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
June 30 1998 1997 Change
---- ---- ------
Three months ended $ 4 $ 5 $ (1)
Six months ended 40 44 (4)
Twelve months ended 56 50 6
The decreases in earnings for the three months and six months ended June
30, 1998 compared to the same 1997 periods reflect decreased gas
deliveries due to warmer 1998 temperatures and higher operations expense
related to growth in retail services programs. The first six months of
1998 were the third warmest since 1864. Revenues were down for the six
month period ended June 30, 1998 due to the elimination of surcharges
related to past conservation programs. Partially offsetting the decrease
for the six month period ended June 30, 1998 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 June 30,
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.
Gas Issues
For a discussion of Consumers Gas Group operating issues, see Consumers
Gas Group Results of Operations-Uncertainties 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 six months of 1998 and
1997 totaled $139 million and $208 million, respectively. The $69 million
decrease is due primarily to higher summer gas inventory balances because
of lower sales resulting from warmer weather, the noncash effect of the
property tax accounting change and a decrease in the sale of accounts
receivable. 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 six
months of 1998 and 1997 totaled $52 million and $56 million,
respectively. The $4 million decrease in cash used primarily reflects a
decrease in capital expenditures.
Financing Activities: Cash used in financing activities during the first
six months of 1998 and 1997 totaled $37 million and $135 million,
respectively. The $98 million decrease in cash used primarily reflects an
increase in the proceeds from senior notes, partially offset by an
increase in the retirement of bonds and other long-term debt and the
return of CMS Energy stockholders' contributions.
Other Investing and Financing Matters: Consumers has an agreement
permitting the sale of certain accounts receivable for up to $500 million.
At June 30, 1998, receivables sold under the program totaled $236 million.
Consumers Gas Group's attributed portion of receivables sold under the
program totaled $40 million. Accounts receivable and accrued revenue in
the Consolidated Balance Sheets have been reduced to reflect receivables
sold. For detailed information, see "Short-Term and Long-Term Financings,
and Capitalization" in CMS Energy's Note 3.
Forward-Looking Information
For cautionary statements relating to Consumers Gas Group's forward-looking
information, see the Forward-Looking Information section 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
the outlook of Consumers Gas Group, 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 Six Months Ended Twelve Months Ended
June 30 1998 1997 1998 1997 1998 1997
In Millions, Except Per Share Amounts
Operating Revenue $ 170 $ 220 $ 599 $ 718 $1,085 $1,242
------ ------ ------ ------ ------ ------
Operating Expenses
Operation
Cost of gas sold 74 118 338 432 600 729
Other 44 43 90 82 183 186
------ ------ ------ ------ ------ ------
118 161 428 514 783 915
Maintenance 8 8 16 16 34 38
Depreciation, depletion and
amortization 14 17 51 55 89 91
General taxes 9 11 29 32 52 55
------ ------ ------ ------ ------ ------
149 197 524 617 958 1,099
------ ------ ------ ------ ------ ------
Pretax Operating Income 21 23 75 101 127 143
------ ------ ------ ------ ------ ------
Other Deductions - - - (1) (1) (5)
------ ------ ------ ------ ------ ------
Fixed Charges
Interest on long-term debt 7 7 14 14 28 29
Other interest 4 3 8 6 15 13
Capitalized interest - - - - - (1)
Preferred stock dividends 1 2 2 3 4 6
------ ------ ------ ------ ------ ------
12 12 24 23 47 47
------ ------ ------ ------ ------ ------
Income Before Income Taxes 9 11 51 77 79 91
Income Taxes 5 6 23 33 35 41
------ ------ ------ ------ ------ ------
Net Income before cumulative effect
of change in accounting principle 4 5 28 44 44 50
Cumulative effect of change in
accounting for property taxes,
net of $6 tax - - 12 - 12 -
------ ------ ------ ------ ------ ------
Net Income $ 4 $ 5 $ 40 $ 44 $ 56 $ 50
====== ====== ====== ====== ====== ======
Net Income Attributable to
CMS Energy Shareholders through
Retained Interest $ 3 $ 3 $ 30 $ 33 $ 42 $ 38
------ ------ ------ ------ ------ ------
Net Income Attributable to
Class G Shareholders $ 1 $ 2 $ 10 $ 11 $ 14 $ 12
------ ------ ------ ------ ------ ------
Average Class G Common Shares
Outstanding 8 8 8 8 8 8
------ ------ ------ ------ ------ ------
Basic and Diluted Earnings Per
Average Class G Common Share
Before Change in Accounting
Principle $ .12 $ .16 $ .84 $ 1.34 $ 1.35 $ 1.52
------ ------ ------ ------ ------ ------
Cumulative Effect of Change in
Accounting Principle, Net of Tax,
Per Average Class G Common Share $ - $ - $ .36 $ - $ .36 $ -
------ ------ ------ ------ ------ ------
Basic and Diluted Earnings Per
Average Class G Common Share $ .12 $ .16 $ 1.20 $ 1.34 $ 1.71 $ 1.52
------ ------ ------ ------ ------ ------
Dividend Declared Per Class G
Common Share $ .31 $ .295 $ .62 $ .59 $ 1.24 $ 1.18
====== ====== ====== ====== ====== ======
<FN>
The accompanying condensed notes are an integral part of these statements.
/TABLE
5
Consumers Gas Group
Statements of Cash Flows
(Unaudited)
Six Months Ended Twelve Months Ended
June 30 1998 1997 1998 1997
In Millions
Cash Flows from Operating Activities
Net income $ 40 $ 44 $ 56 $ 50
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation, depletion and amortization 51 55 89 91
Deferred income taxes and investment tax credit 11 7 9 13
Capital lease and other amortization 2 1 5 2
Cumulative effect of accounting change for
property taxes (18) - (18) -
Other - (1) - -
Changes in other assets and liabilities 53 102 13 42
------ ------ ------ ------
Net cash provided by operating activities 139 208 154 198
------ ------ ------ ------
Cash Flows from Investing Activities
Capital expenditures (excludes assets placed under
capital lease) (49) (51) (111) (135)
Cost to retire property, net (4) (4) (9) (9)
Other 1 (1) 2 (1)
------ ------ ------ ------
Net cash used in investing activities (52) (56) (118) (145)
------ ------ ------ ------
Cash Flows from Financing Activities
Proceeds from senior notes 182 - 182 -
Issuance of common stock 3 2 8 5
Retirement of bonds and other long-term debt (123) (30) (133) (38)
Increase (decrease) in notes payable, net (55) (85) 35 6
Return of CMS Energy stockholders' contribution (21) - (60) -
Payment of common stock dividends (20) (19) (41) (38)
Payment of capital lease obligations (3) (1) (6) (2)
Proceeds from long-term note - - 25 -
Proceeds from bank loans - - - 23
Repayment of long-term note - (2) - (2)
Retirement of preferred stock - - (26) -
------ ------ ------ ------
Net cash used in financing activities (37) (135) (16) (46)
------ ------ ------ ------
Net Increase in Cash and Temporary Cash Investments 50 17 20 7
Cash and Temporary Cash Investments, Beginning of Period 2 15 32 25
------ ------ ------ ------
Cash and Temporary Cash Investments, End of Period $ 52 $ 32 $ 52 $ 32
====== ====== ====== ======
Other cash flow activities and non-cash investing and financing activities were:
Cash transactions
Interest paid (net of amounts capitalized) $ 18 $ 21 $ 39 $ 42
Income taxes paid (net of refunds) 24 25 39 40
Non-cash transactions
Assets placed under capital lease $ 3 $ 1 $ 5 $ 2
====== ====== ====== ======
<FN>
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.
6
Consumers Gas Group
Balance Sheets
ASSETS June 30 June 30
1998 December 31 1997
(Unaudited) 1997 (Unaudited)
In Millions
Plant and Property (At cost)
Plant and property $2,307 $2,322 $2,270
Less accumulated depreciation, depletion and amortization 1,215 1,231 1,202
------ ------ ------
1,092 1,091 1,068
Construction work-in-progress 29 28 22
------ ------ ------
1,121 1,119 1,090
------ ------ ------
Current Assets
Cash and temporary cash investments at cost, which approximates market52 2 32
Accounts receivable and accrued revenue, less allowances
of $3, $3, and $2, respectively (Note 3) 14 53 72
Inventories at average cost
Gas in underground storage 178 197 125
Materials and supplies 6 7 8
Deferred income taxes - 6 3
Prepayments and other 46 51 27
------ ------ ------
296 316 267
------ ------ ------
Non-current Assets
Postretirement benefits 137 142 148
Deferred income taxes 10 6 12
Other 61 61 60
------ ------ ------
208 209 220
------ ------ ------
Total Assets $1,625 $1,644 $1,577
====== ====== ======
STOCKHOLDERS' INVESTMENT AND LIABILITIES June 30 June 30
1998 December 31 1997
(Unaudited) 1997 (Unaudited)
In Millions
Capitalization
Common stockholders' equity $ 360 $ 358 $ 397
Preferred stock 52 52 78
Long-term debt 486 333 356
Non-current portion of capital leases 16 16 16
------ ------ ------
914 759 847
------ ------ ------
Current Liabilities
Current portion of long-term debt and capital leases 27 118 82
Notes payable 64 119 29
Accounts payable 74 94 86
Accrued taxes 45 65 44
Accrued refunds 8 10 5
Accrued interest 6 4 4
Deferred income taxes 3 - -
Other 43 44 40
------ ------ ------
270 454 290
------ ------ ------
Non-current Liabilities
Regulatory liabilities for income taxes, net 180 173 177
Postretirement benefits 164 168 172
Deferred investment tax credit 25 25 26
Other 72 65 65
------ ------ ------
441 431 440
------ ------ ------
Commitments and Contingencies (Note 4)
Total Stockholders' Investment and Liabilities $1,625 $1,644 $1,577
====== ====== ======
<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 1998 1997 1998 1997 1998 1997
In Millions
Common Stock
At beginning and end of period $184 $184 $184 $184 $184 $184
---- ---- ---- ---- ---- ----
Other Paid-in Capital
At beginning of period 88 135 102 134 136 131
Common stock issued 1 1 3 2 8 5
Return of CMS Energy stockholders'
contribution (5) - (21) - (60) -
---- ---- ---- ---- ---- ----
At end of period 84 136 84 136 84 136
---- ---- ---- ---- ---- ----
Retained Earnings
At beginning of period 98 81 72 52 77 65
Net income 4 5 40 44 56 50
Common stock dividends declared (10) (9) (20) (19) (41) (38)
---- ---- ---- ---- ---- ----
At end of period 92 77 92 77 92 77
---- ---- ---- ---- ---- ----
Total Common Stockholders' Equity $360 $397 $360 $397 $360 $397
==== ==== ==== ==== ==== ====
<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 4 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 per share for the three month period ended June 30, 1998 and June
30, 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 six months ended
June 30, 1998 and 1997, are based on 25.27 percent and 24.30 percent of
the income of Consumers Gas Group, respectively.
In February and May 1998, CMS Energy declared and paid dividends of $.31
per share on Class G Common Stock. In July 1998, the Board of Directors
declared a quarterly dividend of $.325 per share on Class G Common Stock
to be paid in August 1998. This represents an increase in the annualized
dividend on Class G Common Stock to $1.30 per share from the previous
dividend of $1.24 per share (a 4.8 percent increase).
3: Short-Term And Long-Term Financings, and Capitalization
Short-Term Financings: Consumers' short-term financings are discussed in
Consolidated Financial Statements of CMS Energy Note 3 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, 1998 and 1997, is estimated by management
to be $40 million and $58 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 3 to the Consolidated Financial
Statements of CMS Energy included and incorporated by reference herein.
4: 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 Consumers Gas Group Contingencies
and Consumers Gas Group Matters in CMS Energy's Note 2 included and
incorporated by reference herein.
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 June 30, 1998 and
1997, 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,
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,
August 11, 1998.