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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission Registrant; State of Incorporation; IRS Employer
File Number Address; and Telephone Number Identification No.
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1-9513 CMS ENERGY CORPORATION 38-2726431
(A Michigan Corporation)
Fairlane Plaza South, Suite 1100
330 Town Center Drive, Dearborn, Michigan 48126
(313)436-9200
1-5611 CONSUMERS ENERGY COMPANY 38-0442310
(A Michigan Corporation)
212 West Michigan Avenue, Jackson, Michigan 49201
(517)788-0550
1-2921 PANHANDLE EASTERN PIPE LINE COMPANY 44-0382470
(A Delaware Corporation)
5444 Westheimer Road, P.O. Box 4967, Houston, Texas 77210-4967
(713)989-7000
Indicate by check mark whether the Registrants (1) have filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrants were required to file such reports), and (2) have been subject to
such filing requirements for the past 90 days. Yes X No
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Panhandle Eastern Pipe Line Company meets the conditions set forth in General
Instructions H(1)(a) and (b) of Form 10-Q and is therefore filing this Form 10-Q
with the reduced disclosure format. In accordance with Instruction H, Part I,
Item 2 has been reduced and Part II, Items 2, 3 and 4 have been omitted.
Number of shares outstanding of each of the issuer's classes of common stock at
July 31, 2001:
CMS ENERGY CORPORATION:
CMS Energy Common Stock, $.01 par value 132,418,057
CONSUMERS ENERGY COMPANY, $10 par value, privately held by CMS Energy 84,108,789
PANHANDLE EASTERN PIPE LINE COMPANY, no par value,
indirectly privately held by CMS Energy 1,000
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CMS ENERGY CORPORATION
AND
CONSUMERS ENERGY COMPANY
AND
PANHANDLE EASTERN PIPE LINE COMPANY
QUARTERLY REPORTS ON FORM 10-Q TO THE
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
FOR THE QUARTER ENDED JUNE 30, 2001
This combined Form 10-Q is separately filed by each of CMS Energy Corporation,
Consumers Energy Company and Panhandle Eastern Pipe Line Company. Information
contained herein relating to each individual registrant is filed by such
registrant on its own behalf. Accordingly, except for their respective
subsidiaries, Consumers Energy Company and Panhandle Eastern Pipe Line Company
make no representation as to information relating to any other companies
affiliated with CMS Energy Corporation.
TABLE OF CONTENTS
Page
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Glossary.................................................................................................. 4
PART I: FINANCIAL INFORMATION
CMS Energy Corporation
Management's Discussion and Analysis
Results of Operations......................................................................... CMS - 1
Market Risk Information......................................................................... CMS - 5
Capital Resources and Liquidity................................................................. CMS - 7
Outlook......................................................................................... CMS - 10
Other Matters................................................................................... CMS - 14
Consolidated Financial Statements
Consolidated Statements of Income............................................................... CMS - 16
Consolidated Statements of Cash Flows........................................................... CMS - 17
Consolidated Balance Sheets..................................................................... CMS - 19
Consolidated Statements of Common Stockholders' Equity.......................................... CMS - 21
Condensed Notes to Consolidated Financial Statements:
1. Corporate Structure and Basis of Presentation.............................................. CMS - 22
2. Uncertainties.............................................................................. CMS - 23
3. Short-Term and Long-Term Financings, and Capitalization.................................... CMS - 34
4. Earnings Per Share and Dividends........................................................... CMS - 36
5. Risk Management Activities and Financial Instruments....................................... CMS - 37
6. Reportable Segments........................................................................ CMS - 42
7. Leases..................................................................................... CMS - 42
Report of Independent Public Accountants............................................................. CMS - 45
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TABLE OF CONTENTS
(CONTINUED)
Page
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Consumers Energy Company
Management's Discussion and Analysis
Results of Operations........................................................................... CE - 1
Capital Resources and Liquidity................................................................. CE - 4
Outlook......................................................................................... CE - 4
Other Matters................................................................................... CE - 7
Consolidated Financial Statements
Consolidated Statements of Income............................................................... CE - 10
Consolidated Statements of Cash Flows........................................................... CE - 11
Consolidated Balance Sheets..................................................................... CE - 12
Consolidated Statements of Common Stockholder's Equity.......................................... CE - 14
Condensed Notes to Consolidated Financial Statements:
1. Corporate Structure and Summary of Significant Accounting Policies......................... CE - 15
2. Uncertainties.............................................................................. CE - 17
3. Short-Term Financings and Capitalization................................................... CE - 26
4. Leases .................................................................................... CE - 27
Report of Independent Public Accountants............................................................. CE - 29
Panhandle Eastern Pipe Line Company
Management's Discussion and Analysis
Results of Operations........................................................................... PE - 1
Outlook........................................................................................ PE - 2
Other Matters................................................................................... PE - 3
Consolidated Financial Statements
Consolidated Statements of Income............................................................... PE - 5
Consolidated Statements of Cash Flows........................................................... PE - 6
Consolidated Balance Sheets..................................................................... PE - 7
Consolidated Statements of Common Stockholder's Equity.......................................... PE - 9
Condensed Notes to Consolidated Financial Statements:
1. Corporate Structure........................................................................ PE - 10
2. Regulatory Matters......................................................................... PE - 10
3. Related Party Transactions................................................................. PE - 11
4. Commitments and Contingencies.............................................................. PE - 11
5. Implementation of SFAS No. 133............................................................. PE - 13
6. System Gas ................................................................................ PE - 13
Report of Independent Public Accountants............................................................. PE - 14
Quantitative and Qualitative Disclosures about Market Risk................................................ CO - 1
PART II: OTHER INFORMATION
Item 1. Legal Proceedings............................................................................ CO - 1
Item 4. Submission of Matters to a Vote of Security Holders.......................................... CO - 2
Item 5. Other Information............................................................................ CO - 2
Item 6. Exhibits and Reports on Form 8-K............................................................. CO - 3
Signatures................................................................................................ CO - 4
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GLOSSARY
Certain terms used in the text and financial statements are defined below.
ABATE..................................... Association of Businesses Advocating Tariff Equity
ALJ....................................... Administrative Law Judge
APB....................................... Accounting Principles Board
Alliance.................................. Alliance Regional Transmission Organization
Anadarko.................................. Anadarko Petroleum Corporation, a non-affiliated company
Articles.................................. Articles of Incorporation
Attorney General.......................... Michigan Attorney General
bcf....................................... Billion cubic feet
Big Rock.................................. Big Rock Point nuclear power plant, owned by Consumers
Board of Directors........................ Board of Directors of CMS Energy
Btu....................................... British thermal unit
Clean Air Act............................. Federal Clean Air Act, as amended
CMS Capital............................... CMS Capital Corporation, a subsidiary of Enterprises
CMS Electric and Gas...................... CMS Electric and Gas Company, a subsidiary of Enterprises
CMS Energy................................ CMS Energy Corporation, the parent of Consumers and
Enterprises
CMS Energy Common Stock................... Common stock of CMS Energy, par value $.01 per share
CMS Gas Transmission...................... CMS Gas Transmission Company, a subsidiary of Enterprises
CMS Generation............................ CMS Generation Company, a subsidiary of Enterprises
CMS Holdings.............................. CMS Midland Holdings Company, a subsidiary of Consumers
CMS Midland............................... CMS Midland Inc., a subsidiary of Consumers
CMS MST................................... CMS Marketing, Services and Trading Company, a subsidiary of
Enterprises
CMS Oil and Gas .......................... CMS Oil and Gas Company, a subsidiary of Enterprises
CMS Panhandle Holding .................... CMS Panhandle Holding Company, a subsidiary of CMS Gas
Transmission
Common Stock.............................. All classes of Common Stock of CMS Energy and each of its
subsidiaries, or any of them individually, at the time of an award
or grant under the Performance Incentive Stock Plan
Consumers Campus Holdings................. Consumers Campus Holdings, L.L.C., a wholly owned subsidiary of
Consumers
Consumers................................. Consumers Energy Company, a subsidiary of CMS Energy
Consumers Gas Group....................... The gas distribution, storage and transportation businesses
currently conducted by Consumers and Michigan Gas Storage
Court of Appeals.......................... Michigan Court of Appeals
Customer Choice Act....................... Customer Choice and Electricity Reliability Act, a Michigan
statute enacted in June 2000 that allows all retail customers
choice of alternative electric suppliers no later than January 1,
2002, provides for full recovery of net stranded costs and
implementation costs, establishes a five percent reduction in
residential rates, establishes rate freeze and rate cap, and allows
for Securitization
Detroit Edison............................ The Detroit Edison Company, a non-affiliated company
DIG....................................... Dearborn Industrial Generation, L.L.C., a wholly owned
subsidiary of CMS Generation
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DOE....................................... U.S. Department of Energy
Dow....................................... The Dow Chemical Company, a non-affiliated company
Duke Energy............................... Duke Energy Corporation, a non-affiliated company
EITF...................................... Emerging Issues Task Force
Enterprises............................... CMS Enterprises Company, a subsidiary of CMS Energy
EPA....................................... U.S. Environmental Protection Agency
EPS....................................... Earnings per share
FASB...................................... Financial Accounting Standards Board
FERC...................................... Federal Energy Regulatory Commission
FMLP...................................... First Midland Limited Partnership, a partnership which holds a
lessor interest in the MCV facility
FTC....................................... Federal Trade Commission
GCR....................................... Gas cost recovery
GTNs...................................... CMS Energy General Term Notes(R), $250 million Series A, $125
million Series B, $150 million Series C, $200 million Series D,
$400 million Series E and $72 million Series F
INGAA..................................... Interstate Natural Gas Association of America
Jorf Lasfar............................... The 1,356 MW coal-fueled power plant in Morocco, jointly
owned by CMS Generation and ABB Energy Venture, Inc.
kWh....................................... Kilowatt-hour
Loy Yang...................................The 2,000 MW brown coal fueled Loy Yang A power plant and
an associated coal mine in Victoria, Australia, in which CMS
Generation holds a 50 percent ownership interest
LNG....................................... Liquefied natural gas
Ludington................................. Ludington pumped storage plant, jointly owned by Consumers
and Detroit Edison
mcf........................................Thousand cubic feet
MCV Facility.............................. A natural gas-fueled, combined-cycle cogeneration facility
operated by the MCV Partnership
MCV Partnership........................... Midland Cogeneration Venture Limited Partnership in which
Consumers has a 49 percent interest through CMS Midland
MD&A...................................... Management's Discussion and Analysis
MEPCC..................................... Michigan Electric Power Coordination Center
Michigan Gas Storage...................... Michigan Gas Storage Company, a subsidiary of Consumers
Michigan Transco.......................... Michigan Electric Transmission Company, a subsidiary of
Consumers Energy
MMBtu..................................... Million British thermal unit
MPSC...................................... Michigan Public Service Commission
MW........................................ Megawatts
NEIL...................................... Nuclear Electric Insurance Limited, an industry mutual insurance
company owned by member utility companies
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NMC........................................Nuclear Management Company, a Wisconsin company, formed in
1999 by Northern States Power Company (now Xcel Energy Inc.),
Alliant Energy, Wisconsin Electric Power Company, and
Wisconsin Public Service Company to operate and manage
nuclear capacity owned by the four utilities.
NOx........................................Nitrogen Oxide
NRC....................................... Nuclear Regulatory Commission
NYMEX......................................New York Mercantile Exchange
Palisades..................................Palisades nuclear power plant, owned by Consumers
Pan Gas Storage........................... Pan Gas Storage Company, a subsidiary of Panhandle Eastern
Pipe Line Company
Panhandle................................. Panhandle Eastern Pipe Line Company, including its subsidiaries
Trunkline, Pan Gas Storage, Panhandle Storage, and Trunkline
LNG. Panhandle is a wholly owned subsidiary of CMS Gas
Transmission
Panhandle Eastern Pipe Line............... Panhandle Eastern Pipe Line Company, a wholly owned
subsidiary of CMS Gas Transmission
Panhandle Storage......................... CMS Panhandle Storage Company, a subsidiary of Panhandle
Eastern Pipe Line Company
PCBs...................................... Poly chlorinated biphenyls
Powder River.............................. CMS Oil & Gas owns a significant interest in 13 coal bed
methane fields or projects developed within the Powder River
Basin which spans the border between Wyoming and Montana.
PPA....................................... The Power Purchase Agreement between Consumers and the
MCV Partnership with a 35-year term commencing in March
1990
PSCR...................................... Power supply cost recovery
PUHCA..................................... Public Utility Holding Company Act of 1935
RTO....................................... Regional Transmission Organization
SAB....................................... Staff Accounting Bulletin
Sea Robin................................. Sea Robin Pipeline Company
SEC....................................... U.S. Securities and Exchange Commission
Securitization............................ A financing authorized by statute in which a MPSC approved
flow of revenues from a portion of the rates charged by a utility to
its customers is set aside and pledged as security for the
repayment of Securitization bonds issued by a special purpose
entity affiliated with such utility.
Senior Credit Facilities.................. $450 million one-year revolving credit facility, maturing in June
2002 and a $300 million three-year revolving credit facility,
maturing in June 2004
SFAS...................................... Statement of Financial Accounting Standards
SIPS...................................... State Implementation Plans
SOP....................................... Statement of Position
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Stranded Costs............................ Costs incurred by utilities in order to serve their customers in a
regulated monopoly environment, but which may not be
recoverable in a competitive environment because of customers
leaving their systems and ceasing to pay for their costs. These
costs could include owned and purchased generation and
regulatory assets.
Superfund................................. Comprehensive Environmental Response, Compensation and
Liability Act
TBtu...................................... Trillion british thermal unit
Transition Costs.......................... Stranded Costs, as defined, plus the costs incurred in the
transition to competition.
Trunkline................................. Trunkline Gas Company, a subsidiary of Panhandle Eastern Pipe
Line Company
Trunkline LNG..............................Trunkline LNG Company, a subsidiary of Panhandle Eastern Pipe
Line Company
Trust Preferred Securities................ Securities representing an undivided beneficial interest in the
assets of statutory business trusts, which interests have a
preference with respect to certain trust distributions over the
interests of either CMS Energy or Consumers, as applicable, as
owner of the common beneficial interests of the trusts
Union..................................... Utility Workers of America, AFL-CIO
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CMS Energy Corporation
CMS ENERGY CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
CMS Energy is the parent holding company of Consumers and Enterprises. Consumers
is a combination electric and gas utility company serving Michigan's Lower
Peninsula. Enterprises, through subsidiaries, including Panhandle and its
subsidiaries, is engaged in several domestic and international diversified
energy businesses including: natural gas transmission, storage and processing;
independent power production; oil and gas exploration and production; energy
marketing, services and trading; and international energy distribution.
The MD&A of this Form 10-Q should be read along with the MD&A and other parts of
CMS Energy's 2000 Form 10-K. This MD&A refers to, and in some sections
specifically incorporates by reference, CMS Energy's Condensed Notes to
Consolidated Financial Statements and should be read in conjunction with such
Consolidated Financial Statements and Notes. This report and other written and
oral statements that CMS Energy may make contain forward-looking statements as
defined by the Private Securities Litigation Reform Act of 1995. CMS Energy's
intentions with the use of the words "anticipates," "believes," "estimates,"
"expects," "intends," and "plans," and variations of such words and similar
expressions, are solely to identify forward-looking statements that involve risk
and uncertainty. These forward-looking statements are subject to various factors
that could cause CMS Energy's actual results to differ materially from the
results anticipated in such statements. CMS Energy has no obligation to update
or revise forward-looking statements regardless of whether new information,
future events or any other factors affect the information contained in such
statements. CMS Energy does, however, discuss certain risk factors,
uncertainties and assumptions in this MD&A and in Item 1 of the 2000 Form 10-K
in the section entitled "Forward-Looking Statements Cautionary Factors and
Uncertainties" and in various public filings it periodically makes with the SEC.
CMS Energy designed this discussion of potential risks and uncertainties, which
is by no means comprehensive, to highlight important factors that may impact CMS
Energy's outlook. This report also describes material contingencies in CMS
Energy's Condensed Notes to Consolidated Financial Statements, and CMS Energy
encourages its readers to review these Notes.
RESULTS OF OPERATIONS
CMS ENERGY CONSOLIDATED EARNINGS
In Millions, Except Per Share Amounts
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Three months ended June 30, 2001 2000(a) Change
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Consolidated Net Income $ 53 $ 79 $ (26)
Earnings Per Average Common Share:
Basic .40 .72 (.32)
Diluted .40 .71 (.31)
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(a) For the three months ended June 30, 2000, the accounting change for crude
oil inventories decreased net income by $2 million, or $.01 per basic and
diluted share.
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CMS Energy Corporation
In Millions, Except Per Share Amounts
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Six months ended June 30, 2001 2000(b) Change
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Consolidated Net Income $ 162 $ 154 $ 8
Earnings Per Average Common Share:
Basic 1.27 1.38 (.11)
Diluted 1.25 1.36 (.11)
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(b) For the six months ended June 30, 2000, the accounting change decreased net
income by $7 million, or $.06 per basic and diluted share.
The decrease in consolidated net income for the second quarter 2001 over the
comparable period in 2000 resulted primarily from the timing of asset sales
gains which totaled 5 cents per share in the second quarter 2001 compared to 43
cents per share in 2000. Partially offsetting the lower asset sales gains were
the increased earnings from CMS Energy's diversified energy businesses,
particularly the marketing, services and trading and oil and gas exploration and
production businesses, and improved earnings from CMS Energy's utility.
The increase in consolidated net income for the six months ended June 30, 2001
over the comparable period in 2000 was due primarily to increased earnings from
CMS Energy's utility and from the marketing, services and trading, oil and gas
exploration and production, and natural gas transmission diversified energy
businesses. Partially offsetting these increases was the timing of asset sales
gain.
For further information, see the individual results of operations for each CMS
Energy business segment in this MD&A.
CONSUMERS' ELECTRIC UTILITY RESULTS OF OPERATIONS
ELECTRIC PRETAX OPERATING INCOME:
In Millions
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June 30 2001 2000 Change
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Three months ended $ 83 $ 109 $ (26)
Six months ended 218 224 (6)
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For the three months ended June 30, 2001, electric pretax operating income
decreased $26 million from the comparable period in 2000. The earnings decrease
is the result of increased replacement power costs from scheduled plant outages
and reduced electric deliveries resulting from the economic slowdown. For the
six months ended June 30, 2001, electric pretax operating income decreased $6
million from the comparable period in 2000. The earnings decrease also reflects
the impact of increased costs of replacement purchased power from plant outages
and reduced electric deliveries resulting from the economic slowdown. The
following table quantifies these impacts on pretax operating income:
CMS-2
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CMS Energy Corporation
In Millions
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Three Months Six Months
Ended June 30 Ended June 30
Change Compared to Prior Year 2001 vs 2000 2001 vs 2000
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Electric system deliveries $ (2) $ 1
Power supply costs and related production revenue (31) (2)
Rate decrease (6) (19)
Non-commodity revenue 4 10
Other operating expenses 9 4
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Total change $ (26) $ (6)
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ELECTRIC DELIVERIES: For the three months ended June 30, 2001, electric
deliveries including intersystem volumes were 9.3 billion kWh, a decrease of 0.8
billion kWh or 8.0 percent compared to the second quarter of 2000. Total
electric deliveries decreased primarily due to lower industrial usage and lower
intersystem sales caused by plant outages which reduced the opportunity to sell
excess capacity. For the six months ended June 30, 2001, electric deliveries
were 19.3 billion kWh, a slight decrease from the corresponding 2000 period.
Total electric deliveries decreased due to lower intersystem sales and less
usage by industrial and special contract customers.
POWER SUPPLY COSTS:
In Millions
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June 30 2001 2000 Change
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Three months ended $ 305 $ 294 $ 11
Six months ended 606 594 12
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For the three and six months ended June 30, 2001, power supply costs increased
$11 million and $12 million, respectively, from the comparable period in 2000,
primarily due to higher interchange power purchases.
CONSUMERS' GAS UTILITY RESULTS OF OPERATIONS
GAS PRETAX OPERATING INCOME:
In Millions
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June 30 2001 2000 Change
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Three months ended $ 17 $ (28) $ 45
Six months ended 82 35 47
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For the three months ended June 30, 2001, gas pretax operating income increased
by $45 million. The earnings increase is primarily the result of the absence of
a $45 million regulatory obligation related to gas prices recorded in the second
quarter of 2000. For the six months ended June 30, 2001, gas pretax operating
income increased by $47 million, primarily the result of the regulatory
obligation discussed for the second quarter above and increased gross margins.
The improvement in gross margin reflects higher deliveries to sales customers
due to colder temperatures during the heating season, partially offset by lower
transport deliveries due to economic conditions. The following table quantifies
these impacts on pretax operating income.
CMS-3
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CMS Energy Corporation
In Millions
Three Months Six Months
Ended June 30 Ended June 30
Change Compared to Prior Year 2001 vs 2000 2001 vs 2000
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Gas deliveries $ (2) $ 8
Gas commodity costs and related revenue 44 42
Gas wholesale and retail services 2 5
Other operating expenses 1 (8)
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Total change $ 45 $ 47
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GAS DELIVERIES: For the three months ended June 30, 2001, gas system deliveries,
including miscellaneous transportation volumes totaled 57 bcf, a decrease of 9
bcf or 14.1 percent compared with 2000. During the second quarter of 2001, the
decreased deliveries reflect warmer temperatures, and a reduction in demand due
to economic factors. For the six months ended June 30, 2001, gas system
deliveries, including miscellaneous transportation totaled 217 bcf, a decrease
of 10 bcf or 4.8 percent compared with 2000.
COST OF GAS SOLD:
In Millions
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June 30 2001 2000 Change
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Three months ended $ 141 $ 95 $ 46
Six months ended 490 390 100
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For the three months ended June 30, 2001, the cost of gas sold increased due to
higher gas prices. During the second quarter of 2001, these higher gas costs
were partially offset by decreased sales from warmer than normal temperatures.
For the six months ended June 30, 2001, higher gas prices through the first two
quarters and colder than normal temperatures contributed to the increased cost
of gas sold.
NATURAL GAS TRANSMISSION RESULTS OF OPERATIONS
PRETAX OPERATING INCOME: For the three months ended June 30, 2001, pretax
operating income decreased $2 million (4 percent) from the comparable period in
2000. The decrease primarily reflects lower earnings from international
investments largely offset by a 57 percent increase in LNG shipments compared to
2000 (22 shipments compared to 14), and improved gas gathering and processing
results of operations. For the six months ended June 30, 2001 pretax operating
income increased, $14 million (11 percent) from the comparable period in 2000.
The increase primarily reflects a 95 percent increase in LNG shipments compared
to 2000 (37 shipments compared to 19), and improved gas gathering and processing
results of operations.
INDEPENDENT POWER PRODUCTION RESULTS OF OPERATIONS
PRETAX OPERATING INCOME: For the three months ended June 30, 2001, pretax
operating income decreased $39 million (57 percent) from the comparable period
in 2000. The decrease reflects decreased earnings from domestic plants due to
the sale of a cogeneration plant and a hydro plant in 2000, reduced earnings
from the MCV Facility, construction delays at the DIG plant which led to
increased steam generation costs, and a gain recorded in 2000 reflecting the
restructuring of a power supply contract. These decreases were partially offset
by the earnings benefits from the expansion of the Jorf Lasfar facility and the
operation of additional units at the Takoradi facility in Africa.
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CMS Energy Corporation
For the six months ended June 30, 2001, pretax operating income decreased $32
million (38 percent) from the comparable period in 2000. The decrease reflects
decreased earnings from domestic plants due to the sale of power plants in 2000,
construction delays at the DIG plant which led to increased costs for steam
generation, and a gain recorded in 2000 reflecting the restructuring of a power
supply contract. These decreases were partially offset by the earnings benefits
from the expansion of the Jorf Lasfar facility, the operation of additional
units at the Takoradi facility and the absence of operating losses in 2001 from
the investment in Loy Yang, which was written off in the fourth quarter of 2000.
OIL AND GAS EXPLORATION AND PRODUCTION RESULTS OF OPERATIONS
PRETAX OPERATING INCOME: For the three months ended June 30, 2001, pretax
operating income increased $27 million (1,350 percent) from the comparable
period in 2000 as a result of higher oil and natural gas liquids prices and
increased production from operations in Equatorial Guinea and the Powder River
properties. Partially offsetting these increases were higher operating, and
general and administrative costs. For the six months ended June 30, 2001, pretax
operating income increased $36 million (600 percent) as a result of higher
commodity prices, and increased production from operations in Equatorial Guinea
and the Powder River properties.
MARKETING, SERVICES AND TRADING RESULTS OF OPERATIONS
PRETAX OPERATING INCOME: For the three months ended June 30, 2001, pretax
operating income increased $51 million from the comparable period in 2000. The
increase reflects increased long-term power sales, wholesale gas trading
activity and mark-to-market revenues, net of reserves, primarily from long-term
power sales and wholesale gas trading. For the six months ended June 30, 2001,
pretax operating income increased $54 million from the comparable period in
2000. The increase reflects the execution of long-term power sales contracts,
increased wholesale gas trading and mark-to-market revenues, net of reserves,
primarily from long-term power sales and wholesale gas trading. Due to the
variable and competitive nature of energy trading, results for this interim
period are not necessarily indicative of results to be achieved for the fiscal
year.
INTERNATIONAL ENERGY DISTRIBUTION RESULTS OF OPERATIONS
PRETAX OPERATING INCOME: For the three and six months periods ended June 30,
2001, pretax operating income decreased $4 million and $8 million from the three
and six months periods ended June 30, 2000, respectively. The decreases
primarily reflect decreased earnings from operations due to the sale of CMS
Energy's ownership interest in an Argentine electric distribution utility.
MARKET RISK INFORMATION
CMS Energy is exposed to market risks including, but not limited to, changes in
interest rates, currency exchange rates, and certain commodity and equity
security prices. CMS Energy's derivative activities are subject to the direction
of the Executive Oversight Committee, which is comprised of certain members of
CMS Energy's senior management, and its Risk Committee, which is comprised of
CMS Energy business unit managers. The purpose of the risk management policy is
to measure and limit CMS Energy's overall energy commodity risk by implementing
an enterprise-wide policy across all CMS Energy business units. This allows CMS
Energy to maximize the use of hedges among its business units before utilizing
derivatives with external parties. The role of the Risk Committee is to review
the corporate commodity position and ensure that net corporate exposures are
within the economic risk tolerance levels established by the Board of Directors.
Management employs established policies and procedures to manage its risks
associated with market fluctuations, including the use of various derivative
instruments such as futures, swaps, options and forward contracts. Management
believes that any losses incurred on derivative instruments used to hedge risk
would be offset by an opposite movement of the value of the hedged risk. For
further information on CMS Energy's use
CMS-5
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CMS Energy Corporation
of derivative instruments to manage risks, see Note 5, Risk Management
Activities and Financial Instruments, incorporated by reference herein.
CMS Energy has performed sensitivity analyses to assess the potential loss in
fair value, cash flows and earnings based upon hypothetical 10 percent increases
and decreases in market exposures. Management does not believe that sensitivity
analyses alone provide an accurate or reliable method for monitoring and
controlling risks; therefore, CMS Energy and its subsidiaries rely on the
experience and judgment of senior management and traders to revise strategies
and adjust positions as they deem necessary. Losses in excess of the amounts
determined in the sensitivity analyses could occur if market rates or prices
exceed the 10 percent shift used for the analyses.
COMMODITY PRICE RISK: CMS Energy is exposed to market fluctuations in the price
of natural gas, oil, electricity, coal and natural gas liquids. CMS Energy
employs established policies and procedures to manage these risks using various
commodity derivatives, including futures contracts, options and swaps (which
require a net cash payment for the difference between a fixed and variable
price.) The prices of these energy commodities can fluctuate because of, among
other things, changes in the supply of and demand for those commodities. To
minimize adverse price changes, CMS Energy also hedges certain inventory and
purchases and sales contracts. Based on a sensitivity analysis, CMS Energy
estimates that if energy commodity prices average 10 percent higher or lower,
pretax operating income for the remainder of 2001 would increase or decrease by
$7.8 million and $7.9 million, respectively. These hypothetical 10 percent
shifts in quoted commodity prices would not have had a material impact on CMS
Energy's consolidated financial position or cash flows as of June 30, 2001. The
analysis does not quantify short-term exposure to hypothetically adverse price
fluctuations in inventories.
Consumers enters into, for purposes other than trading, electricity and gas fuel
call options and swap contracts to protect against risk due to fluctuations in
the market price of these commodities and to ensure a reliable source of
capacity to meet its customers' electric needs.
At June 30, 2001, the fair value based on quoted future market prices of
electricity-related option and swap contracts was $33 million. Assuming a
hypothetical 10 percent adverse change in market prices, the potential reduction
in fair value associated with these contracts would be $6 million. As of June
30, 2001, Consumers had an asset of $122 million as a result of premiums
incurred for electricity call option contracts. Consumers' maximum exposure
associated with the call option contracts is limited to the premiums paid.
INTEREST RATE RISK: CMS Energy is exposed to interest rate risk resulting from
the issuance of fixed-rate and variable-rate debt, including that associated
with trust preferred securities, and from interest rate swaps and interest rate
lock agreements. CMS Energy uses a combination of fixed-rate and variable-rate
debt, as well as interest rate swaps and rate locks to manage and mitigate
interest rate risk exposure when deemed appropriate, based upon market
conditions. CMS Energy employs these strategies to attempt to provide and
maintain the lowest cost of capital. At June 30, 2001, the carrying amounts of
long-term debt and trust preferred securities were $7.2 billion and $1.3
billion, respectively, with corresponding fair values of $7.0 billion and $1.2
billion, respectively. Based on a sensitivity analysis at June 30, 2001, CMS
Energy estimates that if market interest rates average 10 percent higher or
lower, earnings before income taxes for the subsequent 12 months would not have
a material impact on CMS Energy's consolidated financial position or cash flows.
In addition, based on a 10 percent adverse shift in market rates, CMS Energy
would have an exposure of approximately $403 million to the fair value of its
long-term debt and trust preferred securities if it had to refinance all of its
long-term fixed-rate debt and trust preferred securities. CMS Energy does not
intend to refinance its fixed-rate debt and trust preferred securities in the
near term and believes that any adverse change in interest rates would not have
a material effect on CMS Energy's consolidated financial position as of June 30,
2001.
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The fair value of CMS Energy's floating to fixed interest rate swaps at June 30,
2001, with a notional amount of $819 million, was $16 million, which represents
the amount CMS Energy would pay upon settlement. The swaps mature at various
times through 2002 and are designated as cash flow hedges for accounting
purposes.
CURRENCY EXCHANGE RISK: CMS Energy is exposed to currency exchange risk that
arises from net investments in foreign operations as well as various
international projects in which CMS Energy has an equity interest and have debt
denominated in the US dollar. CMS Energy uses forward exchange and option
contracts to hedge these currency exchange risks. At June 30, 2001, CMS Energy's
primary currency exchange rate exposures were the Brazilian real, the Argentine
peso and the Australian dollar. The impact of the hedges of the net investments
in foreign operations is reflected in other comprehensive income as a component
of the foreign currency translation adjustment. For the second quarter of 2001,
the adjustment for hedging was $6 million of the total net foreign currency
translation adjustment of $(17) million. As a result of exchange rate
variations, CMS Energy recognized approximately $3 million in earnings during
the second quarter of 2001 as a result of hedges for US dollar denominated debt
that did not qualify as net investment hedges, and consequently, were
marked-to-market through earnings. This gain appears on the Consolidated
Statements of Income in Other Income (Deductions).
Based on a sensitivity analysis at June 30, 2001, a 10 percent adverse shift in
currency exchange rates would not have a material effect on CMS Energy's
consolidated financial position or results of operations as of June 30, 2001,
but would result in a net cash settlement of approximately $11 million. The
estimated fair value of the foreign exchange hedges at June 30, 2001 was $13
million, which represents the amount CMS Energy would receive upon settlement.
EQUITY SECURITY PRICE RISK: CMS Energy and certain of its subsidiaries have
equity investments in companies in which they hold less than a 20 percent
interest. A hypothetical 10 percent adverse shift in equity security prices
would not have a material effect on CMS Energy's consolidated financial
position, results of operations or cash flows as of June 30, 2001.
For a discussion of accounting policies related to derivative transactions, see
Note 5, Risk Management Activities and Financial Instruments, incorporated by
reference herein.
CAPITAL RESOURCES AND LIQUIDITY
CASH POSITION, INVESTING AND FINANCING
CMS Energy's primary ongoing source of cash is dividends and other distributions
from subsidiaries. During the first six months of 2001, Consumers paid $96
million in common dividends and Enterprises paid $276 million in common
dividends and other distributions to CMS Energy. In July 2001, Consumers
declared a $39 million common dividend to CMS Energy, payable in August 2001.
CMS Energy's consolidated cash requirements are met by its operating and
financing activities.
OPERATING ACTIVITIES: CMS Energy's consolidated net cash provided by operating
activities is derived mainly from the processing, storage, transportation and
sale of natural gas; the generation, transmission, distribution and sale of
electricity; and the sale of oil. For the first six months of 2001 and 2000,
consolidated cash from operations totaled $328 million and $181 million,
respectively. The $147 million increase resulted primarily from an increase in
cash earnings, an increase in distributions from related parties, and the timing
of cash receipts and payments related to working capital items. CMS Energy uses
its cash derived from operating
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activities primarily to maintain and expand its international and domestic
businesses, to maintain and expand electric and gas systems of Consumers, to pay
interest on and retire portions of its long-term debt, and to pay dividends.
INVESTING ACTIVITIES: For the first six months of 2001 and 2000, CMS Energy's
consolidated net cash used in investing activities totaled $659 million and $37
million, respectively. The increased use of cash of $622 million primarily
reflects $475 million of reduced proceeds from the sales of assets in 2001
compared to 2000. CMS Energy's expenditures (excluding acquisitions) during the
first six months of 2001 for its utility and diversified energy businesses were
$373 million and $355 million, respectively, compared to $243 million and $279
million, respectively, during the comparable period in 2000.
FINANCING ACTIVITIES: For the first six months of 2001, CMS Energy's net cash
provided by financing activities totaled $325 million, while net cash used in
financing activities totaled $36 million for the first six months of 2000. The
increase of $361 million resulted primarily from an increase in the proceeds
from notes, bonds, and other long term debt ($113 million), as well as increased
proceeds from Trust Preferred Securities ($121 million), an increase in the
issuance of common stock ($325 million) and a decrease in the repurchase of
common stock ($129 million), partially offset by an increase in the retirement
of bonds and other long-term debt ($167 million) and an increase in the
retirement of notes payable ($148 million). The following table summarizes
securities issued during the first six months of 2001:
In Millions
- -------------------------------------------------------------------------------------------------------------------
Distribution/ Principal
Month Issued Maturity Interest Rate Amount Use of Proceeds
- -------------------------------------------------------------------------------------------------------------------
CMS ENERGY
GTNs Series F (1) (1) 8.58% $ 130 General corporate purposes
Common Stock February n/a 10.0 shares 296 Repay debt and general
corporate purposes
Common Stock (2) n/a 1.2 shares 32 General corporate purposes
Senior Notes March 2011 8.50% 350 Repay debt and general
----- corporate purposes
Total $ 808
=====
===================================================================================================================
(1) GTNs are issued from time to time with varying maturity dates. The rate
shown herein is a weighted average interest rate.
(2) Common Stock is issued from time to time in conjunction with the stock
purchase plan and various employee savings and stock incentive plans.
In the first six months of 2001, CMS Energy declared and paid $94 million in
cash dividends to holders of CMS Energy Common Stock. In July 2001, the Board of
Directors declared a quarterly dividend of $.365 per share on CMS Energy Common
Stock, payable in August 2001.
OTHER INVESTING AND FINANCING MATTERS: At June 30, 2001, the book value per
share of CMS Energy Common Stock was $20.28.
At August 1, 2001, CMS Energy had an aggregate $1.2 billion in securities
registered for future issuance.
CMS Energy has $750 million of senior credit facilities consisting of a $450
million one-year revolving credit facility, maturing in June 2002 and a $300
million three-year revolving credit facility, maturing in June 2004 (Senior
Credit Facilities). CMS Energy also has unsecured lines of credit as anticipated
sources of funds to
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finance working capital requirements and to pay for capital expenditures between
long-term financings. At June 30, 2001, the total amount available under the
Senior Credit Facilities and the unsecured lines of credit were $750 million and
$22 million, respectively. For detailed information, see Note 3, Short-Term and
Long-Term Financings, and Capitalization, incorporated by reference herein.
Consumers has credit facilities, lines of credit and a trade receivable sale
program in place as anticipated sources of funds to fulfill its currently
expected capital expenditures. For detailed information about this source of
funds, see Note 3, Short-Term and Long-Term Financings, and Capitalization,
incorporated by reference herein.
In July 2001, CMS Energy sold $269 million aggregate principal amount of 8.9
percent senior notes due 2008. Net proceeds from the sale of approximately $262
million were used to repay the $250 million aggregate principal amount of 8.0
percent Reset Put Securities due 2011, which were called at par by Banc of
America Securities LLC, and to pay the related call option of approximately $12
million.
In July 2001, CMS Energy called $240 million of GTNs at interest rates ranging
from 7.75% to 8.375% using funds available under CMS Energy's Senior Credit
Facilities at a lower borrowing cost.
CMS Energy is continuing to review its business alternatives for its investment
in Loy Yang, including future financing and operating alternatives, the nature
and extent of CMS Energy's future involvement and the potential for an ultimate
sale of its interest in the future. CMS Energy has not established a deadline
for any of these alternatives.
CMS Energy currently intends to sell assets resulting in cash proceeds and
associated reduction of consolidated project debt in the total amount of
approximately $450 million, as more fully discussed in the Outlook section
below.
CAPITAL EXPENDITURES
CMS Energy estimates that capital expenditures, including new lease commitments
and investments in new business developments through partnerships and
unconsolidated subsidiaries, will total $3.6 billion during 2001 through 2003.
These estimates are prepared for planning purposes and are subject to revision.
CMS Energy expects to satisfy a substantial portion of the capital expenditures
with cash from operations. CMS Energy will continue to evaluate capital markets
in 2001 as a potential source for financing its subsidiaries' investing
activities. CMS Energy estimates capital expenditures by business segment over
the next three years as follows:
In Millions
- -------------------------------------------------------------------------------------------------------------------
Years Ending December 31 2001 2002 2003
- -------------------------------------------------------------------------------------------------------------------
Consumers electric operations (a) (b) $ 550 $ 535 $ 460
Consumers gas operations (a) 145 175 165
Natural gas transmission 218 185 140
Independent power production 98 40 35
Oil and gas exploration and production 195 250 225
Marketing, services and trading 3 15 15
International energy distribution 53 10 5
Other 43 15 10
---------------------------------------------
$1,305 $1,225 $1,055
===================================================================================================================
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(a) These amounts include an attributed portion of Consumers' anticipated
capital expenditures for plant and equipment common to both the electric and gas
utility businesses.
(b) These amounts include estimates for capital expenditures possibly required
to comply with recently revised national air quality standards under the Clean
Air Act. For further information see Note 2, Uncertainties - Electric
Environmental Matters.
For further explanation of CMS Energy's planned investments for the years 2001
through 2003, see the Outlook section below.
OUTLOOK
CMS Energy intends to enhance long-term growth through an asset optimization
program that includes the ongoing sale or refinancing of assets or businesses
performing below prior expectations or no longer within CMS Energy's strategic
plan. In 2001, CMS Energy intends to sell assets that it anticipates will result
in cash proceeds and associated reduction of consolidated project debt in the
total amount of approximately $450 million. There are no assurances that CMS
Energy will achieve this level of asset sales or refinancing and associated debt
reduction in 2001 as planned. Also, CMS Energy is reviewing its options
regarding assets performing below prior expectations, including certain assets
in Argentina and Australia. The ultimate financial impact of these transactions
is still uncertain at this time.
GENERAL OUTLOOK
CMS Energy's vision is to be an integrated energy company with a strong asset
base, supplemented with an active marketing, services and trading capability.
CMS Energy intends to integrate the skills and assets of its business units to
obtain optimal returns and to provide expansion opportunities for its multiple
existing businesses.
CMS Energy continues to sharpen its geographic focus on key growth areas where
it already has significant investments and opportunities. As a result, CMS
Energy's primary development focus shifted to North America, particularly in the
United States' central corridor. In addition, CMS Energy will focus its
international activities on select high-growth regions, particularly in the
Middle East and West Africa.
CMS Energy is currently evaluating longer-term growth initiatives, including:
natural gas acquisitions and joint ventures in North America; marketing
acquisitions; expanded and new North American LNG regasification terminals; and
various corporate and financial repositioning options, including possible
separation of its utility and non-utility businesses.
DIVERSIFIED ENERGY OUTLOOK
NATURAL GAS TRANSMISSION AND PANHANDLE OUTLOOK: CMS Energy seeks to build on
Panhandle's position as a leading United States interstate natural gas pipeline
system and the nation's largest operating LNG receiving terminal through
expansion and better utilization of its existing facilities and construction of
new facilities. In addition, CMS Energy is pursuing structured financings of
several of its assets, including its Lake Charles, Louisiana, LNG receiving
facility. By providing additional transportation, storage and other asset-based,
value-added services to customers such as new gas-fueled power plants, local
distribution companies, industrial and end-users, marketers and others, CMS
Energy expects to expand its natural gas pipeline business. CMS Energy is in the
process of converting certain Panhandle pipeline facilities through a joint
venture to permit the throughput of liquid products, such as gasoline and is
participating in a 150-mile natural gas pipeline venture from
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Illinois to Wisconsin to meet the needs of those significantly growing markets.
Panhandle continues to attempt to maximize revenues from existing assets and to
advance acquisition opportunities and development projects that provide expanded
services to meet the specific needs of customers. In May 2001, Trunkline LNG
signed an agreement with BG Group of the United Kingdom which provides for a
22-year contract, beginning January 2002, for all the uncommitted capacity at
Trunkline LNG's facility.
INDEPENDENT POWER PRODUCTION OUTLOOK: CMS Energy's independent power production
business plans to continue its growth by addressing the increasing demand for
electricity in selected markets, primarily in the United States and the Middle
East. These plans include commencing operations of projects that are at or near
the end of construction, such as a 407 MW facility in the United Arab Emirates,
a 710 MW project in Michigan, and the expansion of a facility in Morocco from
660 MW to 1,356 MW.
OIL AND GAS EXPLORATION AND PRODUCTION OUTLOOK: CMS Energy seeks to accelerate
natural gas exploration, development and production in North America through the
significant natural gas potential in its existing properties in West Texas,
Wyoming and Montana. CMS Energy also seeks to explore for, or acquire, natural
gas reserves in North America where integrated development opportunities exist
with other CMS Energy businesses involved in gathering, processing and pipeline
activities. CMS Energy seeks to capitalize on its West Africa oil and gas
reserves by using the gas from an onshore processing facility in a
methanol-producing plant in West Africa in which the natural gas transmission
business has an ownership interest. Another important part of the CMS Energy
growth plan is to continue an accelerated development program to increase
gas/condensate production in Equatorial Guinea. Accordingly, CMS Energy expects
to bring in a strategic partner to share in the accelerated development of its
investments in Equatorial Guinea. Finally, CMS Energy plans to further develop
its oil and gas assets in the Republic of Congo, Tunisia, Cameroon, Colombia and
Venezuela.
MARKETING, SERVICES AND TRADING OUTLOOK: CMS Energy intends to use its
marketing, services and trading business to focus on wholesale customers such as
municipals, cooperatives and large industrial customers in the central United
States where CMS Energy's existing assets are concentrated. CMS Energy's
marketing, services and trading business also intends to contract for use of
significant gas transportation and storage assets in the central United States
to provide a platform for wholesale marketing, trading, and physical arbitrage.
CMS Energy also seeks to continue developing importing and marketing
opportunities for LNG. CMS Energy plans to capitalize on favorable market
conditions for energy performance contracting through expanding its services
business in selected markets.
INTERNATIONAL ENERGY DISTRIBUTION OUTLOOK: Through its international energy
distribution business, CMS Energy will continue focusing on areas of high growth
and opportunity to expand the range of energy-related services, including
commercial and technical service. At its existing distribution facilities in
Venezuela and Brazil, CMS Energy intends to continue operational improvements to
incrementally grow the business and enhance the facilities' value.
UNCERTAINTIES: The results of operations and financial position of CMS Energy's
diversified energy businesses may be affected by a number of trends or
uncertainties that have, or CMS Energy reasonably expects could have, a material
impact on income from continuing operations and cash flows. Such trends and
uncertainties include: 1) the ability to sell or refinance assets or businesses
and achieve balance sheet and credit improvement in accordance with our
financial plan; 2) the international monetary fluctuations, particularly in
Argentina, Brazil and Australia, 3) changes in foreign governmental and
regulatory policies that could significantly reduce the tariffs charged and
revenues recognized by certain foreign projects; 4) the imposition of stamp
taxes on certain South American contracts that could significantly increase
project expenses; 5) the increased competition in the market for transmission of
natural gas to the Midwest causing pressure on prices charged by Panhandle, and
6) the expected increase in competition for LNG terminalling services, and the
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volatility in natural gas prices, creating volatility in LNG terminalling
revenues.
CONSUMERS' ELECTRIC UTILITY BUSINESS OUTLOOK
GROWTH: Over the next five years, Consumers expects electric system deliveries
to grow an average of approximately two percent per year based primarily on a
steadily growing customer base. This growth rate does not take into account the
impact of electric industry restructuring, including the impact of the Customer
Choice Act that allows all customers to choose their electricity supplier
beginning January 1, 2002, or of changing regulation. Abnormal weather, changing
economic conditions or the developing competitive market for electricity may
affect actual electric deliveries by Consumers in future periods.
COMPETITION AND REGULATORY RESTRUCTURING: The Customer Choice Act, passed by the
Michigan Legislature, as a result of repeated efforts to enact electric utility
restructuring legislation, became effective June 2000.
The intent of the Customer Choice Act is to move the retail electric businesses
in Michigan to competition. Several years prior to the enactment of the Customer
Choice Act, in response to industry restructuring efforts, Consumers entered
into multi-year electric supply contracts with some of its largest industrial
customers to provide power to some of their facilities. The MPSC approved those
contracts as part of its phased introduction to competition. During the period
from 2001 through 2005, either Consumers or these industrial customers can
terminate or restructure some of these contracts. These contracts involve
approximately 600 MW of customer power supply requirements. CMS Energy cannot
predict the ultimate financial impact of changes related to these power supply
contracts.
Uncertainty exists with respect to the enactment of federal electric industry
restructuring legislation. A variety of bills introduced in Congress in recent
years have sought to change existing federal regulation of the industry, and the
House of Representatives passed a bill in the current session of Congress.
These federal bills could potentially affect or supercede state regulation;
however, none have been enacted.
In part because of certain policy pronouncements by the FERC, Consumers joined
the Alliance RTO. In January 2001, the FERC granted Consumers' application to
transfer ownership and control of its transmission facilities to a wholly owned
subsidiary, Michigan Transco. Consumers transferred the transmission facilities
to Michigan Transco on April 1, 2001. This represents a major step in Consumers'
plan to transfer control of or to divest itself of ownership, operation and
control of its transmission assets.
CMS Energy cannot predict the outcome of these electric industry-restructuring
issues on its financial position, liquidity, or results of operations.
RATE MATTERS: Prior to the enactment of the Customer Choice Act, there were
several pending rate issues that could have affected Consumers' electric
business. As a result of the passage of this legislation, the MPSC dismissed
certain rate proceedings and a complaint filed by ABATE seeking a reduction in
rates. ABATE filed a petition for rehearing with the MPSC.
For further information and material changes relating to the rate matters and
restructuring of the electric utility industry, see Note 1, Corporate Structure
and Basis of Presentation - Utility Matters, and Note 2, Uncertainties -
Consumers' Electric Utility Rate Matters, incorporated by reference herein.
NUCLEAR MATTERS: There are a number of issues related to nuclear matters that
may affect Consumers' business. In June 2001, an unplanned outage began at
Palisades that will affect power costs. The plant is expected to be restarted in
the fourth quarter. Until it completes an inspection of Palisades' control rod
drive system piping and determines a definitive plan for repair or replacement
of any flaws, however, Consumers cannot make any assurances as to factors that
may affect the date on which the plant will return to service. For further
information and
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material changes relating to nuclear matters, see Note 2, Uncertainties -
Nuclear Matters, incorporated by reference herein.
UNCERTAINTIES: Several electric business trends or uncertainties may affect
Consumers' financial results and condition. These trends or uncertainties have,
or Consumers reasonably expects could have, a material impact on net sales,
revenues, or income from continuing electric operations. Such trends and
uncertainties include: 1) capital expenditures and increased operating expenses
for compliance with the Clean Air Act; 2) environmental liabilities arising from
various federal, state and local environmental laws and regulations, including
potential liability or expenses relating to the Michigan Natural Resources and
Environmental Protection Acts and Superfund; 3) uncertainties relating to the
storage and ultimate disposal of spent nuclear fuel and the successful operation
of NMC; and 4) electric industry restructuring, including: a) how the MPSC
ultimately calculates the amount of Stranded Costs and the related true-up
adjustments and the manner in which the true-up operates; b) the ability to
recover fully the cost of doing business under the rate caps; c) the ability to
meet peak electric demand requirements at a reasonable cost and without market
disruption and initiatives undertaken to reduce exposure to energy price
increases; d) the restructuring of the MEPCC and the termination of joint
merchant operations with Detroit Edison; e) the effect of the transfer of
Consumers transmission facilities to Michigan Transco and its successful
disposition or integration into an RTO; f) the MPSC adoption of proposed
electric distribution performance standards requiring customer credits for
prolonged outages; and g) the power outage at Palisades and the incremental cost
of replacement power and maintenance. For detailed information about these
trends or uncertainties, see Note 2, Uncertainties, incorporated by reference
herein.
CONSUMERS' GAS UTILITY BUSINESS OUTLOOK
GROWTH: Over the next five years, Consumers anticipates gas deliveries,
including gas customer choice deliveries (excluding transportation to the MCV
Facility and off-system deliveries), to grow at an average of about one percent
per year based primarily on a steadily growing customer base. Actual gas
deliveries in future periods may be affected by abnormal weather, alternative
energy costs, changes in competitive conditions, and the level of natural gas
consumption per customer.
During the spring and summer months of 2001, Consumers will purchase natural gas
for inventory to meet anticipated future customer needs during the winter
heating season. Consumers anticipates that it will incur financing costs on
these natural gas purchases that are higher than are being recovered in current
rates.
UNCERTAINTIES: Several gas business trends or uncertainties may affect
Consumers' financial results and conditions. These trends or uncertainties have,
or Consumers reasonably expects could have, a material impact on net sales,
revenues, or income from continuing gas operations. Such trends and
uncertainties include: 1) potential environmental costs at a number of sites,
including sites formerly housing manufactured gas plant facilities; 2) future
gas industry restructuring initiatives; 3) implementation of the permanent gas
customer choice program for all gas retail customers; 4) any initiatives
undertaken to protect customers against gas price increases; and 5) market and
regulatory responses to increases in gas costs. For detailed information about
these uncertainties, see Note 2, Uncertainties, incorporated by reference
herein.
CONSUMERS' OTHER OUTLOOK
Consumers offers a variety of energy-related services to electric and gas
customers that focus on appliance maintenance, home safety, commodity choice and
assistance to customers purchasing heating, ventilation and air conditioning
equipment. Consumers continues to look for additional growth opportunities in
energy-related services for Consumers' customers.
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In July 2001, the MPSC directed gas utilities under its jurisdiction to prepare
and file an unbundled cost of service study. The purpose of the study is to
allow parties to advocate or oppose the unbundling of the following services:
metering, billing information, transmission, balancing, storage, backup and
peaking, and customer turn-on and turn-off services. Unbundled services could be
separated from future rates and the services could be provided by an approved
third party. Consumers was directed to make this filing in connection with its
June, 2001 request for a gas service rate increase.
OTHER MATTERS
FOREIGN CURRENCY TRANSLATION
CMS Energy adjusts common stockholders' equity to reflect foreign currency
translation adjustments for the operation of long-term investments in foreign
countries. The adjustment is primarily due to the exchange rate fluctuations
between the United States dollar and each of the Australian dollar, Brazilian
real and Argentine peso. During the first six months of 2001, the change in the
foreign currency translation adjustment decreased equity by $47 million, of
which $17 million was recognized during the second quarter, net of after-tax
hedging proceeds. Although management currently believes that the currency
exchange rate fluctuations over the long term will not have a material adverse
affect on CMS Energy's financial position, liquidity or results of operations,
CMS Energy hedges its exposure to the Australian dollar, the Brazilian real and
the Argentine peso. CMS Energy uses forward exchange and option contracts to
hedge certain receivables, payables, long-term debt and equity value relating to
foreign investments. The notional amount of the outstanding foreign exchange
contracts was $469 million at June 30, 2001, which includes $21 million, $50
million and $398 million for Australian, Brazilian and Argentine foreign
exchange contracts, respectively. The estimated fair value of the foreign
exchange and option contracts at June 30, 2001 was $13 million, which represents
the amount CMS Energy would receive upon settlement.
In 2000, an impairment loss of $329 million ($268 million after-tax) was
realized on the carrying amount of the Loy Yang investment. This loss does not
include cumulative net foreign currency losses of $164 million due to
unfavorable changes in the exchange rates, which, in accordance with SFAS No.
52, Foreign Currency Translation, will not be realized until there has been a
sale or full liquidation of CMS Energy's investment.
NEW ACCOUNTING RULES
In July 2001, FASB issued SFAS No. 141, Business Combinations, and SFAS No. 142,
Goodwill and Other Intangible Assets.
SFAS No. 141 requires that all business combinations initiated after June 30,
2001, be accounted for under the purchase method; use of the
pooling-of-interests method is no longer permitted. The adoption of SFAS No. 141
effective July 1, 2001 will result in CMS Energy accounting for any future
business combinations under the purchase method of accounting, but will not
change the method of accounting used in previous business combinations.
SFAS No. 142 requires that goodwill no longer be amortized to earnings, but
instead be reviewed for impairment. The amortization of goodwill ceases upon
adoption of the standard. The provisions of SFAS No. 142 require adoption as of
January 1, 2002 for calendar year entities. CMS Energy is currently studying the
effects of the new standard.
In August 2001, FASB issued SFAS No. 143, Accounting for Asset Retirement
Obligations. The provisions of SFAS No. 143 require adoption as of January 1,
2003. The standard requires entities to record the fair value of a liability for
an asset retirement obligation in the period in which it is incurred. When the
liability is initially
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recorded, the entity capitalizes a cost by increasing the carrying amount of the
related long-lived asset. Over time, the liability is accreted to its present
value each period, and the capitalized cost is depreciated over the useful life
of the related asset. Upon settlement of the liability, an entity either settles
the obligation for its recorded amount or incurs a gain or loss upon settlement.
CMS Energy is currently studying the effects of the new standard.
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CMS ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
June 30 2001 2000 2001 2000
- ------------------------------------------------------------------------------------------------------------------------------------
In Millions, Except Per Share Amounts
OPERATING REVENUE
Electric utility $ 624 $ 647 $ 1,289 $ 1,287
Gas utility 239 148 779 623
Natural gas transmission 263 179 649 357
Independent power production 108 131 216 212
Oil and gas exploration and production 55 30 96 63
Marketing, services and trading 3,089 391 5,433 742
International energy distribution 35 65 72 127
Other 8 5 13 13
-----------------------------------------
4,421 1,596 8,547 3,424
- ------------------------------------------------------------------------------------------------------------------------------------
OPERATING EXPENSES
Operation
Fuel for electric generation 88 104 171 182
Purchased and interchange power - Marketing, services and trading 1,555 71 2,999 111
Purchased and interchange power 122 92 256 220
Purchased power - related parties 126 151 244 297
Cost of gas sold - Marketing, services and trading 1,360 303 2,142 594
Cost of gas sold 291 127 871 427
Other 384 262 743 492
-----------------------------------------
3,926 1,110 7,426 2,323
Maintenance 65 72 131 148
Depreciation, depletion and amortization 116 142 269 318
General taxes 59 70 135 141
-----------------------------------------
4,166 1,394 7,961 2,930
- ------------------------------------------------------------------------------------------------------------------------------------
PRETAX OPERATING INCOME (LOSS)
Electric utility 83 109 218 224
Gas utility 17 (28) 82 35
Natural gas transmission 45 47 138 124
Independent power production 29 68 53 85
Oil and gas exploration and production 29 2 42 6
Marketing, services and trading 51 -- 58 4
International energy distribution -- 4 2 10
Other 1 -- (7) 6
-----------------------------------------
255 202 586 494
- ------------------------------------------------------------------------------------------------------------------------------------
OTHER INCOME (DEDUCTIONS)
Accretion income -- 1 -- 1
Accretion expense (8) (8) (17) (17)
Gain on asset sales, net of foreign currency translation losses of $25 in 2000 10 61 10 69
Other, net (2) 7 11 10
-----------------------------------------
-- 61 4 63
- ------------------------------------------------------------------------------------------------------------------------------------
EARNINGS BEFORE INTEREST AND TAXES 255 263 590 557
- ------------------------------------------------------------------------------------------------------------------------------------
FIXED CHARGES
Interest on long-term debt 142 144 287 291
Other interest 17 12 29 12
Capitalized interest (13) (11) (27) (21)
Preferred dividends -- -- 1 1
Preferred securities distributions 24 24 46 47
-----------------------------------------
170 169 336 330
- ------------------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES AND MINORITY INTERESTS 85 94 254 227
INCOME TAXES 31 14 90 66
MINORITY INTERESTS 1 1 2 2
-----------------------------------------
CONSOLIDATED NET INCOME BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE 53 79 162 159
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING FOR TREATMENT OF INVENTORY,
NET OF TAX BENEFIT OF $(2) -- -- -- (5)
-----------------------------------------
CONSOLIDATED NET INCOME $ 53 $ 79 $ 162 $ 154
====================================================================================================================================
AVERAGE COMMON SHARES OUTSTANDING 132 110 129 112
====================================================================================================================================
BASIC EARNINGS PER AVERAGE COMMON SHARE $ .40 $ .72 $ 1.27 $ 1.38
====================================================================================================================================
DILUTED EARNINGS PER AVERAGE COMMON SHARE $ .40 $ .71 $ 1.25 $ 1.36
====================================================================================================================================
DIVIDENDS DECLARED PER COMMON SHARE $ .365 $ .365 $ .73 $ .73
====================================================================================================================================
THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
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CMS ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six Months Ended
June 30 2001 2000
- -------------------------------------------------------------------------------------------------------------------
In Millions
CASH FLOWS FROM OPERATING ACTIVITIES
Consolidated net income $ 162 $ 154
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation, depletion and amortization (includes nuclear
decommissioning of $3 and $19, respectively) 269 318
Capital lease and debt discount amortization 16 16
Accretion expense 17 17
Accretion income - abandoned Midland project -- (1)
MCV power purchases (7) (28)
Distributions from related parties in excess of (less than) earnings 26 (101)
Cumulative effect of an accounting change -- 7
Gain on the sale of assets, net of foreign currency translation losses (10) (69)
Changes in other assets and liabilities:
Increase in accounts receivable and accrued revenues (2,526) (88)
Decrease (increase) in inventories (103) 17
Increase (decrease) in accounts payable and accrued expenses 2,490 (27)
Increase (decrease) in deferred income taxes and investment tax credit 99 (37)
Regulatory obligation - gas choice (16) 45
Increase in currency translation adjustment (47) (65)
Increase in derivative/hedging capital (24) --
Change in postretirement benefits, net (76) --
Changes in other assets and liabilities 58 23
-----------------------
Net cash provided by operating activities 328 181
- -------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (excludes assets placed under capital lease) (554) (488)
Acquisition of companies, net of cash acquired -- (74)
Investments in partnerships and unconsolidated subsidiaries (146) (24)
Cost to retire property, net (47) (53)
Proceeds from sale of property 99 574
Other (11) 28
-----------------------
Net cash (used in) investing activities (659) (37)
- -------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from notes, bonds, and other long-term debt 457 344
Proceeds from trust preferred securities 121 --
Issuance of common stock 328 3
Retirement of bonds and other long-term debt (401) (234)
Repurchase of common stock -- (129)
Payment of common stock dividends (94) (82)
Increase (decrease) in notes payable, net (74) 74
Payment of capital lease obligations (13) (14)
Other financing 1 2
-----------------------
Net cash provided by (used in) financing activities 325 (36)
- -------------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND TEMPORARY CASH INVESTMENTS (6) 108
CASH AND TEMPORARY CASH INVESTMENTS, BEGINNING OF PERIOD 182 132
-----------------------
CASH AND TEMPORARY CASH INVESTMENTS, END OF PERIOD $ 176 $ 240
===================================================================================================================
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OTHER CASH FLOW ACTIVITIES AND NON-CASH INVESTING AND FINANCING ACTIVITIES WERE:
CASH TRANSACTIONS
Interest paid (net of amounts capitalized) $ 238 $258
Income taxes paid (net of refunds) (6) 24
NON-CASH TRANSACTIONS
Nuclear fuel placed under capital lease $ 12 $ 3
Other assets placed under capital leases 10 7
====================================================================================================================================
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.
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CMS ENERGY CORPORATION
CONSOLIDATED BALANCE SHEETS
ASSETS June 30 June 30
2001 December 31 2000
(Unaudited) 2000 (Unaudited)
- ------------------------------------------------------------------------------------------------------------------------
In Millions
PLANT AND PROPERTY (AT COST)
Electric utility $ 7,482 $ 7,241 $ 7,073
Gas utility 2,539 2,503 2,497
Natural gas transmission 2,158 2,191 2,078
Oil and gas properties (successful efforts method) 708 630 531
Independent power production 395 398 734
International energy distribution 224 258 446
Other 97 101 91
-----------------------------------------
13,603 13,322 13,450
Less accumulated depreciation, depletion and amortization 6,398 6,252 6,207
-----------------------------------------
7,205 7,070 7,243
Construction work-in-progress 934 761 854
-----------------------------------------
8,139 7,831 8,097
- ------------------------------------------------------------------------------------------------------------------------
INVESTMENTS
Independent power production 943 924 957
Natural gas transmission 538 436 382
Midland Cogeneration Venture Limited Partnership 295 290 261
First Midland Limited Partnership 253 245 246
Other 50 121 83
-----------------------------------------
2,079 2,016 1,929
- ------------------------------------------------------------------------------------------------------------------------
CURRENT ASSETS
Cash and temporary cash investments at cost, which approximates market 176 182 240
Accounts receivable - Marketing, services and trading 3,209 526 356
Accounts receivable, notes receivable and accrued revenue, less
allowances of $20, $18 and $20, respectively 714 914 674
Inventories at average cost
Gas in underground storage 389 297 166
Materials and supplies 133 124 185
Generating plant fuel stock 48 46 47
Deferred income taxes -- 39 16
Prepayments and other 304 325 251
-----------------------------------------
4,973 2,453 1,935
- ------------------------------------------------------------------------------------------------------------------------
NON-CURRENT ASSETS
Regulatory Assets
Securitization costs 710 709 --
Postretirement benefits 220 232 325
Abandoned Midland Project 12 22 35
Unamortized nuclear costs -- 6 490
Other 91 87 119
Goodwill, net 849 891 915
Nuclear decommissioning trust funds 594 611 612
Notes receivable - related party 166 155 223
Notes receivable 143 150 35
Other 845 688 595
-----------------------------------------
3,630 3,551 3,349
-----------------------------------------
TOTAL ASSETS $ 18,821 $ 15,851 $ 15,310
========================================================================================================================
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STOCKHOLDERS' INVESTMENT AND LIABILITIES JUNE 30 JUNE 30
2001 December 31 2000
(Unaudited) 2000 (Unaudited)
- ---------------------------------------------------------------------------------------------------------------------------
In Millions
CAPITALIZATION
Common stockholders' equity $ 2,684 $ 2,361 $ 2,338
Preferred stock of subsidiary 44 44 44
Company-obligated convertible Trust Preferred Securities
of subsidiaries (a) 694 694 724
Company-obligated mandatorily redeemable preferred securities
of Consumer's subsidiaries (a) 520 395 395
Long-term debt 7,193 6,770 6,918
Non-current portion of capital leases 55 54 86
-------------------------------------------
11,190 10,318 10,505
- ---------------------------------------------------------------------------------------------------------------------------
MINORITY INTERESTS 89 88 212
- ---------------------------------------------------------------------------------------------------------------------------
CURRENT LIABILITIES
Current portion of long-term debt and capital leases 341 707 547
Notes payable 328 403 278
Accounts payable - Marketing, services and trading 2,953 410 223
Accounts payable 629 614 601
Accrued taxes 222 309 309
Accrued interest 177 159 163
Accounts payable - related parties 72 70 65
Deferred income taxes 21 -- --
Other 625 530 422
-------------------------------------------
5,368 3,202 2,608
- ---------------------------------------------------------------------------------------------------------------------------
NON-CURRENT LIABILITIES
Deferred income taxes 772 749 608
Postretirement benefits 350 437 469
Deferred investment tax credit 107 110 122
Regulatory liabilities for income taxes, net 264 246 82
Gas supply contract obligations 292 304 284
Other 389 397 420
-------------------------------------------
2,174 2,243 1,985
- ---------------------------------------------------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES (Notes 1 and 2)
TOTAL STOCKHOLDERS' INVESTMENT AND LIABILITIES $ 18,821 $ 15,851 $ 15,310
===========================================================================================================================
(a) For further discussion, see Note 3 of the Condensed Notes to Consolidated
Financial Statements.
THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
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CMS ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS' EQUITY
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
June 30 2001 2000 2001 2000
- ------------------------------------------------------------------------------------------------------------------------------------
In Millions
COMMON STOCK
At beginning and end of period $ 1 $ 1 $ 1 $ 1
- ------------------------------------------------------------------------------------------------------------------------------------
OTHER PAID-IN CAPITAL
At beginning of period 3,252 2,653 2,936 2,749
Common stock repurchased -- (27) -- (129)
Common stock reissued -- -- -- 3
Common stock issued 12 -- 328 3
--------------------------------------------
At end of period 3,264 2,626 3,264 2,626
- ------------------------------------------------------------------------------------------------------------------------------------
REVALUATION CAPITAL
Investments
At beginning of period (3) 3 (2) 3
Unrealized gain (loss) on investments (a) (1) (2) (2) (2)
--------------------------------------------
At end of period (4) 1 (4) 1
--------------------------------------------
Derivative Instruments
At beginning of period (b) (7) -- 13 --
Unrealized gain (loss) on derivative instruments (a) (15) -- (29) --
Reclassification adjustments included in consolidated net income (a) (2) -- (8) --
--------------------------------------------
At end of period (24) -- (24) --
- ------------------------------------------------------------------------------------------------------------------------------------
FOREIGN CURRENCY TRANSLATION
At beginning of period (284) (132) (254) (108)
Change in foreign currency translation realized from asset sale (a) -- -- -- 25
Change in foreign currency translation (a) (17) (41) (47) (90)
--------------------------------------------
At end of period (301) (173) (301) (173)
- ------------------------------------------------------------------------------------------------------------------------------------
RETAINED EARNINGS (DEFICIT)
At beginning of period (256) (156) (320) (189)
Consolidated net income (a) 53 79 162 154
Common stock dividends declared (49) (40) (94) (82)
--------------------------------------------
At end of period (252) (117) (252) (117)
--------------------------------------------
TOTAL COMMON STOCKHOLDERS' EQUITY $ 2,684 $ 2,338 $ 2,684 $ 2,338
====================================================================================================================================
(a) Disclosure of Comprehensive Income:
Revaluation capital
Investments
Unrealized gain (loss) on investments, net of tax of
$-, $-, $- and $-, respectively $ (1) $ (2) $ (2) $ (2)
Derivative Instruments
Unrealized gain (loss) on derivative instruments,
net of tax of $5, $-, $13 and $-, respectively (15) -- (29) --
Reclassification adjustments included in consolidated net income,
net of tax of $-, $-, $4 and $-, respectively (2) -- (8) --
Foreign currency translation, net (17) (41) (47) (65)
Consolidated net income 53 79 162 154
--------------------------------------------
Total Consolidated Comprehensive Income $ 18 $ 36 $ 76 $ 87
============================================
(b) Six months ended June 30, 2001 reflects the cumulative effect of change in
accounting principle, net of $(8) tax (Note 5)
THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
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CMS ENERGY CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
These interim Consolidated Financial Statements have been prepared by CMS Energy
and reviewed by the independent public accountant in accordance with SEC rules
and regulations. As such, certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted. Certain prior year amounts
have been reclassified to conform to the presentation in the current year. In
management's opinion, the unaudited information contained in this report
reflects all adjustments necessary to assure the fair presentation of financial
position, results of operations and cash flows for the periods presented. The
Condensed Notes to Consolidated Financial Statements and the related
Consolidated Financial Statements should be read in conjunction with the
Consolidated Financial Statements and Notes to Consolidated Financial Statements
contained in CMS Energy's Form 10-K for the year ended December 31, 2000, which
includes the Reports of Independent Public Accountants. Due to the seasonal
nature of CMS Energy's operations, the results as presented for this interim
period are not necessarily indicative of results to be achieved for the fiscal
year.
1: CORPORATE STRUCTURE AND BASIS OF PRESENTATION
CORPORATE STRUCTURE AND BASIS OF PRESENTATION
CMS Energy is the parent holding company of Consumers and Enterprises.
Consumers, a combination electric and gas utility company serving Michigan's
Lower Peninsula, is a subsidiary of CMS Energy. Enterprises, through
subsidiaries, is engaged in several domestic and international diversified
energy businesses including: natural gas transmission, storage and processing;
independent power production; oil and gas exploration and production; energy
marketing, services and trading; and international energy distribution.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
The consolidated financial statements include the accounts of CMS Energy,
Consumers and Enterprises and their majority-owned subsidiaries. Investments in
affiliated companies where CMS Energy has the ability to exercise significant
influence, but not control, are accounted for using the equity method. For the
three and six months ended June 30, 2001, distributions in excess of equity
earnings were $58 million and $26 million, respectively compared to
undistributed equity earnings of $73 million and $101 million for the three and
six months ended June 30, 2000, respectively. Intercompany transactions and
balances have been eliminated.
CMS Energy's subsidiaries and affiliates whose functional currency is other than
the U.S. dollar translate their assets and liabilities into U.S. dollars at the
current exchange rates in effect at the end of the fiscal period. The revenue
and expense accounts of such subsidiaries and affiliates are translated into
U.S. dollars at the average exchange rates that prevailed during the period. The
gains or losses that result from this process, and gains and losses on
intercompany foreign currency transactions that are long-term in nature, and
which CMS Energy does not intend to settle in the foreseeable future, are shown
in the stockholders' equity section of the balance sheet. For subsidiaries
operating in highly inflationary economies, the U.S. dollar is considered to be
the functional
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currency, and transaction gains and losses are included in determining net
income. Gains and losses that arise from exchange rate fluctuations on
transactions denominated in a currency other than the functional currency,
except those that are hedged, are included in determining net income. During the
first six months of 2001, the change in the foreign currency translation
adjustment decreased equity by $47 million, net of after-tax hedging proceeds.
OIL AND GAS PROPERTIES
CMS Oil and Gas follows the successful efforts method of accounting for its
investments in oil and gas properties. CMS Oil and Gas capitalizes, as incurred,
the costs of property acquisitions, successful exploratory wells, all
development costs, and support equipment and facilities. It expenses
unsuccessful exploratory wells when they are determined to be non-productive.
CMS Oil and Gas also charges to expense, as incurred, production costs,
overhead, and all exploration costs other than exploratory drilling. CMS Oil and
Gas determines depreciation, depletion and amortization of proved oil and gas
properties on a field-by-field basis using the units-of-production method over
the life of the remaining proved reserves.
UTILITY REGULATION
Consumers accounts for the effects of regulation based on the regulated utility
accounting standard SFAS No. 71, Accounting for the Effects of Certain Types of
Regulation. As a result, the actions of regulators affect when Consumers
recognizes revenues, expenses, assets and liabilities.
In March 1999, Consumers received MPSC electric restructuring orders. Consistent
with these orders, Consumers discontinued application of SFAS No. 71 for the
energy supply portion of its business in the first quarter of 1999 because
Consumers expected to implement retail open access for its electric customers in
September 1999. Discontinuation of SFAS No. 71 for the energy supply portion of
Consumers' business resulted in Consumers reducing the carrying value of its
Palisades plant-related assets by approximately $535 million and establishing a
regulatory asset for a corresponding amount. According to current accounting
standards, Consumers can continue to carry its energy supply-related regulatory
assets if legislation or an MPSC rate order allows the collection of cash flows
to recover these regulatory assets from its regulated transmission and
distribution customers. As of June 30, 2001, Consumers had a net investment in
energy supply facilities of $1.277 billion included in electric plant and
property. See Note 2, Uncertainties.
2: UNCERTAINTIES
CONSUMERS' ELECTRIC UTILITY CONTINGENCIES
ELECTRIC ENVIRONMENTAL MATTERS: Consumers is subject to costly and increasingly
stringent environmental regulations. Consumers expects that the cost of future
environmental compliance, especially compliance with clean air laws, will be
significant.
In 1997, the EPA introduced new regulations regarding nitrogen oxide and
particulate-related emissions that were the subject of litigation. The United
States Supreme Court recently found that the EPA has power to revise the
standards but found that the EPA implementation plan was not lawful. In 1998,
the EPA Administrator issued final regulations requiring the State of Michigan
to further limit nitrogen oxide emissions. The EPA has also issued additional
final regulations regarding nitrogen oxide emissions that require certain
generators, including some of Consumers electric generating facilities, to
achieve the same emissions rate as that required by the 1998 plan. These
regulations will require Consumers to make significant capital expenditures. The
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estimated cost to Consumers would be between $470 million and $560 million,
calculated in year 2001 dollars. Consumers anticipates that it will incur these
capital expenditures between 2000 and 2004.
Consumers may need an additional amount of between $300 million and $520 million
of capital expenditures to comply with the new mercury and small particulate
standards sometime after 2004 if those standards become effective.
Beginning January 2004, an annual return of and on these capital expenditures
above depreciation levels are expected to be recoverable, subject to an MPSC
prudence hearing, in future rates.
These and other required environmental expenditures may have a material adverse
effect upon our financial condition and results of operations.
Cleanup and Solid Waste - Under the Michigan Natural Resources and Environmental
Protection Act, Consumers expects that it will ultimately incur investigation
and remedial action costs at a number of sites. Nevertheless, it believes that
these costs are recoverable in rates under current ratemaking policies.
Consumers is a potentially responsible party at several contaminated sites
administered under Superfund. Superfund liability is joint and several. Along
with Consumers, many other creditworthy, potentially responsible parties with
substantial assets cooperate with respect to the individual sites. Based upon
past negotiations, Consumers estimates that its share of the total liability for
the known Superfund sites will be between $2 million and $9 million. As of June
30, 2001, Consumers had accrued the minimum amount of the range for its
estimated Superfund liability.
During routine maintenance activities, Consumers identified PCB as a component
in certain paint, grout and sealant materials at the Ludington Pumped Storage
Facility. Consumers removed and replaced part of the PCB material. Consumers has
proposed a plan to deal with the remaining materials and is awaiting a response
from the EPA.
CONSUMERS' ELECTRIC UTILITY RATE MATTERS
ELECTRIC RESTRUCTURING: In June 2000, the Michigan Legislature passed electric
utility restructuring legislation known as the Customer Choice Act. This act: 1)
permits all customers to exercise choice of electric generation suppliers by
January 1, 2002; 2) cuts residential electric rates by five percent; 3) freezes
all electric rates through December 31, 2003, and establishes a rate cap for
residential customers through at least December 31, 2005, and a rate cap for
small commercial and industrial customers through at least December 31, 2004; 4)
allows for the use of low-cost Securitization bonds to refinance Stranded Costs
as a means of offsetting the earnings impact of the five percent residential
rate reduction; 5) establishes a market power test which may require the
transfer of control of a portion of generation resources in excess of that
required to serve firm retail sales requirements (a requirement with which
Consumers is in compliance); 6) requires Michigan utilities to join a
FERC-approved RTO or divest their interest in transmission facilities to an
independent transmission owner; 7) requires the joint expansion of available
transmission capability by Consumers, Detroit Edison and American Electric Power
by at least 2,000 MW by June 5, 2002; 8)allows for the deferred recovery of an
annual return of and on capital expenditures in excess of depreciation levels
incurred during and before the rate cap period; and 9) allows for the recovery
of Stranded Costs and implementation costs incurred as a result of the passage
of the act. Consumers is highly confident that it will meet the conditions of
items 5 and 7 above, prior to the earliest rate cap termination dates specified
in the act. Failure to do so would result in an extension of the rate caps to as
late as December 31, 2013. As of December 2000, Consumers spent $13 million on
the required expansion of transmission capabilities. Consumers anticipates it
will spend an additional $24 million in 2001 and 2002, unless Consumers
transfers its transmission facilities to a FERC-approved RTO or to an
independent transmission owner.
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CMS Energy Corporation
In July 2000, in accordance with the Customer Choice Act, Consumers filed an
application with the MPSC seeking approval to issue Securitization bonds.
Securitization typically involves the issuance of asset backed bonds with a
higher credit rating than conventional utility corporate financing. In October
2000 and January 2001, the MPSC issued a financing order and a final order,
respectively, authorizing Consumers to securitize approximately $470 million in
qualified costs, which were primarily regulatory assets plus recovery of the
Securitization expenses. Cost savings from Securitization depend upon the level
of debt or equity securities ultimately retired, the amortization schedule for
the securitized qualified costs and the interest rates of the retired debt
securities and the Securitization bonds. These savings will only be determined
once the Securitization bonds are issued and will offset substantially all of
the revenue impact of the five percent residential rate reduction, $51 million
on an annual basis, that Consumers was required to implement by the Customer
Choice Act. The order directs Consumers to apply any cost savings in excess of
the five percent residential rate reduction to rate reductions for
non-residential and retail open access customers after the bonds are sold. In a
subsequent order, the MPSC confirmed that Consumers could recover the five
percent residential rate reduction's effect on revenues lost from the date of
the financing order. Consumers estimates that the disallowed portion of revenue
recovery relating to the year 2000 five percent residential rate reduction
reduced its operating earnings by $22 million in 2000. Consumers, and its
special purpose subsidiary formed to issue the bonds, will recover the repayment
of principal, interest and other expenses relating to the issuance of the bonds
through a Securitization charge and a tax charge. These charges are subject to
an annual true-up until one year prior to the last expected maturity date of the
Securitization bonds and no more than quarterly thereafter. The MPSC's order
will not increase current electric rates for any of Consumers' tariff customers.
In January 2001, Consumers accepted the MPSC's final financing order. The MPSC's
decisions were appealed by the Attorney General of Michigan. In July 2001, the
Michigan Court of Appeals issued a unanimous opinion that affirmed the MPSC
order. Although Consumers cannot make any assurances, Consumers does not
believe that the Attorney General will appeal the decision of the Michigan Court
of Appeals to the Michigan Supreme Court.
Beginning January 1, 2001, the amortization of the approved regulatory assets
being securitized as qualified costs is being deferred which effectively offsets
the loss in revenue resulting from the five percent residential rate reduction.
The amortization will be reestablished later, after the Securitization bond
sale, based on a schedule that is the same as the recovery of the principal
amounts of the securitized qualified costs. Ultimately, sale of Securitization
bonds will be required to offset the majority of the revenue impact of the rate
reduction over the term of the bonds.
In September 1999, Consumers began implementing a plan for electric retail
customer open access. Consumers submitted this plan to the MPSC in 1998, and in
March 1999 the MPSC issued orders that generally supported the plan. The
Customer Choice Act states that orders issued by the MPSC before the date of
this act that 1) allow electric customers to choose their supplier, 2) authorize
recovery of net stranded costs and implementation costs, and 3) confirm any
voluntary commitments of electric utilities, are in compliance with this act and
enforceable by the MPSC. In September 2000, as required by the MPSC, Consumers
filed tariffs governing its retail open access program and addressed revisions
appropriate to comply with the Customer Choice Act. Consumers cannot predict how
the MPSC will modify the tariff or enforce the existing restructuring orders.
In a pending case before the Court of Appeals, ABATE and the Attorney General
each appealed an August 1999 order in which the MPSC found that it had
jurisdiction to approve rates, terms and conditions for electric retail
wheeling, also known as electric customer choice, if a utility voluntarily
chooses to offer that service. The Court of Appeals, based upon the voluntary
mutual agreement of the parties, has dismissed this appeal. This matter is now
closed.
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CMS Energy Corporation
POWER COSTS: During periods when electric demand is high, the cost of purchasing
energy on the spot market can be substantial. To reduce Consumers' exposure to
the fluctuating cost of electricity, and to ensure adequate supply to meet
demand, Consumers intends to maintain sufficient generation and to purchase
electricity from others to create a power reserve, also called a reserve margin,
of approximately 15 percent. The reserve margin provides Consumers with
additional power above its anticipated peak power demands. It also allows
Consumers to provide reliable service to its electric service customers and to
protect itself against unscheduled plant outages and unanticipated demand. For
the summers 2001, 2002, and 2003, Consumers is planning for a reserve margin of
15 percent. The actual reserve margin needed will depend primarily on summer
weather conditions, the level of retail open access requirements being served by
others during the summer, and any unscheduled plant outages. The existing retail
open access plan allows other electric service providers with the opportunity to
serve up to 750 MW of nominal retail open access requirements. As of June 2001,
alternative electric service providers are providing service to 75 MW of retail
open access requirements. In June 2001, an unscheduled plant outage commenced at
Palisades that will affect future power costs. Consumers has secured additional
power and expects to have sufficient power to meet its customers needs. For
further information, refer to the "Nuclear Matters" section of this note.
To reduce the risk of high energy prices during peak demand periods and to
achieve its reserve margin target, Consumers employs a strategy of purchasing
electricity call option contracts for the physical delivery of electricity
during the months of June through September. As of June 30, 2001, Consumers had
purchased or had commitments to purchase electricity call option contracts
covering the estimated reserve margin requirements for summer 2001, and
partially covering the estimated reserve margin requirements for summers 2002
through 2008, at a recognized cost of $134 million, of which $61 million
pertains to 2001.
In 1996, as a result of efforts to move the electric industry in Michigan to
competition, Detroit Edison gave Consumers the required four-year contractual
notice of its intent to terminate the agreements under which the companies
jointly operate the MEPCC. Detroit Edison and Consumers negotiated to
restructure and continue certain parts of the MEPCC control area and joint
transmission operations, but expressly excluded any merchant operations
(electricity purchasing, sales, and dispatch operations). The former joint
merchant operations began operating independently on April 1, 2001. The
termination of joint merchant operations with Detroit Edison has opened Detroit
Edison and Consumers to wholesale market competition as individual companies.
Consumers cannot predict the long term financial impact of terminating these
joint merchant operations with Detroit Edison.
Prior to 1998, the PSCR process provided for the reconciliation of actual power
supply costs with power supply revenues. This process assured recovery of all
reasonable and prudent power supply costs actually incurred by Consumers,
including the actual cost of fuel, interchange power and purchased power. In
1998, as part of the electric restructuring efforts, the MPSC suspended the PSCR
process through December 31, 2001. Under the suspension, the MPSC would not
grant adjustment of customer rates through 2001. As a result of the rate freeze
imposed by the Customer Choice Act, the current rates will remain in effect
until at least December 31, 2003. Therefore, changes in power supply costs as a
result of fluctuating energy prices will not be reflected in rates during the
rate freeze period.
TRANSMISSION ASSETS: In 1999, the FERC issued Order No. 2000, which describes
the characteristics the FERC would find acceptable in a model RTO. In this
order, the FERC declined to mandate that utilities join RTOs, but did order
utilities to make filings in October 2000 and January 2001 declaring their
intentions with respect to RTO membership.
In 1999, Consumers and four other electric utility companies joined together to
form a coalition known as the Alliance Companies for the purpose of creating a
FERC-approved RTO. As the FERC has not made a final
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CMS Energy Corporation
disposition of the Alliance RTO, Consumers is uncertain about the outcome of the
Alliance matter before the FERC and its continued participation in the Alliance
RTO.
In January 2001, the FERC granted Consumers' application to transfer ownership
and control of its transmission facilities to a wholly owned subsidiary,
Michigan Transco. Consumers transferred the transmission facilities to Michigan
Transco on April 1, 2001. This represents a major step in Consumers' plan to
either divest its transmission business to a third party or to transfer control
of or to sell it to an RTO. In either event, Consumers' current plan is to
remain in the business of generating and distributing electric power to retail
customers. In addition, in response to an application that Consumers filed with
the MPSC, the MPSC issued an order that stated in part that, if Consumers sells
its transmission facilities in the manner described in its application, it would
be in compliance with applicable requirements of the Customer Choice Act.
In June 2001, the Michigan South Central Power Agency and the Michigan Public
Power Agency filed suit against Consumers and Michigan Transco in a Michigan
circuit court. The suit seeks to prevent the sale or transfer of transmission
assets without first binding a successor to honor the municipal agencies'
ownership interests and contractual rights that preceded the transfer of the
transmission assets to Michigan Transco. Consumers and Michigan Transco believe
the lawsuit is without merit and intend to vigorously defend against it.
ELECTRIC PROCEEDINGS: In 1997, ABATE filed a complaint with the MPSC. The
complaint alleged that Consumers' electric earnings are more than its authorized
rate of return and sought an immediate reduction in Consumers' electric rates
that approximated $189 million annually. As a result of the rate freeze imposed
by the Customer Choice Act, the MPSC issued an order in June 2000 dismissing the
ABATE complaint. In July 2000, ABATE filed a rehearing petition with the MPSC.
Consumers cannot predict the outcome of the rehearing process.
In March 2000 and 2001, Consumers filed applications with the MPSC for the
recovery of electric utility restructuring implementation costs of $30 million
and $25 million, incurred in 1999 and 2000, respectively. In July 2001,
Consumers received a final order that granted recovery of $25 million of
restructuring implementation costs for 1999. The MPSC disallowed recovery of $5
million, based upon a conclusion that this amount did not represent incremental
costs. The MPSC also ruled that it reserved the right to undertake another
review of the total 1999 restructuring implementation costs depending upon the
progress and success of the retail open access program. In addition, the MPSC
ruled that due to the rate freeze imposed by the Customer Choice Act, it was
premature to establish a cost recovery method for the allowable costs. Consumers
expects to receive a final order for the 2000 cost in early 2002. Consumers
believes these costs are fully recoverable in accordance with the Customer
Choice Act; however, Consumers cannot predict the amounts the MPSC will approve
as recoverable costs.
Also in July 2001, Consumers received an order from the MPSC that proposed
electric distribution performance standards applicable to electric distribution
companies operating in Michigan. The proposed performance standards would
establish standards related to outage restoration, safety, and customer
relations. Failure to meet the proposed performance standards would result in
customer credits. Consumers in is the process of reviewing the order and
preparing comments for submission to the MPSC. Consumers cannot predict the
outcome of the proposed performance standards.
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OTHER CONSUMERS' ELECTRIC UTILITY UNCERTAINTIES
THE MIDLAND COGENERATION VENTURE: The MCV Partnership, which leases and operates
the MCV Facility, contracted to sell electricity to Consumers for a 35-year
period beginning in 1990 and to supply electricity and steam to Dow. Consumers,
through two wholly owned subsidiaries, holds the following assets related to the
MCV Partnership and MCV Facility: 1) CMS Midland owns a 49 percent general
partnership interest in the MCV Partnership; and 2) CMS Holdings holds, through
FMLP, a 35 percent lessor interest in the MCV Facility.
Summarized Statements of Income for CMS Midland and CMS Holdings
In Millions
- ------------------------------------------------------------------------------------------------------------------
Six Months Ended
June 30 2001 2000
- ------------------------------------------------------------------------------------------------------------------
Pretax operating income $21 $20
Income taxes and other 7 6
- ------------------------------------------------------------------------------------------------------------------
Net income $14 $14
==================================================================================================================
Power Purchases from the MCV Partnership - Consumers' annual obligation to
purchase capacity from the MCV Partnership is 1,240 MW through the termination
of the PPA in 2025. The PPA provides that Consumers is to pay, based on the MCV
Facility's availability, a levelized average capacity charge of 3.77 cents per
kWh, a fixed energy charge, and a variable energy charge based primarily on
Consumers' average cost of coal consumed for all kWh delivered. Since January 1,
1993, the MPSC has permitted Consumers to recover capacity charges averaging
3.62 cents per kWh for 915 MW, plus a substantial portion of the fixed and
variable energy charges. Since January 1, 1996, the MPSC has also permitted
Consumers to recover capacity charges for the remaining 325 MW of contract
capacity with an initial average charge of 2.86 cents per kWh increasing
periodically to an eventual 3.62 cents per kWh by 2004 and thereafter. However,
due to the current freeze of Consumers' retail rates that the Customer Choice
Act requires, the capacity charge for the 325 MW is now frozen at 3.17 cents per
kWh. After September 2007, the PPA's terms require Consumers to pay the MCV
Partnership capacity and energy charges that the MPSC has authorized for
recovery from electric customers.
Consumers recognized a loss in 1992 for the present value of the estimated
future underrecoveries of power costs under the PPA based on MPSC cost recovery
orders. At June 30, 2001 and 2000, the remaining after-tax present value of the
estimated future PPA liability associated with the 1992 loss totaled $41 million
and $63 million, respectively. In March 1999, Consumers and the MCV Partnership
reached an agreement effective January 1, 1999, that capped availability
payments to the MCV Partnership at 98.5 percent. If the MCV Facility generates
electricity at the maximum 98.5 percent level during the next five years,
Consumers' after-tax cash underrecoveries associated with the PPA could be as
follows:
In Millions
- ------------------------------------------------------------------------------------------------------------------
2001 2002 2003 2004 2005
- ------------------------------------------------------------------------------------------------------------------
Estimated cash underrecoveries at 98.5%, net of tax $38 $38 $37 $36 $35
==================================================================================================================
Consumers continually evaluates the adequacy of the PPA liability. These
evaluations consider management's assessment of operating levels at the MCV
Facility through 2007, along with certain other factors including
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MCV related costs that are included in Consumers' frozen retail rates. Should
future results differ from management's assessments, Consumers may have to make
additional charges for a given year of up to $33 million, after tax. Management
believes that the PPA liability is adequate at this time. For further discussion
on the impact of the frozen PSCR, see "Electric Rate Matters" in this Note.
In February 1998, the MCV Partnership appealed the January 1998 and February
1998 MPSC orders related to electric utility restructuring. At the same time,
MCV Partnership filed suit in the United States District Court in Grand Rapids
seeking a declaration that the MPSC's failure to provide Consumers and MCV
Partnership a certain source of recovery of capacity payments after 2007
deprived MCV Partnership of its rights under the Public Utilities Regulatory
Policies Act of 1978. In July 1999, the District Court granted MCV Partnership's
motion for summary judgment. The Court permanently prohibited enforcement of the
restructuring orders in any manner that denies any utility the ability to
recover amounts paid to qualifying facilities such as the MCV Facility or that
precludes the MCV Partnership from recovering the avoided cost rate. The MPSC
appealed the Court's order to the 6th Circuit Court of Appeals in Cincinnati. In
June 2001, the 6th Circuit overturned the lower court's order and ordered the
case against the MPSC dismissed. The 6th Circuit found that the case was
premature and concluded that the qualifying facilities needed to wait until 2008
for an actual factual record to develop before bringing claims against the MPSC
in federal court. The MCV Partnership has requested rehearing of the 6th
Circuit's order.
NUCLEAR FUEL COST: Consumers amortizes nuclear fuel cost to fuel expense based
on the quantity of heat produced for electric generation. Consumers expenses
interest on leased nuclear fuel as it is incurred. Under current federal law, as
a federal court decision confirmed, the DOE was to begin accepting deliveries of
spent nuclear fuel for disposal by January 31, 1998. For fuel used after April
6, 1983, Consumers charges disposal costs to nuclear fuel expense, recovers
these costs through electric rates, and then remits them to the DOE quarterly.
Consumers elected to defer payment for disposal of spent nuclear fuel burned
before April 7, 1983. As of June 30, 2001, Consumers has a recorded liability to
the DOE of $133 million, including interest, which is payable upon the first
delivery of spent nuclear fuel to the DOE. Consumers recovered through electric
rates the amount of this liability, excluding a portion of interest. In 1997,
the DOE declared that it would not begin to accept spent nuclear fuel deliveries
in 1998. Also in 1997, a federal court affirmed the DOE's duty to take delivery
of spent fuel. Subsequent litigation in which Consumers and certain other
utilities participated has not been successful in producing more specific relief
for the DOE's failure to comply.
In July 2000, the DOE reached a settlement agreement with another utility to
address the DOE's delay in accepting spent fuel. The DOE may use that settlement
agreement as a framework that it could apply to other nuclear power plants;
however, certain other utilities are challenging the validity of such
settlement. Consumers is evaluating this matter further. Additionally, there are
two court decisions that support the right of utilities to pursue damage claims
in the United States Court of Claims against the DOE for failure to take
delivery of spent fuel. Consumers is evaluating those rulings and their
applicability to its contracts with the DOE.
NUCLEAR MATTERS: In May 2001, Palisades received its annual performance review
in which the NRC stated that Palisades operated in a manner that preserved
public health and safety. The NRC classified all inspection findings to have
very low safety significance. At the time of the annual performance review, the
NRC had planned to conduct only baseline inspections at the facility through May
31, 2002. The NRC, however, is currently conducting supplemental inspections to
oversee the Palisades unplanned outage, which is discussed in more detail below.
The amount of spent nuclear fuel discharged from the reactor to date exceeds
Palisades' temporary on-site storage pool capacity. Consequently, Consumers is
using NRC-approved steel and concrete vaults, commonly known as "dry casks", for
temporary on-site storage. As of June 30, 2001, Consumers had loaded 18 dry
storage casks with spent nuclear fuel at Palisades. Palisades will need to load
additional casks by 2004 in order
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to continue operation. Palisades currently has three additional empty
storage-only casks on-site, with storage pad capacity for up to seven additional
loaded casks. Consumers anticipates, however, that licensed transportable casks,
for additional storage, will be available prior to 2004.
Consumers maintains insurance against property damage, debris removal, personal
injury liability and other risks that are present at its nuclear facilities.
Consumers also maintains coverage for replacement power costs during prolonged
accidental outages at Palisades. Insurance would not cover such costs during the
first 12 weeks of any outage, but would cover most of such costs during the next
52 weeks of the outage, followed by reduced coverage to 80 percent for 110
additional weeks. The nature of the current Palisades outage, however, is not
likely to be an insured event. If certain covered losses occur at its own or
other nuclear plants similarly insured, Consumers could be required to pay
maximum assessments of $12.8 million in any one year to NEIL; $88 million per
occurrence under the nuclear liability secondary financial protection program,
limited to $10 million per occurrence in any year; and $6 million if nuclear
workers claim bodily injury from radiation exposure. Consumers considers the
possibility of these assessments to be remote.
In February 2000, Consumers submitted an analysis to the NRC that shows that the
NRC's screening criteria for reactor vessel embrittlement at Palisades will not
be reached until 2014. On December 14, 2000, the NRC issued an amendment
revising the operating license for Palisades extending the expiration date to
March 2011, with no restrictions related to reactor vessel embrittlement.
In April 2001, Consumers received approval from the NRC to amend the license of
the Palisades nuclear plant to transfer plant operating authority to NMC. The
formal operating authority transfer from Consumers to NMC took place in May
2001. Consumers will retain ownership of Palisades, its 789 MW output, the spent
fuel on site, and ultimate responsibility for the safe operation, maintenance
and decommissioning of the plant. Under this agreement, salaried Palisades'
employees became NMC employees on July 1, 2001. Union employees will work under
the supervision of NMC pursuant to their existing labor contract as Consumers
employees. Consumers will benefit by consolidating expertise and controlling
costs and resources among all of the nuclear plants being operated on behalf of
the five NMC member companies. With Consumers as a partner, NMC currently has
responsibility for operating eight units with 4,500 MW of generating capacity in
Wisconsin, Minnesota, Iowa and Michigan. The ultimate financial impact of
Consumers' participation in NMC is uncertain.
On June 20, 2001, the Palisades reactor was shut down so technicians could
inspect a small steam leak on a control rod drive assembly. There was no risk to
the public or workers. Consumers expanded its inspection to include all similar
control rod drive system piping, and is still in the process of completing the
expanded inspection. As of early August 2001, Consumers had identified some
additional small flaws. At the completion of the inspection process, Consumers
will implement the appropriate repairs or replacements. The plant is not
expected to return to service until the fourth quarter. Until it completes the
inspection and determines a definitive plan for repair or replacement, however,
Consumers cannot make any assurances as to factors that may affect the date on
which the plant will return to service. The incremental cost of replacement
power and maintenance is currently estimated to be approximately $.40 per share
of CMS Energy Common Stock if the Palisades' restart date occurs in mid-November
2001, with further incremental costs of approximately $.06 to $.07 per share for
each month thereafter. Consumers expects to have sufficient power at all times
to meet its load requirements from its other plants or purchase arrangements.
CONSUMERS' GAS UTILITY CONTINGENCIES
GAS ENVIRONMENTAL MATTERS: Under the Michigan Natural Resources and
Environmental Protection Act, Consumers expects that it will ultimately incur
investigation and remedial action costs at a number of sites. These include 23
sites that formerly housed manufactured gas plant facilities, even those in
which it has a partial or no current ownership interest. Consumers has completed
initial investigations at the 23 sites. On sites where Consumers has received
site-wide study plan approvals, it will continue to implement these plans. It
will also work toward closure of environmental issues at sites as studies are
completed. Consumers has estimated its costs related to further investigation
and remedial action for all 23 sites using the Gas Research
Institute-Manufactured Gas Plant Probabilistic Cost Model. Using this model,
Consumers estimates the total costs to be between $82 million and $113 million.
These estimates are based on discounted 2001 costs. As of June 30, 2001,
Consumers has an accrued liability of $62 million, (net of expenditures incurred
to date and net
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of any insurance recoveries), and a regulatory asset of $71 million. Any
significant change in assumptions, such as remediation techniques, nature and
extent of contamination, and legal and regulatory requirements, could affect the
estimate of remedial action costs for the sites. Consumers defers and amortizes,
over a period of ten years, environmental cleanup costs above the amount
currently being recovered in rates. Rate recognition of amortization expense
cannot begin until after a prudence review in a future general gas rate case.
The MPSC allows Consumers to recover $1 million annually.
CONSUMERS' GAS UTILITY RATE MATTERS
GAS RESTRUCTURING: On April 1, 1998, Consumers began an experimental gas
customer choice pilot program that ended March 31, 2001. Under this program, gas
distribution rates were frozen through March 31, 2001. On April 1, 2001 a
permanent gas customer choice program commenced and under this program Consumers
returned to a GCR mechanism that allows it to recover from its customers all
prudently incurred costs to purchase the natural gas commodity and transport it
to Consumers' facilities.
In June 2001, Consumers filed an application with the MPSC seeking its first gas
service rate increase in 17 years. If approved, the request would add about
$6.50 per month, or about 10%, to the typical residential customer's average
monthly bill. Consumers is seeking a 12.25% authorized return on equity along
with a $140 million gas service rate increase. Contemporaneously with this
filing, Consumers has requested partial and immediate relief in the amount of
$34.5 million.
As part of a settlement agreement approved by the MPSC in July 2001, Consumers
agreed not to exceed a ceiling price of $4.69 per mcf of natural gas under the
GCR factor mechanism through March 2002. This agreement is not expected to
affect Consumers' earnings outlook since Consumers charges customers what it
pays for natural gas in the reconciliation process. Consumers initiated the
negotiations in December 2000, requesting a ceiling price of $5.69 per mcf. The
settlement reflects the decreasing prices in the natural gas market. The
settlement does not affect Consumers' June 2001 request to the MPSC for the gas
service rate increase. The MPSC also approved a methodology to adjust for market
price increases quarterly without returning to the MPSC for approval.
PANHANDLE MATTERS
REGULATORY MATTERS: Effective August 1996, Trunkline placed into effect a
general rate increase, subject to refund. In September 1999, Trunkline filed a
FERC settlement agreement to resolve certain issues in this proceeding. FERC
approved this settlement February 2000 and required refunds of approximately $2
million that were made in April 2000, with supplemental refunds of $1.3 million
in June 2000. In January 2001, Trunkline filed a settlement that included the
remaining issues in this proceeding. In April 2001, the FERC approved
Trunkline's uncontested settlement, without modification. As part of the
settlement, Trunkline reduced its maximum rates in May 2001 and made the
remaining refunds totaling approximately $8 million in June 2001.
In conjunction with a FERC order issued in September 1997, FERC required certain
natural gas producers to refund previously collected Kansas ad-valorem taxes to
interstate natural gas pipelines, including Panhandle. FERC ordered these
pipelines to refund these amounts to their customers. The pipelines must make
all payments in compliance with prescribed FERC requirements. In June 2001,
Panhandle filed a proposed settlement with the FERC which is supported by most
of the customers and affected producers; this settlement is awaiting commission
approval. At June 30, 2001 and December 31, 2000, Panhandle's Accounts
Receivable included $62 million and $59 million, respectively, due from natural
gas producers, and Other Current Liabilities included $62 million and $59
million, respectively, for related obligations. The settlement, if approved,
provides for some reductions in these balances due
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CMS Energy Corporation
from producers and corresponding obligations to customers.
In March 2001, Trunkline received FERC approval to abandon 720 miles of its
26-inch diameter pipeline that extends from Longville, Louisiana to Bourbon,
Illinois. This filing is in conjunction with a plan for Centennial Pipeline to
convert the line from natural gas transmission service to a refined products
pipeline by January 2002. Panhandle owns a one-third interest in the venture
along with TEPPCO Partners L.P. and Marathon Ashland Petroleum L.L.C. Effective
April 2001, the 26-inch pipeline was conveyed to Centennial and the book value
of the asset, including related goodwill, is now reflected in Investments on the
Consolidated Balance Sheet.
ENVIRONMENTAL MATTERS: Panhandle is subject to federal, state and local
regulations regarding air and water quality, hazardous and solid waste disposal
and other environmental matters. Panhandle has identified environmental
contamination at certain sites on its systems and has undertaken cleanup
programs at these sites. The contamination resulted from the past use of
lubricants in compressed air systems containing PCBs and the prior use of
wastewater collection facilities and other on-site disposal areas. Panhandle
communicated with the EPA and appropriate state regulatory agencies on these
matters. Under the terms of the sale of Panhandle to CMS Energy, a subsidiary of
Duke Energy is obligated to complete the Panhandle cleanup programs at certain
agreed-upon sites and to indemnify against certain future environmental
litigation and claims. Panhandle expects these cleanup programs to continue
through 2001. The Illinois EPA included Panhandle Eastern Pipe Line and
Trunkline, together with other non-affiliated parties, in a cleanup of former
waste oil disposal sites in Illinois. Prior to a partial cleanup by the EPA, a
preliminary study estimated the cleanup costs at one of the sites to be between
$5 million and $15 million. The State of Illinois contends that Panhandle
Eastern Pipe Line's and Trunkline's share for the costs of assessment and
remediation of the sites, based on the volume of waste sent to the facilities,
is 17.32 percent. Management believes that the costs of cleanup, if any, will
not have a material adverse impact on Panhandle's financial position, liquidity,
or results of operations.
OTHER UNCERTAINTIES
CMS GENERATION-OXFORD TIRE RECYCLING: In a 1999 administrative order, the
California Regional Water Control Board of the State of California named CMS
Generation as a potentially responsible party for the cleanup of the waste from
a fire that occurred in September 1999 at the Filbin tire pile. The tire pile
was maintained as fuel for an adjacent power plant owned by Modesto Energy
Limited Partnership. Oxford Tire Recycling of Northern California, Inc., a
subsidiary of CMS Generation until 1995, owned the Filbin tire pile. CMS
Generation has not owned an interest in Oxford Tire Recycling of Northern
California, Inc. or Modesto Energy Limited Partnership since 1995. In April
2000, the California Attorney General filed a complaint against the potentially
responsible parties for cleanup of the site and assessed penalties for violation
of the California Regional Water Control Board order. The complaint alleges $20
million of cleanup costs to be shared among all the potentially responsible
parties. CMS Generation and all relevant State agencies have reached a
settlement.
Also in connection with this same fire, several class action lawsuits were filed
claiming that the fire resulted in damage to the class and that management of
the site caused the fire. CMS Generation believes these cases are without merit
and intends to vigorously defend against them. CMS Generation's primary
insurance carrier has agreed to defend and indemnify CMS Generation for a
portion of defense costs up to the policy limits.
DEARBORN INDUSTRIAL GENERATION: Duke/Fluor Daniel (DFD) has asserted change
order claims against DIG, a wholly-owned subsidiary of CMS Generation, in excess
of $65 million for additional time and cost relating to the construction by DFD
of the DIG electrical generation facility in Dearborn, Michigan. DIG rejected
the
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CMS Energy Corporation
change orders, tendered change orders indicating cost deductions to DFD relating
to work that DIG was required to take over from DFD, and assessed DFD schedule
liquidated damages. In July 2001, DIG drew down three letters of credit obtained
by DFD, totaling $30 million, in connection with claims against DFD. Neither DFD
nor DIG have initiated a formal dispute resolution regarding this matter yet,
and construction of the electrical generation facility continues.
CMS OIL AND GAS: In 1999, a former subsidiary of CMS Oil and Gas, Terra Energy
Ltd., was sued by Star Energy, Inc. and White Pines Enterprises LLC in the 13th
Judicial Circuit Court in Antrim County, Michigan, on grounds, among others,
that Terra violated oil and gas lease and other agreements by failing to drill
wells it had committed to drill. Among the defenses asserted by Terra were that
the wells were not required to be drilled and the claimant's sole remedy was
termination of the oil and gas lease. During the trial, the judge declared the
lease terminated in favor of White Pines. The jury then awarded Star Energy and
White Pines $7.6 million in damages. Terra has filed an appeal. CMS Energy
believes Terra has meritorious grounds for either reversal of the judgment or
reduction of damages. CMS Energy has an indemnification obligation in favor of
the purchaser of its Michigan properties with respect to this litigation.
OTHER: CMS Energy and Enterprises, including subsidiaries, have guaranteed
payment of obligations, through letters of credit and surety bonds, of
unconsolidated affiliates and related parties approximating $760 million as of
June 30, 2001.
Additionally, Enterprises, in the ordinary course of business, has guarantees in
place for contracts of CMS MST which contain certain schedule and performance
requirements. As of June 30, 2001, the actual amount of financial exposure
covered by these guarantees was $720 million. These amounts exclude the
guarantees associated with CMS MST's natural gas sales arrangements totaling
$292 million, which are recorded as liabilities on the Consolidated Balance
Sheet at June 30, 2001. Management monitors and approves these obligations and
believes it is unlikely that CMS Energy or Enterprises would be required to
perform or otherwise incur any material losses associated with the above
obligations.
Certain CMS Gas Transmission and CMS Generation affiliates in Argentina received
notice from various Argentine provinces claiming stamp taxes and associated
penalties and interest arising from various gas transportation transactions.
Although these claims total approximately $75 million, the affiliates and CMS
Energy believe the claims are without merit and will vigorously contest them.
In March 2000, Adams Affiliates, Inc. and Cottonwood Partnership (prior majority
owners of Continental Natural Gas) initiated arbitration proceedings through the
American Arbitration Association against CMS Energy. The plaintiffs claim, in
connection with an Agreement and Plan of Merger among CMS Energy, CMS Merging
Corporation, Continental Natural Gas and the plaintiffs, damages for breach of
warranty, implied duty of good faith, violation of the Michigan Uniform
Securities Act, and common law fraud and negligent misrepresentation. The
plaintiffs allege $13 million of compensatory damages and $26 million in
exemplary damages. CMS Energy filed a response denying all the claims made by
the plaintiffs and asserting several counterclaims. Arbitration on this matter
was completed in July 2001. The parties must submit post-hearing briefs to the
Arbitrator in September 2001. CMS Energy believes the claims are without merit
and will vigorously defend against them, but cannot predict the outcome of this
matter.
CMS Generation does not currently expect to incur significant capital costs at
its power facilities for compliance with current U.S. environmental regulatory
standards.
In addition to the matters disclosed in this Note, Consumers, Panhandle and
certain other subsidiaries of CMS Energy are parties to certain lawsuits and
administrative proceedings before various courts and governmental
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agencies arising from the ordinary course of business. These lawsuits and
proceedings may involve personal injury, property damage, contractual matters,
environmental issues, federal and state taxes, rates, licensing and other
matters.
CMS Energy has accrued estimated losses for certain contingencies discussed in
this Note. Resolution of these contingencies is not expected to have a material
adverse impact on CMS Energy's financial position, liquidity, or results of
operations.
CAPITAL EXPENDITURES: CMS Energy estimates capital expenditures, including
investments in unconsolidated subsidiaries and new lease commitments, of $1.305
billion for 2001, $1.225 billion for 2002 and $1.055 billion for 2003.
3: SHORT-TERM AND LONG-TERM FINANCINGS, AND CAPITALIZATION
CMS ENERGY: CMS Energy's $750 million Senior Credit Facilities consist of a $450
million one-year revolving credit facility, maturing in June 2002 and a $300
million three-year revolving credit facility, maturing in June 2004 (Senior
Credit Facilities). Additionally, CMS Energy has unsecured lines of credit in an
aggregate amount of $22 million. As of June 30, 2001, no amounts were
outstanding under the Senior Credit Facilities or the unsecured lines of credit.
At June 30, 2001, CMS Energy had $110 million of Series A GTNs, $107 million of
Series B GTNs, $127 million of Series C GTNs, $177 million Series D GTNs, $396
million Series E GTNs and $141 million of Series F GTNs issued and outstanding
with weighted average interest rates of 7.9 percent, 8.1 percent, 7.9 percent,
7.0 percent, 7.8 percent and 8.6 percent, respectively.
In February 2001, CMS Energy sold 10 million shares of CMS Energy Common Stock.
CMS Energy used the net proceeds of approximately $296 million to repay
borrowings under the Senior Credit Facility.
In March 2001, CMS Energy sold $350 million aggregate principal amount of 8.50
percent senior notes due 2011. Net proceeds from the sale were approximately
$337 million. CMS Energy used the net proceeds to reduce borrowings under the
Senior Credit Facility and for general corporate purposes.
MANDATORILY REDEEMABLE PREFERRED SECURITIES: CMS Energy and Consumers each have
wholly-owned statutory business trusts that are consolidated with the respective
parent company. CMS Energy and Consumers created their respective trusts for the
sole purpose of issuing Trust Preferred Securities. In each case, the primary
asset of the trust is a note or debenture of the parent company. The terms of
the Trust Preferred Security parallel the terms of the related parent company
note or debenture. The terms, rights and obligations of the Trust Preferred
Security and related note or debenture are also defined in the related indenture
through which the note or debenture was issued, the parent guarantee of the
related Trust Preferred Security and the declaration of trust for the particular
trust. All of these documents together with their related note or debenture and
Trust Preferred Security constitute a full and unconditional guarantee by the
parent company of the trust's obligations under the Trust Preferred Security. In
addition to the similar provisions previously discussed, specific terms of the
securities follow:
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CMS Energy Trust and Securities In Millions
- -------------------------------------------------------------------------------------------------------------------
Amount Outstanding
- -------------------------------------------------------------------------------------------------------------------
June 30 December 31 June 30 Earliest
Rate(%) 2001 2000 2000 Maturity Redemption
- -------------------------------------------------------------------------------------------------------------------
CMS Energy Trust I (a) 7.75 $ 173 $ 173 $ 173 2027 2001
CMS Energy Trust II (b) 8.75 301 301 301 2004 --
CMS Energy Trust III (c) 7.25 220 220 -- 2004 --
CMS RHINOS Trust LIBOR + 1.75 -- -- 250 -- (d)
- -------------------------------------------------------------------------------------------------------------------
Total Amount Outstanding $ 694 $ 694 $ 724
==================================
(a) Represents Quarterly Income Preferred Securities that are convertible into
1.2255 shares of CMS Energy Common Stock (equivalent to a conversion price of
$40.80). CMS Energy may cause conversion rights to expire on or after July 2001.
(b) Represents Adjustable Convertible Preferred Securities which include 0.125
percent annual contract payments for the stock purchase contract that obligates
the holder to purchase not more than 1.2121 and not less than .7830 shares of
CMS Energy Common Stock in July 2002.
(c) Represents Premium Equity Participating Security Units in which holders are
obligated to purchase a variable number of shares of CMS Energy Common Stock by
August 2003.
(d) Redeemed in August 2000.
CMS Energy Trust and Securities In Millions
- -------------------------------------------------------------------------------------------------------------------
Amount Outstanding
- -------------------------------------------------------------------------------------------------------------------
June 30 December 31 June 30 Earliest
Rate(%) 2001 2000 2000 Maturity Redemption
- -------------------------------------------------------------------------------------------------------------------
Consumers Power Company Financing I,
Trust Originated Preferred Securities 8.36% $100 $100 $100 2015 2000
Consumers Energy Company Financing II,
Trust Originated Preferred Securities 8.20% 120 120 120 2027 2002
Consumers Energy Company Financing III,
Trust Originated Preferred Securities 9.25% 175 175 175 2029 2004
Consumers Energy Company Financing IV,
Trust Originated Preferred Securities 9.00% 125 -- -- 2031 2006
- ------------------------------------------------------------------------------------------------------------------
Total Amount Outstanding $520 $395 $395
==============================
CONSUMERS: At June 30, 2001, Consumers had FERC authorization to issue or
guarantee through June 2002, up to $900 million of short-term securities
outstanding at any one time. Consumers also had remaining FERC authorization to
issue through June 2002 up to $25 million and $800 million of long-term
securities for refinancing or refunding purposes and for general corporate
purposes, respectively. Additionally, Consumers had remaining FERC authorization
to issue $275 million of first mortgage bonds to be issued solely as security
for the long-term securities mentioned above.
Consumers has an unsecured $300 million credit facility maturing in July 2002
and unsecured lines of credit aggregating $215 million. These facilities are
available to finance seasonal working capital requirements and to pay for
capital expenditures between long-term financings. At June 30, 2001, a total of
$328 million was outstanding at a weighted average interest rate of 4.6 percent,
compared with $275 million outstanding at June 30, 2000, at a weighted average
interest rate of 7.8 percent.
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CMS Energy Corporation
Consumers currently has in place a $325 million trade receivables sale program.
At June 30, 2001 and 2000, receivables sold under the program totaled $299
million and $283 million, respectively. Accounts receivable and accrued revenue
in the Consolidated Balance Sheets have been reduced to reflect receivables
sold.
Under the provisions of its Articles of Incorporation, Consumers had $408
million of unrestricted retained earnings available to pay common dividends at
June 30, 2001. In January 2001, Consumers declared a $66 million common dividend
that was paid in February 2001, in April 2001, Consumers declared a $30 million
common dividend paid in May 2001, and in July 2001, Consumers declared a $39
million common dividend payable in August 2001.
CMS OIL AND GAS: CMS Oil and Gas has a $225 million floating rate revolving
credit facility that matures in May 2002. At June 30, 2001, the amount utilized
under the credit facility was $110 million.
4: EARNINGS PER SHARE AND DIVIDENDS
Basic and diluted earnings per share are based on the weighted average number of
shares of common stock and potential common stock outstanding during the period.
Potential common stock, for purposes of determining diluted earnings per share,
includes the effects of dilutive stock options and convertible securities. The
effect of such potential common stock is computed using the treasury stock
method or the if-converted method, as applicable.
The following table presents a reconciliation of the numerators and denominators
of the basic and diluted earnings per share computations.
COMPUTATION OF EARNINGS PER SHARE:
In Millions, Except Per Share Amounts
- -------------------------------------------------------------------------------------------------------------
Three Months Ended June 30 2001 2000(a)
- -------------------------------------------------------------------------------------------------------------
NET INCOME APPLICABLE TO BASIC AND DILUTED EPS
Consolidated Net Income $ 53 $ 79
===================================
Net Income Attributable to Common Stock:
CMS Energy - Basic $ 53 $ 79
Add conversion of 7.75% Trust
Preferred Securities (net of tax) 2 2
-----------------------------------
CMS Energy - Diluted $ 55 $ 81
===================================
AVERAGE COMMON SHARES OUTSTANDING
APPLICABLE TO BASIC AND DILUTED EPS
CMS Energy:
Average Shares - Basic 132.1 10.1
Add conversion of 7.75% Trust
Preferred Securities 4.2 4.2
Options-Treasury Shares .3 .1
-----------------------------------
Average Shares - Diluted 136.6 114.4
===================================
EARNINGS PER AVERAGE COMMON SHARE
Basic $ .40 $ .72
Diluted $ .40 $ .71
=============================================================================================================
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CMS Energy Corporation
(a) For the three months ended June 30, 2000, the accounting change for crude
oil inventories decreased net income by $2 million, or $.01 per basic and
diluted share.
In Millions, Except Per Share Amounts
- ----------------------------------------------------------------------------------------------------------
Six Months Ended June 30 2001 2000(b)
- ----------------------------------------------------------------------------------------------------------
NET INCOME APPLICABLE TO BASIC AND DILUTED EPS
Consolidated Net Income $ 162 $ 154
=====================================
Net Income Attributable to Common Stock:
CMS Energy - Basic $ 162 $ 154
Add conversion of 7.75% Trust 4 4
Preferred Securities (net of tax)
-------------------------------------
CMS Energy - Diluted $ 166 $ 158
=====================================
AVERAGE COMMON SHARES OUTSTANDING
APPLICABLE TO BASIC AND DILUTED EPS
CMS Energy:
Average Shares - Basic 128.8 111.8
Add conversion of 7.75% Trust
Preferred Securities 4.2 4.2
Options-Treasury Shares .3 .1
-------------------------------------
Average Shares - Diluted 133.3 116.1
====================================
EARNINGS PER AVERAGE COMMON SHARE
Basic $ 1.27 $ 1.38
Diluted $ 1.25 $ 1.36
==========================================================================================================
(b) For the six months ended June 30, 2000, the accounting change for crude oil
inventories decreased net income by $7 million, or $.06 per basic and diluted
share.
In February and May 2001, CMS Energy paid dividends of $.365 per share on CMS
Energy Common Stock. In July 2001, the Board of Directors declared a quarterly
dividend of $.365 per share on CMS Energy Common Stock, payable in August 2001.
5: RISK MANAGEMENT ACTIVITIES AND FINANCIAL INSTRUMENTS
The overall goal of the CMS Energy risk management policy is to analyze and
manage individual business unit commodity exposures to take advantage of the
presence of internal hedge opportunities within its diversified business units.
CMS Energy and its subsidiaries, primarily through CMS MST, utilize a variety of
derivative instruments (derivatives) for both trading and non-trading purposes.
These derivatives include futures contracts, swaps, options and forward
contracts with external parties to manage exposure to fluctuations in commodity
prices, interest rates and foreign exchange rates. To qualify for hedge
accounting, derivatives must meet the following criteria: i) the item to be
hedged exposes the enterprise to price, interest or exchange rate risk; and ii)
the derivative reduces that exposure and is designated as a hedge.
Derivative instruments contain credit risk if the counterparties, including
financial institutions and energy marketers, fail to perform under the
agreements. CMS Energy minimizes such risk by performing financial credit
reviews using, among other things, publicly available credit ratings of such
counterparties. No material nonperformance is expected.
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CMS Energy Corporation
IMPLEMENTATION OF SFAS NO. 133: Effective January 1, 2001, CMS Energy adopted
SFAS No. 133. CMS Energy reflected the difference between the fair market value
of the derivative instruments and the recorded book value of the derivative
instruments as a cumulative effect type adjustment to accumulated other
comprehensive income. CMS Energy will reclassify the gains and losses on the
derivative instruments that are reported in accumulated other comprehensive
income as earnings in the periods in which earnings are impacted by the
variability of the cash flows of the hedged item. The ineffective portion, if
any, of all hedges will be recognized in current period earnings. CMS Energy
determines fair market value based upon mathematical models using current and
historical pricing data.
CMS Energy believes that the majority of its non-trading derivative contracts,
power purchase agreements and gas transportation contracts qualify for the
normal purchases and sales exception of SFAS No. 133 and therefore, would not be
recognized at fair value on the balance sheet. CMS Energy does, however, use
certain derivative instruments to limit its exposures to commodity price risk,
interest rate risk, and currency exchange risk. The interest rate and foreign
exchange contracts meet the requirements for hedge accounting under SFAS No. 133
and CMS Energy recorded the changes in the fair value of these contracts in
accumulated other comprehensive income on the balance sheet.
The financial statement impact of recording the SFAS No. 133 transition
adjustment on January 1, 2001 is as follows:
In Millions
- -----------------------------------------------------------------------------------------------------------------------
Fair value of derivative assets $35
Fair value of derivative liabilities 14
Increase in accumulated other comprehensive income, net of tax 13
- -----------------------------------------------------------------------------------------------------------------------
Upon initial adoption of the standard, CMS Energy recorded a $13 million, net of
tax, cumulative effect adjustment to accumulated other comprehensive income.
This adjustment relates to the difference between the fair value and recorded
book value of contracts related to gas options, gas fuel swap contracts, and
interest rate swap contracts that qualified for cash flow hedge accounting prior
to the initial adoption of SFAS No. 133 and Consumers' proportionate share of
the effects of adopting SFAS No. 133 related to its equity investment in the MCV
Partnership. This amount will reduce, or be charged to cost of gas, cost of
power, interest expense, or other operating revenue respectively, when the
related hedged transaction occurs. Based on the pretax amount recorded in
accumulated other comprehensive income on the January 1, 2001 transition date,
Consumers recorded $12 million as a reduction to cost of gas for the six months
ended June 30, 2001. CMS Energy recorded $4 million as additional interest
expense during the first six months of 2001, $3 million was recognized during
the second quarter.
Upon initial adoption of the standard, derivative and hedge accounting for
certain utility industry contracts, particularly electric call option contracts
and option-like contracts, and contracts subject to bookouts remained uncertain.
Consumers accounted for these types of contracts as derivatives that qualified
for the normal purchase exception of SFAS No. 133, and therefore, did not record
these contracts on the balance sheet at fair value. In June 2001, the FASB
issued guidance that effectively resolved most of these matters as of July 1,
2001. Consumers is in the process of evaluating all of its option and
option-like contracts in order to determine if derivative accounting is
required. Consumers expects the majority of these contracts will qualify for the
normal purchase exception of SFAS No. 133, however, certain electricity option
contracts will be required to be accounted for as derivatives. Upon initial
adoption of the standard for these contracts requiring derivative accounting,
Consumers will record the difference between the current fair value of the
contract and the recorded book value of the contract as a cumulative effect type
adjustment to either accumulated other comprehensive income or to earnings
depending on certain criteria. After July 1, 2001, these contracts will not
qualify for hedge accounting under SFAS No. 133, and therefore, Consumers will
record any change in fair
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CMS Energy Corporation
value subsequent to July 1, 2001 directly in earnings, which could cause
earnings volatility. The preliminary estimated financial statement impact of
recording the SFAS No. 133 transition adjustment associated with these
derivatives on July 1, 2001 is immaterial.
In addition, as of July 1, 2001, derivative accounting for certain fuel supply
contracts with quantity variability remained unclear. Consumers believes that
its contracts qualify for the normal purchase exception of SFAS No. 133 and has
therefore not recorded these contracts on the balance sheet at fair value. The
ultimate financial statement impact of adopting SFAS No. 133 depends upon
clarification of this issue with the FASB and could be materially different than
stated above.
COMMODITY DERIVATIVES (NON-TRADING): CMS Energy accounts for its non-trading
activities as cash flow hedges and, as such, defers any changes in market value
and gains and losses resulting from settlements until the hedged transaction is
complete. If there was a material lack of correlation between the changes in the
market value of the commodity price contracts and the market price ultimately
received for the hedged item, the open commodity price contracts would be
marked-to-market and gains and losses would be recognized in the income
statement. At June 30, 2001, these commodity derivatives extended for periods up
to 5 years.
CMS Energy had unrealized net losses of $64 million at June 30, 2001, related to
non-trading activities. The determination of unrealized net gains and losses
represents management's best estimate of prices including the use of exchange
and other third party quotes, time value and volatility factors in estimating
fair value. Accordingly, the unrealized net losses at June 30, 2001 are not
necessarily indicative of the amounts CMS Energy could realize in the current
market.
Consumers' electric business uses purchased electric call option contracts to
meet its regulatory obligation to serve, which requires providing a physical
supply of energy to customers, and to manage energy cost and to ensure a
reliable source of capacity during periods of peak demand. Upon initial adoption
of SFAS No. 133, accounting for these contracts was uncertain. Consumers has
accounted for these types of contracts as derivatives that qualified for the
normal purchase exception of SFAS No. 133, and has therefore not recorded the
fair value of these contracts on the balance sheet. In June 2001, the FASB
issued guidance that effectively resolved the accounting for these contracts as
of July 1, 2001. Consumers is in the process of evaluating all of its option and
option-like contracts in order to determine if derivative accounting is
required. Consumers expects the majority of these contracts will qualify for the
normal purchase exception of SFAS No. 133, however, certain electricity option
contracts will be required to be accounted for as derivatives. Upon initial
adoption of the standard for these contracts requiring derivative accounting,
Consumers will record the difference between the current fair value of the
contract and the recorded book value of the contract as a cumulative effect type
adjustment to either accumulated other comprehensive income or to earnings
depending on certain criteria. After July 1, 2001, these contracts will not
qualify for hedge accounting under SFAS No. 133, and therefore, Consumers will
record any change in fair value subsequent to July 1, 2001 directly in earnings,
which could cause earnings volatility. The preliminary estimated financial
statement impact of recording the SFAS No. 133 transition adjustment associated
with these derivatives on July 1, 2001 is immaterial.
Consumers' electric business also uses purchased gas call option and gas swap
contracts to hedge against price risk due to the fluctuations in the market
price of gas used as fuel for generation of electricity. These contracts are
financial contracts that will be used to offset increases in the price of
probable forecasted gas purchases. These contracts are designated as cash flow
hedges, and therefore, Consumers will record any change in the fair value of
these contracts in other comprehensive income until the forecasted transaction
occurs. Once the forecasted gas purchases occurs, the net gain or loss on these
contracts will be reclassified to earnings and
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CMS Energy Corporation
recorded as part of the cost of power. These contracts have been highly
effective in achieving offsetting cash flows of future gas purchases, and no
component of the gain or loss was excluded from the assessment of the hedge's
effectiveness. As a result, no net gain or loss has been recognized in earnings
as a result of hedge ineffectiveness as of June 30, 2001. At June 30, 2001,
Consumers had a derivative liability with a fair value of $1 million, which
includes $.5 million of premiums paid for these contracts. These contracts
expire in 2001, and Consumers expects to reclassify a $1 million decrease in
fair value to earnings as an increase to power costs in 2001, if this fair value
is sustained. The ultimate fair value of these derivative assets is dependent
upon market conditions related to the derivative instruments.
COMMODITY DERIVATIVES (TRADING): CMS Energy, through its subsidiary CMS MST,
engages in trading activities. CMS MST manages any open positions within certain
guidelines which limit its exposure to market risk and requires timely reporting
to management of potential financial exposure. These guidelines include
statistical risk tolerance limits using historical price movements to calculate
daily value at risk measurements. CMS MST's trading activities are accounted for
under the mark-to-market method of accounting. Under mark-to-market accounting,
energy trading contracts are reflected at fair market value, net of reserves,
with unrealized gains and losses recorded as an asset or liability in the
consolidated balance sheets. These assets and liabilities are affected by the
timing of settlements related to these contracts, current-period changes from
newly originated transactions and the impact of price movements. Changes are
recognized as revenues in the consolidated statements of income in the period in
which the changes occur. Market prices used to value outstanding financial
instruments reflect management's consideration of, among other things, closing
exchange and over-the-counter quotations. In certain of these markets, long-term
contract commitments may extend beyond the period in which market quotations for
such contracts are available. The lack of long-term pricing liquidity requires
the use of mathematical models to value these commitments under the accounting
method employed. These mathematical models utilize historical market data to
forecast future elongated pricing curves, which are used to value the
commitments that reside outside of the liquid market quotations. Realized cash
returns on these commitments may vary, either positively or negatively, from the
results estimated through application of forecasted pricing curves generated
through application of the mathematical model. CMS Energy believes that its
mathematical models utilize state-of-the-art technology, pertinent industry data
and prudent discounting in order to forecast certain elongated pricing curves.
These market prices are adjusted to reflect the potential impact of liquidating
the company's position in an orderly manner over a reasonable period of time
under present market conditions.
In connection with the market valuation of its energy commodity contracts, CMS
Energy maintains certain reserves for a number of risks associated with these
future commitments. Among others, these include reserves for credit risks based
on the financial condition of counterparties. Counterparties in its trading
portfolio consist principally of financial institutions and major energy trading
companies. The creditworthiness of these counterparties may impact overall
exposure to credit risk, either positively or negatively; however, with regard
to its counterparties, CMS Energy maintains credit policies that management
believes minimize overall credit risk. Determination of the credit quality of
its counterparties is based upon a number of factors, including credit ratings,
financial condition, and collateral requirements. When applicable, CMS Energy
employs standardized agreements that allow for netting of positive and negative
exposures associated with a single counterparty. Based on these policies, its
current exposures and its credit reserves, CMS Energy does not anticipate a
material adverse effect on its financial position or results of operations as a
result of counterparty nonperformance.
At June 30, 2001, CMS MST has recorded an asset of $60 million, net of reserves,
related to the unrealized mark-to-market gains on existing arrangements. For the
three and six months ended June 30, 2001, CMS MST reflected $45 million and $44
million, respectively, of mark-to-market revenues, net of reserves, primarily
from newly originated long-term power sales contracts and wholesale gas trading
transactions.
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CMS Energy Corporation
INTEREST RATE DERIVATIVES: CMS Energy and its subsidiaries enter into interest
rate swap agreements to exchange variable rate interest payments to fixed rate
interest payments without exchanging the underlying notional amounts. These
agreements convert variable rate debt to fixed rate debt to reduce the impact of
interest rate fluctuations. Notional amounts reflect the volume of transactions
but do not represent the amount exchanged by the parties to the financial
instruments. Accordingly, notional amounts do not necessarily reflect CMS
Energy's exposure to credit or market risks. These swaps are designated as cash
flow hedges and the difference between the amounts paid and received under the
swaps is accrued and recorded as an adjustment to interest expense over the term
of the agreement. As of June 30, 2001, the weighted average interest rate
associated with outstanding swaps was approximately 6.4 percent.
In Millions
- ------------------------------------------------------------------------------------------------------------------
Floating to Fixed Notional Maturity Fair Unrealized
Interest Rate Swaps Amount Date Value Gain (Loss)
- ------------------------------------------------------------------------------------------------------------------
June 30, 2001 $ 819 2001-06 $ (16) $ (1)
June 30, 2000 $ 1,880 2000-06 $ (1) $ (1)
FOREIGN EXCHANGE DERIVATIVES: CMS Energy uses forward exchange and option
contracts to hedge certain receivables, payables, long-term debt and equity
value relating to foreign investments. The purpose of CMS Energy's foreign
currency hedging activities is to protect the company from the risk that U.S.
dollar net cash flows resulting from sales to foreign customers and purchases
from foreign suppliers and the repayment of non-U.S. dollar borrowings as well
as equity reported on the company's balance sheet, may be adversely affected by
changes in exchange rates. These contracts do not subject CMS Energy to risk
from exchange rate movements because gains and losses on such contracts offset
losses and gains, respectively, on assets and liabilities being hedged. The
estimated fair value of the foreign exchange and option contracts at June 30,
2001 and 2000 was $13 million and $(18) million, respectively; which represents
the amount CMS Energy would receive or (pay) upon settlement. The impacts of the
hedges of the net investments in foreign operations are reflected in other
comprehensive income as a component of the foreign currency translation
adjustment. For the first six months of 2001, the adjustment for hedging was $6
million of the total net foreign currency translation adjustment of $(47)
million. As a result of exchange rate variations, CMS Energy recognized
approximately $3 million in earnings during the second quarter of 2001 as a
result of hedges for US dollar denominated debt that did not qualify as net
investment hedges, and consequently, were marked-to-market through earnings.
This gain appears on the Consolidated Statements of Income in Other Income
(Deductions).
Foreign exchange contracts outstanding as of June 30, 2001 had a total notional
amount of $469 million. Of this amount, $398 million was related to CMS Energy's
investment in Argentina. The Argentine contracts mature at various times during
2001 and 2002. In addition, $50 million of the foreign exchange contracts are
related to investments in Brazil and mature in July 2001. The contracts for the
Australian investments have a notional amount of $21 million maturing in July
2001.
The notional amount of the outstanding foreign exchange contracts at June 30,
2000 was $370 million consisting of $25 million, $150 million and $195 million
for Australian, Brazilian and Argentine, respectively.
FINANCIAL INSTRUMENTS: The carrying amounts of cash, short-term investments and
current liabilities approximate their fair values due to their short-term
nature. The estimated fair values of long-term investments are based on quoted
market prices or, in the absence of specific market prices, on quoted market
prices of similar investments or other valuation techniques. Judgment may also
be required to interpret market data to develop certain estimates of fair value.
Accordingly, the estimates determined as of June 30, 2001 and 2000 are not
necessarily indicative of the amounts that may be realized in current market
exchanges. The carrying amounts of all long-term investments in financial
instruments, except as shown below, approximate fair value.
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CMS Energy Corporation
In Millions
- ------------------------------------------------------------------------------------------------------------------
As of June 30 2001 2000
- ------------------------------------------------------------------------------------------------------------------
Carrying Fair Unrealized Carrying Fair Unrealized
Cost Value Gain (Loss) Cost Value Gain (Loss)
- ------------------------------------------------------------------------------------------------------------------
Long-Term Debt (a) $7,193 $7,011 $ (182) $6,918 $6,521 $(397)
Preferred Stock and
Trust Preferred Securities $1,258 $1,209 $ (49) $1,163 $1,065 $ (98)
(a) Settlement of long-term debt is generally not expected until maturity.
6: REPORTABLE SEGMENTS
CMS Energy operates principally in the following seven reportable segments:
electric utility; gas utility; independent power production; oil and gas
exploration and production; natural gas transmission; marketing, services and
trading; and international energy distribution.
CMS Energy's reportable segments are strategic business units organized and
managed by the nature of the products and services each provides. Management
evaluates performance based on the pretax operating income of each segment. The
electric utility segment consists of regulated activities associated with the
generation, transmission and distribution of electricity in the state of
Michigan through its subsidiary, Consumers Energy. The gas utility segment
consists of regulated activities associated with the transportation, storage and
distribution of natural gas in the state of Michigan through its subsidiary,
Consumers Energy. Independent power production invests in, acquires, develops,
constructs and operates non-utility power generation plants in the United States
and abroad. The oil and gas exploration and production segment conducts oil and
gas exploration and development operations in the United States, primarily the
Permian Basin in Texas and the Powder River Basin in Wyoming and in the
countries of Cameroon, Congo, Colombia, Equatorial Guinea, Tunisia and
Venezuela. Natural gas transmission owns, develops, and manages domestic and
international natural gas facilities. The marketing, services and trading
segment provides gas, oil, and electric marketing, risk management and energy
management services to industrial, commercial, utility and municipal energy
users throughout the United States and abroad. International energy distribution
is involved in purchasing, investing in and operating gas and electric
distribution systems worldwide. Revenues from a land development business fall
below the quantitative thresholds for reporting and have never met any of the
quantitative thresholds for determining reportable segments.
The accounting policies of each reportable segment are the same as those
described in the summary of significant accounting policies contained in CMS
Energy's 2000 Form 10-K. The Consolidated Statements of Income show operating
revenue and pretax operating income by reportable segment. Intersegment sales
and transfers are accounted for at current market prices and are eliminated in
consolidated pretax operating income by segment. There have not been any
material changes in assets during the first six months of 2001 at any of the
segments.
7: LEASES
On April 23, 2001 Consumers Campus Holdings entered into a lease agreement for
the construction of an office building to be used as the main headquarters for
Consumers in Jackson, Michigan. Consumers' current headquarters building leases
expire in June 2003. The lessor has committed to fund up to $70 million for
construction of the building.
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CMS Energy Corporation
The agreement is a seven-year lease term with payments commencing upon
completion of construction, which is projected for March of 2003. Consumers
Campus Holdings has the right to acquire the property at any time during the
life of the agreement. At the end of the lease term, Consumers Campus Holdings
has the option to renew the lease, purchase the property, or return the property
and assist the lessor in the sale of the building. This lease is classified as
an operating lease. Estimated minimum lease commitments, assuming an investment
of $70 million, based on LIBOR at inception of the lease, under this
non-cancelable operating lease would be approximately be $5 million each year
from 2003 through 2007 and $52 million thereafter. Actual lease payments will
depend upon final total construction costs and LIBOR rates.
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Report of Independent Public Accountants
To CMS Energy Corporation:
We have reviewed the accompanying consolidated balance sheets of CMS ENERGY
CORPORATION (a Michigan corporation) and subsidiaries as of June 30, 2001 and
2000, and the related consolidated statements of income and common stockholders'
equity for the three-month and six-month periods then ended and related
consolidated statements of cash flows for the six-month period 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 accounting principles generally accepted in the United States.
We have previously audited, in accordance with auditing standards generally
accepted in the United States, the consolidated balance sheet of CMS Energy
Corporation and subsidiaries as of December 31, 2000, and, in our report dated
February 2, 2001, we expressed an unqualified opinion on that statement. In our
opinion, the information set forth in the accompanying consolidated balance
sheet as of December 31, 2000, is fairly stated, in all material respects, in
relation to the consolidated balance sheet from which it has been derived.
/s/ Arthur Andersen LLP
Detroit, Michigan,
July 31, 2001.
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Consumers Energy Corporation
CONSUMERS ENERGY COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS
Consumers, a subsidiary of CMS Energy, a holding company, is an electric and gas
utility company that provides service to customers in Michigan's Lower
Peninsula. Consumers' customer base includes a mix of residential, commercial
and diversified industrial customers, the largest segment of which is the
automotive industry.
This MD&A refers to, and in some sections specifically incorporates by
reference, Consumers' Condensed Notes to Consolidated Financial Statements and
should be read in conjunction with such Consolidated Financial Statements and
Notes. This Form 10-Q and other written and oral statements that Consumers may
make contain forward-looking statements as defined by the Private Securities
Litigation Reform Act of 1995. Consumers' intentions with the use of the words,
"anticipates," "believes," "estimates," "expects," "intends," and "plans," and
variations of such words and similar expressions, are solely to identify
forward-looking statements that involve risk and uncertainty. These
forward-looking statements are subject to various factors that could cause
Consumers' actual results to differ materially from the results anticipated in
such statements. Consumers has no obligation to update or revise forward-looking
statements regardless of whether new information, future events or any other
factors affect the information contained in such statements. Consumers does,
however discuss certain risk factors, uncertainties and assumptions in this
Management's Discussion and Analysis in the section entitled "CMS Energy,
Consumers and Panhandle Forward-Looking Statements Cautionary Factors" in
Consumers' 2000 Form 10-K Item 1 and in various public filings it periodically
makes with the SEC. Consumers designed this discussion of potential risks and
uncertainties, which is by no means comprehensive, to highlight important
factors that may impact Consumers' outlook. This Form 10-Q also describes
material contingencies in Consumers Notes to Consolidated Financial Statements,
and Consumers encourages its readers to review these Notes.
RESULTS OF OPERATIONS
CONSUMERS CONSOLIDATED EARNINGS
In Millions
- ----------------------------------------------------------------------------------------------------------------
June 30 2001 2000 Change
- ----------------------------------------------------------------------------------------------------------------
Three months ended $ 33 $ 24 $ 9
Six months ended 131 109 22
================================================================================================================
For the three months ended June 30, 2001, net income available to the common
stockholder increased $9 million from the 2000 level. The earnings increase is
primarily the result of the absence of a $45 million regulatory obligation
related to gas prices recorded in the second quarter of 2000, partially offset
by higher current year replacement power costs from scheduled generating plant
outages and reduced electric deliveries reflecting the economic slowdown. The
Palisades generating plant began an unscheduled outage at the end of the second
quarter. While this outage did not materially affect second quarter results, it
is anticipated that the plant will not be returned to service until the fourth
quarter and that the continuing outage will have a material effect on third
quarter results. For the six months ended June 30, 2001, net income increased
$22 million from the comparable period in 2000 also the result of the $45
million gas regulatory obligation referenced above, partially offset by
scheduled electric generating plant outages and reduced economic related
electric deliveries. For further information, see the Electric and Gas Utility
Results of Operations sections and Note 2, Uncertainties.
CE-1
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Consumers Energy Corporation
ELECTRIC UTILITY RESULTS OF OPERATIONS
ELECTRIC PRETAX OPERATING INCOME:
In Millions
- ------------------------------------------------------------------------------------------------------------------
June 30 2001 2000 Change
- ------------------------------------------------------------------------------------------------------------------
Three months ended $ 83 $ 109 $ (26)
Six months ended 218 224 (6)
==================================================================================================================
For the three months ended June 30, 2001, electric pretax operating income
decreased $26 million from the comparable period in 2000. The earnings decrease
is the result of increased replacement power costs from scheduled plant outages
and reduced electric deliveries resulting from the economic slowdown. For the
six months ended June 30, 2001, electric pretax operating income decreased $6
million from the comparable period in 2000. The earnings decrease also reflects
the impact of increased costs of replacement purchased power from plant outages
and reduced electric deliveries resulting from the economic slowdown. The
following table quantifies these impacts on pretax operating income:
In Millions
- ----------------------------------------------------------------------------------------------------------------
Three Months Six Months
Ended June 30 Ended June 30
Change Compared to Prior Year 2001 vs 2000 2001 vs 2000
- ----------------------------------------------------------------------------------------------------------------
Electric system deliveries $ (2) $ 1
Power supply costs and related production revenue (31) (2)
Rate decrease (6) (19)
Non-commodity revenue 4 10
Other operating expenses 9 4
----------------------------
Total change $ (26) $ (6)
================================================================================================================
ELECTRIC DELIVERIES: For the three months ended June 30, 2001, electric
deliveries including intersystem volumes were 9.3 billion kWh, a decrease of 0.8
billion kWh or 8.0 percent compared to the second quarter of 2000. Total
electric deliveries decreased primarily due to lower industrial usage and lower
intersystem sales caused by plant outages which reduced the opportunity to sell
excess capacity. For the six months ended June 30, 2001, electric deliveries
were 19.3 billion kWh, a slight decrease from the corresponding 2000 period.
Total electric deliveries decreased due to lower intersystem sales and less
usage by industrial and special contract customers.
POWER SUPPLY COSTS:
In Millions
- ----------------------------------------------------------------------------------------------------------------
June 30 2001 2000 Change
- ----------------------------------------------------------------------------------------------------------------
Three months ended $ 305 $ 294 $ 11
Six months ended 606 594 12
================================================================================================================
For the three and six months ended June 30, 2001, power supply costs increased
$11 million and $12 million, respectively, from the comparable period in 2000,
primarily due to higher interchange power purchases.
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Consumers Energy Corporation
GAS UTILITY RESULTS OF OPERATIONS
GAS PRETAX OPERATING INCOME:
In Millions
- ----------------------------------------------------------------------------------------------------------------
June 30 2001 2000 Change
- ----------------------------------------------------------------------------------------------------------------
Three months ended $ 17 $ (28) $ 45
Six months ended 82 35 47
================================================================================================================
For the three months ended June 30, 2001, gas pretax operating income increased
by $45 million. The earnings increase is primarily the result of the absence of
a $45 million regulatory obligation related to gas prices recorded in the second
quarter of 2000. For the six months ended June 30, 2001, gas pretax operating
income increased by $47 million, primarily the result of the regulatory
obligation discussed for the second quarter above and increased gross margins.
The improvement in gross margin reflects higher deliveries to sales customers
due to colder temperatures during the heating season, partially offset by lower
transport deliveries due to economic conditions. The following table quantifies
these impacts on pretax operating income.
In Millions
- ----------------------------------------------------------------------------------------------------------------
Three Months Six Months
Ended June 30 Ended June 30
Change Compared to Prior Year 2001 vs 2000 2001 vs 2000
- ----------------------------------------------------------------------------------------------------------------
Gas deliveries $ (2) $ 8
Gas commodity costs and related revenue 44 42
Gas wholesale and retail services 2 5
Other operating expenses 1 (8)
----- -----
Total change $ 45 $ 47
================================================================================================================
GAS DELIVERIES: For the three months ended June 30, 2001, gas system deliveries,
including miscellaneous transportation volumes totaled 57 bcf, a decrease of 9
bcf or 14.1 percent compared with 2000. During the second quarter of 2001, the
decreased deliveries reflect warmer temperatures, and a reduction in demand due
to economic factors. For the six months ended June 30, 2001, gas system
deliveries, including miscellaneous transportation totaled 217 bcf, a decrease
of 10 bcf or 4.8 percent compared with 2000.
COST OF GAS SOLD:
In Millions
- ----------------------------------------------------------------------------------------------------------------
June 30 2001 2000 Change
- ----------------------------------------------------------------------------------------------------------------
Three months ended $ 141 $ 95 $ 46
Six months ended 490 390 100
================================================================================================================
For the three months ended June 30, 2001, the cost of gas sold increased due to
higher gas prices. During the second quarter of 2001, these higher gas costs
were partially offset by decreased sales from warmer than normal temperatures.
For the six months ended June 30, 2001, higher gas prices through the first two
quarters and colder than normal temperatures contributed to the increased cost
of gas sold.
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Consumers Energy Corporation
CAPITAL RESOURCES AND LIQUIDITY
CASH POSITION, INVESTING AND FINANCING
OPERATING ACTIVITIES: Consumers derives cash from operating activities involving
the sale and transportation of natural gas and the generation, transmission,
distribution and sale of electricity. For the first six months of 2001 and 2000,
cash from operations totaled $379 million and $367 million, respectively. The
$12 million increase resulted primarily from a $141 million increase in cash
collected from customers and by a net $24 million of other temporary changes in
working capital items due to timing of cash receipts and payments, offset by a
$153 million use of cash to increase natural gas inventories. Consumers
primarily uses cash derived from operating activities to maintain and expand
electric and gas systems, to retire portions of long-term debt, and to pay
dividends.
INVESTING ACTIVITIES: Cash used for investing activities totaled $395 million
and $293 million for the first six months of 2001 and 2000, respectively. The
change of $102 million is primarily the result of a $112 million increase in
capital expenditures, primarily to comply with the Clean Air Act, offset by a
$16 million decrease in the investment in nuclear decommissioning trust fund.
FINANCING ACTIVITIES: Cash provided by financing activities totaled $9 million
for the first six months of 2001 compared to $82 million used in the first six
months of 2000. The change of $91 million is primarily the result of $121
million net proceeds from the sale of Trust Originated Preferred Securities, a
decrease of $13 million in the payment of common stock dividends, offset by a
$44 million net decrease in notes payable.
OTHER: Consumers has credit facilities, lines of credit and a trade receivable
sale program in place as anticipated sources of funds to fulfill its currently
expected capital expenditures. For detailed information about these source of
funds, see Note 3, Short-Term Financing and Capitalization.
On April 23, 2001, Consumers Campus Holdings, LLC, a wholly owned subsidiary of
Consumers, entered into a $70 million operating lease agreement for the
construction of an office building to be used as the main headquarters for
Consumers in Jackson, Michigan. The seven-year agreement, with payments
commencing upon completion of construction, includes options to renew the lease,
purchase the property under the lease, or return the property at the end of the
lease term and assist the lessor in remarketing the building. Lease payments
will be determined based on LIBOR rates and the total cost of the construction,
which is projected to be completed on or before March 2003. For further
information on the lease agreement, see Note 4, Leases.
OUTLOOK
CAPITAL EXPENDITURES OUTLOOK
Consumers estimates the following capital expenditures, including new lease
commitments, by expenditure type and by business segments over the next three
years. Consumers prepares these estimates for planning purposes and may revise
them.
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Consumers Energy Corporation
In Millions
- ----------------------------------------------------------------------------------------------------------------
Years Ended December 31 2001 2002 2003
- ----------------------------------------------------------------------------------------------------------------
Construction $653 $656 $600
Nuclear fuel lease 16 27 0
Capital leases other than nuclear fuel 26 27 25
-------------------------------
$695 $710 $625
================================================================================================================
Electric utility operations (a)(b) $550 $535 $460
Gas utility operations (a) 145 175 165
-------------------------------
$695 $710 $625
================================================================================================================
(a) These amounts include an attributed portion of Consumers' anticipated
capital expenditures for plant and equipment common to both the electric and gas
utility businesses.
(b) These amounts include estimates for capital expenditures that may be
required by recent revisions to the Clean Air Act's national air quality
standards. For further information see Note 2, Uncertainties.
ELECTRIC BUSINESS OUTLOOK
GROWTH: Over the next five years, Consumers expects electric system deliveries
to grow an average of approximately two percent per year based primarily on a
steadily growing customer base. This growth rate does not take into account the
impact of electric industry restructuring, including the impact of the Customer
Choice Act that allows all customers to choose their electricity supplier
beginning January 1, 2002, or of changing regulation. Abnormal weather, changing
economic conditions or the developing competitive market for electricity may
affect actual electric deliveries by Consumers in future periods.
COMPETITION AND REGULATORY RESTRUCTURING: The Customer Choice Act, passed by the
Michigan Legislature, as a result of repeated efforts to enact electric utility
restructuring legislation, became effective June 2000.
The intent of the Customer Choice Act is to move the retail electric businesses
in Michigan to competition. Several years prior to the enactment of the Customer
Choice Act, in response to industry restructuring efforts, Consumers entered
into multi-year electric supply contracts with some of its largest industrial
customers to provide power to some of their facilities. The MPSC approved those
contracts as part of its phased introduction to competition. During the period
from 2001 through 2005, either Consumers or these industrial customers can
terminate or restructure some of these contracts. These contracts involve
approximately 600 MW of customer power supply requirements. Consumers cannot
predict the ultimate financial impact of changes related to these power supply
contracts.
Uncertainty exists with respect to the enactment of federal electric industry
restructuring legislation. A variety of bills introduced in Congress in recent
years have sought to change existing federal regulation of the industry, and the
House of Representatives passed a bill in the current session of Congress.
These federal bills could potentially affect or supercede state regulation;
however, none have been enacted.
In part because of certain policy pronouncements by the FERC, Consumers joined
the Alliance RTO. In January 2001, the FERC granted Consumers' application to
transfer ownership and control of its transmission facilities to a wholly owned
subsidiary, Michigan Transco. Consumers transferred the
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transmission facilities to Michigan Transco on April 1, 2001. This represents a
major step in Consumers' plan to transfer control of or to divest itself of
ownership, operation and control of its transmission assets.
Consumers cannot predict the outcome of these electric industry-restructuring
issues on its financial position, liquidity, or results of operations.
RATE MATTERS: Prior to the enactment of the Customer Choice Act, there were
several pending rate issues that could have affected Consumers' electric
business. As a result of the passage of this legislation, the MPSC dismissed
certain rate proceedings and a complaint filed by ABATE seeking a reduction in
rates. ABATE filed a petition for rehearing with the MPSC.
For further information and material changes relating to the rate matters and
restructuring of the electric utility industry, see Note 1, Corporate Structure
and Summary of Significant Accounting Policies, and Note 2, Uncertainties,
"Electric Rate Matters - Electric Restructuring" and "Electric Rate Matters -
Electric Proceedings," incorporated by reference herein.
NUCLEAR MATTERS: There are a number of issues related to nuclear matters that
may affect Consumers' business. In June 2001, an unplanned outage began at
Palisades that will affect power costs. The plant is expected to be restarted in
the fourth quarter. Until it completes an inspection of Palisades' control rod
drive system piping and determines a definitive plan for repair or replacement
of any flaws, however, Consumers cannot make any assurances as to factors that
may affect the date on which the plant will return to service. For further
information and material changes relating to nuclear matters, see Note 2,
Uncertainties, "Other Electric Uncertainties - Nuclear Matters."
UNCERTAINTIES: Several electric business trends or uncertainties may affect
Consumers' financial results and condition. These trends or uncertainties have,
or Consumers reasonably expects could have, a material impact on net sales,
revenues, or income from continuing electric operations. Such trends and
uncertainties include: 1) capital expenditures and increased operating expenses
for compliance with the Clean Air Act; 2) environmental liabilities arising from
various federal, state and local environmental laws and regulations, including
potential liability or expenses relating to the Michigan Natural Resources and
Environmental Protection Acts and Superfund; 3) uncertainties relating to the
storage and ultimate disposal of spent nuclear fuel and the successful operation
of NMC; and 4) electric industry restructuring, including: a) how the MPSC
ultimately calculates the amount of Stranded Costs and the related true-up
adjustments and the manner in which the true-up operates; b) the ability to
recover fully the cost of doing business under the rate caps; c) the ability to
meet peak electric demand requirements at a reasonable cost and without market
disruption and initiatives undertaken to reduce exposure to energy price
increases; d) the restructuring of the MEPCC and the termination of joint
merchant operations with Detroit Edison; e) the effect of the transfer of
Consumers transmission facilities to Michigan Transco and its successful
disposition or integration into an RTO; f) the MPSC adoption of proposed
electric distribution performance standards requiring customer credits for
prolonged outages; and g) the power outage at Palisades and the incremental cost
of replacement power and maintenance. For detailed information about these
trends or uncertainties, see Note 2, Uncertainties, incorporated by reference
herein.
GAS BUSINESS OUTLOOK
GROWTH: Over the next five years, Consumers anticipates gas deliveries,
including gas customer choice deliveries (excluding transportation to the MCV
Facility and off-system deliveries), to grow at an average of about one percent
per year based primarily on a steadily growing customer base. Actual gas
deliveries in future periods may be affected by abnormal weather, alternative
energy costs, changes in competitive conditions, and the level of natural gas
consumption per customer.
During the spring and summer months of 2001, Consumers will purchase natural gas
for inventory to meet anticipated future customer needs during the winter
heating season. Consumers anticipates that it will
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Consumers Energy Corporation
incur financing costs on these natural gas purchases that are higher than are
being recovered in current rates.
UNCERTAINTIES: Several gas business trends or uncertainties may affect
Consumers' financial results and conditions. These trends or uncertainties have,
or Consumers reasonably expects could have, a material impact on net sales,
revenues, or income from continuing gas operations. Such trends and
uncertainties include: 1) potential environmental costs at a number of sites,
including sites formerly housing manufactured gas plant facilities; 2) future
gas industry restructuring initiatives; 3) implementation of the permanent gas
customer choice program for all gas retail customers; 4) any initiatives
undertaken to protect customers against gas price increases; and 5) market and
regulatory responses to increases in gas costs. For detailed information about
these uncertainties, see Note 2, Uncertainties, incorporated by reference
herein.
OTHER OUTLOOK
Consumers offers a variety of energy-related services to electric and gas
customers that focus on appliance maintenance, home safety, commodity choice and
assistance to customers purchasing heating, ventilation and air conditioning
equipment. Consumers continues to look for additional growth opportunities in
energy-related services for Consumers' customers.
In July 2001, the MPSC directed gas utilities under its jurisdiction to prepare
and file an unbundled cost of service study. The purpose of the study is to
allow parties to advocate or oppose the unbundling of the following services:
metering, billing information, transmission, balancing, storage, backup and
peaking, and customer turn-on and turn-off services. Unbundled services could be
separated from future rates and the services could be provided by an approved
third party. Consumers was directed to make this filing in connection with its
June, 2001 request for a gas service rate increase.
OTHER MATTERS
NEW ACCOUNTING STANDARDS
In July 2001, FASB issued SFAS No. 141, Business Combinations, and SFAS No. 142,
Goodwill and Other Intangible Assets.
SFAS No. 141 requires that all business combinations initiated after June 30,
2001, be accounted for under the purchase method; use of the
pooling-of-interests method is no longer permitted. The adoption of SFAS No.
141, effective July 1, 2001, will result in Consumers accounting for any future
business combinations under the purchase method of accounting, but not change
the method of accounting used in previous business combinations.
SFAS No. 142 requires that goodwill no longer be amortized to earnings, but
instead be reviewed for impairment. The amortization of goodwill ceases upon
adoption of the standard. The provisions of SFAS No. 142 require adoption as of
January 1, 2002 for calendar year entities. Upon adoption, Consumers will no
longer amortize its existing goodwill. Consumers does not expect that the
provisions of SFAS No. 142 will have a material impact on Consumers'
consolidated results of operations of financial position.
In August 2001, FASB issued SFAS No. 143, Accounting for Asset Retirement
Obligations. The provisions of SFAS No. 143 require adoption as of January 1,
2003. The standard requires entities to record the fair value of a liability for
an asset retirement obligation in the period in which it is incurred. When the
liability is initially recorded, the entity capitalizes a cost by increasing the
carrying amount of the
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Consumers Energy Corporation
related long-lived asset. Over time, the liability is accreted to its present
value each period, and the capitalized cost is depreciated over the useful life
of the related asset. Upon settlement of the liability, an entity either settles
the obligation for its recorded amount or incurs a gain or loss upon settlement.
Consumers is currently studying the new standard but has yet to quantify the
effects of adoption on its financial statements.
DERIVATIVES AND HEDGES
MARKET RISK INFORMATION: Consumers is exposed to market risks including, but not
limited to, changes in interest rates, commodity prices, and equity security
prices in which Consumers holds less than a 20 percent interest. Consumers'
derivative activities are subject to the direction of an executive oversight
committee consisting of designated members of senior management and a risk
committee, consisting of business unit managers. The role of the risk committee
is to review the corporate commodity position and ensure that net corporate
exposures are within the economic risk tolerance levels established by
Consumers' Board of Directors. Management employs established policies and
procedures to manage its risks associated with market fluctuations, including
the use of various derivative instruments such as futures, swaps, options and
forward contracts. Management believes that an opposite movement of the value of
the hedged risk would offset any losses incurred on derivative instruments used
to hedge that risk. Consumers enters into all derivative financial instruments
for purposes other than trading.
In accordance with SEC disclosure requirements, Consumers performs sensitivity
analyses to assess the potential loss in fair value, cash flows and earnings
based upon a hypothetical 10 percent adverse change in market rates or prices.
Consumers determines fair value based upon mathematical models using current and
historical pricing data. Management does not believe that sensitivity analyses
alone provides an accurate or reliable method for monitoring and controlling
risks. Therefore, Consumers relies on the experience and judgment of senior
management to revise strategies and adjust positions, as they deem necessary.
Losses in excess of the amounts determined in sensitivity analyses could occur
if market rates or prices exceed the ten percent shift used for the analyses.
EQUITY SECURITY PRICE RISK: Consumers has a less than 20 percent equity
investment in CMS Energy. At June 30, 2001 and 2000, a hypothetical 10 percent
adverse change in market price would have resulted in a $10 million and $9
million change in its equity investment, respectively. This instrument is
currently marked-to-market through equity. Consumers believes that such an
adverse change would not have a material effect on its consolidated financial
position, results of operation or cash flows.
INTEREST RATE RISK: Consumers is exposed to interest rate risk resulting from
the issuance of fixed-rate debt and variable-rate debt, and from interest rate
swap and rate lock agreements. Consumers uses a combination of fixed-rate and
variable-rate debt, as well as interest rate swaps and rate locks to manage and
mitigate interest rate risk exposure when deemed appropriate, based upon market
conditions. These strategies attempt to provide and maintain the lowest cost of
capital. As of June 30, 2001 and 2000, Consumers had outstanding $995 million
and $975 million of variable-rate debt, respectively. Assuming a hypothetical 10
percent adverse change in market interest rates, Consumers' exposure to
earnings, before tax, would be $4 million and $7 million at June 30, 2001 and
2000, respectively. As of June 30, 2001, Consumers had entered into
floating-to-fixed interest rate swap agreements for a total notional amount of
$225 million. These swaps exchange variable-rate interest payment obligations to
fixed-rate obligations to minimize the impact of potential adverse interest rate
changes. As of June 30, 2001 and 2000, Consumers had outstanding long-term
fixed-rate debt including fixed-rate swaps of $2.283 billion and $2.061 billion,
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Consumers Energy Corporation
respectively, with a fair value of $2.456 billion and $1.934 billion,
respectively. As of June 30, 2001 and 2000, assuming a hypothetical 10 percent
adverse change in market rates, Consumers would have an exposure of $124 million
and $130 million to the fair value of these instruments, respectively, if it had
to refinance all of its long-term fixed-rate debt. Consumers does not intend to
refinance its fixed-rate debt in the near term and believes that any adverse
change in debt price and interest rates would not have a material effect on
either its consolidated financial position, results of operation or cash flows.
For further discussion, see Note 3, Short-Term Financings and Capitalization,
"Derivative Activities".
COMMODITY MARKET RISK: Consumers enters into, for purposes other than trading,
electricity and gas fuel call options and swap contracts to protect against risk
due to fluctuations in the market price of these commodities and to ensure a
reliable source of capacity to meet its customers' electric needs.
At June 30, 2001, the fair value based on quoted future market prices of
electricity-related option and swap contracts was $33 million. Assuming a
hypothetical 10 percent adverse change in market prices, the potential reduction
in fair value associated with these contracts would be $6 million. As of June
30, 2001, Consumers had an asset of $122 million as a result of premiums
incurred for electricity call option contracts. Consumers' maximum exposure
associated with the call option contracts is limited to the premiums paid. For
further discussion on commodity derivatives see "Derivative Activities" under
Note 2, Uncertainties, Other Electric Uncertainties and Other Gas Uncertainties.
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Consumers Energy Company
CONSUMERS ENERGY COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 2001 2000 2001 2000
- ----------------------------------------------------------------------------------------------------------------
In Millions
OPERATING REVENUE
Electric $ 624 $ 647 $1,289 $1,287
Gas 239 148 779 623
Other 10 13 24 24
--------------------------------------------------
873 808 2,092 1,934
- ----------------------------------------------------------------------------------------------------------------
OPERATING EXPENSES
Operation
Fuel for electric generation 77 85 148 146
Purchased power - related parties 126 143 244 290
Purchased and interchange power 102 66 214 158
Cost of gas sold 141 95 490 390
Other 159 146 300 264
------------------------------------------------
605 535 1,396 1,248
Maintenance 50 44 106 92
Depreciation, depletion and amortization 67 93 171 216
General taxes 43 44 98 99
-------------------------------------------------
765 716 1,771 1,655
- ----------------------------------------------------------------------------------------------------------------
PRETAX OPERATING INCOME (LOSS)
Electric 83 109 218 224
Gas 17 (28) 82 35
Other 8 11 21 20
-------------------------------------------------
108 92 321 279
- ----------------------------------------------------------------------------------------------------------------
OTHER INCOME (DEDUCTIONS)
Dividends and interest from affiliates 2 2 4 5
Accretion income - 1 -- 1
Accretion expense (2) (2) (4) (4)
Other, net 1 1 2 3
-------------------------------------------------
1 2 2 5
- ----------------------------------------------------------------------------------------------------------------
INTEREST CHARGES
Interest on long-term debt 37 35 76 69
Other interest 12 10 20 18
Capitalized interest (2) -- (4) --
-------------------------------------------------
47 45 92 87
- ----------------------------------------------------------------------------------------------------------------
NET INCOME BEFORE INCOME TAXES 62 49 231 197
INCOME TAXES 19 16 81 69
-------------------------------------------------
NET INCOME 43 33 150 128
PREFERRED STOCK DIVIDENDS -- -- 1 1
PREFERRED SECURITIES DISTRIBUTIONS 10 9 18 18
-------------------------------------------------
NET INCOME AVAILABLE TO COMMON STOCKHOLDER $ 33 $ 24 $ 131 $ 109
================================================================================================================
THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
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Consumers Energy Company
CONSUMERS ENERGY COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
SIX MONTHS ENDED
JUNE 30 2001 2000
- ----------------------------------------------------------------------------------------------------------------
In Millions
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 150 $ 128
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation, depletion and amortization (includes nuclear
decommissioning of $3 and $19 respectively) 171 216
Accounts Receivable 200 59
Deferred income taxes and investment tax credit 29 (22)
Capital lease and other amortization 14 15
Regulatory obligation - gas choice (16) 45
Undistributed earnings of related parties (23) (21)
Inventories (95) 58
Changes in other assets and liabilities (51) (111)
------------------------
Net cash provided by operating activities 379 367
- ----------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (excludes assets placed under capital lease) (345) (233)
Cost to retire property, net (55) (45)
Investment in Electric Restructuring Implementation Plan (6) (13)
Investments in nuclear decommissioning trust funds (3) (19)
Proceeds from nuclear decommissioning trust funds 14 17
------------------------
Net cash used in investing activities (395) (293)
- ----------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Payment of common stock dividends (96) (109)
Preferred securities distributions (18) (18)
Payment of capital lease obligations (13) (14)
Payment of preferred stock dividends (1) (1)
Retirement of bonds and other long-term debt (1) (1)
Increase (decrease) in notes payable, net 17 61
Proceeds from preferred securities 121 --
------------------------
Net cash provided by (used in) financing activities 9 (82)
- ----------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND TEMPORARY CASH INVESTMENTS (7) (8)
CASH AND TEMPORARY CASH INVESTMENTS, BEGINNING OF PERIOD 21 18
------------------------
CASH AND TEMPORARY CASH INVESTMENTS, END OF PERIOD $ 14 $ 10
================================================================================================================
Other cash flow activities and non-cash investing and financing activities were:
Cash transactions
Interest paid (net of amounts capitalized) $ 76 $ 78
Income taxes paid (net of refunds) 36 76
Non-cash transactions
Nuclear fuel placed under capital lease $ 12 $ 3
Other assets placed under capital leases 10 7
================================================================================================================
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.
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Consumers Energy Company
CONSUMERS ENERGY COMPANY
CONSOLIDATED BALANCE SHEETS
ASSETS JUNE 30 JUNE 30
2001 DECEMBER 31 2000
(UNAUDITED) 2000 (UNAUDITED)
- ---------------------------------------------------------------------------------------------------------------------
In Millions
PLANT (AT ORIGINAL COST)
Electric $7,482 $7,241 $7,073
Gas 2,539 2,503 2,497
Other 17 23 25
----------------------------------------
10,038 9,767 9,595
Less accumulated depreciation, depletion and amortization 5,847 5,768 5,776
----------------------------------------
4,191 3,999 3,819
Construction work-in-progress 344 279 297
----------------------------------------
4,535 4,278 4,116
- ---------------------------------------------------------------------------------------------------------------------
INVESTMENTS
Stock of affiliates 76 86 111
First Midland Limited Partnership 253 245 246
Midland Cogeneration Venture Limited Partnership 295 290 261
----------------------------------------
624 621 618
- ---------------------------------------------------------------------------------------------------------------------
CURRENT ASSETS
Cash and temporary cash investments at cost, which approximates market 14 21 10
Accounts receivable and accrued revenue, less allowances
of $3, $3 and $3, respectively 74 225 36
Accounts receivable - related parties 63 111 70
Inventories at average cost
Gas in underground storage 359 271 153
Materials and supplies 71 66 64
Generating plant fuel stock 48 46 48
Prepaid property taxes 101 136 99
Regulatory assets 19 19 30
Deferred income taxes -- 2 --
Other 5 13 8
----------------------------------------
754 910 518
- ---------------------------------------------------------------------------------------------------------------------
NON-CURRENT ASSETS
Regulatory assets
Securitization costs 710 709 --
Postretirement benefits 220 232 325
Abandoned Midland Project 12 22 35
Unamortized nuclear costs -- 6 490
Other 91 87 119
Nuclear decommissioning trust funds 594 611 612
Other 315 297 205
---------------------------------------
1,942 1,964 1,786
- ---------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $7,855 $7,773 $7,038
=====================================================================================================================
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Consumers Energy Company
STOCKHOLDERS' INVESTMENT AND LIABILITIES JUNE 30 JUNE 30
2001 DECEMBER 31 2000
(UNAUDITED) 2000 (UNAUDITED)
- ----------------------------------------------------------------------------------------------------------------
In Millions
CAPITALIZATION
Common stockholder's equity
Common stock $ 841 $ 841 $ 841
Paid-in capital 646 646 645
Revaluation capital 16 33 19
Retained earnings since December 31, 1992 541 506 485
----------------------------------------
2,044 2,026 1,990
Preferred stock 44 44 44
Company-obligated mandatorily redeemable preferred securities
of subsidiaries (a) 520 395 395
Long-term debt 2,098 2,110 2,008
Non-current portion of capital leases 51 49 85
----------------------------------------
4,757 4,624 4,522
- ----------------------------------------------------------------------------------------------------------------
CURRENT LIABILITIES
Current portion of long-term debt and capital leases 251 231 86
Notes payable 328 403 275
Accounts payable 274 254 175
Accrued taxes 179 247 161
Notes payable - related parties 92 - -
Accounts payable - related parties 71 67 69
Deferred income taxes 20 - 1
Other 263 253 214
---------------------------------------
1,478 1,455 981
- ----------------------------------------------------------------------------------------------------------------
NON-CURRENT LIABILITIES
Deferred income taxes 704 716 646
Postretirement benefits 307 366 402
Regulatory liabilities for income taxes, net 264 246 82
Deferred investment tax credit 106 109 121
Other 239 257 284
---------------------------------------
1,620 1,694 1,535
- ----------------------------------------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES (Notes 1 and 2)
TOTAL STOCKHOLDERS' INVESTMENT AND LIABILITIES $7,855 $7,773 $7,038
================================================================================================================
(a) See Note 3, Short-Term Financings and Capitalization
THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE BALANCE SHEETS.
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Consumers Energy Company
CONSUMERS ENERGY COMPANY
CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDER'S EQUITY
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 2001 2000 2001 2000
- ----------------------------------------------------------------------------------------------------------------
In Millions
COMMON STOCK
At beginning and end of period (a) $ 841 $ 841 $ 841 $ 841
- ----------------------------------------------------------------------------------------------------------------
OTHER PAID-IN CAPITAL
At beginning and end of period 646 645 646 645
- ----------------------------------------------------------------------------------------------------------------
REVALUATION CAPITAL
Investments
At beginning of period 28 12 33 37
Unrealized gain (loss) on investments (b) (2) 7 (7) (18)
---------------------------------------------------
At end of period 26 19 26 19
Derivative Instruments
At beginning of period (c) 1 -- 21 --
Unrealized gain (loss) on derivative instruments (b) (11) -- (24) --
Reclassification adjustments included in net income (b) -- -- (7) --
----------------------------------------------------
At end of period (10) -- (10) --
- ----------------------------------------------------------------------------------------------------------------
RETAINED EARNINGS
At beginning of period 538 491 506 485
Net income 43 33 150 128
Cash dividends declared- Common Stock (30) (30) (96) (109)
Cash dividends declared- Preferred Stock - - (1) (1)
Preferred securities distributions (10) (9) (18) (18)
------------------------------------------------
At end of period 541 485 541 485
- ----------------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCKHOLDER'S EQUITY $2,044 $1,990 $2,044 $1,990
================================================================================================================
(a) Number of shares of common stock outstanding was 84,108,789 for all periods
presented.
(b) Disclosure of Comprehensive Income:
Revaluation capital
Investments
Unrealized gain (loss) on investments, net of tax of
$1, $(4), $4 and $10, respectively $ (2) $ 7 $ (7) $ (18)
Derivative Instruments
Unrealized gain (loss) on derivative instruments,
net of tax of $6, $- , $13 and $-, respectively (11) -- (24) --
Reclassification adjustments included in net income,
net of tax of $-, $-, $4 and $- , respectively -- -- (7) --
Net income 43 33 150 128
------------------------------------------------
Total Comprehensive Income $ 30 $ 40 $ 112 $ 110
================================================
(c) Six Months Ended 2001 is the cumulative effect of change in accounting
principle, net of $(11) tax (Note 1)
THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
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Consumers Energy Corporation
CONSUMERS ENERGY COMPANY
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
These interim Consolidated Financial Statements have been prepared by Consumers
and reviewed by the independent public accountant in accordance with SEC rules
and regulations. As such, certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted. Certain prior year amounts
have been reclassified to conform to the presentation in the current year. In
management's opinion, the unaudited information contained in this report
reflects all adjustments necessary to assure the fair presentation of financial
position, results of operations and cash flows for the periods presented. The
Condensed Notes to Consolidated Financial Statements and the related
Consolidated Financial Statements should be read in conjunction with the
Consolidated Financial Statements and Notes to Consolidated Financial Statements
contained in the Consumers Form 10-K for the year ended December 31, 2000, which
includes the Reports of Independent Public Accountants. Due to the seasonal
nature of Consumers operations, the results as presented for this interim period
are not necessarily indicative of results to be achieved for the fiscal year.
1: CORPORATE STRUCTURE AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CORPORATE STRUCTURE: Consumers, a subsidiary of CMS Energy, a holding company,
is an electric and gas utility company that provides service to customers in
Michigan's Lower Peninsula. Consumers' customer base includes a mix of
residential, commercial and diversified industrial customers, the largest
segment of which is the automotive industry.
UTILITY REGULATION: Consumers accounts for the effects of regulation based on
the regulated utility accounting standard SFAS No. 71, Accounting for the
Effects of Certain Types of Regulation. As a result, the actions of regulators
affect when Consumers recognizes revenues, expenses, assets and liabilities.
In March 1999, Consumers received MPSC electric restructuring orders. Consistent
with these orders, Consumers discontinued application of SFAS No. 71 for the
energy supply portion of its business in the first quarter of 1999 because
Consumers expected to implement retail open access for its electric customers in
September 1999. Discontinuation of SFAS No. 71 for the energy supply portion of
Consumers' business resulted in Consumers reducing the carrying value of its
Palisades plant-related assets by approximately $535 million and establishing a
regulatory asset for a corresponding amount. According to current accounting
standards, Consumers can continue to carry its energy supply-related regulatory
assets if legislation or an MPSC rate order allows the collection of cash flows
to recover these regulatory assets from its regulated transmission and
distribution customers. As of June 30, 2001, Consumers had a net investment in
energy supply facilities of $1.277 billion included in electric plant and
property. See Note 2, Uncertainties, "Electric Rate Matters - Electric
Restructuring."
REPORTABLE SEGMENTS: Consumers has two reportable segments: electric and gas.
The electric segment consists of activities associated with the generation,
transmission and distribution of electricity. The gas segment consists of
activities associated with the transportation, storage and distribution of
natural gas. Consumers' reportable segments are domestic strategic business
units organized and managed by the nature of the product and service each
provides. The accounting policies of the segments are the same as those
described in Consumers' 2000 Form 10-K. Consumers' management evaluates
performance based on pretax operating income. The Consolidated Statements of
Income show operating revenue and pretax operating income by reportable segment.
Intersegment sales and transfers are accounted for at current market prices and
are eliminated in consolidated pretax operating income by segment.
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RISK MANAGEMENT ACTIVITIES AND DERIVATIVES TRANSACTIONS: Consumers' derivative
activities are subject to the direction of an executive oversight committee
consisting of designated members of senior management and a risk committee,
consisting of business unit managers. The role of the risk committee is to
review the corporate debt or commodity position and ensure that net corporate
exposures are within the economic risk tolerance levels established by
Consumers' Board of Directors. Consumers and its subsidiaries use derivative
instruments, including swaps and options, as hedges to manage exposure to
variability in expected future cash flows attributable to fluctuations in
interest rates and commodity prices. To qualify for hedge accounting, the
hedging relationship must be formally documented, be highly effective in
achieving offsetting cash flows of the hedged risk, and the forecasted
transaction must be probable. If a derivative instrument is terminated early
because it is probable that a forecasted transaction will not occur, any gain or
loss as of such date is immediately recognized in earnings. If a derivative is
terminated early for other economic reasons, any gain or loss as of the
termination date is deferred and recorded when the forecasted transaction
affects earnings.
Derivative instruments contain credit risk if the counterparties, including
financial institutions and energy marketers, fail to perform under the
agreements. Consumers minimizes such risk by performing financial credit reviews
using, among other things, publicly available credit ratings of such
counterparties. Consumers considers the risk of nonperformance by the
counterparties remote. For further discussion see "Derivative Activities" under
Note 2, Uncertainties, Other Electric Uncertainties and Other Gas Uncertainties
and Note 3, Short-Term Financing and Capitalization, "Derivative Activities".
IMPLEMENTATION OF NEW ACCOUNTING STANDARDS: Effective January 1, 2001, Consumers
adopted SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities as amended and interpreted. SFAS No. 133 requires Consumers to
recognize at fair value, all contracts that meet the definition of a derivative
instrument on the balance sheet as either assets or liabilities. This standard
also requires Consumers to record all changes in fair value directly in
earnings, or other comprehensive income if the derivative meets certain
qualifying hedge criteria. Consumers determines fair value based upon
mathematical models using current and historical pricing data.
Consumers believes that the majority of its contracts qualify for the normal
purchases and sales exception under the standard, and therefore, are not subject
to derivative accounting. Consumers does, however, use certain contracts that
qualify as derivative instruments to limit its exposure to electricity and gas
commodity price risk and interest rate risk.
Upon initial adoption of the standard, Consumers recorded a $21 million, net of
tax, cumulative effect adjustment as an increase to accumulated other
comprehensive income. This adjustment relates to the difference between the
current fair value and recorded book value of contracts related to gas options,
gas fuel swap contracts, and interest rate swap contracts that qualified for
cash flow hedge accounting prior to the initial adoption of SFAS No. 133 and
Consumers' proportionate share of the effects of adopting SFAS No. 133 related
to its equity investment in the MCV Partnership. This amount will reduce, or be
charged to cost of gas, cost of power, interest expense, or other operating
revenue, respectively, when the related hedged transaction occurs. Based on the
pretax amount recorded in accumulated other comprehensive income on the January
1, 2001 transition date, Consumers recorded $12 million as a reduction to cost
of gas for the six months ended June 30, 2001.
Upon initial adoption of the standard, derivative and hedge accounting for
certain utility industry contracts, particularly electric call option contracts
and option-like contracts, and contracts subject to bookouts remained uncertain.
Consumers accounted for these types of contracts as derivatives that qualified
for the normal purchase exception of SFAS No. 133, and therefore, did not record
these contracts on the balance sheet at fair
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value. In June 2001, the FASB issued guidance that effectively resolved most of
these matters as of July 1, 2001. Consumers is in the process of evaluating all
of its option and option-like contracts in order to determine if derivative
accounting is required. Consumers expects the majority of these contracts will
qualify for the normal purchase exception of SFAS No. 133, however, certain
electricity option contracts will be required to be accounted for as
derivatives. Upon initial adoption of the standard for these contracts requiring
derivative accounting, Consumers will record the difference between the current
fair value of the contract and the recorded book value of the contract as a
cumulative effect type adjustment to either accumulated other comprehensive
income or to earnings depending on certain criteria. After July 1, 2001, these
contracts will not qualify for hedge accounting under SFAS No. 133, and
therefore, Consumers will record any change in fair value subsequent to July 1,
2001 directly in earnings, which could cause earnings volatility. The
preliminary estimated financial statement impact of recording the SFAS No. 133
transition adjustment associated with these derivatives on July 1, 2001 is
immaterial.
In addition, as of July 1, 2001, derivative accounting for certain fuel supply
contracts with quantity variability remained unclear. Consumers believes that
its contracts qualify for the normal purchase exception of SFAS No. 133 and has
therefore not recorded these contracts on the balance sheet at fair value. The
ultimate financial statement impact of adopting SFAS No. 133 depends upon
clarification of this issue with the FASB and could be materially different than
stated above.
For further discussion of derivative activities, see "Derivative Activities"
under Note 2, Uncertainties, Other Electric Uncertainties and Other Gas
Uncertainties and Note 3, Short-Term Financings and Capitalization.
2: UNCERTAINTIES
ELECTRIC CONTINGENCIES
ELECTRIC ENVIRONMENTAL MATTERS: Consumers is subject to costly and increasingly
stringent environmental regulations. Consumers expects that the cost of future
environmental compliance, especially compliance with clean air laws, will be
significant.
In 1997, the EPA introduced new regulations regarding nitrogen oxide and
particulate-related emissions that were the subject of litigation. The United
States Supreme Court recently found that the EPA has power to revise the
standards but found that the EPA implementation plan was not lawful. In 1998,
the EPA Administrator issued final regulations requiring the State of Michigan
to further limit nitrogen oxide emissions. The EPA has also issued additional
final regulations regarding nitrogen oxide emissions that require certain
generators, including some of Consumers electric generating facilities, to
achieve the same emissions rate as that required by the 1998 plan. These
regulations will require Consumers to make significant capital expenditures. The
estimated cost to Consumers would be between $470 million and $560 million,
calculated in year 2001 dollars. Consumers anticipates that it will incur these
capital expenditures between 2000 and 2004.
Consumers may need an additional amount of between $300 million and $520 million
of capital expenditures to comply with the new mercury and small particulate
standards sometime after 2004 if those standards become effective.
Beginning January 2004, an annual return of and on these capital expenditures
above depreciation levels are expected to be recoverable, subject to an MPSC
prudence hearing, in future rates.
These and other required environmental expenditures may have a material adverse
effect upon our financial condition and results of operations.
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Cleanup and Solid Waste - Under the Michigan Natural Resources and Environmental
Protection Act, Consumers expects that it will ultimately incur investigation
and remedial action costs at a number of sites. Nevertheless, it believes that
these costs are recoverable in rates under current ratemaking policies.
Consumers is a potentially responsible party at several contaminated sites
administered under Superfund. Superfund liability is joint and several. Along
with Consumers, many other creditworthy, potentially responsible parties with
substantial assets cooperate with respect to the individual sites. Based upon
past negotiations, Consumers estimates that its share of the total liability for
the known Superfund sites will be between $2 million and $9 million. As of June
30, 2001, Consumers had accrued the minimum amount of the range for its
estimated Superfund liability.
During routine maintenance activities, Consumers identified PCB as a component
in certain paint, grout and sealant materials at the Ludington Pumped Storage
Facility. Consumers removed and replaced part of the PCB material. Consumers has
proposed a plan to deal with the remaining materials and is awaiting a response
from the EPA.
ELECTRIC RATE MATTERS
ELECTRIC RESTRUCTURING: In June 2000, the Michigan Legislature passed electric
utility restructuring legislation known as the Customer Choice Act. This act: 1)
permits all customers to exercise choice of electric generation suppliers by
January 1, 2002; 2) cuts residential electric rates by five percent; 3) freezes
all electric rates through December 31, 2003, and establishes a rate cap for
residential customers through at least December 31, 2005, and a rate cap for
small commercial and industrial customers through at least December 31, 2004; 4)
allows for the use of low-cost Securitization bonds to refinance Stranded Costs
as a means of offsetting the earnings impact of the five percent residential
rate reduction; 5) establishes a market power test which may require the
transfer of control of a portion of generation resources in excess of that
required to serve firm retail sales requirements (a requirement with which
Consumers is in compliance); 6) requires Michigan utilities to join a
FERC-approved RTO or divest their interest in transmission facilities to an
independent transmission owner; 7) requires the joint expansion of available
transmission capability by Consumers, Detroit Edison and American Electric Power
by at least 2,000 MW by June 5, 2002; 8)allows for the deferred recovery of an
annual return of and on capital expenditures in excess of depreciation levels
incurred during and before the rate cap period; and 9) allows for the recovery
of Stranded Costs and implementation costs incurred as a result of the passage
of the act. Consumers is highly confident that it will meet the conditions of
items 5 and 7 above, prior to the earliest rate cap termination dates specified
in the act. Failure to do so would result in an extension of the rate caps to as
late as December 31, 2013. As of December 2000, Consumers spent $13 million on
the required expansion of transmission capabilities. Consumers anticipates it
will spend an additional $24 million in 2001 and 2002, unless Consumers
transfers its transmission facilities to a FERC-approved RTO or to an
independent transmission owner.
In July 2000, in accordance with the Customer Choice Act, Consumers filed an
application with the MPSC seeking approval to issue Securitization bonds.
Securitization typically involves the issuance of asset backed bonds with a
higher credit rating than conventional utility corporate financing. In October
2000 and January 2001, the MPSC issued a financing order and a final order,
respectively, authorizing Consumers to securitize approximately $470 million in
qualified costs, which were primarily regulatory assets plus recovery of the
Securitization expenses. Cost savings from Securitization depend upon the level
of debt or equity securities ultimately retired, the amortization schedule for
the securitized qualified costs and the interest rates of the retired debt
securities and the Securitization bonds. These savings will only be determined
once the Securitization bonds are issued and will offset the majority of the
revenue impact of the five percent residential rate reduction, $51 million on an
annual basis, that Consumers was required to implement by the Customer Choice
Act. The order directs Consumers to apply any cost savings in excess of the five
percent residential
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rate reduction to rate reductions for non-residential and retail open access
customers after the bonds are sold. In a subsequent order, the MPSC confirmed
that Consumers could recover the five percent residential rate reduction's
effect on revenues lost from the date of the financing order. Consumers
estimates that the disallowed portion of revenue recovery relating to the year
2000 five percent residential rate reduction reduced its operating earnings by
$22 million in 2000. Consumers, and its special purpose subsidiary formed to
issue the bonds, will recover the repayment of principal, interest and other
expenses relating to the issuance of the bonds through a Securitization charge
and a tax charge. These charges are subject to an annual true-up until one year
prior to the last expected maturity date of the Securitization bonds and no more
than quarterly thereafter. The MPSC's order will not increase current electric
rates for any of Consumers' tariff customers.
In January 2001, Consumers accepted the MPSC's final financing order. The MPSC's
decisions were appealed by the Attorney General of Michigan. In July 2001, the
Michigan Court of Appeals issued a unanimous opinion that affirmed the MPSC
order. Although Consumers cannot make any assurances, Consumers does not
believe that the Attorney General will appeal the decision of the Michigan Court
of Appeals to the Michigan Supreme Court.
Beginning January 1, 2001, the amortization of the approved regulatory assets
being securitized as qualified costs is being deferred which effectively offsets
the loss in revenue resulting from the five percent residential rate reduction.
The amortization will be reestablished later, after the Securitization bond
sale, based on a schedule that is the same as the recovery of the principal
amounts of the securitized qualified costs. Ultimately, sale of Securitization
bonds will be required to offset the majority of the revenue impact of the rate
reduction over the term of the bonds.
In September 1999, Consumers began implementing a plan for electric retail
customer open access. Consumers submitted this plan to the MPSC in 1998, and in
March 1999 the MPSC issued orders that generally supported the plan. The
Customer Choice Act states that orders issued by the MPSC before the date of
this act that 1) allow electric customers to choose their supplier, 2) authorize
recovery of net stranded costs and implementation costs, and 3) confirm any
voluntary commitments of electric utilities, are in compliance with this act and
enforceable by the MPSC. In September 2000, as required by the MPSC, Consumers
filed tariffs governing its retail open access program and addressed revisions
appropriate to comply with the Customer Choice Act. Consumers cannot predict how
the MPSC will modify the tariff or enforce the existing restructuring orders.
In a pending case before the Court of Appeals, ABATE and the Attorney General
each appealed an August 1999 order in which the MPSC found that it had
jurisdiction to approve rates, terms and conditions for electric retail
wheeling, also known as electric customer choice, if a utility voluntarily
chooses to offer that service. The Court of Appeals, based upon the voluntary
mutual agreement of the parties, has dismissed this appeal. This matter is now
closed.
POWER COSTS: During periods when electric demand is high, the cost of purchasing
energy on the spot market can be substantial. To reduce Consumers' exposure to
the fluctuating cost of electricity, and to ensure adequate supply to meet
demand, Consumers intends to maintain sufficient generation and to purchase
electricity from others to create a power reserve, also called a reserve margin,
of approximately 15 percent. The reserve margin provides Consumers with
additional power above its anticipated peak power demands. It also allows
Consumers to provide reliable service to its electric service customers and to
protect itself against unscheduled plant outages and unanticipated demand. For
the summers 2001, 2002, and 2003, Consumers is planning for a reserve margin of
15 percent. The actual reserve margin needed will depend primarily on summer
weather conditions, the level of retail open access requirements being served by
others during the summer, and any unscheduled plant outages. The existing retail
open access plan allows other electric service providers with the opportunity to
serve up to 750 MW of nominal retail open access requirements. As of June
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2001, alternative electric service providers are providing service to 75 MW of
retail open access requirements. In June 2001, an unscheduled plant outage
commenced at Palisades that will affect future power costs. Consumers has
secured additional power and expects to have sufficient power to meet its
customers needs. For further information, refer to the "Nuclear Matters" section
of this note.
To reduce the risk of high energy prices during peak demand periods and to
achieve its reserve margin target, Consumers employs a strategy of purchasing
electricity call option contracts for the physical delivery of electricity
during the months of June through September. As of June 30, 2001, Consumers had
purchased or had commitments to purchase electricity call option contracts
covering the estimated reserve margin requirements for summer 2001, and
partially covering the estimated reserve margin requirements for summers 2002
through 2008, at a recognized cost of $134 million, of which $61 million
pertains to 2001.
In 1996, as a result of efforts to move the electric industry in Michigan to
competition, Detroit Edison gave Consumers the required four-year contractual
notice of its intent to terminate the agreements under which the companies
jointly operate the MEPCC. Detroit Edison and Consumers negotiated to
restructure and continue certain parts of the MEPCC control area and joint
transmission operations, but expressly excluded any merchant operations
(electricity purchasing, sales, and dispatch operations). The former joint
merchant operations began operating independently on April 1, 2001. The
termination of joint merchant operations with Detroit Edison has opened Detroit
Edison and Consumers to wholesale market competition as individual companies.
Consumers cannot predict the long term financial impact of terminating these
joint merchant operations with Detroit Edison.
Prior to 1998, the PSCR process provided for the reconciliation of actual power
supply costs with power supply revenues. This process assured recovery of all
reasonable and prudent power supply costs actually incurred by Consumers,
including the actual cost of fuel, interchange power and purchased power. In
1998, as part of the electric restructuring efforts, the MPSC suspended the PSCR
process through December 31, 2001. Under the suspension, the MPSC would not
grant adjustment of customer rates through 2001. As a result of the rate freeze
imposed by the Customer Choice Act, the current rates will remain in effect
until at least December 31, 2003. Therefore, changes in power supply costs as a
result of fluctuating energy prices will not be reflected in rates during the
rate freeze period.
TRANSMISSION ASSETS: In 1999, the FERC issued Order No. 2000, which describes
the characteristics the FERC would find acceptable in a model RTO. In this
order, the FERC declined to mandate that utilities join RTOs, but did order
utilities to make filings in October 2000 and January 2001 declaring their
intentions with respect to RTO membership.
In 1999, Consumers and four other electric utility companies joined together to
form a coalition known as the Alliance Companies for the purpose of creating a
FERC-approved RTO. As the FERC has not made a final disposition of the Alliance
RTO, Consumers is uncertain about the outcome of the Alliance matter before the
FERC and its continued participation in the Alliance RTO.
In January 2001, the FERC granted Consumers' application to transfer ownership
and control of its transmission facilities to a wholly owned subsidiary,
Michigan Transco. Consumers transferred the transmission facilities to Michigan
Transco on April 1, 2001. This represents a major step in Consumers' plan to
either divest its transmission business to a third party or to transfer control
of or to sell it to an RTO. In either event, Consumers' current plan is to
remain in the business of generating and distributing electric power to retail
customers. In addition, in response to an application that Consumers filed with
the MPSC, the MPSC issued an order that stated in part that, if Consumers sells
its transmission facilities in the manner described in its application, it would
be in compliance with applicable requirements of the Customer Choice Act.
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In June 2001, the Michigan South Central Power Agency and the Michigan Public
Power Agency filed suit against Consumers and Michigan Transco in a Michigan
circuit court. The suit seeks to prevent the sale or transfer of transmission
assets without first binding a successor to honor the municipal agencies'
ownership interests and, contractual rights that preceded the transfer of the
transmission assets to Michigan Transco. Consumers and Michigan Transco believe
the lawsuit is without merit and intend to vigorously defend against it.
ELECTRIC PROCEEDINGS: In 1997, ABATE filed a complaint with the MPSC. The
complaint alleged that Consumers' electric earnings are more than its authorized
rate of return and sought an immediate reduction in Consumers' electric rates
that approximated $189 million annually. As a result of the rate freeze imposed
by the Customer Choice Act, the MPSC issued an order in June 2000 dismissing the
ABATE complaint. In July 2000, ABATE filed a rehearing petition with the MPSC.
Consumers cannot predict the outcome of the rehearing process.
In March 2000 and 2001, Consumers filed applications with the MPSC for the
recovery of electric utility restructuring implementation costs of $30 million
and $25 million, incurred in 1999 and 2000, respectively. In July 2001,
Consumers received a final order that granted recovery of $25 million of
restructuring implementation costs for 1999. The MPSC disallowed recovery of $5
million, based upon a conclusion that this amount did not represent incremental
costs. The MPSC also ruled that it reserved the right to undertake another
review of the total 1999 restructuring implementation costs depending upon the
progress and success of the retail open access program. In addition, the MPSC
ruled that due to the rate freeze imposed by the Customer Choice Act, it was
premature to establish a cost recovery method for the allowable costs. Consumers
expects to receive a final order for the 2000 cost in early 2002. Consumers
believes these costs are fully recoverable in accordance with the Customer
Choice Act; however, Consumers cannot predict the amounts the MPSC will approve
as recoverable costs.
Also in July 2001, Consumers received an order from the MPSC that proposed
electric distribution performance standards applicable to electric distribution
companies operating in Michigan. The proposed performance standards would
establish standards related to outage restoration, safety, and customer
relations. Failure to meet the proposed performance standards would result in
customer credits. Consumers in is the process of reviewing the order and
preparing comments for submission to the MPSC. Consumers cannot predict the
outcome of the proposed performance standards.
OTHER ELECTRIC UNCERTAINTIES
THE MIDLAND COGENERATION VENTURE: The MCV Partnership, which leases and operates
the MCV Facility, contracted to sell electricity to Consumers for a 35-year
period beginning in 1990 and to supply electricity and steam to Dow. Consumers,
through two wholly owned subsidiaries, holds the following assets related to the
MCV Partnership and MCV Facility: 1) CMS Midland owns a 49 percent general
partnership interest in the MCV Partnership; and 2) CMS Holdings holds, through
FMLP, a 35 percent lessor interest in the MCV Facility.
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Summarized Statements of Income for CMS Midland and CMS Holdings
In Millions
- ------------------------------------------------------------------------------------------------------------------
Six Months Ended
June 30 2001 2000
- ------------------------------------------------------------------------------------------------------------------
Pretax operating income $21 $20
Income taxes and other 7 6
- ------------------------------------------------------------------------------------------------------------------
Net income $14 $14
==================================================================================================================
Power Purchases from the MCV Partnership - Consumers' annual obligation to
purchase capacity from the MCV Partnership is 1,240 MW through the termination
of the PPA in 2025. The PPA provides that Consumers is to pay, based on the MCV
Facility's availability, a levelized average capacity charge of 3.77 cents per
kWh, a fixed energy charge, and a variable energy charge based primarily on
Consumers' average cost of coal consumed for all kWh delivered. Since January 1,
1993, the MPSC has permitted Consumers to recover capacity charges averaging
3.62 cents per kWh for 915 MW, plus a substantial portion of the fixed and
variable energy charges. Since January 1, 1996, the MPSC has also permitted
Consumers to recover capacity charges for the remaining 325 MW of contract
capacity with an initial average charge of 2.86 cents per kWh increasing
periodically to an eventual 3.62 cents per kWh by 2004 and thereafter. However,
due to the current freeze of Consumers' retail rates that the Customer Choice
Act requires, the capacity charge for the 325 MW is now frozen at 3.17 cents per
kWh. After September 2007, the PPA's terms require Consumers to pay the MCV
Partnership capacity and energy charges that the MPSC has authorized for
recovery from electric customers.
Consumers recognized a loss in 1992 for the present value of the estimated
future underrecoveries of power costs under the PPA based on MPSC cost recovery
orders. At June 30, 2001 and 2000, the remaining after-tax present value of the
estimated future PPA liability associated with the 1992 loss totaled $41 million
and $63 million, respectively. In March 1999, Consumers and the MCV Partnership
reached an agreement effective January 1, 1999, that capped availability
payments to the MCV Partnership at 98.5 percent. If the MCV Facility generates
electricity at the maximum 98.5 percent level during the next five years,
Consumers' after-tax cash underrecoveries associated with the PPA could be as
follows:
In Millions
- ------------------------------------------------------------------------------------------------------------------
2001 2002 2003 2004 2005
- ------------------------------------------------------------------------------------------------------------------
Estimated cash underrecoveries at 98.5%, net of tax $38 $38 $37 $36 $35
==================================================================================================================
Consumers continually evaluates the adequacy of the PPA liability. These
evaluations consider management's assessment of operating levels at the MCV
Facility through 2007, along with certain other factors including MCV related
costs that are included in Consumers' frozen retail rates. Should future results
differ from management's assessments, Consumers may have to make additional
charges for a given year of up to $33 million, after tax. Management believes
that the PPA liability is adequate at this time. For further discussion on the
impact of the frozen PSCR, see "Electric Rate Matters" in this Note.
In February 1998, the MCV Partnership appealed the January 1998 and February
1998 MPSC orders related to electric utility restructuring. At the same time,
MCV Partnership filed suit in the United States District Court in Grand Rapids
seeking a declaration that the MPSC's failure to provide Consumers and MCV
Partnership a certain source of recovery of capacity payments after 2007
deprived MCV Partnership of its rights under the Public Utilities Regulatory
Policies Act of 1978. In July 1999, the District Court
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granted MCV Partnership's motion for summary judgment. The Court permanently
prohibited enforcement of the restructuring orders in any manner that denies any
utility the ability to recover amounts paid to qualifying facilities such as the
MCV Facility or that precludes the MCV Partnership from recovering the avoided
cost rate. The MPSC appealed the Court's order to the 6th Circuit Court of
Appeals in Cincinnati. In June 2001, the 6th Circuit overturned the lower
court's order and ordered the case against the MPSC dismissed. The 6th Circuit
found that the case was premature and concluded that the qualifying facilities
needed to wait until 2008 for an actual factual record to develop before
bringing claims against the MPSC in federal court. The MCV Partnership has
requested rehearing of the 6th Circuit's order.
NUCLEAR FUEL COST: Consumers amortizes nuclear fuel cost to fuel expense based
on the quantity of heat produced for electric generation. Consumers expenses
interest on leased nuclear fuel as it is incurred. Under current federal law, as
a federal court decision confirmed, the DOE was to begin accepting deliveries of
spent nuclear fuel for disposal by January 31, 1998. For fuel used after April
6, 1983, Consumers charges disposal costs to nuclear fuel expense, recovers
these costs through electric rates, and then remits them to the DOE quarterly.
Consumers elected to defer payment for disposal of spent nuclear fuel burned
before April 7, 1983. As of June 30, 2001, Consumers has a recorded liability to
the DOE of $133 million, including interest, which is payable upon the first
delivery of spent nuclear fuel to the DOE. Consumers recovered through electric
rates the amount of this liability, excluding a portion of interest. In 1997,
the DOE declared that it would not begin to accept spent nuclear fuel deliveries
in 1998. Also in 1997, a federal court affirmed the DOE's duty to take delivery
of spent fuel. Subsequent litigation in which Consumers and certain other
utilities participated has not been successful in producing more specific relief
for the DOE's failure to comply.
In July 2000, the DOE reached a settlement agreement with another utility to
address the DOE's delay in accepting spent fuel. The DOE may use that settlement
agreement as a framework that it could apply to other nuclear power plants;
however, certain other utilities are challenging the validity of such
settlement. Consumers is evaluating this matter further. Additionally, there are
two court decisions that support the right of utilities to pursue damage claims
in the United States Court of Claims against the DOE for failure to take
delivery of spent fuel. Consumers is evaluating those rulings and their
applicability to its contracts with the DOE.
NUCLEAR MATTERS: In May 2001, Palisades received its annual performance review
in which the NRC stated that Palisades operated in a manner that preserved
public health and safety. The NRC classified all inspection findings to have
very low safety significance. At the time of the annual performance review, the
NRC had planned to conduct only baseline inspections at the facility through May
31, 2002. The NRC, however, is currently conducting supplemental inspections to
oversee the Palisades unplanned outage which is discussed in more detail below.
The amount of spent nuclear fuel discharged from the reactor to date exceeds
Palisades' temporary on-site storage pool capacity. Consequently, Consumers is
using NRC-approved steel and concrete vaults, commonly known as "dry casks", for
temporary on-site storage. As of June 30, 2001, Consumers had loaded 18 dry
storage casks with spent nuclear fuel at Palisades. Palisades will need to load
additional casks by 2004 in order to continue operation. Palisades currently has
three additional empty storage-only casks on-site, with storage pad capacity for
up to seven additional loaded casks. Consumers anticipates, however, that
licensed transportable casks, for additional storage, will be available prior to
2004.
Consumers maintains insurance against property damage, debris removal, personal
injury liability and other risks that are present at its nuclear facilities.
Consumers also maintains coverage for replacement power costs during prolonged
accidental outages at Palisades. Insurance would not cover such costs during the
first 12 weeks of any outage, but would cover most of such costs during the next
52 weeks of the outage, followed by reduced coverage to 80 percent for 110
additional weeks. The nature of the current Palisades outage, however, is not
likely to be an insured event. If certain covered losses occur at its own or
other nuclear plants similarly insured, Consumers could be required to pay
maximum assessments of $12.8 million in any one year to NEIL; $88 million per
occurrence under the nuclear liability secondary financial protection
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program, limited to $10 million per occurrence in any year; and $6 million if
nuclear workers claim bodily injury from radiation exposure. Consumers considers
the possibility of these assessments to be remote.
In February 2000, Consumers submitted an analysis to the NRC that shows that the
NRC's screening criteria for reactor vessel embrittlement at Palisades will not
be reached until 2014. On December 14, 2000, the NRC issued an amendment
revising the operating license for Palisades extending the expiration date to
March 2011, with no restrictions related to reactor vessel embrittlement.
In April 2001, Consumers received approval from the NRC to amend the license of
the Palisades nuclear plant to transfer plant operating authority to NMC. The
formal operating authority transfer from Consumers to NMC took place in May
2001. Consumers will retain ownership of Palisades, its 789 MW output, the spent
fuel on site, and ultimate responsibility for the safe operation, maintenance
and decommissioning of the plant. Under this agreement, salaried Palisades'
employees became NMC employees on July 1, 2001. Union employees will work under
the supervision of NMC pursuant to their existing labor contract as Consumers
employees. Consumers will benefit by consolidating expertise and controlling
costs and resources among all of the nuclear plants being operated on behalf of
the five NMC member companies. With Consumers as a partner, NMC currently has
responsibility for operating eight units with 4,500 MW of generating capacity in
Wisconsin, Minnesota, Iowa and Michigan. The ultimate financial impact of
Consumers' participation in NMC is uncertain.
On June 20, 2001, the Palisades reactor was shut down so technicians could
inspect a small steam leak on a control rod drive assembly. There was no risk to
the public or workers. Consumers expanded its inspection to include all similar
control rod drive system piping, and is still in the process of completing the
expanded inspection. As of early August 2001, Consumers had identified some
additional small flaws. At the completion of the inspection process, Consumers
will implement the appropriate repairs or replacements. The plant is not
expected to return to service until the fourth quarter. Until it completes the
inspection and determines a definitive plan for repair or replacement, however,
Consumers cannot make any assurances as to factors that may affect the date on
which the plant will return to service. The incremental cost of replacement
power and maintenance is currently estimated to be approximately $80 million if
the Palisades' restart date occurs in mid-November 2001, with further
incremental costs of approximately $12 million to $15 million for each month
thereafter. Consumers expects to have sufficient power at all times to meet its
load requirements from its other plants or purchase arrangements.
CAPITAL EXPENDITURES: Consumers estimates electric capital expenditures,
including new lease commitments and environmental costs under the Clean Air Act,
of $550 million for 2001, $535 million for 2002, and $460 million for 2003. For
further information, see the Capital Expenditures Outlook section in the MD&A.
DERIVATIVE ACTIVITIES: Consumers' electric business uses purchased electric call
option contracts to meet its regulatory obligation to serve, which requires
providing a physical supply of energy to customers, and to manage energy cost
and to ensure a reliable source of capacity during periods of peak demand. Upon
initial adoption of SFAS No. 133, accounting for these contracts was uncertain.
Consumers has accounted for these types of contracts as derivatives that
qualified for the normal purchase exception of SFAS No. 133, and has therefore
not recorded the fair value of these contracts on the balance sheet. In June
2001, the FASB issued guidance that effectively resolved the accounting for
these contracts as of July 1, 2001. Consumers is in the process of evaluating
all of its option and option-like contracts in order to determine if derivative
accounting is required. Consumers expects the majority of these contracts will
qualify for the normal purchase exception of SFAS No. 133, however, certain
electricity option contracts will be required to be accounted for as
derivatives. Upon initial adoption of the standard for these contracts requiring
derivative accounting, Consumers will record the difference between the current
fair value of the contract and the recorded book value of the contract as a
cumulative effect type adjustment to either accumulated other comprehensive
income or to earnings depending on certain criteria. After July 1, 2001, these
contracts will not qualify for hedge accounting under SFAS No. 133, and
therefore, Consumers will record any change in fair value subsequent to July 1,
2001 directly in earnings, which could cause earnings volatility. The
preliminary estimated financial statement impact of recording the SFAS No. 133
transition adjustment associated with these derivatives on July 1, 2001 is
immaterial.
Consumers' electric business also uses purchased gas call option and gas swap
contracts to hedge against price
CE-24
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Consumers Energy Corporation
risk due to the fluctuations in the market price of gas used as fuel for
generation of electricity. These contracts are financial contracts that will be
used to offset increases in the price of probable forecasted gas purchases.
These contracts are designated as cash flow hedges, and therefore, Consumers
will record any change in the fair value of these contracts in other
comprehensive income until the forecasted transaction occurs. Once the
forecasted gas purchases occurs, the net gain or loss on these contracts will be
reclassified to earnings and recorded as part of the cost of power. These
contracts have been highly effective in achieving offsetting cash flows of
future gas purchases, and no component of the gain or loss was excluded from the
assessment of the hedge's effectiveness. As a result, no net gain or loss has
been recognized in earnings as a result of hedge ineffectiveness as of June 30,
2001. At June 30, 2001, Consumers had a derivative liability with a fair value
of $1 million, which includes $.5 million of premiums paid for these contracts.
These contracts expire in 2001, and Consumers expects to reclassify a $1 million
decrease in fair value to earnings as an increase to power costs in 2001, if
this fair value is sustained. The ultimate fair value of these derivative assets
is dependent upon market conditions related to the derivative instruments.
GAS CONTINGENCIES
GAS ENVIRONMENTAL MATTERS: Under the Michigan Natural Resources and
Environmental Protection Act, Consumers expects that it will ultimately incur
investigation and remedial action costs at a number of sites. These include 23
sites that formerly housed manufactured gas plant facilities, even those in
which it has a partial or no current ownership interest. Consumers has completed
initial investigations at the 23 sites. On sites where Consumers has received
site-wide study plan approvals, it will continue to implement these plans. It
will also work toward closure of environmental issues at sites as studies are
completed. Consumers has estimated its costs related to further investigation
and remedial action for all 23 sites using the Gas Research
Institute-Manufactured Gas Plant Probabilistic Cost Model. Using this model,
Consumers estimates the total costs to be between $82 million and $113 million.
These estimates are based on discounted 2001 costs. As of June 30, 2001,
Consumers has an accrued liability of $62 million, (net of expenditures incurred
to date and net of any insurance recoveries), and a regulatory asset of $71
million. Any significant change in assumptions, such as remediation techniques,
nature and extent of contamination, and legal and regulatory requirements, could
affect the estimate of remedial action costs for the sites. Consumers defers and
amortizes, over a period of ten years, environmental clean-up costs above the
amount currently being recovered in rates. Rate recognition of amortization
expense cannot begin until after a prudence review in a future general gas rate
case. The MPSC allows Consumers to recover $1 million annually.
GAS RATE MATTERS
GAS RESTRUCTURING: On April 1, 1998, Consumers began an experimental gas
customer choice pilot program that ended March 31, 2001. Under this program, gas
distribution rates were frozen through March 31, 2001. On April 1, 2001 a
permanent gas customer choice program commenced and under this program Consumers
returned to a GCR mechanism that allows it to recover from its customers all
prudently incurred costs to purchase the natural gas commodity and transport it
to Consumers' facilities.
In June 2001, Consumers filed an application with the MPSC seeking its first gas
service rate increase in 17 years. If approved, the request would add about
$6.50 per month, or about 10%, to the typical residential customer's average
monthly bill. Consumers is seeking a 12.25% authorized return on equity along
with a $140 million gas service rate increase. Contemporaneously with this
filing, Consumers has requested partial and immediate relief in the amount of
$34.5 million.
As part of a settlement agreement approved by the MPSC in July 2001, Consumers
agreed not to exceed a ceiling price of $4.69 per mcf of natural gas under the
GCR factor mechanism through March 2002. This agreement is not expected to
affect Consumers' earnings outlook since Consumers charges customers what it
CE-25
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Consumers Energy Corporation
pays for natural gas in the reconciliation process. Consumers initiated the
negotiations in December 2000, requesting a ceiling price of $5.69 per mcf. The
settlement reflects the decreasing prices in the natural gas market. The
settlement does not affect Consumers' June 2001 request to the MPSC for the gas
service rate increase. The MPSC also approved a methodology to adjust for market
price increases quarterly without returning to the MPSC for approval.
OTHER GAS UNCERTAINTIES
CAPITAL EXPENDITURES: Consumers estimates gas capital expenditures, including
new lease commitments, of $145 million for 2001, $175 million for 2002, and $165
million for 2003. For further information, see the Capital Expenditures Outlook
section in the MD&A.
OTHER UNCERTAINTIES
In addition to the matters disclosed in this note, Consumers and certain of its
subsidiaries are parties to certain lawsuits and administrative proceedings
before various courts and governmental agencies arising from the ordinary course
of business. These lawsuits and proceedings may involve personal injury,
property damage, contractual matters, environmental issues, federal and state
taxes, rates, licensing and other matters.
Consumers has accrued estimated losses for certain contingencies discussed in
this note. Resolution of these contingencies is not expected to have a material
adverse impact on Consumers' financial position, liquidity, or results of
operations.
3: SHORT-TERM FINANCINGS AND CAPITALIZATION
AUTHORIZATION: At June 30, 2001, Consumers had FERC authorization to issue or
guarantee through June 2002, up to $900 million of short-term securities
outstanding at any one time. Consumers also had remaining FERC authorization to
issue through June 2002 up to $25 million and $800 million of long-term
securities for refinancing or refunding purposes and for general corporate
purposes, respectively. Additionally, Consumers had remaining FERC authorization
to issue $275 million of first mortgage bonds to be issued solely as security
for the long-term securities mentioned above.
SHORT-TERM FINANCINGS: Consumers has an unsecured $300 million credit facility
maturing in July 2002 and unsecured lines of credit aggregating $215 million.
These facilities are available to finance seasonal working capital requirements
and to pay for capital expenditures between long-term financings. At June 30,
2001, a total of $328 million was outstanding at a weighted average interest
rate of 4.6 percent, compared with $275 million outstanding at June 30, 2000, at
a weighted average interest rate of 7.8 percent.
Consumers currently has in place a $325 million trade receivables sale program.
At June 30, 2001 and 2000, receivables sold under the program totaled $299
million and $283 million, respectively. Accounts receivable and accrued revenue
in the Consolidated Balance Sheets have been reduced to reflect receivables
sold.
MANDATORILY REDEEMABLE PREFERRED SECURITIES: Consumers has wholly-owned
statutory business trusts that are consolidated within its financial statements.
Consumers created these trusts for the sole purpose of issuing Trust Preferred
Securities. The primary asset of the trusts is a note or debenture of Consumers.
The terms of the Trust Preferred Security parallel the terms of the related
Consumers' note or debenture. The term, rights and obligations of the Trust
Preferred Security and related note or debenture are also defined in the related
indenture through which the note or debenture was issued, Consumers' guarantee
of the related Trust Preferred Security and the declaration of trust for the
particular trust. All of these documents together with their related note or
debenture and Trust Preferred Security constitute a full and unconditional
guarantee by Consumers of
CE-26
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Consumers Energy Corporation
the trust's obligations under the Trust Preferred Security. In addition to the
similar provisions previously discussed, specific terms of the securities
follow:
In Millions
- ------------------------------------------------------------------------------------------------------------------
Earliest
Trust and Securities Rate Amount Outstanding Maturity Redemption
- ------------------------------------------------------------------------------------------------------------------
June 30 December 31 June 30
2001 2000 2000
- ------------------------------------------------------------------------------------------------------------------
Consumers Power Company Financing I,
Trust Originated Preferred Securities 8.36% $100 $100 $100 2015 2000
Consumers Energy Company Financing II,
Trust Originated Preferred Securities 8.20% 120 120 120 2027 2002
Consumers Energy Company Financing III,
Trust Originated Preferred Securities 9.25% 175 175 175 2029 2004
Consumers Energy Company Financing IV,
Trust Originated Preferred Securities 9.00% 125 -- -- 2031 2006
------------------------------
Total $520 $395 $395
==================================================================================================================
OTHER: Under the provisions of its Articles of Incorporation, Consumers had $408
million of unrestricted retained earnings available to pay common dividends at
June 30, 2001. In January 2001, Consumers declared a $66 million common dividend
that was paid in February 2001, in April 2001, Consumers declared a $30 million
common dividend paid in May 2001, and in July 2001, Consumers declared a $39
million common dividend payable in August 2001.
DERIVATIVE ACTIVITIES: Consumers uses interest-rate swaps to hedge the risk
associated with forecasted interest payments on variable rate debt. These
interest rate swaps are designated as cash flow hedges. As such, Consumers will
record any change in the fair value of these contracts in other comprehensive
income unless the swap is sold. These swaps fix the interest rate on $225
million of variable rate debt, and expire at varying times from June through
December 2002. As of June 30, 2001, these interest rate swaps had a negative
fair value of $4 million.
4: LEASES
On April 23, 2001 Consumers Campus Holdings entered into a lease agreement for
the construction of an office building to be used as the main headquarters for
Consumers in Jackson, Michigan. Consumers' current headquarters building leases
expire in June 2003. The lessor has committed to fund up to $70 million for
construction of the building. Consumers is acting as the construction agent of
the lessor for this project. The agreement is a seven-year lease term with
payments commencing upon completion of construction, which is projected for
March of 2003. Consumers Campus Holdings has the right to acquire the property
at any time during the life of the agreement. At the end of the lease term,
Consumers Campus Holdings has the option to renew the lease, purchase the
property, or return the property and assist the lessor in the sale of the
building. The return option obligates Consumers Campus Holdings to pay the
lessor an amount equal to the outstanding debt associated with the building.
This lease is classified as an operating lease. Estimated minimum lease
commitments, assuming an investment of $70 million, based on LIBOR at inception
of the lease, under this non-cancelable operating lease would be
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Consumers Energy Corporation
approximately be $5 million each year from 2003 through 2007 and $52 million
thereafter. Actual lease payments will depend upon final total construction
costs and LIBOR rates.
CE-28
81
Report of Independent Public Accountants
To Consumers Energy Company:
We have reviewed the accompanying consolidated balance sheets of CONSUMERS
ENERGY COMPANY (a Michigan corporation and wholly owned subsidiary of CMS Energy
Corporation) and subsidiaries as of June 30, 2001 and 2000, and the related
consolidated statements of income and common stockholder's equity for the
three-month and six-month periods then ended and related consolidated statements
of cash flows for the six-month period 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 accounting principles generally accepted in the United States.
We have previously audited, in accordance with auditing standards generally
accepted in the United States, the consolidated balance sheet of Consumers
Energy Company and subsidiaries as of December 31, 2000, and, in our report
dated February 2, 2001, we expressed an unqualified opinion on that statement.
In our opinion, the information set forth in the accompanying consolidated
balance sheet as of December 31, 2000, is fairly stated, in all material
respects, in relation to the consolidated balance sheet from which it has been
derived.
/s/ Arthur Andersen LLP
Detroit, Michigan,
July 31, 2001.
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Panhandle Eastern Pipe Line Company
PANHANDLE EASTERN PIPE LINE COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS
Panhandle is primarily engaged in the interstate transportation and storage of
natural gas. Panhandle also owns a LNG regasification plant and related
facilities. The rates and conditions of service of interstate natural gas
transmission, storage and LNG operations of Panhandle are subject to the rules
and regulations of the FERC.
The MD&A of this Form 10-Q should be read along with the MD&A and other parts of
Panhandle's 2000 Form 10-K. This MD&A also refers to, and in some sections
specifically incorporates by reference, Panhandle's Condensed Notes to
Consolidated Financial Statements and should be read in conjunction with such
Statements and Notes. This report and other written and oral statements made by
Panhandle from time to time contain forward-looking statements, as defined by
the Private Securities Litigation Reform Act of 1995. The words "anticipates,"
"believes," "estimates," "expects," "intends," and "plans" and variations of
such words and similar expressions, are intended to identify forward-looking
statements that involve risk and uncertainty. These forward-looking statements
are subject to various factors, which could cause Panhandle's actual results to
differ materially from those anticipated in such statements. Panhandle has no
obligation to update or revise forward-looking statements regardless of whether
new information, future events or any other factor affects the information
contained in such statements. Panhandle does, however discuss certain risk
factors, uncertainties and assumptions in this MD&A and particularly in the
section entitled "CMS Energy, Consumers, and Panhandle Forward-Looking
Statements Cautionary Factors" in CMS Energy's 2000 Form 10-K, Item 1 and
periodically in various public filings it makes with the SEC. Panhandle designed
this discussion of potential risks and uncertainties which is by no means
comprehensive, to highlight important factors that may impact Panhandle's
outlook. This report also describes material contingencies in the Condensed
Notes to Consolidated Financial Statements and the readers are encouraged to
read such Notes.
The following information is provided to facilitate increased understanding of
the consolidated financial statements and accompanying Notes of Panhandle and
should be read in conjunction with these financial statements. Because all of
the outstanding common stock of Panhandle Eastern Pipe Line is owned by a
wholly-owned subsidiary of CMS Energy, the following discussion uses the reduced
disclosure format permitted by Form 10-Q for issuers that are wholly-owned
subsidiaries of reporting companies.
RESULTS OF OPERATIONS
NET INCOME:
In Millions
- --------------------------------------------------------------------------------------------------------------------
June 30 2001 2000 Change
- --------------------------------------------------------------------------------------------------------------------
Three Months Ended $11 $9 $2
Six Months Ended $48 $41 $7
====================================================================================================================
For the three months ended June 30, 2001, net income was $11 million, up $2
million from the same period in 2000. Total natural gas transportation volumes
delivered for the three months ended June 30, 2001 decreased 2 percent from 2000
primarily due to decreased transportation volumes for Panhandle Eastern Pipe
Line. For the six months ended June 30, 2001, net income was $48 million, up $7
million from the same period in 2000. Total natural gas transportation volumes
delivered for the six months
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Panhandle Eastern Pipe Line Company
ended June 30, 2001 increased 3 percent from 2000 primarily due to the addition
of Sea Robin in March 2000, see Note 1, Corporate Structure.
Revenues for the three month and six month periods ended June 30, 2001 increased
$10 million and $29 million, respectively, from the corresponding periods in
2000 due primarily to increased LNG terminalling revenues.
Operating expenses for the three months ended June 30, 2001 increased $6 million
from the corresponding period in 2000 due primarily to higher fuel costs,
including a $3 million lower of cost or market adjustment to the company's
current system gas inventory. Operating expenses for the six months ended June
30, 2001 increased $15 million from the corresponding period in 2000 due
primarily to higher fuel costs, and increased expenses for six months in 2001
for Sea Robin versus four months in 2000 (see Note 1, Corporate Structure), and
general taxes.
Interest charges for the three months ended June 30, 2001 decreased $1 million
from the corresponding period in 2000 primarily due to capitalized interest.
Interest charges for the six months ended June 30, 2001 increased $1 million
from the corresponding period in 2000 primarily due to interest on the
additional debt incurred by Panhandle at the end of the first quarter of 2000 to
finance the acquisition of Sea Robin.
PRETAX OPERATING INCOME:
In Millions
- --------------------------------------------------------------------------------------------------------------------
Three Months Six Months
Ended June 30 Ended June 30
Change Compared to Prior Year 2001 Vs 2000 2001 Vs 2000
- --------------------------------------------------------------------------------------------------------------------
Reservation revenue $ (1) $ (12)
LNG terminalling revenue 12 36
Commodity revenue 1 7
Other revenue (2) (2)
Operation and maintenance (6) (12)
Depreciation and amortization - (1)
General taxes - (2)
----------------------------------------------------
Total Change $ 4 $ 14
====================================================================================================================
OUTLOOK
CMS Energy seeks to build on Panhandle's position as a leading United States
interstate natural gas pipeline system and the nation's largest operating LNG
receiving terminal through expansion and better utilization of its existing
facilities and construction of new facilities. In addition, CMS Energy is
pursuing structured financings of several of its assets, including its Lake
Charles, Louisiana, LNG receiving facility. By providing additional
transportation, storage and other asset-based, value-added services to customers
such as new gas-fueled power plants, local distribution companies, industrial
and end-users, marketers and others, CMS Energy expects to expand its natural
gas pipeline business. CMS Energy is in the process of converting certain
Panhandle pipeline facilities through a joint venture to permit the throughput
of liquid products, such as gasoline and is participating in a 150-mile natural
gas pipeline venture from Illinois
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Panhandle Eastern Pipe Line Company
to Wisconsin to meet the needs of those significantly growing markets. Panhandle
continues to attempt to maximize revenues from existing assets and to advance
acquisition opportunities and development projects that provide expanded
services to meet the specific needs of customers. In May 2001, Trunkline LNG
signed an agreement with BG Group of the United Kingdom which provides for a
22-year contract, beginning January 2002, for all the uncommitted capacity at
Trunkline LNG's facility.
UNCERTAINTIES: Panhandle's results of operations and financial position may be
affected by a number of trends or uncertainties that have, or Panhandle
reasonably expects could have, a material impact on income from continuing
operations and cashflows. Such trends and uncertainties include: 1) the
increased competition in the market for transmission of natural gas to the
Midwest causing pressure on prices charged by Panhandle; 2) the current market
conditions causing more contracts to be shorter duration, which may increase
revenue volatility; 3) the impact of future rate cases, if any, for any of
Panhandle's regulated operations; 4) current initiatives for additional federal
rules and legislation regarding pipeline safety; 5) capital spending
requirements for safety, environmental or regulatory requirements that could
result in depreciation expense increases not covered by additional revenues; and
6) construction and market risks associated with Panhandle's investment in the
liquids pipeline business through the Centennial Pipeline venture.
OTHER MATTERS
ENVIRONMENTAL MATTERS
PCB (POLYCHLORINATED BIPHENYL) ASSESSMENT AND CLEAN-UP PROGRAMS: Panhandle
previously identified environmental contamination at certain sites on its
systems and undertook clean-up programs at these sites. For further information,
see Note 4, Commitments and Contingencies - Environmental Matters, incorporated
by reference herein.
AIR QUALITY CONTROL: In 1998, the EPA issued a final rule on regional ozone
control that requires revised SIPS for 22 states, including five states in which
Panhandle operates. For further information, see Note 4, Commitments and
Contingencies - Environmental Matters, incorporated by reference herein.
NEW ACCOUNTING RULES
In July 2001, FASB issued SFAS No. 141, Business Combinations, and SFAS No. 142,
Goodwill and Other Intangible Assets.
SFAS No. 141 requires that all business combinations initiated after June 30,
2001, be accounted for under the purchase method; use of pooling-of-interests
method is no longer permitted. The adoption of SFAS No. 141 effective July 1,
2001 will result in Panhandle accounting for any future business combinations
under the purchase method of accounting, but will not change the method of
accounting used in previous business combinations.
SFAS No. 142 requires that goodwill no longer be amortized to earnings, but
instead be reviewed for impairment. The amortization of goodwill ceases upon
adoption of the standard. The provisions of SFAS No. 142 require adoption as of
January 1, 2002 for calendar year entities. Panhandle is currently studying the
effects of the new standard. At June 30, 2001 goodwill was approximately $723
million and goodwill amortization was approximately $5 million and $10 million
for the three months and six months ended June 30, 2001, respectively.
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Panhandle Eastern Pipe Line Company
In August 2001, FASB issued SFAS No. 143, Accounting for Asset Retirement
Obligations. The provisions of SFAS No. 143 require adoption as of January 1,
2003. The standard requires entities to record the fair value of a liability for
an asset retirement obligation in the period in which it is incurred. When the
liability is initially recorded, the entity capitalizes a cost by increasing the
carrying amount of the related long-lived asset. Over time, the liability is
accreted to its present value each period, and the capitalized cost is
depreciated over the useful life of the related asset. Upon settlement of the
liability, an entity either settles the obligation for its recorded amount or
incurs a gain or loss upon settlement. Panhandle is currently studying the new
standard but has yet to quantify the effects of the new standard.
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Panhandle Eastern Pipe Line Company
PANHANDLE EASTERN PIPE LINE COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(IN MILLIONS)
Three Months Ended June 30 Six Months Ended June 30
2001 2000 2001 2000
----------------- ---------------- ---------------- ----------------
OPERATING REVENUE
Transportation and storage of natural gas $ 92 $ 92 $ 212 $ 217
LNG terminalling revenue 21 9 49 13
Other 2 4 9 11
----------------- ---------------- ---------------- ----------------
Total operating revenue 115 105 270 241
----------------- ---------------- ---------------- ----------------
OPERATING EXPENSES
Operation and maintenance 55 49 105 93
Depreciation and amortization 16 16 33 32
General taxes 6 6 14 12
----------------- ---------------- ---------------- ----------------
Total operating expenses 77 71 152 137
----------------- ---------------- ---------------- ----------------
PRETAX OPERATING INCOME 38 34 118 104
OTHER INCOME, NET 2 2 4 3
INTEREST CHARGES
Interest on Long-term debt 22 22 43 40
Other Interest (1) -- (1) 1
----------------- ---------------- ---------------- ----------------
Total Interest Charges 21 22 42 41
NET INCOME BEFORE INCOME TAXES 19 14 80 66
INCOME TAXES 8 5 32 25
----------------- ---------------- ---------------- ----------------
CONSOLIDATED NET INCOME $ 11 $ 9 $ 48 $ 41
================= ================ ================ ================
The accompanying condensed notes are an integral part of these statements.
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Panhandle Eastern Pipe Line Company
PANHANDLE EASTERN PIPE LINE COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN MILLIONS)
Six Months Ended June 30
2001 2000
------------------- --------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 48 $ 41
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 33 32
Deferred income taxes 36 26
Changes in current assets and liabilities (48) (23)
Other, net (2) 4
------------------- --------------------
Net cash provided by operating activities 67 80
------------------- --------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital and investment expenditures (30) (89)
------------------- --------------------
Net cash used in investing activities (30) (89)
------------------- --------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Contribution from parent 150 --
Proceeds from senior notes -- 99
Net (increase)/decrease in note receivable - CMS Capital (148) (36)
Dividends paid (39) (39)
------------------- --------------------
Net cash provided by/(used by) financing activities (37) 24
------------------- --------------------
Net Increase (Decrease) in Cash and Temporary Cash Investments -- 15
CASH AND TEMPORARY CASH INVESTMENTS, BEGINNING OF PERIOD -- --
------------------- --------------------
CASH AND TEMPORARY CASH INVESTMENTS, END OF PERIOD $ -- $ 15
=================== ====================
OTHER CASH FLOW ACTIVITIES WERE:
Interest paid (net of amounts capitalized) $ 42 $ 38
Income taxes paid (net of refunds) 7 5
The accompanying condensed notes are an integral part of these statements.
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Panhandle Eastern Pipe Line Company
PANHANDLE EASTERN PIPE LINE COMPANY
CONSOLIDATED BALANCE SHEETS
(IN MILLIONS)
June 30,
2001 December 31,
(Unaudited) 2000
------------------ ------------------
ASSETS
PROPERTY, PLANT AND EQUIPMENT
Cost $ 1,642 $ 1,679
Less accumulated depreciation and amortization 120 99
------------------ ------------------
Sub-total 1,522 1,580
Construction work-in-progress 32 20
------------------ ------------------
Net property, plant and equipment 1,554 1,600
------------------ ------------------
INVESTMENTS 63 7
------------------ ------------------
CURRENT ASSETS
Accounts Receivable, less allowances of $2 as of June 30, 2001 171 140
and $1 as of Dec. 31, 2000
Gas Imbalances - Receivable 58 71
Inventory and supplies 20 21
Deferred income taxes 8 12
Note receivable - CMS Capital 310 162
Other 20 21
------------------ ------------------
Total current assets 587 427
------------------ ------------------
NON-CURRENT ASSETS
Goodwill, net 723 753
Debt issuance cost 10 11
Other 73 8
------------------ ------------------
Total non-current assets 806 772
------------------ ------------------
TOTAL ASSETS $ 3,010 $ 2,806
================== ==================
The accompanying condensed notes are an integral part of these statements.
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Panhandle Eastern Pipe Line Company
PANHANDLE EASTERN PIPE LINE COMPANY
CONSOLIDATED BALANCE SHEETS
(IN MILLIONS)
June 30,
2001 December 31,
(Unaudited) 2000
------------------- -------------------
COMMON STOCKHOLDER'S EQUITY AND LIABILITIES
CAPITALIZATION
Common stockholder's equity
Common stock, no par, 1,000 shares authorized, issued and outstanding $ 1 $ 1
Paid-in capital 1,277 1,127
Retained earnings 3 (6)
------------------- -------------------
Total common stockholder's equity 1,281 1,122
Long-term debt 1,192 1,193
------------------- -------------------
Total capitalization 2,473 2,315
------------------- -------------------
CURRENT LIABILITIES
Accounts payable 42 32
Gas Imbalances - Payable 89 56
Accrued taxes 6 3
Accrued interest 31 31
Accrued liabilities 23 45
Other 91 104
------------------- -------------------
Total current liabilities 282 271
------------------- -------------------
NON-CURRENT LIABILITIES
Deferred income taxes 166 134
Other 89 86
------------------- -------------------
Total non-current liabilities 255 220
------------------- -------------------
TOTAL COMMON STOCKHOLDER'S EQUITY AND LIABILITIES $ 3,010 $ 2,806
=================== ===================
The accompanying condensed notes are an integral part of these statements.
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Panhandle Eastern Pipe Line Company
PANHANDLE EASTERN PIPE LINE COMPANY
CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDER'S EQUITY
(UNAUDITED)
(IN MILLIONS)
Six Months Ended Six Months Ended
June 30, June 30,
2001 2000
----------------------- ------------------------
COMMON STOCK
At beginning and end of period $ 1 $ 1
----------------------- ------------------------
ADDITIONAL PAID-IN CAPITAL
At beginning of period 1,127 1,127
Contribution from parent 150 --
----------------------- ------------------------
At end of period 1,277 1,127
----------------------- ------------------------
RETAINED EARNINGS
At beginning of period (6) --
Net income 48 41
Common stock dividends (39) (39)
----------------------- ------------------------
At end of period 3 2
----------------------- ------------------------
TOTAL COMMON STOCKHOLDER'S EQUITY $ 1,281 $ 1,130
======================= ========================
The accompanying condensed notes are an integral part of these statements.
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Panhandle Eastern Pipe Line Company
PANHANDLE EASTERN PIPE LINE COMPANY
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
These interim Consolidated Financial Statements have been prepared by Panhandle
and reviewed by the independent public accountant in accordance with SEC rules
and regulations. As such, certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted. Certain prior year amounts
have been reclassified to conform to the presentation in the current year. In
management's opinion, the unaudited information contained in this report
reflects all adjustments necessary to assure the fair presentation of financial
position, results of operations and cash flows for the periods presented. The
Condensed Notes to Consolidated Financial Statements and the related
Consolidated Financial Statements contained within should be read in conjunction
with the Consolidated Financial Statements and Notes to Consolidated Financial
Statements contained in Panhandle's Form 10-K for the year ended December 31,
2000, which includes the Reports of Independent Public Accountants. Due to the
seasonal nature of Panhandle's operations, the results as presented for this
interim period are not necessarily indicative of results to be achieved for the
fiscal year.
1. CORPORATE STRUCTURE
Panhandle is a wholly owned subsidiary of CMS Gas Transmission. Panhandle
Eastern Pipe Line Company was incorporated in Delaware in 1929. Panhandle is
engaged primarily in interstate transportation and storage of natural gas,
including LNG terminalling, and is subject to the rules and regulations of the
FERC.
In March 2000, Trunkline, a subsidiary of Panhandle Eastern Pipe Line, acquired
the Sea Robin pipeline from El Paso Energy Corporation for cash of approximately
$74 million and certain other consideration. Sea Robin is a 1 bcf per day
capacity pipeline system located in the Gulf of Mexico. Year to date results for
2001 include six months of Sea Robin activity; whereas results for 2000 only
include four months.
2. REGULATORY MATTERS
Effective August 1996, Trunkline placed into effect a general rate increase,
subject to refund. In September 1999, Trunkline filed a FERC settlement
agreement to resolve certain issues in this proceeding. FERC approved this
settlement February 2000 and required refunds of approximately $2 million that
were made in April 2000, with supplemental refunds of $1.3 million in June 2000.
In January 2001, Trunkline filed a settlement that included the remaining issues
in this proceeding. In April 2001, the FERC approved Trunkline's uncontested
settlement, without modification. As part of the settlement, Trunkline reduced
its maximum rates in May 2001 and made the remaining refunds totaling
approximately $8 million in June 2001.
In conjunction with a FERC order issued in September 1997, FERC required certain
natural gas producers to refund previously collected Kansas ad-valorem taxes to
interstate natural gas pipelines, including Panhandle. FERC ordered these
pipelines to refund these amounts to their customers. The pipelines must make
all payments in compliance with prescribed FERC requirements. In June 2001,
Panhandle filed a proposed settlement with the FERC which is supported by most
of the customers and affected producers; this settlement is awaiting commission
approval. At June 30, 2001 and December 31, 2000, Panhandle's Accounts
Receivable included $62 million and $59 million, respectively, due from natural
gas producers, and Other
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Panhandle Eastern Pipe Line Company
Current Liabilities included $62 million and $59 million, respectively, for
related obligations. The settlement, if approved, provides for some reductions
in these balances due from producers and corresponding obligations to customers.
In March 2001, Trunkline received FERC approval to abandon 720 miles of its
26-inch diameter pipeline that extends from Longville, Louisiana to Bourbon,
Illinois. This filing is in conjunction with a plan for Centennial Pipeline to
convert the line from natural gas transmission service to a refined products
pipeline by January 2002. Panhandle owns a one-third interest in the venture
along with TEPPCO Partners L.P. and Marathon Ashland Petroleum L.L.C. Effective
April 2001, the 26-inch pipeline was conveyed to Centennial and the book value
of the asset, including related goodwill, is now reflected in Investments on the
Consolidated Balance Sheet.
3. RELATED PARTY TRANSACTIONS
Other income includes $2 million for the six months ended June 30, 2001 for
interest on Note Receivable from CMS Capital. In June 2001, Panhandle Eastern
Pipe Line received a $150 million capital contribution from CMS Gas
Transmission. Panhandle also loaned CMS Capital $150 million in June 2001.
A summary of certain balances due to or due from related parties included in the
Consolidated Balance Sheets is as follows:
In Millions
- -----------------------------------------------------------------------
June 30, December 31,
2001 2000
-------------------- --------------------
Notes receivable $310 $162
Accounts receivable 77 48
Accounts payable 26 27
- -----------------------------------------------------------------------
4. COMMITMENTS AND CONTINGENCIES
CAPITAL EXPENDITURES: Panhandle currently estimates capital expenditures and
investments, including interest costs capitalized, to be $83 million in 2001,
$84 million in 2002 and $70 million in 2003. The amounts for 2002 and 2003
exclude expenditures associated with a potential LNG terminal expansion.
Panhandle prepared these estimates for planning purposes and they are subject to
revision. Panhandle satisfies capital expenditures using cash from operations.
LITIGATION: Under the terms of the sale of Panhandle to CMS Energy, subsidiaries
of Duke Energy indemnified CMS Energy and its affiliates from losses resulting
from certain legal and tax liabilities of Panhandle, including the matter
specifically discussed below.
In May 1997, Anadarko filed suits against Panhandle and prior PanEnergy Corp
affiliates, as defendants, both in the United States District Court for the
Southern District of Texas and State District Court of Harris County, Texas.
Pursuing only the federal court claim, Anadarko claims that it was effectively
indemnified by the defendants against any responsibility for refunds of Kansas
ad valorem taxes that are due from purchasers of gas from Anadarko, retroactive
to 1983. In October 1998 and January 1999, the FERC issued orders on ad valorem
tax issues, finding that first sellers of gas were primarily liable for refunds;
Panhandle was not a first seller of gas. The FERC also noted that claims for
indemnity or
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Panhandle Eastern Pipe Line Company
reimbursement among the parties would be better addressed by the United States
District Court for the Southern District of Texas. In June 2001, the parties
executed a settlement agreement which resolves most of the issues in this case.
Panhandle believes the resolution of this matter will not have a material
adverse effect on consolidated results of operations, liquidity, or financial
position.
Panhandle is also involved in other legal, tax and regulatory proceedings before
various courts, regulatory commissions and governmental agencies regarding
matters arising in the ordinary course of business, some of which involve
substantial amounts. Where appropriate, Panhandle has made accruals in
accordance with SFAS 5, Accounting for Contingencies, in order to provide for
such matters. Management believes the final disposition of these proceedings
will not have a material adverse effect on consolidated results of operations,
liquidity, or financial position.
ENVIRONMENTAL MATTERS: Panhandle is subject to federal, state and local
regulations regarding air and water quality, hazardous and solid waste disposal
and other environmental matters. Panhandle has identified environmental
contamination at certain sites on its systems and has undertaken clean-up
programs at these sites. The contamination resulted from the past use of
lubricants in compressed air systems containing PCBs and the prior use of
wastewater collection facilities and other on-site disposal areas. Panhandle
communicated with the EPA and appropriate state regulatory agencies on these
matters. Under the terms of the sale of Panhandle to CMS Energy, a subsidiary of
Duke Energy is obligated to complete the Panhandle clean-up programs at certain
agreed-upon sites and to indemnify against certain future environmental
litigation and claims. Panhandle expects these clean-up programs to continue
through 2001. The Illinois EPA included Panhandle Eastern Pipe Line and
Trunkline, together with other non-affiliated parties, in a cleanup of former
waste oil disposal sites in Illinois. Prior to a partial cleanup by the EPA, a
preliminary study estimated the cleanup costs at one of the sites to be between
$5 million and $15 million. The State of Illinois contends that Panhandle
Eastern Pipe Line's and Trunkline's share for the costs of assessment and
remediation of the sites, based on the volume of waste sent to the facilities,
is 17.32 percent. Management believes that the costs of cleanup, if any, will
not have a material adverse impact on Panhandle's financial position, liquidity,
or results of operations.
AIR QUALITY CONTROL: In 1998, the EPA issued a final rule on regional ozone
control that requires revised SIPS for 22 states, including five states in which
Panhandle operates. This EPA ruling was challenged in court by various states,
industry and other interests, including the INGAA, an industry group to which
Panhandle belongs. In March 2000, the court upheld most aspects of the EPA's
rule, but agreed with INGAA's position and remanded to the EPA the sections of
the rule that affected Panhandle. Based on the court's decision, most of the
states subject to the rule submitted their SIP revisions in October 2000.
However, the EPA must revise the section of the rule that affected Panhandle's
facilities. Panhandle expects the EPA to make this section of the rule effective
in 2001 and expects the future costs to range from $13 million to $29 million
for capital improvements to comply.
OTHER COMMITMENTS AND CONTINGENCIES: In 1993, the U.S. Department of the
Interior announced its intention to seek additional royalties from gas producers
as a result of payments received by such producers in connection with past
take-or-pay settlements, and buyouts and buydowns of gas sales contracts with
natural gas pipelines. Panhandle's pipelines, with respect to certain producer
contract settlements, may be contractually required to reimburse or, in some
instances, to indemnify producers against such royalty claims. The potential
liability of the producers to the government and of the pipelines to the
producers involves complex issues of law and fact that are likely to take
substantial time to resolve. If required to reimburse or indemnify the
producers, Panhandle's pipelines will file with FERC to recover a portion of
these costs from pipeline customers. Management believes these commitments and
contingencies will not have a material adverse effect on consolidated results of
operations, liquidity, or financial position.
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Panhandle Eastern Pipe Line Company
Under the terms of a settlement related to a transportation agreement between
Panhandle and Northern Border Pipeline Company, Panhandle guarantees payment to
Northern Border Pipeline Company under a transportation agreement held by a
third party. The transportation agreement requires estimated total payments of
$5 million through October 2001. Management believes the probability that
Panhandle will be required to perform under this guarantee is remote.
In conjunction with the Centennial Pipeline project, Panhandle has provided a
guaranty related to project financing for a maximum of $50 million during the
construction and initial operating period of the project. The guaranty will be
released when Centennial reaches certain operational and financial targets, see
Note 2, Regulatory Matters.
5. IMPLEMENTATION OF SFAS NO. 133
Panhandle adopted SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities as amended, effective January 1, 2001. SFAS No. 133 requires
companies to recognize all derivative instruments as assets or liabilities on
the Balance Sheet and to measure those instruments at fair value.
As of June 30, 2001, Panhandle believes its contracts qualify for the normal
purchase and sales exception of SFAS No. 133, and therefore no impact has been
reflected in the financial statements.
6. SYSTEM GAS
Panhandle recorded a lower of cost or market adjustment of approximately $3
million in the second quarter of 2001, reducing its current gas inventory to
market value. Panhandle classifies its non-current system gas in Other
Non-Current Assets and they are recorded at cost of $58 million and $1 million
at June 30, 2001 and December 31, 2000, respectively.
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Report of Independent Public Accountants
To Panhandle Eastern Pipe Line Company:
We have reviewed the accompanying consolidated balance sheet of Panhandle
Eastern Pipe Line Company (a Delaware corporation) and subsidiaries as of
June 30, 2001, and the related consolidated statements of income, common
stockholder's equity and cash flows for the three-month and six-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 auditing standards generally accepted in the
United States, 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 consolidated financial statements referred to above
for them to be in conformity with accounting principles generally accepted
in the United States.
We have previously audited, in accordance with auditing standards generally
accepted in the United States, the consolidated balance sheet of Panhandle
Eastern Pipe Line Company and subsidiaries as of December 31, 2000, and, in
our report dated March 6, 2001, we expressed an unqualified opinion on that
statement. In our opinion, the information set forth in the accompanying
consolidated balance sheet as of December 31, 2000, is fairly stated, in all
material respects, in relation to the consolidated balance sheet from which
it has been derived.
/s/ Arthur Andersen LLP
Houston, Texas
July 27, 2001
96
QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
CMS ENERGY
Quantitative and Qualitative Disclosures about Market Risk is contained in PART
I: CMS ENERGY CORPORATION'S MANAGEMENT'S DISCUSSION AND ANALYSIS, which is
incorporated by reference herein.
CONSUMERS
Quantitative and Qualitative Disclosures about Market Risk is contained in PART
I: CONSUMERS' ENERGY COMPANY'S MANAGEMENT'S DISCUSSION AND ANALYSIS, which is
incorporated by reference herein.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The discussion below is limited to an update of developments that have occurred
in various judicial and administrative proceedings, many of which are more fully
described in CMS Energy's, Consumers' and Panhandle's Form 10-K for the year
ended December 31, 2000, and in their Form 10-Q for the quarter ended March 31,
2000. Reference is made to the Condensed Notes to the Consolidated Financial
Statements, in particular Note 2 - Uncertainties for CMS Energy and Consumers,
and Note 8 - Commitments and Contingencies for Panhandle, included herein for
additional information regarding various pending administrative and judicial
proceedings involving rate, operating, regulatory and environmental matters.
CONSUMERS
ANTITRUST LITIGATION: In October 1997, Indeck Energy Services, Inc. and Indeck
Saginaw Limited partnership, independent power producers, filed a lawsuit
against Consumers and CMS Energy in the United States District Court for the
Eastern District of Michigan. The suit alleged antitrust violations relating to
contracts that Consumers entered into with some of its customers as well as
claims relating to independent power production projects. The plaintiffs claimed
damages of $100 million (which could be trebled in antitrust cases as provided
by law). The transactions of which plaintiffs complained were regulated by and
subject to the jurisdiction of the MPSC. In September 1998, the United States
District Court for the Eastern District of Michigan granted CMS Energy's motion
to dismiss the complaint for failure to state a claim upon which relief may be
granted. In March 1999, the Court issued an opinion and order granting
Consumers' motion for summary judgment, resulting in dismissal of the case. The
6th Circuit Court of Appeals upheld the dismissal and in December 2000 denied an
independent power producer's petition for rehearing. Indeck then filed a
certiorari petition with the U.S. Supreme Court, which the U.S. Supreme Court
denied in June 2001. This matter is now closed.
CMS ENERGY, CONSUMERS AND PANHANDLE
ENVIRONMENTAL MATTERS: CMS Energy, Consumers, Panhandle and their subsidiaries
and affiliates are subject to various federal, state and local laws and
regulations relating to the environment. Several of these companies have been
named parties to various actions involving environmental issues. Based on their
present knowledge and subject to future legal and factual developments, CMS
Energy, Consumers and Panhandle believe that it is unlikely that these actions,
individually or in total, will have a material
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adverse effect on their financial condition. See CMS Energy's, Consumers' and
Panhandle's MANAGEMENT'S DISCUSSION AND ANALYSIS; and CMS Energy's, Consumers'
and Panhandle's CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the CMS Energy Annual Meeting of Shareholders held on May 25, 2001, the
shareholders ratified the appointment of Arthur Andersen LLP as independent
auditors of CMS Energy for the year ended December 31, 2001. The vote was
111,240,574 shares in favor and 535,826 against, with 655,098 abstaining. The
CMS Energy shareholders also elected all ten nominees for the office of
director. The votes for individual nominees were as follows:
CMS ENERGY CORPORATION
Number of Votes: For Against Total
------------------------------------------------------------------------------------------------------
William T. McCormick, Jr. 108,435,514 3,995,984 112,431,498
John M. Deutch 108,486,480 3,945,018 112,431,498
James J. Duderstadt 108,589,736 3,841,762 112,431,498
Kathleen R. Flaherty 108,672,987 3,758,511 112,431,498
Earl D. Holton 108,658,088 3,773,410 112,431,498
William U. Parfet 108,678,006 3,753,492 112,431,498
Percy A. Pierre 108,608,410 3,823,088 112,431,498
Kenneth L. Way 108,690,795 3,740,703 112,431,498
Kenneth Whipple 108,663,728 3,767,770 112,431,498
John B. Yasinsky 108,682,521 3,748,977 112,431,498
Consumers did not solicit proxies for the matters submitted to votes at the
contemporaneous May 25, 2001 Consumers' Annual Meeting of Shareholders. All
84,108,789 shares of Consumers Common Stock were voted in favor of re-electing
the above-named individuals as directors of Consumers and in favor of ratifying
the appointment of Arthur Andersen LLP as independent auditors of Consumers for
the year ended December 31, 2001. None of the 441,599 shares of Consumers
Preferred Stock were voted at the Annual Meeting.
ITEM 5. OTHER INFORMATION
A shareholder who intends to submit a proposal for a vote at CMS Energy's 2002
Annual Meeting of Shareholders but which will not be included in CMS Energy's
2002 proxy statement must send the proposal to reach CMS Energy on or before
March 10, 2002. The proposals should be addressed to: Mr. Thomas A. McNish,
Corporate Secretary, Fairlane Plaza South, Suite 1100, 330 Town Center Drive,
Dearborn, Michigan 48126. Failure to timely submit the proposal will allow
management to use discretionary voting authority when the proposal is raised at
the Annual Meeting.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) LIST OF EXHIBITS
(3)(a) - Amended and Restated Bylaws of CMS Energy dated as of May 25,
2001.
(12) - CMS Energy: Statements regarding computation of Ratio of
Earnings to Fixed Charges
(15)(a) - CMS Energy: Letter of Independent Public Accountant
(15)(b) - Consumers: Letter of Independent Public Accountant
(B) REPORTS ON FORM 8-K
CMS ENERGY
Current Reports filed May 17, 2001, June 22, 2001 and July 12, 2001 covering
matters pursuant to ITEM 5. OTHER EVENTS.
CONSUMERS
Current Reports filed June 22, 2001 and July 12, 2001 covering matters pursuant
to ITEM 5. OTHER EVENTS.
PANHANDLE
Current Report filed May 17, 2001 covering matters pursuant to ITEM 5. OTHER
EVENTS.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, each
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized. The signature for each undersigned
company shall be deemed to relate only to matters having reference to such
company or its subsidiary.
CMS ENERGY CORPORATION
----------------------------------------------
(Registrant)
Dated: August 13, 2001 By: /s/ A.M. Wright
-------------------------------------------
Alan M. Wright
Executive Vice President
Chief Financial Officer and
Chief Administrative Officer
CONSUMERS ENERGY COMPANY
----------------------------------------------
(Registrant)
Dated: August 13, 2001 By: /s/ A.M. Wright
-------------------------------------------
Alan M. Wright
Executive Vice President
Chief Financial Officer and
Chief Administrative Officer
PANHANDLE EASTERN PIPE LINE COMPANY
----------------------------------------------
(Registrant)
Dated: August 13, 2001 By: /s/ A.M. Wright
-------------------------------------------
Alan M. Wright
Senior Vice President,
Chief Financial Officer and Treasurer
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================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
CMS ENERGY CORPORATION,
CONSUMERS ENERGY COMPANY
AND
PANHANDLE EASTERN PIPE LINE COMPANY
FORM 10-Q
EXHIBITS
FOR QUARTER ENDED JUNE 30, 2001
101
Exhibit
Number Description
- --------------------------------------------------------------------------------
(3)(a) - Amended and Restated Bylaws of CMS Energy dated as of May 25, 2001.
(12) - CMS Energy: Statements regarding computation of Ratio of Earnings
to Fixed Charges
(15)(a) - CMS Energy: Letter of Independent Public Accountant
(15)(b) - Consumers: Letter of Independent Public Accountant