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
June 30 1997 1996 Change
Three months ended $ 5 $ 5 $ -
Six months ended 44 53 (9)
Twelve months ended 50 63 (13)
Earnings while flat for the three month periods, decreased in both the six
month and twelve month periods ended June 30, 1997, as a result of
decreased gas deliveries due to warmer temperatures during the first
quarter of 1997 and an extra day for leap year in 1996. The first half of
1997 earning comparison also reflects higher depreciation and general
taxes, partially offset by lower operation and maintenance expenses. The
twelve month ended earnings comparison reflects higher operation,
depreciation and general taxes, partially offset by lower maintenance
expenses and benefits from gas services activities.
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 six months of 1997 and
1996 totaled $208 million and $151 million, respectively. The $57 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 remained
unchanged for the first six months of 1997 and 1996, primarily reflecting
capital expenditures.
Financing Activities: Cash used in financing activities during the first
six months of 1997 and 1996 totaled $135 million and $76 million,
respectively. The $59 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 June 30, 1997, receivables sold totaled $266 million. Consumers Gas
Group's attributed portion of these receivables sold totaled $58 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 $102 $102
Michigan Gas Storage 3 3 3
---- ---- ----
$115 $105 $105
==== ==== ====
(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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4
Consumers Gas Group
Statements of Income
(Unaudited)
Three Months Ended Six Months Ended Twelve Months Ended
June 30 1997 1996 1997 1996 1997 1996
In Millions, Except Per Share Amounts
Operating Revenue $ 220 $ 209 $ 718 $ 757 $1,242 $1,273
------ ------ ------ ------ ------ ------
Operating Expenses
Operation
Cost of gas sold 118 107 432 453 729 744
Other 43 46 82 88 186 189
------ ------ ------ ------ ------ ------
161 153 514 541 915 933
Maintenance 8 9 16 18 38 38
Depreciation, depletion and amortization 17 14 55 51 91 87
General taxes 11 10 32 31 55 55
------ ------ ------ ------ ------ ------
197 186 617 641 1,099 1,113
------ ------ ------ ------ ------ ------
Pretax Operating Income 23 23 101 116 143 160
------ ------ ------ ------ ------ ------
Other Deductions - (1) (1) (2) (5) (1)
------ ------ ------ ------ ------ ------
Fixed Charges
Interest on long-term debt 7 7 14 15 29 30
Other interest 3 2 6 5 13 11
Capitalized interest - - - - (1) (1)
Preferred stock dividends 2 2 3 3 6 6
------ ------ ------ ------ ------ ------
12 11 23 23 47 46
------ ------ ------ ------ ------ ------
Income Before Income Taxes 11 11 77 91 91 113
Income Taxes 6 6 33 38 41 50
------ ------ ------ ------ ------ ------
Net Income $ 5 $ 5 $ 44 $ 53 $ 50 $ 63
====== ====== ====== ====== ====== ======
Net Income Attributable to CMS Energy
Shareholders through Retained Interest $ 3 $ 4 $ 33 $ 40 $ 38 $ 47
====== ====== ====== ====== ====== ======
Net Income Attributable to Class G Shareholders $ 2 $ 1 $ 11 $ 13 $ 12 $ 16
====== ====== ====== ====== ====== ======
Average Class G Common Shares Outstanding 8 8 8 8 8 8
====== ====== ====== ====== ====== ======
Earnings Per Average Class G Common Share $ .16 $ .16 $ 1.34 $ 1.66 $ 1.52 $ 2.05
====== ====== ====== ====== ====== ======
Dividend Declared Per Class G Common Share $ .295 $ .28 $ .59 $ .56 $ 1.18 $ 1.12
====== ====== ====== ====== ====== ======
<FN>
The accompanying condensed notes are an integral part of these statements.
5
Consumers Gas Group
Statements of Cash Flows
(Unaudited)
Six Months Ended Twelve Months Ended
June 30 1997 1996 1997 1996
In Millions
Cash Flows from Operating Activities
Net income $ 44 $ 53 $ 50 $ 63
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation, depletion and amortization 55 51 91 87
Deferred income taxes and investment tax credit 7 7 13 6
Capital lease and other amortization 1 3 2 5
Other (1) 1 - 1
Changes in other assets and liabilities 102 36 42 1
------ ------ ------ ------
Net cash provided by operating activities 208 151 198 163
------ ------ ------ ------
Cash Flows from Investing Activities
Capital expenditures (excludes assets placed under capital lease) (51) (53) (135) (130)
Cost to retire property, net (4) (4) (9) (10)
Other (1) 1 (1) 4
------ ------ ------ ------
Net cash used in investing activities (56) (56) (145) (136)
------ ------ ------ ------
Cash Flows from Financing Activities
Increase (decrease) in notes payable, net (85) (82) 6 (4)
Retirement of bonds and other long-term debt (23) - (31) (6)
Payment of common stock dividends (19) (18) (38) (36)
Repayment of bank loans (7) - (7) -
Repayment of long-term note (2) - (2) -
Payment of capital lease obligations (1) (3) (2) (6)
Issuance of common stock 2 2 5 3
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 (135) (76) (46) (6)
------ ------ ------ ------
Net Increase in Cash and Temporary Cash Investments 17 19 7 21
Cash and Temporary Cash Investments, Beginning of Period 15 6 25 4
------ ------ ------ ------
Cash and Temporary Cash Investments, End of Period $ 32 $ 25 $ 32 $ 25
====== ====== ====== ======
<FN>
The accompanying condensed notes are an integral part of these statements.
6
Consumers Gas Group
Balance Sheets
ASSETS June 30 June 30
1997 December 31 1996
(Unaudited) 1996 (Unaudited)
In Millions
Plant and Property (At Cost)
Plant and property $2,270 $2,203 $2,229
Less accumulated depreciation, depletion and amortization 1,202 1,133 1,227
------ ------ ------
1,068 1,070 1,002
Construction work-in-progress 22 46 53
------ ------ ------
1,090 1,116 1,055
------ ------ ------
Current Assets
Cash and temporary cash investments at cost, which approximates market 32 15 25
Accounts receivable and accrued revenue, less allowances
of $2, $4 and $1, respectively (Note 4) 72 97 131
Inventories at average cost
Gas in underground storage 125 186 109
Materials and supplies 8 8 9
Deferred income taxes 3 4 9
Trunkline settlement - 25 30
Prepayments and other 27 49 30
------ ------ ------
267 384 343
------ ------ ------
Non-current Assets
Postretirement benefits 148 153 158
Deferred income taxes 12 11 13
Other 60 59 68
------ ------ ------
220 223 239
------ ------ ------
Total Assets $1,577 $1,723 $1,637
====== ====== ======
7
STOCKHOLDERS' INVESTMENT AND LIABILITIES June 30 June 30
1997 December 31 1996
(Unaudited) 1996 (Unaudited)
In Millions
Capitalization
Common stockholders' equity $ 397 $ 370 $ 380
Preferred stock 78 78 78
Long-term debt 356 446 434
Non-current portion of capital leases 16 17 19
------ ------ ------
847 911 911
------ ------ ------
Current Liabilities
Current portion of long-term debt and capital leases 82 24 21
Notes payable 29 114 23
Accounts payable 86 85 82
Accrued taxes 44 61 44
Accrued refunds 5 7 24
Accrued interest 4 7 8
Trunkline settlement - 25 30
Other 40 52 44
------ ------ ------
290 375 276
------ ------ ------
Non-current Liabilities
Postretirement benefits 172 171 176
Regulatory liabilities for income taxes, net 177 169 169
Deferred investment tax credit 26 27 27
Other 65 70 78
------ ------ ------
440 437 450
------ ------ ------
Commitments and Contingencies (Notes 3 and 5)
Total Stockholders' Investment and Liabilities $1,577 $1,723 $1,637
====== ====== ======
<FN>
The accompanying condensed notes are an integral part of these statements.
8
Consumers Gas Group
Statements of Common Stockholders' Equity
(Unaudited)
Three Months Ended Six Months Ended Twelve Months Ended
June 30 1997 1996 1997 1996 1997 1996
In Millions
Common Stock
At beginning and end of period $184 $184 $184 $184 $184 $184
---- ---- ---- ---- ---- ----
Other Paid-in Capital
At beginning of period 135 130 134 126 131 107
Common stock issued 1 1 2 2 5 3
CMS Energy stockholders' contribution - - - 3 - 21
---- ---- ---- ---- ---- ----
At end of period 136 131 136 131 136 131
---- ---- ---- ---- ---- ----
Retained Earnings
At beginning of period 81 69 52 30 65 38
Net income 5 5 44 53 50 63
Common stock dividends declared (9) (9) (19) (18) (38) (36)
---- ---- ---- ---- ---- ----
At end of period 77 65 77 65 77 65
---- ---- ---- ---- ---- ----
Total Common Stockholders' Equity $397 $380 $397 $380 $397 $380
==== ==== ==== ==== ==== ====
<FN>
The accompanying condensed notes are an integral part of these statements.
9
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, six and twelve month periods ended June
30, 1997, and the three and six months ended June 30, 1996, reflect the
performance of Consumers Gas Group. Earnings per share for the twelve
months ended June 30, 1996, reflect 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 six months ended
June 30, 1997 and 1996, are based on 24.30 percent and 23.72 percent of
the income of Consumers Gas Group, respectively.
In February and May 1997, the Board of Directors declared a quarterly
dividend of $.295 per share on Class G Common Stock. In July 1997, the
Board of Directors declared a quarterly dividend of $.31 per share on
Class G Common Stock payable in August 1997.
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 June 30, 1997 and 1996, is estimated by management
to be $58 million and $41 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 $105 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 7 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
Six Months Ended Twelve Months Ended
June 30 1997 1996 1997 1996
Cash transactions
Interest paid (net of
amounts capitalized) $21 $18 $42 $39
Income taxes paid
(net of refunds) 23 30 26 37
Non-cash transactions
Assets placed under
capital lease $ 1 $ - $ 2 $ 1
Capital leases refinanced - - - 9
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 June 30, 1997 and
1996, the related statements of income and common stockholders' equity for
the three-month, six-month and twelve-month periods then ended, and the
related statements of cash flows for the six-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,
August 11, 1997.