a voluntary change to the fair value based
method of accounting for stock-based employee compensation. In addition, the
statement amends the disclosure requirements of SFAS No. 123 to require more
prominent and more frequent disclosures in financial statements about the
effects of stock-based compensation. The transition guidance and annual
disclosure provisions of the statement are effective as of December 31, 2002 and
interim disclosure provisions are effective for interim financial reports
starting in 2003. Consumers has decided to voluntarily adopt the fair value
based method of accounting for stock-based employee compensation effective
December 31, 2002, applying the prospective method of adoption which requires
recognition of all employee awards granted, modified, or settled after the
beginning of the year in which the recognition provisions are first
-43-
Consumers Energy Company
applied. Therefore, Consumers recorded expense for the fair value of stock
options issued in 2002. The implementation had an immaterial effect on
Consumers' financial statements upon adoption of the method.
FASB INTERPRETATION NO. 45, GUARANTOR'S ACCOUNTING AND DISCLOSURE REQUIREMENT
FOR GUARANTEES, INCLUDING INDIRECT GUARANTEES OF INDEBTEDNESS OF OTHERS: Issued
by the FASB in November 2002, the interpretation elaborates on existing
disclosures requirements for most guarantees, and clarifies that at the time a
company issues a guarantee, the company must recognize an initial liability for
the fair value, or market value, of the obligations it assumes under that
guarantee and must disclose that information in its interim and annual financial
statements. The interpretation is effective for guarantees issued or modified
after December 31, 2002. Consumers would be required to recognize a liability
for any guarantees it may issue on or after January 1, 2003, but will not change
the accounting for guarantees it may have issued before that date.
FASB INTERPRETATION NO. 46, CONSOLIDATION OF VARIABLE INTEREST ENTITIES: Issued
by the FASB in January 2003, the interpretation expands upon and strengthens
existing accounting guidance that addresses when a company should include in its
financial statements the assets, liabilities and activities of another entity.
The consolidation requirements of the interpretation apply immediately to
variable interest entities created after January 31, 2003. For Consumers, the
consolidation requirements apply to olderpre-existing entities beginning July 1,
2003. Certain of the disclosure requirements apply to all financial statements
initially issued after January 31, 2003. Consumers will be required to
consolidate any entities that meet the requirements of the interpretation. Upon
adoption of the standard on January 31, 2003, there was no impact on Consumers'
consolidated financial statements, and Consumers is in the process of studying the interpretation, and has yetdoes not anticipate any
additional impact to
determine the effects, if any, on its consolidated financial statements.
-44-statements upon adoption of
additional standard requirements on July 1, 2003.
CE-22
Consumers Energy Company
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CE-23
CONSUMERS ENERGY COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(AS RESTATED, SEE NOTE 4)
THREE MONTHS ENDED
NINE MONTHS ENDED
SEPTEMBER 30MARCH 31 2003 2002 2001 2002 2001
- ----------------------------------------------------------------------------------------------------------------
In Millions
In Millions
OPERATING REVENUE
Electric $ 775653 $ 739 $2,015 $2,028609
Gas 135 150 1,002 928789 616
Other 16 11
11 66 36
------------------------------------------------
921 900 3,083 2,992--------------------
1,458 1,236
- ----------------------------------------------------------------------------------------------------------------
OPERATING EXPENSES
Operation
Fuel for electric generation 98 102 236 25080 67
Purchased power - related parties 143 155 416 399132 141
Purchased and interchange power 111 187 244 40182 61
Cost of gas sold 20 40 528 470519 396
Cost of gas sold - related parties 34 32 96 9225 30
Other 182 151 487 445
------------------------------------------------
588 667 2,007 2,057160 139
-------------------
998 834
Maintenance 43 41 141 14652 50
Depreciation, depletion and amortization 77 71 256 242116 107
General taxes 43 44 144 142
------------------------------------------------
751 823 2,548 2,58759 57
--------------------
1,225 1,048
- ----------------------------------------------------------------------------------------------------------------
PRETAX OPERATING INCOME
(LOSS)
Electric 175 69 406 294116 115
Gas (14) (1) 68 80103 64
Other 14 9
9 61 31
------------------------------------------------
170 77 535 405--------------------
233 188
- ----------------------------------------------------------------------------------------------------------------
OTHER INCOME (DEDUCTIONS)
Dividends and interest from affiliates - 2 2 61
Accretion expense (1) (2) (4) (8)(2)
Other, net 1(8) (1)
----------------------
(10) (2)
- 37 2
------------------------------------------------
- - 35 -
- ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
INTEREST CHARGES
Interest on long-term debt 41 35 111 11142 33
Other interest 5 14 16 359
Capitalized interest (3) (1) (8) (5)
------------------------------------------------
43 48 119 141(2) (2)
---------------------
45 40
- ----------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 127 29 451 264178 146
INCOME TAXES 42 6 150 88
------------------------------------------------68 54
--------------------
NET INCOME 85 23 301 176
PREFERRED STOCK DIVIDENDS - - 1 1110 92
PREFERRED SECURITIES DISTRIBUTIONS 11 12 33 30
------------------------------------------------11
--------------------
NET INCOME AVAILABLE TO COMMON STOCKHOLDER $ 7499 $ 11 $ 267 $ 14581
================================================================================================================
THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
-45-CE-24
CONSUMERS ENERGY COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(AS RESTATED, SEE NOTE 4)
NINETHREE MONTHS ENDED
SEPTEMBER 30MARCH 31 2003 2002
2001
- ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
In Millions
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $110 $ 301 $ 17692
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation, depletion and amortization (includes nuclear
decommissioning of $5$2 and $5,$2, respectively) 256 242116 107
Deferred income taxes and investment tax credit (18) 5828 31
Loss on CMS Energy stock 12 -
Capital lease and other amortization 11 16
Gain on sale of METC and other assets (38) --4 3
Undistributed earnings of related parties (48)(16) (10)
Changes in assets and liabilities
IncreaseDecrease in inventories (37) (340)238 193
Decrease in accounts payable (5) (32)
Increase in accounts receivable and accrued revenue 98 257
Increase (decrease) in accounts payable (79) 12(50) (54)
Changes in other assets and liabilities (26) (90)
-----------------------(50) (60)
-----------------------------
Net cash provided by operating activities 420 321387 270
- -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (excludes assets placed under capital lease) (400) (495)(114) (142)
Cost to retire property, net (50) (73)(18) (15)
Investment in Electric Restructuring Implementation Plan (6) (9)(2) (3)
Investments in nuclear decommissioning trust funds (5) (5)(2) (2)
Proceeds from nuclear decommissioning trust funds 19 21
Associated company preferred stock redemption -- 50
Proceeds6 8
Cash receipts from sale of METC, and other assets 298 --
-----------------------asset sales 13 -
--------------------------
Net cash used in investing activities (144) (511)(117) (154)
- -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Decrease in notes payable, net (205) (109)
Payment of common stock dividends (78) (55)
Retirement of bonds and other long-term debt (409) (2)
Decrease in notes payable, net (182) (247)
Payment of common stock dividends (154) (134)
Redemption of preferred securities (30) --(35) (344)
Preferred securities distributions (33) (30)(11) (11)
Payment of capital lease obligations (11) (17)(3) (3)
Redemption of preferred securities - (30)
Payment of preferred stock dividends - (1) --
Proceeds from preferred securities -- 121
Stockholder's contribution net 50- 150
Proceeds from senior notes and bank loans 602 352
-----------------------281 298
------------------------
Net cash provided from (used)used in financing activities (168) 193(51) (105)
- -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
NET INCREASE IN CASH AND TEMPORARY CASH INVESTMENTS 108 3219 11
CASH AND TEMPORARY CASH INVESTMENTS, BEGINNING OF PERIOD 271 17
21
-------------------------------------------------------
CASH AND TEMPORARY CASH INVESTMENTS, END OF PERIOD $ 125490 $ 24
====================================================================================================================28
=================================================================================================================
OTHER CASH FLOW ACTIVITIES AND NON-CASH INVESTING AND FINANCING ACTIVITIES WERE:
CASH TRANSACTIONS
Interest paid (net of amounts capitalized) $ 11661 $ 12931
Income taxestax paid (net of refunds) 83 365 -
Pension and OPEB cash contribution 101 8418 61
NON-CASH TRANSACTIONS
Nuclear fuel placed under capital lease $ -- $ 13
Other assets placed under capital leases 50 23
====================================================================================================================$ 8 $ 17
=================================================================================================================
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.
-46-CE-25
CONSUMERS ENERGY COMPANY
CONSOLIDATED BALANCE SHEETS
(AS RESTATED, SEE NOTE 4)
ASSETS SEPTEMBER 30 SEPTEMBER 30
2002MARCH 31 MARCH 31
2003 DECEMBER 31 20012002
(UNAUDITED) 20012002 (UNAUDITED)
- ---------------------------------------------------------------------------------------------------------------
(As Restated)
(See Note 6)
In Millions
PLANT (AT ORIGINAL COST)
Electric $ 7,504 $ 7,661 $ 7,513$7,356 $7,523 $7,733
Gas 2,692 2,593 2,5662,787 2,719 2,625
Other 2221 23 16
---------------------------------------
10,218 10,277 10,09521
----------------------------------------
10,164 10,265 10,379
Less accumulated depreciation, depletion and amortization 5,856 5,934 5,8735,267 5,900 6,022
---------------------------------------
4,362 4,343 4,2224,897 4,365 4,357
Construction work-in-progress 463 480 424487 548 532
---------------------------------------
4,825 4,823 4,6465,384 4,913 4,889
- ----------------------------------------------------------------------------------------------------------------
INVESTMENTS
Stock of affiliates 21 5910 22 54
First Midland Limited Partnership 250 253 249259 255 257
Midland Cogeneration Venture Limited Partnership 370 300 296405 388 316
Consumers Nuclear Services, LLC 2 2 2
---------------------------------------
641 612 599676 667 629
- ----------------------------------------------------------------------------------------------------------------
CURRENT ASSETS
Cash and temporary cash investments at cost, which approximates market 125 17 24490 271 28
Accounts receivable and accrued revenue, less allowances
of $4,$5, $4 and $3, respectively 36 125 21279 236 183
Accounts receivable - related parties 18 18 1415 13 15
Inventories at average cost
Gas in underground storage 601 569 603256 486 378
Materials and supplies 74 71 69 72
Generating plant fuel stock 49 52 4926 37 50
Deferred property taxes 82 144 84117 142 120
Regulatory assets 19 19 19
Other 27 14 13
---------------------------------------
1,028 1,027 89953 38 18
----------------------------------------
1,329 1,313 880
- ----------------------------------------------------------------------------------------------------------------
NON-CURRENT ASSETS
Regulatory assets
SecuritizationSecuritized costs 699 717 710678 689 714
Postretirement benefits 191 209 214180 185 203
Abandoned Midland Project 11 12 1211 11
Other 173 167 169233 168 171
Nuclear decommissioning trust funds 530 581 568529 536 576
Other 108 173 182199 218 154
---------------------------------------
1,712 1,859 1,8551,830 1,807 1,829
- ----------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 8,206 $ 8,321 $ 7,999$9,219 $8,700 $8,227
================================================================================================================
-47-CE-26
(AS RESTATED, SEE NOTE 4)
STOCKHOLDERS' INVESTMENT AND LIABILITIES SEPTEMBER 30 SEPTEMBER 30
2002MARCH 31 MARCH 31
2003 DECEMBER 31 20012002
(UNAUDITED) 20012002 (UNAUDITED)
- ---------------------------------------------------------------------------------------------------------------
(As Restated) In Millions
(See Note 6)
CAPITALIZATION
Common stockholder's equity
Common stock $ 841 $ 841 $ 841
Paid-in capital 682 632 796682 782
Other comprehensive income (8) 4 (4)Comprehensive Income (175) (179) 9
Retained earnings since December 31, 1992 525 441 441535 545 467
---------------------------------------
2,040 1,918 2,0741,883 1,889 2,099
Preferred stock 44 44 44
Company-obligated mandatorily redeemable preferred securities
of subsidiaries (a) 490 520 520490 490
Long-term debt 2,701 2,472 2,4522,724 2,442 2,433
Non-current portion of capital leases 110 72 61
---------------------------------------
5,385 5,026121 116 85
----------------------------------------
5,262 4,981 5,151
- ----------------------------------------------------------------------------------------------------------------
CURRENT LIABILITIES
Current portion of long-term debt and capital leases 224 257 251290 318 253
Notes payable 235 416 153252 457 150
Notes payable- CMS Energy - - 157
Accounts payable 212 282 247252 261 249
Accrued taxes 162161 214 115161
Accounts payable - related parties 85 96 90
Notes Payable - related parties - - 288 84 97
Deferred income taxes 18 12 1429 25 23
Current portion of purchasepurchased power agreement-MCV Partnership 22contracts 26 26 24
22
Other 253 247 306198 200 234
---------------------------------------
1,211 1,548 1,2001,296 1,585 1,348
- ----------------------------------------------------------------------------------------------------------------
NON-CURRENT LIABILITIES
Deferred income taxes 752 784 707961 949 808
Postretirement benefits 224 276 292566 563 239
Regulatory liabilities for income taxes, net 282311 297 276
270Other Regulatory liabilities 152 4
Asset Retirement Obligation 364 - -
Power purchase agreement - MCV Partnership 30 52 6121 27 47
Deferred investment tax credit 92 102 10489 91 100
Other 230 257 214197 203 258
---------------------------------------
1,610 1,747 1,6482,661 2,134 1,728
- ----------------------------------------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES (Notes 1 and 2)
TOTAL STOCKHOLDERS' INVESTMENT AND LIABILITIES $ 8,206 $ 8,321 $ 7,999$9,219 $8,700 $8,227
================================================================================================================
(a) See Note 3, Short-Term Financings and Capitalization
THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
-48-BALANCE SHEETS.
CE-27
CONSUMERS ENERGY COMPANY
CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDER'S EQUITY
(UNAUDITED)
(AS RESTATED, SEE NOTE 4)
THREE MONTHS ENDED
NINE MONTHS ENDED
SEPTEMBER 30MARCH 31 2003 2002
2001 2002 2001
- ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
(As Restated) In Millions
COMMON STOCK(See Note 6)
COMMON STOCK
At beginning and end of period (a) $ 841 $ 841
$ 841 $ 841
- -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
OTHER PAID-IN CAPITAL
At beginning of period 682 646 632 646
Stockholder's contribution - 150
150 150
Return of Stockholder's contribution - - (100) -
----------------------------------------------------------------------
At end of period 682 796 682 796782
- -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
OTHER COMPREHENSIVE INCOME
Minimum Pension Liability
At beginning of period (185) -
Minimum liability pension adjustments - -
---------------------
At end of period (185) -
---------------------
Investments
At beginning of period (5) 261 16 33
Unrealized loss on investments (b) (4) (15) (25) (22)
-------------------------------------------------- (3)
---------------------
At end of period (9) 11 (9) 111 13
---------------------
Derivative Instruments (c)
At beginning of period (c) (3) (10)5 (12)
18
Unrealized gain (loss) on derivative instruments (b) 1 (9) 6 (30)7 5
Reclassification adjustments included in net income (b) (3) 3
4 7 (3)
-----------------------------------------------------------------------
At end of period 1 (15) 1 (15)9 (4)
- --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
RETAINED EARNINGS
At beginning of period 480 524545 441 486
Net income 85 23 301 176(b) 110 92
Cash dividends declared- Common Stock (29) (94) (183) (190)
Cash dividends declared- Preferred Stock - - (1) (1)(109) (55)
Preferred securities distributions (11) (12) (33) (30)
-------------------------------------------------(11)
---------------------
At end of period 525 441 525 441535 467
- -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCKHOLDER'S EQUITY $ 2,040 $ 2,074 $ 2,040 $ 2,074
=================================================================================================================$1,883 $2,099
====================================================================================================================
CE-28
(a) Number of shares of common stock outstanding was 84,108,789 for all periods
presented.presented
(b) Disclosure of Comprehensive Income:
Other Comprehensive Income
Investments
Unrealized loss on investments, net of tax of
$3, $8, $14$- and $12,$2, respectively $ (4)- $ (15) $ (25) $ (22)(3)
Derivative Instruments (d)
Unrealized gain (loss) on derivative instruments,
net of tax of $(1), $4 $(4) and $15,$3, respectively 1 (9) 6 (30)7 5
Reclassification adjustments included in net income,
net of tax of $(2), $(2), $(4)($2) and $2,$1, respectively (3) 3 4 7 (3)
Net income 85 23 301 176
-------------------------------------------------110 92
-------------------
Total Comprehensive Income $ 85114 $ 397
===================
(c) Included in these amounts is Consumers' proportionate share of the
effects of derivative accounting related to its equity investment in
the MCV Partnership as follows:
At the beginning of the period $ 2898 $ 121
=================================================
(c) Nine Months Ended 2001 is(8)
Unrealized gain on derivative instruments 7 5
Reclassification adjustments included in net income (4) 2
-------------------
At the cumulative effectend of change in accounting principle, as of 1/1/01 and
7/1/01, net of $(9) tax. (Note 1)period $ 11 $ (1)
===================
THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
-49-The accompanying notes are an integral part of these statements
CE-29
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CE-30
Consumers Energy Company
CONSUMERS ENERGY COMPANY
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Consumers' consolidated financial statementsConsumer's Consolidated Balance Sheets and Consolidated Statements of Common
Stockholder's Equity for the quarterly period ended September 30, 2002March 31, 2003 have been
restated, as discussed in Note 4,6, Restatement, pursuant to audit adjustments resulting from the re-audit of the consolidated
financial statements for the years 2001 and 2000, as well as, reviews of the
quarterly periods of 2002 of CMS Energy, Consumers' parent company, which
included audit and review work at Consumers.reflect a March 2003 common
dividend declaration.
Except for the addition of Notes 4, 5, andNote 6, the following notes to the consolidated
financial statements have generally onlynot been modified for the
effects of the restatement. For further information about Consumers' restated
financial statements for December 31, 2001 and December 31, 2000, see Consumers'
Form 10-K/A for the fiscal year ended December 31, 2001, which was filed with
the SEC on February 21, 2003.
MODIFIED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In April 2002, Consumers' Board of Directors, upon the recommendation of the
Audit Committee of the Board, voted to discontinue using Arthur Andersen to
audit the Consumers' financial statements for the year ending December 31, 2002.
Consumers previously retained Arthur Andersen to review its financial statements
for the quarter ended March 31, 2002. In May 2002, Consumers' Board of Directors
engaged Ernst & Young to audit its financial statements for the year ending
December 31, 2002.
In May 2002, as a result of certain financial reporting issues surrounding
round-trip trading transactions at CMS MST, Arthur Andersen notified CMS Energy
that Arthur Andersen's historical opinions on CMS Energy's financial statements
for the fiscal years ended December 31, 2001 and December 31, 2000 could not be
relied upon. As a result, Ernst & Young began the process of re-auditing CMS
Energy's consolidated financial statements for each of the fiscal years ended
December 31, 2001 and December 31, 2000. Although Arthur Andersen's notification
did not apply to separate, audited financial statements of Consumers for the
applicable years, the re-audit did include audit work at Consumers for these
years.
In connection with Ernst & Young's re-audit of the fiscal years ended December
31, 2001 and December 31, 2000, Consumers has made, in consultation with Ernst &
Young, certain adjustments to its consolidated financial statements for the
fiscal years ended December 31, 2001 and December 31, 2000, which affect the
results of the quarterly periods within 2001 and 2002. Therefore, the
consolidated financial statements for the four quarters of 2001, the years ended
December 31, 2001 and 2000, and the subsequent three quarters of 2002 have been
restated from amounts previously reported. A summary of the principal effects of
the restatement on Consumers' consolidated financial statements for the
quarterly periods ended September 30, 2002 and September 30, 2001 is contained
in Note 4, Restatement, and unaudited restated financial statements for the
first and second quarters of 2002, with comparable restated periods for 2001,
are contained in Note 6, Restated Financial Statements for First and Second
Quarters. For further information about Consumers' restated financial statements
for December 31, 2001 and December 31, 2000, see Consumers' Form 10-K/A for the
fiscal year ended December 31, 2001, which was filed with the SEC on February
21, 2003.modified.
These interim Consolidated Financial Statements have been prepared by Consumers
in accordance with SEC rules and regulations, and reflect all normal recurring
adjustments, whichaccounting principles generally accepted in the opinionUnited States
for interim financial information and with the instructions to Form 10-Q and
Article 10 of management, are necessary for the fair
presentation of the results of the interim periods presented. In accordance with
SEC rules and regulations,Regulation S-X. As such, certain information and footnote
disclosures normally included in full-year financial statements prepared in accordance
with accounting principles generally accepted in the United States have been
condensed or omitted. Certain prior year amounts have been reclassified to
conform to the presentation in the current year. In management's opinion, the
unaudited information contained in this report reflects all adjustments
necessary to assure the fair presentation of financial position, results of
operations and cash flows for the periods presented. The Condensed Notes to
Consolidated Financial Statements and the related Consolidated Financial
Statements should be read in conjunction with the Consolidated Financial
Statements and Notes to -50-
Consumers Energy Company
Consolidated Financial Statements contained in the
Consumers Form 10-K/A10-K for the year ended December 31, 2001. Consumers' electric and gas utility operations are
seasonal in nature. During2002, which includes the
summer months, there is usually an increase in
demand for electric energy, principally due to the useReports of air conditioners and
other cooling equipment, thereby affecting revenues. Also during the summer
months, Consumers injects natural gas into storage for use during the winter
months when demand for natural gas is higher. Peak demand for natural gas
usually occurs in the winter due to colder temperatures and the resulting
increased demand for heating fuels.Independent Auditors. Due to the seasonal nature of Consumers
operations, the results as presented for this interim period are not necessarily
indicative of results to be achieved for the fiscal year.
1: CORPORATE STRUCTURE AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CORPORATE STRUCTURE: Consumers, a subsidiary of CMS Energy, a holding company,
is an electric and gas utility company that provides service to customers in
Michigan's Lower Peninsula. Consumers' customer base includes a mix of
residential, commercial and diversified industrial customers, the largest
segment of which is the automotive industry.
COLLECTIVE BARGAINING AGREEMENT: As of December 31, 2002, 44 percent of
Consumers' workforce was represented by the Utility Workers Union of America.
Consumers and the Union negotiated a collective bargaining agreement that became
effective as of June 1, 2000, and will continue in full force and effect until
June 1, 2005. On March 26, 2003, Consumers reached a tentative agreement with
the Union for a collective bargaining agreement for its Call Center employees.
The agreement was effective April 1, 2003, and covers approximately 300
employees. The agreement will continue in full force and effect until August 1,
2005.
BASIS OF PRESENTATION: The consolidated financial statements include Consumers
and its wholly owned subsidiaries. Consumers prepared the financial statements
in conformity with accounting principles generally accepted in the United States
that include the use of management's estimates. Consumers uses the equity method of
accounting for investments in its companies and partnerships where it has more than
a twenty percent but less than a majority ownership interest and includes these
results in operating income. Consumers prepared the financial statements in
conformity with accounting principles generally accepted in the United States
that include the use of management's estimates.
REPORTABLE SEGMENTS: Consumers has two reportable segments: electric and gas.
The electric segment consists of activities associated with the generation and
distribution of electricity. The gas segment consists of activities associated
with the transportation, storage and distribution of natural gas. Consumers'
reportable segments are domestic strategic business units organized and managed by the
nature of the product and service each provides. The accounting policies of the
segments are the same as those described in Consumers' 20012002 Form 10-K/A.10-K.
Consumers' management has changed its evaluation of the performance of the
electric and gas segments from pretax operating income to net income available to
common stockholder. 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 net
income available to common stockholder by segment. Consumers' classifies its
equity investments as a part of the other business unit. The other business unit
also includes Consumers' consolidated statutory business trusts, which were
created to issue preferred securities and Consumers' consolidated special
purpose entity for the sale of trade receivables.
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Consumers Energy Company
The net income available to common stockholder by reportable segment is as
follows:
In Millions
- ------------------------------------------------------------------------------------------------------------------
Three Months Ended
Nine Months Ended
September 30March 31 2003 2002 2001 2002 2001
- ------------------------------------------------------------------------------------------------------------------
(Restated) (Restated) (Restated) (Restated)
Net income available to common stockholder
Electric $89 $16 $223 $111$51 $50
Gas (18) (10) 13 1954 28
Other (6) 3 5 31 15
- ------------------------------------------------------------------------------------------------------------------
Total Consolidated $74 $11 $267 $145$99 $81
==================================================================================================================
In Millions
- ------------------------------------------------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30 2002 2001 2002 2001
- ------------------------------------------------------------------------------------------------------------------
(Restated) (Restated) (Restated) (Restated)
Net income available to common stockholder
Electric $84 $32 $134 $95
Gas 3 1 31 29
Other 26 2 28 10
- ------------------------------------------------------------------------------------------------------------------
Total Consolidated $113 $35 $193 $134
==================================================================================================================
In Millions
- ------------------------------------------------------------------------------------------------------------------
Three Months Ended
March 31 2002 2001
- ------------------------------------------------------------------------------------------------------------------
(Restated) (Restated)
Net income available to common stockholder
Electric $50 $63
Gas 28 28
Other 3 8
- ------------------------------------------------------------------------------------------------------------------
Total Consolidated $81 $99
==================================================================================================================
FINANCIAL INSTRUMENTS: Consumers accounts for its debt and equity investment
securities in accordance with SFAS No. 115. As such, debt and equity securities
can be classified into one of three categories: held-to-maturity, trading, or
available-for-sale securities. Consumers' investments in equity securities,
including its investment in CMS Energy Common Stock, are classified as
available-for-sale securities. They are reported at fair value, with any
unrealized gains or losses from changes in fair value reported in equity as part
of other comprehensive income and excluded from earnings, unless such changes in
fair value are other than temporary. In 2002, Consumers determined that the
decline in value related to its investment in CMS Energy Common Stock was other
than temporary as the fair value was below the cost basis for a period greater
than six months. As a result, Consumers recognized a loss on its investment in
CMS Energy Common Stock through earnings of $12 million in the fourth quarter of
2002 and an additional $12 million loss in the first quarter of 2003. As of
March 31, 2003, Consumers held 2.4 million shares of CMS Energy Common Stock
with a fair value of $10 million. Unrealized gains or losses from changes in the
fair value of Consumers' nuclear decommissioning investments are reported as
regulatory liabilities. The fair value of these investments is determined from
quoted market prices.
UTILITY REGULATION: Consumers accounts for the effects of regulation based on
the regulated utility accounting standard SFAS No. 71. As a result, the actions
of regulators affect when Consumers recognizes revenues, expenses, assets and
liabilities.
In March 1999, Consumers received MPSC electric restructuring orders, which,
among other things, identified the terms and as a
result,timing for implementing electric
restructuring in Michigan. Consistent with these orders and EITF No. 97-4,
Consumers discontinued the application of SFAS No. 71 for the electricenergy supply
portion of its business.business because Consumers expected to implement retail open
access at competitive market based rates for its electric customers.
Discontinuation of SFAS No. 71 -51-
Consumers Energy Company
for the electricenergy supply portion of Consumers'
business resulted in Consumers reducing the carrying value of its Palisades
plant-related assets, in 1999, by approximately $535 million and establishing a
regulatory asset for a corresponding amount. According to current accounting standards, Consumers can
continue to carry its electric supply-related regulatory assets if legislation
or an MPSC rate order allows the collection of cash flows to recover these
regulatory assets from its regulated distribution customers. As of September 30,
2002,March 31, 2003, Consumers had
a net investment in electricenergy supply facilities of $1.426$1.554 billion included in
electric plant and property.
Since 1999, there has been a significant legislative and regulatory change in
Michigan that has resulted in: 1) electric supply customers of utilities
remaining on cost-based rates and 2) utilities being given the ability to
recover Stranded Costs associated with electric restructuring, from customers
who choose an alternative electric supplier. During 2002, Consumers re-evaluated
the criteria used to determine if an entity or a segment of an entity meets the
requirements to apply regulated utility accounting, and determined that the
energy supply portion of its business could meet the criteria if certain
regulatory events occurred. In December 2002, Consumers received a MPSC Stranded
Cost order that allowed Consumers to re-apply regulatory accounting standard
SFAS No. 71 to the energy supply portion of its business. Re-application of
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Consumers Energy Company
SFAS No. 71 had no effect on the prior discontinuation accounting, but will
allow Consumers to apply regulatory accounting treatment to the energy supply
portion of its business beginning in the fourth quarter of 2002, including
regulatory accounting treatment of costs required to be recognized in accordance
with SFAS No. 143. See Note 2, Uncertainties, "Electric Rate Matters - Electric
Restructuring."
RISK MANAGEMENT ACTIVITIES AND DERIVATIVE TRANSACTIONS: Consumers is exposed to
market risks including, but not limited to, changes in interest rates, commodity
prices, and equity security prices. Consumers' market risk, and activities
designed to minimize this risk, are subject to the direction of an executive
oversight committee consisting of designated members of senior management and a
risk committee, consisting of business unit managers. The risk committee's role
is to review the corporate commodity position and ensure that net corporate
exposures are within the economic risk tolerance levels established by
Consumers' Board of Directors. Established policies and procedures are used to
manage the risks associated with market fluctuations.
Consumers uses various contracts, including swaps, options, and forward
contracts to manage its risks associated with the variability in expected future
cash flows attributable to fluctuations in interest rates and commodity prices.
Consumers enters into all risk management contracts for purposes other than
trading. Contracts to manage interest rate and commodity price risk may be
considered derivative instruments that are subject to derivative and hedge
accounting pursuant to SFAS No. 133.
For further discussion see "Implementation144 imposes strict criteria for retention of New Accounting Standards" below,
Note 2, Uncertainties, "Other Electric Uncertainties - Derivative Activities",
"Other Gas Uncertainties - Derivative Activities" and Note 3, Short-Term
Financings and Capitalization, "Derivative Activities."
IMPLEMENTATION OF NEW ACCOUNTING STANDARDS: Consumers adopted SFAS No. 133 on
January 1, 2001. This standard requires Consumers to recognizeregulatory-created assets
by requiring that such assets be probable of future recovery at fair value all
contracts that meet the definition of a derivative instrument on theeach balance
sheet as eitherdate. Management believes these assets or liabilities. Theare probable of future recovery.
SFAS NO. 148, ACCOUNTING FOR STOCK-BASED COMPENSATION - TRANSITION AND
DISCLOSURE: Issued by the FASB in December 2002, this standard also requires Consumersprovides for
alternative methods of transition for a voluntary change to record all changes in fair value directly in earnings, or other comprehensive
income if the derivative meets certain qualifying hedge criteria. Consumers
determines fair value based
upon quoted market prices and mathematical models
using current and historical pricing data. Any ineffective portionmethod of all hedges
is recognized in earnings.
Consumers believes thataccounting for stock-based employee compensation. In addition, the
majority of its contracts are not subject to
derivative accounting because they qualify forstatement amends the normal purchases and sales
exceptiondisclosure requirements of SFAS No. 133. Derivative accounting is required, however, for
certain contracts used123 to limit Consumers' exposure to electricityrequire more
prominent and gas
commodity price riskmore frequent disclosures in financial statements about the
effects of stock-based compensation. The transition guidance and interest rate risk.
Consumers believes that certain of its electric capacity and energy contracts
are not derivatives due to the lack of an active energy market, as defined by
SFAS No. 133, in the state of Michigan and the transportation cost to deliver
the power under the contracts to the closest active energy market at the Cinergy
hub in Ohio. If a market develops in the future, Consumers may be required to
account for these contracts as derivatives. The mark-to-market impact in
earnings related to these contracts, particularly related to the PPA, could be
material to the financial statements.
On January 1, 2001, upon initial adoptionannual
disclosure provisions of the standard, Consumers recorded a
$21 million, net of tax, ($32 million, pretax) cumulative effect transition
adjustment as an unrealized gain increasing accumulated other comprehensive
income. Consumers then reclassified to earnings $12 million as a reduction to
the cost of gas; $1 million as a reduction to the cost of power supply; $2
million as an increase in interest expense; and $8
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Consumers Energy Company
million as an increase in other revenue for the twelve months ended December 31,
2001. The remaining $9 million difference between the initial transition
adjustment and the amounts reclassified to earnings has been reduced to zero,
decreasing other comprehensive income, and represents an unrealized loss in the
fair value of the derivative instruments since January 1, 2001. As a result,statement were effective as of December 31, 2001, there were no amounts remaining2002
and interim disclosure provisions are effective for interim financial reports
starting in accumulated other
comprehensive income related2003. Consumers decided to the initial transition adjustment.
On January 1, 2001, upon initial adoption of SFAS No. 133, derivative and hedge
accounting for certain utility industry contracts, particularly electric call
option contracts and option-like contracts, and contracts subject to Bookouts
was uncertain. Consumers did not record these contracts on the balance sheet at
fair value, but instead accounted for these types of contracts as derivatives
that qualified for the normal purchase exception of SFAS No. 133. In June and
December 2001, the FASB issued guidance that resolved the accounting for these
contracts. As a result, on July 1, 2001, Consumers recorded a $3 million, net of
tax, cumulative effect adjustment as an unrealized loss, decreasing accumulated
other comprehensive income, and on December 31, 2001, recorded an $11 million,
net of tax, cumulative effect adjustment, as a decrease to earnings. These
adjustments relate to the difference betweenvoluntarily adopt the fair value based
method of accounting for stock-based employee compensation effective December
31, 2002, applying the prospective method of adoption which requires recognition
of all employee awards granted, modified, or settled after the beginning of the
year in which the recognition provisions are first applied. The following table
shows the amounts that would have been included in net income had the fair value
method been applied to all awards granted in the first quarter of 2002:
In Millions
- --------------------------------------------------------------------------------------------------------------------
Three Months Ended March 31 2002
- --------------------------------------------------------------------------------------------------------------------
Net income, as reported $92
Add: Stock-based employee compensation expense included in
reported net income, net of related taxes -
Deduct: Total stock-based employee compensation expense
determined under fair value based method for all awards, net of
related taxes (1)
----------
Pro forma net income $91
====================================================================================================================
2: UNCERTAINTIES
Several business trends or uncertainties may affect Consumers' financial results
and condition. These trends or uncertainties have, or Consumers reasonably
expects could have, a material impact on net sales, revenues, or income from
continuing electric operations. Such trends and uncertainties are discussed in
detail below and include: 1) pending litigation and government investigations;
2) the recorded
book valueneed to make additional capital expenditures and increase operating
expenses for Clean Air Act compliance; 3) environmental liabilities arising from
various federal, state and local environmental laws and regulations, including
potential liability or expenses relating to the Michigan Natural Resources and
Environmental Protection Acts and Superfund; 4) electric industry restructuring
issues; 5) Consumers' ability to meet peak electric demand requirements at a
reasonable cost, without market disruption, and successfully implement
initiatives to reduce exposure to purchased power price increases; 6) the
recovery of certain electric call option contracts.
As of September 30, 2002, Consumers recorded a total of $5 million, net of tax,restructuring implementation costs; 7) Consumers' new
status as an unrealized gain in other comprehensive income relatedelectric transmission customer and not as an electric transmission
owner/operator; 8) sufficient reserves for OATT rate refunds; 9) uncertainties
relating to its proportionate
sharethe storage and ultimate disposal of spent nuclear fuel; 10) the
effects of derivative accounting relatedand potential earnings volatility; 11)
potential environmental costs at a number of sites, including sites formerly
housing manufactured gas plant facilities; 12) future gas industry restructuring
initiatives; 13) any initiatives undertaken to its equity investmentprotect customers against gas
price increases; 14) an inadequate regulatory response to applications for
requested rate increases; 15) market and regulatory responses to increases in
the MCV Partnership. Consumers expects to reclassify this gain, if this value
remains, as an increase to other operating revenue during the next 12 months.
For further discussion of derivative activities, see Note 2, Uncertainties,
"Other Electric Uncertainties - Derivative Activities"gas costs, including a reduced average use per residential customer; and "Other Gas
Uncertainties - Derivative Activities"16)
increased costs for pipeline integrity and Note 3, Short-Term Financingssafety and Capitalization, "Derivative Activities."
SFAS NO. 142, GOODWILL AND OTHER INTANGIBLE ASSETS: SFAS No. 142, issued in July
2001, requireshomeland security
initiatives that goodwill no longer be amortized to earnings, but instead be
reviewed for impairment. Effective, January 1, 2002, the provisions of SFAS No.
142 had no impactare not recoverable on Consumers' consolidated results of operations or financial
position.
SFAS NO. 143, ACCOUNTING FOR ASSET RETIREMENT OBLIGATIONS: Issued by the FASB in
August 2001, the provisions of SFAS No. 143 require adoption as of January 1,
2003. The standard requires entities to record the fair value of a liability for
an asset retirement obligation in the period in which it is incurred. When the
liability is initially recorded, the entity would capitalize an offsetting
amount by increasing the carrying amount of the related long-lived asset. Over
time, the liability is accreted to its present value while the capitalized cost
is depreciated over the useful life of the related asset. Consumers is currently
studying the new standard but has yet to quantify the effects of adoption on its
financial statements.
SFAS NO. 144, ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS:
This new standard was issued by the FASB in August 2001, and supersedes SFAS No.
121, and APB Opinion No. 30. SFAS No. 144 requires long-lived assets to be
measured at the lower of either the carrying amount or of the fair value less
the cost to sell, whether reported in continuing operations or in discontinued
operations. Therefore, discontinued operations will no longer be measured at net
realizable value or include amounts for operating losses that have not yet
occurred. SFAS No. 144 also broadens the reporting of discontinued operations to
include all components of an entity with operations that can be distinguishedtimely basis from the rest of the entity and that will be eliminated from the ongoing
operations of the entity in a disposal transaction. The adoption of SFAS No.
144, effective January 1, 2002, will result in Consumers accounting for any
future impairment or disposal of long-lived assets under the provisions of SFAS
No. 144, but has not changed the accounting used for previous asset impairments
or disposals.
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Consumers Energy Company
ACCOUNTING FOR HEADQUARTERS BUILDING LEASE: In April 2001, Consumers Campus
Holdings entered into a lease agreement for the construction of an office
building to be used as the main headquarters for Consumers in Jackson, Michigan.
Consumers' current headquarters building lease expires in June 2003. The new
office building lessor has committed to fund up to $65 million for construction
of the building, which is due to be completed during March 2003. Consumers is
acting as the construction agent of the lessor for this project. During
construction, the lessor has a maximum recourse of 89.9 percent against
Consumers in the event of certain defaults, which Consumers believes are
unlikely. For several events of default, primarily bankruptcy or intentional
misapplication of funds, there could be full recourse for the amounts expended
by the lessor at that time. The agreement also includes a common change in
control provision, which could trigger full payment of construction costs by
Consumers. As a result of this provision, Consumers elected to classify this
lease as a capital lease during the second quarter of 2002. This classification
represents the total obligation of Consumers under this agreement. As such,
Consumers' balance sheet as of September 30, 2002, reflects a capital lease
asset and an offsetting non-current liability equivalent to the cost of
construction at that date of $45 million.
2: UNCERTAINTIES
UNCERTAINTIES RELATED TO RESTATEMENTcustomers.
SEC AND OTHER INVESTIGATIONS: As a result of the round-trip trading transactions
at CMS MST, CMS Energy's Board of Directors established a special committeeSpecial Committee of
independent directors to investigate matters surrounding the transactions and
retained outside counsel to assist in the investigation. The special committeeSpecial Committee
completed its investigation and reported its findings to the Board of Directors
in October 2002. The special committeeSpecial Committee concluded, based on an extensive
investigation, that the round-trip trades were undertaken to raise CMS MST's
profile as an energy marketer with the goal of enhancing its ability to promote
its services to new customers. The special committeeSpecial Committee found no apparent effort to
manipulate the price of CMS Energy Common Stock or affect energy prices. The
special committeeSpecial Committee also made recommendations designed to prevent any reoccurrence
of this practice, somemost of which have already been implemented, including the
termination of theimplemented. Previously, CMS
Energy terminated its speculative trading business and revisions to CMS Energy'srevised its risk
management policy. The Board of Directors adopted, and CMS Energy has begun
implementing, the remaining recommendations of the special committee.Special Committee.
CMS Energy is cooperating with other investigations concerning round-trip
trading, including an investigation by the SEC regarding round-trip trades and
the
CMS Energy's financial statements, accounting policies and controls, and
investigations by the United States Department of Justice, the Commodity Futures
Trading Commission and the FERC. The FERC issued an order on April 30, 2003
directing eight companies, including CMS Energy has also received subpoenas fromMST, to submit written demonstrations
within forty-five days that they have taken certain specified remedial measures
with respect to the United States Attorney's Office forreporting of natural gas trading data to publications that
compile and publish price indices. CMS MST intends to make a written submission
within the Southern District of New York and fromspecified time period demonstrating compliance with the United States Attorney's Office in Houston regarding investigations of these
trades and has received a number of shareholder class action lawsuits.FERC's
directives. Other than the FERC investigation, CMS Energy is unable to predict
the outcome of these matters, and Consumers is unable to predict what effect, if
any, these investigations will have on its business.
CE-33
Consumers Energy Company
SECURITIES CLASS ACTION LAWSUITS: Beginning on May 17, 2002, a number of
securities class action complaints have beenwere filed against CMS Energy, Consumers, and
certain officers and directors of CMS Energy and its affiliates. The complaints
have beenwere filed as purported class actions in the United States District Court for
the Eastern District of Michigan asMichigan. The cases were consolidated into a single
lawsuit and an amended and consolidated class action complaint was filed on May
1, 2003. The defendants named in the amended and consolidated class action
complaint consist of CMS Energy, Consumers, certain officers and directors of
CMS Energy and its affiliates, and certain underwriters of CMS Energy
securities. The purported class actions by individuals who
allege that they purchased CMS Energy's securities during a purportedperiod is from May 1, 2000 through and including
March 31, 2003. The amended and consolidated class period. At least two of the complaints contain purported class periods beginning
on August 3, 2000 and running through May 10, 2002 or May 14, 2002. These
complaints generally seekaction complaint seeks
unspecified damages based on allegations that the defendants violated United
States securities laws and regulations by making allegedly false and misleading
statements about the company'sCMS Energy's business and financial condition. CMS Energy believes that additional suits might be
commenced against it and
that all such suits
-54-
Consumers Energy Company
against it will eventually be consolidated. Consumers intendsintend to vigorously defend against these actions. Consumersthis action, but cannot predict
the outcome of this litigation.
ERISA CASES: Consumers is a named defendant, along with CMS Energy, CMS MST and
certain named and unnamed officers and directors in two lawsuits brought as
purported class actions on behalf of participants and beneficiaries of the
401(k) Plan.plan. The two cases, filed in July 2002 in the United States District
Court for the Eastern District of Michigan, were consolidated by the trial judge.judge
and an amended and consolidated complaint has been filed. Plaintiffs allege
breaches of fiduciary duties under the ERISA and seek restitution on behalf of the
Planplan with respect to a decline in value of the shares of CMS Energy Common Stock
held in the Plan.plan. Plaintiffs also seek other equitable relief and legal fees.
These cases will be vigorously defended. Consumers cannot predict the outcome of
this litigation.
ELECTRIC CONTINGENCIES
ELECTRIC ENVIRONMENTAL MATTERS: Consumers is subject to costly and increasingly
stringent environmental regulations. Consumers expects that the cost of future
environmental compliance, especially compliance with clean air laws, will be
significant.
Clean Air - In 1998, the EPA issued final regulations requiring the Statestate of Michigan
to further limit nitrogen oxide emissions. The Michigan Department of
Environmental Quality is in the process of finalizingfinalized rules to comply with the EPA final regulations. Rules are expected to be promulgatedregulations in
December 2002 and submitted these rules for approval to the EPA byin the endfirst
quarter of 2002.2003. In addition, the EPA has also issued additional final regulations
regarding nitrogen oxide emissions that require certain generators, including
some of Consumers' electric generating facilities, to achieve the same emissions
rate as that required by the 1998 regulations. The EPA and the State
finalstate regulations will
require Consumers to make significant capital expenditures estimated to be $770
million. As of September 2002,March 31, 2003, Consumers has incurred $372$420 million in capital
expenditures to comply with the EPA final regulations and anticipates that the
remaining capital expenditures will be incurred between 20022003 and 2009.
Additionally, Consumers willcurrently expects to supplement its compliance plan with
the purchase of nitrogen oxide emissions credits in thefor years 2005 through 2008.
The cost of these credits based on the current market is estimated to be an average of $6
million per year,year; however, the market for nitrogen oxide emissions credits is volatile and
thetheir price could change significantly. At some point, if new environmental standards become effective,
Consumers may need additional capital expenditures to comply with the future
standards. Based on the Customer Choice Act,
beginning January 2004, an annual return of and on these types of capital
expenditures, to the extent they are above depreciation levels, is expected to
be recoverable from customers, subject to an MPSC prudency hearing.
These and other required environmental expenditures, if not recovered from
customers in Consumers rates, may have a material adverse effect upon Consumers'
financial condition and results of operations.
Cleanup and Solid Waste - Under the Michigan Natural Resources and Environmental
Protection Act, Consumers expects that it will ultimately incur investigation
and remedial action costs at a number of sites. Consumers believes that these
costs will be recoverable in rates under current ratemaking policies.
Consumers is a potentially responsible party at several contaminated sites
administered under Superfund. Superfund liability is joint and several. Along
with Consumers, many other creditworthy, potentially responsible parties with
substantial assets cooperate with respect to the individual sites. Based upon
past
CE-34
Consumers Energy Company
negotiations, Consumers estimates that its share of the total liability for the
known Superfund sites will be between $1 million and $9 million. As of September 30, 2002,March 31,
2003, Consumers had accrued the minimum amount of the range for its estimated
Superfund liability.
In October 1998, duringDuring routine maintenance activities, Consumers identified PCB as a component
in certain paint, grout and sealant materials at the Ludington Pumped Storage
facility. Consumers removed and replaced -55-
Consumers Energy Company
part of the PCB material. In April 2000, Consumers has
proposed a plan to deal with the remaining materials and is awaiting a response
from the EPA.
ELECTRIC RATE MATTERS
ELECTRIC RESTRUCTURING: In June 2000, the Michigan Legislaturelegislature passed electric
utility restructuring legislation known as the Customer Choice Act. This act: 1)
permits all customers to choose their electric generation supplier beginning
January 1, 2002; 2) cut residential electric rates by five percent; 3) freezes
all electric rates through December 31, 2003, and establishes a rate cap for
residential customers through at least December 31, 2005, and a rate cap for
small commercial and industrial customers through at least December 31, 2004; 4)
allows for the use of low-cost Securitization bonds to refinance qualified
costs, as defined by the act; 5) establishes a market power supply test that may
require transferring control of generation resources in excess of that required
to serve firm retail sales requirements (a requirement(On March 31, 2003, Consumers believes itself
to befiled an
application with the MPSC that seeks confirmation that Consumers is in
compliance with at this time)the market power test set forth in the Customer Choice Act); 6)
requires Michigan utilities to join a FERC-approved RTO or divest their interest
in transmission facilities to an independent transmission owner;owner (Consumers has
sold its interest in its transmission facilities to an independent transmission
owner, see "Transmission" below); 7) requires Consumers, Detroit Edison and
American Electric Power to jointly expand their available transmission
capability by at least 2,000 MW; 8) allows deferred recovery of an annual return
of and on capital expenditures in excess of depreciation levels incurred during
and before the rate freeze/cap period; and 9) allows recovery of "net" Stranded
Costs and implementation costs incurred as a result of the passage of the act.
In July 2002, the MPSC issued an order approving the plan to achieve the
increased transmission capacity. OnceConsumers has completed the increased transmission
capacity projects identified in the plan are
completed,and has submitted verification of compliance is required to be sentthis
fact to the MPSC. Upon
submittal of verification of compliance, Consumers expects to be deemedbelieves it is in full compliance with the MPSC statute. Consumers is highly confident that it will
meet the conditions of items 5 anditem 7 above, prior to the earliest rate cap
termination dates specified in the act. Failure to do so, however, could result
in an extension of the rate caps to as late as December 31, 2013.above.
In 1998, Consumers submitted a plan for electric retail open access to the MPSC.
In March 1999, the MPSC issued orders generally supporting the plan. The
Customer Choice Act states that the MPSC orders issued before June 2000 are in
compliance with this act and enforceable by the MPSC. Those MPSC orders: 1)
allow electric customers to choose their supplier; 2) authorize recovery of
"net" Stranded Costs and implementation costs; and 3) confirm any voluntary
commitments of electric utilities. In September 2000, as required by the MPSC,
Consumers once again filed tariffs governing its retail open access program and
made revisions to comply with the Customer Choice Act. In December 2001, the
MPSC approved revised retail open access tariffs. The revised tariffs establish
the rates, terms, and conditions under which retail customers will be permitted
to choose an alternative electric supplier. The tariffs, effective January 1,
2002, did not require significant modifications in the existing retail open
access program. The tariff terms allow retail open access customers, upon as
little as 30 days notice to Consumers, to return to Consumers' generation
service at current tariff rates. If any class of customers' (residential,
commercial, or industrial) retail open access load reaches 10 percent of
Consumers' total load for that class of customers, then returning retail open
access customers for that class must give 60 days notice to return to Consumers'
generation service at current tariff rates. However, Consumers may not have
sufficient, reasonably priced, capacity to meet the additional demand of
returning retail open access customers, and may be forced to purchase
electricity on the spot market at higher prices than it could recover from its
customers. SECURITIZATION: In October 2000 and January 2001,Consumers cannot predict the total amount of electric supply load
that may be lost to competitor suppliers, nor whether the stranded cost recovery
method adopted by the MPSC issued orders
authorizingwill be applied in a manner that will fully offset
any associated margin loss.
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Consumers Energy Company
SECURITIZATION: The Customer Choice Act allows for the use of low-cost
Securitization bonds to issue Securitization bonds.refinance certain qualified costs, as defined by the
act. Securitization typically involves issuing asset-backed bonds with a higher
credit rating than conventional utility corporate financing. TheIn 2000 and 2001,
the MPSC issued orders authorizedauthorizing Consumers to securitize approximately $469 millionissue Securitization bonds.
Consumers issued its first Securitization bonds in qualified costs, which were primarily
regulatory assets plus recovery of the Securitization expenses.2001. Securitization resulted
in lower interest costs and a longer amortization period for the securitized
assets, and offset the majority of the impact of the required residential rate
reduction (approximately $22
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Consumers Energy Company
million in 2000 and $49 million annually thereafter).reduction. The Securitization orders directed Consumers to apply any cost
savings in excess of the five percent residential rate reduction to rate
reductions for non-residential customers and reductions in Stranded Costs for
retail open access customers after the bonds are sold. Excess savings are
approximately $12 million annually.
In November 2001, Consumers Funding LLC, a special purpose consolidated
subsidiary of Consumers formed to issue the bonds, issued $469 million of
Securitization bonds, Series 2001-1. The Securitization bonds mature at
different times over a period of up to 14 years, with an average interest rate
of 5.3 percent. The last expected maturity date is October 20, 2015. Net
proceeds from the sale of the Securitization bonds, after issuance expenses,
were approximately $460 million. Consumers used the net proceeds to retire $164
million of its common equity from its parent, CMS Energy. From December 2001
through March 2002, the remainder of these proceeds were used to pay down
Consumers long-term debt and Trust Preferred Securities. CMS Energy used the
$164 million from Consumers to pay down its own short-term debt.
Consumers and Consumers Funding LLC will recover the repayment of principal,
interest and other expenses relating to the bond issuance through a
securitization charge and a tax charge that began in December 2001. These
charges are subject to an annual true-up until one year prior to the last
expected bond maturity date, and no more than quarterly thereafter. The first
true-up was issuedoccurred in November 2002, and prospectively modified the total
securitization and related tax charges from 1.677 mills per kWh to 1.746 mills
per kWh. Current electric rate design covers these charges, and there will be no
rate impact for most Consumers electric customers until the Customer Choice Act
rate freeze expires. Securitization charge revenuescollections, $13 million for the
three months ended March 31, 2003, and $12 million for the three months ended
March 31, 2002, are remitted to a trustee for the Securitization bonds.
Securitization charge collections are dedicated for the repayment of the
principal and interest on the Securitization bonds and payment of the ongoing
expenses of Consumers Funding and can only be used for those purposes. Consumers
Funding is legally separate from Consumers. The assets and income of Consumers
Funding, including without limitation, the securitized property, are not
available to Consumers' creditors.
Regulatory assets are normally amortized over their periodcreditors of regulated
recovery. Beginning January 1, 2001,Consumers or CMS Energy.
In March 2003, Consumers filed an application with the amortization was deferred for the
approved regulatory assets being securitized, which effectively offset the loss
in revenue in 2001 resulting from the five percent residential rate reduction.
In December 2001, after theMPSC seeking approval to
issue Securitization bonds were sold,in the amortization was
re-established, based on a schedule that is the same asamount of approximately $1.084 billion. If
approved, this would allow the recovery of costs and reduce interest rates
associated with financing Clean Air Act expenditures, post-2000 Palisades
expenditures, and retail open access implementation costs through December 31,
2003, and certain pension fund expenses, and expenses associated with the
principal amountsissuance of the securitized qualified costs. In 2002, the amortization
amount is expected to be approximately $31 million and the securitized assets
will be fully amortized by the end of 2015.bonds.
TRANSMISSION: In 1999, the FERC issued Order No. 2000, strongly encouraging
electric utilities to transfer operating control of their electric transmission
system to an RTO, or sell the facilities to an independent company. In addition,
in June 2000, the Michigan legislature passed Michigan's Customer Choice Act,
which also requires utilities to divest or transfer the operating authority of
transmission facilities to an independent company. Consumers chose to offer its
electric transmission system for sale rather than own and invest in an asset
that it could not control. In May 2002, Consumers sold its electric transmission system for approximately $290 million in cash(METC) to
MTH, a non-affiliated limited partnership whose general partner is a subsidiary
of Trans-Elect Inc.
Trans-Elect, Inc. submitted the winning bid through a competitive bidding
process, and various federal agencies approved the transaction. Consumers did
not provide any financial or credit support to Trans-Elect, Inc. Certain of
Trans-Elect's officers and directors are former officers and directors of CMS
Energy, Consumers and their subsidiaries. None of them were employed by CMS
Energy, Consumers, or their affiliates when the transaction was discussed
internally and negotiated with purchasers. As a result of the sale, Consumers anticipates that its after-tax earnings will increasebe
decreased by $15 million in 2003, and decrease by approximately $17$14 million
in 2002,annually for the next three years due to the recognition of a $26 million one time gain on the
sale of the electric transmission system. This one time gain is offset by a loss
of revenue from wholesale and retail open access customers who will buy services
directly from MTH, including the loss of a return on the sold electric
transmission system. Consumers anticipates that the future impact of the loss of revenue from wholesale and
retail open access customers who will buy services directly from MTH and the
loss of a return on the sold electric transmission system on its after-tax earnings will be a decrease of $15 million in 2003, and
a decrease of approximately $14 million
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Consumers Energy Company
annually for the next three years.system.
Under thean agreement with MTH, and subject to certain additional RTO surcharges,
contract transmission rates charged to Consumers will beare fixed by contract at current levels
through December 31, 2005, and be subject to FERC ratemaking thereafter. MTH will completehas
completed the capital program to expand the transmission system's capability to
import electricity into Michigan, as required by the Customer Choice Act, and
Consumers will continue to maintain the system under a five-year contract with
MTH. Effective April 30, 2002, Consumers and METC withdrew from the Alliance
RTO.
When IPPs connect to transmission systems, they pay transmission companies the
capital costs incurred to connect the IPP to the transmission system and make
system upgrades needed for the interconnection. It is the FERC's policy that the
system upgrade portion of these IPP payments be credited against transmission
service charges over time as transmission service is taken. METC recorded a $35
million liability for IPP credits. Subsequently, MTH assumed this liability as
part of its purchase of the electric transmission system. Several months after
METC started operation, the FERC changed its policy to provide for interest on
IPP
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Consumers Energy Company
payments that are to be credited. The $35 million liability for IPP credits doesdid
not include interest since the associated interconnection agreements dodid not at
thisthat time provide for interest. METC hasMTH had asserted that Consumers maymight be liable
for interest on the IPP payments to be credited if interest provisions arewere
added to these agreements. However, in January 2003, the FERC changed and
clarified its approach to contracts that were entered into before the FERC
started allowing the crediting of interest, and as a result, Consumers believes
that there is no longer any such potential liability under the current FERC
policy.
POWER SUPPLY COSTS: During periods when electric demand is high, the cost of
purchasing electricity on the spot market can be substantial. To reduce
Consumers' exposure to the fluctuating cost of electricity, and to ensure
adequate supply to meet demand, Consumers intends to maintain sufficient
generation and to purchase electricity from others to create a power supply
reserve, also called a reserve margin. The reserve margin provides additional
power supply capability above Consumers' anticipated peak power supply demands.
It also allows Consumers to provide reliable service to its electric service
customers and to protect itself against unscheduled plant outages and
unanticipated demand. Traditionally,In recent years, Consumers has planned for a reserve
margin of approximately 15 percent.percent from a combination of its owned electric
generating plants and electricity purchase contracts or options, as well as
other arrangements. However, in light of various factors, including the addition
of new in-state
generating capacity in Michigan and throughout the Midwest region and
additional transmission import capability, and FERC's
standard market design notice of proposed rulemaking, which calls for a minimum
reserve margin of 12 percent, Consumers is currently evaluatingcontinuing to evaluate
the appropriate reserve margin for 2003 and beyond. Currently, Consumers has an
estimated reserve margin of approximately 11 percent for summer 2003 or supply
resources equal to 111 percent of projected summer peak load. Of the 111
percent, approximately 101 percent is met from owned electric generating plants
and long-term power purchase contracts and 10 percent from short-term contracts
and options for physical deliveries and other agreements. The ultimate use of
the reserve margin
needed will depend primarily on summer weather conditions, the level
of retail open access requirements being served by others during the summer, and
any unscheduled plant outages. As of November 2002,early May 2003, alternative electric
suppliers are providing 446571 MW of generation supply to ROA customers. Consumers'
reserve margin does not include generation being supplied by other alternative
electric suppliers under the ROA program.
To reduce the risk of high electric prices during peak demand periods and to
achieve its reserve margin target, Consumers employs a strategy of purchasing
electric call option and capacity and energy contracts for the physical delivery
of electricity primarily in the summer months and to a lesser degree in the
winter months. As of September 30, 2002,March 31, 2003, Consumers had purchased or had commitments
to purchase electric call option and capacity and energy contracts partially
covering the estimated reserve margin requirements for 20022003 through 2007. As a
result, Consumers has a recognized asset of $30$28 million for unexpired call
options and capacity and energy contracts. The total cost of electricity call
option and capacity and energy contracts for 20022003 is expected to be
approximately $13 million, which is subject to change
based upon potential changes in fair value for certain unexpired call options.$9 million.
Prior to 1998, the PSCR process provided for the reconciliation of actual power
supply costs with power supply revenues. This process assured recovery of all
reasonable and prudent power supply costs actually incurred by Consumers,
including the actual cost for fuel, and purchased and interchange power. In
1998, as part of the electric restructuring efforts, the MPSC suspended the PSCR
process, and would not grant adjustment of customer rates through 2001. As a
result of the rate freeze imposed by the Customer Choice Act, the current rates
will remain in effect until at least December 31, 2003 and, therefore, the PSCR
process
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Consumers Energy Company remains suspended. Therefore, changes in power supply costs as a result
of fluctuating electricity prices will not be reflected in rates charged to
Consumers' customers during the rate freeze period.
ELECTRIC PROCEEDINGS: The Customer Choice Act allows electric utilities to
recover the act's implementation costs and "net" Stranded Costs (without
defining the term). The act directs the MPSC to establish a method of
calculating "net" Stranded Costs and of conducting related true-up adjustments.
In December 2001, the MPSC adopted a methodology which calculated "net" Stranded
Costs as the shortfall between: (a) the revenue required to cover the costs
associated with fixed generation assets, generation-related regulatory assets,
and
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Consumers Energy Company
capacity payments associated with purchase power agreements, and (b) the
revenues received from customers under existing rates available to cover the
revenue requirement. The MPSC authorized Consumers to use deferred accounting to
recognize the future recovery of costs determined to be stranded. Consumers has
initiated an appeal at the Michigan Court of Appeals related to the MPSC's
December 2001 "net" Stranded Cost order, as a
result of the uncertainty associated with the outcome of the proceeding
described in the following paragraph.order.
According to the MPSC, "net" Stranded Costs arewere to be recovered from retail
open access customers through a Stranded Cost transition charge. Even though the MPSC
set Consumers' Stranded Cost transition charge at zero for calendar year 2000,
those costs for 2000 will be subject to further review in the context of the
MPSC's subsequent determinations of "net" Stranded Costs for 2001 and later
years. The MPSC authorized Consumers to use deferred accounting to recognize the
future recovery of costs determined to be stranded. In April 2002,
Consumers made "net" Stranded Cost filings with the MPSC for $22 million for
2000 and $43 million for 2000 and 2001, respectively.2001. In the same filing, Consumers estimated that it
would experience "net" Stranded Costs of $126 million for 2002. After a series
of appeals and hearings, Consumers in its
hearing brief, filed in August 2002, revised its request for Stranded Costs to
$7 million and $4 million for 2000 and 2001, respectively, and an estimated $73
million for 2002. The single largest reason for the difference in the filing was
the exclusion, as ordered by the MPSC, of all costs associated with expenditures
required by the Clean Air Act.
In December 2002, the MPSC issued an order finding that Consumers experienced
zero "net" Stranded Costs in 2000 and 2001, but declined to establish a separate filing, requested regulatory asset accounting treatmentdefined
methodology that would allow a reliable prediction of the level of Stranded
Costs for its2002 and future years. In January 2003, Consumers filed a petition for
rehearing of the December 2002 Stranded Cost order in which it asked the MPSC to
grant a rehearing and revise certain features of the order. Several other
parties also filed rehearing petitions with the MPSC. As noted above, Consumers
has filed a request with the MPSC for authority to issue securitization bonds
that would allow recovery of the Clean Air Act expenditures through 2003. The outcome of these proceedings beforethat were excluded
from the Stranded Cost calculation and post-2000 Palisades expenditures.
On March 4, 2003, Consumers filed an application with the MPSC seeking approval
of "net" Stranded Costs incurred in 2002, and for approval of a "net" Stranded
Cost recovery charge. In the application, Consumers indicated that if Consumers'
proposal to securitize Clean Air Act expenditures and post-2000 Palisades'
expenditures were approved as proposed in its securitization case as discussed
above, then Consumers' "net" Stranded Costs incurred in 2002 are approximately
$35 million. If the proposal to securitize those costs is uncertain atnot approved, then
Consumers indicated that the costs would be properly included in the 2002 "net"
Stranded Cost calculation, which would increase Consumers' 2002 "net" Stranded
Costs to approximately $103 million. Consumers cannot predict the recoverability
of Stranded Costs, and therefore has not recorded any regulatory assets to
recognize the future recovery of such costs.
The MPSC staff has scheduled a collaborative process to discuss Stranded Costs
and related issues and to identify and make recommendations to the MPSC.
Consumers is participating in this time.collaborative process.
Since 1997, Consumers has incurred significant electric utility restructuring
implementation costs. The following table outlines the applications filed by
Consumers with the MPSC and the status of recovery for these costs.
In Millions
- --------------------------------------------------------------------------------------------------------------
Year Filed Year Incurred Requested Pending Allowed Disallowed
- --------------------------------------------------------------------------------------------------------------
1999 1997 & 1998 $ 20 $ - $ 15 $ 5
2000 1999 30 - 25 5
2001 2000 25 - 20 5
2002 2001 8 8 - -Pending Pending
2003 2002 2 2 Pending Pending
==============================================================================================================
The MPSC disallowed certain costs based upon a conclusion that these amounts did
not represent costs
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Consumers Energy Company
incremental to costs already reflected in electric rates. In the orders received
for the years 1997 through 2000, the MPSC also reserved the right to review
again the total implementation costs depending upon the progress and success of
the retail open access program, and ruled that due to the rate freeze imposed by
the Customer Choice Act, it was premature to establish a cost recovery method
for the allowable implementation costs. In addition to the amounts shown above,
as of September 2002,March 31, 2003, Consumers incurred and deferred as a regulatory asset, $3$2
million of additional implementation costs and has also recorded as a regulatory
asset $13$14 million for the cost of money associated with total implementation
costs. Consumers believes the implementation costs and the associated cost of
money are fully recoverable in accordance with the Customer Choice Act. Cash
recovery from customers will probably begin after the rate freeze or rate cap
period has expired. As discussed above, Consumers has asked to include
implementation costs through December 31, 2003 in the pending securitization
case. If approved, the sale of Securitization bonds will allow for the recovery
of these costs. Consumers cannot predict the amounts the MPSC will approve as
allowable costs.
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Consumers Energy Company
Consumers is also pursuing recovery, throughauthorization at the FERC for MISO ofto reimburse
Consumers for approximately $7$8 million in certain electric utility restructuring
implementation costs related to its former participation in the development of
the Alliance RTO.RTO, a portion of which has been expensed. However, Consumers
cannot predict the amounts itamount the FERC will ultimately order to be reimbursed by the
MISO.
In 1996, Consumers filed new OATT transmission rates with the FERC for approval.
Interveners contested these rates, and hearings were held before an ALJ in 1998.
In 1999, the ALJ made an initial decision that was largely upheld by the FERC in
March 2002, which requires Consumers to refund, with interest, over-collections
for past services as measured by the FERC's finally approved OATT rates. Since
the initial decision, Consumers has been reserving a portion of revenues billed
to customers under the filed 1996 OATT rates. Consumers submitted revised rates
to comply with the FERC final order in June 2002. Those revised rates were
accepted by the FERC in August 2002 and Consumers is in the process of computing
refund amounts for individual customers. Consumers believes its reserve is
sufficient to satisfy its estimated refund obligation. As of April 2003, Consumers had
paid $19 million in refunds.
In November 2002, the MPSC, upon its own motion, commenced a contested
proceeding requiring each utility to give reason as to why its rates should not
be reduced to reflect new personal property multiplier tables, and why it should
not refund any amounts that it receives as refunds from local governments as
they implement the new multiplier tables. Consumers responded to the MPSC that
it believes that such action mayrefunds would be inconsistent with the electric rate freeze
that is currently in effect, and may otherwise be unlawful. Consumers is unable
to predict the outcome of this matter.
OTHER ELECTRIC UNCERTAINTIES
THE MIDLAND COGENERATION VENTURE: The MCV Partnership, which leases and operates
the MCV Facility, contracted to sell electricity to Consumers for a 35-year
period beginning in 1990 and to supply electricity and steam to Dow. Consumers,
through two wholly owned subsidiaries, holds the following assets related to the
MCV Partnership and MCV Facility: 1) CMS Midland owns a 49 percent general
partnership interest in the MCV Partnership; and 2) CMS Holdings holds, through
FMLP, a 35 percent lessor interest in the MCV Facility.
Consumers' consolidated retained earnings includes undistributed earnings from
the MCV Partnership, which at March 31, 2003 and 2002 are $233 million and $187
million, respectively.
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Consumers Energy Company
Summarized Statements of Income for CMS Midland and CMS Holdings
In Millions
Nine Months Ended
September 30- -------------------------------------------------------------------------------------------------------------------
March 31 2003 2002
2001
- -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Pretax operatingOperating income $63 $31$16 $9
Income taxes and other 21 95 3
- -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Net income $42 $22
==================================================================================================================
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Consumers Energy Company
Summarized Statements of Income for the MCV Partnership
In Millions
- ------------------------------------------------------------------------------------------------------------------
Nine Months Ended
September 30 2002 2001
- ------------------------------------------------------------------------------------------------------------------
Operating revenue $451 $454
Operating expenses 318 329
------------------------------
Operating income 133 125
Other expense, net 86 81
------------------------------
Income before cumulative effect of accounting change 47 44
Cumulative effect of change in method of accounting for
derivative option contracts 58 -
------------------------------
Net income $105 $ 44
==================================================================================================================$11 $6
===================================================================================================================
Power Supply Purchases from the MCV Partnership - Consumers' annual obligation
to purchase capacity from the MCV Partnership is 1,240 MW through the terminationterm of
the PPA ending in 2025. The PPA requires Consumers to pay, based on the MCV
Facility's availability, a levelized average capacity charge of 3.77 cents per
kWh and a fixed energy charge, and also to pay a variable energy charge based
primarily on Consumers' average cost of coal consumed for all kWh delivered.
Since January 1, 1993, the MPSC has permitted Consumers to recover capacity
charges averaging 3.62 cents per kWh for 915 MW, plus a substantial portion of
the fixed and variable energy charges. Since January 1, 1996, the MPSC has also
permitted Consumers to recover capacity charges for the remaining 325 MW of
contract capacity with an initial average charge of 2.86 cents per kWh
increasing periodically to an eventual 3.62 cents per kWh by 2004 and
thereafter. However, due to the current freeze of Consumers' retail rates that
the Customer Choice Act requires, the capacity charge for the 325 MW is now
frozen at 3.17 cents per kWh. Recovery of both the 915 MW and 325 MW portions of
the PPA are subject to certain limitations discussed below. After September
2007, the PPA's regulatory out terms obligate Consumers to pay the MCV
Partnership only those capacity and energy charges that the MPSC has authorized
for recovery from electric customers.
In 1992, Consumers recognized a loss and established a PPA liability for the
present value of the estimated future underrecoveries of power supply costs
under the PPA based on MPSC cost recovery orders. Primarily as a result of the
MCV Facility's actual availability being greater than management's original
estimates, the PPA liability has been reduced at a faster rate than originally
anticipated. At September 30,March 31, 2003 and 2002, and 2001, the remaining after-tax present value
of the estimated future PPA liability associated with the loss totaled $38$30
million and $54$46 million, respectively. The PPA liability is expected to be
depleted in late 2004. For further discussion on the impact of the frozen PSCR,
see "Electric Rate Matters" in this Note.
In March 1999, Consumers and the MCV Partnership reached ana settlement agreement
effective January 1, 1999, that addressed, among other things, the ability of
the MCV Partnership to count modifications increasing the capacity of the
existing MCV Facility for purposes of computing the availability of contract
capacity under the PPA for billing purposes. That settlement agreement capped
payments made on the basis of availability payments tothat may be billed by the MCV
Partnership at 98.5 percent. If the MCV Facility generates electricity at thea maximum 98.5 percent level duringavailability level.
When Consumers returns, as expected, to unfrozen rates beginning in 2004,
Consumers will recover from customers capacity and fixed energy charges on the
next six years, Consumers' after-tax cash
underrecoveries associated withbasis of availability, to the PPA could be as follows:
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extent that availability does not exceed 88.7
percent availability established in previous MPSC orders. For capacity and
energy payments billed by the MCV Partnership after September 15, 2007, and not
recovered from customers, Consumers Energy Company
In Millions
- ------------------------------------------------------------------------------------------------------------------
2002 2003 2004 2005 2006 2007
- ------------------------------------------------------------------------------------------------------------------
Estimated cash underrecoveries at 98.5%, net of tax $38 $37 $36 $36 $36 $25
==================================================================================================================
It is currently estimatedwould expect to claim a regulatory out under
the PPA. The regulatory out provision relieves Consumers of the obligation to
pay more for capacity and energy payments than the MPSC allows Consumers to
collect from its customers. Consumers estimates that 51 percent of the actual
cash underrecoveries for the years 2002 through2003 and 2004 will be charged to the PPA
liability, with the remaining portion charged to operating expense as a result
of Consumers' 49 percent ownership in the MCV Partnership. All cash
underrecoveries will be expensed directly to income once the PPA liability is
depleted. In 1992,If the MCV Facility's generating availability remains at the maximum
98.5 percent level during the next five years, Consumers' after-tax cash
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Consumers originally accounted for lossesEnergy Company
underrecoveries associated with the PPA by
establishing a reserve for the difference between the amount that Consumers was
paying for power in accordance with the terms of the PPA, and the amount that
Consumers was ultimately allowed by the MPSC to recover from electric customers.
At that time, the reserve did not take into account earnings Consumers would
receive from its 49 percent interest in the MCV Partnership due to uncertainties
with the level of performance of the facility.
In 2000, Consumers reviewed its estimate of the economic losses it would
experience with respect to the PPA and re-evaluated all of the current facts and
circumstances used to calculate the disallowance reserve, including earnings
from its 49 percent interest in the MCV Partnership. Consumers concluded that no
adjustment to the reserve was required in 2000. However,could be as conditions
surrounding MCV Partnership operations evolved in 2001, Consumers concluded that
it needed to increase the reserve by $126 million (pre-tax) in the third quarter
of 2001, and did so.
In connection with the re-audit of CMS Energy's consolidated financial
statements for the fiscal years 2000 and 2001, Consumers reviewed its 2000 and
2001 PPA accounting and related assumptions, and determined that the reserve
balance as of January 1, 2000 did appropriately reflect Consumers' probable
losses as of that date. However, as a result of reconsideration of all
subsidiary accounting effects, the re-evaluation of the PPA accounting did
result in a net reduction of operating expenses associated with the PPA of $12
million in 2001, an increase to operating expenses associated with the PPA of
$29 million in 2000, the reversal of the $126 million increase to the reserve
originally recorded in 2001, and immaterial adjustments to accretion expense for
both years.
The following table reflects the audit adjustments associated with the MCV PPA
accounting and the related net income effects for the periods ended December 31,
2001 and December 31, 2000:follows:
- -------------------------------------------------------------------------------------------------------------------------
In Millions
2001 2000
- -------------------------------------------------------------------------------------------------------------------------
Income Increase/(Decrease)--------------------------------------------------------------------------------------------------------------------
2003 2004 2005 2006 2007
- ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Reverse the original operating charge associated with
continuing losses on the MCV PPA $39 $-
Charge 49 percent annual capacity losses associated with the
MCV PPA
Estimated cash underrecoveries at 98.5%, net of tax $37 $36 $36 $36 $25
Amount to be charged to operating expense, insteadnet of tax $18 $18 $36 $36 $25
Amount to the reserve (27) (29)
----- -----
Net operating expense decrease/(increase) $12 ($29)
Reverse the 2001 increasebe charged to the MCV PPA reserve 126liability, net of tax $19 $18 $ - Accretion Expense$ - (2)
----- -----
Pre-tax effect of adjustments 138 (31)
Income tax effect (48) 11
----- -----
Net income impact of MCV PPA adjustments $90 ($20)$ -
-------------------------------------------------------------------------------------------------------------------------====================================================================================================================
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Consumers Energy Company
In February 1998, the MCV Partnership appealed the January 1998 and February
1998 MPSC orders related to electric utility restructuring. At the same time,
MCV Partnership filed suit in the United States District Court in Grand Rapids
seeking a declaration that the MPSC's failure to provide Consumers and MCV
Partnership a certain source of recovery of capacity payments after 2007
deprived MCV Partnership of its rights under the Public Utilities Regulatory
Policies Act of 1978. In July 1999, the District Court granted MCV Partnership's
motion for summary judgment. The Court permanently prohibited enforcement of the
restructuring orders in any manner that denies any utility the ability to
recover amounts paid to qualifying facilities such as the MCV Facility or that
precludes the MCV Partnership from recovering the avoided cost rate. The MPSC
appealed the Court's order to the 6th Circuit Court of Appeals in Cincinnati. In
June 2001, the 6th Circuit overturned the lower court's order and dismissed the
case against the MPSC. The appellate court determined that the case was
premature and concluded that the qualifying facilities needed to wait until 2008
for an actual factual record to develop before bringing claims against the MPSC
in federal court.
NUCLEAR MATTERS: Throughout 2002, Big Rock, currently in decommissioning,
progressed on plan with building and equipment dismantlement to return the site
to a natural setting free for any future use. Periodic NRC inspection reports
continued to reflect positively on Big Rock project performance. The MCV Partnership has requested rehearingNRC found
all decommissioning activities were performed in accordance with applicable
regulatory and license conditions.
In February 2003, the NRC completed its end-of-cycle plant performance
assessment of Palisades. The end-of-cycle review for Palisades covered the 2002
calendar year. The NRC determined that Palisades was operated in a manner that
preserved public health and safety and fully met all cornerstone objectives.
Based on the plant's performance, only regularly scheduled inspections are
planned through March 2004. The NRC noted that they are planning inspections of
the appellate
court's order.
NUCLEAR FUEL COST: Consumers amortizes nuclearnew independent spent fuel coststorage facility as needed during construction
activities along with routine inspections for the new security requirements.
Spent Nuclear Fuel Storage: During the fourth quarter of 2002, equipment
fabrication, assembly and testing was completed at Big Rock on NRC approved
transportable steel and concrete canisters or vaults, commonly known as
"dry-casks", for temporary onsite storage of spent fuel and movement of fuel
from the fuel pool to fuel expense based
ondry casks began. As of March 31, 2003, all of the quantity of heat produced for electric generation. Through November 2001,
Consumers expensed the interest on leased nuclear fuel as it was incurred.
Effective December 2001, Consumers no longer leases its nuclearseven
dry casks had been loaded with spent fuel. For nuclear fuel used after April 6, 1983, Consumers charges disposal costs to
nuclear fuel expense, recovers these costs through electric rates, and then
remits them toThese transportable dry casks will
remain onsite until the DOE quarterly. Consumers electedmoves the material to defer payment for
disposala permanent national fuel
repository.
At Palisades, the amount of spent nuclear fuel burned before April 7, 1983.discharged from the reactor to
date exceeds Palisades' temporary on-site storage pool capacity. Consequently,
Consumers is using NRC-approved steel and concrete vaults, "dry casks," for
temporary on-site storage. As of September 30,
2002,March 31, 2003, Consumers has a recorded liability to the DOE of $137 million, including
interest, which is payable upon the first delivery ofhad loaded 18 dry
casks with spent nuclear fuel at Palisades. Palisades will need to load
additional dry casks by the DOE.fall of 2004 in order to continue operation.
Palisades currently has three empty storage-only dry casks on-site, with storage
pad capacity for up to seven additional loaded dry casks. Consumers recovered through electric rates the amount of this liability,
excluding a portion of interest.anticipates
that licensed transportable dry casks for additional storage, along with more
storage pad capacity, will be available prior to 2004.
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In 1997, a federal courtU.S. Court of Appeals decision has confirmed that the DOE was to begin
accepting deliveries of spent nuclear fuel for disposal by January 31, 1998.
Subsequent U.S. Court of Appeals litigation in which Consumers and certain other
utilities participated has not been successful in producing more specific relief
for the DOE's failure to comply.
In July 2000, the DOE reached a settlement agreement with one utility to address
the DOE's delay in accepting spent fuel. The DOE may use that settlement
agreement as a framework that it could apply to other nuclear power plants.
However, certain other utilities challenged the validity of the mechanism for
funding the settlement in an appeal, and recently the reviewing court sustained their
challenge. Additionally, there are two court decisions that support the right of
utilities to pursue damage claims in the United States Court of Claims against
the DOE for failure to take delivery of spent fuel. A number of utilities have
commenced litigation in the Court of Claims.Claims, including Consumers, which filed
its complaint in December 2002. The Chief Judge of the Court of Claims
identified six lead cases to be used as vehicles for resolving dispositive
motions. Consumers' case is evaluating its optionsnot a lead case. It is unclear what impact this
decision by the Chief Judge will have on the outcome of Consumers' litigation.
If the litigation that was commenced in the fourth quarter of 2002, against the
DOE is successful, Consumers anticipates future recoveries from the DOE to
defray the significant costs it will incur for the storage of spent fuel until
the DOE takes possession as required by law.
As of March 31, 2003, Consumers has a recorded liability to the DOE of $138
million, including interest, which is payable upon the first delivery of spent
nuclear fuel to the DOE. Consumers recovered through electric rates the amount
of this liability, excluding a portion of interest.
On March 26, 2003, the Michigan Environmental Council, the Public Interest
Research Group in Michigan, and the Michigan Consumer Federation submitted a
complaint to the MPSC, which was served on Consumers by the MPSC on April 18,
2003. The complaint asks the MPSC to commence a generic investigation and
contested case to review all facts and issues concerning costs associated with
spent nuclear fuel storage and disposal. The complaint seeks a variety of relief
with respect to its contract with the DOEConsumers Energy, The Detroit Edison Company, Indiana & Michigan
Electric Company, Wisconsin Electric Power Company and plansWisconsin Public Service
Corporation, including establishing external trusts to pursue recovery of thewhich amounts collected
in electric rates for spent nuclear fuel removal costsstorage and disposal should be
transferred, and the adoption of additional measures related to the storage and
disposal of spent nuclear fuel. Consumers is reviewing the complaint and, at
its Big Rock and Palisades
plants.this time, is unable to predict the outcome of this matter.
In July 2002, Congress approved and the President signed a bill designating the
site at Yucca Mountain, Nevada, for the development of a repository for the
disposal of high-level radioactive waste and spent nuclear fuel. The next step
will be for the DOE to submit an application to the NRC for a license to begin
construction of the repository. The application and review process is estimated
to take several years.
NUCLEAR MATTERS:Palisades Plant Operations: In AprilMarch 2002, Palisades received its annual performance reviewcorrosion problems were discovered in
whichthe reactor head at an unaffiliated nuclear power plant in Ohio. As a result,
the NRC statedrequested that Palisades operated in a manner that preserved
public health and safety. With the exception of a single finding related to a
fire protection smoke detector location with low safety significance, the NRC
classified all inspection findings as having very low safety significance. Other
than the follow-up fire protection inspection associated with this one finding,
the NRC plans to conduct only baseline inspections at the facility through May
31, 2003.
The amount of spent nuclear fuel discharged from the reactor to date exceeds
Palisades' temporary on-site storage pool capacity. Consequently, Consumers is
using NRC-approved steel and concrete vaults, commonly
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Consumers Energy Company
known as "dry casks", for temporary on-site storage. As of September 30, 2002,
Consumers had loaded 18 dry casks with spent nuclear fuel at Palisades.
Palisades will need to load additional dry casks by the fall of 2004 in order to
continue operation. Palisades currently has three empty storage-only dry casks
on-site, with storage pad capacity for up to seven additional loaded dry casks.
Consumers anticipates that licensed transportable dry casks for additional
storage, along with more storage pad capacity, will be available prior to 2004.
In December 2000, the NRC issued an amendment revising the operating license for
Palisades to extend its expiration date to March 2011, with no restrictions
related to reactor vessel embrittlement.
In 2000, Consumers made an equity investment and entered into an operating
agreement with NMC. NMC was formed in 1999 by four utilities to operate and
manage the nuclear generating plants owned by these utilities. Consumers
benefits by consolidating expertise, cost control and resources among all of theUnited States nuclear plants being operated on behalf of the NMC member companies.
In November 2000, Consumers requested approval from the NRCutilizing pressurized
water reactors to transfer
operating authority for Palisades to NMC and the request was granted in April
2001. The formal transfer of authority from Consumers to NMC took place in May
2001. Consumers retains ownership of Palisades, its 789 MW output, the currentprovide reports detailing their reactor head inspection
histories, design capabilities and future spent fuel on-site,inspection plans. In response to the
issues identified at this and ultimate responsibility for the safe
operation, maintenance and decommissioning of the plant. Under the agreement
that transferred operating authority of the plant to NMC, salaried Palisades'
employees became NMC employeesother nuclear plants worldwide, a bare metal
visual inspection was completed on July 1, 2001. Union employees work under the
supervision of NMC pursuant to their existing labor contract as Consumers'
employees. NMC currently has responsibility for operating eight units with 4,500
MW of generating capacity in Wisconsin, Minnesota, Iowa and Michigan.
Following a refueling outage in April 2001, the Palisades reactor vessel head during the
spring 2003 refueling outage. No indication of leakage was shut downdetected on June 20, 2001 so technicians could inspect a small steam leak on a control
rod drive assembly. There was no risk to the public or workers. In August 2001,
Consumers completed an expanded inspection that included all similar control rod
drive assemblies and elected to completely replace all the components.
Installationany of
the new components was completed54 penetrations.
Insurance: Consumers maintains primary and excess nuclear property insurance
from NEIL, totaling $2.7 billion in December 2001 and the plant
returned to service and has been operating since January 21, 2002. Consumers'
capital expendituresrecoverable limits for the components and their installation was approximately
$31 million.
FromPalisades nuclear
plant. Consumers also procures coverage from NEIL that would partially cover the
start of the June 20th outage through the end of 2001, the impact on
net incomecost of replacement power supply costs associated with the outage was
approximately $59 million. Subsequently, in January 2002, the impact on 2002 net
income was $5 million.
Consumers maintains insurance against property damage, debris removal, personal
injury liability and other risks that are present at its nuclear facilities.
Consumers also maintains coverage for replacement power supply costs during certain prolonged accidental outages at
Palisades. Insurance would not cover
such costs duringNEIL's policies include coverage for acts of terrorism.
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Consumers retains the first 12 weeksrisk of any outage, but would cover most of such
costs duringloss to the next 52 weeksextent of the outage, followed by reduced coverageinsurance deductibles
and to 80
percent for 110 additional weeks. The June 2001 through January 2002 Palisades
outage, however, was not an insured event. If certain covered losses occur atthe extent that its own or other nuclear plants similarly insured,loss exceeds its policy limits. Because NEIL is a
mutual insurance company, Consumers could be requiredsubject to pay maximum assessments offrom NEIL up
to $25.8 million in any onepolicy year if insured losses in excess of NEIL's
maximum policyholders surplus occur at its, or any other member's nuclear
facility.
Consumers maintains nuclear liability insurance for injuries and off-site
property damage resulting from the nuclear hazard at Palisades for up to
NEIL;approximately $9.5 billion, the maximum insurance liability limits established
by the Price-Anderson Act. Congress enacted the Price-Anderson Act to provide
financial protection for persons who may be liable for a nuclear accident or
incident and persons who may be injured by a nuclear incident. The
Price-Anderson Act was recently extended to December 31, 2003. Part of the
Price-Anderson Act's financial protection consists of a mandatory industry-wide
program under which owners of nuclear generating facilities could be assessed if
a nuclear incident occurs at any of such facilities. The maximum assessment
against Consumers could be $88 million per occurrence, limited to maximum annual
installment payments of $10 million. Consumers also maintains insurance under thea
master worker program that covers tort claims for bodily injury to workers
caused by nuclear hazards. The policy contains a $300 million nuclear industry
aggregate limit. Under a previous insurance program providing coverage for
claims brought by nuclear workers, Consumers remains responsible for a maximum
assessment of up to $6.3 million. The Big Rock plant remains insured for nuclear
liability secondary financial protection
program, limited to $10 million per occurrence in any year;by a combination of insurance and $6 million if
nuclear workers claim bodily injury from radiation exposure. Consumers considers
the possibility of these assessments to be remote. NEILUnited States government indemnity
totaling $544 million.
Insurance policy terms, limits its coverage from
multiple acts of terrorism during a twelve-month period to a maximum aggregate
of $3.24 billion, allocated among the claimants, plus recoverable reinsurance,
indemnity and other sources, which could affect the amount of loss coverage for
Consumers should multiple acts of terrorism occur. The Price Anderson Act is
currently in the process of reauthorization by the U. S. Congress. It is
possible that the Price
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Consumers Energy Company
Anderson Act will not be reauthorized or changes may be made that significantly
affect the insurance provisions for nuclear plants.
CAPITAL EXPENDITURES: In 2002, 2003, and 2004, Consumers estimates electric
capital expenditures, including new lease commitments and environmental costs
under the Clean Air Act, of $474 million, $352 million, and $410 million.
DERIVATIVE ACTIVITIES: Consumers' electric business uses purchased electric call
option contracts to meet, in part, its regulatory obligation to serve. This
obligation requires Consumers to provide a physical supply of electricity to
customers, to manage electric costs and to ensure a reliable source of capacity
during peak demand periods. These contractsconditions are subject to SFAS No. 133
derivative accounting, and are required to be recorded onchange during the
balance sheet at
fair value, with changes in fair value recorded directly in earnings or other
comprehensive income, if the contract meets qualifying hedge criteria. On July
1, 2001, upon initial adoption of the standard for these contracts,year as Consumers recorded a $3 million, net of tax, cumulative effect adjustment as an unrealized
loss, decreasing accumulated other comprehensive income. This adjustment relates
to the difference between the fair value and the recorded book value of these
electric call option contracts. The adjustment to accumulated other
comprehensive income relates to electric call option contracts that qualified
for cash flow hedge accounting prior to the initial adoption of SFAS No. 133.
After July 1, 2001, these contracts did not qualify for hedge accounting under
SFAS No. 133 and, therefore, Consumers records any change in fair value
subsequent to July 1, 2001 directly in earnings, which can cause earnings
volatility. The initial amount recorded in other comprehensive income was
reclassified to earnings as the forecasted future transactions occurred or the
call options expired. The majority of these contracts expired in the third
quarter 2001 and the remaining contracts expired in the third quarter of 2002.
As of December 31, 2001, Consumers reclassified from other comprehensive income
to earnings, $2 million, net of tax, as part of the cost of power supply, and
the remainder, $1 million, net of tax, was reclassified from other comprehensive
income to earnings in the third quarter of 2002.
In December 2001, the FASB issued revised guidance regarding derivative
accounting for electric call option contracts and option-like contracts. The
revised guidance amended the criteria used to determine if derivative accounting
is required. In light of the amended criteria, Consumers re-evaluatedrenews its electric call option and option-like contracts, and determined that additional
contracts require derivative accounting. Therefore, as of December 31, 2001,
upon initial adoption of the revised guidance for these contracts, Consumers
recorded an $11 million, net of tax, cumulative effect adjustment as a decrease
to earnings. This adjustment relates to the difference between the fair value
and the recorded book value of these electric call option contracts. Consumers
will record any change in fair value subsequent to December 31, 2001, directly
in earnings, which could cause earnings volatility. As of September 30, 2002,
Consumers recorded on the balance sheet all of its unexpired purchased electric
call option contracts subject to derivative accounting at a fair value of $1
million.
Consumers believes that certain of its electric capacity and energy contracts
are not derivatives due to the lack of an active energy market, as defined by
SFAS No. 133, in the state of Michigan and the transportation cost to deliver
the power under the contracts to the closest active energy market at the Cinergy
hub in Ohio. If a market develops in the future, Consumers may be required to
account for these contracts as derivatives. The mark-to-market impact in
earnings related to these contracts, particularly related to the PPA could be
material to the financial statements.
Consumers' electric business also uses gas swap contracts to protect against
price risk due to the fluctuations in the market price of gas used as fuel for
generation of electricity. These gas swaps are financial contracts that will be
used to offset increases in the price of probable forecasted gas purchases.
These contracts do not qualify for hedge accounting. Therefore, Consumers
records any change in the fair value of these contracts directly in earnings as
part of power supply costs, which could cause earnings volatility. As of
September 30,
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Consumers Energy Company
2002, a mark to market gain of $1 million has been recorded for 2002, which
represents the fair value of these contracts at September 30, 2002. These
contracts expire in December 2002.
As of September 30, 2001, Consumers' electric business also used purchased gas
call option and gas swap contracts to hedge against price risk due to the
fluctuations in the market price of gas used as fuel for generation of
electricity. These contracts were financial contracts that were used to offset
increases in the price of probable forecasted gas purchases. These contracts
were designated as cash flow hedges and, therefore, Consumers recorded any
change in the fair value of these contracts in other comprehensive income until
the forecasted transaction occurs. Once the forecasted gas purchases occurred,
the net gain or loss on these contracts were reclassified to earnings and
recorded as part of the cost of power. These contracts were highly effective in
achieving offsetting cash flows of future gas purchases, and no component of the
gain or loss was excluded from the assessment of the hedge's effectiveness. As a
result, no net gain or loss was recognized in earnings as a result of hedge
ineffectiveness as of September 30, 2001. At September 30, 2001, Consumers had a
derivative liability with a fair value of $0.4 million. These contracts expired
in 2001.policies.
GAS CONTINGENCIES
GAS ENVIRONMENTAL MATTERS: Under the Michigan Natural Resources and
Environmental Protection Act, Consumers expects that it will ultimately incur
investigation and remedial action costs at a number of sites. These include 23
former manufactured gas plant facilities, which were operated by Consumers for
some part of their operating lives, including sites in which it has a partial or
no current ownership interest. Consumers has completed initial investigations at
the 23 sites. For sites where Consumers has received site-wide study plan
approvals, it will continue to implement these plans. It will also work toward
closure of environmental issues at sites as studies are completed. Consumers has
estimated its costs related to further investigation and remedial action for all 23
sites using the Gas Research Institute-Manufactured Gas Plant Probabilistic Cost
Model. The estimated total costs are between $82 million and $113 million; these
estimates are based on discounted 2001 costs and follow EPA recommended use of
discount rates between 3three and 7seven percent for this type of activity.
Consumers expects to recoverfund a significant portion of these costs through insurance
proceeds and through MPSC approved rates charged to its customers. As of September 30, 2002,March
31, 2003, Consumers has an accrued liability of $51$49 million, net of $31$33 million
of expenditures incurred to date, and a regulatory asset of $70$69 million. Any
significant change in assumptions, such as an increase in the number of sites,
different remediation techniques, nature and extent of contamination, and legal
and regulatory requirements, could affect Consumers' estimate of remedial action
costs.
The MPSC, in its November 7, 2002, gas distribution rate order, authorized
Consumers to continue to recover approximately $1 million of manufactured gas
plant facilities environmental clean-up costs annually. Consumers defers and
amortizes, over a period of 10 years, manufactured gas plant facilities
environmental clean-up costs above the amount currently being recovered in
rates. Additional rate recognition of amortization expense cannot begin until
after a prudency review in a gas rate case. The annual amount that the MPSC
authorized Consumers to recover in rates will continue to be offset by $2
million to reflect amounts recovered from all other sources.
GAS RATE MATTERS
GAS RESTRUCTURING: From April 1, 1998 to March 31, 2001, Consumers conducted an
experimental gas customer choice pilot program that froze gas distribution and
GCR rates through the period. On April 1, 2001, a permanent gas customer choice
program commenced under which Consumers returned to a GCR mechanism that allows
it to recover from its bundled sales customers all prudently incurred costs to
purchase the natural gas commodity and transport it to Consumers for ultimate
distribution to customers.
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Consumers Energy Company
GAS RATE MATTERS
GAS COST RECOVERY: As part of a settlement agreement approvedthe on-going GCR process, which includes an annual
reconciliation process with the MPSC, Consumers expects to collect all of its
incurred gas costs. Under an order issued by the MPSC in
July 2001,on March 12, 2003,
Consumers agreed not to bill a price in excess of $4.69 per mcf of
natural gas under theincreased its maximum GCR factor mechanism through March 2002. This agreement is
not expected to affect Consumers' earnings outlook because Consumers recovers
from customers the amountin May 2003, based on a formula that
it actually pays for natural gastracks increases in the
reconciliation process. The settlement does not affect Consumers' June 2001
request to the MPSC for a distribution service rate increase. The MPSC also
approved a methodology to adjust bills for market price increases quarterly
without returning to the MPSC for approval. In December 2001, Consumers filed
its GCR Plan for the period April 2002 through March 2003. Consumers is
requesting authority to bill a GCR factor up to $3.50 per mcf for this period.
The Company also requested the MPSC approve the same methodology which adjusts
bills for market price increases that the MPSC approved, through settlement, in
the previous plan year. A settlement with all parties in the proceeding was
signed and submitted to the Commission in March 2002. The settlement stipulated
to all requests of Consumers and the MPSC approved the settlement, as filed, in
July 2002. Consistent with the terms of the settlement, Consumers filed in June
of 2002 to raise the GCR factor cap to $3.66 for the period July through
September and Consumers proceeded to bill its customers at this new rate. In
September, Consumers filed to raise the GCR factor cap to $3.79 for October
through December, but expects to be able to continue billing at the $3.66 rate.NYMEX prices.
2003 GAS RATE CASE: In June 2001,On March 14, 2003, Consumers filed an application with the
MPSC seeking a $140$156 million distribution service rate increase. Consumers requestedincrease in its gas delivery and transportation
rates, which include a 12.2513.5 percent authorized return on equity.equity, based on a 2004
test year. If approved, the request would add about $6.40 per month, or about 9
percent, to the typical residential customer's average monthly bill.
Contemporaneously with this filing, Consumers has requested partial and immediateinterim rate relief
in the annual amount of $33
million. The relief was primarily for higher carrying costs on more expensive
natural gas inventory than is currently included in rates. In October 2001,
Consumers revised its filing to reflect lower operating costs and requested a
$133 million annual distribution service rate increase. In December 2001, the
MPSC authorized a $15 million annual interim increase in distribution service
rate revenues. The order authorized Consumers to apply the interim increase on
its gas sales customers' bills for service effective December 21, 2001. In
February 2002, Consumers revised its filing to reflect lower estimated gas
inventory prices and revised depreciation expense and requested an annual $105
million distribution service rate increase. On November 7, 2002, the MPSC issued
a final order approving a $56 million annual distribution service rate increase,
which includes the $15 million interim increase, with an 11.4 percent authorized
return on equity, effective for service November 8, 2002.same amount.
In September 2002, the FERC issued an order rejecting a filing by Consumers to
assess certain rates for non-physical gas title tracking services offered by
Consumers. Despite ConsumerConsumers' arguments to the contrary, the CommissionFERC asserted
jurisdiction over such activities and allowed Consumers to refile and justify a
title transfer fee not based on volumes as Consumers proposed. Because the order
was issued 6six years after Consumers made its original filing initiating the
proceeding, over $3 million in non-title transfer tracking fees had been
collected. No refunds have been ordered, and Consumers sought rehearing of the
September order. Consumers has made no reservations for refunds in this matter.
If refunds were ordered they may include interest which would
increase the refund liability to more than the $3 million collected. In December
2002, Consumers established a $3.6 million reserve related to this matter.
Consumers is unable to say with certainty what the final outcome of this
proceeding might be.
In November 2002, the MPSC upon its own motion commenced a contested proceeding
requiring each utility to give reason as to why its rates should not be reduced
to reflect new personal property multiplier tables, and why it should not refund
any amounts that it receives as refunds from local governments as they implement
the new multiplier tables. Consumers responded to the MPSC that it believes that
such action mayrefunds would be inconsistent with the November 7, 2002 gas rate order in case
U-13000, with the Customer Choice Act, and may otherwise be unlawful. Consumers
is unable to predict the outcome of this matter.
OTHER GAS UNCERTAINTIES
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States, Consumers has increased security at all critical facilities and over its
critical infrastructure, and will continue to evaluate security on an ongoing
basis. Consumers may be required to comply with federal and state regulatory
security measures promulgated in the future. Through December 31, 2002,
Consumers has incurred approximately $4 million in incremental security costs,
including operating, capital, and decommissioning and removal costs. Consumers
estimates it may incur additional incremental security costs in 2003 of
approximately $6 million. Consumers will attempt to seek recovery of these costs
from its customers. In December 2002, the Michigan legislature passed, and the
governor signed, a bill that would allow Consumers to seek recovery of
additional nuclear electric division security costs incurred during the rate
freeze and cap periods imposed by the Customer Choice Act. Of the $4 million in
incremental security costs incurred through December 31, 2002, approximately $3
million related to nuclear security costs. Of the estimated $6 million for
incremental security costs expected to be incurred in 2003, $4 million relates
to nuclear security costs. On February 5, 2003, the MPSC adopted filing
requirements for the recovery of enhanced security costs.
DERIVATIVE ACTIVITIES: Consumers uses a variety of contracts to protect against
commodity price and interest rate risk. Some of these contracts may be subject
to derivative accounting, which requires that the value of the contracts to be
adjusted fair value through earnings or equity depending upon certain criteria.
Such adjustments to fair value could cause earnings volatility. For further
information about derivative activities, see Note 4, Financial and Derivative
Instruments.
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CAPITAL EXPENDITURES: In 2002, 2003, and 2004, Consumers estimates gas capital
expenditures, including new lease commitments, of $207 million, $151 million,
and $165 million.
DERIVATIVE ACTIVITIES: Consumers' gas business uses fixed price gas supply
contracts, and fixed price weather-based gas supply call options and fixed price
gas supply put options, and other types of contracts, to meet its regulatory
obligation to provide gas to its customers at a reasonable and prudent cost.
Some of the fixed price gas supply contracts require derivative accounting
because they contain embedded put options that disqualify the contracts from the
normal purchase exception of SFAS No. 133. As of September 30, 2002, Consumers'
gas supply contracts requiring derivative accounting had a fair value of $1
million, representing a fair value gain on the contracts since the date of
inception. This gain was recorded directly in earnings as part of other income,
and then directly offset and recorded on the balance sheet as a regulatory
liability. Any subsequent changes in fair value will be recorded in a similar
manner. These contracts expire in October 2002.
As of September 30, 2002, weather-based gas call options and gas put options
requiring derivative accounting had a net fair value of $1 million. The change
in value since inception in August 2002 is immaterial. Any change in fair value
will be recorded in a similar manner as stated above for the change in fair
value for fixed price gas supply contracts requiring derivative accounting.
OTHER UNCERTAINTIES
PENSION: The recent significant downturn in the equities markets has affected
the value of the Pension Plan assets. If the plan's Accumulated Benefit
Obligation exceeds the value of these assets at December 31, 2002, Consumers
Energy will be required to recognize an additional minimum liability for this
excess in accordance with SFAS No. 87. Consumers cannot predict the future fair
value of the plan's assets but it is possible, without significant appreciation
in the plan's assets, that Consumers will need to book an additional minimum
liability through a charge to other comprehensive income. The value of the Plan
assets and the Accumulated Benefits Obligation are determined by the Plan's
actuary in the fourth quarter of each year.
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.
TAX LOSS ALLOCATIONS: The Job Creation and Worker Assistance Act of 2002
provided to corporate taxpayers a 5-year carryback of tax losses incurred in
2001 and 2002. As a result of this legislation, CMS Energy was able to carry
back a consolidated 2001 tax loss to tax years 1996 through 1999 and obtain
refunds of prior years tax payments totaling $217 million. The tax loss
carryback, however, resulted in a reduction in AMT credit carryforwards that
previously had been recorded by CMS Energy as deferred tax assets in the amount
of $41 million. This one-time non-cash reduction in AMT credit carryforwards was
originally reflected in the tax provisions of CMS Energy and each of its
consolidated subsidiaries, as of September 2002, according to their
contributions to the consolidated CMS Energy tax loss, of which $29 million was
allocated to Consumers under the CMS Energy tax sharing agreement. As of
September 30, 2002, the $29 million tax sharing allocation has been restated
for financial reporting purposes and reflected as a dividend to be paid by
Consumers to CMS Energy. In December 2002, Consumers' estimated $29 million
dividend was adjusted to $25 million upon calculation of the final tax
allocation.
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3: SHORT-TERM FINANCINGS AND CAPITALIZATION
AUTHORIZATION:REGULATORY AUTHORIZATION FOR FINANCINGS: At September 30, 2002,March 31, 2003, Consumers had FERC
authorization to issue or guarantee through June 2004, up to $1.1 billion of
short-term securities outstanding at any one time. Consumers also had remaining
FERC authorization to issue through June 2004 up to $500 million of long-term
securities for refinancing or refunding purposes, $690$381 million for general
corporate purposes, and $900$610 million of First Mortgage Bondsfirst mortgage bonds to be issued solely
as securitycollateral for the long-term securities. On April 30, 2003, Consumers sold
$625 million principal amount of first mortgage bonds, described below. Its
remaining FERC authorization after this issue is (1) $250 million of long-term
securities for refinancing or refunding purposes, (2) $6 million for general
corporate purposes, and (3) $610 million remaining first mortgage bonds
available to be issued solely as collateral for the long-term securities. On
October 10, 2002, FERC granted a waiver of its competitive bid/negotiated
placement requirements applicable to the remaining long-term securities
authorization indicated above.
SHORT-TERM FINANCINGS: At September 30, 2002,In March 2003, Consumers hadobtained a replacement revolving
credit facility in the amount of $250 million secured by first mortgage bonds.
The cost of the facility is LIBOR plus 350 basis points. The new credit facility
secured by First Mortgage Bonds. Thismatures in March 2004 with two annual extensions at Consumers' option, which
would extend the maturity to March 2006. The prior facility is availablewas due to finance seasonal working capital requirements and to pay for capital
expenditures between long-term financings.expire in
July 2003. At September 30, 2002,March 31, 2003, a total of $235$252 million was outstanding on all
short-term financing at a weighted average interest rate of 3.76.22 percent,
compared with $153$150 million outstanding on a revolving credit facility at September 30, 2001,March 31, 2002 at a weighted average
interest rate of 3.52.6 percent.
LONG-TERM FINANCINGS: In July 2002, the credit rating of the publicly traded securities ofMarch 2003, Consumers was downgraded by the major rating agencies. The rating downgrade is purported
to be largelyentered into a function of the uncertainties associated with CMS Energy's
financial condition and liquidity pending resolution of the round-trip trading
investigations and lawsuits, the special board committee investigation,
restatement and re-audit of 2000 and 2001 financial statements and uncertain
future access to the capital markets.
As a result of certain of these downgrades, a few commodity suppliers to
Consumers have requested advance payments or other forms of assurances in
connection with maintenance of ongoing deliveries of gas and electricity.
Consumers is addressing these issues as required.
On July 12, 2002, Consumers reached agreement with its lenders on two credit
facilities as follows: a $250 million revolving credit facility maturing
July 11, 2003 and a $300$140 million term
loan maturing July 11, 2003. In September
2002, the termsecured by first mortgage bonds with a private investor bank. This loan maturity was extended by one year at Consumers' option and
now has
a maturity dateterm of July 11, 2004. These two facilities aggregating $550
million replacesix years at a $300 million revolving credit facility that matured
July 14, 2002 as well as various credit lines aggregating $200 million. At
September 30, 2002, a total of $535 million was outstanding under these
facilities. The prior credit facilities and lines were unsecured. The two new
credit facilities are secured with Consumers First Mortgage Bonds.
Consumers $250 million revolving credit facility has an interest ratecost of LIBOR plus 200475 basis points, although the rate may fluctuate depending on the rating
of Consumers' first mortgage bonds, and the interest rate on the $300points. Proceeds from this
loan were used for general corporate purposes.
In March 2003, Consumers entered into a $150 million term loan issecured by first
mortgage bonds. This term loan has a three-year maturity expiring in March 2006;
the loan has a cost of LIBOR plus 450 basis points which may also fluctuate depending on
the rating of Consumers' first mortgage bonds. The effective interest rate at
September 30, 2002 was 4.76 percent and 8.89 percent on the revolving credit
facility and the $300 million termpoints. Proceeds from this loan respectively. Consumers bank and legal
fees associated with arranging the facilities were
$6 million.
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Consumers Energy Company
The credit facilities have contractual restrictions that require Consumers to
maintain, as of the last day of each fiscal quarter, the following:
Required Ratio Limitation Ratio at September 30, 2002
==================================================================================================================
(Restated)
Debt to Capital Ratio (a) Not more than 0.65 to 1.00 0.52 to 1.00
Interest Coverage Ratio (a) Not less than 2.0 to 1.0 3.38 to 1.0
==================================================================================================================
(a) Violation of this ratio would constitute an event of default under the
facilities which provides the lender, among other remedies, the right to declare
the principal and interest immediately due and payable.
Also pursuant to restrictive covenants in its facilities, Consumers is limited
to dividend payments that will not exceed $300 million in any calendar year.used for general corporate purposes.
FIRST MORTGAGE BONDS: In 2001, Consumers paid $190 million in common stock dividends to CMS Energy.
Consumers declared $183 million and paid $154 million in common dividends
through September 2002.
In October 2002, Consumers simultaneously entered into a new Term Loan Agreement
collateralized by First Mortgage Bonds and a new Gas Inventory Term Loan
Agreement collateralized by Consumers' natural gas in storage. These agreements
contain complementary collateral packages that provide Consumers, as additional
first mortgage bonds become available, borrowing capacity of up to $225 million.
Consumers drew $220 million of the capacity upon execution of the Agreements and
is expected to be in a position to draw the full $225 million by mid-November of
2002. The interest rate under the Agreements is currently LIBOR plus 300 basis
points, but will increase by 100 basis points for any period after December 1,
2002 during which the banks thereunder have not yet received, among other
deliveries, certified restated financial statements for CMS Energy's 2000 and
2001 fiscal years. The bank and legal fees associated with the Agreement were $2
million. The first net amortization payment under these agreements is scheduled
to occur at the end of 2002 with monthly amortization scheduled until full
repayment is completed in mid-April of 2003. This financing should eliminate the
need for Consumers to access the capital markets for the remainder of 2002.
LONG-TERM FINANCINGS: In March 2002,April 2003, Consumers sold $300$625 million principal
amount of sixfirst mortgage bonds in a private offering to institutional investors;
$250 million were issued at 4.25 percent, senior notes, maturing in March 2005. Neton April 15, 2008, and net
proceeds from
the sale were $299approximately $248 million, $375 million were issued at 5.38
percent, maturing on April 15, 2013, and net proceeds were approximately $371
million. Consumers used the net proceeds to replace a $250 million senior reset
put bond that matured in May 2003, to pay an associated $32 million option call
payment, and for general corporate purposes that may include paying down
additional debt. Consumers has agreed to file a registration statement with the
SEC to permit holders of these first mortgage bondbonds to exchange the bonds for
new bonds that waswill be registered under the Securities Act of 1933. Consumers
has agreed to mature infile this registration statement by December 31, 2003.
FIRST MORTGAGE BONDS:CE-45
Consumers Energy Company
Consumers secures its First Mortgage Bondsfirst mortgage bonds by a mortgage and lien on
substantially all of its property. Consumers' ability to issue and sell
securities is restricted by certain provisions in its First Mortgage Bondfirst mortgage bond
Indenture, its Articlesarticles of Incorporationincorporation and the need for regulatory approvals
to meet appropriate federal law.
MANDATORILY REDEEMABLE PREFERRED SECURITIES: Consumers has wholly owned
statutory business trusts that are consolidated within its financial statements.
Consumers created these trusts for the sole purpose of issuing Trust Preferred
Securities. The primary asset of the trusts is a note or debenture of Consumers.
The terms of the Trust Preferred Security parallel the terms of the related
Consumers' note or debenture. The term, rights and obligations of the Trust
Preferred Security and related note or debenture are also defined in the related
indenture through which the note or debenture was issued, Consumers' guarantee
of the related Trust Preferred Security and the declaration of trust for the
particular trust. All of these documents together with their related note or
debenture and Trust Preferred Security constitute a full and unconditional
guarantee by Consumers of the trust's obligations under the Trust Preferred
Security. In addition to the similar provisions previously discussed, specific
terms of the securities follow:
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Consumers Energy Companyfollow.
In Millions
- ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Earliest
Trust and Securities Rate Amount Outstanding Maturity Redemption
- ---------------------------------------------------------------------------------------------------------------
September 30------------------------------------------------------------------------------------------------------------------
March 31 2003 2002 2001 2000 Year
- ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Consumers Power Company Financing I,
Trust Originated Preferred Securities 8.36% $ 70 $100$ 70 $100 2015 2000
Consumers Energy Company Financing II,
Trust Originated Preferred Securities 8.20% 120 120 120 2027 2002
Consumers Energy Company Financing III,
Trust Originated Preferred Securities 9.25% 175 175 175 2029 2004
Consumers Energy Company Financing IV,
Trust Preferred Securities 9.00% 125 125 - 2031 2006
---------------------------
Total $490 $520$490 $395
==================================================================================================================================================================================================================================
InOTHER: At March 2002, Consumers reduced its' outstanding debt to Consumers Power
Company Financing I, Trust Originated Preferred Securities by $30 million.
OTHER: Under the provisions of its Articles of Incorporation,31, 2003, Consumers had, $345
million of unrestricted retained earnings available to pay common dividends at
September 30, 2002.
On April 1, 2002, Consumers established a newthrough its wholly owned subsidiary
Consumers Receivable
Funding. This consolidated subsidiary was established to sell accounts
receivable purchased from Consumers to an unrelated third party under a trade
receivables sale program. Prior to the establishment of Consumers ReceivableReceivables Funding, Consumers sold its accounts receivable directly to an unrelated third
party. Consumers, through Consumers Receivable Funding, currently has in place a $325 million trade receivablesreceivable sale program.program in
place as an anticipated source of funds for general corporate purposes. At September 30,March
31, 2003 and 2002, and 2001, the receivables sold totaledunder the program were $325 million for
each year. During 2002, $248 million
cash proceeds were received underyear; the trade receivables sale program.average annual discount rate was 1.57 percent and 2.15 percent,
respectively. Accounts receivable and accrued revenue in the Consolidated
Balance Sheets have been reduced to reflect receivables sold. On April 30, 2003,
Consumers ended its trade receivable sale program with its then existing
purchaser and anticipates that a new trade receivable program will be in place
with a new purchaser in May 2003.
Under the program discussed above, Consumers sold accounts receivable but
retained servicing responsibility. Consumers is responsible for the
collectability of the accounts receivable sold, however, the purchaser of sale
of accounts receivable have no recourse to Consumers' other assets for failure
of debtors to pay when due and there are no restrictions on accounts receivables
not sold. No gain or loss has been recorded on the sale of accounts receivable
and Consumers retains no interest in the receivables sold.
DIVIDEND RESTRICTIONS: Under the provisions of its articles of incorporation,
Consumers had $423 million of unrestricted retained earnings available to pay
common dividends at March 31, 2003. However, pursuant to restrictive covenants
in its debt facilities, Consumers is limited to common stock dividend payments
that will not exceed $300 million in any calendar year. In January 2003,
Consumers declared and paid a $78 million common dividend. In March 2003,
Consumers declared a $31 million common dividend payable in May 2003.
FASB INTERPRETATION NO. 45, GUARANTOR'S ACCOUNTING AND DISCLOSURE REQUIREMENT
FOR GUARANTEES, INCLUDING INDIRECT GUARANTEES OF INDEBTEDNESS OF OTHERS:
Effective January 2003, this interpretation elaborates on the disclosure to be
made by a guarantor about its obligations under certain guarantees that it has
issued. It also requires that a guarantor recognize, at the inception of a
guarantee, a liability for the fair value of the obligation undertaken in
issuing the guarantee. The initial recognition and measurement provision of this
interpretation does not apply to certain guarantee contracts, such as
warranties, derivatives, or guarantees between either parent and subsidiaries or
corporations under common control, although
CE-46
Consumers Energy Company
disclosure of such guarantees is required. For contracts that are within the
initial recognition and measurement provision of this interpretation, the
provisions are to be applied to guarantees issued or modified after December 31,
2002; no cumulative effect adjustments are required.
Following is a general description of Consumers' guarantees as required by this
Interpretation:
March 31, 2003 In Millions
- ------------------------------------------------------------------------------------------------------------------
Issue Expiration Maximum Carrying Recourse
Guarantee Description Date Date Obligation Amount Provision(a)
- ------------------------------------------------------------------------------------------------------------------
Standby letters of credit Various Various $ 7 $ - $ -
Surety bonds Various Various 8 - -
Nuclear insurance retrospective premiums Various Various 120 - -
==================================================================================================================
(a) Recourse provision indicates the approximate recovery from third
parties including assets held as collateral.
Following is additional information regarding Consumers' guarantees:
March 31, 2003
- ---------------------------------------------------------------------------------------------------------------------
Events That Would
Guarantee Description How Guarantee Arose Require Performance
- ---------------------------------------------------------------------------------------------------------------------
Standby letters of credit Normal operations of Non-compliance with
coal power plants environmental regulations
Self insurance requirement Non-performance
Surety bonds Normal operating activity, Non-performance
permits and license
Nuclear insurance retrospective premiums Normal operations of Call by NEIL and
nuclear plants Price-Anderson Act
for nuclear incident
=====================================================================================================================
4: FINANCIAL AND DERIVATIVE ACTIVITIES:INSTRUMENTS
FINANCIAL INSTRUMENTS: The carrying amounts of cash, short-term investments and
current liabilities approximate their fair values due to their short-term
nature. Consumers estimates the fair values of long-term investments based on
quoted market prices or, in the absence of specific market prices, on quoted
market prices of similar investments or other valuation techniques. The carrying
amounts of all long-term investments, except as shown below, approximate fair
value.
CE-47
Consumers Energy Company
In Millions
- ---------------------------------------------------------------------------------------------------------------
March 31 2003 2002
- ---------------------------------------------------------------------------------------------------------------
Fair Unrealized Fair Unrealized
Available-for-sale securities Cost Value Gain Cost Value Gain
- ---------------------------------------------------------------------------------------------------------------
Common stock of CMS Energy (a) $ 10 $ 10 $ - $ 35 $ 54 $ 19
SERP 18 18 - 21 22 1
Nuclear decommissioning
investments (b) 458 529 71 465 576 111
===============================================================================================================
(a) Consumers recognized a $12 million loss on this investment in 2002 and an
additional $12 million loss in the first quarter of 2003 because the loss was
other than temporary, as the fair value was below the cost basis for a period
greater than six months. As of March 31, 2003, Consumers held 2.4 million shares
of CMS Energy Common Stock with a fair value of $10 million.
(b) On January 1, 2003, Consumers adopted SFAS No. 143 and began classifying its
unrealized gains and losses on nuclear decommissioning investments as regulatory
liabilities. Consumers previously classified these investments in accumulated
depreciation.
At March 31, 2003, the carrying amount of long-term debt was $2.7 billion and at
March 31, 2002, $2.4 billion, and the fair values were $2.7 billion and $2.4
billion, respectively. For held-to-maturity securities and related-party
financial instruments, see Note 1.
RISK MANAGEMENT ACTIVITIES AND DERIVATIVE TRANSACTIONS: Consumers is exposed to
market risks including, but not limited to, changes in interest rates, commodity
prices, and equity security prices. Consumers' market risk, and activities
designed to minimize this risk, are subject to the direction of an executive
oversight committee consisting of designated members of senior management and a
risk committee, consisting of certain business unit managers. The role of the
risk committee is to review the corporate commodity position and ensure that net
corporate exposures are within the economic risk tolerance levels established by
Consumers' Board of Directors. Established policies and procedures are used to
manage the risks associated with market fluctuations.
Consumers uses various contracts, including swaps, options, and forward
contracts to manage its risks associated with the variability in expected future
cash flows attributable to fluctuations in interest rates and commodity prices.
When management uses these instruments, it intends that an opposite movement in
the value of the at-risk item would offset any losses incurred on the contracts.
Consumers enters into all risk management contracts for purposes other than
trading.
These instruments contain credit risk if the counterparties, including financial
institutions and energy marketers, fail to perform under the agreements.
Consumers minimizes such risk by performing financial credit reviews using,
among other things, publicly available credit ratings of such counterparties.
Contracts used to manage interest rate and commodity price risk may be
considered derivative instruments that are subject to derivative and hedge
accounting pursuant to SFAS No. 133. SFAS No. 133 requires Consumers to
recognize at fair value all contracts that meet the definition of a derivative
instrument on the balance sheet as either assets or liabilities. The standard
also requires Consumers to record all changes in fair value directly in
earnings, or other comprehensive income if the derivative meets certain
qualifying cash flow hedge criteria. In order for derivative instruments to
qualify for hedge accounting under SFAS No. 133, the hedging relationship must
be formally documented at inception and be highly effective in achieving
offsetting cash flows or offsetting changes in fair value attributable to the
risk being hedged. If hedging a forecasted transaction, the forecasted
transaction must be probable. If a derivative instrument, used as a cash flow
hedge, is terminated early because it is probable that a forecasted transaction
will not occur, any gain or loss
CE-48
Consumers Energy Company
as of such date is immediately recognized in earnings. If a derivative
instrument, used as a cash flow hedge, is terminated early for other economic
reasons, any gain or loss as of the termination date is deferred and recorded
when the forecasted transaction affects earnings.
Consumers determines fair value based upon quoted market prices and mathematical
models using current and historical pricing data. Option models require various
inputs, including forward prices, volatilities, interest rates and exercise
periods. Changes in forward prices or volatilities could significantly change
the calculated fair value of the call option contracts. At March 31, 2003,
Consumers assumed a market-based interest rate of 4.5 percent and a volatility
rate of 107.5 percent in calculating the fair value of its electric call
options. The ineffective portion, if any, of all hedges is recognized in
earnings.
The majority of Consumers' contracts are not subject to derivative accounting
because they qualify for the normal purchases and sales exception of SFAS No.
133. Derivative accounting is required, however, for certain contracts used to
limit Consumers' exposure to electricity and gas commodity price risk and
interest rate risk.
The following table reflects the fair value of contracts requiring derivative
accounting:
In Millions
- ------------------------------------------------------------------------------------------------------------------
March 31 2003 2002
- -------------------------------------------------------------------------------------------------------------------
Fair Fair
Derivative Instruments Cost Value Cost Value
- -------------------------------------------------------------------------------------------------------------------
Electric contracts $8 $ 1 $21 $ 5
Gas contracts - - - 4
Interest rate risk contracts - (1) - (2)
Derivative contracts associated with Consumers'
equity investment in the MCV Partnership - 17 - (1)
===================================================================================================================
The fair value of all derivative contracts, except the fair value of derivative
contracts associated with Consumers' equity investment in the MCV Partnership,
is included in either Other Assets or Other Liabilities on the Balance Sheet.
The fair value of derivative contracts associated with Consumers' equity
investment in the MCV Partnership is included in Investments - Midland
Cogeneration Venture Limited Partnership on the Balance Sheet.
ELECTRIC CONTRACTS: Consumers' electric business uses purchased electric call
option contracts to meet, in part, its regulatory obligation to serve. This
obligation requires Consumers to provide a physical supply of electricity to
customers, to manage electric costs and to ensure a reliable source of capacity
during peak demand periods. As of March 31, 2003, Consumers recorded on the
balance sheet all of its unexpired purchased electric call option contracts
subject to derivative accounting at a fair value of $1 million. These contracts
will expire in the third quarter of 2003.
Consumers believes that certain of its electric capacity and energy contracts
are not derivatives due to the lack of an active energy market in the state of
Michigan, as defined by SFAS No. 133, and the transportation cost to deliver the
power under the contracts to the closest active energy market at the Cinergy hub
in Ohio. If a market develops in the future, Consumers may be required to
account for these contracts as derivatives. The mark-to-market impact in
earnings related to these contracts, particularly related to the PPA could be
material to the financial statements.
CE-49
Consumers Energy Company
During 2002, Consumers' electric business also used gas swap contracts to
protect against price risk due to the fluctuations in the market price of gas
used as fuel for generation of electricity. These gas swaps were financial
contracts that were used to offset increases in the price of probable forecasted
gas purchases. These contracts did not qualify for hedge accounting. Therefore,
Consumers recorded any change in the fair value of these contracts directly in
earnings as part of power supply costs. As of March 31, 2002, these contracts
had a fair value of $1 million. These contracts expired in December 2002.
As of March 31, 2003, Consumers recorded a total of $11 million, net of tax, as
an unrealized gain in other comprehensive income related to its proportionate
share of the effects of derivative accounting related to its equity investment
in the MCV Partnership. Consumers expects to reclassify this gain, if this value
remains, as an increase to other operating revenue during the next 12 months.
GAS CONTRACTS: Consumers' gas business uses fixed price gas supply contracts,
and fixed price weather-based gas supply call options and fixed price gas supply
put options, and other types of contracts, to meet its regulatory obligation to
provide gas to its customers at a reasonable and prudent cost. During 2002, some
of the fixed price gas supply contracts and the weather-based gas call options
and gas put options required derivative accounting. The fixed price gas supply
contracts expired in October 2002, and the weather-based gas call options and
gas put options expired in February 2003. As of March 31, 2003, Consumers did
not have any gas supply related contracts that required derivative accounting.
INTEREST RATE RISK CONTRACTS: Consumers uses interest rate swaps to hedge the
risk associated with forecasted interest payments on variable ratevariable-rate debt. These
interest rate swaps are designated as cash flow hedges. As such, Consumers will
record any change in the fair value of these contracts in other comprehensive
income unless the swap isswaps are sold. As of September 30,March 31, 2003 and March 31, 2002,
Consumers had entered into a swap to fix the interest rate on $75 million of
variable ratevariable-rate debt. This swap will expire in June 2003. As of September 30, 2002,March 31, 2003,
this interest rate swap had a negative fair value of $2$1 million. This amount, if
sustained, will be reclassified to earnings, increasing interest expense when
the swaps areswap is settled on a monthly basis. As of September 30, 2001, Consumers had entered into swaps
to fix theMarch 31, 2002, this interest rate
on $150 million of variable rate debt. The swaps
expired at varying times from June through December 2001. As of September 30,
2001, these interest rate swapsswap had a negative fair value of $4$2 million.
Consumers also uses interest rate swaps to hedge the risk associated with the
fair value of its debt. These interest rate swaps are designated as fair value
hedges. In March 2002, Consumers entered into a fair value hedge to hedge the
risk associated with the fair value of $300 million of fixed ratefixed-rate debt, issued
in March 2002. As of March 31, 2002, the swap had a negative fair value of less
than $1 million. In June 2002, this swap was terminated and resulted in a $7
million gain that is deferred and recorded as part of the debt. It is
anticipated that this gain will be recognized over the remaining life of the
debt.
As of September 2001, Consumers had entered intowas able to apply the shortcut method to all interest rate swaps to hedge
the riskhedges,
therefore there was no ineffectiveness associated with the fair value of $400 million of fixed rate debt,
which expire in May 2003 and December 2006. As of September 30, 2001, these interest rate swaps had a fair value of $1 million. Subsequently in November
2001, these
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Consumers Energy Company
swaps were terminated and resulted in a $4 million gain that will be deferred
and recorded as part of the debt. It is anticipated that this gain will be
recognized over the remaining life of the debt.
During the third quarter 2001, Consumers entered into fair value hedges to hedge
the risk associated with the fair value of $250 million of debt. These swaps
terminated in the third quarter 2001, and resulted in a $4 million gain that has
been deferred and recorded as part of the debt. It is anticipated that this gain
will be recognized over the remaining life of the debt.
In September 2001, Consumers entered into a cash flow hedge to fix the interest
rate on $100 million of debt to be issued. In September 2001, the swap
terminated and resulted in a $2 million loss that was recorded in other
comprehensive income and will be amortized to interest expense over the life of
the debt using the effective interest method.
4: RESTATEMENT
In April 2002, Consumers' Board of Directors, upon the recommendation of the
Audit Committee of the Board, voted to discontinue using Arthur Andersen to
audit Consumers' financial statements for the year ending December 31, 2002.
Consumers previously retained Arthur Andersen to review its financial statements
for the quarter ended March 31, 2002. In May 2002, Consumers' Board of Directors
engaged Ernst & Young to audit its financial statements for the year ending
December 31, 2002.
In May 2002, as a result of certain financial reporting issues surrounding
round-trip trading transactions at CMS MST, Arthur Andersen notified CMS Energy
that Arthur Andersen's historical opinions on CMS Energy's financial statements
for the fiscal years ended December 31, 2001 and December 31, 2000 could not be
relied upon. As a result, Ernst & Young began the process of re-auditing CMS
Energy's consolidated financial statements for each of the fiscal years ended
December 31, 2001 and December 31, 2000. Although Arthur Andersen's notification
did not apply to separate, audited financial statements of Consumers for the
applicable years, the re-audit did include audit work at Consumers for these
years.
In connection with Ernst & Young's re-audit of the fiscal years ended December
31, 2001 and December 31, 2000, Consumers has made, in consultation with Ernst &
Young, certain adjustments to its consolidated financial statements for the
fiscal years ended December 31, 2001 and December 31, 2000, which affect the
results of the quarterly periods within 2001 and 2002. Therefore, the
consolidated financial statements for the four quarters of 2001, the years ended
December 31, 2001 and 2000, and the subsequent three quarters of 2002 have been
restated from amounts previously reported. At the time it adopted the accounting
treatment for these items, Consumers believed that such accounting was
appropriate under generally accepted accounting principles and Arthur Andersen
concurred.
The audit adjustments: 1) change the accounting associated with the PPA reserve,
which results in: the reversal of the 2001 increase to the PPA reserve of $126
million; the reversal of a net $12 million charged to operating expenses
associated with the PPA in 2001; and the reversal of $29 million of the amount
charged to the PPA reserve in 2000; and 2) recognize Consumers' new headquarters
lease as a capital lease, instead of an operating lease, and record the lease
obligation and capitalize costs incurred. Each of these transactions involved
estimates, assumptions, and judgment based on the best information available at
the time the transactions occurred. The audit adjustments reflect current
judgment on these matters. In addition, the audit adjustments recognize
immaterial reconciling adjustments to advertising costs, Consumers' OPEB
liability and related party receivables and payables. Consumers has also made an
additional adjustment associated with its financial statements as of September
30, 2002. This additional adjustment by Consumers recognizes the $29 million
federal income tax sharing allocation from CMS Energy as a dividend to be paid
by Consumers to CMS Energy instead of income tax expense as originally recorded
in September 2002.
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Consumers Energy Company
In 1992, Consumers originally accounted for losses associated with the PPA by
establishing a reserve for the difference between the amount that Consumers was
paying for power in accordance with the terms of the PPA, and the amount that
Consumers was ultimately allowed by the MPSC to recover from electric customers.
At that time, the reserve did not take into account earnings Consumers would
receive from its 49 percent interest in the MCV Partnership due to uncertainties
with the level of performance of the facility.
In 2000, Consumers reviewed its estimate of the economic losses it would
experience with respect to the PPA and re-evaluated all of the current facts and
circumstances used to calculate the disallowance reserve, including earnings
from its 49 percent interest in the MCV Partnership. Consumers concluded that no
adjustment to the reserve was required in 2000. However, as conditions
surrounding MCV Partnership operations evolved in 2001, Consumers concluded that
it needed to increase the reserve by $126 million (pre-tax) in the third quarter
of 2001, and did so.
In connection with the re-audit of CMS Energy's consolidated financial
statements for the fiscal years 2000 and 2001, Consumers reviewed its 2000 and
2001 PPA accounting and related assumptions, and determined that the reserve
balance as of January 1, 2000 did appropriately reflect Consumers' probable
losses as of that date. However, as a result of reconsideration of all
subsidiary accounting effects, the re-evaluation of the PPA accounting did
result in a net reduction of operating expenses associated with the PPA of $12
million in 2001, an increase to operating expenses associated with the PPA of
$29 million in 2000, the reversal of the $126 million increase to the reserve
originally recorded in 2001, and immaterial adjustments to accretion expense for
both years.
The following table reflects the audit adjustments associated with the MCV PPA
accounting and the related net income statement effects for the periods ended
December 31, 2001 and December 31, 2000:
- --------------------------------------------------------------------------------------------------------------
In Millions 2001 2000
- --------------------------------------------------------------------------------------------------------------
Income Increase/(Decrease)
- --------------------------------------------------------------------------------------------------------------
Reverse the original operating charge associated with continuing
losses on the MCV PPA $39 $-
Charge 49 percent of annual capacity losses associated with the MCV
PPA to operating expense instead of to the reserve (27) (29)
----- -----
Net operating expense decrease/(increase) 12 (29)
Reverse the 2001 increase to the MCV PPA reserve 126 -
Accretion Expense - (2)
----- -----
Pre-tax effect of adjustments 138 (31)
Income tax effect (48) 11
----- -----
Net income impact of MCV PPA adjustments $90 ($20)
- --------------------------------------------------------------------------------------------------------------
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Consumers Energy Company
The following table reflects all audit and other adjustments by quarter for the
income statement including a non-re-audit adjustment by Consumers reclassifying
SERP unrealized losses to realized losses and an income tax adjustment during
the period ended September 30, 2002:
- -------------------------------------------------------------------------------------------------------------------
In Millions (Unaudited)
- -------------------------------------------------------------------------------------------------------------------
2002 2001
Quarters Ended March 31 June 30 Sept. 30 March 31 June 30 Sept. 30 Dec. 31
- -------------------------------------------------------------------------------------------------------------------
Operating expenses $1,049 $748 $752 $1,006 $765 $953 $945
MCV PPA Adjustment (.5) - - (4) (4) (130) -
Advertising Expense - - - - - - 1
Intercompany items (.5) - (1) 1 - - -
Other - 1 - - - - -
Restated operating expenses $1,048 $749 $751 $1,003 $761 $823 $946
- -------------------------------------------------------------------------------------------------------------------
Pretax operating income $187 $179 $169 $213 $108 $(53) $77
MCV PPA Adjustment .5 - 4 4 130 -
Advertising Expense - - - - - - (1)
Intercompany items .5 (1) - (1) - - -
Other - - 1 - - - -
Restated Pretax operating
Income $188 $178 $170 $216 $112 $77 $76
- -------------------------------------------------------------------------------------------------------------------
Other income $(1) $36 $- $2 $- $- $(1)
MCV PPA Adjustment 1 2 3 (1) - - 1
Intercompany items (2) (1) - - 1 - (1)
SERP - (1) (3) - - - -
Restated other income $(2) $36 $- $1 $1 $- $(1)
- -------------------------------------------------------------------------------------------------------------------
Income before taxes $146 $179 $126 $168 $63 $(102) $31
MCV PPA Adjustment - 2 3 4 4 130 -
Advertising Expense - - - - - - (1)
Intercompany items - (2) 1 (2) (1) 1 1
SERP - (1) (3) - - - -
Restated income before taxes $146 $178 $127 $170 $66 $29 $31
- -------------------------------------------------------------------------------------------------------------------
Income (loss) before
cumulative effect of change
in accounting principle $92 $124 $55 $107 $43 $(62) $23
MCV PPA Adjustment - 2 2 2 2 85 1
Intercompany items - (1) 1 (1) - - (1)
SERP - (1) (2) - - - -
Income Tax - - 29 - - - -
Restated income (loss) before
cumulative effect of change
in accounting principle $92 $124 $85 $108 $45 $23 $23
- ------------------------------------------------------------------------------------------------------------------
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Consumers Energy Company
- -------------------------------------------------------------------------------------------------------------------
In Millions (Unaudited)
- -------------------------------------------------------------------------------------------------------------------
2002 2001
Quarters Ended March 31 June 30 Sept. 30 March 31 June 30 Sept. 30 Dec. 31
- -------------------------------------------------------------------------------------------------------------------
Net income (loss) $92 $124 $55 $107 $43 $(62) $12
MCV PPA Adjustment - 2 2 2 2 85 1
Intercompany items - (1) 1 (1) - - (1)
SERP - (1) (2) - - - -
Income Tax - - 29 - - - -
Restated net income (loss) $92 $124 $85 $108 $45 $23 $12
- -------------------------------------------------------------------------------------------------------------------
Net income (loss)
available to
common stockholder $81 $113 $44 $98 $33 $(74) $-
MCV PPA Adjustment - 2 2 2 2 85 1
Intercompany items - (1) 1 (1) - - (1)
SERP - (1) (2) - - - -
Income Tax - - 29 - - - -
Restated net income (loss)
available to
common stockholder $81 $113 $74 $99 $35 $11 $-
- -------------------------------------------------------------------------------------------------------------------
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Consumers Energy Company
The following tables reflect the effects the audit adjustments have on Consumers
consolidated financial statements for the quarterly periods ended September 30,
2002 and 2001:
CONSOLIDATED STATEMENTShedges.
5: IMPLEMENTATION OF INCOME (UNAUDITED) IN MILLIONS
- -------------------------------------------------------------------------------------------------------------------------
Three Months Ended Three Months Ended
------------------ ------------------
2002 2001
---- ----
September 30 As Reported As Restated As Reported As Restated
- -------------------------------------------------------------------------------------------------------------------------
OPERATING REVENUES
Electric $776 $775 $739 $739
Gas 134 135 149 150
Total Operating Revenue 921 921 899 900
OPERATING EXPENSES
Loss on MCV power purchases - - 126 -
Other 183 182 154 151
Total Operating Expenses 752 751 952 823
PRETAX OPERATING INCOME (LOSS)
Electric 175 175 (62) 69
Gas (15) (14) (1) (1)
Other 9 9 10 9
Total Pretax Operating Income (Loss) 169 170 (53) 77
OTHER INCOME (DEDUCTIONS)
Accretion expense (2) (1) (2) (2)
Other, net 2 1 - -
INCOME (LOSS) BEFORE INCOME TAXES 126 127 (101) 29
INCOME TAXES (BENEFITS) 71 42 (39) 6
NET INCOME (LOSS) 55 85 (62) 23
NET INCOME (LOSS) AVAILABLE TO COMMON STOCKHOLDER $44 $74 $(74) $11
- -------------------------------------------------------------------------------------------------------------------------
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Consumers Energy Company
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) IN MILLIONS
- ------------------------------------------------------------------------------------------------------------------------
Nine Months Ended Nine Months Ended
------------------ ------------------
2002 2001
---- ----
September 30 As Reported As Restated As Reported As Restated
- ------------------------------------------------------------------------------------------------------------------------
OPERATING REVENUE
Electric $2,016 $2,015 $2,028 $2,028
Total Operating Revenue 3,084 3,083 2,992 2,992
OPERATING EXPENSES
Loss on MCV power purchases - - 126 -
Other 488 487 456 445
Total Operating Expenses 2,549 2,548 2,724 2,587
PRETAX OPERATING INCOME
Electric 406 406 157 294
Gas 68 68 81 80
Other 61 61 30 31
Total Pretax Operating Income 535 535 268 405
OTHER INCOME (DEDUCTIONS)
Accretion expense (7) (4) (6) (8)
Other, net 39 37 2 2
Total Other Income 34 35 2 -
INCOME BEFORE INCOME TAXES 450 451 129 264
INCOME TAXES 179 150 41 88
NET INCOME 271 301 88 176
NET INCOME AVAILABLE TO COMMON STOCKHOLDER $237 $267 $57 $145
- ------------------------------------------------------------------------------------------------------------------------
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Consumers Energy Company
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) IN MILLIONS
- -------------------------------------------------------------------------------------------------------------------------
Nine Months Ended Nine Months Ended
------------------ ------------------
2002 2001
---- ----
September 30 As Reported As Restated As Reported As Restated
- -------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $271 $301 $88 $176
Loss on power purchase agreement - MCV Partnership - - 126 -
Deferred income taxes and investment tax credit (20) (18) 1 58
Undistributed earnings of related parties (48) (48) (25) (10)
Decrease in accounts receivable and accrued revenue 97 98 251 257
Increase (decrease) in accounts payable (72) (79) 15 12
Changes in other assets and liabilities - (26) (53) (90)
CASH AND TEMPORARY CASH INVESTMENTS - BEGINNING OF 16 17 21 21
PERIOD
CASH AND TEMPORARY CASH INVESTMENTS - END OF PERIOD $124 $125 $24 $24
OTHER CASH FLOW ACTIVITIES AND NON-CASH INVESTING AND FINANCING
ACTIVITIES:
Cash transactions
Income taxes paid (net of refunds) 87 83 - -
NON-CASH TRANSACTIONS
Other assets placed under capital lease $65 $50 $15 $23
- -------------------------------------------------------------------------------------------------------------------------
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Consumers Energy Company
CONSOLIDATED BALANCE SHEETS
- -------------------------------------------------------------------------------------------------------------------------
September 30, 2002 December 31, 2001 September 30, 2001
------------------ ----------------- ------------------
(Unaudited) (Unaudited)
- -------------------------------------------------------------------------------------------------------------------------
In Millions As Reported As Restated As Reported As Restated As Reported As Restated
- -------------------------------------------------------------------------------------------------------------------------
ASSETS
PLANT
Other $66 $22 $23 $23 $16 $16
Gross Plant 10,262 10,218 10,277 10,277 10,095 10,095
Less accumulated depreciation,
depletion and amortization 5,855 5,856 5,934 5,934 5,873 5,873
Plant, net 4,407 4,362 4,343 4,343 4,222 4,222
Construction work-in-progress 419 463 464 480 416 424
Total Plant 4,826 4,825 4,807 4,823 4,638 4,646
CURRENT ASSETS
Cash and temporary
cash investments 124 125 16 17 24 24
Accounts receivable and accrued
revenue 36 36 125 125 22 21
Accounts receivable -
related parties 18 18 17 18 13 14
Inventories at average cost
Materials and supplies 71 71 69 69 70 72
Generating plant fuel stock 49 49 52 52 50 49
Deferred property taxes 82 82 144 144 86 84
Other 27 27 14 14 12 13
Total Current Assets 1,027 1,028 1,025 1,027 899 899
NON-CURRENT ASSETS
Regulatory Assets - Other 173 173 167 167 89 169
Other 116 108 176 173 265 182
Total Non-current Assets 1,720 1,712 1,862 1,859 1,858 1,855
TOTAL ASSETS $8,214 $8,206 $8,306 $8,321 $7,994 $7,999
- -------------------------------------------------------------------------------------------------------------------------
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Consumers Energy Company
CONSOLIDATED BALANCE SHEETS
- -------------------------------------------------------------------------------------------------------------------------
September 30, 2002 December 31, 2001 September 30, 2001
------------------ ----------------- ------------------
(Unaudited) (Unaudited)
- -------------------------------------------------------------------------------------------------------------------------
In Millions As Reported As Restated As Reported As Restated As Reported As Restated
- -------------------------------------------------------------------------------------------------------------------------
STOCKHOLDER'S INVESTMENT AND
LIABILITIES
CAPITALIZATION
Common stockholder's equity
Retained earnings since
December 31, 1992 $456 $525 $373 $441 $373 $441
Total common stockholder's
equity 1,971 2,040 1,850 1,918 2,006 2,074
Non-current portion of
capital leases 110 110 56 72 53 61
Total Capitalization 5,316 5,385 4,942 5,026 5,075 5,151
CURRENT LIABILITIES
Note payable 235 235 416 416 155 153
Accounts payable 213 212 291 282 258 247
Accrued taxes 192 162 219 214 115 115
Accounts payable - related parties 83 85 80 96 78 90
Notes payable - related parties - - - - - 2
Current portion of purchase power
contracts - 22 - 24 - 22
Deferred income taxes 17 18 12 12 17 14
Other 239 253 260 247 319 306
Total Current Liabilities 1,203 1,211 1,535 1,548 1,193 1,200
NON-CURRENT LIABILITIES
Deferred income taxes 714 752 747 784 668 707
Postretirement benefits 227 224 279 276 294 292
Power purchase agreement -
MCV Partnership 150 30 169 52 175 61
Other 230 230 256 257 215 214
Total Non-current Liabilities
1,695 1,610 1,829 1,747 1,726 1,648
TOTAL STOCKHOLDER'S INVESTMENT AND
LIABILITIES $8,214 $8,206 $8,306 $8,321 $7,994 $7,999
- -------------------------------------------------------------------------------------------------------------------------
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Consumers Energy Company
CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDER'S EQUITY (UNAUDITED) IN MILLIONS
- ------------------------------------------------------------------------------------------------------------------------
Three Months Ended 2002 Three Months Ended 2001
----------------------- -----------------------
September 30 As Reported As Restated As Reported As Restated
- ------------------------------------------------------------------------------------------------------------------------
OTHER COMPREHENSIVE INCOME
Investments
At beginning of period $(2) $(5) $26 $26
Unrealized loss on investments (7) (4) (15) (15)
RETAINED EARNINGS
At beginning of period 412 480 541 524
Net income (loss) 55 85 (62) 23
Cash dividends declared- Common Stock - (29) (94) (94)
At end of period 456 525 373 441
Total Common Stockholder's Equity $1,971 $2,040 $2,006 $2,074
- ------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDER'S EQUITY (UNAUDITED) IN MILLIONS
- ------------------------------------------------------------------------------------------------------------------------
Nine Months Ended 2002 Nine Months Ended 2001
---------------------- ----------------------
September 30 As Reported As Restated As Reported As Restated
- ------------------------------------------------------------------------------------------------------------------------
RETAINED EARNINGS
At beginning of period $373 $441 $506 $486
Net income 271 301 88 176
Cash dividends declared- Common Stock (154) (183) (190) (190)
At end of period 456 525 373 441
Total Common Stockholder's Equity $1,971 $2,040 $2,006 $2,074
- ------------------------------------------------------------------------------------------------------------------------
In addition, as a result of Consumers reclassifying its headquarters' lease from
an operating lease to a capital lease the following table illustrates the amount
of capital leases included in Consumers' restated balance sheet plant accounts:
In Millions
- ----------------------------------------------------------------------------------------------------------------
September 30 December 31 September 30
2002 2001 2001
(Unaudited) (Unaudited)
Capital leases As Restated As Restated As Restated
- ----------------------------------------------------------------------------------------------------------------
Electric $ 101 $ 93 $ 90
Gas 42 39 39
Other 75 46 39
---- ---- ----
218 178 168
Less accumulated amortization 96 93 95
---- ---- ----
Net capital lease $ 122 $ 85 $ 73
================================================================================================================
5: SUBSEQUENT EVENTS
Subsequent to November 14, 2002, the date of filing Consumers' Form 10-Q for the
third quarter 2002, a number of material events have occurred. Below is a
summary of these events:
CHANGE IN EXECUTIVE OFFICERS: Subsequent to March 1, 2002, certain changes have
occurred in Consumers' executive officers. On May 24, 2002, the Board of
Directors of Consumers elected Kenneth Whipple as Chairman of the Board and
Chief Executive Officer; on June 27, 2002, S. Kinnie Smith, Jr. was elected Vice
Chairman of the Board; on July 22, 2002, Thomas J. Webb was elected Executive
Vice President and Chief
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Consumers Energy Company
Financial Officer; on August 2, 2002, John F. Drake was elected Senior Vice
President and on December 6, 2002, Michael T. Monahan and Joseph F. Paquette,
Jr. joined the Board of Directors of Consumers. NEW ACCOUNTING STANDARDS
SFAS NO. 143, ACCOUNTING FOR ASSET RETIREMENT OBLIGATIONS: Beginning January 1,
2003, companies must comply with SFAS No. 143. The standard requires companies
to record the fair value of the legal obligations related to an asset retirement
in the period in which it is incurred. When the liability is initially recorded,
the company would capitalize an offsetting amount by increasing the carrying
amount of the related long-lived asset. Over time, the initial liability is
accreted to its present value each period and the capitalized cost is
depreciated over the related asset's useful life. Consumers has determined that it has some
legal asset retirement obligations, particularly in regard to its nuclear
plants, but has notplants.
Prior to adoption of SFAS No. 143, Consumers classified the removal cost
liability of assets included in the scope of SFAS No. 143 as yet finalized its assessmentpart of the obligation.
Once Consumers' assessment is finalized, itsreserve
for accumulated depreciation. For these assets, the removal cost estimate will be
determined based on fair value cost estimatesof $448 million
which was classified as part of the reserve at December 31, 2002, was
reclassified in January 2003, in part, as 1) a $364 million ARO liability, 2) a
$136 million regulatory liability, 3) a $45 million regulatory asset, and 4) a
$7 million net increase to property, plant, and equipment, as prescribed by SFAS
CE-50
Consumers Energy Company
No. 143. As required by the new standard.SFAS No. 71 for regulated entities, Consumers is
reflecting a regulatory asset and liability instead of a cumulative effect of a
change in accounting principle.
The fair value of ARO liabilities has been calculated using an expected present
value technique. This technique reflects assumptions, such as costs, inflation,
and profit margin that third parties would consider in order to take on the
legalsettlement of the obligation. Fair value, to the extent possible, should include
a market risk premium for unforeseeable circumstances. No market risk premium
was included in Consumers' ARO fair value estimate since a reasonable estimate
could not be made. If a five percent market risk premium was assumed, Consumers'
ARO liability would be $381 million.
If a reasonable estimate of fair value cannot be made in the period the asset
retirement obligations willobligation is incurred, such as assets with an indeterminate life,
the liability is to be present valuedrecognized when a reasonable estimate of fair value can
be made. Generally, transmission and used to quantify the effectsdistribution assets have an indeterminate
life, retirement cash flows cannot be determined and there is a low probability
of adoption of this standard.
SFAS NO. 145, RESCISSION OF FASB STATEMENTS NO. 4, 44 AND 64, AMENDMENT OF FASB
STATEMENT NO. 13, AND TECHNICAL CORRECTIONS: Issued by the FASB in April 2002,
this standard rescinds SFAS No. 4, Reporting Gains and Losses from
Extinguishment of Debt, and SFAS No. 64, Extinguishment of Debt Made to Satisfy
Sinking-Fund Requirements. As a result, any gain or loss on extinguishment of
debt should be classified as an extraordinary item only if it meets the criteria
set forth in APB Opinion No. 30. The provisions of this section are applicable
to fiscal years beginning 2003. SFAS No. 145 amends SFAS No. 13, Accountingretirement date, therefore no liability has been recorded for Leases, to require sale-leaseback accountingthese assets.
No liability has been recorded for certain lease modificationsassets that have similar economic impacts to sale-leaseback transactions. This
provision is effective for transactions occurring after May 15, 2002. Finally,
SFAS No. 145 amends other existing authoritative pronouncements to make various
technical corrections and rescinds SFAS No. 44, Accounting for Intangible Assets
of Motor Carriers. These provisions are effective for financial statements
issued on or after May 15, 2002. Upon adoptionan immaterial cumulative
disposal cost, such as substation batteries. The initial measurement of the standard, there was no
impactARO
liability for Consumers' Palisades Nuclear Plant and Big Rock Nuclear Plant is
based on Consumers' financial statements.decommissioning studies, which are based largely on third party cost
estimates.
The following table is a general description of the AROs and their associated
long-lived assets.
March 31, 2003 In Millions
- -------------------------------------------------------------------------------------------------------------------
In Service Trust
ARO Description Date Long Lived Assets Fund
- -------------------------------------------------------------------------------------------------------------------
Palisades - decommission plant site 1972 Palisades nuclear plant $ 426
Big Rock - decommission plant site 1962 Big Rock nuclear plant 103
JHCampbell intake/discharge water line 1980 Plant intake/discharge water line -
Closure of coal ash disposal areas Various Generating plants coal ash areas -
Closure of wells at gas storage fields Various Gas storage fields -
Indoor gas services equipment relocations Various Gas meters located inside structures -
====================================================================================================================
The following table is a reconciliation of the carrying amount of the AROs.
March 31, 2003 In Millions
- -------------------------------------------------------------------------------------------------------------------
Pro Forma ARO Liability ARO
ARO liability ---------------------------- Cash flow liability
ARO 1/1/02 1/1/03 Incurred Settled Accretion Revisions 3/31/03
- ------------------------------- --------- ----------------------------------------------------------------------
Palisades - decommission $232 $249 $ - $ - $4 $ - $253
Big Rock - decommission 94 61 - (7) 3 - 57
JHCampbell intake line - - - - - - -
Coal ash disposal areas 46 51 - - 1 - 52
Wells at gas storage fields 2 2 - - - - 2
Indoor gas services relocations 1 1 - - - - 1
--------- ----------------------------------------------------------------------
Total $375 $364 $ - $(7) $8 $ - $365
===================================================================================================================
SFAS NO. 146, ACCOUNTING FOR COSTS ASSOCIATED WITH EXIT OR DISPOSAL ACTIVITIES:
Issued by the FASB in July 2002, this standard requires companies to recognize
costs associated with exit or disposal activities when they are incurred rather
than at the date of a commitment to an exit or disposal plan. This standard is
effective for exit or disposal activities initiated after December 31, 2002.
There will beUpon adoption of the standard, there was no impact on Consumers' consolidated
financial statements upon adoption of the
standard.
SFAS NO, 148, ACCOUNTING FOR STOCK-BASED COMPENSATION - TRANSITION AND
DISCLOSURE: Issued by the FASB in December 2002, this standard provides for
alternative methods of transition for a voluntary change to the fair value based
method of accounting for stock-based employee compensation. In addition, the
statement amends the disclosure requirements of SFAS No. 123 to require more
prominent and more frequent disclosures in financial statements about the
effects of stock-based compensation. The transition guidance and annual
disclosure provisions of the statement are effective as of December 31, 2002 and
interim disclosure provisions are effective for interim financial reports
starting in 2003. Consumers has decided to voluntarily adopt the fair value
based method of accounting for stock-based employee compensation effective
December 31, 2002, applying the prospective method of adoption which requires
recognition of all employee awards granted, modified, or settled after the
beginning of the year in which the recognition provisions are first applied.
Therefore, Consumers recorded expense for the fair value of stock options issued
in 2002. The implementation had an immaterial effect on Consumers' financial
statements upon adoption of the method.
FASB INTERPRETATION NO. 45, GUARANTOR'S ACCOUNTING AND DISCLOSURE REQUIREMENT
FOR GUARANTEES, INCLUDING INDIRECT GUARANTEES OF INDEBTEDNESS OF OTHERS: Issued
by the FASB in November 2002, the interpretation elaborates on existing
disclosures requirements for most guarantees, and clarifies that at the time
-82-statements.
CE-51
Consumers Energy Company
a company issues a guarantee, the company must recognize an initial liability
for the fair value, or market value, of the obligations it assumes under that
guarantee and must disclose that information in its interim and annual financial
statements. The interpretation is effective for guarantees issued or modified
after December 31, 2002. Consumers would be required to recognize a liability
for any guarantees it may issue on or after January 1, 2003, but will not change
the accounting for guarantees it may have issued before that date.
FASB INTERPRETATION NO. 46, CONSOLIDATION OF VARIABLE INTEREST ENTITIES: Issued
by the FASB in January 2003, the interpretation expands upon and strengthens
existing accounting guidance that addresses when a company should include in its
financial statements the assets, liabilities and activities of another entity.
The consolidation requirements of the interpretation apply immediately to
variable interest entities created after January 31, 2003. For Consumers, the
consolidation requirements apply to olderpre-existing entities beginning July 1,
2003. Certain of the disclosure requirements apply to all financial statements
initially issued after January 31, 2003. Consumers will be required to
consolidate any entities that meet the requirements of the interpretation. Consumers is in the process of studying the interpretation, and has yet to
determine the effects, if any, on its consolidated financial statements.
ELECTRIC CONTINGENCIES
These and other required environmental expenditures, if not recovered from
customers in Consumers rates, may have a material adverse effect upon Consumers'
financial condition and results of operations.
ELECTRIC RATE MATTERS
ELECTRIC RESTRUCTURING: The Customer Choice Act requires Consumers, Detroit
Edison and American Electric Power to jointly expand their available
transmission capability by at least 2,000 MW. In July 2002, the MPSC issued an
order approving the plan to achieve the increased transmission capacity. In
November 2002, Consumers completed the transmission capacity projects identified
in the plan and in December 2002, submitted verification of this fact to the
MPSC. Consumers believes it is in full compliance with the requirement to expand
available transmission capability.
ELECTRIC PROCEEDINGS: In December 2002, the MPSC issued an order finding that
Consumers experienced zero stranded costs in 2000 and 2001, but declined to
establish a defined methodology that would allow a reliable predictionUpon
adoption of the level of stranded costs for 2002 and future years. Instandard on January 31, 2003, Consumers
filed a petition for rehearing of the December 2002 stranded cost order in which
it asked the MPSC to grant a rehearing and revise certain features of the order.
Several other parties also filed rehearing petitions with the MPSC. The request
for regulatory asset accounting treatment for Clean Air Act expenditures remains
pending before the MPSC.
On March 4, 2003, Consumers filed an application with the MPSC seeking approval
of net stranded costs incurred in 2002, and for approval of a net stranded cost
recovery charge. In the application, Consumers indicated that if Consumers'
proposal to securitize Clean Air Act expenditures and post-2000 Palisades
expenditures were approved as proposed in its securitization case as discussed
below, then Consumers' net stranded costs incurred in 2002 are approximately $35
million. If the proposal to securitize those costs is not approved, then
Consumers indicated that the costs would be properly included in the 2002 net
stranded cost calculation, which would increase Consumers' 2002 net stranded
costs to approximately $103 million.
SECURITIZATION: On March 4, 2003, Consumers filed an application with the MPSC
seeking approval to issue additional securitization bonds in the amount of
approximately $1.084 billion. If approved, this would allow the recovery of
costs associated with Clean Air Act expenditures, post-2000 Palisades
expenditures, retail open access implementation costs, electric pension fund
costs, and expenses associated with the issuance of the bonds and retirement of
existing Consumers' debt. Consumers will use the proceeds from securitization
for refinancing or retirement of debt.
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Consumers Energy Company
NUCLEAR MATTERS: As of February 2003, Big Rock completed five of the seven dry
fuel storage canister loadings. The Price-Anderson Act expired in August 2002
but remained in effect for existing nuclear facilities. In February 2003,
Congress approved the extension of the Price-Anderson Act to expire on December
31, 2003.
OTHER ELECTRIC UNCERTAINTIES
CAPITAL EXPENDITURES: In 2002, 2003, and 2004, Consumers estimates electric
capital expenditures, including new lease commitments and environmental costs
under the Clean Air Act, of $436 million, $341 million, and $408 million.
GAS RATE MATTERS
GAS RATE CASE: On November 7, 2002, the MPSC issued a final order approving a
$56 million annual gas distribution service rate increase, which includes the
$15 million interim increase, with an 11.4 percent authorized return on equity,
effective for service November 8, 2002. As part of this order, the MPSC approved
Consumers' proposal to absorb the assets and liabilities of Michigan Gas Storage
Company into Consumers' rate base and rates. This has occurred through a
statutory merger of Michigan Gas Storage Company into Consumers and this is not
expected to have anthere was no impact on Consumers'
consolidated financial statements.
Onstatements, and Consumers does not anticipate any
additional impact to its consolidated financial statements upon adoption of
additional standard requirements on July 1, 2003.
6. RESTATEMENT
In March 14, 2003, ConsumersConsumers' Board of Directors declared a $31 million common
dividend to CMS Energy, payable in May 2003. Consumers' Consolidated Balance
Sheets and Consolidated Statements of Common Stockholder's Equity filed an application within Form
10-Q for the MPSC seeking an
increase in its gas delivery and transportation rates based on a 2004 test year.
If approved, the request would add about $6.40 per month, or about 9 percent, to
the typical residential customers' average monthly distribution bill. Consumers
is seeking a 13.5 percent authorized return on equity along with a $156 million
revenue deficiency. Contemporaneously withquarterly period ended March 31, 2003 did not reflect this
filing,dividend declaration. Therefore, Consumers has requested
interim rate relief in the same amount.
OTHER GAS UNCERTAINTIES
CAPITAL EXPENDITURES: In 2002, 2003, and 2004, Consumers estimates gas capital
expenditures, including new lease commitments, of $181 million, $144 million,
and $167 million.
OTHER UNCERTAINTIES
PENSION: The recent significant downturn in the equities markets has affected
the value of the Pension Plan's assets. The estimated fair value of the Pension
Plan's assets at December 31, 2002 was $607 million. The Accumulated Benefit
Obligation was estimated at $1.055 billion. The Pension Plan's Accumulated
Benefit Obligation exceeded the value of these assets at December 31, 2002, and
as a result, Consumers and the other participants of the plan were required to
recognize an additional minimum liability for this excess in accordance with
SFAS No. 87. As of December 31, 2002, the additional minimum liability allocated
to Consumers was $325 million, of which $40 million was recorded as an
intangible asset, and $285 million was charged to other comprehensive income
($185 million after-tax).
PENSION AND OPEB PLAN ASSETS: As of December 31, 2001, the balance of Pension
Plan and OPEB plan assets was $845 million and $475 million, respectively. These
amounts consisted primarily of stocks and bonds, including CMS Energy Common
Stock of $126 million in the Pension Plan's assets and $3 million in the OPEB
plan's assets at December 31, 2001. As of Januaryrestated its March 31, 2003
Consolidated Balance Sheets and Consolidated Statements of Common Stockholder's
Equity to reflect this dividend declaration.
The financial statement items affected by the market valuereflection of CMS Energy Common Stock in these plans was $30 million in the Pension Plan and
$1 million in the OPEB plan.
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Consumers Energy Company
SHORT-TERM FINANCINGS AND CAPITALIZATION
RESTATEMENT: As a result of the restatement, ratings downgrades and related
changes in its financial situation, Consumers' access to bank financing and the
capital markets and its ability to incur additional indebtedness may be
restricted. In the event Consumers is unable to access bank financing or the
capital markets to incur or refinance indebtedness, there could be a material
adverse effect on Consumers' liquidity and operations. In such event, it would
be required to consider the full range of strategic measures available to
companies in similar circumstances.
FINANCING: In October 2002, Consumers simultaneously entered into a new term
loan agreement collateralized by first mortgage bonds and a new gas inventory
term loan agreement collateralized by Consumers' natural gas in storage. These
agreements contain complementary collateral packages that provide Consumers, as
additional first mortgage bonds become available, borrowing capacity of up to
$225 million. Consumers drew $220 million of the capacity upon execution of the
agreements. In November 2002, Consumers paid $80 million on the gas inventory
loan and drew $85 million under the term loan agreement. The bank and legal fees
associated with the agreements was $2 million. The first amortization payment
under these agreements occurred in December 2002 with monthly amortization
payments scheduled until full repayment is completed in mid-April of 2003. This
financing eliminated the need for Consumers to access the capital markets for
the remainder of 2002.
OTHER: Under the provisions of its Articles of Incorporation, Consumers had $345
million of unrestricted retained earnings available to pay common dividends at
September 30, 2002. However, due tothis dividend
restrictions included as part of an
agreement with its lenders, Consumers' dividendsdeclaration are not to exceed $300 million
in any calendar year. Consumers declared and paid $233 million in common stock
dividends in 2002, including the $25 million tax sharing allocation from CMS
Energy.
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Consumers Energy Company
6: RESTATED FINANCIAL STATEMENTS FOR FIRST AND SECOND QUARTERS
CONSUMERS ENERGY COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(AS RESTATED, SEE NOTE 4)shown below:
THREE MONTHS ENDED
MARCHCONSOLIDATED BALANCE SHEETS
- ------------------------------------------------------------------------------------------------------------------------
March 31, 2003 December 31, 2002 2001March 31, 2002
(Unaudited) (Unaudited)
- ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
In Millions
OPERATING REVENUE
Electric $ 609 $ 665
Gas 616 540
Other 11 14
--------------------
1,236 1,219As Reported As Restated As Reported As Restated As Reported As Restated
- ----------------------------------------------------------------------------------------------------------------
OPERATING EXPENSES
Operation
Fuel for electric generation 67 71
Purchased power - related parties 141 118
Purchased and interchange power 61 112
Cost of gas sold 396 318
Cost of gas sold - related parties 30 31
Other 139 139
--------------------
834 789
Maintenance 50 55
Depreciation, depletion and amortization 107 104
General taxes 57 55
--------------------
1,048 1,003
- ----------------------------------------------------------------------------------------------------------------
PRETAX OPERATING INCOME
Electric 115 139
Gas 64 64
Other 9 13
--------------------
188 216
- ----------------------------------------------------------------------------------------------------------------
OTHER INCOME (DEDUCTIONS)
Dividends and interest from affiliates 1 2
Accretion expense (2) (2)
Other, net (1) 1
--------------------
(2) 1
- ----------------------------------------------------------------------------------------------------------------
INTEREST CHARGES
Interest on long-term debt 33 38
Other interest 9 10
Capitalized interest (2) (1)
---------------------
40 47
- ----------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 146 170
INCOME TAXES 54 62
--------------------
NET INCOME 92 108
PREFERRED STOCK DIVIDENDS - -
PREFERRED SECURITIES DISTRIBUTIONS 11 9
--------------------
NET INCOME AVAILABLE TO COMMON STOCKHOLDER $ 81 $ 99
================================================================================================================
THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
-86-
Consumers Energy Company
CONSUMERS ENERGY COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(AS RESTATED, SEE NOTE 4)
THREE MONTHS ENDED
MARCH 31 2002 2001
- ----------------------------------------------------------------------------------------------------------------
In Millions
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 92 $ 108
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation, depletion and amortization (includes nuclear
decommissioning of $2 and $2, respectively) 107 104
Deferred income taxes and investment tax credit 31 12
Capital lease and other amortization 3 8
Undistributed earnings of related parties (10) (13)
Changes in assets and liabilities
Decrease (increase) in accounts receivable and accrued revenue (54) 230
Increase (decrease) in accounts payable (32) (11)
Decrease (increase) in inventories 193 123
Regulatory obligation - gas customer choice (7) (16)
Changes in other assets and liabilities (53) (66)
---------------------
Net cash provided by operating activities 270 479
- ----------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (excludes assets placed under capital lease) (142) (183)
Cost to retire property, net (15) (26)
Investment in Electric Restructuring Implementation Plan (3) (3)
Investments in nuclear decommissioning trust funds (2) (2)
Proceeds from nuclear decommissioning trust funds 8 10
---------------------
Net cash used in investing activities (154) (204)
- ----------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Retirement of bonds and other long-term debt (344) --
Increase (decrease) in notes payable, net (109) (203)
Payment of common stock dividends (55) (66)
Redemption of preferred securities (30) --
Preferred securities distributions (11) (9)
Payment of capital lease obligations (3) (8)
Payment of preferred stock dividends (1) --
Stockholder's contribution 150 --
Proceeds from senior notes and bank loans 298 --
---------------------
Net cash used in financing activities (105) (286)
- ----------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND TEMPORARY CASH INVESTMENTS 11 (11)
CASH AND TEMPORARY CASH INVESTMENTS, BEGINNING OF PERIOD 17 21
---------------------
CASH AND TEMPORARY CASH INVESTMENTS, END OF PERIOD $ 28 $ 10
================================================================================================================
OTHER CASH FLOW ACTIVITIES AND NON-CASH INVESTING AND FINANCING ACTIVITIES WERE:
CASH TRANSACTIONS
Interest paid (net of amounts capitalized) $ 31 $ 47
Income taxes paid (net of refunds) -- --
NON-CASH TRANSACTIONS
Nuclear fuel placed under capital lease $ -- $ 2
Other assets placed under capital leases 17 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.
-87-
Consumers Energy Company
CONSUMERS ENERGY COMPANY
CONSOLIDATED BALANCE SHEETS
(AS RESTATED, SEE NOTE 4)
ASSETS MARCH 31 MARCH 31
2002 DECEMBER 31 2001
(UNAUDITED) 2001 (UNAUDITED)
- ---------------------------------------------------------------------------------------------------------------
In Millions------------------------------------------------------------------------------------------------------------------------
PLANT (AT ORIGINAL COST)
Electric $ 7,733 $ 7,661 $ 7,298
Gas 2,625 2,593 2,524
Other 21 23 21
---------------------------------------
10,379 10,277 9,843
Less accumulated depreciation, depletion and amortization 6,022 5,934 5,802
---------------------------------------
4,357 4,343 4,041
Construction work-in-progress 532 480 390
---------------------------------------
4,889 4,823 4,431
- ----------------------------------------------------------------------------------------------------------------
INVESTMENTS
Stock of affiliates 56 59 80
First Midland Limited Partnership 257 253 248
Midland Cogeneration Venture Limited Partnership 316 300 302
---------------------------------------
629 612 630
- ----------------------------------------------------------------------------------------------------------------
CURRENT ASSETS
Cash and temporary cash investments at cost, which approximates market 28 17 10
Accounts receivable and accrued revenue, less allowances
of $4, $4 and $3, respectively 183 125 43
Accounts receivable - related parties 15 18 68
Inventories at average cost
Gas in underground storage 378 569 143
Materials and supplies 69 69 67
Generating plant fuel stock 50 52 50
Deferred property taxes 120 144 113
Regulatory assets 19 19 19
Other 18 14 24
---------------------------------------
880 1,027 537
- ----------------------------------------------------------------------------------------------------------------
NON-CURRENT ASSETS
Regulatory assets
Securitization costs 714 717 709
Postretirement benefits 203 209 226
Abandoned Midland Project 11 12 15
Other 171 167 162
Nuclear decommissioning trust funds 576 581 585
Other 154 173 217
---------------------------------------
1,829 1,859 1,914
- ----------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 8,227 $ 8,321 $ 7,512
================================================================================================================
-88-
Consumers Energy Company
(AS RESTATED, SEE NOTE 4)
STOCKHOLDERS'
STOCKHOLDER'S
INVESTMENT AND
LIABILITIES
MARCH 31 MARCH 31
2002 DECEMBER 31 2001
(UNAUDITED) 2001 (UNAUDITED)
- ---------------------------------------------------------------------------------------------------------------
In Millions
CAPITALIZATION
Common stockholder's equity
Common stock $ 841 $ 841 $ 841
Paid-in capital 782 632 646
Other comprehensive income 9 4 29
Retained earnings since
December 31, 1992 $ 566 $ 535 $ 545 $ 545 $ 467 441 519
---------------------------------------$ 467
Total common stockholder's
equity 1,914 1,883 1,889 1,889 2,099 1,918 2,035
Preferred stock 44 44 44
Company-obligated mandatorily redeemable preferred securities
of subsidiaries (a) 490 520 395
Long-term debt 2,433 2,472 2,097
Non-current portion of capital leases 85 72 51
----------------------------------------2,099
Total Capitalization 5,293 5,262 4,981 4,981 5,151 5,026 4,622
- ----------------------------------------------------------------------------------------------------------------5,151
CURRENT LIABILITIES
Other 167 198 200 200 234 234
Total Current portion of long-term debt and capital leases 253 257 243
Notes payable 150 416 170
Notes payable- CMS Energy 157 - 30
Accounts payable 249 282 236
Accrued taxes 161 214 216
Accounts payable - related parties 97 96 77
Deferred income taxes 23 12 -
Current portion of purchased power contracts 24 24 22
Other 234 247 221
---------------------------------------Liabilities 1,265 1,296 1,585 1,585 1,348 1,548 1,215
- ----------------------------------------------------------------------------------------------------------------
NON-CURRENT LIABILITIES
Deferred income taxes 808 784 701
Postretirement benefits 239 276 351
Regulatory liabilities for income taxes, net 276 276 260
Power purchase agreement - MCV Partnership 47 52 72
Deferred investment tax credit 100 102 107
Other 258 257 184
---------------------------------------
1,728 1,747 1,675
- ----------------------------------------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES (Notes 1 and 2)
TOTAL STOCKHOLDERS' INVESTMENT AND LIABILITIES $8,227 $8,321 $7,512
================================================================================================================1,348
(a) See Note 3, Short-Term Financings and Capitalization
THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE BALANCE SHEETS.
-89-
Consumers Energy Company
CONSUMERS ENERGY COMPANY
CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDER'S EQUITY
(UNAUDITED)
(AS RESTATED, SEE NOTE 4)
THREE MONTHS ENDED
MARCH 31 2002 2001
- -------------------------------------------------------------------------------------------------------------------------------
In Millions
COMMON STOCK
At beginning and end of period (a) $ 841 $ 841
- -------------------------------------------------------------------------------------------------------------------------------
OTHER PAID-IN CAPITAL
At beginning of period 632 646
Stockholder's contribution 150 --
--------------------------
At end of period 782 646
- -------------------------------------------------------------------------------------------------------------------------------
OTHER COMPREHENSIVE INCOME
Investments
At beginning of period 16 33
Unrealized loss on investments (b) (3) (5)
--------------------------
At end of period 13 28
--------------------------
Derivative Instruments
At beginning of period (c) (12) 21
Unrealized gain (loss) on derivative instruments (b) 5 (13)
Reclassification adjustments included in net income (b) 3 (7)
--------------------------
At end of period (4) 1
- -------------------------------------------------------------------------------------------------------------------------------
RETAINED EARNINGS
At beginning of period 441 486
Net income (b) 92 108
Cash dividends declared- Common Stock (55) (66)
Cash dividends declared- Preferred Stock -- --
Preferred securities distributions (11) (10)
--------------------------
At end of period 467 518
- -------------------------------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCKHOLDER'S EQUITY $ 2,099 $ 2,035
===============================================================================================================================
(a) Number of shares of common stock outstanding was 84,108,789 for all periods presented.
(b) Disclosure of Comprehensive Income:
Other comprehensive income
Investments
Unrealized loss on investments, net of tax of
$2 and $3, respectively $ (3) $ (5)
Derivative Instruments
Unrealized gain (loss) on derivative instruments,
net of tax of $(3) and $7, respectively 5 (13)
Reclassification adjustments included in net income,
net of tax of $(1) and $4, respectively 3 (7)
Net income 92 108
--------------------------
Total Comprehensive Income $ 97 $ 83
==========================
(c)(UNAUDITED) IN MILLIONS
- ----------------------------------------------------------------------------------------------------------
Three Months Ended 2001 is the cumulative effect of change in accounting
principle, net of $(11) tax (Note 1)
THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
-90-
Consumers Energy Company
CONSUMERS ENERGY COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(AS RESTATED, SEE NOTE 4)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 302003 Three Months Ended 2002
2001 2002 2001March 31 As Reported As Restated As Reported As Restated
- ----------------------------------------------------------------------------------------------------------------
In Millions----------------------------------------------------------------------------------------------------------
OPERATING REVENUE
ElectricRETAINED EARNINGS
Cash dividends declared-Common Stock $ 631(78) $ 624 $1,240 $1,289
Gas 252 239 868 779
Other 44 10 55 25
------------------------------------------------
927 873 2,163 2,093
- ----------------------------------------------------------------------------------------------------------------
OPERATING EXPENSES
Operation
Fuel for electric generation 71 77 138 148
Purchased power - related parties 133 126 273 244
Purchased and interchange power 72 102 133 214
Cost of gas sold 113 112 508 430
Cost of gas sold - related parties 31 29 62 60
Other 166 155 306 294
------------------------------------------------
586 601 1,420 1,390
Maintenance 48 50 98 106
Depreciation, depletion and amortization 71 67 179 171
General taxes 44 43 101 98
------------------------------------------------
749 761 1,798 1,765
- ----------------------------------------------------------------------------------------------------------------
PRETAX OPERATING INCOME (LOSS)
Electric 116 87 231 226
Gas 19 17 82 81
Other 43 8 52 21
------------------------------------------------
178 112 365 328
- ----------------------------------------------------------------------------------------------------------------
OTHER INCOME (DEDUCTIONS)
Dividends and interest from affiliates 1 2 2 4
Accretion expense (1) (2) (3) (5)
Other, net 36 1 36 1
------------------------------------------------
36 1 35 -
- ----------------------------------------------------------------------------------------------------------------
INTEREST CHARGES
Interest on long-term debt 37 37 70 76
Other interest 2 12 11 20
Capitalized interest (3) (2) (5) (4)
------------------------------------------------
36 47 76 92
- ----------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 178 66 324 236
INCOME TAXES 54 21 108 83
------------------------------------------------
NET INCOME 124 45 216 153
PREFERRED STOCK DIVIDENDS - 1 1 1
PREFERRED SECURITIES DISTRIBUTIONS 11 9 22 18
------------------------------------------------
NET INCOME AVAILABLE TO COMMON STOCKHOLDER(109) $ 113(55) $ 35 $ 193 $ 134
================================================================================================================
THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
-91-
Consumers Energy Company
CONSUMERS ENERGY COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(AS RESTATED, SEE NOTE 4)
SIX MONTHS ENDED
JUNE 30 2002 2001
- ----------------------------------------------------------------------------------------------------------------
In Millions
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 216 $ 153
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation, depletion and amortization (includes nuclear
decommissioning of $3 and $3, respectively) 179 171
Gain on sale of METC and other assets (38) --
Deferred income taxes and investment tax credit (19) 35
Capital lease and other amortization 8 14
Undistributed earnings of related parties (53) (22)
Changes in assets and liabilities
Decrease (increase) in inventories 128 (95)
Decrease (increase) in accounts receivable and accrued revenue 61 205
Increase (decrease) in accounts payable (69) 23
Regulatory obligation - gas customer choice (6) (16)
Changes in other assets and liabilities 28 (89)
---------------------
Net cash provided by operating activities 435 379
- ---------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (excludes assets placed under capital lease) (273) (345)
Cost to retire property, net (31) (55)
Investment in Electric Restructuring Implementation Plan (5) (6)
Investments in nuclear decommissioning trust funds (3) (3)
Proceeds from nuclear decommissioning trust funds 12 14
Proceeds from sale of METC and other assets 293 --
---------------------
Net cash used in investing activities (7) (395)
- ---------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Retirement of bonds and other long-term debt (372) (1)
Increase (decrease) in notes payable, net (161) 17
Payment of common stock dividends (154) (96)
Redemption of preferred securities (30) --
Preferred securities distributions (22) (18)
Payment of capital lease obligations (7) (13)
Payment of preferred stock dividends (1) (1)
Proceeds from preferred securities -- 121
Stockholder's contribution, net 50 --
Proceeds from senior notes and bank loans 304 --
---------------------
Net cash (used in)/provided by financing activities (393) 9
- ---------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND TEMPORARY CASH INVESTMENTS 35 (7)
CASH AND TEMPORARY CASH INVESTMENTS, BEGINNING OF PERIOD 17 21
---------------------
CASH AND TEMPORARY CASH INVESTMENTS, END OF PERIOD $ 52 $ 14
===============================================================================================================
OTHER CASH FLOW ACTIVITIES AND NON-CASH INVESTING AND FINANCING ACTIVITIES WERE:
CASH TRANSACTIONS
Interest paid (net of amounts capitalized) $ 47 $ 76
Income taxes paid (net of refunds) 52 36
Pension and OPEB cash contribution 83 72
NON-CASH TRANSACTIONS
Nuclear fuel placed under capital lease $ -- $ 12
Other assets placed under capital leases 35 14
===============================================================================================================
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.
-92-
Consumers Energy Company
CONSUMERS ENERGY COMPANY
CONSOLIDATED BALANCE SHEETS
(AS RESTATED, SEE NOTE 4)
ASSETS JUNE 30 JUNE 30
2002 DECEMBER 31 2001
(UNAUDITED) 2001 (UNAUDITED)
- ---------------------------------------------------------------------------------------------------------------------
In Millions
PLANT (AT ORIGINAL COST)
Electric $ 7,396 $ 7,661 $ 7,482
Gas 2,651 2,593 2,539
Other 21 23 17
-------------------------------------
10,068 10,277 10,038
Less accumulated depreciation, depletion and amortization 5,822 5,934 5,847
-------------------------------------
4,246 4,343 4,191
Construction work-in-progress 477 480 347
-------------------------------------
4,723 4,823 4,538
- ---------------------------------------------------------------------------------------------------------------------
INVESTMENTS
Stock of affiliates 28 59 76
First Midland Limited Partnership 261 253 253
Midland Cogeneration Venture Limited Partnership 359 300 295
-------------------------------------
648 612 624
-------------------------------------
CURRENT ASSETS
Cash and temporary cash investments at cost, which approximates market 52 17 14
Accounts receivable and accrued revenue, less allowances
of $4, $4 and $3, respectively 76 125 74
Accounts receivable - related parties 15 18 63
Inventories at average cost
Gas in underground storage 431 569 359
Materials and supplies 67 69 71
Generating plant fuel stock 57 52 48
Deferred property taxes 99 144 101
Regulatory assets 19 19 19
Other 9 14 5
-------------------------------------
825 1,027 754
- ---------------------------------------------------------------------------------------------------------------------
NON-CURRENT ASSETS
Regulatory assets
Securitization costs 709 717 710
Postretirement benefits 197 209 220
Abandoned Midland Project 11 12 12
Other 173 167 173
Nuclear decommissioning trust funds 555 581 594
Other 137 173 230
-------------------------------------
1,782 1,859 1,939
- ---------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 7,978 $ 8,321 $ 7,855
=====================================================================================================================
-93-
Consumers Energy Company
(AS RESTATED, SEE NOTE 4)
STOCKHOLDERS' INVESTMENT AND LIABILITIES JUNE 30 JUNE 30
2002 DECEMBER 31 2001
(UNAUDITED) 2001 (UNAUDITED)
- ---------------------------------------------------------------------------------------------------------------
In Millions
CAPITALIZATION
Common stockholder's equity
Common stock $ 841 $ 841 $ 841
Paid-in capital 682 632 646
Other comprehensive income (8) 4 16
Retained earnings since December 31, 1992 480 441 524
---------------------------------------
1,995 1,918 2,027
Preferred stock 44 44 44
Company-obligated mandatorily redeemable preferred securities
of subsidiaries (a) 490 520 520
Long-term debt 2,441 2,472 2,098
Non-current portion of capital leases 97 72 55
---------------------------------------
5,067 5,026 4,744
- ----------------------------------------------------------------------------------------------------------------
CURRENT LIABILITIES
Current portion of long-term debt and capital leases 225 257 251
Notes payable 255 416 328
Notes payable- CMS Energy - - 92
Accounts payable 219 282 258
Accrued taxes 213 214 179
Accounts payable - related parties 87 96 89
Deferred income taxes 19 12 20
Current portion of purchase power contract 24 24 22
Other 247 247 248
---------------------------------------
1,289 1,548 1,487
- ----------------------------------------------------------------------------------------------------------------
NON-CURRENT LIABILITIES
Deferred income taxes 755 784 696
Postretirement benefits 230 276 304
Regulatory liabilities for income taxes, net 276 276 264
Power purchase agreement - MCV Partnership 41 52 67
Deferred investment tax credit 94 102 106
Other 226 257 187
---------------------------------------
1,622 1,747 1,624
- ----------------------------------------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES (Notes 1 and 2)
TOTAL STOCKHOLDERS' INVESTMENT AND LIABILITIES $ 7,978 $ 8,321 $ 7,855
================================================================================================================
(a) See Note 3, Short-Term Financings and Capitalization
THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE BALANCE SHEETS.
-94-
Consumers Energy Company
CONSUMERS ENERGY COMPANY
CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDER'S EQUITY
(UNAUDITED)
(AS RESTATED, SEE NOTE 4)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 2002 2001 2002 2001
- ----------------------------------------------------------------------------------------------------------------------------
In Millions
COMMON STOCK
At beginning and end of period (a) $ 841 $ 841 $ 841 $ 841
- ----------------------------------------------------------------------------------------------------------------------------
OTHER PAID-IN CAPITAL
At beginning and end of period 782 646 632 646
Stockholder's contribution -- -- 150 --
Return of Stockholder's contribution (100) -- (100) --
-------------------------------------------------------
At end of Period 682 646 682 646
- ----------------------------------------------------------------------------------------------------------------------------
OTHER COMPREHENSIVE INCOME
Investments
At beginning of period 13 28 16 33
Unrealized loss on investments (b) (18) (2) (21) (7)
-------------------------------------------------------
At end of period (5) 26 (5) 26
Derivative Instruments
At beginning of period (c) (4) 1 (12) 21
Unrealized gain (loss) on derivative instruments (b) -- (11) 5 (24)
Reclassification adjustments included in net income (b) 1 -- 4 (7)
-------------------------------------------------------
At end of period (3) (10) (3) (10)
- ----------------------------------------------------------------------------------------------------------------------------
RETAINED EARNINGS
At beginning of period566 535 467 519 441 486
Net income 124 45 216 153
Cash dividends declared-467
Total Common Stock (100) (30) (154) (96)
Cash dividends declared- Preferred Stock -- (1) (1) (1)
Preferred securities distributions (11) (9) (22) (18)
-------------------------------------------------------
At end of period 480 524 480 524
- ----------------------------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCKHOLDER'S EQUITY $ 1,995 $ 2,027 $ 1,995 $ 2,027
============================================================================================================================
(a) Number of shares of common stock outstanding was 84,108,789 for all periods presented.
(b) Disclosure of Comprehensive Income:
Other comprehensive income
Investments
Unrealized loss on investments, net of tax of
$10, $1, $12 and $4, respectively $ (18) $ (2) $ (21) $ (7)
Derivative Instruments
Unrealized gain (loss) on derivative instruments,
net of tax of $-, $6, $3 and $13, respectively -- (11) 5 (24)
Reclassification adjustments included in net income,
net of tax of $1, $-, $2 and $4, respectively 1 -- 4 (7)
Net income 124 45 216 153
-------------------------------------------------------
Total Comprehensive Income $ 107 $ 32 $ 204 $ 115
=======================================================Stockholder's Equity $1,914 $1,883 $2,099 $2,099
(c) Six Months Ended 2001 is the cumulative effect of change in accounting
principle, net of $(11) tax (Note 1)
THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
-95-CE-52
QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
CONSUMERS
Quantitative and Qualitative Disclosures about Market Risk is contained in PART
I: CONSUMERS' ENERGY COMPANY'S MANAGEMENT'S DISCUSSION AND ANALYSIS, which is
incorporated by reference herein.
CONTROLS AND PROCEDURES
DISCLOSURE AND INTERNAL CONTROLS: Consumers' CEO and CFO is responsible for
establishing and maintaining disclosure controls and procedures. Management,
under the direction of its principal executive and financial officers, have
evaluated the effectiveness of Consumers' disclosure controls and procedures as
of February 17, 2003. Based on these evaluations, Consumers' CEO and CFO has
concluded that disclosure controls and procedures are effective to ensure that
material information was presented to them and properly disclosed. There have
been no significant changes in Consumers internal controls or in factors that
could significantly affect internal controls subsequent to February 17, 2003.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The discussion below is limited to an update of developments that have occurred
in various judicial and administrative proceedings, many of which are more fully
described in Consumers' Form 10-K/A10-K for the year ended December 31, 2001.2002.
Reference is also made to the Condensed Notes to the Consolidated Financial
Statements, in particular Note 2, Uncertainties for Consumers, included herein
for additional information regarding various pending administrative and judicial
proceedings involving rate, operating, regulatory and environmental matters.
CO-1
EMPLOYMENT RETIREMENT INCOME SECURITY ACT ("ERISA") CLASS ACTION LAWSUITS:LAWSUITS
CMS Energy is a named defendant, along with Consumers, CMS MSTMS&T and certain
named and unnamed officers and directors, in two lawsuits brought as purported
class actions on behalf of participants and beneficiaries of the CMS Employee's
Savings and Incentive Plan (the "Plan"). The two cases, filed in July 2002 in
the U.S. District Court, were consolidated by the trial judge.judge, and an amended
consolidated complaint was filed. Plaintiffs allege breaches of fiduciary duties
under ERISA and seek restitution on behalf of the Plan with respect to a decline
in value of the shares of Common Stock held in the Plan. Plaintiffs also seek
other equitable relief and legal fees. These cases will be vigorously defended.
CMS Energy and Consumers cannot predict the outcome of this litigation.
SECURITIES CLASS ACTION LAWSUITS: BetweenLAWSUITS
Beginning on May and July17, 2002, eighteen separate
civil lawsuitsa number of securities class action complaints were
filed against CMS Energy, Consumers, and certain officers and directors of CMS
Energy and its affiliates. The complaints were filed as purported class actions
in the U.S.United States District Court in connection with
round-trip trading, alleging (i) violationfor the Eastern District of Section 10(b) and Rule 10b-5 of
the Securities Exchange Act of 1934 ("Exchange Act") and (ii) violation of
Section 20(a) of the Exchange Act. All suits name Messrs. McCormick and Wright
and CMS Energy as defendants. Consumers, Mr. Joos and Ms. Pallas are named as
defendants on certain of the suits.Michigan. The
cases will bewere consolidated into a single lawsuit. These complaints generally seeklawsuit and an amended and consolidated
class action complaint was filed on May 1, 2003. The defendants named in the
amended and consolidated class action complaint consist of CMS Energy,
Consumers, certain officers and directors of CMS Energy and its affiliates, and
certain underwriters of CMS Energy securities. The purported class period is
from May 1, 2000 through and including March 31, 2003. The amended and
consolidated class action complaint seeks unspecified damages based on
allegations that the defendants violated United States securities laws and
regulations by making allegedly false and misleading statements about theCMS
Energy's business and financial condition of CMS Energy and Consumers. These cases will
becondition. The companies intend to vigorously
defended. CMS Energy and Consumersdefend against this action but cannot predict the outcome of this litigation.
ENVIRONMENTAL MATTERS: Consumers, and its subsidiaries and affiliates are
subject to various federal, state and local laws and regulations relating to the
environment. Several of these companies have been named parties to various
actions involving environmental issues. Based on theirits present knowledge and
subject to future legal and factual developments, Consumers believes that it is
unlikely that these actions, individually or in total, will -96-
have a material
adverse effect on its financial condition. See Consumers' MANAGEMENT'S
DISCUSSION AND ANALYSIS; and Consumers' CONDENSED NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS.
ITEM 5. OTHER INFORMATION
A shareholder who wishes to submit a proposal for consideration at the CMS
Energy 2004 Annual Meeting pursuant to the applicable rules of the SEC must send
the proposal to reach CMS' Corporate Secretary on or before December 24, 2003.
In any event if CMS has not
CO-2
received written notice of any matter to be proposed at that meeting by March 8,
2004, the holders of the proxies may use their discretionary voting authority on
any such matter. The proposals should be addressed to: Mr. Michael D. VanHemert,
Corporate Secretary, One Energy Plaza, Jackson, Michigan 49201.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) LIST OF EXHIBITS
(3) * By-Laws of Consumers Energy Company
(4)(a) * 87th Supplemental Indenture, dated as of March 26, 2003,
between Consumers Energy Company and JPMorgan Chase Bank as
Trustee
(4)(b) * 88th Supplemental Indenture, dated as of March 27, 2003,
between Consumers Energy Company and JPMorgan Chase Bank as
Trustee
(4)(c) * 89th Supplemental Indenture, dated as of March 28, 2003,
between Consumers Energy Company and JPMorgan Chase Bank as
Trustee
(4)(d) * 90th Supplemental Indenture, dated as of April 30, 2003,
between Consumers Energy Company and JPMorgan Chase Bank as
Trustee
(4)(e) * $140 million Term Loan Agreement dated March 26, 2003 between
Consumers Energy Company and the Bank/Agent, as defined
therein
(4)(f) * $250 million Revolving Credit Facility dated March 27, 2003
among Consumers Energy Company, the Banks, the Agent, and the
Co-Documentation Agents, all as defined therein
(4)(g) * $150 million Term Loan Agreement dated March 28, 2003 among
Consumers Energy Company, the Banks, and the Agent, all as
defined therein
(99) Certifications(a) Consumers Energy Company's certifications pursuant to Section
906 of the Sarbanes-Oxley Act of 2002
- -------------
* Filed as an Exhibit to Consumers Energy Company's Form 10-Q filed on May 14,
2003.
CO-3
(B) REPORTS ON FORM 8-K
During 3rd1st Quarter 2002,2003, Consumers filed reports of Form 8-K on July 30, 2002January 24,
2003, February 21, 2003, March 5, 2003 and August 8, 2002March 13, 2003 covering matters
pursuant to ITEM 5. OTHER EVENTS.
-97-CO-4
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Consumers
Energy Company has duly caused this Quarterly Report on
Form 10-Q/Areport to be signed on its behalf by the
undersigned thereunto duly authorized, on the 14th day of March, 2003.authorized.
CONSUMERS ENERGY COMPANY
Dated: May 15, 2003 By: /s/ Thomas J. Webb
----------------------------------------------------------------------------
Thomas J. Webb
Executive Vice President and
Chief Financial Officer
-98-CO-5
CERTIFICATION OF KENNETH WHIPPLE
I, Kenneth Whipple, certify that:
1. I have reviewed this quarterly report on Form 10-Q/A of Consumers
Energy Company;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operation and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a) Designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) Presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and
the audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) All significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data and
have identified for the registrant's auditors any material weaknesses
in internal controls; and
b) Any fraud, whether or not material, that involves
management or other employees who have a significant role in the
registrant's internal controls; and
-99-CO-6
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes
in internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: March 14,Dated: May 15, 2003 By: /s/ Kenneth Whipple
--------------------------------------------------------------------
Kenneth Whipple
Chairman of the Board and
Chief Executive Officer
-100-CO-7
CERTIFICATION OF THOMAS J. WEBB
I, Thomas J. Webb, certify that:
1. I have reviewed this quarterly report on Form 10-Q/A of Consumers
Energy Company;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operation and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a) Designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) Presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and
the audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) All significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data and
have identified for the registrant's auditors any material weaknesses
in internal controls; and
b) Any fraud, whether or not material, that involves
management or other employees who have a significant role in the
registrant's internal controls; and
-101-CO-8
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes
in internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: March 14,Dated: May 15, 2003 By: /s/ Thomas J. Webb
---------------------------------------------------------------------
Thomas J. Webb
Executive Vice President and
Chief Financial Officer
-102-CO-9
EXHIBITS
EXHIBIT INDEXNUMBER DESCRIPTION
- -------------- -----------
(3) * By-Laws of Consumers Energy Company
(4)(a) * 87th Supplemental Indenture, dated as of March 26, 2003
between Consumers Energy Company and JPMorgan Chase Bank as
Trustee
(4)(b) * 88th Supplemental Indenture, dated as of March 27, 2003
between Consumers Energy Company and JPMorgan Chase Bank as
Trustee
(4)(c) * 89th Supplemental Indenture, dated as of March 28, 2003
between Consumers Energy Company and JPMorgan Chase Bank as
Trustee
(4)(d) * 90th Supplemental Indenture, dated as of April 30, 2003,
between Consumers Energy Company and JPMorgan Chase Bank as
Trustee
(4)(e) * $140 million Term Loan Agreement dated March 26, 2003 between
Consumers Energy Company and the Bank/Agent, as defined
therein
(4)(f) * $250 million Revolving Credit Facility dated March 27, 2003
among Consumers Energy Company, the Banks, the Agent, and the
Co-Documentation Agents, all as defined therein
(4)(g) * $150 million Term Loan Agreement dated March 28, 2003 among
Consumers Energy Company, the Banks, and the Agent, all as
defined therein
(99)(a) Consumers Energy Company's certifications pursuant to Section
906 of the Sarbanes-Oxley Act of 2002
- --------------
* Filed as an Exhibit Description
- ------- -----------
99 Certification of CEO and CFOto Consumers Energy Company's Form 10-Q filed on May 14,
2003.