1
EXHIBIT 99
CONSUMERS GAS GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS
In 1995, CMS Energy Corporation (CMS Energy) issued a total of 7.62 million
shares of Class G Common Stock. This class of common stock reflects the separate
performance of the gas distribution, storage and transportation businesses
conducted by Consumers Energy Company (Consumers) and Michigan Gas Storage
Company, a subsidiary of Consumers (collectively, Consumers Gas Group).
Accordingly, this Management's Discussion and Analysis (MD&A) should be read
along with the MD&A in the 1998 Annual Report of CMS Energy included and
incorporated by reference herein.
CMS Energy is the parent holding company of Consumers and CMS Enterprises
Company. Consumers, a combination electric and gas utility company serving the
Lower Peninsula of Michigan, is the principal subsidiary of CMS Energy. For
further information regarding the businesses of CMS Energy, including the nature
and issuance of Class G Common Stock, see the MD&A of CMS Energy.
RESULTS OF OPERATIONS
Net income for Consumers Gas Group for 1998 totaled $52 million compared with
$60 million for 1997. The decrease in 1998 net income reflects decreased gas
deliveries due to warmer 1998 temperatures. Partially offsetting the decrease
was the benefit resulting from an accounting change for property taxes. The
recognition of property tax expense was changed from expensing on a calendar
year basis to a fiscal year basis which resulted in a benefit of $18 million
($12 million after-tax). Net income for 1997 totaled $60 million compared with
$59 million for 1996. The increase in 1997 net income reflects reduced operation
and maintenance expenses offset by decreased gas deliveries due to warmer winter
month temperatures in 1997 and an extra day for the 1996 leap year, and
increased depreciation and general tax expenses. Other items benefiting 1997
were the recognition of interest income from a related-party property sale and
reduced other income deductions in 1997 reflecting the absence of an unusual
material write-off which occurred during 1996. For a further discussion, see
Consumers Gas Group Results of Operations in CMS Energy's MD&A.
GAS UNCERTAINTIES
For a discussion of gas uncertainties, see Consumers Gas Group Results of
Operations - Uncertainties in CMS Energy's MD&A.
CASH POSITION, INVESTING AND FINANCING
OPERATING ACTIVITIES: Consumers Gas Group's cash requirements are met by its
operating and financing activities. Consumers Gas Group's cash from operations
is derived mainly from Consumers' sale and transportation of natural gas. Cash
from operations for 1998 and 1997 totaled $110 million and $223 million,
respectively. The $113 million decrease primarily reflects a decrease in the
sale of accounts receivable, an increase in gas inventories, the noncash effect
of the property tax accounting change, and changes in the timing of cash
receipts and payments related to normal operations. Consumers Gas Group
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uses its operating cash primarily to maintain and expand its gas utility
transmission and distribution systems, to retire portions of its long-term debt,
and to pay dividends.
INVESTING ACTIVITIES: Cash used in investing activities for 1998 and 1997
totaled $114 million and $122 million, respectively. The $8 million decrease in
cash used primarily reflects an increase in the proceeds received from the sale
of assets.
FINANCING ACTIVITIES: Cash provided by financing activities during 1998 totaled
$4 million while cash used in financing activities during 1997 totaled $114
million. The $118 million increase in cash provided primarily reflects an
increase in the proceeds from senior notes, partially offset by an increase in
the retirement of bonds and other long-term debt.
OTHER INVESTING AND FINANCING MATTERS: Consumers has an agreement permitting the
sale of certain accounts receivable for up to $500 million. At December 31,
1998, receivables sold totaled $306 million. Consumers Gas Group's attributed
portion of these receivables sold totaled $107 million. Accounts receivable and
accrued revenue in the Balance Sheets have been reduced to reflect receivables
sold. For further information, see "Short-Term Financings" in CMS Energy's Note
4.
CAPITAL EXPENDITURES
CMS Energy estimates the following capital expenditures for Consumers Gas Group,
including new lease commitments, over the next three years. These estimates are
prepared for planning purposes and are subject to revision.
In Millions
- --------------------------------------------------------------------------------
Years Ended December 31 1999 2000 2001
- --------------------------------------------------------------------------------
Gas utility (a) $120 $122 $118
Michigan Gas Storage 3 3 2
---------------------------------------
$123 $125 $120
================================================================================
(a) Includes a portion of anticipated capital expenditures common to Consumers'
gas and electric utility businesses.
Consumers Gas Group expects that cash from operations and the ability to access
debt markets will provide necessary working capital and liquidity to fund future
capital expenditures, required debt payments, and other cash needs in the
foreseeable future. For further information regarding forward-looking
information, see the Consumers Gas Group Outlook discussion in CMS Energy's
MD&A.
YEAR 2000 COMPUTER MODIFICATIONS
For a discussion of Consumers Gas Group's year 2000 computer modification
efforts, see Year 2000 Computer Modifications in CMS Energy's MD&A.
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FORWARD-LOOKING STATEMENTS
For cautionary statements relating to Consumers Gas Group's forward-looking
information, see Forward-Looking Statements in CMS Energy's MD&A.
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STATEMENTS OF INCOME CONSUMERS GAS GROUP
In Millions, Except Per Share Amounts
Years Ended December 31 1998 1997 1996
- --------------------------------------------------------------------------------------------------------------------------
OPERATING REVENUE $1,051 $1,204 $1,282
- --------------------------------------------------------------------------------------------------------------------------
OPERATING EXPENSES Operation
Cost of gas sold 564 694 750
Other 177 175 193
-------------------------------------------
741 869 943
Maintenance 32 34 40
Depreciation, depletion and amortization 97 93 87
General taxes 55 55 54
-------------------------------------------
925 1,051 1,124
- --------------------------------------------------------------------------------------------------------------------------
PRETAX OPERATING INCOME 126 153 158
- --------------------------------------------------------------------------------------------------------------------------
OTHER DEDUCTIONS (4) (2) (6)
- --------------------------------------------------------------------------------------------------------------------------
FIXED CHARGES Interest on long-term debt 28 28 30
Other interest 15 13 12
Capitalized interest - - (1)
Preferred dividends 4 5 6
-------------------------------------------
47 46 47
- --------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 75 105 105
INCOME TAXES 35 45 46
-------------------------------------------
NET INCOME BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE 40 60 59
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING FOR PROPERTY TAXES, NET OF $6 TAX
12 - -
NET INCOME $ 52 $ 60 $ 59
==========================================================================================================================
NET INCOME ATTRIBUTABLE TO CMS ENERGY SHAREHOLDERS
THROUGH RETAINED INTEREST $ 39 $ 45 $ 45
==========================================================================================================================
NET INCOME ATTRIBUTABLE TO CLASS G SHAREHOLDERS $ 13 $ 15 $ 14
==========================================================================================================================
AVERAGE CLASS G COMMON SHARES OUTSTANDING 8 8 8
==========================================================================================================================
BASIC AND DILUTED EARNINGS PER AVERAGE CLASS G COMMON SHARE
BEFORE CHANGE IN ACCOUNTING PRINCIPLE $ 1.20 $ 1.84 $ 1.82
==========================================================================================================================
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE, NET OF TAX,
PER AVERAGE CLASS G COMMON SHARE $ .36 $ - $ -
==========================================================================================================================
BASIC AND DILUTED EARNINGS PER AVERAGE CLASS G COMMON SHARE $ 1.56 $ 1.84 $ 1.82
==========================================================================================================================
DIVIDENDS DECLARED PER CLASS G COMMON SHARE $ 1.27 $ 1.21 $ 1.15
==========================================================================================================================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
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STATEMENTS OF CASH FLOWS
CONSUMERS GAS GROUP
In Millions
Years Ended December 31 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM Net income $ 52 $ 60 $ 59
OPERATING ACTIVITIES Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation, depletion and amortization 97 93 87
Deferred income taxes and investment tax credit 16 5 13
Capital lease and other amortization 2 4 4
Other - (1) 2
Cumulative effect of accounting change for property taxes (18) - -
Changes in other assets and liabilities (39) 62 (24)
-------------------------------------
Net cash provided by operating activities 110 223 141
- ------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM Capital expenditures (excludes capital
INVESTING ACTIVITIES lease additions) (111) (113) (137)
Cost to retire property, net (9) (9) (99)
Proceeds from the sale of property 4 - -
Other 2 - 1
-------------------------------------
Net cash used in investing activities (114) (122) (145)
- ------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM Proceeds from senior notes 212 - -
FINANCING ACTIVITIES Increase (decrease) in notes payable, net (1) 5 9
Contribution from CMS Energy stockholders 37 - 3
Issuance of common stock 6 7 5
Retirement of bonds and other long-term debt (169) (40) (8)
Payment of common stock dividends (42) (40) (37)
Return of CMS Energy stockholders' contribution (32) (39) -
Payment of capital lease obligations (6) (4) (4)
Proceeds from long-term note - 25 22
Proceeds from bank loans - - 23
Retirement of preferred stock - (26) -
Repayment of long-term note (1) (2) -
-------------------------------------
Net cash provided by (used in) financing activities 4 (114) 13
- ------------------------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND TEMPORARY CASH INVESTMENTS - (13) 9
Cash and temporary cash investments
Beginning of year 2 15 6
-------------------------------------
End of year $ 2 $ 2 $ 15
==============================================================================================================================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
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BALANCE SHEETS
CONSUMERS GAS GROUP
ASSETS In Millions
December 31 1998 1997
- ------------------------------------------------------------------------------------------------------------------
PLANT AND PROPERTY Plant and property $2,360 $2,322
(AT COST) Less accumulated depreciation, depletion
and amortization 1,252 1,231
-----------------------------
1,108 1,091
Construction work-in-progress 31 28
-------------------------------
1,139 1,119
- ------------------------------------------------------------------------------------------------------------------
CURRENT ASSETS Cash and temporary cash investments at cost,
which approximates market 2 2
Accounts receivable and accrued revenue, less allowances
of $3 in 1998 and $3 in 1997 75 53
Inventories at average cost
Gas in underground storage 219 197
Materials and supplies 6 7
Deferred income taxes - 6
Prepayments and other 51 51
-------------------------------
353 316
- ------------------------------------------------------------------------------------------------------------------
NON-CURRENT ASSETS Postretirement benefits 131 142
Deferred income taxes 16 6
Other 87 61
-------------------------------
234 209
------------------------------
TOTAL ASSETS $1,726 $1,644
==================================================================================================================
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CONSUMERS GAS GROUP
STOCKHOLDERS' INVESTMENT AND LIABILITIES In Millions
December 31 1998 1997
- ------------------------------------------------------------------------------------------------------------------
CAPITALIZATION Common stockholders' equity
Common stock $ 184 $ 184
Paid-in capital 113 102
Retained earnings since December 31, 1992 82 72
-------------------------------
379 358
Preferred stock 52 52
Long-term debt 454 333
Non-current portion of capital leases 14 16
-------------------------------
899 759
- ------------------------------------------------------------------------------------------------------------------
CURRENT LIABILITIES Current portion of long-term debt and capital leases 37 118
Notes payable 118 119
Accounts payable 92 94
Accrued taxes 61 65
Accrued refunds 9 10
Accrued interest 8 4
Deferred income taxes 4 -
Other 47 44
-------------------------------
376 454
- ------------------------------------------------------------------------------------------------------------------
NON-CURRENT Postretirement benefits 159 168
LIABILITIES Regulatory liabilities for income taxes, net 189 173
Deferred investment tax credit 25 25
Other 78 65
-------------------------------
451 431
------------------------------
Commitments and Contingencies (Notes 2, 3, 5 and 10)
TOTAL STOCKHOLDERS' INVESTMENT AND LIABILITIES $1,726 $1,644
==================================================================================================================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
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STATEMENTS OF COMMON STOCKHOLDERS' EQUITY
CONSUMERS GAS GROUP
In Millions
Years Ended December 31 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------
COMMON STOCK At beginning and end of period (a) $ 184 $ 184 $ 184
- ----------------------------------------------------------------------------------------------------------------
OTHER PAID-IN CAPITAL At beginning of period 102 134 126
Common stock issued 6 7 5
CMS Energy stockholders' contribution 37 - 3
Return of CMS Energy stockholders' contribution (32) (39) -
------------------------------
At end of period 113 102 134
- ----------------------------------------------------------------------------------------------------------------
RETAINED EARNINGS At beginning of period 72 52 30
Net income 52 60 59
Common stock dividends declared (42) (40) (37)
------------------------------
At end of period 82 72 52
------------------------------
TOTAL COMMON STOCKHOLDERS' EQUITY $ 379 $ 358 $ 370
================================================================================================================
(a) Number of shares of Consumers' common stock outstanding was 84,108,789 for
all periods presented. Common stock allocated to the Consumers Gas Group
is consistent with the allocation method discussed in Note 4.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
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CONSUMERS GAS GROUP
NOTES TO FINANCIAL STATEMENTS
1: CORPORATE STRUCTURE
CMS Energy Corporation (CMS Energy) is the parent holding company of Consumers
Energy Company (Consumers) and CMS Enterprises Company (Enterprises). Consumers,
a combination electric and gas utility company serving the Lower Peninsula of
Michigan, is the principal subsidiary of CMS Energy. For further information
regarding the businesses of CMS Energy, see the Notes to Consolidated Financial
Statements of CMS Energy included and incorporated by reference herein.
CMS Energy has issued shares of Class G Common Stock. This class of common stock
reflects the separate performance of the gas distribution, storage and
transportation businesses conducted by Consumers and Michigan Gas Storage
Company, a subsidiary of Consumers (collectively, Consumers Gas Group). For
further information regarding the nature and issuance of the Class G Common
Stock, see Note 6 to the Consolidated Financial Statements of CMS Energy
included and incorporated by reference herein.
These Financial Statements and their related Notes should be read along with the
Financial Statements and Notes contained in the 1998 Annual Report of CMS Energy
that includes the Report of Independent Public Accountants, included and
incorporated by reference herein.
2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND OTHER MATTERS
BASIS OF PRESENTATION: Consumers is a regulated utility. Accordingly, the
majority of the accounting allocation policies described within these notes have
a long-standing basis and have historically been used in proceedings conducted
before the Michigan Public Service Commission (MPSC). The financial statements
for Consumers Gas Group have been prepared based upon consistent methods that
management believes are reasonable and appropriate to reflect its financial
position, results of operations and cash flows. Where appropriate, the financial
statements reflect the assets, liabilities, revenues and expenses directly
related to Consumers Gas Group. However, in instances where common accounts
(containing both electric and gas activities) were not readily attributable to a
single business segment, management allocated to Consumers Gas Group's financial
statements based on certain measures of business activities, such as gas
revenues, salaries, other operation and maintenance expenditures, number of gas
customers in relationship to total utility customers and/or functional use
surveys. Management believes the attributions are reasonable.
Although the financial statements of Consumers Gas Group separately report the
assets, liabilities and stockholders' equity, legal title to such assets and the
responsibility for such liabilities are not separately identifiable to a
specific class of common stock. Therefore, the creditors of CMS Energy are
unaffected by the implementation of Consumers Gas Group, because all assets of
the corporation remain available to satisfy all liabilities. The holders of CMS
Energy Common Stock and the Class G Common Stock will be subject to all risks
associated with investments in CMS Energy. Holders of Class G Common Stock have
no direct rights in the equity or assets of Consumers Gas Group, but rather have
rights in the equity and assets of CMS Energy.
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The financial statements of Consumers Gas Group incorporate Consumers' natural
gas utility business and the related business of Michigan Gas Storage Company.
The Consumers Gas Group and the remaining business segments of CMS Energy
comprise all of the accounts included in the Consolidated Financial Statements
of CMS Energy.
The financial statements of Consumers Gas Group were prepared in accordance with
generally accepted accounting principles on a consistent basis and include the
use of management's estimates. Any future changes in accounting policy not
mandated by appropriate authorities must be, in management's opinion, preferable
to the policy in place and must be disclosed in accordance with generally
accepted accounting principles. For presentation purposes, all material
transactions between companies within Consumers Gas Group have been eliminated.
CHANGE IN METHOD OF ACCOUNTING FOR PROPERTY TAXES: During the first quarter of
1998, Consumers Gas Group implemented a change in the method of accounting for
property taxes so that taxes are recognized during the fiscal period of the
taxing authority for which the taxes are levied. This change provides a better
matching of property tax expenses with the services provided by the taxing
authorities, and is considered the most acceptable basis of recording property
taxes. Prior to 1998, Consumers Gas Group recorded property taxes monthly during
the year following the assessment date (December 31). The cumulative effect of
this one-time change in accounting increased other income by $18 million, and
earnings net of tax, by $12 million. The pro forma effect on prior years'
consolidated net income of retroactively recording property taxes as if the new
method of accounting had been in effect for all periods presented is not
material.
EARNINGS PER SHARE AND DIVIDENDS: Basic and diluted earnings per share for the
years ended December 31, 1998, 1997 and 1996, reflect the performance of
Consumers Gas Group. The earnings attributable to Class G Common Stock and the
related amounts per share are computed by considering the weighted average
number of shares of Class G Common Stock outstanding.
Earnings attributable to outstanding Class G Common Stock are equal to Consumers
Gas Group's net income multiplied by a fraction; the numerator is the weighted
average number of Outstanding Shares during the period (Outstanding Shares), and
the denominator is the weighted average number of Outstanding Shares and
Retained Interest Shares, shares not held by the holders of the Outstanding
Shares, during the period. The earnings attributable to Class G Common Stock on
a per share basis, for the years ended December 31, 1998, 1997 and 1996, are
based on 25.5 percent, 24.5 percent and 23.8 percent of the income of Consumers
Gas Group since the initial issuance, respectively.
Holders of Class G Common Stock have no direct rights in the equity or assets of
Consumers Gas Group, but rather have rights in the equity and assets of CMS
Energy as a whole. In the sole discretion of the Board of Directors of CMS
Energy (Board of Directors), dividends may be paid exclusively to the holders of
Class G Common Stock, exclusively to the holders of CMS Energy Common Stock, or
to the holders of both classes in equal or unequal amounts. Dividends on Class G
Common Stock are paid at the discretion of the Board of Directors based
primarily upon the earnings and financial condition of Consumers Gas Group, and
to a lesser extent, CMS Energy as a whole. It is the Board of Directors' current
intention that the declaration or payment of dividends with respect to the Class
G Common Stock will not be reduced, suspended or eliminated as a result of
factors arising out of or relating to the electric utility business or the
nonutility businesses of CMS Energy unless such factors also require, in the
Board of Directors' sole discretion, the omission of the declaration or
reduction in payment of dividends on both the CMS Energy Common Stock and the
Class G Common Stock.
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In February and May 1998, CMS Energy paid dividends of $.31 per share on Class G
Common Stock. In August and November of 1998, and February 1999, CMS Energy paid
dividends of $.325 per share on Class G Common Stock.
RELATED PARTY TRANSACTIONS: Consumers Gas Group sold, stored and transported
natural gas and provided other services to the Midland Cogeneration Venture
Limited Partnership totaling $13 million, each year, for 1998, 1997 and 1996.
Consumers Gas Group purchases a portion of its gas from CMS Oil and Gas Co., a
wholly owned subsidiary of Enterprises. The amounts of purchases for the years
ended December 31, 1998, 1997 and 1996 totaled $24 million, $25 million and $24
million, respectively.
OTHER: For significant accounting policies refer to the following Notes to
Consolidated Financial Statements of CMS Energy: for Consumers Gas Group's gas
inventory, maintenance, depreciation and depletion, and utility regulation, see
Note 2; for cash equivalents, see Note 16; for income taxes, see Note 9; for
executive incentive compensation, see Note 11; and for pensions and other
postretirement benefits, see Note 12 included and incorporated by reference
herein.
3: RATE MATTERS
For information regarding rate matters directly affecting Consumers Gas Group,
see Note 3 in the Consolidated Financial Statements of CMS Energy included and
incorporated by reference herein.
4: SHORT-TERM FINANCINGS AND CAPITALIZATION
SHORT-TERM FINANCINGS: Consumers' short-term financings are discussed in
Consolidated Financial Statements of CMS Energy Note 4 included and incorporated
by reference herein.
Consumers generally manages its short-term financings on a centralized
consolidated basis. The portion of receivables sold attributable to Consumers
Gas Group at December 31, 1998 and 1997, is estimated by management to be $107
million and $138 million, respectively. Accounts receivable and accrued revenue
in the balance sheets have been reduced to reflect receivables sold. The
portions of short-term debt and receivables sold attributable to Consumers Gas
Group reflect the high utilization of short-term borrowing to finance the
purchase of gas for storage in the summer and fall periods. The allocation of
short-term financings and related interest charges to Consumers Gas Group
generally follows the ratio of gas utility assets to total Consumers' assets.
Additionally, the carrying costs for Consumers' sales of certain of its accounts
receivable under its trade receivable purchase and sale agreement generally are
allocated to Consumers Gas Group based on the ratio of customer revenues
contributed by Consumers' gas customers to total Consumers' revenue. As a result
of the centralized management of short-term financing, the amounts allocated to
Consumers Gas Group are further adjusted in both the seasonal gas inventory
build-up period (second and third quarters) and the high seasonal gas sales
period (first and fourth quarters) to more closely reflect the higher short-term
financing requirements of the inventory build-up period and conversely the lower
financing requirements during the higher sales periods. Management believes
these allocations to be reasonable.
CAPITAL STOCK AND LONG-TERM DEBT: Consumers Gas Group's capital stock and
long-term debt, including debt resulting from the sale of Trust Preferred
Securities, have been allocated based on the ratio of gas utility assets
(including common assets attributed to the gas utility segment) to total
Consumers' assets. Management believes these measurements are reasonable. For
information regarding the long-term debt
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and capital stock of CMS Energy and Consumers, see Notes 5 and Note 6,
respectively, to the Consolidated Financial Statements of CMS Energy included
and incorporated by reference herein.
5: COMMITMENTS AND CONTINGENCIES
CAPITAL EXPENDITURES: Consumers Gas Group estimates capital expenditures,
including new lease commitments, of $123 million for 1999, $125 million for
2000, and $120 million for 2001. These estimates include an attributed portion
of Consumers' anticipated capital expenditures for common plant and equipment.
For further information regarding commitments and contingencies directly
affecting Consumers Gas Group (including those involving former manufactured gas
plant sites), see the Gas Environmental Matters and Other discussions in CMS
Energy's Note 3 included and incorporated by reference herein.
6: INCOME TAXES
Consumers Gas Group is included in the consolidated federal income tax return
filed by CMS Energy (see Note 9 to the Consolidated Financial Statements of CMS
Energy). The financial statement provision and actual cash tax payments have
been reflected in Consumers Gas Group's financial statements in accordance with
CMS Energy's tax allocation policy. The financial statement amounts reflect
management's estimate of the separate taxable income of the segment, the effect
of deferred tax accounting for temporary differences that arise and the
amortization of investment tax credits (ITC) over the life of the related
property included within the Consumers Gas Group. Tax settlements at Consumers
Gas Group are consistent with settlements of CMS Energy's consolidated tax
returns and are generally settled in the year, or in the year following the year
in which such amounts are accrued. The significant components of income tax
expense (benefit) for Consumers Gas Group consisted of:
In Millions
- -----------------------------------------------------------------------------
Years Ended December 31 1998 1997 1996
- -----------------------------------------------------------------------------
Current federal income $25 $40 $33
Deferred income taxes 16 7 14
Deferred ITC, net - (2) (1)
-------------------------------
$41 $45 $46
===============================
Operating $37 $46 $50
Other 4 (1) (4)
-------------------------------
$41 $45 $46
============================================================================
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The principal components of deferred tax assets (liabilities) recognized in the
balance sheet for Consumers Gas Group are as follows:
In Millions
- ----------------------------------------------------------------------------------------------------------
December 31 1998 1997
- ----------------------------------------------------------------------------------------------------------
Property $ (62) $ (66)
Postretirement benefits (Note 9) (50) (53)
Employee benefit obligations (includes postretirement
benefits of $49 and $53) (Note 9) 61 66
Regulatory liability for income taxes 66 60
Other (3) 5
-------------------------
$ 12 $ 12
=========================
Gross deferred tax liabilities $ (222) $ (217)
Gross deferred tax assets 234 229
-------------------------
$ 12 $ 12
==========================================================================================================
The actual income tax expense for Consumers Gas Group differs from the amount
computed by applying the statutory federal tax rate to income before income
taxes as follows:
In Millions
- --------------------------------------------------------------------
Years Ended December 31 1998 1997 1996
- --------------------------------------------------------------------
Net income before preferred dividends $ 56 $ 65 $ 65
Income tax expense 41 45 46
-----------------------
97 110 111
Statutory federal income tax rate x 35% x 35% x 35%
-----------------------
Expected income tax expense 34 39 39
Increase (decrease) in taxes from:
Differences in book and tax depreciation
not previously deferred 8 8 9
ITC amortization (1) (2) (2)
-----------------------
Actual income tax expense $ 41 $ 45 $ 46
====================================================================
7: FINANCIAL INSTRUMENTS
The carrying amount of Consumers Gas Group's long-term debt was $454 million and
$333 million and the fair value was $457 million and $335 million as of December
31, 1998 and 1997, respectively. For additional information regarding financial
instruments, see Note 10 to the Consolidated Financial Statements of CMS Energy
included and incorporated by reference herein.
8: EXECUTIVE INCENTIVE COMPENSATION
For information regarding CMS Energy's Performance Incentive Stock Plan,
restricted shares of Common Stock, stock options and stock appreciation rights,
see Note 11 to the Consolidated Financial Statements of CMS Energy included and
incorporated by reference herein. This plan allows for awards of Class G Common
Stock and has established criteria for certain plan awards.
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9: RETIREMENT BENEFITS
POSTRETIREMENT BENEFIT PLANS OTHER THAN PENSIONS: Consumers Gas Group's
attributed portion of CMS Energy's net periodic cost for health and life
insurance benefits totaled $11 million, $12 million and $15 million in 1998,
1997 and 1996, respectively. These allocations were based on the ratio of
salaries and wages related to Consumers' gas operations to Consumers' total
salaries and wages. Management believes these allocations are reasonable.
Consumers Gas Group's attributed portion of CMS Energy's total recorded
liability for postretirement benefit plans is estimated to be $141 million and
$153 million at December 31, 1998 and 1997, respectively. These amounts were
allocated based on policies Consumers has historically used in proceedings
conducted before the Michigan Public Service Commission. For further information
regarding CMS Energy's postretirement benefit plans other than pensions, see
Note 12 to the Consolidated Financial Statements of CMS Energy included and
incorporated by reference herein.
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN: The attributed Supplemental Executive
Retirement Plan (SERP) trust assets of Consumers Gas Group were $8 million at
December 31, 1998 and $8 million at December 31, 1997 and were classified as
other noncurrent assets. Consumers Gas Group's estimated portion of CMS Energy's
recorded liability for the SERP totaled $5 million at December 31, 1998 and $4
million at December 31, 1997. These allocations were based on a ratio of
salaries and wages related to Consumers' gas operations to Consumers' total
salaries and wages. Management believes these allocations are reasonable. For
further information, see Note 12 to the Consolidated Financial Statements of CMS
Energy included and incorporated by reference herein.
DEFINED BENEFIT PENSION PLAN: A trusteed, noncontributory, defined benefit
pension plan (Pension Plan) covers substantially all employees. Consumers Gas
Group's attributed portion of CMS Energy's net periodic pension cost totaled $3
million in 1998 and $4 million in 1997 and 1996. These allocations were based on
the ratio of salaries and wages related to Consumers' gas operations to
Consumers' total salaries and wages. Management believes these allocations are
reasonable.
Consumers Gas Group's attributed portion of CMS Energy's total recorded
liability for the Pension Plan totaled $20 million at December 31, 1998 and $17
million at December 31, 1997 and was allocated to Consumers Gas Group based on
the ratio of salaries and wages related to Consumers' gas operations to
Consumers' total salaries and wages. Management believes these allocations are
reasonable. For further information, see Note 12 to the Consolidated Financial
Statements of CMS Energy included and incorporated by reference herein.
DEFINED CONTRIBUTION PLAN: Consumers provides a defined contribution 401(k) plan
to all U.S. employees of CMS Energy and its subsidiaries which are at least 80
percent owned and have adopted the plan. Consumers' contributions to the plan
are invested in CMS Energy Common Stock. For further information, see Note 12 to
the Consolidated Financial Statements of CMS Energy included and incorporated by
reference herein.
10: LEASES
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CMS Energy and its subsidiaries lease various assets, including vehicles,
aircraft, construction equipment, computer equipment and buildings. Consumers
Gas Group's attributed portion of CMS Energy's minimum rental commitments under
noncancelable leases at December 31, 1998, were:
In Millions
- --------------------------------------------------------------------------------
Capital Leases
- --------------------------------------------------------------------------------
1999 $ 7
2000 6
2001 6
2002 5
2003 4
2004 and thereafter 3
---
Total minimum lease payments 31
Less imputed interest 13
---
Present value of net minimum lease payments 18
Less current portion 4
---
Noncurrent portion $14
============================================================================
Consumers recovers lease charges from customers and accordingly charges payments
for its capital and operating leases to operating expense. Operating lease
charges for Consumers Gas Group in 1998 were $1 million, and there were no
operating lease charges in 1997 and 1996. Capital lease expenses for Consumers
Gas Group for the years ended December 31, 1998, 1997 and 1996 were $7 million,
$6 million and $6 million, respectively.
Consumers Gas Group's minimum rental commitments and lease expenses are
generally allocated based on the specific use of the leased item. Common leases
are allocated to Consumers Gas Group through functional use surveys, which
management believes to be reasonable.
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11: EFFECTS OF THE RATEMAKING PROCESS
The following regulatory assets (liabilities), which include both current and
noncurrent amounts, are reflected in Consumers Gas Group's Balance Sheets. These
assets represent probable future revenue to Consumers associated with certain
incurred costs as these costs are recovered through the ratemaking process.
Virtually all of these costs are being recovered through current rates.
In Millions
- -------------------------------------------------------------------------------
December 31 1998 1997
- -------------------------------------------------------------------------------
Postretirement benefits (Note 9) $ 140 $ 150
Manufactured gas plant sites 48 47
Other 5 3
------------------------
Total regulatory assets $ 193 $ 200
===============================================================================
Regulatory liabilities for income taxes $(189) $(173)
===============================================================================
12: SUPPLEMENTAL CASH FLOW INFORMATION
For purposes of the Statement of Cash Flows, all highly liquid investments with
an original maturity of three months or less are considered cash equivalents.
Consumers Gas Group's other cash flow activities and noncash investing and
financing activities were:
In Millions
- --------------------------------------------------------------------------------
Years Ended December 31 1998 1997 1996
- --------------------------------------------------------------------------------
CASH TRANSACTIONS
Interest paid (net of amounts capitalized) $38 $42 $39
Income taxes paid (net of refunds) 38 40 33
NONCASH TRANSACTIONS
Assets placed under capital lease $ 5 $ 3 $ 1
================================================================================
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Changes in other assets and liabilities as shown on the Statements of Cash Flows
at December 31 are described below:
In Millions
- ------------------------------------------------------------------------------
Years Ended December 31 1998 1997 1996
- ------------------------------------------------------------------------------
Sale of receivables, net $ (31) $ 1 $ -
Accounts receivable 17 18 7
Accrued revenue (9) 25 (5)
Inventories (21) (10) -
Accounts payable (1) 9 6
Accrued refunds (1) 3 (13)
Other current assets and liabilities, net 22 (9) (5)
Noncurrent deferred amounts, net (15) 25 (14)
------------------------------
$ (39) $ 62 $(24)
==============================================================================
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ARTHUR ANDERSEN LLP
Report of Independent Public Accountants
To CMS Energy Corporation:
We have audited the accompanying balance sheets of CONSUMERS GAS GROUP
(representing a business unit of Consumers Energy Company ("Consumers") and its
wholly-owned subsidiary, Michigan Gas Storage Company) as of December 31, 1998
and 1997, and the related statements of income, common stockholders' equity, and
cash flows for each of the three years in the period ended December 31, 1998.
These financial statements are the responsibility of the management of CMS
Energy Corporation, the parent of Consumers. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Consumers Gas Group as of
December 31, 1998 and 1997, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1998 in conformity
with generally accepted accounting principles.
As discussed in Note 2 to the financial statements, effective January 1, 1998,
Consumers Energy Company changed its method of accounting for property taxes.
Arthur Andersen LLP
Detroit, Michigan,
January 26, 1999.
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QUARTERLY FINANCIAL AND COMMON STOCK INFORMATION CONSUMERS GAS GROUP
In Millions, Except Per Share Amounts
1998 (Unaudited) 1997 (Unaudited)
Quarters Ended March 31 June 30 Sept. 30 Dec. 31 March 31 June 30 Sept. 30 Dec. 31
- -----------------------------------------------------------------------------------------------------
Operating revenue $ 429 $ 170 $ 117 $ 335 $ 498 $ 220 $ 110 $ 376
Pretax operating income
(loss) $ 54 $ 21 $ 6 $ 45 $ 78 $ 23 $ (1) $ 53
Net income (loss) $ 36 $ 4 $ (5) $ 17 $ 39 $ 5 $ (7) $ 23
Basic and diluted earnings
(loss) per average
common share (a) $1.09 $ .12 $(.16) $ .52 $1.18 $ .16 $(.21) $ .70
Dividends declared per
common share $ .31 $ .31 $.325 $.325 $.295 $.295 $ .31 $ .31
Common stock prices (b)
High $26-5/8 $26-7/8 $25-1/4 $26-1/2 $19-7/8 $19-7/8 $22 $27-1/8
Low $22-1/4 $23-1/4 $21-3/8 $23-1/8 $17-7/8 $17-5/8 $19 $20-5/8
- -----------------------------------------------------------------------------------------------------
(a) The sum of the quarters may not equal the annual earnings per share due to
changes in shares outstanding.
(b) Based on New York Stock Exchange - Composite transactions.
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