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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q/A
AMENDMENT NO. 1
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission Registrant; State of Incorporation; IRS Employer
File Number Address; and Telephone Number Identification No.
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1-5611 CONSUMERS ENERGY COMPANY 38-0442310
(A Michigan Corporation)
One Energy Plaza, Jackson, Michigan 49201
(517) 788-0550
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
Number of shares outstanding of each of the issuer's classes of common stock at
May 1, 2003:
CONSUMERS ENERGY COMPANY, $10 par value, privately held by CMS Energy 84,108,789
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CONSUMERS ENERGY COMPANY
QUARTERLY REPORT ON FORM 10-Q/A TO THE UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2003
EXPLANATORY NOTE
This Form 10-Q/A amends Consumers' quarterly report on Form 10-Q for the
quarterly period ended March 31, 2003, which was filed with the SEC on May 14,
2003. As discussed below, Consumers' Consolidated Balance Sheets and
Consolidated Statements of Common Stockholder's Equity for the quarterly period
ending March 31, 2003 have been restated to reflect a March 2003 common dividend
declaration.
In March 2003, Consumers Board of Directors declared a $31 million common
dividend to CMS Energy, payable in May 2003. Consumers' Consolidated Balance
Sheets and Consolidated Statements of Common Stockholder's Equity filed in the
Form 10-Q for the quarterly period ended March 31, 2003 did not reflect this
dividend declaration. Therefore, Consumers has restated its March 31, 2003
Consolidated Balance Sheets and Consolidated Statements of Common Stockholder's
Equity to reflect this dividend declaration.
There is no impact on the CMS Energy Corporation or Panhandle Eastern Pipeline
Company Form 10-Q for the quarterly period ended March 31, 2003 regarding this
issue and they are not being amended.
No attempt has been made in this Form 10-Q/A to modify or update other
disclosures as presented in the March 31, 2003 Form 10-Q except as required to
reflect the effects of the restatement.
2
CONSUMERS ENERGY COMPANY
QUARTERLY REPORT ON FORM 10-Q/A TO THE
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
FOR THE QUARTER ENDED MARCH 31, 2003
TABLE OF CONTENTS
Page
----
Glossary......................................................................................... 4
PART I: FINANCIAL INFORMATION
Management's Discussion and Analysis
Forward-Looking Statements and Risk Factors............................................ CE - 1
Critical Accounting Policies........................................................... CE - 1
Results of Operations.................................................................. CE - 9
Capital Resources and Liquidity........................................................ CE - 11
Outlook................................................................................ CE - 13
Other Matters.......................................................................... CE - 22
Consolidated Financial Statements
Consolidated Statements of Income...................................................... CE - 24
Consolidated Statements of Cash Flows.................................................. CE - 25
Consolidated Balance Sheets............................................................ CE - 26
Consolidated Statements of Common Stockholder's Equity................................. CE - 28
Condensed Notes to Consolidated Financial Statements:
1. Corporate Structure and Summary of Significant Accounting Policies................. CE - 31
2. Uncertainties...................................................................... CE - 33
3. Financings and Capitalization...................................................... CE - 45
4. Financial and Derivative Instruments............................................... CE - 48
5. Implementation of New Accounting Standards......................................... CE - 51
6. Restatement........................................................................ CE - 53
Quantitative and Qualitative Disclosures about Market Risk....................................... CO - 1
PART II: OTHER INFORMATION
Item 1. Legal Proceedings................................................................... CO - 1
Item 5. Other Information................................................................... CO - 2
Item 6. Exhibits and Reports on Form 8-K.................................................... CO - 3
Signatures.................................................................................. CO - 5
3
GLOSSARY
Certain terms used in the text and financial statements are defined below.
ALJ....................................... Administrative Law Judge
APB....................................... Accounting Principles Board
APB Opinion No. 18....................... APB Opinion No. 18, "The Equity Method of Accounting for
Investments in Common Stock"
APB Opinion No. 20........................ APB Opinion No. 20, "Accounting Changes"
APB Opinion No. 30........................ APB Opinion No. 30, "Reporting Results of Operations --
Reporting the Effects of Disposal of a Segment of a Business"
Accumulated Benefit Obligation............ The liabilities of a pension plan based on service and pay to
date. This differs from the Projected Benefit Obligation that
is typically disclosed in that it does not reflect expected
future salary increases
Alliance.................................. Alliance Regional Transmission Organization
ARO....................................... Asset Retirement Obligation
bcf....................................... Billion cubic feet
BG LNG Services........................... BG LNG Services, Inc., a subsidiary of BG Group of the United
Kingdom
Big Rock.................................. Big Rock Point nuclear power plant, owned by Consumers
Board of Directors........................ Board of Directors of CMS Energy
Centennial................................ Centennial Pipeline, LLC, in which Panhandle owns a one-third
interest
CEO....................................... Chief Executive Officer
CFO....................................... Chief Financial Officer
Clean Air Act............................. Federal Clean Air Act, as amended
CMS Capital............................... CMS Capital Corp., a subsidiary of Enterprises
CMS Electric and Gas...................... CMS Electric and Gas Company, a subsidiary of Enterprises
CMS Energy................................ CMS Energy Corporation, the parent of Consumers and
Enterprises
CMS Energy Common Stock................... Common stock of CMS Energy, par value $.01 per share
CMS Gas Transmission...................... CMS Gas Transmission Company, a subsidiary of Enterprises
CMS Generation............................ CMS Generation 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 Viron................................. CMS Viron Energy Services, a wholly owned subsidiary of CMS
MST
Consumers................................. Consumers Energy Company, a subsidiary of CMS Energy
Court of Appeals.......................... Michigan Court of Appeals
Customer Choice Act....................... Customer Choice and Electricity Reliability Act, a Michigan
statute enacted in June 2000 that allows all retail customers
choice of alternative electric suppliers as of January 1,
2002, provides for full recovery of net stranded costs and
implementation costs, establishes a five percent reduction
in residential rates, establishes rate freeze and rate cap,
and allows for Securitization
Detroit Edison............................ The Detroit Edison Company, a non-affiliated company
DIG....................................... Dearborn Industrial Generation, L.L.C., a wholly owned
subsidiary of CMS Generation
4
DOE....................................... U.S. Department of Energy
Dow....................................... The Dow Chemical Company, a non-affiliated company
Duke Energy............................... Duke Energy Corporation, a non-affiliated company
EITF...................................... Emerging Issues Task Force
Enterprises............................... CMS Enterprises Company, a subsidiary of CMS Energy
EPA....................................... U.S. Environmental Protection Agency
EPS....................................... Earnings per share
ERISA..................................... Employee Retirement Income Security Act
Ernst & Young............................. Ernst & Young LLP
FASB...................................... Financial Accounting Standards Board
FERC...................................... Federal Energy Regulatory Commission
FMB....................................... First Mortgage Bonds
FMLP...................................... First Midland Limited Partnership, a partnership that holds a
lessor interest in the MCV facility
FTC....................................... Federal Trade Commission
GCR....................................... Gas cost recovery
GTNs...................................... CMS Energy General Term Notes(R), $200 million Series D, $400
million Series E and $300 million Series F
Guardian ................................. Guardian Pipeline, LLC, in which Panhandle owns a one-third
interest
Health Care Plan.......................... The medical, dental, and prescription drug programs offered
to eligible employees of Panhandle, Consumers and CMS Energy
INGAA .................................... Interstate Natural Gas Association of America
IPP....................................... Independent Power Producer
Jorf Lasfar............................... The 1,356 MW coal-fueled power plant in Morocco, jointly
owned by CMS Generation and ABB Energy Venture, Inc.
kWh....................................... Kilowatt-hour
LIBOR..................................... London Inter-Bank Offered Rate
Loy Yang.................................. The 2,000 MW brown coal fueled Loy Yang A power plant and an
associated coal mine in Victoria, Australia, in which CMS
Generation holds a 50 percent ownership interest
LNG....................................... Liquefied natural gas
LNG Holdings.............................. CMS Trunkline LNG Holdings, LLC, jointly owned by CMS
Panhandle Holdings, LLC and Dekatherm Investor Trust
Ludington................................. Ludington pumped storage plant, jointly owned by Consumers
and Detroit Edison
MACT.......................................Maximum Achievable Control Technology
MAPL...................................... Marathon Ashland Petroleum, LLC, partner in Centennial
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
5
METC...................................... Michigan Electric Transmission Company, formally a subsidiary
of Consumers Energy and now an indirect subsidiary of
Trans-Elect
Michigan Gas Storage...................... Michigan Gas Storage Company, a subsidiary of Consumers
MISO...................................... Midwest Independent System Operator
Moody's .................................. Moody's Investors Service, Inc.
MPSC...................................... Michigan Public Service Commission
MTH....................................... Michigan Transco Holdings, Limited Partnership
MW........................................ Megawatts
NEIL...................................... Nuclear Electric Insurance Limited, an industry mutual
insurance company owned by member utility companies
NMC....................................... Nuclear Management Company, LLC, formed in 1999 by Northern
States Power Company (now Xcel Energy Inc.), Alliant Energy,
Wisconsin Electric Power Company, and Wisconsin Public
Service Company to operate and manage nuclear generating
facilities owned by the four utilities
NOPR...................................... Notice of Proposed Rulemaking
NRC....................................... Nuclear Regulatory Commission
OATT...................................... Open Access Transmission Tariff
OPEB...................................... Postretirement benefit plans other than pensions for retired
employees
Palisades................................. Palisades nuclear power plant, which is owned by Consumers
Panhandle................................. Panhandle Eastern Pipe Line Company, including its
subsidiaries Trunkline, Pan Gas Storage, Panhandle Storage,
and Panhandle Holdings. Panhandle is a wholly owned
subsidiary of CMS Gas Transmission
Panhandle Eastern Pipe Line............... Panhandle Eastern Pipe Line Company, a wholly owned subsidiary
of CMS Gas Transmission
PCB....................................... Polychlorinated biphenyl
Pension Plan.............................. The trusteed, non-contributory, defined benefit pension plan
of Panhandle, Consumers and CMS Energy
Powder River.............................. CMS Oil & Gas previously owned a significant interest in
coalbed methane fields or projects developed within the
Powder River Basin which spans the border between Wyoming and
Montana. The Powder River properties have been sold and
reported as a discontinued operation for the three months
ended March 31, 2002
PPA....................................... The Power Purchase Agreement between Consumers and the MCV
Partnership with a 35-year term commencing in March 1990
Price Anderson Act........................ Price Anderson Act, enacted in 1957 as an amendment to the
Atomic Energy Act of 1954, as revised and extended over the
years. This act stipulates between nuclear licensees and the
U.S. government the insurance, financial responsibility, and
legal liability for nuclear accidents
PSCR...................................... Power supply cost recovery
PURPA..................................... Public Utility Regulatory Policies Act of 1978
RTO....................................... Regional Transmission Organization
SEC....................................... U.S. Securities and Exchange Commission
6
Securitization............................ A financing method authorized by statute and approved by the MPSC
which allows a utility to set aside and pledge a portion of the
rate payments received by its customers for the repayment of
Securitization bonds issued by a special purpose entity affiliated
with such utility
SERP...................................... Supplemental Executive Retirement Plan
SFAS...................................... Statement of Financial Accounting Standards
SFAS No. 5................................ SFAS No. 5, "Accounting for Contingencies"
SFAS No. 34............................... SFAS No. 34, "Capitalization of Interest Cost"
SFAS No. 52............................... SFAS No. 52, "Foreign Currency Translation"
SFAS No. 71............................... SFAS No. 71, "Accounting for the Effects of Certain Types of
Regulation"
SFAS No. 87............................... SFAS No. 87, "Employers' Accounting for Pensions"
SFAS No. 106.............................. SFAS No. 106, "Employers' Accounting for Postretirement
Benefits Other Than Pensions"
SFAS No. 115.............................. SFAS No. 115, "Accounting for Certain Investments in Debt and
Equity Securities"
SFAS No. 123.............................. SFAS No. 123, "Accounting for Stock-Based Compensation"
SFAS No. 133.............................. SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities, as amended and interpreted"
SFAS No. 142.............................. SFAS No. 142, "Goodwill and Other Intangible Assets"
SFAS No. 143.............................. SFAS No. 143, "Accounting for Asset Retirement Obligations"
SFAS No. 144.............................. SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets"
SFAS No. 145.............................. SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and
64, Amendment of FASB Statement No. 13, and Technical
Corrections"
SFAS No. 146.............................. SFAS No. 146, "Accounting for Costs Associated with Exit or
Disposal Activities"
SFAS No. 148.............................. SFAS No. 148, "Accounting for Stock-Based Compensation --
Transition and Disclosure"
SIPS...................................... State Implementation Plans
Southern Union............................ Southern Union Company, a non-affiliated company
Special Committee......................... A special committee of independent directors, established by
CMS Energy's Board of Directors, to investigate matters
surrounding round-trip trading
Stranded Costs............................ Costs incurred by utilities in order to serve their customers
in a regulated monopoly environment, which may not be
recoverable in a competitive environment because of customers
leaving their systems and ceasing to pay for their costs.
These costs could include owned and purchased generation and
regulatory assets
Superfund................................. Comprehensive Environmental Response, Compensation and
Liability Act
TEPPCO.................................... TE Products Pipeline Company, Limited Partnership, partner in
Centennial
Trunkline ................................ Trunkline Gas Company, LLC, a subsidiary of CMS Panhandle
Holdings, LLC
Trunkline LNG ............................ Trunkline LNG Company, LLC, a subsidiary of LNG Holdings, LLC
Trust Preferred Securities................ Securities representing an undivided beneficial interest in the
assets of statutory business trusts, the interests of which 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
7
VEBA Trusts............................... VEBA (voluntary employees' beneficiary association) Trusts
are tax-exempt accounts established to specifically set aside
employer contributed assets to pay for future expenses of the
OPEB plan
8
Consumers Energy Company
CONSUMERS ENERGY COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS
Consumers, a subsidiary of CMS Energy, a holding company, is an electric and gas
utility company that provides service to customers in Michigan's Lower
Peninsula. Consumers' customer base includes a mix of residential, commercial
and diversified industrial customers, the largest segment of which is the
automotive industry.
FORWARD-LOOKING STATEMENTS AND RISK FACTORS
This MD&A refers to, and in some sections specifically incorporates by
reference, Consumers' Notes to Consolidated Financial Statements and should be
read in conjunction with such Consolidated Financial Statements and Notes. This
Form 10-Q and other written and oral statements that Consumers may make contain
forward-looking statements as defined by the Private Securities Litigation
Reform Act of 1995. Consumers' intentions with the use of the words,
"anticipates," "believes," "estimates," "expects," "intends," and "plans," and
variations of such words and similar expressions, are solely to identify
forward-looking statements that involve risk and uncertainty. These
forward-looking statements are subject to various factors that could cause
Consumers' actual results to differ materially from the results anticipated in
such statements. Consumers has no obligation to update or revise forward-looking
statements regardless of whether new information, future events or any other
factors affect the information contained in such statements. Consumers does,
however, discuss certain risk factors, uncertainties and assumptions in this
MD&A and in Item 1 of the 2002 Form 10-K in the section entitled
"Forward-Looking Statements Cautionary Factors" and in various public filings it
periodically makes with the SEC. Consumers designed this discussion of potential
risks and uncertainties, which is by no means comprehensive, to highlight
important factors that may impact Consumers' business and financial outlook.
This Form 10-Q also describes material contingencies in Consumers' Condensed
Notes to Consolidated Financial Statements, and Consumers encourages its readers
to review these Notes. All note references within this MD&A refer to Consumers'
Notes to Consolidated Financial Statements.
CRITICAL ACCOUNTING POLICIES
Presenting financial statements in accordance with accounting principles
generally accepted in the United States requires using estimates, assumptions,
and accounting methods that are often subject to judgment. Presented below, are
the accounting policies and assumptions that Consumers believes are most
critical to both the presentation and understanding of its financial statements.
Applying these accounting policies to financial statements can involve very
complex judgments. Accordingly, applying different judgments, estimates or
assumptions could result in a different financial presentation.
USE OF ESTIMATES IN ACCOUNTING FOR CONTINGENCIES
The principles in SFAS No. 5 guide the recording of estimated liabilities for
contingencies within the financial statements. SFAS No. 5 requires a company to
record estimated liabilities in the financial statements when a current event
has caused a probable future loss payment of an amount that can be reasonably
estimated. Consumers has used this accounting principle to record estimated
liabilities for the following significant events.
ELECTRIC ENVIRONMENTAL ESTIMATES: Consumers is subject to costly and
increasingly stringent environmental regulations. Consumers expects to incur
significant costs for future environmental compliance, especially compliance
with clean air laws.
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Consumers Energy Company
The EPA has issued regulations regarding nitrogen oxide emissions from certain
generators, including some of Consumers' electric generating facilities. These
regulations require Consumers to make significant capital expenditures estimated
to be $770 million. As of March 31, 2003, Consumers has incurred $420 million in
capital expenditures to comply with these regulations and anticipates that the
remaining capital expenditures will be incurred between 2003 and 2009.
Additionally, Consumers expects to supplement its compliance plan with the
purchase of nitrogen oxide emissions credits in the years 2005 through 2008. The
cost of these credits based on the current market is estimated to average $6
million per year; however, the market for nitrogen oxide emissions credits and
their cost can change significantly. At some point, if new environmental
standards become effective, Consumers may need additional capital expenditures
to comply with the standards. For further information see Note 2, Uncertainties,
"Electric Contingencies - Electric Environmental Matters."
GAS ENVIRONMENTAL ESTIMATES: Under the Michigan Natural Resources and
Environmental Protection Act, Consumers expects that it will incur investigation
and remedial action costs at a number of sites. Consumers estimates the costs
for 23 former manufactured gas plant sites will be between $82 million and $113
million, using the Gas Research Institute-Manufactured Gas Plant Probabilistic
Cost Model. These estimates are based on discounted 2001 costs and follow EPA
recommended use of discount rates between three and seven percent. Consumers
expects to recover a significant portion of these costs through MPSC-approved
rates charged to its customers. Any significant change in assumptions, such as
remediation techniques, nature and extent of contamination, and legal and
regulatory requirements, could change the remedial action costs for the sites.
For further information see Note 2, Uncertainties, "Gas Contingencies - Gas
Environmental Matters."
MCV UNDERRECOVERIES: 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 a 49 percent partnership interest in the
MCV Partnership, and a 35 percent lessor interest in the MCV Facility.
Consumers' annual obligation to purchase capacity from the MCV Partnership is
1,240 MW through the term of the PPA ending in 2025. The PPA requires Consumers
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 also to pay a
variable energy charge based primarily on Consumers' average cost of coal
consumed for all kWh delivered. Consumers has not been allowed full recovery of
the capacity and fixed energy charges in rates. After September 2007, the PPA's
regulatory out terms obligate Consumers to pay the MCV Partnership only those
capacity and energy charges that the MPSC has authorized for recovery from
electric customers.
In 1992, Consumers recognized a loss and established a PPA liability for the
present value of the estimated future underrecoveries of power supply costs
under the PPA based on MPSC cost recovery orders. Primarily as a result of the
MCV Facility's actual availability being greater than management's original
estimates, the PPA liability has been reduced at a faster rate than originally
anticipated. At March 31, 2003 and 2002, the remaining after-tax present value
of the estimated future PPA liability associated with the loss totaled $30
million and $46 million, respectively. The PPA liability is expected to be
depleted in late 2004.
In March 1999, Consumers and the MCV Partnership reached a settlement agreement
effective January 1, 1999, that addressed, among other things, the ability of
the MCV Partnership to count modifications increasing the capacity of the
existing MCV Facility for purposes of computing the availability of contract
capacity under the PPA for billing purposes. That settlement agreement capped
payments made on the basis of availability that may be billed by the MCV
Partnership at a maximum 98.5 percent availability level.
When Consumers returns, as expected, to unfrozen rates beginning in 2004,
Consumers will recover from customers capacity and fixed energy charges on the
basis of availability, to the extent that availability does
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Consumers Energy Company
not exceed 88.7 percent availability established in previous MPSC orders. For
capacity and energy payments billed by the MCV Partnership after September 15,
2007, and not recovered from customers, Consumers would expect to claim a
regulatory out under the PPA. The regulatory out provision relieves Consumers of
the obligation to pay more for capacity and energy payments than the MPSC allows
Consumers to collect from its customers. Consumers estimates that 51 percent of
the actual cash underrecoveries for the years 2003 and 2004 will be charged to
the PPA liability, with the remaining portion charged to operating expense as a
result of Consumers' 49 percent ownership in the MCV Partnership. All cash
underrecoveries will be expensed directly to income once the PPA liability is
depleted. If the MCV Facility's generating availability remains at the maximum
98.5 percent level during the next five years, Consumers' after-tax cash
underrecoveries associated with the PPA could be as follows:
In Millions
------------------------------------------------------------------------------------------------------------
2003 2004 2005 2006 2007
------------------------------------------------------------------------------------------------------------
Estimated cash underrecoveries at 98.5%, net of tax $37 $36 $36 $36 $25
Amount to be charged to operating expense, net of tax $18 $18 36 $36 $25
Amount to be charged to PPA liability, net of tax $19 $18 $-- $-- $--
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In February 1998, the MCV Partnership appealed the January 1998 and February
1998 MPSC orders related to electric utility restructuring. At the same time,
MCV Partnership filed suit in the United States District Court in Grand Rapids
seeking a declaration that the MPSC's failure to provide Consumers and MCV
Partnership a certain source of recovery of capacity payments after 2007
deprived MCV Partnership of its rights under the Public Utilities Regulatory
Policies Act of 1978. In July 1999, the District Court granted MCV Partnership's
motion for summary judgment. The Court permanently prohibited enforcement of the
restructuring orders in any manner that denies any utility the ability to
recover amounts paid to qualifying facilities such as the MCV Facility or that
precludes the MCV Partnership from recovering the avoided cost rate. The MPSC
appealed the Court's order to the 6th Circuit Court of Appeals in Cincinnati. In
June 2001, the 6th Circuit overturned the lower court's order and dismissed the
case against the MPSC. The appellate court determined that the case was
premature and concluded that the qualifying facilities needed to wait until 2008
for an actual factual record to develop before bringing claims against the MPSC
in federal court.
For further information see Note 2, Uncertainties, "Other Electric Uncertainties
- The Midland Cogeneration Venture."
ACCOUNTING FOR DERIVATIVE AND FINANCIAL INSTRUMENTS AND MARKET RISK INFORMATION
DERIVATIVE INSTRUMENTS: Consumers uses the criteria in SFAS No. 133, as amended
and interpreted, to determine if certain contracts must be accounted for as
derivative instruments. The rules for determining whether a contract meets the
criteria for derivative accounting are numerous and complex. As a result,
significant judgment is required to determine whether a contract requires
derivative accounting, and similar contracts can sometimes be accounted for
differently.
Consumers currently accounts for the following contracts as derivative
instruments: interest rate swaps, certain electric call options, fixed priced
weather-based gas supply call options and fixed price gas supply put options.
Consumers does not account for the following contracts as derivative
instruments: electric capacity and energy contracts, gas supply contracts
without embedded options, coal and nuclear fuel supply contracts, and purchase
orders for numerous supply items.
Consumers believes that certain of its electric capacity and energy contracts
are not derivatives due to the lack of an active energy market in the state of
Michigan, as defined by SFAS No. 133, and the transportation cost
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Consumers Energy Company
to deliver the power under the contracts to the closest active energy market at
the Cinergy hub in Ohio. If a market develops in the future, Consumers may be
required to account for these contracts as derivatives. The mark-to-market
impact on earnings related to these contracts, particularly related to the PPA,
could be material to the financial statements.
If a contract is accounted for as a derivative instrument, it is recorded in the
financial statements as an asset or a liability, at the fair value of the
contract. Any difference between the recorded book value and the fair value is
reported either in earnings or other comprehensive income, depending on certain
qualifying criteria. The recorded fair value of the contract is then adjusted
quarterly to reflect any change in the market value of the contract.
In order to determine the fair value of contracts that are accounted for as
derivative instruments, Consumers uses a combination of quoted market prices and
mathematical models. Option models require various inputs, including forward
prices, volatilities, interest rates and exercise periods. Changes in forward
prices or volatilities could significantly change the calculated fair value of
the call option contracts. At March 31, 2003, Consumers assumed a market-based
interest rate of 4.5 percent and a volatility rate of 107.5 percent in
calculating the fair value of its electric call options.
In order for derivative instruments to qualify for hedge accounting under SFAS
No. 133, the hedging relationship must be formally documented at inception and
be highly effective in achieving offsetting cash flows or offsetting changes in
fair value, attributable to the risk being hedged. If hedging a forecasted
transaction, the forecasted transaction must be probable. If a derivative
instrument, used as a cash flow hedge, is terminated early because it is
probable that a forecasted transaction will not occur, any gain or loss as of
such date is immediately recognized in earnings. If a derivative instrument,
used as a cash flow hedge, is terminated early for other economic reasons, any
gain or loss as of the termination date is deferred and recorded when the
forecasted transaction affects earnings.
FINANCIAL INSTRUMENTS: Consumers accounts for its debt and equity investment
securities in accordance with SFAS No. 115. As such, debt and equity securities
can be classified into one of three categories: held-to-maturity, trading, or
available-for-sale securities. Consumers' investments in equity securities,
including its investment in CMS Energy Common Stock, are classified as
available-for-sale securities. They are reported at fair value, with any
unrealized gains or losses from changes in fair value reported in equity as part
of other comprehensive income and excluded from earnings unless such changes in
fair value are other than temporary. In 2002, Consumers determined that the
decline in value related to its investment in CMS Energy Common Stock was other
than temporary as the fair value was below the cost basis for a period greater
than six months. As a result, Consumers recognized a loss on its investment in
CMS Energy Common Stock through earnings of $12 million in the fourth quarter of
2002, and an additional $12 million in the first quarter of 2003. As of March
31, 2003, Consumers held 2.4 million shares of CMS Energy Common Stock with a
fair value of $10 million. Unrealized gains or losses from changes in the fair
value of Consumers' nuclear decommissioning investments are reported as
regulatory liabilities. The fair value of these investments is determined from
quoted market prices.
MARKET RISK INFORMATION: Consumers is exposed to market risks including, but not
limited to, changes in interest rates, commodity prices, and equity security
prices. Consumers' market risk, and activities designed to minimize this risk,
are subject to the direction of an executive oversight committee consisting of
designated members of senior management and a risk committee, consisting of
certain business unit managers. The role of the risk committee is to review the
corporate commodity position and ensure that net corporate exposures are within
the economic risk tolerance levels established by Consumers' Board of Directors.
Established policies and procedures are used to manage the risks associated with
market fluctuations.
Consumers uses various contracts, including swaps, options, and forward
contracts to manage its risks
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Consumers Energy Company
associated with the variability in expected future cash flows attributable to
fluctuations in interest rates and commodity prices. When management uses these
instruments, it intends that an opposite movement in the value of the at-risk
item would offset any losses incurred on the contracts. Contracts used to manage
interest rate and commodity price risk may be considered derivative instruments
that are subject to derivative and hedge accounting pursuant to SFAS No. 133.
Consumers enters into all risk management contracts for purposes other than
trading.
These instruments contain credit risk if the counterparties, including financial
institutions and energy marketers, fail to perform under the agreements.
Consumers minimizes such risk by performing financial credit reviews using,
among other things, publicly available credit ratings of such counterparties.
In accordance with SEC disclosure requirements, Consumers performs sensitivity
analyses to assess the potential loss in fair value, cash flows and earnings
based upon a hypothetical 10 percent adverse change in market rates or prices.
Management does not believe that sensitivity analyses alone provide an accurate
or reliable method for monitoring and controlling risks. Therefore, Consumers
relies on the experience and judgment of its senior management to revise
strategies and adjust positions, as it deems necessary. Losses in excess of the
amounts determined in sensitivity analyses could occur if market rates or prices
exceed the 10 percent shift used for the analyses.
INTEREST RATE RISK: Consumers is exposed to interest rate risk resulting from
the issuance of fixed-rate financing and variable-rate financing, and from
interest rate swap agreements. Consumers uses a combination of these instruments
to manage and mitigate interest rate risk exposure when it deems it appropriate,
based upon market conditions. These strategies attempt to provide and maintain
the lowest cost of capital. As of March 31, 2003 and 2002, Consumers had
outstanding $1.324 billion and $1.329 billion of variable-rate financing,
respectively, including variable-rate swaps and fixed-rate swaps. At March 31,
2003 and 2002, assuming a hypothetical 10 percent adverse change in market
interest rates, Consumers' before tax earnings exposure on its variable-rate
financing would be $2 million and $3 million, respectively. As of March 31, 2003
and 2002, Consumers had entered into a floating-to-fixed interest rate swap
agreement for a notional amount of $75 million, and as of March 31, 2002 a
variable-to-fixed interest rate swap agreement for a notional of $300 million.
These swaps exchange variable-rate interest payment obligations for fixed-rate
interest payment obligations, or fixed-rate interest payment obligations for
variable-rate interest payment obligations in order to minimize the impact of
potential adverse interest rate changes. As of March 31, 2003 and 2002,
Consumers had outstanding fixed-rate financing, including fixed and
variable-rate swaps, of $2.756 billion and $2.477 billion, respectively, with a
fair value of $2.690 billion and $2.769 billion, respectively. As of March 31,
2003 and 2002, assuming a hypothetical 10 percent adverse change in market
rates, Consumers would have an exposure of $131 million and $144 million,
respectively, to the fair value of these instruments if it had to refinance all
of its fixed-rate financing. As discussed below in Electric Business Outlook -
Securitization, Consumers has filed an application with the MPSC to securitize
certain costs. If approved, Consumers will use the proceeds from the
securitization for refinancing or retirement of debt, which could include a
portion of its current fixed-rate debt. Consumers does not believe that any
adverse change in debt price and interest rates would have a material adverse
effect on either its consolidated financial position, results of operation or
cash flows.
COMMODITY MARKET RISK: For purposes other than trading, Consumers enters into
electric call options, fixed price gas supply contracts containing embedded put
options, fixed priced weather-based gas supply call options and fixed priced gas
supply put options. The electric call options are used to protect against risk
due to fluctuations in the market price of electricity and to ensure a reliable
source of capacity to meet customers' electric needs. The gas supply contracts
containing embedded put options, the weather-based gas supply call options, and
the gas supply put options are used to purchase reasonably priced gas supply.
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Consumers Energy Company
As of March 31, 2003 and 2002, the fair value based on quoted future market
prices of electricity-related call option and swap contracts was $10 million and
$19 million, respectively. At March 31, 2003 and 2002, assuming a hypothetical
10 percent adverse change in market prices, the potential reduction in fair
value associated with these contracts would be $2 million and $4 million
respectively. As of March 31, 2003 and 2002, Consumers had an asset of $28
million and $48 million, respectively, related to premiums incurred for electric
call option contracts. Consumers' maximum exposure associated with the call
option contracts is limited to the premiums incurred. As of March 31, 2003,
Consumers did not have any gas supply-related call or put option contracts. As
of March 31, 2002, the fair value based on quoted future market prices of gas
supply contracts containing embedded put options was $4 million. At March 31,
2002, a hypothetical 10 percent adverse change in market prices was immaterial.
EQUITY SECURITY PRICE RISK: Consumers owns less than 20 percent of the
outstanding shares of CMS Energy Common Stock. Consumers recognized a loss on
this investment through earnings of $12 million in the fourth quarter of 2002
and an additional $12 million loss in the first quarter of 2003, because the
loss was other than temporary as the fair value was below the cost basis for a
period greater than six months. As of March 31, 2003, Consumers held 2.4 million
shares of CMS Energy Common stock at a fair value of $10 million. Consumers
believes that any further adverse change in the market price of this investment
would not have a material effect on its consolidated financial position, results
of operation or cash flows.
For further information on market risk and derivative activities, see Note 4,
Financial and Derivative Instruments.
ACCOUNTING FOR THE EFFECTS OF INDUSTRY REGULATION
Because Consumers is involved in a regulated industry, regulatory decisions
affect the timing and recognition of revenues and expenses. Consumers uses SFAS
No. 71 to account for the effects of these regulatory decisions. As a result,
Consumers may defer or recognize revenues and expenses differently than a
non-regulated entity.
For example, items that a non-regulated entity would normally expense, Consumers
may capitalize as regulatory assets if the actions of the regulator indicate
such expenses will be recovered in future rates. Conversely, items that
non-regulated entities may normally recognize as revenues, Consumers may record
as regulatory liabilities if the actions of the regulator indicate they will
require such revenues to be refunded to customers. Judgment is required to
discern the recoverability of items recorded as regulatory assets and
liabilities. As of March 31, 2003, Consumers had $1.121 billion recorded as
regulatory assets and $463 million recorded as regulatory liabilities.
In March 1999, Consumers received MPSC electric restructuring orders, which,
among other things, identified the terms and timing for implementing electric
restructuring in Michigan. Consistent with these orders and EITF No. 97-4,
Consumers discontinued the application of SFAS No. 71 for the energy supply
portion of its business because Consumers expected to implement retail open
access at competitive market-based rates for its electric customers. Since 1999,
there has been a significant legislative and regulatory change in Michigan that
has resulted in: 1) electric supply customers of utilities remaining on
cost-based rates and 2) utilities being given the ability to recover Stranded
Costs associated with electric restructuring, from customers who choose an
alternative electric supplier. During 2002, Consumers re-evaluated the criteria
used to determine if an entity or a segment of an entity meets the requirements
to apply regulated utility accounting, and determined that the energy supply
portion of its business could meet the criteria if certain regulatory events
occurred. In December 2002, Consumers received a MPSC Stranded Cost order that
allowed Consumers to re-apply regulatory accounting standard SFAS No. 71 to the
energy supply portion of its business. Re-application of SFAS No. 71 had no
effect on the prior discontinuation accounting, but will allow Consumers to
apply regulatory accounting treatment to the energy supply portion of its
business
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Consumers Energy Company
beginning in the fourth quarter of 2002, including regulatory accounting
treatment of costs required to be recognized in accordance with SFAS No. 143.
ACCOUNTING FOR PENSION AND OPEB
Consumers provides postretirement benefits under its Pension Plan, and
postretirement health and life benefits under its OPEB plans to substantially
all its retired employees. Consumers uses SFAS No. 87 to account for pension
costs and uses SFAS No. 106 to account for other postretirement benefit costs.
These statements require liabilities to be recorded on the balance sheet at the
present value of these future obligations to employees net of any plan assets.
The calculation of these liabilities and associated expenses require the
expertise of actuaries and are subject to many assumptions including life
expectancies, present value discount rates, expected long-term rate of return on
plan assets, rate of compensation increase and anticipated health care costs.
Any change in these assumptions can significantly change the liability and
associated expenses recognized in any given year. The Pension Plan includes
amounts for employees of CMS Energy and non-utility affiliates, including
Panhandle, which were not distinguishable from the Pension Plan's total assets.
On December 21, 2002, a definitive agreement was executed to sell Panhandle. The
sale is expected to close in 2003. No portion of the Pension Plan will be
transferred with the sale of Panhandle. At the closing of the sale, none of the
employees of Panhandle will be eligible to accrue additional benefits. The
Pension Plan will retain pension payment obligations for Panhandle employees
that are vested under the Pension Plan. Consumers does not expect the impact to
be material.
Consumers estimates pension expense will approximate $36 million, $42 million
and $48 million in fiscal 2003, fiscal 2004 and fiscal 2005, respectively.
Future actual pension expense will depend on future investment performance,
changes in future discount rates and various other factors related to the
populations participating in the Pension Plan.
Consumers has announced changes to the Pension Plan. Employees hired on or after
July 1, 2003 will be covered by the cash balance plan section of the current
plan. Under the cash balance section, an employee's retirement account is
credited annually with a percentage of their salary and any amounts that are
vested are portable when an employee leaves the company. In addition, the method
used to convert an employee's benefit to a lump sum payment is being changed.
Employees who elect the lump sum payment option will not earn an additional
early retirement subsidy. As a result, employees who choose the lump sum payment
option, and retire before age 65, will receive lower lump sum payments.
In order to keep health care benefits and costs competitive, Consumers has
announced several changes to the Health Care Plan. These changes were effective
January 1, 2003. The most significant change is that Consumers' future increases
in health care costs will be shared with salaried employees. The salaried
retirees health care plan has also been amended. Pre-Medicare retirees now elect
coverage from four different levels of coverage, with the two best coverage
options requiring premium contributions. These plans also coordinate benefits
under a maintenance of benefits provision to reduce claim costs for Consumers.
Mail-order prescription copays have also been increased for all salaried
retirees.
ACCOUNTING FOR NUCLEAR DECOMMISSIONING COSTS
Consumers' decommissioning cost estimates for the Big Rock and Palisades plants
assume that each plant site will eventually be restored to conform to the
adjacent landscape with all contaminated equipment and material removed and
disposed of in a licensed burial facility and the site released for unrestricted
use. A March 1999 MPSC order provided for fully funding the decommissioning
trust funds for both sites. The order set the annual decommissioning surcharge
for the Palisades decommissioning at $6 million a year. Consumers estimates that
at the time of the decommissioning of Palisades, its decommissioning trust fund
will be fully funded. Earnings assumptions are that the trust funds are invested
in equities and fixed income investments,
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Consumers Energy Company
equities will be converted to fixed income investments during decommissioning
and fixed income investments are converted to cash as needed. Decommissioning
costs have been developed, in part, by independent contractors with expertise in
decommissioning. These costs estimates use various inflation rates for labor,
non-labor, and contaminated equipment disposal costs.
On December 31, 2000, the Big Rock trust fund was considered fully funded. A
portion of its current decommissioning cost is due to the failure of the DOE to
remove fuel from the site. These costs, and similar costs incurred at Palisades,
would not be necessary but for the failure of the DOE to take possession of the
spent fuel as required by the Nuclear Waste Policy Act of 1982. A number of
utilities have commenced litigation in the Court of Claims, including Consumers,
which filed its complaint in December 2002. The Chief Judge of the Court of
Claims identified six lead cases to be used as vehicles for resolving
dispositive motions. Consumers' case is not a lead case. It is unclear what
impact this decision by the Chief Judge will have on the outcome of Consumers'
litigation. If the litigation that was commenced in the fourth quarter of 2002,
against the DOE is successful, Consumers anticipates future recoveries from the
DOE to defray the significant costs it will incur for the storage of spent fuel
until the DOE takes possession as required by law.
On March 26, 2003, the Michigan Environmental Council, the Public Interest
Research Group in Michigan, and the Michigan Consumer Federation submitted a
complaint to the MPSC, which was served on Consumers by the MPSC on April 18,
2003. The complaint asks the MPSC to commence a generic investigation and
contested case to review all facts and issues concerning costs associated with
spent nuclear fuel storage and disposal. The complaint seeks a variety of relief
with respect to Consumers Energy, The Detroit Edison Company, Indiana & Michigan
Electric Company, Wisconsin Electric Power Company and Wisconsin Public Service
Corporation including establishing external trusts to which amounts collected in
electric rates for spent nuclear fuel storage and disposal should be
transferred, and the adoption of additional measures related to the storage and
disposal of spent nuclear fuel. Consumers is reviewing the complaint. Consumers
is unable to predict the outcome of this matter.
The funds provided by the trusts and additional funds from DOE litigation are
expected to fully fund the decommissioning costs. Variance from trust earnings,
a lesser recovery of costs from the DOE, changes in decommissioning technology,
regulations, estimates or assumptions could affect the cost of decommissioning
these sites and the adequacy of the decommissioning trust funds.
RELATED PARTY TRANSACTIONS
Consumers enters into a number of significant transactions with related parties.
These transactions include the purchase of capacity and energy from the MCV
Partnership and from affiliates of Enterprises, the purchase of electricity and
gas supply from CMS MST, the sale of electricity to CMS MST, the purchase of gas
transportation from CMS Bay Area Pipeline, L.L.C., the purchase of gas
transportation from Trunkline, a subsidiary of Panhandle, the payment of parent
company overhead costs to CMS Energy, the sale, storage and transportation of
natural gas and other services to the MCV Partnership, and an investment in CMS
Energy Common Stock.
Transactions involving CMS Energy and its affiliates and the sale, storage and
transportation of natural gas and other services to the MCV Partnership are
generally based on regulated prices, market prices or competitive bidding.
Transactions involving the power supply purchases from the MCV Partnership, and
certain affiliates of Enterprises, are based upon avoided costs under PURPA and
competitive bidding; and the payment of parent company overhead costs to CMS
Energy are based upon use or accepted industry allocation methodologies.
In 2002, Consumers also sold its transmission facilities to MTH, a
non-affiliated limited partnership whose general partner is a subsidiary of
Trans-Elect, Inc., an independent company, whose management includes former
executive employees of Consumers. The transaction was based on competitive
bidding. Additionally, Consumers continues to use the transmission facilities
now owned by MTH, and a director of Consumers is currently a stockholder of
Trans-Elect, Inc.
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Consumers Energy Company
For detailed information about related party transactions see Note 2,
Uncertainties, "Electric Rate Matters - Transmission", and "Other Electric
Uncertainties - The Midland Cogeneration Venture".
RESULTS OF OPERATIONS
CONSUMERS CONSOLIDATED EARNINGS
In Millions
-------------------------------------------------------------------------------------------------------------------
March 31 2003 2002 Change
-------------------------------------------------------------------------------------------------------------------
Three months ended $99 $81 $18
===================================================================================================================
2003 COMPARED TO 2002: For the three months ended March 31, 2003, Consumers' net
income available to the common stockholder totaled $99 million, an increase of
$18 million from the previous year. This increase in earnings reflects an
after-tax benefit of $30 million due to increased electric and gas deliveries.
Also contributing to the earnings increase is the after-tax benefit of $12
million due to the final gas rate order issued in 2002 authorizing Consumers to
increase its gas tariff rates. This increase in earnings also reflects an $8
million after-tax benefit primarily from increased intersystem revenues along
with a $5 million benefit from increased electric miscellaneous service
revenues. Offsetting these increases is a $12 million charge to non-utility
expense in order to recognize a decline in market value of CMS Energy Stock held
by Consumers and increased electric and gas operating expenses that reduced
earnings by $24 million after-tax.
For further information, see the Electric and Gas Utility Results of Operations
sections and Note 2, Uncertainties.
ELECTRIC UTILITY RESULTS OF OPERATIONS
In Millions
-------------------------------------------------------------------------------------------------------------------
March 31 2003 2002 Change
-------------------------------------------------------------------------------------------------------------------
Three months ended $51 $50 $1
===================================================================================================================
Reasons for the change:
Electric deliveries $13
Power supply costs and related revenue 13
Other operating expenses and non-commodity revenue (22)
Fixed charges (3)
-------
Total change $ 1
===================================================================================================================
ELECTRIC DELIVERIES: For the three months ended March 31, 2003, electric
delivery revenues increased by $13 million from the previous year. Electric
deliveries, including transactions with other wholesale market participants and
other electric utilities, were 9.7 billion kWh, an increase of 0.5 billion kWh
or 5.6 percent from 2002. This increase is primarily the result of increased
deliveries to the higher margin residential and commercial sectors, along with
the growth in retail deliveries.
POWER SUPPLY COSTS AND RELATED REVENUE: For the three months ended March 31,
2003, power supply costs and related revenues increased electric net income by
$13 million from 2002. This increase is primarily the result of increased
intersystem revenues.
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Consumers Energy Company
OTHER OPERATING EXPENSES AND NON-COMMODITY REVENUE: For the three months ended
March 31, 2003, operating expenses increased compared to 2002. This increase can
be attributed to a scheduled refueling outage at Palisades that began in March
and higher transmission costs due to the loss of a financial return on the sold
Consumers transmission system asset in May 2002. Slightly offsetting these
increased operating expenses are increased non-commodity revenues associated
with miscellaneous service revenues.
INCOME TAXES: For the three months ended March 31, 2003, income tax expense
remained relatively flat compared to 2002.
GAS UTILITY RESULTS OF OPERATIONS
In Millions
-------------------------------------------------------------------------------------------------------------------
March 31 2003 2002 Change
-------------------------------------------------------------------------------------------------------------------
Three months ended $54 $28 $26
===================================================================================================================
Reasons for the change:
Gas deliveries $33
Gas rate increase 19
Gas wholesales and retail services 3
Operation and maintenance (10)
General taxes, depreciation, and other income (5)
Fixed charges (1)
Income taxes (13)
----------
Total change $ 26
===================================================================================================================
GAS DELIVERIES: For the three months ended March 31, 2003, gas delivery revenues
increased by $33 million from the previous year. System deliveries, including
miscellaneous transportation, totaled 174 bcf, an increase of 25 bcf or 16.4
percent compared with 2002. This increase is primarily due to colder weather
that resulted in increased deliveries to the residential and commercial sectors
in 2003.
GAS RATE INCREASE: In November 2002, the MPSC issued a final gas rate order
authorizing a $56 million annual increase in Consumers gas tariff rates. As a
result of this order, Consumers recognized increased gas revenues of $19
million.
OPERATION AND MAINTENANCE: For the three months ended March 31, 2003, operation
and maintenance expenses increased $10 million compared to 2002. This increase
reflects the recognition of additional expenditures on safety, reliability and
customer service due to the colder temperatures for the quarter, compared to the
same period in 2002
INCOME TAXES: For the three months ended March 31, 2003, income tax expense
increased primarily due to improved earnings of the gas utility.
CAPITAL RESOURCES AND LIQUIDITY
CASH POSITION, INVESTING AND FINANCING
OPERATING ACTIVITIES: Consumers' principal source of liquidity is from cash
derived from operating activities involving the sale and transportation of
natural gas and the generation, delivery and sale of electricity. Cash
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Consumers Energy Company
from operations totaled $387 million and $270 million for the first three months
of 2003 and 2002, respectively. The $117 million increase resulted from an
increase in electric and gas deliveries, a gas rate increase and changes in
working capital items due to the timing of cash receipts and payments. Consumers
primarily uses cash derived from operating activities to operate, maintain,
expand and construct its electric and gas systems, to retire portions of
long-term debt, and to pay dividends. A decrease in cash from operations could
reduce the availability of funds and result in additional short-term financings,
see Note 3, Financings and Capitalization for additional details about this
source of funds.
INVESTING ACTIVITIES: Cash used for investing activities totaled $117 million
and $154 million for the first three months of 2003 and 2002, respectively. The
change of $37 million is primarily due to a $16 million decrease from the 2002
level of capital expenditures to comply with the Clean Air Act and a $12 million
decrease in gas supply system additions and improvements.
FINANCING ACTIVITIES: Cash used for financing activities totaled $51 million and
$105 million for the first three months of 2003 and 2002, respectively. The
change of $54 million is primarily due to a decrease of $309 million retirements
of bonds and other long-term debt, partially offset by $96 million additional
payments of notes payable and the absence of $150 million cash infusion from CMS
Energy.
CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS: The following schedule of
material contractual obligations and commercial commitments is provided to
aggregate information in a single location so that a picture of liquidity and
capital resources is readily available. For further information see Note 2,
Uncertainties, and Note 3, Financings and Capitalization.
Contractual Obligations In Millions
--------------------------------------------------------------------------------------------------------------
Payments Due
------------------------------------------------------------
2008 and
March 31 Total 2003 2004 2005 2006 2007 beyond
--------------------------------------------------------------------------------------------------------------
On-balance sheet:
Long-term debt $ 2,724 $ - $228 $470 $512 $ 31 $ 1,483
Current portion of long-
term debt 277 277 - - - - -
Notes payable 252 252 - - - - -
Capital lease obligations 153 14 19 18 17 16 69
Off-balance sheet:
Operating leases 79 10 12 8 8 6 35
Non-recourse debt of FMLP 208 8 54 41 26 13 66
Sale of accounts receivable 325 325 - - - - -
Unconditional purchase
obligations 18,888 1,843 1,386 1,119 874 742 12,924
==============================================================================================================
REGULATORY AUTHORIZATION FOR FINANCINGS: At March 31, 2003, Consumers had FERC
authorization to issue or guarantee through June 2004, up to $1.1 billion of
short-term securities outstanding at any one time. Consumers also had remaining
FERC authorization to issue through June 2004 up to $500 million of long-term
securities for refinancing or refunding purposes, $381 million for general
corporate purposes, and $610 million of first mortgage bonds to be issued solely
as collateral for the long-term securities. On April 30, 2003, Consumers sold
$625 million principal amount of first mortgage bonds, described below. Its
remaining FERC authorization after this issue is (1) $250 million of long-term
securities for refinancing or refunding purposes, (2) $6 million for general
corporate purposes, and (3) $610 million remaining first mortgage bonds
available to be issued solely as collateral for the long-term securities.
Consumers anticipates applying in the second quarter of 2003 for an increase in
FERC authorization to issue new long-term securities for
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Consumers Energy Company
refinancing or refunding and for general corporate purposes. On October 10,
2002, FERC granted a waiver of its competitive bid/negotiated placement
requirements applicable to the remaining long-term securities authorization
indicated above.
LONG TERM DEBT: In March 2003, Consumers entered into a $140 million term loan
secured by first mortgage bonds with a private investor bank. This loan has a
term of six years at a cost of LIBOR plus 475 basis points. Proceeds from this
loan were used for general corporate purposes.
In March 2003, Consumers entered into a $150 million term loan secured by first
mortgage bonds. This term loan has a three-year maturity expiring in March 2006;
the loan has a cost of LIBOR plus 450 basis points. Proceeds from this loan were
used for general corporate purposes.
In April 2003, Consumers sold $625 million principal amount of first mortgage
bonds in a private offering to institutional investors ; $250 million were
issued at 4.25 percent, maturing on April 15, 2008, and net proceeds were
approximately $248 million, $375 million were issued at 5.38 percent, maturing
on April 15, 2013, and net proceeds were approximately $371 million. Consumers
used the net proceeds to replace a $250 million senior reset put bond that
matured in May 2003, to pay an associated $32 million option call payment, and
for general corporate purposes that may include paying down additional debt.
Consumers has agreed to file a registration statement with the SEC to permit
holders of these first mortgage bonds to exchange the bonds for new bonds that
will be registered under the Securities Act of 1933. Consumers has agreed to
file this registration statement by December 31, 2003.
Consumers' current portion of long-term debt maturing in 2003 is $277 million.
Refer to Outlook, "Liquidity and Capital Resources" below for information about
Consumers strategic measures addressing its future liquidity and capital
requirements.
SHORT TERM FINANCINGS: In March 2003, Consumers obtained a replacement revolving
credit facility in the amount of $250 million secured by first mortgage bonds.
The cost of the facility is LIBOR plus 350 basis points. The new credit facility
matures in March 2004 with two annual extensions at Consumers' option, which
would extend the maturity to March 2006. The prior facility was due to expire in
July 2003.
Pursuant to restrictive covenants in debt facilities, Consumers is limited to
common stock dividend payments that will not exceed $300 million in any calendar
year. Consumers paid common stock dividends of $231 million in 2002 and $190
million in 2001 to CMS Energy. In January 2003, Consumers declared and paid a
$78 million common dividend. In March 2003, Consumers declared a $31 million
common dividend payable in May 2003.
LEASES: Consumers' capital leases are predominately for leased service vehicles
and the new headquarters building. Operating leases are predominately for
railroad coal cars.
OFF-BALANCE SHEET ARRANGEMENTS: Consumers' use of long-term contracts for the
purchase of commodities and services, the sale of its accounts receivable, and
operating leases are considered to be off-balance sheet arrangements. Consumers
has responsibility for the collectability of the accounts receivable sold, and
the full obligation of its leases become due in case of lease payment default.
Consumers uses these off-balance sheet arrangements in its normal business
operations.
SALE OF ACCOUNTS RECEIVABLE: At March 31, 2003, Consumers had, through its
wholly owned subsidiary Consumers Receivables Funding, a $325 million trade
receivable sale program in place as an anticipated source of funds for general
corporate purposes. At March 31, 2003 and 2002, the receivables sold totaled
$325 million for each year; the average annual discount rate was 1.57 percent
and 2.15 percent, respectively. Accounts receivable and accrued revenue in the
Consolidated Balance Sheets have been reduced to reflect receivables sold. On
April 30, 2003, Consumers ended its trade receivable sale program with its then
existing purchaser and anticipates that a new trade receivable program will be
in place with a new purchaser in May 2003.
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Consumers Energy Company
UNCONDITIONAL PURCHASE OBLIGATIONS: Unconditional purchase obligations include
natural gas, electricity, and coal purchase contracts and their associated cost
of transportation. These obligations represent normal business operating
contracts used to assure adequate supply and to minimize exposure to market
price fluctuations.
Included in unconditional purchase obligations are long-term power purchase
agreements with various generating plants including the MCV Facility. These
contracts require monthly capacity payments based on the plants' availability or
deliverability. These payments are approximately $47 million per month for the
remaining nine months of 2003, including $34 million related to the MCV
Facility. For the period that a plant is not available to deliver electricity to
Consumers, Consumers is not obligated to make the capacity payments to the
plant. See Electric Utility Results of Operations above and Note 2,
Uncertainties, "Electric Rate Matters - Power Supply Costs" and "Other Electric
Uncertainties - The Midland Cogeneration Venture" for further information
concerning power supply costs.
Commercial Commitments In Millions
--------------------------------------------------------------------------------------------------------------
Commitment Expiration
-----------------------------------------------------------
2008 and
March 31 Total 2003 2004 2005 2006 2007 beyond
--------------------------------------------------------------------------------------------------------------
Off-balance sheet:
Indemnities $8 $- - - - - $8
Letters of credit 7 7 - - - - -
==============================================================================================================
Indemnities are agreements by Consumers to reimburse other companies, such as an
insurance company, if those companies have to complete Consumers' performance
involving a third party contract. Letters of credit are issued by a bank on
behalf of Consumers, guaranteeing payment to a third party. Letters of credit
substitute the bank's credit for Consumers' and reduce credit risk for the third
party beneficiary. The amount and time period for drawing on a letter of credit
is limited.
OUTLOOK
LIQUIDITY AND CAPITAL RESOURCES
Consumers' liquidity and capital requirements generally are a function of its
results of operations, capital expenditures, contractual obligations, debt
maturities, working capital needs and collateral requirements. During the summer
months, Consumers purchases natural gas and stores it for resale primarily
during the winter heating season. Recently, the market price for natural gas has
increased. If continued, this price increase could impose liquidity needs beyond
what is anticipated for 2003. Although Consumers' natural gas purchases are
recoverable from its customers, the amount paid for natural gas stored as
inventory could require additional liquidity due to the timing of the cost
recoveries. In addition, certain commodity suppliers to Consumers have requested
advance payments or other forms of assurances in connection with maintenance of
ongoing deliveries of gas and electricity.
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Consumers Energy Company
Consumers has historically met its consolidated cash needs through its operating
and financing activities and access to bank financing and the capital markets.
In 2003, Consumers has contractual obligations and planned capital expenditures
that would require substantial amounts of cash. Consumers may also become
subject to liquidity demands pursuant to commercial commitments under
guarantees, indemnities and letters of credit as indicated above. Consumers
plans to meet its liquidity and capital requirements in 2003 through a
combination of approximately $290 million from operations, $1.290 billion from
borrowings, including $563 million of new debt and $727 million from refinancing
of existing debt, reduced capital expenditures, cost reductions and other
measures. The following table is a summary of Consumers' debt financing plan and
actual borrowings for 2003:
Debt Financing in 2003 In Millions
----------------------------------------------------------------------------------------------------------------
Financing Actual Retired or
Financing Plan Borrowing Type Issued Date Maturity Collateral
----------------------------------------------------------------------------------------------------------------
Anticipated Maturities:
Revolving credit
facility $ 250 $ 250 Refinanced March 2003 March 2004 (a) FMB
Senior note 250 250 Refunded (b) April 2003 April 2008 -
Gas Inventory
facility 227 - Retired (c) March 2003 - -
------ ------
Subtotal $ 727 $ 500
------ ------
New Financings:
Bank loan 140 140 New issue March 2003 March 2009 FMB (e)
Term loan 150 150 New issue March 2003 March 2006 FMB (e)
First mortgage bonds 250 375 New issue April 2003 April 2013 -
Additional gas
Inventory facility 23 - (d)- - - -
------- ------
Subtotal $ 563 $ 665
------- ------
Total $1,290 $1,165
================================================================================================================
(a) This facility has two annual extensions at Consumers' option, which would
extend the maturity to March 2006.
(b) Refunded and replaced with FMB.
(c) Includes a gas inventory facility of $207 million retired in March 2003 and
anticipated new gas inventory facility pay down of $20 million expected to
occur in December 2003. See footnote (d).
(d) Consumers will seek to arrange a $125 million gas inventory loan in the
third quarter 2003 and thus complete the $1.290 billion financing plan.
(e) Refer to Capital Resources and Liquidity, "Regulatory Authorization for
Financings" above for information about Consumers' remaining FERC debt
authorization.
Consumers believes that its current level of cash and borrowing capacity, along
with anticipated cash flows from operating and investing activities, will be
sufficient to meet its liquidity needs through 2003, including debt maturities
in 2003. In addition to executing the debt financing plan for 2003 as discussed
above, the following activities also have been initiated by Consumers to enhance
further its liquidity beyond 2003:
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Consumers Energy Company
o Consumers filed a general rate case for its gas utility business
on March 14, 2003. Consumers requested rate relief in the amount
of approximately $156 million. In its filing, Consumers requested
immediate interim relief. If interim relief of $156 million were
granted, Consumers expects that it will be in place by the fourth
quarter of 2003.
o Consumers filed an application in March 2003, with the MPSC
seeking authorization to issue $1.084 billion of Securitization
bonds. These bonds would provide liquidity to Consumers at
interest rates reflective of high quality credit. Consumers would
utilize these proceeds to retire higher cost debt and in turn
would realize significant interest expense savings over the life
of the bonds. If the MPSC approves a financing in the amount
requested, and there are no rehearing or court appeals and no
other delays in the offering process, Consumers anticipates that
bonds could be issued by year-end 2003.
There is no assurance that the pending Securitization bond issuance transaction
noted above will be completed, nor is there assurance that the MPSC will grant
either interim or final gas utility rate relief.
SEC AND OTHER INVESTIGATIONS
As a result of round-trip trading transactions at CMS MST, CMS Energy's Board of
Directors established a Special Committee of independent directors to
investigate matters surrounding the transactions and retained outside counsel to
assist in the investigation. The Special Committee completed its investigation
and reported its findings to the Board of Directors in October 2002. The Special
Committee concluded, based on an extensive investigation, that the round-trip
trades were undertaken to raise CMS MST's profile as an energy marketer with the
goal of enhancing its ability to promote its services to new customers. The
Special Committee found no apparent effort to manipulate the price of CMS Energy
Common Stock or affect energy prices. The Special Committee also made
recommendations designed to prevent any reoccurrence of this practice, most of
which have already been implemented. Previously, CMS Energy terminated its
speculative trading business and revised its risk management policy. The Board
of Directors adopted, and CMS Energy has begun implementing, the remaining
recommendations of the Special Committee.
CMS Energy is cooperating with other investigations concerning round-trip
trading, including an investigation by the SEC regarding round-trip trades and
CMS Energy's financial statements, accounting policies and controls, and
investigations by the United States Department of Justice, the Commodity Futures
Trading Commission and the FERC. The FERC issued an order on April 30, 2003
directing eight companies, including CMS MST, to submit written demonstrations
within forty-five days that they have taken certain specified remedial measures
with respect to the reporting of natural gas trading data to publications that
compile and publish price indices. CMS MST intends to make a written submission
within the specified time period demonstrating compliance with the FERC's
directives. Other than the FERC investigation, CMS Energy is unable to predict
the outcome of these matters, and Consumers is unable to predict what effect, if
any, these investigations will have on its business.
SECURITIES CLASS ACTION LAWSUITS: Beginning on May 17, 2002, a number of
securities class action complaints were filed against CMS Energy, Consumers, and
certain officers and directors of CMS Energy and its affiliates. The complaints
were filed as purported class actions in the United States District Court for
the Eastern District of Michigan. The cases were consolidated into a single
lawsuit and an amended and consolidated class action complaint was filed on May
1, 2003. The defendants named in the amended and consolidated class action
complaint consist of CMS Energy, Consumers, and certain officers and directors
of CMS Energy and its affiliates, and certain underwriters of CMS Energy
securities. The purported class period is from May 1, 2000 through and including
March 31, 2003. The amended and consolidated class action complaint seeks
unspecified damages based on allegations that the defendants violated United
States securities laws and regulations by making allegedly false and misleading
statements about CMS Energy's business and financial condition. CMS Energy and
Consumers intend to vigorously defend against this action, but cannot predict
the outcome of this litigation.
ERISA CASES: Consumers is a named defendant, along with CMS Energy, CMS MST and
certain named
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Consumers Energy Company
and unnamed officers and directors, in two lawsuits brought as purported class
actions on behalf of participants and beneficiaries of the 401(k) plan. The two
cases, filed in July 2002 in the United States District Court for the Eastern
District of Michigan, were consolidated by the trial judge and an amended and
consolidated complaint has been filed. Plaintiffs allege breaches of fiduciary
duties under ERISA and seek restitution on behalf of the plan with respect to a
decline in value of the shares of CMS Energy Common Stock held in the plan.
Plaintiffs also seek other equitable relief and legal fees. These cases will be
vigorously defended. Consumers cannot predict the outcome of this litigation.
ELECTRIC BUSINESS OUTLOOK
GROWTH: Over the next five years, Consumers expects electric deliveries
(including both full service sales and delivery service to customers who choose
to buy generation service from an alternative electric supplier, but excluding
transactions with other wholesale market participants including other electric
utilities) to grow at an average rate of approximately two percent per year
based primarily on a steadily growing customer base. This growth rate reflects a
long-range expected trend of growth. Growth from year to year may vary from this
trend due to customer response to abnormal weather conditions and changes in
economic conditions including, utilization and expansion of manufacturing
facilities. Consumers has experienced much stronger than expected growth in 2002
as a result of warmer than normal summer weather. Assuming that normal weather
conditions will occur in the remaining three quarters of 2003, electric
deliveries are expected to grow less than one percent over the strong 2002
electric deliveries.
COMPETITION AND REGULATORY RESTRUCTURING: The enactment in 2000 of Michigan's
Customer Choice Act and other developments will continue to result in increased
competition in the electric business. Generally, increased competition can
reduce profitability and threatens Consumers' market share for generation
services. The Customer Choice Act allowed all of the company's electric
customers to buy electric generation service from Consumers or from an
alternative electric supplier as of January 1, 2002. As a result, alternative
electric suppliers for generation services have entered Consumers' market. As of
early May 2003, alternative electric suppliers are providing 571 MW of
generation supply to customers. To the extent Consumers experiences "net"
Stranded Costs as determined by the MPSC, the Customer Choice Act allows for the
company to recover such "net" Stranded Costs by collecting a transition
surcharge from those customers who switch to an alternative electric supplier.
Consumers cannot predict the total amount of electric supply load that may be
lost to competitor suppliers, nor whether the stranded cost recovery method
adopted by the MPSC will be applied in a manner that will fully offset any
associated margin loss.
Stranded and Implementation Costs: The Customer Choice Act allows electric
utilities to recover the act's implementation costs and "net" Stranded Costs
(without defining the term). The act directs the MPSC to establish a method of
calculating "net" Stranded Costs and of conducting related true-up adjustments.
In December 2001, the MPSC adopted a methodology which calculated "net" Stranded
Costs as the shortfall between: (a) the revenue required to cover the costs
associated with fixed generation assets, generation-related regulatory assets,
and capacity payments associated with purchase power agreements, and (b) the
revenues received from customers under existing rates available to cover the
revenue requirement. The MPSC authorized Consumers to use deferred accounting to
recognize the future recovery of costs determined to be stranded. Consumers has
initiated an appeal at the Michigan Court of Appeals related to the MPSC's
December 2001 "net" Stranded Cost order.
According to the MPSC, "net" Stranded Costs were to be recovered from retail
open access customers through a Stranded Cost transition charge. In April 2002,
Consumers made "net" Stranded Cost filings with the MPSC for $22 million for
2000 and $43 million for 2001. In the same filing, Consumers estimated that it
would experience "net" Stranded Costs of $126 million for 2002. Consumers, in
its hearing brief, filed in August 2002, revised its request for "net" Stranded
Costs to $7 million and $4 million for 2000 and 2001, respectively, and an
estimated $73 million for 2002. The single largest reason for the difference was
the
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Consumers Energy Company
exclusion, as ordered by the MPSC, of all costs associated with expenditures
required by the Clean Air Act.
In December 2002, the MPSC issued an order finding that Consumers experienced
zero "net" Stranded Costs in 2000 and 2001, but declined to establish a defined
methodology that would allow a reliable prediction of the level of Stranded
Costs for 2002 and future years. In January 2003, Consumers filed a petition for
rehearing of the December 2002 Stranded Cost order in which it asked the MPSC to
grant rehearing and revise certain features of the order. Several other parties
also filed rehearing petitions with the MPSC. As discussed below, Consumers has
filed a request with the MPSC for authority to issue securitization bonds that
would allow recovery of the Clean Air Act expenditures that were excluded from
the Stranded Cost calculation and post-2000 Palisades expenditures.
On March 4, 2003, Consumers filed an application with the MPSC seeking approval
of "net" Stranded Costs incurred in 2002, and for approval of a "net" Stranded
Cost recovery charge. In the application, Consumers indicated that if Consumers'
proposal to securitize Clean Air Act expenditures and post-2000 Palisades
expenditures were approved as proposed in its securitization case as discussed
below, then Consumers' "net" Stranded Costs incurred in 2002 are approximately
$35 million. If the proposal to securitize those costs is not approved, then
Consumers indicated that the costs would be properly included in the 2002 "net"
Stranded Cost calculation, which would increase Consumers' 2002 "net" Stranded
Costs to approximately $103 million. Consumers cannot predict the recoverability
of Stranded Costs, and therefore has not recorded any regulatory assets to
recognize the future recovery of such costs.
The MPSC staff has scheduled a collaborative process to discuss Stranded Costs
and related issues and to identify and make recommendations to the MPSC.
Consumers is participating in this collaborative process.
Since 1997, Consumers has incurred significant electric utility restructuring
implementation costs. The following table outlines the applications filed by
Consumers with the MPSC and the status of recovery for these costs.
In Millions
--------------------------------------------------------------------------------------------------------------
Year Filed Year Incurred Requested Pending Allowed Disallowed
--------------------------------------------------------------------------------------------------------------
1999 1997 & 1998 $20 $ - $15 $5
2000 1999 30 - 25 5
2001 2000 25 - 20 5
2002 2001 8 8 Pending Pending
2003 2002 2 2 Pending Pending
==============================================================================================================
The MPSC disallowed certain costs based upon a conclusion that these amounts did
not represent costs incremental to costs already reflected in electric rates. In
the orders received for the years 1997 through 2000, the MPSC also reserved the
right to review again the total implementation costs depending upon the progress
and success of the retail open access program, and ruled that due to the rate
freeze imposed by the Customer Choice Act, it was premature to establish a cost
recovery method for the allowable implementation costs. In addition to the
amounts shown above, as of March 31, 2003, Consumers incurred and deferred as a
regulatory asset, $2 million of additional implementation costs and has also
recorded as a regulatory asset $14 million for the cost of money associated with
total implementation costs. Consumers believes the implementation costs and the
associated cost of money are fully recoverable in accordance with the Customer
Choice Act. Cash recovery from customers will probably begin after the rate
freeze or rate cap period has expired. As discussed below, Consumers has asked
to include implementation costs through December 31, 2003 in the pending
securitization case. If approved, the sale of Securitization bonds will allow
for the recovery of these costs. Consumers cannot predict the amounts the MPSC
will approve as allowable costs.
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Consumers Energy Company
Consumers is also pursuing authorization at the FERC for MISO to reimburse
Consumers for approximately $8 million in certain electric utility restructuring
implementation costs related to its former participation in the development of
the Alliance RTO, a portion of which has been expensed. However, Consumers
cannot predict the amount the FERC will ultimately order to be reimbursed by the
MISO.
Securitization: In March 2003, Consumers filed an application with the MPSC
seeking approval to issue Securitization bonds in the amount of approximately
$1.084 billion. If approved, this would allow the recovery of costs and reduce
interest rates associated with financing Clean Air Act expenditures, post-2000
Palisades expenditures, and retail open access implementation costs through
December 31, 2003, and certain pension fund expenses, and expenses associated
with the issuance of the bonds.
Rate Caps: The Customer Choice Act imposes certain limitations on electric rates
that could result in Consumers being unable to collect from electric customers
its full cost of conducting business. Some of these costs are beyond Consumers'
control. In particular, if Consumers needs to purchase power supply from
wholesale suppliers while retail rates are frozen or capped, the rate
restrictions may make it impossible for Consumers to fully recover purchased
power and associated transmission costs from its customers. As a result,
Consumers may be unable to maintain its profit margins in its electric utility
business during the rate freeze or rate cap periods. The rate freeze is in
effect through December 31, 2003. The rate caps are in effect through at least
December 31, 2004 for small commercial and industrial customers, and at least
through December 31, 2005 for residential customers.
Industrial Contracts: In response to industry restructuring efforts, in 1995 and
1996, Consumers entered into multi-year electric supply contracts with certain
large industrial customers to provide electricity at specially negotiated
prices, usually at a discount from tariff prices. The MPSC approved these
special contracts as part of its phased introduction to competition. Unless
terminated or restructured, the majority of these contracts are in effect
through 2005. As of March 31, 2003, outstanding contracts involve approximately
513 MW. Consumers cannot predict the ultimate financial impact of changes
related to these power supply contracts, or whether additional contracts will be
necessary or advisable. However, of the original special contracts that have
terminated, contracts for 52MW have gone to an alternative electric supplier
and contracts for 129MW have returned to bundled tariff rates.
Code of Conduct: In December 2000, as a result of the passage of the Customer
Choice Act, the MPSC issued a new code of conduct that applies to electric
utilities and alternative electric suppliers. The code of conduct seeks to
prevent cross-subsidization, information sharing, and preferential treatment
between a utility's regulated and unregulated services. The new code of conduct
is broadly written, and as a result, could affect Consumers' retail gas
business, the marketing of unregulated services and equipment to Michigan
customers, and internal transfer pricing between Consumers' departments and
affiliates. In October 2001, the new code of conduct was reaffirmed by the MPSC
without substantial modification. Consumers appealed the MPSC orders related to
the code of conduct and sought a stay of the orders until the appeal was
complete; however, the request for a stay was denied. Consumers filed a
compliance plan in accordance with the code of conduct. It also sought waivers
to the code of conduct in order to continue utility activities that provide
approximately $50 million in annual electric and gas revenues. In October 2002,
the MPSC denied waivers for three programs that provided approximately $32
million in gas revenues in 2001, of which $30 million relates to the appliance
service plan. The waivers denied included all waivers associated with the
appliance service plan program that has been offered by Consumers for many
years. Consumers filed a renewed motion for a stay of the effectiveness of the
code of conduct and an appeal of the waiver denials with the Michigan Court of
Appeals. On November 8, 2002, the Michigan Court of Appeals denied Consumers'
request for a stay. Consumers filed an application for leave to appeal with the
Michigan Supreme Court with respect to the Michigan Court of Appeals' November
ruling denying the stay. In February 2003, the Michigan Supreme Court denied the
application. In December 2002, Consumers filed a renewed request with the MPSC
for a temporary waiver until April 2004 for the appliance service plan, which
generated $33 million in gas revenues in 2002. In February 2003, the MPSC
granted an extension of the temporary waiver until December 31, 2003. The full
impact of the new code of conduct on Consumers' business will remain uncertain
until the
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Consumers Energy Company
appellate courts issue definitive rulings. Recently, in an appeal involving
affiliate pricing guidelines, the Michigan Court of Appeals struck the
guidelines down because of a procedurally defective manner of enactment by the
MPSC. A similar procedure was used by the MPSC in enacting the new code of
conduct. Consumers is also exploring seeking legislative clarification of the
scope of the code of conduct.
Energy Policy: Uncertainty exists regarding the enactment of a national
comprehensive energy policy, specifically federal electric industry
restructuring legislation. A variety of bills introduced in the United States
Congress in recent years aimed to change existing federal regulation of the
industry. If the federal government enacts a comprehensive energy policy or
electric restructuring legislation, then that legislation could potentially
affect company operations and financial requirements.
Transmission: In 2002, Consumers sold its electric transmission system to MTH, a
non-affiliated limited partnership whose general partner is a subsidiary of
Trans-Elect, Inc.
As a result of the sale, Consumers anticipates its after-tax earnings will be
decreased by $15 million in 2003, and decrease by approximately $14 million
annually for the next three years due to a loss of revenue from wholesale and
retail open access customers who will buy services directly from MTH and the
loss of a return on the sold electric transmission system.
Under an agreement with MTH, and subject to certain additional RTO surcharges,
transmission rates charged to Consumers are fixed by contract at current levels
through December 31, 2005, and subject to FERC ratemaking thereafter. MTH has
completed the capital program to expand the transmission system's capability to
import electricity into Michigan, as required by the Customer Choice Act, and
Consumers will continue to maintain the system under a five-year contract with
MTH.
Consumers is a customer of AEP, holding 300 MW of long-term transmission service
reservations through the AEP transmission system. Effective June 1, 2003,
Consumers will have an additional 100 MW of long-term transmission, resulting in
a total of 400 MW of long-term transmission for summer 2003, reserved through
the AEP transmission system. AEP has indicated its intent, and has received
preliminary FERC approval, to turn control of its transmission system over to
the PJM RTO. This will require current AEP wholesale transmission customers to
become members of, and resubmit reservation requests to, PJM. Due to legislation
recently enacted in Virginia, which precludes Virginia utilities (including AEP)
from joining an RTO until at least July 2004, as well as uncertainty associated
with state approvals AEP is seeking from various state regulatory bodies, the
timing of AEP's membership in PJM is currently in some doubt. Upon completion of
the steps necessary for the integration of AEP into PJM, Consumers will complete
the application process to join PJM as a transmission customer.
There are multiple proceedings and a proposed rulemaking pending before the FERC
regarding transmission pricing mechanisms and standard market design for
electric bulk power markets and transmission. The results of these proceedings
and proposed rulemaking could significantly affect the trend of transmission
costs and increase the delivered power costs to Consumers and the retail
electric customers it serves. The specific financial impact on Consumers of such
proceedings, rulemaking and trends are not currently quantifiable.
In addition, Consumers is evaluating whether or not there may be impacts on
electric reliability associated with the outcomes of these various transmission
related proceedings. Consumers cannot assure that all risks to reliability can
be avoided.
Consumers cannot predict the impact of these electric industry-restructuring
issues on its financial position, liquidity, or results of operations.
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Consumers Energy Company
PERFORMANCE STANDARDS: In July 2001, the MPSC proposed electric distribution
performance standards for Consumers and other Michigan electric distribution
utilities. The proposal would establish standards related to restoration after
an outage, safety, and customer relations. Failure to meet the standards would
result in customer bill credits. Consumers submitted comments to the MPSC. In
December 2001, the MPSC issued an order stating its intent to initiate a formal
rulemaking proceeding to develop and adopt performance standards. In November
2002, the MPSC issued an order initiating the formal rulemaking proceeding.
Consumers has filed comments on the proposed rules and will continue to
participate in this process. Consumers cannot predict the nature of the proposed
standards or the likely effect, if any, on Consumers.
For further information and material changes relating to the rate matters and
restructuring of the electric utility industry, see Note 1, Corporate Structure
and Summary of Significant Accounting Policies, and Note 2, Uncertainties,
"Electric Rate Matters - Electric Restructuring" and "Electric Rate Matters -
Electric Proceedings."
UNCERTAINTIES: Several electric business trends or uncertainties may affect
Consumers' financial results and condition. These trends or uncertainties have,
or Consumers reasonably expects could have, a material impact on net sales,
revenues, or income from continuing electric operations. Such trends and
uncertainties include: 1) pending litigation and government investigations; 2)
the need to make additional capital expenditures and increase operating expenses
for Clean Air Act compliance; 3) environmental liabilities arising from various
federal, state and local environmental laws and regulations, including potential
liability or expenses relating to the Michigan Natural Resources and
Environmental Protection Acts and Superfund; 4) uncertainties relating to the
storage and ultimate disposal of spent nuclear fuel; 5) electric industry
restructuring issues, including those described above; 6) Consumers' ability to
meet peak electric demand requirements at a reasonable cost, without market
disruption, and successfully implement initiatives to reduce exposure to
purchased power price increases; 7) the recovery of electric restructuring
implementation costs; 8) Consumers new status as an electric transmission
customer and not as an electric transmission owner/operator; 9) sufficient
reserves for OATT rate refunds; 10) the effects of derivative accounting and
potential earnings volatility; 11) increased costs for safety and homeland
security initiatives that are not recoverable on a timely basis from customers;
and 12) potentially rising pension costs due to market losses (as discussed
above in Accounting for Pension and OPEB). For further information about these
trends or uncertainties, see Note 2, Uncertainties.
GAS BUSINESS OUTLOOK
GROWTH: Over the next five years, Consumers expects gas deliveries, including
gas full service and customer choice deliveries (excluding transportation to the
MCV Facility and off-system deliveries), to grow at an average rate of less than
one percent per year based primarily on a steadily growing customer base. Actual
gas deliveries in future periods may be affected by abnormal weather, use of gas
by independent power producers, changes in competitive and economic conditions,
and the level of natural gas consumption per customer.
2001 GAS RATE CASE: In June 2001, Consumers filed an application with the MPSC
seeking a distribution service rate increase. On November 7, 2002, the MPSC
issued a final order approving a $56 million annual distribution service rate
increase, which includes the $15 million interim increase, with an 11.4 percent
authorized return on equity, for service effective November 8, 2002. As part of
this order, the MPSC approved Consumers' proposal to absorb the assets and
liabilities of Michigan Gas Storage Company into Consumers' rate base and rates.
This has occurred through a statutory merger of Michigan Gas Storage Company
into Consumers and this is not expected to have an impact on Consumers'
consolidated financial statements.
2003 GAS RATE CASE: On March 14, 2003, Consumers filed an application with the
MPSC seeking a $156 million increase in its gas delivery and transportation
rates, which includes a 13.5 percent authorized return on
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Consumers Energy Company
equity, based on a 2004 test year. If approved, the request would add about
$6.40 per month, or about 9 percent, to the typical residential customer's
average monthly bill. Contemporaneously with this filing, Consumers has
requested interim rate relief in the same amount.
In September 2002, the FERC issued an order rejecting a filing by Consumers to
assess certain rates for non-physical gas title tracking services offered by
Consumers. Despite Consumers' arguments to the contrary, the FERC asserted
jurisdiction over such activities and allowed Consumers to refile and justify a
title transfer fee not based on volumes as Consumers proposed. Because the order
was issued six years after Consumers made its original filing initiating the
proceeding, over $3 million in non-title transfer tracking fees had been
collected. No refunds have been ordered, and Consumers sought rehearing of the
September order. If refunds were ordered they may include interest which would
increase the refund liability to more than the $3 million collected. In December
2002, Consumers established a $3.6 million reserve related to this matter.
Consumers is unable to say with certainty what the final outcome of this
proceeding might be.
ENERGY-RELATED SERVICES: Consumers offers a variety of energy-related services
to retail customers that focus on appliance maintenance, home safety, commodity
choice, and assistance to customers purchasing heating, ventilation and air
conditioning equipment. Consumers continues to look for additional growth
opportunities in providing energy-related services to its customers. The ability
to offer all or some of these services and other utility related
revenue-generating services, which provide approximately $36 million in annual
gas revenues, may be restricted by the new code of conduct issued by the MPSC,
as discussed above in Electric Business Outlook, "Competition and Regulatory
Restructuring - Code of Conduct."
UNCERTAINTIES: Several gas business trends or uncertainties may affect
Consumers' financial results and conditions. These trends or uncertainties have,
or Consumers reasonably expects could have, a material impact on net sales,
revenues, or income from continuing gas operations. Such trends and
uncertainties include: 1) pending litigation and government investigations; 2)
potential environmental costs at a number of sites, including sites formerly
housing manufactured gas plant facilities; 3) future gas industry restructuring
initiatives; 4) any initiatives undertaken to protect customers against gas
price increases; 5) an inadequate regulatory response to applications for
requested rate increases; 6) market and regulatory responses to increases in gas
costs, including a reduced average use per residential customer; 7) increased
costs for pipeline integrity and safety and homeland security initiatives that
are not recoverable on a timely basis from customers; and 8) potentially rising
pension costs due to market losses (as discussed above in Accounting for Pension
and OPEB). For further information about these uncertainties, see Note 2,
Uncertainties.
OTHER OUTLOOK
See Outlook, "Liquidity and Capital Resources," "SEC and Other Investigations,"
"Securities Class Action Lawsuits," and "ERISA Cases" above.
SECURITY COSTS: Since the September 11, 2001 terrorist attacks in the United
States, Consumers has increased security at all critical facilities and over its
critical infrastructure, and will continue to evaluate security on an ongoing
basis. Consumers may be required to comply with federal and state regulatory
security measures promulgated in the future. Through December 31, 2002,
Consumers has incurred approximately $4 million in incremental security costs,
including operating, capital, and decommissioning and removal costs. Consumers
estimates it may incur additional incremental security costs in 2003 of
approximately $6 million. Consumers will attempt to seek recovery of these costs
from its customers. In December 2002, the Michigan legislature passed, and the
governor signed, a bill that would allow Consumers to seek recovery of
additional nuclear electric division security costs incurred during the rate
freeze and cap periods imposed by the Customer Choice Act. Of the $4 million in
incremental security costs incurred through December 31, 2002, approximately $3
million related to nuclear security costs. Of the estimated $6 million for
incremental
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security costs expected to be incurred in 2003, $4 million relates to nuclear
security costs. On February 5, 2003, the MPSC adopted filing requirements for
the recovery of enhanced security costs.
OTHER MATTERS
DISCLOSURE AND INTERNAL CONTROLS
Consumers' CEO and CFO are responsible for establishing and maintaining
Consumers' disclosure controls and procedures. Management, under the direction
of Consumers' principal executive and financial officers, has evaluated the
effectiveness of Consumers' disclosure controls and procedures as of a date
within 90 days prior to this filing. Based on this evaluation, Consumers' CEO
and CFO have concluded that Consumers' disclosure controls and procedures are
effective to ensure that material information was presented to them. There have
been no significant changes in Consumers' internal controls or in other factors
that could significantly affect internal controls subsequent to such evaluation.
NEW ACCOUNTING STANDARDS
FASB INTERPRETATION NO. 46, CONSOLIDATION OF VARIABLE INTEREST ENTITIES: Issued
by the FASB in January 2003, the interpretation expands upon and strengthens
existing accounting guidance that addresses when a company should include in its
financial statements the assets, liabilities and activities of another entity.
The consolidation requirements of the interpretation apply immediately to
variable interest entities created after January 31, 2003. For Consumers, the
consolidation requirements apply to pre-existing entities beginning July 1,
2003. Certain of the disclosure requirements apply to all financial statements
initially issued after January 31, 2003. Consumers will be required to
consolidate any entities that meet the requirements of the interpretation. Upon
adoption of the standard on January 31, 2003, there was no impact on Consumers'
consolidated financial statements, and Consumers does not anticipate any
additional impact to its consolidated financial statements upon adoption of
additional standard requirements on July 1, 2003.
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CONSUMERS ENERGY COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31 2003 2002
----------------------------------------------------------------------------------------------------------------
In Millions
OPERATING REVENUE
Electric $ 653 $ 609
Gas 789 616
Other 16 11
--------------------
1,458 1,236
----------------------------------------------------------------------------------------------------------------
OPERATING EXPENSES
Operation
Fuel for electric generation 80 67
Purchased power - related parties 132 141
Purchased and interchange power 82 61
Cost of gas sold 519 396
Cost of gas sold - related parties 25 30
Other 160 139
-------------------
998 834
Maintenance 52 50
Depreciation, depletion and amortization 116 107
General taxes 59 57
--------------------
1,225 1,048
----------------------------------------------------------------------------------------------------------------
OPERATING INCOME
Electric 116 115
Gas 103 64
Other 14 9
--------------------
233 188
----------------------------------------------------------------------------------------------------------------
OTHER INCOME (DEDUCTIONS)
Dividends and interest from affiliates - 1
Accretion expense (2) (2)
Other, net (8) (1)
----------------------
(10) (2)
-----------------------------------------------------------------------------------------------------------------
INTEREST CHARGES
Interest on long-term debt 42 33
Other interest 5 9
Capitalized interest (2) (2)
---------------------
45 40
----------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 178 146
INCOME TAXES 68 54
--------------------
NET INCOME 110 92
PREFERRED SECURITIES DISTRIBUTIONS 11 11
--------------------
NET INCOME AVAILABLE TO COMMON STOCKHOLDER $ 99 $ 81
================================================================================================================
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
MARCH 31 2003 2002
----------------------------------------------------------------------------------------------------------------
In Millions
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $110 $ 92
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation, depletion and amortization (includes nuclear
decommissioning of $2 and $2, respectively) 116 107
Deferred income taxes and investment tax credit 28 31
Loss on CMS Energy stock 12 -
Capital lease and other amortization 4 3
Undistributed earnings of related parties (16) (10)
Changes in assets and liabilities
Decrease in inventories 238 193
Decrease in accounts payable (5) (32)
Increase in accounts receivable and accrued revenue (50) (54)
Changes in other assets and liabilities (50) (60)
-----------------------------
Net cash provided by operating activities 387 270
-----------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (excludes assets placed under capital lease) (114) (142)
Cost to retire property, net (18) (15)
Investment in Electric Restructuring Implementation Plan (2) (3)
Investments in nuclear decommissioning trust funds (2) (2)
Proceeds from nuclear decommissioning trust funds 6 8
Cash receipts from asset sales 13 -
--------------------------
Net cash used in investing activities (117) (154)
-----------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Decrease in notes payable, net (205) (109)
Payment of common stock dividends (78) (55)
Retirement of bonds and other long-term debt (35) (344)
Preferred securities distributions (11) (11)
Payment of capital lease obligations (3) (3)
Redemption of preferred securities - (30)
Payment of preferred stock dividends - (1)
Stockholder's contribution - 150
Proceeds from senior notes and bank loans 281 298
------------------------
Net cash used in financing activities (51) (105)
-----------------------------------------------------------------------------------------------------------------
NET INCREASE IN CASH AND TEMPORARY CASH INVESTMENTS 219 11
CASH AND TEMPORARY CASH INVESTMENTS, BEGINNING OF PERIOD 271 17
--------------------------------
CASH AND TEMPORARY CASH INVESTMENTS, END OF PERIOD $ 490 $ 28
=================================================================================================================
OTHER CASH FLOW ACTIVITIES AND NON-CASH INVESTING AND FINANCING ACTIVITIES WERE:
CASH TRANSACTIONS
Interest paid (net of amounts capitalized) $ 61 $ 31
Income tax paid 5 -
Pension and OPEB cash contribution 18 61
NON-CASH TRANSACTIONS
Other assets placed under capital leases $ 8 $ 17
=================================================================================================================
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.
CE-25
CONSUMERS ENERGY COMPANY
CONSOLIDATED BALANCE SHEETS
ASSETS MARCH 31 MARCH 31
2003 DECEMBER 31 2002
(UNAUDITED) 2002 (UNAUDITED)
---------------------------------------------------------------------------------------------------------------
(As Restated)
(See Note 6)
In Millions
PLANT (AT ORIGINAL COST)
Electric $7,356 $7,523 $7,733
Gas 2,787 2,719 2,625
Other 21 23 21
----------------------------------------
10,164 10,265 10,379
Less accumulated depreciation, depletion and amortization 5,267 5,900 6,022
---------------------------------------
4,897 4,365 4,357
Construction work-in-progress 487 548 532
---------------------------------------
5,384 4,913 4,889
----------------------------------------------------------------------------------------------------------------
INVESTMENTS
Stock of affiliates 10 22 54
First Midland Limited Partnership 259 255 257
Midland Cogeneration Venture Limited Partnership 405 388 316
Consumers Nuclear Services, LLC 2 2 2
---------------------------------------
676 667 629
----------------------------------------------------------------------------------------------------------------
CURRENT ASSETS
Cash and temporary cash investments at cost, which approximates market 490 271 28
Accounts receivable and accrued revenue, less allowances
of $5, $4 and $3, respectively 279 236 183
Accounts receivable - related parties 15 13 15
Inventories at average cost
Gas in underground storage 256 486 378
Materials and supplies 74 71 69
Generating plant fuel stock 26 37 50
Deferred property taxes 117 142 120
Regulatory assets 19 19 19
Other 53 38 18
----------------------------------------
1,329 1,313 880
----------------------------------------------------------------------------------------------------------------
NON-CURRENT ASSETS
Regulatory assets
Securitized costs 678 689 714
Postretirement benefits 180 185 203
Abandoned Midland Project 11 11 11
Other 233 168 171
Nuclear decommissioning trust funds 529 536 576
Other 199 218 154
---------------------------------------
1,830 1,807 1,829
----------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $9,219 $8,700 $8,227
================================================================================================================
CE-26
STOCKHOLDERS' INVESTMENT AND LIABILITIES MARCH 31 MARCH 31
2003 DECEMBER 31 2002
(UNAUDITED) 2002 (UNAUDITED)
---------------------------------------------------------------------------------------------------------------
(As Restated) In Millions
(See Note 6)
CAPITALIZATION
Common stockholder's equity
Common stock $ 841 $ 841 $ 841
Paid-in capital 682 682 782
Other Comprehensive Income (175) (179) 9
Retained earnings since December 31, 1992 535 545 467
---------------------------------------
1,883 1,889 2,099
Preferred stock 44 44 44
Company-obligated mandatorily redeemable preferred securities
of subsidiaries (a) 490 490 490
Long-term debt 2,724 2,442 2,433
Non-current portion of capital leases 121 116 85
----------------------------------------
5,262 4,981 5,151
----------------------------------------------------------------------------------------------------------------
CURRENT LIABILITIES
Current portion of long-term debt and capital leases 290 318 253
Notes payable 252 457 150
Notes payable- CMS Energy - - 157
Accounts payable 252 261 249
Accrued taxes 161 214 161
Accounts payable - related parties 88 84 97
Deferred income taxes 29 25 23
Current portion of purchased power contracts 26 26 24
Other 198 200 234
---------------------------------------
1,296 1,585 1,348
----------------------------------------------------------------------------------------------------------------
NON-CURRENT LIABILITIES
Deferred income taxes 961 949 808
Postretirement benefits 566 563 239
Regulatory liabilities for income taxes, net 311 297 276
Other Regulatory liabilities 152 4
Asset Retirement Obligation 364 - -
Power purchase agreement - MCV Partnership 21 27 47
Deferred investment tax credit 89 91 100
Other 197 203 258
---------------------------------------
2,661 2,134 1,728
----------------------------------------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES (Notes 1 and 2)
TOTAL STOCKHOLDERS' INVESTMENT AND LIABILITIES $9,219 $8,700 $8,227
================================================================================================================
(a) See Note 3, Financings and Capitalization
THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE BALANCE SHEETS.
CE-27
CONSUMERS ENERGY COMPANY
CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDER'S EQUITY
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31 2003 2002
--------------------------------------------------------------------------------------------------------------------
(As Restated) In Millions
(See Note 6)
COMMON STOCK
At beginning and end of period (a) $ 841 $ 841
--------------------------------------------------------------------------------------------------------------------
OTHER PAID-IN CAPITAL
At beginning of period 682 632
Stockholder's contribution - 150
---------------------
At end of period 682 782
--------------------------------------------------------------------------------------------------------------------
OTHER COMPREHENSIVE INCOME
Minimum Pension Liability
At beginning of period (185) -
Minimum liability pension adjustments - -
---------------------
At end of period (185) -
---------------------
Investments
At beginning of period 1 16
Unrealized loss on investments (b) - (3)
---------------------
At end of period 1 13
---------------------
Derivative Instruments (c)
At beginning of period 5 (12)
Unrealized gain on derivative instruments (b) 7 5
Reclassification adjustments included in net income (b) (3) 3
---------------------
At end of period 9 (4)
--------------------------------------------------------------------------------------------------------------------
RETAINED EARNINGS
At beginning of period 545 441
Net income (b) 110 92
Cash dividends declared- Common Stock (109) (55)
Preferred securities distributions (11) (11)
---------------------
At end of period 535 467
--------------------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCKHOLDER'S EQUITY $1,883 $2,099
====================================================================================================================
CE-28
(a) Number of shares of common stock outstanding was 84,108,789 for all periods
presented
(b) Disclosure of Comprehensive Income:
Other Comprehensive Income
Investments
Unrealized loss on investments, net of tax of
$- and $2, respectively $ - $ (3)
Derivative Instruments (d)
Unrealized gain on derivative instruments,
net of tax of $4 and $3, respectively 7 5
Reclassification adjustments included in net income,
net of tax of ($2) and $1, respectively (3) 3
Net income 110 92
-------------------
Total Comprehensive Income $ 114 $ 97
===================
(c) Included in these amounts is Consumers' proportionate share of the
effects of derivative accounting related to its equity investment in
the MCV Partnership as follows:
At the beginning of the period $ 8 $ (8)
Unrealized gain on derivative instruments 7 5
Reclassification adjustments included in net income (4) 2
-------------------
At the end of period $ 11 $ (1)
===================
The accompanying notes are an integral part of these statements
CE-29
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CE-30
Consumers Energy Company
CONSUMERS ENERGY COMPANY
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Consumer's Consolidated Balance Sheets and Consolidated Statements of Common
Stockholder's Equity for the quarterly period ended March 31, 2003 have been
restated, as discussed in Note 6, Restatement, to reflect a March 2003 common
dividend declaration.
Except for the addition of Note 6, the following notes to the consolidated
financial statements have not been modified.
These interim Consolidated Financial Statements have been prepared by Consumers
in accordance with accounting principles generally accepted in the United States
for interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. As such, certain information and footnote
disclosures normally included in financial statements prepared in accordance
with accounting principles generally accepted in the United States have been
condensed or omitted. Certain prior year amounts have been reclassified to
conform to the presentation in the current year. In management's opinion, the
unaudited information contained in this report reflects all adjustments
necessary to assure the fair presentation of financial position, results of
operations and cash flows for the periods presented. The Condensed Notes to
Consolidated Financial Statements and the related Consolidated Financial
Statements should be read in conjunction with the Consolidated Financial
Statements and Notes to Consolidated Financial Statements contained in the
Consumers Form 10-K for the year ended December 31, 2002, which includes the
Reports of Independent Auditors. Due to the seasonal nature of Consumers
operations, the results as presented for this interim period are not necessarily
indicative of results to be achieved for the fiscal year.
1: CORPORATE STRUCTURE AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CORPORATE STRUCTURE: Consumers, a subsidiary of CMS Energy, a holding company,
is an electric and gas utility company that provides service to customers in
Michigan's Lower Peninsula. Consumers' customer base includes a mix of
residential, commercial and diversified industrial customers, the largest
segment of which is the automotive industry.
COLLECTIVE BARGAINING AGREEMENT: As of December 31, 2002, 44 percent of
Consumers' workforce was represented by the Utility Workers Union of America.
Consumers and the Union negotiated a collective bargaining agreement that became
effective as of June 1, 2000, and will continue in full force and effect until
June 1, 2005. On March 26, 2003, Consumers reached a tentative agreement with
the Union for a collective bargaining agreement for its Call Center employees.
The agreement was effective April 1, 2003, and covers approximately 300
employees. The agreement will continue in full force and effect until August 1,
2005.
BASIS OF PRESENTATION: The consolidated financial statements include Consumers
and its wholly owned subsidiaries. Consumers uses the equity method of
accounting for investments in companies and partnerships where it has more than
a twenty percent but less than a majority ownership interest and includes these
results in operating income. Consumers prepared the financial statements in
conformity with accounting principles generally accepted in the United States
that include the use of management's estimates.
REPORTABLE SEGMENTS: Consumers has two reportable segments: electric and gas.
The electric segment consists of activities associated with the generation and
distribution of electricity. The gas segment consists of activities associated
with the transportation, storage and distribution of natural gas. Consumers'
reportable segments are domestic 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' 2002 Form 10-K.
Consumers' management has changed its evaluation of the performance of the
electric and gas segments from operating income to net income available to
common stockholder. The Consolidated Statements of Income show operating revenue
and operating income by reportable segment. Intersegment sales and transfers are
accounted for at current market prices and are eliminated in consolidated net
income available to common stockholder by segment. Consumers' classifies its
equity investments as a part of the other business unit. The other business unit
also includes Consumers' consolidated statutory business trusts, which were
created to issue preferred securities and Consumers' consolidated special
purpose entity for the sale of trade receivables.
CE-31
Consumers Energy Company
The net income available to common stockholder by reportable segment is as
follows:
In Millions
------------------------------------------------------------------------------------------------------------------
Three Months Ended
March 31 2003 2002
------------------------------------------------------------------------------------------------------------------
Net income available to common stockholder
Electric $51 $50
Gas 54 28
Other (6) 3
------------------------------------------------------------------------------------------------------------------
Total Consolidated $99 $81
==================================================================================================================
FINANCIAL INSTRUMENTS: Consumers accounts for its debt and equity investment
securities in accordance with SFAS No. 115. As such, debt and equity securities
can be classified into one of three categories: held-to-maturity, trading, or
available-for-sale securities. Consumers' investments in equity securities,
including its investment in CMS Energy Common Stock, are classified as
available-for-sale securities. They are reported at fair value, with any
unrealized gains or losses from changes in fair value reported in equity as part
of other comprehensive income and excluded from earnings, unless such changes in
fair value are other than temporary. In 2002, Consumers determined that the
decline in value related to its investment in CMS Energy Common Stock was other
than temporary as the fair value was below the cost basis for a period greater
than six months. As a result, Consumers recognized a loss on its investment in
CMS Energy Common Stock through earnings of $12 million in the fourth quarter of
2002 and an additional $12 million loss in the first quarter of 2003. As of
March 31, 2003, Consumers held 2.4 million shares of CMS Energy Common Stock
with a fair value of $10 million. Unrealized gains or losses from changes in the
fair value of Consumers' nuclear decommissioning investments are reported as
regulatory liabilities. The fair value of these investments is determined from
quoted market prices.
UTILITY REGULATION: Consumers accounts for the effects of regulation based on
the regulated utility accounting standard SFAS No. 71. As a result, the actions
of regulators affect when Consumers recognizes revenues, expenses, assets and
liabilities.
In March 1999, Consumers received MPSC electric restructuring orders, which,
among other things, identified the terms and timing for implementing electric
restructuring in Michigan. Consistent with these orders and EITF No. 97-4,
Consumers discontinued the application of SFAS No. 71 for the energy supply
portion of its business because Consumers expected to implement retail open
access at competitive market based rates for its electric customers.
Discontinuation of SFAS No. 71 for the energy supply portion of Consumers'
business resulted in Consumers reducing the carrying value of its Palisades
plant-related assets, in 1999, by approximately $535 million and establishing a
regulatory asset for a corresponding amount. As of March 31, 2003, Consumers had
a net investment in energy supply facilities of $1.554 billion included in
electric plant and property.
Since 1999, there has been a significant legislative and regulatory change in
Michigan that has resulted in: 1) electric supply customers of utilities
remaining on cost-based rates and 2) utilities being given the ability to
recover Stranded Costs associated with electric restructuring, from customers
who choose an alternative electric supplier. During 2002, Consumers re-evaluated
the criteria used to determine if an entity or a segment of an entity meets the
requirements to apply regulated utility accounting, and determined that the
energy supply portion of its business could meet the criteria if certain
regulatory events occurred. In December 2002, Consumers received a MPSC Stranded
Cost order that allowed Consumers to re-apply regulatory accounting standard
SFAS No. 71 to the energy supply portion of its business. Re-application of
CE-32
Consumers Energy Company
SFAS No. 71 had no effect on the prior discontinuation accounting, but will
allow Consumers to apply regulatory accounting treatment to the energy supply
portion of its business beginning in the fourth quarter of 2002, including
regulatory accounting treatment of costs required to be recognized in accordance
with SFAS No. 143. See Note 2, Uncertainties, "Electric Rate Matters - Electric
Restructuring."
SFAS No. 144 imposes strict criteria for retention of regulatory-created assets
by requiring that such assets be probable of future recovery at each balance
sheet date. Management believes these assets are probable of future recovery.
SFAS NO. 148, ACCOUNTING FOR STOCK-BASED COMPENSATION - TRANSITION AND
DISCLOSURE: Issued by the FASB in December 2002, this standard provides for
alternative methods of transition for a voluntary change to the fair value based
method of accounting for stock-based employee compensation. In addition, the
statement amends the disclosure requirements of SFAS No. 123 to require more
prominent and more frequent disclosures in financial statements about the
effects of stock-based compensation. The transition guidance and annual
disclosure provisions of the statement were effective as of December 31, 2002
and interim disclosure provisions are effective for interim financial reports
starting in 2003. Consumers decided to voluntarily adopt the fair value based
method of accounting for stock-based employee compensation effective December
31, 2002, applying the prospective method of adoption which requires recognition
of all employee awards granted, modified, or settled after the beginning of the
year in which the recognition provisions are first applied. The following table
shows the amounts that would have been included in net income had the fair value
method been applied to all awards granted in the first quarter of 2002:
In Millions
--------------------------------------------------------------------------------------------------------------------
Three Months Ended March 31 2002
--------------------------------------------------------------------------------------------------------------------
Net income, as reported $92
Add: Stock-based employee compensation expense included in
reported net income, net of related taxes -
Deduct: Total stock-based employee compensation expense
determined under fair value based method for all awards, net of
related taxes (1)
----------
Pro forma net income $91
====================================================================================================================
2: UNCERTAINTIES
Several business trends or uncertainties may affect Consumers' financial results
and condition. These trends or uncertainties have, or Consumers reasonably
expects could have, a material impact on net sales, revenues, or income from
continuing electric operations. Such trends and uncertainties are discussed in
detail below and include: 1) pending litigation and government investigations;
2) the need to make additional capital expenditures and increase operating
expenses for Clean Air Act compliance; 3) environmental liabilities arising from
various federal, state and local environmental laws and regulations, including
potential liability or expenses relating to the Michigan Natural Resources and
Environmental Protection Acts and Superfund; 4) electric industry restructuring
issues; 5) Consumers' ability to meet peak electric demand requirements at a
reasonable cost, without market disruption, and successfully implement
initiatives to reduce exposure to purchased power price increases; 6) the
recovery of electric restructuring implementation costs; 7) Consumers' new
status as an electric transmission customer and not as an electric transmission
owner/operator; 8) sufficient reserves for OATT rate refunds; 9) uncertainties
relating to the storage and ultimate disposal of spent nuclear fuel; 10) the
effects of derivative accounting and potential earnings volatility; 11)
potential environmental costs at a number of sites, including sites formerly
housing manufactured gas plant facilities; 12) future gas industry restructuring
initiatives; 13) any initiatives undertaken to protect customers against gas
price increases; 14) an inadequate regulatory response to applications for
requested rate increases; 15) market and regulatory responses to increases in
gas costs, including a reduced average use per residential customer; and 16)
increased costs for pipeline integrity and safety and homeland security
initiatives that are not recoverable on a timely basis from customers.
SEC AND OTHER INVESTIGATIONS: As a result of the round-trip trading transactions
at CMS MST, CMS Energy's Board of Directors established a Special Committee of
independent directors to investigate matters surrounding the transactions and
retained outside counsel to assist in the investigation. The Special Committee
completed its investigation and reported its findings to the Board of Directors
in October 2002. The Special Committee concluded, based on an extensive
investigation, that the round-trip trades were undertaken to raise CMS MST's
profile as an energy marketer with the goal of enhancing its ability to promote
its services to new customers. The Special Committee found no apparent effort to
manipulate the price of CMS Energy Common Stock or affect energy prices. The
Special Committee also made recommendations designed to prevent any reoccurrence
of this practice, most of which have already been implemented. Previously, CMS
Energy terminated its speculative trading business and revised its risk
management policy. The Board of Directors adopted, and CMS Energy has begun
implementing, the remaining recommendations of the Special Committee.
CMS Energy is cooperating with other investigations concerning round-trip
trading, including an investigation by the SEC regarding round-trip trades and
CMS Energy's financial statements, accounting policies and controls, and
investigations by the United States Department of Justice, the Commodity Futures
Trading Commission and the FERC. The FERC issued an order on April 30, 2003
directing eight companies, including CMS MST, to submit written demonstrations
within forty-five days that they have taken certain specified remedial measures
with respect to the reporting of natural gas trading data to publications that
compile and publish price indices. CMS MST intends to make a written submission
within the specified time period demonstrating compliance with the FERC's
directives. Other than the FERC investigation, CMS Energy is unable to predict
the outcome of these matters, and Consumers is unable to predict what effect, if
any, these investigations will have on its business.
CE-33
Consumers Energy Company
SECURITIES CLASS ACTION LAWSUITS: Beginning on May 17, 2002, a number of
securities class action complaints were filed against CMS Energy, Consumers, and
certain officers and directors of CMS Energy and its affiliates. The complaints
were filed as purported class actions in the United States District Court for
the Eastern District of Michigan. The cases were consolidated into a single
lawsuit and an amended and consolidated class action complaint was filed on May
1, 2003. The defendants named in the amended and consolidated class action
complaint consist of CMS Energy, Consumers, certain officers and directors of
CMS Energy and its affiliates, and certain underwriters of CMS Energy
securities. The purported class period is from May 1, 2000 through and including
March 31, 2003. The amended and consolidated class action complaint seeks
unspecified damages based on allegations that the defendants violated United
States securities laws and regulations by making allegedly false and misleading
statements about CMS Energy's business and financial condition. CMS Energy and
Consumers intend to vigorously defend against this action, but cannot predict
the outcome of this litigation.
ERISA CASES: Consumers is a named defendant, along with CMS Energy, CMS MST and
certain named and unnamed officers and directors in two lawsuits brought as
purported class actions on behalf of participants and beneficiaries of the
401(k) plan. The two cases, filed in July 2002 in the United States District
Court for the Eastern District of Michigan, were consolidated by the trial judge
and an amended and consolidated complaint has been filed. Plaintiffs allege
breaches of fiduciary duties under ERISA and seek restitution on behalf of the
plan with respect to a decline in value of the shares of CMS Energy Common Stock
held in the plan. Plaintiffs also seek other equitable relief and legal fees.
These cases will be vigorously defended. Consumers cannot predict the outcome of
this litigation.
ELECTRIC CONTINGENCIES
ELECTRIC ENVIRONMENTAL MATTERS: Consumers is subject to costly and increasingly
stringent environmental regulations. Consumers expects that the cost of future
environmental compliance, especially compliance with clean air laws, will be
significant.
Clean Air - In 1998, the EPA issued regulations requiring the state of Michigan
to further limit nitrogen oxide emissions. The Michigan Department of
Environmental Quality finalized rules to comply with the EPA regulations in
December 2002 and submitted these rules for approval to the EPA in the first
quarter of 2003. In addition, the EPA has also issued additional regulations
regarding nitrogen oxide emissions that require certain generators, including
some of Consumers' electric generating facilities, to achieve the same emissions
rate as that required by the 1998 regulations. The EPA and the state regulations
require Consumers to make significant capital expenditures estimated to be $770
million. As of March 31, 2003, Consumers has incurred $420 million in capital
expenditures to comply with the EPA regulations and anticipates that the
remaining capital expenditures will be incurred between 2003 and 2009.
Additionally, Consumers currently expects to supplement its compliance plan with
the purchase of nitrogen oxide emissions credits for years 2005 through 2008.
The cost of these credits based on the current market is estimated to average $6
million per year; however, the market for nitrogen oxide emissions credits and
their price could change significantly. Based on the Customer Choice Act,
beginning January 2004, an annual return of and on these types of capital
expenditures, to the extent they are above depreciation levels, is expected to
be recoverable from customers, subject to an MPSC prudency hearing.
Cleanup and Solid Waste - Under the Michigan Natural Resources and Environmental
Protection Act, Consumers expects that it will ultimately incur investigation
and remedial action costs at a number of sites. Consumers believes that these
costs will be recoverable in rates under current ratemaking policies.
Consumers is a potentially responsible party at several contaminated sites
administered under Superfund. Superfund liability is joint and several. Along
with Consumers, many other creditworthy, potentially responsible parties with
substantial assets cooperate with respect to the individual sites. Based upon
past
CE-34
Consumers Energy Company
negotiations, Consumers estimates that its share of the total liability for the
known Superfund sites will be between $1 million and $9 million. As of March 31,
2003, Consumers had accrued the minimum amount of the range for its estimated
Superfund liability.
During routine maintenance activities, Consumers identified PCB as a component
in certain paint, grout and sealant materials at the Ludington Pumped Storage
facility. Consumers removed and replaced part of the PCB material. Consumers has
proposed a plan to deal with the remaining materials and is awaiting a response
from the EPA.
ELECTRIC RATE MATTERS
ELECTRIC RESTRUCTURING: In June 2000, the Michigan legislature passed electric
utility restructuring legislation known as the Customer Choice Act. This act: 1)
permits all customers to choose their electric generation supplier beginning
January 1, 2002; 2) cut residential electric rates by five percent; 3) freezes
all electric rates through December 31, 2003, and establishes a rate cap for
residential customers through at least December 31, 2005, and a rate cap for
small commercial and industrial customers through at least December 31, 2004; 4)
allows for the use of low-cost Securitization bonds to refinance qualified
costs, as defined by the act; 5) establishes a market power supply test that may
require transferring control of generation resources in excess of that required
to serve firm retail sales requirements (On March 31, 2003, Consumers filed an
application with the MPSC that seeks confirmation that Consumers is in
compliance with the market power test set forth in the Customer Choice Act); 6)
requires Michigan utilities to join a FERC-approved RTO or divest their interest
in transmission facilities to an independent transmission owner (Consumers has
sold its interest in its transmission facilities to an independent transmission
owner, see "Transmission" below); 7) requires Consumers, Detroit Edison and
American Electric Power to jointly expand their available transmission
capability by at least 2,000 MW; 8) allows deferred recovery of an annual return
of and on capital expenditures in excess of depreciation levels incurred during
and before the rate freeze/cap period; and 9) allows recovery of "net" Stranded
Costs and implementation costs incurred as a result of the passage of the act.
In July 2002, the MPSC issued an order approving the plan to achieve the
increased transmission capacity. Consumers has completed the transmission
capacity projects identified in the plan and has submitted verification of this
fact to the MPSC. Consumers believes it is in full compliance with item 7 above.
In 1998, Consumers submitted a plan for electric retail open access to the MPSC.
In March 1999, the MPSC issued orders generally supporting the plan. The
Customer Choice Act states that the MPSC orders issued before June 2000 are in
compliance with this act and enforceable by the MPSC. Those MPSC orders: 1)
allow electric customers to choose their supplier; 2) authorize recovery of
"net" Stranded Costs and implementation costs; and 3) confirm any voluntary
commitments of electric utilities. In September 2000, as required by the MPSC,
Consumers once again filed tariffs governing its retail open access program and
made revisions to comply with the Customer Choice Act. In December 2001, the
MPSC approved revised retail open access tariffs. The revised tariffs establish
the rates, terms, and conditions under which retail customers will be permitted
to choose an alternative electric supplier. The tariffs, effective January 1,
2002, did not require significant modifications in the existing retail open
access program. The tariff terms allow retail open access customers, upon as
little as 30 days notice to Consumers, to return to Consumers' generation
service at current tariff rates. If any class of customers' (residential,
commercial, or industrial) retail open access load reaches 10 percent of
Consumers' total load for that class of customers, then returning retail open
access customers for that class must give 60 days notice to return to Consumers'
generation service at current tariff rates. However, Consumers may not have
sufficient, reasonably priced, capacity to meet the additional demand of
returning retail open access customers, and may be forced to purchase
electricity on the spot market at higher prices than it could recover from its
customers. Consumers cannot predict the total amount of electric supply load
that may be lost to competitor suppliers, nor whether the stranded cost recovery
method adopted by the MPSC will be applied in a manner that will fully offset
any associated margin loss.
CE-35
Consumers Energy Company
SECURITIZATION: The Customer Choice Act allows for the use of low-cost
Securitization bonds to refinance certain qualified costs, as defined by the
act. Securitization typically involves issuing asset-backed bonds with a higher
credit rating than conventional utility corporate financing. In 2000 and 2001,
the MPSC issued orders authorizing Consumers to issue Securitization bonds.
Consumers issued its first Securitization bonds in 2001. Securitization resulted
in lower interest costs and a longer amortization period for the securitized
assets, and offset the majority of the impact of the required residential rate
reduction. The Securitization orders directed Consumers to apply any cost
savings in excess of the five percent residential rate reduction to rate
reductions for non-residential customers and reductions in Stranded Costs for
retail open access customers after the bonds are sold. Excess savings are
approximately $12 million annually.
Consumers and Consumers Funding will recover the repayment of principal,
interest and other expenses relating to the bond issuance through a
securitization charge and a tax charge that began in December 2001. These
charges are subject to an annual true-up until one year prior to the last
expected bond maturity date, and no more than quarterly thereafter. The first
true-up occurred in November 2002, and prospectively modified the total
securitization and related tax charges from 1.677 mills per kWh to 1.746 mills
per kWh. Current electric rate design covers these charges, and there will be no
rate impact for most Consumers electric customers until the Customer Choice Act
rate freeze expires. Securitization charge collections, $13 million for the
three months ended March 31, 2003, and $12 million for the three months ended
March 31, 2002, are remitted to a trustee for the Securitization bonds.
Securitization charge collections are dedicated for the repayment of the
principal and interest on the Securitization bonds and payment of the ongoing
expenses of Consumers Funding and can only be used for those purposes. Consumers
Funding is legally separate from Consumers. The assets and income of Consumers
Funding, including without limitation, the securitized property, are not
available to creditors of Consumers or CMS Energy.
In March 2003, Consumers filed an application with the MPSC seeking approval to
issue Securitization bonds in the amount of approximately $1.084 billion. If
approved, this would allow the recovery of costs and reduce interest rates
associated with financing Clean Air Act expenditures, post-2000 Palisades
expenditures, and retail open access implementation costs through December 31,
2003, and certain pension fund expenses, and expenses associated with the
issuance of the bonds.
TRANSMISSION: In 2002, Consumers sold its electric transmission system (METC) to
MTH, a non-affiliated limited partnership whose general partner is a subsidiary
of Trans-Elect Inc.
As a result of the sale, Consumers anticipates its after-tax earnings will be
decreased by $15 million in 2003, and decrease by approximately $14 million
annually for the next three years due to a loss of revenue from wholesale and
retail open access customers who will buy services directly from MTH and the
loss of a return on the sold electric transmission system.
Under an agreement with MTH, and subject to certain additional RTO surcharges,
transmission rates charged to Consumers are fixed by contract at current levels
through December 31, 2005, and subject to FERC ratemaking thereafter. MTH has
completed the capital program to expand the transmission system's capability to
import electricity into Michigan, as required by the Customer Choice Act, and
Consumers will continue to maintain the system under a five-year contract with
MTH.
When IPPs connect to transmission systems, they pay transmission companies the
capital costs incurred to connect the IPP to the transmission system and make
system upgrades needed for the interconnection. It is the FERC's policy that the
system upgrade portion of these IPP payments be credited against transmission
service charges over time as transmission service is taken. METC recorded a $35
million liability for IPP credits. Subsequently, MTH assumed this liability as
part of its purchase of the electric transmission system. Several months after
METC started operation, the FERC changed its policy to provide for interest on
IPP
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payments that are to be credited. The $35 million liability for IPP credits did
not include interest since the associated interconnection agreements did not at
that time provide for interest. MTH had asserted that Consumers might be liable
for interest on the IPP payments to be credited if interest provisions were
added to these agreements. However, in January 2003, the FERC changed and
clarified its approach to contracts that were entered into before the FERC
started allowing the crediting of interest, and as a result, Consumers believes
that there is no longer any such potential liability under the current FERC
policy.
POWER SUPPLY COSTS: During periods when electric demand is high, the cost of
purchasing electricity on the spot market can be substantial. To reduce
Consumers' exposure to the fluctuating cost of electricity, and to ensure
adequate supply to meet demand, Consumers intends to maintain sufficient
generation and to purchase electricity from others to create a power supply
reserve, also called a reserve margin. The reserve margin provides additional
power supply capability above Consumers' anticipated peak power supply demands.
It also allows Consumers to provide reliable service to its electric service
customers and to protect itself against unscheduled plant outages and
unanticipated demand. In recent years, Consumers has planned for a reserve
margin of approximately 15 percent from a combination of its owned electric
generating plants and electricity purchase contracts or options, as well as
other arrangements. However, in light of various factors, including the addition
of new generating capacity in Michigan and throughout the Midwest region and
additional transmission import capability, Consumers is continuing to evaluate
the appropriate reserve margin for 2003 and beyond. Currently, Consumers has an
estimated reserve margin of approximately 11 percent for summer 2003 or supply
resources equal to 111 percent of projected summer peak load. Of the 111
percent, approximately 101 percent is met from owned electric generating plants
and long-term power purchase contracts and 10 percent from short-term contracts
and options for physical deliveries and other agreements. The ultimate use of
the reserve margin will depend primarily on summer weather conditions, the level
of retail open access requirements being served by others during the summer, and
any unscheduled plant outages. As of early May 2003, alternative electric
suppliers are providing 571 MW of generation supply to ROA customers. Consumers'
reserve margin does not include generation being supplied by other alternative
electric suppliers under the ROA program.
To reduce the risk of high electric prices during peak demand periods and to
achieve its reserve margin target, Consumers employs a strategy of purchasing
electric call option and capacity and energy contracts for the physical delivery
of electricity primarily in the summer months and to a lesser degree in the
winter months. As of March 31, 2003, Consumers had purchased or had commitments
to purchase electric call option and capacity and energy contracts partially
covering the estimated reserve margin requirements for 2003 through 2007. As a
result, Consumers has a recognized asset of $28 million for unexpired call
options and capacity and energy contracts. The total cost of electricity call
option and capacity and energy contracts for 2003 is expected to be
approximately $9 million.
Prior to 1998, the PSCR process provided for the reconciliation of actual power
supply costs with power supply revenues. This process assured recovery of all
reasonable and prudent power supply costs actually incurred by Consumers,
including the actual cost for fuel, and purchased and interchange power. In
1998, as part of the electric restructuring efforts, the MPSC suspended the PSCR
process, and would not grant adjustment of customer rates through 2001. As a
result of the rate freeze imposed by the Customer Choice Act, the current rates
will remain in effect until at least December 31, 2003 and, therefore, the PSCR
process remains suspended. Therefore, changes in power supply costs as a result
of fluctuating electricity prices will not be reflected in rates charged to
Consumers' customers during the rate freeze period.
ELECTRIC PROCEEDINGS: The Customer Choice Act allows electric utilities to
recover the act's implementation costs and "net" Stranded Costs (without
defining the term). The act directs the MPSC to establish a method of
calculating "net" Stranded Costs and of conducting related true-up adjustments.
In December 2001, the MPSC adopted a methodology which calculated "net" Stranded
Costs as the shortfall between: (a) the revenue required to cover the costs
associated with fixed generation assets, generation-related regulatory assets,
and
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capacity payments associated with purchase power agreements, and (b) the
revenues received from customers under existing rates available to cover the
revenue requirement. The MPSC authorized Consumers to use deferred accounting to
recognize the future recovery of costs determined to be stranded. Consumers has
initiated an appeal at the Michigan Court of Appeals related to the MPSC's
December 2001 "net" Stranded Cost order.
According to the MPSC, "net" Stranded Costs were to be recovered from retail
open access customers through a Stranded Cost transition charge. In April 2002,
Consumers made "net" Stranded Cost filings with the MPSC for $22 million for
2000 and $43 million for 2001. In the same filing, Consumers estimated that it
would experience "net" Stranded Costs of $126 million for 2002. Consumers in its
hearing brief, filed in August 2002, revised its request for Stranded Costs to
$7 million and $4 million for 2000 and 2001, respectively, and an estimated $73
million for 2002. The single largest reason for the difference in the filing was
the exclusion, as ordered by the MPSC, of all costs associated with expenditures
required by the Clean Air Act.
In December 2002, the MPSC issued an order finding that Consumers experienced
zero "net" Stranded Costs in 2000 and 2001, but declined to establish a defined
methodology that would allow a reliable prediction of the level of Stranded
Costs for 2002 and future years. In January 2003, Consumers filed a petition for
rehearing of the December 2002 Stranded Cost order in which it asked the MPSC to
grant a rehearing and revise certain features of the order. Several other
parties also filed rehearing petitions with the MPSC. As noted above, Consumers
has filed a request with the MPSC for authority to issue securitization bonds
that would allow recovery of the Clean Air Act expenditures that were excluded
from the Stranded Cost calculation and post-2000 Palisades expenditures.
On March 4, 2003, Consumers filed an application with the MPSC seeking approval
of "net" Stranded Costs incurred in 2002, and for approval of a "net" Stranded
Cost recovery charge. In the application, Consumers indicated that if Consumers'
proposal to securitize Clean Air Act expenditures and post-2000 Palisades'
expenditures were approved as proposed in its securitization case as discussed
above, then Consumers' "net" Stranded Costs incurred in 2002 are approximately
$35 million. If the proposal to securitize those costs is not approved, then
Consumers indicated that the costs would be properly included in the 2002 "net"
Stranded Cost calculation, which would increase Consumers' 2002 "net" Stranded
Costs to approximately $103 million. Consumers cannot predict the recoverability
of Stranded Costs, and therefore has not recorded any regulatory assets to
recognize the future recovery of such costs.
The MPSC staff has scheduled a collaborative process to discuss Stranded Costs
and related issues and to identify and make recommendations to the MPSC.
Consumers is participating in this collaborative process.
Since 1997, Consumers has incurred significant electric utility restructuring
implementation costs. The following table outlines the applications filed by
Consumers with the MPSC and the status of recovery for these costs.
In Millions
--------------------------------------------------------------------------------------------------------------
Year Filed Year Incurred Requested Pending Allowed Disallowed
--------------------------------------------------------------------------------------------------------------
1999 1997 & 1998 $ 20 $ - $ 15 $ 5
2000 1999 30 - 25 5
2001 2000 25 - 20 5
2002 2001 8 8 Pending Pending
2003 2002 2 2 Pending Pending
==============================================================================================================
The MPSC disallowed certain costs based upon a conclusion that these amounts did
not represent costs
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incremental to costs already reflected in electric rates. In the orders received
for the years 1997 through 2000, the MPSC also reserved the right to review
again the total implementation costs depending upon the progress and success of
the retail open access program, and ruled that due to the rate freeze imposed by
the Customer Choice Act, it was premature to establish a cost recovery method
for the allowable implementation costs. In addition to the amounts shown above,
as of March 31, 2003, Consumers incurred and deferred as a regulatory asset, $2
million of additional implementation costs and has also recorded as a regulatory
asset $14 million for the cost of money associated with total implementation
costs. Consumers believes the implementation costs and the associated cost of
money are fully recoverable in accordance with the Customer Choice Act. Cash
recovery from customers will probably begin after the rate freeze or rate cap
period has expired. As discussed above, Consumers has asked to include
implementation costs through December 31, 2003 in the pending securitization
case. If approved, the sale of Securitization bonds will allow for the recovery
of these costs. Consumers cannot predict the amounts the MPSC will approve as
allowable costs.
Consumers is also pursuing authorization at the FERC for MISO to reimburse
Consumers for approximately $8 million in certain electric utility restructuring
implementation costs related to its former participation in the development of
the Alliance RTO, a portion of which has been expensed. However, Consumers
cannot predict the amount the FERC will ultimately order to be reimbursed by the
MISO.
In 1996, Consumers filed new OATT transmission rates with the FERC for approval.
Interveners contested these rates, and hearings were held before an ALJ in 1998.
In 1999, the ALJ made an initial decision that was largely upheld by the FERC in
March 2002, which requires Consumers to refund, with interest, over-collections
for past services as measured by the FERC's finally approved OATT rates. Since
the initial decision, Consumers has been reserving a portion of revenues billed
to customers under the filed 1996 OATT rates. Consumers submitted revised rates
to comply with the FERC final order in June 2002. Those revised rates were
accepted by the FERC in August 2002 and Consumers is in the process of computing
refund amounts for individual customers. Consumers believes its reserve is
sufficient to satisfy its refund obligation. As of April 2003, Consumers had
paid $19 million in refunds.
In November 2002, the MPSC, upon its own motion, commenced a contested
proceeding requiring each utility to give reason as to why its rates should not
be reduced to reflect new personal property multiplier tables, and why it should
not refund any amounts that it receives as refunds from local governments as
they implement the new multiplier tables. Consumers responded to the MPSC that
it believes that refunds would be inconsistent with the electric rate freeze
that is currently in effect, and may otherwise be unlawful. Consumers is unable
to predict the outcome of this matter.
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.
Consumers' consolidated retained earnings includes undistributed earnings from
the MCV Partnership, which at March 31, 2003 and 2002 are $233 million and $187
million, respectively.
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Summarized Statements of Income for CMS Midland and CMS Holdings
In Millions
-------------------------------------------------------------------------------------------------------------------
March 31 2003 2002
-------------------------------------------------------------------------------------------------------------------
Operating income $16 $9
Income taxes and other 5 3
-------------------------------------------------------------------------------------------------------------------
Net income $11 $6
===================================================================================================================
Power Supply Purchases from the MCV Partnership - Consumers' annual obligation
to purchase capacity from the MCV Partnership is 1,240 MW through the term of
the PPA ending in 2025. The PPA requires Consumers 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 also to pay a variable energy charge based
primarily on Consumers' average cost of coal consumed for all kWh delivered.
Since January 1, 1993, the MPSC has permitted Consumers to recover capacity
charges averaging 3.62 cents per kWh for 915 MW, plus a substantial portion of
the fixed and variable energy charges. Since January 1, 1996, the MPSC has also
permitted Consumers to recover capacity charges for the remaining 325 MW of
contract capacity with an initial average charge of 2.86 cents per kWh
increasing periodically to an eventual 3.62 cents per kWh by 2004 and
thereafter. However, due to the current freeze of Consumers' retail rates that
the Customer Choice Act requires, the capacity charge for the 325 MW is now
frozen at 3.17 cents per kWh. Recovery of both the 915 MW and 325 MW portions of
the PPA are subject to certain limitations discussed below. After September
2007, the PPA's regulatory out terms obligate Consumers to pay the MCV
Partnership only those capacity and energy charges that the MPSC has authorized
for recovery from electric customers.
In 1992, Consumers recognized a loss and established a PPA liability for the
present value of the estimated future underrecoveries of power supply costs
under the PPA based on MPSC cost recovery orders. Primarily as a result of the
MCV Facility's actual availability being greater than management's original
estimates, the PPA liability has been reduced at a faster rate than originally
anticipated. At March 31, 2003 and 2002, the remaining after-tax present value
of the estimated future PPA liability associated with the loss totaled $30
million and $46 million, respectively. The PPA liability is expected to be
depleted in late 2004. For further discussion on the impact of the frozen PSCR,
see "Electric Rate Matters" in this Note.
In March 1999, Consumers and the MCV Partnership reached a settlement agreement
effective January 1, 1999, that addressed, among other things, the ability of
the MCV Partnership to count modifications increasing the capacity of the
existing MCV Facility for purposes of computing the availability of contract
capacity under the PPA for billing purposes. That settlement agreement capped
payments made on the basis of availability that may be billed by the MCV
Partnership at a maximum 98.5 percent availability level.
When Consumers returns, as expected, to unfrozen rates beginning in 2004,
Consumers will recover from customers capacity and fixed energy charges on the
basis of availability, to the extent that availability does not exceed 88.7
percent availability established in previous MPSC orders. For capacity and
energy payments billed by the MCV Partnership after September 15, 2007, and not
recovered from customers, Consumers would expect to claim a regulatory out under
the PPA. The regulatory out provision relieves Consumers of the obligation to
pay more for capacity and energy payments than the MPSC allows Consumers to
collect from its customers. Consumers estimates that 51 percent of the actual
cash underrecoveries for the years 2003 and 2004 will be charged to the PPA
liability, with the remaining portion charged to operating expense as a result
of Consumers' 49 percent ownership in the MCV Partnership. All cash
underrecoveries will be expensed directly to income once the PPA liability is
depleted. If the MCV Facility's generating availability remains at the maximum
98.5 percent level during the next five years, Consumers' after-tax cash
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underrecoveries associated with the PPA could be as follows:
In Millions
--------------------------------------------------------------------------------------------------------------------
2003 2004 2005 2006 2007
--------------------------------------------------------------------------------------------------------------------
Estimated cash underrecoveries at 98.5%, net of tax $37 $36 $36 $36 $25
Amount to be charged to operating expense, net of tax $18 $18 $36 $36 $25
Amount to be charged to PPA liability, net of tax $19 $18 $ - $ - $ -
====================================================================================================================
In February 1998, the MCV Partnership appealed the January 1998 and February
1998 MPSC orders related to electric utility restructuring. At the same time,
MCV Partnership filed suit in the United States District Court in Grand Rapids
seeking a declaration that the MPSC's failure to provide Consumers and MCV
Partnership a certain source of recovery of capacity payments after 2007
deprived MCV Partnership of its rights under the Public Utilities Regulatory
Policies Act of 1978. In July 1999, the District Court granted MCV Partnership's
motion for summary judgment. The Court permanently prohibited enforcement of the
restructuring orders in any manner that denies any utility the ability to
recover amounts paid to qualifying facilities such as the MCV Facility or that
precludes the MCV Partnership from recovering the avoided cost rate. The MPSC
appealed the Court's order to the 6th Circuit Court of Appeals in Cincinnati. In
June 2001, the 6th Circuit overturned the lower court's order and dismissed the
case against the MPSC. The appellate court determined that the case was
premature and concluded that the qualifying facilities needed to wait until 2008
for an actual factual record to develop before bringing claims against the MPSC
in federal court.
NUCLEAR MATTERS: Throughout 2002, Big Rock, currently in decommissioning,
progressed on plan with building and equipment dismantlement to return the site
to a natural setting free for any future use. Periodic NRC inspection reports
continued to reflect positively on Big Rock project performance. The NRC found
all decommissioning activities were performed in accordance with applicable
regulatory and license conditions.
In February 2003, the NRC completed its end-of-cycle plant performance
assessment of Palisades. The end-of-cycle review for Palisades covered the 2002
calendar year. The NRC determined that Palisades was operated in a manner that
preserved public health and safety and fully met all cornerstone objectives.
Based on the plant's performance, only regularly scheduled inspections are
planned through March 2004. The NRC noted that they are planning inspections of
the new independent spent fuel storage facility as needed during construction
activities along with routine inspections for the new security requirements.
Spent Nuclear Fuel Storage: During the fourth quarter of 2002, equipment
fabrication, assembly and testing was completed at Big Rock on NRC approved
transportable steel and concrete canisters or vaults, commonly known as
"dry-casks", for temporary onsite storage of spent fuel and movement of fuel
from the fuel pool to dry casks began. As of March 31, 2003, all of the seven
dry casks had been loaded with spent fuel. These transportable dry casks will
remain onsite until the DOE moves the material to a permanent national fuel
repository.
At Palisades, the amount of spent nuclear fuel discharged from the reactor to
date exceeds Palisades' temporary on-site storage pool capacity. Consequently,
Consumers is using NRC-approved steel and concrete vaults, "dry casks," for
temporary on-site storage. As of March 31, 2003, Consumers had loaded 18 dry
casks with spent nuclear fuel at Palisades. Palisades will need to load
additional dry casks by the fall of 2004 in order to continue operation.
Palisades currently has three empty storage-only dry casks on-site, with storage
pad capacity for up to seven additional loaded dry casks. Consumers anticipates
that licensed transportable dry casks for additional storage, along with more
storage pad capacity, will be available prior to 2004.
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In 1997, a U.S. Court of Appeals decision confirmed that the DOE was to begin
accepting deliveries of spent nuclear fuel for disposal by January 31, 1998.
Subsequent U.S. Court of Appeals litigation in which Consumers and certain other
utilities participated has not been successful in producing more specific relief
for the DOE's failure to comply.
In July 2000, the DOE reached a settlement agreement with one utility to address
the DOE's delay in accepting spent fuel. The DOE may use that settlement
agreement as a framework that it could apply to other nuclear power plants.
However, certain other utilities challenged the validity of the mechanism for
funding the settlement in an appeal, and the reviewing court sustained their
challenge. Additionally, there are two court decisions that support the right of
utilities to pursue damage claims in the United States Court of Claims against
the DOE for failure to take delivery of spent fuel. A number of utilities have
commenced litigation in the Court of Claims, including Consumers, which filed
its complaint in December 2002. The Chief Judge of the Court of Claims
identified six lead cases to be used as vehicles for resolving dispositive
motions. Consumers' case is not a lead case. It is unclear what impact this
decision by the Chief Judge will have on the outcome of Consumers' litigation.
If the litigation that was commenced in the fourth quarter of 2002, against the
DOE is successful, Consumers anticipates future recoveries from the DOE to
defray the significant costs it will incur for the storage of spent fuel until
the DOE takes possession as required by law.
As of March 31, 2003, Consumers has a recorded liability to the DOE of $138
million, including interest, which is payable upon the first delivery of spent
nuclear fuel to the DOE. Consumers recovered through electric rates the amount
of this liability, excluding a portion of interest.
On March 26, 2003, the Michigan Environmental Council, the Public Interest
Research Group in Michigan, and the Michigan Consumer Federation submitted a
complaint to the MPSC, which was served on Consumers by the MPSC on April 18,
2003. The complaint asks the MPSC to commence a generic investigation and
contested case to review all facts and issues concerning costs associated with
spent nuclear fuel storage and disposal. The complaint seeks a variety of relief
with respect to Consumers Energy, The Detroit Edison Company, Indiana & Michigan
Electric Company, Wisconsin Electric Power Company and Wisconsin Public Service
Corporation, including establishing external trusts to which amounts collected
in electric rates for spent nuclear fuel storage and disposal should be
transferred, and the adoption of additional measures related to the storage and
disposal of spent nuclear fuel. Consumers is reviewing the complaint and, at
this time, is unable to predict the outcome of this matter.
In July 2002, Congress approved and the President signed a bill designating the
site at Yucca Mountain, Nevada, for the development of a repository for the
disposal of high-level radioactive waste and spent nuclear fuel. The next step
will be for the DOE to submit an application to the NRC for a license to begin
construction of the repository. The application and review process is estimated
to take several years.
Palisades Plant Operations: In March 2002, corrosion problems were discovered in
the reactor head at an unaffiliated nuclear power plant in Ohio. As a result,
the NRC requested that all United States nuclear plants utilizing pressurized
water reactors to provide reports detailing their reactor head inspection
histories, design capabilities and future inspection plans. In response to the
issues identified at this and other nuclear plants worldwide, a bare metal
visual inspection was completed on the Palisades reactor vessel head during the
spring 2003 refueling outage. No indication of leakage was detected on any of
the 54 penetrations.
Insurance: Consumers maintains primary and excess nuclear property insurance
from NEIL, totaling $2.7 billion in recoverable limits for the Palisades nuclear
plant. Consumers also procures coverage from NEIL that would partially cover the
cost of replacement power during certain prolonged accidental outages at
Palisades. NEIL's policies include coverage for acts of terrorism.
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Consumers retains the risk of loss to the extent of the insurance deductibles
and to the extent that its loss exceeds its policy limits. Because NEIL is a
mutual insurance company, Consumers could be subject to assessments from NEIL up
to $25.8 million in any policy year if insured losses in excess of NEIL's
maximum policyholders surplus occur at its, or any other member's nuclear
facility.
Consumers maintains nuclear liability insurance for injuries and off-site
property damage resulting from the nuclear hazard at Palisades for up to
approximately $9.5 billion, the maximum insurance liability limits established
by the Price-Anderson Act. Congress enacted the Price-Anderson Act to provide
financial protection for persons who may be liable for a nuclear accident or
incident and persons who may be injured by a nuclear incident. The
Price-Anderson Act was recently extended to December 31, 2003. Part of the
Price-Anderson Act's financial protection consists of a mandatory industry-wide
program under which owners of nuclear generating facilities could be assessed if
a nuclear incident occurs at any of such facilities. The maximum assessment
against Consumers could be $88 million per occurrence, limited to maximum annual
installment payments of $10 million. Consumers also maintains insurance under a
master worker program that covers tort claims for bodily injury to workers
caused by nuclear hazards. The policy contains a $300 million nuclear industry
aggregate limit. Under a previous insurance program providing coverage for
claims brought by nuclear workers, Consumers remains responsible for a maximum
assessment of up to $6.3 million. The Big Rock plant remains insured for nuclear
liability by a combination of insurance and United States government indemnity
totaling $544 million.
Insurance policy terms, limits and conditions are subject to change during the
year as Consumers renews its policies.
GAS CONTINGENCIES
GAS ENVIRONMENTAL MATTERS: Under the Michigan Natural Resources and
Environmental Protection Act, Consumers expects that it will ultimately incur
investigation and remedial action costs at a number of sites. These include 23
former manufactured gas plant facilities, which were operated by Consumers for
some part of their operating lives, including sites in which it has a partial or
no current ownership interest. Consumers has completed initial investigations at
the 23 sites. For sites where Consumers has received site-wide study plan
approvals, it will continue to implement these plans. It will also work toward
closure of environmental issues at sites as studies are completed. Consumers has
estimated its costs related to investigation and remedial action for all 23
sites using the Gas Research Institute-Manufactured Gas Plant Probabilistic Cost
Model. The estimated total costs are between $82 million and $113 million; these
estimates are based on discounted 2001 costs and follow EPA recommended use of
discount rates between three and seven percent for this type of activity.
Consumers expects to fund a significant portion of these costs through insurance
proceeds and through MPSC approved rates charged to its customers. As of March
31, 2003, Consumers has an accrued liability of $49 million, net of $33 million
of expenditures incurred to date, and a regulatory asset of $69 million. Any
significant change in assumptions, such as an increase in the number of sites,
different remediation techniques, nature and extent of contamination, and legal
and regulatory requirements, could affect Consumers' estimate of remedial action
costs.
The MPSC, in its November 7, 2002, gas distribution rate order, authorized
Consumers to continue to recover approximately $1 million of manufactured gas
plant facilities environmental clean-up costs annually. Consumers defers and
amortizes, over a period of 10 years, manufactured gas plant facilities
environmental clean-up costs above the amount currently being recovered in
rates. Additional rate recognition of amortization expense cannot begin until
after a prudency review in a gas rate case. The annual amount that the MPSC
authorized Consumers to recover in rates will continue to be offset by $2
million to reflect amounts recovered from all other sources.
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GAS RATE MATTERS
GAS COST RECOVERY: As part of the on-going GCR process, which includes an annual
reconciliation process with the MPSC, Consumers expects to collect all of its
incurred gas costs. Under an order issued by the MPSC on March 12, 2003,
Consumers increased its maximum GCR factor in May 2003, based on a formula that
tracks increases in NYMEX prices.
2003 GAS RATE CASE: On March 14, 2003, Consumers filed an application with the
MPSC seeking a $156 million increase in its gas delivery and transportation
rates, which include a 13.5 percent authorized return on equity, based on a 2004
test year. If approved, the request would add about $6.40 per month, or about 9
percent, to the typical residential customer's average monthly bill.
Contemporaneously with this filing, Consumers has requested interim rate relief
in the same amount.
In September 2002, the FERC issued an order rejecting a filing by Consumers to
assess certain rates for non-physical gas title tracking services offered by
Consumers. Despite Consumers' arguments to the contrary, the FERC asserted
jurisdiction over such activities and allowed Consumers to refile and justify a
title transfer fee not based on volumes as Consumers proposed. Because the order
was issued six years after Consumers made its original filing initiating the
proceeding, over $3 million in non-title transfer tracking fees had been
collected. No refunds have been ordered, and Consumers sought rehearing of the
September order. If refunds were ordered they may include interest which would
increase the refund liability to more than the $3 million collected. In December
2002, Consumers established a $3.6 million reserve related to this matter.
Consumers is unable to say with certainty what the final outcome of this
proceeding might be.
In November 2002, the MPSC upon its own motion commenced a contested proceeding
requiring each utility to give reason as to why its rates should not be reduced
to reflect new personal property multiplier tables, and why it should not refund
any amounts that it receives as refunds from local governments as they implement
the new multiplier tables. Consumers responded to the MPSC that it believes that
refunds would be inconsistent with the November 7, 2002 gas rate order in case
U-13000, with the Customer Choice Act, and may otherwise be unlawful. Consumers
is unable to predict the outcome of this matter.
OTHER UNCERTAINTIES
SECURITY COSTS: Since the September 11, 2001 terrorist attacks in the United
States, Consumers has increased security at all critical facilities and over its
critical infrastructure, and will continue to evaluate security on an ongoing
basis. Consumers may be required to comply with federal and state regulatory
security measures promulgated in the future. Through December 31, 2002,
Consumers has incurred approximately $4 million in incremental security costs,
including operating, capital, and decommissioning and removal costs. Consumers
estimates it may incur additional incremental security costs in 2003 of
approximately $6 million. Consumers will attempt to seek recovery of these costs
from its customers. In December 2002, the Michigan legislature passed, and the
governor signed, a bill that would allow Consumers to seek recovery of
additional nuclear electric division security costs incurred during the rate
freeze and cap periods imposed by the Customer Choice Act. Of the $4 million in
incremental security costs incurred through December 31, 2002, approximately $3
million related to nuclear security costs. Of the estimated $6 million for
incremental security costs expected to be incurred in 2003, $4 million relates
to nuclear security costs. On February 5, 2003, the MPSC adopted filing
requirements for the recovery of enhanced security costs.
DERIVATIVE ACTIVITIES: Consumers uses a variety of contracts to protect against
commodity price and interest rate risk. Some of these contracts may be subject
to derivative accounting, which requires that the value of the contracts to be
adjusted fair value through earnings or equity depending upon certain criteria.
Such adjustments to fair value could cause earnings volatility. For further
information about derivative activities, see Note 4, Financial and Derivative
Instruments.
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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: FINANCINGS AND CAPITALIZATION
REGULATORY AUTHORIZATION FOR FINANCINGS: At March 31, 2003, Consumers had FERC
authorization to issue or guarantee through June 2004, up to $1.1 billion of
short-term securities outstanding at any one time. Consumers also had remaining
FERC authorization to issue through June 2004 up to $500 million of long-term
securities for refinancing or refunding purposes, $381 million for general
corporate purposes, and $610 million of first mortgage bonds to be issued solely
as collateral for the long-term securities. On April 30, 2003, Consumers sold
$625 million principal amount of first mortgage bonds, described below. Its
remaining FERC authorization after this issue is (1) $250 million of long-term
securities for refinancing or refunding purposes, (2) $6 million for general
corporate purposes, and (3) $610 million remaining first mortgage bonds
available to be issued solely as collateral for the long-term securities. On
October 10, 2002, FERC granted a waiver of its competitive bid/negotiated
placement requirements applicable to the remaining long-term securities
authorization indicated above.
SHORT-TERM FINANCINGS: In March 2003, Consumers obtained a replacement revolving
credit facility in the amount of $250 million secured by first mortgage bonds.
The cost of the facility is LIBOR plus 350 basis points. The new credit facility
matures in March 2004 with two annual extensions at Consumers' option, which
would extend the maturity to March 2006. The prior facility was due to expire in
July 2003. At March 31, 2003, a total of $252 million was outstanding on all
short-term financing at a weighted average interest rate of 6.22 percent,
compared with $150 million outstanding at March 31, 2002 at a weighted average
interest rate of 2.6 percent.
LONG-TERM FINANCINGS: In March 2003, Consumers entered into a $140 million term
loan secured by first mortgage bonds with a private investor bank. This loan has
a term of six years at a cost of LIBOR plus 475 basis points. Proceeds from this
loan were used for general corporate purposes.
In March 2003, Consumers entered into a $150 million term loan secured by first
mortgage bonds. This term loan has a three-year maturity expiring in March 2006;
the loan has a cost of LIBOR plus 450 basis points. Proceeds from this loan were
used for general corporate purposes.
FIRST MORTGAGE BONDS: In April 2003, Consumers sold $625 million principal
amount of first mortgage bonds in a private offering to institutional investors;
$250 million were issued at 4.25 percent, maturing on April 15, 2008, and net
proceeds were approximately $248 million, $375 million were issued at 5.38
percent, maturing on April 15, 2013, and net proceeds were approximately $371
million. Consumers used the net proceeds to replace a $250 million senior reset
put bond that matured in May 2003, to pay an associated $32 million option call
payment, and for general corporate purposes that may include paying down
additional debt. Consumers has agreed to file a registration statement with the
SEC to permit holders of these first mortgage bonds to exchange the bonds for
new bonds that will be registered under the Securities Act of 1933. Consumers
has agreed to file this registration statement by December 31, 2003.
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Consumers Energy Company
Consumers secures its first mortgage bonds by a mortgage and lien on
substantially all of its property. Consumers' ability to issue and sell
securities is restricted by certain provisions in its first mortgage bond
Indenture, its articles of incorporation and the need for regulatory approvals
to meet appropriate federal law.
MANDATORILY REDEEMABLE PREFERRED SECURITIES: Consumers has wholly owned
statutory business trusts that are consolidated within its financial statements.
Consumers created these trusts for the sole purpose of issuing Trust Preferred
Securities. The primary asset of the trusts is a note or debenture of Consumers.
The terms of the Trust Preferred Security parallel the terms of the related
Consumers' note or debenture. The term, rights and obligations of the Trust
Preferred Security and related note or debenture are also defined in the related
indenture through which the note or debenture was issued, Consumers' guarantee
of the related Trust Preferred Security and the declaration of trust for the
particular trust. All of these documents together with their related note or
debenture and Trust Preferred Security constitute a full and unconditional
guarantee by Consumers of the trust's obligations under the Trust Preferred
Security. In addition to the similar provisions previously discussed, specific
terms of the securities follow.
In Millions
------------------------------------------------------------------------------------------------------------------
Earliest
Trust and Securities Rate Amount Outstanding Maturity Redemption
------------------------------------------------------------------------------------------------------------------
March 31 2003 2002 2001 Year
------------------------------------------------------------------------------------------------------------------
Consumers Power Company Financing I,
Trust Originated Preferred Securities 8.36% $ 70 $ 70 $100 2015 2000
Consumers Energy Company Financing II,
Trust Originated Preferred Securities 8.20% 120 120 120 2027 2002
Consumers Energy Company Financing III,
Trust Originated Preferred Securities 9.25% 175 175 175 2029 2004
Consumers Energy Company Financing IV,
Trust Preferred Securities 9.00% 125 125 - 2031 2006
---------------------------
Total $490 $490 $395
==================================================================================================================
OTHER: At March 31, 2003, Consumers had, through its wholly owned subsidiary
Consumers Receivables Funding, a $325 million trade receivable sale program in
place as an anticipated source of funds for general corporate purposes. At March
31, 2003 and 2002, the receivables sold under the program were $325 million for
each year; the average annual discount rate was 1.57 percent and 2.15 percent,
respectively. Accounts receivable and accrued revenue in the Consolidated
Balance Sheets have been reduced to reflect receivables sold. On April 30, 2003,
Consumers ended its trade receivable sale program with its then existing
purchaser and anticipates that a new trade receivable program will be in place
with a new purchaser in May 2003.
Under the program discussed above, Consumers sold accounts receivable but
retained servicing responsibility. Consumers is responsible for the
collectability of the accounts receivable sold, however, the purchaser of sale
of accounts receivable have no recourse to Consumers' other assets for failure
of debtors to pay when due and there are no restrictions on accounts receivables
not sold. No gain or loss has been recorded on the sale of accounts receivable
and Consumers retains no interest in the receivables sold.
DIVIDEND RESTRICTIONS: Under the provisions of its articles of incorporation,
Consumers had $423 million of unrestricted retained earnings available to pay
common dividends at March 31, 2003. However, pursuant to restrictive covenants
in its debt facilities, Consumers is limited to common stock dividend payments
that will not exceed $300 million in any calendar year. In January 2003,
Consumers declared and paid a $78 million common dividend. In March 2003,
Consumers declared a $31 million common dividend payable in May 2003.
FASB INTERPRETATION NO. 45, GUARANTOR'S ACCOUNTING AND DISCLOSURE REQUIREMENT
FOR GUARANTEES, INCLUDING INDIRECT GUARANTEES OF INDEBTEDNESS OF OTHERS:
Effective January 2003, this interpretation elaborates on the disclosure to be
made by a guarantor about its obligations under certain guarantees that it has
issued. It also requires that a guarantor recognize, at the inception of a
guarantee, a liability for the fair value of the obligation undertaken in
issuing the guarantee. The initial recognition and measurement provision of this
interpretation does not apply to certain guarantee contracts, such as
warranties, derivatives, or guarantees between either parent and subsidiaries or
corporations under common control, although
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Consumers Energy Company
disclosure of such guarantees is required. For contracts that are within the
initial recognition and measurement provision of this interpretation, the
provisions are to be applied to guarantees issued or modified after December 31,
2002; no cumulative effect adjustments are required.
Following is a general description of Consumers' guarantees as required by this
Interpretation:
March 31, 2003 In Millions
------------------------------------------------------------------------------------------------------------------
Issue Expiration Maximum Carrying Recourse
Guarantee Description Date Date Obligation Amount Provision(a)
------------------------------------------------------------------------------------------------------------------
Standby letters of credit Various Various $ 7 $ - $ -
Surety bonds Various Various 8 - -
Nuclear insurance retrospective premiums Various Various 120 - -
==================================================================================================================
(a) Recourse provision indicates the approximate recovery from third
parties including assets held as collateral.
Following is additional information regarding Consumers' guarantees:
March 31, 2003
---------------------------------------------------------------------------------------------------------------------
Events That Would
Guarantee Description How Guarantee Arose Require Performance
---------------------------------------------------------------------------------------------------------------------
Standby letters of credit Normal operations of Non-compliance with
coal power plants environmental regulations
Self insurance requirement Non-performance
Surety bonds Normal operating activity, Non-performance
permits and license
Nuclear insurance retrospective premiums Normal operations of Call by NEIL and
nuclear plants Price-Anderson Act
for nuclear incident
=====================================================================================================================
4: FINANCIAL AND DERIVATIVE INSTRUMENTS
FINANCIAL INSTRUMENTS: The carrying amounts of cash, short-term investments and
current liabilities approximate their fair values due to their short-term
nature. Consumers estimates the fair values of long-term investments based on
quoted market prices or, in the absence of specific market prices, on quoted
market prices of similar investments or other valuation techniques. The carrying
amounts of all long-term investments, except as shown below, approximate fair
value.
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Consumers Energy Company
In Millions
---------------------------------------------------------------------------------------------------------------
March 31 2003 2002
---------------------------------------------------------------------------------------------------------------
Fair Unrealized Fair Unrealized
Available-for-sale securities Cost Value Gain Cost Value Gain
---------------------------------------------------------------------------------------------------------------
Common stock of CMS Energy (a) $ 10 $ 10 $ - $ 35 $ 54 $ 19
SERP 18 18 - 21 22 1
Nuclear decommissioning
investments (b) 458 529 71 465 576 111
===============================================================================================================
(a) Consumers recognized a $12 million loss on this investment in 2002 and an
additional $12 million loss in the first quarter of 2003 because the loss was
other than temporary, as the fair value was below the cost basis for a period
greater than six months. As of March 31, 2003, Consumers held 2.4 million shares
of CMS Energy Common Stock with a fair value of $10 million.
(b) On January 1, 2003, Consumers adopted SFAS No. 143 and began classifying its
unrealized gains and losses on nuclear decommissioning investments as regulatory
liabilities. Consumers previously classified these investments in accumulated
depreciation.
At March 31, 2003, the carrying amount of long-term debt was $2.7 billion and at
March 31, 2002, $2.4 billion, and the fair values were $2.7 billion and $2.4
billion, respectively. For held-to-maturity securities and related-party
financial instruments, see Note 1.
RISK MANAGEMENT ACTIVITIES AND DERIVATIVE TRANSACTIONS: Consumers is exposed to
market risks including, but not limited to, changes in interest rates, commodity
prices, and equity security prices. Consumers' market risk, and activities
designed to minimize this risk, are subject to the direction of an executive
oversight committee consisting of designated members of senior management and a
risk committee, consisting of certain business unit managers. The role of the
risk committee is to review the corporate commodity position and ensure that net
corporate exposures are within the economic risk tolerance levels established by
Consumers' Board of Directors. Established policies and procedures are used to
manage the risks associated with market fluctuations.
Consumers uses various contracts, including swaps, options, and forward
contracts to manage its risks associated with the variability in expected future
cash flows attributable to fluctuations in interest rates and commodity prices.
When management uses these instruments, it intends that an opposite movement in
the value of the at-risk item would offset any losses incurred on the contracts.
Consumers enters into all risk management contracts for purposes other than
trading.
These instruments contain credit risk if the counterparties, including financial
institutions and energy marketers, fail to perform under the agreements.
Consumers minimizes such risk by performing financial credit reviews using,
among other things, publicly available credit ratings of such counterparties.
Contracts used to manage interest rate and commodity price risk may be
considered derivative instruments that are subject to derivative and hedge
accounting pursuant to SFAS No. 133. SFAS No. 133 requires Consumers to
recognize at fair value all contracts that meet the definition of a derivative
instrument on the balance sheet as either assets or liabilities. The standard
also requires Consumers to record all changes in fair value directly in
earnings, or other comprehensive income if the derivative meets certain
qualifying cash flow hedge criteria. In order for derivative instruments to
qualify for hedge accounting under SFAS No. 133, the hedging relationship must
be formally documented at inception and be highly effective in achieving
offsetting cash flows or offsetting changes in fair value attributable to the
risk being hedged. If hedging a forecasted transaction, the forecasted
transaction must be probable. If a derivative instrument, used as a cash flow
hedge, is terminated early because it is probable that a forecasted transaction
will not occur, any gain or loss
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Consumers Energy Company
as of such date is immediately recognized in earnings. If a derivative
instrument, used as a cash flow hedge, is terminated early for other economic
reasons, any gain or loss as of the termination date is deferred and recorded
when the forecasted transaction affects earnings.
Consumers determines fair value based upon quoted market prices and mathematical
models using current and historical pricing data. Option models require various
inputs, including forward prices, volatilities, interest rates and exercise
periods. Changes in forward prices or volatilities could significantly change
the calculated fair value of the call option contracts. At March 31, 2003,
Consumers assumed a market-based interest rate of 4.5 percent and a volatility
rate of 107.5 percent in calculating the fair value of its electric call
options. The ineffective portion, if any, of all hedges is recognized in
earnings.
The majority of Consumers' contracts are not subject to derivative accounting
because they qualify for the normal purchases and sales exception of SFAS No.
133. Derivative accounting is required, however, for certain contracts used to
limit Consumers' exposure to electricity and gas commodity price risk and
interest rate risk.
The following table reflects the fair value of contracts requiring derivative
accounting:
In Millions
------------------------------------------------------------------------------------------------------------------
March 31 2003 2002
-------------------------------------------------------------------------------------------------------------------
Fair Fair
Derivative Instruments Cost Value Cost Value
-------------------------------------------------------------------------------------------------------------------
Electric contracts $8 $ 1 $21 $ 5
Gas contracts - - - 4
Interest rate risk contracts - (1) - (2)
Derivative contracts associated with Consumers'
equity investment in the MCV Partnership - 17 - (1)
===================================================================================================================
The fair value of all derivative contracts, except the fair value of derivative
contracts associated with Consumers' equity investment in the MCV Partnership,
is included in either Other Assets or Other Liabilities on the Balance Sheet.
The fair value of derivative contracts associated with Consumers' equity
investment in the MCV Partnership is included in Investments - Midland
Cogeneration Venture Limited Partnership on the Balance Sheet.
ELECTRIC CONTRACTS: Consumers' electric business uses purchased electric call
option contracts to meet, in part, its regulatory obligation to serve. This
obligation requires Consumers to provide a physical supply of electricity to
customers, to manage electric costs and to ensure a reliable source of capacity
during peak demand periods. As of March 31, 2003, Consumers recorded on the
balance sheet all of its unexpired purchased electric call option contracts
subject to derivative accounting at a fair value of $1 million. These contracts
will expire in the third quarter of 2003.
Consumers believes that certain of its electric capacity and energy contracts
are not derivatives due to the lack of an active energy market in the state of
Michigan, as defined by SFAS No. 133, and the transportation cost to deliver the
power under the contracts to the closest active energy market at the Cinergy hub
in Ohio. If a market develops in the future, Consumers may be required to
account for these contracts as derivatives. The mark-to-market impact in
earnings related to these contracts, particularly related to the PPA could be
material to the financial statements.
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Consumers Energy Company
During 2002, Consumers' electric business also used gas swap contracts to
protect against price risk due to the fluctuations in the market price of gas
used as fuel for generation of electricity. These gas swaps were financial
contracts that were used to offset increases in the price of probable forecasted
gas purchases. These contracts did not qualify for hedge accounting. Therefore,
Consumers recorded any change in the fair value of these contracts directly in
earnings as part of power supply costs. As of March 31, 2002, these contracts
had a fair value of $1 million. These contracts expired in December 2002.
As of March 31, 2003, Consumers recorded a total of $11 million, net of tax, as
an unrealized gain in other comprehensive income related to its proportionate
share of the effects of derivative accounting related to its equity investment
in the MCV Partnership. Consumers expects to reclassify this gain, if this value
remains, as an increase to other operating revenue during the next 12 months.
GAS CONTRACTS: Consumers' gas business uses fixed price gas supply contracts,
and fixed price weather-based gas supply call options and fixed price gas supply
put options, and other types of contracts, to meet its regulatory obligation to
provide gas to its customers at a reasonable and prudent cost. During 2002, some
of the fixed price gas supply contracts and the weather-based gas call options
and gas put options required derivative accounting. The fixed price gas supply
contracts expired in October 2002, and the weather-based gas call options and
gas put options expired in February 2003. As of March 31, 2003, Consumers did
not have any gas supply related contracts that required derivative accounting.
INTEREST RATE RISK CONTRACTS: Consumers uses interest rate swaps to hedge the
risk associated with forecasted interest payments on variable-rate debt. These
interest rate swaps are designated as cash flow hedges. As such, Consumers will
record any change in the fair value of these contracts in other comprehensive
income unless the swaps are sold. As of March 31, 2003 and March 31, 2002,
Consumers had entered into a swap to fix the interest rate on $75 million of
variable-rate debt. This swap will expire in June 2003. As of March 31, 2003,
this interest rate swap had a negative fair value of $1 million. This amount, if
sustained, will be reclassified to earnings, increasing interest expense when
the swap is settled on a monthly basis. As of March 31, 2002, this interest rate
swap had a negative fair value of $2 million.
Consumers also uses interest rate swaps to hedge the risk associated with the
fair value of its debt. These interest rate swaps are designated as fair value
hedges. In March 2002, Consumers entered into a fair value hedge to hedge the
risk associated with the fair value of $300 million of fixed-rate debt, issued
in March 2002. As of March 31, 2002, the swap had a negative fair value of less
than $1 million. In June 2002, this swap was terminated and resulted in a $7
million gain that is deferred and recorded as part of the debt. It is
anticipated that this gain will be recognized over the remaining life of the
debt.
Consumers was able to apply the shortcut method to all interest rate hedges,
therefore there was no ineffectiveness associated with these hedges.
5: IMPLEMENTATION OF NEW ACCOUNTING STANDARDS
SFAS NO. 143, ACCOUNTING FOR ASSET RETIREMENT OBLIGATIONS: Beginning January 1,
2003, companies must comply with SFAS No. 143. The standard requires companies
to record the fair value of the legal obligations related to an asset retirement
in the period in which it is incurred. Consumers has determined that it has
legal asset retirement obligations, particularly in regard to its nuclear
plants.
Prior to adoption of SFAS No. 143, Consumers classified the removal cost
liability of assets included in the scope of SFAS No. 143 as part of the reserve
for accumulated depreciation. For these assets, the removal cost of $448 million
which was classified as part of the reserve at December 31, 2002, was
reclassified in January 2003, in part, as 1) a $364 million ARO liability, 2) a
$136 million regulatory liability, 3) a $45 million regulatory asset, and 4) a
$7 million net increase to property, plant, and equipment, as prescribed by SFAS
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Consumers Energy Company
No. 143. As required by SFAS No. 71 for regulated entities, Consumers is
reflecting a regulatory asset and liability instead of a cumulative effect of a
change in accounting principle.
The fair value of ARO liabilities has been calculated using an expected present
value technique. This technique reflects assumptions, such as costs, inflation,
and profit margin that third parties would consider in order to take on the
settlement of the obligation. Fair value, to the extent possible, should include
a market risk premium for unforeseeable circumstances. No market risk premium
was included in Consumers' ARO fair value estimate since a reasonable estimate
could not be made. If a five percent market risk premium was assumed, Consumers'
ARO liability would be $381 million.
If a reasonable estimate of fair value cannot be made in the period the asset
retirement obligation is incurred, such as assets with an indeterminate life,
the liability is to be recognized when a reasonable estimate of fair value can
be made. Generally, transmission and distribution assets have an indeterminate
life, retirement cash flows cannot be determined and there is a low probability
of a retirement date, therefore no liability has been recorded for these assets.
No liability has been recorded for assets that have an immaterial cumulative
disposal cost, such as substation batteries. The initial measurement of the ARO
liability for Consumers' Palisades Nuclear Plant and Big Rock Nuclear Plant is
based on decommissioning studies, which are based largely on third party cost
estimates.
The following table is a general description of the AROs and their associated
long-lived assets.
March 31, 2003 In Millions
-------------------------------------------------------------------------------------------------------------------
In Service Trust
ARO Description Date Long Lived Assets Fund
-------------------------------------------------------------------------------------------------------------------
Palisades - decommission plant site 1972 Palisades nuclear plant $ 426
Big Rock - decommission plant site 1962 Big Rock nuclear plant 103
JHCampbell intake/discharge water line 1980 Plant intake/discharge water line -
Closure of coal ash disposal areas Various Generating plants coal ash areas -
Closure of wells at gas storage fields Various Gas storage fields -
Indoor gas services equipment relocations Various Gas meters located inside structures -
====================================================================================================================
The following table is a reconciliation of the carrying amount of the AROs.
March 31, 2003 In Millions
-------------------------------------------------------------------------------------------------------------------
Pro Forma ARO Liability ARO
ARO liability ---------------------------- Cash flow liability
ARO 1/1/02 1/1/03 Incurred Settled Accretion Revisions 3/31/03
------------------------------- --------- ----------------------------------------------------------------------
Palisades - decommission $232 $249 $ - $ - $4 $ - $253
Big Rock - decommission 94 61 - (7) 3 - 57
JHCampbell intake line - - - - - - -
Coal ash disposal areas 46 51 - - 1 - 52
Wells at gas storage fields 2 2 - - - - 2
Indoor gas services relocations 1 1 - - - - 1
--------- ----------------------------------------------------------------------
Total $375 $364 $ - $(7) $8 $ - $365
===================================================================================================================
SFAS NO. 146, ACCOUNTING FOR COSTS ASSOCIATED WITH EXIT OR DISPOSAL ACTIVITIES:
Issued by the FASB in July 2002, this standard requires companies to recognize
costs associated with exit or disposal activities when they are incurred rather
than at the date of a commitment to an exit or disposal plan. This standard is
effective for exit or disposal activities initiated after December 31, 2002.
Upon adoption of the standard, there was no impact on Consumers' consolidated
financial statements.
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Consumers Energy Company
FASB INTERPRETATION NO. 46, CONSOLIDATION OF VARIABLE INTEREST ENTITIES: Issued
by the FASB in January 2003, the interpretation expands upon and strengthens
existing accounting guidance that addresses when a company should include in its
financial statements the assets, liabilities and activities of another entity.
The consolidation requirements of the interpretation apply immediately to
variable interest entities created after January 31, 2003. For Consumers, the
consolidation requirements apply to pre-existing entities beginning July 1,
2003. Certain of the disclosure requirements apply to all financial statements
initially issued after January 31, 2003. Consumers will be required to
consolidate any entities that meet the requirements of the interpretation. Upon
adoption of the standard on January 31, 2003, there was no impact on Consumers'
consolidated financial statements, and Consumers does not anticipate any
additional impact to its consolidated financial statements upon adoption of
additional standard requirements on July 1, 2003.
6. RESTATEMENT
In March 2003, Consumers' Board of Directors declared a $31 million common
dividend to CMS Energy, payable in May 2003. Consumers' Consolidated Balance
Sheets and Consolidated Statements of Common Stockholder's Equity filed in Form
10-Q for the quarterly period ended March 31, 2003 did not reflect this
dividend declaration. Therefore, Consumers has restated its March 31, 2003
Consolidated Balance Sheets and Consolidated Statements of Common Stockholder's
Equity to reflect this dividend declaration.
The financial statement items affected by the reflection of this dividend
declaration are shown below:
CONSOLIDATED BALANCE SHEETS
------------------------------------------------------------------------------------------------------------------------
March 31, 2003 December 31, 2002 March 31, 2002
(Unaudited) (Unaudited)
------------------------------------------------------------------------------------------------------------------------
In Millions As Reported As Restated As Reported As Restated As Reported As Restated
------------------------------------------------------------------------------------------------------------------------
STOCKHOLDER'S
INVESTMENT AND
LIABILITIES
CAPITALIZATION
Common stockholder's equity
Retained earnings since
December 31, 1992 $ 566 $ 535 $ 545 $ 545 $ 467 $ 467
Total common stockholder's
equity 1,914 1,883 1,889 1,889 2,099 2,099
Total Capitalization 5,293 5,262 4,981 4,981 5,151 5,151
CURRENT LIABILITIES
Other 167 198 200 200 234 234
Total Current Liabilities 1,265 1,296 1,585 1,585 1,348 1,348
CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDER'S EQUITY (UNAUDITED) IN MILLIONS
----------------------------------------------------------------------------------------------------------
Three Months Ended 2003 Three Months Ended 2002
March 31 As Reported As Restated As Reported As Restated
----------------------------------------------------------------------------------------------------------
RETAINED EARNINGS
Cash dividends declared-Common Stock $ (78) $ (109) $ (55) $ (55)
At end of period 566 535 467 467
Total Common Stockholder's Equity $1,914 $1,883 $2,099 $2,099
CE-52
QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
CONSUMERS
Quantitative and Qualitative Disclosures about Market Risk is contained in PART
I: CONSUMERS' ENERGY COMPANY'S MANAGEMENT'S DISCUSSION AND ANALYSIS, which is
incorporated by reference herein.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The discussion below is limited to an update of developments that have occurred
in various judicial and administrative proceedings, many of which are more fully
described in Consumers' Form 10-K for the year ended December 31, 2002.
Reference is also made to the Condensed Notes to the Consolidated Financial
Statements, in particular Note 2, Uncertainties for Consumers, included herein
for additional information regarding various pending administrative and judicial
proceedings involving rate, operating, regulatory and environmental matters.
CO-1
EMPLOYMENT RETIREMENT INCOME SECURITY ACT ("ERISA") CLASS ACTION LAWSUITS
CMS Energy is a named defendant, along with Consumers, CMS MS&T and certain
named and unnamed officers and directors, in two lawsuits brought as purported
class actions on behalf of participants and beneficiaries of the CMS Employee's
Savings and Incentive Plan (the "Plan"). The two cases, filed in July 2002 in
the U.S. District Court, were consolidated by the trial judge, and an amended
consolidated complaint was filed. Plaintiffs allege breaches of fiduciary duties
under ERISA and seek restitution on behalf of the Plan with respect to a decline
in value of the shares of Common Stock held in the Plan. Plaintiffs also seek
other equitable relief and legal fees. These cases will be vigorously defended.
CMS Energy and Consumers cannot predict the outcome of this litigation.
SECURITIES CLASS ACTION LAWSUITS
Beginning on May 17, 2002, a number of securities class action complaints were
filed against CMS Energy, Consumers, and certain officers and directors of CMS
Energy and its affiliates. The complaints were filed as purported class actions
in the United States District Court for the Eastern District of Michigan. The
cases were consolidated into a single lawsuit and an amended and consolidated
class action complaint was filed on May 1, 2003. The defendants named in the
amended and consolidated class action complaint consist of CMS Energy,
Consumers, certain officers and directors of CMS Energy and its affiliates, and
certain underwriters of CMS Energy securities. The purported class period is
from May 1, 2000 through and including March 31, 2003. The amended and
consolidated class action complaint seeks unspecified damages based on
allegations that the defendants violated United States securities laws and
regulations by making allegedly false and misleading statements about CMS
Energy's business and financial condition. The companies intend to vigorously
defend against this action but cannot predict the outcome of this litigation.
ENVIRONMENTAL MATTERS: Consumers, and its subsidiaries and affiliates are
subject to various federal, state and local laws and regulations relating to the
environment. Several of these companies have been named parties to various
actions involving environmental issues. Based on its present knowledge and
subject to future legal and factual developments, Consumers believes that it is
unlikely that these actions, individually or in total, will have a material
adverse effect on its financial condition. See Consumers' MANAGEMENT'S
DISCUSSION AND ANALYSIS; and Consumers' CONDENSED NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS.
ITEM 5. OTHER INFORMATION
A shareholder who wishes to submit a proposal for consideration at the CMS
Energy 2004 Annual Meeting pursuant to the applicable rules of the SEC must send
the proposal to reach CMS' Corporate Secretary on or before December 24, 2003.
In any event if CMS has not
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received written notice of any matter to be proposed at that meeting by March 8,
2004, the holders of the proxies may use their discretionary voting authority on
any such matter. The proposals should be addressed to: Mr. Michael D. VanHemert,
Corporate Secretary, One Energy Plaza, Jackson, Michigan 49201.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) LIST OF EXHIBITS
(3) * By-Laws of Consumers Energy Company
(4)(a) * 87th Supplemental Indenture, dated as of March 26, 2003,
between Consumers Energy Company and JPMorgan Chase Bank as
Trustee
(4)(b) * 88th Supplemental Indenture, dated as of March 27, 2003,
between Consumers Energy Company and JPMorgan Chase Bank as
Trustee
(4)(c) * 89th Supplemental Indenture, dated as of March 28, 2003,
between Consumers Energy Company and JPMorgan Chase Bank as
Trustee
(4)(d) * 90th Supplemental Indenture, dated as of April 30, 2003,
between Consumers Energy Company and JPMorgan Chase Bank as
Trustee
(4)(e) * $140 million Term Loan Agreement dated March 26, 2003 between
Consumers Energy Company and the Bank/Agent, as defined
therein
(4)(f) * $250 million Revolving Credit Facility dated March 27, 2003
among Consumers Energy Company, the Banks, the Agent, and the
Co-Documentation Agents, all as defined therein
(4)(g) * $150 million Term Loan Agreement dated March 28, 2003 among
Consumers Energy Company, the Banks, and the Agent, all as
defined therein
(99)(a) Consumers Energy Company's certifications pursuant to Section
906 of the Sarbanes-Oxley Act of 2002
-------------
* Filed as an Exhibit to Consumers Energy Company's Form 10-Q filed on May 14,
2003.
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(B) REPORTS ON FORM 8-K
During 1st Quarter 2003, Consumers filed reports of Form 8-K on January 24,
2003, February 21, 2003, March 5, 2003 and March 13, 2003 covering matters
pursuant to ITEM 5. OTHER EVENTS.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, Consumers
Energy Company has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CONSUMERS ENERGY COMPANY
Dated: May 15, 2003 By: /s/ Thomas J. Webb
-------------------------------------------------
Thomas J. Webb
Executive Vice President and
Chief Financial Officer
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CERTIFICATION OF KENNETH WHIPPLE
I, Kenneth Whipple, certify that:
1. I have reviewed this quarterly report on Form 10-Q/A of Consumers
Energy Company;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operation and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a) Designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) Presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and
the audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) All significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data and
have identified for the registrant's auditors any material weaknesses
in internal controls; and
b) Any fraud, whether or not material, that involves
management or other employees who have a significant role in the
registrant's internal controls; and
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6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes
in internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Dated: May 15, 2003 By: /s/ Kenneth Whipple
---------------------------------------
Kenneth Whipple
Chairman of the Board and
Chief Executive Officer
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CERTIFICATION OF THOMAS J. WEBB
I, Thomas J. Webb, certify that:
1. I have reviewed this quarterly report on Form 10-Q/A of Consumers
Energy Company;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operation and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a) Designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) Presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and
the audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) All significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data and
have identified for the registrant's auditors any material weaknesses
in internal controls; and
b) Any fraud, whether or not material, that involves
management or other employees who have a significant role in the
registrant's internal controls; and
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6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes
in internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Dated: May 15, 2003 By: /s/ Thomas J. Webb
---------------------------------------
Thomas J. Webb
Executive Vice President and
Chief Financial Officer
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EXHIBITS
EXHIBIT NUMBER DESCRIPTION
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(3) * By-Laws of Consumers Energy Company
(4)(a) * 87th Supplemental Indenture, dated as of March 26, 2003
between Consumers Energy Company and JPMorgan Chase Bank as
Trustee
(4)(b) * 88th Supplemental Indenture, dated as of March 27, 2003
between Consumers Energy Company and JPMorgan Chase Bank as
Trustee
(4)(c) * 89th Supplemental Indenture, dated as of March 28, 2003
between Consumers Energy Company and JPMorgan Chase Bank as
Trustee
(4)(d) * 90th Supplemental Indenture, dated as of April 30, 2003,
between Consumers Energy Company and JPMorgan Chase Bank as
Trustee
(4)(e) * $140 million Term Loan Agreement dated March 26, 2003 between
Consumers Energy Company and the Bank/Agent, as defined
therein
(4)(f) * $250 million Revolving Credit Facility dated March 27, 2003
among Consumers Energy Company, the Banks, the Agent, and the
Co-Documentation Agents, all as defined therein
(4)(g) * $150 million Term Loan Agreement dated March 28, 2003 among
Consumers Energy Company, the Banks, and the Agent, all as
defined therein
(99)(a) Consumers Energy Company's certifications pursuant to Section
906 of the Sarbanes-Oxley Act of 2002
--------------
* Filed as an Exhibit to Consumers Energy Company's Form 10-Q filed on May 14,
2003.