United States Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [NO FEE REQUIRED]
For the quarterly period ended March 31, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from __________ to __________
Commission File Registrant; State of Incorporation; IRS Employer
Number Address and Telephone Number Identification No.
-------------------- ---------------------------------------- ---------------------
333-47938 Consumers Funding LLC 38-3575109
(Exact name of Registrant as
specified in its charter)
(Delaware)
212 W. Michigan
Jackson, Michigan 49201
(517) 788-0250
Securities registered pursuant to Section 12 (b) of the Act: None.
Securities registered pursuant to Section 12 (g) of the Act: None.
Indicate by check mark whether the Registrant (1) has 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 Registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. YES [X]
NO [ ]
Consumers Funding LLC meets the conditions set forth in General
Instruction H(i)(a) of the 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 Parts III, Items 2, 3 and 4 have
been omitted.
The aggregate market value of the voting and non-voting common equity
held by non-affiliates of the Registrant: None.
Documents incorporated by reference:
Not applicable.
CONSUMERS FUNDING, LLC
QUARTERLY REPORT ON FORM 10-Q TO
THE SECURITIES AND EXCHANGE COMMISSION
FOR THE QUARTER ENDED MARCH 31, 2002
TABLE OF CONTENTS
PAGE
----
PART I: Financial Information
Management Narrative Analysis 3
Financial Statements 5
Part II: Other Information
Item 1: Legal Proceedings 15
Item 5: Other Information 15
Item 6: Exhibit and Report on Form 8-K 15
Signatures 16
2
CONSUMERS FUNDING LLC
MANAGEMENT'S NARRATIVE ANALYSIS OF RESULTS OF OPERATION
This Management's Narrative Analysis (MNA) of the results of operation of
Consumers Funding LLC (Consumers Funding) is an abbreviated format pursuant to
Instruction H of Form 10-Q. The MNA refers to Consumers Funding's Notes to
Financial Statements and should be read in conjunction with such Financial
Statements and Notes.
This Form 10-Q and other written and oral statements from Consumers Funding may
contain forward-looking statements as defined by the Private Securities
Litigation Reform Act of 1995. Consumers Funding's intentions with the use of
the words, "expects," 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 Funding's actual results to differ materially from the results
anticipated in such statements. Consumers Funding 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 Funding does, however, discuss certain risk factors, uncertainties and
assumptions in this MNA, and in various public filings it periodically makes
with the Securities and Exchange Commission. Consumers Funding designed this
discussion of potential risks and uncertainties, which is by no means
comprehensive, to highlight important factors that may impact Consumers
Funding's outlook.
Consumers Funding, a Delaware limited liability company, whose sole member is
Consumers Energy Company (Consumers), was formed by Consumers on October 11,
2000. Consumers is an electric and gas utility and is a wholly owned subsidiary
of CMS Energy Corporation. Consumers Funding was organized for the sole purpose
of purchasing and owning securitization property (see below), issuing
securitization bonds, pledging its interest in securitization property and other
collateral to the trustee to collateralize the securitization bonds, and
performing activities that are necessary, suitable or convenient to accomplish
these purposes.
On November 8, 2001, Consumers Funding issued $468.6 million of securitization
bonds. The proceeds from the securitization bond issuance were used to purchase
securitization property from Consumers. As discussed in Note 1 to the Financial
Statements, securitization property represents the irrevocable right of
Consumers to collect a nonbypassable securitization charge (Securitization
Charge) from customers in accordance with a financing order issued by the
Michigan Public Service Commission (MPSC). The securitization property, which is
classified as a securitization receivable, resulted in the recording of $5.7
million of interest income for the three months ended March 31, 2002. Interest
expense associated with the securitization bonds totaled $5.8 million for the
same three-month period.
Consumers, as servicer, began billing a securitization charge to electric
customers beginning with its December 2001 billing cycle. The surcharge
currently totals $.001427 per kilowatthour. In the servicing agreement between
Consumers Funding and Consumers, Consumers is required to remit its
Securitization Charge collections to the trustee each business day. Through
March 31, 2002, Consumers had remitted approximately $12.8 million of
Securitization Charge collections to the trustee. Consumers Funding expects that
there will be sufficient cash remitted
3
to the trustee for the first payment of approximately $25.4 million for
securitization bond principal, interest and related expenses due on July 20,
2002.
Under the servicing agreement, Consumers is required to request periodic
Securitization Charge adjustments from the MPSC. The request for an adjustment
must be submitted at least 45 days before the adjustment may take place.
Adjustments will be made annually, and then quarterly beginning approximately
one year before the expected final payment date of the last maturing class of
securitization bonds. Adjustments to the Securitization Charge are based, among
other things, on actual securitization charge revenue collections and updated
assumptions by Consumers as to projected future deliveries of electricity to
customers.
4
CONSUMERS FUNDING LLC
STATEMENTS OF INCOME
(THOUSANDS OF DOLLARS)
THREE MONTHS ENDED
MARCH 31
2002 2001
---- ----
OPERATING REVENUES
Interest Income - Consumers Energy $ 5,730 $ -
Interest Income 25 -
Other Operating Revenue - Consumers Energy 335 -
------------------------------
Total Operating Revenue 6,090 -
OPERATING EXPENSES
Interest Expense 5,755 -
Administrative Fee - Consumers Energy 20 -
Service Fee - Consumers Energy 315 -
------------------------------
Total Operating Expenses 6,090 -
------------------------------
OPERATING INCOME - -
------------------------------
NET INCOME $ - $ -
==============================
The accompanying notes are an integral part of these statements.
5
CONSUMERS FUNDING LLC
BALANCE SHEETS
(THOUSANDS OF DOLLARS)
ASSETS March 31 December 31
2002 2001
----------------------------------
CURRENT ASSETS
Restricted Cash $ 15,172 $ 3,604
Securitization Receivable - Consumers Energy 19,087 15,650
Interest Receivable - Consumers Energy - 2,257
----------------------------------
Total Current Assets 34,259 21,511
----------------------------------
NON-CURRENT ASSETS
Securitization Receivable - Consumers Energy 446,283 452,942
----------------------------------
Total Non-Current Assets 446,283 452,942
----------------------------------
TOTAL ASSETS $ 480,542 $ 474,453
==================================
LIABILITIES AND MEMBER'S EQUITY
CURRENT LIABILITIES
Securitization Bonds Payable $ 22,309 $ 15,650
Accounts Payable - Consumers Energy 464 129
Interest Payable 9,143 3,389
----------------------------------
Total Current Liabilities 31,916 19,168
----------------------------------
NON-CURRENT LIABILITIES
Securitization Bonds Payable 446,283 452,942
----------------------------------
Total Non-Current Liabilities 446,283 452,942
----------------------------------
MEMBER'S EQUITY 2,343 2,343
----------------------------------
TOTAL LIABILITIES AND MEMBER'S EQUITY $ 480,542 $ 474,453
==================================
The accompanying notes are an integral part of these Balance Sheets.
6
CONSUMERS FUNDING LLC
STATEMENTS OF CASH FLOWS
(THOUSANDS OF DOLLARS)
THREE MONTHS ENDED
MARCH 31
--------------------------------
OPERATING ACTIVITIES 2002 2001
--------------------------------
Net Income $ - $ -
--------------------------------
Changes in Current Assets and Liabilities:
Interest Receivable - Consumers Energy 2,257 -
Interest Payable 5,754 -
Accounts Payable - Consumers Energy 335 -
--------------------------------
NET CASH FROM OPERATING ACTIVITIES 8,346 -
--------------------------------
INVESTING ACTIVITIES
Reduction of Securitization Receivable 3,222 -
NET CASH USED FOR INVESTING ACTIVITIES 3,222 -
--------------------------------
FINANCING ACTIVITIES
Member's Investment 0 1
--------------------------------
NET CASH FROM FINANCING ACTIVITIES 0 1
--------------------------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 11,568 1
--------------------------------
CASH AND CASH EQUIVALENTS AT BEGINNING OF THE PERIOD 3,604 -
--------------------------------
CASH AND CASH EQUIVALENTS AT END OF THE PERIOD $ 15,172 $ 1
================================
OTHER CASH ACTIVITIES:
Interest Paid $ - $ -
================================
The accompanying notes are an integral part of these statements.
7
CONSUMERS FUNDING LLC
STATEMENTS OF MEMBER'S EQUITY
(THOUSANDS OF DOLLARS)
Three Months Ended
March 31
--------------------------------
2002 2001
---- ----
BALANCE AT BEGINNING OF PERIOD $ 2,343 $ -
--------------------------------
ADD:
Member's Investment - 1
--------------------------------
BALANCE AT END OF PERIOD $ 2,343 $ 1
================================
The accompanying notes are an integral part of these statements.
8
CONSUMERS FUNDING LLC
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND NATURE OF OPERATIONS
Consumers Funding LLC (Consumers Funding), a Delaware limited liability company,
whose sole member is Consumers Energy Company (Consumers), was formed by
Consumers on October 11, 2000 and on January 22, 2001, Consumers completed a
$1,000 equity contribution to Consumers Funding. Consumers is an electric and
gas utility and is a wholly owned subsidiary of CMS Energy Corporation.
Consumers Funding was organized for the sole purpose of purchasing and owning
securitization property (see below), issuing securitization bonds, pledging its
interest in securitization property and other collateral to the trustee to
collateralize the securitization bonds, and performing activities that are
necessary, suitable or convenient to accomplish these purposes.
Securitization property represents the irrevocable right of Consumers, or its
successor or assignee, to collect a nonbypassable securitization charge
(Securitization Charge) from customers in accordance with a financing order
(MPSC Financing Order) issued by the Michigan Public Service Commission on
October 24, 2000. As modified by rehearing on January 4, 2001, the MPSC
Financing Order authorizes the Securitization Charge to be sufficient to recover
$468.6 million aggregate principal amount of securitization bonds, plus an
amount sufficient to provide for any credit enhancement, to fund any reserves
and to pay interest, redemption premiums, if any, servicing fees and other
expenses relating to the securitization bonds. For financial reporting purposes,
the purchase of the securitization property has been accounted for as a
financing in the amount of $468.6 million. Accordingly, Consumers Funding has
classified the purchase of securitization property as a securitization
receivable from Consumers in the financial statements.
Consumers Funding's organizational documents require it to operate in a manner
so that it would not be consolidated into the bankruptcy estate of Consumers in
the event Consumers becomes subject to a bankruptcy proceeding. Both Consumers
and Consumers Funding will treat the transfer of the securitization property to
Consumers Funding as a true sale under applicable law for bankruptcy purposes.
The securitization bonds are treated as debt obligations of Consumers Funding.
For financial reporting, Federal income tax and State of Michigan income and
franchise tax purposes, the transfer of securitization property to Consumers
Funding is treated as part of a financing arrangement and not as a sale.
Furthermore, the results of operations of Consumers Funding are consolidated
with Consumers for financial and income tax reporting purposes.
Consumers Funding is legally separate from Consumers. The assets and income of
Consumers Funding, including without limitation, the securitization property,
are not available to creditors of Consumers or CMS Energy Corporation.
On November 8, 2001, Consumers Funding issued $468.6 million of securitization
bonds, Series 2001-1, in six different classes. The proceeds were used to fund
the purchase of securitization property from Consumers. The principal amount of
the securitization bonds,
9
interest, fees and required overcollateralization for the securitization bonds,
will be recovered through securitization charges collected from electric retail
customers taking delivery of electricity from Consumers or its successor based
on MPSC approved rate schedules and as permitted by contracts between Consumers
and certain specific customers.
Consumers, as servicer, collects securitization charges from its customers and
deposits collections daily into the General Subaccount held by the trustee (The
Bank of New York). The trustee is required to use these funds to make principal
and interest payments on the securitization bonds and to pay certain fees and
expenses of Consumers Funding.
Consumers Funding has no employees. Under the servicing agreement with
Consumers, Consumers is required to manage and administer the securitization
property and to collect securitization charges on behalf of Consumers Funding.
Consumers receives a monthly servicing fee of one twelfth times 0.25 percent of
the principal amount of securitization bonds outstanding as of the payment date.
The servicing agreement also requires Consumers to file annual securitization
charge adjustment requests with the MPSC. These securitization charge adjustment
requests will be based on actual securitization charge revenue collections and
updated assumptions by Consumers as to projected future deliveries of
electricity to customers, expected delinquencies and write-offs, future payments
and costs and expenses relating to securitization property and the
securitization bonds, any deficiency in the Capital or Overcollateralization
Subaccounts and any amounts on deposit in the Reserve Subaccount.
2. SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions. These estimates and assumptions affect the reported amount of
revenues, expenses, assets, and liabilities and disclosure of contingencies.
Actual results could differ from these estimates.
INCOME TAXES
Consumers Funding has elected not to be taxed as a corporation for Federal
income tax purposes. Consumers Funding is treated as a division of Consumers,
and accordingly, will not be treated as a separate taxable entity.
RESTRICTED CASH
The trustee has established the following subaccounts for the securitization
bonds.
GENERAL SUBACCOUNT: The General Subaccount is comprised of Securitization Charge
collections and interest earned from short term investments. These amounts
accumulate until the trustee pays principal, interest, service and
administration fees and other expenses. At March 31, 2002, the General
Subaccount totaled $12.8 million.
10
RESERVE SUBACCOUNT: The Reserve Subaccount includes any Securitization Charge
collections in excess of the amounts required in the General,
Overcollateralization and Capital Subaccounts. The trustee will draw funds from
this subaccount if the General Subaccount is insufficient to make scheduled
payments. At March 31, 2002, there was no balance in the Reserve Subaccount.
OVERCOLLATERALIZATION SUBACCOUNT: On each payment date, the trustee will deposit
in the Overcollateralization Subaccount a predetermined, specified amount so
that the account balance reaches the required amount of $2.3 million, which
represents 0.5 percent of the initial outstanding principal balance of the
securitization bonds. If amounts available in the General Subaccount and the
Reserve Subaccount are not sufficient on any payment date to make scheduled
payments to the securitization bondholders and to pay the required expenses,
fees and charges, the trustee will draw on the amounts in the
Overcollateralization Subaccount to make those payments. The first scheduled
funding of the Overcollateralization Subaccount by the trustee will occur on the
July 20, 2002 scheduled payment date.
CAPITAL SUBACCOUNT: The Capital Subaccount was established on November 8, 2001.
Consumers deposited $2.3 million into the Capital Subaccount, an amount equal to
0.5 percent of the initial principal balance of the securitization bonds. If
amounts available in the General Subaccount, the Reserve Subaccount and the
Overcollateralization Subaccount are not sufficient on any payment date to make
scheduled payments of principal and interest to the securitization bondholders
and to pay the expenses, fees and charges of Consumers Funding, the trustee will
draw on amounts in the Capital Subaccount to make those payments. At March 31,
2002, the Capital Subaccount contained a balance of $2.3 million.
11
3. LONG-TERM DEBT
On November 8, 2001, Consumers Funding issued $468.6 million of securitization
bonds, in six classes at interest rates ranging from 2.59 percent to 5.76
percent. Consumers Funding used the proceeds from the securitization bonds to
purchase securitization property from Consumers.
Scheduled maturities and interest rates for the securitization bonds at March
31, 2002 are as follows:
Initial Class Expected
Principal Final Final
Bond Balance Payment Maturity
Class Rate (in thousands) Date Date
- -------------------------------------------------------------------------------------------------
A-1 2.59% $ 26,000 4/20/2003 4/20/2005
A-2 3.80% 84,000 4/20/2006 4/20/2008
A-3 4.55% 31,000 4/20/2007 4/20/2009
A-4 4.98% 95,000 4/20/2010 4/20/2012
A-5 5.43% 117,000 4/20/2013 4/20/2015
A-6 5.76% 115,592 10/20/2015 10/20/2016
--------
Total $468,592
Current Maturities (22,309)
--------
Long-Term Debt $446,283
========
Current maturities are based on the expected final payment dates indicated
above.
The amortization schedule for the securitization bonds provides for an initial
payment to bondholders on July 20, 2002 and then quarterly thereafter. The
following table provides the expected principal retirement of the securitization
bonds over the next five calendar years (in thousands).
Principal
Year Retirement
---- ----------
2002 $ 15,650
2003 26,905
2004 27,786
2005 28,646
2006 29,591
12
4. FAIR VALUE OF FINANCIAL INSTRUMENTS
Restricted cash is on deposit with the trustee and, by definition, is carried at
its fair value. At March 31, 2002, Consumers Funding had a financial asset
(representing its securitization receivable from Consumers) of approximately
$465.4 million, and financial liabilities (representing the securitization
bonds) with a cost basis of approximately $468.6 million. The securitization
receivable and securitization bonds are carried at cost, which approximates fair
value. Fair value is estimated based on quoted market prices, or, in the absence
of specific market prices, on quoted market prices of similar investments or
other valuation techniques.
5. SIGNIFICANT AGREEMENTS AND RELATED PARTY TRANSACTIONS
Under the servicing and administration agreements, Consumers is required to
manage and administer the securitization property of Consumers Funding, and to
collect the Securitization Charge on behalf of Consumers Funding. Consumers
Funding pays a servicing fee which currently totals approximately $1.2 million
annually (see Note 1) and an annual administrative fee of $80,000. These fees
are payable to Consumers on each scheduled quarterly payment date beginning July
20, 2002. For the three-month period ending March 31, 2002, Consumers Funding
has recorded servicing and administration fees of $315,000 and $20,000,
respectively, respectively, and has recorded a corresponding liability on its
balance sheet.
13
Report of Independent Public Accountants
To Consumers Funding LLC:
We have reviewed the accompanying balance sheet of CONSUMERS FUNDING LLC (a
Delaware limited liability company and wholly owned subsidiary of Consumers
Energy Company) as of March 31, 2002, and the related statements of income, cash
flows and common stockholder's equity for the three-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 balance sheet of Consumers Funding LLC as
of December 31, 2001, and, in our report dated March 14, 2002, we expressed an
unqualified opinion on that statement. In our opinion, the information set forth
in the accompanying balance sheet as of December 31, 2001, is fairly stated, in
all material respects, in relation to the balance sheet from which it has been
derived.
/s/ Arthur Andersen LLP
Detroit, Michigan
April 30, 2002.
14
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
NONE
ITEM 4. OTHER INFORMATION
NONE
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
See Exhibit Index that appears following the Signature page to this
report.
(b) Reports on Form 8-K:
None
15
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
CONSUMERS FUNDING LLC
By: /s/ Laura L. Mountcastle
-------------------------
Laura L. Mountcastle
President, Chief Executive Officer,
Chief Financial Officer and
Treasurer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Quarterly Report has been signed below by the following persons on behalf of
Consumers Funding LLC and in the capacities and on the 15th day of May 2002.
SIGNATURE TITLE
---------------- ------------
By /s/ Laura L. Mountcastle President, Chief Executive Officer,
--------------------------- Chief Financial Officer and Treasurer
Laura L. Mountcastle
By /s/ Glenn P. Barba Chief Accounting Officer and Controller
--------------------
Glenn P. Barba
By /s/ Michael D. VanHemert Manager
---------------------------
Michael D. VanHemert
By /s/ David A. Mikelonis Manager
-------------------------
David A. Mikelonis
By /s/ Alan M. Wright Manager
---------------------
Alan M. Wright
16
INDEX TO EXHIBITS
The following Exhibits indicated by an asterisk preceding the Exhibit number are
filed herewith. The balance of the Exhibits have heretofore been filed with the
Commission and pursuant to Rule 12(b) -- 32 are incorporated herein by
reference.
EXHIBIT
NO. DESCRIPTION
10(a) Monthly Servicer's Certificate dated January 17, 2002
10(b) Monthly Servicer's Certificate dated February 13, 2002
10(c) Monthly Servicer's Certificate dated March 14, 2002
10(d) Monthly Servicer's Certificate dated April 12, 2002
17