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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
---------------
FORM 10-K/A
AMENDMENT NO. 1
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 For the
fiscal year ended December 31, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
COMMISSION REGISTRANT; STATE OF INCORPORATION IRS EMPLOYER
FILE NUMBER ADDRESS; AND TELEPHONE NUMBER IDENTIFICATION NO.
----------- ----------------------------- ------------------
1-9513 CMS ENERGY CORPORATION 38-2726431
(A Michigan Corporation)
Fairlane Plaza South, Suite 1100
330 Town Center Drive,
Dearborn, Michigan 48126
(313) 436-9200
Securities registered pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE
REGISTRANT TITLE OF CLASS ON WHICH REGISTERED
---------------------------- ----------------------------------------------- -------------------------
CMS ENERGY CORPORATION Common Stock, $.01 par value New York Stock Exchange
CMS ENERGY TRUST I 7.75% Quarterly Income Preferred Securities New York Stock Exchange
CMS ENERGY TRUST III 7.25% Premium Equity Participating New York Stock Exchange
Security Units
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: None
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K/A or any amendment to
this Form 10-K/A. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes [X] No [ ]
The aggregate market value of CMS Energy voting and non-voting common equity
held by non-affiliates was $1.483 billion for the 135,104,392 CMS Energy Common
Stock shares outstanding on June 28, 2002 based on the closing sale price of
$10.98 for CMS Energy Common Stock, as reported by the New York Stock Exchange
on such date. There were 144,078,509 Shares of CMS Energy Common Stock
outstanding as of March 15, 2003.
Documents incorporated by reference: CMS Energy's proxy statement and Consumers,
information statement relating to the 2003 annual meeting of shareholders to be
held May 23, 2003, are incorporated by reference in Part III, except for the
organization and compensation committee report, performance graph and audit
committee report contained therein.
CMS ENERGY CORPORATION
ANNUAL REPORT ON FORM 10-K/A TO THE SECURITIES AND EXCHANGE COMMISSION
FOR THE YEAR ENDED DECEMBER 31, 2002
EXPLANATORY NOTE
This Form 10-K/A amends CMS Energy's annual report on Form 10-K for the fiscal
year ended December 31, 2002, which was filed with the SEC on March 31, 2003.
CMS Energy's consolidated financial statements for each of the 2001 quarters
have been restated pursuant to audit adjustments resulting from the re-audit of
the consolidated financial statements for 2001. The restatement adjustments for
the interim periods of 2001 comprise adjustments that were previously identified
and recorded in connection with the re-audit of 2001, as well as adjustments
identified through the quarterly reconstruction and reconciliation project at
CMS MST.
Each item of the 2002 Form 10-K that is affected by the quarterly restatements
has been amended and restated. Generally, no attempt has been made in this Form
10-K/A to modify or update other disclosures as presented in the 2002 Form 10-K
except as required to reflect the effects of the quarterly restatement. However,
material subsequent events have been reported in a separate section of the MD&A
entitled "Subsequent Events" and in Note 21, Subsequent Events, in the notes to
the consolidated financial statements. This document should be read in
conjunction with CMS Energy's Form 10-Q for the quarterly period ended March 31,
2003 filed with the SEC on May 14, 2003, and CMS Energy's Form 8-K filed with
the SEC on June 24, 2003, which are incorporated by reference herein.
The certifications of the principal executive officer and principal financial
officer of CMS Energy were not provided at the time of the initial filing and
are included with this Form 10-K/A.
2
CMS Energy Corporation
Annual Report on Form 10-K to the Securities and Exchange Commission
for the Year Ended December 31, 2002
TABLE OF CONTENTS
Page
Glossary
PART I
Item 1. Business 9
Item 2. Properties 26
Item 3. Legal Proceedings 26
Item 4. Submission of Matters to a Vote of Security Holders 27
PART II
Item 5. Market for CMS Energy's Common Equity and Related
Stockholder Matters 28
Item 6. Selected Financial Data 28
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 28
Item 7A. Quantitative and Qualitative Disclosures About Market
Risk 28
Item 8. Financial Statements and Supplementary Data 29
Item 9. Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure 144
PART III
Item 10. Directors and Executive Officers of CMS Energy 145
Item 11. Executive Compensation 145
Item 12. Security Ownership of Certain Beneficial Owners and
Management 145
Item 13. Certain Relationships and Related Transactions 145
Item 14. Controls and Procedures 145
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form
8-K 146
3
GLOSSARY
Certain terms used in the text and financial statements are defined below.
ABATE.............................. Association of Businesses Advocating Tariff Equity
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
AEP................................ American Electric Power Co.
ALJ................................ Administrative Law Judge
Alliance........................... Alliance Regional Transmission Organization
AMT................................ Alternative minimum tax
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. 25................. APB Opinion No. 25, "Accounting for Stock Issued to
Employees"
APB Opinion No. 30................. APB Opinion No. 30, "Reporting Results of
Operations -- Reporting the Effects of Disposal of a
Segment of a Business"
Arthur Andersen.................... Arthur Andersen, LLP
Attorney General................... Michigan Attorney General
bcf................................ Billion cubic feet
Big Rock........................... Big Rock Point nuclear power plant, owned by Consumers
Board of Directors................. Board of Directors of CMS Energy
Bookouts........................... Unplanned netting of transactions from multiple
Contracts
Btu................................ British thermal unit
CEO................................ Chief Executive Officer
CFO................................ Chief Financial Officer
Clean Air Act...................... Federal Clean Air Act, as amended
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 Panhandle..................... Panhandle Eastern Pipeline Company, including its
subsidiaries Trunkline, Pan Storage, Panhandle Storage,
and Trunkline LNG. Panhandle is a wholly owned
subsidiary of CMS Gas Transmission
Common Stock....................... All classes of Common Stock of CMS Energy and each of
its subsidiaries, or any of them individually, at the
time of an award or grant under the Performance
Incentive Stock Plan
Consumers.......................... Consumers Energy Company, a subsidiary of CMS Energy
Consumers Campus Holdings.......... Consumers Campus Holdings, L.L.C., a wholly owned
subsidiary of Consumers
Consumers Receivables Funding...... Consumers Receivables Funding L.L.C., a wholly-owned
subsidiary of Consumers
Court of Appeals................... Michigan Court of Appeals
4
Customer Choice Act................ Customer Choice and Electricity Reliability Act, a
Michigan statute enacted in June 2000 that allows all
retail customers choice of alternative electric
suppliers no later than January 1, 2002, provides for
full recovery of net stranded costs and implementation
costs, establishes a five percent reduction in
residential rates, establishes rate freeze and rate cap,
and allows for Securitization
Detroit Edison..................... The Detroit Edison Company, a non-affiliated company
DIG................................ Dearborn Industrial Generation, L.L.C., a wholly owned
subsidiary of CMS Generation
DOE................................ U.S. Department of Energy
Dow................................ The Dow Chemical Company, a non-affiliated company
DSM................................ Demand-side management
Duke Energy........................ Duke Energy Corporation, a non-affiliated company
EISP............................... Executive Incentive Separation Plan
EITF............................... Emerging Issues Task Force
El Chocon.......................... Hidroelectrica El Chocon S.A.
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
FMLP............................... First Midland Limited Partnership, a partnership which
holds a lessor interest in the MCV facility
FTC................................ Federal Trade Commission
GCR................................ Gas cost recovery
GTNs............................... CMS Energy General Term Notes(R), $200 million Series D,
$400 million Series E and $300 million Series F
GWh................................ Gigawatt-hour
Health Care Plan................... The medical, dental, and prescription drug programs
offered to eligible employees of Panhandle, Consumers
and CMS Energy
IPP................................ Independent Power Producer
ISO................................ Independent System Operator
ITC................................ Investment tax credit
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
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
METC............................... Michigan Electric Transmission Company, a subsidiary of
Consumers Energy
5
Michigan Gas Storage............... Michigan Gas Storage Company, a subsidiary of Consumers
MISO............................... Midwest Independent System Operator
Mbbls.............................. Thousand barrels
MMbbls............................. Million barrels
MMBtu.............................. Million British thermal unit
MMcf............................... Million cubic feet
MPSC............................... Michigan Public Service Commission
MTH................................ Michigan Transco Holdings, Limited Partnership
MTM................................ Mark-to-market
MW................................. Megawatts
NEIL............................... Nuclear Electric Insurance Limited, an industry mutual
insurance company owned by member utility companies
Nitrotec........................... Nitrotec Corporation, a propriety gas technology company
in which CMS Gas Transmission owns an equity interest
NMC................................ Nuclear Management Company, a Wisconsin company, formed
in 1999 by Northern States Power Company (now Xcel
Energy Inc.), Alliant Energy, Wisconsin Electric Power
Company, and Wisconsin Public Service Company to operate
and manage nuclear generating facilities owned by the
four utilities
NOx................................ Nitrogen Oxide
NRC................................ Nuclear Regulatory Commission
NYMEX.............................. New York Mercantile Exchange
OATT............................... Open Access Transmission Tariff
OPEB............................... Postretirement benefit plans other than pensions for
retired employees
Palisades.......................... Palisades nuclear power plant, owned by Consumers
Pan Gas Storage.................... Pan Gas Storage Company, a subsidiary of Panhandle
Eastern Pipe Line Company
Panhandle.......................... Panhandle Eastern Pipe Line Company, including its
subsidiaries Trunkline, Pan Gas Storage, Panhandle
Storage, and Trunkline LNG. Panhandle is a wholly owned
subsidiary of CMS Gas Transmission
Panhandle Eastern Pipe Line........ Panhandle Eastern Pipe Line Company, a wholly owned
subsidiary of CMS Gas Transmission
Panhandle Storage.................. CMS Panhandle Storage Company, a subsidiary of Panhandle
Eastern Pipe Line Company
PCB................................ Polychlorinated biphenyl
Pension Plan....................... The trusteed, non-contributory, defined benefit pension
plan of Panhandle, Consumers and CMS Energy
PJM................................ Pennsylvania-Jersey-Maryland
Powder River....................... CMS Oil & Gas owns a significant interest in 13 coal bed
Methane fields or projects developed within the Powder
River Basin which spans the border between Wyoming and Montana.
PPA................................ The Power Purchase Agreement between Consumers and the
MCV Partnership with a 35-year term commencing in March
1990
ppm................................ Parts per million
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
PUHCA.............................. Public Utility Holding Company Act of 1935
PURPA.............................. Public Utility Regulatory Policies Act of 1978
RTO................................ Regional Transmission Organization
SAB................................ Staff Accounting Bulletin
SAB No. 101........................ SEC SAB No. 101, "Revenue Recognition"
6
Sea Robin.......................... Sea Robin Pipeline Company
SEC................................ U.S. Securities and Exchange Commission
Securitization..................... A financing authorized by statute in which a MPSC
approved flow of revenues from a portion of the rates
charged by a utility to its customers is set aside and
pledged as security for the repayment of Securitization
bonds issued by a special purpose entity affiliated
with such utility
SERP............................... Supplemental Executive Retirement Plan
SFAS............................... Statement of Financial Accounting Standards
SFAS No. 5......................... SFAS No. 5, "Accounting for Contingencies"
SFAS No. 13........................ SFAS No. 13 "Accounting for Leases"
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"
SFAS No. 115....................... SFAS No. 115, "Accounting for Certain Investments in
Debt and Equity Securities"
SFAS No. 121....................... SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be
Disposed Of"
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 with Exit or Disposal Activities"
SFAS No. 149....................... SFAS No. 149, "Amendment of Statement 133 on Derivative
Instruments and Hedging Activities"
SFAS No. 150....................... SFAS No. 150, "Accounting for Certain Financial Instruments with
Characteristics of Both Liabilities and Equity"
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, but which
may not be recoverable in a competitive environment
because of customers leaving their systems and ceasing
to pay for their costs. These costs could include owned
and purchased generation and regulatory assets.
Superfund.......................... Comprehensive Environmental Response, Compensation and
Liability Act
Taweelah........................... Al Taweelah A2, a power and desalination plant of Emirates CMS
Power Company, a forty percent owned subsidiary of CMS Generation
TBtu............................... Trillion british thermal unit
Transition Costs................... Stranded Costs, as defined, plus the costs incurred in
the transition to competition.
Trunkline.......................... Trunkline Gas Company, a subsidiary of Panhandle Eastern
Pipe Line Company
7
Trunkline LNG...................... Trunkline LNG Company, a subsidiary of Panhandle Eastern
Pipe Line Company
Trust Preferred Securities......... Securities representing an undivided beneficial interest
in the assets of statutory business trusts, which
Interests have a preference with respect to certain
trust distributions over the interests of either CMS
Energy or Consumers, as applicable, as owner of the
common beneficial interests of the trusts
Union.............................. Utility Workers of America, AFL-CIO
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
PART I
ITEM 1. BUSINESS
GENERAL
CMS ENERGY
CMS Energy, formed in Michigan in 1987, is an energy holding company
operating through subsidiaries in the United States and in selected markets
around the world. Its two principal subsidiaries are Consumers and Enterprises.
Consumers is a public utility that provides natural gas and/or electricity to
almost 6 million of Michigan's 10 million residents and serves customers in all
68 of the state's Lower Peninsula counties. Enterprises, through subsidiaries,
is engaged in several energy businesses in the United States and in selected
international markets.
In 2002, CMS Energy's consolidated operating revenue was approximately $8.7
billion. See BUSINESS SEGMENTS later in this Item 1 for further discussion of
each segment.
CONSUMERS
Consumers, formed in Michigan in 1968, is the successor to a corporation
organized in Maine in 1910 that conducted business in Michigan from 1915 to
1968. In 1997, Consumers, formerly named Consumers Power Company, changed its
name to Consumers Energy Company to better reflect its integrated electricity
and gas businesses.
Consumers' service areas include automotive, metal, chemical, food and wood
products and a diversified group of other industries. Consumers' consolidated
operations account for a majority of CMS Energy's total assets and income, as
well as a substantial portion of its operating revenue. At year-end 2002,
Consumers' customer base and operating revenues were as follows:
CUSTOMERS OPERATING 2002 VS. 2001
SERVED REVENUE OPERATING REVENUE
(MILLIONS) (MILLIONS) % INCREASE/(DECREASE)
---------- ---------- ---------------------
Electric Utility Business. 1.73 $ 2,648 0.57%
Gas Utility Business...... 1.65 1,519 13.53
Other..................... -- 55(a) 27.91
Total................... 3.38 $ 4,222 5.18%
---------
(a) Primarily represents earnings attributable to Consumers' interest in the MCV
Partnership and MCV Facility, the earnings of which are reported within CMS
Energy's independent power production business segment.
Consumers' rates and certain other aspects of its business are subject to
the jurisdiction of the MPSC and FERC, as described in CMS ENERGY, CONSUMERS AND
PANHANDLE REGULATION later in this Item 1.
CONSUMERS PROPERTIES -- GENERAL: The principal properties of Consumers and
its subsidiaries are owned in fee, except that most electric lines and gas mains
are located, pursuant to easements and other rights, in public roads or on land
owned by others. Substantially all of Consumers' properties are subject to the
lien of its First Mortgage Bond Indenture. For additional information on
Consumers' properties see BUSINESS SEGMENTS -- Consumers Electric Utility
Operations -- Electric Utility Properties, and -- Consumers Gas Utility
Operations -- Gas Utility Properties, below.
BUSINESS SEGMENTS
CMS ENERGY FINANCIAL INFORMATION
For information with respect to operating revenue, net operating income,
identifiable assets and liabilities attributable to all of CMS Energy's business
segments and international and domestic operations, see ITEM 8. FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA -- SELECTED FINANCIAL INFORMATION AND CMS
ENERGY'S CONSOLIDATED FINANCIAL STATEMENTS AND NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS.
9
CONSUMERS' ELECTRIC UTILITY OPERATIONS
Based on the average number of customers, Consumers' electric utility
operations, if independent, would be the thirteenth largest electric utility
company in the United States. Consumers' electric utility operations include the
generation, purchase, distribution and sale of electricity. At year-end 2002, it
served customers in 61 of the 68 counties of Michigan's lower peninsula.
Principal cities served include Battle Creek, Flint, Grand Rapids, Jackson,
Kalamazoo, Midland, Muskegon and Saginaw. Consumers' electric utility customer
base includes a mix of residential, commercial and diversified industrial
customers, the largest segment of which is the automotive industry. Consumers'
electric utility operations are not dependent upon a single customer, or even a
few customers, and the loss of any one or even a few of such customers is not
reasonably likely to have a material adverse effect on its financial condition.
Consumers' electric utility operations are seasonal. The summer months
usually increase demand for electric energy, principally due to the use of air
conditioners and other cooling equipment, thereby affecting revenues. In 2002
and 2001, total electric deliveries were 39 billion kWh and 40 billion kWh,
respectively. In 2002, electric sales totaled 37 billion kWh and retail open
access deliveries totaled 2 billion kWh. In 2001, electric sales totaled 39
billion kWh and retail open access deliveries totaled 1 billion kWh.
Excluding retail open access loads, Consumers experienced a 2002 summer peak
demand of 7,697 MW. In 2002, the winter peak demand was 5,573 MW for the winter
2001-02 period and 5,862 MW for the winter 2002-03 period. In 2002, based on the
actual summer peak, Consumers' power reserve, also called a reserve margin, was
20.6 percent compared to 11.1 percent in 2001. Based on its summer 2002
forecast, Consumers carried a 15.0 percent reserve margin. 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 a reserve margin of approximately 11 percent
for summer 2003. The ultimate use of the reserve margin needed will depend
primarily on summer weather conditions, the level of retail open access
requirements being served by others during the summer, and any unscheduled plant
outages.
Including retail open access loads, Consumers experienced a 2002 summer peak
demand of 7,984 MW. Winter peak demand for 2002, including retail open access
loads, was 5,694 MW for the winter 2001-02 period and 6,140 MW for the winter
2002-03 period.
ELECTRIC UTILITY PROPERTIES: At December 31, 2002, Consumers' electric
generating system consists of the following:
2002 NET
2002 SUMMER NET GENERATION
SIZE AND YEAR DEMONSTRATED (THOUSANDS
NAME AND LOCATION (MICHIGAN) ENTERING SERVICE CAPABILITY (KWS) OF KWHS)
----------------------------------------- ---------------------- ------------------ ------------
COAL GENERATION
J H Campbell 1 & 2 -- West Olive...... 2 Units, 1962-1967 615,000 4,406,940
J H Campbell 3 -- West Olive.......... 1 Unit, 1980 765,140(a) 4,511,713
D E Karn -- Essexville................ 2 Units, 1959-1961 515,000 3,824,249
B C Cobb -- Muskegon.................. 2 Units, 1956-1957 312,000 2,150,510
J R Whiting -- Erie................... 3 Units, 1952-1953 326,000 2,262,509
J C Weadock -- Essexville............. 2 Units, 1955-1958 310,000 2,205,575
---------- ------------
Total coal generation................... 2,843,140 19,361,496
---------- ------------
OIL/GAS GENERATION
B C Cobb -- Muskegon.................. 3 Units, 1999-2000 183,000 38,035
D E Karn -- Essexville................ 2 Units, 1975-1977 1,276,000 650,008
---------- ------------
Total oil/gas generation................ 1,459,000 688,043
---------- ------------
HYRDOELECTRIC
Conventional Hydro Generation......... 13 Plants, 1906-1949 73,540 386,691
Ludington Pumped Storage.............. 6 Units, 1973 954,700(b) (486,322)(c)
---------- ------------
Total Hydroelectric..................... 1,028,240 (99,631)
---------- ------------
NUCLEAR GENERATION
Palisades -- South Haven.............. 1 Unit, 1971 767,000 6,357,962
---------- ------------
GAS/OIL COMBUSTION TURBINE
Generation............................ 7 Plants, 1966-1971 346,800(d) 12,743
---------- ------------
Total owned generation.................. 6,444,180 26,320,613
PURCHASED AND INTERCHANGE POWER
Capacity.............................. 1,766,180(e)
----------
Total................................... 8,210,360
==========
10
----------
(a) Represents Consumers' share of the capacity of the J H Campbell 3, net of
6.69 percent (ownership interests of the Michigan Public Power Agency and
Wolverine Power Supply Cooperative, Inc.).
(b) Represents Consumers' share of the capacity of Ludington. Consumers and
Detroit Edison have 51 percent and 49 percent undivided ownership,
respectively, in the plant.
(c) Represents Consumers' share of net pumped storage generation. This facility
electrically pumps water during off-peak hours for storage to later generate
electricity during peak-demand hours.
(d) Includes 1.8 MW of distributed diesel generation.
(e) Includes 1,240 MW of purchased contract capacity from the MCV Facility.
In 2002, Consumers purchased, through long-term purchase contracts, options,
spot market and other seasonal purchases, up to 2,683 MW of net capacity from
other power producers, which amounted to 34.9 percent of Consumers' total system
requirements, the largest of which was the MCV Partnership.
A high voltage transmission system interconnects Consumers' electric
generating plants at many locations with transmission facilities of unaffiliated
systems including those of other utilities in Michigan and Indiana. The
interconnections permit a sharing of the reserve capacity of the connected
systems. This allows mutual assistance during emergencies and substantially
reduces investment in utility plant facilities. Consumers owns: a) 338 miles of
high voltage distribution radial lines operating at 120 kilovolts and above; b)
4,159 miles of high voltage distribution overhead lines operating at 23
kilovolts and 46 kilovolts; c) 16 subsurface miles of high voltage distribution
underground lines operating at 23 kilovolts and 46 kilovolts; d) 54,681 miles of
electric distribution overhead lines; e) 8,201 subsurface miles of underground
distribution lines and f) substations having an aggregate transformer capacity
of 20,596,240 kilovoltamperes.
On April 1, 2001, Consumers transferred its investment in electric
transmission lines and substations to a wholly owned subsidiary, Michigan
Electric Transmission Company (METC). On May 1, 2002, Consumers transferred its
interest in METC to a third party, Michigan Transco Holdings, LLC (MTH), and
Consumers no longer owns or controls transmission facilities either directly or
indirectly. MTH owns the former Consumers transmission assets through a new
transmission company called Michigan Electric Transmission Company, LLC. For
additional information on the sale of the transmission assets, see ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA -- NOTE 2 OF CONSUMERS' NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS -- ELECTRIC RATE MATTERS -- TRANSMISSION.
FUEL SUPPLY: Consumers has four generating plant sites that use coal as a
fuel source and that constitute 73.6 percent of its baseload supply, the
capacity used to serve a constant level of customer demand. In 2002, these
plants produced a combined total of 19,361 million kWhs of electricity and
required 9.7 million tons of coal. On December 31, 2002, Consumers' coal
inventory amounted to approximately 30 days' supply. For additional information
on future sources of coal, see ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY
DATA -- NOTE 2 OF CONSUMERS' NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- OTHER
ELECTRIC UNCERTAINTIES -- COAL SUPPLY.
Consumers owns two nuclear power plants, Big Rock, located near Charlevoix,
Michigan and Palisades, located near South Haven, Michigan. In 1997, Consumers
ceased operating Big Rock. In May 2001, with the approval of the NRC, Consumers
transferred its authority to operate Palisades to the Nuclear Management Company
(NMC). The Palisades nuclear fuel supply responsibilities are under the control
of NMC acting as agent for Consumers. During 2002, Palisades' net generation was
6,358 million kWhs, constituting 24.2 percent of Consumers' baseload supply. New
fuel contracts are being written as NMC Agreements. Consumers/NMC currently have
sufficient contracts for uranium concentrates to provide up to 100 percent of
its fuel supply requirements for the 2003 and 2004 period. Consumers/NMC also
have contracts for conversion services and enrichment services with quantity
flexibility ranging up to 100 percent. If spot market prices are below the
contract price, NMC will purchase only the minimum amount of nuclear fuel
required by the contracts. Conversely, if spot market prices are above the
contract prices, Consumers will purchase the maximum amount of nuclear fuel
allowed by the contracts to meet its requirements.
11
For the spring 2003 refueling outage, Consumers has purchased all of its
fuel supply requirements. NMC also has contracts for nuclear fuel services and
for fabrication of nuclear fuel assemblies. The fabrication contract for
Palisades remains in effect for the next two reloads with options to extend the
contract for an additional two reloads. The fuel contracts are with major
private industrial suppliers of nuclear fuel and related services and with
uranium producers, converters and enrichers who participate in the world nuclear
fuel marketplace.
As shown below, Consumers generates electricity principally from coal and
nuclear fuel.
MILLIONS OF KWHS
------------------------------------------------
POWER GENERATED 2002 2001 2000 1999 1998
----------------------------- ------ ------ ------ ------ ------
Coal........................ 19,361 19,203 17,926 19,085 17,959
Nuclear..................... 6,358 2,326(a) 5,724 5,105 5,364
Oil......................... 347 331 645 809 520
Gas......................... 354 670 400 441 302
Hydro....................... 387 423 351 365 395
Net pumped storage ......... (486) (553) (541) (476) (480)
------ ------ ------ ------ ------
Total net generation........ 26,321 22,400 24,505 25,329 24,060
====== ====== ====== ====== ======
----------
(a) On June 20, 2001, the Palisades reactor was shut down so technicians could
inspect a small steam leak on a control rod drive assembly. The defective
components were replaced and the plant returned to service on January 21,
2002.
The cost of all fuels consumed, shown below, fluctuates with the mix of fuel
burned.
COST PER MILLION BTU
-------------------------------------------------
FUEL CONSUMED 2002 2001 2000 1999 1998
----------------------------- ------ ------ ------ ------ ------
Coal........................ $ 1.34 $ 1.38 $ 1.34 $ 1.38 $ 1.45
Oil......................... 3.49 4.02 3.30 2.69 2.73
Gas......................... 3.98 4.05 4.80 2.74 2.66
Nuclear..................... 0.35 0.39 0.45 0.52 0.50
All Fuels(a)................ 1.19 1.44 1.27 1.28 1.28
----------
(a) Weighted average fuel costs.
Pursuant to the Nuclear Waste Policy Act of 1982, the federal government
became responsible for the permanent disposal of spent nuclear fuel and
high-level radioactive waste by 1998. To date, the DOE has been unable to
arrange for storage facilities to meet this obligation and it does not expect
that in 2003 it will be able to receive spent nuclear fuel for storage. For
additional information on disposal of nuclear fuel see ITEM 8. FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA -- NOTE 2 OF CMS ENERGY'S NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS. The amount of spent nuclear fuel discharged
from the reactor to date exceeds Palisades' temporary on-site storage pool
capacity, and Consumers is currently storing spent nuclear fuel in NRC-approved
steel and concrete vaults, known as "dry casks". Currently, three dry casks are
available for future storage. For a discussion relating to the NRC approval of
dry casks and Consumers' use of the dry casks, see ITEM 8. FINANCIAL STATEMENTS
AND SUPPLEMENTARY DATA -- NOTE 5 OF CMS ENERGY'S NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS -- UNCERTAINTIES -- OTHER CONSUMERS ELECTRIC UTILITY UNCERTAINTIES.
CONSUMERS' GAS UTILITY OPERATIONS
Based on the average number of customers, Consumers' gas utility operations,
if independent, would be the 6th largest gas utility company in the United
States. Consumers' gas utility operations purchase, transport, store, distribute
and sell natural gas. As of December 31, 2002, it was authorized to provide
service in 54 of the 68 counties in Michigan's lower peninsula. Principal cities
served include Bay City, Flint, Jackson, Kalamazoo, Lansing, Pontiac and
Saginaw, as well as the suburban Detroit area, where nearly 900,000 of the gas
customers are located. Consumers' gas utility operations are not dependent upon
a single customer, or even a few customers, and the loss of any one or even a
few of such customers is not reasonably likely to have a material adverse effect
on its financial condition.
Consumers' gas utility operations are seasonal. Consumers injects natural
gas into storage during the summer months of the year for use during the winter
months when the demand for natural gas is higher. Peak demand usually occurs in
the winter due to colder
12
temperatures and the resulting increased demand for heating fuels. In 2002,
total deliveries of natural gas sold by Consumers and by other sellers who
deliver natural gas through Consumers' pipeline and distribution network to
ultimate customers, including the MCV Partnership, totaled 376.4 bcf.
Due to prolonged colder than normal weather during the winter months of
2002-2003, Consumers' gas storage fields were drawn down to unexpected and
unusually low levels. This caused withdrawal of the entire amount of working
storage gas from some fields. As a result, some salt water has entered
Consumers' pipelines and distribution lines that may increase future maintenance
problems and costs resulting from pipe corrosion.
GAS UTILITY PROPERTIES: Consumers' gas distribution and transmission system
consists of 25,218 miles of distribution mains and 1,624 miles of transmission
lines throughout Michigan's lower peninsula. It owns and operates seven
compressor stations with a total of 162,000 installed horsepower. Consumers has
14 gas storage fields located across Michigan with an aggregate storage capacity
of 330.8 bcf.
In February 2002, the FERC approved Michigan Gas Storage's application for a
declaration of exemption from provisions of the National Gas Act. This allowed
Consumers to file with the MPSC for approval to merge with Michigan Gas Storage.
The merger was approved and completed in November 2002.
GAS SUPPLY: Total 2002 purchases included 58 percent from United States
producers outside Michigan, 22 percent from Canadian producers and 6 percent
from Michigan producers. Authorized suppliers in the permanent gas customer
choice pilot program, which started in April 2001, supplied the remaining 14
percent of gas delivered by Consumers.
Consumers' firm transportation agreements are with ANR Pipeline Company,
Great Lakes Gas Transmission, L.P., Trunkline and Panhandle Eastern Pipe Line.
Consumers uses these agreements to deliver gas to Michigan for ultimate
deliveries to market. In total, Consumers' firm transportation and city gate
arrangements are capable of delivering over 95 percent of Consumers' total gas
supply requirements. As of December 31, 2002, Consumers' portfolio of firm
transportation from pipelines to Michigan is as follows:
VOLUME
(DEKATHERMS/DAY) EXPIRATION
---------------- -------------------
ANR Pipeline Company.................................... 84,113 October 2003
Great Lakes Gas Transmission, L.P....................... 85,092 April 2004
Trunkline............................................... 336,375 October 2005
Panhandle Eastern Pipe Line (starting April 1, 2003).... 60,000 October 2003
ANR Pipeline Company.................................... 10,000 December 2002
Consumers purchases the balance of its required gas supply under firm city
gate contracts and as needed, interruptible contracts. The amount of
interruptible transportation service and its use varies primarily with the price
for such service and the availability and price of the spot supplies being
purchased and transported. Consumers' use of interruptible transportation is
generally in off-peak summer months and after Consumers has fully utilized the
services under the firm transportation agreements.
NATURAL GAS TRANSMISSION
CMS Gas Transmission, formed in 1988, owns, develops and manages domestic
and international natural gas facilities. In 2002, CMS Gas Transmission's
operating revenue was $50 million. In 1999, CMS Energy acquired Panhandle.
PANHANDLE: On December 21, 2002, CMS Energy reached a definitive agreement
to sell the Panhandle companies to Southern Union Panhandle Corp. The agreement
calls for Southern Union Panhandle Corp., a newly formed entity owned by
Southern Union Company and AIG Highstar Capital, L.P. to pay $662 million in
cash and assume $1.166 billion in debt. Under terms of the agreement, CMS Energy
will retain Panhandle's ownership in the Centennial and Guardian pipeline
projects, as well as certain of Panhandle's net deferred tax assets, all tax
liabilities, and pension assets and liabilities. Panhandle has since sold its
interest in Centennial and the Guardian interest and the related cash collateral
has been transferred to Panhandle's direct parent, CMS Gas Transmission. The
sale of Panhandle has been approved by the board of directors of each company
and is subject to customary closing conditions and action by the Federal Trade
Commission under the Hart-Scott-Rodino Act.
On February 10, 2003, Panhandle sold its one-third equity interest in
Centennial Pipeline, LLC for $40 million to Centennial's two other partners,
Marathon Ashland Petroleum, LLC (MAPL) and TE Products Pipeline Company, Limited
Partnership, through its general partner, Texas Eastern Products Pipeline
Company, LLC (TEPPCO). Panhandle has been released by MAPL, TEPPCO and
13
the lenders for any liabilities, including credit fees, related to Panhandle's
$50 million parent guaranty of the project debt. In December 2002, Panhandle
recorded a $26 million pre-tax ($16 million after-tax) writedown of its
investment in Centennial to $40 million.
On March 10, 2003, Panhandle's ownership interest in Guardian and $63
million of cash collateral was transferred to CMS Gas Transmission. Panhandle
was also released from its guarantee obligations associated with the Guardian
non-recourse guaranty as of March 10, 2003, by the partners, Prudential and the
other noteholders.
Panhandle Eastern Pipe Line, formed in Delaware in 1929, is a wholly owned
subsidiary of CMS Gas Transmission. In March 1999, CMS Energy acquired Panhandle
Eastern Pipe Line and its principal subsidiaries, Trunkline and Pan Gas Storage,
as well as Panhandle Eastern Pipe Line's affiliates, Trunkline LNG and Panhandle
Storage, from subsidiaries of Duke Energy. Immediately following the
acquisition, Trunkline LNG and Panhandle Storage became wholly owned
subsidiaries of Panhandle Eastern Pipe Line. In December 2001, Panhandle
monetized the value of its Trunkline LNG business and the value created by
long-term contracts for capacity at the Trunkline LNG Lake Charles terminal. The
transaction included the formation of CMS Trunkline LNG Holdings LLC which now
owns 100 percent of Trunkline LNG. At December 31, 2001, LNG Holdings was
jointly owned by a subsidiary of Panhandle Eastern Pipe Line and Dekatherm
Investor Trust, an unaffiliated entity. In November 2002, Panhandle acquired
Dekatherm Investor Trust's interest for approximately $41 million and now owns
100% of LNG Holdings, which has $281 million of non-recourse secured debt at
December 31, 2002.
Panhandle is primarily engaged in the interstate transmission and storage of
natural gas and also provides LNG terminalling and regasification services.
Panhandle operates a large natural gas pipeline network, which provides
customers in the Midwest and Southwest with a comprehensive array of
transportation services. Panhandle's major customers include 25 utilities
located primarily in the United States Midwest market area, which encompasses
large portions of Illinois, Indiana, Michigan, Missouri, Ohio and Tennessee.
In 2002, Panhandle's consolidated operating revenue was $484 million. Of
Panhandle's operating revenue, 77 percent was generated from transportation
services, 12 percent from LNG terminalling services, 8 percent from storage
services and 3 percent from other services. During 2002, sales to Proliance
Energy, LLC, a nonaffiliated gas marketer, accounted for 16 percent of
Panhandle's consolidated revenues. Also during 2002, sales to BG LNG Services, a
nonaffiliated gas marketer, accounted for 13 percent of Panhandle's consolidated
revenue. Sales to subsidiaries of CMS Energy, primarily Consumers, accounted for
12 percent of Panhandle's consolidated revenues during 2002; 15 percent during
2001; and 12 percent during 2000. No other customer accounted for 10 percent or
more of Panhandle's consolidated revenues during 2002, 2001 or 2000. Aggregate
sales to Panhandle's top ten customers accounted for 67%, 60% and 53% during
2002, 2001 and 2000, respectively.
For the years 1998 to 2002, Panhandle's combined throughput was 1,141 TBtu,
1,139 TBtu, 1,374 TBtu, 1,335 TBtu and 1,259 TBtu, respectively. Beginning in
March 2000, the combined throughput includes Sea Robin's throughput. A majority
of Panhandle's revenue comes from long-term service agreements with local
distribution company customers. Panhandle also provides firm transportation
services under contract to gas marketers, producers, other pipelines, electric
power generators and a variety of end-users. In addition, the pipelines offer
both firm and interruptible transportation to customers on a short-term or
seasonal basis. Demand for gas transmission on Panhandle's pipeline systems is
seasonal, with the highest throughput and a higher portion of revenues occurring
during the colder period in the first and fourth quarters.
NATURAL GAS TRANSMISSION PROPERTIES: Domestic -- CMS Gas Transmission has a
total of 15,460 miles of pipeline in the United States, with a daily capacity of
approximately 8 bcf. Panhandle Eastern Pipe Line's portion of CMS Gas
Transmission's natural gas transmission system consists of four large diameter
pipelines extending approximately 1,300 miles from producing areas in the
Anadarko Basin of Texas, Oklahoma and Kansas through the states of Missouri,
Illinois, Indiana, Ohio and into Michigan. Trunkline's transmission system now
includes 2 large diameter pipelines which extend approximately 1,400 miles from
the Gulf Coast areas of Texas and Louisiana through the states of Arkansas,
Mississippi, Tennessee, Kentucky, Illinois and Indiana to a point on the
Indiana-Michigan border.
At December 31, 2002, CMS Gas Transmission had processing capabilities of
approximately 700 MMcf per day of natural gas at eight locations in Michigan,
Oklahoma and Texas. In addition, CMS Gas Transmission has a hydrocarbon
fractionation plant in Michigan with a capacity of 30,000 barrels per day.
Through Panhandle, CMS Gas Transmission owns and operates 47 compressor
stations. It also has five gas storage fields located in Illinois, Kansas,
Louisiana, Michigan and Oklahoma with an aggregate storage capacity of 70 bcf.
CMS Gas Transmission has a 51 percent ownership interest in underground storage
caverns capable of storing 7 million barrels of natural gas liquids.
14
At December 31, 2002, CMS Gas Transmission operated 3,826 miles of gas
gathering systems with total capacity of approximately 1 bcf per day in
Michigan, Oklahoma, Texas and Wyoming.
During 2002, CMS Gas Transmission, through Panhandle, had a one-third
interest in Guardian Pipeline LLC, which constructed a 141 mile, 36 inch
pipeline from Illinois to southeastern Wisconsin for the transportation of
natural gas. The Guardian Pipeline was placed into service on December 7, 2002.
On March 10, 2003, Panhandle's ownership interest in Guardian was transferred to
CMS Gas Transmission, Panhandle's direct parent company. Panhandle was also
released from its guarantee obligations associated with the Guardian non-
recourse guaranty as of March 10, 2003 by the partners, Prudential and the other
note holders.
International -- At December 31, 2002, CMS Gas Transmission has ownership
interests in the following pipelines:
LOCATION OWNERSHIP INTEREST (%) MILES OF PIPELINES
-------------------------------- ---------------------- ------------------
Argentina...................... 29.42 3,362
Argentina to Brazil............ 20.00 262
Argentina to Chile............. 50.00 707
Australia (Western Australia).. 40.00(a) 927
Australia (Western Australia).. 100.00 259
----------
(a) CMS Gas Transmission has a 45 percent interest in a consortium that acquired
an 88 percent interest in the pipeline.
In January 2002, CMS Gas Transmission completed the previously announced
sale of all of its ownership interest in the Atlantic Methanol Production
Company located in Equatorial Guinea.
Properties of certain CMS Gas Transmission subsidiaries are subject to liens
of creditors of the respective subsidiaries.
INDEPENDENT POWER PRODUCTION
CMS Generation, formed in 1986, invests in, acquires, develops, constructs
and operates non-utility power generation plants in the United States and
abroad. In 2002, the independent power production business segment's operating
revenue, which includes revenues from CMS Generation, CMS Operating, S.A., the
MCV Facility and the MCV Partnership, was $372 million. For additional
information, see ITEM 7. CMS ENERGY'S MANAGEMENT'S DISCUSSION AND ANALYSIS --
INDEPENDENT POWER PRODUCTION RESULTS OF OPERATIONS.
INDEPENDENT POWER PRODUCTION PROPERTIES: As of December 31, 2002, CMS
Generation had ownership interests in operating power plants totaling 8,745
gross MW (4,140 net MW) throughout the United States and abroad. At December 31,
2002, additional plants totaling approximately 1,789 gross MW (421 net MW) were
under construction or advanced development. In 2003, CMS Generation plans to
complete the restructuring of its operations by narrowing the scope of its
existing operations and commitments from four to two regions: the U.S. and the
Middle East/North Africa. In addition, it plans to sell designated assets and
investments that are under-performing, non-region focused and non-synergistic
with other CMS Energy business units. For additional information on CMS
Generation's restructuring see ITEM 7. CMS ENERGY'S MANAGEMENT'S DISCUSSION AND
ANALYSIS -- OUTLOOK -- DIVERSIFIED ENERGY OUTLOOK -- INDEPENDENT POWER
PRODUCTION OUTLOOK.
The following table details CMS Generation's interest in independent power
plants in the United States as well as abroad as of year-end 2002 (excluding the
plants owned by CMS Operating S.A. and CMS Electric and Gas and the MCV
facility, discussed further below):
OWNERSHIP INTEREST GROSS CAPACITY
LOCATION FUEL TYPE (%) (MW)
-------------------------------------------- -------------- ------------------ ------------------
California................................. Wood 37.8% 36
Connecticut................................ Scrap tire 100.0% 31
Michigan................................... Coal 50.0% 62
Michigan................................... Natural gas 100.0% 710
Michigan................................... Natural gas 100.0% 224
Michigan................................... Wood 50.0% 35
15
Michigan................................... Wood 50.0% 39
New York................................... Hydro 0.3% 14
North Carolina............................. Wood 50.0% 45
Oklahoma................................... Natural gas 8.8% 124
------
DOMESTIC................................... 1,320
Argentina.................................. Hydro 17.2% 1,320
Australia.................................. Coal 49.6% 2,000
Chile...................................... Natural gas 50.0% 720
Ghana...................................... Light fuel oil 90.0% 224
India...................................... Coal 50.0% 250
India...................................... Natural gas 33.2% 235
Jamaica.................................... Diesel 41.2% 63
Latin America.............................. Various Various 480
Morocco.................................... Coal 50.0% 1,356
United Arab Emirates....................... Natural gas 40.0% 777
------
INTERNATIONAL.............................. 7,425
TOTAL...................................... 8,745
======
PROJECTS UNDER CONSTRUCTION/ADV.DEV........ 1,789
CMS Enterprises, CMS Gas Transmission and CMS Generation, through a CMS
International Ventures subsidiary, CMS Operating, SRL, have 100 percent
ownership interest in a 128 MW natural gas power plant and a 92.6 percent
ownership interest in a 540 MW natural gas power plant, each in Argentina.
CMS Enterprises, through CMS Electric and Gas, have a 70 percent ownership
interest in a 150 MW diesel plant in Venezuela.
CMS Midland owns 49 percent interest in the MCV Partnership, which was
formed to construct and operate the MCV Facility. The MCV Facility was sold to
five owner trusts and leased back to the MCV Partnership. CMS Holdings is a
limited partner in the FMLP, which is a beneficiary of one of these trusts. CMS
Holdings' indirect beneficial interest in the MCV Facility is 49 percent. The
MCV Facility has a net electrical generating capacity of approximately 1,500 MW.
CMS Generation has ownership interests in certain facilities such as Loy
Yang, Jorf Lasfar and El Chocon. The Loy Yang assets are owned in fee, but are
subject to the security interests of its lenders. CMS Energy is actively working
to sell its interest in the Loy Yang facility. The Jorf Lasfar facility is held
pursuant to a right of possession agreement with the Moroccan state-owned Office
National de l'Electricite. The El Chocon facility is held pursuant to a 30-year
possession agreement.
For information on capital expenditures, see ITEM 7. CMS ENERGY'S
MANAGEMENT'S DISCUSSION AND ANALYSIS -- CAPITAL RESOURCES AND LIQUIDITY AND ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA -- NOTE 5 OF CMS ENERGY'S NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS.
OIL AND GAS EXPLORATION AND PRODUCTION
CMS Oil and Gas, formed in 1967, conducted oil and gas exploration and
development operations in the United States, primarily the Permian Basin in
Texas and the Powder River Basin in Wyoming, and in the countries of Cameroon,
Congo, Colombia, Eritrea, Tunisia and Venezuela. In January 2002, CMS Energy
completed the sale of its ownership interests in Equatorial Guinea to Marathon
Oil Company for approximately $993 million. Proceeds from this transaction were
used primarily to retire existing debt. Included in the sale were all of CMS Oil
and Gas' oil and gas reserves in Equatorial Guinea. In September 2002, CMS
Energy closed on the sale of the stock of CMS Oil and Gas and the stock of a
subsidiary of CMS Oil and Gas that holds property in Venezuela. In October 2002,
CMS Energy completed its exit from the oil and gas exploration and production
business.
MARKETING, SERVICES AND TRADING
CMS MST, provides or has provided gas, oil, and electric marketing, risk
management and energy management services to industrial, commercial, utility and
municipal energy users throughout the United States and abroad. CMS Energy has
decided to phase out CMS MST's wholesale energy trading business. On January 16,
2003, CMS MST closed the sale on a major portion of its wholesale natural gas
trading book to Sempra Energy Trading. The cash proceeds were approximately $17
million. On February 13, 2003, CMS MST signed a
16
definitive agreement with Constellation Power Source, Inc. to sell its wholesale
electric power business. The sale has been approved by the FERC and closing is
expected within the second quarter of 2003. On February 20, 2003, CMS MST signed
a definitive agreement with Chevron Energy Solutions Company, a division of
Chevron U.S.A., to sell the non-federal business of CMS Viron, its energy
management services provider subsidiary. On February 26, 2003 CMS MST signed a
definitive agreement with Pepco Energy Services, Inc. to sell CMS Viron's
federal energy management services business. The sale is subject to federal
government novation which the parties are not permitted to seek until closing
has occurred. CMS MST will continue to focus its business on the retail sector,
specifically in the state of Michigan. CMS MST has announced plans to move its
headquarters from Houston, Texas to Jackson, Michigan. In 2002, CMS MST marketed
approximately 550 bcf of natural gas, 62,971 GWh of electricity, 34 million
barrels of crude oil and 10 million barrels of natural gas liquids. From 1997
through 2002, CMS MST also performed over 300 energy management services
projects. At December 31, 2002, CMS MST had more than 1,200 wholesale and retail
customers, transported gas on more than 40 gas pipelines and was active in 50
states and Canada. In 2002, CMS MST's operating revenue was $4.1 billion. For
additional information, see ITEM 7. CMS ENERGY'S MANAGEMENT'S DISCUSSION AND
ANALYSIS -- MARKETING, SERVICES AND TRADING RESULTS OF OPERATIONS.
INTERNATIONAL ENERGY DISTRIBUTION
In October 2001, CMS discontinued the operations of its international energy
distribution business. CMS also discontinued all new development outside North
America, which includes closing all non-US development offices. However, CMS
will continue to honor prior commitments in the Middle East. For additional
information, see ITEM 7 -- CMS ENERGY'S MANAGEMENT'S DISCUSSION AND ANALYSIS --
OUTLOOK.
CMS ENERGY REGULATION
CMS Energy is a public utility holding company that is exempt from
registration under PUHCA. CMS Energy, Consumers, Panhandle and their
subsidiaries are subject to regulation by various federal, state, local and
foreign governmental agencies, including those specifically described below.
MICHIGAN PUBLIC SERVICE COMMISSION
Consumers is subject to the MPSC's jurisdiction, which regulates public
utilities in Michigan with respect to retail utility rates, accounting, utility
services, certain facilities and various other matters. The MPSC also has, or
will have, rate jurisdiction over several limited partnerships in which CMS Gas
Transmission has ownership interests. These partnerships own, or will own, and
operate intrastate gas transmission pipelines.
The Attorney General, ABATE, and the MPSC staff typically intervene in MPSC
electric and gas related proceedings concerning Consumers. For many years,
almost every significant MPSC order affecting Consumers has been appealed.
Certain appeals from the MPSC orders are pending in the Court of Appeals.
RATE PROCEEDINGS: In 1996, the MPSC issued an order that established the
electric authorized rate of return on common equity at 12.25 percent. In 2002,
the MPSC issued an order that established the gas authorized rate of return on
common equity at 11.4 percent.
MPSC REGULATORY AND MICHIGAN LEGISLATIVE CHANGES: State regulation of the
retail electric and gas utility businesses is in the process of undergoing
significant changes. In 2000, the Michigan Legislature enacted the Customer
Choice Act. Pursuant to the Customer Choice Act, as of January 2002, all
electric customers have their choice of buying generation service from an
alternative electric supplier. The Customer Choice Act also imposes rate
reductions, rate freezes and rate caps. For a description and additional
information regarding the Customer Choice Act, see ITEM 8. FINANCIAL STATEMENTS
AND SUPPLEMENTARY DATA -- NOTE 5 OF CMS ENERGY'S NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS.
As a result of regulatory changes in the natural gas industry, Consumers
transports the natural gas commodity that is sold to some customers by
competitors like gas producers, marketers and others. From April 1, 1998, to
March 31, 2001, Consumers' implemented a statewide experimental gas customer
choice pilot program that allowed up to 300,000 residential, commercial and
industrial retail gas sales customers to choose their gas supplier and froze the
rates Consumers was permitted to charge for the service of distributing gas to
its customers.
Beginning April 1, 2001, Consumers established a permanent gas customer
choice program that allows up to 600,000 of Consumers' gas customers to select
an alternative gas commodity supplier. By April 2003, all of Consumers' gas
customers will be eligible to select an alternative gas commodity supplier. As
of December 31, 2002, 178,000 of Consumers' gas customers had elected an
alternate gas commodity supplier. Also on April 1, 2001, pursuant to the
permanent gas customer choice program, Consumers
17
returned to a GCR mechanism that allows it to recover from its customers all
prudently incurred costs to purchase the natural gas commodity and transport it
to Consumers' facilities. For additional information on gas customer choice
programs see ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA -- NOTE 5 OF
CMS ENERGY'S NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
FEDERAL ENERGY REGULATORY COMMISSION
FERC has exercised limited jurisdiction over several independent power
plants in which CMS Generation has ownership interests, as well as over CMS MST.
FERC also has more comprehensive jurisdiction over Panhandle Eastern Pipe Line,
Pan Gas Storage, Trunkline, Trunkline LNG and Sea Robin as natural gas companies
within the meaning of the Natural Gas Act. FERC jurisdiction relates, among
other things, to the acquisition, operation and disposal of assets and
facilities and to the service provided and rates charged. Some of Consumers' gas
business is also subject to regulation by FERC, including a blanket
transportation tariff pursuant to which Consumers can transport gas in
interstate commerce.
FERC has authority to regulate rates and charges for transportation or
storage of natural gas in interstate commerce, as well as those for gas, sold by
a natural gas company in interstate commerce for resale. FERC also has authority
over the construction and operation of pipeline and related facilities utilized
in the transportation and sale of natural gas in interstate commerce, including
the extension, enlargement or abandonment of service using such facilities.
Panhandle Eastern Pipe Line, Trunkline Gas Company, Sea Robin, Trunkline LNG,
and Pan Gas Storage hold certificates of public convenience and necessity issued
by the FERC, authorizing them to construct and operate the pipelines, facilities
and properties now in operation for which such certificates are required, and to
transport and store natural gas in interstate commerce.
FERC also regulates certain aspects of Consumers' electric operations
including: compliance with FERC accounting rules; wholesale rates; transfers of
certain facilities; and corporate mergers and issuance of securities. FERC is
currently soliciting comments on whether it should exercise jurisdiction over
power marketers like CMS MST and require them to follow FERC's uniform system of
accounts and seek authorization for issuance of securities and assumption of
liabilities. These issues are pending before the agency.
For a discussion of the effect of certain FERC orders on Consumers, see ITEM
7. CMS ENERGY'S MANAGEMENT'S DISCUSSION AND ANALYSIS -- OUTLOOK -- CONSUMERS'
ELECTRIC BUSINESS OUTLOOK.
NUCLEAR REGULATORY COMMISSION
Under the Atomic Energy Act of 1954, as amended, and the Energy
Reorganization Act of 1974, Consumers is subject to the jurisdiction of the NRC
with respect to the design, construction, operation and decommissioning of its
nuclear power plants. Consumers is also subject to NRC jurisdiction with respect
to certain other uses of nuclear material. These and other matters concerning
Consumers' nuclear plants are more fully discussed in ITEM 8. FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA -- NOTES 2 AND 5 OF CMS ENERGY'S CONSOLIDATED
FINANCIAL STATEMENTS.
OTHER REGULATION
The Secretary of Energy regulates the importation and exportation of natural
gas and has delegated various aspects of this jurisdiction to FERC and the DOE's
Office of Fossil Fuels.
Pipelines owned by system companies are also subject to the Natural Gas
Pipeline Safety Act of 1968 and the Pipeline Safety Improvement Act of 2002,
which regulates the safety of gas pipelines. Consumers and Panhandle are also
subject to the Hazardous Liquid Pipeline Safety Act of 1979, which regulates oil
and petroleum pipelines.
CMS ENERGY ENVIRONMENTAL COMPLIANCE
CMS Energy, Consumers and Panhandle and their subsidiaries are subject to
various federal, state and local regulations for environmental quality,
including air and water quality, waste management, zoning and other matters. For
additional information concerning environmental matters, see ITEM 8. FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA -- NOTE 5 OF CMS ENERGY'S NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS -- UNCERTAINTIES -- CONSUMERS' ELECTRIC
UTILITY CONTINGENCIES.
18
Consumers has installed and is currently installing modern emission controls
at its electric generating plants and has converted and is converting electric
generating units to burn cleaner fuels. Consumers expects that the cost of
future environmental compliance, especially compliance with clean air laws, will
be significant because of EPA regulations regarding nitrogen oxide and
particulate-related emissions. These regulations will require Consumers to make
significant capital expenditures. For the preliminary estimates of these capital
expenditures to reduce nitrogen oxide-related emissions see ITEM 8. FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA -- NOTE 5 OF CMS ENERGY'S NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS UNCERTAINTIES -- CONSUMERS ELECTRIC UTILITY
CONTINGENCIES.
Consumers is in the process of closing older ash disposal areas at two
plants. Construction, operation, and closure of a modern solid waste disposal
area for ash can be expensive, because of strict federal and state requirements.
In order to significantly reduce ash field closure costs, Consumers has worked
with others to use bottom ash and fly ash as part of temporary and final cover
for ash disposal areas instead of native materials in cases where such use of
bottom ash and fly ash is compatible with environmental standards. To reduce
disposal volumes, Consumers sells coal ash for use as a filler for asphalt, for
incorporation into concrete products and for other environmentally compatible
uses. The EPA has announced its intention to develop new nationwide standards
for ash disposal areas. Consumers intends to work through industry groups to
help ensure that any such regulations require only the minimum cost necessary to
adhere to standards that are consistent with protection of the environment.
Consumers has PCB in some of its electrical equipment, as do most electric
utilities. 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 the EPA to deal with the remaining materials
and is waiting on a response from the EPA.
Certain environmental regulations affecting CMS Energy, Consumers and
Panhandle include, but are not limited to, the Clean Air Act Amendments of 1990
and Superfund. Superfund can require any individual or entity that may have
owned or operated a disposal site, as well as transporters or generators of
hazardous substances that were sent to such site, to share in remediation costs
for the site.
Consumers', CMS Energy's and Panhandle's current insurance coverages do not
extend to certain environmental clean-up costs, such as claims for air
pollution, some past PCB contamination and for some long-term storage or
disposal of pollutants.
Panhandle does not anticipate that compliance with federal, state and local
provisions regulating the discharge of materials into the environment, or
otherwise protecting the environment will have a material adverse effect on the
competitive position, consolidated results of operations or financial position
of Panhandle.
CMS ENERGY COMPETITION
ELECTRIC COMPETITION
Consumers' electric utility business experiences competition, actual and
potential, from many sources, both in the wholesale and retail markets, and in
electric generation, electric delivery, and retail services.
In the wholesale electricity markets, Consumers competes with other
wholesale suppliers, marketers and brokers. Electric competition in the
wholesale markets increased significantly since 1996 due to FERC Order 888.
Whereas Consumers is still active in wholesale electricity markets, wholesale
for retail transactions by Consumers generated an immaterial amount of
Consumers' 2002 revenues from electric utility operations. Consumers does not
believe future loss of wholesale for retail sales to be significant.
A significant increase in retail electric competition is now possible with
the passage of the Customer Choice Act and the availability of retail open
access. The Customer Choice Act of June 2000 required Consumers to open
progressive tiers of its electric customer power supply requirement such that a
total of 750 MW was open to competition in 2001. As of January 1, 2002, the
Consumer Choice Act also gave all electric customers the right to buy generation
service from an alternative electric supplier. The Michigan Public Service
Commission has adopted a mechanism pursuant to the Customer Choice Act to
provide for recovery of stranded costs. The company 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.
In addition to retail electric customer choice, Consumers also has
competition or potential competition from: 1) the threat of customers relocating
outside Consumers' service territory; 2) the possibility of municipalities
owning or operating competing electric
19
delivery systems; 3) customer self-generation; and 4) adjacent municipal
utilities that extend lines to customers near service territory boundaries.
Consumers addresses this competition primarily through offering rate discounts,
providing additional services and insistence upon compliance with MPSC and FERC
rules.
Consumers offers non-commodity retail services to electric customers in an
effort to offset costs. Consumers faces competition from many sources, including
energy management services companies, other utilities, contractors, and retail
merchandisers.
CMS MST, which is a non-utility electric subsidiary, faced competition from
marketers, brokers, financial management firms, energy management firms and
other utilities. CMS Energy's independent power production business segment,
another non-utility electric subsidiary, faces competition from generators,
marketers and brokers, as well as lower power prices on the wholesale market.
For additional information concerning electric competition, see ITEM 7. CMS
ENERGY'S MANAGEMENT'S DISCUSSION AND ANALYSIS -- OUTLOOK -- CONSUMERS' ELECTRIC
UTILITY BUSINESS OUTLOOK.
GAS COMPETITION
Competition has existed for the past decade, and is likely to increase, in
various aspects of Consumers' gas utility business. Competition traditionally
comes from alternate fuels and energy sources, such as propane, oil, and
electricity. Competition has also been introduced through the gas customer
choice program which allows residential, commercial and industrial retail gas
sales customers to choose an alternative gas commodity supplier in direct
competition with Consumers. Consumers would continue to transport and distribute
gas to these customers.
CMS Energy's non-utility gas subsidiaries face significant competition from
other gas pipeline companies, gas producers, gas storage companies, brokers and
marketers and competition from other fuels such as oil and coal.
For additional information concerning gas competition, see Panhandle
Competition below, ITEM 7. CMS ENERGY'S MANAGEMENT DISCUSSION AND ANALYSIS --
OUTLOOK.
PANHANDLE COMPETITION
Panhandle's interstate pipelines compete with other interstate and
intrastate pipeline companies in the transportation and storage of natural gas.
The principal elements of competition among pipelines are rates, terms of
service and flexibility and reliability of service. Panhandle competes directly
with Alliance Pipeline LP, ANR Pipeline Company, Natural Gas Pipeline Company of
America, Northern Border Pipeline Company, Texas Gas Transmission Corporation,
Northern Natural Gas Company and Vector Pipeline in the Midwest market area.
Natural gas competes with other forms of energy available to Panhandle's
customers and end-users, including electricity, coal and fuel oils. The primary
competitive factor is price. Changes in the availability or price of natural gas
and other forms of energy, the level of business activity, conservation,
legislation and governmental regulations, the capability to convert to
alternative fuels, and other factors, including weather and natural gas storage
levels, affect the demand for natural gas in the areas served by Panhandle.
INSURANCE
CMS Energy and its subsidiaries, including Consumers and Panhandle, maintain
insurance coverage similar to other comparable companies in the same lines of
business. The insurance policies are subject to term, conditions, limitations
and exclusions that might not fully compensate CMS for all losses. Furthermore,
as CMS renews its policies it is possible that full insurance coverage may not
be obtainable on commercially reasonable terms due to the recent increasingly
restrictive insurance markets.
For additional information regarding Insurance, see CMS ENERGY FORWARD
LOOKING STATEMENTS CAUTIONARY FACTORS AND UNCERTAINTIES -- International
Operations, NOTE 5 -- Nuclear Matters of CMS ENERGY'S NOTE'S TO CONSOLIDATED
FINANCIAL STATEMENTS.
EMPLOYEES
CMS ENERGY
20
As of December 31, 2002, CMS Energy and its subsidiaries, including
Consumers and Panhandle, had 10,477 full-time equivalent employees of whom
10,398 are full-time employees and 79 full-time equivalent employees associated
with the part-time work force. Included in the total are 3,902 employees who are
covered by union contracts.
CONSUMERS
As of December 31, 2002, Consumers and its subsidiaries had 8,311 full-time
equivalent employees of whom 8,238 are full-time employees and 73 full-time
equivalent employees associated with the part-time work force. Included in the
total are 3,630 full-time operating, maintenance and construction employees of
Consumers who are 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. Consumers is currently negotiating with the Union for a collective
bargaining agreement for its Call Center employees.
PANHANDLE
At December 31, 2002, Panhandle and its subsidiaries had 1,155 full-time
equivalent employees. Included in the total are 247 full-time, compressor,
pipeline, gas measurement, and field clerical employees of Panhandle Eastern
Pipe Line Company who are represented by the Paper, Allied -- Industrial
Chemical and Energy Workers International Union. Panhandle and the Union
negotiated a collective bargaining agreement that became effective as of May 28,
1999 and will continue in full force and effect until May 27, 2003.
CMS ENERGY FORWARD-LOOKING STATEMENTS, CAUTIONARY FACTORS AND UNCERTAINTIES.
INTERNATIONAL OPERATIONS
CMS Energy, through certain of its Enterprises subsidiaries, has made
substantial international investments in approximately 10 countries. These
international investments in electric generating facilities, natural gas
pipelines and electric distribution systems face a number of risks inherent in
acquiring, developing and owning these types of facilities. CMS Energy believes
that its subsidiaries maintain appropriate levels of traditional insurance,
similar to comparable companies in the same line of business, for the various
risk exposures incidental to CMS Energy's businesses. Notably, all insurance is
subject to terms and conditions that might not fully compensate a loss. Further,
due to increasingly restrictive insurance markets, partly as a result of
terrorist attacks of September 11, 2001, it is anticipated that insurance,
particularly terrorism and sabotage coverages, will be difficult or impossible
to maintain on all investments.
Although CMS Energy maintains insurance in certain high-risk countries for
certain specific political risks, CMS Energy is exposed to some risks that
include local political and economic factors over which it has no control and
that may not be covered by insurance. CMS Energy, through its Enterprises
subsidiaries, may incur risk exposures such as changes in foreign governmental
and regulatory policies (including changes in industrial regulation and control
and changes in taxation), changing political conditions and international
monetary fluctuations. Particularly, international investments are subject to
the risk that they may be expropriated or that the required agreements,
licenses, permits and other approvals may be changed or terminated in violation
of their terms. Also, the local foreign currency may be devalued or the
conversion of the currency may be restricted or prohibited or other actions,
such as increases in taxes, royalties or import duties, may be taken which
adversely affect the value and the recovery of the investment. In some cases,
the investment may have to be abandoned or disposed of at a loss. These factors
could significantly adversely affect the financial results of the affected
subsidiary and CMS Energy's financial position and results of operations.
UNCERTAINTIES
Specific uncertainties are described in ITEM 8. FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA -- NOTE 5 OF CMS ENERGY'S NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS. Certain risks are described in ITEM 7. CMS ENERGY'S MANAGEMENT'S
DISCUSSION AND ANALYSIS -- MARKET RISK INFORMATION and ITEM 8. FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA -- NOTE 10 OF CMS ENERGY'S NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS.
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward-looking statements to encourage such disclosures without the
threat of litigation, if those statements are identified as forward-looking and
are accompanied by meaningful,
21
cautionary statements identifying important factors that could cause the actual
results to differ materially from those projected in the statements.
Forward-looking statements give our expectations or forecasts of future events.
You can identify these statements by the fact that they do not relate strictly
to historical or current facts. Forward-looking statements have been and will be
made in this Form 10-K and in our other written documents (such as press
releases, visual presentations, and securities disclosure documents) and oral
presentations (such as analyst conference calls). Such statements are based on
management's beliefs as well as assumptions made by, and information currently
available to, management. When used in our documents or oral presentations, we
intend the words "anticipate", "believe", "estimate", "expect", "forecast",
"intend", "objective", "plan", "possible", "potential", "project" "projection"
and variations of such words and similar expressions to target forward-looking
statements that involve risk and uncertainty.
Any or all of our forward-looking statements in oral or written statements
or in other publications may turn out to be wrong. They can be affected by
inaccurate assumptions or by known or unknown risks and uncertainties. Many such
factors will be important in determining our actual future results.
Consequently, we cannot guarantee any forward-looking statement.
In addition to any assumptions and other factors referred to specifically in
connection with such forward-looking statements, there are numerous factors that
could cause our actual results to differ materially from those contemplated in
any forward-looking statements. Such factors include our inability to predict
and/or control:
- The efficient sale of non-strategic and under-performing domestic and
international assets and discontinuation of certain operations;
- Achievement of capital expenditure reductions and cost savings;
- Capital and financial market conditions, including current price of CMS
Energy Common Stock and the effect on the Pension Plan, interest rates
and availability of financing to CMS Energy, Consumers, Panhandle or any
of their affiliates and the energy industry;
- Market perception of the energy industry, CMS Energy, Consumers,
Panhandle or any of their affiliates;
- CMS Energy's, Consumers', Panhandle's or any of their affiliates'
securities ratings;
- Currency fluctuations, transfer restrictions and exchange controls;
- Factors affecting utility and diversified energy operations such as
unusual weather conditions, catastrophic weather-related damage,
unscheduled generation outages, maintenance or repairs, unanticipated
changes to fossil fuel, nuclear fuel or gas supply costs or availability
due to higher demand, shortages, transportation problems or other
developments, environmental incidents, or electric transmission or gas
pipeline system constraints;
- Ability to successfully access the capital markets;
- Electric transmission or gas pipeline system constraints;
- International, national, regional and local economic, competitive and
regulatory conditions and developments;
- Adverse regulatory or legal decisions, including environmental laws and
regulations;
- Federal regulation of electric sales and transmission of electricity
including re-examination by Federal regulators of the market-based sales
authorizations by which our subsidiaries participate in wholesale power
markets without price restrictions and proposals by FERC to change the
way it currently lets our subsidiaries and other public utilities and
natural gas companies interact with each other;
- Energy markets, including the timing and extent of unanticipated changes
in commodity prices for oil, coal, natural gas, natural gas liquids,
electricity and certain related products due to lower or higher demand,
shortages, transportation problems or other developments;
- The increased competition in natural gas transportation which could
reduce volumes of gas transported by our natural gas transmission
businesses or cause them to lower rates in order to meet competition;
22
- Potential disruption, expropriation or interruption of facilities or
operations due to accidents, war and terrorism or political events and
the ability to obtain or maintain insurance coverage for such events;
- Nuclear power plant performance, decommissioning, policies, procedures,
incidents, and regulation, including the availability of spent nuclear
fuel storage;
- Technological developments in energy production, delivery and usage;
- Changes in financial or regulatory accounting principles or policies;
- Outcome, cost, and other effects of legal and administrative
proceedings, settlements, investigations and claims including
particularly claims, damages, and fines resulting from those involving
round-trip trading and inaccurate commodity price reporting;
- Limitations on our ability to control the development or operation of
projects in which our subsidiaries have a minority interest;
- Disruptions in the normal commercial insurance and surety bond markets
that may increase costs or reduce traditional insurance coverage,
particularly terrorism and sabotage insurance and performance bonds;
- Other business or investment considerations that may be disclosed from
time to time in CMS Energy's, Consumers' or Panhandle's SEC filings or
in other publicly disseminated written documents; and
- Other uncertainties, which are difficult to predict and many of which
are beyond our control.
CMS Energy and its affiliates undertake no obligation to update or revise
any forward-looking statements, whether as a result of new information, future
events or otherwise. The foregoing review of factors pursuant to the Private
Securities Litigation Reform Act should not be construed as exhaustive or as any
admission regarding the adequacy of our disclosures. Certain risk factors are
detailed from time to time in our various public filings. You are advised,
however to consult any further disclosures we make on related subjects in our
reports to the SEC. In particular, you should read the discussion in the section
entitled "Forward-Looking Statements and Risk Factors" in our most recent
reports to the SEC on Form 10-Q or Form 8-K filed subsequent to this Form 10-K.
23
EXECUTIVE OFFICERS
NAME AGE POSITION PERIOD
---------------------- --- ------------------------------------------- --------------
Kenneth Whipple...... 68 Chairman of the Board, Chief Executive
Officer of CMS Energy 2002-Present
Chairman of the Board, Chief Executive
Officer of Consumers 2002-Present
Chairman of the Board of Enterprises 2002-Present
Director of CMS Energy 1993-Present
Director of Consumers 1993-Present
Chairman and Chief Executive Officer of
Ford Credit Company 1997-1999
Executive Vice President and President of
Ford Financial Services Group 1989-1999
S. Kinnie Smith, Jr.. 72 Vice Chairman of the Board of CMS
Enterprises 2003-Present
Vice Chairman of the Board and General
Counsel of CMS Energy 2002-Present
Vice Chairman of the Board of Consumers 2002-Present
Executive Vice President of Enterprises 2002-2003
Director of CMS Energy 2002-Present
Director of Consumers 2002-Present
Vice Chairman of Trans-Elect, Inc 2002
Senior Counsel at Skadden, Arps, Slate,
Meagher, & Flom LLP 1995-2002
David W. Joos........ 49 Chairman of the Board and Chief Executive
Officer of CMS Enterprises 2003-Present
President and Chief Operating Officer of
CMS Energy 2001-Present
President and Chief Operating Officer of
Consumers 2001-Present
President and Chief Operating Officer of
CMS Enterprises 2001-2003
Director of CMS Energy 2001-Present
Director of Consumers 2001-Present
Executive Vice President and Chief
Operating Officer-- Electric of CMS
Energy 2000-2001
Executive Vice President and Chief
Operating Officer-- Electric of
Enterprises 2000-2001
Executive Vice President and President and
Chief Executive Officer-- Electric of
Consumers 1997-2001
Thomas J. Webb.......... 50 Executive Vice President and Chief
Financial Officer of CMS Energy 2002-Present
Executive Vice President and Chief
Financial Officer of Consumers 2002-Present
Executive Vice President and Chief
Financial Officer of Enterprises 2002-Present
Executive Vice President and Chief
Financial Officer of Panhandle Eastern
Pipe Line 2002-Present
Executive Vice President and Chief
Financial Officer of Kellogg Company 1999-2002
Vice President and Chief Financial Officer
of Visteon, a division of Ford Motor
Company 1996-1999
Thomas W. Elward........ 54 President and Chief Operating Officer of
24
CMS Enterprises 2003-Present
President and Chief Executive Officer of
CMS Generation Co. 2002-Present
Senior Vice President of CMS Enterprises 2002-2003
Senior Vice President of CMS Generation Co. 1998-2001
Vice President of CMS Generation Co 1990-1998
Carl L. English......... 56 Executive Vice President and President and
Chief Executive Officer-- Gas of
Consumers 1999-Present
Vice President of Consumers 1990-1999
David G. Mengebier*..... 45 Senior Vice President of CMS Enterprises 2003-Present
Senior Vice President of CMS Energy 2001-Present
Senior Vice President of Consumers 2001-Present
Vice President of CMS Energy 1999-2001
Vice President of Consumers 1999-2001
John G. Russell**....... 45 Executive Vice President and President and
Chief Executive Officer-- Electric of
Consumers 2001-Present
Senior Vice President of Consumers 2000-2001
Vice President of Consumers 1999-2000
John F. Drake........... 54 Senior Vice President of CMS Enterprises 2003-Present
Senior Vice President of CMS Energy 2002-Present
Senior Vice President of Consumers 2002-Present
Vice President of CMS Energy 1997-2002
Vice President of Consumers 1998-2002
Glenn P. Barba.......... 37 Vice President and Chief Accounting Officer
of CMS Enterprises 2003-Present
Vice President, Controller and Chief
Accounting Officer of CMS Energy 2003-Present
Vice President, Controller and Chief
Accounting Officer of Consumers 2003-Present
Vice President and Controller of Consumers 2001-2003
Controller of CMS Generation 1997-2001
----------
* Mr. Mengebier has served as Senior Vice President of CMS Energy and
Consumers since 2001, after receiving a promotion from his position in both
companies as Vice President, which he had held since 1999. From 1997 to
1999, Mr. Mengebier served as Executive Director of Federal Governmental
Affairs for CMS Enterprises.
** Mr.Russell has served as Executive Vice President and President and Chief
Executive Officer-- Electric of Consumers since October 2001. From December
2000 until October 2001, Mr. Russell served as Senior Vice President of
Consumers. From October 1999 until December 2000, Mr. Russell served as Vice
President of Consumers. From July 1997 until October 1999, Mr. Russell
served as Manager-- Electric Customer Operations of Consumers.
The present term of office of each of the executive officers extends to the
first meeting of the Board of Directors after the next annual election of
Directors of CMS Energy (scheduled to be held on May 23, 2003).
There are no family relationships among executive officers and directors of
CMS Energy.
AVAILABLE INFORMATION
CMS Energy's internet address is http://www.cmsenergy.com. You can access
free of charge on our website all of our annual reports on Form 10-K, quarterly
reports on Form 10-Q, current reports on Form 8-K, and amendments to those
reports filed pursuant to Section 13(a) or 15(d) of the Exchange Act. Such
reports are available as soon as practical after they are electronically filed
with the SEC.
25
ITEM 2. PROPERTIES.
A description of CMS Energy properties is contained in ITEM 1. BUSINESS --
Consumers -- Consumers Properties -- General; BUSINESS -- BUSINESS SEGMENTS --
Consumers Electric Utility Operations -- Electric Utility Properties; Consumers
Gas Utility -- Gas Utility Properties; Natural Gas Transmission -- Natural Gas
Transmission Properties; Independent Power Production -- Independent Power
Production Properties; Oil and Gas Exploration and Production -- Oil and Gas
Exploration and Production Properties; International Energy Distribution --
International Energy Distribution Properties, all of which are incorporated by
reference herein.
ITEM 3. LEGAL PROCEEDINGS
CMS Energy and some of its subsidiaries and affiliates are parties to
certain routine lawsuits and administrative proceedings incidental to their
businesses involving, for example, claims for personal injury and property
damage, contractual matters, various taxes, and rates and licensing. Reference
is made to the ITEM 1. BUSINESS -- CMS ENERGY REGULATION, as well as CMS
Energy's ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS and CMS Energy's ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA -- NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS included herein for additional information regarding various pending
administrative and judicial proceedings involving regulatory, operating and
environmental matters.
CMS ENERGY
DEMAND FOR ACTIONS AGAINST OFFICERS AND DIRECTORS
The Board of Directors of CMS Energy received a demand, on behalf of a
shareholder of Common Stock, that it commence civil actions (i) to remedy
alleged breaches of fiduciary duties by CMS Energy officers and directors in
connection with round-trip trading at CMS MS&T, and (ii) to recover damages
sustained by CMS Energy as a result of alleged insider trades alleged to have
been made by certain current and former officers of CMS Energy and its
subsidiaries. If the Board elects not to commence such actions, the shareholder
has stated that he will initiate a derivative suit, bringing such claims on
behalf of CMS Energy. CMS Energy has elected two new members to its Board of
Directors to serve as an independent litigation committee to determine whether
it is in the best interest of the company to bring the action demanded by the
shareholder. Counsel for the shareholder has agreed to extend the time for CMS
Energy to respond to the demand. CMS Energy cannot predict the outcome of this
litigation.
EMPLOYMENT RETIREMENT INCOME SECURITY ACT CLASS ACTION LAWSUITS
CMS Energy is a named defendant, along with Consumers, 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 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
have been filed against CMS Energy, Consumers and certain officers and directors
of CMS Energy and its affiliates. The complaints have been filed in the United
States District Court for the Eastern District of Michigan as purported class
actions by individuals who allege that they purchased CMS Energy's securities
during a purported class period. At least two of the complaints contain
purported class periods beginning on August 3, 2000 and running through May 10,
2002 or May 14, 2002. These complaints generally seek unspecified damages based
on allegations that the defendants violated United States securities laws and
regulations by making allegedly false and misleading statements about the
company's business and financial condition. The cases have been consolidated
into a single lawsuit, and an amended and consolidated complaint is due to be
filed by May 1, 2003. CMS Energy and Consumers intend to vigorously defend
against this action. CMS Energy and Consumers cannot predict the outcome of this
litigation.
ENVIRONMENTAL MATTERS: CMS Energy 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
26
environmental issues. Based on its present knowledge and subject to future legal
and factual developments, CMS Energy, believe that it is unlikely that these
actions, individually or in total, will have a material adverse effect on its
financial condition. See CMS Energy's, Consumers' and Panhandle's ITEM 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS; and CMS Energy's ITEM 8. FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA -- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
During the fourth quarter of 2002, CMS Energy did not submit any matters to
vote of security holders.
27
PART II
ITEM 5. MARKET FOR CMS ENERGY'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS.
Market prices for CMS Energy's Common Stock and related security holder
matters are contained in ITEM 7. CMS ENERGY'S MANAGEMENT'S DISCUSSION AND
ANALYSIS and ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA -- CMS ENERGY'S
QUARTERLY FINANCIAL AND COMMON STOCK INFORMATION, which is incorporated by
reference herein. At February 28, 2003, the number of registered shareholders
totaled 62,687.
ITEM 6. SELECTED FINANCIAL DATA.
Selected financial information is contained in ITEM 8. FINANCIAL STATEMENTS
AND SUPPLEMENTARY DATA -- CMS ENERGY'S SELECTED FINANCIAL INFORMATION, which is
incorporated by reference herein.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Management's discussion and analysis of financial condition and results of
operations is contained in ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
-- CMS ENERGY'S MANAGEMENT'S DISCUSSION AND ANALYSIS, which is incorporated by
reference herein.
ITEM 7A. QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
Quantitative and Qualitative Disclosures About Market Risk is contained in
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA -- CMS ENERGY'S MANAGEMENT'S
DISCUSSION AND ANALYSIS -- CRITICAL ACCOUNTING POLICIES -- MARKET RISK
INFORMATION, which is incorporated by reference herein.
28
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Index to Financial Statements:
Page
----
Selected Financial Information................................ 30
Management's Discussion and Analysis.......................... 32
Consolidated Statements of Income............................. 70
Consolidated Statements of Cash Flows......................... 72
Consolidated Balance Sheets................................... 74
Consolidated Statements of Preferred Stock.................... 76
Consolidated Statements of Common Stockholders' Equity........ 77
Notes to Consolidated Financial Statements.................... 79
Report of Independent Public Auditors......................... 140
29
CMS ENERGY CORPORATION
SELECTED FINANCIAL INFORMATION
RESTATED RESTATED
2002 2001(A) 2000(A) 1999 1998
------- ------- ------- ------- -------
Operating revenue (in millions)(e)..... ($) 8,687 8,063 6,697 5,094 4,963
Income (loss) from continuing
operations(e)........................ ($) (416) (236) (40) 207 250
Consolidated net income (loss) (in
millions)(e)......................... ($) (620) (448) 43 277 285
Average common shares outstanding (in
thousands)
CMS Energy........................... 139,047 130,758 113,128 110,140 102,446
Class G.............................. -- -- -- -- 8,333
Income (loss) from continuing operations
per average common share
CMS Energy -- Basic.................. (2.99) (1.79) (0.35) 1.81 2.31
-- Diluted................ (2.99) (1.79) (0.35) 1.81 2.29
Class G -- Basic and Diluted...... -- -- -- 4.21 1.57
Net income (loss) per average common
share
CMS Energy -- Basic.................. ($) (4.46) (3.42) 0.38 2.18(b) 2.65
-- Diluted................ ($) (4.46) (3.42) 0.38 2.17(b) 2.62
Class G -- Basic and Diluted...... ($) -- -- -- 4.21(b) 1.56
Cash from operations (in millions)..... ($) 624 366 600 917 516
Capital expenditures, excluding
acquisitions, capital lease additions
and DSM (in millions)................ ($) 747 1,239 1,032 1,124 1,295
Total assets (in millions)............. ($) 13,915 16,775 16,905 15,462 11,310
Long-term debt, excluding current
maturities (in millions)............. ($) 5,356 5,840 6,048 6,428 4,726
Non-current portion of capital leases
(in millions).......................... ($) 116 71 49 88 105
Total preferred stock (in millions).... ($) 44 44 44 44 238
Total Trust Preferred Securities
(in millions)........................ ($) 883 1,214 1,088 1,119 393
Cash dividends declared per common share
CMS Energy........................... ($) 1.09 1.46 1.46 1.39 1.26
Class G.............................. ($) -- -- -- 0.99 1.27
Market price of common stock at year-end
CMS Energy........................... ($) 9.44 24.03 31.69 31.19 48.44
Class G.............................. ($) -- -- -- 24.56(c) 25.25
Book value per common share at year-end
CMS Energy........................... ($) 7.86 15.33 19.93 21.17 19.61
Class G............................. ($) -- -- -- -- 11.46
Return on average common equity....... (%) (39.1) (20.1) 1.8 11.8 14.2
Return on assets...................... (%) (1.6) (0.2) 2.7 5.3 5.5
Number of employees at year-end
(full-time equivalents)............. 10,477 11,510 11,652 11,462 9,710
ELECTRIC UTILITY STATISTICS
Sales (billions of kWh).............. 39.3 39.6 41.0 41.0 40.0
Customers (in thousands)............. 1,734 1,712 1,691 1,665 1,640
Average sales rate per kWh........... ((cent)) 6.88 6.65 6.56 6.54 6.50
GAS UTILITY STATISTICS
Sales and transportation deliveries
(bcf)............................. 376 367 410 389 360
Customers (in thousands)(d).......... 1,652 1,630 1,611 1,584 1,558
Average sales rate per mcf........... ($) 5.67 5.34 4.39 4.52 4.56
DIVERSIFIED ENERGY STATISTICS
CMS Energy's share of unconsolidated
revenue (in millions):
Independent power production...... ($) 704 742 837 802 761
Natural gas transmission.......... ($) 150 239 171 130 67
Marketing, services and trading... ($) 1,003 1,138 1,238 524 291
Independent power production sales
(millions of kWh)............... 19,776 19,212 21,379 20,478 19,017
Gas pipeline throughput (bcf)..... 1,534 1,555 1,586 1,141 253
Gas managed and marketed for end
users (bcf)..................... 550 750 606 470 366
Electric power marketed (millions of
kWh)............................ 62,971 31,199 8,155 3,709 6,973
30
----------
(a) CMS Energy's Consolidated Financial Statements for the years 2001 and 2000
have been restated, pursuant to adjustments resulting from the re-audit of
CMS Energy. See Note 2 in the Notes to the Consolidated Financial
Statements.
(b) 1999 earnings per average common share includes allocation of the premium on
redemption of Class G Common Stock of $(.26) per CMS Energy basic share,
$(.25) per CMS Energy diluted share and $3.31 per Class G basic and diluted
share.
(c) Reflects closing price at the October 25, 1999 exchange date.
(d) Excludes off-system transportation customers.
(e) See Notes 3, 4 and 5 to the Consolidated Financial Statements.
31
CMS ENERGY CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
The following discussion and analysis is generally not affected by the
completion of the restatement of the 2001 interim periods resulting from the
adjustments identified in connection with the re-audit of the consolidated
financial statements for 2001 and adjustments identified through the quarterly
reconciliation and reconstruction project at CMS MST. However, material
subsequent events have been reported in a separate section entitled "Subsequent
Events".
This document should be read in combination with CMS Energy's consolidated
financial statements and notes to those statements included in this Form 10-K/A.
All note references within this MD&A refer to the notes to CMS Energy's
consolidated financial statements. This document should also be read in
conjunction with CMS Energy's Form 10-Q for the quarterly period ended March 31,
2003 filed with the SEC on May 14, 2003, and CMS Energy's Form 8-K filed with
the SEC on June 24, 2003, which are incorporated by reference herein.
CMS Energy is the parent holding company of Consumers and Enterprises.
Consumers is a combination electric and gas utility company serving Michigan's
Lower Peninsula. Enterprises, through subsidiaries, including Panhandle and its
subsidiaries, is engaged in several domestic and international diversified
energy businesses including: natural gas transmission, storage and processing;
independent power production; and energy marketing, services and trading. CMS
Energy's consolidated financial statements for the years 2001 and 2000 have been
restated as a result of accounting adjustments identified in connection with the
re-audit and preparation of the restated 2001 and 2000 consolidated financial
statements of CMS Energy. CMS Energy has completed its restatement of the
consolidated financial statements for the quarters of 2002 and 2001. As a
result, the 2002 and 2001 quarterly information has been restated. The interim
financial data contained in Note 20, Quarterly Financial and Common Stock
Information, to the consolidated financial statements has been restated to
reflect the impacts of restatement adjustments.
FORWARD-LOOKING STATEMENTS AND RISK FACTORS
This MD&A refers to, and in some sections specifically incorporates by
reference, CMS Energy's Notes to Consolidated Financial Statements and should be
read in conjunction with such Consolidated Financial Statements and Notes. This
Annual Report and other written and oral statements that CMS Energy may make
contain forward-looking statements as defined by the Private Securities
Litigation Reform Act of 1995. CMS Energy's intentions with the use of the words
"anticipates," "believes," "estimates," "expects," "intends," and "plans," and
variations of such words and similar expressions, are solely to identify
forward-looking statements that involve risk and uncertainty. These
forward-looking statements are subject to various factors that could cause CMS
Energy's actual results to differ materially from the results anticipated in
such statements. CMS Energy has no obligation to update or revise
forward-looking statements regardless of whether new information, future events
or any other factors affect the information contained in such statements. CMS
Energy does, however, discuss certain risk factors, uncertainties and
assumptions in this MD&A and in Item 1 of this Form 10-K in the section entitled
"Forward-Looking Statements Cautionary Factors and Uncertainties" and in various
public filings it periodically makes with the SEC. CMS Energy designed this
discussion of potential risks and uncertainties, which is by no means
comprehensive, to highlight important factors that may impact CMS Energy's
business and financial outlook. This Annual Report also describes material
contingencies in CMS Energy's Notes to Consolidated Financial Statements, and
CMS Energy encourages its readers to review these Notes.
In addition to any assumptions and other factors referred to specifically in
connection with such forward-looking statements, there are several factors that
could affect CMS Energy's liquidity, including but not limited to:
- Generation of sufficient cash flows from operations;
- Near term cash requirements;
- Timely closing of asset sales, including the sale of Panhandle;
- Access to capital markets or other financing sources; and
- Numerous other significant risks and difficulties including, but not
limited to, SEC and other investigations, securities class action
lawsuits, and ERISA cases.
32
CAPITAL RESOURCES AND LIQUIDITY
CMS Energy's liquidity and capital requirements generally are a function of
its results of operations, capital expenditures, contractual obligations,
working capital needs and collateral requirements. CMS Energy historically has
met its consolidated cash needs through its operating and investing activities
and, as needed, through access to bank financing and the capital markets.
During 2003, CMS Energy has contractual obligations and planned capital
expenditures that would require substantial amounts of cash. As of March 14,
2003, CMS Energy at the parent level had approximately $598 million, Consumers
Energy and its subsidiaries had approximately $727 million, and Panhandle and
its subsidiaries had approximately $52 million of publicly issued and credit
facility debt maturing in 2003. CMS Energy and Consumers Energy have taken
significant steps to address their 2003 maturities, as described below. In
addition, CMS Energy also could become subject to liquidity demands pursuant to
commercial commitments under guarantees, indemnities and letters of credit.
Management is pursuing actively plans to refinance debt and to sell assets,
including the sale of Panhandle. In December 2002, CMS Energy signed a
definitive agreement to sell Panhandle for a total of $1.828 billion, which is
expected to result in $662 million of cash and $1.166 billion of debt
assumption. However, closing of the sale is pending action by the FTC under the
Hart-Scott-Rodino Act. All other regulatory approvals have been granted.
CMS ENERGY PARENT LEVEL LIQUIDITY
CMS Energy at the parent level is addressing its near-to-mid-term liquidity
and capital requirements through a financial improvement plan that involves the
sale of non-strategic and under-performing assets of approximately $912 million,
receipt of dividends from its subsidiaries of approximately $280 million, and
reduction of approximately $598 million of outstanding debt along with reduced
capital expenditures, cost reductions and other measures.
As noted elsewhere in this MDA, CMS Energy has reduced debt by approximately
$2.8 billion through asset sales with cash proceeds and associated debt
assumption from such sales over the past two years. Through the first quarter of
2003, CMS Energy has accomplished approximately $97 million of additional asset
sales. In January 2003, CMS MST closed on the sale of a substantial portion of
its natural gas trading contracts for $17 million of cash proceeds. The sale of
the Centennial Pipeline, resulting in proceeds to CMS Energy of $40 million,
closed in February 2003. In March 2003, CMS MST sold the majority of its
wholesale power book and related supply portfolio for cash proceeds of $34
million to Constellation Power Source, Inc. The sale contains a potential to
increase proceeds to $40 million dependent upon future years' performance of the
sold assets. Additionally, during the first quarter of 2003, CMS MST sold its 50
percent joint venture ownership interest in Texon, its 50 percent interest in
Premstar and its Tulsa retail contracts, resulting in net cash proceeds of
approximately $6 million.
CMS Energy believes that further targeted asset sales, together with its
planned reductions in operating expenses, capital expenditures, and the
suspension of the common dividend also will contribute to improved liquidity.
CMS Energy believes that, assuming the successful implementation of its
financial improvement plan, its present 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. There can be no
assurances that the financial improvement plan will be successful and failure to
achieve its goals could have a material adverse effect on CMS Energy's liquidity
and operations. In such event, CMS Energy would be required to consider the full
range of strategic measures available to companies in similar circumstances.
CMS Energy continues to explore financing opportunities to supplement its
financial improvement plan. These potential opportunities include refinancing
its bank credit facilities; entering into leasing arrangements and/or vendor
financing; refinancing and issuing new capital markets debt, preferred and/or
common equity; and negotiating private placement debt, preferred and/or common
equity. Specifically, as of March 31, 2003, CMS Energy has taken the following
action to supplement its financial improvement plan in 2003:
- On March 30, 2003 CMS Energy entered into an amendment and restatement
of its existing $300 million and $295.8 million revolving credit
facilities under which $409 was then outstanding. The Second Amended and
Restated Senior Credit Agreement includes a $250 million tranche with a
maturity date of April 30, 2004 and a $159 million tranche with a
maturity date of September 30, 2004. The facility is being underwritten
by several banks at a total annual cost to CMS Energy of approximately
ten percent, which includes the initial commitment fee. Any proceeds of
equity issuances by CMS Energy and its subsidiaries or any asset sales
and debt issuances by CMS Energy or its subsidiaries, other than
Consumers Energy, are required to be used to prepay this facility. This
facility is collateralized primarily by the common stock of Consumers
Energy, CMS Enterprises and certain CMS Enterprises subsidiaries.
- On March 30, 2003 CMS Enterprises entered into a revolving credit
facility in an aggregate amount of $441 million. The maturity date of
this facility is April 30, 2004. The facility is being underwritten by
several banks at a total annual cost to CMS Energy of approximately ten
percent, which includes the initial commitment fee. Proceeds from this
loan will be used for
33
general corporate purposes, to retire debt, and to collateralize
approximately $160 million of letters of credit. Any proceeds of equity
issuances by CMS Energy and its subsidiaries or any asset sales and debt
issuances by CMS Energy or its subsidiaries, other than Consumers
Energy, are required to be used to prepay this facility. It is expected
that proceeds from the Panhandle sale will be used to pay off this
facility in full. This facility is guaranteed by CMS Energy, whose
guaranty is secured by the common stock of Consumers Energy and CMS
Enterprises.
In addition, if necessary, CMS Energy also would postpone the $52 million
pension contribution expected to be made in September 2003. Also, CMS Energy may
pursue other avenues of private debt or equity investment.
CONSUMERS ENERGY LIQUIDITY
Consumers plans to meet its liquidity and capital requirements in 2003
through a combination of approximately $229 million from operations and
approximately $513 million of new debt along with reduced capital expenditures,
cost reductions and other measures. As of March 14, 2003, Consumers planned to
refinance $727 million of debt in 2003. To that end, Consumers has initiated
several transactions with various financial institutions, regulators, banks,
lenders, and others that are designed to provide liquidity:
- On March 26, 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 will be used to retire debt and for general
corporate purposes.
- On March 27, 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.
- On March 28, 2003, Consumers syndicated a $150 million term loan secured
by first mortgage bonds. This term loan has a three-year maturity and
will bear interest at LIBOR plus 450 basis points. Proceeds from this
loan will be used to retire debt and for general corporate purposes.
- 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 the rate relief could be in place by the fourth
quarter of 2003.
- Consumers has filed an application 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 delays in the offering process,
Consumers anticipates that bonds would be issued by year-end, 2003.
If necessary, Consumers would also postpone the planned $158 million pension
contribution expected to be made in September 2003.
In the event Consumers is unable to access bank financing or the capital
markets to incur or refinance indebtedness, there could be a material adverse
effect on Consumers' liquidity and operations. There is no assurance that the
pending securitization bond issuance transaction noted above will be completed.
Further, there is no assurance that the MPSC will grant either interim or final
gas utility rate relief.
ROUND-TRIP TRADES
During the period of May 2000 through January 2002, CMS MST engaged in
simultaneous, prearranged commodity trading transactions in which energy
commodities were sold and repurchased at the same price. These transactions,
which had no impact on previously reported consolidated net income, earnings per
share or cash flows, had the effect of increasing operating revenues, operating
expenses, accounts receivable, accounts payable and reported trading volumes.
After internally concluding that cessation of these trades was in CMS Energy's
best interest, these so called round-trip trades were halted in January 2002.
34
CMS Energy accounted for these trades in gross revenue and expense through
the third quarter of 2001, but subsequently concluded that these round-trip
trades should have been reflected on a net basis. In the fourth quarter of 2001,
CMS Energy ceased recording these trades in either revenues or expenses. CMS
Energy's 2001 Form 10-K, issued in March 2002, restated revenue and expense for
the first three quarters of 2001 to eliminate $4.2 billion of previously
reported revenue and expense. The 2001 Form 10-K did include $5 million of
revenue and expense for 2001 from such trades, which remained uncorrected. At
the time of the initial restatement, CMS Energy inadvertently failed to restate
2000 for round-trip trades.
CMS Energy is cooperating with an SEC investigation regarding round-trip
trading and the Company's financial statements, accounting practices and
controls. CMS Energy is also cooperating with inquiries by the Commodity Futures
Trading Commission, the FERC, and the United States Department of Justice
regarding these transactions. CMS Energy has also received subpoenas from U.S.
Attorneys Offices regarding investigations of these trades. In addition, CMS
Energy's Board of Directors established the Special Committee of independent
directors to investigate matters surrounding round-trip trading and the Special
Committee retained outside counsel to assist in the investigation.
On October 31, 2002, the Special Committee reported the results of its
investigation to the Board of Directors. The Special Committee discovered no new
information inconsistent with the information previously reported by CMS Energy
and as reported above. The investigation also concluded that the round-trip
trades were undertaken to raise CMS MST's profile as an energy marketer, with
the goal of enhancing CMS MST's 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 to 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.
CHANGE IN AUDITORS AND RESTATEMENTS
In April 2002, the Board of Directors, upon the recommendation of the Audit
Committee of the Board, voted to discontinue using Arthur Andersen to audit CMS
Energy's financial statements for the year ending December 31, 2002. CMS Energy
previously had retained Arthur Andersen to review its financial statements for
the quarter ended March 31, 2002. In May 2002, the Board of Directors engaged
Ernst & Young to audit CMS Energy's financial statements for the year ending
December 31, 2002. Also in May 2002, CMS Energy stated its intention to restate
its consolidated financial statements for 2000 and 2001 to eliminate the effects
of round-trip trading.
Following CMS Energy's announcement that it would restate its financial
statements for 2000 and 2001 to eliminate the effects of round-trip energy
trades and form the Special Committee to investigate these trades, CMS Energy
received formal notification from Arthur Andersen that it had terminated its
relationship with CMS Energy and affiliates. Arthur Andersen notified CMS Energy
that due to the investigation, Arthur Andersen's historical opinions on CMS
Energy's financial statements for the periods being restated could not be relied
upon. Arthur Andersen also notified CMS Energy that it would be unable to give
an opinion on CMS Energy's restated financial statements when they are
completed. Arthur Andersen's reports on CMS Energy's, Consumers', and
Panhandle's consolidated financial statements for each of the fiscal years ended
December 31, 2001 and December 31, 2000 contained no adverse or disclaimer of
opinion, nor were the reports qualified or modified regarding uncertainty, audit
scope or accounting principles.
There were no disagreements between CMS Energy and Arthur Andersen on any
matter of accounting principle or practice, financial statement disclosure, or
auditing scope or procedure during the years 2000 and 2001 and through the date
of their opinion for the quarter ended March 31, 2002.
As a result of the restatement required with respect to the round-trip
trading transactions, Ernst & Young was engaged to re-audit CMS Energy's
consolidated financial statements for each of the fiscal years ended December
31, 2001 and December 31, 2000, which included audit work at Consumers and
Panhandle for these years. None of CMS Energy's former auditors, some of whom
are now employed by Ernst & Young, were involved in the re-audit of CMS Energy's
consolidated financial statements. During CMS Energy's two most recent fiscal
years ended December 31, 2000 and December 31, 2001 and the subsequent interim
period through June 10, 2002, CMS Energy did not consult with Ernst & Young
regarding any matter or event identified by SEC laws and regulations.
In connection with Ernst & Young's re-audit of the fiscal years ended
December 31, 2001 and December 31, 2000, CMS Energy has determined to make
certain adjustments (in addition to the round-trip trades) to its consolidated
financial statements for the fiscal
35
years ended December 31, 2001 and December 31, 2000. Therefore, the consolidated
financial statements for 2001 and 2000 have been restated from amounts
previously reported. At the time it adopted the accounting treatment for these
items, CMS Energy believed such accounting was appropriate under accounting
principles generally accepted in the United States.
The tables below summarize the adjustments and the effects on CMS Energy's
consolidated financial statements.
NET INCOME INCREASE (DECREASE) 2001 2000 TOTAL
------------------------------------------------------------------ -------- ------- -------
(IN MILLIONS)
MCV PPA Adjustments.............................................. $ 90 $ (20) $ 70
DIG Loss Contract Accounting..................................... 126 -- 126
Mark-to-Market Gains and Losses on Inter-book Transactions
and other related adjustments.................................. (43) 18 (25)
Mark-to-Market Gains and Losses on Intercompany
Transactions................................................... (30) 18 (12)
CMS MST Account Reconciliations.................................. (5) (13) (18)
Income Tax Adjustments........................................... (30) -- (30)
Panhandle System Gas............................................. (7) -- (7)
Amortization of Debt Costs....................................... (2) 7 5
Other............................................................ (2) (3) (5)
------- ------ -------
Total............................................................ $ 97 $ 7 $ 104
======= ====== =======
BALANCE SHEET: INCREASE IN CONSOLIDATED DEBT 2001 2000
-------------------------------------------- ---- ----
(IN MILLIONS)
Reconsolidation of LNG Facility........... $ 215 $ --
Structured Financing of Methanol Plant.... 125 125
Consumers' Headquarters Capital Lease..... 16 --
For detailed information about the restatement of CMS Energy's consolidated
financial statements reflecting these audit adjustments, see Note 2,
Restatement.
CRITICAL ACCOUNTING POLICIES
CMS Energy's consolidated financial statements are based on the application
of accounting principles generally accepted in the United States. The
application of these principles often requires management to make certain
judgments, assumptions and estimates that may result in different financial
presentations. CMS Energy believes that certain accounting principles are
critical in terms of understanding its consolidated financial statements. These
principles include the use of estimates in accounting for contingencies and
long-lived assets, equity method investments and long-term obligations,
accounting for derivatives and financial instruments, mark-to-market accounting,
and international operations and foreign currency, pension and postretirement
benefits and Regulatory accounting.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
judgments, estimates and assumptions that affect the reported amounts of assets
and liabilities, disclosure of contingent assets and liabilities at the date of
the financial statements, and the reported amounts of revenues and expenses
during the reporting period. Certain accounting principles require subjective
and complex judgments used in the preparation of financial statements.
Accordingly, a different financial presentation could result depending on the
judgment, estimates or assumptions that are used. Such estimates and assumptions
include, but are not specifically limited to: depreciation, amortization,
interest rates, discount rates, currency exchange rates, future commodity
prices, mark-to-market valuations, investment returns, impact of new accounting
standards, international economic policy, future costs associated with long-term
contractual obligations, future compliance costs associated with environmental
regulations and continuing creditworthiness of counterparties. Actual results
could materially differ from those estimates.
Periodically, in accordance with SFAS No. 144 and APB Opinion No. 18,
long-lived assets and equity method investments of CMS Energy and its
subsidiaries are evaluated to determine whether conditions, other than those of
a temporary nature, indicate that the carrying value of an asset may not be
recoverable. Management bases its evaluation on impairment indicators such as
the nature of the assets, future economic benefits, domestic and foreign state
and federal regulatory and political environments, historical or future
profitability measurements, as well as other external market conditions or
factors that may be present. If such indicators are present or
36
other factors exist that indicate that the carrying value of the asset may not
be recoverable, CMS Energy determines whether impairment has occurred through
the use of an undiscounted cash flow analysis of assets at the lowest level for
which identifiable cash flows exist. If impairment, other than a temporary
nature, has occurred, CMS Energy recognizes a loss for the difference between
the carrying value and the estimated fair value of the asset. The fair value of
the asset is measured using discounted cash flow analysis or other valuation
techniques. The analysis of each long-lived asset is unique and requires
management to use certain estimates and assumptions that are deemed prudent and
reasonable for a particular set of circumstances. Of CMS Energy's total assets,
valued at $14 billion at December 31, 2002, approximately 45 to 50 percent
represent the carrying value of long-lived assets and equity method investments
that are subject to this type of analysis. If future market, political or
regulatory conditions warrant, CMS Energy and its subsidiaries may be subject to
write-downs in future periods. Conversely, if market, political or regulatory
conditions improve, accounting standards prohibit the reversal of previous
write-downs.
CMS Energy recently recorded write-downs of non-strategic or
under-performing long-lived assets as a result of implementing a new strategic
direction. CMS Energy is pursuing the sale of all of these non-strategic and
under-performing assets, including some assets that were not determined to be
impaired. Upon the sale of these assets, the proceeds realized may be materially
different from the remaining carrying value of these assets. Even though these
assets have been identified for sale, management cannot predict when, nor make
any assurances that, these asset sales will occur, or the amount of cash or the
value of consideration to be received.
Similarly, the recording of estimated liabilities for contingent losses,
including estimated losses on long-term obligations, within the financial
statements is guided by the principles in SFAS No. 5 that require a company to
record estimated liabilities in the financial statements when it is probable
that a loss will be incurred in the future as a result of a current event, and
the amount can be reasonably estimated. Management uses cash flow valuation
techniques similar to those described above to estimate contingent losses on
long-term contracts.
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.
The EPA has issued final regulations regarding nitrogen oxide emissions from
certain generators, including some of Consumers' electric generating facilities.
These regulations will require Consumers to make significant capital
expenditures estimated to be $770 million. As of December 31, 2002, Consumers
has incurred $405 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 is volatile and the price could change significantly. At
some point, if new environmental standards become effective, Consumers may need
additional capital expenditures to comply with the standards. These and other
required environmental expenditures, if not recovered in Consumers' rates, may
have a material adverse effect upon Consumers' financial condition and results
of operations. For further information see Note 6, 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 6, 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 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, a fixed energy charge, and 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 charges in rates. After September
2007, the PPA's terms obligate Consumers to pay the MCV Partnership only those
capacity and energy charges that the MPSC has authorized for recovery from
electric customers.
37
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 December 31, 2002, 2001 and 2000, the remaining after-tax
present value of the estimated future PPA liability associated with the loss
totaled $34 million, $50 million and $64 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
availability payments that may be billed by the MCV Partnership at a 98.5
percent level.
When Consumers returns, as expected, to unfrozen rates beginning in 2004,
Consumers will recover from customers, on-peak and off-peak capacity, so long as
availability does not exceed an average 88.7 percent established in previous
MPSC orders. For availability 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. 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:
2003 2004 2005 2006 2007
---- ---- ---- ---- ----
IN MILLIONS
Estimated cash underrecoveries at 98.5%, net of tax.... $ 37 $ 36 $ 36 $ 36 $ 25
It is currently estimated 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.
For further information see Note 6, Uncertainties, "Other Electric
Uncertainties -- The Midland Cogeneration Venture."
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 December 31, 2002, Consumers
had a net investment in energy supply facilities of $1.475 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 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 on a prospective basis, including regulatory accounting
treatment of costs required to be recognized in accordance with SFAS No. 143.
See Note 6, 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.
38
The following regulatory assets (liabilities), which include both current
and non-current amounts, are reflected in the Consolidated Balance Sheets. These
costs are expected to be recovered through rates over periods of up to 14 years.
Consumers recognized an OPEB transition obligation in accordance with SFAS No.
106 and established a regulatory asset for this amount, which it expects to
recover in rates over the next ten years.
DECEMBER 31 2002 2001
---------------------------------------------- --------- --------
IN MILLIONS
Securitized costs............................. $ 689 $ 717
Postretirement benefits....................... 204 228
Electric Restructuring Implementation Plan.... 83 82
Manufactured gas plant sites.................. 69 70
Abandoned Midland project..................... 11 12
Income taxes.................................. -- 6
Other......................................... 16 15
--------- ---------
Total regulatory assets....................... $ 1,072 $ 1,130
========= =========
Income taxes.................................. $ (297) $ (282)
GCR over recovery............................. (11) (9)
Other......................................... (5) --
--------- ---------
Total regulatory liabilities.................. $ (313) $ (291)
========= =========
In October 2000, Consumers received an MPSC order authorizing Consumers to
securitize certain regulatory assets up to $469 million, net of tax, see Note 6,
Uncertainties, "Electric Rate Matters -- Electric Restructuring". Accordingly,
in December 2000, Consumers established a regulatory asset for securitized costs
of $709 million, before tax, that had previously been recorded in other
regulatory asset accounts. In order to prepare for the financing of the
securitized assets and the subsequent retirement of debt with Securitization
proceeds, issuance fees of $1 million, $10 million and $1 million were incurred
in 2002, 2001 and 2000, respectively, and capitalized as a part of
Securitization costs. These issuance costs are amortized each month for up to
fourteen years. Amortization of the Securitized assets approximated $29 million
and $2 million in 2002 and 2001, respectively, for accumulated securitized cost
amortization of $31 million. The components of the unamortized securitized costs
are illustrated below.
DECEMBER 31 2002 2001
--------------------------------------------------------------- --------- -------
IN MILLIONS
Unamortized nuclear costs..................................... $ 405 $ 405
Postretirement benefits....................................... 84 84
Income taxes.................................................. 203 203
Uranium enrichment facility................................... 16 16
Accumulated Securitization cost amortization.................. (31) (2)
Other......................................................... 12 11
--------- -------
Total unamortized securitized costs........................... $ 689 $ 717
=============================================================== ========= =======
ACCOUNTING FOR DERIVATIVE AND FINANCIAL INSTRUMENTS AND MARKET RISK INFORMATION
DERIVATIVE INSTRUMENTS: CMS Energy 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.
The types of contracts CMS Energy currently accounts for as derivative
instruments include interest rate swaps, foreign currency exchange contracts,
certain electric call options, fixed priced weather-based gas supply call
options and fixed price gas supply put options. CMS Energy does not account for
electric capacity and certain energy contracts, gas supply contracts, coal and
nuclear fuel supply contracts, or purchase orders for numerous supply items as
derivatives.
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 on earnings related to these contracts, particularly related to the PPA,
could be material to the financial statements.
39
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 value the contracts that are accounted for as derivative
instruments, CMS Energy uses a combination of market quoted 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. The models used by CMS Energy have been tested
against market quotes to ensure consistency between model outputs and market
quotes. At December 31, 2002, CMS Energy assumed a market-based interest rate of
4.5 percent and a volatility rate of 70 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: CMS Energy accounts for its investments in debt and
equity 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. CMS Energy's investments in equity
securities are classified as available-for-sale securities. They are reported at
fair value with any unrealized gains or losses resulting 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. Unrealized
gains or losses resulting from changes in the fair value of Consumers' nuclear
decommissioning investments are reported in accumulated depreciation. The fair
value of these investments is determined from quoted market prices.
MARKET RISK INFORMATION: CMS Energy is exposed to market risks including,
but not limited to, changes in interest rates, commodity prices, currency
exchange rates, and equity security prices. CMS Energy's 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 CMS Energy's Board of Directors. Established policies and
procedures are used to manage the risks associated with market fluctuations.
In accordance with SEC disclosure requirements, CMS Energy performs
sensitivity analyses to assess the potential loss in fair value, cash flows and
earnings based upon hypothetical 10 percent increases and decreases 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, CMS Energy and its subsidiaries, rely on the experience and judgment
of senior management and traders to revise strategies and adjust positions as
they deem necessary. Losses in excess of the amounts determined in the
sensitivity analyses could occur if market rates or prices exceed the 10 percent
shift used for the analyses.
INTEREST RATE RISK: CMS Energy is exposed to interest rate risk resulting
from the issuance of fixed-rate and variable-rate financing, including interest
rate risk associated with trust preferred securities, and from interest rate
swap agreements. CMS Energy uses a combination of these instruments to manage
and mitigate interest rate risk exposure when deemed appropriate, based upon
market conditions. These strategies attempt to provide and maintain a balance
between risk and the lowest cost of capital. At December 31, 2002, the carrying
amounts of long-term debt and trust preferred securities were $5.4 billion and
$927 million, respectively, with corresponding fair values of $5.0 billion and
$729 million, respectively. Based on a sensitivity analysis at December 31,
2002, CMS Energy estimates that if market interest rates average 10 percent
higher or lower, earnings before income taxes for the subsequent 12 months would
decrease or increase, respectively, by approximately $9 million. In addition,
based on a 10 percent adverse shift in market interest rates, CMS Energy would
have an exposure of approximately $332 million to the fair value of its
long-term debt and trust preferred securities if it had to refinance all of its
long-term fixed-rate debt and trust preferred securities. CMS Energy does not
intend to refinance any of its outstanding fixed-rate debt and trust preferred
securities in the near term and believes that any adverse change in interest
rates would not have a material effect on CMS Energy's consolidated financial
position as of December 31, 2002.
40
At December 31, 2002, the fair value of CMS Energy's floating to fixed
interest rate swaps with a notional amount of $294 million was negative $7
million, which represents the amount CMS Energy would pay to settle. The swaps
mature at various times through 2006 and are designated as cash flow hedges for
accounting purposes.
COMMODITY PRICE RISK: CMS Energy is exposed to market fluctuations in the
price of natural gas, oil, electricity, coal, natural gas liquids and other
commodities. CMS Energy employs established policies and procedures to manage
these risks using various commodity derivatives, including futures contracts,
options and swaps (which require a net cash payment for the difference between a
fixed and variable price), for non-trading purposes. The prices of these energy
commodities can fluctuate because of, among other things, changes in the supply
of and demand for those commodities. To minimize adverse price changes, CMS
Energy also hedges certain inventory and purchases and sales contracts. Based on
a sensitivity analysis, CMS Energy estimates that if energy commodity prices
change by an average 10 percent, pretax operating income for the subsequent
twelve months would change by $1.7 million. These hypothetical 10 percent shifts
in quoted commodity prices would not have had a material impact on CMS Energy's
consolidated financial position or cash flows as of December 31, 2002. The
analysis does not quantify short-term exposure to hypothetically adverse price
fluctuations in inventories or for commodity positions related to trading
activities, or the commodity price risks of certain operating activities.
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.
As of December 31, 2002, the fair value based on quoted future market prices
of electricity-related call option contracts was $9 million. At December 31,
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. As of December 31, 2002, Consumers had an asset of $37 million, 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 December 31, 2002, the fair value based on quoted future market
prices of gas supply-related call and put option contracts was $1 million. At
December 31, 2002, a hypothetical 10 percent adverse change in market prices
would be immaterial.
CURRENCY EXCHANGE RISK: CMS Energy is exposed to currency exchange risk
arising from investments in foreign operations as well as various international
projects in which CMS Energy has an equity interest and which have debt
denominated in U.S. dollars. CMS Energy typically uses forward exchange
contracts and other risk mitigating instruments to hedge currency exchange
rates. The impact of the hedges on the investments in foreign operations is
reflected in other comprehensive income as a component of foreign currency
translation adjustment. For the year ended December 31, 2002, there was no
mark-to-market adjustment included in the total net foreign currency translation
adjustment of $225 million. Based on a sensitivity analysis at December 31,
2002, a 10 percent adverse shift in currency exchange rates would not have a
material effect on CMS Energy's consolidated financial position or results of
operations. At December 31, 2002, the estimated fair value of the foreign
exchange hedges was immaterial.
EQUITY SECURITY PRICE RISK: CMS Energy and certain of its subsidiaries have
equity investments in companies in which they hold less than a 20 percent
interest. As of December 31, 2002, a hypothetical 10 percent adverse shift in
equity securities prices would not have a material effect on CMS Energy's
consolidated financial position, results of operations or cash flows.
For a discussion of accounting policies related to derivative transactions,
see Note 10, Risk Management Activities and Financial Instruments, incorporated
by reference herein.
MARK-TO-MARKET ACCOUNTING
CMS MST's wholesale power and gas trading activities are accounted for under
mark-to-market method of accounting consistent with guidance provided in EITF
Issue No. 98-10. EITF Issue No. 98-10 has been rescinded by EITF Issue No.
02-03. The consensus rescinding EITF Issue No. 98-10 must be applied to all
contracts that existed as of October 25, 2002 and must be recognized as a
cumulative effect of a change in accounting principle in accordance with APB
Opinion No. 20, Accounting Changes, effective the first day of the first interim
or annual period beginning after December 15, 2002. The consensus also must be
applied immediately to all new contracts entered into after October 25, 2002.
See discussion on EITF Issue No. 02-03 under New Accounting Standards. Under
mark-to-market accounting, energy-trading contracts are reflected at fair market
value, net of reserves, with unrealized gains and losses recorded as an asset or
liability in the consolidated balance sheets. These assets and liabilities are
affected by the timing of
41
settlements related to these contracts, current-period changes from newly
originated transactions and the impact of price movements. Changes in fair value
are recognized as revenues in the consolidated statements of income in the
period in which the changes occur. Market prices used to value outstanding
energy trading contracts reflect management's consideration of, among other
things, closing exchange and over-the-counter quotations. In certain contracts,
long-term commitments may extend beyond the period in which market quotations
for such contracts are available and volumetric obligations may not be defined.
Mathematical models are developed to determine various inputs into the fair
value calculation including price, anticipated volumetric obligations and other
inputs that may be required to adequately address the determination of fair
value of the contracts. Realized cash returns on these commitments may vary,
either positively or negatively, from the results estimated through application
of the mathematical model. CMS Energy believes that its mathematical models
utilize state-of-the-art technology, pertinent industry data and prudent
discounting in order to forecast certain elongated pricing curves. Market prices
are adjusted to reflect the impact of liquidating the company's position in an
orderly manner over a reasonable period of time under present market conditions.
In connection with the market valuation of its energy commodity contracts,
CMS Energy maintains reserves for credit risks based on the financial condition
of counterparties. The creditworthiness of these counterparties will impact
overall exposure to credit risk; however, CMS Energy maintains credit policies
that management believes minimize overall credit risk with regard to its
counterparties. Determination of its counterparties' credit quality is based
upon a number of factors, including credit ratings, financial condition, and
collateral requirements. When trading terms permit, CMS Energy employs standard
agreements that allow for netting of positive and negative exposures associated
with a single counterparty. Based on these policies, its current exposures and
its credit reserves, CMS Energy does not anticipate a material adverse effect on
its financial position or results of operations as a result of counterparty
nonperformance.
The following tables provide a summary of the fair value of CMS Energy's
energy commodity contracts as of December 31, 2002.
IN MILLIONS
Fair value of contracts outstanding as of January 1, 2002....... $ 41
Fair value of new contracts when entered into during the
period........................................................ 22
Changes in fair value attributable to changes in valuation
techniques and assumptions (a)................................ (48)
Contracts realized or otherwise settled during the period
(b)........................................................... 40
Other changes in fair value (c)................................. 26
------
Fair value of contracts outstanding as of December 31, 2002
(d)........................................................... $ 81
======
----------
(a) Reflects change in fair value based on market indicators confirmed by the
anticipated sale of gas and power contracts.
(b) Reflects current net liability position as of 12/31/01.
(c) Reflects changes in price and net increase/(decrease) in position size of
forward positions as well as changes to MTM and credit reserves.
(d) Includes $62 million of net assets and liabilities classified as "held for
sale".
FAIR VALUE OF CONTRACTS AT DECEMBER 31, 2002
--------------------------------------------
TOTAL
SOURCE OF FAIR VALUE FAIR VALUE LESS THAN 1 1 TO 3 4 TO 5 GREATER THAN 5
-------------------------------------- ---------- ----------- ------ ------ --------------
IN MILLIONS
MATURITY (IN YEARS)
Prices actively quoted..................... $ 7 $ 7 $ -- $ -- $ --
Prices provided by other external sources.. 57 7 29 13 8
Prices based on models and other valuation
methods.................................. 17 (15) 19 5 8
----- ----- ----- ----- ----
Total................................... $ 81 $ (1) $ 48 $ 18 $ 16
===== ===== ===== ===== ====
INTERNATIONAL OPERATIONS AND FOREIGN CURRENCY
CMS Energy, through its subsidiaries and affiliates, has acquired
investments in energy-related projects in a number of world markets. As a result
of a change in business strategy, CMS Energy has begun divesting its non-
strategic or under-performing foreign investments.
42
BALANCE SHEET: CMS Energy's subsidiaries and affiliates whose functional
currency is other than the U.S. dollar translate their assets and liabilities
into U.S. dollars at the exchange rates in effect at the end of the fiscal
period. The revenue and expense accounts of such subsidiaries and affiliates are
translated into U.S. dollars at the average exchange rate during the period. The
gains or losses that result from this process, and gains and losses on
intercompany foreign currency transactions that are long-term in nature that CMS
Energy does not intend to settle in the foreseeable future, are reflected as a
component of stockholders' equity in the consolidated balance sheets as "Foreign
Currency Translation" in accordance with the accounting guidance provided in
SFAS No. 52. In 2002, the cumulative Foreign Currency Translation decreased
stockholders' equity by $225 million.
INCOME STATEMENT: For subsidiaries operating in highly inflationary
economies or that meet the U.S. functional currency criteria outlined in SFAS
No. 52, the U.S. dollar is deemed to be the functional currency. Gains and
losses that arise from exchange rate fluctuations on transactions denominated in
a currency other than the U.S. dollar, except those that are hedged, are
included in determining net income.
Argentina: In January 2002, the Republic of Argentina enacted the Public
Emergency and Foreign Exchange System Reform Act. This law repealed the fixed
exchange rate of one U.S. dollar to one Argentina peso, converted all
dollar-denominated utility tariffs and energy contract obligations into pesos at
the same one-to-one exchange rate, and directed the President of Argentina to
renegotiate such tariffs.
In February 2002, the Republic of Argentina enacted additional measures that
required all monetary obligations (including current debt and future contract
payment obligations) denominated in foreign currencies to be converted into
pesos. These February measures also authorize the Argentine judiciary
essentially to rewrite private contracts denominated in dollars or other foreign
currencies if the parties cannot agree on how to share equitably the impact of
the conversion of their contract payment obligations into pesos. In April 2002,
based on a consideration of these environmental factors, CMS Energy evaluated
its Argentine investments for impairment as required under SFAS No. 144 and APB
Opinion No. 18. These impairment models contain certain assumptions regarding
anticipated future exchange rates and operating performance of the investments.
Exchange rates used in the models assume that the rate will decrease from
current levels to approximately 3.00 pesos per U.S. dollar over the remaining
life of these investments. Based on the results of these models, CMS Energy
determined that these investments were not impaired.
Effective April 30, 2002, CMS Energy adopted the Argentine peso as the
functional currency for most of its Argentine investments. CMS had previously
used the U.S. dollar as the functional currency for its Argentine investments.
As a result, on April 30, 2002, CMS Energy translated the assets and liabilities
of its Argentine entities into U.S. dollars, in accordance with SFAS No. 52,
using an exchange rate of 3.45 pesos per U.S. dollar, and recorded an initial
charge to the Foreign Currency Translation component of Common Stockholders'
Equity of approximately $400 million.
For the year ended December 31, 2002, CMS Energy recorded losses of $31
million reflecting the negative impact of the actions of the Argentine
government. These losses represent changes in the value of peso-denominated
monetary assets (such as receivables) and liabilities of Argentina-based
subsidiaries and lower net project earnings resulting from the conversion to
pesos of utility tariffs and energy contract obligations that were previously
calculated in dollars.
While CMS Energy's management cannot predict the most likely future, or
average peso to U.S. dollar exchange rates, it does expect that these non-cash
charges substantially reduce the risk of further material balance sheet impacts
when combined with anticipated proceeds from international arbitration currently
in progress, political risk insurance, and the eventual sale of these assets. At
December 31, 2002, the net foreign currency loss due to the unfavorable exchange
rate of the Argentine peso recorded in the Foreign Currency Translation
component of Common Stockholder's Equity using an exchange rate of 3.3647 pesos
per U.S. dollar was $266 million. This amount also reflected the effect of
recording, at December 31, 2002, U.S. income taxes with respect to temporary
differences between the book and tax bases of foreign investments, including the
foreign currency translation associated with CMS Energy's Argentine investments,
that were determined to be no longer essentially permanent in duration (see Note
11).
Australia: In 2000, an impairment loss of $329 million ($268 million
after-tax) was realized on the carrying amount of the investment in Loy Yang.
This loss did not include $168 million cumulative net foreign currency
translation losses due to unfavorable changes in the exchange rates, which, in
accordance with SFAS No. 52, will not be realized until there has been a sale,
full liquidation, or other disposition of CMS Energy's investment in Loy Yang,
all of which are currently being pursued. In connection with the restatement of
CMS Energy's December 31, 2000 consolidated financial statements, a deferred
U.S. income tax asset of $48 million was recorded with respect to the cumulative
net foreign currency translation losses associated with CMS Energy's Loy Yang
investment. At December 31, 2002, the net foreign currency loss due to the
unfavorable exchange rate of the Australian dollar
43
recorded in the Foreign Currency Translation component of Common Stockholders'
Equity using an exchange rate of 1.78 Australian dollars per U.S. dollar was
$124 million.
HEDGING STRATEGY: CMS Energy uses forward exchange and option contracts to
hedge certain receivables, payables, long-term debt and equity value relating to
foreign investments. The purpose of CMS Energy's foreign currency hedging
activities is to protect the company from risk that U.S. dollar net cash flows
resulting from sales to foreign customers and purchases from foreign suppliers
and the repayment of non-U.S. dollar borrowings, as well as the equity reported
on the company's balance sheet, may be adversely affected by changes in exchange
rates. These contracts do not subject CMS Energy to risk from exchange rate
movements because gains and losses on such contracts are inversely correlated
with the losses and gains, respectively, on the assets and liabilities being
hedged. Foreign currency adjustments for other CMS Energy international
investments were immaterial.
ACCOUNTING FOR PENSION AND OPEB
CMS Energy provides postretirement benefits under its Pension Plan, and
postretirement health and life insurance benefits under its OPEB plans to
substantially all its retired employees. CMS Energy 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 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, all employees of Panhandle will no longer be eligible to accrue
additional benefits. The Pension Plan will retain pension payment obligations
for Panhandle employees that are vested under the Pension Plan. CMS Energy does
not expect the curtailment from both the Pension Plan and OPEB plans to be
material.
Pension and OPEB plan assets, net of contributions, have reduced in value
from the previous year due to the downturn in the equities market, and a
decrease in the price of CMS Energy Common Stock. As a result, CMS Energy
expects to see an increase in pension and OPEB expense levels over the next
several years unless market performance of plan assets improves. CMS Energy
anticipates its pension expense to rise in 2003 by approximately $13 million
over 2002 expenses. OPEB expenses in 2003 are anticipated to stay the same as
2002 expenses. For pension expense, this increase is due to a downturn in value
of pension assets during the past two years, forecasted increases in pay and
added service, and a decline in the interest rate used to value the liability of
the plan. Estimated 2003 OPEB expenses are expected to remain the same as 2002
due to additional required contributions from retirees and increases in
mail-order prescription copays. Under the OPEB plans' assumptions, health care
costs increase at a slower rate from current levels through 2010; however, CMS
Energy cannot predict the impact that future health care costs and interest
rates or market returns will have on pension and OPEB expense in the future. As
of January 2002, OPEB plan claims are paid from the VEBA Trusts.
The recent significant downturn in the equities markets has affected the
value of the Pension Plan assets. The Pension Plan's Accumulated Benefit
Obligation exceeded the value of these assets at December 31, 2002, and as a
result, CMS Energy was required to recognize an additional minimum liability for
this excess in accordance with SFAS No. 87. The fair value of the Pension Plan
assets at December 31, 2002 was $607 million, including CMS Energy Common Stock
which had a market value of $49 million based on a market price of $9.44. As of
March 14, 2003, the market value of CMS Energy Common Stock in the Pension Plan
was $18 million based on a share price of $3.52. As of December 31, 2002, the
Accumulated Benefit Obligation was estimated at $1.055 billion and the
additional minimum liability was $426 million, of which $53 million was recorded
as an intangible asset, and $373 million was charged to other comprehensive
income ($241 million after-tax).
At December 31, 2002, the balance of the OPEB plans' assets was $509
million. This amount consists primarily of stocks and bonds, including CMS
Energy Common Stock of $1.3 million, based on a share price of $9.44. As of
March 14, 2003, the market value of CMS Energy Common Stock in the OPEB plans'
assets was $0.5 million, based on a share price of $3.52.
During 2002, CMS Energy made contributions to the plans' trust accounts of
$148 million. This amount represents $64 million of pension related benefits and
$84 million of postretirement health care and life insurance benefits. CMS
Energy expects similar contributions for postretirement health care and life
insurance benefits will be made in 2003, 2004, and 2005. The investment
performance returns and declining discount rates have worsened the underfunded
status of the Pension Plan, net of benefit obligations, from $350 million at
December 31, 2001 to $650 million at December 31, 2002. Because of the recent
rise in the underfunded status
44
of the Pension Plan, based on actuarial assumptions, CMS Energy expects to make
cash contributions to the Pension Plan which approximate $210 million, $292
million, and $29 million in 2003, 2004, and 2005, respectively. However, if
necessary to increase liquidity, CMS Energy would postpone the 2003
contribution.
CMS Energy's expense for the pension plan approximated $33 million and $23
million for the years ended December 31, 2002 and December 31, 2001,
respectively, and is calculated based upon a number of actuarial assumptions,
including an expected long-term rate of return on the Plan assets of 8.75
percent in 2002 and 9.75 percent in 2001.
Lowering the expected long-term rate of return on the Plan assets by 0.25
percent (from 8.75 percent to 8.5 percent) would have increased pension expense
for fiscal 2002 by approximately $3 million. Lowering the discount rate by 0.25
percent would have increased pension expense for fiscal 2002 by approximately $2
million.
CMS Energy estimates pension expense will approximate $46 million, $51
million and $58 million in 2003, 2004 and 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.
CMS Energy bases the determination of pension expense on a market-related
valuation of assets which reduces year-to-year volatility. This market-related
valuation recognizes investment gains or losses over a 5-year period from the
year in which they occur. Investment gains or losses for this purpose are the
difference between the expected return calculated using the market-related value
of assets and the actual return based on the market- related value of assets.
Since the market-related value of assets recognizes gains or losses over a
5-year period, the future value of assets will be impacted as previously
deferred gains or losses are recorded.
Due to the unfavorable performance of the equity markets, as of December 31,
2002, CMS Energy had cumulative losses of approximately $205 million which
remain to be recognized in the calculation of the market-related value of
assets. These unrecognized net actuarial losses result in increases in future
pension expense depending on several factors, including whether such losses at
each measurement date exceed the corridor in accordance with SFAS No. 87.
CMS Energy 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 plan
currently being used. Under the cash balance plan, 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 no longer receive
an 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.
CMS Energy also provides retirement benefits under a defined contribution
401(k) plan. CMS Energy previously offered an employer's contribution match of
50 percent of the employee's contribution up to six percent (three percent
maximum), as well as an incentive match in years when CMS Energy's financial
performance exceeded targeted levels. Amount charged to expense for the
employer's match for 2002 was $12 million, $26 million in 2001, and $24 million
in 2000. Effective September 1, 2002, the employer's match was suspended until
January 1, 2005, and the incentive match was permanently eliminated.
In order to keep health care benefits and costs competitive, CMS Energy has
announced several changes to the Health Care Plan. These changes are effective
January 1, 2003. The most significant change is that CMS Energy's 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 claims cost for CMS
Energy. Mail-order prescription copays have also been increased for all salaried
retirees.
RESULTS OF OPERATIONS
CMS ENERGY CONSOLIDATED EARNINGS (LOSS)
CMS Energy Consolidated earnings reflect the continued implementation of the
financial improvement plan and on-going asset sales program first announced in
2001. The financial improvement plan focuses on strengthening CMS Energy's
balance sheet and improving financial liquidity through debt reduction and
aggressive cost management. The on-going asset sales program's objective is to
reduce business risk and to provide for more predictable on-going earnings. This
encompasses the sale of non-strategic and under-
45
performing assets, the proceeds of which are being used to reduce debt. In
2002, CMS Energy has recorded charges to earnings in connection with the
execution of its "back-to-basics" strategy.
RESTATED RESTATED
YEARS ENDED DECEMBER 31 2002 2001 2000
---------------------------------------------------- --------- --------- -------
IN MILLIONS
CMS Energy Consolidated Net Income (Loss).......... $ (620) $ (448) $ 43
CMS Energy Basic Earnings (Loss) Per Share......... $ (4.46) $ (3.42) $ 0.38
CMS Energy Diluted Earnings (Loss) Per Share....... $ (4.46) $ (3.42) $ 0.38
CMS ENERGY CONSOLIDATED NET INCOME (LOSS)
RESTATED RESTATED RESTATED
YEARS ENDED DECEMBER 31 2002 2001 CHANGE 2001 2000 CHANGE
----------------------------- ------- -------- -------- -------- -------- -------
IN MILLIONS
$ (620) $ (448) $ (172) $ (448) $ 43 $ (491)
======= ====== ======= ====== ====== =======
Electric Utility............ $ 264 $ 109 $ 155 $ 109 $ 173 $ (64)
Gas Utility................. 46 21 25 21 18 3
Independent Power Production (336) (63) (273) (63) (92) 29
Natural Gas Transmission.... (30) (53) 23 (53) 11 (64)
Marketing, Services and
Trading..................... (42) (6) (36) (6) 13 (19)
Corporate Interest and Other (300) (246) (54) (246) (163) (83)
Discontinued Operations..... (222) (210) (12) (210) 83 (293)
------- ------ ------- ------ ------ -------
Net Income.................. $ (620) $ (448) $ (172) $ (448) $ 43 $ (491)
======= ====== ======= ====== ====== =======
During 2002, CMS Energy recorded $388 million of after-tax charges in
recognition of planned and completed divestitures and reduced asset valuations.
These included a $299 million after-tax impairment loss on the carrying value of
DIG and $89 million of after-tax charges related to other investments and
development projects in recognition of the reduced net recoverable value or sale
of these investments. The $388 million after-tax charge is comprised of: $367
million for independent power production; $11 million for marketing, services
and trading; and $10 million for Enterprises and other businesses.
2002 also reflects a $222 million after-tax loss related to the
discontinuation of several businesses. These include Panhandle, the sale of
which is pending regulatory approval and is currently expected to close in 2003,
CMS Oil and Gas, which sale was completed in September 2002, and CMS Field
Services and CMS Viron, which sales are expected to close in 2003. Included in
the discontinued operations are after-tax goodwill impairments at Panhandle
($369 million) and CMS Viron ($10 million). 2002 also reflects $37 million of
after-tax gains on asset sales and $21 million of after-tax restructuring
charges.
CMS Energy's 2001 results reflect $408 million of after-tax charges in
recognition of completed and planned divestitures and reduced asset valuations.
These charges include a $210 million after-tax charge related to the
discontinuation of certain CMS Energy businesses and a $198 million after-tax
charge related to energy development projects and international investments in
recognition of the reduced net recoverable value of these investments. Results
of operations also includes a $2 million after-tax charge related to the
cumulative effect of a change in accounting for derivatives.
In 2000, an impairment loss was recorded on the carrying amount of the
equity investment in Loy Yang of $268 million after-tax. This loss does not
include $168 million cumulative net foreign currency translation losses due to
unfavorable changes in exchange rates, which, in accordance with SFAS No. 52
will not be realized until there has been a sale, full liquidation or other
disposition of CMS Energy's investment in Loy Yang, all of which are currently
being pursued but may not occur in 2003. In connection with the restatement of
CMS Energy's December 31, 2000 consolidated financial statements, a deferred
U.S. income tax asset of $48 million was recorded with respect to the cumulative
net foreign currency translation losses associated with CMS Energy's Loy Yang
investment (see Note 11, Income Taxes).
46
CONSUMERS' ELECTRIC UTILITY RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31 2002 2001 CHANGE 2001 2000 CHANGE
--------------------------------------------- ------ -------------------- ------ -------
IN MILLIONS
Net income available to common stockholder.. $ 264 $ 109 $ 155 $ 109 $ 199 $ (90)
====== ===== ===== ====== ====== =======
Reasons for the change:
Electric deliveries......................... $ 41 $ 19
Power supply costs and related revenue...... 120 (109)
Rate decrease............................... -- (35)
Other operating expenses and non-commodity
revenue................................... 5 17
Implementation of accounting standard (SFAS 17 (17)
133)........................................
Gain on asset sales......................... 38 --
Fixed charges............................... 9 (6)
Income taxes................................ (75) 41
----- -------
Total change................................ $ 155 $ (90)
===== =======
ELECTRIC DELIVERIES: For the year 2002, electric delivery revenues increased
by $41 million from the previous year. Electric deliveries, including
transactions with other wholesale market participants and other electric
utilities, were 39.3 billion kWh, a decrease of 0.3 billion kWh or 0.7 percent
from 2001. This reduction in electric deliveries is primarily due to reduced
transactions with other utilities and the expiration of wholesale power sales
contracts with certain Michigan municipal utilities. Although total deliveries
were below the 2001 level, increased deliveries to the higher margin residential
and commercial sectors, along with the growth in retail deliveries, more than
offset the impact of reduced deliveries to lower margin customers. For the year,
Consumers set an all-time monthly sendout record during the month of July, and
new monthly hourly peak demand records were set on April 16, 2002, June 25,
2002, September 9, 2002, and October 1, 2002. For the year 2001, electric
delivery revenues increased by $19 million from the previous year. Electric
deliveries, including transactions with other wholesale market participants and
other electric utilities, were 39.6 billion kWh, a decrease of 1.4 billion kWh
or 3.5 percent from 2000.
POWER SUPPLY COSTS AND RELATED REVENUE: For the year 2002, power supply
costs and related revenues provided a net increase of $120 million from 2001.
This net increase was primarily due to reduced purchased power costs resulting
from the Palisades plant being returned to service in 2002. In 2001, Consumers
purchased higher cost replacement power during the refueling outage that began
in March and ended in May and the unscheduled forced outage at Palisades that
began in June and ended in January 2002. Also contributing to this decrease in
power costs is lower priced power options and dispatchable capacity contracts
that were purchased for 2002. For the year 2001, power supply costs and related
revenues resulted in a net decrease of $109 million from 2000. This net decrease
was primarily due to the need to purchase greater quantities of higher-priced
electricity to offset the loss of generation resulting from the Palisades
outages mentioned above.
For the years 2002 and 2001 respectively, Consumers purchased and expensed
$23 million and $65 million of electric call options to ensure a reliable source
of power supply during the summer months. As a result of periodic excess daily
capacity, certain call options were sold and the remaining call options were
either exercised or expired. Consumers accounted for the costs relating to the
expired call options and the income received from the sale of call options, as
purchased power supply costs.
OTHER OPERATING EXPENSES AND NON-COMMODITY REVENUE: For the year 2002,
non-commodity revenues increased primarily resulting from increased
miscellaneous service revenues. Partially offsetting this increase in revenues,
are increased other operating expenses compared to 2001. This increase can be
attributed to higher depreciation expense resulting from higher plant in service
along with increased operating costs resulting from higher health care expenses,
storm restoration expenses, and increased contracted maintenance expenses. For
the year 2001, other operating expenses and non-commodity revenues provided a
net benefit when compared to 2000. This benefit is primarily due to reduced
amortization expense, as permitted by MPSC orders resulting from the Customer
Choice Act. Consumers temporarily suspended amortization of the securitized
assets pending the issuance of Securitization bonds in November 2001.
IMPLEMENTATION OF ACCOUNTING STANDARD (SFAS NO. 133): In 2001, Consumers
implemented SFAS No. 133 which provides for derivative and hedge accounting for
certain utility industry contracts, particularly electric call option contracts
and option-like contracts. After receiving guidance from the FASB, Consumers
re-evaluated its electric call option and option-like contracts and determined
that these contracts require derivative accounting, and therefore recorded a $17
million pre-tax cumulative effect adjustment as a decrease to earnings. This
adjustment relates to the difference between the fair value and the recorded
book value of these electric call option contracts.
47
GAIN ON ASSET SALES: For the year 2002, asset sales resulted in a $31
million pretax gain associated with the sale of Consumers' electric transmission
system and a $7 million pretax gain on the sale of nuclear equipment from the
cancelled Midland project.
INCOME TAXES: For the year 2002, income tax expense increased primarily due
to an increase in earnings by the electric utility. Income taxes associated with
the transmission system sale reflect a $5 million benefit due to the recognition
of the remaining unutilized investment tax credit related to the assets sold.
CONSUMERS' GAS UTILITY RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31 2002 2001 CHANGE 2001 2000 CHANGE
--------------------------------------- --------------------------------------
IN MILLIONS
Net income available to common
stockholder............................ $ 46 $ 21 $ 25 $ 21 $ 18 $ 3
===== ===== ===== ===== ==== =====
Gas deliveries......................... 21 (21)
Gas commodity and related revenue...... -- 44
Gas rate increase...................... 25 --
Gas wholesales and retail services..... 1 8
Operation and maintenance.............. (14) (30)
General taxes and depreciation......... (3) --
Fixed charges.......................... 3 1
Income taxes........................... (8) 1
----- -----
Total change........................... $ 25 $ 3
===== =====
GAS DELIVERIES: For the year 2002, gas delivery revenues increased by $21
million from the previous year. System deliveries, including miscellaneous
transportation, totaled 376.4 bcf, an increase of 9.4 bcf or 2.6 percent
compared with 2001. This increase is primarily due to colder weather that
resulted in increased deliveries to the residential and commercial sectors in
2002. For the year 2001, gas delivery revenues decreased by $21 million from the
previous year. System deliveries, including miscellaneous transportation,
totaled 367 bcf, a decrease of 43 bcf or 10 percent compared with 2000. This
decrease is primarily due to warmer temperatures compared to the 2000 heating
season and a reduction due to the economic slowdown in 2001.
GAS RATE INCREASE: In 2001, the MPSC issued an interim order in Consumers'
gas rate filing. 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 these orders, Consumers recognized increased gas revenues of $25
million.
OPERATION AND MAINTENANCE: For the year 2002, operation and maintenance
expenses increased $14 million compared to 2001. This increase reflects the
recognition of gas storage inventory losses, and additional expenditures on
customer reliability and service.
INCOME TAXES: For the year 2002, income tax expense increased, primarily due
to improved earnings of the gas utility.
INDEPENDENT POWER PRODUCTION RESULTS OF OPERATIONS
NET INCOME: For the year ended December 31, 2002, independent power
production's reported net loss was $336 million, a degradation of $273 million
from its restated reported net loss in 2001. The variation reflects the effects
of the investment write-downs, net of an improved operating performance at DIG
due to lower steam generation costs compared to 2001, when DIG was experiencing
construction delays. Other operation performance improvements were offset by
expropriation and devaluation losses related to the Argentine facilities.
For the year ended December 31, 2001, independent power production's
restated reported net loss was $63 million, an improvement of $29 million from
restated reported net loss in 2000. This change reflects the sale of power
plants in 2000, construction delays at the DIG plant that led to increased costs
for steam generation, and a gain recorded in 2000 on the restructuring of a
power supply contract. These changes were partially offset by the earnings
benefits from the expansion of the Jorf Lasfar facility coupled with the
facility's improved operating performance, the operation of additional units at
a new African facility and the absence of operating losses in 2001 from the
investment in Loy Yang, which was written off in the fourth quarter of 2000.
NATURAL GAS TRANSMISSION RESULTS OF OPERATIONS
In December 2002, CMS Energy reached a definitive agreement to sell the
Panhandle companies to Southern Union Panhandle Corp. The agreement calls for
Southern Union Panhandle Corp, a newly formed entity owned by Southern Union
Company and AIG Highstar Capital, L.P. to pay $662 million in cash and assume
$1.166 billion in debt. Under the terms of the agreement, CMS Energy was to
retain Panhandle's ownership interests in the Centennial and Guardian pipeline
projects, as well as certain of Panhandle's net
48
deferred tax assets, all tax liabilities, and pension assets and liabilities.
Panhandle has since sold its interest in Centennial and the Guardian interest
and related cash collateral has been transferred to Panhandle's direct parent,
CMS Gas Transmission. The transaction has been approved by the board of
directors of each company and is subject to customary closing conditions and
action by the FTC under the Hart-Scott-Rodino Act. The sale is expected to close
in 2003. Panhandle's results have been reclassified to discontinued operations
in the consolidated statements of income. For more information, see Note 4,
Discontinued Operations.
NET INCOME: For the year ended December 31, 2002, the natural gas
transmission segment's reported net loss was $30 million, an improvement of $23
million from the restated reported net loss in 2001. This increase was due
primarily to project write-downs recorded in 2001 partly offset by additional
Argentine expropriation and devaluation losses in 2002.
For the year ended December 31, 2001, the segment's restated reported net
loss was $53 million, a degradation of $64 million from the restated reported
net loss in 2000.
MARKETING, SERVICES AND TRADING RESULTS OF OPERATIONS
During the second quarter of 2002, CMS MST announced its intention to sell
its ownership interest in CMS Viron, resulting in a reclassification of CMS
Viron's assets and liabilities to be classified as held for sale and its results
of operations to discontinued operations in the consolidated statements of
income. For more information, see Note 4, Discontinued Operations. CMS Energy
closed on the sale of a majority of CMS MST's wholesale natural gas contracts
and inventory to Sempra Energy Trading in January 2003 and signed a definitive
agreement in February 2003 to sell its wholesale power trading portfolio to a
unit of Constellation Energy Group, Inc. These actions resulted in classifying
$77 million of net price risk management assets and liabilities and natural gas
inventory expected to be sold into Assets and Liabilities Held For Sale in the
consolidated balance sheets. In addition, CMS MST sold its 50 percent joint
venture ownership in Enline in September 2002, reached agreement to sell its 50
percent interest in Premstar in early 2003, and sold its Tulsa retail trading
contracts in January 2003 and is in the process of negotiating an agreement to
sell its 50 percent interest in Texon.
NET INCOME: For the year ended December 31, 2002, CMS MST's reported net
loss was $42 million excluding a loss from discontinued operations of $21
million, a decrease of $36 million from its restated reported net loss in 2001.
Credit constraints severely reduced the overall liquidity of the energy trading
markets, limiting CMS MST's ability to actively manage and optimize its open
positions and to execute new transactions. Contributing to the net loss was the
recognition of a $31 million (net of tax) reduction in fair value of the
wholesale natural gas and power portfolios based on valuation reductions
resulting from fair value evidence derived from the negotiated sales prices for
its wholesale natural gas and power contracts. Restructuring costs related to
the reorganization of the business unit of $9 million and impairment of an
investment of $11 million.
For the year ended December 31, 2001, CMS MST's restated reported net loss
was $6 million, including a cumulative effect of a change in accounting for
derivative instruments of $9 million and excluding income from discontinued
operations of $1 million. This was a decrease of $19 million from restated
reported net income in 2000. This decrease was primarily a result of the change
in fair value of financial derivatives entered into as economic hedges for the
retail sales contracts that are accounted for on an accrual basis. Partially
offsetting these losses was an increase in the value of the wholesale power
portfolio due to power contracts executed during 2001, and $9 million increase
to net income representing the cumulative effect of a change in accounting
resulting from the implementation of SFAS No. 133.
SALES VOLUMES: For the year ended December 31, 2002, power sales volumes
were 62,971 GWh, an increase of 31,772 GWh over 2001, for which volumes have
been restated to exclude the effect of any round-trip trades. The increase in
power volumes reflect the addition of long-term power contracts that were
executed during the latter part of 2001 and early 2002. Natural gas sales
volumes were 550 bcf, a decrease of 200 bcf from 2001, for which volumes have
been restated to exclude the effect of any round-trip trades.
For the year ended December 31, 2001, power sales volumes were 31,199 GWh,
an increase of 23,044 GWh over 2000, for which volumes have been restated to
exclude the effect of any round-trip trades. Natural gas sales volumes were 750
bcf, an increase of 144 bcf over 2000, for which volumes have been restated to
exclude the effect of any round-trip trades.
OIL AND GAS EXPLORATION AND PRODUCTION RESULTS OF OPERATIONS
In January 2002, CMS Energy completed the sale of its ownership interests in
Equatorial Guinea to Marathon Oil Company for approximately $993 million.
Included in the sale were all of CMS Oil and Gas' oil and gas reserves in
Equatorial Guinea and CMS
49
Gas Transmission's ownership interest in the related methanol plant. The gain on
the CMS Oil and Gas Equatorial Guinea properties of $497 million ($310 million,
net of tax) is included in discontinued operations.
In September 2002, CMS Energy closed on the sale of the stock of CMS Oil and
Gas and the stock of a subsidiary of CMS Oil and Gas that holds property in
Venezuela. In October 2002, CMS Energy closed on the sale of CMS Oil and Gas's
properties in Colombia. As a result of these closings, CMS Energy has completed
its exit from the oil and gas exploration and production business. The proceeds
from the combined sales total approximately $232 million and have been used to
retire the remaining balance on a $150 million Enterprises term loan due in
December 2002 and a portion of a $295.8 million CMS Energy loan which had at
that time a due date of the March 31, 2003. The combined sales resulted in an
after-tax loss of approximately $82 million. For more information, see Note 4,
Discontinued Operations, incorporated by reference herein.
INTERNATIONAL ENERGY DISTRIBUTION RESULTS OF OPERATIONS
In the third quarter of 2001, CMS Energy discontinued the operations of the
international energy distribution segment of its business. For more information,
see Note 4, Discontinued Operations, incorporated by reference herein.
OTHER RESULTS OF OPERATIONS
TAX LOSS ALLOCATIONS: The Job Creation and Worker Assistance Act of 2002
provided to corporate taxpayers a 5-year carryback of tax losses incurred in
2001 and 2002. As a result of this legislation, CMS Energy was able to carry
back consolidated 2001 and 2002 tax losses to tax years 1996 through 1999 to
obtain refunds of prior years tax payments totaling $250 million. The tax loss
carryback, however, resulted in a reduction of AMT credit carryforwards that
previously had been recorded by CMS Energy as deferred tax assets in the amount
of $47 million. This non-cash reduction in AMT credit carryforwards has been
reflected in the tax provision of CMS Energy.
OTHER: Corporate and other net expenses were $300 million in 2002, an
increase of $54 million from $246 million in 2001. In 2002, tax credit
write-offs, which are all recorded at CMS Energy, the Parent, amounted to $58
million. Interest expense after tax amounted to $195 million in 2002 as compared
to $197 million in 2001. Corporate and other net expenses include $56 million
related to investment write-downs, and restructuring and other costs of $24
million in 2002. These expenses were partly offset by the consolidating
eliminations of intercompany losses and gains recorded by CMS MST that result
from mark-to-market transactions with affiliates. These eliminations increased
net income by $46 million in 2002 and decreased net income by $30 million in
2001.
Corporate and other net expenses were $246 million in 2001, an increase of
$83 million from $163 million in 2000. Interest expense after taxes amounted to
$197 million in 2001 as compared to $173 million in 2000. These expenses also
include the consolidating eliminations of intercompany losses and gains recorded
by CMS MST that result from mark-to-market transactions with affiliates. These
eliminations decreased net income by $30 million in 2001 and increased net
income by $18 million in 2000.
Discontinued Operations include, in addition to Panhandle, CMS Viron, CMS
Oil and Gas, and International Energy Distribution discussed above, a $31
million after-tax loss as a result of abandoning the Zirconium Recovery Project.
For more information, see Note 4, Discontinued Operations.
RESTRUCTURING AND OTHER COSTS
CMS Energy announced in 2002 a series of new initiatives intended to sharpen
its business focus and help restore its financial health by reducing operating
costs. The initiatives announced included the following:
- Relocating CMS Energy's corporate headquarters from Dearborn, Michigan
to a new headquarters building then under construction in Jackson,
Michigan. The Jackson headquarters building opened in March 2003 and
will house an estimated 1,450 CMS Energy and Consumers Energy employees.
In the longer term, the relocation will reduce corporate operating
expenses.
- Implementing changes to CMS Energy's 401(K) savings program which will
provide savings for CMS Energy and enhanced investment options for
employee participants.
- Implementing changes to CMS Energy's health care plan in order to keep
benefits and costs competitive.
50
- Terminating five officers, 18 CMS Field Services employees and 41 CMS
MST trading group employees. Prior to December 31, 2002, 31
Dearborn-based employees and 92 Houston employees have elected severance
arrangements. Of these 187 officers and employees, 65 had been
terminated as of December 31, 2002. The remaining terminations will be
completed in 2003.
Restructuring costs for the year ended December 31, 2002, which are reported
in operating expenses, include:
- Involuntary termination benefits of $22 million for officers and
employees.
- The present value of future non-cancelable lease obligations of $11
million related to relocating the corporate headquarters to Jackson,
Michigan.
In addition, in the first half of 2003, restructuring costs related to
relocating employees and other headquarters expenses are expected to be $2
million. The relocation will occur between March and June 2003, and such costs
will be expensed as incurred.
The following table shows the amount charged to expense during 2002 for
restructuring costs, the payments made, and the unpaid balance of accrued costs
at December 31, 2002, which is expected to be paid in 2003.
YEAR ENDED
DECEMBER 31, 2002 UNPAID BALANCE
-------------------- -----------------
EXPENSE PAYMENTS DECEMBER 31, 2002
------- -------- -----------------
IN MILLIONS
Involuntary termination............ $ 22 $ 10 $ 12
Non-cancelable lease obligations... 11 3 8
----- ----- ------
Total.............................. $ 33 $ 13 $ 20
===== ===== ======
CAPITAL RESOURCES AND LIQUIDITY
CMS Energy's liquidity and capital requirements generally are a function of
its results of operations, capital expenditures, contractual obligations,
working capital needs and collateral requirements. CMS Energy historically has
met its consolidated cash needs through its operating and investing activities
and, as needed, through access to bank financing and the capital markets.
CASH POSITION, INVESTING AND FINANCING
CMS Energy's primary ongoing source of cash is dividends and other
distributions from subsidiaries, including proceeds from asset sales. In 2002,
Consumers paid $333 million in common dividends and other distributions and
Enterprises paid $1,053 million in common dividends and other distributions to
CMS Energy. In January 2003, Consumers paid a $78 million common dividend to CMS
Energy. In February 2003, Enterprises paid $18 million in dividends and other
distributions to CMS Energy. CMS Energy's consolidated cash requirements are met
by its operating and financing activities. At December 31, 2002, CMS Energy had
$377 million cash on hand.
OPERATING ACTIVITIES: CMS Energy's consolidated net cash provided by
operating activities is derived mainly from the processing, storage,
transportation and sale of natural gas; and the generation, distribution and
sale of electricity. For 2002 and 2001, consolidated cash from operations after
interest charges totaled $624 million and $366 million, respectively. The $258
million increase in cash from operations resulted primarily from a decrease in
inventories and other temporary changes in working capital items due to timing
of cash receipts and payments. These sources of cash were partially offset by a
decrease in deferred income taxes and investment tax credit. CMS Energy uses
cash derived from its operating activities primarily to maintain its diversified
energy businesses, to maintain and expand electric and gas systems of Consumers
and, to pay interest on and retire portions of long-term debt.
INVESTING ACTIVITIES: For 2002 and 2001, CMS Energy's consolidated net cash
provided by (used in) investing activities totaled $863 million and ($1,348)
million, respectively. The $2,211 million increase in cash provided as compared
to 2001, primarily reflects an increase in proceeds received from the sale of
assets ($1,525 million), a reduction in the amount of capital expenditures ($492
million), and a reduction in investments in partnerships and unconsolidated
subsidiaries ($56 million). CMS Energy's expenditures, including cash infusions
and other items, during 2002 for its utility and diversified energy businesses
were $618 million and $243 million, respectively, compared to $768 million and
$605 million, respectively, during 2001.
51
FINANCING ACTIVITIES: For 2002 and 2001, CMS Energy's net cash provided by
(used in) financing activities totaled ($1,237 million) and $968 million,
respectively. The $2,205 million increased use of cash resulted primarily from a
reduction of proceeds from notes, bonds, and other long-term debt ($1,296
million), combined with an increase in retirement of long-term debt ($505
million), an increase in the retirement of trust preferred securities ($331
million), and a reduction in the proceeds from trust preferred securities ($125
million). These changes were partially offset by a reduction in the amount of
common stock dividends paid ($41 million) and an increase in notes payable. The
following table summarizes securities issued during 2002:
DISTRIBUTION/
MONTH ISSUED MATURITY INTEREST RATE AMOUNT USE OF PROCEEDS
------------ -------- ------------- ------ ---------------
(IN MILLIONS)
CMS ENERGY
GTNs Series F. January (1) 7.33% $ 12 General corporate purposes
Common Stock.. (2) n/a 11 million shares 357 Repay debt and general
corporate purposes
------
369
------
CONSUMERS
Senior Notes.. March 2005 6.00% 300 Repay debt
------
Total......... $ 669
======
----------
(1) GTNs are issued with varying maturity dates. The interest rate shown herein
is a weighted average interest rate.
(2) In July 2002, approximately 8.8 million shares of Common Stock were issued
in conjunction with the conversion of the Adjustable Convertible Trust
Securities (CMS Energy Trust II). Through May 10, 2002, 1.3 million shares
were issued in conjunction with CMS Energy's Continuous Stock Offering
Program, activated in February 2002, for which 2 million shares are
registered. No shares have been issued under this program since that date.
Finally, approximately 1 million shares were issued from time to time in
conjunction with the stock purchase plan and various employee savings and
stock incentive plans.
In 2002, CMS Energy paid $149 million in cash dividends to holders of CMS
Energy Common Stock. In January 2003, the Board of Directors suspended the
payment of dividends. CMS Energy expects the dividend suspension will improve
its liquidity by more than $100 million in 2003.
OTHER INVESTING AND FINANCING MATTERS:
In May 2002, CMS Energy registered $300 million Series G GTNs. The notes
will be issued from time to time with the proceeds being used for general
corporate purposes. As of December 31, 2002, no Series G GTNs had been issued.
On July 1, 2002, the 7,250,000 units of 8.75 percent Adjustable Convertible
Trust Securities (CMS Energy Trust II) were converted to 8,787,725 newly issued
shares of CMS Energy Common Stock.
CREDIT FACILITIES: On July 12, 2002, CMS Energy and its subsidiaries reached
agreement with its lenders on five credit facilities (facilities) totaling
approximately $1.3 billion of credit for CMS Energy, Enterprises and Consumers.
The agreements were executed by various combinations of up to 21 lenders and by
CMS Energy, Consumers and Enterprises and included: a $295.8 million revolving
credit facility for CMS Energy originally set to mature on March 31, 2003; a
$300 million revolving credit facility for CMS Energy, maturing December 15,
2003; a $150 million short-term loan for Enterprises, originally set to mature
on December 13, 2002; a $250 million revolving credit facility for Consumers,
maturing July 11, 2003; and a $300 million term loan for Consumers, maturing
July 11, 2003. In March 2003, the CMS Energy $295.8 million revolving credit
facility and $300 million revolving credit facility under which a combined $409
million was then outstanding were amended and restated. The Second Amended and
Restated Senior Credit Agreement includes a $250 million tranche with a maturity
date of April 30, 2004 and a $159 million tranche with a maturity date of
September 30, 2004. Also in March 2003, Consumers obtained a replacement
revolving credit facility in the amount of $250 million. The new credit facility
matures in March 2004 with two annual extensions at Consumers' option, which
would extend the maturity to March 2006. In September 2002, the term loan
maturity was extended by one year at Consumers' option and now has a maturity
date of July 11, 2004. Also in September 2002, CMS Energy retired the $150
million short-term loan to Enterprises using proceeds from the sale of CMS Oil
and Gas and other assets. At December 31, 2002, a total of $841 million was
outstanding under these facilities, of which Consumers' $250 million revolving
credit facility is included in notes payable, in the accompanying consolidated
balance sheet.
52
In March 2003, CMS Enterprises entered into a revolving credit facility in
an aggregate amount of $441 million. The maturity date of this facility is April
30, 2004.
The facilities are secured with mandatory prepayment of borrowings under
certain of the facilities with proceeds from asset sales and capital market
issuances. The CMS Energy facilities grant the applicable bank groups first
liens on the capital stock of Consumers and Enterprises and its major direct and
indirect domestic subsidiaries, including Panhandle Eastern Pipe Line (but
excluding subsidiaries of Panhandle Eastern Pipe Line). The Consumers facilities
grant the applicable bank groups security through first mortgage bonds.
The July 12, 2002 facilities essentially replaced or restructured previously
existing credit facilities or lines at CMS Energy or Consumers, without
substantially changing credit commitments. The two CMS Energy facilities and the
terminated Enterprises facility aggregating $745.8 million represented a
restructuring of a prior CMS Energy $300 million three-year revolving credit
facility maturing in June 2004 and a prior CMS Energy $450 million revolving
credit facility originally maturing June 2002, but previously extended through
July 12, 2002. The two Consumers facilities aggregating $550 million replace a
$300 million revolving credit facility that matured July 14, 2002, as well as
various credit lines aggregating $200 million. The prior credit facilities and
lines were unsecured.
CONSUMERS' REGULATORY AUTHORIZATION FOR FINANCINGS: At December 31, 2002,
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, $677
million for general corporate purposes, and $900 million of first mortgage bonds
to be issued solely as security 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.
NOTES PAYABLE: In October 2002, Consumers simultaneously entered into a new
term loan agreement collateralized by first mortgage bonds and a new gas
inventory term loan agreement collateralized by Consumers' natural gas in
storage. These agreements contain complementary collateral packages that provide
Consumers, as additional first mortgage bonds become available, borrowing
capacity of up to $225 million, of which $207 million was outstanding at
December 31, 2002 with an effective interest rate of 6.3 percent. The bank and
legal fees associated with the agreements were $2 million. The first
amortization payment under these agreements occurred in December 2002 with
monthly amortization payments scheduled until full repayment is completed in
mid-April of 2003. The loan amortization also reduces the bank's loan commitment
to the amount of loan outstanding, which was $207 million as of December 31,
2002.
RESTRICTED PAYMENTS: CMS Energy's Board of Directors reduced the CMS Energy
Common Stock dividend by approximately 50 percent, to an annual rate of 72 cents
per share during the third quarter of 2002. In January 2003, the Board of
Directors suspended the common stock dividend.
Pursuant to restrictive covenants in its facilities, Consumers is limited to
common stock dividend payments that will not exceed $300 million in any calendar
year. Consumers paid $233 million and $190 million in common stock dividends to
CMS Energy in 2002 and 2001, respectively. In January 2003, Consumers declared
and paid a $78 million common dividend.
REQUIRED RATIOS: The facilities also have contractual restrictions that
require CMS Energy and Consumers to maintain, as of the last day of each fiscal
quarter, the following:
REQUIRED RATIO LIMITATION RATIO AT DECEMBER 31, 2002
------------------------------------- ---------------------------- --------------------------
CMS ENERGY:
Consolidated Leverage Ratio(a)(b).... not more than 5.75 to 1.00 5.59 to 1.00
Cash Dividend Coverage Ratio(a)...... not less than 1.25 to 1.00 1.57 to 1.00
CONSUMERS:
Debt to Capital Ratio(a)(b).......... not more than 0.65 to 1.00 0.55 to 1.00
Interest Coverage Ratio(a)(b)........ not less than 2.00 to 1.00 4.00 to 1.00
----------
(a) Violation of this ratio would constitute an event of default under the
facility which provides the lender, among other remedies, the right to
declare the principal and interest immediately due and payable.
53
(b) For purposes of these ratios, the terms of the credit facilities provide for
the exclusion of securitization bonds in the calculation of these ratios.
In 1994, CMS Energy executed an indenture with J.P.Morgan Chase Bank
pursuant to CMS Energy's general term notes program. The indenture, through
supplements, contains certain provisions that can trigger a limitation on CMS
Energy's consolidated indebtedness. The limitation can be activated when CMS
Energy's consolidated leverage ratio, as defined in the indenture (essentially
the ratio of consolidated debt to consolidated capital), exceeds 0.75 to 1.0. At
December 31, 2002, CMS Energy's consolidated leverage ratio was 0.79 to 1.0. As
a result, CMS Energy will not, and will not permit certain material
subsidiaries, excluding Consumers and its subsidiaries, to become liable for new
indebtedness. However, the indenture contains certain express exceptions to this
limitation, and pursuant to one such exception, CMS Energy and the material
subsidiaries may incur revolving indebtedness to banks of up to $1 billion in
the aggregate and refinance existing debt outstanding of CMS Energy and of its
material subsidiaries.
CREDIT RATINGS: In July 2002, the credit ratings of the publicly traded
securities of each of CMS Energy, Consumers and Panhandle (but not Consumers
Funding LLC) were downgraded by the major rating agencies. The ratings downgrade
for all three companies' securities was largely a function of the uncertainties
associated with CMS Energy's financial condition and liquidity, restatement and
re-audit of 2000 and 2001 financial statements, and lawsuits. These downgrades
directly affect and limit CMS Energy's access to the capital markets.
As a result of certain of these downgrades, rights were triggered in several
contractual arrangements between CMS Energy subsidiaries and third parties. A
few commodity suppliers to Consumers have requested advanced payments or other
forms of assurances in connection with maintenance of ongoing deliveries of gas
and electricity. Consumers has addressed these issues.
In addition, the construction lenders for each of the Guardian and
Centennial pipeline projects, each partially owned by Panhandle, requested
acceptable credit support for Panhandle's guarantee of its pro rata portion of
those construction loans, which aggregate $110 million including anticipated
future draws. On September 27, 2002 Panhandle's Centennial partners provided
credit support of $25 million each in the form of guarantees to the lender to
cover Panhandle's obligation of $50 million of loan guarantees. The partners
were paid credit fees by Panhandle on the outstanding balance of the guarantees
for any periods for which they were in effect. On February 10, 2003, Panhandle
sold its one-third interest in Centennial for $40 million to Centennial's two
other partners. Panhandle has been relieved and indemnified by the purchasers
and the lenders for any liabilities, including credit fees related to
Panhandle's $50 million parent guaranty of the project debt.
In October 2002, Panhandle provided a letter of credit to the lenders which
constitutes acceptable credit support under the Guardian financing agreement.
This letter of credit was cash collateralized by Panhandle with approximately
$63 million. Effective March 1, 2003, Panhandle's ownership interest in Guardian
was transferred to CMS Gas Transmission along with the $63 million of cash
collateral plus accrued interest. Panhandle was released from its guarantee
obligations associated with the Guardian non-recourse guaranty as of March 10,
2003 by Prudential and the other noteholders.
In December 2002 and January 2003, Panhandle secured short-term bank loans
in the amounts of $30 million and $10 million, respectively. The loans are due
the earlier of December 2003 or upon the sale of Panhandle. The stock of most of
Panhandle's subsidiaries were pledged as collateral for the loans, which were
utilized to improve overall liquidity which had been reduced by various cash
requirements. Panhandle is required to provide certified September 30, 2002
financial statements to the banks by April 30, 2003. Panhandle intends to
provide these statements to the banks prior to April 30, 2003. Should it be
unable to deliver the certified financial statements or obtain a waiver by that
date, Panhandle could be declared to be in default and the debt could be
accelerated and become immediately due and payable.
Additionally, Panhandle was unable to deliver certified September 30, 2002
financial statements to the LNG Holdings lenders as required under that credit
facility. Panhandle has received a waiver of this requirement until April 30,
2003 and a waiver of a requirement to provide certain documentation until June
30, 2003. Should Panhandle be unable to deliver the certified financial
statements or execute the required documents by the timing indicated, LNG
Holdings could be declared to be in default under its credit facility and the
debt there under could be accelerated and become immediately due and payable.
Further, one of the issuers of a joint and several surety bond in the
approximate amount of $187 million supporting a CMS MST gas supply contract has
demanded acceptable collateral for the full amount of such bond. The second
issuer of the $187 million surety bond has similar rights in connection with
surety bonds supporting two other CMS MST gas supply contracts, aggregating
approximately $112 million. CMS Energy has reached a settlement that provides
the issuers with acceptable collateral.
54
CMS Energy plans to continue to pursue the sale of targeted assets
throughout 2003. Even though assets have been identified for sale, management
cannot predict when, nor make assurances regarding the value of the
consideration to be received or whether these sales will occur.
OBLIGATIONS AND COMMITMENTS
The following information on CMS Energy's contractual obligations,
off-balance sheet arrangements and commercial commitments is provided to collect
information in a single location so that a picture of liquidity and capital
resources is readily available.
CONTRACTUAL OBLIGATIONS: CMS Energy has contractual obligations including
long-term debt, notes payable, and capital lease obligations. Notes payable
include the two term loans at Consumers and their revolving credit agreement.
Capital leases include leased service vehicles and the new headquarters
building.
OFF-BALANCE SHEET ARRANGEMENTS: CMS Energy's use of long-term contracts for
the purchase of commodities and services, the sale of Consumers' accounts
receivables, and operating leases are considered to be off-balance sheet
arrangements. Consumers has responsibility for the collectability of the
accounts receivables sold, and the full obligation of its leases become due in
case of lease payment default. Operating leases are predominately railroad coal
car leases, aircraft, vehicles and miscellaneous office equipment. 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. Consumers has 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 $45 million per
month for year 2003, which includes $33 million related to the MCV Facility. If
a plant is not available to deliver electricity to Consumers, then Consumers
would not be obligated to make the capacity payment while the plant is unable to
deliver. CMS Energy uses these off-balance sheet arrangements in its normal
business operations.
In addition, CMS Energy, through its subsidiary companies, has equity
investments in partnerships and joint ventures in which they have a minority
ownership interest. As of December 31, 2002, CMS Energy's proportionate share of
unconsolidated debt associated with these investments was $2.6 billion. This
unconsolidated debt is non-recourse to CMS Energy and is not included in the
amount of long-term debt that appears on CMS Energy's Consolidated Balance
Sheets.
CONTRACTUAL OBLIGATIONS
PAYMENTS DUE
-----------------------------------------------
DECEMBER 31 TOTAL 2003 2004 2005 2006 2007 BEYOND
---------------------------- --------- ------- -------- ------ ------- ------ --------
IN MILLIONS
On-balance sheet:
Long-term debt............ $ 5,983 $ 627 $ 964 $ 742 $ 514 $ 538 $ 2,598
Notes payable............. 458 458 -- -- -- -- --
Capital lease
obligations(a).......... 163 21 20 18 17 16 71
-------- -------- ------- ------- ------- ------ ---------
Total on-balance sheet...... $ 6,604 $ 1,106 $ 984 $ 760 $ 531 $ 554 $ 2,669
======== ======== ======= ======= ======= ====== =========
Off-balance sheet:
Non-recourse debt......... 2,601 253 188 123 346 96 1,595
Headquarters building
lease(b)................ 6 -- -- -- -- -- 6
Operating leases(c)....... 93 16 12 10 9 8 38
Sale of accounts
receivable.............. 325 325 -- -- -- -- --
Unconditional purchase
Obligations............ 17,344 1,368 975 877 727 727 12,670
-------- -------- ------- ------- ------- ------ ---------
Total off-balance sheet..... $ 20,369 $ 1,962 $ 1,175 $ 1,010 $ 1,082 $ 831 $ 14,309
======== ======== ======= ======= ======= ====== =========
----------
(a) Capital lease obligation shown includes imputed interest of $28 million.
(b) The headquarters building capital lease is estimated to be $60 million, of
which a $54 million construction obligation has been incurred and recorded
on CMS Energy's balance sheet as of December 31, 2002.
(c) Operating lease obligation shown excludes $53 million for Panhandle due to
the discontinuation of Panhandle during 2002.
55
COMMERCIAL COMMITMENTS: As of December 31, 2002, CMS Energy, Enterprises,
and their subsidiaries have guaranteed payment of obligations through
guarantees, indemnities and letters of credit, of unconsolidated affiliates and
related parties approximating $1.1 billion. Included in this amount,
Enterprises, in the ordinary course of its business, has guaranteed contracts of
CMS MST that contain certain schedule and performance requirements. As of
December 31, 2002, the actual amount of financial exposure covered by these
guarantees and indemnities was $219 million. Management monitors and approves
these obligations and believes it is unlikely that CMS Energy would be required
to perform or otherwise incur any material losses associated with these
guarantees. Indemnities are three-party agreements used to assure performance of
contracts by CMS Energy. Letters of credit are issued by banks guaranteeing CMS
Energy's payments of its drafts. Drafts are for a stated amount and for a
specified period; they substitute the bank's credit for CMS Energy's and
eliminate the credit risk for the other party.
COMMERCIAL COMMITMENTS
COMMITMENT EXPIRATION
-------------------------------------
DECEMBER 31 TOTAL 2003 2004 2005 2006 2007 BEYOND
----------------- ------- ------ ---- ---- ---- ---- ------
IN MILLIONS
Off-balance sheet:
Guarantees.... $ 524 $ -- $ -- $ -- $ 4 $ -- $ 520
Indemnities... $ 230 5 -- 36 -- -- 189
Letters of
Credit.......... 296 275 18 -- -- -- 3
------- ------ ---- ----- ----- ----- -----
Total.... $ 1,050 $ 280 $ 18 $ 36 $ 4 $ -- $ 712
======= ====== ==== ===== ===== ===== =====
For further information, see Note 7, Short-Term and Long-Term Financings and
Note 8, Capitalization, incorporated by reference herein.
CAPITAL EXPENDITURES
CMS Energy estimates that capital expenditures, including new lease
commitments and investments in new business developments through partnerships
and unconsolidated subsidiaries, will total $1.8 billion during 2003 through
2005. These estimates are prepared for planning purposes and are subject to
revision. CMS Energy expects to satisfy a substantial portion of the capital
expenditures with cash from operations.
CMS Energy estimates capital expenditures by business segment over the next
three years as follows:
YEARS ENDING DECEMBER 31 2003 2004 2005
-------------------------------------- ------- -------------
IN MILLIONS
Consumers electric operations(a)(b)... $ 341 $ 408 $ 385
Consumers gas operations(a)........... 144 167 225
Natural gas transmission.............. 23 1 1
Independent power production.......... 9 79 4
Marketing, services and trading....... 1 -- --
Other................................. 27 -- --
------- ------ -------
$ 545 $ 655 $ 615
======= ====== =======
----------
(a) These amounts include an attributed portion of Consumers' anticipated
capital expenditures for plant and equipment common to both the electric and
gas utility businesses.
(b) These amounts include estimates for capital expenditures that may be
required by recent revisions to the Clean Air Act's national air quality
standards. For further information see Note 6, Uncertainties -- Electric
Environmental Matters.
OUTLOOK
CORPORATE OUTLOOK
During 2002, CMS Energy continued to implement its financial improvement
plan and on-going asset sales program first announced in 2001. The financial
improvement plan focuses on strengthening CMS Energy's balance sheet and
improving financial liquidity through debt reduction and aggressive cost
management. The on-going asset sales program's objective is to reduce business
56
risk and to provide for more predictable on-going earnings. This encompasses the
sale of non-strategic and under-performing assets, the proceeds of which are
being used to reduce debt.
Consistent with this "back-to-basics" strategy, CMS Energy is actively
pursuing the sale of non-strategic and under-performing assets in order to
improve cash flow and the balance sheet and has received approximately $2.7
billion of cash and associated debt assumption from asset sales. Upon the sale
of additional non-strategic and under-performing assets, the proceeds realized
may be materially different than the book value of those assets. Even though
these assets have been identified for sale, management cannot predict when, nor
make any assurances that, these asset sales will occur. CMS Energy anticipates,
however, that the sales, if any, will result in additional cash proceeds that
will be used to retire existing debt of CMS Energy or Consumers.
In December 2002, CMS Energy reached a definitive agreement to sell the
Panhandle companies to Southern Union Panhandle Corp. The agreement calls for
Southern Union Panhandle Corp, a newly formed entity owned by Southern Union
Company and AIG Highstar Capital, L.P. to pay $662 million in cash and assume
$1.166 billion in debt. Under the terms of the agreement, CMS Energy was to
retain Panhandle's ownership interests in the Centennial and Guardian pipeline
projects, as well as certain of Panhandle's net deferred tax assets, all tax
liabilities, and pension assets and liabilities. Panhandle has since sold its
interest in Centennial (described below) and the Guardian interest has been
transferred to Panhandle's direct parent, CMS Gas Transmission. The transaction
has been approved by the board of directors of each company and is subject to
customary closing conditions and action by the FTC under the Hart-Scott-Rodino
Act. The sale is expected to close in 2003. Panhandle's results have been
reclassified to discontinued operations in the consolidated statements of
income. For more information, see Note 4, Discontinued Operations to
consolidated financial statements.
In January 2003, CMS Energy closed on the sale of a substantial portion of
CMS MST's wholesale natural gas trading contracts to Sempra Energy Trading, the
wholesale commodity trading unit of Sempra Energy and received $17 million of
cash proceeds. In February 2003, CMS Energy entered into a definitive agreement
with Constellation Power Source, Inc. to sell CMS MST's wholesale power
contracts. The sale has been approved by FERC and is expected to close as early
as March 31 of 2003.
In February 2003, Panhandle sold its one third interest in Centennial
Pipeline, LLC for $40 million to Centennial's two other partners, Marathon
Ashland Petroleum, LLC and TE Products Pipeline Company, Limited Partner,
through its general partner, Texas Eastern Products Pipeline Company.
CONSUMERS' ELECTRIC UTILITY 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 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
mid-March 2003, alternative electric suppliers are providing 516 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-
57
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 and $43
million for 2000 and 2001, respectively. 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 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
and post-2000 Palisades expenditures that were excluded from the Stranded Cost
calculation.
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 intends to participate 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.
YEAR FILED YEAR INCURRED REQUESTED PENDING ALLOWED DISALLOWED
----------- ------------- --------- ------- ------- ----------
IN MILLIONS
1999....... 1997 & 1998 $ 20 $ -- $ 15 $ 5
2000....... 1999 30 -- 25 5
2001....... 2000 25 -- 20 5
2002....... 2001 8 8 -- --
2003....... 2002 2 2 -- --
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 December 2002, Consumers incurred and
deferred as a regulatory asset, $1 million of additional implementation costs
and has also recorded as a regulatory asset $13 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. 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.
58
Securitization: On March 4, 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 associated with 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 December 2002, some contracts have expired, but outstanding
contracts involve approximately 500 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.
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 revenues. In October 2002, the MPSC denied
waivers for three programs that provide approximately $32 million in 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 has
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
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 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 1999, the FERC issued Order No. 2000, strongly encouraging
electric utilities to transfer operating control of their electric transmission
system to an RTO, or sell the facilities to an independent company. In addition,
in June 2000, the Michigan legislature passed Michigan's Customer Choice Act,
which also requires utilities to divest or transfer the operating authority of
transmission facilities to an independent company. Consumers chose to offer its
electric transmission system (METC) for sale rather than own and invest in an
asset it could not control. In May 2002, Consumers sold its electric
transmission system for approximately $290 million in cash to MTH, a
non-affiliated limited partnership whose general partner is a subsidiary of
Trans-Elect, Inc.
Trans-Elect, Inc. submitted the winning bid through a competitive bidding
process, and various federal agencies approved the transaction. Consumers did
not provide any financial or credit support to Trans-Elect, Inc. Certain of
Trans-Elect's officers and
59
directors are former officers and directors of CMS Energy, Consumers and their
subsidiaries. None of them were employed by CMS Energy, Consumers, or their
affiliates when the transaction was discussed internally and negotiated with
purchasers. As a result of the sale, Consumers experienced an after-tax earnings
increase of approximately $17 million in 2002, due to the recognition of a $26
million gain on the sale of the electric transmission system. This gain from the
sale is offset by a loss of revenue from wholesale and retail open access
customers who will buy services directly from MTH, including the loss of a
return on the sold electric transmission system. Consumers anticipates that the
future impact of the 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 on its after-tax earnings will be a
decrease of $15 million in 2003, and a decrease of approximately $14 million
annually for the next three years.
Under the 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. Effective April 30, 2002, Consumers and METC
withdrew from the Alliance RTO, and MTH (METC) has joined the MISO RTO. For
further information, see Note 6, Uncertainties, "Electric Rate Matters --
Transmission."
Consumers is a customer of AEP, holding 500 MW of long-term transmission
service reservations through the AEP transmission system. AEP recently indicated
its intent to turn control of its transmission system over to the PJM RTO and
become part of the PJM market sometime after May 1, 2003, which requires
approval by FERC. This will require current AEP customers to become members of,
and resubmit reservation requests to, PJM. Consumers filed an intervention
requesting clarification in January 2003. Upon FERC's approval of this transfer,
Consumers will complete the application process to join PJM. Of the 500 MW of
long-term transmission service reservations held, 200 MW will expire on April 1,
2003. 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.
In July 2002, the FERC issued a 600-page notice of proposed rulemaking on
standard market design for electric bulk power markets and transmission. Its
stated purpose is to remedy undue discrimination in the use of the interstate
transmission system and give the nation the benefits of a competitive bulk power
system. The proposed rulemaking is primarily designed to correct perceived
problems in the electric transmission industry. Consumers sold its electric
transmission system in 2002, but is a transmission customer. The financial
impact to Consumers is uncertain, but the final standard market design rules
could significantly increase delivered power costs to Consumers and the retail
electric customers it serves. Consumers has filed comments with the FERC in
general opposition to the proposal.
There are multiple proceedings pending before the FERC regarding
transitional transmission pricing mechanisms intended to mitigate the revenue
impact on transmission owners resulting from the elimination of "Rate
Pancaking". "Rate Pancaking" represents the application of the transmission rate
of each individual transmission owner whose system is utilized on the scheduled
path of an energy delivery and its elimination has been alleged to result in
"lost revenues" for transmission owners. It is unknown what mechanism(s) may
result from the proceedings currently pending before the FERC, and as such, it
is not possible at this time to identify the specific effect on Consumers. It
should be noted, however, that Consumers believes the results of these
proceedings could also significantly increase the delivered power costs to
Consumers and the retail electric customers it serves.
Similarly, other proceedings before the FERC involving rates of transmission
providers of Consumers could increase Consumers' cost of transmitting power to
its customers in Michigan. As RTOs develop and mature in Consumers' area of
electrical operation, and those RTOs respond to FERC initiatives concerning the
services they must provide and the systems they maintain, Consumers believes
that there is likely to be an upward cost trend in transmission used by
Consumers, ultimately increasing the delivered cost of power to Consumers and
the retail electric customers it serves. The specific financial impact on
Consumers of such proceedings and trends is not currently quantifiable.
In addition to the potential cost impacts identified above, 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.
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
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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 6,
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 and the successful operation
of Palisades by NMC; 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; 12) Consumers' continuing ability to raise funds at
reasonable rates in order to meet the cash requirements of its electric business
and to pay maturing debt in the short-term, and 13) potentially rising pension
costs due to market losses. For further information about these trends or
uncertainties, see Note 6, Uncertainties.
CONSUMERS' GAS UTILITY 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. See Note 6, Uncertainties, Gas Rate Matters
-- 2001 Gas Rate Case for further information.
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 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
distribution bill. Contemporaneously with this filing, Consumers has requested
interim rate relief in the same amount.
UNBUNDLING STUDY: In July 2001, the MPSC directed gas utilities under its
jurisdiction to prepare and file an unbundled cost of service study. The purpose
of the study is to allow parties to advocate or oppose the unbundling of the
following services: metering, billing information, transmission, balancing,
storage, backup and peaking, and customer turn-on and turn-off services.
Unbundled services could be separately priced in the future and made subject to
competition by other providers. The MPSC addressed Consumers' study in the
November 2002 gas distribution rate case order and indicated that it makes
little sense to set rates for unbundled services before the details of those
services are known. Unbundled services may continue to be an issue in future
proceedings.
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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.
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; 8) Consumers' continuing
ability to raise funds at reasonable rates in order to meet the cash
requirements of its gas business; and 9) potentially rising pension costs due to
market losses. For further information about these uncertainties, see Note 6,
Uncertainties.
CONSUMERS' OTHER OUTLOOK
TERRORIST ATTACKS: 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 electric division security costs incurred during the rate freeze and
cap periods imposed by the Customer Choice Act. On February 5, 2003, the MPSC
adopted filing requirements for the recovery of enhanced security costs.
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 $50 million in annual
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."
ENTERPRISES OUTLOOK
CMS Energy's independent power production subsidiary plans to complete the
restructuring of its operations by narrowing the scope of its existing
operations and commitments to two regions: North America and the Middle
East/North Africa. In addition, its plans include selling designated assets and
investments that are under-performing, non-region focused and non-synergistic
with other CMS Energy business units. The independent power production business
unit will continue to optimize the operations and management of its remaining
portfolio of assets in order to contribute to CMS Energy's earnings and to
maintain its reputation for solid performance in the construction and operation
of power plants.
Dynamic changes in the energy trading markets over the past year have
resulted in a deterioration of credit quality, loss of market liquidity and a
heightened sensitivity to earnings volatility. Management cannot predict what
effect these events may have on the liquidity of the trading markets in the
short-term, but credit constraints continue to severely limit CMS MST's ability
to actively manage and optimize its open positions. These changes have forced a
significant change in CMS MST's business strategy. CMS MST will continue to
streamline its portfolio to reduce outstanding credit guarantees as well as its
non-core businesses. In January 2003, CMS MST closed on the sale of a
significant portion of its natural gas trading contracts for $17 million of cash
proceeds, and in February 2003 signed a definitive agreement to sell its
wholesale power contracts. The sale of the company's non-core retail offices
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and its energy conservation unit, CMS Viron, are expected to be complete by the
second quarter of 2003, however, management cannot make any assurances as to
when these asset sales will actually occur.
The future CMS MST activities will be centered around marketing the merchant
power from DIG, Michigan Power, LLC and other IPPs as their current power
purchase agreements expire. CMS MST will continue to focus its business on the
retail sector, specifically in the state of Michigan. CMS Gas Transmission plans
to also narrow its scope of existing operations and commitments. In doing so,
CMS Energy is actively pursuing the sale, liquidation, or other disposition of
several of its designated assets and investments, but management cannot predict
when, nor make any assurances that, these asset and investment sales will occur.
UNCERTAINTIES: The results of operations and financial position of CMS
Energy's diversified energy businesses may be affected by a number of trends or
uncertainties that have, or CMS Energy reasonably expects could have, a material
impact on income from continuing operations, cash flows and balance sheet and
credit improvement. Such trends and uncertainties include: 1) the ability to
sell or optimize assets or businesses in accordance with its financial plan; 2)
the international monetary fluctuations, particularly in Argentina, as well as
Brazil and Australia; 3) the changes in foreign laws, governmental and
regulatory policies that could significantly reduce the tariffs charged and
revenues recognized by certain foreign investments; 4) the imposition of stamp
taxes on certain South American contracts that could significantly increase
project expenses; 5) the impact of any future rate cases or FERC actions or
orders on regulated businesses and the effects of changing regulatory and
accounting related matters resulting from current events; 6) unhedged commodity
price exposures; and 7) the impact of ratings downgrades on CMS Energy's
liquidity, costs of operating, current limited access to capital markets, and
cost of capital.
OTHER OUTLOOK
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 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. CMS Energy has also received subpoenas from
U.S. Attorneys Offices regarding investigations of those trades. CMS Energy is
unable to predict the outcome of these matters, and 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 have been filed against CMS Energy,
Consumers, and certain officers and directors of CMS Energy and its affiliates.
The complaints have been filed in the United States District Court for the
Eastern District of Michigan as purported class actions by individuals who
allege that they purchased CMS Energy's securities during a purported class
period. At least two of the complaints contain purported class periods beginning
on August 3, 2000 and running through May 10, 2002 or May 14, 2002. These
complaints generally seek unspecified damages based on allegations that the
defendants violated United States securities laws and regulations by making
allegedly false and misleading statements about the company's business and
financial condition. The cases have been consolidated into a single lawsuit, and
an amended and consolidated complaint is due to be filed by May 1, 2003. CMS
Energy intends to vigorously defend against these actions. CMS Energy cannot
predict the outcome of this litigation.
DEMAND FOR ACTIONS AGAINST OFFICERS AND DIRECTORS: The Board of Directors
received a demand, on behalf of a shareholder of CMS Energy Common Stock, that
it commence civil actions (i) to remedy alleged breaches of fiduciary duties by
CMS Energy officers and directors in connection with round-trip trading at CMS
Energy, and (ii) to recover damages sustained by CMS Energy as a result of
alleged insider trades alleged to have been made by certain current and former
officers of CMS Energy and its subsidiaries. If the Board elects not to commence
such actions, the shareholder has stated that he will initiate a derivative
suit, bringing such claims on behalf of CMS Energy. CMS Energy has elected two
new members to its Board of Directors to serve as an independent litigation
committee to determine whether it is in the best interest of CMS Energy to bring
the action demanded by the shareholder. Counsel for
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the shareholder has agreed to extend the time for CMS Energy to respond to the
demand. CMS Energy cannot predict the outcome of this litigation.
ERISA CLAIMS: CMS Energy is a named defendant, along with Consumers, 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. CMS Energy cannot predict the outcome
of this litigation.
GAS INDEX PRICING REPORTING: CMS Energy has notified appropriate regulatory
and governmental agencies that some employees at CMS MST and CMS Field Services
appeared to have provided inaccurate information regarding natural gas trades to
various energy industry publications which compile and report index prices. CMS
Energy is cooperating with investigations by the Commodity Futures Trading
Commission, Department of Justice and FERC regarding this matter. CMS Energy is
unable to predict the outcome of these matters and what effect, if any, these
investigations will have on its business.
OTHER MATTERS
CHANGE IN EXECUTIVE OFFICERS
In 2002, certain changes occurred in CMS Energy's executive officers. In May
2002, the Board of Directors elected Kenneth Whipple as Chairman of the Board
and Chief Executive Officer; on June 27, 2002, S. Kinnie Smith, Jr. was elected
Vice Chairman of the Board and General Counsel; on July 22, 2002, Thomas J. Webb
was elected Executive Vice President and Chief Financial Officer; on August 2,
2002, John F. Drake was elected Senior Vice President; and on December 6, 2002,
Michael T. Monahan and Joseph F. Paquette, Jr. joined the Board of Directors.
COMPLIANCE WITH THE SARBANES-OXLEY ACT OF 2002
In July 2002, the Sarbanes-Oxley Act of 2002 was enacted and requires
companies to: 1) make certain certifications related to its financial
statements, disclosure controls and procedures, and internal controls; and 2)
make certain disclosures about its disclosure controls and procedures, and
internal controls as follows:
DISCLOSURE AND INTERNAL CONTROLS
CMS Energy's CEO and CFO are responsible for establishing and maintaining
CMS Energy's disclosure controls and procedures. Management, under the direction
of CMS Energy's principal executive and financial officers, has evaluated the
effectiveness of CMS Energy's disclosure controls and procedures within the past
ninety days of this filing. Based on this evaluation, CMS Energy's CEO and CFO
have concluded that disclosure controls and procedures are effective to ensure
that material information was presented to them and properly disclosed. There
have been no significant changes in CMS Energy's internal controls or in
factors, other than as discussed below, that could significantly affect internal
controls subsequent to such evaluation.
CONTROL WEAKNESSES AT CMS MST
In late 2001 and during 2002, the Company identified a number of
deficiencies in MST's systems of internal accounting controls. The internal
control deficiencies related to, among other things, a lack of account
reconciliations, unidentified differences between subsidiary ledgers and the
general ledger, and procedures and processes surrounding the Company's
accounting for energy trading contracts, including mark-to-market accounting.
Senior management, the Audit Committee of the Board of Directors, and the
independent auditors were notified of these deficiencies as they were
discovered, and the Company commenced a plan of remediation that included the
replacement of certain key personnel and the deployment of additional internal
and external accounting personnel to CMS MST. Significant aspects of the
remediation plan, which includes the implementation of improvements and changes
to CMS MST's internal accounting controls, were postponed to enable the Company
to prepare restated financial statements for 2000 and 2001. While a number of
these control improvements and changes were implemented in late 2002, the most
important ones occurred in the first quarter of 2003.
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The implementation of certain elements of its remediation plan enabled the
Company to prepare reliable restated financial statements for CMS MST for
December 31, 2000 and 2001, as well as for the quarterly periods and full years
of 2001 and 2002.
Management believes that the improvements to its system of internal
accounting controls implemented in late 2002 and the first quarter of 2003 are
appropriate and responsive to the internal control deficiencies that were
identified. Management will continue to monitor the operation of the improved
internal controls to assess their sustained effectiveness through 2003.
NEW ACCOUNTING STANDARDS NOT YET ADOPTED
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. CMS Energy has determined that
it has legal asset retirement obligations, particularly in regard to Consumers'
nuclear plants, but it has not yet finalized its assessment of the obligation.
However, upon initial adoption of the standard, CMS Energy, as it relates to
Consumers, expects to record a regulatory liability, as well as an asset
retirement obligation, as required by SFAS No. 71. The regulatory liability
recognizes the difference between the cost of removal included in the reserve
for accumulated depreciation for assets within the scope of SFAS No. 143 and the
accretion expense of the asset retirement obligation and the depreciation
expense of the asset retirement obligation asset from when the obligation was
initially incurred through December 2002. When the asset retirement obligation
liability is initially recorded, the company would capitalize an offsetting
amount by increasing the carrying amount of the related long-lived asset. Over
time, the initial liability would be accreted to its present value each period
and the capitalized cost would be depreciated over the related asset's useful
life. CMS Energy, as it relates to Enterprises, is currently inventorying
assets, including its international investments, that may have a retirement
obligation and consulting with counsel to determine if a legal retirement
obligation exists. While CMS Energy has not finalized its assessment of the
legal retirement obligation, the removal cost estimate will be determined based
on fair value cost estimates as required by the new standard. The present value
of the legal retirement obligations will be used to quantify the future effects
of adoption of this standard.
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. CMS Energy believes there will be no impact on its financial
statements upon adoption of the standard.
FASB INTERPRETATION NO. 45, GUARANTOR'S ACCOUNTING AND DISCLOSURE
REQUIREMENT FOR GUARANTEES, INCLUDING INDIRECT GUARANTEES OF INDEBTEDNESS OF
OTHERS: Effective January 1, 2003, CMS Energy adopted this interpretation which
elaborates on the disclosure to be made by a guarantor about its obligations
under certain guarantees that it has issued. It 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 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 will be required.
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
CMS Energy, 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. CMS Energy will be
required to consolidate any entities that meet the requirements of the
interpretation. CMS Energy is in the process of studying the interpretation, and
has yet to determine the effects, if any, on its consolidated financial
statements.
EITF ISSUE NO. 02-03, RECOGNITION AND REPORTING OF GAINS AND LOSSES ON
ENERGY TRADING CONTRACTS UNDER EITF ISSUES NO. 98-10 AND 00-17: At the October
25, 2002 meeting, the EITF reached a final consensus to rescind EITF Issue No.
98-10, Accounting for Contracts Involved in Energy Trading and Risk Management
Activities. As a result, only energy contracts that meet the definition of a
derivative in SFAS No. 133 will be carried at fair value. Energy trading
contracts that do not meet the definition of a derivative must be accounted for
as an executory contract (i.e., on an accrual basis). The consensus rescinding
EITF Issue No. 98-10 must be applied to all contracts that existed as of October
25, 2002 and must be recognized as a cumulative effect of a change in accounting
principle in accordance with APB Opinion No. 20, Accounting Changes, effective
the first day of the first interim or annual period beginning after December 15,
2002. The consensus also must be applied immediately to all new contracts
entered into after October
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25, 2002. As a result of these recent changes, CMS Energy is currently
evaluating its existing energy contracts to determine the impact of this change
which will be effective January 1, 2003.
SUBSEQUENT EVENTS
Subsequent to March 31, 2003, the date of filing CMS Energy's 2002 Form 10-K, a
number of material events have occurred. These material events have been
disclosed in CMS Energy's Form 10-Q for the quarterly period ended March 31,
2003 filed with the SEC on May 14, 2003, and CMS Energy's Form 8-K filed with
the SEC on June 24, 2003, which are incorporated by reference herein. In
addition to the events disclosed in the above referenced documents, see below
for a summary of events that have occurred subsequent to May 14, 2003.
CAPITAL RESOURCES AND LIQUIDITY
CMS ENERGY PARENT LEVEL LIQUIDITY
CMS Energy's liquidity and capital requirements generally are a function of its
results of operations, capital expenditures, contractual obligations, working
capital needs and collateral requirements. CMS Energy has historically met its
consolidated cash needs through its operating and investing activities and, as
needed, through access to bank financing and the capital markets.
As of June 15, 2003, CMS Energy at the parent level had approximately $220
million and Consumers and its subsidiaries had approximately $20 million of
publicly issued and credit facility debt maturing in 2003. In addition, CMS
Energy could also become subject to liquidity demands pursuant to commercial
commitments under guarantees, indemnities and letters of credit. Management is
pursuing actively plans to refinance debt and to sell assets, including the sale
of CMS Field Services. See Corporate Outlook section below.
On July 1, 2003, CMS Energy will pay down $150 million principal amount of CMS
Energy's 8.375% Reset Put Securities due 2013. As a result, CMS Energy will
record a charge of approximately $19 million after-tax related to the
accelerated amortization of debt issuance costs and the premium paid associated
with the discharge of these securities.
CMS Energy believes that further targeted asset sales, together with its planned
reductions in operating expenses, capital expenditures, and the suspension of
the common dividend also will contribute to improved liquidity. CMS Energy
believes that, assuming the successful implementation of its financial
improvement plan, its present 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. CMS Energy has
approximately $902 million of debt maturities in 2004. These maturities include:
$287 million of senior notes due in January 2004; $140.5 million (as of June 15,
2003) due in April 2004 under one tranche of the Second Amended and Restated
Senior Credit Agreement; $250 million (as of June 15, 2003) due September 2004
under a second tranche of the Second Amended and Restated Senior Credit
Agreement; $175.8 million of senior notes due in November 2004; and
approximately $48.9 million of general term notes that mature at various times
during 2004. After giving effect to asset sales, including the expected sale of
CMS Field Services, capital markets or bank financing and cash flow from
operations, CMS Energy believes, but can make no assurance, that it has
sufficient liquidity to meet its debt maturities through 2004.
There can be no assurances that the financial improvement plan will be
successful and failure to achieve its goals could have a material adverse effect
on CMS Energy's liquidity and operations. In such event, CMS Energy would be
required to consider the full range of strategic measures available to companies
in similar circumstances.
CMS Energy continues to explore financing opportunities to supplement its
financial improvement plan. These potential opportunities include refinancing
its bank credit facilities; entering into leasing arrangements and/or vendor
financing; refinancing and issuing new capital markets debt, preferred and/or
common equity; and negotiating private placement debt, preferred and/or common
equity.
CONSUMERS ENERGY LIQUIDITY
As discussed in CMS Energy's March 31, 2003 Form 10-Q, 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
debt maturity and liquidity needs through 2003. In addition to executing the
debt financing plan for 2003 as discussed therein, the following activities also
have been initiated by Consumers to enhance further its liquidity beyond 2003:
66
- 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. On June 2, 2003, the MPSC
issued an order authorizing the issuance of Securitization bonds in the
amount of approximately $554 million. For additional information, see
Securitization below.
- In May 2003, Consumers sold $250 million principal amount of first
mortgage bonds in a private offering to institutional investors; the
bonds were issued at 4.00 percent, maturing on May 15, 2010, and net
proceeds were approximately $247 million. Consumers used the net
proceeds to pay down existing 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 26, 2003.
ENTERPRISES LIQUIDITY
On March 30, 2003, Enterprises entered into a revolving credit facility in an
aggregate amount of $441 million. The maturity date of this facility was April
30, 2004. Subsequently, on April 21, 2003, Enterprises entered into a $75
million revolving credit facility with a maturity date of April 30, 2004. These
facilities were underwritten by several banks at a total annual cost to CMS
Energy of approximately ten percent, which included the initial commitment fee.
Proceeds from these loans were used for general corporate purposes, to retire
debt and to collateralize $160 million of letters of credit. The proceeds from
the sale of Panhandle were used to pay off these facilities in full.
In June 2003, cash collateral was released associated with the sale of the
Guardian Pipeline as discussed below. Following the Guardian transaction, CMS
Energy had letters of credit supported by cash collateral of $184 million.
CASH POSITION, INVESTING AND FINANCING
REGULATORY AUTHORIZATION FOR FINANCINGS: In May 2003, Consumers applied for an
increase in FERC authorization to issue short and long-term debt. In June 2003,
the FERC granted Consumers' request for an increase in its authorization for
short-term debt allowing Consumers to issue up to $1.1 billion of first mortgage
bonds as security for $1.1 billion of secured and/or unsecured short-term
securities outstanding at any one time through June 30, 2004, for which
Consumers had already received authorization. The FERC also granted Consumers'
request for an increase in its authorization for long-term debt, allowing
Consumers to issue up to an additional 1) $750 million of long-term securities
for general corporate purposes, 2) $1 billion of long-term securities for
refinancing or refunding of existing long-term securities, and 3) $1.45 billion
of long-term first mortgage bonds to be issued as security for other long-term
securities, through June 30, 2004.
OFF-BALANCE SHEET ARRANGEMENTS: On April 30, 2003, Consumers ended its trade
receivable sale program with its existing purchaser. During May 2003, a new
trade receivable program was put in place with a new purchaser. As a result of
changing purchasers, Consumers established a new subsidiary, Consumers
Receivable Funding II. This consolidated subsidiary was established as a special
purpose entity in order to properly reflect the sale of receivables from
Consumers to Consumers Receivable Funding II, through to the purchaser, an
unrelated third party. The program's maximum receivable sale amount of $325
million remains unchanged. Consumers will also continue to retain servicing
responsibilities for the trade receivables sold, however the purchaser of the
trade receivables has no recourse to Consumers' other assets for failure of
debtor to pay when due and the purchaser has no right to any receivables not
sold. No gain or loss has been recorded on the sale of trade receivables and
Consumers retains no interest in the receivables sold. At May 31, 2003,
receivables sold under the program were $50 million.
OUTLOOK
CORPORATE OUTLOOK
On June 11, 2003, CMS Energy completed the $1.8 billion sale of the Panhandle
companies to Southern Union Panhandle Corp. CMS Energy received approximately
$582 million in cash and 3 million shares of Southern Union Company common
stock, worth approximately $49 million, based on the June 11, 2003 closing price
of Southern Union common stock on the New York Stock Exchange of $16.48 per
share. Southern Union Panhandle Corp. has also assumed approximately $1.166
billion of Panhandle debt. The sale agreement allows CMS Energy to sell the
Southern Union Company common stock after 90 days from the date of closing. CMS
Energy used the cash and will use the proceeds from the ultimate sale of the
Southern Union Company common stock to reduce debt.
67
CMS Energy expects to incur a loss on the sale of Panhandle. The loss
calculations have not been finalized, but CMS Energy's best estimate is an
after-tax loss of approximately $31 million on the sale of Panhandle to be
recognized in the second quarter of 2003.
Further, a significant number of Panhandle employees elected to retire as of
July 1, 2003 under the Pension Plan. As a result, CMS Energy expects to record a
settlement loss and a plan curtailment gain in the second quarter of 2003
pursuant to the provisions of SFAS No. 88, Employers' Accounting for Settlements
and Curtailments of Defined Benefit Pension Plans and for Termination Benefits.
The calculations have not been finalized, but CMS Energy expects a net after-tax
loss of approximately $13 million. In addition, CMS Energy will be required to
re-measure its defined benefit retirement plan obligations during the second
quarter of 2003 and as a result, in the second quarter of 2003, will likely
record an additional minimum pension liability charge to other comprehensive
income estimated to be $20 million, net of tax. The re-measurement could also
result in an increase to CMS Energy's 2003 pension expense of approximately $9.5
million.
In May 2003, CMS Energy signed a definitive agreement to sell CMS Field Services
to Cantera Resources Inc. for $115.5 million in cash and a $50 million face
value note of Cantera Resources Inc. The note is payable to CMS Energy for up to
$50 million subject to the financial performance of the Fort Union and Bighorn
natural gas gathering systems from 2004 through 2008. This sale is expected to
close in the third quarter of 2003.
In June 2003, CMS Energy completed the sale of its one-third membership interest
in the Guardian Pipeline, L.L.C., to a subsidiary of WPS Resources Corporation.
Proceeds from the sale were $26 million and will be used to reduce debt. In
conjunction with the sale, approximately $63 million of cash that CMS Energy had
committed to collateralize a letter of credit was released. CMS Energy expects
to record an after-tax loss on the sale of Guardian of $2.8 million in the
second quarter of 2003.
CONSUMERS' ELECTRIC UTILITY BUSINESS OUTLOOK
SECURITIZATION: On June 2, 2003, the MPSC issued a financing order authorizing
the issuance of Securitization bonds in the amount of approximately $554
million. This amount relates to Clean Air Act expenditures and an associated
return on those expenditures through December 31, 2002; retail open access
implementation costs and previously authorized return on those expenditures
through December 31, 2000, and the "up front" other qualified costs related to
issuance of the Securitization bonds. The MPSC also adopted a rate design that
would allow retail open access customers to pay a securitization charge (and
related tax charge) that are a fraction of the amounts paid by full service
bundled sales customers and special contract customers of the utility. The
financing order provides that the securitization charges (and related tax
charges) for the latter customers are increased under the rate design ordered by
the MPSC in order to be sufficient to repay the principal, interest and all
other "ongoing" qualified costs related to servicing the Securitization bonds.
The financing order also restricts the amount of common dividends payable by
Consumers to its "earnings." Consumers is currently studying the order and will
be seeking a rehearing and clarification of a number of features in the
financing order, including the dividend restriction. The financing order will
only become effective after rehearing upon acceptance by Consumers.
STRANDED AND IMPLEMENTATION COSTS: On June 16, 2003, the MPSC issued an order
authorizing deferred recovery of electric utility restructuring implementation
costs for 2001 of approximately $8 million.
Consumers is 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 already been expensed. MISO filed an
application with the FERC seeking authorization to reimburse Consumers for all
of these costs. On May 23, 2003, the FERC issued an order denying this request.
Consumers has sought rehearing of that order. Consumers cannot predict the
outcome of this matter.
CONSUMERS' GAS UTILITY BUSINESS OUTLOOK
GROWTH: The magnitude of the recent increase in gas commodity prices may have an
elasticity of demand impact, which consumers is not able to predict.
ENTERPRISES OUTLOOK
An affiliate of CMS Generation owns a 49.6 percent interest in Loy Yang, which
owns the 2,000 MW Loy Yang coal-fired power project in Victoria, Australia. Due
to unfavorable power prices in the Australian market, Loy Yang is not
generating cash flow sufficient to meet its operating and debt-service
obligations. Loy Yang currently has $500 million of term bank debt, which
pursuant to extensions from the lenders, is scheduled to mature on July 11,
2003. The partners in Loy Yang are actively exploring the possible sale of the
project (or control of the project) or a restructuring of the finances of Loy
Yang. CMS Energy cannot predict whether any of these initiatives will be
successful, and it is possible that CMS Generation may lose all or a
substantial part of its equity investment in Loy Yang. CMS Energy has
previously written off its equity investment in Loy Yang, and further
write-offs would be limited to cumulative net foreign currency translation
losses. The amount of such cumulative net foreign currency translation losses
is $119 million at March 31, 2003. Any such write-off would flow through CMS
Energy's income statement but would not result in a reduction in shareholders'
equity or cause noncompliance with CMS Energy's financing agreements.
NEW ACCOUNTING STANDARDS
SFAS NO. 149, AMENDMENT OF STATEMENT 133 ON DERIVATIVE INSTRUMENTS AND HEDGING
ACTIVITIES: Issued by the FASB in April 2003, this statement amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts and for
hedging activities under FASB Statement No. 133, Accounting for Derivative
Instruments and Hedging Activities. The statement improves financial reporting
by requiring that contracts with comparable characteristics be accounted for
similarly. This statement clarifies under what circumstances a contract with an
initial net investment meets the characteristic of a derivative discussed in
paragraph 6(b) of SFAS No. 133, clarifies when a derivative contains a financing
component, amends the definition of an underlying to conform it to the language
used in FASB Interpretation No. 45, Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others, and amends certain other existing pronouncements. Those changes will
result in a more consistent reporting of contracts as either derivatives or
hybrid instruments. This statement is effective for contracts entered into or
modified after June 30, 2003. CMS Energy is in the process of studying this
statement, and has yet to determine the effects, if any, on its consolidated
financial statements.
SFAS NO. 150, ACCOUNTING FOR CERTAIN FINANCIAL INSTRUMENTS WITH CHARACTERISTICS
OF BOTH LIABILITIES AND EQUITY: Issued by the FASB in May 2003, this statement
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. The
statement requires an issuer to classify financial instruments within its scope
as liabilities. Those instruments were previously classified as mezzanine
equity. SFAS No. 150 will be effective July 1, 2003.
68
CMS Energy has determined that Consumers Power Company Financing I, Consumers
Energy Company Financing II, Consumers Energy Company Financing III, Consumers
Energy Company Financing IV, and CMS Energy Trust I securities fall under the
scope of SFAS No. 150. These securities have fixed redemption dates and amounts
and qualify as mandatory redeemable preferred securities under SFAS No. 150.
Beginning July 1, 2003, these securities will be reclassified from the mezzanine
equity section to the liability section of CMS Energy's consolidated balance
sheet at fair value.
CMS Energy has determined that CMS Energy Trust Securities III have both equity
and liability characteristics. The securities include both a future stock
purchase contract and a preferred security. CMS Energy is continuing to
evaluate the overall effect of SFAS No. 150.
69
CMS ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31
---------------------------------------
AS RESTATED AS RESTATED
2002 2001 2000
---------- ----------- -----------
IN MILLIONS
OPERATING REVENUE
Electric utility ....................................... $ 2,644 $ 2,630 $ 2,676
Gas utility ............................................ 1,519 1,338 1,196
Independent power production ........................... 372 388 503
Natural gas transmission ............................... 50 59 88
Marketing, services and trading ........................ 4,076 3,674 2,178
Other .................................................. 26 (26) 56
---------- ---------- ----------
8,687 8,063 6,697
---------- ---------- ----------
OPERATING EXPENSES
Operation
Fuel for electric generation ........................ 341 297 407
Purchased and interchange power--
Marketing, services and trading ................ 2,193 1,189 349
Purchased and interchange power ..................... 455 599 429
Purchased power-- related parties ................... 546 539 555
Cost of gas sold-- Marketing, services and
trading ....................................... 1,710 2,311 1,699
Cost of gas sold .................................... 1,037 923 707
Other operating expenses ............................ 895 904 867
---------- ---------- ----------
7,177 6,762 5,013
Maintenance ............................................ 211 224 189
Depreciation, depletion and amortization ............... 403 398 489
General taxes .......................................... 199 196 209
Reduced asset valuations ............................... 598 240 329
---------- ---------- ----------
8,588 7,820 6,229
---------- ---------- ----------
OPERATING INCOME (LOSS)
Electric utility ....................................... 512 349 454
Gas utility ............................................ 127 97 96
Independent power production ........................... (444) (76) (136)
Natural gas transmission ............................... (15) (50) 22
Marketing, services and trading ........................ (60) (22) 23
Other .................................................. (21) (55) 9
---------- ---------- ----------
99 243 468
---------- ---------- ----------
OTHER INCOME (DEDUCTIONS)
Accretion expense ...................................... (31) (37) (35)
Gain on asset sales, net of foreign currency translation
losses of $25 in 2000 ............................... 37 -- 54
Other, net ............................................. (4) 25 12
---------- ---------- ----------
2 (12) 31
---------- ---------- ----------
INCOME BEFORE FIXED CHARGES AND TAXES .................... 101 231 499
---------- ---------- ----------
FIXED CHARGES
Interest on long-term debt ............................. 401 416 420
Other interest ......................................... 31 83 34
Capitalized interest ................................... (16) (35) (47)
Preferred dividends .................................... 2 2 2
Preferred securities distributions ..................... 86 96 93
---------- ---------- ----------
504 562 502
---------- ---------- ----------
LOSS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES AND
MINORITY INTERESTS ..................................... (403) (331) (3)
INCOME TAX EXPENSE (BENEFIT) ............................. 13 (98) 34
70
MINORITY INTERESTS ....................................... -- 3 3
---------- ---------- ----------
LOSS FROM CONTINUING OPERATIONS .......................... (416) (236) (40)
---------- ---------- ----------
DISCONTINUED OPERATIONS, NET OF $167 TAX BENEFIT IN 2002,
$93 TAX EXPENSE IN 2001 AND $32 TAX EXPENSE IN 2000 .... (222) (210) 83
---------- ---------- ----------
INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE ................................... (638) (446) 43
---------- ---------- ----------
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING FOR DERIVATIVE
INSTRUMENTS, NET OF $10 TAX IN 2002 AND $-- IN
2001 ................................................... 18 (2) --
---------- ---------- ----------
CONSOLIDATED NET INCOME (LOSS) ........................... $ (620) $ (448) $ 43
========== ========== ==========
YEARS ENDED DECEMBER 31
---------------------------------------
AS RESTATED AS RESTATED
2002 2001 2000
--------- ----------- ----------
IN MILLIONS,
EXCEPT PER SHARE AMOUNTS
CMS ENERGY
NET INCOME (LOSS)
Net Income (Loss) Available to Common Stock.................. $ (620) $ (448) $ 43
========= ========= =======
BASIC INCOME (LOSS) PER AVERAGE COMMON SHARE
Loss from Continuing Operations.............................. $ (2.99) $ (1.79) $ (0.35)
Income (Loss) from Discontinued Operations................... (1.60) (1.61) 0.73
Income (Loss) from Change in Accounting Principle............ 0.13 (0.02) --
-------- -------- -------
Net Income (Loss) Available to Common Stock.................. $ (4.46) $ (3.42) $ 0.38
======== ======== =======
DILUTED INCOME (LOSS) PER AVERAGE COMMON SHARE
Loss from Continuing Operations.............................. $ (2.99) $ (1.79) $ (0.35)
Income (Loss) from Discontinued Operations................... (1.60) (1.61) 0.73
Income (Loss) from Change in Accounting Principle............ 0.13 (0.02) --
-------- -------- -------
Net Income (Loss) Available to Common Stock.................. $ (4.46) $ (3.42) $ 0.38
======== ======== =======
DIVIDENDS DECLARED PER COMMON SHARE............................. $ 1.09 $ 1.46 $ 1.46
-------- -------- -------
The accompanying notes are an integral part of these statements.
71
CMS ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31
----------------------------------------------
AS RESTATED AS RESTATED
2002 2001 2000
----------- ----------- -----------
IN MILLIONS
CASH FLOWS FROM OPERATING ACTIVITIES
Consolidated net income (loss) ........................... $ (620) $ (448) $ 43
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation, depletion and amortization (includes
nuclear decommissioning of $6, $6, and $39,
respectively) .................................... 403 398 489
Depreciation and amortization of discontinued
Operations ....................................... 94 186 --
Reduced asset valuations (Note 3) ................... 598 240 329
Loss on disposal of discontinued operations (Note
4) ............................................... 186 193 --
Capital lease and debt discount amortization ........ 18 11 34
Accretion expense ................................... 31 37 35
Distributions from related parties in excess of (less
than) earnings ................................... (39) 68 (171)
Cumulative effect of accounting change .............. (18) 2 --
Gain on sale of assets .............................. (37) -- (54)
Changes in assets and liabilities:
Decrease (increase) in accounts receivable and
accrued revenues ............................... 100 330 (310)
Decrease (increase) in inventories ............... 140 (346) (73)
Increase (decrease) in accounts payable and
accrued expenses ............................... (13) (363) 101
Increase (decrease) in deferred income taxes and
investment tax credit .......................... (374) 227 2
Changes in other assets and liabilities .......... 155 (169) 175
----------- ----------- -----------
Net cash provided by operating activities ........... 624 366 600
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (excludes assets placed under capital
lease) ................................................ (747) (1,239) (1,032)
Investments in partnerships and unconsolidated
Subsidiaries .......................................... (55) (111) (466)
Cost to retire property, net ............................. (66) (118) (125)
Investments in Electric Restructuring Implementation
Plan .................................................. (8) (13) (29)
Investments in nuclear decommissioning trust funds ....... (6) (6) (39)
Proceeds from nuclear decommissioning trust funds ........ 30 29 37
Acquisition of companies, net of cash acquired ........... -- -- (74)
Proceeds from sale of property ........................... 1,659 134 629
Other .................................................... 56 (24) (121)
----------- ----------- -----------
Net cash provided by (used in) investing activities ... 863 (1,348) (1,220)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from notes, bonds and other long-term debt ...... 725 2,021 1,189
Proceeds from trust preferred securities ................. -- 125 220
Issuance of common stock ................................. 357 327 332
Retirement of bonds and other long-term debt ............. (1,848) (1,343) (692)
Retirement of trust preferred securities ................. (331) -- (250)
Common stock reacquired .................................. (1) (1) (16)
Repurchase of common stock ............................... (8) (5) (129)
Payment of common stock dividends ........................ (149) (190) (167)
72
Payment of capital lease obligations ..................... (15) (20) (32)
Increase (decrease) in notes payable, net ................ 75 21 174
Other .................................................... (42) 33 --
----------- ----------- -----------
Net cash provided by (used in) financing activities ... (1,237) 968 629
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH AND TEMPORARY CASH
Investments .............................................. 250 (14) 9
CASH AND TEMPORARY CASH INVESTMENTS, BEGINNING OF
PERIOD ................................................... 127 141 132
----------- ----------- -----------
CASH AND TEMPORARY CASH INVESTMENTS, END OF PERIOD ......... $ 377 $ 127 $ 141
=========== =========== ===========
OTHER CASH FLOW ACTIVITIES AND NON-CASH INVESTING AND
FINANCING ACTIVITIES WERE:
Cash transactions
Interest paid (net of amounts capitalized) ............... $ 408 $ 442 $ 413
Income taxes paid (net of refunds) ....................... (217) (60) --
Pension and OPEB cash contribution ....................... 148 122 --
NON-CASH TRANSACTIONS
Nuclear fuel placed under capital leases ................. $ -- $ 13 $ 4
Other assets placed under capital lease .................. 62 37 15
All highly liquid investments with an original maturity of three months or
less are considered cash equivalents.
The accompanying notes are an integral part of these statements.
73
CMS ENERGY CORPORATION
CONSOLIDATED BALANCE SHEETS
DECEMBER 31
-----------------------
AS RESTATED
2002 2001
------- -----------
IN MILLIONS
ASSETS
PLANT AND PROPERTY (AT COST)
Electric utility ......................................... $ 7,523 $ 7,661
Gas utility .............................................. 2,719 2,593
Natural gas transmission ................................. 210 205
Independent power production ............................. 251 916
Other .................................................... 92 110
------- -----------
10,795 11,485
Less accumulated depreciation, depletion and
amortization .......................................... 6,110 6,158
------- -----------
4,685 5,327
Construction work-in-progress ............................ 549 521
------- -----------
5,234 5,848
------- -----------
INVESTMENTS
Independent power production ............................. 565 714
Natural gas transmission ................................. 178 577
Midland Cogeneration Venture Limited Partnership ......... 388 300
First Midland Limited Partnership ........................ 255 253
Other .................................................... 12 117
------- -----------
1,398 1,961
------- -----------
CURRENT ASSETS
Cash and temporary cash investments at cost, which
approximates market ................................... 377 127
Accounts receivable, notes receivable and accrued revenue,
less allowances of $8 in 2002 and $5 in 2001 .......... 322 219
Accounts receivable-- Marketing, services and trading,
less allowances of $8 in 2002 and $9 in 2001 .......... 248 295
Accounts receivable and notes receivable-- related
parties ............................................... 187 190
Inventories at average cost
Gas in underground storage ............................ 491 590
Materials and supplies ................................ 89 89
Generating plant fuel stock ........................... 37 52
Assets held for sale ..................................... 644 471
Price risk management assets ............................. 115 327
Prepayments and other .................................... 238 200
------- -----------
2,748 2,560
------- -----------
NON-CURRENT ASSETS
Regulatory Assets
Securitized costs ..................................... 689 717
Postretirement benefits ............................... 185 209
Abandoned Midland project ............................. 11 12
Other ................................................. 168 167
Assets held for sale ..................................... 2,081 3,480
Price risk management assets ............................. 135 368
Nuclear decommissioning trust funds ...................... 536 581
Notes receivable-- related parties ....................... 160 177
Notes receivable ......................................... 126 130
Other .................................................... 444 565
------- -----------
4,535 6,406
------- -----------
TOTAL ASSETS ............................................... $13,915 $ 16,775
======= ===========
The accompanying notes are an integral part of these statements.
74
CMS ENERGY CORPORATION
STOCKHOLDERS' INVESTMENT AND LIABILITIES
DECEMBER 31
-------------------------
AS RESTATED
2002 2001
-------- -----------
IN MILLIONS
CAPITALIZATION
Common stockholders' equity
Common stock, authorized 250.0 shares; outstanding
144.1 shares in 2002 and 133.0 shares in 2001 ........ $ 1 $ 1
Other paid-in capital ................................... 3,605 3,257
Other comprehensive income (loss) ....................... (753) (269)
Retained earnings (deficit) ............................. (1,720) (951)
-------- -----------
1,133 2,038
Preferred stock of subsidiary ........................... 44 44
Company-obligated convertible Trust Preferred Securities
of subsidiaries(a) ................................... 393 694
Company-obligated mandatorily redeemable preferred
securities of Consumers' subsidiaries(a) ............. 490 520
Long-term debt .......................................... 5,356 5,840
Non-current portion of capital leases ................... 116 71
-------- -----------
7,532 9,207
-------- -----------
MINORITY INTERESTS ........................................ 21 24
-------- -----------
CURRENT LIABILITIES
Current portion of long-term debt and capital leases .... 640 1,016
Notes payable ........................................... 458 416
Accounts payable ........................................ 363 359
Accounts payable-- Marketing, services and trading ...... 119 236
Accrued interest ........................................ 131 135
Accrued taxes ........................................... 291 111
Accounts payable-- related parties ...................... 53 54
Liabilities held for sale ............................... 465 639
Price risk management liabilities ....................... 96 367
Current portion of purchase power contracts ............. 26 24
Current portion of gas supply contract obligations ...... 25 22
Deferred income taxes ................................... 15 49
Other ................................................... 216 243
-------- -----------
2,898 3,671
-------- -----------
NON-CURRENT LIABILITIES
Postretirement benefits ................................. 725 356
Deferred income taxes ................................... 414 824
Deferred investment tax credit .......................... 91 102
Regulatory liabilities for income taxes, net ............ 297 276
Liabilities held for sale ............................... 1,243 1,376
Price risk management liabilities ....................... 135 287
Gas supply contract obligations ......................... 241 266
Power purchase agreement-- MCV Partnership .............. 27 52
Other ................................................... 291 334
-------- -----------
3,464 3,873
-------- -----------
Commitments and Contingencies (Notes 1, 2, 3, 4, 5, 6, 14
18 and 21)
TOTAL STOCKHOLDERS' INVESTMENT AND LIABILITIES ............ $ 13,915 $ 16,775
======== ===========
----------
(a) For further discussion, see Note 8 to the Consolidated Financial Statements.
75
CMS ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF PREFERRED STOCK
OPTIONAL
REDEMPTION
DECEMBER 31 SERIES PRICE 2002 2001 2002 2001
--------------------------------------------------- ------ ----- ---- ---- ---- ----
NUMBER OF SHARES IN MILLIONS
CONSUMERS' PREFERRED STOCK
Cumulative, $100 par value, authorized
7,500,000 shares, with no mandatory
redemption.................................... $ 4.16 $ 103.25 68,451 68,451 $ 7 $ 7
4.50 110.00 373,148 373,148 37 37
--- ---
TOTAL PREFERRED STOCK.............................. $44 $44
=== ===
The accompanying notes are an integral part of these statements.
76
CMS ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS' EQUITY
AS RESTATED AS RESTATED
YEARS ENDED DECEMBER 31 2002 2001 2000 2002 2001 2000
-------------------------------- -------- -------- -------- -------- -------- --------
NUMBER OF SHARES IN THOUSANDS IN MILLIONS
COMMON STOCK
At beginning and end of period............... $ 1 $ 1 $ 1
-------- -------- --------
OTHER PAID-IN CAPITAL
At beginning of period....................... 132,989 121,201 116,038 3,257 2,936 2,749
Common stock repurchased..................... (39) (232) (6,600) (8) (5) (129)
Common stock reacquired...................... (220) (11) (259) (1) (1) (16)
Common stock issued.......................... 11,358 11,681 11,538 357 320 321
Common stock reissued........................ -- 350 484 -- 7 11
-------- -------- -------- -------- -------- --------
At end of period..................... 144,088 132,989 121,201 3,605 3,257 2,936
-------- -------- -------- -------- -------- --------
OTHER COMPREHENSIVE INCOME (LOSS)
Minimum Pension Liability
At beginning of period -- -- --
Minimum pension liability
adjustments(a).......................... (241) -- --
-------- -------- --------
At end of period..................... (241) -- --
-------- -------- --------
Investments
At beginning of period.................... (5) (2) 3
Unrealized gain (loss) on
investments(a).......................... -- (3) (5)
Realized gain (loss) on
investments(a).......................... 7 -- --
-------- -------- --------
At end of period..................... 2 (5) (2)
-------- -------- --------
Derivative Instruments(c)
At beginning of period(b)................. (31) 7 --
Unrealized gain (loss) on
derivative instruments(a)............... (29) (31) --
Reclassification adjustments
included in consolidated net
income (loss)(a)........................ 4 (7) --
-------- -------- --------
At end of period..................... (56) (31) --
-------- -------- --------
Foreign Currency Translation
At beginning of period.................... (233) (206) (108)
Change in foreign currency
translation realized from
asset sale(a)........................... -- -- 25
Change in foreign currency
translation(a).......................... (225) (27) (123)
-------- -------- --------
At end of period..................... (458) (233) (206)
-------- -------- --------
RETAINED EARNINGS (DEFICIT)
At beginning of period....................... (951) (313) (189)
Consolidated net income
(loss)(a)................................. (620) (448) 43
Common stock dividends declared:
Common stock dividends
declared.................................. (149) (190) (167)
-------- -------- --------
At end of period..................... (1,720) (951) (313)
-------- -------- --------
TOTAL COMMON STOCKHOLDERS' EQUITY....... $ 1,133 $ 2,038 $ 2,416
======== ======== ========
(A) DISCLOSURE OF COMPREHENSIVE INCOME (LOSS):
Other Comprehensive Income
Minimum pension liability
Minimum pension liability
adjustments, net of tax
of $132, $--, and
$--, respectively.................. $ (241) $-- $--
Investments
Unrealized gain (loss) on
investments, net of tax
77
of $--, $2, and $3,
respectively................................................. -- (3) (5)
Realized gain (loss) on
investments, net of tax
of $--, $--, and
$--, respectively
Derivative Instruments............................................ 7 -- --
Unrealized gain (loss) on
derivative instruments,
net of tax of $--,
$13, and $--,
respectively................................................. (29) (31) --
Reclassification
adjustments included in
consolidated net
income, net of tax of
$(2), $3, and $--,
respectively................................................. 4 (7) --
Foreign currency
translation.................................................... (225) (27) (98)
Consolidated net income
(loss)......................................................... (620) (448) 43
-------- -------- --------
Total Consolidated
Comprehensive Loss........................................... $ (1,104) $ (516) $ (60)
======== ======== ========
----------
(b) Year ended December 31, 2001 reflects the cumulative change in accounting
principle, net of $(7) tax (Note 10).
(c) Included in these amounts is CMS Energy's proportionate share of the
effects of derivative accounting related to its equity investment in the
MCV Partnership and Taweelah as follows:
MCV Partnership:
At the beginning of the period................................ $ (8) $ 5 $ --
Unrealized gain (loss) on derivative instruments.............. 12 (15) --
Reclassification adjustments included in net income........... 4 2 --
-------- -------- --------
At the end of period.......................................... $ 8 $ (8) $ --
======== ======== ========
Taweelah:
At the beginning of the period................................ $ -- $ -- $ --
Unrealized gain (loss) on derivative instruments.............. (32) -- --
-------- -------- --------
At the end of period.......................................... $ (32) $ -- $ --
======== ======== ========
The accompanying notes are an integral part of these statements.
78
CMS ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CMS Energy's consolidated financial statements for the years 2001 and 2000
have been restated as a result of accounting adjustments identified in
connection with the re-audit and preparation of the restated 2001 and 2000
consolidated financial statements of CMS Energy. CMS Energy has completed its
restatement of the consolidated financial statements for the quarters of 2002
and 2001. As a result, the 2002 and 2001 quarterly information has been
restated. The interim financial data contained in Note 20, Quarterly Financial
and Common Stock Information, to the consolidated financial statements has been
restated to reflect the impacts of restatement adjustments.
Except for the addition of Note 21, Subsequent Events, the following notes to
the consolidated financial statements have generally only been modified for the
effects of the quarterly restatements. This document should be read in
conjunction with CMS Energy's Form 10-Q for the quarterly period ended March 31,
2003 filed with the SEC on May 14, 2003, and CMS Energy's Form 8-K filed with
the SEC on June 24, 2003, which are incorporated by reference herein.
1: CORPORATE STRUCTURE AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CORPORATE STRUCTURE: CMS Energy is the parent holding company of Consumers
and Enterprises. Consumers is a combination electric and gas utility company
serving Michigan's Lower Peninsula. Enterprises, through subsidiaries, is
engaged in domestic and international diversified energy businesses including:
natural gas transmission, storage and processing; independent power production;
and energy marketing, services and trading.
RESTATEMENT: CMS Energy's consolidated financial statements for the years
2001 and 2000 have been restated, as discussed in Note 2, Restatement, pursuant
to adjustments resulting from the re-audit of the consolidated financial
statements of CMS Energy for the years 2001 and 2000.
PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include
the accounts of CMS Energy, Consumers and Enterprises and their majority-owned
subsidiaries. Investments in affiliated companies where CMS Energy has the
ability to exercise significant influence, but not control are accounted for
using the equity method. Intercompany transactions and balances have been
eliminated.
USE OF ESTIMATES: The preparation of financial statements in conformity
with accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
The 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 it is probable
that a loss will be paid in the future as a result of a current event, and that
an amount can be reasonably estimated. CMS Energy has used this accounting
principle to record estimated liabilities discussed in Note 6, Uncertainties.
REVENUE RECOGNITION POLICY: Revenues from deliveries of electricity and the
transportation and storage of natural gas are recognized as services are
provided. Revenues on sales of marketed electricity, natural gas, and other
energy products, as well as natural gas and LNGs, are recognized at delivery.
Revenues on sales of oil and natural gas produced are recognized when production
occurs, a sale is completed, and the risk of loss transfers to a third-party
purchaser. Mark-to-market changes in the fair value of energy trading contracts
are recognized as revenues in the periods in which the changes occur.
ACCRETION INCOME AND EXPENSE: In 1991, the MPSC allowed Consumers to
recover a portion of its abandoned Midland investment over a 10-year period, but
did not allow Consumers to earn a return on that amount. Consumers reduced the
recoverable investment to the present value of the future recoveries. During the
recovery period, Consumers adjusts the unrecovered asset to its present value.
It reflects this adjustment as accretion income. In 1992, Consumers recorded a
loss for the present value of its estimated future underrecoveries of power
supply costs resulting from purchases from the MCV Partnership (see Note 6). It
now recognizes
79
accretion expense annually to reflect the time value of money on the recorded
loss. CMS MST has entered into prepaid sales arrangements to provide natural gas
to various entities over periods of up to 12 years at predetermined price
levels. CMS MST has established a liability for these outstanding obligations
equal to the discounted present value of the contracts, and has hedged its
exposures under these arrangements. At December 31, 2002 and 2001, the amounts
recorded as liabilities on the Consolidated Balance Sheets totaled $266 million
and $288 million, respectively, and are guaranteed by Enterprises. As CMS MST
fulfills its obligations under the contracts, it recognizes revenues upon the
delivery of natural gas, and records a reduction to the outstanding obligation,
and recognizes accretion expense.
CAPITALIZED INTEREST: SFAS No. 34 requires capitalization of interest on
certain qualifying assets that are undergoing activities to prepare them for
their intended use. SFAS No. 34 limits the capitalization of interest for the
period to the actual interest cost that is incurred and prohibits imputing
interest costs on any equity funds. The nonregulated businesses of CMS Energy
are subject to these rules. The regulated businesses of CMS Energy are permitted
to capitalize an allowance for funds used during construction on regulated
construction projects and to include such amounts in plant in service.
EARNINGS PER SHARE: Basic and diluted earnings per share are based on the
weighted average number of shares of common stock and potential common stock
outstanding during the period. Potential common stock, for purposes of
determining diluted earnings per share, includes the effects of dilutive stock
options and convertible securities. The effect of such potential common stock is
computed using the treasury stock method or the if-converted method, as
applicable. For earnings per share computation, see Note 9.
FINANCIAL INSTRUMENTS: CMS Energy 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. CMS Energy's investments in equity
securities are classified as available-for-sale securities. They are reported at
fair value, with any unrealized gains or losses from changes in fair value
usually reported in equity as part of other comprehensive income and excluded
from earnings unless such changes in fair value are other than temporary.
Unrealized gains or losses from changes in the fair value of Consumers' nuclear
decommissioning investments are reported in accumulated depreciation. The fair
value of these investments is determined from quoted market prices.
FOREIGN CURRENCY TRANSLATION: CMS Energy's subsidiaries and affiliates
whose functional currency is other than the U.S. dollar translate their assets
and liabilities into U.S. dollars at the current exchange rates in effect at the
end of the fiscal period. The revenue and expense accounts of such subsidiaries
and affiliates are translated into U.S. dollars at the average exchange rates
that prevailed during the period. The gains or losses that result from this
process, and gains and losses on intercompany foreign currency transactions that
are long-term in nature, and which CMS Energy does not intend to settle in the
foreseeable future, are shown in the stockholders' equity section of the balance
sheet. For subsidiaries operating in highly inflationary economies, the U.S.
dollar is considered to be the functional currency, and transaction gains and
losses are included in determining net income. Gains and losses that arise from
exchange rate fluctuations on transactions denominated in a currency other than
the functional currency, except those that are hedged, are included in
determining net income. For the years ended 2002 and 2001, the change in the
foreign currency translation adjustment decreased equity by $225 million and $27
million, respectively, net of after-tax hedging proceeds.
GOODWILL: Goodwill represents the excess of the purchase price over the
fair value of the net assets of acquired companies. Effective January 1, 2002,
CMS Energy adopted SFAS No. 142, which disallowed, upon adoption and on an
annual basis, the continued amortization of goodwill and required the testing of
goodwill for potential impairment. Effective January 1, 2002, CMS MST recorded a
loss of $10 million, net of tax for goodwill impairment. In addition, Panhandle
recorded a write-off of goodwill in the amount of $369 million, net of tax. For
additional information, see Note 5, Goodwill.
IMPAIRMENT OF INVESTMENTS AND LONG-LIVED ASSETS: In accordance with APB
Opinion No. 18 and SFAS No. 144, CMS Energy evaluates the potential impairment
of its investments in projects and other long-lived assets, other than goodwill,
based on various analyses, including the projection of undiscounted cash flows,
whenever events or changes in circumstances indicate that the carrying amount of
the assets may not be recoverable. If the carrying amount of the investment or
asset exceeds the amount of the expected future undiscounted cash flows, an
impairment loss is recognized and the investment or asset is written down to its
estimated fair value.
INVENTORIES: Consumers uses the weighted average cost method for valuing
working gas inventory. Beginning October 2000, gas inventory also includes
recoverable cushion gas. Consumers records non-recoverable cushion gas in the
appropriate gas utility plant account. Consumers stores gas inventory in its
underground storage facilities.
80
In 2000, CMS Energy adopted the provisions of the SAB No. 101 summarizing
the SEC staff's views on revenue recognition policies based upon existing
generally accepted accounting principles. As a result, the oil and gas
exploration and production industry's long-standing practice of recording
inventories at their net realizable amount at the time of production was viewed
as inappropriate. Rather, inventories should be presented at the lower of cost
or market. Consequently, in conforming to the interpretations of SAB No. 101,
CMS Energy implemented a change in the recording of these oil and gas
exploration and production inventories as of January 1, 2000. The cumulative
effect of this one-time non-cash accounting change decreased 2000 income by $7
million, or $5 million, net of tax.
NUCLEAR FUEL COST: Consumers amortizes nuclear fuel cost to fuel expense
based on the quantity of heat produced for electric generation. Through November
2001, Consumers expensed the interest on leased nuclear fuel as it was incurred.
Effective December 2001, Consumers no longer leases its nuclear fuel.
For nuclear fuel used after April 6, 1983, Consumers charges disposal costs
to nuclear fuel expense, recovers these costs through electric rates, and then
emits them to the DOE quarterly. Consumers elected to defer payment for disposal
of spent nuclear fuel burned before April 7, 1983. As of December 31, 2002,
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.
NUCLEAR PLANT DECOMMISSIONING: In 2002, Consumers collected $6 million from
its electric customers for the decommissioning of its Palisades nuclear plant.
Amounts collected from electric retail customers and deposited in trusts
(including trust earnings) are credited to accumulated depreciation. In March
2001, Consumers filed updated decommissioning cost estimates for Big Rock and
Palisades that were $349 million and $739 million in 2000 dollars, respectively.
Using the inflation factors presented in the filing to the MPSC, the Palisades
estimated decommissioning cost in 2002 dollars is $809 million. The Big Rock
decommissioning cost in 2002 dollars is $327 million. Consumers' site-specific
decommissioning cost estimates for Big Rock and Palisades assume that each plant
site will eventually be restored to conform to the adjacent landscape, and all
contaminated equipment will be disassembled and disposed of in a licensed burial
facility. On December 31, 2000, Big Rock trusts were fully funded per the March
22, 1999 MPSC order and Consumers discontinued depositing funds in the trust. In
December 2000, the NRC extended the Palisades operating license to March 2011
and the impact of this extension was included as part of Consumers' March 2001
filing with the MPSC. Consumers is required to file the next "Report on the
Adequacy of the Existing Annual Provision for Nuclear Plant Decommissioning"
(Report) with the MPSC by March 31, 2004.
In 1997, Big Rock closed permanently and plant decommissioning began.
Consumers estimates that the Big Rock site will be returned to a natural state
by the end of 2012 if the DOE begins removing the spent nuclear fuel by 2010. In
2002, Consumers incurred costs of $28 million that were charged to the
accumulated depreciation reserve for decommissioning and withdrew $30 million
from the Big Rock nuclear decommissioning trust fund. In total, Consumers has
incurred costs of $218 million that have been charged to the accumulated
depreciation reserve for decommissioning and withdrew $209 million from the Big
Rock nuclear decommissioning trust fund.
These activities had no material impact on net income. At December 31, 2002,
Consumers is the beneficiary of the investment in nuclear decommissioning trust
funds of $110 million for Big Rock.
After retirement of Palisades, Consumers plans to maintain the facility in
protective storage if radioactive waste disposal facilities are not available.
Consumers will incur most of the Palisades decommissioning costs after the
plant's NRC operating license expires. Palisades' current NRC license will
expire in 2011 and the trust funds were estimated to have accumulated $921
million by that time, assuming currently approved MPSC surcharge levels.
Consumers estimates that at the time Palisades is fully decommissioned in the
year 2049, the trust funds will have provided $2.5 billion, including trust
earnings, to pay for the anticipated expenditures over the entire
decommissioning period. At December 31, 2002, Consumers is the beneficiary of
the investment in the MPSC nuclear decommissioning trust funds of $416 million
for Palisades. In addition, at December 31, 2002, Consumers has a FERC
decommissioning trust fund with a balance of approximately $9 million.
PLANT AND PROPERTY: Plant and Property, including improvements, is stated
at cost. Construction-related labor and material costs, as well as indirect
construction costs such as engineering and interest costs, are capitalized.
Property repairs, minor property replacements and maintenance are charged to
maintenance expense as incurred. When depreciable plant and property maintained
by CMS Energy's regulated operations are retired or sold, the original cost plus
cost of removal (net of salvage credits), is charged to accumulated
depreciation.
81
Depreciation expense for plant and property was $343 million, $312 million,
and $345 million in 2002, 2001 and 2000, respectively. Consumers bases
depreciation provisions for utility property on straight-line and units-of-
production rates approved by the MPSC. For 2002, 2001 and 2000, the composite
depreciation rate for electric utility property was 3.1 percent annually. For
2002, 2001 and 2000, the composite rate for gas utility property was 4.5
percent, 4.4 percent and 4.4 percent, respectively. For 2002, 2001 and 2000, the
composite rate for other property was 7.2 percent, 11.2 percent and 10.7
percent, respectively. Other nonutility depreciable property is amortized over
its estimated useful life; gains and losses on asset sales are recognized at the
time of sale.
RELATED-PARTY TRANSACTIONS: In 2002, 2001 and 2000, Consumers paid $49
million, $55 million, and $51 million, respectively, for electric generating
capacity and energy from affiliates of Enterprises. Affiliates of CMS Energy
sold, stored and transported natural gas and provided other services to the MCV
Partnership totaling $43 million, $49 million, and $54 million for 2002, 2001
and 2000. For additional discussion of related-party transactions with the MCV
Partnership and the FMLP, see Note 6, Uncertainties and Note 18, Summarized
Financial Information of Significant Related Energy Supplier. Other
related-party transactions are immaterial.
UNAMORTIZED DEBT PREMIUM, DISCOUNT AND EXPENSE: CMS Energy amortizes
premiums, discounts and expenses incurred in connection with the issuance of
presently outstanding long-term debt over the terms of the respective issues.
For the regulated portions of CMS Energy's businesses, if debt is refinanced,
CMS Energy amortizes any unamortized premiums, discounts and expenses over the
term of the new debt, as allowed under regulated utility accounting.
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 December 31, 2002, Consumers
had a net investment in energy supply facilities of $1.475 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 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 on a prospective basis, including regulatory accounting
treatment of costs required to be recognized in accordance with SFAS No. 143.
See Note 6, 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.
The following regulatory assets (liabilities), which include both current
and non-current amounts, are reflected in the Consolidated Balance Sheets. These
costs are expected to be recovered through rates over periods of up to 14 years.
Consumers recognized an OPEB transition obligation in accordance with SFAS No.
106 and established a regulatory asset for this amount, which it expects to
recover in rates over the next ten years.
DECEMBER 31
----------------------
2002 2001
-------- --------
IN MILLIONS
Securitized costs.............................. $ 689 $ 717
Postretirement benefits........................ 204 228
Electric Restructuring Implementation Plan..... 83 82
Manufactured gas plant sites................... 69 70
Abandoned Midland project...................... 11 12
Income taxes................................... -- 6
82
Other.......................................... 16 15
-------- --------
Total regulatory assets........................ $ 1,072 $ 1,130
======== ========
Income taxes................................... $ (297) $ (282)
GCR over recovery.............................. (11) (9)
Other.......................................... (5) --
-------- --------
Total regulatory liabilities................... $ (313) $ (291)
======== ========
In October 2000, Consumers received an MPSC order authorizing Consumers to
securitize certain regulatory assets up to $469 million, net of tax; see Note 6,
Uncertainties, "Electric Rate Matters -- Electric Restructuring". Accordingly,
in December 2000, Consumers established a regulatory asset for securitized costs
of $709 million, before tax, that had previously been recorded in other
regulatory asset accounts. In order to prepare for the financing of the
securitized assets and the subsequent retirement of debt with Securitization
proceeds, issuance fees of $1 million, $10 million and $1 million were incurred
in 2002, 2001 and 2000, respectively, and capitalized as a part of
Securitization costs. These issuance costs are amortized each month for up to
fourteen years. Amortization of the securitized assets approximated $29 million
and $2 million in 2002 and 2001, respectively for accumulated securitized cost
amortization of $31 million. The components of the unamortized securitized costs
are illustrated below.
DECEMBER 31
------------------------
2002 2001
-------- --------
IN MILLIONS
Unamortized nuclear costs........................ $ 405 $ 405
Postretirement benefits.......................... 84 84
Income taxes..................................... 203 203
Uranium enrichment facility...................... 16 16
Accumulated Securitization cost amortization..... (31) (2)
Other............................................ 12 11
------ -----
Total unamortized securitized costs.............. $ 689 $ 717
====== =====
IMPLEMENTATION OF NEW ACCOUNTING STANDARDS
SFAS NO. 144, ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF LONG-LIVED
ASSETS: This new standard was issued by the FASB in October 2001, and supersedes
SFAS No. 121, and APB Opinion No. 30. SFAS No. 144 requires long-lived assets to
be measured at the lower of either the carrying amount or of the fair value less
the cost to sell, whether reported in continuing operations or in discontinued
operations. Therefore, discontinued operations will no longer be measured at net
realizable value or include amounts for operating losses that have not yet
occurred. SFAS No. 144 also broadens the reporting of discontinued operations to
include all components of an entity with operations that can be distinguished
from the rest of the entity and that will be eliminated from the ongoing
operations of the entity in a disposal transaction. The adoption of SFAS No.
144, effective January 1, 2002, results in CMS Energy accounting for any
impairment or disposal of long-lived assets under the provisions of SFAS No. 144
subsequent to January 1, 2002, but will not change the accounting used for
previous asset impairments or disposals. See Note 4, Discontinued Operations.
SFAS NO. 145, RESCISSION OF FASB STATEMENTS NO. 4, 44, AND 64, AMENDMENT OF
FASB STATEMENT NO. 13, AND TECHNICAL CORRECTIONS: Issued by the FASB in April
2002, this standard rescinds SFAS No. 4, Reporting Gains and Losses from
Extinguishment of Debt, and SFAS No. 64, Extinguishment of Debt Made to Satisfy
Sinking-Fund Requirements. As a result, any gain or loss on extinguishment of
debt should be classified as an extraordinary item only if it meets the criteria
set forth in APB Opinion No. 30. The provisions of this section are applicable
to fiscal years beginning 2003, however CMS Energy has adopted this provision
effective in 2002 and reclassified extraordinary losses of $7 million and $18
million in 2002 and 2001, respectively, to the accompanying Consolidated
Statements of Income. The 2002 reclassification increased interest expense $12
million ($8 million after-tax) and increased income from discontinued operations
$1 million. The 2001 reclassification increased interest expense $25 million
($16 million after-tax) and decreased income from discontinued operations $2
million. SFAS No. 145 amends SFAS No. 13, Accounting for Leases, to require
sale-leaseback accounting for certain lease modifications that have similar
economic impacts to sale-leaseback transactions. This provision is effective for
transactions occurring after May 15, 2002. Finally, SFAS No. 145 amends other
existing authoritative pronouncements to make various technical corrections and
rescinds SFAS No. 44, Accounting for Intangible Assets of Motor Carriers. These
provisions are effective for financial statements issued on or after May 15,
2002.
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
83
guidance and annual disclosure provisions of the statement are effective as of
December 31, 2002 and interim disclosure provisions are effective for interim
financial reports starting in 2003. CMS Energy adopted 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. Therefore, CMS
Energy recorded expense for the fair value of stock options issued in 2002. The
implementation had an immaterial effect on CMS Energy's financial statements
upon adoption of the method. Accordingly, CMS Energy recognized the $4 million
fair value of stock based awards granted, modified or settled in 2002 in
operating expenses. See Note 12, Executive Incentive Compensation.
NEW ACCOUNTING STANDARDS NOT YET ADOPTED: Beginning January 1, 2003,
companies must comply with SFAS No. 143, Accounting for Asset Retirement
Obligations. 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, but it has not yet
finalized its assessment of the obligation. However, upon initial adoption of
the standard, CMS Energy, as it relates to Consumers, expects to record a
regulatory liability, as well as an asset retirement obligation, as required by
SFAS No. 71. The regulatory liability recognizes the difference between the cost
of removal included in the reserve for accumulated depreciation for assets
within the scope of SFAS No. 143 and the accretion expense of the asset
retirement obligation and the depreciation expense of the asset retirement
obligation asset from when the obligation was initially incurred through
December 2002. When the asset retirement obligation liability is initially
recorded, the company would capitalize an offsetting amount by increasing the
carrying amount of the related long-lived asset. Over time, the initial
liability would be accreted to its present value each period and the capitalized
cost would be depreciated over the related asset's useful life. CMS Energy, as
it relates to Enterprises, is currently inventorying assets, including its
international investments, that may have a retirement obligation and is
consulting with counsel to determine if a legal retirement obligation exists.
While CMS Energy has not finalized its assessment of the legal retirement
obligation, the removal cost estimate will be determined based on fair value
cost estimates as required by the new standard. The present value of the legal
retirement obligations will be used to quantify the future effects of adoption
of this standard.
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. CMS Energy believes there will be no impact on its financial
statements upon adoption of the standard.
FASB INTERPRETATION NO. 45, GUARANTOR'S ACCOUNTING AND DISCLOSURE
REQUIREMENT FOR GUARANTEES, INCLUDING INDIRECT GUARANTEES OF INDEBTEDNESS OF
OTHERS: Effective January 1, 2003, CMS Energy adopted this interpretation which
elaborates on the disclosure to be made by a guarantor about its obligations
under certain guarantees that it has issued. It 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 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 will be required.
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
CMS Energy, 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. CMS Energy will be
required to consolidate any entities that meet the requirements of the
interpretation. CMS Energy is in the process of studying the interpretation, and
has yet to determine the effects, if any, on its consolidated financial
statements.
EITF ISSUE NO. 02-03, RECOGNITION AND REPORTING OF GAINS AND LOSSES ON
ENERGY TRADING CONTRACTS UNDER EITF ISSUES NO. 98-10 AND 00-17: AT THE OCTOBER
25, 2002 MEETING, THE EITF REACHED A FINAL CONSENSUS TO RESCIND EITF ISSUE NO.
98-10, Accounting for Contracts Involved in Energy Trading and Risk Management
Activities. As a result, only energy contracts that meet the definition of a
derivative in SFAS No. 133 will be carried at fair value. Energy trading
contracts that do not meet the definition of a derivative must be accounted for
as an executory contract (i.e., on an accrual basis). The consensus rescinding
EITF Issue No. 98-10 must be applied to all contracts that existed as of October
25, 2002 and must be recognized as a cumulative effect of a change in accounting
principle in accordance with APB Opinion No. 20, Accounting Changes, effective
the first day of the first interim or annual period beginning after December 15,
2002. The consensus also must be applied immediately to all new contracts
entered into
84
after October 25, 2002. As a result of these recent changes, CMS Energy is
currently evaluating its existing energy contracts to determine the impact of
this change which will be effective January 1, 2003.
OTHER: For significant accounting policies regarding risk management
activities and financial instruments, see Note 10; income taxes, see Note 11;
executive incentive compensation, see Note 12; and retirement benefits, see Note
13.
2. RESTATEMENT
ROUND-TRIP TRADES: During the period of May 2000 through January 2002, CMS
MST engaged in simultaneous, prearranged commodity trading transactions in which
energy commodities were sold and repurchased at the same price. These
transactions, which had no impact on previously reported consolidated net
income, earnings per share or cash flows, had the effect of increasing operating
revenues, operating expenses, accounts receivable, accounts payable and reported
trading volumes. After internally concluding that cessation of these trades was
in CMS Energy's best interest, these so called round-trip trades were halted in
January 2002.
CMS Energy accounted for these trades in gross revenue and expense through
the third quarter of 2001, but subsequently concluded that these round-trip
trades should have been reflected on a net basis. In the fourth quarter of 2001,
CMS Energy ceased recording these trades in either revenues or expenses. CMS
Energy's 2001 Form 10-K, issued in March 2002, restated revenue and expense for
the first three quarters of 2001 to eliminate $4.2 billion of previously
reported revenue and expense. The 2001 Form 10-K did include $5 million of
revenue and expense for 2001 from such trades, which remained uncorrected. CMS
Energy inadvertently failed to restate 2000 for round trip trades in the 2001
10-K. Financial statements have now been restated to eliminate $1 billion in
2000 and $5 million in 2001 of previously reported revenue and expenses.
CMS Energy is cooperating with an SEC investigation regarding round-trip
trading and the Company's financial statements, accounting practices and
controls. CMS Energy is also cooperating with inquiries by the Commodity Futures
Trading Commission, the FERC, and the United States Department of Justice
regarding these transactions. CMS Energy has also received subpoenas from U.S.
Attorney Offices regarding investigations of those trades. In addition, CMS
Energy's Board of Directors established the Special Committee of independent
directors to investigate matters surrounding round-trip trading and the Special
Committee retained outside counsel to assist in the investigation.
On October 31, 2002, the Special Committee reported the results of its
investigation to the Board of Directors. The Special Committee discovered no new
information inconsistent with the information previously reported by CMS Energy
and as reported above. The investigation also concluded that the round-trip
trades were undertaken to raise CMS MST's profile as an energy marketer, with
the goal of enhancing CMS MST's 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 to 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.
RESTATEMENT: In connection with the re-audit of the financial statements
for the fiscal years ended December 31, 2001 and December 31, 2000, CMS Energy
determined to make certain adjustments (in addition to the round-trip trades) to
its consolidated financial statements for the fiscal years ended December 31,
2001 and December 31, 2000. Therefore, the consolidated financial statements for
2001 and 2000 have been restated from amounts previously reported. At the time
it adopted the accounting treatment for these items, CMS Energy believed such
accounting was appropriate under accounting principles generally accepted in the
United States. The tables below summarize the significant adjustments and the
effects on CMS Energy's consolidated financial statements.
NET INCOME INCREASE (DECREASE) 2001 2000 TOTAL
------------------------------------------------------------------------------------ ---------- ---------- --------
(IN MILLIONS)
MCV PPA Adjustments................................................................ $ 90 $ (20) $ 70
DIG Loss Contract Accounting....................................................... 126 -- 126
Mark-to-Market Gains and Losses on Inter-book Transactions
and other related adjustments.................................................... (43) 18 (25)
Mark-to-Market Gains and Losses on Intercompany
Transactions..................................................................... (30) 18 (12)
CMS MST Account Reconciliations.................................................... (5) (13) (18)
Income Tax Adjustments............................................................. (30) -- (30)
85
Panhandle System Gas............................................................... (7) -- (7)
Amortization of Debt Costs......................................................... (2) 7 5
Other.............................................................................. (2) (3) (5)
------- ------- ------
Total.............................................................................. $ 97 $ 7 $ 104
======= ======= ======
BALANCE SHEET: INCREASE IN CONSOLIDATED DEBT 2001 2000
------------------------------------------------------ --------- -------
(IN MILLIONS)
Reconsolidation of LNG Facility....................... $ 215 $ --
Structured Financing of Methanol Plant................ 125 125
Consumers' Headquarters Capital Lease................. 16 --
MCV PPA ADJUSTMENTS: In 1992, Consumers originally accounted for losses
associated with the PPA by establishing a reserve for the difference between the
amount that Consumers was paying for power in accordance with the terms of the
PPA, and the amount that Consumers was ultimately allowed by the MPSC to recover
from electric customers. At that time, the reserve did not take into account
earnings Consumers would receive from its 49 percent interest in the MCV
Partnership due to uncertainties with the level of performance of the facility.
In 2000, Consumers reviewed its estimate of the economic losses it would
experience with respect to the PPA and re-evaluated all of the then current
facts and circumstances used to calculate the disallowance reserve, including
earnings from its 49 percent interest in the MCV Partnership. Consumers
concluded that no adjustment to the reserve was required in 2000. However, as
conditions surrounding MCV Partnership operations evolved in 2001, Consumers
concluded that it needed to increase the reserve by $126 million (pre-tax) in
the third quarter of 2001, and did so.
In connection with the re-audit of CMS Energy's consolidated financial
statements for the fiscal years 2000 and 2001, Consumers reviewed its 2000 and
2001 PPA accounting and related assumptions, and determined that the reserve
balance as of January 1, 2000 did appropriately reflect Consumers' probable
losses as of that date. However, as a result of reconsideration of all
subsidiary accounting effects, the re-evaluation of the PPA accounting did
result in a net reduction of operating expenses associated with the PPA of $12
million in 2001, an increase to operating expenses associated with the PPA of
$29 million in 2000, the reversal of the $126 million increase to the reserve
originally recorded in 2001, and immaterial adjustments to accretion expense for
both years.
The following table reflects the audit adjustments associated with the MCV
PPA accounting and the related net income statement effects:
2001 2000
--------- --------
INCREASE/(DECREASE)
IN MILLIONS
Reverse the original operating charge associated with
continuing losses on the MCV PPA.................................... $ 39 $ --
Charge 49 percent of annual capacity losses associated with
the MCV PPA to operating expense instead of to the
reserve............................................................. (27) (29)
--------- --------
Net operating expense decrease/(increase)............................. 12 (29)
Reverse the 2001 increase to the MCV PPA reserve...................... 126 --
Accretion Expense..................................................... -- (2)
--------- --------
Pre-tax effect of adjustments......................................... 138 (31)
Income tax effect..................................................... (48) 11
--------- --------
Net income impact of MCV PPA adjustments.............................. $ 90 $ (20)
========= ========
DIG LOSS CONTRACT ACCOUNTING: The Dearborn Industrial Generation complex, a
710 MW combined-cycle facility, was constructed during 1998 through 2001 to
fulfill contractual requirements and to sell excess power in the wholesale power
market. DIG entered into electric sales agreements (ESA) with Ford Motor
Company, Rouge Industries and Double Eagle Steel Coating Company, later assigned
by DIG to CMS MST Michigan, LLC, that require CMS MST Michigan to provide up to
300 MW of electricity at pre-determined prices for a fifteen-year term beginning
in June 2000. DIG also entered into steam sales agreements (SSA) with Ford and
Rouge, whereby DIG is to supply process and heating steam at a fixed price
commencing no later than June 1, 2000.
During the third quarter of 2001, CMS Energy recognized a pretax charge to
earnings of $200 million for the calculated loss on portions of the power
capacity under the ESAs. At that time CMS Energy assessed whether the DIG
facility was impaired under SFAS No. 121 and concluded that the DIG facility was
not impaired.
86
CMS Energy has now determined that existing accounting literature precludes
the recognition of anticipated losses on executory contracts such as those
involved with the ESAs at DIG. Accordingly, CMS Energy reversed the $200 million
pretax loss ($126 million after-tax) in 2001 on the ESA contracts and subsequent
related transactions.
ELIMINATION OF MARK-TO-MARKET GAINS AND LOSSES ON INTER-BOOK TRANSACTIONS
AND OTHER RELATED ADJUSTMENTS: CMS MST's business activities include marketing
to end users of energy commodities such as commercial and small industrial
purchasers of natural gas (CMS MST's retail business) and trading activities
with such entities as other energy trading companies (CMS MST's wholesale
business). During 2000 and 2001, CMS MST used two different methods to account
for these distinct activities: it applied the mark-to-market method of
accounting to its wholesale trading business operations, and it accounted for
its retail business operations using the accrual method. Some other energy
trading companies have taken a similar approach when their business activities
have included retail operations.
EITF Issue No. 98-10, Accounting for Contracts Involved in Energy Trading
and Risk Management Activities, applies to certain parts of CMS MST's
operations. EITF Issue No. 98-10 requires that energy-trading contracts be
marked to market; that is, measured at fair value determined as of the balance
sheet date, with the gains and losses included in earnings. According to EITF
Issue No. 98-10, the determination of whether an entity is involved in energy
trading activities is a matter of judgment that depends on the relevant facts
and circumstances. CMS MST had used the mark-to-market method of accounting for
its wholesale operations because these had been considered trading activities
under EITF Issue No. 98-10. Because CMS MST's retail operations had not been
considered trading activities, mark-to-market accounting under EITF Issue No.
98-10 was not applied to any retail contracts.
During 2000 and 2001, CMS MST's wholesale business entered into certain
transactions with CMS MST's retail business (inter-book transactions) in order
to economically hedge retail sales. The wholesale business marked-to-market
these inter-book transactions while the retail business did not; however, the
transactions were not properly documented as hedges under SFAS No. 133 or other
previously applicable accounting standard. Accordingly, CMS Energy has
determined that the mark-to-market gains and losses that were recognized by the
wholesale business on these inter-book transactions should have been eliminated
in consolidation. CMS Energy therefore has recognized a $75 million after-tax
charge to earnings in 2001 and $34 million of after-tax income in 2000 to
eliminate the effects of mark-to-market accounting in consolidation on
inter-book transactions.
A number of other adjustments have been recorded at CMS MST relating to
front-office activities and mark-to-market accounting. The adjustments, which
mainly affect price risk management assets and liabilities and inventory,
increased after-tax income by $32 million in 2001 and reduced after-tax income
by $16 million in 2000.
ELIMINATION OF MARK-TO-MARKET GAINS AND LOSSES ON INTERCOMPANY
TRANSACTIONS: As explained above, during 2000 and 2001 CMS MST applied the
mark-to-market method of accounting to the energy-trading contracts of its
wholesale operations. In doing so, CMS MST did not distinguish between
counterparties that were unrelated third parties, and those that were
consolidated or equity-method affiliates. Energy-trading contracts with
affiliated companies were therefore measured at their fair values as of the
balance sheet date, with the gains and losses included in earnings. The
affiliated counterparties, however, accounted for these contracts on the accrual
basis, because these companies were not engaged in energy trading activities and
therefore their activities were not within the scope of EITF Issue No. 98-10. In
addition, their contracts with CMS MST were not required to be marked to market
in 2001 under SFAS No. 133. The mark-to-market profits and losses that CMS MST
recognized on the contracts with affiliated companies were included in the CMS
Energy consolidated financial statements. CMS Energy has now concluded that
these amounts should have been eliminated in consolidation.
CMS Energy's restated consolidated financial statements have eliminated $30
million of after-tax mark-to-market gains in 2001 and $18 million of after-tax
mark-to-market losses in 2000 on intercompany transactions.
CMS MST ACCOUNT RECONCILIATIONS: CMS MST's business experienced rapid
growth during 2000 and 2001. Late in 2001, CMS Energy became aware of certain
control weaknesses at CMS MST and immediately began an internal investigation.
The investigation revealed that the size and expertise of the back-office
accounting staff had not kept pace with the rapid growth and, as a result,
bookkeeping errors had occurred and account reconciliations were not prepared.
Additionally, computer interfaces of sub-ledgers to the general ledger were
ineffective or lacking. As a result, sub-ledger balances did not agree to the
general ledger and the differences were not adjusted. In early 2002, CMS MST
commenced an account recalculation and reconciliation project that focused
initially on accounts receivable and payable, intercompany and cash accounts,
but was later expanded to include other accounts. The recalculation and
reconstruction work for 2000, 2001 and 2002 has been completed and the
consolidated financial statements reflect the required adjustments, which
decreased net income by $5 million in 2001 and $13 million in 2000.
87
INCOME TAX ADJUSTMENT: During the third quarter of 2001, CMS Energy wrote
down the value of certain of its foreign investments (see Note 3, Asset Sales,
Write-downs and Restructuring). The write-down was net of deferred U.S. income
tax benefits in the amount of $30 million expected to be realized upon the
ultimate disposition of these investments in transactions subject to U.S. income
tax. CMS Energy has now concluded that since these foreign investments were
considered by CMS Energy at the time to be essentially permanent in duration, no
deferred U.S. income tax benefits should have been recorded in 2001 on the
write-down (see Note 11, Income Taxes).
PANHANDLE SYSTEM GAS: Panhandle maintains system-balancing gas for use in
operations. During 2001, Panhandle applied lower of cost or market pricing only
to the portion of system balancing gas that it expected to consume in its
operations over the next twelve months. The remaining gas was reflected as
non-current and was recorded at cost. Upon further review, Panhandle has
determined that it should have applied lower of cost or market pricing to all
system balancing gas. The application of the lower of cost or market pricing to
the non-current system balancing gas results in an additional $7 million
after-tax write-down.
CONSOLIDATION OF LNG HOLDINGS: In late 2001, Panhandle entered into a
structured transaction to monetize a portion of the value of a long-term
terminalling contract of its LNG subsidiary. The LNG assets were contributed to
LNG Holdings, which then received an equity investment from an unaffiliated
third party, Dekatherm Investor Trust, and obtained new loans secured by the
assets. After paying expenses, net proceeds of $235 million were distributed to
Panhandle and the venture also loaned $75 million to Panhandle. While the
proceeds received by Panhandle were in excess of its book basis, a gain on the
transaction was not recorded. This excess was originally recorded as a deferred
commitment, reflecting the fact that Panhandle was expecting to reinvest
proceeds into LNG Holdings for a planned expansion. Panhandle is the manager and
operator of the venture, and has the primary economic interest in it. Initially,
Panhandle believed that off-balance sheet treatment for the venture was
appropriate under generally accepted accounting principles. Upon further
analysis of these facts, CMS Energy and Panhandle have now concluded that it did
not meet the conditions precedent to account for the contribution of the LNG
entity as a disposition given Panhandle's continuing involvement and the lack of
sufficient participating rights by the third-party equity holder in the venture.
As a result, CMS Energy has restated its financial statements to reflect
consolidation of LNG Holdings at December 31, 2001. The new accounting treatment
resulted in a net increase of $215 million of debt, the elimination of $183
million of deferred commitment, minority interest of $30 million and other net
assets of $62 million. Due to the pending sale of Panhandle, all of these
adjustments are included in discontinued operations on CMS Energy's consolidated
balance sheet at December 31, 2001. With the exception of certain immaterial
reclassifications, there was no impact to 2001 net income resulting from this
accounting treatment.
STRUCTURED FINANCING OF METHANOL PLANT: In 1999, CMS Gas Transmission and
an unrelated entity financed $250 million of the costs of construction of a
jointly owned methanol plant with an off-balance-sheet special purpose entity
(SPE) that entered into two separate non-recourse note borrowings containing
cross-collateral provisions only with respect to a joint collection account into
which the proceeds from shared collateral were to be deposited. Plant
construction was completed in the spring of 2001. In December 2001, CMS Gas
Transmission issued an irrevocable call for $125 million of these notes (i.e.,
the A1 Notes) and they were paid off in January 2002. As part of the 1999
financing, CMS Energy guaranteed the interest payments on the A1 Notes, subject
to a $75 million limit. CMS Energy did not guarantee repayment of the A1 Notes;
however, CMS Energy issued mandatorily convertible preferred stock to a trust as
security for the A1 Notes. If an amount to repay the A1 Notes was not deposited
within 120 days of the maturity date (or earlier date caused by, for example, a
downgrade of the credit rating of CMS Energy) the holders of 25 percent of the
A1 Notes could cause the mandatorily convertible preferred shares to be sold.
The mandatorily convertible preferred stock of CMS Energy was convertible into
the number of shares of CMS Energy Common Stock needed to make the note holder
whole without limit. Additional security for the A1 Notes was 60 percent of the
capital stock of CMS Methanol, an entity that held a 45 percent ownership
interest in the methanol plant. The SPE's assets comprised investments in CMS
Methanol and in another subsidiary that also owned a 45 percent interest in the
methanol plant. Because the use of non-recourse debt having cross-collateral
provisions only with respect to the joint collection account effectively
segregated the cash flows and assets, in substance this financing created two
separate SPEs. CMS Energy has now concluded that it should have consolidated the
virtual SPE created by the non-recourse borrowing. Therefore, CMS Energy has
restated its 2000 and 2001 financial statements to increase its equity ownership
interest in the methanol plant and increase debt, each by $125 million.
The following tables reflect the effects of the adjustments CMS Energy made
to its consolidated financial statements for the fiscal years ended December 31,
2001 and December 31, 2000, as well as the effects of discontinued operations.
88
CONSOLIDATED STATEMENT OF INCOME(a)
2001 2000
----------------------------- ----------------------------
AS REPORTED AS RESTATED AS REPORTED AS RESTATED
------------ ----------- ------------ -----------
IN MILLIONS
Operating Revenue..................................... $ 9,597 $ 8,063 $ 8,739 $ 6,697
------------ ----------- ------------ -----------
Operating expenses.................................... 7,644 6,762 6,567 5,013
Maintenance......................................... 263 224 295 189
Depreciation, depletion and amortization............ 530 398 605 489
General taxes....................................... 231 196 240 209
Reduced asset valuations............................ 628 240 329 329
------------ ----------- ------------ -----------
Total Operating Expenses.............................. 9,296 7,820 8,036 6,229
------------ ----------- ------------ -----------
Operating Income:
Electric utility.................................... 339 349 481 454
Gas utility......................................... 99 97 98 96
Natural gas transmission............................ 207 (50) 227 22
Independent power production........................ 121 (76) 192 (136)
Oil and gas exploration and production.............. 74 -- 31 --
Marketing, services and trading..................... 71 (22) 14 23
Other............................................... 18 (55) (11) 9
Loss contracts and reduced asset valuation(b)......... (628) -- (329) --
------------ ----------- ------------ -----------
Total Operating Income................................ 301 243 703 468
------------ ----------- ------------ -----------
Other Income (Deductions):
Accretion expense................................... (37) (37) (33) (35)
Gains on asset sales, net........................... 11 -- 84 54
Other, net.......................................... 15 25 12 12
------------ ----------- ------------ -----------
Total Other Income (Deductions)....................... (11) (12) 63 31
------------ ----------- ------------ -----------
Fixed Charges......................................... 691 562 676 502
------------ ----------- ------------ -----------
Income (Loss) From Continuing Operations Before
Income Taxes and Minority Interests:................ (401) (331) 90 (3)
------------ ----------- ------------ -----------
Income Tax Provision (Benefit)........................ (73) (98) 50 34
Minority Interests.................................... 3 3 2 3
------------ ----------- ------------ -----------
Income (Loss) From Continuing Operations.............. (331) (236) 38 (40)
------------ ----------- ------------ -----------
Discontinued Operations............................... (185) (210) 3 83
------------ ----------- ------------ -----------
Income (Loss) Before Cumulative Effect of Change
in Accounting Principle and Extraordinary
Item................................................ (516) (446) 41 43
------------ ----------- ------------ -----------
Cumulative Effect of Change in Accounting for
Derivative Instruments.............................. (11) (2) (5) --
Extraordinary Item.................................... (18) -- -- --
------------ ----------- ------------ -----------
Consolidated Net Income (Loss)........................ (545) (448) 36 43
============ =========== ============ ===========
Basic and diluted earnings (loss) per share........... $ (4.17) $ (3.42) $ 0.32 $ 0.38
============ =========== ============ ===========
----------
(a) 2001 and 2000 also includes the effects of discontinued operations.
(b) 2001 and 2002 as reported did not reflect an allocation of reduced asset
valuations to the associated business segments. 2001 and 2000 as restated
reflect such an allocation. See Note 3 for a breakdown of reduced asset
valuation by business segment for 2001 and 2000 as restated.
89
CONSOLIDATED STATEMENT OF CASH FLOWS(a)
2001 2000
---------------------------- ----------------------------
AS REPORTED AS RESTATED AS REPORTED AS RESTATED
----------- ----------- ----------- -----------
IN MILLIONS
Cash Flows from Operating Activities
Net Income (Loss)............................................. $ (545) $ (448) $ 36 $ 43
Reduced asset valuations...................................... 628 240 329 329
Increase (decrease) deferred income taxes and
investment tax credit....................................... 135 227 8 2
Decrease (increase) in accounts receivable and
accrued revenue............................................. 68 330 (398) (310)
Decrease (increase) in inventories............................ (353) (346) (54) (73)
Increase (decrease) in accounts payable....................... (94) (363) 181 101
Changes in other assets and liabilities....................... (74) (169) (46) 175
Net cash provided by operating activities..................... 417 366 453 600
Net increase (decrease) in Cash and Temporary
Cash Investments............................................ 7 (14) 50 9
Cash and Cash Investments, End of Period...................... 189 127 182 141
----------
(a) 2001 and 2000 also includes the effects of discontinued operations.
90
CONSOLIDATED BALANCE SHEET
2001 2000
---------------------------- ----------------------------
AS REPORTED AS RESTATED AS REPORTED AS RESTATED
------------- ------------- ------------- -------------
IN MILLIONS
ASSETS
Plant and Property (at cost) .................................... 8,362 5,848 7,831 5,227
------------- ------------- ------------- -------------
Investments...................................................... 1,895 1,961 2,016 2,091
------------- ------------- ------------- -------------
Current Assets:
Cash and temporary cash investments............................ 189 127 182 141
Accounts receivable, notes receivable, accrued
revenue...................................................... 681 219 914 589
Accounts receivable, Marketing, services and
trading...................................................... 683 295 526 336
Price risk management assets................................... 461 327 1,097 871
Assets held for sale........................................... -- 471 -- 545
Deferred income taxes.......................................... -- -- 39 30
Prepayments, inventories, and other............................ 1,019 1,121 745 641
------------- ------------- ------------- -------------
Total Current Assets............................................. 3,033 2,560 3,503 3,153
------------- ------------- ------------- -------------
Non-current Assets:
Assets held for sale........................................... -- 3,480 -- 3,508
Price risk management assets................................... 424 368 350 212
Goodwill, net.................................................. 811 71 891 87
Regulatory assets.............................................. 1,105 1,105 1,131 968
Other.......................................................... 1,472 1,382 1,529 1,659
------------- ------------- ------------- -------------
Total Non-current Assets......................................... 3,812 6,406 3,901 6,434
------------- ------------- ------------- -------------
Total Assets..................................................... $ 17,102 $ 16,775 $ 17,251 $ 16,905
============= ============= ============= =============
STOCKHOLDERS' INVESTMENT AND LIABILITIES
Capitalization:
Total common stockholders' equity................................ $ 1,890 $ 2,038 $ 2,361 $ 2,416
Long-term debt................................................... 6,923 5,840 6,770 6,048
Non-current portion of capital leases............................ 60 71 54 49
Other............................................................ 1,258 1,258 1,133 1,133
------------- ------------- ------------- -------------
Total Capitalization............................................. 10,131 9,207 10,318 9,646
------------- ------------- ------------- -------------
Minority Interests............................................... 86 24 88 23
------------- ------------- ------------- -------------
Current Liabilities:
Current maturities of long-term debt and capital
leases....................................................... 981 1,016 707 272
Notes payable.................................................. 416 416 403 403
Accounts payable............................................... 547 359 614 325
Accounts payable -- Marketing, services and
trading...................................................... 574 236 410 274
Liabilities held for sale...................................... -- 639 -- 604
Accrued taxes.................................................. 125 111 309 300
Deferred income taxes.......................................... 51 49 -- --
Price risk management liabilities.............................. 381 367 1,068 831
Other.......................................................... 735 478 750 489
------------- ------------- ------------- -------------
Total Current Liabilities........................................ 3,810 3,671 4,261 3,498
------------- ------------- ------------- -------------
Non-current Liabilities:
Deferred income taxes.......................................... 773 824 749 697
Price risk management liabilities.............................. 352 287 341 208
Liabilities held for sale...................................... -- 1,376 -- 1,418
Other.......................................................... 1,950 1,386 1,494 1,415
------------- ------------- ------------- -------------
Total Non-current Liabilities.................................... 3,075 3,873 2,584 3,738
------------- ------------- ------------- -------------
Total Stockholders' Investment and Liabilities................... $ 17,102 $ 16,775 $ 17,251 $ 16,905
============= ============= ============= =============
91
CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS' EQUITY
2001 2000
----------------------------- ----------------------------
AS REPORTED AS RESTATED AS REPORTED AS RESTATED
------------ ------------ ------------ -----------
IN MILLIONS
Retained Earnings
At beginning of period..................... $ (320) $ (313) $ (189) $ (189)
Consolidated net income (loss)............. (545) (448) 36 43
Common stock dividends declared............ (190) (190) (167) (167)
------------ ----------- ------------ -----------
At end of period......................... (1,055) (951) (320) (313)
------------ ----------- ------------ -----------
Other Comprehensive Income (Loss)
At beginning of period..................... (249) (201) (105) (105)
Investments................................ (2) (3) (5) (5)
Derivative instruments..................... (33) (38) -- --
Foreign currency translation............... (41) (27) (146) (98)
------------ ----------- ------------- ------------
At end of period......................... (325) (269) (256) (208)
------------ ----------- ------------ -----------
Common stock................................. 1 1 1 1
Other paid-in-capital........................ 3,269 3,257 2,936 2,936
------------ ----------- ------------ -----------
Total Common Stockholders' Equity............ $ 1,890 $ 2,038 $ 2,361 $ 2,416
============ =========== ============ ===========
Total Consolidated Comprehensive Income
(Loss)..................................... $ (621) $ (516) $ (115) $ (60)
============ =========== ============ ===========
3. ASSET SALES, WRITE-DOWNS AND RESTRUCTURING
During 2001 and 2002, CMS Energy completed numerous asset sales, recorded
significant write-downs and incurred restructuring costs.
ASSET SALES
During 2002, CMS Energy continued to implement its financial improvement
plan and on-going asset sales program that was initiated in late 2001. The asset
sales program encompasses the sale of all non-strategic and under-performing
assets. The impacts of these sales are included in "Gain (losses) on asset
sales" in the Consolidated Statements of Income.
In January 2002, CMS Energy completed the sale of its ownership interests
in Equatorial Guinea to Marathon Oil Company for approximately $993 million.
Proceeds from this transaction were used primarily to retire existing debt.
Included in the sale were all of CMS Oil and Gas' oil and gas reserves in
Equatorial Guinea and CMS Gas Transmission's ownership interest in the related
methanol plant. The gain on the methanol plant of $19 million ($12 million, net
of tax) is included in "Gain (loss) on asset sales" in the accompanying
consolidated statements of income. The gain on the sale of CMS Oil & Gas'
Equatorial Guinea properties of $497 million ($310 million, net of tax) is
included in discontinued operations in 2002.
In April 2002, CMS Energy sold its equity ownership interest in Toledo
Power Company electric generating facility in the Philippines for $10 million.
Proceeds from the sale were used to repay debt. The pretax loss of $11 million
($5 million, net of tax) is included in "Gain (loss) on asset sales" in the
accompanying consolidated statements of income in 2002.
In May 2002, Consumers Energy closed on the sale of its electric
transmission system to a limited partnership whose general partner is Washington
D.C.-based Trans-Elect. Also, in May 2002, Consumers sold its reactor top
equipment. Both sales totaled approximately $295 million. The pretax gains on
these sales, which totaled $39 million ($31 million, net of tax), are included
in "Gain (loss) on asset sales" in the accompanying consolidated statements of
income.
In August 2002, CMS Energy sold its equity ownership interest in The
National Power Supply Company electric generating facility in Thailand for $48
million. The pretax gain of $15 million ($30 million, net of tax benefit) is
included in "Gain (loss) on asset sales" in the accompanying consolidated
statements of income.
In October 2002, CMS Generation completed the sale of its ownership
interest in the 200 MW Vasavi Power Plant, located in Tamil Nada, India for $34
million. CMS Generation's investment in the Vasavi Power Plant at September 30,
2002 was $59 million.
92
PRE-TAX AFTER-TAX PRE-TAX AFTER-TAX PRE-TAX AFTER-TAX
2002 2002 2001 2001 2000 2000
--------- ----------- --------- ----------- --------- --------
IN MILLIONS
Asset Sales -- Gain (Loss):
Energy............................... -- -- (1) -- 12 8
Enterprises.......................... -- -- -- -- -- --
Generation........................... (21) 1 (1) -- 42 25
Natural Gas Transmission............. 19 12 -- -- -- --
Consumers Energy..................... 39 31 1 -- -- --
Energy Distribution.................. -- -- -- -- (8) (2)
----
Total Gain (Loss) on Asset Sales....... 37 44 (1) -- 46 31
==== == === == === ==
In January 2003, CMS Energy closed on the sale of a substantial portion of
CMS MST's wholesale natural gas trading contracts to Sempra Energy Trading, the
wholesale commodity trading unit of Sempra Energy and received $17 million of
cash proceeds. In February 2003, CMS Energy entered into a definitive agreement
with Constellation Power Source, Inc. to sell CMS MST's wholesale power
contracts. The sale has been approved by FERC and is expected to close as early
as March 31, 2003.
In February 2003, Panhandle sold its one third interest in Centennial
Pipeline, LLC for $40 million to Centennial's two other partners, Marathon
Ashland Petroleum, LLC and TE Products Pipeline Company, Limited Partner,
through its general partner, Texas Eastern Products Pipeline Company.
ASSET WRITE-DOWNS
In 2002 and 2001, implementation of a new strategic direction and financial
improvement plan for CMS Energy has resulted in assets and development projects
that have been identified by the business units as non-strategic or
under-performing. These assets include both domestic and foreign electric power
plants, gas processing facilities, and certain equity method and other
investments. In addition, CMS Energy has written off the carrying value of
development projects that will no longer be pursued. Management has evaluated
operating assets for impairment in accordance with the provisions of SFAS No.
144 in 2002 (SFAS No. 121 in 2001 or prior), and has evaluated equity
investments for impairment in accordance with the provisions of APB Opinion No.
18.
The reduced asset valuations were primarily a result of management's
determination that the anticipated future cash flows from these projects would
be insufficient to provide for recovery of their carrying value. The charges are
reflected in the accompanying consolidated statements of income under the
caption "Reduced asset valuations". CMS Generation has evaluated the fair values
of its investments using discounted cash flow analyses and the values of
contract prices. The fair values of other CMS Energy investments have been
determined using market prices and evaluations of expected future cash flows.
Based on these evaluations, certain assets were determined to be impaired.
Reductions in asset valuations recognized in 2002 were $598 million ($388
million, net of tax). Included in this amount were reductions in CMS
Generation's valuation of DIG $460 million ($299 million, net of tax); Michigan
Power, which owns natural gas-fueled peaking units in Michigan, $62 million ($40
million, net of tax); and Craven, a 45-Mwh wood-fueled plant in North Carolina,
$23 million ($15 million, net of tax). DIG's reduced valuation is primarily a
reflection of the unfavorable terms of its power purchase agreement (PPA).
Michigan Power's reduced valuation is primarily a result of a depressed merchant
power market and the lack of a long-term PPA. Craven's reduced valuation is
primarily a result of the anticipated expiration of its current PPA at the end
of 2005 and a depressed merchant power market.
In 2001, asset valuations were reduced by $240 million ($198 million, net
of tax) to reflect the excess of the carrying value of these assets over their
fair value. Included in the 2001 charge were reduced asset valuations at CMS
Generation for National Power Supply, a 300-Mwh coal-fueled plant in Thailand,
$89 million ($88 million, net of tax); El Chocon, a 1,200-Mwh hydro-electric
plant in Argentina, $45 million ($42 million net of tax); and HL Power, a 36-Mwh
wood-fueled plant in California, $30 million ($18 million net of tax). Also
included in the 2001 charge were reduced asset valuations at CMS Gas
Transmission for several development projects of $16 million ($10 million, net
of tax) that would no longer be pursued, and for goodwill associated with a gas
fractionation facility in southeastern Michigan.
93
In the first quarter of 2000, CMS Energy announced its intention to sell
its 50 percent ownership interest in Loy Yang, retained the services of
investment bankers to assist in the sales process, and solicited bids from
potential buyers for CMS Energy's interest in Loy Yang. As a result of being
unable to attract a reasonable offer for Loy Yang by the end of November 2000,
and after re-evaluating the expected future cash flows from this investment,
including the continuing unfavorable electric market prices in Victoria,
Australia, management determined in the fourth quarter of 2000 that the carrying
amount of the equity investment in Loy Yang was not recoverable. Consequently,
in accordance with the provisions of APB Opinion No. 18, CMS Energy determined
that there has been a loss in value of the investment and an impairment loss on
the carrying amount of the investment has been realized.
This impairment loss is reflected under the caption "Reduced asset
valuations" in the accompanying consolidated statements of income in 2000 as a
pretax charge of $329 million ($268 million after-tax). This loss does not
include cumulative net foreign currency translation losses of $168 million due
to unfavorable changes in exchange rates, which, in accordance with SFAS No. 52,
will not be realized until there has been a sale, full liquidation or other
disposition of CMS Energy's investment in Loy Yang. In connection with the
restatement of CMS Energy's December 31, 2000 consolidated financial statements,
a deferred U.S. income tax asset of $48 million was recorded with respect to the
cumulative net foreign currency translation losses associated with CMS Energy's
Loy Yang investment (see Note 11, Income Taxes).
CMS Energy is continuing to review its business alternatives for its
investment in Loy Yang, including future financing and operating alternatives,
the nature and extent of CMS Energy's future involvement and the potential for
an ultimate sale of its interest in the future. CMS Energy has not established a
deadline for any of these alternatives.
PRE-TAX AFTER-TAX PRE-TAX AFTER-TAX PRE-TAX AFTER-TAX
2002 2002 2001 2001 2000 2000
---------- ----------- ---------- ----------- ---------- --------
IN MILLIONS
Asset Write-Downs:
Enterprises........................... $ (15) $ (10) $ (14) $ (9) $ -- $ --
Generation............................ (565) (367) (180) (159) (329) (268)
Natural Gas Transmission.............. -- -- (43) (28) -- --
Consumers Energy...................... -- -- (3) (2) -- --
Marketing, Services and Trading....... (18) (11) -- -- -- --
--------- -------- --------- -------- --------- --------
Total Asset Write-Downs................. $ (598) $ (388) $ (240) $ (198) $ (329) $ (268)
========= ======== ========= ======== ========= ========
RESTRUCTURING AND OTHER COSTS
CMS Energy announced in 2002 a series of new initiatives intended to
sharpen its business focus and help restore its financial health by reducing
operating costs. The initiatives announced included the following:
- Relocating CMS Energy's corporate headquarters from Dearborn, Michigan
to a new headquarters building then under construction in Jackson,
Michigan. The Jackson headquarters building opened in March 2003 and
will house an estimated 1,450 CMS Energy and Consumers Energy
employees. In the longer term, the relocation will reduce corporate
operating expenses.
- Implementing changes to CMS Energy's 401(K) savings program which will
provide savings for CMS Energy and enhanced investment options for
employee participants.
- Implementing changes to CMS Energy's health care plan in order to keep
benefits and costs competitive.
- Terminating five officers, 18 CMS Field Services employees and 41 CMS
MST trading group employees. Prior to December 31, 2002, 31
Dearborn-based employees and 92 Houston employees have elected
severance arrangements. Of these 187 officers and employees, 65 had
been terminated as of December 31, 2002. The remaining terminations
will be completed in 2003.
Restructuring costs for the year ended December 31, 2002, which are
reported in operating expenses, include:
- Involuntary termination benefits of $22 million for officers and
employees.
- The present value of future non-cancelable lease obligations of $11
million related to relocating the corporate headquarters to Jackson,
Michigan.
94
In addition, in the first half of 2003, restructuring costs related to
relocating employees and other headquarters expenses are expected to be $2
million. The relocation will occur between March and June 2003, and such costs
will be expensed as incurred.
The following table shows the amount charged to expense during 2002 for
restructuring costs, the payments made, and the unpaid balance of accrued costs
at December 31, 2002, which is expected to be paid in 2003.
YEAR ENDED
DECEMBER 31, 2002 UNPAID BALANCE
------------------------- -----------------
EXPENSE PAYMENTS DECEMBER 31, 2002
------- -------- -----------------
IN MILLIONS
Involuntary termination........................ $ 22 $ 10 $ 12
Non-cancelable lease obligations............... 11 3 8
------- ------- -------
Total.......................................... $ 33 $ 13 $ 20
======= ======= =======
4: DISCONTINUED OPERATIONS
In accordance with SFAS No. 144, discontinued operations include components
of entities or entire entities that, through disposal transactions, will be
eliminated from the ongoing operations of CMS Energy. The assets and liabilities
of these entities were measured at the lower of the carrying value or the fair
value less cost to sell as required by SFAS No. 144. A description of the
entities included in discontinued operations is as follows:
In September 2001, CMS Energy discontinued the operations of the
International Energy Distribution segment. CMS Energy is actively seeking a
buyer for the assets of CMS Electric and Gas, and although the timing of this
sale is difficult to predict, nor can it be assured, management expects the sale
to occur in 2003.
In January 2002, CMS Energy completed the sale of its ownership interests
in Equatorial Guinea to Marathon Oil Company for approximately $993 million.
Included in the sale were all of CMS Oil and Gas' oil and gas reserves in
Equatorial Guinea and CMS Gas Transmission's ownership interest in the related
methanol plant. The gain on the CMS Oil & Gas Equatorial Guinea properties of
$497 million ($310 million, net of tax) is included in discontinued operations.
In May 2002, CMS closed on the sale of CMS Oil and Gas' coal-bed methane
holdings in the Powder River Basin to XTO Energy. The Powder River properties
were included in discontinued operations for the first four months of 2002,
including a gain on the sale of $17 million ($11 million, net of tax).
In June 2002, CMS Energy abandoned the Zirconium Recovery Project, which
was initiated in January 2000. The purpose of the project was to extract and
sell uranium and zirconium from a pile of caldesite ore held by the Defense
Logistic Agency of the U.S. Department of Defense. After evaluating future cost
and risk, CMS Energy decided to abandon this project and recorded a $47 million
loss ($31 million, net of tax) in discontinued operations.
In June 2002, CMS Energy announced its plan to sell CMS MST's energy
performance contracting subsidiary, CMS Viron. CMS Viron enabled building owners
to improve their facilities with equipment upgrades and retrofits and finance
the work with guaranteed energy and operational savings. After evaluating all of
the relevant facts and circumstances, $6 million, net of tax, has been reflected
as a loss on discontinued operations in order to appropriately reflect the fair
value less selling costs of CMS Viron. CMS Energy is actively seeking a buyer
for the assets of CMS Viron and although the timing of this sale is difficult to
predict, nor can it be assured, management expects the sale to occur in 2003.
In September 2002, CMS Energy closed on the sale of the stock of CMS Oil
and Gas and the stock of a subsidiary of CMS Oil and Gas that holds property in
Venezuela. In October 2002, CMS Energy closed on the sale of CMS Oil and Gas's
properties in Colombia. As a result of these closings, CMS Energy has completed
its exit from the oil and gas exploration and production business. The proceeds
from the combined sales total approximately $232 million and have been used to
retire the remaining balance on a $150 million Enterprises term loan due in
December 2002 and a portion of a $295.8 million CMS Energy loan originally due
March 2003. The combined sales resulted in a loss of approximately $126 million
($82 million, net of tax), which is included in discontinued operations.
In December 2002, CMS Energy reached a definitive agreement to sell the
Panhandle companies to Southern Union Panhandle Corp. The agreement calls for
Southern Union Panhandle Corp, a newly formed entity owned by Southern Union
Company and AIG Highstar Capital, L.P. to pay $662 million in cash and assume
$1.166 billion in debt. Under the terms of the agreement, CMS Energy
95
was to retain Panhandle's ownership interests in the Centennial and Guardian
pipeline projects, as well as certain of Panhandle's net deferred tax assets,
all tax liabilities, and pension assets and liabilities. Panhandle has since
sold its interest in Centennial and the Guardian interest has been transferred
to Panhandle's direct parent, CMS Gas Transmission. The transaction has been
approved by the board of directors of each company and is subject to customary
closing conditions and action by the FTC under the Hart-Scott-Rodino Act. The
sale is expected to close in 2003. Panhandle's results of operations have been
reclassified to discontinued operations in the consolidated statements of
income.
In December 2002, CMS Energy discontinued the operations of Field Services,
a subsidiary of CMS Gas Transmission. CMS Energy is actively seeking a buyer for
the assets of Field Services, and although the timing of this sale is difficult
to predict, nor can it be assured, management expects the sale to occur in 2003.
The summary of balance sheet information below represents those entities
that are still in the disposal process, including Panhandle, CMS Viron, Field
Services, International Energy Distribution, and the Zirconium Recovery Project.
The assets and liabilities of the discontinued operations and other assets and
liabilities held for sale, including price risk management assets and
liabilities and equity method investments are shown as separate components in
the consolidated balance sheets of CMS Energy.
DECEMBER 31
-----------
2001
2002 (RESTATED)
---- ----------
IN MILLIONS
Assets
Cash....................................................... $ 83 $ 47
Accounts receivable, net................................... 179 313
Materials and supplies..................................... 53 92
Other...................................................... 329 19
------------ -----------
Total current assets held for sale......................... $ 644 $ 471
============ ===========
Property, plant and equipment, net......................... $ 1,970 $ 2,562
Unconsolidated investments................................. (80) 88
Goodwill................................................... 139 754
Other...................................................... 52 76
------------ -----------
Total non current assets held for sale..................... $ 2,081 $ 3,480
============ ===========
Liabilities
Accounts payable........................................... $ 105 $ 212
Current portion of long-term debt.......................... 6 112
Accrued taxes.............................................. 22 --
Other current liabilities.................................. 332 315
------------ -----------
Total current liabilities held for sale.................... $ 465 $ 639
============ ===========
Long-term debt............................................. $ 1,151 $ 1,290
Minority interest.......................................... 63 91
Other non current liabilities.............................. 29 (5)
------------ ------------
Total non current liabilities held for sale................ $ 1,243 $ 1,376
============ ===========
Revenues from such operations were $1,158 million, $1,453 million and
$1,008 million in 2002, 2001 and 2000, respectively. In accordance with SFAS No.
144, the net income (loss) of the operations is included in the consolidated
statements of income under "discontinued operations". The pretax gain (loss)
related to discontinued operations recorded for the years ended December 31,
2002, 2001 and 2000 was ($389) million, ($117) million and $115 million,
respectively, which included charges resulting from reductions in asset values
and a portion of CMS Energy's interest expense. Interest expense of $69 million,
$94 million and $83 million for 2002, 2001 and 2000, respectively, was allocated
to each discontinued operation based on its ratio of total capital to that of
CMS Energy. See the table below for income statement components of the
discontinued operations.
YEARS ENDED DECEMBER 31
-------------------------------------
2001 2000
2002 (RESTATED) (RESTATED)
---------- ---------- -------
IN MILLIONS
Discontinued operations:
Income (loss) from discontinued operations, net of tax
benefit of $2, tax of $93, and tax of $32................................... $ (36) $ (17) $ 83
Loss on disposal of discontinued operations, net of tax
benefit of $165, tax of $0, and tax of $0................................... (186) (193) --
---------- ---------- -------
Total............................................................................ $ (222) $ (210) $ 83
========== ========== =======
96
5. GOODWILL
CMS GAS TRANSMISSION: Effective January 1, 2002, SFAS No. 142 disallowed
the continued amortization of goodwill and required the testing of goodwill for
potential impairment. In accordance with SFAS No. 142, Panhandle completed the
first step of the goodwill impairment testing which indicated a significant
impairment of Panhandle's goodwill existed as of January 1, 2002. The actual
amount of impairment was determined in a second step by comparing the fair value
of goodwill, as determined by independent appraisers, to book value, using a
combination of the income approach based on discounted cash flows and the market
approach using public guideline companies and market transactions. As a result
of this second step appraisal, Panhandle recorded a write-off of goodwill in the
amount of $601 million ($369 million, net of tax).
CMS MST: During the third quarter of 1999, CMS MST purchased a 100 percent
interest in Viron Energy Services. CMS MST consolidated the activity of CMS
Viron and recorded goodwill as a result of the purchase price allocation. Based
on the quantitative and qualitative analysis, CMS MST recorded a loss of $15
million ($10 million, net of tax) for goodwill impairment effective January 1,
2002.
In 2002, CMS Energy discontinued the operations of Panhandle. As a result,
the goodwill impairment of $369 million after tax is reflected in discontinued
operations. Also in 2002, CMS Energy discontinued the operations of CMS Viron.
As a result, the goodwill impairment of $10 million after tax is reflected in
discontinued operations.
Accumulated amortization of goodwill at December 31, 2002 and 2001 was $63
million and $67 million, respectively.
Additionally, the following table represents pro forma net income for the
years 2002, 2001 and 2000, exclusive of amortization expense.
RESTATED RESTATED
2002 2001 2000
------------ ------------ ----------
IN MILLIONS
Reported Net Income (Loss)........................................................... $ (620) $ (448) $ 43
Add: goodwill amortization expense, net of tax of $--, $7,
and $8, respectively............................................................... -- 13 14
----------- ----------- ---------
Adjusted Net Income.................................................................. $ (620) $ (435) $ 57
=========== =========== =========
Adjusted Net Income (Loss) Per Share................................................. $ (4.46) $ (3.33) $ 0.50
=========== =========== =========
6: UNCERTAINTIES
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 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. CMS Energy has also received subpoenas from
U.S. Attorneys Offices regarding investigations of those trades. CMS Energy is
unable to predict the outcome of these matters, and 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 have been filed against CMS Energy,
Consumers, and certain officers and directors of CMS Energy and its affiliates.
The complaints have been filed in the United States District Court for the
Eastern District of Michigan as purported class actions by individuals who
allege that they purchased CMS Energy's securities during a purported class
period. At least two of the complaints contain purported class periods
97
beginning on August 3, 2000 and running through May 10, 2002 or May 14, 2002.
These complaints generally seek unspecified damages based on allegations that
the defendants violated United States securities laws and regulations by making
allegedly false and misleading statements about the company's business and
financial condition. The cases have been consolidated into a single lawsuit, and
an amended and consolidated complaint is due to be filed by May 1, 2003. CMS
Energy intends to vigorously defend against these actions. CMS Energy cannot
predict the outcome of this litigation.
DEMAND FOR ACTIONS AGAINST OFFICERS AND DIRECTORS: The Board of Directors
received a demand, on behalf of a shareholder of CMS Energy Common Stock, that
it commence civil actions (i) to remedy alleged breaches of fiduciary duties by
CMS Energy officers and directors in connection with round-trip trading at CMS
MST, and (ii) to recover damages sustained by CMS Energy as a result of alleged
insider trades alleged to have been made by certain current and former officers
of CMS Energy and its subsidiaries. If the Board elects not to commence such
actions, the shareholder has stated that he will initiate a derivative suit,
bringing such claims on behalf of CMS Energy. CMS Energy has elected two new
members to its Board of Directors to serve as an independent litigation
committee to determine whether it is in the best interest of CMS Energy to bring
the action demanded by the shareholder. Counsel for the shareholder has agreed
to extend the time for CMS Energy to respond to the demand. CMS Energy cannot
predict the outcome of this litigation.
ERISA CLAIMS: CMS Energy is a named defendant, along with Consumers, 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. CMS Energy cannot predict
the outcome of this litigation.
GAS INDEX PRICING REPORTING: CMS Energy has notified appropriate regulatory
and governmental agencies that some employees at CMS MST and CMS Field Services
appeared to have provided inaccurate information regarding natural gas trades to
various energy industry publications which compile and report index prices. CMS
Energy is cooperating with investigations by the Commodity Futures Trading
Commission, Department of Justice and FERC regarding this matter. CMS Energy is
unable to predict the outcome of these matters and what effect, if any, these
investigations will have on its business.
FEES AND EXPENSES: CMS Energy has accrued $15 million for attorney's fees
and costs associated with responding to and/or defending against investigations
and lawsuits related to round-trip trading and the reporting of gas prices to
trade publications. These expenses could total as much as $37 million. CMS
Energy expects to recover a significant portion of these expenses from insurers.
CONSUMERS' ELECTRIC UTILITY CONTINGENCIES
ELECTRIC ENVIRONMENTAL MATTERS: Consumers is subject to costly and
increasingly stringent environmental regulations. Consumers expects that the
cost of future environmental compliance, especially compliance with clean air
laws, will be significant.
Clean Air -- In 1998, the EPA issued final 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 final
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
final regulations regarding nitrogen oxide emissions that require certain
generators, including some of Consumers' electric generating facilities, to
achieve the same emissions rate as that required by the 1998 regulations. The
EPA and the state final regulations will require Consumers to make significant
capital expenditures estimated to be $770 million. As of December 31, 2002,
Consumers has incurred $405 million in capital expenditures to comply with the
EPA final 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 is volatile and the price could
change significantly. At some point, if new environmental standards become
effective, Consumers may need additional capital expenditures to comply with the
future standards. 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.
These and other required environmental expenditures, if not recovered from
customers in Consumers' rates, may have a material adverse effect upon
Consumers' financial condition and results of operations.
98
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 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
December 31, 2002, Consumers had accrued the minimum amount of the range for its
estimated Superfund liability.
During routine maintenance activities, Consumers identified PCB as a
component in certain paint, grout and sealant materials at the Ludington Pumped
Storage facility. Consumers removed and replaced part of the PCB material.
Consumers has proposed a plan to deal with the remaining materials and is
awaiting a response from the EPA.
CONSUMERS' ELECTRIC UTILITY RATE MATTERS
ELECTRIC RESTRUCTURING: In June 2000, the Michigan legislature passed
electric utility restructuring legislation known as the Customer Choice Act.
This act: 1) permits all customers to 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 (a requirement Consumers believes itself
to be in compliance with at this time); 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. Consumers is also highly confident
that it will meet the conditions contained in item 5 above, prior to the
earliest rate cap termination dates specified in the act. Failure to do so,
however, could result in an extension of the rate caps to as late as December
31, 2013.
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.
SECURITIZATION: In October 2000 and January 2001, the MPSC issued orders
authorizing Consumers to issue Securitization bonds. Securitization typically
involves issuing asset-backed bonds with a higher credit rating than
conventional utility corporate financing. The orders authorized Consumers to
securitize approximately $469 million in qualified costs, which were primarily
regulatory assets plus recovery of the Securitization expenses. Securitization
resulted in lower interest costs and a longer amortization period for the
99
securitized assets, and offset the majority of the impact of the required
residential rate reduction (approximately $22 million in 2000 and $49 million
annually thereafter). The 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.
In November 2001, Consumers Funding issued $469 million of Securitization
bonds, Series 2001-1. The Securitization bonds mature at different times over a
period of up to 14 years, with an average interest rate of 5.3 percent. The last
expected maturity date is October 20, 2015. Net proceeds from the sale of the
Securitization bonds, after issuance expenses, were approximately $460 million.
Consumers used the net proceeds to retire $164 million of its common equity from
its parent, CMS Energy. CMS Energy used the $164 million from Consumers to pay
down its own short-term debt. From December 2001 through March 2002, the
remainder of these proceeds were used to pay down Consumers' long-term debt and
Trust Preferred Securities. CMS Energy used the $164 million from Consumers to
pay down its own short-term debt.
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, $52 million in 2002, are
remitted to a trustee for the Securitization bonds. Securitization charge
collections are dedicated for the repayment of the principle and interest on the
Securitization bonds and payment of the ongoing expenses of Consumers Funding
and can be used only 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.
Regulatory assets are normally amortized over their period of regulated
recovery. Beginning January 1, 2001, the amortization was deferred for the
approved regulatory assets being securitized, which effectively offset the loss
in revenue in 2001 resulting from the five percent residential rate reduction.
In December 2001, after the Securitization bonds were sold, the amortization was
re-established, based on a schedule that is the same as the recovery of the
principal amounts of the securitized qualified costs. In 2002, the accumulated
amortization amount was approximately $31 million and the securitized assets
will be fully amortized by the end of 2015.
On March 4, 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 associated with
Clean Air Act expenditures, post-2000 Palisades expenditures, and retail open
access implementation costs through December 31, 2002, and certain pension fund
expenses and expenses associated with the issuance of the bonds.
TRANSMISSION: In 1999, the FERC issued Order No. 2000, strongly encouraging
electric utilities to transfer operating control of their electric transmission
system to an RTO, or sell the facilities to an independent company. In addition,
in June 2000, the Michigan legislature passed Michigan's Customer Choice Act,
which also requires utilities to divest or transfer the operating authority of
transmission facilities to an independent company. Consumers chose to offer its
electric transmission system for sale rather than own and invest in an asset
that it could not control. In May 2002, Consumers sold its electric transmission
system (METC) for approximately $290 million in cash to MTH, a non-affiliated
limited partnership whose general partner is a subsidiary of Trans-Elect Inc.
Trans-Elect, Inc. submitted the winning bid through a competitive bidding
process, and various federal agencies approved the transaction. Consumers did
not provide any financial or credit support to Trans-Elect, Inc. Certain of
Trans-Elect's officers and directors are former officers and directors of CMS
Energy, Consumers and their subsidiaries. None of them were employed by CMS
Energy, Consumers, or their affiliates when the transaction was discussed
internally and negotiated with purchasers. As a result of the sale, Consumers
experienced an after-tax earnings increase of approximately $17 million in 2002,
due to the recognition of a $26 million gain on the sale of the electric
transmission system. This gain from the sale is offset by a loss of revenue from
wholesale and retail open access customers who will buy services directly from
MTH, including the loss of a return on the sold electric transmission system.
Consumers anticipates that the future impact of the 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 on its
after-tax earnings will be a decrease of $15 million in 2003, and a decrease of
approximately $14 million annually for the next three years.
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Under the 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. Effective April 30, 2002, Consumers and METC
withdrew from the Alliance RTO, and MTH has joined the MISO RTO.
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 payments that are to be credited. The $35 million liability for
IPP credits does not include interest since the associated interconnection
agreements do not at this time provide for interest. MTH has asserted that
Consumers may be liable for interest on the IPP payments to be credited if
interest provisions are added to these agreements. Consumers believes that any
potential liability would not have a material adverse affect on its financial
condition.
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 a
reserve margin of approximately 11 percent for summer 2003, or 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 needed will depend
primarily on summer weather conditions, the level of retail open access
requirements being served by others during the summer, and any unscheduled plant
outages. As of mid-March 2003, alternative electric suppliers are providing 516
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 contracts for the physical delivery of
electricity primarily in the summer months and to a lesser degree in the winter
months. As of December 31, 2002, Consumers had purchased or had commitments to
purchase electric call option and capacity contracts partially covering the
estimated reserve margin requirements for 2003 through 2007. As a result
Consumers has a recognized asset of $30 million for unexpired call options and
capacity contracts. The total cost of electricity call option and capacity
contracts for 2002 was $13 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 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.
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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
and $43 million for 2000 and 2001, respectively. 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
and post-2000 Palisades expenditures that were excluded from the Stranded Cost
calculation.
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 intends to participate 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.
YEAR FILED YEAR INCURRED REQUESTED PENDING ALLOWED DISALLOWED
---------- ------------- --------- ------- ------- ----------
IN MILLIONS
1999.......... 1997 & 1998 $ 20 $ -- $ 15 $ 5
2000.......... 1999 30 -- 25 5
2001.......... 2000 25 -- 20 5
2002.......... 2001 8 8 -- --
2003.......... 2002 2 2 -- --
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 December 2002, Consumers incurred and
deferred as a regulatory asset, $1 million of additional implementation costs
and has also recorded as a regulatory asset $13 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. 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
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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 estimated refund obligation. As of December 2002, Consumers had paid $17
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 CONSUMERS' ELECTRIC UTILITY UNCERTAINTIES
THE MIDLAND COGENERATION VENTURE: The MCV Partnership, which leases and
operates the MCV Facility, contracted to sell electricity to Consumers for a
35-year period beginning in 1990 and to supply electricity and steam to Dow.
Consumers, through two wholly owned subsidiaries, holds the following assets
related to the MCV Partnership and MCV Facility: 1) CMS Midland owns a 49
percent general partnership interest in the MCV Partnership; and 2) CMS Holdings
holds, through FMLP, a 35 percent lessor interest in the MCV Facility.
Consumers' consolidated retained earnings include undistributed earnings
from the MCV Partnership for the years 2002, 2001 and 2000 of $226 million, $184
million, and $168 million, respectively.
Summarized Statements of Income for CMS Midland and CMS Holdings
YEARS ENDED DECEMBER 31 2002 2001 2000
---------------------------------------------------------------------------------------- ---------- -----------------
IN MILLIONS
Operating income....................................................................... $ 52 $ 36 $ 56
Income taxes and other................................................................. (18) (11) (18)
Cumulative effect of a change in accounting for derivatives,
net of $10 million tax expense....................................................... 18 -- --
--------- --------- ---------
Net income............................................................................. $ 52 $ 25 $ 38
========= ========= =========
Power Supply Purchases from the MCV Partnership -- Consumers' annual
obligation to purchase capacity from the MCV Partnership is 1,240 MW through the
termination of the PPA in 2025. The PPA requires Consumers to pay, based on the
MCV Facility's availability, a levelized average capacity charge of 3.77 cents
per kWh, a fixed energy charge, and a variable energy charge based primarily on
Consumers' average cost of coal consumed for all kWh delivered. Since January 1,
1993, the MPSC has permitted Consumers to recover capacity charges averaging
3.62 cents per kWh for 915 MW, plus a substantial portion of the fixed and
variable energy charges. Since January 1, 1996, the MPSC has also permitted
Consumers to recover capacity charges for the remaining 325 MW of contract
capacity with an initial average charge of 2.86 cents per kWh increasing
periodically to an eventual 3.62 cents per kWh by 2004 and thereafter. However,
due to the current freeze of Consumers' retail rates that the Customer Choice
Act requires, the capacity charge for the 325 MW is now frozen at 3.17 cents per
kWh. 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 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 December 31, 2002, 2001 and 2000, the remaining after-tax
present value of the estimated future PPA liability associated with the loss
totaled $34 million, $50 million and $64 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
availability payments that may be billed by the MCV Partnership at a 98.5
percent level.
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When Consumers returns, as expected, to unfrozen rates beginning in 2004,
Consumers will recover from customers, on-peak and off-peak capacity, so long as
availability does not exceed an average 88.7 percent established in previous
MPSC orders. For availability 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. 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:
2003 2004 2005 2006 2007
------- ------- ------- ------- -------
IN MILLIONS
Estimated cash underrecoveries at 98.5%, net of tax......... $ 37 $ 36 $ 36 $ 36 $ 25
It is currently estimated 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.
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 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 December 31, 2002, 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.
In 1997, a federal court decision has confirmed that the DOE was to begin
accepting deliveries of spent nuclear fuel for disposal by January 31, 1998.
Subsequent litigation in which Consumers and certain other utilities
participated has not been successful in producing more specific relief for the
DOE's failure to comply.
In July 2000, the DOE reached a settlement agreement with 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 recently 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
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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. 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.
In March, 2003, the Michigan Environmental Council, the Public Interest
Research Group in Michigan, and the Michigan Consumer Federation filed a
complaint with the MPSC that asks the MPSC to commence a generic investigation
and contested case to review all facts and issues concerning the recovery of
costs associated with spent nuclear fuel storage and disposal. The complaint
alleges that the rates of Consumers, The Detroit Edison Company, Indiana &
Michigan Electric Company, Wisconsin Electric Power Company and Wisconsin Public
Service Corporation are unjust and unreasonable with respect to the recovery of
costs associated with spent nuclear fuel storage and disposal. The complaint
seeks a variety of relief, including the establishing of 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 to
assure that adequate funds are available for the storage and disposal of spent
nuclear fuel. Consumers has not had an opportunity to review the complaint in
detail.
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 December 2000, the NRC issued an amendment
revising the operating license for Palisades to extend its expiration date to
March 2011, with no restrictions related to reactor vessel embrittlement.
In 2000, Consumers made an equity investment and entered into an operating
agreement with NMC. NMC was formed in 1999 by four utilities to operate and
manage the nuclear generating plants owned by these utilities. Consumers
benefits by consolidating expertise, cost control and resources among all of the
nuclear plants being operated on behalf of the NMC member companies.
In November 2000, Consumers requested approval from the NRC to transfer
operating authority for Palisades to NMC and the request was granted in April
2001. The formal transfer of authority from Consumers to NMC took place in May
2001. Consumers retains ownership of Palisades, its 789 MW output, the current
and future spent fuel on-site, and ultimate responsibility for the safe
operation, maintenance and decommissioning of the plant. Under the agreement
that transferred operating authority of the plant to NMC, salaried Palisades'
employees became NMC employees on July 1, 2001. Union employees work under the
supervision of NMC pursuant to their existing labor contract as Consumers'
employees. NMC currently has responsibility for operating eight units with 4,500
MW of generating capacity in Wisconsin, Minnesota, Iowa and Michigan.
Following a refueling outage in April 2001, the Palisades reactor was shut
down on June 20, 2001 so technicians could inspect a small steam leak on a
control rod drive assembly. There was no risk to the public or workers. In
August 2001, Consumers completed an expanded inspection that included all
similar control rod drive assemblies and elected to completely replace all the
components. Installation of the new components was completed in December 2001.
The plant was returned to service on January 21, 2002 and has been in continuous
operation with the exception of three days in December 2002 when there was a
transmission line related outage. Consumers' capital expenditures for the
components and their installation was approximately $31 million.
From the start of the June 20th outage through the end of 2001, the impact
on net income of replacement power supply costs associated with the outage was
approximately $59 million. Subsequently, in January 2002, the impact on 2002 net
income was $5 million.
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.
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.
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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.
COMMITMENTS FOR FUTURE PURCHASES: Consumers enters into a number of
unconditional purchase obligations that represent normal business operating
contracts. These contracts are used to assure an adequate supply of goods and
services necessary for the operation of its business and to minimize exposure to
market price fluctuations. Consumers believes that these future costs are
prudent and reasonably assured of recovery in future rates.
Coal Supply: Consumers has entered into coal supply contracts with various
suppliers for its coal-fired generating stations. Under the terms of these
agreements, Consumers is obligated to take physical delivery of the coal and
make payment based upon the contract terms. Consumers' current contracts have
expiration dates that range from 2003 to 2005, and total an estimated $276
million. Long-term coal supply contracts account for approximately 60 to 90
percent of Consumers annual coal requirements. In 2002, coal purchases totaled
$247 million of which $224 million (88 percent of the tonnage requirement) was
under long-term contract. Consumers supplements its long-term contracts with
spot-market purchases.
Power Supply, Capacity and Transmission: As of December 31, 2001, Consumers
had future unrecognized commitments to purchase power supply and transmission
services under fixed price forward contracts for the years 2003 and 2004
totaling $15 million. Consumers also had commitments to purchase capacity and
energy under 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 for the
years 2003 through 2030 total an estimated $16 billion, undiscounted, which
includes $12 billion related to the MCV Facility. This amount may vary depending
upon plant availability and fuel costs. If a plant were not available to deliver
electricity to Consumers, then Consumers would not be obligated to make the
capacity payment until the plant could deliver. For further information, see
Note 6, Uncertainties, "The Midland Cogeneration Venture" for information
concerning power purchases from the MCV Facility.
CONSUMERS' GAS UTILITY CONTINGENCIES
GAS ENVIRONMENTAL MATTERS: Under the Michigan Natural Resources and
Environmental Protection Act, Consumers expects that it will ultimately incur
investigation and remedial action costs at a number of sites. These include 23
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 further 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 3 and 7 percent for this type of activity.
Consumers expects to recover a significant portion of these costs through
insurance proceeds and through MPSC approved rates charged to its customers. As
of December 31, 2002, Consumers has an accrued liability of $51 million, net of
$31 million of expenditures incurred to date, and a regulatory asset of $70
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
106
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.
CONSUMERS' GAS UTILITY RATE MATTERS
GAS RESTRUCTURING: From April 1, 1998 to March 31, 2001, Consumers
conducted an experimental gas customer choice pilot program that froze gas
distribution and GCR rates through the period. On April 1, 2001, a permanent gas
customer choice program commenced under which Consumers returned to a GCR
mechanism that allows it to recover from its bundled sales customers all
prudently incurred costs to purchase the natural gas commodity and transport it
to Consumers for ultimate distribution to customers.
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 is allowed to increase its maximum GCR factor in May 2003, based on a
formula that tracks increases in NYMEX prices.
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 gas distribution service
rate increase, which includes the $15 million interim increase, with an 11.4
percent authorized return on equity, effective for service 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 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
distribution 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 CONSUMERS' GAS UTILITY UNCERTAINTIES
COMMITMENTS FOR GAS SUPPLIES: Consumers contracts to purchase gas and
transportation from various suppliers for its natural gas business. These
contracts have expiration dates that range from 2003 to 2005. Consumers' 2002
gas requirements totaled 199 bcf at a cost of $727 million. As of the end of
2002, Consumers' expected gas requirements for 2003 are 231 bcf of which 38
percent is covered by existing contracts.
OTHER CONSUMERS' UNCERTAINTIES
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. Consumers is currently negotiating with the Union for a collective
bargaining agreement for its Call Center employees.
OTHER UNCERTAINTIES
107
CMS GENERATION-OXFORD TIRE RECYCLING: In 1999, the California Regional
Water Control Board of the State of California named CMS Generation as a
potentially responsible party for the cleanup of the waste from a fire that
occurred in September 1999 at the Filbin tire pile. The tire pile was maintained
as fuel for an adjacent power plant owned by Modesto Energy Limited Partnership.
Oxford Tire Recycling of Northern California, Inc., a subsidiary of CMS
Generation until 1995, owned the Filbin tire pile. CMS Generation has not owned
an interest in Oxford Tire Recycling of Northern California, Inc. or Modesto
Energy Limited Partnership since 1995. In 2000, the California Attorney General
filed a complaint against the potentially responsible parties for cleanup of the
site and assessed penalties for violation of the California Regional Water
Control Board order. The parties have reached a settlement with the state, which
the court approved, pursuant to which CMS Energy had to pay $6 million. At the
request of the U.S. Department of Justice in San Francisco (DOJ), CMS Energy and
other parties contacted by the DOJ entered into separate tolling agreements with
the DOJ in September 2002 that stopped the running of any statute of limitations
until March 14, 2003 (later extended to June 30, 2003) to facilitate the
settlement discussions between all the parties in connection with federal claims
arising from the fire at the Filbin tire pile. On September 23, 2002, CMS Energy
received a written demand from the U.S. Coast Guard for reimbursement of
approximately $3.5 million in costs incurred by the U.S. Coast Guard in fighting
the fire.
In connection with this fire, several class action lawsuits were filed
claiming that the fire resulted in damage to the class and that management of
the site caused the fire. CMS Generation has reached a settlement in principle
with the plaintiffs in the amount of $9 million. The primary insurance carrier
will cover 100 percent of the settlement once the agreement is finalized.
DEARBORN INDUSTRIAL GENERATION: In October 2001, Duke/Fluor Daniel (DFD)
presented DIG with a change order to their construction contract and filed an
action in Michigan state court claiming damages in the amount of $110 million,
plus interest and costs, which DFD states represents the cumulative amount owed
by DIG for delays DFD believes DIG caused and for prior change orders that DIG
previously rejected. DFD also filed a construction lien for the $110 million.
DIG, in addition to drawing down on three letters of credit totaling $30 million
that it obtained from DFD, has filed an arbitration claim against DFD asserting
in excess of an additional $75 million in claims against DFD. The judge in the
Michigan State Court case entered an order staying DFD's prosecution of its
claims in the court case and permitting the arbitration to proceed. DFD has
appealed the decision by the judge in the Michigan state court case to stay the
arbitration. DIG will continue to vigorously defend itself and pursue its
claims. CMS Energy cannot predict the outcome of this matter.
DEARBORN INDUSTRIAL GENERATION CUSTOMER DISPUTES: As a result of the
continued delays in the DIG project becoming fully operational, DIG's customers,
Ford Motor Company and Rouge Industries, have asserted claims that the continued
delays relieve them of certain contractual obligations totaling $43 million. In
addition, Ford and/or Rouge have asserted several other commercial claims
against DIG relating to operation of the DIG plant. In February 2003, Rouge
filed an Arbitration Demand against DIG and CMS MST Michigan, LLC with the
American Arbitration Association. Rouge is seeking a total of $27 million plus
additional accrued damages at the time of any award, plus interest. More
specifically, Rouge is seeking at least $20 million under a Blast Furnace Gas
Delivery Agreement in connection with DIG's purported failure to declare a Blast
Furnace Gas Delivery Date within a reasonable time period, plus $7 million for
assorted damage claims under several legal theories. DIG and CMS MST Michigan,
LLC intend to vigorously defend themselves, and DIG has filed claims against
Rouge and Ford as part of this arbitration. CMS Energy cannot predict the
outcome of this matter.
DEARBORN INDUSTRIAL GENERATION NOISE ABATEMENT LAWSUIT: In February 2003,
DIG was served with a three-count first amended complaint in the matter of
Ahmed, et al. v. Dearborn Industrial Generation, LLC, Wayne County Circuit Court
Case No. 02-241296-CZ. The complaint seeks damages "in excess of $25,000" and
injunctive relief based upon allegations of excessive noise and vibration
created by operation of the power plant. The first amended complaint was filed
on behalf of six named plaintiffs, all alleged to be adjacent or nearby
residents or property owners. The damages alleged are injury to persons and
property of the landowners. Certification of a class of "potentially thousands"
who have been similarly affected is requested. DIG intends to aggressively
defend this action. CMS Energy cannot predict the outcome of this matter.
MIDLAND COGENERATION VENTURE EXPANSION, LLC: Under an agreement entered
into with General Electric Company ("GE") in October 2002, as of December 31,
2002 Midland Cogeneration Venture Expansion, LLC ("MCV Expansion") has a
remaining contingent obligation to GE in the amount of $3.5 million that may
become payable on July 1, 2003. The agreement provides that this contingent
obligation is subject to a pro rata reduction under a formula based upon certain
purchase orders being entered into with GE by June 30, 2003. MCV Expansion
anticipates but cannot assure that purchase orders will be executed with GE by
June 30, 2003 sufficient to eliminate the contingent obligation of $3.5 million.
108
CMS OIL AND GAS: In 1999, a former subsidiary of CMS Oil and Gas, Terra
Energy Ltd., was sued by Star Energy, Inc. and White Pine Enterprises LLC in the
13th Judicial Circuit Court in Antrim County, Michigan, on grounds, among
others, that Terra violated oil and gas lease and other agreements by failing to
drill wells. Among the defenses asserted by Terra were that the wells were not
required to be drilled and the claimant's sole remedy was termination of the oil
and gas lease. During the trial, the judge declared the lease terminated in
favor of White Pine. The jury then awarded Star Energy and White Pine $7.6
million in damages. Terra appealed this matter to the Michigan Court of Appeals.
The Court of Appeals reversed the trial court judgment with respect to the
appropriate measure of damages and remanded the case for a new trial on damages.
Terra has taken an appeal to the Michigan Supreme Court. A reserve has been
established for this matter.
ARGENTINA ECONOMIC SITUATION: In January 2002, the Republic of Argentina
enacted the Public Emergency and Foreign Exchange System Reform Act. This law
repealed the fixed exchange rate of one U.S. dollar to one Argentina peso,
converted all dollar-denominated utility tariffs and energy contract obligations
into pesos at the same one-to-one exchange rate, and directed the President of
Argentina to renegotiate such tariffs.
In February 2002, the Republic of Argentina enacted additional measures
that required all monetary obligations (including current debt and future
contract payment obligations) denominated in foreign currencies to be converted
into pesos. These February measures also authorize the Argentine judiciary
essentially to rewrite private contracts denominated in dollars or other foreign
currencies if the parties cannot agree on how to share equitably the impact of
the conversion of their contract payment obligations into pesos. In April 2002,
based on a consideration of these environmental factors, CMS Energy evaluated
its Argentine investments for impairment as required under SFAS No. 144 and APB
Opinion No. 18. These impairment models contain certain assumptions regarding
anticipated future exchange rates and operating performance of the investments.
Exchange rates used in the models assume that the rate will decrease from
current levels to approximately 3.00 pesos per U.S. dollar over the remaining
life of these investments. Based on the results of these models, CMS Energy
determined that these investments were not impaired.
Effective April 30, 2002, CMS Energy adopted the Argentine peso as the
functional currency for most of its Argentine investments. CMS had previously
used the U.S. dollar as the functional currency for its Argentine investments.
As a result, on April 30, 2002, CMS Energy translated the assets and liabilities
of its Argentine entities into U.S. dollars, in accordance with SFAS No. 52,
using an exchange rate of 3.45 pesos per U.S. dollar, and recorded an initial
charge to the Foreign Currency Translation component of Common Stockholders'
Equity of approximately $400 million.
For the year ended December 31, 2002, CMS Energy recorded losses of $31
million, reflecting the negative impact of the actions of the Argentine
government. These losses represent changes in the value of peso-denominated
monetary assets (such as receivables) and liabilities of Argentina-based
subsidiaries and lower net project earnings resulting from the conversion to
pesos of utility tariffs and energy contract obligations that were previously
calculated in dollars.
While CMS Energy's management cannot predict the most likely future, or
average peso to U.S. dollar exchange rates, it does expect that these non-cash
charges substantially reduce the risk of further material balance sheet impacts
when combined with anticipated proceeds from international arbitration currently
in progress, political risk insurance, and the eventual sale of these assets. At
December 31, 2002, the net foreign currency loss due to the unfavorable exchange
rate of the Argentine peso recorded in the Foreign Currency Translation
component of Common Stockholder's Equity using an exchange rate of 3.3647 pesos
per U.S. dollar was $266 million. This amount also reflected the effect of
recording, at December 31, 2002, U.S. income taxes with respect to temporary
differences between the book and tax bases of foreign investments, including the
foreign currency translation associated with CMS Energy's Argentine investments,
that were determined to no longer be essentially permanent in duration (see Note
11, Income Taxes.)
OTHER: Certain CMS Gas Transmission and CMS Generation affiliates in
Argentina received notice from various Argentine provinces claiming stamp taxes
and associated penalties and interest arising from various gas transportation
transactions. Although these claims total approximately $91 million, the
affiliates and CMS Energy believe the claims are without merit and will continue
to vigorously contest them.
CMS Generation does not currently expect to incur significant capital costs
at its power facilities for compliance with current U.S. environmental
regulatory standards.
In addition to the matters disclosed in this Note, Consumers, Panhandle and
certain other subsidiaries of CMS Energy are parties to certain lawsuits and
administrative proceedings before various courts and governmental agencies
arising from the ordinary course of
109
business. These lawsuits and proceedings may involve personal injury, property
damage, contractual matters, environmental issues, federal and state taxes,
rates, licensing and other matters.
CMS Energy has accrued estimated losses for certain contingencies discussed
in this Note. Resolution of these contingencies is not expected to have a
material adverse impact on CMS Energy's financial position, liquidity, or
results of operations.
7: SHORT-TERM AND LONG-TERM FINANCINGS
LONG-TERM DEBT SUMMARY
DECEMBER 31
-------------------------
INTEREST RATE(%) MATURITY 2002 2001
---------------- ----------- ------------ ------------
IN MILLIONS
RESTATED
CMS ENERGY
Senior Notes................................................. 8.125 2002 $ -- $ 350
7.625 2004 176 180
6.750 2004 287 300
9.875 2007 468 500
8.900 2008 260 269
7.500 2009 409 480
8.500 2011 300 350
8.375 2013 150 150
------------ ------------
2,050 2,579
General Term Notes
Series A................................................... 2002--2010 -- 31
Series B................................................... 2002--2010 -- 14
Series C................................................... 2002--2010 -- 58
Series D................................................... 6.90 (a) 2003--2010 94 168
Series E................................................... 7.90 (a) 2003--2010 227 391
Series F................................................... 7.60 (a) 2003--2010 298 288
----------- -----------
619 950
Extendible Tenor Rate Adjusted Securities.................... 7.000 2005 180 180
Senior Credit Facilities..................................... 2003--2004 291 167
Lines of Credit.............................................. 2002 -- 22
Other........................................................ 29 11
------------ ------------
500 380
CONSUMERS ENERGY
First Mortgage Bonds......................................... 6.375 2003 -- 300
7.375 2023 208 208
------------ ------------
208 508
Senior Notes................................................. Floating 2002 -- 100
6.000 2005 300 --
6.250 2006 332 332
6.375 2008 159 159
6.200(b) 2008 250 250
6.875 2018 180 180
6.500(c) 2018 141 141
6.500 2028 142 143
------------ ------------
1,504 1,305
Securitization Bonds......................................... 2005--2016 453 469
Long-Term Bank Debt.......................................... 328 184
Nuclear Fuel Disposal........................................ 2003 (d) 138 135
Pollution Control Revenue Bonds.............................. 5.100 2010--2018 126 126
Other........................................................ 8 8
------------ ------------
1,053 922
110
OTHER SUBSIDIARIES .......................................... 77 231
------- -------
Principal Amount Outstanding ................................ 6,011 6,875
Current Amounts ............................................. (627) (1,003)
Net Unamortized Discount .................................... (28) (32)
------- -------
Total Long-Term Debt ........................................ $ 5,356 $ 5,840
======= =======
----------
(a) Represents the weighted average interest rate at December 31, 2002.
(b) These notes are subject to a Call Option by the Callholder or a Mandatory
Put on May 1, 2003.
(c) Includes $141 million Senior Remarketed Notes subject to optional
redemption by Consumers after June 15, 2005.
(d) Maturity date uncertain (see Note 1).
The scheduled maturities of long-term debt and improvement fund obligations
before consideration of refinancings completed subsequent to December 31, 2002
discussed in Note 19 are as follows: $627 million in 2003, $964 million in 2004,
$742 million in 2005, $514 million in 2006, $538 million in 2007 and $2,626
million thereafter.
CREDIT FACILITIES
On July 12, 2002, CMS Energy and its subsidiaries reached agreement with
its lenders on five credit facilities (facilities) totaling approximately $1.3
billion of credit for CMS Energy, Enterprises and Consumers. The agreements were
executed by various combinations of up to 21 lenders and by CMS Energy and
included: a $259.9 million revolving credit facility for CMS Energy originally
set to mature on March 31, 2003; a $300 million revolving credit facility for
CMS Energy, maturing December 15, 2003; a $150 million short-term loan for
Enterprises, originally set to mature on December 13, 2002; a $250 million
revolving credit facility for Consumers, maturing July 11, 2003; and a $300
million term loan for Consumers, maturing July 11, 2003. In March 2003, the CMS
Energy $295.8 million revolving credit facility and $300 million revolving
credit facility under which $409 million was then outstanding were amended and
restated. The Second Amended and Restated Senior Credit Agreement includes a
$250 million tranche with a maturity date of April 30, 2004 and a $159 million
tranche with a maturity date of September 30, 2004. Also in March 2003,
Consumers obtained a replacement revolving credit facility in the amount of $250
million. The new credit facility matures in March 2004 with two annual
extensions at Consumers' option which would extend the maturity to March 2006.
In September 2002, CMS Energy retired the $150 million short-term loan to
Enterprises using proceeds from the sale of CMS Oil and Gas. Also in September
2002, Consumers' exercised its extension option on the $300 million term loan to
move the maturity date to July 11, 2004. At December 31, 2002, $841 million
remained outstanding under these facilities, of which Consumers' $250 million
revolving credit facility is included in notes payable in the accompanying
consolidated balance sheet.
CMS ENERGY
SHORT-TERM FINANCINGS: At December 31, 2002, CMS had $291 million of
borrowings outstanding under its credit facilities. CMS Energy's $295.8 million
credit facility had been reduced to $187 million as a result of mandatory
prepayments with proceeds of various asset sales and had $187 million of
borrowings at December 31, 2002. CMS Energy's $300 million credit facility had
$104 million of borrowings and $185 million of letter-of-credit usage
outstanding at December 31, 2002.
GENERAL TERM NOTES: In May 2002, CMS Energy registered $300 million of
Series G GTNs. For the year ended December 31, 2002, no Series G GTNs had been
issued. In 2002, CMS Energy called $243 million of Series A through F GTNs at
interest rates ranging from 7 percent to 9 percent using funds available from
asset sales proceeds. At December 31, 2002, CMS Energy had issued and
outstanding $619 million GTNs, comprised of $94 million Series D GTNs, $227
million Series E GTNs and $299 million of Series F GTNs with weighted average
interest rates of 6.9 percent, 7.9 percent and 7.6 percent, respectively.
CONSUMERS
AUTHORIZATION: At December 31, 2002, 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, $677 million for general
corporate purposes, and $900 million of first mortgage bonds to be issued solely
as security for the long-term securities. On October 10, 2002, FERC
111
granted a waiver of its competitive bid/negotiated placement requirements
applicable to the remaining long-term securities authorization indicated above.
SHORT-TERM FINANCINGS: At December 31, 2002 Consumers had a $250 million
credit facility secured by first mortgage bonds, a first mortgage bond term loan
of $155 million and a gas inventory loan of $52 million. These facilities are
available to finance seasonal working capital requirements and to pay for
capital expenditures between long-term financings. At December 31, 2002, a total
of $457 million was outstanding at a weighted average interest rate of 4.5
percent, compared with $416 million outstanding on a revolving credit facility
and unsecured lines of credit at December 31, 2001, at a weighted average
interest rate of 2.7 percent.
At December 31, 2002, Consumers' $250 million credit facility had an
effective interest rate of 5.9 percent. The rate may fluctuate depending on the
rating of Consumers' first mortgage bonds or changes in the base LIBOR rate. On
March 27, 2003, Consumers renewed its revolving credit facility which was set to
expire in July 2003. The new $250 million credit facility, secured by first
mortgage bonds, matures in March 2004 with two annual extensions at Consumers'
option, which would extend the maturity to March 2006. The cost of the facility
is LIBOR plus 350 basis points.
The term loan, collateralized by first mortgage bonds, and the gas
inventory loan, collateralized by Consumers' natural gas in storage, were
simultaneously entered into in October 2002. These agreements contain
complementary collateral packages that provide Consumers, as additional first
mortgage bonds become available, borrowing capacity of up to $225 million, of
which $207 million was outstanding at December 31, 2002 with an effective
interest rate of 6.3 percent.
LONG-TERM FINANCINGS: In March 2002, Consumers sold $300 million principal
amount of six percent senior notes, maturing in March 2005. Net proceeds from
the sale were $299 million. Consumers used the net proceeds to replace a first
mortgage bond that was to mature in 2003.
At December 31, 2002, Consumers' $300 million credit facility, maturing in
July 2004 and secured by first mortgage bonds had an effective interest rate of
8.9 percent. The rate may fluctuate depending on the rating of Consumers' first
mortgage bonds or changes in the base LIBOR rate.
Consumers has a total of $126 million of long-term pollution control
revenue bonds outstanding, secured by first mortgage bonds and insurance
policies. These bonds had a weighted average interest rate of 2.7 percent at
December 31, 2002.
FIRST MORTGAGE BONDS: 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.
RESTRICTED PAYMENTS: Under the provisions of its articles of incorporation,
Consumers had $394 million of unrestricted retained earnings available to pay
common dividends at December 31, 2002. In January 2003, Consumers declared and
paid a $78 million common dividend. However, due to Consumers' dividend
restrictions included as part of an agreement with its lenders, Consumers'
dividends are not to exceed $300 million in any calendar year.
OTHER: On April 1, 2002, Consumers established a new subsidiary, Consumers
Receivables Funding. This consolidated subsidiary was established as a special
purpose entity to properly reflect the sale of trade receivables from Consumers
to ASCC, an unrelated third party under a trade receivables sale agreement.
Prior to the establishment of Consumers Receivables Funding, Consumers sold its
accounts receivable directly to ASCC. At December 31, 2002 and 2001, the
receivables sold under the program were $325 million and $334 million,
respectively. Accounts receivable and accrued revenue in the Consolidated
Balance Sheets have been reduced to reflect receivables sold.
Under the program discussed above, during 2002 and 2001, Consumers sold
accounts receivable but retained servicing responsibility. Consumers is
responsible for the collectability of the accounts receivable sold, however, the
investors associated with the 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. The average annual discount rate was 2.05 percent and 4.37
percent for 2002 and 2001, respectively.
112
REQUIRED RATIOS
CMS Energy's and Consumers' credit facilities also have contractual
restrictions that require CMS Energy and Consumers to maintain, as of the last
day of each fiscal quarter, the following:
REQUIRED RATIO LIMITATION RATIO AT DECEMBER 31, 2002
---------------------------------------------- -------------------------- -------------------------------
CMS ENERGY:
Consolidated Leverage Ratio(a)(b)............. not more than 5.75 to 1.00 5.59 to 1.00
Cash Dividend Coverage Ratio(a)............... not less than 1.25 to 1.00 1.57 to 1.00
CONSUMERS:
Debt to Capital Ratio(a)(b)................... not more than 0.65 to 1.00 0.55 to 1.00
Interest Coverage Ratio(a)(b)................. not less than 2.00 to 1.00 4.00 to 1.00
----------
(a) Violation of this ratio would constitute an event of default under the
facility which provides the lender, among other remedies, the right to
declare the principal and interest immediately due and payable.
(b) For purposes of these ratios, the terms of the credit facilities provide
for the exclusion of securitization bonds in the calculation of these
ratios.
In 1994, CMS Energy executed an indenture with J.P.Morgan Chase Bank
pursuant to CMS Energy's general term notes program. The indenture, through
supplements, contains certain provisions that can trigger a limitation on CMS
Energy's consolidated indebtedness. The limitation can be activated when CMS
Energy's consolidated leverage ratio, as defined in the indenture (essentially
the ratio of consolidated debt to consolidated capital), exceeds 0.75 to 1.0. At
December 31, 2002, CMS Energy's consolidated leverage ratio was 0.79 to 1.0. As
a result, CMS Energy will not and will not permit certain material subsidiaries,
excluding Consumers and its subsidiaries, to become liable for new indebtedness.
However, the indenture contains certain express exceptions to this limitation,
and pursuant to one such exception, CMS Energy and the material subsidiaries may
incur revolving indebtedness to banks of up to $1 billion in the aggregate and
refinance existing debt outstanding of CMS Energy and of its material
subsidiaries.
Effective January 1, 2003, CMS Energy adopted the provisions of FASB
Interpretation No. 45, Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others. This
interpretation requires additional disclosures by a guarantor about its
obligations under certain guarantees that it has issued.
The off-balance sheet commitments at December 31, 2002 are as follows:
COMMERCIAL COMMITMENTS
COMMITMENT EXPIRATION
-------------------------------------------------------------
DECEMBER 31
-------------------------------------------------------------
TOTAL 2003 2004 2005 2006 2007 BEYOND
---------- -------- ------- ------- ------- ------- --------
IN MILLIONS
Off-balance sheet:
Guarantees.......... $ 524 $ -- $ -- $ -- $ 4 $ -- $ 520
Indemnities......... 230 5 -- 36 -- -- 189
Letters of Credit... 296 275 18 -- -- -- 3
---------- -------- ------- ------- ------- ------ --------
Total................. $ 1,050 $ 280 $ 18 $ 36 $ 4 $ -- $ 712
========== ======== ======= ======= ======= ====== ========
CMS Energy and Enterprises, including subsidiaries, have guaranteed payment
of obligations, through letters of credit and surety bonds, of unconsolidated
affiliates and related parties approximating $1.1 billion as of December 31,
2002. Included in this amount, Enterprises, in the ordinary course of business,
has guarantees in place for contracts of CMS MST that contain certain schedule
and performance requirements. As of December 31, 2002, the actual amount of
financial exposure covered by these guarantees was $219 million. This amount
excludes the guarantees associated with CMS MST's natural gas sales arrangements
totaling $266 million, which are recorded as liabilities on the Consolidated
Balance Sheet at December 31, 2002. Management monitors and approves these
obligations and believes it is unlikely that CMS Energy or Enterprises would be
required to perform or otherwise incur any material losses associated with the
above obligations.
The following table is a summary of CMS Energy's guarantees as required by
FASB Interpretation No. 45:
113
DECEMBER 31, 2002
---------------------------------------------------------------------
ISSUE EXPIRATION MAXIMUM CARRYING RECOURSE
GUARANTEE DESCRIPTION DATE DATE OBLIGATION AMOUNT(b) PROVISION(c)
--------------------------------------------------- --------- ------------- -------------- ------------ --------------
IN MILLIONS
Indemnifications from asset sales and other
agreements(a)................................... Various Various $ 1,672 $ -- $ --
Letters of credit................................. Various Various 296 -- --
Surety bonds and other indemnifications........... Various Various 230 -- --
Other guarantees.................................. Various Various 524 -- --
Nuclear insurance retrospective premiums.......... Various Various 120 -- --
----------
(a) The majority of this amount arises from routine provisions in stock and
asset sales agreements under which the purchaser is indemnified by CMS
Energy or a subsidiary for losses resulting from events such as failure of
title to the assets or stock sold by CMS Energy or a subsidiary to the
purchaser. CMS Energy believes the likelihood of a loss arising from such
events to be remote.
(b) The carrying amount represents the fair market value of guarantees and
indemnities on CMS Energy's balance sheet that are entered into subsequent
to January 1, 2003.
(c) Recourse provision indicates the approximate recovery from third parties
including assets held as collateral.
CMS Energy has entered into typical tax indemnity agreements in connection
with a variety of transactions, including transactions for the sale of
subsidiaries and assets, equipment leasing and financing agreements. These
indemnity agreements generally are not limited in amount and, while a maximum
amount of exposure cannot be identified, the amount and probability of liability
is considered remote.
See Note 19 for further discussion of CMS Energy's and Consumers Energy's
new financing arrangements as of March 30, 2003.
8: CAPITALIZATION
The authorized capital stock of CMS Energy consists of 250 million shares
of CMS Energy Common Stock and 10 million shares of CMS Energy Preferred Stock,
$.01 par value.
COMPANY-OBLIGATED PREFERRED SECURITIES: CMS Energy and Consumers each have
wholly-owned statutory business trusts that are consolidated with the respective
parent company. CMS Energy and Consumers created their respective trusts for the
sole purpose of issuing trust preferred securities. In each case, the primary
asset of the trust is a note or debenture of the parent company. The terms of
the trust preferred security parallel the terms of the related parent company
note or debenture. The terms, rights and obligations of the trust preferred
security and related note or debenture are also defined in the related indenture
through which the note or debenture was issued, the parent guarantee of the
related trust preferred security and the declaration of trust for the particular
trust. All of these documents together with their related note or debenture and
trust preferred security constitute a full and unconditional guarantee by the
parent company of the trust's obligations under the trust preferred security. In
addition to the similar provisions previously discussed, specific terms of the
securities follow:
AMOUNT
CMS ENERGY OUTSTANDING
TRUST AND SECURITIES --------------------- EARLIEST
DECEMBER 31 RATE(%) 2002 2001 MATURITY REDEMPTION
-------------------------------- ----------- ---------- ---------- ---------- -------------
IN MILLIONS
CMS Energy Trust I(a).......... 7.75 $ 173 $ 173 2027 2001
CMS Energy Trust II(b)......... 8.75 -- 301 2004 --
CMS Energy Trust III(c)........ 7.25 220 220 2004 --
-------- --------
Total Amount Outstanding....... $ 393 $ 694
======== ========
----------
(a) Represents Quarterly Income Preferred Securities that are convertible into
1.2255 shares of CMS Energy Common Stock (equivalent to a conversion price
of $40.80). Effective July 2001, CMS Energy can revoke the conversion
rights if certain conditions are met.
114
(b) On July 1, 2002, the 7,250,000 units of Adjustable Convertible Preferred
Securities were converted to 8,787,725 newly issues shares of CMS Energy
Common Stock.
(c) Represents Premium Equity Participating Security Units in which holders
are obligated to purchase a variable number of shares of CMS Energy Common
Stock by the August 2003 conversion date.
AMOUNT
CONSUMERS ENERGY COMPANY OUTSTANDING
TRUST AND SECURITIES --------------------- EARLIEST
DECEMBER 31 RATE(%) 2002 2001 MATURITY REDEMPTION
---------------------------------------------------------- ----------- ---------- ---------- ----------- ------------
IN MILLIONS
Consumers Power Company Financing I, Trust
Originated Preferred Securities......................... 8.36 $ 70 $ 100 2015 2000
Consumers Energy Company Financing II, Trust
Originated Preferred Securities......................... 8.20 120 120 2027 2002
Consumers Energy Company Financing III, Trust
Originated Preferred Securities......................... 9.25 175 175 2029 2004
Consumers Energy Company Financing IV, Trust
Preferred Securities.................................... 9.00 125 125 2031 2006
-------- --------
Total Amount Outstanding.................................. $ 490 $ 520
======== ========
In March 2002, Consumers reduced its outstanding debt to Consumers Power
Company Financing I, Trust Obligated Preferred Securities by $30 million.
9: EARNINGS PER SHARE AND DIVIDENDS
The following table presents a reconciliation of the numerators and
denominators of the basic and diluted earnings per share computations.
YEARS ENDED DECEMBER 31
----------------------------------------------
RESTATED RESTATED
2002 2001 2000
----------- ----------- -----------
IN MILLIONS, EXCEPT PER SHARE AMOUNTS
NET INCOME (LOSS) APPLICABLE TO BASIC AND DILUTED EPS
Consolidated Net Income (Loss).................................... $ (620) $ (448) $ 43
=========== =========== ===========
Net Income (Loss) Available to Common Stock:
CMS Energy-- Basic.............................................. $ (620) $ (448) $ 43
Add conversion of Trust Preferred Securities (net of
tax)......................................................... --(a) --(a) --(a)
----------- ----------- -----------
CMS Energy-- Diluted............................................ $ (620) $ (448) $ 43
=========== =========== ===========
AVERAGE COMMON SHARES OUTSTANDING APPLICABLE TO BASIC AND
DILUTED EPS
CMS Energy:
Average Shares-- Basic.......................................... 139.0 130.7 113.1
Add conversion of Trust Preferred Securities.................... --(a) --(a) --(a)
Stock Options................................................... -- --(b) --(b)
----------- ----------- -----------
Average Shares-- Diluted........................................ 139.0 130.7 113.1
=========== =========== ===========
NET INCOME (LOSS) PER AVERAGE COMMON SHARE
Basic........................................................... $ (4.46) $ (3.42) $ 0.38
Diluted......................................................... $ (4.46) $ (3.42) $ 0.38
=========== =========== ===========
----------
(a) The effects of converting the trust preferred securities were not included
in the computation of diluted earnings per share because to do so would
have been antidilutive.
(b) Shares of outstanding stock options of 0.2 million for both 2001 and 2000
were not included in the computation of diluted earnings per share because
to do so would have been antidilutive.
In February, April, August and November 2002, CMS Energy paid dividends of
$0.365, $0.365, $0.18 and $0.18 per share, respectively on CMS Energy Common
Stock. In January 2003, the Board of Directors suspended the payment of common
stock dividends.
115
10: RISK MANAGEMENT ACTIVITIES AND FINANCIAL INSTRUMENTS
The objective of the CMS Energy risk management policy is to analyze,
manage and coordinate the identified risk exposures of the individual business
segments and to exploit the presence of internal hedge opportunities that exist
among its diversified business segments. CMS Energy, on behalf of its regulated
and non-regulated subsidiaries, utilizes a variety of derivative instruments for
both trading and non-trading purposes and executes these transactions with
external parties through either CMS Enterprises or its marketing subsidiary, CMS
MST. These derivative instruments include futures contracts, swaps, options and
forward contracts to manage exposure to fluctuations in commodity prices,
interest rates and foreign exchange rates. 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.
Derivative instruments contain credit risk if the counterparties, including
financial institutions and energy marketers, fail to perform under the
agreements. CMS Energy minimizes such risk by performing financial credit
mitigation programs including, among other things, using publicly available
credit ratings of such counterparties, internally developed statistical models
for credit scoring and use of internal hedging programs to minimize exposure to
external counterparties. No material nonperformance is expected.
COMMODITY DERIVATIVES: Prior to January 1, 2001, CMS Energy accounted for
its non-trading commodity contracts as hedges and deferred any changes in the
market value and gains/losses resulting from settlements until the hedged
transaction was completed. Since January 1, 2001, commodity contracts have been
accounted for in accordance with the requirements of SFAS No. 133, as amended
and interpreted, and may or may not qualify for hedge accounting treatment
depending on the characteristics of each contract.
DERIVATIVE INSTRUMENTS: CMS Energy adopted SFAS No. 133 on January 1, 2001.
This standard requires CMS Energy to recognize at fair value on the balance
sheet, as assets or liabilities, all contracts that meet the definition of a
derivative instrument. The standard also requires CMS Energy to record all
changes in fair value directly in earnings unless the derivative instrument
meets certain qualifying cash flow hedge criteria, in which case the changes in
fair value would be reflected in other comprehensive income. CMS Energy
generally determines fair value based upon quoted market prices and mathematical
models using current and historical pricing data. The ineffective portion, if
any, of all hedges is recognized in earnings.
Excluding a substantial portion of CMS MST's operations, CMS Energy
believes that the majority of its contracts, power purchase agreements and gas
transportation contracts qualify for the normal purchases and sales exception of
SFAS No. 133 and are not subject to the accounting rules for derivative
instruments. CMS Energy uses derivative instruments that require derivative
accounting, to limit its exposures to electricity and gas commodity price risk.
The interest rate and foreign currency exchange contracts met the requirements
for hedge accounting under SFAS No. 133 and CMS Energy recorded the changes in
the fair value of these contracts in other comprehensive income.
On January 1, 2001, upon initial adoption of the standard including
adjustments for subsequent guidance, CMS Energy recorded a $7 million, net of
tax, cumulative effect adjustment as an increase in accumulated other
comprehensive income. This adjustment relates to the difference between the fair
value and recorded book value of contracts related to gas call options, gas fuel
for generation swap contracts, and interest rate swap contracts that qualified
for hedge accounting prior to the initial adoption of SFAS No. 133 and
Consumers' proportionate share of the effects of adopting SFAS No. 133 related
to its equity investment in the MCV Partnership. Based on the pretax initial
transition adjustment of $21 million recorded in accumulated other comprehensive
income at January 1, 2001, Consumers reclassified to earnings $12 million as a
reduction to the cost of gas, $1 million as a reduction to the cost of power
supply, $2 million as an increase in interest expense and $8 million as an
increase in other revenues for the twelve months ended December 31, 2001. CMS
Energy recorded $12 million as an increase in interest expense during 2001,
which includes the $2 million of additional interest expense at Consumers. The
difference between the initial transition adjustment and the amounts
reclassified to earnings represents an unrealized loss in the fair value of the
derivative instruments since January 1, 2001, resulting in a decrease of other
comprehensive income.
At adoption of the standard on January 1, 2001, derivative and hedge
accounting for certain utility industry contracts, particularly electric call
option contracts and option-like contracts, and contracts subject to Bookouts
was uncertain. Consumers did not record these contracts on the balance sheet at
fair value, but instead accounted for these types of contracts as derivatives
that qualified for the normal purchase exception of SFAS No. 133. In June and
December 2001, the FASB issued guidance that resolved the accounting for these
contracts. As a result, on July 1, 2001, Consumers recorded a $3 million, net of
tax, cumulative effect adjustment as an unrealized loss decreasing accumulated
other comprehensive income, and on December 31, 2001, recorded an $11 million,
net of tax,
116
cumulative effect adjustment as a decrease to earnings. These adjustments relate
to the difference between the fair value and the recorded book value of electric
call option contracts.
Financial gas instruments and supply contracts that were assigned to CMS
MST from another CMS subsidiary in 2000 and accounted for on an accrual basis
were classified as derivatives under SFAS No. 133 on January 1, 2001. Upon
adoption of the standard, CMS MST recorded a cumulative effect adjustment to
record the fair value of these derivatives, which was a $9 million increase to
earnings, net of tax. Any changes after January 1, 2001 in the fair value of
these derivatives is included in net income from continuing operations.
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. On July 1, 2001, upon initial adoption of the
standard for these contracts, Consumers recorded a $3 million, net of tax,
cumulative effect adjustment as an unrealized loss, decreasing accumulated other
comprehensive income. This adjustment relates to the difference between the fair
value and the recorded book value of these electric call option contracts. The
adjustment to accumulated other comprehensive income relates to electric call
option contracts that qualified for cash flow hedge accounting prior to the
initial adoption of SFAS No. 133. After July 1, 2001, these contracts did not
qualify for hedge accounting under SFAS No. 133 and, therefore, Consumers
records any change in fair value subsequent to July 1, 2001 directly in
earnings, which can cause earnings volatility. The initial amount recorded in
other comprehensive income was reclassified to earnings as the forecasted future
transactions occurred or the call options expired. The majority of these
contracts expired in the third quarter 2001 and the remaining contracts expired
in the third quarter of 2002. As of December 31, 2001, Consumers reclassified
from other comprehensive income to earnings, $2 million, net of tax, as part of
the cost of power supply, and the remainder, $1 million, net of tax, was
reclassified from other comprehensive income to earnings in the third quarter of
2002.
In December 2001, the FASB issued revised guidance regarding derivative
accounting for electric call option contracts and option-like contracts. The
revised guidance amended the criteria used to determine if derivative accounting
is required. In light of the amended criteria, Consumers re-evaluated its
electric call option and option-like contracts, and determined that additional
contracts require derivative accounting. Therefore, as of December 31, 2001,
upon initial adoption of the revised guidance for these contracts, Consumers
recorded an $11 million, net of tax, cumulative effect adjustment as a decrease
to earnings. This adjustment relates to the difference between the fair value
and the recorded book value of these electric call option contracts. Consumers
records any change in fair value subsequent to December 31, 2001, directly in
earnings, which could cause earnings volatility. During 2002, Consumers
recorded, as part of power costs, a $245,000 unrecognized gain on its unexpired
electric call options contracts. As of December 31, 2002, 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.
Consumers believes that certain of its electric capacity and energy
contracts are not derivatives due to the lack of an active energy market, as
defined by SFAS No. 133, in the state of Michigan 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.
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. These contracts expired in December
2002.
As of December 31, 2002, Consumers recorded a total of $8 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. On April 11, 2002, MCV Partnership changed its accounting
for derivatives (Note 18). Consumers' ownership share of the cumulative
effective adjustment to earnings is reflected as a change in accounting
principle in 2002 in the accompanying statement of income.
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
117
customers at a reasonable and prudent cost. During 2002, some of the fixed price
gas supply contracts required derivative accounting because they contained
embedded put options that disqualified the contracts from the normal purchase
exception of SFAS No. 133. These contracts expired in October 2002.
As of December 31, 2002, weather-based gas call options and gas put options
requiring derivative accounting had a net fair value of $1 million, of which
$600,000, represents a fair value gain on the contracts since the date of
inception. This gain was recorded directly in earnings as part of other income,
and then directly offset and recorded on the balance sheet as a regulatory
liability. Any subsequent changes in fair value will be recorded in a similar
manner.
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 swap is sold. As of December 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 December 31, 2002, 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 swaps are
settled on a monthly basis. As of December 31, 2001, this interest rate swap had
a negative fair value of $3 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. 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.
In 2001, Consumers had entered into interest rate swaps to hedge the risk
associated with the fair value of $400 million of fixed-rate debt, which expire
in May 2003 and December 2006. In November 2001, these swaps were terminated and
resulted in a $4 million gain that was deferred and recorded as part of the
debt. This gain is being recognized over the remaining life of the debt.
In 2001, Consumers entered into fair value hedges to hedge the risk
associated with the fair value of $250 million of debt. These swaps terminated
in the third quarter 2001, and resulted in a $4 million gain that has been
deferred and recorded as part of the debt. This gain is being recognized over
the remaining life of the debt.
In September 2001, Consumers entered into a cash flow hedge to fix the
interest rate on $100 million of debt to be issued. In September 2001, the swap
terminated and resulted in a $2 million loss that was recorded in other
comprehensive income and will be amortized to interest expense over the life of
the debt using the effective interest method.
ENERGY TRADING ACTIVITIES: CMS Energy, through its subsidiary CMS MST, has
engaged in trading activities. CMS MST manages any open positions within certain
guidelines that limit its exposure to market risk and requires timely reporting
to management of potential financial exposure. These guidelines include
statistical risk tolerance limits using historical price movements to calculate
daily value at risk measurements. CMS MST's wholesale power and gas trading
activities are accounted for under mark-to-market method of accounting
consistent with guidance provided in EITF Issue No. 98-10. EITF Issue No. 98-10
has been rescinded by EITF Issue No. 02-03. The consensus rescinding EITF Issue
No. 98-10 must be applied to all contracts that existed as of October 25, 2002
and must be recognized as a cumulative effect of a change in accounting
principle in accordance with APB Opinion No. 20, Accounting Changes, effective
the first day of the first interim or annual period beginning after December 15,
2002. The consensus also must be applied immediately to all new contracts
entered into after October 25, 2002. See discussion on EITF Issue No. 02-03
under New Accounting Standards. Under mark-to-market accounting, energy-trading
contracts are reflected at fair market value, net of reserves, with unrealized
gains and losses recorded as an asset or liability in the consolidated balance
sheets. These assets and liabilities are affected by the timing of settlements
related to these contracts; current-period changes from newly originated
transactions and the impact of price movements. Changes in fair values are
recognized as revenues in the consolidated statements of income in the period in
which the changes occur. Market prices used to value outstanding financial
instruments reflect management's consideration of, among other things, closing
exchange and over-the-counter quotations. In certain contracts, long-term
commitments may extend beyond the period in which market quotations for such
contracts are available and volumetric obligations may not be defined.
Mathematical models are developed to determine various inputs into the fair
value calculation including price, anticipated volumetric obligations and other
inputs that may be required to adequately address the determination of fair
value of the contracts. Realized cash returns on these commitments may vary,
either positively or negatively, from the results estimated through application
of the mathematical model. CMS Energy believes that its mathematical models
utilize state-of-the-art technology, pertinent industry
118
data and prudent discounting in order to forecast certain elongated pricing
curves. Market prices are adjusted to reflect the potential impact of
liquidating the company's position in an orderly manner over a reasonable period
of time under present market conditions.
In connection with the market valuation of its energy commodity contracts,
CMS Energy maintains reserves for credit risks based on the financial condition
of counterparties. The creditworthiness of these counterparties will impact
overall exposure to credit risk; however, with regard to its counterparties, CMS
Energy maintains credit policies that management believes minimize overall
credit risk. Determination of the credit quality of its counterparties is based
upon a number of factors, including credit ratings, financial condition, and
collateral requirements. When trading terms permit, CMS Energy employs standard
agreements that allow for netting of positive and negative exposures associated
with a single counterparty. Based on these policies, its current exposures and
its credit reserves, CMS Energy does not anticipate a material adverse effect on
its financial position or results of operations as a result of counterparty
nonperformance.
At December 31, 2002, and 2001, CMS Energy has recorded a net price risk
management asset of $81 million and $41 million respectively, net of reserves,
related to the unrealized mark-to-market gains on existing wholesale power
contracts, gas contracts, and economic hedges for retail activities that are
marked as derivatives. For the year ended 2002, $62 million of the $81 million
in net price risk management assets were reclassified to assets and liabilities
held for sale to reflect the pending sales of CMS MST's wholesale gas and power
contracts. In addition, the fair value of these portfolios were reduced by $48
million as a result of fair value evidence derived from the negotiated sales
prices for these contracts held for sale. See MD&A disclosure on mark-to-market
accounting for further analysis of price risk management assets and liabilities.
FAIR VALUE OF CONTRACTS AT DECEMBER 31, 2002
--------------------------------------------------------
TOTAL
SOURCE OF FAIR VALUE FAIR VALUE LESS THAN 1 1 TO 3 4 TO 5 GREATER THAN 5
------------------------------------------------ -------------- -------------- ------------ ---------- --------------
IN MILLIONS
MATURITY (IN YEARS)
Prices actively quoted.......................... $ 7 $ 7 $ -- $ -- $ --
Prices provided by other external sources....... 57 7 29 13 8
Prices based on models and other valuation
methods....................................... 17 (15) 19 5 8
------ ------- ------- ------- -------
Total........................................... $ 81 $ (1) $ 48 $ 18 $ 16
====== ======= ======= ======= =======
FLOATING TO FIXED INTEREST RATE SWAPS: CMS Energy and its subsidiaries
enter into floating to fixed interest rate swap agreements to reduce the impact
of interest rate fluctuations. These swaps are designated as cash flow hedges
and the difference between the amounts paid and received under the swaps is
accrued and recorded as an adjustment to interest expense over the term of the
agreement. Changes in the fair value of these swaps are recorded in accumulated
other comprehensive income until the swaps are terminated. As of December 31,
2002, these swaps had a negative fair value of $7 million that if sustained,
will be reclassified to earnings as the swaps are settled on a quarterly basis.
No ineffectiveness was recognized during the fourth quarter of 2002 under the
requirements of SFAS No. 133.
Notional amounts reflect the volume of transactions but do not represent
the amount exchanged by the parties to the financial instruments. Accordingly,
notional amounts do not necessarily reflect CMS Energy's exposure to credit or
market risks. As of December 31, 2002 and 2001, the weighted average interest
rate associated with outstanding swaps was approximately 5.2 percent and 5.9
percent, respectively.
FLOATING TO FIXED NOTIONAL MATURITY FAIR UNREALIZED
INTEREST RATE SWAPS AMOUNT DATE VALUE GAIN (LOSS)
----------------------------- -------- --------- -------- -----------
IN MILLIONS
December 31, 2002............ $ 294 2003-2006 $ (7) $ 6
December 31, 2001............ $ 318 2002-2006 $ (11) $ (2)
FIXED TO FLOATING INTEREST RATE SWAPS: CMS Energy monitors its debt
portfolio mix of fixed and variable rate instruments and from time to time
enters into fixed to floating rate swaps to maintain the optimum mix of fixed
and floating rate debt. These swaps are designated as fair value hedges and any
realized gains or losses in the fair value are amortized to earnings after the
termination of the hedge instrument over the remaining life of the hedged item.
There were no outstanding fixed to floating interest rate swaps as of December
31, 2002.
119
FLOATING TO FIXED NOTIONAL MATURITY FAIR UNREALIZED
INTEREST RATE SWAPS AMOUNT DATE VALUE GAIN (LOSS)
----------------------------- -------- --------- -------- -----------
IN MILLIONS
December 31, 2002............ $ -- -- $ -- $ 1
December 31, 2001............ 200 2004-2005 (1) (1)
FOREIGN EXCHANGE DERIVATIVES: CMS Energy uses forward exchange and option
contracts to hedge certain receivables, payables, long-term debt and equity
value relating to foreign investments. The purpose of CMS Energy's foreign
currency hedging activities is to protect the company from the risk that U.S.
dollar net cash flows resulting from sales to foreign customers and purchases
from foreign suppliers and the repayment of non-U.S. dollar borrowings as well
as equity reported on the company's balance sheet, may be adversely affected by
changes in exchange rates. These contracts do not subject CMS Energy to risk
from exchange rate movements because gains and losses on such contracts offset
losses and gains, respectively, on assets and liabilities being hedged. The 2001
estimated 2002 fair value of the foreign exchange and option contracts at
December 31, 2002 and 2001 was immaterial and $(1) million, respectively;
representing the amount CMS Energy would receive or (pay) upon settlement.
The notional amount of the outstanding foreign exchange contracts at
December 31, 2002 was $1 million Canadian contracts. Foreign exchange contracts
outstanding as of December 31, 2001 had a total notional amount of $50 million
related to investments in Brazil. The Brazilian contracts matured during 2002
and had a weighted average transaction rate of 2.58 Brazilian Real to the U.S.
dollar.
FINANCIAL INSTRUMENTS: The carrying amounts of cash, short-term investments
and current liabilities approximate their fair values due to their short-term
nature. The estimated fair values of long-term investments are based on quoted
market prices or, in the absence of specific market prices, on quoted market
prices of similar investments or other valuation techniques. Judgment may also
be required to interpret market data to develop certain estimates of fair value.
Accordingly, the estimates determined as of December 31, 2002 and 2001 are not
necessarily indicative of the amounts that may be realized in current market
exchanges. The carrying amounts of all long-term investments in financial
instruments, except for those as shown below, approximate fair value.
AS OF DECEMBER 31
--------------------------------------------------------------------------------
2002 2001
---------------------------------------- ---------------------------------------
CARRYING FAIR UNREALIZED CARRYING FAIR UNREALIZED
COST VALUE GAIN(LOSS) COST VALUE GAIN(LOSS)
------------ ---------- -------------- ----------- ----------- ------------
IN MILLIONS
Long-Term Debt(a)....................... $ 5,356 $ 5,027 $ 329 $ 5,840 $ 5,731 $ 109
Preferred Stock and Trust Preferred
Securities............................ $ 927 $ 729 $ 198 $ 1,258 $ 1,169 $ 89
Available-for-Sale Securities:
Nuclear Decommissioning(b)............ $ 458 $ 536 $ 78 $ 467 $ 581 $ 114
SERP.................................. 54 57 3 52 56 4
Trading Securities:
Investments........................... $ 5 $ 6 $ 1 $ 4 $ 7 $ 3
----------
(a) Settlement of long-term debt is generally not expected until maturity.
(b) Unrealized gains and losses on nuclear decommissioning investments are
classified in accumulated depreciation.
11: INCOME TAXES
CMS Energy and its subsidiaries file a consolidated federal income tax
return. Income taxes are generally allocated based on each company's separate
taxable income. CMS Energy utilizes deferred tax accounting for temporary
differences in accordance with SFAS No. 109, Accounting for Income Taxes.
U.S. income taxes are not recorded on the undistributed earnings of foreign
subsidiaries that have been or are intended to be reinvested indefinitely. Upon
distribution, those earnings may be subject to both U.S. income taxes (adjusted
for foreign tax credits or deductions) and withholding taxes payable to various
foreign countries. CMS Energy annually determines the amount of undistributed
foreign earnings that it expects will remain invested indefinitely in foreign
subsidiaries. Cumulative undistributed earnings of foreign subsidiaries for
which income taxes have not been provided totaled approximately $2 million at
December 31, 2002. It is impractical to estimate the amount of unrecognized
deferred income taxes or withholding taxes on these undistributed earnings.
Also, at
120
December 31, 2002, CMS Energy recorded U.S. income taxes with respect
to temporary differences between the book and tax bases of foreign investments
that were determined to be no longer essentially permanent in duration.
The Job Creation and Worker Assistance Act of 2002 provided to corporate
taxpayers a 5-year carryback of tax losses incurred in 2001 and 2002. As a
result of this legislation, CMS Energy was able to carry back consolidated 2001
and 2002 tax losses to tax years 1996 through 1999 to obtain refunds of prior
years tax payments totaling $250 million. The tax loss carryback, however,
resulted in a reduction in AMT credit carryforwards that previously had been
recorded by CMS Energy as deferred tax assets in the amount of $47 million. This
non-cash reduction in AMT credit carryforwards has been reflected in the tax
provision of CMS Energy.
CMS Energy used ITC to reduce current income taxes payable, and amortizes
ITC over the life of the related property. Alternative minimum tax AMT paid
generally becomes a tax credit that CMS Energy can carry forward indefinitely to
reduce regular tax liabilities in future periods when regular taxes paid exceed
the tax calculated for AMT. At December 31, 2002, CMS Energy had AMT credit
carryforwards in the amount of $207 million that do not expire, tax loss
carryforwards in the amount of $327 million that expire in 2021 and 2022,
capital loss carryforwards in the amount of $215 million that expire in 2007,
and general business credit carryforwards in the amount of $39 million that
expire in 2005.
The significant components of income tax expense (benefit) on continuing
operations consisted of:
YEARS ENDED DECEMBER 31
----------------------------------------
RESTATED RESTATED
2002 2001 2000
---------- ----------- ----------
IN MILLIONS
Current income taxes
Federal........................ $ (105) $ (197) $ 74
State and local................ (8) 7 4
Foreign........................ 25 (3) 21
---------- ---------- ----------
$ (88) $ (193) $ 99
Deferred income taxes
Federal........................ $ 103 $ 94 $ (91)
State.......................... 2 1 11
Foreign........................ 2 8 24
---------- ---------- ----------
$ 107 $ 103 $ (56)
Deferred ITC, net................ (6) (8) (9)
---------- ---------- ----------
Tax expense (benefit)............ $ 13 $ (98) $ 34
========== ========== ==========
The principal components of CMS Energy's deferred tax assets (liabilities)
recognized in the consolidated balance sheet are as follows:
DECEMBER 31
----------------------------
RESTATED
2002 2001
-------------- -------------
IN MILLIONS
Property............................................ $ (814) $ (826)
Securitized costs................................... (192) (194)
Unconsolidated investments.......................... 79 (119)
Postretirement benefits............................. (72) (76)
Gas inventories..................................... (74) (57)
Employee benefit obligations........................ 265 148
Tax credit carryforward............................. 247 182
Tax loss carryforward............................... 190 --
Power purchases..................................... 18 27
Regulatory liabilities.............................. 115 104
Other, net.......................................... (191) (62)
------------- -------------
Net deferred tax assets (liabilities)............. $ (429) $ (873)
============= =============
Deferred tax liabilities............................ $ (1,288) $ (1,442)
Deferred tax assets................................. 859 569
------------- -------------
Net deferred tax assets (liabilities)............. $ (429) $ (873)
============= =============
121
The actual income tax expense on continuing operations differs from the
amount computed by applying the statutory federal tax rate of 35% to income
before income taxes as follows:
RESTATED RESTATED
2002 2001 2000
------------- ------------ ----------
IN MILLIONS
Loss from continuing operations before income taxes and
minority interests
Domestic.............................................. $ (505) $ (349) $ 206
Foreign............................................... 102 18 (209)
---------- ---------- ----------
Total.............................................. (403) (331) (3)
Statutory federal income tax rate....................... x 35% x 35% x 35%
---------- ---------- ----------
Expected income tax expense............................. (141) (116) (1)
Increase (decrease) in taxes from:
Property differences.................................. 18 23 27
Income tax effect of foreign investments.............. 93 7 9
Tax credits........................................... 51 (8) (9)
State and local income taxes, net of federal benefit.. (7) 3 10
Other, net............................................ (1) (7) (2)
---------- ---------- ----------
Recorded income tax expense............................. $ 13 $ (98) $ 34
========== ========== ==========
Effective tax rate...................................... 3.3% 29.7% (a)
========== ========== ==========
----------
(a) Because of the small size of the net loss in 2000, the effective tax rate
is not meaningful. Changes in the effective tax rate in 2002 from 2001
resulted principally from the reduction in AMT credit carryforwards and
the recording of U.S. taxes on undistributed earnings and basis difference
of foreign subsidiaries.
12: EXECUTIVE INCENTIVE COMPENSATION
Under CMS Energy's Performance Incentive Stock Plan, restricted shares of
CMS Energy Common Stock as well as stock options and stock appreciation rights
relating to common stock may be granted to key employees based on their
contributions to the successful management of CMS Energy and its subsidiaries.
Certain plan awards are subject to performance-based business criteria. The plan
reserves for award not more than five percent of Common Stock outstanding on
January 1 each year, less (i) the number of shares of restricted Common Stock
awarded and (ii) Common Stock subject to options granted under the plan during
the immediately preceding four calendar years. The number of shares of
restricted Common Stock awarded under this plan cannot exceed 20 percent of the
aggregate number of shares reserved for award. Any forfeitures of shares
previously awarded will increase the number of shares available to be awarded
under the plan. At December 31, 2002, awards of up to 1,716,856 shares of CMS
Energy Common Stock may be issued.
Restricted shares of Common Stock are outstanding shares with full voting
and dividend rights. These awards vest over five years at the rate of 25 percent
per year after two years. Some restricted shares are subject to achievement of
specified levels of total shareholder return and are subject to forfeiture if
employment terminates before vesting. If performance objectives are exceeded,
the plan provides additional awards. Restricted shares vest fully if control of
CMS Energy changes, as defined by the plan. At December 31, 2002, 375,039 of the
958,326 shares of restricted CMS Energy Common Stock outstanding are subject to
performance objectives.
Under the plan, stock options and stock appreciation rights relating to
Common Stock are granted with an exercise price equal to the closing market
price on each grant date. Some options may be exercised upon grant; some vest
over five years at the rate of 25 percent per year beginning at the end of the
first year and others vest over three years at a rate of 33 1/3 percent per year
after one year. All options expire up to ten years and one month from date of
grant. The status of the restricted stock granted to CMS Energy's key employees
under the Performance Incentive Stock Plan and options granted under the plan
follows.
122
RESTRICTED
STOCK OPTIONS
------------- ----------------------------------
NUMBER NUMBER WEIGHTED-AVERAGE
OF SHARES OF SHARES EXERCISE PRICE
------------- ----------------------------------
CMS ENERGY COMMON STOCK:
Outstanding at January 1, 2000..................... 884,129 2,530,040 $ 35.33
Granted.......................................... 246,250 878,630 $ 17.96
Exercised or Issued.............................. (134,173) (185,600) $ 17.36
Forfeited........................................ (209,779) -- --
Expired.......................................... -- (164,884) $ 34.58
------------- ------------ ------------
Outstanding at December 31, 2000................... 786,427 3,058,186 $ 31.47
Granted.......................................... 266,500 1,036,000 $ 30.21
Exercised or Issued.............................. (82,765) (150,174) $ 19.11
Forfeited........................................ (182,177) -- --
Expired.......................................... -- (31,832) $ 35.10
------------- ------------ ------------
Outstanding at December 31, 2001................... 787,985 3,912,180 $ 31.58
Granted.......................................... 512,726 1,492,200 $ 15.64
Exercised or Issued.............................. (116,562) (39,600) $ 17.07
Forfeited........................................ (225,823) -- --
Expired.......................................... -- (243,160) $ 28.91
------------- ------------ ------------
Outstanding at December 31, 2002................... 958,326 5,121,620 $ 27.18
============= ============ ============
The following table summarizes information about stock options outstanding
at December 31, 2002:
NUMBER OF WEIGHTED- WEIGHTED-
SHARES AVERAGE AVERAGE
RANGE OF EXERCISE PRICES OUTSTANDING REMAINING LIFE EXERCISE PRICE
----------------------------------------------- ------------------ ------------------- ------------------
CMS ENERGY COMMON STOCK:
$ 8.12-- $17.00................................ 1,198,300 8.64 years $ 11.85
$18.00-- $24.75................................ 1,096,286 7.60 years $ 22.40
$25.13-- $31.04................................ 1,221,576 6.85 years $ 30.33
$33.11-- $39.06................................ 1,042,552 6.07 years $ 37.80
$41.44-- $44.06................................ 562,906 5.92 years $ 42.58
-------------- ---------- ----------
$ 8.12-- $44.06................................ 5,121,620 7.17 years $ 27.18
============== ========== ==========
At December 31, 2002, 2001 and 2000, the number of stock options
exercisable was 5,007,329, 3,760,883, and 2,827,971, respectively.
The weighted average fair value of options granted for CMS Energy Common
Stock in February 2002 was $3.84, and in July 2002, $1.44. In 2001 and 2000, the
weighted average fair value of options granted for CMS Energy Common Stock were
$6.43 and $2.04, respectively. Fair value is estimated using the Black-Scholes
model, a mathematical formula used to value options traded on securities
exchanges, with the following assumptions. For 2002, the assumptions listed are
for the February grant, followed by the July grant:
YEARS ENDED DECEMBER 31
-------------------------------------------------------
FEBRUARY JULY
2002 2002 2001 2000
------------ ------------ ------------ ----------
CMS ENERGY COMMON STOCK OPTIONS
Risk-free interest rate...................... 3.95% 3.16% 4.77% 6.56%
Expected stock-price volatility.............. 32.44% 40.81% 30.59% 27.25%
Expected dividend rate....................... $0.365 $0.1825 $0.365 $0.365
Expected option life (years)................. 4.2 4.2 4.2 4.1
In 2002 CMS Energy adopted the fair value method of accounting for stock
based compensation under SFAS No. 123 as amended by SFAS No. 148 on a
prospective method. Accordingly, CMS Energy recognized the $4 million fair value
of stock based awards granted, modified or settled in 2002 in operating
expenses.
CMS Energy applied APB Opinion No. 25 and related interpretations in
accounting for the Performance Incentive Stock Plan. Prior to 2002, stock
options were granted at market price, no compensation cost was recognized for
stock options granted under the plan. The net compensation cost charged against
income for restricted stock was less than $1 million in 2002, $1 million in
2001, and
123
$2 million in 2000. If compensation cost for stock options had been determined
in accordance with SFAS No. 123, in 2001, and 2000, CMS Energy's consolidated
net income (loss), as reported and pro forma, and earnings per share would have
been as follows:
YEARS ENDED DECEMBER 31
-----------------------------------------------------------------------------------------------
RESTATED RESTATED
2002 BASIC DILUTED 2001 BASIC DILUTED 2000 BASIC DILUTED
--------- ---------- ---------- --------- ---------- ---------- --------- ---------- ---------
IN MILLIONS, EXCEPT PER SHARE AMOUNTS
Net income (loss), as
reported....................... $ (620) $ (4.46) $ (4.46) $ (448) $ (3.42) $ (3.42) $ 43 $ 0.38 $ 0.38
Add: Stock-based employee
compensation expense included
in reported net income
(loss), net of related
taxes.......................... 3 0.02 0.02 -- -- -- -- -- --
Deduct: Total stock-based
employee compensation expense
determined under fair value
based method for all awards,
net of related taxes........... (3) (0.02) (0.02) (4) (0.03) (0.03) (1) (0.01) (0.01)
-------- --------- -------- -------- --------- --------- ------ --------- ---------
Pro forma net income (loss)...... $ (620) $ (4.46) $ (4.46) $ (452) $ (3.45) $ (3.45) $ 42 $ 0.37 $ 0.37
======== ========= ======== ======== ========= ========= ====== ========= =========
13: RETIREMENT BENEFITS
CMS Energy and its subsidiaries provide retirement benefits under a number
of different plans, including certain health care and life insurance benefits
under OPEB, benefits to certain management employees under SERP and EISP, and
benefits to substantially all its employees under a trusteed, non-contributory,
defined benefit pension plan of Consumers and CMS Energy, and a defined
contribution 401(k) plan.
Weighted-Average Assumptions:
YEARS ENDED DECEMBER 31
------------------------------------------------------------------
PENSION & SERP OPEB
--------------------------------- --------------------------------
RESTATED RESTATED RESTATED RESTATED
2002 2001 2000 2002 2001 2000
--------- ----------- ----------- --------- ----------- --------
Discount rate.................................... 6.75% 7.25% 7.75% 6.75% 7.25% 7.75%
Expected long-term rate of return on plan
assets:........................................ 8.75% 9.75% 9.75%
Union.......................................... 8.75% 9.75% 9.75%
Non-Union...................................... 6.00% 6.00% 6.00%
Rate of compensation increase:
Pension-- to age 45............................ 3.50% 5.25% 5.25%
-- age 45 to assumed retirement................. 3.50% 3.75% 3.75%
SERP............................................. 5.50% 5.50% 5.50%
Retiree health care costs at December 31, 2002 are based on the assumption
that costs would increase 8.5 percent in 2002 with a gradual decrease to 5.5
percent in 2010 and thereafter.
Net Pension Plan, SERP, EISP, and OPEB costs consist of:
YEARS ENDED DECEMBER 31
------------------------------------------------------------------
PENSION & SERP & EISP OPEB
--------------------------------- -------------------------------
2002 2001 2000 2002 2001 2000
---------- ---------- ---------- --------- ---------- --------
IN MILLIONS
Service cost........................ $ 46 $ 39 $ 33 $ 20 $ 16 $ 14
Interest expense.................... 89 88 82 69 62 56
Expected return on plan assets...... (103) (98) (92) (43) (41) (35)
Amortization of:
Prior service cost................ 8 8 6 (1) (1) --
Net transition (asset)............ -- (5) (5) -- -- --
Other............................. (1) (1) (2) 10 1 (2)
Plan amendments..................... 4 -- -- -- -- --
-------- ------- ------- ------- ------- -------
Net periodic benefit cost........... $ 43 $ 31 $ 22 $ 55 $ 37 $ 33
======== ======= ======= ======= ======= =======
The health care cost trend rate assumption significantly affects the
amounts reported. A one percentage point change in the assumed health care cost
trend assumption would have the following effects:
124
ONE PERCENTAGE ONE PERCENTAGE
POINT INCREASE POINT DECREASE
-------------- --------------
IN MILLIONS
Effect on total service and interest cost components............. $ 15 $ (12)
Effect on accumulated postretirement benefit obligation.......... 137 (114)
The funded status of CMS Energy's Pension Plan, SERP and OPEB plans is
reconciled with the liability recorded at December 31 as follows:
PENSION PLAN SERP OPEB
---------------------------- ----------------------- ----------------------
2002 2001 2002 2001 2002 2001
------------- ------------- ----------- ----------- ----------- ----------
IN MILLIONS
Benefit obligation, January 1............. $ 1,195 $ 1,081 $ 73 $ 58 $ 956 $ 815
Service cost.............................. 40 36 4 3 20 16
Interest cost............................. 84 83 5 5 69 62
Plan amendments........................... 4 -- -- -- (64) (17)
Actuarial loss (gain)..................... 72 96 1 8 41 116
Benefits paid............................. (138) (101) (2) (1) (40) (36)
---------- ---------- ------- ------- -------- --------
Benefit obligation, December 31........... $ 1,257 $ 1,195 $ 81 $ 73 $ 982 $ 956
---------- ---------- ------- ------- -------- --------
Plan assets at fair value, January 1...... $ 845 $ 994 $ -- $ -- $ 508 $ 473
Actual return on plan assets.............. (164) (113) -- -- (43) (21)
Company contribution...................... 64 65 2 1 83 57
Actual benefits paid...................... (138) (101) (2) (1) (40) (1)
---------- ---------- ------- ------- -------- --------
Plan assets at fair value, December 31.... $ 607(a) $ 845(a) $ -- $ -- $ 508 $ 508
---------- ---------- ------- ------- -------- --------
Benefit obligation less than (in excess
of) plan assets......................... $ (650) $ (350) $ (81) $ (73) $ (474) $ (448)
Unrecognized:
Net (gain) loss from experience
different than assumed............... 574 235 13 12 313 197
Prior service cost...................... 60 68 1 1 (77) (16)
Other................................... (7) (7) -- -- -- --
---------- ---------- ------- ------- -------- --------
Recorded liability........................ $ (23) $ (54) $ (67) $ (60) $ (238) $ (267)
----------- ----------- ---------- ---------- ----------- -----------
Additional minimum pension
liability(b)............................ (426) -- -- -- -- --
---------- ---------- ------- ------- -------- --------
Total recorded liability.................. $ (449) $ (54) $ (67) $ (60) $ (238) $ (267)
========== ========== ======= ======= ======== ========
----------
(a) Primarily stocks and bonds, including 5,241,656 and 141,000 shares of CMS
Energy Common Stock in Pension Plan assets and OPEB plan assets,
respectively, with fair values of $49 million and $1 million,
respectively, at December 31, 2002. Fair values at December 31, 2001 were
$126 million and $3 million for the Pension Plan assets and OPEB plan
assets, respectively.
(b) The recent significant downturn in the equities markets has affected the
value of the Pension Plan assets. At December 31, 2002, the value of the
Pension Plan assets was $607 million and Accumulated Benefit Obligation
was at $1.055 billion. In accordance with SFAS No. 87, CMS Energy
recognized an additional $426 million pension liability, recorded a $53
million intangible asset and charged $373 million ($242 after-tax) to
accumulated other comprehensive income.
SERP benefits are paid from a trust established in 1988. SERP is not a
qualified plan under the Internal Revenue Code, and as such, earnings of the
trust are taxable and trust assets are included in consolidated assets. At
December 31, 2002 and 2001, trust assets were $57 million and $56 million,
respectively, and were classified as other noncurrent assets. The Accumulated
Benefit Obligation for SERP was $54 million in 2002 and $48 million in 2001.
The Executive Incentive Separation Plan (EISP) was established to provide
flexibility in separation of employment by officers, a select group of
management, or other highly compensated employees. Terms of the plan may include
payment of a lump sum, payment of monthly benefits for life, payment of premium
for continuation of health care, or any other legally permissible term deemed to
be in the best interest of CMS Energy to offer. As of December 31, 2002, the
Accumulated Benefit Obligation of the EISP was $1.7 million.
The Pension Plan includes amounts for Panhandle employees 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, all employees of Panhandle will no
longer
125
be eligible to accrue additional benefits. The Pension Plan will retain
pension payment obligations under the Pension Plan for Panhandle employees that
are vested under the Pension Plan. CMS Energy does not expect the curtailment
from both the Pension and OPEB Plans to be material.
Contributions to the 401(k) plan are invested in CMS Energy Common Stock.
Amounts charged to expense for this plan were $12 million in 2002, $26 million
in 2001, and $24 million in 2000. Effective September 1, 2002, the employer's
match for the 401(k) plan was suspended until January 1, 2005.
Beginning January 1, 1986, the amortization period for the Pension Plan's
unrecognized net transition asset is 16 years. Prior service costs are amortized
on a straight-line basis over the average remaining service period of active
employees.
CMS Energy and its subsidiaries adopted SFAS No. 106, effective as of the
beginning of 1992 and Consumers recorded a liability of $466 million for the
accumulated transition obligation and a corresponding regulatory asset for
anticipated recovery in utility rates (see Note 1, Corporate Structure and
Summary of Significant Accounting Policies, "Utility Regulation"). The MPSC
authorized recovery of the electric utility portion of these costs in 1994 over
18 years and the gas utility portion in 1996 over 16 years.
14: LEASES
CMS Energy, Consumers, and Enterprises lease various assets, including
vehicles, rail cars, construction equipment, computer equipment, and buildings.
In November 2001, Consumers' nuclear fuel capital leasing arrangement expired
upon mutual agreement by the lessor and Consumers. At termination of the lease,
Consumers paid the lessor $48 million, which was the lessor's remaining
investment at that time. Consumers has both full-service and net leases, the
latter of which requires Consumers to pay for taxes, maintenance, operating
costs, and insurance.
Minimum rental commitments under CMS Energy's non-cancelable leases at
December 31, 2002 were:
CAPITAL OPERATING
LEASES LEASES
--------- ---------
IN MILLIONS
2003........................................................... $ 21 $ 16
2004........................................................... 20 12
2005........................................................... 18 10
2006........................................................... 17 9
2007........................................................... 16 8
2008 and thereafter............................................ 71 38
--------- ---------
Total minimum lease payments................................... 163 $ 93
=========
Less imputed interest.......................................... (28)
---------
Present value of net minimum lease payments.................... 135
Less current portion........................................... (13)
Less non-current portion of off-balance sheet lease
payments..................................................... (6)
---------
Non-current portion............................................ $ 116
=========
The minimum lease rental commitments as shown do not include amounts for
Panhandle and Field Services, as those business units have been discontinued.
Collectively, Panhandle and Field Services have $53 million and $1 million in
future commitments for operating and capital leases, respectively.
For the years ended December 31, 2002, 2001, and 2000, operating lease
charges, including charges to clearing and other accounts, were $13 million, $15
million, and $22 million, respectively. Consumers recovers lease charges from
customers and accordingly charges payments for its capital and operating leases
to operating expense.
For the years ended December 31, 2002, 2001 and 2000, capital lease
expenses were $20 million, $25 million, and $40 million, respectively. Included
in these amounts for the years ended 2002, 2001 and 2000 are nuclear fuel lease
expenses of $-- million, $7 million, and $22 million, respectively.
In April 2001, Consumers Campus Holdings entered into a lease agreement for
the construction of an office building to be used as the main headquarters for
Consumers in Jackson, Michigan. The new office-building lessor has committed to
fund up to $65 million
126
for construction of the building and has appointed Consumers the construction
agent for the project. Consumers' balance sheet as of December 31, 2002,
reflects a capital lease asset and an offsetting non-current liability
equivalent to the cost of construction at that date of $54 million. The
agreement is a seven-year lease term with payments commencing upon completion of
construction, which occurred in March 2003. Consumers Campus Holdings has the
right to acquire the property at any time during the life of the agreement. At
the end of the lease term, Consumers Campus Holdings has the option to renew the
lease, purchase the property, or return the property and assist the lessor in
the sale of the building. The return option obligates Consumers Campus Holdings
to pay the lessor an amount equal to the outstanding debt associated with the
building. Estimated minimum lease commitments, assuming an investment of $60
million and rates consistent with LIBOR at the inception of the lease, would be
approximately $4 million annually from April 2003 through April 2008 and a total
of $54 million for the remainder of the lease. Actual lease payments will depend
upon final total construction costs and LIBOR rates.
15: JOINTLY OWNED UTILITY FACILITIES
Consumers is responsible for providing its share of financing for the
jointly owned utility facilities. Consumers includes in operating expenses the
direct expenses of the joint plants. The following table indicates the extent of
Consumers' investment in jointly owned utility facilities:
NET ACCUMULATED
INVESTMENT DEPRECIATION
-------------------- -------------------
DECEMBER 31 2002 2001 2002 2001
---------------------------------------------- --------- --------- --------- ---------
IN MILLIONS
Campbell Unit 3 -- 93.3 percent............... $ 299 $ 279 $ 312 $ 312
Ludington -- 51 percent....................... 75 76 94 88
Transmission facilities -- various............ -- 37 -- 40
Distribution lines -- various................. 13 10 1 --
16: REPORTABLE SEGMENTS
In 2002, CMS Energy operated principally in the following five reportable
segments: electric utility; gas utility; independent power production; natural
gas transmission; and marketing, services and trading. In 2003, operations will
include three reportable segments: electric utility, gas utility, and
enterprises.
CMS Energy's reportable segments are strategic business units organized and
managed by the nature of the products and services each provides. Management
evaluates performance based on the net income of each segment. The electric
utility segment consists of regulated activities associated with the generation,
transmission and distribution of electricity in the state of Michigan through
its subsidiary, Consumers Energy. The gas utility segment consists of regulated
activities associated with the transportation, storage and distribution of
natural gas in the state of Michigan through its subsidiary, Consumers Energy.
Independent power production invests in, acquires, develops, constructs and
operates non-utility power generation plants in the United States and abroad.
Natural gas transmission owns, develops, and manages natural gas facilities. The
marketing, services and trading segment provides gas, oil, and electric
marketing, risk management and energy management services to industrial,
commercial, utility and municipal energy users.
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 operating income by
segment. Other financial data for reportable segments and geographic area are as
follows:
127
REPORTABLE SEGMENTS
YEARS ENDED DECEMBER 31
--------------------------------------------
RESTATED RESTATED
2002 2001 2000
------------- ------------- -------------
IN MILLIONS
Net Income
Electric utility(e)........................ $ 264 $ 109 $ 173
Gas utility................................ 46 21 18
Natural gas transmission................... (30) (53) 11
Independent power production............... (336) (63) (92)
Marketing, services and trading(e)......... (42) (6) 13
Other...................................... (522) (456) (80)
------------- ------------- -------------
$ (620) $ (448) $ 43
============= ============= =============
Income Taxes
Electric utility........................... $ 138 $ 69 $ 123
Gas utility................................ 33 25 24
Natural gas transmission................... 36 (31) 2
Independent power production............... (112) (21) (19)
Marketing, services and trading............ (23) (8) 8
Other...................................... (59) (132) (104)
------------- ------------- -------------
$ 13 $ (98) $ 34
============= ============= =============
Depreciation, Depletion and Amortization
Electric utility........................... $ 228 $ 219 $ 311
Gas utility................................ 118 118 113
Natural gas transmission................... 8 11 11
Independent power production............... 38 40 45
Marketing, services and trading............ 6 5 5
Other...................................... 5 5 4
------------- ------------- -------------
$ 403 $ 398 $ 489
============= ============= =============
Identifiable Assets
Electric utility(a)........................ $ 5,744 $ 5,454 $ 5,230
Gas utility(a)............................. 2,002 2,194 1,776
Natural gas transmission................... 2,821 3,953 4,025
Independent power production............... 1,816 2,630 2,699
Marketing, services and trading............ 794 1,139 1,600
Other...................................... 738 1,405 1,575
------------- ------------- -------------
$ 13,915 $ 16,775 $ 16,905
============= ============= =============
Capital Expenditures(b)
Electric utility........................... $ 437 $ 623 $ 430
Gas utility................................ 181 145 120
Natural gas transmission................... 148 271 276
Independent power production............... 81 147 452
Marketing, services and trading............ 6 9 11
Other...................................... 8 263 208
------------- ------------- -------------
$ 861 $ 1,458 $ 1,497
============= ============= =============
Investments in Equity Method Investees
Natural gas transmission................... $ 178 $ 577 $ 549
Independent power production............... 565 714 904
Marketing, services and trading............ 8 26 28
Other...................................... 4 79 61
------------- ------------- -------------
$ 755 $ 1,396 $ 1,542
============= ============= =============
Earnings from Equity Method Investees(c)
Natural gas transmission................... $ 10 $ 13 $ 36
Independent power production............... 193 157 168
Marketing, services and trading............ 9 10 9
Other...................................... (58) 5 1
------------- ------------- -------------
$ 154 $ 185 $ 214
============= ============= =============
128
Geographic Areas(d)
OPERATING OPERATING IDENTIFIABLE
REVENUE INCOME ASSETS
--------- --------- ------------
2002
United States........... $ 8,427 $ (13) $ 12,459
International........... 260 112 1,456
2001 -- Restated
United States........... $ 7,716 $ 213 $ 13,900
International........... 347 30 2,875
2000 -- Restated
United States........... $ 6,319 $ 629 $ 13,672
International........... 378 (161) 3,231
----------
(a) Amounts include an attributed portion of Consumers' other common assets to
both the electric and gas utility businesses.
(b) Includes electric restructuring implementation plan, capital leases for
nuclear fuel, purchase of nuclear fuel and other assets and electric DSM
costs. Amounts also include an attributed portion of Consumers' capital
expenditures for plant and equipment common to both the electric and gas
utility businesses.
(c) These amounts are included in operating revenue in the Consolidated
Statements of Income.
(d) Revenues are attributed to countries based on location of customers.
(e) Amounts exclude a $11 million decrease and $9 million increase related to
cumulative effect of accounting change in 2001 related to electric utility
and MS&T segments.
17. EQUITY METHOD INVESTMENTS
Certain of CMS Energy's investments in companies, partnerships and joint
ventures, where ownership is more than 20 percent but less than a majority, are
accounted for by the equity method of accounting in accordance with APB Opinion
No. 18. In 2002, 2001 and 2000 undistributed earnings from these investments
were $39 million, ($68) million, and $171 million, respectively. The most
significant of these investments is CMS Energy's 50 percent interest in Jorf
Lasfar, as well as its 46 percent interest in First Midland and 40 percent
interest in Taweelah. CMS Energy's investment in Loy Yang met the test of a
significant subsidiary in prior years but was not reported separately in 2002 or
2001 as a result of the write-off of the investment in the fourth quarter of
2000 (Note 3). Summarized combined financial information of CMS Energy's equity
method investments follows, with the exception of the MCV Partnership that is
disclosed separately in Note 18, Summarized Financial Information of Significant
Related Energy Supplier.
Income Statement Data
YEARS ENDED DECEMBER 31, 2002
----------------------------------------------------------------------
FIRST
JORF LASFAR LOY YANG MIDLAND TAWEELAH ALL OTHERS TOTAL
----------- -------- ------- -------- ---------- ----------
IN MILLIONS
Operating revenue...... $ 364 $ -- $ 91 $ 101 $ 3,916 $ 4,472
Operating expenses..... 176 -- 4 33 3,489 3,702
------- ------- ------- -------- ---------- ----------
Operating income....... 188 -- 87 68 427 770
Other expense, net..... 56 -- 49 32 511 648
------- ------- ------- -------- ---------- ----------
Net income............. $ 132 $ -- $ 38 $ 36 $ (84) $ 122
======= ======= ======= ======== ========== ==========
129
YEARS ENDED DECEMBER 31, 2001
--------------------------------------------------------------------------
FIRST
JORF LASFAR LOY YANG MIDLAND TAWEELAH ALL OTHERS TOTAL
----------- -------- ------- -------- ---------- ----------
IN MILLIONS
Operating revenue...... $ 357 $ -- $ 99 $ 44 $ 4,154 $ 4,654
Operating expenses..... 151 -- 6 17 3,600 3,774
------- ------- ------- ------ ---------- ----------
Operating income....... 206 -- 93 27 554 880
Other expense, net..... 45 -- 63 8 420 536
------- ------- ------- ------ ---------- ----------
Net income............. $ 161 $ -- $ 30 $ 19 $ 134 $ 344
======= ======= ======= ====== ========== ==========
YEARS ENDED DECEMBER 31, 2000
--------------------------------------------------------------------------
FIRST
JORF LASFAR LOY YANG MIDLAND TAWEELAH ALL OTHERS TOTAL
----------- -------- ------- -------- ---------- ----------
IN MILLIONS
Operating revenue...... $ 246 $ 311 $ 109 $ 17 $ 3,767 $ 4,450
Operating expenses..... 99 141 2 9 3,356 3,607
------- ------- ------- ------ ---------- ----------
Operating income....... 147 170 107 8 411 843
Other expense, net..... 29 196 80 6 177 488
------- ------- ------- ------ ---------- ----------
Net income............. $ 118 $ (26) $ 27 $ 2 $ 234 $ 355
======= ======= ======= ====== ========== ==========
Balance Sheet Data
DECEMBER 31, 2002
------------------------------------------------------------------------------
FIRST
JORF LASFAR LOY YANG MIDLAND TAWEELAH ALL OTHERS TOTAL
----------- -------- ------- -------- ---------- -----------
IN MILLIONS
Assets
Current assets................. $ 225 $ -- $ -- $ 91 $ 931 $ 1,247
Property, plant and equipment,
Net......................... 7 -- -- 656 6,191 6,854
Other assets................... 1,118 -- 998 10 1,078 3,204
--------- ------- ------- -------- ---------- -----------
$ 1,350 $ -- $ 998 $ 757 $ 8,200 $ 11,305
========= ======= ======= ======== ========== ===========
Liabilities and Equity
Current liabilities............ $ 252 $ -- $ 22 $ 95 $ 1,622 $ 1,991
Long-term debt and other
non-current liabilities..... 619 -- 428 530 4,096 5,673
Equity......................... 479 -- 548 132 2,482 3,641
--------- ------- ------- -------- ---------- -----------
$ 1,350 $ -- $ 998 $ 757 $ 8,200 $ 11,305
========= ======= ======= ======== ========== ===========
Balance Sheet Data
DECEMBER 31, 2001
-------------------------------------------------------------------
FIRST
JORF LASFAR LOY YANG MIDLAND TAWEELAH ALL OTHERS TOTAL
----------- -------- ------- -------- ---------- ---------
IN MILLIONS
Assets
Current assets................. $ 267 $ -- $ -- $ 127 $ 955 $ 1,349
Property, plant and equipment,
Net......................... 6 -- -- 676 6,856 7,538
Other assets................... 1,053 -- 1,138 -- 985 3,176
---------- ------- ------- -------- ---------- ---------
$ 1,326 $ -- $ 1,138 $ 803 $ 8,796 $ 12,063
========== ======= ======= ======== ========== =========
Liabilities and Equity
Current liabilities............ $ 174 $ -- $ 28 $ 38 $ 1,075 $ 1,315
Long-term debt and other
non-current liabilities..... 588 -- 569 630 4,661 6,448
Equity......................... 564 -- 541 135 3,060 4,300
---------- ------- ------- -------- ---------- ---------
$ 1,326 $ -- $ 1,138 $ 803 $ 8,796 $ 12,063
========== ======= ======= ======== ========== =========
18: SUMMARIZED FINANCIAL INFORMATION OF SIGNIFICANT RELATED ENERGY SUPPLIER
Under the PPA with the MCV Partnership discussed in Note 6, Consumers' 2002
obligation to purchase electric capacity from the MCV Partnership provided 15.1
percent of Consumers' owned and contracted electric generating capacity.
Summarized financial information of the MCV Partnership follows:
130
STATEMENTS OF INCOME
YEARS ENDED
DECEMBER 31
----------------------------
2002 2001 2000
------- ------- -------
IN MILLIONS
Operating revenue(a)........................................ $ 597 $ 611 $ 604
Operating expenses.......................................... 409 453 392
------- ------- -------
Operating income............................................ 188 158 212
Other expense, net.......................................... 114 110 122
------- ------- -------
Net income before cumulative effect of accounting change.... 74 48 90
Cumulative effect of change in method of accounting for
derivative options contracts (April 1, 2002)(b)........... 58 -- --
------- ------- -------
Net income.................................................. $ 132 $ 48 $ 90
======= ======= =======
BALANCE SHEETS
DECEMBER 31
----------------------
2002 2001
--------- ---------
IN MILLIONS
ASSETS
Current assets(c)........ $ 356 $ 341
Plant, net............... 1,550 1,610
Other assets............. 192 166
--------- ---------
$ 2,098 $ 2,117
========= =========
LIABILITIES AND
Equity
Current liabilities........ $ 209 $ 320
Non-current
liabilities(d)........... 1,155 1,245
Partners' equity(e)........ 734 552
--------- ---------
$ 2,098 $ 2,117
========= =========
----------
(a) For 2002, 2001, and 2000, revenue from Consumers totaled $557 million,
$550 million and $569 million, respectively.
(b) On April 1, 2002, the MCV Partnership implemented Derivative
Implementation Group Issue C-16, an interpretation of SFAS No. 133. The
MCV Partnership began accounting for several natural gas contracts
containing an option component at fair value. As a result, a $58 million
cumulative effect adjustment for the change in accounting principle was
recorded as an increase to earnings. CMS Midland's 49 percent ownership
share was $28 million, $18 million after tax.
(c) At December 31, 2002 and 2001, receivables from Consumers totaled $44 and
$49 million, respectively.
(d) FMLP is the sole beneficiary of an owner trust that is the lessor in a
long-term direct finance lease with the lessee, MCV Partnership. CMS
Holdings holds a 46.4 percent ownership interest in FMLP. At December 31,
2002 and 2001, the MCV Partnership owed lease obligations of $975 million
and $1.11 billion, respectively, to the owner trust. CMS Holdings' share
of the interest and principal portion for the 2002 lease payments was $34
million and $65 million, respectively, and for the 2001 lease payments was
$36 million and $54 million, respectively. As of December 31, 2002 and
2001, the lease payments service $449 million and $597 million in
non-recourse debt outstanding, respectively, of the owner trust. The MCV
Partnership's lease obligations, assets, and operating revenues secures
FMLP's debt. For 2002 and 2001, the owner trust made debt payments
(including interest) of $370 million and $217 million, respectively.
FMLP's earnings for 2002, 2001, and 2000 were $38 million, $30 million,
and $30 million, respectively.
(e) CMS Midland's recorded investment in the MCV Partnership includes
capitalized interest, which Consumers is amortizing to expense over the
life of its investment in the MCV Partnership. Covenants contained in
financing agreements prohibit the MCV Partnership from paying
distributions until it meets certain financial test requirements.
Consumers does not anticipate receiving a cash distribution in the near
future.
131
19: FINANCIAL IMPROVEMENT PLAN
CAPITAL RESOURCES AND LIQUIDITY
CMS Energy's liquidity and capital requirements are generally a function of
its results of operations, capital expenditures, contractual obligations,
working capital needs and collateral requirements. CMS Energy historically has
met its consolidated cash needs through its operating and investing activities
and, as needed, through access to bank financing and the capital markets.
During 2003, CMS Energy has contractual obligations and planned capital
expenditures that will require substantial amounts of cash. As of March 14,
2003, CMS Energy at the parent level had approximately $598 million, Consumers
Energy and its subsidiaries had approximately $727 million, and Panhandle and
its subsidiaries had approximately $52 million of publicly issued and credit
facility debt maturing in 2003. CMS Energy and Consumers Energy have taken
significant steps to address their 2003 maturities, as described. In addition,
CMS Energy also could become subject to liquidity demands pursuant to commercial
commitments under guarantees, indemnities and letters of credit. Management is
pursuing actively plans to refinance debt and to sell assets, including the sale
of Panhandle. In December 2002, CMS Energy signed a definitive agreement to sell
Panhandle for a total of $1.828 billion, which is expected to result in $662
million of cash and $1.166 billion of debt assumption. However, closing of the
sale is pending action by the Federal Trade Commission. All other regulatory
approvals have been granted.
CMS ENERGY PARENT LEVEL LIQUIDITY
CMS Energy at the parent level is addressing its near-to-mid-term liquidity
and capital requirements through a financial improvement plan that involves the
sale of non-strategic and under-performing assets of approximately $912 million,
receipt of dividends from its subsidiaries of approximately $280 million, and
reduction of approximately $598 million of outstanding debt along with reduced
capital expenditures, cost reductions and other measures.
As noted elsewhere in these notes, CMS Energy has reduced debt by
approximately $2.8 billion through asset sales with cash proceeds and associated
debt reduction from such sales over the past two years. Through the first
quarter of 2003, CMS Energy has accomplished approximately $97 million of
additional asset sales. In January 2003, CMS MST closed on the sale of a
substantial portion of its natural gas trading contracts for $17 million of cash
proceeds. The sale of the Centennial Pipeline, resulting in proceeds to CMS
Energy of $40 million, closed in February 2003. In March 2003, CMS MST sold the
majority of its wholesale power book and related supply portfolio for cash
proceeds of $34 million to Constellation Power Source, Inc. The sale contains a
potential to increase proceeds to $40 million dependent upon future years'
performance of the sold assets. Additionally, during the first quarter of 2003,
CMS MST sold its 50 percent joint venture ownership interest in Texon, its 50
percent interest in Premstar and its Tulsa retail contracts, resulting in net
cash proceeds of approximately $6 million.
CMS Energy believes that further targeted asset sales, together with its
planned reductions in operating expenses, capital expenditures, and the
suspension of the common dividend also will contribute to improved liquidity.
CMS Energy believes that, assuming the successful implementation of its
financial improvement plan, its present 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. There can be no
assurances that the financial improvement plan will be successful and failure to
achieve its goals could have a material adverse effect on CMS Energy's liquidity
and operations. In such event, CMS Energy would be required to consider the full
range of strategic measures available to companies in similar circumstances.
CMS Energy continues to explore financing opportunities to supplement its
financial improvement plan. These potential opportunities include refinancing
its bank credit facilities; entering into leasing arrangements and/or vendor
financing; refinancing and issuing new capital markets debt, preferred and/or
common equity; and negotiating private placement debt, preferred and/or common
equity. Specifically, as of March 31, 2003, CMS Energy has taken the following
action to supplement its financial improvement plan in 2003:
- On March 30, 2003 CMS Energy entered into an amendment and restatement
of its existing $300 million and $295.8 million revolving credit
facilities under which $409 million was then outstanding. The Second
Amended and Restated Senior Credit Agreement includes a $250 million
tranche with a maturity date of April 30, 2004 and a $159 million
tranche with a maturity date of September 30, 2004. The facility is
being underwritten by several banks at a total annual cost to CMS
Energy of approximately ten percent, which includes the initial
commitment fee. Any proceeds of equity issuances by CMS Energy and its
subsidiaries or any asset sales and debt issuances by CMS Energy or
its subsidiaries, other than Consumers Energy, are required to be used
to prepay this facility. This facility is collateralized primarily by
the common stock of Consumers Energy, CMS Enterprises and certain CMS
Enterprises subsidiaries.
132
- On March 30, 2003 CMS Enterprises entered into a revolving credit
facility in an aggregate amount of $441 million. The maturity date of
this facility is April 30, 2004. The facility is being underwritten by
several banks at a total annual cost to CMS Energy of approximately
ten percent, which includes the initial commitment fee. Proceeds from
this loan will be used for general corporate purposes, to retire debt,
and to collateralize approximately $160 million of letters of credit.
Any proceeds of equity issuances by CMS Energy and its subsidiaries or
any asset sales and debt issuances by CMS Energy or its subsidiaries,
other than Consumers Energy, are required to be used to prepay this
facility. It is expected that proceeds from the Panhandle sale will be
used to pay off this facility in full. This facility is guaranteed by
CMS Energy, whose guaranty is secured by the common stock of Consumers
Energy and CMS Enterprises.
In addition, if necessary, CMS Energy would also postpone the $52 million
pension contribution expected to be made in September 2003. Also, CMS Energy may
pursue other avenues of private debt or equity investment, albeit at a
potentially significant cost.
CONSUMERS ENERGY LIQUIDITY
Consumers plans to meet its liquidity and capital requirements in 2003
through a combination of approximately $229 million from operations and
approximately $513 million of new debt along with reduced capital expenditures,
cost reductions and other measures. In addition, Consumers plans to refinance
$727 million of debt. Consumers has initiated several transactions with various
financial institutions, regulators, banks, lenders, and others that are designed
to provide liquidity:
- On March 26, 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 will be used to retire debt, and for general
corporate purposes.
- 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
of consumers' option, which would extend the maturity to March 2006.
The prior facility was due to expire in July 2003.
- On March 28, 2003, Consumers syndicated a $150 million term loan
secured by first mortgage bonds. This term loan has a tenor of three
years at an anticipated cost of LIBOR plus 450 basis points. Proceeds
from this loan will be used to retire debt and for general corporate
purposes.
- 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 the rate relief could be in place by
the fourth quarter of 2003.
- Consumers has filed an application 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 delays in the
offering process, Consumers anticipates that bonds would be issued by
year end, 2003.
If necessary, Consumers would also postpone the planned $158 million
pension contribution expected to be made in September 2003.
In the event Consumers is unable to access bank financing or the capital
markets to incur or refinance indebtedness, there could be a material adverse
effect on Consumers' liquidity and operations. There is no assurance that the
pending securitization bond issuance transaction noted above will be completed.
Further, there is no assurance that the MPSC will grant either interim or final
gas utility rate relief.
133
20: QUARTERLY FINANCIAL AND COMMON STOCK INFORMATION (UNAUDITED)
2002 (RESTATED)
---------------------------------------------
QUARTERS ENDED MARCH 31 JUNE 30 SEPT. 30 DEC. 31
------------------------------------------------ ---------- --------- ---------- ---------
IN MILLIONS, EXCEPT PER SHARE AMOUNTS
Operating revenue $ 2,263 $ 2,137 $ 2,579 $ 1,708
Operating income (loss) $ 275 $ 152 $ 192 $ (520)
Income (loss) from continuing operations $ 93 $ 36 $ 12 $ (557)
Discontinued Operations (a) $ (51) $ (127) $ 24 $ (68)
Cumulative effect of change in accounting principles (a) $ - $ 17 $ 1 $ -
Consolidated net income (loss) $ 42 $ (74) $ 37 $ (625)
Basic earnings (loss) per average common share (b): $ 0.32 $ (0.55) $ 0.26 $ (4.34)
Diluted earnings (loss) per average common share (b): $ 0.32 $ (0.55) $ 0.26 $ (4.34)
Dividends declared per common share: $ 0.365 $ 0.365 $ 0.18 $ 0.18
Common stock prices (c):
High $ 24.62 $ 22.24 $ 11.28 $ 10.48
Low $ 21.27 $ 10.46 $ 7.49 $ 5.79
2001 (RESTATED)
---------------------------------------------
QUARTERS ENDED MARCH 31 JUNE 30 SEPT. 30 DEC. 31
------------------------------------------------ ---------- --------- ---------- ---------
IN MILLIONS, EXCEPT PER SHARE AMOUNTS
Operating revenue $ 2,416 $ 1,932 $ 1,898 $ 1,817
Operating income (loss) $ 214 $ 93 $ (129) $ 65
Income (loss) from continuing operations $ 52 $ (18) $ (176) $ (94)
Discontinued Operations (a) $ 27 $ 21 $ (202) $ (56)
Cumulative effect of change in accounting principles(a) $ 9 $ - $ - $ (11)
Consolidated net income (loss) $ 88 $ 3 $ (378) $ (161)
Basic earnings (loss) per average common share (b): $ 0.70 $ 0.02 $ (2.85) $ (1.21)
Diluted earnings (loss) per average common share (b): $ 0.70 $ 0.02 $ (2.85) $ (1.21)
Dividends declared per common share: $ 0.365 $ 0.365 $ 0.365 $ 0.365
Common stock prices (c):
High $ 31.44 $ 31.75 $ 28.37 $ 24.31
Low $ 26.75 $ 27.68 $ 19.89 $ 20.00
2002
----------------------------------------------------
QUARTERS ENDED - REPORTED VS. RESTATED MARCH 31 (d) JUNE 30 (e) SEPT. 30 (e) DEC. 31
------------------------------------------------ ------------ ----------- ------------ -----------
IN MILLIONS, EXCEPT PER SHARE AMOUNTS
Operating revenue as reported $ 2,525 $ 2,368 $ 1,333 $ 1,708
Operating revenue as restated $ 2,263 $ 2,137 $ 2,579 $ 1,708
Operating income (loss) as reported $ 292 $ 233 $ 211 $ (520)
Operating income (loss) as restated $ 275 $ 152 $ 192 $ (520)
Income (loss) from continuing operations as reported $ 400 $ 73 $ 6 $ (557)
Income (loss) from continuing operations as restated $ 93 $ 36 $ 12 $ (557)
Discontinued operations as reported $ - $ (141) $ 17 $ (68)
Discontinued operations as restated $ (51) $ (127) $ 24 $ (68)
Cumulative effect of change in accounting principles as reported $ - $ - $ - $ -
Cumulative effect of change in accounting principles as restated $ - $ 17 $ 1 $ -
Extraordinary item as reported $ (1) $ (7) $ - $ -
Extraordinary item as restated $ - $ - $ - $ -
Consolidated net income (loss) as reported $ 399 $ (75) $ 23 $ (625)
Consolidated net income (loss) as restated $ 42 $ (74) $ 37 $ (625)
Basic earnings (loss) per average common share as reported $ 2.99 $ (0.56) $ 0.16 $ (4.34)
Basic earnings (loss) per average common share as restated $ 0.32 $ (0.55) $ 0.26 $ (4.34)
134
Diluted earnings (loss) per average common share as reported $ 2.92 $ (0.56) $ 0.16 $ (4.34)
Diluted earnings (loss) per average common share as restated $ 0.32 $ (0.55) $ 0.26 $ (4.34)
2001
-----------------------------------------------------
QUARTERS ENDED - REPORTED VS. RESTATED (f) MARCH 31 (g) JUNE 30 (h) SEPT. 30 (i) DEC. 31 (j)
------------------------------------------------ ------------ ----------- ------------ -----------
IN MILLIONS, EXCEPT PER SHARE AMOUNTS
Operating revenue as reported $ 2,859 $ 2,237 $ 2,150 $ 2,351
Operating revenue as restated $ 2,416 $ 1,932 $ 1,898 $ 1,817
Operating income (loss) as reported $ 329 $ 254 $ (401) $ 119
Operating income (loss) as restated $ 214 $ 93 $ (129) $ 65
Income (loss) from continuing operations as reported $ 109 $ 53 $ (384) $ (109)
Income (loss) from continuing operations as restated $ 52 $ (18) $ (176) $ (94)
Discontinued operations as reported $ - $ - $ (185) $ -
Discontinued operations as restated $ 27 $ 21 $ (202) $ (56)
Cumulative effect of change in accounting principles as reported $ - $ - $ - $ (11)
Cumulative effect of change in accounting principles as restated $ 9 $ - $ - $ (11)
Extraordinary item as reported $ - $ - $ - $ (18)
Extraordinary item as restated $ - $ - $ - $ -
Consolidated net income (loss) as reported $ 109 $ 53 $ (569) $ (138)
Consolidated net income (loss) as restated $ 88 $ 3 $ (378) $ (161)
Basic earnings (loss) per average common share as reported $ 0.87 $ 0.40 $ (4.29) $ (1.03)
Basic earnings (loss) per average common share as restated $ 0.70 $ 0.02 $ (2.85) $ (1.21)
Diluted earnings (loss) per average common share as reported $ 0.85 $ 0.40 $ (4.29) $ (1.03)
Diluted earnings (loss) per average common share as restated $ 0.70 $ 0.02 $ (2.85) $ (1.21)
----------
(a) Net of tax.
(b) The sum of the quarters may not equal the annual earnings per share due to
changes in shares outstanding.
(c) Based on New York Stock Exchange-- Composite transactions.
(d) All adjustments from previously reported amounts in this quarter relate to
the MCV PPA reserve adjustment, the Panhandle and MST Viron goodwill adjustment,
the DIG loss contract adjustment, the CMS MST account reconciliation's and
mark-to-market gains and losses on intercompany transactions, the amortization
of debt costs, and other miscellaneous audit adjustments. The restatement
amounts also include the effects of discontinued operations. See Note 2,
Restatement, Note 4, Discontinued Operations, and Note 5, Goodwill.
(e) All adjustments from previously reported amounts in these quarters relate to
the same items as (d) above except for the Panhandle and MST Viron goodwill
adjustment. The restatement amounts also include the effects of discontinued
operations. See Note 2, Restatement and Note 4, Discontinued Operations.
(f) Reported amounts have been conformed to 2002 financial statement
presentation. The most significant modifications represent the reporting of
discontinued operations and the adoption of EITF Issue No. 02-03.
(g) All adjustments from previously reported amounts in this quarter relate to
the MCV PPA reserve adjustment, the CMS MST account reconciliation's and
mark-to-market gains and losses on inter-book transactions and other related
adjustments, the amortization of debt costs, and the mark-to-market gains and
losses on intercompany transactions, and other miscellaneous audit adjustments.
The restatement amounts also include the effects of discontinued operations. See
Note 2, Restatement and Note 4, Discontinued Operations.
135
(h) All adjustments from previously reported amounts in this quarter relate to
the same items as (f) above plus the Panhandle system gas adjustment. The
restatement amounts also include the effects of discontinued operations. See
Note 2, Restatement and Note 4, Discontinued Operations.
(i) All adjustments from previously reported amounts in this quarter relate to
the same items as (g) above plus the DIG loss contract accounting adjustment.
The restatement amounts also include the effects of discontinued operations. See
Note 2, Restatement and Note 4, Discontinued Operations.
(j) All adjustments from previously reported amounts in this quarter relate to
the same items as (h) above plus the income tax adjustments. The restatement
amounts also include the effects of discontinued operations. See Note 2,
Restatement and Note 4, Discontinued Operations.
The following table reflects the effects of all audit adjustments and the
Panhandle and MST Viron goodwill adjustment on net income by quarter:
---------------------------------------------------------------------------------------------------------------------------
In Millions (Unaudited)
---------------------------------------------------------------------------------------------------------------------------
2002 2001
Quarters Ended March 31 June 30 Sept. 30 Dec. 31 March 31 June 30 Sept. 30 Dec. 31
---------------------------------------------------------------------------------------------------------------------------
Consolidated Net Income $ 399 $(75) $23 $(625) $109 $53 $(569) $(138)
MCV PPA Adjustment 1 - 1 - 2 2 85 1
Goodwill
Adjustment (379) - - - - - - -
DIG Loss Contract (6) (5) (3) - - - 130 (4)
MTM Inter-book Transactions and MST
Account Reconciliations 17 8 9 - (3) (48) (18) 21
MTM Gains and Losses on Intercompany
Transactions 14 (1) 9 - (6) (12) (12) -
Income Tax Adjustments - - - - - - - (30)
Panhandle System Gas - - - - - (3) 2 (6)
Amortization of Debt Costs - - - - (11) 8 2 (1)
Other (4) (1) (2) - (3) 3 2 (4)
Restated Consolidated Net Income $ 42 $(74) $37 $(625) $ 88 $ 3 (378) $(161)
---------------------------------------------------------------------------------------------------------------------------
21: SUBSEQUENT EVENTS
Subsequent to March 31, 2003, the date of filing CMS Energy's 2002 Form 10-K, a
number of material events have occurred. These events have been disclosed in CMS
Energy's Form 10-Q for the quarterly period ended March 31, 2003 filed with the
SEC on May 14, 2003, and CMS Energy's Form 8-K filed with the SEC on June 24,
2003, which are incorporated by reference herein. In addition to the events
disclosed in the above referenced documents, see below for a summary of events
that have occurred subsequent to May 14, 2003.
DISCONTINUED OPERATIONS
On June 11, 2003, CMS Energy completed the $1.8 billion sale of the Panhandle
companies to Southern Union Panhandle Corp. CMS Energy received approximately
$582 million in cash and 3 million shares of Southern Union Company common
stock, worth approximately $49 million, based on the June 11, 2003 closing price
of Southern Union common stock on the New York Stock Exchange of $16.48 per
share. South Union Panhandle Corp. has also assumed approximately $1.166 billion
of Panhandle debt. The sale agreement allows CMS Energy to sell the Southern
Union Company common stock after 90 days from the date of closing. CMS Energy
used the cash and will use the proceeds from the ultimate sale of the Southern
Union Company common stock to reduce debt.
136
CMS Energy expects to incur a loss on the sale of Panhandle. The loss
calculations have not been finalized, but CMS Energy's best estimate is an
after-tax loss of approximately $31 million on the sale of Panhandle to be
recognized in the second quarter of 2003.
Further, a significant number of Panhandle employees elected to retire as of
July 1, 2003 under the Pension Plan. As a result, CMS Energy expects to record a
settlement loss and a plan curtailment gain in the second quarter of 2003
pursuant to the provisions of SFAS No. 88, Employers' Accounting for Settlements
and Curtailments of Defined Benefit Pension Plans and for Termination Benefits.
The calculations have not been finalized, but CMS Energy expects a net after-tax
loss of approximately $13 million. In addition, CMS Energy will be required to
re-measure its defined benefit retirement plan obligations during the second
quarter of 2003 and as a result, in the second quarter of 2003, will likely
record an additional minimum pension liability charge to other comprehensive
income estimated to be $20 million, net of tax.
In May 2003, CMS Energy signed a definitive agreement to sell CMS Field Services
to Cantera Resources Inc. for $115.5 million in cash and a $50 million face
value note of Cantera Resources Inc. The note is payable to CMS Energy for up to
$50 million subject to the financial performance of the Fort Union and Bighorn
natural gas gathering systems from 2004 through 2008. This sale is expected to
close in the third quarter of 2003.
UNCERTAINTIES
CONSUMERS' ELECTRIC UTILITY RATE MATTERS
SECURITIZATION: On June 2, 2003, the MPSC issued a financing order authorizing
the issuance of Securitization bonds in the amount of approximately $554
million. This amount relates to Clean Air Act expenditures and associated return
on those expenditures through December 31, 2002, retail open access
implementation costs and previously authorized return on those expenditures
through December 31, 2000 and the "up front" other qualified costs related to
issuance of the Securitization bonds. The MPSC also adopted a rate design that
would allow retail open access customers to pay a securitization charge (and
related tax charge) that are a fraction of the amounts paid by full service
bundled sales customers and special contract customers of the utility. The
financing order provides that the securitization charges (and related tax
charges) for the latter customers are increased under the rate design order by
the MPSC in order to be sufficient to repay the principal, interest and on all
other "ongoing" qualified costs related to servicing the Securitization bonds.
The financing order also restricts the amount of common dividends payable by
Consumers to its "earnings." Consumers is currently studying the order and will
be seeking rehearing and clarification of a number of features in the financing
order, including the dividend restriction. The financing order will only become
effective after rehearing upon acceptance by Consumers.
ELECTRIC PROCEEDINGS: 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. On May
28, 2003, the MPSC issued an order that terminated this proceeding.
STRANDED AND IMPLEMENTATION COSTS: On June 16, 2003, the MPSC issued an order
authorizing deferred recovery of electric utility restructuring implementation
costs for 2001 of approximately $8 million.
Consumers is 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 already been expensed. MISO filed an
application with the FERC seeking authorization to reimburse Consumers for all
of these costs. On May 23, 2003, the FERC issued an order denying this request.
Consumers has sought rehearing of that order. Consumers cannot predict the
outcome of this matter.
ENTERPRISES
An affiliate of CMS Generation owns a 49.6 percent interest in Loy Yang, which
owns the 2,000 MW Loy Yang coal-fired power project in Victoria, Australia. Due
to unfavorable power prices in the Australian market, Loy Yang is not generating
cash flow sufficient to meet its operating and debt-service obligations. Loy
Yang currently has $500 million of term bank debt, which pursuant to extensions
from the lenders, is scheduled to mature on July 11, 2003. The partners in Loy
Yang are actively exploring the possible sale of the project (or control of the
project) or a restructuring of the finances of Loy Yang. CMS Energy cannot
predict whether any of these initiatives will be successful, and it is possible
that CMS Generation may lose all or a substantial part of its equity investment
in Loy Yang. CMS Energy has previously written off its equity investment in Loy
Yang, and further write-offs would be limited to cumulative net foreign currency
translation losses. The amount of such cumulative net foreign currency
translation losses is $119 million at March 31, 2003. Any such write-off would
flow through CMS Energy's income statement but would not result in a reduction
in shareholders' equity or cause noncompliance with CMS Energy's financing
agreements.
OTHER
MIDLAND COGENERATION VENTURE EXPANSION, LLC: Under an agreement entered into
with General Electric Company ("GE") in October 2002, as of December 31, 2002
Midland Cogeneration Venture Expansion, LLC ("MCV Expansion") has a remaining
contingent obligation to GE in the amount of $3.5 million that may become
payable on July 1, 2003. The agreement provides that this contingent obligation
is subject to a pro rata reduction under a formula based upon certain purchase
orders being entered into with GE by June 30, 2003. At June 30, 2003, CMS
Energy's portion of this obligation is $2.2 million. CMS Energy is actively
pursuing alternatives with GE to eliminate the contingent obligation.
137
SHORT-TERM AND LONG-TERM FINANCINGS
CONSUMERS
REGULATORY AUTHORIZATION FOR FINANCINGS: In May 2003, Consumers applied for an
increase in FERC authorization to issue short and long-term debt. In June 2003,
the FERC granted Consumers' request for an increase in its authorization for
short-term debt allowing Consumers to issue up to $1.1 billion of first mortgage
bonds as security for $1.1 billion of secured and/or unsecured short-term
securities outstanding at any one time through June 30, 2004, for which
Consumers had already received authorization. The FERC also granted Consumers'
request for an increase in its authorization for long-term debt, allowing
Consumers to issue up to an additional 1) $750 million of long-term securities
for general corporate purposes, 2) $1 billion of long-term securities for
refinancing or refunding of existing long-term securities, and 3) $1.45 billion
of long-term first mortgage bonds to be issued as security for other long-term
securities, through June 30, 2004.
FIRST MORTGAGE BONDS: In May 2003, Consumers sold $250 million principal amount
of first mortgage bonds in a private offering to institutional investors; the
bonds were issued at 4.00 percent, maturing on May 15, 2010, and net proceeds
were approximately $247 million. Consumers used the net proceeds to pay down
existing 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 26, 2003.
OTHER: On April 30, 2003, Consumers ended its trade receivable sales program
with its existing purchaser. During May 2003, a new trade receivable program was
put in place with a new purchaser. As a result of changing purchasers, Consumers
established a new subsidiary, Consumers Receivable Funding II. This consolidated
subsidiary was established as a special purpose entity in order to properly
reflect the sale of receivables from Consumers to Consumers Receivable Funding
II, through to the purchaser, an unrelated third party. The program's maximum
receivable sale amount of $325 million remains unchanged. Consumers will also
continue to retain servicing responsibilities for the trade receivables sold,
however the purchaser of the trade receivables has no recourse to Consumers'
other assets for failure of debtor to pay when due and the purchaser has no
right to any receivables not sold. No gain or loss has been recorded on the sale
of trade receivables and Consumers retains no interest in the receivables sold.
At May 31, 2003, receivables sold under the program were $50 million.
ENTERPRISES
REVOLVING CREDIT FACILITY: On March 30, 2003, Enterprises entered into a
revolving credit facility in an aggregate amount of $441 million. The maturity
date of this facility was April 30, 2004. Subsequently, on April 21, 2003,
Enterprises entered into a $75 million revolving credit facility with a maturity
date of April 30, 2004. These facilities were underwritten by several banks at a
total annual cost to CMS Energy of approximately ten percent, which included the
initial commitment fee. Proceeds from these loans were used for general
corporate purposes, to retire debt and to collateralize $160 million of letters
of credit. The proceeds from the sale of Panhandle were used to pay off these
facilities in full.
In June 2003, cash collateral was released associated with the sale of the
Guardian Pipeline as discussed below. Following the Guardian transaction, CMS
Energy had letters of credit supported by cash collateral of $184 million.
GUARDIAN PIPELINE: On June 2, 2003, CMS Energy completed the sale of its
one-third membership interest in the Guardian Pipeline, L.L.C., to a subsidiary
of WPS Resources Corporation. Proceeds from the sale were $26 million and will
be used to reduce debt. In conjunction with the sale, approximately $63 million
of cash that CMS Energy had committed to collateralize a letter of credit was
released.
ADOPTION OF NEW ACCOUNTING STANDARDS
SFAS NO. 149, AMENDMENT OF STATEMENT 133 ON DERIVATIVE INSTRUMENTS AND HEDGING
ACTIVITIES: Issued by the FASB in April 2003, this statement amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts and for
hedging activities under FASB Statement No. 133, Accounting for Derivative
Instruments and Hedging Activities. The statement improves financial reporting
by requiring that contracts with comparable characteristics be accounted for
similarly. This statement clarifies under what circumstances a contract with an
initial net investment meets the characteristic of a derivative discussed in
paragraph 6(b) of SFAS No. 133, clarifies when a derivative contains a financing
component, amends the definition of an underlying to conform it to the language
used in FASB Interpretation No. 45, Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others, and amends certain other existing pronouncements. Those changes will
result in a more consistent reporting of contracts as either derivatives or
hybrid instruments. This statement is effective for contracts entered into or
modified after June 30, 2003. CMS Energy is in the process of studying this
statement, and has yet to determine the effects, if any, on its consolidated
financial statements.
138
SFAS NO. 150, ACCOUNTING FOR CERTAIN FINANCIAL INSTRUMENTS WITH CHARACTERISTICS
OF BOTH LIABILITIES AND EQUITY: Issued by the FASB in May 2003, this statement
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. The
statement requires an issuer to classify financial instruments within its scope
as liabilities. Those instruments were previously classified as mezzanine
equity. SFAS No. 150 will be effective July 1, 2003.
CMS Energy has determined that Consumers Power Company Financing I, Consumers
Energy Company Financing II, Consumers Energy Company Financing III, Consumers
Energy Company Financing IV, and CMS Energy Trust I securities fall under the
scope of SFAS No. 150. These securities have fixed redemption dates and amounts
and qualify as mandatory redeemable preferred securities under SFAS No. 150.
Beginning July 1, 2003, these securities will be reclassified from the mezzanine
equity section to the liability section of CMS Energy's consolidated balance
sheet at fair value.
CMS Energy has determined that CMS Energy Trust Securities III have both equity
and liability characteristics. The securities include both a future stock
purchase contract and a preferred security. CMS Energy is continuing to
evaluate the overall effect of SFAS No. 150.
139
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
CMS Energy Corporation
We have audited the accompanying consolidated balance sheets and
consolidated statements of preferred stock of CMS Energy Corporation (a Michigan
corporation) and subsidiaries as of December 31, 2002 and 2001, and the related
consolidated statements of income, common stockholders' equity and cash flows
for each of three years in the period ended December 31, 2002. Our audits also
included the financial statement schedule listed in the Index at Item 15(a)(2).
These financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits. The financial statements of Midland
Cogeneration Venture Limited Partnership and Jorf Lasfar, which represent
investments accounted for under the equity method of accounting, have been
audited by other auditors (the other auditors for 2001 and 2000 for Midland
Cogeneration Venture Limited Partnership have ceased operations) whose reports
have been furnished to us; insofar as our opinion on the consolidated financial
statements relates to the amounts included for Midland Cogeneration Venture
Limited Partnership and Jorf Lasfar, respectively, it is based solely on their
reports.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits and the reports of other
auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the reports of other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the consolidated financial position of CMS Energy Corporation
and subsidiaries at December 31, 2002 and 2001, and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended December 31, 2002 in conformity with accounting principles generally
accepted in the United States. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
As discussed in Note 10 to the consolidated financial statements, in 2001
CMS Energy Corporation changed its method of accounting related to derivatives
and hedging. Also, in 2002 as discussed in Notes 5 and 12 to the consolidated
financial statements, CMS Energy Corporation changed its method for accounting
for goodwill and other intangibles and its method of accounting for stock-based
compensation, respectively.
As more fully described in Note 2 to the consolidated financial statements,
the Company restated its 2001 and 2000 financial statements.
/s/ Ernst & Young LLP
Detroit, Michigan
March 14, 2003, except for Notes 7 and 19,
as to which the date is March 31,
2003 and Notes 20 and 21, as to
which the date is June 26, 2003
140
REPORT OF INDEPENDENT ACCOUNTANTS
To the Management Committee
And Stockholders of Jorf Lasfar
Energy Company S.C.A.
B.P. 99 Sidi Bouzid
El Jadida
We have audited the accompanying balance sheets of Jorf Lasfar Energy Company as
of December 31, 2002, 2001 and 2000, and the related statements of income, of
stockholders' equity and of cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Jorf Lasfar Energy Company at
December 31, 2002, 2001 and 2000, and the results of its operations and its cash
flows for the years then ended in conformity with accounting principles
generally accepted in the United States of America.
/s/ Price Waterhouse
Price Waterhouse
Casablanca, Morocco
February 7, 2003
141
REPORT OF INDEPENDENT ACCOUNTANTS
To the Partners and the Management Committee of
Midland Cogeneration Venture Limited Partnership:
In our opinion, the accompanying consolidated balance sheet as of December
31, 2002 and the related consolidated statements of operations, partners' equity
and cash flows present fairly, in all material respects, the financial position
of the Midland Cogeneration Limited Partnership (a Michigan limited partnership)
and subsidiaries (MCV) at December 31, 2002 and the results of their operations
and their cash flows for the year then ended in conformity with accounting
principles generally accepted in the United States of America. These financial
statements are the responsibility of MCV's management; our responsibility is to
express an opinion on these financial statements based on our audit. We
conducted our audit of these statements in accordance with auditing standards
generally accepted in the United States of America, which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion. The
financial statements of MCV as of December 31, 2001 and for each of the two
years in the period ended December 31, 2001, were audited by other independent
accountants who have ceased operations. Those independent accountants expressed
an unqualified opinion on those financial statements in their report dated
January 18, 2002.
As explained in Note 2 to the financial statements, effective April 1,
2002, Midland Cogeneration Venture Limited Partnership changed its method of
accounting for derivative and hedging activities in accordance with Derivative
Implementation Group ("DIG") Issue C-16.
/s/ PricewaterhouseCoopers LLP
Detroit, Michigan
January 17, 2003
142
THIS REPORT IS A COPY OF THE PREVIOUSLY ISSUED ARTHUR
ANDERSEN REPORT AND THIS REPORT HAS NOT BEEN REISSUED
BY ARTHUR ANDERSEN LLP
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Partners and the Management Committee of the
Midland Cogeneration Venture Limited Partnership:
We have audited the accompanying consolidated balance sheets of the MIDLAND
COGENERATION VENTURE LIMITED PARTNERSHIP (a Michigan limited partnership) and
subsidiaries (MCV) as of December 31, 2001 and 2000, and the related
consolidated statements of operations, partners' equity and cash flows for each
of the three years in the period ended December 31, 2001. These financial
statements are the responsibility of MCV's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of the Midland
Cogeneration Venture Limited Partnership and subsidiaries as of December 31,
2001 and 2000, and the consolidated results of their operations and their cash
flows for each of the three years in the period ended December 31, 2001, in
conformity with accounting principles generally accepted in the United States.
As explained in Note 2 to the financial statements, effective January 1,
2001, Midland Cogeneration Venture Limited Partnership changed its method of
accounting related to derivatives and hedging activities.
/s/ Arthur Andersen LLP
Detroit, Michigan,
January 18, 2002
143
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
In April 2002, CMS Energy's Board of Directors, upon the recommendation of
the Audit Committee of the Board, voted to discontinue using Arthur Andersen to
audit the CMS Energy's financial statements for the year ending December 31,
2002. CMS Energy had previously retained Arthur Andersen to review its financial
statements for the quarter ended March 31, 2002. In May 2002, CMS Energy's Board
of Directors engaged Ernst & Young to audit its financial statements for the
year ending December 31, 2002. Ernst & Young audited 2000, 2001, and 2002. As a
result, CMS Energy restated its 2000 and 2001 financial statements contained
herein.
144
PART III
ITEMS 10., 11., 12. and 13.
CMS Energy's definitive proxy statement, except for the Organization and
Compensation Committee Report, the comparison of five-year cumulative total
return performance graph contained therein, and the Audit Committee Report is
incorporated by reference herein. See also ITEM 1. BUSINESS for information
pursuant to ITEM 10.
The following information regarding independent auditor compensation has
been revised from the information disclosed in the annual proxy statement dated
April 22, 2003:
Audit Fees
The aggregate fees billed by Ernst & Young, LLP for professional services
rendered for the audit of the CMS Energy annual financial statements for the
year 2002 and for the reviews of the 2002 quarterly financial statements were
$4,886,000. Consumers' portion is included in this total.
Additionally, the aggregate fees billed by Arthur Andersen, LLP for
professional services rendered for the audit of CMS Energy 2002 annual financial
statements prior to the departure of Arthur Andersen were $2,121,000. Consumers'
portion is included in this total.
Additionally, the aggregate fees billed by Ernst & Young, LLP for services
rendered for the audit of restated CMS Energy financial statements for the years
2000 and 2001 were $8,803,000. Consumers' portion is included in this total.
Audit-Related Fees
The aggregate fees billed by Ernst & Young, LLP for audit-related services
in 2002 were $130,000. Consumers' portion is included in this total. These
audit-related fees are charges for services traditionally performed by the
independent auditor or that can only be performed by the independent auditor.
Examples of audit-related services include accounting assistance on proposed
financing transactions, review of documents filed with the SEC, and audits of
benefit plans.
ITEM 14. CONTROLS AND PROCEDURES
CMS Energy's CEO and CFO are responsible for establishing and maintaining
CMS Energy's disclosure controls and procedures. Management, under the direction
of CMS Energy's principal executive and financial officers, has evaluated the
effectiveness of CMS Energy's disclosure controls and procedures as of a date
within 90 days of the filing of this annual report on Form 10-K/A. Based on this
evaluation, CMS Energy's CEO and CFO have concluded that CMS Energy's disclosure
controls and procedures are effective to ensure that material information was
presented to them. There have been no significant changes in CMS Energy's
internal controls or in other factors that could significantly affect internal
controls subsequent to such evaluation.
145
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
AND REPORTS ON FORM 8-K.
(a)(1) Financial Statements and Reports of Independent Public Accountants
are listed in ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
and are incorporated by reference herein.
(a)(2) Financial Statement Schedules and Reports of Independent Public
Accountants are listed after the Exhibits in the Index to Financial
Statement Schedules, and are incorporated by reference herein.
(a)(3) Exhibits are listed after Item (c) below and are incorporated by
reference herein.
(b) Reports on Form 8-K.
During the fourth quarter of 2002, CMS Energy filed Current Reports
on Form 8-K on December 23, 2002, covering matters reported pursuant
to ITEM 5. OTHER EVENTS.
(c) Exhibits, including those incorporated by reference (see also
Exhibit volume).
146
CMS ENERGY EXHIBITS
PREVIOUSLY FILED
--------------------------------
WITH FILE AS EXHIBIT
EXHIBITS NUMBER NUMBER DESCRIPTION
------------ --------------- ---------------- -----------------------------------------------------------
(3)(a) 333-51932 (3)(a) -- Restated Articles of Incorporation of CMS Energy. (Form S-3
filed December 15, 2000)
(3)(b) 333-45556 (3)(b) -- By-Laws of CMS Energy. (Form S-3 filed September 11, 2000)
(3)(c) 1-5611 (3)(c) -- Restated Articles of Incorporation dated May 26, 2000, of
Consumers (2000 Form 10-K)
(3)(d) 1-5611 (3)(d) -- By-Laws of Consumers. (1999 Form 10-K)
(3)(e) 1-2921 3.01 -- Restated Certificate of Incorporation of Panhandle. (1999
Form 10-K)
(3)(f) 1-2921 (3)(f) -- By-Laws of Panhandle. (1999 Form 10-K)
(4)(a) 2-65973 (b)(1)-4 -- Indenture dated as of September 1, 1945, between Consumers
and Chemical Bank (successor to Manufacturers Hanover
Trust Company), as Trustee, including therein
indentures supplemental thereto through the
Forty-third Supplemental Indenture dated as of May 1,
1979.
-- Indentures Supplemental thereto:
33-41126 (4)(c) -- 68th dated as of 06/15/93
1-5611 (4) -- 69th dated as of 09/15/93 (Form 8-K dated Sep. 21, 1993)
1-5611 (4)(a) -- 70th dated as of 02/01/98 (1997 Form 10-K)
1-5611 (4)(a) -- 71st dated as of 03/06/98 (1997 Form 10-K)
1-5611 (4)(b) -- 72nd dated as of 05/01/98 (1st Qtr. 1998 Form 10-Q)
333-58943 (4)(d) -- 73rd dated as of 06/15/98 (Form S-4 dated July 13, 1998)
1-5611 (4)(b) -- 74th dated as of 10/29/98 (3rd Qtr. 1998 Form 10-Q)
1-5611 (4)(b) -- 75th dated as of 10/1/99 (1999 Form 10-K)
1-5611 (4)(d) -- 77th dated as of 10/1/99 (1999 Form 10-K)
1-5611 4(b) -- 79th dated as of 9/26/01 (3rd qtr 2001 10-Q)
1-5611 4(a)(i) -- 80th dated as of 3/22/02 (2001 Form 10-K)
1-5611 4.6 -- 81st dated as of 7/12//02 (Form 8-K dated July 30, 2002)
1-5611 4.7 -- 82nd dated as of 7/12//02 (Form 8-K dated July 30, 2002)
1-5611 4(a)(i) -- 83rd dated as of 9/26/02 (Consumers Energy 2002 Form 10-K)
1-5611 4(a)(ii) -- 84th dated as of 12/11/02 (Consumers Energy 2002 Form 10-K)
1-5611 4(a)(iii) -- 85th dated as of 10/17/02 (Consumers Energy 2002 Form 10-K)
1-5611 4(a)(iv) -- 86th dated as of 11/25/02 (Consumers Energy 2002 Form 10-K)
(4)(c) 1-5611 (4)(b) -- Indenture dated as of January 1, 1996 between Consumers and
The Bank of New York, as Trustee. (1995 Form 10-K)
-- Indentures Supplemental thereto:
1-5611 (4)(b) -- 1st dated as of 01/18/96 (1995 Form 10-K)
1-5611 (4)(a) -- 2nd dated as of 09/04/97 (3rd qtr 1997 Form 10-Q)
1-9513 (4)(a) -- 3rd 11/04/99 (3rd qtr 1999 Form 10-Q)
(4)(d) 1-5611 (4)(c) -- Indenture dated as of February 1, 1998 between Consumers and
JPMorgan Chase (formerly "The Chase Manhattan Bank), as
Trustee. (1997 Form 10-K)
1-5611 (4)(a) -- 1st dated as of 05/01/98 (1st Qtr. 1998 Form 10-Q)
333-58943 (4)(b) -- 2nd dated as of 06/15/98
1-5611 (4)(a) -- 3rd 10/29/98 (3rd Qtr. 1998 Form 10-Q)
(4)(e) 33-47629 (4)(a) -- Indenture dated as of September 15, 1992 between CMS Energy
and NBD Bank, as Trustee. (Form S-3 filed May 1, 1992)
-- Indentures Supplemental thereto:
1-9513 (4) -- 1st dated as of 10/01/92 (Form 8-K dated October 1, 1992)
1-9513 (4)(a) -- 2nd dated as of 10/01/92 (Form 8-K dated October 1, 1992)
1-9513 (4) -- 3rd dated as of 05/06/97 (1st qtr 1997 Form 10-Q)
333-37241 (4)(a) -- 4th dated as of 09/26/97 (Form S-3 filed October 6, 1997)
1-9513 (4)(b) -- 5th dated as of 11/04/97 (3rd qtr 1997 Form 10-Q)
1-9513 (4)(d) -- 6th dated as of 01/13/98 (1997 Form 10-K)
1-9513 (4)(d)(i) -- 7th dated as of 01/25/99 (1998 Form 10-K)
1-9513 (4)(d)(ii) -- 8th dated as of 02/03/99 (1998 Form 10-K)
147
1-9513 (4)(a) -- 9th dated as of 06/22/99 (2nd qtr 1999 Form 10-Q)
333-48276 (4) -- 10th dated as of 10/12/00 (Form S-3MEF filed October 19, 2000)
333-58686 (4) 11th dated as of 03/29/01(Form S-8 filed April 11, 2001)
333-51932 (4)(a) -- 12th dated as of 07/02/01 (Form POS AM filed August 8, 2001)
(4)(f) 1-9513 (4)(b) -- Indenture between CMS Energy and JPMorgan Chase (formerly
"The Chase Manhattan Bank), as Trustee, dated as of
January 15, 1994. (Form 8-K dated March 29, 1994)
-- Indentures Supplemental thereto:
1-9513 (4b) -- 1st dated as of 01/20/94 (Form 8-K dated March 29, 1994)
1-9513 (4) -- 2nd dated as of 03/19/96 (1st qtr 1996 Form 10-Q)
1-9513 (4)(a)(iv) -- 3rd dated as of 03/17/97 (Form 8-K dated May 1, 1997)
333-36115 (4)(d) -- 4th dated as of 09/17/97 (Form S-3 filed September 22, 1997)
333-63229 (4)(c) -- 5th dated as of 08/26/98 (Form S-4 filed September 10, 1998)
1-9513 (4) -- 6th dated as of 11/9/00 (3rd qtr 2000 Form 10-Q)
333-74958 (4)(a)(viii) -- Form of Seventh Indenture (Form S-3 filed December 12, 2001)
(4)(g) 1-9513 (4a) -- Indenture dated as of June 1, 1997, between CMS Energy and
-- The Bank of New York, as trustee. (Form 8-K filed July 1,
1997) Indentures Supplemental thereto:
1-9513 (4)(b) -- 1st dated as of 06/20/97 (Form 8-K filed July 1, 1997)
333-45556 (4)(e) -- 4th dated as of 08/22/00 (Form S-3 filed September 11, 2000)
(4)(h) 1-2921 (4)(a) -- Indenture dated as of March 29, 1999, among CMS Panhandle
Holding Company, Panhandle Eastern Pipe Line Company
and NBD Bank, as Trustee. (1st Qtr. 1999 10-Q)
1-2921 (4)(b) -- 1st Supplemental Indenture dated as of March 29, 1999, among
CMS Panhandle Holding Company, Panhandle Eastern Pipe
Line Company and NBD Bank, as Trustee, including a
form of Guarantee by Panhandle Eastern Pipe Line
Company of the obligations of CMS Panhandle Holding
Company. (1st qtr 1999 Form 10-Q)
1-2921 (4)(a) -- 2nd Supplemental Indenture dated as of March 27, 2000, among
Panhandle, as Issuer and Bank One Trust Company,
National Association, as Trustee, Pursuant to Item
6.01(b)(4)(iii) of Regulation S-K, in lieu of filing
a copy of such agreement, Panhandle agrees to furnish
a copy of such agreement to the Commission upon
request.
(4)(i) 33-58552 (4) -- Indenture, dated as of February 1, 1993, between Panhandle
And Morgan Guaranty Trust Company of New York. (Form
S-3 filed February 19, 1993)
(4)(j) 1-9513 4.1 -- $295.8 million Revolving Credit Facility dated July 12, 2002
among CMS Energy, the Banks, the Administrative
Agent, the Collateral Agent, the Co-Syndication
Agents, the Documentation Agents, all as defined
therein (Form 8-K filed July 30, 2002)
(4)(k) 1-9513 4.2 -- $300 million Revolving Credit Facility dated July 12, 2002
among CMS Energy, the Banks, the Administrative
Agent, the Collateral Agent, the Co-Syndication
Agents, the Documentation Agents, all as defined
therein (Form 8-K filed July 30, 2002)
(4)(l) 1-5611 4.4 -- $250 million Revolving Credit Facility dated July 12, 2002
among Consumers, the Banks, and the Agent, all as
defined therein (Form 8-K filed July 30, 2002)
(4)(m) 1-5611 (4)(m) -- $155 million Term Loan Agreement dated October 17, 2002
among Consumers Energy, the Banks, the Administrative
Agent and the Syndication Agent, all as defined
therein. (Consumers Energy 2002 Form 10-K)
(4)(n) 1-5611 (4)(n) -- $300 million Amended and Restated Term Loan Agreement dated
September 26, 2002 among Consumers, the Banks and the
Agent, all as defined therein. (Consumers Energy 2002
Form 10-K)
(4)(o) 1-9513 4.9 -- Pledge and Security Agreement dated as of July 12, 2002
148
among CMS Energy, Grantors and the Collateral Agent,
all as defined therein (Form 8-K filed July 30, 2002)
(4)(p) 1-9513 4.11 -- Pledge and Security Agreement dated as of July 12, 2002
among CMS Energy and the Collateral Agent, as defined
therein (Form 8-K filed July 30, 2002)
(4)(q) 1-9513 4.12 -- Guaranty dated as of July 12, 2002 by the Guarantor in favor
of the Lenders, all as defined therein (Form 8-K
filed July 30, 2002)
(10)(a) 1-9513 (10)(b) -- Form of Employment Agreement entered into by CMS Energy's
and Consumers' executive officers. (1999 Form 10-K)
(10)(b) 1-9513 (10)(a) -- Acknowledgement of Resignation between Tamela W. Pallas and
CMS Energy Corporation (3rd qtr 2002 Form 10-Q)
(10)(c) 1-5611 (10)(g) -- Consumers' Executive Stock Option and Stock Appreciation
Rights Plan effective December 1, 1989. (1990 Form 10-K)
(10)(d) 1-9513 (10)(b) -- Employment, Separation and General Release Agreement between
William T. McCormick and CMS Energy Corporation (3rd qtr
2002 Form 10-Q)
(10)(e) 1-9513 (10)(d) -- CMS Energy's Performance Incentive Stock Plan effective
February 3, 1988, as amended December 3, 1999. (1999 Form
10-K)
(10)(f) 1-9513 (10)(c) -- Employment, Separation and General Release Agreement between
Alan M. Wright and CMS Energy Corporation (3rd qtr 2002 Form
10-Q)
(10)(g) 1-5611 (10)(g) -- Employment Agreement dated as of June 1, 2002 between
Kenneth Whipple and CMS Energy Corporation (Consumers Energy
2002 Form 10-K)
(10)(h) 1-9513 (10)(m) -- CMS Deferred Salary Savings Plan effective January 1, 1994.
(1993 Form 10-K)
(10)(i) 1-9513 (10)(n) -- CMS Energy and Consumers Annual Executive Incentive
Compensation Plan effective January 1, 1986, as amended
January 1995. (1995 Form 10-K)
(10)(j) 1-9513 (10)(h) -- Supplemental Executive Retirement Plan for Employees of CMS
Energy/Consumers Energy Company effective January 1, 1982,
as amended December 3, 1999. (1999 Form 10-K)
(10)(k) 33-37977 4.1 -- Senior Trust Indenture, Leasehold Mortgage and Security
Agreement dated as of June 1, 1990 between The
Connecticut National Bank and United States Trust
Company of New York. (MCV Partnership) Indenture
Supplemental thereto:
33-37977 4.2 -- Supplement No. 1 dated as of June 1, 1990. (MCV Partnership)
(10)(l) 1-9513 (28)(b) -- Collateral Trust Indenture dated as of June 1, 1990 among
Midland Funding Corporation I, MCV Partnership and
United States Trust Company of New York, Trustee.
(3rd qtr 1990 Form 10-Q)
Indenture Supplemental thereto:
33-37977 4.4 -- Supplement No. 1 dated as of June 1, 1990. (MCV Partnership)
(10)(m) 1-9513 (10)(v) -- Amended and Restated Investor Partner Tax Indemnification
Agreement dated as of June 1, 1990 among Investor Partners,
CMS Midland as Indemnitor and CMS Energy as Guarantor. (1990
Form 10-K)
(10)(n) 1-9513 (19)(d)** -- Environmental Agreement dated as of June 1, 1990 made by CMS
Energy to The Connecticut National Bank and Others. (1990
Form 10-K)
(10)(o) 1-9513 (10)(z)** -- Indemnity Agreement dated as of June 1, 1990 made by CMS
Energy to Midland Cogeneration Venture Limited Partnership.
(1990 Form 10-K)
(10)(p) 1-9513 (10)(aa)** -- Environmental Agreement dated as of June 1, 1990 made by CMS
Energy to United States Trust Company of New York, Meridian
Trust Company, each Subordinated Collateral Trust Trustee
and Holders from time to time of Senior Bonds and
Subordinated Bonds and Participants from time to time in
149
Senior Bonds and Subordinated Bonds. (1990 Form 10-K)
(10)(q) 33-37977 10.4 -- Amended and Restated Participation Agreement dated as of
June 1, 1990 among MCV Partnership, Owner Participant, The
Connecticut National Bank, United States Trust Company,
Meridian Trust Company, Midland Funding Corporation I,
Midland Funding Corporation II, MEC Development Corporation
and Institutional Senior Bond Purchasers. (MCV Partnership)
(10)(r) 33-37977 10.4 -- Power Purchase Agreement dated as of July 17, 1986 between
MCV Partnership and Consumers. (MCV Partnership) Amendments
thereto:
33-37977 10.5 -- Amendment No. 1 dated September 10, 1987. (MCV Partnership)
33-37977 10.6 -- Amendment No. 2 dated March 18, 1988. (MCV Partnership)
33-37977 10.7 -- Amendment No. 3 dated August 28, 1989. (MCV Partnership)
33-37977 10.8 -- Amendment No. 4A dated May 25, 1989. (MCV Partnership)
(10)(s) 1-5611 (10)(y) -- Unwind Agreement dated as of December 10, 1991 by and among
CMS Energy, Midland Group, Ltd., Consumers, CMS Midland,
Inc., MEC Development Corp. and CMS Midland Holdings
Company. (1991 Form 10-K)
(10)(t) 1-5611 (10)(z) -- Stipulated AGE Release Amount Payment Agreement dated as of
June 1, 1990, among CMS Energy, Consumers and The Dow
Chemical Company. (1991 Form 10-K)
(10)(u) 1-5611 (10)(aa)** -- Parent Guaranty dated as of June 14, 1990 from CMS Energy to
MCV, each of the Owner Trustees, the Indenture
Trustees, the Owner Participants and the Initial
Purchasers of Senior Bonds in the MCV Sale Leaseback
transaction, and MEC Development. (1991 Form 10-K)
(10)(v) 1-8157 10.41 -- Contract for Firm Transportation of Natural Gas between
Consumers Power Company and Trunkline Gas Company, dated
November 1, 1989, and Amendment, dated November 1, 1989.
(1989 Form 10-K of PanEnergy Corp.)
(10)(w) 1-8157 10.41 -- Contract for Firm Transportation of Natural Gas between
Consumers Power Company and Trunkline Gas Company, dated
November 1, 1989. (1991 Form 10-K of PanEnergy Corp.)
(10)(x) 1-2921 10.03 -- Contract for Firm Transportation of Natural Gas between
Consumers Power Company and Trunkline Gas Company, dated
September 1, 1993. (1993 Form 10-K)
(10)(y) 1-09513 10.1 -- Stock Purchase Agreement by and among CMS Gas Transmission
Company, AIG Highstar Capital, L.P., AIG Highstar II
Funding Corp., Southern Union Panhandle Corp., dated
as of December 21, 2002 (Form 8-K filed December 23, 2002)
(12) -- Statements regarding computation of CMS Energy's Ratio of
Earnings to Fixed Charges.
(16) 1-09513 16.1 -- Letter from Arthur Anderson LLP to the Securities and
Exchange Commission dated April 29, 2002 regarding change in
certifying accountant (Form 8-K filed April 29, 2002)
(21) 69-00333 -- Subsidiaries of CMS Energy. (Form U-3A-2/A filed April 15,
2003).
(23)(a) -- Consent of Ernst & Young LLP.
(23)(b) -- Consent of PricewaterhouseCoopers LLP.
(23)(c) -- Consent of Price Waterhouse.
99(a) 1-09513 99(a) -- Financial Statements for Midland Cogeneration Venture
Limited Partnership for the year ended December 31, 2000,
2001, and 2002.
99(b) -- Financial statements for Jorf Lasfar for the years ended
December 31, 2000, 2001, and 2002.
99(c) -- CMS Energy Corporation's certifications pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
150
----------
** Obligations of only CMS Holdings and CMS Midland, second tier subsidiaries
of Consumers, and of CMS Energy but not of Consumers.
Exhibits listed above which have heretofore been filed with the Securities
and Exchange Commission pursuant to various acts administered by the Commission,
and which were designated as noted above, are hereby incorporated herein by
reference and made a part hereof with the same effect as if filed herewith.
151
INDEX TO FINANCIAL STATEMENT SCHEDULES
Schedule II Valuation and Qualifying Accounts and Reserves
2002, 2001 and 2000:
CMS Energy Corporation 153
Schedules other than those listed above are omitted because they are either
not required, not applicable or the required information is shown in the
financial statements or notes thereto.
Columns omitted from schedules filed have been omitted because the
information is not applicable.
152
CMS ENERGY CORPORATION
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
YEARS ENDED DECEMBER 31, 2002, 2001, AND 2000
BALANCE AT CHARGED CHARGED TO BALANCE
BEGINNING TO OTHER AT END
DESCRIPTION OF PERIOD EXPENSE ACCOUNTS DEDUCTIONS OF PERIOD
----------- --------- ------- -------- ---------- ---------
(IN MILLIONS)
Accumulated provision for uncollectible accounts:
2002......................................... $ 14 $ 18 $ 1 $ 17(a) $ 16
2001......................................... $ 8 $ 20 $ -- $ 14(a) $ 14
2000......................................... $ 12 $ 19 $ (5) $ 18(a) $ 8
----------
(a) Accounts receivable written off including net uncollectible amounts of $15
in 2002, $12 in 2001, and $14 in 2000 charged directly to operating
expense and credited to accounts receivable.
153
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CMS ENERGY CORPORATION
(Registrant)
Dated: June 26, 2003 By: /s/ Thomas J. Webb
---------------------------------------
Thomas J. Webb
Executive Vice President and
Chief Financial Officer
154
CERTIFICATION OF KENNETH WHIPPLE
I, Kenneth Whipple, certify that:
1. I have reviewed this annual report on Form 10-K/A of CMS Energy
Corporation;
2. Based on my knowledge, this annual 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 annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual 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 annual
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 annual report (the "Evaluation Date"); and
c) Presented in this annual 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
6. The registrant's other certifying officers and I have indicated in
this annual 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: June 26, 2003 By: /s/ Kenneth Whipple
----------------------------------------
Kenneth Whipple
Chairman of the Board and
Chief Executive Officer
155
CERTIFICATION OF THOMAS J. WEBB
I, Thomas J. Webb, certify that:
1. I have reviewed this annual report on Form 10-K/A of CMS Energy
Corporation;
2. Based on my knowledge, this annual 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 annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual 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 annual
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 annual report (the "Evaluation Date"); and
c) Presented in this annual 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
6. The registrant's other certifying officers and I have indicated in
this annual 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: June 26, 2003 By: /s/ Thomas J. Webb
----------------------------------------
Thomas J. Webb
Executive Vice President and
Chief Financial Officer
156
CMS ENERGY EXHIBITS INDEX
PREVIOUSLY FILED
--------------------------------
WITH FILE AS EXHIBIT
EXHIBITS NUMBER NUMBER DESCRIPTION
------------ --------------- ---------------- -----------------------------------------------------------
(3)(a) 333-51932 (3)(a) -- Restated Articles of Incorporation of CMS Energy. (Form S-3
filed December 15, 2000)
(3)(b) 333-45556 (3)(b) -- By-Laws of CMS Energy. (Form S-3 filed September 11, 2000)
(3)(c) 1-5611 (3)(c) -- Restated Articles of Incorporation dated May 26, 2000, of
Consumers (2000 Form 10-K)
(3)(d) 1-5611 (3)(d) -- By-Laws of Consumers. (1999 Form 10-K)
(3)(e) 1-2921 3.01 -- Restated Certificate of Incorporation of Panhandle. (1999
Form 10-K)
(3)(f) 1-2921 (3)(f) -- By-Laws of Panhandle. (1999 Form 10-K)
(4)(a) 2-65973 (b)(1)-4 -- Indenture dated as of September 1, 1945, between Consumers
and Chemical Bank (successor to Manufacturers Hanover
Trust Company), as Trustee, including therein
indentures supplemental thereto through the
Forty-third Supplemental Indenture dated as of May 1,
1979.
-- Indentures Supplemental thereto:
33-41126 (4)(c) -- 68th dated as of 06/15/93
1-5611 (4) -- 69th dated as of 09/15/93 (Form 8-K dated Sep. 21, 1993)
1-5611 (4)(a) -- 70th dated as of 02/01/98 (1997 Form 10-K)
1-5611 (4)(a) -- 71st dated as of 03/06/98 (1997 Form 10-K)
1-5611 (4)(b) -- 72nd dated as of 05/01/98 (1st Qtr. 1998 Form 10-Q)
333-58943 (4)(d) -- 73rd dated as of 06/15/98 (Form S-4 dated July 13, 1998)
1-5611 (4)(b) -- 74th dated as of 10/29/98 (3rd Qtr. 1998 Form 10-Q)
1-5611 (4)(b) -- 75th dated as of 10/1/99 (1999 Form 10-K)
1-5611 (4)(d) -- 77th dated as of 10/1/99 (1999 Form 10-K)
1-5611 4(b) -- 79th dated as of 9/26/01 (3rd qtr 2001 10-Q)
1-5611 4(a)(i) -- 80th dated as of 3/22/02 (2001 Form 10-K)
1-5611 4.6 -- 81st dated as of 7/12//02 (Form 8-K dated July 30, 2002)
1-5611 4.7 -- 82nd dated as of 7/12//02 (Form 8-K dated July 30, 2002)
1-5611 4(a)(i) -- 83rd dated as of 9/26/02 (Consumers Energy 2002 Form 10-K)
1-5611 4(a)(ii) -- 84th dated as of 12/11/02 (Consumers Energy 2002 Form 10-K)
1-5611 4(a)(iii) -- 85th dated as of 10/17/02 (Consumers Energy 2002 Form 10-K)
1-5611 4(a)(iv) -- 86th dated as of 11/25/02 (Consumers Energy 2002 Form 10-K)
(4)(c) 1-5611 (4)(b) -- Indenture dated as of January 1, 1996 between Consumers and
The Bank of New York, as Trustee. (1995 Form 10-K)
-- Indentures Supplemental thereto:
1-5611 (4)(b) -- 1st dated as of 01/18/96 (1995 Form 10-K)
1-5611 (4)(a) -- 2nd dated as of 09/04/97 (3rd qtr 1997 Form 10-Q)
1-9513 (4)(a) -- 3rd 11/04/99 (3rd qtr 1999 Form 10-Q)
(4)(d) 1-5611 (4)(c) -- Indenture dated as of February 1, 1998 between Consumers and
JPMorgan Chase (formerly "The Chase Manhattan Bank), as
Trustee. (1997 Form 10-K)
1-5611 (4)(a) -- 1st dated as of 05/01/98 (1st Qtr. 1998 Form 10-Q)
333-58943 (4)(b) -- 2nd dated as of 06/15/98
1-5611 (4)(a) -- 3rd 10/29/98 (3rd Qtr. 1998 Form 10-Q)
(4)(e) 33-47629 (4)(a) -- Indenture dated as of September 15, 1992 between CMS Energy
and NBD Bank, as Trustee. (Form S-3 filed May 1, 1992)
-- Indentures Supplemental thereto:
1-9513 (4) -- 1st dated as of 10/01/92 (Form 8-K dated October 1, 1992)
1-9513 (4)(a) -- 2nd dated as of 10/01/92 (Form 8-K dated October 1, 1992)
1-9513 (4) -- 3rd dated as of 05/06/97 (1st qtr 1997 Form 10-Q)
333-37241 (4)(a) -- 4th dated as of 09/26/97 (Form S-3 filed October 6, 1997)
1-9513 (4)(b) -- 5th dated as of 11/04/97 (3rd qtr 1997 Form 10-Q)
1-9513 (4)(d) -- 6th dated as of 01/13/98 (1997 Form 10-K)
1-9513 (4)(d)(i) -- 7th dated as of 01/25/99 (1998 Form 10-K)
1-9513 (4)(d)(ii) -- 8th dated as of 02/03/99 (1998 Form 10-K)
1-9513 (4)(a) -- 9th dated as of 06/22/99 (2nd qtr 1999 Form 10-Q)
333-48276 (4) -- 10th dated as of 10/12/00 (Form S-3MEF filed October 19, 2000)
333-58686 (4) 11th dated as of 03/29/01(Form S-8 filed April 11, 2001)
333-51932 (4)(a) -- 12th dated as of 07/02/01 (Form POS AM filed August 8, 2001)
(4)(f) 1-9513 (4)(b) -- Indenture between CMS Energy and JPMorgan Chase (formerly
"The Chase Manhattan Bank), as Trustee, dated as of
January 15, 1994. (Form 8-K dated March 29, 1994)
-- Indentures Supplemental thereto:
1-9513 (4b) -- 1st dated as of 01/20/94 (Form 8-K dated March 29, 1994)
1-9513 (4) -- 2nd dated as of 03/19/96 (1st qtr 1996 Form 10-Q)
1-9513 (4)(a)(iv) -- 3rd dated as of 03/17/97 (Form 8-K dated May 1, 1997)
333-36115 (4)(d) -- 4th dated as of 09/17/97 (Form S-3 filed September 22, 1997)
333-63229 (4)(c) -- 5th dated as of 08/26/98 (Form S-4 filed September 10, 1998)
1-9513 (4) -- 6th dated as of 11/9/00 (3rd qtr 2000 Form 10-Q)
333-74958 (4)(a)(viii) -- Form of Seventh Indenture (Form S-3 filed December 12, 2001)
(4)(g) 1-9513 (4a) -- Indenture dated as of June 1, 1997, between CMS Energy and
-- The Bank of New York, as trustee. (Form 8-K filed July 1,
1997) Indentures Supplemental thereto:
1-9513 (4)(b) -- 1st dated as of 06/20/97 (Form 8-K filed July 1, 1997)
333-45556 (4)(e) -- 4th dated as of 08/22/00 (Form S-3 filed September 11, 2000)
(4)(h) 1-2921 (4)(a) -- Indenture dated as of March 29, 1999, among CMS Panhandle
Holding Company, Panhandle Eastern Pipe Line Company
and NBD Bank, as Trustee. (1st Qtr. 1999 10-Q)
1-2921 (4)(b) -- 1st Supplemental Indenture dated as of March 29, 1999, among
CMS Panhandle Holding Company, Panhandle Eastern Pipe
Line Company and NBD Bank, as Trustee, including a
form of Guarantee by Panhandle Eastern Pipe Line
Company of the obligations of CMS Panhandle Holding
Company. (1st qtr 1999 Form 10-Q)
1-2921 (4)(a) -- 2nd Supplemental Indenture dated as of March 27, 2000, among
Panhandle, as Issuer and Bank One Trust Company,
National Association, as Trustee, Pursuant to Item
6.01(b)(4)(iii) of Regulation S-K, in lieu of filing
a copy of such agreement, Panhandle agrees to furnish
a copy of such agreement to the Commission upon
request.
(4)(i) 33-58552 (4) -- Indenture, dated as of February 1, 1993, between Panhandle
And Morgan Guaranty Trust Company of New York. (Form
S-3 filed February 19, 1993)
(4)(j) 1-9513 4.1 -- $295.8 million Revolving Credit Facility dated July 12, 2002
among CMS Energy, the Banks, the Administrative
Agent, the Collateral Agent, the Co-Syndication
Agents, the Documentation Agents, all as defined
therein (Form 8-K filed July 30, 2002)
(4)(k) 1-9513 4.2 -- $300 million Revolving Credit Facility dated July 12, 2002
among CMS Energy, the Banks, the Administrative
Agent, the Collateral Agent, the Co-Syndication
Agents, the Documentation Agents, all as defined
therein (Form 8-K filed July 30, 2002)
(4)(l) 1-5611 4.4 -- $250 million Revolving Credit Facility dated July 12, 2002
among Consumers, the Banks, and the Agent, all as
defined therein (Form 8-K filed July 30, 2002)
(4)(m) 1-5611 (4)(m) -- $155 million Term Loan Agreement dated October 17, 2002
among Consumers Energy, the Banks, the Administrative
Agent and the Syndication Agent, all as defined
therein. (Consumers Energy 2002 Form 10-K)
(4)(n) 1-5611 (4)(n) -- $300 million Amended and Restated Term Loan Agreement dated
September 26, 2002 among Consumers, the Banks and the
Agent, all as defined therein. (Consumers Energy 2002
Form 10-K)
(4)(o) 1-9513 4.9 -- Pledge and Security Agreement dated as of July 12, 2002
among CMS Energy, Grantors and the Collateral Agent,
all as defined therein (Form 8-K filed July 30, 2002)
(4)(p) 1-9513 4.11 -- Pledge and Security Agreement dated as of July 12, 2002
among CMS Energy and the Collateral Agent, as defined
therein (Form 8-K filed July 30, 2002)
(4)(q) 1-9513 4.12 -- Guaranty dated as of July 12, 2002 by the Guarantor in favor
of the Lenders, all as defined therein (Form 8-K
filed July 30, 2002)
(10)(a) 1-9513 (10)(b) -- Form of Employment Agreement entered into by CMS Energy's
and Consumers' executive officers. (1999 Form 10-K)
(10)(b) 1-9513 (10)(a) -- Acknowledgement of Resignation between Tamela W. Pallas and
CMS Energy Corporation (3rd qtr 2002 Form 10-Q)
(10)(c) 1-5611 (10)(g) -- Consumers' Executive Stock Option and Stock Appreciation
Rights Plan effective December 1, 1989. (1990 Form 10-K)
(10)(d) 1-9513 (10)(b) -- Employment, Separation and General Release Agreement between
William T. McCormick and CMS Energy Corporation (3rd qtr
2002 Form 10-Q)
(10)(e) 1-9513 (10)(d) -- CMS Energy's Performance Incentive Stock Plan effective
February 3, 1988, as amended December 3, 1999. (1999 Form
10-K)
(10)(f) 1-9513 (10)(c) -- Employment, Separation and General Release Agreement between
Alan M. Wright and CMS Energy Corporation (3rd qtr 2002 Form
10-Q)
(10)(g) 1-5611 (10)(g) -- Employment Agreement dated as of June 1, 2002 between
Kenneth Whipple and CMS Energy Corporation (Consumers Energy
2002 Form 10-K)
(10)(h) 1-9513 (10)(m) -- CMS Deferred Salary Savings Plan effective January 1, 1994.
(1993 Form 10-K)
(10)(i) 1-9513 (10)(n) -- CMS Energy and Consumers Annual Executive Incentive
Compensation Plan effective January 1, 1986, as amended
January 1995. (1995 Form 10-K)
(10)(j) 1-9513 (10)(h) -- Supplemental Executive Retirement Plan for Employees of CMS
Energy/Consumers Energy Company effective January 1, 1982,
as amended December 3, 1999. (1999 Form 10-K)
(10)(k) 33-37977 4.1 -- Senior Trust Indenture, Leasehold Mortgage and Security
Agreement dated as of June 1, 1990 between The
Connecticut National Bank and United States Trust
Company of New York. (MCV Partnership) Indenture
Supplemental thereto:
33-37977 4.2 -- Supplement No. 1 dated as of June 1, 1990. (MCV Partnership)
(10)(l) 1-9513 (28)(b) -- Collateral Trust Indenture dated as of June 1, 1990 among
Midland Funding Corporation I, MCV Partnership and
United States Trust Company of New York, Trustee.
(3rd qtr 1990 Form 10-Q)
Indenture Supplemental thereto:
33-37977 4.4 -- Supplement No. 1 dated as of June 1, 1990. (MCV Partnership)
(10)(m) 1-9513 (10)(v) -- Amended and Restated Investor Partner Tax Indemnification
Agreement dated as of June 1, 1990 among Investor Partners,
CMS Midland as Indemnitor and CMS Energy as Guarantor. (1990
Form 10-K)
(10)(n) 1-9513 (19)(d)** -- Environmental Agreement dated as of June 1, 1990 made by CMS
Energy to The Connecticut National Bank and Others. (1990
Form 10-K)
(10)(o) 1-9513 (10)(z)** -- Indemnity Agreement dated as of June 1, 1990 made by CMS
Energy to Midland Cogeneration Venture Limited Partnership.
(1990 Form 10-K)
(10)(p) 1-9513 (10)(aa)** -- Environmental Agreement dated as of June 1, 1990 made by CMS
Energy to United States Trust Company of New York, Meridian
Trust Company, each Subordinated Collateral Trust Trustee
and Holders from time to time of Senior Bonds and
Subordinated Bonds and Participants from time to time in
Senior Bonds and Subordinated Bonds. (1990 Form 10-K)
(10)(q) 33-37977 10.4 -- Amended and Restated Participation Agreement dated as of
June 1, 1990 among MCV Partnership, Owner Participant, The
Connecticut National Bank, United States Trust Company,
Meridian Trust Company, Midland Funding Corporation I,
Midland Funding Corporation II, MEC Development Corporation
and Institutional Senior Bond Purchasers. (MCV Partnership)
(10)(r) 33-37977 10.4 -- Power Purchase Agreement dated as of July 17, 1986 between
MCV Partnership and Consumers. (MCV Partnership) Amendments
thereto:
33-37977 10.5 -- Amendment No. 1 dated September 10, 1987. (MCV Partnership)
33-37977 10.6 -- Amendment No. 2 dated March 18, 1988. (MCV Partnership)
33-37977 10.7 -- Amendment No. 3 dated August 28, 1989. (MCV Partnership)
33-37977 10.8 -- Amendment No. 4A dated May 25, 1989. (MCV Partnership)
(10)(s) 1-5611 (10)(y) -- Unwind Agreement dated as of December 10, 1991 by and among
CMS Energy, Midland Group, Ltd., Consumers, CMS Midland,
Inc., MEC Development Corp. and CMS Midland Holdings
Company. (1991 Form 10-K)
(10)(t) 1-5611 (10)(z) -- Stipulated AGE Release Amount Payment Agreement dated as of
June 1, 1990, among CMS Energy, Consumers and The Dow
Chemical Company. (1991 Form 10-K)
(10)(u) 1-5611 (10)(aa)** -- Parent Guaranty dated as of June 14, 1990 from CMS Energy to
MCV, each of the Owner Trustees, the Indenture
Trustees, the Owner Participants and the Initial
Purchasers of Senior Bonds in the MCV Sale Leaseback
transaction, and MEC Development. (1991 Form 10-K)
(10)(v) 1-8157 10.41 -- Contract for Firm Transportation of Natural Gas between
Consumers Power Company and Trunkline Gas Company, dated
November 1, 1989, and Amendment, dated November 1, 1989.
(1989 Form 10-K of PanEnergy Corp.)
(10)(w) 1-8157 10.41 -- Contract for Firm Transportation of Natural Gas between
Consumers Power Company and Trunkline Gas Company, dated
November 1, 1989. (1991 Form 10-K of PanEnergy Corp.)
(10)(x) 1-2921 10.03 -- Contract for Firm Transportation of Natural Gas between
Consumers Power Company and Trunkline Gas Company, dated
September 1, 1993. (1993 Form 10-K)
(10)(y) 1-09513 10.1 -- Stock Purchase Agreement by and among CMS Gas Transmission
Company, AIG Highstar Capital, L.P., AIG Highstar II
Funding Corp., Southern Union Panhandle Corp., dated
as of December 21, 2002 (Form 8-K filed December 23, 2002)
(12) -- Statements regarding computation of CMS Energy's Ratio of
Earnings to Fixed Charges.
(16) 1-09513 16.1 -- Letter from Arthur Anderson LLP to the Securities and
Exchange Commission dated April 29, 2002 regarding change in
certifying accountant (Form 8-K filed April 29, 2002)
(21) 69-00333 -- Subsidiaries of CMS Energy. (Form U-3A-2/A filed April 15,
2003).
(23)(a) -- Consent of Ernst & Young LLP.
(23)(b) -- Consent of PricewaterhouseCoopers LLP.
(23)(c) -- Consent of Price Waterhouse.
99(a) 1-09513 99(a) -- Financial Statements for Midland Cogeneration Venture
Limited Partnership for the year ended December 31, 2000,
2001, and 2002.
99(b) -- Financial statements for Jorf Lasfar for the years ended
December 31, 2000, 2001, and 2002.
99(c) -- CMS Energy Corporation's certifications pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
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** Obligations of only CMS Holdings and CMS Midland, second tier subsidiaries
of Consumers, and of CMS Energy but not of Consumers.
Exhibits listed above which have heretofore been filed with the Securities
and Exchange Commission pursuant to various acts administered by the Commission,
and which were designated as noted above, are hereby incorporated herein by
reference and made a part hereof with the same effect as if filed herewith.