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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 MARCH 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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)
5400 Westheimer Court, P.O. Box 4967, Houston, Texas 77210-4967
(713)627-5400
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
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
April 30, 1999:
CMS ENERGY CORPORATION:
CMS Energy Common Stock, $.01 par value 108,724,689
CMS Energy Class G Common Stock, no par value 8,570,285
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 SECURITIES AND EXCHANGE COMMISSION
FOR THE QUARTER ENDED MARCH 31, 1999
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
Glossary................................................................. 3
PART I:
CMS Energy Corporation
Management's Discussion and Analysis................................ 6
Consolidated Statements of Income................................... 21
Consolidated Statements of Cash Flows............................... 23
Consolidated Balance Sheets......................................... 25
Consolidated Statements of Common Stockholders' Equity.............. 27
Condensed Notes to Consolidated Financial Statements................ 28
Report of Independent Public Accountants............................ 44
Consumers Energy Company
Management's Discussion and Analysis................................ 46
Consolidated Statements of Income................................... 56
Consolidated Statements of Cash Flows............................... 57
Consolidated Balance Sheets......................................... 59
Consolidated Statements of Common Stockholder's Equity.............. 61
Condensed Notes to Consolidated Financial Statements................ 62
Report of Independent Public Accountants............................ 71
Panhandle Eastern Pipe Line Company
Management's Discussion and Analysis................................ 73
Consolidated Statements of Income................................... 79
Consolidated Statements of Cash Flows............................... 80
Consolidated Balance Sheets......................................... 81
Consolidated Statements of Common Stockholder's Equity.............. 83
Condensed Notes to Consolidated Financial Statements................ 84
Report of Independent Public Accountants............................ 89
Quantitative and Qualitative Disclosures about Market Risk............... 90
PART II:
Item 1 Legal Proceedings ......................................... 90
Item 6 Exhibits and Reports on Form 8-K .......................... 91
Signatures ............................................................. 92
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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
Anadarko.................... Anadarko Petroleum Corporation, a non-affiliated company
Articles.................... Articles of Incorporation
Attorney General............ Michigan Attorney General
Aux Sable................... Aux Sable Liquids Products, L.P., a non-affiliated company
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
Class G Common Stock........ One of two classes of common stock of CMS Energy, no par
value, which reflects the separate performance of the Consumers
Gas Group
Clean Air Act............... Federal Clean Air Act, as amended
CMS Energy.................. CMS Energy Corporation, the parent of Consumers and
Enterprises
CMS Energy Common Stock..... One of two classes of common stock of CMS Energy, par value
$.01 per share
CMS Gas Transmission........ CMS Gas Transmission and Storage Company, a subsidiary of
Enterprises
CMS Generation.............. CMS Generation Co., 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................ CMS Energy Common Stock and Class G Common Stock
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
Detroit Edison.............. The Detroit Edison Company, a non-affiliated company
Dow......................... The Dow Chemical Company, a non-affiliated company
Duke Energy................. Duke Energy Corporation, a non-affiliated company
Enterprises................. CMS Enterprises Company, a subsidiary of CMS Energy
EPA......................... Environmental Protection Agency
EPS......................... Earning per share
EITF........................ Emerging Issues Task Force
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FASB........................ Financial Accounting Standards Board
FERC........................ Federal Energy Regulatory Commission
FMLP........................ First Midland Limited Partnership, a partnership which operates a
marketing center for natural gas
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 and
$400 million Series E
IT.......................... Information technology
Jorf Lasfar................. A 1,356 MW (660 MW in operation and 696 MW under
construction) coal-fueled power plant in Morocco, jointly owned
by CMS Generation and ABB Energy Venture, Inc.
kWh......................... Kilowatt-hour
Loy Yang.................... A 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
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
Mdth/d...................... Million dekatherms per day
MichCon..................... Michigan Consolidated Gas Company, a non-affiliated company
Michigan Gas Storage........ Michigan Gas Storage Company, a subsidiary of Consumers
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
NOI......................... Notice of inquiry
NOPR........................ Notice of proposed rulemaking
Northern Border............. Northern Border Pipeline Company
NRC......................... Nuclear Regulatory Commission
Order 888 and Order 889..... FERC final rules issued on April 24, 1996
Outstanding Shares.......... Outstanding shares of Class G Common Stock
Palisades................... Palisades nuclear power plant, owned by Consumers
PanEnergy................... PanEnergy Corporation, a non-affiliated company
Pan Gas Storage............. Pan Gas Storage Company, a subsidiary of Panhandle Eastern Pipe
Line Company
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Panhandle................................ Panhandle Eastern Pipe Line Company, a subsidiary of CMS
Panhandle Holding, including Panhandle Eastern Pipe Line
Company subsidiaries Trunkline, Pan Gas Storage, Panhandle
Storage, and Trunkline LNG
Panhandle Storage........................ Panhandle Storage Company, a subsidiary of Panhandle Eastern
Pipe Line Company
PCBs..................................... Poly chlorinated biphenyls
PECO..................................... PECO Energy Company, a non-affiliated company
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
SEC...................................... Securities and Exchange Commission
Senior Credit Facilities................. $725 million senior credit facilities consisting of a $600 million
three-year revolving credit facility and a five-year $125 million
term loan facility
SFAS..................................... Statement of Financial Accounting Standards
SOP...................................... Statement of position
Superfund................................ Comprehensive Environmental Response, Compensation and
Liability Act
Transition 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, regulatory
assets, and 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............... Undivided beneficial interest in the assets of statutory business
trusts, these 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
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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 the Lower Peninsula of
Michigan and is the principal subsidiary of CMS Energy. Enterprises, through
subsidiaries, is engaged in several domestic and international energy-related
businesses including: natural gas transmission, interstate transportation,
storage and processing; independent power production; oil and gas exploration
and production; energy marketing, services and trading; and international energy
distribution. On March 29, 1999, CMS Energy completed the acquisition of
Panhandle from Duke Energy, as further discussed in the Capital Resources and
Liquidity section of this MD&A and Note 1. Panhandle is primarily engaged in the
interstate transportation, storage and processing of natural gas.
The MD&A of this Form 10-Q should be read along with the MD&A and other parts of
CMS Energy's 1998 Form 10-K. This MD&A also 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
Statements and Notes. This report contains forward-looking statements, as
defined by the Private Securities Litigation Reform Act of 1995. While
forward-looking statements are based on assumptions and such assumptions are
believed to be reasonable and are made in good faith, CMS Energy cautions that
assumed results almost always vary from actual results and differences between
assumed and actual results can be material. The type of assumptions that could
materially affect the actual results are discussed in the Forward-Looking
Statements section in this MD&A. More specific risk factors are contained in
various public filings made by CMS Energy with the SEC. This report also
describes material contingencies in the Notes to Consolidated Financial
Statements and the readers are encouraged to read such Notes.
RESULTS OF OPERATIONS
CMS ENERGY CONSOLIDATED EARNINGS
In Millions, Except Per Share Amounts
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March 31 1999 1998(a) Change
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THREE MONTHS ENDED
Consolidated Net Income $ 98 $ 88 $ 10
Net Income Attributable to Common Stocks:
CMS Energy 88 79 9
Class G 10 9 1
Earnings Per Average Common Share:
CMS Energy
Basic .82 .79 .03
Diluted .80 .77 .03
Class G
Basic and Diluted 1.19 1.09 .10
TWELVE MONTHS ENDED
Consolidated Net Income $295 $254 $ 41
Net Income Attributable to Common Stocks:
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CMS Energy 281 239 42
Class G 14 15 (1)
Earnings Per Average Common Share:
CMS Energy
Basic 2.69 2.45 .24
Diluted 2.66 2.44 .22
Class G
Basic and Diluted 1.68 1.76 (.08)
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(a) Includes the cumulative effect of an accounting change for property taxes
which increased net income by $43 million or $.40 per share - basic and diluted
- - for CMS Energy Common Stock and $12 million or $.36 per share - basic and
diluted - for Class G Common Stock.
The increase in consolidated net income for the first quarter of 1999 over the
comparable period in 1998 resulted from increased earnings from the electric and
gas utilities; independent power production; and marketing, services and trading
businesses, and the recognition in 1998 of a $37 million loss ($24 million
after-tax) for the underrecovery of power costs under the PPA. Partially
offsetting these increases were lower earnings from the natural gas
transmission, storage, and processing business, which had a $9 million gain from
an asset sale in 1998, lower earnings from the international energy distribution
business, the 1998 cumulative effect of the accounting change for property
taxes, and higher interest expense.
The increase in consolidated net income for the twelve months ended March 31,
1999 over the comparable 1998 period reflects increased earnings from the
electric and gas utilities; independent power production; and marketing,
services and trading businesses. Partially offsetting these increases were lower
earnings from the natural gas transmission, storage and processing and
exploration and production businesses coupled with higher interest expense.
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:
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In Millions
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Three Months Twelve Months
Ended March 31 Ended March 31
Change Compared to Prior Year 1999 vs 1998 1999 vs 1998
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Electric Deliveries $ 8 $ 42
Power supply costs 5 24
Rate increases and other non-commodity revenue 2 2
Operations and maintenance 2 (11)
General taxes and depreciation (2) (10)
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Total change $ 15 $ 47
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ELECTRIC DELIVERIES: Total electric deliveries were 10 billion kwh for the three
months ended March 31, 1999, an increase of 4.0 percent resulting primarily from
higher electric deliveries to ultimate customers in the residential and
commercial sectors. Electric deliveries were 40.4 billion kwh for the twelve
months ended March 31, 1999, an increase of 5.1 percent which also reflects an
increase in electric deliveries to ultimate customers, primarily in the
residential and commercial sectors.
POWER COSTS:
In Millions
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March 31 1999 1998 Change
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Three months ended $ 279 $ 270 $ 9
Twelve months ended 1,183 1,128 55
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Power costs increased for the three months period ended March 31, 1999 compared
to the same 1998 period as a result of increased sales. Power costs also
increased for the twelve months ended March 31, 1999 compared to the same period
in 1998 for the same reason. Both internal generation and power purchases from
outside sources increased during this period to meet the increased demand.
UNCERTAINTIES: CMS Energy's financial position may be affected by a number of
trends or uncertainties that have, or CMS Energy reasonably expects could have,
a material impact on net sales, revenues, or income from continuing electric
operations. Such uncertainties include: 1) capital expenditures for compliance
with the Clean Air Act; 2)environmental liabilities arising from compliance with
various federal, state and local environmental laws and regulations, including
potential liability or expenses relating to the Michigan Natural Resources and
Environmental Protection Act and Superfund; 3) cost recovery relating to the MCV
Facility; 4) electric industry restructuring; 5) implementation of a frozen PSCR
and initiatives to be undertaken to reduce exposure to high energy prices; 6)
underrecoveries associated with power purchases from the MCV Partnership; and 7)
decommissioning issues and ongoing issues relating to the storage of spent fuel
and the operating life of Palisades. For detailed information about these trends
or uncertainties, see Note 2, Uncertainties, incorporated by reference herein.
CONSUMERS GAS GROUP RESULTS OF OPERATIONS
GAS PRETAX OPERATING INCOME:
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9
In Millions
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Three Months Twelve Months
Ended March 31 Ended March 31
Change Compared to Prior Year 1999 vs 1998 1999 vs 1998
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Sales $ 19 $ (4)
Reduced gas cost per mcf 14 33
Gas wholesale and retail services activities 1 4
Operation and maintenance -- 7
General taxes, depreciation and other (10) (20)
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Total increase(decrease) in pretax operating income $ 24 $ 20
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GAS DELIVERIES: System deliveries for the three month period ended March 31,
1999, including miscellaneous transportation, were 166 bcf compared to 146 bcf
for the same 1998 period. This increase of 20 bcf or 14 percent was primarily
due to colder temperatures during the 1999 heating season. System deliveries for
the twelve month period ended March 31, 1999, including miscellaneous
transportation, were 380 bcf compared to 399 bcf for the same 1998 period. This
decrease of 19 bcf or 5 percent was primarily the result of warmer temperatures
for the most recent twelve month period.
COST OF GAS SOLD:
In Millions
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March 31 1999 1998 Change
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Three months ended $306 $264 $42
Twelve months ended 606 645 (39)
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The cost increases for the three month period ended March 31, 1999 was the
result of increased gas deliveries due to colder temperatures during the 1999
winter heating season. The cost decrease for the twelve month period ended March
31, 1999 was the result of decreased sales due to warmer overall temperatures.
UNCERTAINTIES: CMS Energy's financial position may be affected by a number of
trends or uncertainties that have, or CMS Energy reasonably expects could have,
a material impact on net sales or revenues or income from continuing gas utility
operations. Such uncertainties include: 1) potential environmental costs at a
number of sites, including sites formerly housing manufactured gas plant
facilities, 2) a statewide experimental gas restructuring program, and 3)
implementation of a frozen GCR and initiatives undertaken to protect against gas
price increases. For detailed information about these uncertainties see Note 2,
Uncertainties, incorporated by reference herein.
INDEPENDENT POWER PRODUCTION RESULTS OF OPERATIONS
PRETAX OPERATING INCOME: Pretax operating income for the three months ended
March 31, 1999 increased $12 million (75 percent) from the comparable period in
1998. This increase primarily reflects increased operating income from
international plant earnings and fees, increased electricity sales by the MCV
Facility, and a $4 million operating bonus earned in connection with Jorf
Lasfar, partially offset by higher net operating expenses and a cash payment in
settlement of a legal proceeding. Pretax operating income for the twelve months
ended March 31, 1999 increased $54 million (53 percent) from the comparable
period in 1998, primarily reflecting increased international and domestic
earnings and operating fees, gains
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on the sale of biomass plant assets and biomass power purchase agreements, and
higher electricity sales by the MCV Facility, partially offset by higher
operating expenses, the settlement of a legal proceeding obligation and a
scheduled reduction of the industry expertise service fee income earned in
connection with Loy Yang.
OIL AND GAS EXPLORATION AND PRODUCTION RESULTS OF OPERATIONS
PRETAX OPERATING INCOME: Pretax operating income for the three months ended
March 31, 1999 was unchanged from the comparable period in 1998 as a result of
higher oil prices and lower exploration expenses, offset by lower gas prices and
increased depreciation, depletion and amortization expenses. Pretax operating
income for the twelve months ended March 31, 1999 decreased $22 million (79
percent) from the comparable period in 1998 as a result of lower oil and gas
prices and a gain in the prior period from the sale of CMS Oil and Gas' entire
interest in oil and gas properties in Yemen, partially offset by lower operating
and exploration expenses.
NATURAL GAS TRANSMISSION, STORAGE AND PROCESSING RESULTS OF OPERATIONS
PRETAX OPERATING INCOME: Pretax operating income for the three months ended
March 31, 1999 decreased $10 million (77 percent) from the comparable period in
1998. The decrease reflects a gain in the prior period on the sale of Petal Gas
Storage Company and lower earnings from domestic operations primarily due to
depressed natural gas liquids prices, partially offset by increased earnings
from international operations and earnings from Panhandle, which was acquired on
March 29, 1999. Pretax operating income for the twelve months ended March 31,
1999 decreased $8 million (26 percent) from the comparable period in 1998. The
decrease primarily reflects a gain in the prior period on the sale of Petal Gas
Storage Company and decreased domestic and international earnings, partially
offset by a gain on the sale of Australian gas reserves, earnings attributable
to Panhandle and decreased operating expenses.
UNCERTAINTIES: CMS Energy's financial position may be affected by a number of
trends or uncertainties that have, or CMS Energy reasonably expects could have,
a material impact on net sales or revenues or income from continuing gas
operations. For detailed information about Panhandle's regulatory uncertainties
see Note 2, Uncertainties - Panhandle Regulatory Matters, incorporated by
reference herein.
MARKETING, SERVICES AND TRADING RESULTS OF OPERATIONS
PRETAX OPERATING INCOME: Pretax operating income for the three months ended
March 31, 1999 increased $6 million from the comparable period in 1998. The
increase is the result of improved commodity margins and the effect of an
accounting change that recognizes currently the fair market value of trading
contracts. Pretax operating income for the twelve months ended March 31, 1999
increased $17 million from the comparable period in 1998. The increase is a
result of improved margins on electric and gas sales, increased electric volumes
and the market value of trading contracts, partially offset by increased
expenses related to growth objectives. Gas managed and marketed for end users
totaled 99 bcf and 91 bcf for the three months ended March 31, 1999 and 1998,
respectively.
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
prices. Management employs established policies and procedures to manage its
risks associated with these market fluctuations including the use of various
derivative instruments such as futures, swaps, options and forward contracts.
Management believes that
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any losses incurred on derivative instruments used to
hedge risk would be offset by an opposite movement of the value of the hedged
item.
In accordance with SEC disclosure requirements, 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: Management uses commodity futures contracts, options and
swaps (which require a net cash payment for the difference between a fixed and
variable price) to manage commodity price risk. The prices of energy commodities
fluctuate due to changes in the supply of and demand for those commodities. To
reduce price risk caused by these market fluctuations, CMS Energy hedges certain
inventory and purchases and sales contracts. A hypothetical 10 percent adverse
shift in quoted commodity prices in the near term would not have a material
impact on CMS Energy's consolidated financial position, results of operations or
cash flows as of March 31, 1999. The analysis assumes that the maximum exposure
associated with purchased options is limited to premiums paid. The analysis also
does not quantify short-term exposure to hypothetically adverse price
fluctuations in inventories.
INTEREST RATE RISK: Management uses a combination of fixed-rate and
variable-rate debt to reduce interest rate exposure. Interest rate swaps and
rate locks may be used to adjust exposure when deemed appropriate, based upon
market conditions. These strategies attempt to provide and maintain the lowest
cost of capital. The carrying amount of long-term debt was $7.3 billion at March
31, 1999 with a fair value of $7.3 billion. The fair value of CMS Energy's
financial derivative instruments at March 31, 1999, with a notional amount of
$658 million, was $10 million, representing the amount CMS Energy would pay upon
settlement. A hypothetical 10 percent adverse shift in interest rates in the
near term would not have a material effect on CMS Energy's consolidated
financial position, results of operations or cash flows as of March 31, 1999.
CURRENCY EXCHANGE RISK: Management uses forward exchange and option contracts to
hedge certain net investments in foreign operations. A hypothetical 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 March
31, 1999, but would result in a net cash settlement of approximately $54
million. The estimated fair value of the foreign exchange and option contracts
at March 31, 1999 was $10 million, representing the amount CMS Energy would
receive upon settlement.
EQUITY SECURITY PRICE RISK: CMS Energy and its subsidiaries have equity
investments 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 March 31, 1999.
For a discussion of accounting policies related to derivative transactions, see
Note 5.
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CAPITAL RESOURCES AND LIQUIDITY
CASH POSITION, INVESTING AND FINANCING
CMS Energy's primary ongoing source of operating cash is dividends and
distributions from subsidiaries. During the first quarter of 1999, Consumers
paid $80 million in common dividends and Enterprises paid $19 million in common
dividends to CMS Energy. CMS Energy's consolidated operating 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 and sale of electricity; and
the sale of oil. Consolidated cash from operations totaled $321 million and $243
million for the first quarter of 1999 and 1998, respectively. The $78 million
increase resulted from increased earnings and higher depreciation, coupled with
a $29 million net increase due to the absence of the 1998 accounting change for
property taxes and an increased provision for underrecoveries under the PPA. CMS
Energy uses its operating cash primarily to 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: CMS Energy's consolidated net cash used in investing
activities totaled $2.235 billion and $242 million for the first quarter of 1999
and 1998, respectively. The increase of $1.993 billion primarily reflects the
acquisition of Panhandle in March 1999. CMS Energy's 1999 expenditures for its
utility and international businesses were $95 million and $2.2 billion,
respectively, compared to $81 million and $162 million, respectively, during
1998.
FINANCING ACTIVITIES: CMS Energy's net cash provided by financing activities
totaled $1.917 billion and $2 million for the first quarter of 1999 and 1998,
respectively. The increase of $1.915 billion in net cash provided by financing
activities resulted from an increase of $2.281 billion in the issuance of new
securities and a decrease in the retirement of bonds and other long-term debt
($357 million), partially offset by an increase in the repayment of bank loans
($667 million).
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In Millions
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Distribution/ Principal
Month Issued Maturity Interest Rate Amount Use of Proceeds
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CMS ENERGY
GTNs
Series E (1) (1) 6.9%(1) $ 45 General corporate purposes
Senior Notes January 2009 7.5% $ 480 Repay debt and general
corporate purposes
Senior Notes February 2004 6.75% $ 300 Repay debt and general
corporate purposes
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Subtotal $ 825
PANHANDLE
Senior Notes (2) March 2004 6.125% $ 300 To fund acquisition of
Panhandle
Senior Notes (2) March 2009 6.5% $ 200 To fund acquisition of
Panhandle
Senior Notes (2) March 2029 7.0% $ 300 To fund acquisition of
Panhandle
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Subtotal $ 800
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Total $1,625
(1) GTNs are issued from time to time with varying maturity dates. The rate
shown herein is a weighted average interest rate.
(2) These notes were issued by CMS Panhandle Holding on March 29, 1999, with an
irrevocable and unconditional guarantee by Panhandle. CMS Energy intends to
merge CMS Panhandle Holding with Panhandle in the second quarter of 1999,
at which point the notes will become senior unsecured obligations of
Panhandle.
In the first quarter of 1999, CMS Energy paid $36 million in cash dividends to
holders of CMS Energy Common Stock and $3 million in cash dividends to holders
of Class G Common Stock. In April 1999, the Board of Directors declared a
quarterly dividend of $.33 per share on CMS Energy Common Stock and $.325 per
share on Class G Common Stock, payable in May 1999.
OTHER INVESTING AND FINANCING MATTERS: At March 31, 1999, the book value per
share of CMS Energy Common Stock and Class G Common Stock was $20.22 and $11.27,
respectively.
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At March 31, 1999, CMS Energy had an aggregate $1.9 billion in securities
registered for future issuance and sale. In April 1999, CMS Energy filed a shelf
registration statement for the issuance of $375 million of senior and
subordinated debt securities.
CMS Energy also has Senior Credit Facilities, unsecured lines of credit and
letters of credit as sources of funds needed to fulfill, in whole or in part,
material commitments for capital expenditures. For detailed information, see
Note 3, incorporated by reference herein.
CMS Energy's Senior Credit Facilities consist of a $600 million three-year
revolving credit facility and a five-year $125 million term loan facility.
Additionally, CMS Energy has unsecured lines of credit and letters of credit in
an aggregate amount of $361 million. These credit facilities are available to
finance working capital requirements and to pay for capital expenditures between
long-term financings. At March 31, 1999, the total amount utilized under the
Senior Credit Facilities was $687 million, including $47 million of contingent
obligations, and under the unsecured lines of credit and letters of credit was
$94 million. Of the $687 million outstanding at March 31, 1999, approximately
$500 million was utilized to fund the acquisition of Panhandle as discussed
below.
Consumers is authorized by FERC to issue securities and guarantees. Consumers
has credit facilities, lines of credit and a trade receivable sale program in
place as anticipated sources of funds needed to fulfill, in whole or in part,
material commitments for capital expenditures. On April 1, 1999, Consumers
redeemed all of its eight million outstanding shares of the $2.08 preferred
stock at $25.00 per share. For detailed information about these sources of
funds, see Note 3.
On March 29, 1999, CMS Energy acquired Panhandle from Duke Energy for a cash
payment of $1.9 billion and existing Panhandle debt of $300 million. The
acquisition of Panhandle initially was financed in part with bridge loan and
revolving credit facilities negotiated with domestic banks and in part with
approximately $800 million of debt securities issued by CMS Panhandle Holding.
The $600 million CMS Energy bridge loan has a weighted-average interest rate of
6.02 percent and a term of six months. CMS Energy expects to finance permanently
the acquisition with existing arrangements as well as the sale of approximately
$600 million of CMS Energy Common Stock and/or other CMS Energy securities.
CAPITAL EXPENDITURES
CMS Energy estimates that capital expenditures, including new lease commitments
and investments in partnerships and unconsolidated subsidiaries, will total $6.4
billion over the next three years. These estimates are prepared for planning
purposes and are subject to revision. This total includes approximately $2.2
billion for the acquisition of Panhandle as described above. A substantial
portion of the remaining capital expenditures is expected to be satisfied by
cash from operations. CMS Energy will continue to also evaluate capital markets
in 1999 as a potential source of financing its subsidiaries' investing
activities. CMS Energy estimates capital expenditures by business segment over
the next three years as follows:
In Millions
- -------------------------------------------------------------------------------------------------------------------
Years Ended December 31 1999 2000 2001
- -------------------------------------------------------------------------------------------------------------------
Consumers electric operations (a) (b) $ 382 $ 392 $ 395
Consumers gas operations (a) 123 123 120
Independent power production 395 400 171
Oil and gas exploration and production 135 152 158
Natural gas transmission and storage 2,435(c) 299 198
International energy distribution 150 197 151
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15
Marketing, services and trading 5 12 12
Other 10 -- --
--------------------------------------------
$3,635 $1,575 $1,205
===================================================================================================================
(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 do not include preliminary 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.
(c) This amount includes approximately $2.2 billion for the acquisition of
Panhandle.
CMS Energy currently plans investments from 1999 to 2001: i) in oil and gas
exploration and production operations, primarily in North and South America,
offshore West Africa and North Africa; ii) in independent power production
operations to pursue acquisitions and development of electric generating plants
in the United States, Latin America, Asia, Australia, the Pacific Rim region,
North Africa and the Middle East; iii) to continue development of nonutility
natural gas storage, gathering and pipeline operations of CMS Gas Transmission
in North and South America, Australia and Africa; iv) to acquire, develop and
expand international energy distribution businesses; and v) to provide gas,
electric, oil and coal marketing, risk management and energy management services
throughout the United States and eventually worldwide.
OUTLOOK
As the deregulation and privatization of the energy industry takes place in the
United States and internationally, CMS Energy has positioned itself to be a
leading international diversified energy company acquiring, developing and
operating energy facilities and providing energy services in major world growth
markets. CMS Energy provides a complete range of international energy expertise
from energy production to consumption.
INTERNATIONAL OPERATIONS OUTLOOK
CMS Energy will continue to grow internationally by investing in multiple
projects in several countries as well as by developing synergistic projects
across its lines of business. CMS Energy believes these integrated projects will
create more opportunities and greater value than individual investments. Also,
CMS Energy will achieve this growth through strategic partnering where
appropriate.
CMS Energy seeks to minimize operational and financial risks when operating
internationally by working with local partners, utilizing multilateral financing
institutions, procuring political risk insurance and hedging foreign currency
exposure where appropriate.
CONSUMERS' ELECTRIC UTILITY OUTLOOK
GROWTH: Consumers expects average annual growth of 2.4 percent per year in
electric system deliveries over the next five years, absent the impact of
restructuring on the industry and its regulation in Michigan. Abnormal weather,
changing economic conditions, or the developing competitive market for
electricity may affect actual electric sales in future periods.
15
16
RESTRUCTURING: Consumers' retail electric business is affected by competition.
To meet its challenges, Consumers entered into multi-year contracts with some of
its largest industrial customers to serve certain facilities. The MPSC has
approved these contracts as part of its phased introduction to competition.
Certain customers have the option of terminating their contracts early.
FERC Orders 888 and 889, as amended, require utilities to provide direct access
to the interstate transmission grid for wholesale transactions. Consumers and
Detroit Edison disagree on the effect of the orders on the Michigan Electric
Power Coordination Center pool. Consumers proposes to maintain the benefits of
the pool through at least December 2000, while Detroit Edison contends that the
pool agreement should be terminated immediately. Among Consumers' alternatives
in the event of the pool being terminated would be joining an independent system
operator. FERC has indicated this preference for structuring the operations of
the electric transmission grid.
For material changes relating to the restructuring of the electric utility
industry, see Note 1, Corporate Structure and Basis of Presentation, "Utility
Regulation" and Note 2, Uncertainties," Consumers' Electric Utility Rate Matters
- - Electric Restructuring", incorporated by reference herein.
RATE MATTERS: In November 1997, ABATE filed a complaint with the MPSC alleging
that Consumers' earnings are in excess of its authorized rate of return and
seeking an immediate reduction in Consumers' electric rates. The MPSC staff
conducted an investigation and concluded in an April 1998 report that no formal
rate proceeding was warranted at that time. The MPSC has now set the complaint
for hearing, but the presiding ALJ has restricted the scope of the hearing so
that the most favorable relief available to ABATE would be an MPSC direction for
Consumers to file an electric rate case. Various procedural issues relating to
this complaint, including the ALJ's ruling on its scope, are currently on appeal
at the MPSC. Consumers is unable to predict the outcome of this matter.
CONSUMERS GAS GROUP OUTLOOK
GROWTH: Consumers currently anticipates gas deliveries, including gas customer
choice deliveries, excluding transportation to the MCV Facility and off-system
deliveries, to grow at an average annual rate of between one and two percent
over the next five years based primarily on a steadily growing customer base.
Actual gas deliveries in future periods may be affected by abnormal weather,
alternative energy prices, changes in competitive conditions, particularly as a
result of industry restructuring, and the level of natural gas consumption.
Consumers also offers a variety of energy-related services to its customers
focused upon appliance maintenance, home safety, commodity choice and assistance
to customers purchasing heating, ventilation and air conditioning equipment.
RESTRUCTURING: In December 1997, the MPSC approved Consumers' application to
implement a statewide three-year experimental gas transportation program,
eventually allowing 300,000 residential, commercial and industrial retail gas
sales customers to choose their gas supplier. For further information, regarding
restructuring of the Gas Business, see Note 2, Uncertainties, "Consumers Gas
Group Matters-Gas Restructuring," incorporated by reference herein.
PANHANDLE OUTLOOK
GROWTH: The market for transmission of natural gas to the Midwest is
increasingly competitive and may become more so in light of projects in progress
to increase Midwest transmission capacity for gas originating in Canada and the
Rocky Mountain region. As a result, there continues to be pressure on prices
charged by Panhandle and an increasing necessity to discount the prices charged
from the legal maximum. Panhandle continues to be selective in offering
discounts to maximize revenues from existing capacity and
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to advance projects that provide expanded services to meet the specific needs of
customers. Management is evaluating the continued applicability of SFAS 71,
particularly in light of the acquisition and the new cost basis of Panhandle
which will result from the pending merger of CMS Panhandle Holding with
Panhandle.
REGULATORY MATTERS: For detailed information about Panhandle's regulatory
uncertainties see Note 2, Uncertainties - Panhandle Regulatory Matters,
incorporated by reference herein.
OTHER MATTERS
NEW ACCOUNTING RULES
In 1998, the American Institute of Certified Public Accountants issued Statement
of Position 98-1, Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use, and Statement of Position 98-5, Reporting on the
Costs of Start-Up Activities. These statements became effective in 1999.
Application of these standards has not had a material effect on CMS Energy's
financial position, liquidity, or results of operations. Effective January 1,
1999, CMS Energy adopted Emerging Issues Task Force Issue 98-10, Accounting for
Energy Trading and Risk Management Activities, which requires mark-to-market
accounting for energy contracts entered into for trading purposes. Under
mark-to-market accounting, gains and losses resulting from changes in market
prices on contracts entered into for trading purposes are reflected in current
earnings. The after-tax mark-to-market adjustment resulting from the adoption of
EITF 98-10 had an immaterial effect on CMS Energy's consolidated financial
position, results of operations and cash flows as of March 31, 1999. For energy
contracts that are hedges of non-trading activities, CMS Energy will continue to
use accrual accounting until it adopts SFAS 133, Accounting for Derivative
Instruments and Hedging Activities, which will be effective January 1, 2000. CMS
Energy is currently studying SFAS 133 and has not yet quantified the impacts of
adoption on its financial statements and has not determined the timing of or
method of adoption.
YEAR 2000 COMPUTER MODIFICATIONS
CMS Energy uses software and related technologies throughout its domestic and
international businesses that the year 2000 date change could affect and, if
uncorrected, could cause CMS Energy to, among other things, delay issuance of
bills or reports, issue inaccurate bills, report inaccurate data, incur
generating plant outages, or create energy delivery uncertainties. In 1995, CMS
Energy established a Year 2000 Program to ensure the continued operation of its
businesses at the turn of the century. CMS Energy's efforts included dividing
the programs requiring modification between critical and noncritical programs. A
formal methodology was established to identify critical business functions and
risk scenarios, to correct problems identified, to develop test plans and
expected results, and to test the corrections made. CMS Energy's Year 2000
Program involves an aggressive, comprehensive four-phase approach, including
impact analysis, remediation, compliance review, and monitoring/contingency
planning.
The impact analysis phase includes the analysis, inventory, prioritization and
remediation plan development for all technology essential to core business
processes. The remediation phase involves testing and implementation of
remediated technology. A mainframe test environment was established in 1997 and
a test environment for network servers and stand-alone personal computers was
established in mid-1998. All essential corporate business systems have been, or
will be, tested in these test environments. The compliance review phase includes
the assembling of compliance documentation for each technology component as
remediation efforts are completed, and additional verification testing of
essential technology where necessary. The monitoring/contingency planning phase
includes compliance monitoring to ensure
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that year 2000 problems are not reintroduced into remediated technology, as well
as the development of contingency plans to address reasonably likely risk
scenarios.
On March 29, 1999, CMS Energy acquired Panhandle. As part of CMS Energy's
acquisition due diligence, CMS Energy evaluated Panhandle's year 2000 compliance
program, which had been initiated in 1996. Management believes Panhandle is
devoting the necessary resources to achieve year 2000 readiness in a timely
manner. The status of Panhandle's Year 2000 Program by phase as of March 31,
1999, with target dates for completion and current percentage complete, are
included within the data presented for natural gas transmission.
STATE OF READINESS: CMS Energy is managing traditional Information Technology
(IT), which consists of essential business systems such as payroll, billing and
purchasing; and infrastructure, including mainframe, wide area network, local
area networks, personal computers, radios and telephone systems. CMS Energy is
also managing process control computers and embedded systems contained in
buildings, equipment and energy supply and delivery systems.
Essential goods and services for CMS Energy are electric fuel supply, gas fuel
supply, independent electric power supplies, facilities, electronic commerce,
telecommunications network carriers, financial institutions, purchasing vendors,
and software and hardware technology vendors. CMS Energy is addressing the
preparedness of these businesses and their risk through readiness assessment
questionnaires.
The status of CMS Energy's Year 2000 Program by phase, with target dates for
completion and current percentage complete based upon software and hardware
inventory counts as of March 31, 1999, is as follows:
Monitoring/
Impact Compliance Contingency
Analysis Remediation Review Planning
- ---------------------------------------------------------------------------------------------------------------------------
(a) (b) (a) (b) (a) (b) (a) (b)
Electric utility 3/98 100% 6/99 93% 6/99 91% 6/99 75%
Gas utility 3/98 100% 6/99 91% 6/99 91% 6/99 75%
Independent power production 6/99 86% 9/99 78% 9/99 74% 9/99 10%
Oil and gas 6/99 97% 9/99 94% 9/99 84% 9/99 10%
Natural gas transmission 6/99 99% 9/99 98% 9/99 98% 9/99 10%
Marketing, services and trading 6/99 62% 9/99 61% 9/99 17% 9/99 10%
Essential goods and services 6/99 56% N/A N/A (c)
===========================================================================================================================
(a) Target date for completion.
(b) Current percentage complete.
(c) Contingency planning for essential goods and services is incorporated into
contingency planning for each segment presented.
COST OF REMEDIATION: CMS Energy expenses spending for software modifications as
incurred, and capitalizes and amortizes the cost for new software and equipment
over its useful life. The total estimated cost of the Year 2000 Program is
approximately $30 million. Costs incurred through March 31, 1999 were
approximately $20 million. CMS Energy's annual Year 2000 Program costs have
represented
18
19
approximately 2 percent to 10 percent of CMS Energy's annual IT budget through
1998 and are expected to represent approximately 25 percent of CMS Energy's
annual IT budget in 1999. Year 2000 compliance work is being funded primarily
from operations. To date, the commitment of CMS Energy resources to the year
2000 issue has not deferred any material IT projects which could have a material
adverse affect on CMS Energy's financial position, liquidity or results of
operations.
RISK ASSESSMENT: CMS Energy considers the most reasonably likely worst-case
scenarios to be: i) a lack of communications to dispatch crews to electric or
gas emergencies; ii) a lack of communications to generating units to balance
electrical load; iii) power shortages due to the lack of stability of the
electric grid; and iv) a failure of fuel suppliers to deliver fuel to generating
facilities. These scenarios could result in CMS Energy not being able to
generate or distribute enough energy to meet customer demand for a period of
time, which could result in lost sales and profits, as well as legal liability.
Year 2000 remediation and testing efforts are concentrating on these risk areas
and will continue through the end of 1999. Contingency plans will be revised and
executed to further mitigate the risks associated with these scenarios.
CONTINGENCY PLANS: Contingency planning efforts are currently underway for all
business systems and providers of essential goods and services. Extensive
contingency plans are already in place in many locations and are currently being
revised for reasonably likely worst-case scenarios related to year 2000 issues.
In many cases, Consumers already has arrangements with multiple vendors of
similar goods and services so that in the event that one cannot meet its
commitments, others may be able to. Current contingency plans provide for manual
dispatching of crews and manual coordination of electrical load balancing and
are being revised to provide for radio or satellite communications. Coordinated
contingency planning efforts are in progress with third parties to minimize risk
to electric generation, transmission and distribution systems.
EXPECTATIONS: CMS Energy does not expect that the cost of these modifications
will materially affect its financial position, liquidity, or results of
operations. There can be no guarantee, however, that these costs, plans or time
estimates will be achieved, and actual results could differ materially.
Because of the integrated nature of CMS Energy's business with other energy
companies, utilities, jointly owned facilities operated by other entities, and
business conducted with suppliers and large customers, CMS Energy may be
indirectly affected by year 2000 compliance complications.
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 U.S. dollar and each of the Australian dollar, Brazilian real and
Argentine peso. From January 1, 1999 through March 31, 1999, the change in the
foreign currency translation adjustment totaled $5 million, 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 has hedged its exposure to the Australian dollar, the Brazilian real
and the Argentine peso. CMS Energy uses forward exchange contracts and collared
options 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 $1.2 billion at March 31, 1999, which includes $716
million, $250 million and $220 million for Australian, Brazilian and Argentine
foreign exchange contracts, respectively. The estimated fair value of the
foreign exchange and option contracts at March 31, 1999 was $10 million,
representing the amount CMS Energy would receive upon settlement.
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FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements as defined by the Private
Securities Litigation Reform Act of 1995. The words "anticipates," "believes,"
"estimates," "expects," "intends," and "plans," as well as variations of such
words and similar expressions, are intended to identify forward-looking
statements that involve risk and uncertainty. These statements are necessarily
based upon various assumptions involving judgements with respect to the future
including, among others, the ability to achieve operating synergies and revenue
enhancements; international, national, regional and local economic, competitive
and regulatory conditions and developments; capital and financial market
conditions, including currency exchange controls and interest rates; weather
conditions and other natural phenomena; adverse regulatory or legal decisions,
including environmental laws and regulations; the pace of deregulation of the
natural gas and electric industries; energy markets, including the timing and
extent of changes in commodity prices for oil, coal, natural gas, natural gas
liquids, electricity and certain related products; the timing and success of
business development efforts; potential disruption, expropriation or
interruption of facilities or operations due to accidents or political events;
nuclear power and other technological developments; the effect of changes in
accounting policies; year 2000 readiness; and other uncertainties, all of which
are difficult to predict and many of which are beyond the control of CMS Energy.
Accordingly, while CMS Energy believes that the assumed results are reasonable,
there can be no assurance that they will approximate actual results. CMS Energy
disclaims any obligation to update or revise forward-looking statements, whether
as a result of new information, future events or otherwise. Certain risk factors
are detailed from time to time in various public filings made by CMS Energy with
the SEC.
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CMS ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
THREE MONTHS ENDED TWELVE MONTHS ENDED
MARCH 31 1999 1998* 1999 1998*
- ----------------------------------------------------------------------------------------------------------------
In Millions, Except Per Share Amounts
OPERATING REVENUE
Electric utility $ 636 $ 612 $2,630 $2,507
Gas utility 506 429 1,128 1,135
Natural gas transmission, storage and processing 104 27 237 97
Independent power production 73 44 306 183
Oil and gas exploration and production 19 12 70 88
Marketing, services and trading 158 247 850 840
Other 42 3 84 10
-------------------------------------------------
1,538 1,374 5,305 4,860
- ----------------------------------------------------------------------------------------------------------------
OPERATING EXPENSES
Operation
Fuel for electric generation 93 80 372 325
Purchased power - related parties 139 145 567 594
Purchased and interchange power 103 85 602 287
Cost of gas sold 496 463 1,245 1,375
Other 207 181 789 724
------------------------------------------------
1,038 954 3,575 3,305
Maintenance 39 37 178 170
Depreciation, depletion and amortization 150 128 506 468
General taxes 66 58 223 208
-------------------------------------------------
1,293 1,177 4,482 4,151
- ----------------------------------------------------------------------------------------------------------------
PRETAX OPERATING INCOME (LOSS)
Electric utility 134 119 491 444
Gas utility 78 54 150 130
Independent power production 28 16 156 102
Natural gas transmission, storage and processing 3 13 23 31
Oil and gas exploration and production 2 2 6 28
Marketing, services and trading 5 (1) 10 (7)
Other (5) (6) (13) (19)
-------------------------------------------------
245 197 823 709
- ----------------------------------------------------------------------------------------------------------------
OTHER INCOME (DEDUCTIONS)
Accretion income 1 2 6 7
Accretion expense (4) (4) (15) (17)
Loss on MCV power purchases -- (37) -- (37)
Other, net 4 3 -- 1
--------------------------------------------------
1 (36) (9) (46)
- -----------------------------------------------------------------------------------------------------------------
FIXED CHARGES
Interest on long-term debt 96 76 338 289
Other interest 12 12 47 51
Capitalized interest (10) (4) (35) (15)
Preferred dividends 5 5 19 23
Preferred securities distributions 8 8 32 24
-------------------------------------------------
111 97 401 372
- ----------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 135 64 413 291
INCOME TAXES 37 19 118 80
-------------------------------------------------
CONSOLIDATED NET INCOME BEFORE CUMULATIVE EFFECT OF CHANGE
IN ACCOUNTING PRINCIPLE 98 45 295 211
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING FOR PROPERTY TAXES,
NET OF $23 TAX -- 43 -- 43
--------------------------------------------------
CONSOLIDATED NET INCOME $ 98 $ 88 $ 295 $ 254
================================================================================================================
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THREE MONTHS ENDED TWELVE MONTHS ENDED
MARCH 31 1999 1998* 1999 1998*
- -----------------------------------------------------------------------------------------------------------
In Millions, Except Per Share Amounts
NET INCOME ATTRIBUTABLE TO COMMON STOCKS CMS ENERGY $ 88 $ 79 $ 281 $ 239
CLASS G $ 10 $ 9 $ 14 $ 15
- -----------------------------------------------------------------------------------------------------------
AVERAGE COMMON SHARES OUTSTANDING CMS ENERGY 108 101 104 98
CLASS G 8 8 8 8
- -----------------------------------------------------------------------------------------------------------
BASIC EARNINGS PER AVERAGE COMMON SHARE CMS ENERGY $ .82 $ .39 $ 2.69 $ 2.05
BEFORE CHANGE IN ACCOUNTING PRINCIPLE CLASS G $ 1.19 $ .73 $ 1.68 $ 1.40
- -----------------------------------------------------------------------------------------------------------
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE, NET OF TAX, PER AVERAGE CMS ENERGY $ -- $ .40 $ -- $ .40
COMMON SHARE CLASS G $ -- $ .36 $ -- $ .36
- -----------------------------------------------------------------------------------------------------------
BASIC EARNINGS PER AVERAGE COMMON SHARE CMS ENERGY $ .82 $ .79 $ 2.69 $ 2.45
CLASS G $ 1.19 $ 1.09 $ 1.68 $ 1.76
- -----------------------------------------------------------------------------------------------------------
DILUTED EARNINGS PER AVERAGE COMMON SHARE CMS ENERGY $ .80 $ .77 $ 2.66 $ 2.44
CLASS G $ 1.19 $ 1.09 $ 1.68 $ 1.76
- -----------------------------------------------------------------------------------------------------------
DIVIDENDS DECLARED PER COMMON SHARE CMS ENERGY $ .33 $ .30 $ 1.29 $ 1.17
CLASS G $ .325 $ .31 $ 1.285 $1.225
===========================================================================================================
* RESTATED FOR CHANGE IN METHOD OF ACCOUNTING FOR OIL AND GAS OPERATIONS FROM
FULL COST METHOD TO SUCCESSFUL EFFORTS METHOD. THE ACCOMPANYING CONDENSED NOTES
ARE AN INTEGRAL PART OF THESE STATEMENTS.
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23
CMS ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
THREE MONTHS ENDED TWELVE MONTHS ENDED
MARCH 31 1999 1998* 1999 1998*
- -------------------------------------------------------------------------------------------------------------------
In Millions
CASH FLOWS FROM OPERATING ACTIVITIES
Consolidated net income $ 98 $ 88 $ 295 $ 254
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation, depletion and amortization (includes nuclear
decommissioning of $13, $13, $52 and $50, respectively) 150 128 506 468
Loss on MCV power purchases -- 37 -- 37
Capital lease and debt discount amortization 9 11 49 47
Accretion expense 4 4 15 17
Accretion income - abandoned Midland project (1) (2) (6) (7)
Cumulative effect of accounting change -- (66) -- (66)
MCV power purchases (14) (17) (61) (65)
Undistributed earnings of related parties (16) (17) (94) (62)
Deferred income taxes and investment tax credit (2) (8) 60 16
Other (1) (8) 13 (16)
Changes in other assets and liabilities 94 93 (183) (123)
----------------------------------------------------
Net cash provided by operating activities 321 243 594 500
- -------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Aquisition of companies net of cash acquired (1,899) -- (1,899) --
Capital expenditures (excludes assets placed under capital lease) (157) (124) (1,328) (683)
Investments in partnerships and unconsolidated subsidiaries (202) (112) (435) (930)
Cost to retire property, net (21) (17) (88) (41)
Other 44 (7) 94 (59)
Proceeds from sale of property -- 28 29 64
---------------------------------------------------
Net cash used in investing activities (2,235) (242) (3,627) (1,649)
- -------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from bank loans, notes and bonds 3,131 850 4,629 1,994
Issuance of common stock 27 20 276 227
Retirement of bonds and other long-term debt (12) (369) (304) (890)
Repayment of bank loans (989) (322) (1,241) (324)
Increase (decrease) in notes payable, net (189) (137) (105) 157
Payment of common stock dividends (38) (33) (145) (124)
Payment of capital lease obligations (11) (7) (40) (43)
Retirement of preferred stock (2) -- (2) (120)
Retirement of common stock -- -- (3) (2)
Proceeds from preferred securities -- -- -- 286
----------------------------------------------------
Net cash provided by financing activities 1,917 2 3,065 1,161
- -------------------------------------------------------------------------------------------------------------------
NET INCREASE IN CASH AND TEMPORARY CASH INVESTMENTS 3 3 32 12
CASH AND TEMPORARY CASH INVESTMENTS, BEGINNING OF PERIOD 101 69 72 60
----------------------------------------------------
CASH AND TEMPORARY CASH INVESTMENTS, END OF PERIOD $ 104 $ 72 $ 104 $ 72
===================================================================================================================
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OTHER CASH FLOW ACTIVITIES AND NON-CASH INVESTING AND FINANCING ACTIVITIES WERE:
CASH TRANSACTIONS
Interest paid (net of amounts capitalized) $ 82 $ 75 $ 320 $305
Income taxes paid (net of refunds) 2 19 47 86
NON-CASH TRANSACTIONS
Nuclear fuel placed under capital lease $ -- $ 5 $ 42 $ 6
Other assets placed under capital leases 2 2 14 7
Common stock issued to acquire companies -- -- 61 --
Assumption of debt 318 -- 406 --
================================================================================================================
All highly liquid investments with an original maturity of three months or less
are considered cash equivalents.
* RESTATED FOR CHANGE IN METHOD OF ACCOUNTING FOR OIL AND GAS OPERATIONS FROM
FULL COST METHOD TO SUCCESSFUL EFFORTS METHOD.
THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
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CMS ENERGY CORPORATION
CONSOLIDATED BALANCE SHEETS
ASSETS MARCH 31 MARCH 31
1999 DECEMBER 31 1998*
(UNAUDITED) 1998 (UNAUDITED)
- ----------------------------------------------------------------------------------------------------------------
In Millions
PLANT AND PROPERTY (AT COST)
Electric utility $ 6,772 $ 6,720 $ 6,547
Gas utility 2,374 2,360 2,346
Natural gas transmission, storage and processing 1,825 341 186
Oil and gas properties (successful efforts method) 679 670 571
Independent power production 520 518 124
Other 392 373 47
-----------------------------------------
12,562 10,982 9,821
Less accumulated depreciation, depletion and amortization 5,803 5,213 4,979
-----------------------------------------
6,759 5,769 4,842
Construction work-in-progress 330 271 272
-----------------------------------------
7,089 6,040 5,114
- ----------------------------------------------------------------------------------------------------------------
INVESTMENTS
Independent power production 991 888 884
Natural gas transmission, storage and processing 563 494 264
International energy distribution 146 209 266
First Midland Limited Partnership 236 240 244
Midland Cogeneration Venture Limited Partnership 220 209 179
Other 33 33 42
-----------------------------------------
2,189 2,073 1,879
- ----------------------------------------------------------------------------------------------------------------
CURRENT ASSETS
Cash and temporary cash investments at cost, which approximates market 104 101 72
Accounts receivable, notes receivable and accrued revenue, less
allowances of $17, $13 and $7, respectively 859 720 467
Inventories at average cost
Gas in underground storage 82 219 79
Materials and supplies 140 99 90
Generating plant fuel stock 33 43 39
Deferred income taxes -- -- 28
Prepayments and other 188 225 248
-----------------------------------------
1,406 1,407 1,023
- ----------------------------------------------------------------------------------------------------------------
NON-CURRENT ASSETS
Nuclear decommissioning trust funds 565 557 518
Nuclear plant - related assets 535 -- --
Postretirement benefits 366 373 396
Abandoned Midland project 66 71 88
Other 1,551 789 487
----------------------------------------
3,083 1,790 1,489
----------------------------------------
TOTAL ASSETS $13,767 $11,310 $ 9,505
================================================================================================================
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STOCKHOLDERS' INVESTMENT AND LIABILITIES MARCH 31 MARCH 31
1999 DECEMBER 31 1998*
(UNAUDITED) 1998 (UNAUDITED)
- ----------------------------------------------------------------------------------------------------------------
In Millions
CAPITALIZATION
Common stockholders' equity $ 2,292 $ 2,216 $ 1,867
Preferred stock of subsidiary 244 238 238
Company-obligated mandatorily redeemable Trust Preferred
Securities of:
Consumers Power Company Financing I (a) 100 100 100
Consumers Energy Company Financing II (a) 120 120 120
Company-obligated convertible Trust Preferred Securities of
CMS Energy Trust I (b) 173 173 173
Long-term debt 7,258 4,726 3,755
Non-current portion of capital leases 99 105 74
------------------------------------------
10,286 7,678 6,327
- ----------------------------------------------------------------------------------------------------------------
CURRENT LIABILITIES
Current portion of long-term debt and capital leases 300 293 318
Notes payable 139 328 245
Accounts payable 419 501 330
Accrued taxes 278 272 235
Accounts payable - related parties 79 79 82
Accrued interest 78 65 56
Power purchases 47 47 47
Accrued refunds 13 11 11
Other 287 214 182
-----------------------------------------
1,640 1,810 1,506
- ----------------------------------------------------------------------------------------------------------------
NON-CURRENT LIABILITIES
Deferred income taxes 630 649 626
Postretirement benefits 480 489 510
Power purchases 111 121 157
Deferred investment tax credit 133 135 148
Regulatory liabilities for income taxes, net 108 87 61
Other 379 341 170
-----------------------------------------
1,841 1,822 1,672
-----------------------------------------
COMMITMENTS AND CONTINGENCIES (Notes 1 and 2)
TOTAL STOCKHOLDERS' INVESTMENT AND LIABILITIES $13,767 $11,310 $ 9,505
- ----------------------------------------------------------------------------------------------------------------
(a) The primary asset of Consumers Power Company Financing I is $103 million
principal amount of 8.36 percent subordinated deferrable interest notes due 2015
from Consumers. The primary asset of Consumers Energy Company Financing II is
$124 million principal amount of 8.20 percent subordinated deferrable interest
notes due 2027 from Consumers. For further discussion, see Note 3 to the
Consolidated Financial Statements.
(b) As described in Note 3, the primary asset of CMS Energy Trust I is $178
million principal amount of 7.75 percent convertible subordinated debentures due
2027 from CMS Energy.
* RESTATED FOR CHANGE IN METHOD OF ACCOUNTING FOR OIL AND
GAS OPERATIONS FROM FULL COST METHOD TO SUCCESSFUL EFFORTS METHOD. 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 TWELVE MONTHS ENDED
MARCH 31 1999 1998* 1999 1998*
- ----------------------------------------------------------------------------------------------------------------
In Millions
COMMON STOCK
At beginning and end of period $ 1 $ 1 $ 1 $ 1
- ----------------------------------------------------------------------------------------------------------------
OTHER PAID-IN CAPITAL
At beginning of period 2,594 2,267 2,287 2,062
Redemption of affiliate's preferred stock (2) -- (2) --
Common stock reacquired -- -- (3) (2)
Common stock issued:
CMS Energy 26 18 332 219
Class G 1 2 5 8
--------------------------------------------------
At end of period 2,619 2,287 2,619 2,287
- ----------------------------------------------------------------------------------------------------------------
REVALUATION CAPITAL
At beginning of period (9) (6) (3) (6)
Change in unrealized investment-gain (loss) (a) (4) 3 (10) 3
--------------------------------------------------
At end of period (13) (3) (13) (3)
- ----------------------------------------------------------------------------------------------------------------
FOREIGN CURRENCY TRANSLATION
At beginning of period (136) (96) (94) --
Change in foreign currency translation (a) (5) 2 (47) (94)
--------------------------------------------------
At end of period (141) (94) (141) (94)
- ----------------------------------------------------------------------------------------------------------------
RETAINED EARNINGS (DEFICIT)
At beginning of period (234) (379) (324) (454)
Consolidated net income (a) 98 88 295 254
Common stock dividends declared:
CMS Energy (35) (30) (134) (113)
Class G (3) (3) (11) (11)
--------------------------------------------------
At end of period (174) (324) (174) (324)
--------------------------------------------------
TOTAL COMMON STOCKHOLDERS' EQUITY $2,292 $1,867 $2,292 $1,867
================================================================================================================
(a) DISCLOSURE OF COMPREHENSIVE INCOME:
Revaluation capital
Unrealized investment-gain (loss), net of tax of
$2, $(1), $5 and $(2), respectively $ (4) $ 3 $ (10) $ 3
Foreign currency translation (5) 2 (47) (94)
Consolidated net income 98 88 295 254
-------------------------------------------------
Total Consolidated Comprehensive Income $ 89 $ 93 $ 238 $ 163
=================================================
* RESTATED FOR CHANGE IN METHOD OF ACCOUNTING FOR OIL AND GAS OPERATIONS FROM
FULL COST METHOD TO SUCCESSFUL EFFORTS METHOD. THE ACCOMPANYING CONDENSED NOTES
ARE AN INTEGRAL PART OF THESE STATEMENTS.
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CMS ENERGY CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
These Condensed Notes and their related Consolidated Financial Statements should
be read along with the Consolidated Financial Statements and Notes contained in
the 1998 Form 10-K of CMS Energy, which include the Reports of Independent
Public Accountants. Certain prior year amounts have been reclassified to conform
with the presentation in the current year. In the opinion of management, the
unaudited information herein reflects all adjustments necessary to assure the
fair presentation of financial position, results of operations and cash flows
for the periods presented.
1: CORPORATE STRUCTURE AND BASIS OF PRESENTATION
CORPORATE STRUCTURE AND BASIS OF PRESENTATION
CMS Energy Corporation is the parent holding company of Consumers and
Enterprises. Consumers, a combination electric and gas utility company serving
the Lower Peninsula of Michigan, is the principal subsidiary of CMS Energy.
Enterprises, through subsidiaries, is engaged in several domestic and
international energy-related businesses including: natural gas transmission,
interstate transportation, storage and processing; independent power production;
oil and gas exploration and production; energy marketing, services and trading;
and international energy distribution. On March 29, 1999, CMS Energy completed
the acquisition of Panhandle from Duke Energy, as discussed further below.
Panhandle is primarily engaged in the interstate transportation, storage and
processing of natural gas.
The consolidated financial statements include CMS Energy, Consumers and
Enterprises and their majority owned subsidiaries. The financial statements are
prepared in conformity with generally accepted accounting principles and use
management's estimates where appropriate. Affiliated companies (where CMS Energy
has more than 20 percent but less than a majority ownership interest) are
accounted for by the equity method. For the three and twelve-month periods ended
March 31, 1999, undistributed equity earnings were $16 million and $94 million,
respectively, compared to $17 million and $62 million for the three and
twelve-month periods ended March 31, 1998.
Foreign currency translation adjustments relating to the operation of CMS
Energy's long-term investments in foreign countries are included in common
stockholders' equity. From January 1, 1999 through March 31, 1999, the change in
the foreign currency translation adjustment totaled $5 million, net of after-tax
hedging proceeds.
NEW ACCOUNTING RULES
In 1999, CMS Energy implemented SOP 98-1, Accounting for the Costs of Computer
Software Developed for Internal Use, and SOP 98-5, Reporting on the Costs of
Start-Up Activities. Application of these standards has not had a material
effect on CMS Energy's financial position, liquidity, or results of operations.
Effective January 1, 1999, CMS Energy adopted EITF Issue 98-10, Accounting for
Energy Trading and Risk Management Activities, which requires mark-to-market
accounting for energy contracts
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entered into for trading purposes. Under mark-to-market accounting, gains and
losses resulting from changes in market prices on contracts entered into for
trading purposes are reflected in current earnings. The after-tax mark-to-market
adjustment resulting from the adoption of EITF 98-10 had an immaterial effect on
CMS Energy's consolidated financial position, results of operations and cash
flows as of March 31, 1999. For energy contracts that are hedges of non-trading
activities, CMS Energy will continue to use accrual accounting until it adopts
SFAS 133, Accounting for Derivative Instruments and Hedging Activities, which
will be effective January 1, 2000.
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 the costs of
property acquisitions, successful exploratory wells, all development costs, and
support equipment and facilities when incurred. It expenses unsuccessful
exploratory wells when they are determined to be non-productive. CMS Oil and Gas
also charges to expense production costs, overhead, and all exploration costs
other than exploratory drilling as incurred. Depreciation, depletion and
amortization of proved oil and gas properties is determined 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 a regulated utility
accounting standard (SFAS 71). As a result, the actions of regulators affect
when revenues, expenses, assets and liabilities are recognized.
In March 1999, Consumers received MPSC electric restructuring orders which,
among other things, identified the terms and timing for implementing electric
restructuring in Michigan. Based upon these orders, Consumers expects to
implement retail open access for its electric customers in September 1999, and
therefore, Consumers discontinued application of SFAS 71 for the energy supply
portion of its business in the first quarter of 1999. Discontinuation of SFAS 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 established a regulatory asset for a
corresponding amount. The regulatory asset is collectible as part of the
Transition Costs which are recoverable through the regulated transmission and
distribution portion of Consumers' business as approved by an MPSC order in
1998. This order also allowed Consumers to recover any energy supply related
regulatory assets, plus a return on any unamortized balance of those assets,
from its transmission and distribution customers. According to current
accounting standards, Consumers can continue to carry its energy supply related
regulatory assets or liabilities for the part of the business subject to
regulatory change if legislation or an MPSC rate order allows the collection of
cash flows, to recover specific costs or to settle obligations, from its
regulated transmission and distribution customers. At March 31, 1999, Consumers
had a net investment in energy supply facilities of $839 million included in
electric plant and property.
ACQUISITION
In March 1999, CMS Energy completed the acquisition of Panhandle from Duke
Energy for a cash payment of $1.9 billion and existing Panhandle debt of $300
million. The acquisition has been accounted for using the purchase method of
accounting. Accordingly, the purchase price has been preliminarily allocated to
the assets purchased and the liabilities assumed based upon the fair values at
the date of
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acquisition, with the tentative excess purchase price of approximately $700
million classified as goodwill to be amortized on a straight-line basis over a
period of forty years.
Unaudited pro forma amounts for operating revenue, consolidated net income,
basic earnings per share and total assets, as if the acquisition had occurred on
January 1, 1998, are as follows:
In Millions, except per share amounts
- ----------------------------------------------------------------------------------------------------------------
Year ended
Three Months Ended March 31, December 31,
1999 1998 1998
- ----------------------------------------------------------------------------------------------------------------
Operating revenue $ 1,650 $ 1,494 $ 5,566
Consolidated net income 109 105 320
Basic earnings per share .90 .92 2.66
Diluted earnings per share .88 .90 2.63
- ----------------------------------------------------------------------------------------------------------------
March 31, December 31,
1999 1998 1998
- ----------------------------------------------------------------------------------------------------------------
Total assets $13,767 $11,974 $13,784
- ----------------------------------------------------------------------------------------------------------------
2: UNCERTAINTIES
CONSUMERS' ELECTRIC UTILITY CONTINGENCIES
ELECTRIC ENVIRONMENTAL MATTERS: The Clean Air Act limits emissions of sulfur
dioxide and nitrogen oxides and requires emissions and air quality monitoring.
Consumers currently operates within these limits and meets current emission
requirements. The Clean Air Act requires the EPA to periodically review the
effectiveness of the national air quality standards in preventing adverse health
effects, and in 1997 the EPA revised these standards. It is probable that the
1997 standards will result in further limitations on small particulate- related
emissions.
In September 1998, based upon the 1997 standards, the EPA Administrator signed
final regulations requiring the State of Michigan to further limit nitrogen
oxide emissions. Fossil-fueled emitters, such as Consumers' generating units,
can anticipate a reduction in nitrogen oxide emissions by 2003 to only 32
percent of levels allowed for the year 2000. The State of Michigan has one year
to submit an implementation plan. The State of Michigan has filed a lawsuit
objecting to the extent of the required emission reductions. It is unlikely that
the State of Michigan will establish Consumers' nitrogen oxide emissions
reduction target until mid-to-late 1999. Until this target is established, the
estimated cost of compliance discussed below is subject to revision. If a court
were to order the EPA to adopt the State of Michigan's position, compliance
costs could be less than the preliminary estimated amounts.
The preliminary estimate of capital expenditures to reduce nitrogen
oxide-related emissions for Consumers' fossil-fueled generating units is
approximately $290 million, plus $10 million per year for operation and
maintenance costs. Consumers anticipates that these capital expenditures will be
incurred between 1999
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31
and 2003. Consumers may need an equivalent amount of capital expenditures and
operation and maintenance costs to comply with the new small particulate
standards.
Consumers' coal-fueled electric generating units burn low-sulfur coal and are
currently operating at or near the sulfur dioxide emission limits that will be
effective in the year 2000. During the past few years, in order to comply with
the Clean Air Act, Consumers incurred capital expenditures totaling $55 million
to install equipment at certain generating units. Consumers estimates an
additional $16 million of capital expenditures for ongoing and proposed
modifications at the remaining coal-fueled units to meet year 2000 requirements.
Management believes that these expenditures will not materially affect
Consumers' annual operating costs.
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 properly
recoverable in rates under current ratemaking policies.
Consumers is a so-called 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. At March 31, 1999, Consumers has accrued the minimum amount of the
range for its estimated Superfund liability.
While decommissioning Big Rock, Consumers found that some areas of the plant
have coatings that contain both metals and PCBs. The cost of removal and
disposal of these materials is currently unknown. There may be some radioactive
portion of these materials which no facility in the United States will currently
accept. The cost of removal and disposal will constitute part of the cost to
decommission the plant, and will be paid from the decommissioning fund.
Consumers is studying the extent of the contamination and reviewing options.
ANTITRUST: In October 1997, two independent power producers sued Consumers in a
federal court. The suit alleged antitrust violations relating to contracts which
Consumers entered into with some of its customers and claims relating to power
facilities. On March 31, 1999, the court issued an opinion and order granting
Consumers' motion for summary judgement, resulting in the dismissal of the case.
The plaintiffs are appealing this decision.
CONSUMERS' ELECTRIC UTILITY RATE MATTERS
ELECTRIC PROCEEDINGS: In 1996, the MPSC issued a final order that authorized
Consumers to recover costs associated with the purchase of the additional 325 MW
of MCV Facility capacity (see "Power Purchases from the MCV Partnership" in this
Note) and to recover its nuclear plant investment by increasing prospective
annual nuclear plant depreciation expense by $18 million, with a corresponding
decrease in fossil-fueled generating plant depreciation expense. It also
established an experimental direct-access program. Customers having a maximum
demand of 2 MW or greater are eligible to purchase generation services directly
from any eligible third-party power supplier and Consumers will transmit the
power for a fee. The direct-access program is limited to 134 MW of load. In
accordance with the MPSC order, Consumers held a lottery in April 1997 to select
the customers to participate in the direct-access program.
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32
Subsequently, direct access for a portion of this 134 MW began in late 1997. The
program was substantially filled by the end of March 1999.
In January 1998, the Court of Appeals affirmed an MPSC conclusion that the MPSC
has statutory authority to authorize an experimental electric retail wheeling
program. No retail wheeling has yet occurred pursuant to that program. In
October 1998, the Michigan Supreme Court issued an order granting Consumers'
application for leave to appeal. A decision by the Michigan Supreme Court in
this matter may be issued in mid-1999.
ELECTRIC RESTRUCTURING: As part of ongoing proceedings relating to the
restructuring of the electric utility industry in Michigan, the MPSC in June
1997 issued an order proposing that beginning January 1, 1998 Consumers transmit
and distribute energy on behalf of competing power suppliers to retail
customers. Further restructuring orders issued in late 1997 and early 1998
provide for: 1) recovery of estimated Transition Costs of $1.755 billion through
a charge to all customers purchasing their power from other sources until the
end of the transition period in 2007, subject to an adjustment through a true-up
mechanism; 2) commencement of the phase-in of retail open access in 1998; 3)
suspension of the PSCR clause as discussed below; and 4) all customers to choose
their power suppliers on January 1, 2002. The recovery of costs of implementing
a retail open access program, preliminarily estimated at an additional $200
million, would be reviewed for prudence and recovered via a charge approved by
the MPSC. Nuclear decommissioning costs will also continue to be collected
through a separate surcharge to all customers.
In June 1998, Consumers submitted its plan for implementing retail open access
to the MPSC. The primary issues addressed in the plan are: 1) the implementation
schedule; 2) the retail open access service options available to customers and
suppliers; 3) the process and requirements for customers and others to obtain
retail open access service; and 4) the roles and responsibilities for Consumers,
customers and suppliers. In the plan, Consumers proposed to phase in 750 MW of
retail customer load to customers purchasing their power from other sources over
the 1998-2001 period. In March 1999, Consumers received MPSC electric
restructuring orders which generally supported Consumers' implementation plan.
Accordingly, Consumers is in the process of implementing electric customer
retail open access.
There are numerous appeals pending at the Court of Appeals relating to the
MPSC's restructuring orders, including appeals by Consumers. Consumers believes
that the MPSC lacks statutory authority to mandate industry restructuring, and
its appeal generally is limited to this jurisdictional issue. CMS Energy cannot
predict the outcome of electric restructuring on CMS Energy's financial
position, liquidity, or results of operations.
As a result of a 1998 MPSC order in connection with the electric restructuring
program, the PSCR process was suspended. Under this program, customers buying
electricity from Consumers as traditional customers will not have their rates
adjusted to reflect the actual costs of fuel and purchased and interchanged
power during the 1998-2001 period. In prior years, any change in power supply
costs was passed through to such customers. In order to reduce the risk of
high energy prices during peak demand periods, Consumers is purchasing
electricity options and contracting to buy electricity during the months of June
through September 1999. Consumers is planning to have sufficient generation and
purchased capacity for a 16 percent reserve margin in order to provide reliable
service to its electric service customers and to protect itself against
unscheduled plant outages. Under certain circumstances, the cost of purchasing
capacity and energy on the spot market could be substantial.
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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
Three Months Ended Twelve Months Ended
March 31 1999 1998 1999 1998
- ------------------------------------------------------------------------------------------------------------------
Pretax operating income $14 $10 $53 $47
Income taxes and other 4 3 16 14
- ------------------------------------------------------------------------------------------------------------------
Net income $10 $ 7 $37 $33
==================================================================================================================
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 and 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, Consumers has been permitted by the MPSC 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, Consumers also has been
permitted 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. Because
the MPSC has already approved recovery of this capacity, Consumers expects to
recover these increases through an adjustment to the currently frozen PSCR level
which is currently under consideration by the MPSC. After September 2007, under
the terms of the PPA, Consumers will only be required to pay the MCV Partnership
capacity and energy charges that the MPSC has authorized for recovery from
electric customers.
In March 1999, Consumers signed a long-term power sales agreement to supply PECO
with electric generating capacity under the PPA until September 2007. After a
three-year transition period during which 100 to 150 MW will be sold to PECO,
beginning in 2002 Consumers will sell all 1,240 MW of PPA capacity and
associated energy to PECO. In March 1999, Consumers also filed an application
with the MPSC for accounting and rate-making approvals related to the
transaction. In an order issued on April 30, 1999, the MPSC conditionally
approved the requests for accounting and rate-making treatment to the extent
that customer rates are not increased from their level absent the agreement and
as modified by the order. Consumers is currently studying the conditions
attached to the approval to determine whether there is any need for
clarification of how the conditions would operate under various future scenarios
and whether the conditional approval is acceptable to Consumers.
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Consumers recognized a loss in 1992 for the present value of the estimated
future underrecoveries of power costs under the PPA based on MPSC recovery
orders. At March 31, 1999 and March 31, 1998, the remaining after-tax present
value of the estimated future PPA liability associated with the 1992 loss
totaled $103 million and $133 million, respectively. At March 31, 1999, the
undiscounted after-tax amount associated with this liability totaled $159
million. These after-tax cash underrecoveries are based on the assumption that
the MCV Facility would be available to generate electricity 91.5 percent of the
time over its expected life. Historically the MCV Facility has operated above
the 91.5 percent level. Accordingly, in 1998, Consumers increased its PPA
liability by $37 million. Because the MCV Facility operated above the 91.5
percent level in 1998 and thus far in 1999, Consumers has an accumulated
unrecovered after-tax shortfall of $13 million as of March 31, 1999. If the MCV
Facility generates electricity at the 91.5 percent level during the next five
years, Consumers' after-tax cash underrecoveries associated with the PPA would
be as follows.
In Millions
- ------------------------------------------------------------------------------------------------------------------
1999 2000 2001 2002 2003
- ------------------------------------------------------------------------------------------------------------------
Estimated cash underrecoveries, net of tax $26 $21 $20 $19 $18
==================================================================================================================
If the MCV Facility operates at availability levels above management's 91.5
percent estimate made in 1992 for the remainder of the PPA, Consumers will need
to recognize additional losses for future underrecoveries. In March 1999,
Consumers and the MCV Partnership reached an agreement effective January 1, 1999
that will cap availability payments to the MCV Partnership at 98.5 percent. For
further discussion on the impact of the frozen PSCR, see "Electric
Restructuring" in this Note. Management is evaluating the adequacy of the
contract loss liability considering actual MCV Facility operations and any other
relevant circumstances.
In February 1998, the MCV Partnership filed a claim of appeal from the January
1998 and February 1998 MPSC orders in the electric utility industry
restructuring. At the same time, the MCV Partnership filed suit in the U.S.
District Court seeking a declaration that the MPSC's failure to provide
Consumers and the MCV Partnership a certain source of recovery of capacity
payments after 2007 deprived the MCV Partnership of its rights under the Public
Utilities Regulatory Policies Act of 1978. The MCV Partnership is seeking to
prohibit the MPSC from implementing portions of the orders.
NUCLEAR MATTERS: In January 1997, the NRC issued its Systematic Assessment of
Licensee Performance report for Palisades. The report rated all areas as good.
The NRC suspended this same assessment process for all licensees in 1998. Until
such time as the NRC completes its review of processes for assessing performance
at nuclear power plants, the Plant Performance Review is being used to provide
an assessment of licensee performance. Palisades received its performance review
dated March 26, 1999 in which the NRC stated that the overall performance at
Palisades was acceptable.
Palisades' temporary on-site storage pool for spent nuclear fuel is at capacity.
Consequently, Consumers is using NRC-approved steel and concrete vaults,
commonly known as "dry casks", for temporary on-site storage. As of March 31,
1999 Consumers had loaded 13 dry storage casks with spent nuclear fuel at
Palisades and plans to load five additional casks in 1999 pending approval by
the NRC. In June 1997, the NRC approved Consumers' process for unloading spent
fuel from a cask previously discovered to have minor weld flaws. Consumers
intends to transfer the spent fuel to a new transportable cask when one is
available.
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Consumers maintains insurance coverage against property damage, debris removal,
personal injury liability and other risks that are present at its nuclear
generating facilities. Consumers also maintains coverage for replacement power
costs during prolonged accidental outages at Palisades. Insurance would not
cover such costs during the first 17 weeks of any outage, but would cover most
of such costs during the next 58 weeks of the outage, followed by reduced
coverage to 80 percent for two additional years. If certain covered losses occur
at its own or other nuclear plants similarly insured, Consumers could be
required to pay maximum assessments of $15 million in any one year to NEIL under
the nuclear liability secondary protection program; $88 million per occurrence,
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.
The NRC requires Consumers to make certain calculations and report on the
continuing ability of the Palisades reactor vessel to withstand postulated
pressurized thermal shock events during its remaining license life, considering
the embrittlement of reactor materials. In December 1996, Consumers received an
interim Safety Evaluation Report from the NRC indicating that the reactor vessel
can be safely operated through 2003 before reaching the NRC's screening criteria
for reactor embrittlement. Consumers believes that with fuel management designed
to minimize embrittlement, it can operate Palisades to the end of its license
life in the year 2007 without annealing the reactor vessel. Nevertheless,
Consumers will continue to monitor the matter.
NUCLEAR PLANT DECOMMISSIONING: Consumers collected $51 million in 1998 from its
electric customers for decommissioning of its two nuclear plants. Amounts
collected from electric retail customers and deposited in trusts (including
trust earnings) are credited to accumulated depreciation. On March 22, 1999,
Consumers received a decommissioning order from the MPSC that estimated
decommissioning costs for Big Rock and Palisades to be $304 million and $541
million (in 1998 dollars), respectively. Consumers' site-specific
decommissioning cost estimates for Big Rock and Palisades assume that each plant
site will eventually be restored to conform with the adjacent landscape, and all
contaminated equipment will be disassembled and disposed of in a licensed burial
facility. The MPSC order also reduced annual decommissioning surcharges by $4
million a year and required Consumers to file revised decommissioning surcharges
for Palisades that incorporate a gradual reduction in the decommission trust's
equity investments following the plant's retirement. On April 21, 1999,
Consumers filed with the MPSC a revised decommissioning surcharge for Palisades
and anticipates a revised MPSC order in late 1999 or early 2000. If approved,
the annual decommissioning surcharges for Palisades would be reduced by an
additional $3 million a year. After retirement of Palisades, Consumers plans to
maintain the facility in protective storage if radioactive waste disposal
facilities are not available. Consumers will incur most of the Palisades
decommissioning costs after the plant's NRC operating license expires. When the
Palisades' NRC license expires in 2007, the trust funds are currently estimated
to have accumulated $677 million. Consumers estimates that at the time Palisades
is fully decommissioned in the year 2046, the trust funds will have provided
$1.9 billion, including trust earnings, over this decommissioning period. At
March 31, 1999, Consumers had an investment in nuclear decommissioning trust
funds of $386 million for Palisades and $179 million for Big Rock.
Big Rock was closed permanently in 1997 because management determined that it
would be uneconomical to operate in an increasingly competitive environment. The
plant was originally scheduled to close on May 31, 2000, at the end of the
plant's operating license. The MPSC has allowed Consumers to continue collecting
decommissioning surcharges through December 31, 2000. Plant decommissioning
began in 1997 and may take five to ten years to return the site to its original
condition. For the first three months of 1999, Consumers spent $14 million for
the decommissioning and withdrew $12 million from the Big Rock nuclear
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decommissioning trust fund. In total, Consumers has spent $88 million for the
decommissioning and withdrew $81 million from the Big Rock nuclear
decommissioning trust fund. These activities had no impact on net income.
CONSUMERS GAS GROUP 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, including some 23
sites that formerly housed manufactured gas plant facilities, even those in
which it has a partial or no current ownership interest. By late 1999, Consumers
expects to have completed sufficient investigation of the 23 sites to make a
more accurate estimate of remediation methods and costs. 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 estimates its costs related to
investigation and remedial action for all 23 sites between $48 million and $98
million, of which Consumers accrued a liability for $48 million. These estimates
are based on undiscounted 1998 costs. As of March 31, 1999, Consumers has an
accrued liability of $48 million and a regulatory asset for approximately the
same amount. 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 will not begin until after a prudence review
in a general rate case. Consumers is allowed current recovery of $1 million
annually. Consumers has initiated lawsuits against certain insurance companies
regarding coverage for some or all of the costs that it may incur for these
sites.
CONSUMERS GAS GROUP MATTERS
GAS RESTRUCTURING: In December 1997, the MPSC approved Consumers' application to
implement an experimental gas transportation program, which will extend over a
three-year period, eventually allowing 300,000 residential, commercial and
industrial retail gas sales customers to choose their gas commodity supplier.
The program is voluntary and participating natural gas customers are selected on
a first-come, first-served basis, up to a limit of 100,000 per year. As of April
19,1999, more than 142,000 customers chose alternative gas suppliers,
representing approximately 34 bcf of gas load. Under traditional regulation,
Consumers had not been allowed to benefit from reducing its cost of the
commodity supplied to its customers, so the loss of commodity sales to these
customers will not have any impact on net income. Customers choosing to remain
as sales customers of Consumers will not see a rate change in their natural gas
rates. This three-year program: 1) suspends Consumers' GCR clause, effective
April 1, 1998, establishing a gas commodity cost at a fixed rate of $2.84 per
mcf, allowing Consumers the opportunity to benefit by reducing its cost of the
commodity; 2) establishes an earnings sharing mechanism with customers if
Consumers' earnings exceed certain pre-determined levels; and 3) establishes a
gas transportation code of conduct that addresses the relationship between
Consumers and marketers, including its affiliated marketers. In January 1998,
the Attorney General, ABATE and other parties filed claims of appeal regarding
the program with the Court of Appeals.
Consumers uses gas purchase contracts to limit its risk associated with
increases in its gas price above the $2.84 per mcf during the three-year
experimental gas program. It is management's intent to take physical delivery of
the commodity and failure could result in a significant penalty for
nonperformance. At March 31, 1999, Consumers had an exposure to gas price
increases if the ultimate cost of gas was to exceed $2.84
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per mcf for the following volumes: 7 percent of its 1999 requirements; 55
percent of its 2000 requirements; and 55 percent of its first quarter 2001
requirements. Additional contract coverage is currently under review. The gas
purchase contracts currently in place were consummated at prices less than $2.84
per mcf. The gas purchase contracts are being used to protect against gas price
increases in a three-year experimental gas program where Consumers is recovering
from its customers $2.84 per mcf for gas.
PANHANDLE REGULATORY MATTERS
Effective August 1996, Trunkline placed into effect a general rate increase,
subject to refund. Hearings were completed in October of 1997 and initial
decisions by a FERC ALJ were issued on certain matters in May 1998 and on the
remainder of the rate proceedings in November 1998. Responses to the initial
decisions were provided by Trunkline to FERC following the issuance of the
initial decisions. In May 1999, FERC issued an order remanding certain matters
back to the ALJ for further proceedings.
In conjunction with a FERC order issued in September 1997, certain natural gas
producers were required to refund previously collected Kansas ad-valorem taxes
to interstate natural gas pipelines. These pipelines were ordered to refund
these amounts to their customers. All payments are to be made in compliance with
prescribed FERC requirements. At March 31, 1999 and December 31, 1998, accounts
receivable included $51 million and $50 million, respectively, due from natural
gas producers, and other current liabilities included $51 million and $50
million, respectively, for related obligations.
In June 1998, Trunkline filed a petition with the FERC to abandon 720 miles of
its 26-inch diameter pipeline that extends from Longville, Louisiana to Bourbon,
Illinois. Trunkline requested permission to transfer the pipeline to an
affiliate, which has entered into an option agreement with Aux Sable for
potential conversion of the line to allow transportation of hydrocarbon vapors.
Trunkline has requested FERC to grant the abandonment authorization in time to
separate the pipeline from existing facilities and allow Aux Sable to convert
the pipeline to hydrocarbon vapor service by October 1, 2000, if the option is
exercised. The abandonment would reduce Trunkline's certificated capacity from
the current level of 1,810 Mdth/d to 1,555 Mdth/d, but will have no adverse
effect on Trunkline's ability to meet all of its firm service obligations. The
filing is pending FERC action.
OTHER UNCERTAINTIES
CMS GENERATION ENVIRONMENTAL MATTERS: CMS Generation does not currently expect
to incur significant capital costs at its power facilities to comply with
current environmental regulatory standards.
CAPITAL EXPENDITURES: CMS Energy estimates capital expenditures, including
investments in unconsolidated subsidiaries and new lease commitments, of $3.635
billion for 1999, which includes approximately $2.2 billion for the acquisition
of Panhandle, $1.575 billion for 2000, and $1.205 billion for 2001. For further
information, see Capital Resources and Liquidity-Capital Expenditures in the
MD&A.
OTHER: As of December 31, 1998, CMS Energy and Enterprises have guaranteed up to
$539 million in contingent obligations of unconsolidated affiliates and related
parties.
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In addition to the matters disclosed in this note, Consumers and certain other
subsidiaries of CMS Energy 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.
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.
3: SHORT-TERM AND LONG-TERM FINANCINGS, AND CAPITALIZATION
CMS ENERGY: CMS Energy's Senior Credit Facilities consist of a $600 million
three-year revolving credit facility and a five-year $125 million term loan
facility. Additionally, CMS Energy has unsecured lines of credit and letters of
credit in an aggregate amount of $361 million. At March 31, 1999, the total
amount utilized under the Senior Credit Facilities was $687 million, including
$47 million of contingent obligations, and under the unsecured lines of credit
and letters of credit was $94 million. Of the $687 million outstanding at March
31, 1999, approximately $500 million was utilized to fund the acquisition of
Panhandle.
At March 31, 1999, CMS Energy had utilized $600 million of a bridge loan
facility to partially fund the acquisition of Panhandle. The bridge loan has a
weighted-average interest rate of 5.94 percent and a term of six months.
In January 1999, CMS Energy received net proceeds of approximately $473 million
from the sale of $480 million of senior notes. In February 1999, CMS Energy
received net proceeds of approximately $296 million from the sale of $300
million of senior notes. Proceeds from these offerings were used to repay debt
and for general corporate purposes.
At March 31, 1999, CMS Energy had $116 million of Series A GTNs, $123 million of
Series B GTNs, $150 million of Series C GTNs, $200 million of Series D GTNs, and
$79 million of Series E GTNs issued and outstanding with weighted average
interest rates of 7.9 percent, 7.9 percent, 7.7 percent, 7.0 percent, and 6.9
percent, respectively.
In April 1999, CMS Energy filed a shelf registration statement for the issuance
of $375 million of senior and subordinated debt securities.
CONSUMERS: At March 31, 1999, Consumers had FERC authorization to issue or
guarantee, through June 2000, up to $900 million of short-term securities
outstanding at any one time and to guarantee, through 1999, up to $25 million in
loans made by others to residents of Michigan for making energy-related home
improvements. Consumers also had remaining FERC authorization to issue, through
June 2000, up to $475 million and $425 million of long-term securities with
maturities up to 30 years for refinancing purposes and for general corporate
purposes, respectively.
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Consumers has an unsecured $425 million credit facility and unsecured lines of
credit aggregating $130 million. These facilities are available to finance
seasonal working capital requirements and to pay for capital expenditures
between long-term financings. At March 31, 1999, a total of $221 million was
outstanding at a weighted average interest rate of 5.6 percent, compared with
$245 million outstanding at March 31, 1998, at a weighted average interest rate
of 6.2 percent. In January 1999, Consumers renegotiated a variable-to-fixed
interest rate swap totaling $175 million in order to reduce the impact of
interest rate fluctuations.
Consumers also has in place a $500 million trade receivables sale program. At
March 31, 1999 and 1998, receivables sold under the program totaled $344 million
and $340 million, respectively. Accounts receivable and accrued revenue in the
Consolidated Balance Sheets have been reduced to reflect receivables sold.
Consumers issued long-term bank debt of $15 million in February 1999, maturing
in February 2002, at an initial interest rate of 5.3 percent. Proceeds from this
issuance were used for general corporate purposes.
On April 1, 1999, Consumers redeemed all of its eight million outstanding shares
of the $2.08 preferred stock at $25.00 per share.
Under the provisions of its Articles of Incorporation, Consumers had $308
million of unrestricted retained earnings available to pay common dividends at
March 31, 1999. In January 1999, Consumers declared and paid a $97 million
common dividend.
PANHANDLE: In March 1999, CMS Energy, through its subsidiary CMS Panhandle
Holding, received net proceeds of approximately $789 million from the sale of
$800 million of senior notes issued by CMS Panhandle Holding. Proceeds from this
offering were used to fund the acquisition of Panhandle.
CMS OIL AND GAS: CMS Oil and Gas has a $225 million revolving credit facility
which was originally scheduled to convert to term loans maturing from March 1999
through March 2003. However, CMS Oil and Gas and the banks are currently
negotiating the maturity and other terms of the facility. CMS Oil and Gas
anticipates a mutually satisfactory conclusion of the negotiations prior to the
presently stipulated termination date of the extended revolving credit facility
on May 31, 1999.
4: EARNINGS PER SHARE AND DIVIDENDS
Earnings per share attributable to Common Stock for the three and twelve months
ended March 31, 1999 reflect the performance of the Consumers Gas Group. The
allocation of earnings attributable to each class of Common Stock and the
related amounts per share are computed by considering the weighted average
number of shares outstanding.
Earnings attributable to the Outstanding Shares are equal to Consumers Gas Group
net income multiplied by a fraction; the numerator is the weighted average
number of Outstanding Shares during the period and the denominator is the
weighted average number of Outstanding Shares and authorized but unissued shares
of Class G Common Stock not held by holders of the Outstanding Shares during the
period. The earnings attributable to Class G Common Stock on a per share basis
for the three months ended March 31, 1999
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and 1998 are based on 25.62 percent and 25.16 percent, respectively, of the
income of Consumers Gas Group.
COMPUTATION OF EARNINGS PER SHARE:
In Millions, Except Per Share Amounts
- ---------------------------------------------------------------------------------------------------------------------------
Three Months Ended Twelve Months Ended
- ---------------------------------------------------------------------------------------------------------------------------
1999 1998 1999 1998
(a) (a)
NET INCOME APPLICABLE TO BASIC AND DILUTED EPS
Consolidated Net Income $98 $88 $295 $254
==================================================
Net Income Attributable to Common Stocks:
CMS Energy - Basic Income $88 $79 $281 $239
Add conversion of 7.75% Trust
Preferred Securities (net of tax) 2 2 9 7
--------------------------------------------------
CMS Energy - Diluted Income $90 $81 $290 $246
==================================================
Class G:
Basic and Diluted Income $10 $ 9 $ 14 $ 15
==================================================
AVERAGE COMMON SHARES OUTSTANDING
APPLICABLE TO BASIC AND DILUTED EARNINGS PER SHARE
CMS Energy:
Average Shares - Basic 108.2 100.9 104.3 97.6
Add conversion of 7.75% Trust
Preferred Securities 4.2 4.2 4.2 3.3
Options-Treasury Shares .4 .6 .4 .4
--------------------------------------------------
Average Shares - Diluted 112.8 105.7 108.9 101.3
==================================================
Class G:
Average Shares
Basic and Diluted 8.5 8.2 8.4 8.1
==================================================
EARNINGS PER AVERAGE COMMON SHARE
CMS Energy:
Basic $ .82 $ .79 $ 2.69 $2.45
Diluted $ .80 $ .77 $ 2.66 $2.44
Class G:
Basic and Diluted $ 1.19 $ 1.09 $ 1.68 $1.76
===========================================================================================================================
(a) Includes the cumulative effect of an accounting change in the first quarter
of 1998 which increased net income attributible to CMS Energy Common Stock $43
million ($.40 per share - basic and diluted) and Class G Common Stock $12
million ($.36 per share - basic and diluted).
In February 1999, CMS Energy declared and paid dividends of $.33 per share on
CMS Energy Common Stock and $.325 per share on Class G Common Stock. In April
1999, the Board of Directors declared a
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quarterly dividend of $.33 per share on CMS Energy Common Stock and $.325 per
share on Class G Common Stock, payable in May 1999.
5: RISK MANAGEMENT ACTIVITIES AND DERIVATIVES TRANSACTIONS
CMS Energy and its subsidiaries use a variety of derivative instruments
(derivatives), including futures contracts, swaps, options and forward
contracts, 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 counter parties, 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
counter parties. Nonperformance by counter parties is not expected to have a
material adverse impact on CMS Energy's financial position, liquidity, or
results of operations.
COMMODITY PRICE HEDGES: CMS Energy engages in commodity price risk management
activities for both energy trading and non-trading activities as defined by EITF
98-10, Accounting for Energy Trading and Risk Management Activities. CMS Energy
accounts for its non-trading commodity price derivatives as 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 loss of
correlation between the changes in i) the market value of the commodity price
contracts and ii) the market price ultimately received for the hedged item, and
the impact was material, the open commodity price contracts would be
marked-to-market and gains and losses would be recognized in the income
statement currently. Effective January 1, 1999, CMS Energy adopted
mark-to-market accounting for energy trading contracts in accordance with EITF
98-10. Mark-to-market accounting requires gains and losses resulting from
changes in market prices on contracts entered into for trading purposes to be
reflected in earnings currently. The after-tax mark-to-market adjustment
resulting from the adoption of EITF 98-10 had an immaterial effect on CMS
Energy's financial position, results of operations and cash flows as of March
31, 1999.
Consumers has entered into and will enter into electric option contracts to
ensure a reliable source of capacity to meet its customers' electricity
requirements and to limit its risk associated with electricity price increases.
It is management's intent to take physical delivery of the commodity. Consumers
continuously evaluates its daily capacity needs and sells the option contracts,
if marketable, when it has excess daily capacity. Consumers' maximum exposure
associated with these options is limited to premiums paid.
CMS Oil and Gas has one arrangement which is used to fix the prices that CMS Oil
and Gas will pay for gas supplied to the MCV Facility for the years 2001 through
2006 by purchasing the economic equivalent of 10,000 MMBtu per day at a fixed
price, escalating at 8 percent per year thereafter, starting at $2.82 per MMBtu
in 2001. The settlement periods are each a one-year period ending December 31,
2001 through 2006 on 3.65 million MMBtu. If the floating price, essentially the
then-current Gulf Coast spot price, for a period is higher than the fixed price,
the seller pays CMS Oil and Gas the difference, and vice versa.
The contract with the seller provides a calculation of exposure for the purpose
of requiring an exposed party to post a standby letter of credit. Under this
calculation, if a party's exposure at any time exceeds
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$5 million, that party is required to obtain a letter of credit in favor of the
other party for the excess over $5 million and up to $10 million. At March 31,
1999, the seller posted a letter of credit in an amount approximating $300,000.
The letter of credit obligation does not necessarily bear any relation to the
market value of the contract. At March 31, 1999, the fair value of this contract
was $13 million.
A subsidiary of CMS Gas Transmission uses natural gas futures contracts and CMS
Marketing, Services and Trading Company uses natural gas and oil futures
contracts, options and swaps (which require a net cash payment for the
difference between a fixed and variable price).
INTEREST RATE HEDGES: CMS Energy and some of its subsidiaries enter into
interest rate swap agreements to exchange variable rate interest payment
obligations to fixed rate obligations without exchanging the underlying notional
amounts. These agreements convert variable rate debt to fixed rate debt to
reduce the impact of interest rate fluctuations. The notional amounts parallel
the underlying debt levels and are used to measure interest to be paid or
received and do not represent the exposure to credit loss. The notional amount
of CMS Energy's and its subsidiaries' interest rate swaps was $658 million at
March 31, 1999. The difference between the amounts paid and received under the
swaps is accrued and recorded as an adjustment to interest expense over the life
of the hedged agreement.
FOREIGN EXCHANGE HEDGES: CMS Energy uses forward exchange contracts and collared
options 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 notional amount
of the outstanding foreign exchange contracts was $1.2 billion at March 31,
1999, which includes $716 million, $250 million and $220 million for Australian,
Brazilian and Argentine foreign exchange contracts, respectively. The estimated
fair value of the foreign exchange and option contracts at March 31, 1999 was
$10 million, representing the amount CMS Energy would receive upon settlement.
6: REPORTABLE SEGMENTS
CMS Energy operates principally in the following six reportable segments:
electric utility; gas utility; independent power production; oil and gas
exploration and production; natural gas transmission, storage and processing;
and energy marketing, services and trading.
The electric utility segment consists of regulated activities associated with
the generation, transmission and distribution of electricity in the State of
Michigan. The gas utility segment consists of regulated activities associated
with the production, transportation, storage and distribution of natural gas in
the State of Michigan. The other reportable segments consist of the development
and management of electric, gas and other energy-related projects in the United
States and internationally, including energy trading and marketing. CMS Energy's
reportable segments are strategic business units organized and managed by the
nature of the products and services each provides. The accounting policies of
each reportable segment are the same as those described in the summary of
significant accounting policies. CMS Energy's management
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evaluates performance based on pretax operating income. Intersegment sales and
transfers are accounted for at current market prices and are eliminated in
consolidated pretax operating income by segment.
The Consolidated Statements of Income show operating revenue and pretax
operating income by reportable segment. Revenues from an international energy
distribution business and a land development business fall below the
quantitative thresholds for reporting. Neither of these segments has ever met
any of the quantitative thresholds for determining reportable segments. Amounts
shown for the natural gas transmission, storage and processing segment include
Panhandle, which was acquired on March 29, 1999. Other financial data for
reportable segments are as follows:
Reportable Segments
In Millions
- ------------------------------------------------------------------------------------------------
March 31, December 31,
1999 1998
- ------------------------------------------------------------------------------------------------
Identifiable Assets
Electric utility (a) $ 4,525 $ 4,640
Gas utility (a) 1,654 1,726
Independent power production 2,444 2,252
Oil and gas exploration and production 556 547
Natural gas transmission, storage and processing 3,417 971
Marketing, services and trading 158 152
Other 1,013 1,022
---------------------------------------------------------
$13,767 $11,310
================================================================================================
(a) Amounts include an attributed portion of Consumers' other common assets to
both the electric and gas utility businesses.
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ARTHUR ANDERSEN LLP
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 March 31, 1999 and
1998, and the related consolidated statements of income, common stockholders'
equity and cash flows for the three-month and twelve-month periods then ended.
These financial statements are the responsibility of the Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which is the
expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the financial statements referred to above for them to be in
conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet and consolidated statement of
preferred stock of CMS Energy Corporation and subsidiaries as of December 31,
1998, and the related consolidated statements of income, common stockholders'
equity and cash flows for the year then ended (not presented herein), and, in
our report dated January 26, 1999 (except with respect to the matters disclosed
in Note 3, "Consumers' Electric Utility Rate Matters", and Note 19, as to which
the date is March 29, 1999), we expressed an unqualified opinion on those
statements. In our opinion, the information set forth in the accompanying
consolidated balance sheet as of December 31, 1998, 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,
May 11, 1999.
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CONSUMERS ENERGY COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS
Consumers is a combination electric and gas utility company serving the Lower
Peninsula of Michigan and is the principal subsidiary of CMS Energy, a holding
company. Consumers' customer base includes a mix of residential, commercial and
diversified industrial customers, the largest segment of which is the automotive
industry.
The MD&A of this Form 10-Q should be read along with the MD&A and other parts of
Consumers' 1998 Form 10-K. This MD&A also 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
Statements and Notes.
This report contains forward-looking statements, as defined by the Private
Securities Litigation Reform Act of 1995. While forward-looking statements are
based upon assumptions and such assumptions are believed to be reasonable and
are made in good faith, Consumers cautions that assumed results almost always
vary from actual results and the difference between assumed and actual results
can be material. The type of assumptions that could materially affect the actual
results are discussed in the Forward-Looking Statements section in this MD&A.
More specific risk factors are contained in various public filings made by
Consumers with the SEC. This report also describes material contingencies in the
Notes to Consolidated Financial Statements and the readers are encouraged to
read such Notes.
RESULTS OF OPERATIONS
In Millions
March 31 1999 1998 Change
- ----------------------------------------------------------------------------------------------------------------
Three months ended $109 $102 $ 7
Twelve months ended 319 299 20
================================================================================================================
Net income available to the common stockholder was $109 million for the three
months ended March 31, 1999 compared to $102 million for the same 1998 period.
The increase in earnings of $7 million was due to higher electric and gas
deliveries as a result of more normal winter temperatures as compared to 1998,
the result of changes in regulation which allow Consumers the opportunity to
benefit from lower electric power supply costs and reduced gas costs, and
improved earnings from the MCV Partnership. These increases were partially
offset by higher operating costs related to increased gas deliveries and the
absence of an accounting change for property taxes which occurred in 1998. The
accounting change resulted in a benefit of $66 million ($43 million after-tax)
that was partially offset by the recognition of a $37 million dollar loss ($24
million after tax) for the underrecovery of power costs under the PPA. Net
income available to the common shareholder was $319 million for the twelve
months ended March 31, 1999 compared to $299 million for the same period in
1998. The increase in earnings of $20 million is primarily due to increased
electric deliveries and the result of the changes in regulation which allowed
Consumers the opportunity to benefit from lower electric power supply costs and
reduced gas costs. Partially offsetting this increase in earnings was reduced
gas deliveries, increased operating expenses, and the absence of the 1998 change
in accounting for property taxes and the loss from the PPA as discussed above.
For further information, see the Electric and Gas Utility Results of Operations
sections and Note 2.
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ELECTRIC UTILITY RESULTS OF OPERATIONS
ELECTRIC PRETAX OPERATING INCOME:
In Millions
March 31 1999 1998 Change
- ----------------------------------------------------------------------------------------------------------------
Three months ended $ 134 $ 119 $ 15
Twelve months ended 491 444 47
================================================================================================================
Electric pretax operating income was $134 million for the three months ended
March 31, 1999 compared to $119 million for the same period in 1998. The
increase in earnings of $15 million resulted from increased electric deliveries
and changes in regulation which provides Consumers the opportunity to benefit
from reduced power supply costs. In the past, reductions to power costs would
have had no impact on net income because power cost savings were passed onto
Consumers' electric customers. Electric pretax operating income was $491 million
for the twelve months ended March 31, 1999 compared to $444 million for the same
period of 1998. This increase of $47 million also resulted from increased
electric deliveries and changes in regulation which provided benefits from
reduced power supply costs in 1999 partially offset by increased operating
expenses. The following table quantifies these impacts on Pretax Operating
Income:
In Millions
Three Months Twelve Months
Ended March 31 Ended March 31
Change Compared to Prior Year 1999 vs 1998 1999 vs 1998
- ----------------------------------------------------------------------------------------------------------------
Electric Deliveries $ 8 $ 42
Power supply costs 5 24
Rate increases and other non-commodity revenue 2 2
Operations and maintenance 2 (11)
General taxes and depreciation (2) (10)
---------------------------------
Total change $ 15 $ 47
================================================================================================================
ELECTRIC DELIVERIES: Total electric deliveries were 10 billion kwh for the three
months ended March 31, 1999, an increase of 4.0 percent resulting primarily from
higher electric deliveries to ultimate customers in the residential and
commercial sectors. Electric deliveries were 40.4 billion kwh for the twelve
months ended March 31, 1999, an increase of 5.1 percent which also reflects an
increase in electric deliveries to ultimate customers, primarily in the
residential and commercial sectors.
POWER COSTS:
In Millions
March 31 1999 1998 Change
- ----------------------------------------------------------------------------------------------------------------
Three months ended $ 279 $ 270 $ 9
Twelve months ended 1,183 1,128 55
================================================================================================================
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Power costs increased for the three months period ended March 31, 1999 compared
to the same 1998 period as a result of increased sales. Power costs also
increased for the twelve months ended March 31, 1999 compared to the same period
in 1998 for the same reason. Both internal generation and power purchases from
outside sources increased during this period to meet the increased demand.
UNCERTAINTIES: Consumers' financial position may be affected by a number of
trends or uncertainties that have, or Consumers reasonably expects could have, a
material impact on net sales, revenues, or income from continuing electric
operations. Such uncertainties include: 1) capital expenditures for compliance
with the Clean Air Act; 2) environmental liabilities arising from compliance
with various federal, state and local environmental laws and regulations,
including potential liability or expenses relating to the Michigan Natural
Resources and Environmental Protection Act and Superfund; 3) cost recovery
relating to the MCV Facility; 4) electric industry restructuring; 5)
implementation of a frozen PSCR and initiatives to be undertaken to reduce
exposure to high energy prices; 6) underrecoveries associated with power
purchases from the MCV Partnership; and 7) decommissioning issues and ongoing
issues relating to the storage of spent fuel and the operating life of
Palisades. For detailed information about these trends or uncertainties, see
Note 2, Uncertainties, incorporated by reference herein.
GAS UTILITY RESULTS OF OPERATIONS
GAS PRETAX OPERATING INCOME:
In Millions
- ----------------------------------------------------------------------------------------------------------------
March 31 1999 1998 Change
- ----------------------------------------------------------------------------------------------------------------
Three months ended $ 78 $ 54 $24
Twelve months ended 150 130 20
================================================================================================================
Gas pretax operating income was $78 million for the three months ended March 31,
1999 compared to $54 million for the same period in 1998. The increase of $24
million is the result of increased gas deliveries due to colder temperatures
during the 1999 heating season and changes in gas regulation which suspended
Consumers' GCR clause in mid-1998. This suspension provided Consumers the
opportunity to benefit from lower gas prices. In the past reductions in gas
costs would have had no impact on gas pretax operating income because any gas
cost savings were passed on to Consumers' gas customers. This increase was
partially offset by increased depreciation and general tax expense associated
with additional plant expansion. Gas pretax operating income was $150 million
for the twelve month period ended March 31, 1999 compared to $130 million for
the same period in 1998. The increase of $20 million results from the suspension
of Consumers' GCR clause during 1998 as discussed above and lower operation and
maintenance costs due to cost controls. The following table quantifies these
impacts on Pretax Operating Income:
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In Millions
- ----------------------------------------------------------------------------------------------------------------
Three Months Twelve Months
Ended March 31 Ended March 31
Change Compared to Prior Year 1999 vs 1998 1999 vs 1998
- ----------------------------------------------------------------------------------------------------------------
Sales $ 19 $ (4)
Reduced gas cost per mcf 14 33
Gas wholesale and retail services activities 1 4
Operation and maintenance - 7
General taxes, depreciation and other (10) (20)
-----------------------------
Total increase(decrease) in pretax operating income $ 24 $ 20
================================================================================================================
GAS DELIVERIES: System deliveries for the three month period ended March 31,
1999, including miscellaneous transportation, were 166 bcf compared to 146 bcf
for the same 1998 period. This increase of 20 bcf or 14 percent was primarily
due to colder temperatures during the 1999 heating season. System deliveries for
the twelve month period ended March 31, 1999, including miscellaneous
transportation, were 380 bcf compared to 399 bcf for the same 1998 period. This
decrease of 19 bcf or 5 percent was primarily the result of warmer temperatures
for the most recent twelve month period.
COST OF GAS SOLD:
In Millions
- ----------------------------------------------------------------------------------------------------------------
March 31 1999 1998 Change
- ----------------------------------------------------------------------------------------------------------------
Three months ended $306 $264 $42
Twelve months ended 606 645 (39)
================================================================================================================
The cost increases for the three month period ended March 31, 1999 was the
result of increased gas deliveries due to colder temperatures during the 1999
winter heating season. The cost decrease for the twelve month period ended March
31, 1999 was the result of decreased sales due to warmer overall temperatures.
UNCERTAINTIES: Consumers' financial position may be affected by a number of
trends or uncertainties that have, or Consumers reasonably expects could have, a
material impact on net sales or revenues or income from continuing gas
operations. Such uncertainties include: 1) potential environmental costs at a
number of sites, including sites formerly housing manufactured gas plant
facilities, 2) a statewide experimental gas restructuring program, and 3)
implementation of a frozen GCR and initiatives undertaken to protect against gas
price increases. For detailed information about these uncertainties see Note 2,
Uncertainties, incorporated by reference herein.
CAPITAL RESOURCES AND LIQUIDITY
CASH POSITION, INVESTING AND FINANCING
OPERATING ACTIVITIES: Consumers derives cash from operations, from the sale and
transportation of natural gas and the generation, transmission and sale of
electricity. Cash from operations totaled $386 million and $275 million for the
first three months of 1999 and 1998, respectively. The $111 million increase
resulted
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primarily from higher electric and gas sales and a $32 million decrease in gas
and coal inventories. Consumers uses operating cash primarily to maintain and
expand electric and gas systems, to retire portions of long-term debt, and to
pay dividends.
INVESTING ACTIVITIES: Cash used in investing activities totaled $(113) million
and $(88) million for the first three months of 1999 and 1998, respectively. The
change of $25 million was primarily the result of a $19 million increase in
capital expenditures and a $5 million increase in electric restructuring
implementation plan expenditures.
FINANCING ACTIVITIES: Cash used in financing activities totaled $(271) and
$(178) million for the first three months of 1999 and 1998, respectively. The
change of $93 million is primarily the result of the net increase in proceeds of
$74 million from the refinancing and issuance of Consumers' debt in 1998 and a
$17 million increase in the payment of common stock dividends in 1999.
OTHER INVESTING AND FINANCING MATTERS: Consumers is authorized by FERC to issue
securities and guarantees. Consumers has credit facilities, lines of credit and
a trade receivable sale program in place as anticipated sources of funds needed
to fulfill, in whole or in part, material commitments for capital expenditures.
On April 1, 1999, Consumers redeemed all of its eight million outstanding shares
of the $2.08 preferred stock at $25.00 per share. For detailed information about
these sources of funds, see Note 3, Short-Term Financings and Capitalization.
OUTLOOK
CAPITAL EXPENDITURES OUTLOOK
Consumers estimates the following capital expenditures, including new lease
commitments, by type and by business segment 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
- ----------------------------------------------------------------------------------------------------------------
Construction $476 $499 $482
Nuclear fuel lease 11 - 16
Capital leases other than nuclear fuel 18 16 17
----------------------------------------
$505 $515 $515
================================================================================================================
Electric utility operations (a)(b) $382 $392 $395
Gas utility operations (a) 123 123 120
----------------------------------------
$505 $515 $515
================================================================================================================
(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 do not include preliminary 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.
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ELECTRIC BUSINESS OUTLOOK
GROWTH: Consumers expects average annual growth of 2.4 percent per year in
electric system deliveries over the next five years, absent the impact of
restructuring on the industry and its regulation in Michigan. Abnormal weather,
changing economic conditions, or the developing competitive market for
electricity may affect actual electric sales in future periods.
RESTRUCTURING: Consumers' retail electric business is affected by competition.
To meet its challenges, Consumers entered into multi-year contracts with some of
its largest industrial customers to serve certain facilities. The MPSC has
approved these contracts as part of its phased introduction to competition.
Certain customers have the option of terminating their contracts early.
FERC Orders 888 and 889, as amended, require utilities to provide direct access
to the interstate transmission grid for wholesale transactions. Consumers and
Detroit Edison disagree on the effect of the orders on the Michigan Electric
Power Coordination Center pool. Consumers proposes to maintain the benefits of
the pool through at least December 2000, while Detroit Edison contends that the
pool agreement should be terminated immediately. Among Consumers' alternatives
in the event of the pool being terminated would be joining an independent system
operator. FERC has indicated this preference for structuring the operations of
the electric transmission grid.
For material changes relating to the restructuring of the electric utility
industry, see Note 1, Corporate Structure and Summary of Significant Accounting
Policies, "Utility Regulation" and Note 2, Uncertainties,"Electric Rate Matters
- - Electric Restructuring", incorporated by reference herein.
RATE MATTERS: In November 1997, ABATE filed a complaint with the MPSC alleging
that Consumers' earnings are in excess of its authorized rate of return and
seeking an immediate reduction in Consumers' electric rates. The MPSC staff
conducted an investigation and concluded in an April 1998 report that no formal
rate proceeding was warranted at that time. The MPSC has now set the complaint
for hearing, but the presiding ALJ has restricted the scope of the hearing so
that the most favorable relief available to ABATE would be an MPSC direction for
Consumers to file an electric rate case. Various procedural issues relating to
this complaint, including the ALJ's ruling on its scope, are currently on appeal
at the MPSC. Consumers is unable to predict the outcome of this matter.
GAS BUSINESS OUTLOOK
GROWTH: Consumers currently anticipates gas deliveries, including gas customer
choice deliveries, excluding transportation to the MCV Facility and off-system
deliveries, to grow at an average annual rate of between one and two percent
over the next five years based primarily on a steadily growing customer base.
Actual gas deliveries in future periods may be affected by abnormal weather,
alternative energy prices, changes in competitive conditions, particularly as a
result of industry restructuring, and the level of natural gas consumption.
Consumers also offers a variety of energy-related services to its customers
focused upon appliance maintenance, home safety, commodity choice and assistance
to customers purchasing heating, ventilation and air conditioning equipment.
RESTRUCTURING: In December 1997, the MPSC approved Consumers' application to
implement a statewide three-year experimental gas transportation program,
eventually allowing 300,000 residential, commercial and industrial retail gas
sales customers to choose their gas supplier. For further information, regarding
restructuring of the Gas Business, see Note 2, Uncertainties, "Gas Rate
Matters-Gas Restructuring," incorporated by reference herein.
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OTHER MATTERS
YEAR 2000 COMPUTER MODIFICATIONS
Consumers uses software and related technologies throughout its businesses that
the year 2000 date change could affect and, if uncorrected, could cause
Consumers to, among other things, delay issuance of bills or reports, issue
inaccurate bills, report inaccurate data, incur generating plant outages, or
create energy delivery uncertainties. In 1995, Consumers established a Year 2000
Program to ensure the continued operation of its businesses at the turn of the
century. Consumers' efforts included dividing the programs requiring
modification between critical and noncritical programs. A formal methodology was
established to identify critical business functions and risk scenarios, to
correct problems identified, to develop test plans and expected results, and to
test the corrections made. Consumers' Year 2000 Program involves an aggressive,
comprehensive four-phase approach, including impact analysis, remediation,
compliance review, and monitoring/contingency planning.
The impact analysis phase includes the analysis, inventory, prioritization and
remediation plan development for all technology essential to core business
processes. The remediation phase involves testing and implementation of
remediated technology. A mainframe test environment was established in 1997 and
a test environment for network servers and stand-alone personal computers was
established in mid-1998. All essential corporate business systems have been, or
will be, tested in these test environments. The compliance review phase includes
the assembling of compliance documentation for each technology component as
remediation efforts are completed, and additional verification testing of
essential technology where necessary. The monitoring/contingency planning phase
includes compliance monitoring to ensure that year 2000 problems are not
reintroduced into remediated technology, as well as the development of
contingency plans to address reasonably likely risk scenarios.
STATE OF READINESS: Consumers is managing traditional information technology,
which consists of essential business systems (such as payroll, billing and
purchasing) and infrastructure (including mainframe, wide area network, local
area networks, personal computers, radios and telephone systems). Consumers is
also managing process control computers and embedded systems contained in
buildings, equipment and energy supply and delivery systems.
Additionally, Consumers is managing essential goods and services, which include
electric fuel supply, gas fuel supply, independent electric power supplies,
buildings and other facilities, electronic commerce, telecommunications network
carriers, financial institutions, purchasing vendors, and software and hardware
technology vendors. Consumers is addressing the preparedness of these businesses
and their risk through readiness assessment questionnaires.
The status of Consumers' Year 2000 Program by phase, with target dates for
completion and current percentage complete based upon software and hardware
inventory counts as of March 31, 1999, is as follows:
MONITORING/
IMPACT COMPLIANCE CONTINGENCY
ANALYSIS REMEDIATION REVIEW PLANNING
------------ ----------- ------------ -----------
SYSTEMS (a) (b) (a) (b) (a) (b) (a) (b)
- -------
Electric 3/98 100% 6/99 93% 6/99 91% 6/99 75%
Gas 3/98 100% 6/99 91% 6/99 91% 6/99 75%
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Corporate 3/98 100% 6/99 85% 6/99 81% 6/99 75%
Operating Services 3/98 100% 6/99 94% 6/99 90% 6/99 75%
Information Technology 3/98 100% 6/99 75% 6/99 70% 6/99 75%
Essential Goods
& Services 6/99 60% N/A N/A (c)
(a) Target date for completion.
(b) Current percentage complete.
(c) Contingency planning for essential goods and services is incorporated into
contingency planning for each major system presented.
COST OF REMEDIATION: Consumers expenses cost for software modifications as
incurred, and capitalizes and amortizes the cost for new software and equipment
over its useful life. The total estimated cost of the Year 2000 Program is $22
million. Costs incurred through March 31, 1999 were $17 million. Consumers'
annual Year 2000 Program costs represent approximately 1% to 10% of a typical
Consumers' annual information technology budget. Year 2000 compliance work is
being funded primarily from operations. To date, the commitment of Consumers
resources to the year 2000 issue has not deferred any information technology
projects which could have a material adverse affect on Consumers' financial
position, liquidity or results of operations.
RISK ASSESSMENT: Consumers considers the most reasonably likely worst-case
scenarios to be: (1) a lack of communications to dispatch crews to electric or
gas emergencies; (2) a lack of communications to generating units to balance
electrical load; and (3) power shortages due to the lack of stability of the
regional or national electric grid. These scenarios could result in Consumers
not being able to generate or distribute enough energy to meet customer demand
for a period of time, which could result in lost sales and profits, as well as
legal liability. Year 2000 remediation and testing efforts are concentrating on
these risk areas and will continue through the end of 1999. Contingency plans
will be revised and executed to further mitigate the risks associated with these
scenarios.
CONTINGENCY PLANS: Contingency planning efforts are currently underway for all
systems and providers of essential goods and services. Extensive contingency
plans are already in place in many locations and are currently being revised for
reasonably likely worst-case scenarios related to year 2000 issues. In many
cases, Consumers already has arrangements with multiple vendors of similar goods
and services so that in the event that one cannot meet its commitments, others
may be able to. Current contingency plans provide for manual dispatching of
crews and manual coordination of electrical load balancing and are being revised
to provide for radio or satellite communications. Coordinated contingency
planning efforts are in progress with the North American Electric Reliability
Council and its Regional Reliability Councils to minimize risk to electric
generation, transmission and distribution systems.
EXPECTATIONS: Consumers does not expect that the cost of these modifications
will materially affect its financial position, liquidity, or results of
operations. There can be no guarantee, however, that these costs, plans or time
estimates will be achieved, and actual results could differ materially.
Because of the integrated nature of Consumers' business with other energy
companies, utilities, jointly owned facilities operated by other entities, and
business conducted with suppliers and large customers, Consumers may be
indirectly affected by year 2000 compliance complications.
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DERIVATIVES AND HEDGES
MARKET RISK INFORMATION: Consumers' exposure to market risk sensitive
instruments and positions include, but are not limited to, changes in interest
rates, debt prices and equity prices in which Consumers holds less than a 20
percent interest. In accordance with the SEC's disclosure requirements,
Consumers performed a 10 percent sensitivity analysis on its derivative and
non-derivative financial instruments. The analysis measures the change in the
net present values based on a hypothetical 10 percent adverse change in the
market rates to determine the potential loss in fair values, cash flows and
earnings. Losses in excess of the amounts determined could occur if market rates
or prices exceed the 10 percent change used for the analysis. Management does
not believe that a sensitivity analysis alone provides an accurate or reliable
method for monitoring and controlling risk. Therefore, Consumers relies on the
experience and judgment of senior management to revise strategies and adjust
positions as they deem necessary.
For purposes of the analysis below, Consumers has not quantified short-term
exposures to hypothetically adverse changes in the price or nominal amounts
associated with inventories or trade receivables and payables. Furthermore, all
derivative financial instruments are entered into for purposes other than
trading. In the case of hedges, management believes that any losses incurred on
derivative instruments used as a hedge would be offset by the opposite movement
of the underlying hedged item.
EQUITY SECURITY PRICE RISK: Consumers has an equity investment in which it holds
less than a 20 percent interest in the entity. A hypothetical 10 percent adverse
change in market price would result in a $14 million change in its investment
and equity since this equity 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.
DEBT PRICE AND INTEREST RATE RISK: Management uses a combination of fixed-rate
and variable-rate debt to reduce interest rate exposure. Interest rate swaps and
rate locks may be used to adjust exposure when deemed appropriate, based upon
market conditions. These strategies attempt to provide and maintain the lowest
cost of capital.
As of March 31, 1999, Consumers had outstanding $819 million of variable-rate
debt. In order to minimize adverse interest-rate changes, Consumers entered into
fixed interest-rate swaps for a notional amount of $190 million. Assuming a
hypothetical 10 percent adverse change in market interest rates, Consumers'
exposure to earnings is limited to $3 million. As of March 31, 1999, Consumers
has outstanding fixed-rate debt including fixed-rate swaps of $2.143 billion
with a fair value of $2.145 billion. Assuming a hypothetical 10 percent adverse
change in market rates, Consumers would have an exposure of $122 million to its
fair value. Consumers believes that any adverse change in debt price and
interest rates would not have a material effect on its consolidated financial
position, results of operation or cash flows.
FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements as defined by the Private
Securities Litigation Reform Act of 1995. The words "anticipates," "believes,"
"estimates," "expects," "intends," and "plans," as well as variations of such
words and similar expressions, are intended to identify forward-looking
statements that involve risk and uncertainty. These statements are based upon
various assumptions involving judgements with respect to the future including,
among others, the ability to achieve revenue enhancements; national, regional,
and local economic competitive and regulatory conditions and developments;
capital and financial market conditions including interest rates; weather
conditions and other natural phenomena; adverse
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regulatory or legal decisions, including environmental laws and regulations; the
pace of deregulation of the natural gas and electric industries; energy markets,
including the timing and extent of changes in commodity prices for oil, coal,
natural gas, natural gas liquids, electricity and certain related products; the
timing and success of business development efforts; potential disruption or
interruption of facilities or operations due to accidents or political events;
nuclear power and other technological developments; the effect of changes in
accounting policies; year 2000 readiness; and other uncertainties, all of which
are difficult to predict and many of which are beyond the control of Consumers.
Accordingly, while Consumers believes that the assumed results are reasonable,
there can be no assurance that they will approximate actual results. Consumers
disclaims any obligation to update or revise forward-looking statements, whether
as a result of new information, future events or otherwise. Certain risk factors
are detailed from time to time in various public filings made by Consumers with
the SEC.
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CONSUMERS ENERGY COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
THREE MONTHS ENDED TWELVE MONTHS ENDED
MARCH 31 1999 1998 1999 1998
- ----------------------------------------------------------------------------------------------------------------
In Millions
OPERATING REVENUE
Electric $ 636 $ 612 $2,630 $2,507
Gas 506 429 1,128 1,135
Other 14 11 55 51
-------------------------------------------------
1,156 1,052 3,813 3,693
- ----------------------------------------------------------------------------------------------------------------
OPERATING EXPENSES
Operation
Fuel for electric generation 77 71 322 300
Purchased power - related parties 139 145 567 594
Purchased and interchange power 63 54 294 234
Cost of gas sold 306 264 606 645
Other 127 133 540 544
------------------------------------------------
712 667 2,329 2,317
Maintenance 38 37 174 166
Depreciation, depletion and amortization 121 110 413 389
General taxes 58 55 204 198
-------------------------------------------------
929 869 3,120 3,070
- ----------------------------------------------------------------------------------------------------------------
PRETAX OPERATING INCOME
Electric 134 119 491 444
Gas 78 54 150 130
Other 15 10 52 49
-------------------------------------------------
227 183 693 623
- ----------------------------------------------------------------------------------------------------------------
OTHER INCOME (DEDUCTIONS)
Loss on MCV power purchases - (37) - (37)
Dividends and interest from affiliates 3 4 13 23
Accretion income 1 2 6 7
Accretion expense (4) (4) (15) (17)
Other, net 3 1 (2) 1
--------------------------------------------------
3 (34) 2 (23)
- ----------------------------------------------------------------------------------------------------------------
INTEREST CHARGES
Interest on long-term debt 35 34 139 137
Other interest 8 10 36 38
Capitalized interest - - (2) (1)
---------------------------------------------------
43 44 173 174
- ----------------------------------------------------------------------------------------------------------------
NET INCOME BEFORE INCOME TAXES 187 105 522 426
INCOME TAXES 68 36 166 133
-------------------------------------------------
NET INCOME BEFORE CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE 119 69 356 293
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING FOR
PROPERTY TAXES, NET OF $23 TAX - 43 - 43
--------------------------------------------------
NET INCOME 119 112 356 336
PREFERRED STOCK DIVIDENDS 5 5 19 23
PREFERRED SECURITIES DISTRIBUTIONS 5 5 18 14
--------------------------------------------------
NET INCOME AVAILABLE TO COMMON STOCKHOLDER $ 109 $ 102 $ 319 $ 299
================================================================================================================
THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
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CONSUMERS ENERGY COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
THREE MONTHS ENDED TWELVE MONTHS ENDED
MARCH 31 1999 1998 1999 1998
- ----------------------------------------------------------------------------------------------------------------
In Millions
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 119 $ 112 $ 356 $ 336
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation, depletion and amortization (includes nuclear
decommissioning of $13, $13, $52 and $50, respectively) 121 110 413 389
Loss on MCV power purchases - 37 - 37
Capital lease and other amortization 11 8 38 43
Accretion expense 4 4 15 17
Accretion income - abandoned Midland project (1) (2) (6) (7)
Deferred income taxes and investment tax credit (3) (10) 28 3
Undistributed earnings of related parties (14) (11) (55) (48)
MCV power purchases (14) (17) (61) (65)
Cumulative effect of accounting change - (66) - (66)
Changes in other assets and liabilities 163 110 (3) 13
-----------------------------------------------
Net cash provided by operating activities 386 275 725 652
- ----------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (excludes assets placed under capital lease) (93) (74) (388) (357)
Cost to retire property, net (21) (17) (88) (41)
Investments in nuclear decommissioning trust funds (13) (13) (52) (50)
Investment in Electric Restructuring Implementation Plan (5) - (22) (3)
Proceeds from nuclear decommissioning trust funds 12 12 64 29
Proceeds from FMLP 7 - 19 -
Proceeds from the sale of two partnerships - - 27 -
Associated company preferred stock redemption - - 50 -
Other - 4 2 54
-------------------------------------------------
Net cash used in investing activities (113) (88) (388) (368)
- ----------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase (decrease) in notes payable, net (169) (132) (199) 157
Payment of common stock dividends (97) (80) (258) (298)
Payment of capital lease obligations (9) (7) (37) (43)
Payment of preferred stock dividends (5) (5) (19) (27)
Preferred securities distributions (5) (5) (18) (14)
Retirement of bonds and other long-term debt (1) (418) (437) (470)
Proceeds from bank loans 15 - 15 -
Proceeds from senior notes - 469 577 469
Contribution from (return of equity to) stockholder - - 50 (50)
Proceeds from Trust Preferred Securities - - - 116
Retirement of preferred stock - - - (120)
-------------------------------------------------
Net cash provided by (used in) financing activities (271) (178) (326) (280)
- -----------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND TEMPORARY CASH INVESTMENTS 2 9 11 14
CASH AND TEMPORARY CASH INVESTMENTS, BEGINNING OF PERIOD 25 7 16 12
--------------------------------------------------
CASH AND TEMPORARY CASH INVESTMENTS, END OF PERIOD $ 27 $ 16 $ 27 $ 16
================================================================================================================
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THREE MONTHS ENDED TWELVE MONTHS ENDED
MARCH 31 1999 1998 1999 1998
- ----------------------------------------------------------------------------------------------------------------
In Millions
OTHER CASH FLOW ACTIVITIES AND NON-CASH INVESTING AND FINANCING ACTIVITIES WERE:
CASH TRANSACTIONS
Interest paid (net of amounts capitalized) $ 49 $ 53 $ 157 $ 170
Income taxes paid (net of refunds) - 3 149 119
NON-CASH TRANSACTIONS
Nuclear fuel placed under capital lease $ - $ 5 $ 42 $ 6
Other assets placed under capital leases 2 2 14 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
CONSOLIDATED BALANCE SHEETS
ASSETS MARCH 31 MARCH 31
1999 DECEMBER 31 1998
(UNAUDITED) 1998 (UNAUDITED)
- ----------------------------------------------------------------------------------------------------------------
In Millions
PLANT (AT ORIGINAL COST)
Electric $6,772 $6,720 $6,547
Gas 2,374 2,360 2,346
Other 26 25 24
--------------------------------------
9,172 9,105 8,917
Less accumulated depreciation, depletion and amortization 5,430 4,862 4,722
--------------------------------------
3,742 4,243 4,195
Construction work-in-progress 161 165 144
--------------------------------------
3,903 4,408 4,339
- ----------------------------------------------------------------------------------------------------------------
INVESTMENTS
Stock of affiliates 217 241 287
First Midland Limited Partnership 236 240 244
Midland Cogeneration Venture Limited Partnership 220 209 179
Other - - 7
--------------------------------------
673 690 717
- ----------------------------------------------------------------------------------------------------------------
CURRENT ASSETS
Cash and temporary cash investments at cost, which approximates market 27 25 16
Accounts receivable and accrued revenue, less allowances
of $5, $5 and $6, respectively 106 114 52
Accounts receivable - related parties 65 63 71
Inventories at average cost
Gas in underground storage 82 219 79
Materials and supplies 50 67 64
Generating plant fuel stock 33 43 39
Postretirement benefits 25 25 25
Deferred income taxes - - 13
Prepaid property taxes and other 116 162 182
--------------------------------------
504 718 541
- ----------------------------------------------------------------------------------------------------------------
NON-CURRENT ASSETS
Nuclear decommissioning trust funds 565 557 518
Nuclear plant-related assets 535 - -
Postretirement benefits 364 372 395
Abandoned Midland Project 66 71 88
Other 324 347 235
--------------------------------------
1,854 1,347 1,236
--------------------------------------
TOTAL ASSETS $6,934 $7,163 $6,833
================================================================================================================
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STOCKHOLDERS' INVESTMENT AND LIABILITIES MARCH 31 MARCH 31
1999 DECEMBER 31 1998
(UNAUDITED) 1998 (UNAUDITED)
- ----------------------------------------------------------------------------------------------------------------
In Millions
CAPITALIZATION
Common stockholder's equity
Common stock $ 841 $ 841 $ 841
Paid-in capital 495 502 452
Revaluation capital 54 68 65
Retained earnings since December 31, 1992 446 434 385
--------------------------------------
1,836 1,845 1,743
Preferred stock 244 238 238
Company-obligated mandatorily redeemable preferred securities of:
Consumers Power Company Financing I (a) 100 100 100
Consumers Energy Company Financing II (a) 120 120 120
Long-term debt 2,023 2,007 1,722
Non-current portion of capital leases 94 100 73
--------------------------------------
4,417 4,410 3,996
- ----------------------------------------------------------------------------------------------------------------
CURRENT LIABILITIES
Current portion of long-term debt and capital leases 153 152 284
Notes payable 46 215 245
Accrued taxes 229 238 232
Accounts payable 148 190 128
Accounts payable - related parties 87 79 82
Power purchases 47 47 47
Accrued interest 27 36 20
Deferred income taxes 6 9 -
Accrued refunds 13 11 11
Other 144 138 132
--------------------------------------
900 1,115 1,181
- ----------------------------------------------------------------------------------------------------------------
NON-CURRENT LIABILITIES
Deferred income taxes 638 666 668
Postretirement benefits 446 456 480
Power purchases 111 121 157
Deferred investment tax credit 131 134 147
Regulatory liabilities for income taxes, net 108 87 61
Other 183 174 143
--------------------------------------
1,617 1,638 1,656
--------------------------------------
COMMITMENTS AND CONTINGENCIES (NOTES 1 AND 2)
Total Stockholders' Investment and Liabilities $6,934 $7,163 $6,833
================================================================================================================
(a) The primary asset of Consumers Power Company Financing I is $103 million
principal amount of 8.36% subordinated deferrable interest notes due 2015 from
Consumers. The primary asset of Consumers Energy Company Financing II is $124
million principal amount of 8.20% subordinated deferrable interest notes due
2027 from Consumers.
THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE BALANCE SHEETS .
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61
CONSUMERS ENERGY COMPANY
CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDER'S EQUITY
(UNAUDITED)
THREE MONTHS ENDED TWELVE MONTHS ENDED
MARCH 31 1999 1998 1999 1998
- ----------------------------------------------------------------------------------------------------------------
In Millions
COMMON STOCK
At beginning and end of period $ 841 $ 841 $ 841 $ 841
- ----------------------------------------------------------------------------------------------------------------
OTHER PAID-IN CAPITAL
At beginning of period 502 452 452 504
Preferred stock reaquired - - - (2)
Stockholder's contribution - - 100 -
Return of stockholder's contribution - - (50) (50)
Capital stock expense (7) - (7) -
--------------------------------------------------
At end of period 495 452 495 452
- ----------------------------------------------------------------------------------------------------------------
REVALUATION CAPITAL
At beginning of period 68 58 65 36
Change in unrealized investment-gain (loss) (a) (14) 7 (11) 29
--------------------------------------------------
At end of period 54 65 54 65
- ----------------------------------------------------------------------------------------------------------------
RETAINED EARNINGS
At beginning of period 434 363 385 385
Net income (a) 119 112 356 336
Cash dividends declared- Common Stock (97) (80) (258) (299)
Cash dividends declared- Preferred Stock (5) (5) (19) (23)
Preferred securities distributions (5) (5) (18) (14)
--------------------------------------------------
At end of period 446 385 446 385
-------------------------------------------------
TOTAL COMMON STOCKHOLDER'S EQUITY $1,836 $1,743 $1,836 $1,743
================================================================================================================
(a) DISCLOSURE OF COMPREHENSIVE INCOME:
Revaluation capital
Unrealized investment-gain (loss), net of tax of
$(8), $4, $(6) and $16, respectively $ (14) $ 7 $ (11) $ 29
Net income 119 112 356 336
------------------------------------------------
Total Comprehensive Income $ 105 $ 119 $ 345 $ 365
===============================================
THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
61
62
CONSUMERS ENERGY COMPANY
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
These Condensed Notes and their related Consolidated Financial Statements should
be read along with the Consolidated Financial Statements and Notes contained in
the Consumers 1998 Form 10-K that includes the Report of Independent Public
Accountants. In the opinion of management, the unaudited information herein
reflects all adjustments necessary to assure the fair presentation of financial
position, results of operations and cash flows for the periods presented.
1: CORPORATE STRUCTURE AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CORPORATE STRUCTURE: Consumers is a combination electric and gas utility company
serving the Lower Peninsula of Michigan and is the principal subsidiary of CMS
Energy, a holding company. Consumers' customer base includes a mix of
residential, commercial and diversified industrial customers, the largest
segment of which is the automotive industry.
RISK MANAGEMENT ACTIVITIES AND DERIVATIVES TRANSACTIONS: Consumers and its
subsidiaries use derivative instruments, including swaps and options, to manage
exposure to fluctuations in interest rates and commodity prices, respectively.
To qualify for hedge accounting, derivatives must meet the following criteria:
(1) the item to be hedged exposes the enterprise to price and interest rate
risk; and (2) the derivative reduces that exposure and is designated as a hedge.
Derivative instruments contain credit risk if the counter parties, 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 counter
parties. The risk of nonperformance by the counter parties is considered remote.
Consumers enters into interest rate swap agreements to exchange variable-rate
interest payment obligations for fixed-rate obligations without exchanging the
underlying notional amounts. These agreements convert variable-rate debt to
fixed-rate debt in order to reduce the impact of interest rate fluctuations. The
notional amounts parallel the underlying debt levels and are used to measure
interest to be paid or received and do not represent the exposure to credit
loss.
Consumers has entered into and will enter into electric option contracts to
ensure a reliable source of capacity to meet its customers' electricity
requirements and to limit its risk associated with electricity price increases.
It is management's intent to take physical delivery of the commodity. Consumers
continuously evaluates its daily capacity needs and sells the option contracts,
if marketable, when it has excess daily capacity. Consumers' maximum exposure
associated with these options is limited to premiums paid.
UTILITY REGULATION: Consumers accounts for the effects of regulation based on a
regulated utility accounting standard (SFAS 71). As a result, the actions of
regulators affect when revenues, expenses, assets and liabilities are
recognized.
In March 1999, Consumers received MPSC electric restructuring orders which,
among other things, identified the terms and timing for implementing electric
restructuring in Michigan. Based upon these orders, Consumers expects to
implement retail open access for its electric customers in September 1999, and
therefore, Consumers discontinued application of SFAS 71 for the energy supply
portion of its business
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in the first quarter of 1999. Discontinuation of SFAS 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
established a regulatory asset for a corresponding amount. The regulatory asset
is collectible as part of the Transition Costs which are recoverable through the
regulated transmission and distribution portion of Consumers' business as
approved by an MPSC order in 1998. This order also allowed Consumers to recover
any energy supply related regulatory assets, plus a return on any unamortized
balance of those assets, from its transmission and distribution customers.
According to current accounting standards, Consumers can continue to carry its
energy supply related regulatory assets or liabilities for the part of the
business subject to regulatory change if legislation or an MPSC rate order
allows the collection of cash flows, to recover specific costs or to settle
obligations, from its regulated transmission and distribution customers. At
March 31, 1999, Consumers had a net investment in energy supply facilities of
$839 million included in electric plant and property.
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 production, 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' Form 10-K for year ending December 31, 1998.
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.
IMPLEMENTATION OF NEW ACCOUNTING STANDARDS: In 1998, the American Institute of
Certified Public Accountants issued Statement of Position 98-1, Accounting for
the Costs of Computer Software Developed or Obtained for Internal Use, and
Statement of Position 98-5, Reporting on the Costs of Start-Up Activities. Also
in 1998, the Emerging Issues Task Force published Issue 98-10, Accounting for
Energy Trading and Risk Management Activities. Each of these statements is
effective for 1999. Application of these standards has not had a material affect
on Consumers' financial position, liquidity or results of operations.
2: UNCERTAINTIES
ELECTRIC CONTINGENCIES
ELECTRIC ENVIRONMENTAL MATTERS: The Clean Air Act limits emissions of sulfur
dioxide and nitrogen oxides and requires emissions and air quality monitoring.
Consumers currently operates within these limits and meets current emission
requirements. The Clean Air Act requires the EPA to periodically review the
effectiveness of the national air quality standards in preventing adverse health
effects, and in 1997 the EPA revised these standards. It is probable that the
1997 standards will result in further limitations on small particulate-related
emissions.
In September 1998, based upon the 1997 standards, the EPA Administrator signed
final regulations requiring the State of Michigan to further limit nitrogen
oxide emissions. Fossil-fueled emitters, such as Consumers' generating units,
can anticipate a reduction in nitrogen oxide emissions by 2003 to only 32
percent of levels allowed for the year 2000. The State of Michigan has one year
to submit an implementation plan. The State of Michigan has filed a lawsuit
objecting to the extent of the required emission reductions. It is unlikely that
the State of Michigan will establish Consumers' nitrogen oxide
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emissions reduction target until mid-to-late 1999. Until this target is
established, the estimated cost of compliance discussed below is subject to
revision. If a court were to order the EPA to adopt the State of Michigan's
position, compliance costs could be less than the preliminary estimated amounts.
The preliminary estimate of capital expenditures to reduce nitrogen
oxide-related emissions for Consumers' fossil-fueled generating units is
approximately $290 million, plus $10 million per year for operation and
maintenance costs. Consumers anticipates that these capital expenditures will be
incurred between 1999 and 2003. Consumers may need an equivalent amount of
capital expenditures and operation and maintenance costs to comply with the new
small particulate standards.
Consumers' coal-fueled electric generating units burn low-sulfur coal and are
currently operating at or near the sulfur dioxide emission limits that will be
effective in the year 2000. During the past few years, in order to comply with
the Clean Air Act, Consumers incurred capital expenditures totaling $55 million
to install equipment at certain generating units. Consumers estimates an
additional $16 million of capital expenditures for ongoing and proposed
modifications at the remaining coal-fueled units to meet year 2000 requirements.
Management believes that these expenditures will not materially affect
Consumers' annual operating costs.
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 properly
recoverable in rates under current ratemaking policies.
Consumers is a so-called 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. At March 31, 1999, Consumers has accrued the minimum amount of the
range for its estimated Superfund liability.
While decommissioning Big Rock, Consumers found that some areas of the plant
have coatings that contain both metals and PCBs. The cost of removal and
disposal of these materials is currently unknown. There may be some radioactive
portion of these materials which no facility in the United States will currently
accept. The cost of removal and disposal will constitute part of the cost to
decommission the plant, and will be paid from the decommissioning fund.
Consumers is studying the extent of the contamination and reviewing options.
ANTITRUST: In October 1997, two independent power producers sued Consumers in a
federal court. The suit alleged antitrust violations relating to contracts which
Consumers entered into with some of its customers and claims relating to power
facilities. On March 31, 1999, the court issued an opinion and order granting
Consumers' motion for summary judgement, resulting in the dismissal of the case.
The plaintiffs are appealing this decision.
ELECTRIC RATE MATTERS
ELECTRIC PROCEEDINGS: In 1996, the MPSC issued a final order that authorized
Consumers to recover costs associated with the purchase of the additional 325 MW
of MCV Facility capacity (see "Power Purchases from the MCV Partnership" in this
Note) and to recover its nuclear plant investment by increasing prospective
annual nuclear plant depreciation expense by $18 million, with a corresponding
decrease in fossil-fueled generating plant depreciation expense. It also
established an experimental direct-access program. Customers having a maximum
demand of 2 MW or greater are eligible to purchase generation
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services directly from any eligible third-party power supplier and Consumers
will transmit the power for a fee. The direct-access program is limited to 134
MW of load. In accordance with the MPSC order, Consumers held a lottery in April
1997 to select the customers to participate in the direct-access program.
Subsequently, direct access for a portion of this 134 MW began in late 1997. The
program was substantially filled by the end of March 1999.
In January 1998, the Court of Appeals affirmed an MPSC conclusion that the MPSC
has statutory authority to authorize an experimental electric retail wheeling
program. No retail wheeling has yet occurred pursuant to that program. In
October 1998, the Michigan Supreme Court issued an order granting Consumers'
application for leave to appeal. A decision by the Michigan Supreme Court in
this matter may be issued in mid-1999.
ELECTRIC RESTRUCTURING: As part of ongoing proceedings relating to the
restructuring of the electric utility industry in Michigan, the MPSC in June
1997 issued an order proposing that beginning January 1, 1998 Consumers transmit
and distribute energy on behalf of competing power suppliers to retail
customers. Further restructuring orders issued in late 1997 and early 1998
provide for: 1) recovery of estimated Transition Costs of $1.755 billion through
a charge to all customers purchasing their power from other sources until the
end of the transition period in 2007, subject to an adjustment through a true-up
mechanism; 2) commencement of the phase-in of retail open access in 1998; 3)
suspension of the PSCR clause as discussed below; and 4) all customers to choose
their power suppliers on January 1, 2002. The recovery of costs of implementing
a retail open access program, preliminarily estimated at an additional $200
million, would be reviewed for prudence and recovered via a charge approved by
the MPSC. Nuclear decommissioning costs will also continue to be collected
through a separate surcharge to all customers.
In June 1998, Consumers submitted its plan for implementing retail open access
to the MPSC. The primary issues addressed in the plan are: 1) the implementation
schedule; 2) the retail open access service options available to customers and
suppliers; 3) the process and requirements for customers and others to obtain
retail open access service; and 4) the roles and responsibilities for Consumers,
customers and suppliers. In the plan, Consumers proposed to phase in 750 MW of
retail customer load to customers purchasing their power from other sources over
the 1998-2001 period. In March 1999, Consumers received MPSC electric
restructuring orders which generally supported Consumers' implementation plan.
Accordingly, Consumers is in the process of implementing electric customer
retail open access.
There are numerous appeals pending at the Court of Appeals relating to the
MPSC's restructuring orders, including appeals by Consumers. Consumers believes
that the MPSC lacks statutory authority to mandate industry restructuring, and
its appeal generally is limited to this jurisdictional issue. Consumers cannot
predict the outcome of electric restructuring on Consumers' financial position,
liquidity, or results of operations.
As a result of a 1998 MPSC order in connection with the electric restructuring
program, the PSCR process was suspended. Under this program, customers buying
electricity from Consumers as traditional customers will not have their rates
adjusted to reflect the actual costs of fuel and purchased and interchanged
power during the 1998-2001 period. In prior years, any change in power supply
costs was passed through to such customers. In order to reduce the risk of
high energy prices during peak demand periods, Consumers is purchasing
electricity options and contracting to buy electricity during the months of June
through September 1999. Consumers is planning to have sufficient generation and
purchased capacity for a 16 percent reserve margin in order to provide reliable
service to its electric service customers and to protect itself against
unscheduled plant outages. Under certain circumstances, the cost of purchasing
capacity and energy on the spot market could be substantial.
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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.
Summarized Statements of Income for CMS Midland and CMS Holdings-
In Millions
- ------------------------------------------------------------------------------------------------
Three Months Ended Twelve Months Ended
March 31 1999 1998 1999 1998
- ------------------------------------------------------------------------------------------------
Pretax operating income $14 $10 $53 $47
Income taxes and other 4 3 16 14
- ------------------------------------------------------------------------------------------------
Net income $10 $7 $37 $33
================================================================================================
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 and 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, Consumers has been permitted by the MPSC 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, Consumers also has been
permitted 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. Because
the MPSC has already approved recovery of this capacity, Consumers expects to
recover these increases through an adjustment to the currently frozen PSCR level
which is currently under consideration by the MPSC. After September 2007, under
the terms of the PPA, Consumers will only be required to pay the MCV Partnership
capacity and energy charges that the MPSC has authorized for recovery from
electric customers.
In March 1999, Consumers signed a long-term power sales agreement to supply PECO
with electric generating capacity under the PPA until September 2007. After a
three-year transition period during which 100 to 150 MW will be sold to PECO,
beginning in 2002 Consumers will sell all 1,240 MW of PPA capacity and
associated energy to PECO. In March 1999, Consumers also filed an application
with the MPSC for accounting and rate-making approvals related to the
transaction. In an order issued on April 30, 1999, the MPSC conditionally
approved the requests for accounting and rate-making treatment to the extent
that customer rates are not increased from their level absent the agreement and
as modified by the order. Consumers is currently studying the conditions
attached to the approval to determine whether there is any need for
clarification of how the conditions would operate under various future scenarios
and whether the conditional approval is acceptable to Consumers.
Consumers recognized a loss in 1992 for the present value of the estimated
future underrecoveries of power costs under the PPA based on MPSC recovery
orders. At March 31, 1999 and March 31, 1998, the
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remaining after-tax present value of the estimated future PPA liability
associated with the 1992 loss totaled $103 million and $133 million,
respectively. At March 31, 1999, the undiscounted after-tax amount associated
with this liability totaled $159 million. These after-tax cash underrecoveries
are based on the assumption that the MCV Facility would be available to generate
electricity 91.5 percent of the time over its expected life. Historically the
MCV Facility has operated above the 91.5 percent level. Accordingly, in 1998,
Consumers increased its PPA liability by $37 million. Because the MCV Facility
operated above the 91.5 percent level in 1998 and thus far in 1999, Consumers
has an accumulated unrecovered after-tax shortfall of $13 million as of March
31, 1999. If the MCV Facility generates electricity at the 91.5 percent level
during the next five years, Consumers' after-tax cash underrecoveries associated
with the PPA would be as follows.
In Millions
- ------------------------------------------------------------------------------------------------------------------
1999 2000 2001 2002 2003
- ------------------------------------------------------------------------------------------------------------------
Estimated cash underrecoveries, net of tax $26 $21 $20 $19 $18
==================================================================================================================
If the MCV Facility operates at availability levels above management's 91.5
percent estimate made in 1992 for the remainder of the PPA, Consumers will need
to recognize additional losses for future underrecoveries. In March 1999,
Consumers and the MCV Partnership reached an agreement effective January 1, 1999
that will cap availability payments to the MCV Partnership at 98.5 percent. For
further discussion on the impact of the frozen PSCR, see "Electric
Restructuring" in this Note. Management is evaluating the adequacy of the
contract loss liability considering actual MCV Facility operations and any other
relevant circumstances.
In February 1998, the MCV Partnership filed a claim of appeal from the January
1998 and February 1998 MPSC orders in the electric utility industry
restructuring. At the same time, the MCV Partnership filed suit in the U.S.
District Court seeking a declaration that the MPSC's failure to provide
Consumers and the MCV Partnership a certain source of recovery of capacity
payments after 2007 deprived the MCV Partnership of its rights under the Public
Utilities Regulatory Policies Act of 1978. The MCV Partnership is seeking to
prohibit the MPSC from implementing portions of the orders.
NUCLEAR MATTERS: In January 1997, the NRC issued its Systematic Assessment of
Licensee Performance report for Palisades. The report rated all areas as good.
The NRC suspended this same assessment process for all licensees in 1998. Until
such time as the NRC completes its review of processes for assessing performance
at nuclear power plants, the Plant Performance Review is being used to provide
an assessment of licensee performance. Palisades received its performance review
dated March 26, 1999 in which the NRC stated that the overall performance at
Palisades was acceptable.
Palisades' temporary on-site storage pool for spent nuclear fuel is at capacity.
Consequently, Consumers is using NRC-approved steel and concrete vaults,
commonly known as "dry casks", for temporary on-site storage. As of March 31,
1999 Consumers had loaded 13 dry storage casks with spent nuclear fuel at
Palisades and plans to load five additional casks in 1999 pending approval by
the NRC. In June 1997, the NRC approved Consumers' process for unloading spent
fuel from a cask previously discovered to have minor weld flaws. Consumers
intends to transfer the spent fuel to a new transportable cask when one is
available.
Consumers maintains insurance coverage against property damage, debris removal,
personal injury liability and other risks that are present at its nuclear
generating facilities. Consumers also maintains coverage for replacement power
costs during prolonged accidental outages at Palisades. Insurance would not
cover such costs during the first 17 weeks of any outage, but would cover most
of such costs during the next 58 weeks
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of the outage, followed by reduced coverage to 80 percent for two additional
years. If certain covered losses occur at its own or other nuclear plants
similarly insured, Consumers could be required to pay maximum assessments of $15
million in any one year to NEIL under the nuclear liability secondary protection
program; $88 million per occurrence, 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.
The NRC requires Consumers to make certain calculations and report on the
continuing ability of the Palisades reactor vessel to withstand postulated
pressurized thermal shock events during its remaining license life, considering
the embrittlement of reactor materials. In December 1996, Consumers received an
interim Safety Evaluation Report from the NRC indicating that the reactor vessel
can be safely operated through 2003 before reaching the NRC's screening criteria
for reactor embrittlement. Consumers believes that with fuel management designed
to minimize embrittlement, it can operate Palisades to the end of its license
life in the year 2007 without annealing the reactor vessel. Nevertheless,
Consumers will continue to monitor the matter.
NUCLEAR PLANT DECOMMISSIONING: Consumers collected $51 million in 1998 from its
electric customers for decommissioning of its two nuclear plants. Amounts
collected from electric retail customers and deposited in trusts (including
trust earnings) are credited to accumulated depreciation. On March 22, 1999,
Consumers received a decommissioning order from the MPSC that estimated
decommissioning costs for Big Rock and Palisades to be $304 million and $541
million (in 1998 dollars), respectively. Consumers' site-specific
decommissioning cost estimates for Big Rock and Palisades assume that each plant
site will eventually be restored to conform with the adjacent landscape, and all
contaminated equipment will be disassembled and disposed of in a licensed burial
facility. The MPSC order also reduced annual decommissioning surcharges by $4
million a year and required Consumers to file revised decommissioning surcharges
for Palisades that incorporate a gradual reduction in the decommission trust's
equity investments following the plant's retirement. On April 21, 1999,
Consumers filed with the MPSC a revised decommissioning surcharge for Palisades
and anticipates a revised MPSC order in late 1999 or early 2000. If approved,
the annual decommissioning surcharges for Palisades would be reduced by an
additional $3 million a year. After retirement of Palisades, Consumers plans to
maintain the facility in protective storage if radioactive waste disposal
facilities are not available. Consumers will incur most of the Palisades
decommissioning costs after the plant's NRC operating license expires. When the
Palisades' NRC license expires in 2007, the trust funds are currently estimated
to have accumulated $677 million. Consumers estimates that at the time Palisades
is fully decommissioned in the year 2046, the trust funds will have provided
$1.9 billion, including trust earnings, over this decommissioning period. At
March 31, 1999, Consumers had an investment in nuclear decommissioning trust
funds of $386 million for Palisades and $179 million for Big Rock.
Big Rock was closed permanently in 1997 because management determined that it
would be uneconomical to operate in an increasingly competitive environment. The
plant was originally scheduled to close on May 31, 2000, at the end of the
plant's operating license. The MPSC has allowed Consumers to continue collecting
decommissioning surcharges through December 31, 2000. Plant decommissioning
began in 1997 and may take five to ten years to return the site to its original
condition. For the first three months of 1999, Consumers spent $14 million for
the decommissioning and withdrew $12 million from the Big Rock nuclear
decommissioning trust fund. In total, Consumers has spent $88 million for the
decommissioning and withdrew $81 million from the Big Rock nuclear
decommissioning trust fund. These activities had no impact on net income.
CAPITAL EXPENDITURES: Consumers estimates electric capital expenditures,
including new lease commitments, of $382 million for 1999, $392 million for
2000, and $395 million for 2001. For further information, see the Capital
Expenditures Outlook section in the MD&A.
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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, including some 23
sites that formerly housed manufactured gas plant facilities, even those in
which it has a partial or no current ownership interest. By late 1999, Consumers
expects to have completed sufficient investigation of the 23 sites to make a
more accurate estimate of remediation methods and costs. 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 estimates its costs related to
investigation and remedial action for all 23 sites between $48 million and $98
million, of which Consumers accrued a liability for $48 million. These estimates
are based on undiscounted 1998 costs. As of March 31, 1999, Consumers has an
accrued liability of $48 million and a regulatory asset for approximately the
same amount. 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 will not begin until after a prudence review
in a general rate case. Consumers is allowed current recovery of $1 million
annually. Consumers has initiated lawsuits against certain insurance companies
regarding coverage for some or all of the costs that it may incur for these
sites.
GAS RATE MATTERS
GAS RESTRUCTURING: In December 1997, the MPSC approved Consumers' application to
implement an experimental gas transportation program, which will extend over a
three-year period, eventually allowing 300,000 residential, commercial and
industrial retail gas sales customers to choose their gas commodity supplier.
The program is voluntary and participating natural gas customers are selected on
a first-come, first-served basis, up to a limit of 100,000 per year. As of April
19,1999, more than 142,000 customers chose alternative gas suppliers,
representing approximately 34 bcf of gas load. Under traditional regulation,
Consumers had not been allowed to benefit from reducing its cost of the
commodity supplied to its customers, so the loss of commodity sales to these
customers will not have any impact on net income. Customers choosing to remain
as sales customers of Consumers will not see a rate change in their natural gas
rates. This three-year program: 1) suspends Consumers' GCR clause, effective
April 1, 1998, establishing a gas commodity cost at a fixed rate of $2.84 per
mcf, allowing Consumers the opportunity to benefit by reducing its cost of the
commodity; 2) establishes an earnings sharing mechanism with customers if
Consumers' earnings exceed certain pre-determined levels; and 3) establishes a
gas transportation code of conduct that addresses the relationship between
Consumers and marketers, including its affiliated marketers. In January 1998,
the Attorney General, ABATE and other parties filed claims of appeal regarding
the program with the Court of Appeals.
Consumers uses gas purchase contracts to limit its risk associated with
increases in its gas price above the $2.84 per mcf during the three-year
experimental gas program. It is management's intent to take physical delivery of
the commodity and failure could result in a significant penalty for
nonperformance. At March 31, 1999, Consumers had an exposure to gas price
increases if the ultimate cost of gas was to exceed $2.84 per mcf for the
following volumes: 7 percent of its 1999 requirements; 55 percent of its 2000
requirements; and 55 percent of its first quarter 2001 requirements. Additional
contract coverage is currently under review. The gas purchase contracts
currently in place were consummated at prices less than $2.84 per mcf. The gas
purchase contracts are being used to protect against gas price increases in a
three-year experimental gas program where Consumers is recovering from its
customers $2.84 per mcf for gas.
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OTHER GAS UNCERTAINTIES
CAPITAL EXPENDITURES: Consumers estimates gas capital expenditures, including
new lease commitments, of $123 million for each of 1999 and 2000, and $120
million for 2001. For further information, see the Capital Expenditures Outlook
section in the MD&A.
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 March 31, 1999, Consumers had FERC authorization to issue or
guarantee, through June 2000, up to $900 million of short-term securities
outstanding at any one time and to guarantee, through 1999, up to $25 million in
loans made by others to residents of Michigan for making energy-related home
improvements. Consumers also had remaining FERC authorization to issue, through
June 2000, up to $475 million and $425 million of long-term securities with
maturities up to 30 years for refinancing purposes and for general corporate
purposes, respectively.
SHORT-TERM FINANCINGS: Consumers has an unsecured $425 million credit facility
and unsecured lines of credit aggregating $130 million. These facilities are
available to finance seasonal working capital requirements and to pay for
capital expenditures between long-term financings. At March 31, 1999, a total of
$221 million was outstanding at a weighted average interest rate of 5.6 percent,
compared with $245 million outstanding at March 31, 1998, at a weighted average
interest rate of 6.2 percent. In January 1999, Consumers renegotiated a
variable-to-fixed interest rate swap totaling $175 million in order to reduce
the impact of interest rate fluctuations.
Consumers also has in place a $500 million trade receivables sale program. At
March 31, 1999 and 1998, receivables sold under the program totaled $344 million
and $340 million, respectively. Accounts receivable and accrued revenue in the
Consolidated Balance Sheets have been reduced to reflect receivables sold.
LONG-TERM FINANCINGS: Consumers issued long-term bank debt of $15 million in
February 1999, maturing in February 2002, at an initial interest rate of 5.3
percent. Proceeds from this issuance were used for general corporate purposes.
On April 1, 1999, Consumers redeemed all of its eight million outstanding shares
of the $2.08 preferred stock at $25.00 per share.
Under the provisions of its Articles of Incorporation, Consumers had $308
million of unrestricted retained earnings available to pay common dividends at
March 31, 1999. In January 1999, Consumers declared and paid a $97 million
common dividend.
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ARTHUR ANDERSEN LLP
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 March 31, 1999 and 1998, and the related
consolidated statements of income, common stockholder's equity and cash flows
for the three-month and twelve-month periods then ended. These financial
statements are the responsibility of the Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which is the
expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the financial statements referred to above for them to be in
conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet and consolidated statements of
long-term debt and preferred stock of Consumers Energy Company and subsidiaries
as of December 31, 1998, and the related consolidated statements of income,
common stockholder's equity and cash flows for the year then ended (not
presented herein), and, in our report dated January 26, 1999 (except with
respect to the matter disclosed in Note 2, "Electric Rate Matters", as to which
the date is March 29, 1999), we expressed an unqualified opinion on those
statements. In our opinion, the information set forth in the accompanying
consolidated balance sheet as of December 31, 1998, 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,
May 11, 1999.
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PANHANDLE EASTERN PIPE LINE COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS
Panhandle is primarily engaged in the interstate transportation and storage of
natural gas. Panhandle owns an LNG regasification plant and related tanker port
unloading facilities and LNG and gas storage 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 1998 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 contains forward-looking statements, as
defined by the Private Securities Litigation Reform Act of 1995. While
forward-looking statements are based on assumptions and such assumptions are
believed to be reasonable and are made in good faith, Panhandle cautions that
assumed results almost always vary from actual results and differences between
assumed and actual results can be material. The type of assumptions that could
materially affect the actual results are discussed in the Forward-Looking
Information section in this MD&A. More specific risk factors are contained in
various public filings made by Panhandle with the SEC. This report also
describes material contingencies in the Notes to Consolidated Financial
Statements and the readers are encouraged to read such Notes.
On March 29, 1999, Panhandle Eastern Pipe Line Company and its principal
consolidated subsidiaries, Trunkline and Pan Gas Storage, as well as Panhandle
Eastern Pipe Line Company's affiliates, Trunkline LNG and Panhandle Storage,
were acquired by CMS Panhandle Holding, which is an indirect wholly owned
subsidiary of CMS Energy. Immediately following the acquisition, Trunkline LNG
and Panhandle Storage became direct wholly owned subsidiaries of Panhandle
Eastern Pipe Line Company.
Prior to the acquisition, Panhandle's interests in Northern Border Pipeline
Company, Panhandle Field Services Company, Panhandle Gathering Company, and
certain other assets, including the Houston corporate headquarters building,
were transferred to other subsidiaries of Duke Energy; certain intercompany
accounts and notes between Panhandle and Duke Energy subsidiaries were
eliminated; and with respect to certain other liabilities, including tax,
environmental and legal matters, CMS Energy was indemnified for any resulting
losses. In addition, Duke Energy agreed to continue its environmental clean-up
program at certain properties and to defend and indemnify Panhandle against
certain future environmental litigation and claims with respect to certain
agreed-upon sites or matters.
CMS Panhandle Holding issued $800 million of senior unsecured notes and received
a $1.1 billion capital contribution from CMS Energy to fund the acquisition of
Panhandle. The CMS Panhandle Holding senior notes are guaranteed by Panhandle
Eastern Pipe Line Company. CMS Panhandle Holding intends to merge into Panhandle
Eastern Pipe Line Company during the second quarter of 1999, at which time the
purchase accounting impact of CMS Panhandle Holding's acquisition of Panhandle,
including the additional debt, equity and related allocation of fair value to
assets acquired and liabilities assumed, will be reflected in Panhandle's
consolidated financial statements. As of March 31, 1999, Panhandle's financial
statements reflect the assets and liabilities of Panhandle on a historical
basis.
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RESULTS OF OPERATIONS
NET INCOME:
In Millions
- -------------------------------------------------------------------------------
March 31 1999 1998 Change
- -------------------------------------------------------------------------------
Three Months Ended $ 34 $ 35 $ (1)
===============================================================================
For the three months ended March 31, 1999, net income was $34 million, down $1
million from the comparable period in 1998. Total natural gas transportation
volumes for the three months ended March 31, 1999 decreased one percent from the
same period in 1998.
Revenues for the three months ended March 31, 1999 decreased $6 million from the
comparable period in 1998 due primarily to decreased reservation revenues and
lower transportation volumes in 1999.
Operating expenses for the three months ended March 31, 1999 decreased $5
million from the prior year comparable period, primarily as a result of lower
benefit costs.
PRETAX OPERATING INCOME:
In Millions
- --------------------------------------------------------------------------------
Three Months
Ended March 31
Change Compared to Prior Year 1999 vs. 1998
- --------------------------------------------------------------------------------
Deliveries (including special contract discounts) $(5)
Other non-commodity revenue (1)
Operations and maintenance 5
------------------
Total Change $(1)
================================================================================
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CASH POSITION AND INVESTING
OPERATING ACTIVITIES: Panhandle's consolidated net cash provided by operating
activities is derived mainly from the transportation and storage of natural gas.
Consolidated cash from operations totaled $21 million and $19 million for the
first three months of 1999 and 1998, respectively. Panhandle uses operating cash
primarily to maintain and expand its gas systems.
INVESTING ACTIVITIES: Panhandle's consolidated net cash used in investing
activities totaled $21 million and $19 million for the first three months of
1999 and 1998, respectively. The increase of $2 million primarily reflects an
increase in advances to subsidiaries of Duke Energy, partially offset by
decreased capital expenditures due to the 1998 expenditures related to the
Terrebonne expansion project in the Gulf of Mexico.
CAPITAL EXPENDITURES
Panhandle estimates capital expenditures and investments, including allowance
for funds used during construction, for the next three years to be approximately
$60 million for each year. These estimates are prepared for planning purposes
and are subject to revision. Capital expenditures for 1999 are expected to be
satisfied by cash from operations.
OUTLOOK
The market for transmission of natural gas to the Midwest is increasingly
competitive and may become more so in light of projects in progress to increase
Midwest transmission capacity for gas originating in Canada and the Rocky
Mountain region. As a result, there continues to be pressure on prices charged
by Panhandle and an increasing necessity to discount the prices charged from the
legal maximum. Panhandle continues to be selective in offering discounts to
maximize revenues from existing capacity and to advance projects that provide
expanded services to meet the specific needs of customers. Management is
evaluating the continued applicability of SFAS 71, particularly in light of the
acquisition by CMS Panhandle Holding and the new cost basis of Panhandle which
will result from the pending merger of CMS Panhandle Holding with Panhandle.
OTHER MATTERS
REGULATORY MATTERS
The interstate natural gas transmission industry currently is regulated on a
basis designed to recover the costs (including depreciation and return on
investment) of providing services to customers. In July 1998, the FERC issued a
NOPR on short-term interstate natural gas transportation services, which
proposed an integrated package of revisions to its regulations governing such
services. "Short term" has been defined in the NOPR as all transactions of less
than one year. Under the proposed approach, cost-based regulation would be
eliminated for short-term transportation and replaced by regulatory policies
intended to maximize competition in the short-term transportation market,
mitigate the ability of companies to exercise residual monopoly power and
provide opportunities for greater flexibility providing pipeline services. The
proposed changes include initiatives to revise pipeline scheduling procedures,
receipt and delivery point policies and penalty policies, and require pipelines
to auction short-term capacity. Other
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proposed changes would improve the FERC's reporting requirements, permit
pipelines to negotiate rates and terms of services, and revise certain rate and
certificate policies that affect competition.
In conjunction with the NOPR, the FERC also issued a NOI on its pricing policies
for the long-term markets. The NOI seeks comments on whether FERC's policies are
biased toward either short-term or long-term service, provide accurate price
signals and the right incentives for pipelines to provide optimal transportation
services and construct facilities that meet future demand, and do not result in
over-building and excess capacity.
Comments on the NOPR and NOI were filed in April 1999. Because these notices are
at a very early stage and ultimate resolution is unknown, management cannot
estimate the effects of these matters on future consolidated results of
operations or financial position.
For detailed information about other uncertainties, see Note 2, Regulatory
Matters, incorporated by reference herein.
NEW ACCOUNTING RULES
In 1998, SFAS 133, Accounting for Derivative Instruments and Hedging Activities,
was issued., Panhandle is required to adopt this standard by January 1, 2000.
SFAS 133 requires that all derivatives be recognized as either assets or
liabilities and measured at fair value, and it defines the accounting for
changes in the fair value of the derivatives depending on the intended use of
the derivative. Panhandle is currently reviewing the expected impact of SFAS 133
on its financial statements and has not yet determined the timing of or method
of adoption.
YEAR 2000 COMPUTER MODIFICATIONS
STATE OF READINESS: In 1996, Panhandle initiated its Year 2000 Readiness Program
and began a formal review of computer-based systems and devices that are used in
its business operations. These systems and devices include customer information,
financial, materials management and personnel systems, as well as components of
natural gas production, gathering, processing and transmission.
Panhandle is using a three-phase approach to address year 2000 issues: 1)
inventory and preliminary assessment of computer systems, equipment and devices;
2) detailed assessment and remediation planning; and 3) conversion, testing and
contingency planning. Panhandle is employing a combination of systems repair and
planned systems replacement activities to achieve year 2000 readiness for its
business and process control systems, equipment and devices. Panhandle has
substantially completed the first two phases throughout its business operations,
and is in various stages of the third and final phase. Panhandle's goal is to
have its critical systems, equipment and devices year 2000 ready by mid-1999.
Business acquisitions routinely involve an analysis of year 2000 readiness and
are incorporated into Panhandle's overall program as necessary.
Panhandle is actively evaluating and tracking year 2000 readiness of external
third parties with which it has a significant relationship. Such third parties
include vendors, customers, governmental agencies and other business associates.
While the year 2000 readiness of third parties cannot be controlled, Panhandle
is attempting to assess the readiness of third parties and any potential
implications to its operations. Alternative suppliers of critical products,
goods and services are being identified, where necessary.
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COSTS: Management believes it is devoting the resources necessary to achieve
year 2000 readiness in a timely manner. Current estimates for total costs of the
program, including internal labor as well as consulting and contract costs, are
approximately $1 million. The costs exclude replacement systems that, in
addition to being year 2000 ready, provide significantly enhanced capabilities
which will benefit operations in future periods.
RISKS: Management believes it has an effective program in place to manage the
risks associated with the year 2000 issue in a timely manner. Nevertheless,
since it is not possible to anticipate all future outcomes, especially when
third parties are involved, there could be circumstances in which Panhandle
would temporarily be unable to deliver services to its customers. Management
believes that the most reasonably likely worst case scenario would be minor,
localized interruptions of service, which likely would be rapidly restored. In
addition, there could be a temporary reduction in the service needs of customers
due to their own year 2000 problems. In the event that such a scenario occurs,
it is not expected to have a material adverse impact on results of operations or
financial position.
CONTINGENCY PLANS: Year 2000 contingency planning is currently underway to
assure continuity of business operations for all periods during which year 2000
impacts may occur. Panhandle intends to complete its year 2000 contingency plans
by mid-1999. These plans address various year 2000 risk scenarios that cross
departmental, business unit and industry lines as well as specific risks from
various internal and external sources, including supplier readiness.
Based on assessments completed to date and compliance plans in process,
management believes that year 2000 issues, including the cost of making critical
systems, equipment and devices ready, will not have a material adverse effect on
Panhandle's business operation, results of operations or financial position.
Nevertheless, achieving year 2000 readiness is subject to risks and
uncertainties, including those described above. While management believes the
possibility is remote, if Panhandle's internal systems, or the internal systems
of external parties with which it has a significant relationship, fail to
achieve year 2000 readiness in a timely manner, Panhandle's business operation,
results of operations or financial position could be adversely affected.
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FORWARD-LOOKING INFORMATION
From time to time, Panhandle may make statements regarding its assumptions,
projections, expectations, intentions or beliefs about future events. These
statements are intended as "forward-looking statements" under the Private
Securities Litigation Reform Act of 1995. Panhandle cautions that assumptions,
projections, expectations, intentions or beliefs about future events may and
often do vary from actual results and the differences between assumptions,
projections, expectations, intentions or beliefs and actual results can be
material. Accordingly, there can be no assurance that actual results will not
differ materially from those expressed or implied by the forward-looking
statements. The following are some of the factors that could cause actual
achievements and events to differ materially from those expressed or implied in
such forward-looking statements: entry of competing pipelines into Panhandle's
markets and competitive strategies of competing pipelines, including rate and
other pricing practices; state and federal legislative and regulatory
initiatives that affect cost and investment recovery, have an impact on rate
structures, and affect the speed and degree to which competition enters the
natural gas industry; the weather and other natural phenomena; the timing and
extent of changes in prices of commodities (primarily natural gas and competing
fuels) and interest rates; changes in environmental and other laws and
regulations to which Panhandle is subject to or other external factors over
which Panhandle has no control; the results of financing efforts; expansion and
other growth opportunities; year 2000 readiness; and the effect of Panhandle's
accounting policies issued periodically by accounting standard-setting bodies.
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PANHANDLE EASTERN PIPE LINE COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(IN MILLIONS)
Three Months Ended
March 31,
----------------------
1999 1998
------- -------
OPERATING REVENUE
Transportation and storage of natural gas $127 $132
Other 6 7
---- ----
Total operating revenue 133 139
---- ----
OPERATING EXPENSES
Operation and maintenance 43 48
Depreciation and amortization 14 14
General taxes 7 7
---- ----
Total operating expenses 64 69
---- ----
PRETAX OPERATING INCOME 69 70
OTHER INCOME 5 6
---- ----
EARNINGS BEFORE INTEREST AND TAXES 74 76
---- ----
INTEREST CHARGES
Interest on long-term debt 6 6
Other interest 13 13
---- ----
19 19
NET INCOME BEFORE INCOME TAXES 55 57
INCOME TAXES 21 22
---- ----
CONSOLIDATED NET INCOME $ 34 $ 35
==== ====
The accompanying condensed notes are an integral part of these statements.
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PANHANDLE EASTERN PIPE LINE COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN MILLIONS)
Three Months Ended
March 31,
--------------------------
1999 1998
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 34 $ 35
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 15 15
Deferred income taxes -- (1)
Changes in current assets and liabilites (31) (31)
Other, net 3 1
---- ----
Net cash provided by operating activities 21 19
---- ----
CASH FLOWS FROM INVESTING ACTIVITIES
Capital and investment expenditures (4) (18)
Net decrease (increase) in advances receivable - PanEnergy (17) 1
Retirements and other -- (2)
---- ----
Net cash used in investing activities (21) (19)
---- ----
Net Increase (Decrease) in Cash and Temporary Cash Investments -- --
CASH AND TEMPORARY CASH INVESTMENTS, BEGINNING OF PERIOD -- --
---- ----
CASH AND TEMPORARY CASH INVESTMENTS, END OF PERIOD $ -- $ --
==== ====
OTHER CASH FLOW ACTIVITIES WERE:
Interest paid (net of amounts capitalized) $ 25 $ 25
Income taxes paid (net of refunds) 37 55
The accompanying condensed notes are an integral part of these statements.
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PANHANDLE EASTERN PIPE LINE COMPANY
CONSOLIDATED BALANCE SHEETS
(IN MILLIONS, EXCEPT SHARE AMOUNTS)
March 31,
1999 December 31,
(Unaudited) 1998
------------- --------------
ASSETS
PROPERTY, PLANT AND EQUIPMENT
Cost $2,478 $2,760
Less accumulated depreciation and amortization 1,652 1,798
------ ------
Sub-total 826 962
Construction work-in-progress 12 17
------ ------
Net property, plant and equipment 838 979
------ ------
INVESTMENTS
Advances and note receivable - PanEnergy -- 738
Investment in affiliates 1 44
Other 7 6
------ ------
Total investments and other assets 8 788
------ ------
CURRENT ASSETS
Receivables 88 94
Inventory and supplies 56 55
Deferred income tax 8 2
Current portion of regulatory assets -- 6
Other 29 23
------ ------
Total current assets 181 180
------ ------
NON-CURRENT ASSETS
Deferred income taxes 469 --
Debt expense 11 11
Other 16 15
------ ------
Total non-current assets 496 26
------ ------
TOTAL ASSETS $1,523 $1,973
====== ======
The accompanying condensed notes are an integral part of these statements.
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March 31,
1999 December 31,
(Unaudited) 1998
------------ ------------
STOCKHOLDER'S INVESTMENT AND LIABILITIES
CAPITALIZATION
Common stockholder's equity
Common stock, no par, 1,000 shares authorized, issued and outstanding $ 1 $ 1
Paid-in capital 966 466
Retained earnings 102 91
------ ------
Total common stockholder's equity 1,069 558
Long-term debt 299 299
------ ------
Total capitalization 1,368 857
------ ------
CURRENT LIABILITIES
Notes payable - PanEnergy -- 675
Accounts payable 8 56
Accrued taxes 1 58
Accrued interest 2 8
Other 110 117
------ ------
Total current liabilities 121 914
------ ------
NON-CURRENT LIABILITIES
Deferred income taxes -- 99
Other 34 103
------ ------
Total deferred credits and other liabilities 34 202
------ ------
COMMITMENTS AND CONTINGENCIES (NOTES 6 AND 7)
TOTAL STOCKHOLDER'S INVESTMENT AND LIABILITIES $1,523 $1,973
====== ======
The accompanying condensed notes are an integral part of these statements.
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PANHANDLE EASTERN PIPE LINE COMPANY
CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDER'S EQUITY
(UNAUDITED)
(IN MILLIONS)
Three Months Ended
March 31,
------------------------
1999 1998
------- -------
COMMON STOCK
At beginning and end of period $ 1 $ 1
------- -------
OTHER PAID-IN CAPITAL
At beginning of period 466 466
Contributions from CMS Panhandle Holding 500 --
------- -------
At end of period 966 466
------- -------
RETAINED EARNINGS
At beginning of period 91 34
Net Income 34 35
Contributions to PanEnergy 57 --
Common stock dividends (80) (2)
------- -------
At end of period 102 67
------- -------
TOTAL COMMON STOCKHOLDER'S EQUITY $ 1,069 $ 534
======= =======
The accompanying condensed notes are an integral part of these statements.
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PANHANDLE EASTERN PIPE LINE COMPANY
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
These Condensed Notes and their related Consolidated Financial Statements should
be read along with the Consolidated Financial Statements and Notes contained in
the 1998 Form 10-K of Panhandle Eastern Pipe Line Company, which include the
Reports of Independent Public Accountants. Certain prior year amounts have been
reclassified to conform with the presentation in the current year. In the
opinion of management, the unaudited information herein reflects all adjustments
necessary to assure the fair presentation of financial position, results of
operations and cash flows for the periods presented.
1. CORPORATE STRUCTURE
Panhandle Eastern Pipe Line Company is a wholly owned subsidiary of CMS
Panhandle Holding, which is an indirect wholly owned subsidiary of CMS Energy.
Panhandle Eastern Pipe Line Company was incorporated in Delaware in 1929.
Panhandle is primarily engaged in the interstate transportation and storage of
natural gas. The interstate natural gas transmission and storage operations of
Panhandle are subject to the rules and regulations of the FERC.
On March 29, 1999, Panhandle Eastern Pipe Line Company and its principal
consolidated subsidiaries, Trunkline and Pan Gas Storage, as well as its
affiliates, Trunkline LNG and Panhandle Storage, were acquired from subsidiaries
of Duke Energy by CMS Panhandle Holding for $1.9 billion in cash and existing
Panhandle debt of $300 million. Immediately following the acquisition, CMS
Panhandle Holding contributed the stock of Trunkline LNG and Panhandle Storage
to Panhandle Eastern Pipe Line Company. As a result, at March 31, 1999,
Trunkline LNG and Panhandle Storage were wholly owned subsidiaries of Panhandle
Eastern Pipe Line Company.
Prior to the acquisition, Panhandle's interests in Northern Border Pipeline
Company, Panhandle Field Services Company, Panhandle Gathering Company, and
certain other assets, including the Houston corporate headquarters building,
were transferred to other subsidiaries of Duke Energy; certain intercompany
accounts and notes between Panhandle and Duke Energy subsidiaries were
eliminated; and with respect to certain other liabilities, including tax,
environmental and legal matters, CMS Energy was indemnified for any resulting
losses. In addition, Duke Energy agreed to continue its environmental clean-up
program at certain properties and to defend and indemnify Panhandle against
certain future environmental litigation and claims with respect to certain
agreed-upon sites or matters.
CMS Panhandle Holding issued $800 million of senior unsecured notes and received
a $1.1 billion capital contribution from CMS Energy to fund the acquisition of
Panhandle. The CMS Panhandle Holding senior notes are guaranteed by Panhandle
Eastern Pipe Line Company. CMS Panhandle Holding intends to merge into Panhandle
Eastern Pipe Line Company during the second quarter of 1999, at which time the
purchase accounting impact of CMS Panhandle Holding's acquisition of Panhandle,
including the additional debt, equity and related allocation of fair value to
assets and liabilities acquired, will be reflected in Panhandle's consolidated
financial statements. As of March 31, 1999, Panhandle's financial statements
reflect the assets and liabilities of Panhandle on a historical basis. If the
acquisition and the merger of CMS Panhandle Holding into Panhandle Eastern Pipe
Line Company had occurred on January 1, 1999, the unaudited March 31, 1999 pro
forma amounts for operating revenue, net income and total assets would have been
$128 million, $27 million and $2.5 billion, respectively.
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2. REGULATORY MATTERS
Effective August 1996, Trunkline placed into effect a general rate increase,
subject to refund. Hearings were completed in October of 1997 and initial
decisions by a FERC ALJ were issued on certain matters in May 1998 and on the
remainder of the rate proceedings in November 1998. Responses to the initial
decisions were provided by Trunkline to FERC following the issuance of the
initial decisions. In May 1999, FERC issued an order remanding certain matters
back to the ALJ for further proceedings.
In conjunction with a FERC order issued in September 1997, certain natural gas
producers were required to refund previously collected Kansas ad-valorem taxes
to interstate natural gas pipelines. These pipelines were ordered to refund
these amounts to their customers. All payments are to be made in compliance with
prescribed FERC requirements. At March 31, 1999 and December 31, 1998, accounts
receivable included $51 million and $50 million, respectively, due from natural
gas producers, and other current liabilities included $51 million and $50
million, respectively, for related obligations.
In June 1998, Trunkline filed a petition with the FERC to abandon 720 miles of
its 26-inch diameter pipeline that extends from Longville, Louisiana to Bourbon,
Illinois. Trunkline requested permission to transfer the pipeline to an
affiliate, which has entered into an option agreement with Aux Sable for
potential conversion of the line to allow transportation of hydrocarbon vapors.
Trunkline has requested FERC to grant the abandonment authorization in time to
separate the pipeline from existing facilities and allow Aux Sable to convert
the pipeline to hydrocarbon vapor service by October 1, 2000, if the option is
exercised. The abandonment would reduce Trunkline's certificated capacity from
the current level of 1,810 Mdth/d to 1,555 Mdth/d, but will have no adverse
effect on Trunkline's ability to meet all of its firm service obligations. The
filing is pending FERC action.
3. RELATED PARTY TRANSACTIONS
A summary of certain balances due to or due from related parties included in the
Consolidated Balance Sheets is as follows:
Millions
- -------------------------------------------------------------------------
March 31, December 31,
1999 1998
- -------------------------------------------------------------------------
Receivables $ 1 $ 2
Accounts payable - 46
Taxes accrued 1 35
- -------------------------------------------------------------------------
Interest charges included $13 million and $14 million for the three months ended
March 31, 1999 and 1998, respectively, for interest associated with notes
payable to a subsidiary of Duke Energy.
In conjunction with the acquisition, all intercompany advance and note balances
between Panhandle and subsidiaries of Duke Energy were eliminated. Transactions
with prior affiliates before the acquisition are now reflected as receivables on
the Consolidated Balance Sheets.
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4. GAS IMBALANCES
The Consolidated Balance Sheets include in-kind balances as a result of
differences in gas volumes received and delivered. At March 31, 1999 and
December 31, 1998, other current assets included $24 million and $20 million,
respectively, and other current liabilities included $24 million and $22
million, respectively, related to gas imbalances.
5. INVESTMENT IN AFFILIATES
NORTHERN BORDER PARTNERS, L.P. Northern Border Partners, L.P. is a master
limited partnership that owns 70 percent of Northern Border Pipeline Company, a
partnership operating a pipeline transporting natural gas from Canada to the
Midwest area of the United States. At December 31, 1998, Panhandle held a 7.0
percent limited partnership interest in Northern Border Partners, L.P., and
thus, an indirect 4.9 percent ownership interest in Northern Border Pipeline
Company. In conjunction with the acquisition of Panhandle by CMS Energy,
Panhandle transferred its interest in Northern Border to a subsidiary of Duke
Energy in the first quarter of 1999.
WESTANA GATHERING COMPANY. Westana Gathering Company is a joint venture that
provides gathering, processing and marketing services for natural gas producers
in Oklahoma. In conjunction with the acquisition of Panhandle by CMS Energy,
Panhandle's interest in Westana Gathering Company was transferred to a
subsidiary of Duke Energy in the first quarter of 1999.
LEE 8 STORAGE. Panhandle, through its subsidiary Panhandle Storage, owns a 40
percent interest in the Lee 8 partnership, which operates a 1.4 bcf natural gas
storage facility in Michigan. This interest results from the contribution of the
stock of Panhandle Storage to Panhandle Eastern Pipe Line Company by CMS
Panhandle Holding on March 29, 1999.
6. COMMITMENTS AND CONTINGENCIES
CONTINGENT INDEBTEDNESS: On March 29, 1999, CMS Panhandle Holding issued $800
million of senior unsecured notes which were guaranteed by Panhandle: $300
million of 6.125 percent senior notes due 2004; $200 million of 6.5 percent
senior notes due 2009; and $300 million of 7.0 percent senior notes due 2029.
CMS Panhandle Holding intends to merge into Panhandle during the second quarter
of 1999, at which point Panhandle will become the direct obligor on these notes.
CAPITAL EXPENDITURES: Panhandle estimates capital expenditures and investments,
including allowance for funds used during construction, for the next three years
to be approximately $60 million for each year. These estimates are prepared for
planning purposes and are subject to revision. Capital expenditures for 1999 are
expected to be satisfied by cash from operations.
LITIGATION: Under the terms of the sale of Panhandle to CMS Energy discussed in
Note 1 to the Consolidated Financial Statements, subsidiaries of Duke Energy
indemnified CMS Energy from losses resulting from certain legal and tax
liabilities of Panhandle, including the matters specifically discussed below:
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In April 1997, a group of affiliated plaintiffs that own and/or operate various
pipeline and marketing companies and partnerships primarily in Kansas filed suit
against Panhandle in the United States District Court for the Western District
of Missouri. The plaintiffs alleged that Panhandle has engaged in unlawful and
anti-competitive conduct with regard to requests for interconnects with the
Panhandle system for service to the Kansas City area. This matter was resolved
between the parties in March 1999 and did not have a material adverse effect on
consolidated results of operations or financial position.
In May 1997, Anadarko filed suits against Panhandle and other PanEnergy
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 which are due 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. The
FERC also noted that claims for indemnity or reimbursement among the parties
would be better addressed by the United States District Court for the Southern
District of Texas. Panhandle believes the resolution of this matter will not
have a material adverse effect on consolidated results of operations 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 or
financial position.
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 which 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 or financial position.
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 an
affiliate of Pan-Alberta Gas Limited. The transportation agreement requires
estimated total payments of $53 million for the remainder of 1999 through 2001.
Management believes the probability that Panhandle will be required to perform
under this guarantee is remote.
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7. 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. Soil and sediment testing, to date, has detected no significant
off-site contamination. Panhandle has communicated with the EPA and appropriate
state regulatory agencies on these matters. Under the terms of the sale of
Panhandle to CMS Energy, as discussed in Note 1 to the Consolidated Financial
Statements, a subsidiary of Duke Energy is obligated to complete the Panhandle
clean-up programs at certain agreed-upon sites and to defend and indemnify
Panhandle against certain future environmental litigation and claims. These
clean-up programs are expected to continue until 2001.
8. BENEFIT PLANS
RETIREMENT PLAN: Following the acquisition of Panhandle by CMS Energy described
in Note 1, Panhandle now participates in CMS Energy's non-contributory defined
benefit retirement plan covering most employees with a minimum of one year
vesting service.
Under the terms of the acquisition of Panhandle by CMS Energy, benefit
obligations related to active employees and certain plan assets were transferred
to CMS Energy. Benefit obligations related to existing retired employees and
remaining plan assets were retained by a subsidiary of Duke Energy.
OTHER POSTRETIREMENT BENEFITS: Panhandle, in conjunction with CMS Energy,
provides certain health care and life insurance benefits for retired employees
on a contributory and noncontributory basis. Substantially all employees may
become eligible for these benefits if they have met certain age and service
requirements as defined in the plans.
Under the terms of the acquisition of Panhandle by CMS Energy as discussed in
Note 1 to the Consolidated Financial Statements, benefit obligations related to
active employees were transferred to CMS Energy, and benefit obligations related
to existing retired employees and plan assets were retained by a subsidiary of
Duke Energy.
9. TAXES
As described in Note 1, the stock of Panhandle was acquired from subsidiaries of
Duke Energy by CMS Panhandle Holding for a total of $2.2 billion in cash and
acquired debt. The acquisition was treated as an asset acquisition for tax
purposes, which eliminated Panhandle's deferred tax liability and gave rise to a
new tax basis in Panhandle's assets equal to the purchase price. This tax basis
in excess of Panhandle's current book basis creates deferred tax assets and
associated paid-in-capital of approximately $477 million. When CMS Panhandle
Holding is merged with Panhandle, approximately $462 million of Panhandle's
deferred tax assets will be eliminated.
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ARTHUR ANDERSEN LLP
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 March
31, 1999, and the related consolidated statements of income, common
stockholder's equity and cash flows for the three-month period then ended.
These financial statements are the responsibility of the Company's management.
The consolidated financial statements of Panhandle Eastern Pipe Line Company as
of December 31, 1998, were audited by other auditors whose report dated
February 12, 1999, expressed an unqualified opinion on those statements.
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 consolidated financial statements referred to above for them to
be in conformity with generally accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
Houston, Texas,
May 11, 1999.
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QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
CMS ENERGY
Quantitative and Qualitative Disclosures About Market Risk is contained in PART
I: CMS ENERGY CORPORATION 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 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 Eastern Pipe Line Company's
Form 10-K for the year ended December 31, 1998. Reference is made to the Notes
to the Consolidated Financial Statements included herein for additional
information regarding various pending administrative and judicial proceedings
involving rate, operating, regulatory and environmental matters.
CONSUMERS
ANTITRUST LITIGATION
For a discussion of Consumers' antitrust litigation see Note 2 subsection
"Antitrust" of the Condensed Notes to the Consolidated Financial Statements in
Part I of this Report, incorporated by reference herein.
PANHANDLE
REGULATORY MATTERS
For a discussion of certain Panhandle regulatory matters see Note 2 "Regulatory
Matters" of the Condensed Notes to the Consolidated Financial Statements in Part
I of this Report, incorporated by reference herein.
OTHER MATTERS
For a discussion of Panhandle's other litigation matters see Note 6 subsection
"Litigation" of the Condensed Notes to the Consolidated Financial Statements in
Part I of this Report, incorporated by reference herein.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) LIST OF EXHIBITS
(4)(a) - Panhandle: Indenture dated as of March 29, 1999, among CMS Panhandle Holding Company,
Panhandle Eastern Pipe Line Company and NBD Bank, as Trustee
(4)(b) - Panhandle: First Supplemental Indenture dated as of March 29, 1999, among CMS Panhandle
Holding Company, Panhandle Eastern Pipe Line Company and NBD Bank, as Trustee,
including a form of Guarantee by Panhandle Eastern Pipe Line Company of the
obligations of CMS Panhandle Holding Company
(10)(a) - Panhandle: Purchase Agreement between the Underwriters named therein and CMS Panhandle
Holding Company dated March 23, 1999
(12) - CMS Energy: Statements regarding computation of Ratio of Earnings to Fixed Charges
(15)(a) - CMS Energy: Letter of Independent Public Accountant
(27)(a) - CMS Energy: Financial Data Schedule
(27)(b) - Consumers: Financial Data Schedule
(27)(c) - Panhandle: Financial Data Schedule
(99) - CMS Energy: Consumers Gas Group Financials
(B) REPORTS ON FORM 8-K
CMS Energy filed Current Reports on Form 8-K on January 20, 1999 covering
matters pursuant to "Item 5. Other Events" and on April 6, 1999 covering matters
pursuant to "Item 2. Acquisition of Assets" and "Item 7. Exhibits."
Panhandle Eastern Pipe Line Company filed Current Reports on Form 8-K on January
26, 1999 covering matters pursuant to "Item 5. Other Events" and on April 5,
1999 covering matters pursuant to "Item 2. Disposition of Assets", "Item 4.
Changes in Registrant's Certifying Accountant" and "Item 7. Exhibits."
Consumers did not file any Current Reports on Form 8-K since filing its Annual
Report on Form 10-K for the year ended December 31, 1998.
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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: May 13, 1999 By: /s/ A.M. Wright
----------------------------------------------
Alan M. Wright
Senior Vice President and
Chief Financial Officer
CONSUMERS ENERGY COMPANY
(Registrant)
Dated: May 13, 1999 By: /s/ A.M. Wright
----------------------------------------------
Alan M. Wright
Senior Vice President and
Chief Financial Officer
PANHANDLE EASTERN PIPE LINE COMPANY
--------------------------------------------------
(Registrant)
Dated: May 13, 1999 By: /s/ A.M. Wright
----------------------------------------------
Alan M. Wright
Senior Vice President and
Chief Financial Officer
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LIST OF EXHIBITS
(4)(a) - Panhandle: Indenture dated as of March 29, 1999, among CMS Panhandle Holding Company,
Panhandle Eastern Pipe Line Company and NBD Bank, as Trustee
(4)(b) - Panhandle: First Supplemental Indenture dated as of March 29, 1999, among CMS Panhandle
Holding Company, Panhandle Eastern Pipe Line Company and NBD Bank, as Trustee,
including a form of Guarantee by Panhandle Eastern Pipe Line Company of the
obligations of CMS Panhandle Holding Company
(10)(a) - Panhandle: Purchase Agreement between the Underwriters named therein and CMS Panhandle
Holding Company dated March 23, 1999
(12) - CMS Energy: Statements regarding computation of Ratio of Earnings to Fixed Charges
(15)(a) - CMS Energy: Letter of Independent Public Accountant
(27)(a) - CMS Energy: Financial Data Schedule
(27)(b) - Consumers: Financial Data Schedule
(27)(c) - Panhandle: Financial Data Schedule
(99) - CMS Energy: Consumers Gas Group Financials
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