1
Consumers Gas Group
Management's Discussion and Analysis
This MD&A should be read along with the MD&A in the 1996 Form 10-K of
CMS Energy included and incorporated by reference herein. CMS Energy has
issued shares of Class G Common Stock. This class of common stock
reflects the separate performance of the gas distribution, storage and
transportation businesses conducted by Consumers and Michigan Gas Storage
(collectively, Consumers Gas Group). For further information regarding
the businesses of CMS Energy, including the nature and issuance of Class G
Common Stock, see the MD&A of CMS Energy.
Earnings
In Millions
March 31 1997 1996 Change
Three months ended $39 $48 $(9)
Twelve months ended 50 61 (11)
The decrease in earnings for both the three months and twelve months ended
periods in 1997 compared to 1996 reflect lower gas deliveries resulting
from warmer temperatures during the first quarter of 1997. In addition,
the reduced deliveries reflect an extra day for leap year in 1996. The
quarter ended earnings comparison also reflects higher depreciation and
general tax expenses, partially offset by lower operation and maintenance
expenses. The twelve-month ended earnings comparison reflects higher
operation, depreciation and general tax expenses, partially offset by
lower maintenance expenses.
Cash Position, Investing and Financing
Operating Activities: Consumers Gas Group's cash requirements are met by
its operating and financing activities. Consumers Gas Group's cash from
operations is derived mainly from Consumers' sale and transportation of
natural gas. Cash from operations for the first three months of 1997 and
1996 totaled $157 million and $98 million, respectively. The $59 million
increase primarily reflects changes in the timing of cash receipts and
payments related to Consumers Gas Group's operations. Consumers Gas Group
uses its operating cash mainly to maintain and expand its gas utility
transmission and distribution systems and to retire portions of its long-
term debt and pay dividends.
Investing Activities: Cash used in investing activities totaled $25
million for the first three months of 1997 and 1996.
Financing Activities: Cash used in financing activities during the first
three months of 1997 and 1996 totaled $139 million and $75 million,
respectively. The $64 million increase reflects the reduction of
allocated long-term debt and the 1997 absence of proceeds from preferred
securities sold in 1996.
Other Investing and Financing Matters: Consumers has an agreement
permitting the sale of certain accounts receivable for up to $500 million.
At March 31, 1997, receivables sold totaled $398 million. Consumers Gas
Group's attributed portion of these receivables sold totaled $178 million.
For further information, see Cash Position, Investing and Financing in
CMS Energy's MD&A.
Results of Operations
For a discussion of results of operations, see Consumers Gas Group Results
of Operations in CMS Energy's MD&A.
Gas Issues
For a discussion of Gas Rate Proceedings, GCR Matters and Gas
Environmental Matters, see Consumers Gas Group Issues in CMS Energy's
MD&A.
Forward-Looking Information
For cautionary statements relating to Consumers Gas Group's forward-
looking information, see Forward-Looking Information in CMS Energy's MD&A.
Capital Expenditures: CMS Energy estimates the following capital
expenditures for Consumers Gas Group, including new lease commitments,
over the next three years. These estimates are prepared for planning
purposes and are subject to revision.
In Millions
Years Ended December 31 1997 1998 1999
Gas utility (a) $112 $100 $100
Michigan Gas Storage 3 3 3
---- ---- ----
$115 $103 $103
==== ==== ====
(a) Includes a portion of anticipated capital expenditures common to
Consumers' gas and electric utility businesses.
Consumers Gas Group expects that cash from operations and the ability to
access debt markets will provide necessary working capital and liquidity
to fund future capital expenditures, required debt payments, and other
cash needs in the foreseeable future. For further information regarding
forward-looking information, see the Consumers Gas Group Outlook
discussion in CMS Energy's MD&A.
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Consumers Gas Group
Statements of Income
(Unaudited)
Three Months Ended Twelve Months Ended
March 31 1997 1996 1997 1996
In Millions, Except Per Share Amounts
Operating Revenue $ 498 $ 548 $1,231 $1,261
------ ------ ------ ------
Operating Expenses
Operation
Cost of gas sold 314 346 718 739
Other 39 42 190 187
------ ------ ------ ------
353 388 908 926
Maintenance 8 9 38 38
Depreciation, depletion and amortization 38 37 88 87
General taxes 21 21 54 54
------ ------ ------ ------
420 455 1,088 1,105
------ ------ ------ ------
Pretax Operating Income 78 93 143 156
------ ------ ------ ------
Other Income (Deductions) (1) (1) (6) (1)
------ ------ ------ ------
Fixed Charges
Interest on long-term debt 7 8 29 29
Other interest 3 3 12 12
Capitalized interest - - (1) (1)
Preferred dividends 1 1 6 6
------ ------ ------ ------
11 12 46 46
------ ------ ------ ------
Income Before Income Taxes 66 80 91 109
Income Taxes 27 32 41 48
------ ------ ------ ------
Net Income $ 39 $ 48 $ 50 $ 61
====== ====== ====== ======
Net Income Attributable to CMS Energy Shareholders
through Retained Interest $ 30 $ 36 $ 39 $ 46
====== ====== ====== ======
Net Income Attributable to Class G Shareholders $ 9 $ 12 $ 11 $ 15
====== ====== ====== ======
Average Class G Common Shares Outstanding 8 8 8 8
====== ====== ====== ======
Earnings Per Average Class G Common Share $ 1.18 $ 1.50 $ 1.53 $ 1.90
====== ====== ====== ======
Dividend Declared Per Class G Common Share $ .295 $ .28 $1.165 $ .84
====== ====== ====== ======
<FN>
The accompanying condensed notes are an integral part of these statements.
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Consumers Gas Group
Statements of Cash Flows
(Unaudited)
Three Months Ended Twelve Months Ended
March 31 1997 1996 1997 1996
In Millions
Cash Flows from Operating Activities
Net income $ 39 $ 48 $ 50 $ 61
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation, depletion and amortization 38 37 88 87
Capital lease and other amortization 1 1 4 5
Deferred income taxes and investment tax credit 4 5 12 2
Other (2) 1 (1) 2
Changes in other assets and liabilities 77 6 47 5
------ ------ ------ ------
Net cash provided by operating activities 157 98 200 162
------ ------ ------ ------
Cash Flows from Investing Activities
Capital expenditures (excludes assets placed under capital lease) (22) (24) (135) (127)
Cost to retire property, net (2) (2) (9) (10)
Other (1) 1 (1) 4
------ ------ ------ ------
Net cash used in investing activities (25) (25) (145) (133)
------ ------ ------ ------
Cash Flows from Financing Activities
Increase (decrease) in notes payable, net (97) (90) 2 5
Retirement of bonds and other long-term debt (23) - (31) (5)
Payment of common stock dividends (10) (9) (38) (67)
Repayment of bank loans (6) - (6) (1)
Repayment of long-term note (2) - (2) -
Payment of capital lease obligations (1) (1) (4) (5)
Proceeds from bank loans - - 23 -
Proceeds from long-term note - 22 - 22
Contribution from CMS Energy stockholders - 3 - 21
------ ------ ------ ------
Net cash used in financing activities (139) (75) (56) (30)
------ ------ ------ ------
Net Decrease in Cash and Temporary Cash Investments (7) (2) (1) (1)
Cash and Temporary Cash Investments, Beginning of Period 9 5 3 4
------ ------ ------ ------
Cash and Temporary Cash Investments, End of Period $ 2 $ 3 $ 2 $ 3
====== ====== ====== ======
<FN>
The accompanying condensed notes are an integral part of these statements.
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Consumers Gas Group
Balance Sheets
ASSETS March 31 March 31
1997 December 31 1996
(Unaudited) 1996 (Unaudited)
In Millions
Plant and Property (At cost)
Plant and property $2,242 $2,203 $2,207
Less accumulated depreciation, depletion and amortization 1,177 1,133 1,216
------ ------ ------
1,065 1,070 991
Construction work-in-progress 21 46 48
------ ------ ------
1,086 1,116 1,039
------ ------ ------
Current Assets
Cash and temporary cash investments at cost, which approximates market 2 9 3
Accounts receivable and accrued revenue, less allowances
of $2, $4 and $1, respectively (Note 4) 152 97 254
Inventories at average cost
Gas in underground storage 51 186 39
Materials and supplies 8 8 10
Trunkline settlement 18 25 30
Deferred income taxes 5 4 8
Prepayments and other 36 49 39
------ ------ ------
272 378 383
------ ------ ------
Non-current Assets
Postretirement benefits 150 153 162
Deferred income taxes 11 11 14
Other 60 59 76
------ ------ ------
221 223 252
------ ------ ------
Total Assets $1,579 $1,717 $1,674
====== ====== ======
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STOCKHOLDERS' INVESTMENT AND LIABILITIES March 31 March 31
1997 December 31 1996
(Unaudited) 1996 (Unaudited)
In Millions
Capitalization
Common stockholders' equity $ 393 $ 364 $ 381
Preferred stock 78 78 78
Long-term debt 364 446 433
Non-current portion of capital leases 16 17 20
------ ------ ------
851 905 912
------ ------ ------
Current Liabilities
Current portion of long-term debt and capital leases 73 24 23
Accrued taxes 58 61 70
Accounts payable 69 85 84
Trunkline settlement 18 25 30
Notes payable 17 114 15
Accrued interest 5 7 6
Accrued refunds 5 7 25
Other 41 52 46
------ ------ ------
286 375 299
------ ------ ------
Non-current Liabilities
Postretirement benefits 173 171 178
Regulatory liabilities for income taxes, net 175 169 167
Deferred investment tax credit 26 27 28
Other 68 70 90
------ ------ ------
442 437 463
------ ------ ------
Commitments and Contingencies (Notes 3 and 5)
Total Stockholders' Investment and Liabilities $1,579 $1,717 $1,674
====== ====== ======
<FN>
The accompanying condensed notes are an integral part of these statements.
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Consumers Gas Group
Statements of Common Stockholders' Equity
(Unaudited)
Three Months Ended Twelve Months Ended
March 31 1997 1996 1997 1996
In Millions
Common Stock
At beginning and end of period $184 $184 $184 $184
---- ---- ---- ----
Other Paid-in Capital
At beginning of period 128 125 128 107
CMS Energy stockholders' contribution - 3 - 21
---- ---- ---- ----
At end of period 128 128 128 128
---- ---- ---- ----
Retained Earnings
At beginning of period 52 30 69 75
Net income 39 48 50 61
Common stock dividends declared (10) (9) (38) (67)
---- ---- ---- ----
At end of period 81 69 81 69
---- ---- ---- ----
Total Common Stockholders' Equity $393 $381 $393 $381
==== ==== ==== ====
<FN>
The accompanying condensed notes are an integral part of these statements.
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Consumers Gas Group
Condensed Notes to Financial Statements
These financial statements and their related notes should be read along
with the financial statements and notes contained in the 1996 Form 10-K of
CMS Energy Corporation that includes the Report of Independent Public
Accountants, included and incorporated by reference herein.
1: Corporate Structure
CMS Energy is the parent holding company of Consumers and Enterprises.
Consumers, a combination electric and gas utility company serving the
Lower Peninsula of Michigan, is the principal subsidiary of CMS Energy.
For further information regarding the business of CMS Energy, see the
Notes to the Consolidated Financial Statements of CMS Energy included and
incorporated by reference herein.
CMS Energy has issued shares of Class G Common Stock. This class of
common stock reflects the separate performance of the gas distribution,
storage and transportation businesses conducted by Consumers and Michigan
Gas Storage (collectively, Consumers Gas Group). For further information
regarding the nature and issuance of the Class G Common Stock, see Note 5
to the Consolidated Financial Statements of CMS Energy included and
incorporated by reference herein.
2: Earnings Per Share and Dividends
Earnings per share for the three and twelve month periods ended March 31,
1997 and the three months ended March 31, 1996, reflects the performance
of Consumers Gas Group. Earnings per share for the twelve months ended
March 31, 1996 reflects the performance of Consumers Gas Group since the
initial issuance of the Class G Common Stock in 1995. The earnings (loss)
attributable to Class G Common Stock and the related amounts per share are
computed by considering the weighted average number of shares of Class G
Common Stock outstanding.
Earnings attributable to outstanding Class G Common Stock are equal to
Consumers Gas Group's net income multiplied by a fraction; the numerator
is the weighted average number of Outstanding Shares during the period,
and the denominator is the weighted average number of Outstanding Shares
and Retained Interest Shares during the period. The earnings attributable
to Class G Common Stock on a per share basis, for the three months ended
March 31, 1997 and 1996, are based on 24.29 percent and 23.72 percent of
the income of Consumers Gas Group.
In January and April 1997, the Board of Directors declared a quarterly
dividend of $.295 per share on Class G Common Stock, payable in
February and May 1997, respectively.
3: Rate Matters
For information regarding rate matters directly affecting Consumers Gas
Group, see the Gas Proceedings discussion in Note 3 to the Consolidated
Financial Statements of CMS Energy included and incorporated by reference
herein.
4: Short-Term and Long-Term Financings
Consumers' short-term and long-term financings are discussed in Note 4 to
the Consolidated Financial Statements of CMS Energy included and
incorporated by reference herein.
Consumers generally manages its short-term financings on a centralized
consolidated basis. The portion of receivables sold attributable to
Consumers Gas Group at March 31, 1997 and 1996, is estimated by management
to be $178 million and $141 million, respectively. Accounts receivable
and accrued revenue in the balance sheets have been reduced to reflect
receivables sold. The portions of short-term debt and receivables sold
attributed to Consumers Gas Group reflect the high utilization of
short-term borrowing to finance the purchase of gas for storage in the
summer and fall periods. Management believes these allocations to be
reasonable.
5: Commitments and Contingencies
Capital Expenditures: Consumers Gas Group estimates capital expenditures,
including new lease commitments, of $115 million for 1997 and $103 million
for 1998 and 1999. These estimates include an attributed portion of
Consumers' anticipated capital expenditures for common plant and
equipment.
For further information regarding commitments and contingencies directly
affecting Consumers Gas Group (including those involving former
manufactured gas plant sites), see the Environmental Matters and Other
discussions in Note 6 to the Consolidated Financial Statements of
CMS Energy included and incorporated by reference herein.
6: Supplemental Cash Flow Information
For purposes of the Statement of Cash Flows, all highly liquid investments
with an original maturity of three months or less are considered cash
equivalents. Consumers Gas Group's other cash flow activities and
non-cash investing and financing activities were:
In Millions
Three Months Twelve Months
Ended Ended
March 31 1997 1996 1997 1996
Cash transactions
Interest paid (net of amounts
capitalized) $12 $11 $39 $39
Income taxes paid (net of refunds) - 2 31 27
Non-cash transactions
Assets placed under capital lease $ 1 $ - $ 2 $ 1
Capital leases refinanced - - - 9
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ARTHUR ANDERSEN LLP
Report of Independent Public Accountants
----------------------------------------
To CMS Energy Corporation:
We have reviewed the accompanying balance sheets of CONSUMERS GAS GROUP
(representing a business unit of Consumers Energy Company and its wholly-
owned subsidiary, Michigan Gas Storage Company) as of March 31, 1997 and
1996, and the related statements of income, common stockholders' equity
and cash flows for the three-month and twelve-month periods then ended.
These financial statements are the responsibility of the Company's
management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical
procedures to financial data and making inquiries of persons responsible
for financial and accounting matters. It is substantially less in scope
than an audit conducted in accordance with generally accepted auditing
standards, the objective of which is the expression of an opinion
regarding the financial statements taken as a whole. Accordingly, we do
not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to the financial statements referred to above for them to
be in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the balance sheet of Consumers Gas Group as of December 31,
1996, and the related statements of income, common stockholders' equity
and cash flows for the year then ended (not presented herein), and, in our
report dated January 24, 1997, we expressed an unqualified opinion on
those statements. In our opinion, the information set forth in the
accompanying balance sheet as of December 31, 1996, is fairly stated, in
all material respects, in relation to the balance sheet from which it has
been derived.
Arthur Andersen LLP
Detroit, Michigan,
May 9, 1997.