1
Consumers Gas Group
Management's Discussion and Analysis
This MD&A should be read along with the MD&A and other parts of 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's Form 10-Q for the
quarter ended September 30, 1997.
Earnings
In Millions
September 30 1997 1996 Change
Three months ended $ (7) $ (9) $ 2
Nine months ended 37 44 (7)
Twelve months ended 52 62 (10)
The increase in earnings for the three months ended September 30, 1997
compared to the same 1996 period reflects reduced operation and
maintenance expenses and the August 1997 recognition of interest income
related to a property sale. Earnings decreased in both the nine month and
twelve month periods ended September 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. In addition, the earnings comparisons
for the nine and twelve month periods ended September 30, 1997 reflect
higher depreciation and general taxes, partially offset by lower operation
and 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 nine months of 1997 and
1996 totaled $122 million and $79 million, respectively. The $43 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 for the first
nine months of 1997 and 1996 totaled $87 million and $100 million,
respectively. The $13 million decrease in cash used primarily reflects a
decrease in capital expenditures.
Financing Activities: Cash used in financing activities during the first
nine months of 1997 totaled $31 million; and cash provided by financing
activities during the first nine months of 1996 totaled $38 million. The
$69 million increase in cash used primarily reflects an increase in the
retirement of bonds, other long-term debt, preferred stock and the
repayment of bank loans in 1997 compared to 1996.
Other Investing and Financing Matters: Consumers has an agreement
permitting the sale of certain accounts receivable for up to $500 million.
At September 30, 1997, receivables sold totaled $250 million. Consumers
Gas Group's attributed portion of these receivables sold totaled $36
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) $117 $117 $112
Michigan Gas Storage 3 3 3
---- ---- ----
$120 $120 $115
==== ==== ====
(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 Nine Months Ended Twelve Months Ended
September 30 1997 1996 1997 1996 1997 1996
In Millions, Except Per Share Amounts
Operating Revenue $ 110 $ 123 $ 828 $ 880 $1,230 $1,274
------ ------ ------ ------ ------ ------
Operating Expenses
Operation
Cost of gas sold 39 51 472 504 718 742
Other 47 47 128 135 186 194
86 98 600 639 904 936
Maintenance 9 9 24 27 37 39
Depreciation, depletion
and amortization 9 9 64 60 91 86
General taxes 7 7 40 38 56 55
------ ------ ------ ------ ------ ------
111 123 728 764 1,088 1,116
------ ------ ------ ------ ------ ------
Pretax Operating Income (Loss) (1) - 100 116 142 158
------ ------ ------ ------ ------ ------
Other Income (Deductions) 1 - - (2) (4) (2)
------ ------ ------ ------ ------ ------
Fixed Charges
Interest on long-term debt 7 7 21 22 29 29
Other interest 3 3 9 8 13 11
Capitalized interest - - - - (1) -
Preferred stock dividends 1 2 4 5 5 6
------ ------ ------ ------ ------ ------
11 12 34 35 46 46
------ ------ ------ ------ ------ ------
Income (Loss) Before Income Taxes (11) (12) 66 79 92 110
Income Taxes (4) (3) 29 35 40 48
------ ------ ------ ------ ------ ------
Net Income (Loss) $ (7) $ (9) $ 37 $ 44 $ 52 $ 62
====== ====== ====== ====== ====== ======
Net Income (Loss) Attributable
to CMS Energy
Shareholders through
Retained Interest $ (5) $ (6) $ 28 $ 34 $ 39 $ 48
Net Income (Loss) Attributable to
Class G Shareholders $ (2) $ (3) $ 9 $ 10 $ 13 $ 14
Average Class G Common
Shares Outstanding 8 8 8 8 8 8
Earnings (Loss) Per Average Class G
Common Share $ (.21) $ (.28) $ 1.13 $ 1.38 $ 1.57 $ 1.92
Dividend Declared Per Class G
Common Share $ .31 $ .295 $ .90 $ .855 $1.195 $1.135
====== ====== ====== ====== ====== ======
<FN>
The accompanying condensed notes are an integral part of these statements.
5
Consumers Gas Group
Statements of Cash Flows
(Unaudited)
Nine Months Ended Twelve Months Ended
September 30 1997 1996 1997 1996
In Millions
Cash Flows from Operating Activities
Net income $ 37 $ 44 $ 52 $ 62
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation, depletion and amortization 64 60 91 86
Capital lease and other amortization 3 3 4 5
Deferred income taxes and investment tax credit 7 10 10 4
Other (1) 1 - 1
Changes in other assets and liabilities 12 (39) 27 36
------ ------ ------ ------
Net cash provided by operating activities 122 79 184 194
------ ------ ------ ------
Cash Flows from Investing Activities
Capital expenditures (excludes assets
placed under capital lease) (79) (94) (122) (141)
Cost to retire property, net (6) (7) (8) (11)
Other (2) 1 (2) 2
------ ------ ------ ------
Net cash used in investing activities (87) (100) (132) (150)
------ ------ ------ ------
Cash Flows from Financing Activities
Increase (decrease) in notes payable, net 40 48 1 (5)
Proceeds from long-term note 25 22 25 22
Issuance of common stock 4 3 6 4
Retirement of bonds and other long-term debt (33) (8) (33) (14)
Payment of common stock dividends (29) (27) (39) (36)
Retirement of preferred stock (26) - (26) -
Repayment of bank loans (7) - (7) -
Payment of capital lease obligations (3) (3) (4) (6)
Repayment of long-term note (2) - (2) -
Proceeds from bank loans - - 23 -
Contribution from CMS Energy stockholders - 3 - 12
------ ------ ------ ------
Net cash provided by (used in) financing activities (31) 38 (56) (23)
------ ------ ------ ------
Net Increase (Decrease) in Cash and Temporary Cash Investments 4 17 (4) 21
Cash and Temporary Cash Investments, Beginning of Period 15 6 23 2
------ ------ ------ ------
Cash and Temporary Cash Investments, End of Period $ 19 $ 23 $ 19 $ 23
====== ====== ====== ======
<FN>
The accompanying condensed notes are an integral part of these statements.
6
Consumers Gas Group
Balance Sheets
ASSETS September 30 September 30
1997 December 31 1996
(Unaudited) 1996 (Unaudited)
In Millions
Plant and Property (At Cost)
Plant and property $2,292 $2,203 $2,268
Less accumulated depreciation, depletion and amortization 1,209 1,133 1,232
------ ------ ------
1,083 1,070 1,036
Construction work-in-progress 28 46 53
------ ------ ------
1,111 1,116 1,089
------ ------ ------
Current Assets
Cash and temporary cash investments at cost, which approximates market 19 15 23
Accounts receivable and accrued revenue, less allowances
of $2, $4 and $1, respectively (Note 4) 33 97 39
Inventories at average cost
Gas in underground storage 253 186 250
Materials and supplies 8 8 9
Deferred income taxes 4 4 7
Trunkline settlement - 25 30
Prepayments and other 20 49 22
------ ------ ------
337 384 380
------ ------ ------
Non-current Assets
Postretirement benefits 145 153 156
Deferred income taxes 12 11 14
Other 60 59 60
------ ------ ------
217 223 230
------ ------ ------
Total Assets $1,665 $1,723 $1,699
====== ====== ======
7
STOCKHOLDERS' INVESTMENT AND LIABILITIES September 30 September 30
1997 December 31 1996
(Unaudited) 1996 (Unaudited)
In Millions
Capitalization
Common stockholders' equity $ 382 $ 370 $ 363
Preferred stock 52 78 78
Long-term debt 351 446 423
Non-current portion of capital leases 16 17 18
------ ------ ------
801 911 882
------ ------ ------
Current Liabilities
Current portion of long-term debt and capital leases 100 24 24
Notes payable 154 114 153
Accounts payable 94 85 69
Accrued taxes 30 61 27
Accrued refunds 5 7 22
Accrued interest 3 7 6
Trunkline settlement - 25 30
Other 41 52 44
------ ------ ------
427 375 375
------ ------ ------
Non-current Liabilities
Postretirement benefits 170 171 174
Regulatory liabilities for income taxes, net 178 169 171
Deferred investment tax credit 26 27 27
Other 63 70 70
------ ------ ------
437 437 442
------ ------ ------
Commitments and Contingencies (Notes 3 and 5)
Total Stockholders' Investment and Liabilities $1,665 $1,723 $1,699
====== ====== ======
<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 Nine Months Ended Twelve Months Ended
September 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 136 131 134 126 132 116
Common stock issued 2 1 4 3 6 4
CMS Energy stockholders'
contribution - - - 3 - 12
---- ---- ---- ---- ---- ----
At end of period 138 132 138 132 138 132
---- ---- ---- ---- ---- ----
Retained Earnings
At beginning of period 77 65 52 30 47 21
Net income (loss) (7) (9) 37 44 52 62
Common stock dividends
declared (10) (9) (29) (27) (39) (36)
---- ---- ---- ---- ---- ----
At end of period 60 47 60 47 60 47
---- ---- ---- ---- ---- ----
Total Common Stockholders' Equity $382 $363 $382 $363 $382 $363
==== ==== ==== ==== ==== ====
<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
CMS Energy Notes 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
CMS Energy's Note 5 included and incorporated by reference herein.
2: Earnings Per Share and Dividends
Earnings (loss) per share for the three, nine and twelve month periods
ended September 30, 1997 and September 30, 1996 reflect the performance of
Consumers Gas Group. The Class G Common Stock has participated in
earnings and dividends since its original issue date in July 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 nine months ended
September 30, 1997 and 1996, are based on 24.65 percent and 23.67 percent
of the income of Consumers Gas Group, respectively.
In February and May 1997, CMS Energy paid dividends of $.295 per share on
Class G Common Stock. In August 1997, CMS Energy paid a dividend of $.31
per share on Class G Common Stock. In October 1997, the Board of
Directors declared a quarterly dividend of $.31 per share on Class G
Common Stock to be paid in November 1997.
3: Rate Matters
For information regarding rate matters directly affecting Consumers Gas
Group, see the Gas Proceedings discussion in CMS Energy's Note 3 included
and incorporated by reference herein.
4: Short-Term and Long-Term Financings
Consumers' short-term and long-term financings are discussed in
CMS Energy's Note 4 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 September 30, 1997 and 1996, is estimated by
management to be $36 million and $28 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 $120 million for 1997 and 1998 and
$115 million for 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 CMS Energy's Note 7 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
Nine Months Ended Twelve Months Ended
September 30 1997 1996 1997 1996
Cash transactions
Interest paid
(net of amounts capitalized) $32 $29 $42 $39
Income taxes paid
(net of refunds) 33 29 37 27
Non-cash transactions
Assets placed under
capital lease $ 1 $ 1 $ 2 $ 2
Capital leases refinanced - - - 9
11
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 September 30, 1997
and 1996, the related statements of income and common stockholders' equity
for the three-month, nine-month and twelve-month periods then ended, and
the related statements of cash flows for the nine-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,
November 10, 1997.