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
- --------------------------------------------------------------------------
September 30 1998 1997 Change
__________________________________________________________________________
Three months ended $(5) $(7) $2
Nine months ended 35 37 (2)
Twelve months ended 58 52 6
==========================================================================
The increase in earnings for the three months ended September 30, 1998
compared to the same 1997 period reflects increased gas deliveries, the
operation of the gas customer choice program and increased revenues from
gas retail and wholesale services activities. The decrease in earnings
for the first nine months of 1998 compared to the same 1997 period
reflects decreased gas deliveries due to warmer 1998 temperatures. The
first nine months of 1998 were the fourth warmest since 1864. Revenues
were down for the nine month period ended September 30, 1998 due to the
elimination of surcharges related to past conservation programs.
Partially offsetting the decrease for the nine month period ended
September 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 September 30, 1998 compared to the
1997 period reflects the change in accounting for property taxes
implemented in March 1998 as discussed above. 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 nine months of 1998 and
1997 totaled $66 million and $122 million, respectively. The $56 million
decrease is due primarily to higher gas inventory balances because of
lower sales as a result of warmer weather, the noncash effect of the
property tax accounting change and a decrease in accounts payable.
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 1998 and 1997 totaled $84 million and $87 million,
respectively. The $3 million decrease in cash used primarily reflects an
increase in the proceeds received from the sale of assets.
Financing Activities: Cash provided by financing activities during the
first nine months of 1998 totaled $20 million compared to cash used in
financing activities during the first nine months of 1997 of $31 million.
The $51 million increase in cash provided 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 September 30, 1998, receivables sold under the program totaled $307
million. Consumers Gas Group's attributed portion of receivables sold
under the program totaled $52 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) $114 $122 $122
Michigan Gas Storage 3 3 3
_______________________
$117 $125 $125
=================================================================
(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.
4
Consumers Gas Group
Statements of Income
(Unaudited)
Three Months Ended Nine Months Ended Twelve Months Ended
September 30 1998 1997 1998 1997 1998 1997
In Millions, Except Per Share Amounts
Operating Revenue $ 117 $ 110 $ 716 $ 828 $1,092 $1,230
------ ------ ------ ------ ------ ------
Operating Expenses
Operation
Cost of gas sold 39 39 377 472 600 718
Other 46 47 136 128 183 186
------ ------ ------ ------ ------ ------
85 86 513 600 783 904
Maintenance 8 9 25 24 34 37
Depreciation, depletion
and amortization 10 9 60 64 89 91
General taxes 8 7 37 40 52 56
------ ------ ------ ------ ------ ------
111 111 635 728 958 1,088
------ ------ ------ ------ ------ ------
Pretax Operating Income (Loss) 6 (1) 81 100 134 142
------ ------ ------ ------ ------ ------
Other Income (Deductions) - 1 - - (2) (4)
------ ------ ------ ------ ------ ------
Fixed Charges
Interest on long-term debt 7 7 21 21 28 29
Other interest 3 3 11 9 15 13
Capitalized interest - - - - - (1)
Preferred stock dividends 1 1 3 4 4 5
------ ------ ------ ------ ------ ------
11 11 35 34 47 46
------ ------ ------ ------ ------ ------
Income (Loss) Before Income Taxes (5) (11) 46 66 85 92
Income Taxes - (4) 23 29 39 40
------ ------ ------ ------ ------ ------
Net Income (Loss) before cumulative
effect of change in accounting
principle (5) (7) 23 37 46 52
Cumulative effect of change in
accounting for property taxes,
net of $6 tax - - 12 - 12 -
------ ------ ------ ------ ------ ------
Net Income (Loss) $ (5) $ (7) $ 35 $ 37 $ 58 $ 52
====== ====== ====== ====== ====== ======
Net Income (Loss) Attributable to
CMS Energy Shareholders through
Retained Interest $ (3) $ (5) $ 27 $ 28 $ 44 $ 39
------ ------ ------ ------ ------ ------
Net Income (Loss) Attributable to
Class G Shareholders $ (2) $ (2) $ 8 $ 9 $ 14 $ 13
------ ------ ------ ------ ------ ------
Average Class G Common Shares
Outstanding 8 8 8 8 8 8
------ ------ ------ ------ ------ ------
Basic and Diluted Earnings (Loss)
Per Average Class G Common Share
Before Change in Accounting
Principle $ (.16) $ (.21) $ .68 $ 1.13 $ 1.37 $ 1.57
------ ------ ------ ------ ------ ------
Cumulative Effect of Change in
Accounting Principle, Net of Tax,
Per Average Class G Common Share $ - $ - $ .36 $ - $ .36 $ -
------ ------ ------ ------ ------ ------
Basic and Diluted Earnings (Loss)
Per Average Class G Common Share $ (.16) $ (.21) $ 1.04 $ 1.13 $ 1.73 $ 1.57
------ ------ ------ ------ ------ ------
Dividend Declared Per Class G
Common Share $ .325 $ .31 $ .945 $ .90 $1.255 $1.195
====== ====== ====== ====== ====== ======
<FN>
The accompanying condensed notes are an integral part of these statements.
/TABLE
5
Consumers Gas Group
Statements of Cash Flows
(Unaudited)
Nine Months Ended Twelve Months Ended
September 30 1998 1997 1998 1997
In Millions
Cash Flows from Operating Activities
Net income $ 35 $ 37 $ 58 $ 52
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation, depletion and amortization 60 64 89 91
Deferred income taxes and investment tax credit 11 7 9 10
Capital lease and other amortization 5 3 6 4
Other - (1) - -
Cumulative effect of accounting change for
property taxes (18) - (18) -
Changes in other assets and liabilities (27) 12 23 27
------ ------ ------ ------
Net cash provided by operating activities 66 122 167 184
------ ------ ------ ------
Cash Flows from Investing Activities
Capital expenditures (excludes assets placed under
capital lease) (81) (79) (115) (122)
Cost to retire property, net (7) (6) (10) (8)
Proceeds from the sale of Marysville assets 3 - 3 -
Other 1 (2) 3 (2)
------ ------ ------ ------
Net cash used in investing activities (84) (87) (119) (132)
------ ------ ------ ------
Cash Flows from Financing Activities
Proceeds from senior notes 182 - 182 -
Increase in notes payable, net 37 40 2 1
Contribution of CMS Energy stockholders 15 - 15 -
Issuance of common stock 4 4 7 6
Retirement of bonds and other long-term debt (150) (40) (150) (40)
Return of CMS Energy stockholders' contribution (32) - (71) -
Payment of common stock dividends (31) (29) (42) (39)
Payment of capital lease obligations (5) (3) (6) (4)
Proceeds from long-term note - 25 - 25
Proceeds from bank loans - - - 23
Retirement of preferred stock - (26) - (26)
Repayment of long-term note - (2) - (2)
------ ------ ------ ------
Net cash provided by (used in) financing activities 20 (31) (63) (56)
------ ------ ------ ------
Net Increase (Decrease) in Cash and Temporary Cash Investments 2 4 (15) (4)
Cash and Temporary Cash Investments, Beginning of Period 2 15 19 23
------ ------ ------ ------
Cash and Temporary Cash Investments, End of Period $ 4 $ 19 $ 4 $ 19
====== ====== ====== ======
Other cash flow activities and non-cash investing and financing activities were:
Cash transactions
Interest paid (net of amounts capitalized) $ 29 $ 32 $ 39 $ 42
Income taxes paid (net of refunds) 35 37 38 41
Non-cash transactions
Assets placed under capital lease $ 5 $ 2 $ 6 $ 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 September 30 September 30
1998 December 31 1997
(Unaudited) 1997 (Unaudited)
In Millions
Plant and Property (At Cost)
Plant and property $2,328 $2,322 $2,292
Less accumulated depreciation, depletion and amortization 1,213 1,231 1,209
------ ------ ------
1,115 1,091 1,083
Construction work-in-progress 31 28 28
------ ------ ------
1,146 1,119 1,111
------ ------ ------
Current Assets
Cash and temporary cash investments at cost, which approximates market 4 2 19
Accounts receivable and accrued revenue, less allowances
of $3, $3 and $2, respectively (Note 3) 5 53 33
Inventories at average cost
Gas in underground storage 276 197 253
Materials and supplies 6 7 8
Deferred income taxes - 6 4
Prepayments and other 40 51 20
------ ------ ------
331 316 337
------ ------ ------
Non-current Assets
Postretirement benefits 134 142 145
Deferred income taxes 14 6 12
Other 62 61 60
------ ------ ------
210 209 217
------ ------ ------
Total Assets $1,687 $1,644 $1,665
====== ====== ======
7
STOCKHOLDERS' INVESTMENT AND LIABILITIES September 30 September 30
1998 December 31 1997
(Unaudited) 1997 (Unaudited)
In Millions
Capitalization
Common stockholders' equity $ 349 $ 358 $ 382
Preferred stock 52 52 52
Long-term debt 449 333 351
Non-current portion of capital leases 16 16 16
------ ------ ------
866 759 801
------ ------ ------
Current Liabilities
Current portion of long-term debt and capital leases 39 118 100
Notes payable 156 119 154
Accounts payable 86 94 94
Accrued taxes 34 65 30
Accrued refunds 10 10 5
Accrued interest 6 4 3
Deferred income taxes 4 - -
Other 43 44 41
------ ------ ------
378 454 427
------ ------ ------
Non-current Liabilities
Regulatory liabilities for income taxes, net 183 173 178
Postretirement benefits 162 168 170
Deferred investment tax credit 24 25 26
Other 74 65 63
------ ------ ------
443 431 437
------ ------ ------
Commitments and Contingencies (Note 4)
Total Stockholders' Investment and Liabilities $1,687 $1,644 $1,665
====== ====== ======
<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 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 84 136 102 134 138 132
Common stock issued 1 2 4 4 7 6
CMS Energy stockholders' contribution 15 - 15 - 15 -
Return of CMS Energy stockholders'
contribution (11) - (32) - (71) -
---- ---- ---- ---- ---- ----
At end of period 89 138 89 138 89 138
---- ---- ---- ---- ---- ----
Retained Earnings
At beginning of period 92 77 72 52 60 47
Net income (loss) (5) (7) 35 37 58 52
Common stock dividends declared (11) (10) (31) (29) (42) (39)
---- ---- ---- ---- ---- ----
At end of period 76 60 76 60 76 60
---- ---- ---- ---- ---- ----
Total Common Stockholders' Equity $349 $382 $349 $382 $349 $382
==== ==== ==== ==== ==== ====
<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.
Change In Method of Accounting For Property Taxes
During the first quarter of 1998, Consumers Gas Group implemented a change
in the method of accounting for property taxes so that taxes are
recognized during the fiscal period of the taxing authority for which the
taxes are levied. This change provides a better matching of property tax
expenses with the services provided by the taxing authorities, and is
considered the most acceptable basis of recording property taxes. Prior
to 1998, Consumers Gas Group recorded property taxes monthly during the
year following the assessment date (December 31). The cumulative effect
of this one-time change in accounting increased other income by $18
million, and earnings net of tax, by $12 million. The pro forma effect on
prior years' consolidated net income of retroactively recording property
taxes as if the new method of accounting had been in effect for all
periods presented is not material.
2: Earnings Per Share and Dividends
Earnings per share for the three month period ended September 30, 1998 and
September 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 nine months ended
September 30, 1998 and 1997, are based on 25.38 percent and 24.65 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
which was 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). In October
1998, the Board of Directors declared a quarterly dividend of .325 per
share on Class G Common Stock to be paid in November 1998.
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 September 30, 1998 and 1997, is estimated by
management to be $52 million and $36 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 $117 million for 1998, $125 million
for 1999, and $125 million for 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 September 30, 1998
and 1997, the related statements of income and common stockholders' equity
for the three-month, nine-month, and twelve-month periods then ended, and
the related consolidated 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,
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,
November 10, 1998.