1
Consumers Gas Group
Management's Discussion and Analysis
In 1995, CMS Energy issued a total of 7.62 million 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 Company, a subsidiary of
Consumers (collectively, Consumers Gas Group). Accordingly, this MD&A
should be read along with the MD&A in the 1997 Annual Report of CMS Energy
included and incorporated by reference herein.
CMS Energy is the parent holding company of Consumers and CMS Enterprises
Company. 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 businesses of
CMS Energy, including the nature and issuance of Class G Common Stock, see
the MD&A of CMS Energy.
Results of Operations
In Millions
March 31 1998 1997 Change
---- ---- -----
Three months ended $36 $39 $(3)
Twelve months ended 57 50 7
The decrease in earnings for the three months ended March 31,1998 compared
to the same 1997 period reflects increased operation and maintenance
expenses and decreased gas deliveries due to warmer 1998 temperatures.
Partially offsetting these decreases was the benefit resulting from an
accounting change for property taxes. The recognition of property tax
expense was changed from expensing on a calendar year basis to a fiscal
year basis which resulted in a benefit of $18 million ($12 million after-
tax). This one-time benefit helped to offset the warmest winter since
1880. The increase in earnings for the twelve months ended 1998 compared
to the 1997 period reflects the change in accounting for property taxes
implemented in March 1998 as discussed above. Also benefitting the 1998
period was the recognition of interest income from a related-party
property sale. Partially offsetting these increases were decreased gas
deliveries due to warmer winter temperatures during the 1997/1998 winter
heating season, and reduced revenues due to the elimination of surcharges
related to past conservation programs. For a further discussion, see
Consumers Gas Group Results of Operations in CMS Energy's MD&A.
Gas Issues
For a discussion of Gas Rate Proceedings, Gas Cost Recovery Matters and
Gas Environmental Matters, see Consumers Gas Group Operating Issues in
CMS Energy's MD&A.
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 1998 and
1997 totaled $159 million and $157 million, respectively. 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
three months of 1998 and 1997 totaled $22 million and $25 million,
respectively. The $3 million decrease in cash used primarily reflects a
decrease in capital expenditures.
Financing Activities: Cash used in financing activities during the first
three months of 1998 and 1997 totaled $133 million and $138 million,
respectively. The $5 million decrease in cash used primarily reflects an
increase in the retirement of bonds and other long-term debt, and the
return of CMS Energy stockholders' contributions, which were more than
offset by the proceeds from senior notes.
Other Investing and Financing Matters: Consumers has an agreement
permitting the sale of certain accounts receivable for up to $500 million.
At March 31, 1998, $160 million in receivables remained available for sale
under the program. Consumers Gas Group's attributed portion of
receivables remaining available for sale totaled $71 million. For further
information, see Cash Position, Investing and Financing 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 1998 1999 2000
---- ---- ----
Gas utility (a) $112 $112 $112
Michigan Gas Storage 3 3 3
---- ---- ----
$115 $115 $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 Business Outlook
discussion in CMS Energy's MD&A.
4
Consumers Gas Group
Statements of Income
(Unaudited)
Three Months Ended Twelve Months Ended
March 31 1998 1997 1998 1997
In Millions, Except Per Share Amounts
Operating Revenue $ 429 $ 498 $1,135 $1,231
------ ------ ------ ------
Operating Expenses
Operation
Cost of gas sold 264 314 645 718
Other 46 39 182 190
------ ------ ------ ------
310 353 827 908
Maintenance 9 8 34 38
Depreciation, depletion and amortization 36 38 90 88
General taxes 20 21 54 54
------ ------ ------ ------
375 420 1,005 1,088
------ ------ ------ ------
Pretax Operating Income 54 78 130 143
------ ------ ------ ------
Other Deductions - (1) (2) (6)
------ ------ ------ ------
Fixed Charges
Interest on long-term debt 7 7 28 29
Other interest 4 3 14 12
Capitalized interest - - - (1)
Preferred dividends 1 1 5 6
------ ------ ------ ------
12 11 47 46
------ ------ ------ ------
Income Before Income Taxes 42 66 81 91
Income Taxes 18 27 36 41
------ ------ ------ ------
Net Income before cumulative effect of change in
accounting principle 24 39 45 50
Cumulative effect of change in accounting for
property taxes, net of $6 tax 12 - 12 -
------ ------ ------ ------
Net Income $ 36 $ 39 $ 57 $ 50
====== ====== ====== ======
Net Income Attributable to CMS Energy Shareholders
through Retained Interest $ 27 $ 30 $ 42 $ 39
------ ------ ------ ------
Net Income Attributable to Class G Shareholders $ 9 $ 9 $ 15 $ 11
------ ------ ------ ------
Average Class G Common Shares Outstanding 8 8 8 8
------ ------ ------ ------
Basic and Diluted Earnings Per Average Class G
Common Share Before Change in Accounting Principle $ .73 $ 1.18 $ 1.40 $ 1.53
------ ------ ------ ------
Gain Per Average Class G Common Share
From Change in Accounting Principle $ .36 $ - $ .36 $ -
------ ------ ------ ------
Basic and Diluted Earnings Per Average Class G
Common Share $ 1.09 $ 1.18 $ 1.76 $ 1.53
------ ------ ------ ------
Dividend Declared Per Class G Common Share $ .31 $ .295 $1.225 $1.165
====== ====== ====== ======
<FN>
The accompanying condensed notes are an integral part of these statements.
5
Consumers Gas Group
Statements of Cash Flows
(Unaudited)
Three Months Ended Twelve Months Ended
March 31 1998 1997 1998 1997
In Millions
Cash Flows from Operating Activities
Net income $ 36 $ 39 $ 57 $ 50
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation, depletion and amortization 36 38 90 88
Capital lease and other amortization 1 1 4 4
Deferred income taxes and investment tax credit 4 4 5 12
Other - (2) 1 (1)
Changes in other assets and liabilities 82 77 68 47
------ ------ ------ ------
Net cash provided by operating activities 159 157 225 200
------ ------ ------ ------
Cash Flows from Investing Activities
Capital expenditures (excludes assets placed
under capital lease) (20) (22) (111) (135)
Cost to retire property, net (2) (2) (9) (9)
Other - (1) 1 (1)
------ ------ ------ ------
Net cash used in investing activities (22) (25) (119) (145)
------ ------ ------ ------
Cash Flows from Financing Activities
Increase (decrease) in notes payable, net (119) (97) (17) 2
Retirement of bonds and other long-term debt (73) (23) (83) (31)
Return of CMS Energy stockholders' contribution (16) - (55) -
Payment of common stock dividends (10) (10) (40) (38)
Repayment of bank loans (10) (6) (11) (6)
Payment of capital lease obligations (1) (1) (4) (4)
Proceeds from senior notes 94 - 94 -
Issuance of common stock 2 1 8 5
Repayment of long-term note - (2) - (2)
Retirement of preferred stock - - (26) -
Proceeds from long-term note and bank loans - - 25 23
------ ------ ------ ------
Net cash used in financing activities (133) (138) (109) (51)
------ ------ ------ ------
Net Increase (Decrease) in Cash and Temporary Cash Investments 4 (6) (3) 4
Cash and Temporary Cash Investments, Beginning of Period 2 15 9 5
------ ------ ------ ------
Cash and Temporary Cash Investments, End of Period $ 6 $ 9 $ 6 $ 9
====== ====== ====== ======
<FN>
The accompanying condensed notes are an integral part of these statements.
6
Consumers Gas Group
Balance Sheets
ASSETS March 31 March 31
1998 December 31 1997
(Unaudited) 1997 (Unaudited)
In Millions
Plant and Property (At cost)
Plant and property $2,346 $2,322 $2,242
Less accumulated depreciation, depletion and amortization 1,264 1,231 1,177
------ ------ ------
1,082 1,091 1,065
Construction work-in-progress 27 28 21
------ ------ ------
1,109 1,119 1,086
------ ------ ------
Current Assets
Cash and temporary cash investments at cost, which
approximates market 6 2 9
Accounts receivable and accrued revenue, less allowances
of $3, $3, and $2, respectively (Note 4) 64 53 152
Inventories at average cost
Gas in underground storage 79 197 51
Materials and supplies 7 7 8
Deferred income taxes 3 6 5
Trunkline settlement - - 18
Prepayments and other 55 51 36
------ ------ ------
214 316 279
------ ------ ------
Non-current Assets
Postretirement benefits 140 142 150
Deferred income taxes 10 6 11
Other 62 61 60
------ ------ ------
212 209 221
------ ------ ------
Total Assets $1,535 $1,644 $1,586
====== ====== ======
7
STOCKHOLDERS' INVESTMENT AND LIABILITIES March 31 March 31
1998 December 31 1997
(Unaudited) 1997 (Unaudited)
In Millions
Capitalization
Common stockholders' equity $ 370 $ 358 $ 400
Preferred stock 52 52 78
Long-term debt 401 333 364
Non-current portion of capital leases 16 16 16
------ ------ ------
839 759 858
------ ------ ------
Current Liabilities
Current portion of long-term debt and capital leases 62 118 73
Accrued taxes 76 65 58
Accounts payable 70 94 69
Accrued refunds 8 10 5
Accrued interest 2 4 5
Notes payable - 119 17
Trunkline settlement - - 18
Other 45 44 41
------ ------ ------
263 454 286
------ ------ ------
Non-current Liabilities
Regulatory liabilities for income taxes, net 178 173 175
Postretirement benefits 166 168 173
Deferred investment tax credit 25 25 26
Other 64 65 68
------ ------ ------
433 431 442
------ ------ ------
Commitments and Contingencies (Notes 3 and 5)
Total Stockholders' Investment and Liabilities $1,535 $1,644 $1,586
====== ====== ======
<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 Twelve Months Ended
March 31 1998 1997 1998 1997
In Millions
Common Stock
At beginning and end of period $184 $184 $184 $184
---- ---- ---- ----
Other Paid-in Capital
At beginning of period 102 134 135 130
Common stock issued 2 1 8 5
Return of CMS Energy stockholders' contribution (16) - (55) -
---- ---- ---- ----
At end of period 88 135 88 135
---- ---- ---- ----
Retained Earnings
At beginning of period 72 52 81 69
Net income 36 39 57 50
Common stock dividends declared (10) (10) (40) (38)
---- ---- ---- ----
At end of period 98 81 98 81
---- ---- ---- ----
Total Common Stockholders' Equity $370 $400 $370 $400
==== ==== ==== ====
<FN>
The accompanying condensed notes are an integral part of these statements.
9
Consumers Gas Group
Condensed Notes to Financial Statements
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 businesses of CMS Energy, see the
Notes to 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 Company, a subsidiary of Consumers (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.
These Financial Statements and their related Notes should be read along
with the Financial Statements and Notes contained in the 1997 Annual
Report of CMS Energy that includes the Report of Independent Public
Accountants, included and incorporated by reference herein.
2: Earnings Per Share and Dividends
Earnings (loss) per share for the three month period ended March 31, 1998
and March 31, 1997 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 three months ended
March 31, 1998 and 1997, are based on 25.16 percent and 24.29 percent of
the income of Consumers Gas Group, respectively.
In February 1998, CMS Energy declared and paid dividends of $.31 per share
on Class G Common Stock. In April 1998, the Board of Directors declared
a quarterly dividend of $.31 per share on Class G Common Stock to be paid
in May 1998.
3: Rate Matters
For information regarding rate matters directly affecting Consumers Gas
Group, see Note 3 in the Consolidated Financial Statements of CMS Energy
included and incorporated by reference herein.
4: Short-Term Financings and Capitalization
Short-Term Financings: Consumers' short-term financings are discussed in
Consolidated Financial Statements of CMS Energy 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 March 31, 1998 and 1997, is estimated by management
to be $150 million and $178 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
attributable 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. The allocation of short-term financings and
related interest charges to Consumers Gas Group generally follows the
ratio of gas utility assets to total Consumers' assets. Additionally, the
carrying costs for Consumers' sales of certain of its accounts receivable
under its trade receivable purchase and sale agreement generally are
allocated to Consumers Gas Group based on the ratio of customer revenues
contributed by Consumers' gas customers to total Consumers' revenue. As a
result of the centralized management of short-term financing, the amounts
allocated to Consumers Gas Group are further adjusted in both the seasonal
gas inventory build-up period (second and third quarters) and the high
seasonal gas sales period (first and fourth quarters) to more closely
reflect the higher short-term financing requirements of the inventory
build-up period and conversely the lower financing requirements during the
higher sales periods. Management believes these allocations to be
reasonable.
Capital Stock and Long-Term Debt: Consumers Gas Group's capital stock and
long-term debt, including debt resulting from the sale of Trust Preferred
Securities, have been allocated based on the ratio of gas utility assets
(including common assets attributed to the gas utility segment) to total
Consumers' assets. Management believes these measurements are reasonable.
For information regarding the long-term debt and capital stock of
CMS Energy and Consumers, see Note 4 to the Consolidated Financial
Statements of CMS Energy included and incorporated by reference herein.
5: Commitments and Contingencies
Capital Expenditures: Consumers Gas Group estimates capital expenditures,
including new lease commitments, of $115 million for 1998, 1999 and 2000.
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 Gas 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
Three Months Ended Twelve Months Ended
March 31 1998 1997 1998 1997
---- ---- ---- ----
Cash transactions
Interest paid (net of
amounts capitalized) $13 $12 $43 $39
Income taxes paid
(net of refunds) 1 - 41 31
Non-cash transactions
Assets placed under
capital lease $ 1 $ 1 $3 $ 2
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 March 31, 1998 and
1997, 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,
1997, 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 26, 1998, we expressed an unqualified opinion on
those statements. In our opinion, the information set forth in the
accompanying balance sheet as of December 31, 1997, 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 11, 1998.