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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q/A
AMENDMENT NO. 1
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 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.
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1-9513 CMS ENERGY CORPORATION 38-2726431
(A Michigan Corporation)
Fairlane Plaza South, Suite 1100
330 Town Center Drive, Dearborn, Michigan 48126
(313)436-9200
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
--- ---
Number of shares outstanding of the issuer's class of common stock at October
31, 2002:
CMS ENERGY CORPORATION:
CMS Energy Common Stock, $.01 par value 144,086,749
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CMS ENERGY CORPORATION
QUARTERLY REPORT ON FORM 10-Q/A TO THE UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2002
Explanatory Note
This Form 10-Q/A amends CMS Energy's quarterly report on Form 10-Q for the
quarterly period ended September 30, 2002, which was filed with the SEC on
November 14, 2002. As discussed below, CMS Energy's consolidated financial
statements for the quarterly periods ending September 30, 2002 and 2001 have
been restated, pursuant to audit adjustments resulting from the re-audit of the
consolidated financial statements for the years 2001 and 2000, as well as,
completion of its restatement of the consolidated financial statements for the
quarters of 2002 and 2001.
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.
In May 2002, as a result of certain financial reporting issues surrounding
round-trip trading transactions at CMS MST, CMS Energy announced that it would
restate its consolidated financial statements for 2000 and 2001 to eliminate the
effects of round-trip energy trades and form a Special Committee to investigate
these trades. Following this announcement, 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 were 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.
In connection with Ernst & Young's re-audit of the financial statements for the
fiscal years ended December 31, 2001 and December 31, 2000, CMS Energy has made,
in consultation with Ernst & Young, 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, which affect the results of the
quarterly periods within 2001 and 2002. Therefore, the consolidated financial
statements for the quarters of 2001, the years ended December 31, 2001 and 2000,
and the quarters of 2002 have been restated from amounts previously reported. At
the time it adopted the accounting treatment for these items, CMS Energy
believed such accounting was
2
appropriate under accounting principles generally accepted in the United States.
The primary restated items: 1) adjust the timing of the recognition of
Consumers' losses for underrecoveries of power costs on power purchases from the
MCV; 2) account for Consumers' new headquarters building as a capital lease; 3)
reverse a 2001 charge associated with the DIG complex; 4) eliminate
mark-to-market gains and losses on inter-book and intercompany transactions at
CMS MST; 5) record adjustments associated with account reconciliations at CMS
MST; 6) reverse deferred income tax benefits recorded in association with the
write-down of certain foreign investments; 7) record an additional write-down of
system-balancing gas at Panhandle; 8) change the accounting treatment for CMS
Energy's and Panhandle's interest in the LNG business; and 9) change the
accounting treatment for CMS Energy's financing of its methanol plant.
In addition to restatements related to the re-audit, goodwill write-downs of
$616 million ($379 million, net of tax) were reflected in discontinued
operations retroactively to the first quarter of 2002 as a cumulative effect of
change in accounting for goodwill, pursuant to the requirements of SFAS No. 142
(see Note 4, Goodwill).
A summary of the principal effects of the restatement on CMS Energy's
consolidated financial statements for the quarterly periods ended September 30,
2002 and September 30, 2001 is contained in Note 10, Restatement, and unaudited
restated financial statements for the first and second quarters of 2002, with
comparable restated periods for 2001, are contained in Note 12, Restated
Financial Statements for First and Second Quarters, in the notes to the
consolidated financial statements.
Each item of the September 30, 2002 Form 10-Q that is affected by the
restatement has been amended and restated. Generally, no attempt has been made
in this Form 10-Q/A to modify or update other disclosures as presented in the
September 30, 2002 Form 10-Q except as required to reflect the effects of the
restatement. However, material subsequent events have been reported in a
separate section of the MD&A, entitled "Subsequent Events", and in Note 11,
Subsequent Events, in the notes to the consolidated financial statements. In
addition, certain financial information from the first and second quarters of
2002 and 2001 has been included in the Results of Operations and Capital
Resources and Liquidity sections of the MD&A, and restated financial statements
for March 31, 2002 and 2001 and June 30, 2002 and 2001 have been included in
Note 12 Restated Financial Statements for First and Second Quarters, in the
notes to the consolidated financial statements. This document should be read in
conjunction with CMS Energy's Form 10-K/A Amendment No. 2 for the fiscal year
ended December 31, 2002, CMS Energy's Form 10-Q for the quarterly period ended
March 31, 2003 and CMS Energy's Form 8-K, each of which is incorporated by
reference herein, and were filed with the SEC on July 1, 2003, May 14, 2003 and
June 24, 2003, respectively.
3
CMS ENERGY CORPORATION
QUARTERLY REPORT ON FORM 10-Q/A TO THE
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
FOR THE QUARTER ENDED SEPTEMBER 30, 2002
This Form 10-Q/A is filed by CMS Energy Corporation. Separate Form 10Q/A's have
been filed by Consumers Energy Company and Panhandle Eastern Pipe Line Company.
Accordingly, except for their respective subsidiaries, Consumers Energy Company
and Panhandle Eastern Pipe Line Company make no representation as to information
relating to any other companies affiliated with CMS Energy Corporation.
TABLE OF CONTENTS
Page
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Glossary.................................................................................................. 6
PART I: FINANCIAL INFORMATION
CMS Energy Corporation
Management's Discussion and Analysis
Change in Auditors and Restatement.............................................................. 12
Modified Management's Discussion and Analysis................................................... 13
Forward-Looking Statements and Risk Factors..................................................... 13
Round-Trip Trades............................................................................... 15
Other Matters.................................................................................. 16
Results of Operations........................................................................... 18
Critical Accounting Policies.................................................................... 34
Capital Resources and Liquidity................................................................. 42
Market Risk Information......................................................................... 50
Outlook......................................................................................... 53
Other Outlook................................................................................... 57
Subsequent Events............................................................................... 65
Consolidated Financial Statements
Consolidated Statements of Income............................................................... 69
Consolidated Statements of Cash Flows........................................................... 71
Consolidated Balance Sheets..................................................................... 73
Consolidated Statements of Common Stockholders' Equity.......................................... 75
Condensed Notes to Consolidated Financial Statements:
1. Corporate Structure and Basis of Presentation............................................... 77
2. Discontinued Operations..................................................................... 82
3. Asset Dispositions.......................................................................... 84
4. Goodwill.................................................................................... 85
5. Uncertainties............................................................................... 86
6. Short-Term and Long-Term Financings, and Capitalization..................................... 110
7. Earnings Per Share and Dividends............................................................ 114
8. Risk Management Activities and Financial Instruments........................................ 115
9. Reportable Segments......................................................................... 120
10. Restatement................................................................................. 122
11. Subsequent Events........................................................................... 152
12. Restated Financial Statements for First and Second Quarters ................................ 156
13. Equity Method Investments................................................................... 170
4
Quantitative and Qualitative Disclosures About Market Risk................................................ 173
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........................................................................... 173
Item 5. Other Information........................................................................... 175
Item 6. Exhibits and Reports on Form 8-K............................................................ 175
Signatures........................................................................................... 176
5
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 subsidiaries Trunkline,
Pan Storage, Panhandle Storage, and Trunkline LNG. Panhandle is a
wholly owned subsidiary of CMS Gas Transmission
CMS Viron................................. CMS Viron Energy Services, a wholly owned subsidiary of CMS MST
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
6
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
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................................. The 1,200 MW hydro power plant located in Argentina which CMS Generation holds
a 17.23 percent ownership interest.
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
FondElec.................................. FondElec Essential Services Growth Fund, an investment at Enterprises,
formed in 1997 to invest in companies whose business is to invest in
communications and utility sectors, primarily in Latin America
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
HL Power.................................. H.L. Power Company, a California Limited Partnership, owner of the Honey Lake
generation project in Wendel, California
IPP....................................... Independent Power Producer
ISO....................................... Independent System Operator
ITC....................................... Investment tax credit
JEC....................................... Jubail Energy Company
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
7
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
Michigan Gas Storage...................... Michigan Gas Storage Company, a subsidiary of Consumers
Michigan Power............................ CMS Generation Michigan Power, LLC, owner of the Kalamazoo River Generating
Station and the Livingston Generating Station
MISO...................................... Midwest Independent System Operator
MPSC...................................... Michigan Public Service Commission
MTH....................................... Michigan Transco Holdings, Limited Partnership
MW........................................ Megawatts
NEIL...................................... Nuclear Electric Insurance Limited, an industry mutual insurance
company owned by member utility companies
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
NOPR...................................... Notice of Proposed Rulemaking
NOx....................................... Nitrogen Oxide
NPS....................................... National Power Supply Company, Ltd., owner of two generating facilities
in Thailand. CMS Generation sold its 66.2 percent interest in NPS in 2002
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
8
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"
SADAF..................................... Saudi Petrochemical Company
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"
9
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 No. 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"
SIPS...................................... State Implementation Plans
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
Toledo Power.............................. Toledo Power Company, the 135 MW coal and fuel oil power plant located
on Cebu Island, Phillipines, in which CMS Generation held a 47.5
percent interest. Toledo Power was sold to Mirant Toledo Holdings
Corporation on April 24, 2002
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
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.
10
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11
CMS Energy Corporation
CMS ENERGY CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
CHANGE IN AUDITORS AND RESTATEMENT
CMS Energy's consolidated financial statements for the quarterly periods ended
September 30, 2002 and 2001 have been restated, pursuant to audit adjustments
resulting from the re-audit of the consolidated financial statements for the
years 2001 and 2000, as well as completion of its restatement of the
consolidated financial statements for the quarters of 2002 and 2001. This
document should be read in conjunction with CMS Energy's Form 10-K/A Amendment
No. 2 for the fiscal year ended December 31, 2002 and CMS Energy's Form 10-Q for
the quarterly period ended March 31, 2003 and CMS Energy's Form 8-K, each of
which is incorporated by reference herein, and were filed with the SEC on July
1, 2003, May 14, 2003 and June 24, 2003, respectively.
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.
In May 2002, as a result of certain financial reporting issues surrounding
round-trip trading transactions at CMS MST, CMS Energy announced that it would
restate its consolidated financial statements for 2000 and 2001 to eliminate the
effects of round-trip energy trades and form a Special Committee to investigate
these trades. Following this announcement, 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 were completed. As a
result, Ernst & Young began the process of re-auditing CMS Energy's consolidated
financial statements for each of the fiscal years ended December 31, 2001 and
December 31, 2000. Although Arthur Andersen's notification did not apply to
separate, audited financial statements of Consumers and Panhandle for the
applicable years, the re-audit did include audit work at Consumers and Panhandle
for these years.
In connection with Ernst & Young's re-audit of the financial statements for the
fiscal years ended December 31, 2001 and December 31, 2000, CMS Energy has made,
in consultation with Ernst & Young, 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, which affect the results of the
quarterly periods within 2001 and 2002. Therefore, the consolidated financial
statements for the four quarters of 2001, the years ended December 31, 2001 and
2000, and the subsequent three quarters of 2002 have been restated from amounts
previously reported. At the time it adopted the accounting treatment for these
items, CMS Energy believed that such accounting was appropriate under accounting
principles generally accepted in the United States.
The primary restated items: 1) change the accounting associated with the PPA
reserve, which results in: the reversal of the 2001 increase to the PPA reserve
of $126 million; the reversal of a net $12 million charged to operating expenses
associated with the PPA in 2001; and the reversal of $29 million of the amount
charged to the PPA reserve in 2000; 2) recognize Consumers' new headquarters
lease as a capital lease,
12
CMS Energy Corporation
instead of an operating lease, and record the lease obligation and capitalize
costs incurred; 3) reverse a 2001 charge for a contract loss associated with the
DIG complex; 4) eliminate mark-to-market gains and losses on inter-book and
intercompany transactions at CMS MST; 5) record adjustments associated with
account reconciliations at CMS MST; 6) reverse deferred income tax benefits
recorded in association with the write-down of certain foreign investments; 7)
record an additional write-down of system-balancing gas at Panhandle; 8) change
the accounting treatment for CMS Energy's and Panhandle's interest in the LNG
business; and 9) change the accounting treatment for CMS Energy's financing of
its methanol plant.
In addition to restatements related to the re-audit, goodwill write-downs of
$616 million ($379 million, net of tax) were reflected in discontinued
operations retroactively to the first quarter of 2002 as a cumulative effect of
change in accounting for goodwill, pursuant to the requirements of SFAS No. 142
(see Note 4, Goodwill).
A summary of the principal effects of the restatement on CMS Energy's
consolidated financial statements for the quarterly periods ended March 31, June
30, and September 30, 2002 and 2001 are contained in Note 10, Restatement, and
unaudited restated financial statements for the first and second quarters of
2002, with comparable restated periods for 2001 are contained in Note 12,
Restated Financial Statements for First and Second Quarters, in the notes to the
consolidated financial statements. In addition, certain financial information
from the first and second quarters of 2002 and 2001 has been included in the
Results of Operations and Capital Resources and Liquidity sections of this MD&A.
MODIFIED MANAGEMENT'S DISCUSSION AND ANALYSIS
The following discussion and analysis has been modified for the restatement,
including the first and second quarters of 2002 and 2001, and should be read in
conjunction with CMS Energy's consolidated financial statements and notes to
those statements included in this Form 10-Q/A, and CMS Energy's 2002 Form 10-K/A
Amendment No. 2 that was previously filed with the SEC on July 1, 2003. All note
references within this MD&A refer to the notes to CMS Energy's consolidated
financial statements.
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.
FORWARD-LOOKING STATEMENTS AND RISK FACTORS
The MD&A of this Form 10-Q/A should be read along with the MD&A and other parts
of CMS Energy's 2001 Form 10-K. This MD&A refers to, and in some sections
specifically incorporates by reference, CMS Energy's Condensed Notes to
Consolidated Financial Statements and should be read in conjunction with such
Consolidated Financial Statements and Notes. This Form 10-Q/A 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
13
CMS Energy Corporation
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 the 2001 Form 10-K in the section entitled "CMS
Energy, Consumers, and Panhandle Forward-Looking Statements Cautionary Factors
and Uncertainties" and in various public filings it periodically makes with the
SEC. 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:
o The efficient sale of non-strategic and under-performing international
assets and discontinuation of our international energy distribution
systems;
o Achievement of operating synergies and revenue enhancements;
o Capital and financial market conditions, including current price of CMS
Energy's Common Stock, interest rates and availability of financing to CMS
Energy, Consumers, Panhandle or any of their affiliates and the energy
industry;
o CMS Energy, Consumers, Panhandle or any of their affiliates' securities
ratings;
o Market perception of the energy industry, CMS Energy, Consumers, Panhandle
or any of their affiliates;
o Ability to successfully access the capital markets;
o Currency fluctuations and exchange controls;
o 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 transmissions or gas pipeline system
constraints;
o International, national, regional and local economic, competitive and
regulatory conditions and developments;
o Adverse regulatory or legal decisions, including environmental laws and
regulations;
o 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;
o Energy markets, including the timing and extent of unanticipated changes in
commodity prices for oil, coal, natural gas liquids, electricity and
certain related products due to lower or higher demand, shortages,
transportation problems or other developments;
o The increased competition of new pipeline and pipeline expansion projects
that transport large additional volumes of natural gas to the Midwestern
United States from Canada, which could reduce the volumes of gas
transported by our natural gas transmission business or cause them to lower
rates in order to meet competition;
o Potential disruption, expropriation or interruption of facilities or
operations due to accidents, war and terrorism or political events and the
ability to get or maintain insurance coverage for such events;
o Nuclear power plant performance, decommissioning, policies, procedures,
incidents, and regulation, including the availability of spent nuclear fuel
storage;
o Technological developments in energy production, delivery and usage;
o Changes in financial or regulatory accounting principles or policies;
o 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 reporting of trading confirmations to the publishers of energy
price indexes;
14
CMS Energy Corporation
o Limitations on our ability to control the development or operation of
projects in which our subsidiaries have a minority interest;
o 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;
o 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
o Other uncertainties, which are difficult to predict and many of which are
beyond our control.
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 Form 10-Q/A also describes
material contingencies in CMS Energy's Condensed Notes to Consolidated Financial
Statements, and CMS Energy encourages its readers to review these Notes.
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. 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 and has received a number of
shareholder class action lawsuits. 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.
15
CMS Energy Corporation
The Special Committee also made recommendations designed to prevent any
reoccurrence of this practice, some of which have already been implemented,
including the termination of the speculative trading business and revisions to
CMS Energy's risk management policy. The Board of Directors adopted, and CMS
Energy has begun implementing, the remaining recommendations of the Special
Committee.
OTHER MATTERS
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:
CEO AND CFO CERTIFICATIONS
The Sarbanes-Oxley Act of 2002 requires the CEOs and CFOs of public companies to
make certain certifications relating to the financial statements included in SEC
filings. The certifications required by the Sarbanes-Oxley Act of 2002 relating
to the financial statements included in this Form 10-Q/A for the period ended
September 30, 2002 are filed herewith.
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 as of September
30, 2002. Based on this evaluation, other than the control weaknesses at CMS MST
described below, 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, particularly during the third quarter
of 2002. 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 September 30, 2002.
CONTROL WEAKNESSES AT CMS MST
In late 2001 and during 2002, the Company identified a number of deficiencies in
CMS 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, 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. Certain
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
16
CMS Energy Corporation
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.
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 year
of 2002. Management has also prepared restated quarterly financial statements
for 2001; refer to the consolidated financial statements, and Note 12, Restated
Financial Statements for First and Second Quarters, to the consolidated
financial statements.
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.
RESTRUCTURING AND OTHER COSTS
CMS Energy began a series of initiatives in the aftermath of CMS Energy's
round-trip trading disclosure and the sharp drop of the Company's stock price.
Significant expenses associated with these initiatives have been incurred and
are considered restructuring and other costs. These actions include: termination
of five officers, 18 CMS Field Services employees and 37 CMS MST trading group
employees, renegotiating a number of debt agreements, responding to many
investigation and litigation matters, re-audit of the 2000 and 2001 financial
statements and plans to relocate the corporate headquarters to Jackson,
Michigan.
Restructuring and other costs for the year-to-date September 30, 2002, which are
reported in operating expenses ($41 million) and fixed charges ($12 million)
includes:
o Involuntary termination benefits of $17 million for officers and employees.
o Consulting and restructuring fees of $12 million to assist CMS Energy to
arrange credit facilities related to the July 2002 debt renegotiations.
o The $12 million of expense associated with responding to and/or defending
against investigations and lawsuits related to round-trip trading. These
expenses could total $21 million for attorneys' fees and costs. Potential
insurance proceeds may total $12 million, reducing these expenses to $9
million.
o Expenses for future rentals of $7 million have been accrued in connection
with relocating the corporate headquarters to Jackson, Michigan. The
relocation is expected to be complete by June 2003.
o Other expenses, including the cost of re-auditing 2000 and 2001 total $5
million.
Of the above $53 million, $12 million has been paid for consulting and
restructuring fees and $10 million has been paid for severance and benefits as
of September 30, 2002.
Additional restructuring and other costs are expected in the fourth quarter of
2002 of approximately $5 million related to relocating the corporate
headquarters, terminating approximately 30 employees, and additional legal
expenses for litigation issues. In the first half of 2003, restructuring and
other costs related to relocating employees and other headquarters expenses are
expected to be $2 million. The relocation is expected to occur between March and
June 2003.
17
CMS Energy Corporation
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-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.
For the three and nine months ended September 30, 2002, and 2001, consolidated
net income included gains (losses) on asset sales, asset write-downs,
restructuring costs associated with implementing CMS Energy's new strategic
direction, AMT tax credit write-offs, and the discontinued operations of CMS Oil
and Gas, CMS Electric and Gas, CMS Panhandle, CMS Viron, and other non-strategic
businesses. The nine months ended September 30, 2002 also reflects the adoption
of SFAS No. 142 as of January 1, 2002, which required an after-tax goodwill
impairment of $369 million for Panhandle and $10 million for CMS Viron reflected
in discontinued operations. The following tables depict CMS Energy's Results of
Operations.
In Millions, Except Per Share Amounts
-------------------------------------------------------------------------------------------------------------------
RESTATED RESTATED
THREE MONTHS ENDED SEPTEMBER 30 2002 2001
-------------------------------------------------------------------------------------------------------------------
CMS Energy Consolidated Net Income (Loss) $ 37 $ (378)
CMS Energy Basic Earnings (Loss) Per Share $ 0.26 $ (2.85)
CMS Energy Diluted Earnings (Loss) Per Share $ 0.26 $ (2.85)
===================================================================================================================
In Millions
-------------------------------------------------------------------------------------------------------------------
RESTATED RESTATED
THREE MONTHS ENDED SEPTEMBER 30 2002 2001 CHANGE
-------------------------------------------------------------------------------------------------------------------
Electric Utility $88 $ 15 $ 73
Gas Utility (18) (11) (7)
Independent Power Production 49 (89) 138
Natural Gas Transmission - (20) 20
Marketing, Services, and Trading 8 (7) 15
Corporate Interest and Other (115) (64) (51)
-------------------------------------------
Income (Loss) From Continuing Operations 12 (176) 188
Discontinued Operations 24 (202) 226
Cumulative Accounting Change 1 - 1
-------------------------------------------
Consolidated Net Income (Loss) $ 37 $ (378) $ 415
===================================================================================================================
18
CMS Energy Corporation
For the three months ended September 30, 2002, CMS Energy's net income was $37
million, an increase of $415 million from the $378 million loss for the
comparable period in 2001. Income from discontinued operations was $24 million,
an increase of $226 million from the $202 million loss for the comparable 2001
period. Income from continuing operations was $12 million, an increase of $188
million from the $176 million loss for the comparable prior period primarily due
to decreased power costs and increased deliveries at the Electric Utility, and
the impact of asset sales and write-downs that occurred in the three months
ended September 30, 2001, partially offset by higher corporate interest and
other expenses.
In Millions, Except Per Share Amounts
-------------------------------------------------------------------------------------------------------------------
RESTATED RESTATED
NINE MONTHS ENDED SEPTEMBER 30 2002 2001
-------------------------------------------------------------------------------------------------------------------
CMS Energy Consolidated Net Income (Loss) $ 5 $ (287)
CMS Energy Basic Earnings (Loss) Per Share $ 0.04 $ (2.20)
CMS Energy Diluted Earnings (Loss) Per Share $ 0.04 $ (2.20)
===================================================================================================================
In Millions
-------------------------------------------------------------------------------------------------------------------
RESTATED RESTATED
NINE MONTHS ENDED SEPTEMBER 30 2002 2001 CHANGE
-------------------------------------------------------------------------------------------------------------------
Electric Utility $ 222 $ 108 $ 114
Gas Utility 13 16 (3)
Independent Power Production 83 (44) 127
Natural Gas Transmission 8 (16) 24
Marketing, Services, and Trading 13 (27) 40
Corporate Interest and Other (198) (179) (19)
--------------------------------------------
Income (Loss) From Continuing Operations 141 (142) 283
Discontinued Operations (154) (154) -
Cumulative Accounting Change 18 9 9
--------------------------------------------
Consolidated Net Income (Loss) $ 5 $ (287) $ 292
===================================================================================================================
For the nine months ended September 30, 2002, CMS Energy's net income was $5
million, an increase of $292 million from the net loss of $287 million for the
nine months ended 2001. Loss from discontinued operations was $154 million for
both 2002 and 2001. Income from continuing operations was $141 million, an
increase of $283 million from the $142 million loss from continuing operations
for the nine months ended September 2001. The increase is primarily due to
decreased power costs and increased deliveries at the Electric Utility, the
impact of asset write-downs that occurred in 2001, improved earnings at CMS MST,
and gains on asset sales in 2002.
For the three and six months ended June 30, 2002, consolidated net income
included gains on asset sales, restructuring costs associated with implementing
CMS Energy's new strategic direction, and the discontinued operations of CMS Oil
and Gas, CMS Electric and Gas, Panhandle and other non-strategic businesses. The
six months ended June 30, 2002 also reflects the adoption of SFAS No. 142 as of
January 1, 2002, which required an after-tax goodwill impairment of $369 million
for Panhandle and $10 million for CMS Viron reflected in discontinued
operations.
19
CMS Energy Corporation
In Millions, Except Per Share Amounts
-------------------------------------------------------------------------------------------------------------------
RESTATED RESTATED
THREE MONTHS ENDED JUNE 30 2002 2001
-------------------------------------------------------------------------------------------------------------------
CMS Energy Consolidated Net Income (Loss) $ (74) $ 3
CMS Energy Basic Earnings (Loss) Per Share $ (0.55) $ 0.02
CMS Energy Diluted Earnings (Loss) Per Share $ (0.55) $ 0.02
===================================================================================================================
In Millions
-------------------------------------------------------------------------------------------------------------------
RESTATED RESTATED
THREE MONTHS ENDED JUNE 30 2002 2001 CHANGE
-------------------------------------------------------------------------------------------------------------------
Electric Utility $ 84 $ 31 $ 53
Gas Utility 3 - 3
Independent Power Production 17 20 (3)
Natural Gas Transmission (4) (1) (3)
Marketing, Services, and Trading (20) (16) (4)
Corporate Interest and Other (44) (52) 8
------------------------------------------
Income (Loss) From Continuing Operations 36 (18) 54
Discontinued Operations (127) 21 (148)
Cumulative Accounting Change 17 - 17
------------------------------------------
Consolidated Net Income (Loss) $ (74) $ 3 $ (77)
====================================================================================================================
For the three months ended June 30, 2002, CMS Energy's net loss totaled $74
million, a change of $77 million from the $3 million net income for the
comparable 2001 period. Loss from discontinued operations was $127 million, a
change of $148 million from the $21 million income for the comparable period in
2001. Income from continuing operations was $36 million, an increase of $54
million from the loss of $18 million for the comparable period in 2001. The
increase primarily reflects decreased power costs at the Electric Utility
resulting from outages at Palisades in the second quarter of 2001, and a gain on
the May 2002 sale of Consumers' electric transmission facilities.
20
CMS Energy Corporation
In Millions, Except Per Share Amounts
-------------------------------------------------------------------------------------------------------------------
RESTATED RESTATED
SIX MONTHS ENDED JUNE 30 2002 2001
-------------------------------------------------------------------------------------------------------------------
CMS Energy Consolidated Net Income (Loss) $ (32) $ 91
CMS Energy Basic Earnings (Loss) Per Share $ (0.24) $ 0.70
CMS Energy Diluted Earnings (Loss) Per Share $ (0.24) $ 0.70
===================================================================================================================
In Millions
-------------------------------------------------------------------------------------------------------------------
RESTATED RESTATED
SIX MONTHS ENDED JUNE 30 2002 2001 CHANGE
-------------------------------------------------------------------------------------------------------------------
Electric Utility $ 134 $ 93 $ 41
Gas Utility 31 27 4
Independent Power Production 34 45 (11)
Natural Gas Transmission 8 4 4
Marketing, Services, and Trading 5 (20) 25
Corporate Interest and Other (83) (115) 32
------------------------------------------
Income From Continuing Operations 129 34 95
Discontinued Operations (178) 48 (226)
Cumulative Accounting Change 17 9 8
------------------------------------------
Consolidated Net Income (Loss) $ (32) $ 91 $ (123)
====================================================================================================================
For the six months ended June 30, 2002, net loss totaled $32 million, a change
of $123 million from the $91 million net income for the comparable period in
2001. Loss from discontinued operations totaled $178 million, a change of $226
million from the $48 million income for the comparable period in 2001. Income
from continuing operations totaled $129 million compared to $34 million for the
comparable period in 2001, an increase of $95 million. This increase reflects
the after-tax benefit of decreased electric power costs from the comparable
period in 2001, the gain on the sale of Consumers' electric transmission
facilities, and decreased Corporate Interest and Other expenses.
For the three months ended March 31, 2002, consolidated net income included
gains on asset sales, restructuring costs associated with implementing CMS
Energy's new strategic direction, and the discontinued operations of CMS Oil and
Gas, CMS Electric and Gas, Panhandle and other non-strategic businesses. The
three months ended March 31, 2002 also reflects the adoption of SFAS No. 142 as
of January 1, 2002, which required an after-tax goodwill impairment of $369
million for Panhandle and $10 million for CMS Viron reflected in discontinued
operations.
21
CMS Energy Corporation
In Millions, Except Per Share Amounts
-------------------------------------------------------------------------------------------------------------------
RESTATED RESTATED
THREE MONTHS ENDED MARCH 31 2002 2001
-------------------------------------------------------------------------------------------------------------------
CMS Energy Consolidated Net Income $ 42 $ 88
CMS Energy Basic Earnings Per Share $ 0.32 $ 0.70
CMS Energy Diluted Earnings Per Share $ 0.32 $ 0.70
===================================================================================================================
In Millions
-------------------------------------------------------------------------------------------------------------------
RESTATED RESTATED
THREE MONTHS ENDED MARCH 31 2002 2001 CHANGE
-------------------------------------------------------------------------------------------------------------------
Electric Utility $ 50 $ 62 $ (12)
Gas Utility 28 27 1
Independent Power Production 17 25 (8)
Natural Gas Transmission 12 5 7
Marketing, Services, and Trading 25 (4) 29
Corporate Interest and Other (39) (63) 24
------------------------------------------
Income From Continuing Operations 93 52 41
Discontinued Operations (51) 27 (78)
Cumulative Accounting Change - 9 (9)
------------------------------------------
Consolidated Net Income $ 42 $ 88 $ (46)
===================================================================================================================
For the three months ended March 31, 2002, net income totaled $42 million
compared to $88 million for the comparable 2001 period, a change of $46 million
from the comparable period in 2001. Loss from discontinued operations totaled
$51 million a change of $78 million from the $27 million of income in the
comparable period in 2001. Discontinued operations includes the after-tax
goodwill impairment of $369 million for Panhandle and $10 million for CMS Viron,
offset by the gain on the CMS Oil and Gas Equatorial Guinea properties of $310
million, net of tax. Income from continuing operations totaled $93 million
compared to $52 million for the comparable period in 2001, an increase of $41
million. This increase primarily reflects improved CMS MST earnings and lower
corporate interest and other costs.
For further information, see the individual results of operations for each CMS
Energy business segment in this MD&A.
22
CMS Energy Corporation
CONSUMERS' ELECTRIC UTILITY RESULTS OF OPERATIONS
ELECTRIC UTILITY NET INCOME:
In Millions
--------------------------------------------------------------------------------------------------------------------
RESTATED RESTATED
SEPTEMBER 30 2002 2001 CHANGE
--------------------------------------------------------------------------------------------------------------------
Three months ended $ 88 $ 15 $ 73
Nine months ended 222 108 114
====================================================================================================================
In Millions
--------------------------------------------------------------------------------------------------------------------
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30 ENDED SEPTEMBER 30
REASONS FOR CHANGE 2002 VS. 2001 RESTATED 2002 VS. 2001 RESTATED
--------------------------------------------------------------------------------------------------------------------
Electric deliveries $ 25 $ 30
Power supply costs and related revenue 100 113
Other operating expenses and non-commodity revenue (16) (26)
Gain on asset sales - 38
Fixed charges 4 12
Income taxes (40) (53)
----------------------------------------
Total change $ 73 $ 114
====================================================================================================================
ELECTRIC DELIVERIES: For the three months ended September 30, 2002, electric
delivery revenues increased by $25 million from the 2001 level. Electric
deliveries, including transactions with other wholesale market participants and
other electric utilities, were 10.9 billion kWh, a decrease of 0.1 billion kWh,
or 0.9 percent from the comparable period in 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
growth in retail deliveries, more than offset the impact of reductions to the
lower-margin customers. Even though deliveries were below the 2001 level,
Consumers set an all-time monthly sendout record during the month of July, and a
monthly hourly peak demand record of 7,312 MW was set on September 9, 2002.
For the nine months ended September 30, 2002, electric delivery revenues
increased by $30 million from the 2001 level. Electric deliveries, including
transactions with other wholesale market participants and other electric
utilities, were 29.5 billion kWh, a decrease of 0.7 billion kWh, or 2.5 percent
from the comparable period in 2001. Again, 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.
Even though total deliveries were below the 2001 level, increased deliveries to
the higher-margin residential and commercial sectors, along with growth in
retail deliveries, more than offset the impact of reductions to the lower-margin
customers. For the year, Consumers has set an all-time monthly sendout record
during the month of July, and monthly hourly peak demand records were set on
April 16, 2002, June 25, 2002, and September 9, 2002.
23
CMS Energy Corporation
POWER SUPPLY COSTS AND RELATED REVENUE: For the three months ended September 30,
2002, power supply costs and related revenues increased by $100 million from the
comparable period in 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 unscheduled forced outage at Palisades that began in June of 2001.
Also contributing to the overall decrease in power costs was the lower volume
and lower priced power options and dispatchable capacity contracts that were
purchased for 2002.
For the nine months ended September 30, 2002, power supply costs and related
revenues increased by a total of $113 million from the comparable period in
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 is lower-priced power options and dispatchable capacity contracts
that were purchased for 2002.
OTHER OPERATING EXPENSES AND NON-COMMODITY REVENUES: For the three and nine
months ended September 30, 2002, other operating expenses increased $16 million
and $26 million, respectively, from the comparable period in 2001. Both of these
increases are attributed to higher amortization of securitized assets, higher
depreciation expense resulting from higher plant in service along with increased
operating costs resulting from higher health care and storm restoration
expenses.
GAIN ON ASSET SALES: For the nine months ended September 30, 2002, asset sales
increased as a result of the $31 million pretax gain associated with the May
2002 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 three and nine months ended September 30, 2002, income tax
expense increased due to increased 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.
24
CMS Energy Corporation
In Millions
--------------------------------------------------------------------------------------------------------------------
RESTATED RESTATED
JUNE 30 2002 2001 CHANGE
--------------------------------------------------------------------------------------------------------------------
Three months ended $ 84 $31 $53
Six months ended 134 93 41
====================================================================================================================
In Millions
--------------------------------------------------------------------------------------------------------------------
THREE MONTHS SIX MONTHS
ENDED JUNE 30 ENDED JUNE 30
REASONS FOR CHANGE 2002 VS. 2001 RESTATED 2002 VS. 2001 RESTATED
--------------------------------------------------------------------------------------------------------------------
Electric deliveries $ 10 $ 6
Power supply costs and related revenue 34 18
Other operating expenses and non-commodity revenue (13) (16)
Gain on asset sales 38 38
Fixed charges 6 8
Income taxes (22) (13)
---------------------------------------
Total change $ 53 $41
===================================================================================================================
ELECTRIC DELIVERIES: For the three months ended June 30, 2002, electric delivery
revenues increased by $10 million from the 2001 level. Electric deliveries,
including transactions with other electric utilities, were 9.4 billion kWh, an
increase of 0.1 billion kWh, or 1.4 percent from the comparable period in 2001.
The increase in total electric deliveries was primarily due to higher
residential usage resulting from warmer June 2002 temperatures.
For the six months ended June 30, 2002, electric delivery revenues increased by
$6 million from the 2001 level. Electric deliveries, including transactions with
other electric utilities, were 18.6 billion kWh, a decrease of 0.7 billion kWh,
or 3.4 percent from the comparable period in 2001. This decrease is the result
of reduced first quarter industrial usage due to the economic downturn.
POWER SUPPLY COSTS AND RELATED REVENUE: For the three months ended June 30,
2002, power supply costs and related revenues increased by $34 million from the
comparable period in 2001. This increase is primarily the result of decreased
power costs in 2002 due to the higher availability of the lower priced Palisades
Nuclear Plant. In the 2001 period, Consumers was required to purchase greater
quantities of higher-priced power to offset the loss of internal generation
resulting from outages at Palisades.
For the six months ended June 30, 2002, power supply costs and related revenues
increased by a total of $18 million from the comparable period in 2001. This
increase is a result of decreased power costs due to the Palisades outage
described for the second quarter partially offset by a plant outage at Palisades
in early 2002.
OTHER OPERATING EXPENSES AND NON-COMMODITY REVENUES: For the three months ended
June 30, 2002, other operating expenses increased $13 million due to higher
amortization of securitized assets, increased depreciation expense resulting
from higher plant in service along with a decrease in miscellaneous revenues.
25
CMS Energy Corporation
For the six months ended June 30, 2002, other operating expenses increased $16
million due to higher amortization of securitized assets, increased depreciation
expense resulting from higher plant in service along with a decrease in
miscellaneous revenues.
GAIN ON ASSET SALES: For the three and six months ended June 30, 2002, asset
sales increased as a result of the $31 million pre-tax gain associated with the
May 2002 sale of Consumers' electric transmission system and a $7 million
pre-tax gain on the sale of unused nuclear equipment from the cancelled Midland
project.
INCOME TAXES: For the three and six months ended June 30, 2002, income tax
expense increased due to increased 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.
In Millions
--------------------------------------------------------------------------------------------------------------------
RESTATED RESTATED
MARCH 31 2002 2001 CHANGE
--------------------------------------------------------------------------------------------------------------------
Three months ended $50 $62 $(12)
====================================================================================================================
In Millions
--------------------------------------------------------------------------------------------------------------------
THREE MONTHS
ENDED MARCH 31
REASONS FOR CHANGE 2002 VS. 2001 RESTATED
--------------------------------------------------------------------------------------------------------------------
Electric deliveries $ (4)
Power supply costs and related revenue (16)
Other operating expenses and non-commodity revenue (3)
Fixed charges 2
Income taxes 9
------------------------------------------
Total change $(12)
====================================================================================================================
ELECTRIC DELIVERIES: For the period ended March 31, 2002, electric delivery
revenues decreased by $4 million from the 2001 level. Electric deliveries,
including transactions with other electric utilities, were 9.2 billion kWh, a
decrease of 0.8 billion kWh or 7.9 percent from the comparable period in 2001.
Total electric deliveries decreased primarily due to lower industrial usage
driven by the economic downturn.
POWER SUPPLY COSTS AND RELATED REVENUE: For the period ended March 31, 2002,
electric net income was adversely affected by lower power supply cost related
revenues. Additionally, the average power supply cost increased due to the need
to purchase greater quantities of higher-priced power to offset the loss of
internal generation resulting from the unscheduled Palisades outage.
26
CMS Energy Corporation
CONSUMERS' GAS UTILITY RESULTS OF OPERATIONS
GAS UTILITY NET INCOME (LOSS):
In Millions
--------------------------------------------------------------------------------------------------------------------
RESTATED RESTATED
SEPTEMBER 30 2002 2001 CHANGE
--------------------------------------------------------------------------------------------------------------------
Three months ended $ (18) $ (11) $(7)
Nine months ended 13 16 (3)
====================================================================================================================
In Millions
--------------------------------------------------------------------------------------------------------------------
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30 ENDED SEPTEMBER 30
REASONS FOR CHANGE 2002 VS. 2001 RESTATED 2002 VS. 2001 RESTATED
--------------------------------------------------------------------------------------------------------------------
Gas deliveries $ (2) $ (2)
Gas rate increase 1 10
Gas wholesale and retail services 3 3
Operation and maintenance (17) (17)
Other operating expenses 4 1
Income taxes 4 2
-------------------------------------------
Total change $ (7) $ (3)
====================================================================================================================
For the three months ended September 30, 2002, gas revenues decreased due to
warmer temperatures compared to the third quarter 2001. Gas wholesale and retail
service revenues increased principally due to growth in the appliance service
plan. Operation and maintenance cost increases reflect recognition of gas
storage inventory losses, and additional expenditures on customer reliability
and service. System deliveries, including miscellaneous transportation volumes,
totaled 40.1 bcf, a decrease of 1.7 bcf or 4.1 percent compared with 2001.
For the nine months ended September 30, 2002, gas revenues increased due to an
interim gas rate increase granted in December of 2001, partially offset by a
decrease in gas delivery revenue due to warmer temperatures and decelerated
economic demand. Operation and maintenance cost increases reflect recognition of
gas storage inventory losses, and additional expenditures on customer
reliability and service. System deliveries, including miscellaneous
transportation volumes, totaled 254.7 bcf, a decrease of 3.7 bcf or 1.4 percent
compared with 2001.
27
CMS Energy Corporation
In Millions
-------------------------------------------------------------------------------------------------------------------
RESTATED RESTATED
JUNE 30 2002 2001 CHANGE
-------------------------------------------------------------------------------------------------------------------
Three months ended $ 3 $ - $3
Six months ended 31 27 4
===================================================================================================================
In Millions
-------------------------------------------------------------------------------------------------------------------
THREE MONTHS SIX MONTHS
ENDED JUNE 30 ENDED JUNE 30
REASONS FOR CHANGE 2002 VS. 2001 RESTATED 2002 VS. 2001 RESTATED
-------------------------------------------------------------------------------------------------------------------
Gas deliveries $ 9 $ -
Gas rate increase 2 9
Gas wholesale and retail services 1 -
Operation and maintenance (4) -
Other operating expenses (3) (3)
Income taxes (2) (2)
-------------------------------------
Total change $ 3 $ 4
==================================================================================================================
For the three months ended June 30, 2002, gas revenues increased due to colder
temperatures compared to the second quarter 2001. Operation and maintenance cost
increases reflect additional expenditures on customer reliability and service.
System deliveries, including miscellaneous transportation volumes, totaled 65.3
bcf, an increase of 8.3 bcf or 14.7 percent compared with 2001.
For the six months ended June 30, 2002, gas revenues increased due to an interim
gas rate increase granted in December of 2001. System deliveries, including
miscellaneous transportation volumes, totaled 214.5 bcf, a decrease of 2.0 bcf
or 0.9 percent compared with 2001.
28
CMS Energy Corporation
In Millions
--------------------------------------------------------------------------------------------------------------------
RESTATED RESTATED
MARCH 31 2002 2001 CHANGE
--------------------------------------------------------------------------------------------------------------------
Three months ended $28 $27 $ 1
====================================================================================================================
In Millions
--------------------------------------------------------------------------------------------------------------------
THREE MONTHS
ENDED MARCH 31
REASONS FOR CHANGE 2002 VS. 2001 RESTATED
--------------------------------------------------------------------------------------------------------------------
Gas deliveries $ (9)
Rate increase 7
Other operating expenses and non-commodity revenue 3
Fixed charges 1
Income taxes (1)
-------
Total change $ 1
===================================================================================================================
For the period ended March 31, 2002, gas delivery revenues decreased due to
significantly milder temperatures during the first quarter of 2002. This
decrease was significantly offset by an interim gas rate increase granted in
December of 2001. System deliveries, including miscellaneous transportation
volumes, totaled 149 bcf, a decrease of 10 bcf or 6.5 percent compared with
2001.
INDEPENDENT POWER PRODUCTION RESULTS OF OPERATIONS
In Millions
--------------------------------------------------------------------------------------------------------------------
RESTATED RESTATED
SEPTEMBER 30 2002 2001 CHANGE
--------------------------------------------------------------------------------------------------------------------
Three months ended $ 49 $ (89) $ 138
Nine months ended 83 (44) 127
====================================================================================================================
For the three months ended September 30, 2002, net income increased by $138
million from the comparable period in 2001. The increase was due primarily to
the asset write-downs in 2001 (NPS, El Chocon, and HL Power). Additionally,
operational performance at DIG improved, reflecting lower costs for steam
generation as compared to 2001 when the plant experienced construction delays.
These performance improvements were offset by expropriation and devaluation
issues at the Argentine plants as well as lower option premiums at the Michigan
Power peaking units.
For the nine months ended September 30, 2002, net income increased $127 million
from the comparable period in 2001. The increase was due in large part to the
asset write-downs in 2001 (NPS, El Chocon, and HL Power). Additionally,
operational improvements at DIG lowered steam generation costs as compared to
2001 when the plant experienced construction delays. These performance
improvements were offset by expropriation and devaluation issues at the
Argentine plants, the loss on sale of assets (Toledo Power), as well as lower
option premium revenue at the Michigan Power peaking units.
29
CMS Energy Corporation
In Millions
-------------------------------------------------------------------------------------------------------------------
RESTATED RESTATED
JUNE 30 2002 2001 CHANGE
-------------------------------------------------------------------------------------------------------------------
Three months ended $ 17 $ 20 $ (3)
Six months ended 34 45 (11)
===================================================================================================================
For the three months ended June 30, 2002, net income decreased by $3 million
from the comparable period in 2001. Operational performance at DIG improved,
reflecting lower costs for steam generation as compared to 2001 when the plant
experienced construction delays. These performance improvements were offset by a
loss on asset sales (primarily Toledo Power) as well as expropriation and
devaluation issues at the Argentine plants in 2002. Additionally, in 2001, the
company had recorded a gain on the sale of a purchase power agreement.
For the six months ended June 30, 2002, net income decreased by $11 million from
the comparable period in 2001. The decrease reflects the expropriation and
devaluation issues at the Argentine plants in 2002, a gain on sale of a power
purchase agreement in 2001, and losses on asset sales (primarily Toledo Power).
Offsetting these were operational improvements at DIG due to lower steam
generation costs as compared to 2001 when the plant experienced construction
delays and lower operating costs.
In Millions
-------------------------------------------------------------------------------------------------------------------
RESTATED RESTATED
MARCH 31 2002 2001 CHANGE
-------------------------------------------------------------------------------------------------------------------
Three months ended $ 17 $ 25 $ (8)
===================================================================================================================
NET INCOME: For the three months ended March 31, 2002, net income decreased by
$8 million from the comparable period in 2001. Results reflected expropriation
and devaluation issues at the Argentine plants, partially offset by stronger
operational performance at DIG reflecting lower costs for steam generation.
NATURAL GAS TRANSMISSION RESULTS OF OPERATIONS
In Millions
------------------------------------------------------------------------------------------------------------------
RESTATED RESTATED
SEPTEMBER 30 2002 2001 CHANGE
------------------------------------------------------------------------------------------------------------------
Three months ended $ - $ (20) $ 20
Nine months ended 8 (16) 24
==================================================================================================================
For the three months ended September 30, 2002, net income increased $20 million
from the comparable period in 2001. The increase was primarily due to asset
write-downs of $24 million recorded in 2001, partly offset by the Argentine
expropriation and devaluation losses.
For the nine months ended September 30, 2002, net income was $8 million, an
increase of $24 million from the comparable period in 2001. The increase was due
to asset write-downs of $24 million recorded in 2001 and the gain of $12 million
on the sale of Gas Transmission's ownership interest in a methanol plant in
Equatorial Guinea. These increases were partly offset by the impact of Argentine
expropriation and devaluation losses on ongoing operations.
30
CMS Energy Corporation
In Millions
-------------------------------------------------------------------------------------------------------------------
RESTATED RESTATED
JUNE 30 2002 2001 CHANGE
-------------------------------------------------------------------------------------------------------------------
Three months ended $ (4) $ (1) $ (3)
Six months ended 8 4 4
===================================================================================================================
For the three months ended June 30, 2002, a loss of $4 million was incurred, a
decrease of $3 million from the comparable period in 2001. The decrease was
primarily due to the impact of Argentine expropriation and devaluation losses on
ongoing operations.
For the six months ended June 30, 2002, net income was $8 million, an increase
of $4 million from the comparable period in 2001. The increase was primarily due
to the gain of $12 million on the sale of CMS Gas Transmission's ownership
interest in a methanol plant in Equatorial Guinea, partly offset by the impact
of Argentine expropriation and devaluation losses on ongoing operations.
In Millions
-------------------------------------------------------------------------------------------------------------------
RESTATED RESTATED
MARCH 31 2002 2001 CHANGE
-------------------------------------------------------------------------------------------------------------------
Three months ended $ 12 $ 5 $ 7
===================================================================================================================
For the three months ended March 31, 2002, net income was $12 million, an
increase of $7 million from the comparable period in 2001. The increase was
primarily due to the gain of $12 million on the sale of CMS Gas Transmission's
ownership interest in a methanol plant in Equatorial Guinea, partly offset by
the impacts of Argentine expropriation and devaluation losses.
MARKETING, SERVICES AND TRADING RESULTS OF OPERATIONS
In Millions
-------------------------------------------------------------------------------------------------------------------
RESTATED RESTATED
SEPTEMBER 30 2002 2001 CHANGE
-------------------------------------------------------------------------------------------------------------------
Three months ended $ 8 $ (7) $ 15
Nine months ended 13 (27) 40
===================================================================================================================
For the three months ended September 30, 2002, CMS MST's net income was $8
million, an increase of $15 million from its net loss in the comparable 2001
period of $7 million. This increase was due to mark-to-market income on
derivatives used to hedge natural gas retail sales, a decrease in operating
expenses due to a significant reduction in personnel, partially offset by the
lack of new structured power transactions and decreased natural gas trading
margins.
For the nine months ended September 30, 2002, net income was $13 million, an
increase of $40 million from the comparable period in 2001 resulting from income
on derivatives used to hedge natural gas retail sales, elimination of incentive
compensation accrual, and reduction in operating expenses partially offset by a
reduction in structured power transactions in 2002 and downward pressure on gas
trading margins.
31
CMS Energy Corporation
For the three months ended September 30, 2002, power sales volumes were 22,653
GWh, an increase of 14,210 GWh (168 percent) and natural gas sales volumes were
136 bcf, a decrease of 56 bcf (29 percent) compared to third quarter 2001. Power
volumes were higher in third quarter 2002 due to structured power transactions
and lower natural gas volumes in the third quarter compared to 2001 due to
significantly decreased trading activities.
For the nine months ended September 30, 2002, power sales volumes were 55,525
GWh, an increase of 39,581 GWh (248 percent) and natural gas volumes were 463
bcf, a decrease of 96 bcf (17 percent) compared to the nine months ended
September 2001. Power volumes were higher in 2002 than 2001 due to structured
power deals closed in the second half of 2001 and early 2002 as well as
increased trading activities; natural gas volumes were reduced due to credit
constraints which prevented CMS MST from transacting new deals.
In Millions
-------------------------------------------------------------------------------------------------------------------
RESTATED RESTATED
JUNE 30 2002 2001 CHANGE
-------------------------------------------------------------------------------------------------------------------
Three months ended $ (20) $ (16) $ (4)
Six months ended 5 (20) 25
===================================================================================================================
For the three months ended June 30, 2002, CMS MST's net loss was $20 million,
reflecting $4 million more losses from the comparable 2001 period. The
additional losses were driven by changes in mark-to-market income due to losses
on intercompany power tolling options, downward pressure on gas trading margins
and the lack of new structured power transactions, partially offset by income on
derivatives used to hedge natural gas retail sales, and a significant decrease
in other operating expenses resulting from an elimination of the incentive
compensation accrual in 2002.
For the six months ended June 30, 2002, net income was $5 million, an increase
of $25 million from the comparable period in 2001, primarily due to an increase
in mark-to-market income on derivatives used to hedge natural gas retail sales
and elimination of the incentive compensation accrual.
During the three months ended June 30, 2002, power sales volumes were 18,451
GWh, an increase of 14,437 GWh (360 percent) and natural gas sales volumes were
155 bcf, a decrease of 64 bcf (29 percent) compared to second quarter 2001.
Structured power transactions closed in 2001 and early 2002 and increased power
trading activities contributed to the increase in power sales volumes; gas sales
volumes were significantly impacted by credit constraints due to the inability
to transact new deals.
For the six months ended June 30, 2002, power sales volumes were 32,872 GWh, an
increase of 25,371 GWh (338 percent). This was due to the structured power
transactions closed in 2001 and early 2002 and increased trading activities.
Natural gas sales volumes were 327 bcf; a decrease of 40 bcf (11 percent)
resulting from significantly decreased trading activities during second quarter
due to credit constraints.
In Millions
-------------------------------------------------------------------------------------------------------------------
RESTATED RESTATED
MARCH 31 2002 2001 CHANGE
-------------------------------------------------------------------------------------------------------------------
Three months ended $ 25 $ (4) $ 29
===================================================================================================================
32
CMS Energy Corporation
For the three months ended March 31, 2002, CMS MST's net income was $25 million,
an increase of $29 million from the comparable 2001 period. Contributing to the
increase in net income was a structured power transaction that closed during the
first quarter of 2002 and mark-to-market income on derivatives used to hedge
natural gas retail sales.
During the three months ended March 31, 2002, power sales volumes were 14,421
GWh, an increase of 10,934 GWh (314 percent), and natural gas sales volumes were
172 bcf, an increase of 24 bcf (16 percent), compared to the first quarter of
2001. The increase in sales volumes was a result of new structured power
transactions that closed during 2001 and increased trading activities for
natural gas.
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 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'
properties in Columbia. 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 March 31, 2003. The combined sales resulted in an
after-tax loss of approximately $82 million. For more information, see Note 2,
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 2, Discontinued Operations, incorporated by reference herein.
OTHER RESULTS OF OPERATIONS
TAX LOSS ALLOCATION: 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 a
consolidated 2001 tax loss to tax years 1996 through 1999 and obtain refunds of
prior years tax payments totaling $217 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 $41 million. This
non-cash reduction in AMT credit carryforwards has been reflected in the tax
provision of CMS Energy as of September 30, 2002.
CORPORATE INTEREST AND OTHER: For the three months ended September 30, 2002,
Corporate Interest and Other expense was $115 million, an increase of $51
million from the comparable period in 2001. The increase resulted from a $41
million increase in income tax expense attributable to a reduction in AMT credit
carryforwards, an increase of Parent net overhead costs of $17 million for
restructuring, a gain of $9
33
CMS Energy Corporation
million in a foreign currency exchange transaction in 2001 and an increase of
interest and other expense of $5 million. The increase in the above expenses
were partially offset by an increase of $21 million in the elimination of
intercompany losses recorded by CMS MST for mark-to-market accounting
transactions with affiliates (corresponding decrease in CMS MST results of
operations).
For the nine months ended September 30, 2002, Corporate Interest and Other
expense was $198 million, an increase of $19 million from the comparable period
in 2001. The increase resulted from a $41 million increase in income tax expense
attributable to a reduction in AMT credit carryforwards, an increase of Parent
net overhead and other costs of $22 million, an increase of interest expense net
of tax of $11 million, a gain of $9 million in a foreign currency exchange
transaction in 2001 and a loss of $8 million on the Fondelec investments in
Latin America. The increase in the above expenses were partially offset by an
increase of $73 million in the elimination of intercompany losses recorded by
CMS MST for mark-to-market accounting transactions with affiliates
(corresponding decrease in CMS MST results of operations).
For the three months ended June 30, 2002, Corporate Interest and Other expense
was $44 million, a decrease of $8 million from the comparable period in 2001.
The decrease resulted from an increase of $32 million in the elimination of
intercompany losses recorded by CMS MST for mark-to-market accounting
transactions with affiliates (corresponding decrease in CMS MST results of
operations) which was offset by an increase in interest expense net of tax of
$11 million, a loss of $8 million on the Fondelec investments in Latin America
and an increase of Parent net overhead and other costs of $5 million.
For the six months ended June 30, 2002, Corporate Interest and Other expense was
$83 million, a decrease of $32 million versus the comparable period in 2001. The
decrease resulted from an increase of $53 million in the elimination of
intercompany losses recorded by CMS MST for mark-to-market accounting
transactions with affiliates (corresponding decrease in CMS MST results of
operations) which was offset by an increase of interest expense net of tax of $8
million, a loss of $8 million on the Fondelec investments in Latin America and
an increase of Parent net overhead and other costs of $4 million.
For the three months ended March 31, 2002, Corporate Interest and Other expense
was $39 million, a decrease of $24 million versus the comparable period in 2001.
This decrease resulted from an increase of $21 million in the elimination of
intercompany losses recorded by CMS MST for mark-to-market accounting
transactions with affiliates (corresponding decrease in CMS MST results of
operations) and a decrease in interest expense of $4 million.
CRITICAL ACCOUNTING POLICIES
The results of operations, as presented above, 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 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, international operations and foreign
currency and pension and postretirement benefits.
34
CMS Energy Corporation
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 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 September
30, 2002, approximately 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 has 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.
35
CMS Energy Corporation
ACCOUNTING FOR DERIVATIVE AND FINANCIAL INSTRUMENTS
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 price 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 supply
contracts, or purchase orders for numerous supply items as derivatives.
If a contract must be accounted for as a derivative instrument, the contract is
recorded as either an asset or a liability in the financial statements 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 September 30, 2002, CMS Energy assumed a market-based interest rate
of 4.5 percent in calculating the fair value of its electric call options.
In order for derivative instruments to qualify for hedge accounting under SFAS
No. 133, the hedging relationship must be formally documented at inception and
be highly effective in achieving offsetting cash flows or offsetting changes in
fair value attributable to the risk being hedged. If hedging a forecasted
transaction, the forecasted transaction must be probable. If a derivative
instrument, used as a cash flow hedge, is terminated early because it is
probable that a forecasted transaction will not occur, any gain or loss as of
such date is immediately recognized in earnings. If a derivative instrument,
used as a cash flow hedge, is terminated early for other economic reasons, any
gain or loss as of the termination date is deferred and recorded when the
forecasted transaction affects earnings.
Consumers believes that certain of its electric capacity and energy contracts
are not derivatives due to the lack of an active energy market in the state of
Michigan, as defined by SFAS No. 133, and the transportation cost to deliver the
power under the contracts to the closest active energy market at the Cinergy hub
in Ohio. If a market develops in the future, Consumers may be required to
account for these contracts as derivatives. The mark-to-market impact in
earnings related to these contracts, particularly related to the PPA, could be
material to the financial statements.
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 and are reported at
fair value with any
36
CMS Energy Corporation
unrealized gains or losses resulting from changes in fair value excluded from
earnings and reported in equity as part of other comprehensive income.
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.
MARK-TO-MARKET ACCOUNTING
CMS MST's trading activities are accounted for under the mark-to-market method
of accounting consistent with guidance provided in EITF Issue No. 98-10. 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 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 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 forecasted pricing curves generated 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 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, 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 September 30, 2002.
In Millions
-------------------------------------------------------------------------------------------------------------------
Fair value of contracts outstanding as of June 30, 2002 $109
Fair value of new contracts when entered into during the period 7
Contracts realized or otherwise settled during the period (a) 7
Other changes in fair value (b) 6
-------------------------------------------------------------------------------------------------------------------
Fair value of contracts outstanding as of September 30, 2002 $129
===================================================================================================================
37
CMS Energy Corporation
a) Reflects value of contracts, included in June 30, 2002 values, that expired
during the third quarter of 2002.
b) Reflects changes in price and net increase/decrease in size of forward
positions, as well as changes to mark-to-market reserve accounts.
In Millions
-------------------------------------------------------------------------------------------------------------------
Fair Value of Contracts at September 30, 2002
-------------------------------------------------------------------------------------------------------------------
Total Maturity (in years)
------------------------------------------------------------
Source of Fair Value Fair Less than 1 1 to 4 to Greater than 5
Value 3 5
-------------------------------------------------------------------------------------------------------------------
Prices actively quoted $ 7 $ 7 $ - $ - $ -
Prices provided by other external sources 23 7 16 - -
Prices based on models & other valuation methods 99 13 54 22 10
-------------------------------------------------------------------------------------------------------------------
Total $129 $27 $70 $22 $10
===================================================================================================================
INTERNATIONAL OPERATIONS AND FOREIGN CURRENCY
CMS Energy, through its subsidiaries and affiliates, has acquired investments in
energy-related projects throughout the world. As a result of a change in
business strategy, CMS Energy has begun divesting its non-strategic or
under-performing foreign investments.
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. As of September 30, 2002, the cumulative Foreign Currency
Translation decreased stockholders' equity by $667 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
38
CMS Energy Corporation
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 nine months ended September 30, 2002, CMS Energy recorded losses of $40
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, average, or
end of period 2002 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. As a result of the change in functional currency, and the ongoing
translation of revenue and expense accounts of these investments into U.S.
Dollars, an additional $6 million, assuming exchange rates ranging from 3.00 to
4.00 Pesos per U.S. Dollar, may adversely affect 2002 earnings for CMS Energy.
At September 30, 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 3.665 Pesos
per U.S. Dollar was approximately $400 million.
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
does 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.
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.
39
CMS Energy Corporation
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. As of January 2002, OPEB
plan claims are paid from the VEBA Trusts.
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 pension
expense and OPEB expense to rise in 2002 by approximately $10 million and $21
million, respectively, over 2001 expenses. For pension expense, this increase is
due to a downturn in the value of pension assets during the past two years,
forecasted increases in pay and added service, decline in the interest rate used
to value the liability of the plan, and expiration of the transition gain
amortization. For OPEB expense, the increase is due to the trend of rising
health care costs, the market return on plan assets being below expected levels
and a lower discount rate, based on recent economic conditions, used to compute
the benefit obligation. Under the OPEB plans' assumptions, health care costs
increase at a slower rate from current levels through 2009; 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.
The recent significant downturn in the equities markets has affected the value
of the Pension Plan assets. If the plan's Accumulated Benefit Obligation exceeds
the value of these assets at December 31, 2002, CMS Energy will be required to
recognize an additional minimum liability for this excess in accordance with
SFAS No 87. CMS Energy cannot predict the future fair value of the plan's assets
but it is probable, without significant appreciation in the plan's assets that
CMS Energy will need to book an additional minimum liability through a charge to
other comprehensive income. The Accumulated Benefit Obligation is determined by
the plan's actuary in the fourth quarter of each year.
In January 2002, CMS Energy contributed $85 million to the plan's trust
accounts. This amount was comprised of $64 million of pension-related benefits
and $21 million of postretirement health care and life insurance benefits. In
the second and third quarters of 2002, CMS Energy made additional contributions
for postretirement health care and life insurance benefits in the amount of $21
million and $20 million, respectively. CMS Energy expects to make an additional
contribution to the Pension Plan of approximately $219 million in the third
quarter of 2003.
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 equally with employees.
CMS Energy also provides retirement benefits under a defined contribution 401(k)
plan. CMS Energy previously offered a 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
40
CMS Energy Corporation
performance exceeded targeted levels. Effective September 1, 2002, the
employer's match was suspended until January 1, 2005, and the incentive match
was permanently eliminated. Amounts charged to expense for the employer's match
and incentive match during 2001 were $15 million and $11 million, respectively.
NEW ACCOUNTING STANDARDS
In addition to the identified critical accounting policies discussed above,
future results will be affected by new accounting standards that recently have
been issued.
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. When the 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 liability is accreted to
its present value each period and the capitalized cost is depreciated over the
related asset's useful life. CMS Energy is currently inventorying assets that
may have a retirement obligation and consulting with counsel to determine if a
legal retirement obligation exists. The legal retirement obligation 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. 145, RESCISSION OF FASB STATEMENTS NO. 4, 44, AND 64, AMENDMENT OF FASB
STATEMENT NO. 13, AND TECHNICAL CORRECTIONS: Issued by the FASB on April 30,
2002, this Statement 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. CMS Energy is currently studying the effects of
the new standard, but has yet to quantify the effects of adoption on its
financial statements. 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. 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. 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.
EITF ISSUE NO. 02-3, RECOGNITION AND REPORTING OF GAINS AND LOSSES ON ENERGY
TRADING CONTRACTS UNDER EITF ISSUES NO. 98-10 AND 00-17: In September 2002, the
EITF reaffirmed the consensus originally reached in June 2002 that requires all
gains and losses, including mark-to-market gains and losses and physical
settlements, related to energy trading activities within the scope of EITF Issue
No. 98-10 be presented as a net amount in the income statement. This consensus
is applicable to financial statement periods ending after July 15, 2002 and
requires the reclassification of comparable reporting periods.
41
CMS Energy Corporation
At the October 25, 2002 meeting, the EITF reached a 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 25, 2002. As a
result of these recent changes, CMS Energy will evaluate its existing energy
contracts to determine if any changes in the method of reporting the results of
these contracts will be required effective January 1, 2003.
For a discussion of new accounting standards effective January 1, 2002, see Note
1, Corporate Structure and Basis of Presentation.
CAPITAL RESOURCES AND LIQUIDITY
CASH POSITION, INVESTING AND FINANCING
CMS Energy's primary ongoing source of cash is dividends and other distributions
from subsidiaries. During the first nine months of 2002, Consumers paid $255
million in common dividends and other capital distributions and Enterprises paid
$749 million in common dividends and other capital distributions to CMS Energy.
CMS Energy's consolidated cash requirements are met by its operating and
investing activities.
OPERATING ACTIVITIES: CMS Energy's consolidated net cash provided by operating
activities is derived mainly from the processing, storage, transportation and
sale of natural gas and the generation, distribution and sale of electricity.
CMS Energy uses cash derived from its operating activities primarily to maintain
its energy businesses, to maintain and expand electric and gas systems of
Consumers, to pay interest on and retire portions of its long-term debt.
For the first three months of 2002, consolidated cash from operations after
interest charges totaled $246 million compared to $255 million for the first
three months of 2001. The $9 million decrease in cash from operations resulted
primarily from a decrease in cash earnings, a significant decrease in deferred
income taxes and investment tax credit and a smaller decrease in accounts
receivable and accrued revenues. These uses of cash were partially offset by a
larger decrease in inventories; an increase in accounts payable and accrued
expenses and changes in other assets and liabilities.
For the first six months of 2002 and 2001, consolidated cash from operations
after interest charges totaled $412 million and $279 million, respectively. The
$133 million increase in cash from operations resulted primarily from a decrease
in inventories, an increase in accounts payable and accrued expenses and change
in other assets and liabilities. These sources of cash were partially offset by
a decrease in cash earnings, smaller decreases in accounts receivable and
accrued revenues and decreases in deferred income taxes and investment tax
credit.
For the first nine months of 2002 and 2001, consolidated cash from operations
after interest charges totaled $333 million and $181 million, respectively. The
$152 million increase in cash from operations resulted primarily from a smaller
increase in inventories and a smaller decrease in accounts payable and accrued
expenses. These sources of cash were partially offset by a decrease in cash
earnings, smaller decreases in
42
CMS Energy Corporation
accounts receivable and accrued revenues, decreases in deferred income taxes
and investment tax credit and changes in other assets and liabilities.
INVESTING ACTIVITIES: For the first three months of 2002, CMS Energy's
consolidated net cash provided by investing activities totaled $647 million,
while net cash used in investing activities totaled $283 million for the first
three months of 2001. The $930 million increase in cash reflects increased net
proceeds from the sale of assets ($855 million) and a reduction in capital
expenditures and investments in partnerships and unconsolidated subsidiaries
($118 million). CMS Energy's expenditures in the first three months of 2002 for
its utility and diversified energy businesses, including investments and other
items, were $164 million and $30 million, respectively, compared to $195 million
and $107 million, respectively, during the comparable period in 2001.
For the first six months of 2002, CMS Energy's consolidated net cash provided by
investing activities totaled $855 million, while net cash used in investing
activities totaled $617 million for the first six months of 2001. The $1,472
million increase in cash reflects increased net proceeds from asset sales
($1,164 million) and a reduction in capital expenditures and investments in
partnerships and unconsolidated subsidiaries ($315 million). CMS Energy's
expenditures in the first six months of 2002 for its utility and diversified
energy businesses, including investments and other items, were $316 million and
$113 million, respectively, compared to $368 million and $356 million,
respectively, during the comparable period in 2001.
For the first nine months of 2002, CMS Energy's consolidated net cash provided
by investing activities totaled $884 million, while net cash used in investing
activities totaled $959 million for the first nine months of 2001. The $1,843
million increase in cash reflects increased net proceeds from the sale of assets
($1,411 million) and a reduction in capital expenditures and investments in
partnerships and unconsolidated subsidiaries ($426 million). CMS Energy's
expenditures in the first nine months of 2002 for its utility and diversified
energy businesses, including investments and other items, were $461 million and
$187 million, respectively, compared to $532 million and $518 million,
respectively, during the comparable period in 2001.
FINANCING ACTIVITIES: For the first three months of 2002, CMS Energy's net cash
used in financing activities totaled $891 million, while net cash provided by
financing activities totaled $17 million for the first three months of 2001. The
decrease of $908 million resulted primarily from a decrease in proceeds from
notes, bonds and other long-term debt ($144 million), a decrease in proceeds
from the issuance of common stock ($274 million), an increase in the retirement
of bonds and other long-term debt ($441 million), and an increase in the
retirement of Trust Preferred Securities ($30 million).
For the first six months of 2002, CMS Energy's net cash used in financing
activities totaled $1,172 million, while net cash provided by financing
activities totaled $330 million for the first six months of 2001. The decrease
of $1,502 million resulted primarily from an increase in the retirement of bonds
and other long-term debt ($831 million), an increase in the retirement of Trust
Preferred Securities ($30 million), a decrease in proceeds from Trust Preferred
Securities ($125 million), a decrease in proceeds from notes, bonds and other
long-term debt ($180 million), and a decrease in the issuance of common stock
($268 million).
For the first nine months of 2002, CMS Energy's net cash used in financing
activities totaled $994 million, while net cash provided by financing activities
totaled $770 million for the first nine months of 2001. The decrease of $1,764
million resulted primarily from a decrease in proceeds from notes, bonds and
other long-term debt ($1,045 million), a decrease in proceeds from Trust
Preferred Securities ($125 million), an increase in the retirement of bonds and
other long-term debt ($403 million), and an increase in
43
CMS Energy Corporation
the retirement of Trust Preferred Securities ($331 million).
In the first nine months of 2002, CMS Energy declared and paid $124 million in
cash dividends to holders of CMS Energy Common Stock. In October 2002, the Board
of Directors declared a quarterly dividend of $0.18 per share on CMS Energy
Common Stock, payable in November 2002. The quarterly dividend is consistent
with the requirements of the new credit facilities described below.
The following table summarizes securities issued during the first nine months of
2002:
Distribution/ Amount
Month Issued Maturity Interest Rate (In Millions) Use of Proceeds
-------------------------------------------------------------------------------------------------------------------
CMS ENERGY:
GTNs Series F January (1) 7.33% $ 12 General corporate purposes
Common Stock (2) n/a 11 million shares 350 Repay debt and general
---- corporate purposes
$362
----
CONSUMERS:
Senior Notes March 2005 6.00% $300 Repay debt
----
Total $662
====
===================================================================================================================
(1) GTNs are issued with varying maturity dates. The interest rate shown herein
is a weighted average interest rate.
(2) In July 2002, 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.
OTHER INVESTING AND FINANCING MATTERS: At September 30, 2002, the book value per
share of CMS Energy Common Stock was $12.69.
At November 1, 2002, CMS Energy had an aggregate $1.3 billion in securities
registered for future issuance.
In May 2002, CMS Energy registered $300,000,000 Series G GTNs. The notes will be
issued from time to time with the proceeds being used for general corporate
purposes. As of November 1, 2002, no Series G GTNs had been issued.
On July 1, 2002, the 7,250,000 units of 8.75% Adjustable Convertible Trust
Securities (CMS Energy Trust II) were converted to 8,787,725 newly issued shares
of CMS Energy Common Stock.
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 are
as follows: a $295.8 million revolving credit facility by CMS Energy, maturing
March 31,
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CMS Energy Corporation
2003; a $300 million revolving credit facility by CMS Energy, maturing December
15, 2003; a $150 million short-term loan by Enterprises, maturing December 13,
2002; a $250 million revolving credit facility by Consumers, maturing July 11,
2003; and a $300 million term loan by Consumers, maturing July 11, 2003 with a
one-year extension at Consumers' option.
The facilities are secured credits with mandatory prepayment of borrowings under
certain of the facilities with proceeds from asset sales and capital market
issuances. The CMS Energy and Enterprises facilities grant the applicable bank
groups either first or second liens on the capital stock of 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. Bank and legal fees associated with restructuring the facilities
were approximately $12 million.
The facilities essentially replace or restructure previously existing credit
facilities or lines at CMS Energy or Consumers, without substantially changing
credit commitments. The three CMS Energy and Enterprises facilities aggregating
$745.8 million represent 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.
Pursuant to restrictive covenants in the CMS Energy $295.8 million facility, CMS
Energy is limited to quarterly dividend payments of $0.1825 per share and must
receive $250 million in net cash proceeds from the planned issuance of equity or
equity-linked securities by December 31, 2002 in order to continue to pay a
dividend thereafter. Further cost-cutting steps and sales of non-strategic
assets are expected to eliminate the need for CMS Energy to access the capital
markets for the remainder of 2002. Asset sale proceeds are expected to be used
to repay the balance of CMS Energy's $295.8 million facility, but management can
make no assurances that such payment will be made or that dividends will be
declared by the Board of Directors.
The CMS Energy $300 million facility does not have the foregoing restrictive
covenant, but does include a limitation on cash dividends if CMS Energy's level
of Cash Dividend Income (as defined by the agreement) to Interest Expense falls
below 1.05 to 1.00. As a result of these dividend restrictions, CMS Energy's
Board of Directors cut 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. Also 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. In 2001, Consumers paid $190 million in common stock
dividends to CMS Energy, and declared $183 million and paid $154 million for the
nine months ended September 30, 2002.
The CMS Energy credit facilities have an interest rate of LIBOR plus 300 basis
points. The Consumers' $250 million credit facility has an interest rate of
LIBOR plus 200 basis points (although the rate may fluctuate depending on the
rating of Consumers First Mortgage Bonds) and the interest rate on the $300
million term loan is LIBOR plus 450 basis points, which may fluctuate depending
on the rating of Consumers' First Mortgage Bonds.
45
CMS Energy Corporation
In September 2002, Consumers' exercised its extension option on the $300 million
term loan to move the maturity date to July 11, 2004. Also in September 2002,
CMS Energy retired the $150 million short-term loan by Enterprises using
proceeds from the sale of CMS Oil and Gas and other assets. 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.
Consumers drew $220 million of the capacity upon execution of the Agreements and
is expected to be in a position to draw the full $225 million by mid-November of
2002. The interest rate under the Agreements is currently LIBOR plus 300 basis
points, but will increase by 100 basis points for any period after December 1,
2002 during which the banks thereunder have not yet received, among other
deliveries, certified restated financial statements for CMS Energy's 2000 and
2001 fiscal years. The bank and legal fees associated with the Agreement were $2
million. The first net amortization payment under these Agreements currently is
scheduled to occur at the end of 2002 with monthly amortization scheduled until
full repayment is completed in mid-April of 2003. This financing should
eliminate the need for Consumers to access the capital markets for the remainder
of 2002.
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 September 30, 2002
-------------------------------------------------------------------------------------------------------------------
Restated
CMS ENERGY:
Consolidated Leverage Ratio (a) not more than 5.75 to 1.00 5.43 to 1.00
Cash Dividend Coverage Ratio (a) not less than 1.25 to 1.00 2.15 to 1.00
Dividend Coverage Ratio not less than 1.15 to 1.00 4.14 to 1.00
Restricted Payment Ratio (a) not less than 1.05 to 1.00 2.30 to 1.00
CONSUMERS:
Debt to Capital Ratio (a) not more than 0.65 to 1.00 0.52 to 1.00
Interest Coverage Ratio (a) not less than 2.00 to 1.00 3.38 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.
In 1994, CMS Energy executed an indenture (the "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. Upon activation of the limitation, CMS Energy will not and will not
permit certain material subsidiaries, excluding Consumers and its subsidiaries,
to become liable for new indebtedness. However, 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 at CMS Energy and at the
material subsidiaries. At September 30, 2002, CMS Energy's consolidated leverage
ratio was 0.75 to 1.0. CMS Energy expects that the aggregate effect of non-cash
charges to equity and the reconsolidation of debt on the balance sheet
anticipated to occur in the fourth quarter of 2002 would result in a year-end
debt ratio in excess of 75 percent. This debt ratio may be significantly reduced
if CMS Energy decides to proceed with its sale of Panhandle, its sale of CMS
Field Services, other asset sales or other options such as the securitization of
additional assets at Consumers.
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CMS Energy Corporation
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, and directly
affects and limits 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. More
specifically, a loan to Panhandle made in connection with the December 2001 LNG
off balance sheet monetization transaction is subject to repayment demand by the
unaffiliated equity partner in the LNG Holdings joint venture. At September 30,
2002, Panhandle's remaining balance on the $75 million note payable to LNG
Holdings was approximately $66 million. Dekatherm Investor Trust has agreed not
to make demand for payment before November 22, 2002 in return for a fee and an
agreement for Panhandle to acquire Dekatherm Investor Trust's interest in LNG
Holdings. When Panhandle acquires Dekatherm Investor Trust's interest, it will
then own 100 percent of LNG Holdings and will not demand payment on the note
payable to LNG Holdings.
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 will be
paid credit fees by Panhandle on the outstanding balance of the guarantees for
any periods for which they are in effect. This additional credit support does
not remove Panhandle from its original $50 million obligation. 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. As
of September 30, 2002, Panhandle has also provided $16 million of equity
contributions to Guardian.
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. As of September 30, 2002, Panhandle has also provided $16 million
of equity contributions to Guardian.
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CMS Energy Corporation
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. This issuer has
commenced litigation against Enterprises and CMS MST in Michigan federal
district court and is seeking to require Enterprises and CMS MST to provide
acceptable collateral and to prevent them from disposing of or transferring any
corporate assets outside the ordinary course of business before the Court has an
opportunity to fully adjudicate the issuer's claim. Enterprises and CMS MST
continue to work with the issuer to find mutually satisfactory arrangements. 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. That surety bond issuer has entered into discussions
with CMS MST about the possible posting of acceptable collateral for all three
additional surety bonds; however, to date no legal action has commenced and no
hearing date has been set by the court. CMS Energy has reached a settlement in
principle that would provide the surety bond issuers with collateral and resolve
one of the issuer's litigation. However, the settlement is subject to final
documentation as well as approval by the banks that are party to the CMS Energy
secured credit lines.
CMS Energy plans to continue to pursue the sale of targeted assets throughout
2002. 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.
The following information on CMS Energy's contractual obligations, off-balance
sheet financings 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: Contractual obligations include CMS Energy's long-term
debt, notes payable, lease obligations, sales of accounts receivable and other
unconditional purchase obligations, that represent normal business operating
contracts used to assure adequate supply of and 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 2002, which
includes $33 million related to the MCV Facility. 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.
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CMS Energy Corporation
Contractual Obligations In Millions
--------------------------------------------------------------------------------------------------------------
Payments Due (Restated)
------------------------------------------------------------
September 30 Total 2002 2003 2004 2005 2006 and beyond
--------------------------------------------------------------------------------------------------------------
On-balance sheet:
Long-term debt $ 6,237 $ 158 $ 562 $1,424 $ 706 $ 3,387
Notes payable 235 - 235 - - -
Capital lease obligations (a) 138 50 21 19 18 30
--------------------------------------------------------------------------------------------------------------
Off-balance sheet:
Headquarters building lease (a) 20 7 13 - - -
Operating leases 83 5 12 9 8 49
Non-recourse debt of FMLP 276 65 8 54 41 108
Sale of accounts receivable 325 325 - - - -
Unconditional purchase
Obligations 18,049 956 1,175 929 860 14,129
--------------------------------------------------------------------------------------------------------------
a) The headquarters building capital lease is estimated to be $65 million of
which a $45 million construction obligation has been incurred and recorded
on Consumers' balance sheet.
OFF-BALANCE SHEET ARRANGEMENTS: CMS Energy, through its subsidiary companies,
has equity investments in partnerships and joint ventures in which they have a
minority ownership interest. As of September 30, 2002, CMS Energy's
proportionate share of unconsolidated debt associated with these investments was
$2.8 billion, which includes the operating leases and non-recourse debt of FMLP
shown in the table above. 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.
COMMERCIAL COMMITMENTS: As of September 30, 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 $1.5 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 September 30, 2002,
the actual amount of financial exposure covered by these guarantees and
indemnities was $473 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.
Commercial Commitments In Millions
--------------------------------------------------------------------------------------------------------------
Commitment Expiration
------------------------------------------------------------
September 30 Total 2002 2003 2004 2005 2006 and beyond
--------------------------------------------------------------------------------------------------------------
Off-balance sheet:
Guarantees $ 995 $ 20 - - - 975
Indemnities 267 - 5 - 36 226
Letters of Credit 240 28 191 18 - 3
--------------------------------------------------------------------------------------------------------------
For further information, see Note 6, Short-Term and Long-Term Financings, and
Capitalization, incorporated by reference herein.
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CMS Energy Corporation
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 $2.1 billion during 2002 through 2004.
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. As of September 2002, Consumers had $250 million in
credit facilities and, through its wholly owned subsidiary Consumers Receivable
Funding, a $325 million trade receivable sale program in place as anticipated
sources of funds for general corporate purposes and currently expected capital
expenditures.
CMS Energy estimates capital expenditures by business segment over the next
three years as follows:
In Millions
-------------------------------------------------------------------------------------------------------------------
Years Ending December 31 2002 2003 2004
-------------------------------------------------------------------------------------------------------------------
Consumers electric operations (a) (b) $ 474 $352 $410
Consumers gas operations (a) 207 151 165
Natural gas transmission 150 - -
Independent power production 50 10 80
Oil and gas exploration and production 40 - -
Marketing, services and trading 10 - -
Other 15 - -
------------------------------------------------
$946(c) $513(d) $655(d)
======================================================================================================================
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 5, Uncertainties -- Electric
Environmental Matters.
c) This amount include Panhandle's estimated capital expenditures of $124
million in 2002, which includes expenditures associated with the Trunkline
LNG terminal expansion, for which an application was filed with the FERC in
December 2001, estimated at $8 million in 2002.
d) These amounts exclude Panhandle's estimated capital expenditures of $112
million in 2003 and $124 million in 2004, which include expenditures
associated with the Trunkline LNG terminal expansion, estimated at $33
million in 2003 and $66 million in 2004. CMS Energy is exploring the sale
of Panhandle. For further information, see Outlook section of the MD&A.
For further explanation of CMS Energy's planned investments for the years 2002
through 2004, see the Outlook section below.
MARKET RISK INFORMATION
CMS Energy is exposed to market risks including, but not limited to, changes in
interest rates, currency exchange rates, commodity prices and equity security
prices. CMS Energy's derivative activities are subject to the direction of the
Executive Oversight Committee, which is comprised of certain members of CMS
Energy's senior management, and its Risk Committee, which is comprised of CMS
Energy business unit managers and chaired by the CMS Chief Risk Officer. The
purpose of the risk management policy is to measure and limit CMS Energy's
overall energy commodity risk by implementing an enterprise-wide
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CMS Energy Corporation
policy across all CMS Energy business units. This allows CMS Energy to maximize
the use of hedges among its business units before utilizing derivatives with
external parties. 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 the Board of Directors. Management
employs established policies and procedures to manage its risks associated with
market fluctuations, including the use of various derivative instruments such as
futures, swaps, options and forward contracts. When management uses these
derivative instruments, it intends that an opposite movement in the value of the
hedged item would offset any losses incurred on the derivative instruments.
CMS Energy has performed sensitivity analyses to assess the potential loss in
fair value, cash flows and earnings based upon hypothetical 10 percent increases
and decreases in market exposures. Management does not believe that sensitivity
analyses alone provide an accurate or reliable method for monitoring and
controlling risks; therefore, CMS Energy and its subsidiaries rely on the
experience and judgment of senior management and traders to revise strategies
and adjust positions, as they deem necessary. Losses in excess of the amounts
determined in the sensitivity analyses could occur if market rates or prices
exceed the 10 percent shift used for the analyses.
COMMODITY PRICE RISK: 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
average 10 percent higher or lower, pretax operating income for the subsequent
nine months would increase or decrease by $1 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 September
30, 2002 . The analysis does not quantify short-term exposure to hypothetically
adverse price fluctuations in inventories or for commodity positions related to
trading activities.
Consumers enters into electric call options, gas fuel for generation call
options and swap contracts, 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 fuel for
generation call options and swap contracts are used to protect generation
activities against risk due to fluctuations in the market price of natural gas.
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 September 30, 2002, the fair value based on quoted future market prices of
electricity-related call option and swap contracts was $8 million. At September
30, 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 September 30, 2002, Consumers had an asset of $30 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 September 30, 2002, the fair value based on quoted
future market prices of gas supply-related call and put option contracts was $1
million. At September 30,
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CMS Energy Corporation
2002, assuming a hypothetical 10 percent adverse change in market prices, the
potential reduction in fair value associated with these contracts would be $0.3
million.
Consumers is also planning to purchase nitrogen oxide emission credits in the
years 2005 through 2008 to supplement its environmental compliance plan. The
cost of these credits based on today's market is estimated to be $6 million per
year, however, the market for nitrogen oxide emission credits is volatile and
the price could change significantly. Based on these estimated costs, a
hypothetical 10 percent adverse change in the market price would have a result
of increasing the cost of the credits by $2 million.
INTEREST RATE RISK: CMS Energy is exposed to interest rate risk resulting from
the issuance of fixed-rate and variable-rate debt, including interest rate risk
associated with Trust Preferred Securities, and from interest rate swaps. CMS
Energy uses a combination of fixed-rate and variable-rate debt, as well as
interest rate swaps to manage and mitigate interest rate risk exposure when
deemed appropriate, based upon market conditions. CMS Energy employs these
strategies to provide a balance between risk and the lowest cost of capital. At
September 30, 2002, the carrying amounts of long-term debt and Trust Preferred
Securities were $5.6 billion and $0.9 billion, respectively, with corresponding
fair values of $5.2 billion and $0.7 billion, respectively. Based on a
sensitivity analysis at September 30, 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 $7 million. In addition, based on a 10 percent adverse shift in
market interest rates, CMS Energy would have an exposure of approximately $365
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 its entire 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 September 30, 2002.
At September 30, 2002, the fair value of CMS Energy's floating to fixed interest
rate swaps with a notional amount of $294 million was $9 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.
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 first nine months of 2002, the mark-to-market adjustment for hedging was
approximately zero of the total net foreign currency translation adjustment of
$434 million of which approximately $400 million was related to the Argentine
currency translation adjustment. Based on a sensitivity analysis at September
30, 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 September 30, 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 September 30, 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.
52
CMS Energy Corporation
For a discussion of accounting policies related to derivative transactions, see
Note 8, Risk Management Activities and Financial Instruments, incorporated by
reference herein.
OUTLOOK
LIQUIDITY AND CAPITAL RESOURCES
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 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 discussed
above, for the remainder of 2002 and during 2003, CMS Energy has contractual
obligations and planned capital expenditures that would require substantial
amounts of cash. CMS Energy and its subsidiaries also have approximately $1.6
billion of publicly issued and credit facility debt maturing in 2003, including
the CMS Energy credit facilities described above. In addition, CMS Energy may
also become subject to liquidity demands pursuant to commercial commitments
under guarantees, indemnities and letters of credit as indicated above.
CMS Energy is addressing its near-to-mid-term liquidity and capital requirements
through a financial improvement plan, which involves the sale of non-strategic
and under-performing assets, reduced capital expenditures, cost reductions and
other measures. As noted elsewhere in this MD&A, CMS Energy has improved its
liquidity through asset sales, with a total of approximately $2.7 billion in
cash proceeds from such sales over the past two years. CMS Energy believes that
further targeted asset sales, together with further reductions in operating
expenses and capital expenditures, will also contribute to improved liquidity.
CMS Energy believes that, assuming the successful implementation of its
financial improvement plan, its current level of cash and borrowing capacity,
along with anticipated cash flows from operating and investing activities, will
be sufficient to meet its liquidity needs through 2003, including the
approximately $1.6 billion in 2003 debt maturities.
On November 26, 2002, CMS Energy's various bank groups waived delivery of
financial statements for the period ended September 30, 2002 until February 28,
2003. CMS Energy provided the banks with the required financial statements
before the waivers expired.
CMS Energy's January 15, 1994 indenture restricts CMS Energy from incurring
additional indebtedness when the debt ratio is in excess of 75 percent. CMS
Energy expects that the aggregate effect of non-cash charges to equity and the
reconsolidation of debt on the balance sheet anticipated to occur in the fourth
quarter of 2002 would result in a year-end debt ratio in excess of 75 percent.
In this event, CMS Energy and certain of its subsidiaries other than Consumers
will be restricted from incurring new indebtedness until this condition is
remedied. This restriction will not prevent CMS Energy from refinancing existing
indebtedness or incurring up to $1 billion in bank financing. This debt ratio
could be significantly reduced if CMS Energy decides to proceed with its sale of
Panhandle, its sale of CMS Field Services, other asset sales or other options
such as the securitization of additional assets at Consumers.
It should be noted that CMS Energy has historically met its liquidity needs
through a combination of operating and investing activities, including through
access to bank financing and the capital markets. As a result of the impact of
the re-audit and restatement, ratings downgrades and related changes in its
financial situation, CMS Energy's access to bank financing and the capital
markets and its ability to incur additional indebtedness may be restricted.
There can be no assurance that the financial improvement plan will be
successful, or that the necessary bank waivers will be obtained and the debt
ratio lowered. A failure to
53
CMS Energy Corporation
achieve any of these goals could have a material adverse effect on CMS Energy's
liquidity and operations. In such event, it would be required to consider the
full range of strategic measures available to companies in similar
circumstances.
CORPORATE OUTLOOK
CMS Energy announced in October 2001 significant changes in its business
strategy in order to strengthen its balance sheet, provide more transparent and
predictable future earnings, and lower its business risk by focusing its future
business growth primarily in North America. Specifically, CMS Energy announced
its plans to sell or optimize non-strategic and under-performing international
assets and discontinue its international energy distribution business. CMS
Energy also announced its plans to discontinue all new development outside North
America, which includes closing all non-U.S. development offices, except for
certain prior international commitments.
CMS Energy will continue to focus geographically on key growth areas where it
already has significant investments and opportunities. CMS Energy's focus will
be on North America, and on certain existing international operations and prior
commitments in the Middle East.
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
from asset sales, securitization proceeds and proceeds from LNG monetization out
of its $2.9 billion asset sales and balance sheet improvement program. 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, Consumers
and/or Panhandle.
In June 2002, CMS Energy announced its plans to sell CMS MST's performance
contracting subsidiary, CMS Viron. CMS MST has eliminated its speculative
trading business and reduced its workforce by approximately 25 percent.
In July 2002, CMS Energy began to undertake a series of initiatives to further
sharpen its business focus and reduce operating costs. These include relocating
the corporate headquarters from Dearborn, Michigan to Jackson, Michigan, which
will result in lower operating and information technology costs starting in
2003, changes to CMS Energy's employee benefit plans, and adjustments to the
CEO's compensation package, which will be based largely on the financial
performance of CMS Energy.
In August 2002, CMS Energy began exploring the sale of Panhandle and CMS Field
Services business units as part of its ongoing effort to strengthen its balance
sheet, improve credit ratings and enhance financial flexibility. The Panhandle
units to be considered for sale are Panhandle Eastern Pipe Line Company,
Trunkline Gas Company, Sea Robin, Pan Gas Storage and Panhandle's interests in
LNG Holdings, Guardian and Centennial. CMS Energy has begun assessing the
market's interest in purchasing this pipeline and field services businesses and
it is reviewing the financial, legal and regulatory issues associated with the
possible sale.
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
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CMS Energy Corporation
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 due March 2003. The combined sales will result in an
after-tax loss of approximately $82 million, which is included in discontinued
operations at September 30, 2002.
In October 2002, CMS Land executed a settlement agreement abandoning its 50
percent ownership interest in Bay Harbor Company, LLC, a real estate development
company located in the northwestern region of Michigan's lower peninsula. The
settlement agreement requires CMS Land to pay $16 million to Bay Harbor in
consideration for certain indemnities and past liabilities assumed by Bay
Harbor. CMS Land's investment in Bay Harbor at September 30, 2002 was $9
million.
DIVERSIFIED ENERGY OUTLOOK
NATURAL GAS TRANSMISSION OUTLOOK: Panhandle has a one-third interest in Guardian
Pipeline, L.L.C., which is currently constructing a 141-mile, 36-inch pipeline
from Illinois to southeastern Wisconsin for the transportation of natural gas
beginning late 2002. Upon completion of the project, Trunkline will operate and
maintain the pipeline. Panhandle also has a one-third interest in the Centennial
Pipeline LLC, which operates a 720-mile, 26-inch pipeline extending from the
U.S. Gulf Coast to Illinois for the transportation of interstate refined
petroleum products. The pipeline began commercial service in April 2002.
In April 2001, FERC approved Trunkline's rate settlement without modification.
The settlement resulted in Trunkline reducing its maximum rates in May 2001. The
reduction is expected to reduce revenues by approximately $2 million annually.
In October 2001, Trunkline LNG, in which Panhandle owns an interest through its
equity interest in LNG Holdings, announced the planned expansion of the Lake
Charles, Louisiana facility to approximately 1.2 bcf per day of sendout
capacity, up from its current sendout capacity of 630 million cubic feet per
day. The terminal's storage capacity will also be expanded to 9 bcf from its
current storage capacity of 6.3 bcf. The Commission Staff's Environmental
Assessment determined that the Trunkline LNG expansion facilities do not
constitute a major federal action significantly affecting the environment and
recommended certain compliance and mitigation measures. Comments on the
Environmental Assessment were filed on August 30, 2002. On August 27, 2002 the
FERC issued a "Preliminary Determination on Non-Environmental Issues"
recommending approval of the planned expansion project. The application for a
certificate of public convenience and necessity of the expansion is still
pending final FERC action. The expanded facility is currently expected to be in
operation by January 2006 pending final FERC approvals. The expansion
expenditures are currently expected to be funded by Panhandle loans or equity
contributions to LNG Holdings, which would be sourced by capital markets,
operating cash flows, or other funding.
In October 2001, CMS Energy and Sempra Energy announced an agreement to jointly
develop a major new LNG receiving terminal to bring much-needed natural gas
supplies into northwestern Mexico and southern California. Since the October
2001 announcement, CMS Energy has adjusted its role in the development of the
terminal since CMS Energy's top priority is to reduce debt and improve the
balance sheet, which will require restraint in capital spending. As a result,
Panhandle will not be an equity partner in the project, but is negotiating to
participate as the LNG plant operator and will also provide technical support
during the development of the project, which is currently estimated to commence
commercial operations in 2007.
55
CMS Energy Corporation
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 a consolidated
2001 tax loss to tax years 1996 through 1999 and obtain refunds of prior years
tax payments totaling $217 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 $41 million. This non-cash
reduction in AMT credit carryforwards has been reflected in the tax provision of
CMS Energy as of September 30, 2002.
CMS Energy has completed the goodwill impairment testing at Panhandle which
resulted in a $601 million pretax write-down ($369 million after-tax) in
accordance with SFAS No.142, reflected retroactively to the first quarter of
2002, as a cumulative effect of change in accounting for goodwill, shown in
discontinued operations. For further information, see Note 4, Goodwill.
In August of 2002, the FERC issued a NOPR concerning the management of funds
from a FERC-regulated subsidiary by a non-FERC regulated parent. The proposed
rule would establish limits on the amount of funds that could be swept from a
regulated subsidiary to a non-regulated parent under cash management programs.
The proposed rule would require written cash management arrangements that would
specify the duties and restrictions of the participants, the methods of
calculating interest and allocating interest income and expenses, and the
restrictions on deposits or borrowings by money pool members. These cash
management agreements would also require participants to provide documentation
of certain transactions. In the NOPR, the FERC proposed that to participate in a
cash management or money pool arrangement, FERC-regulated entities would be
required to maintain a minimum proprietary capital balance (stockholder's
equity) of 30 percent and both the FERC-regulated entity and its parent would be
required to maintain investment grade credit ratings.
INDEPENDENT POWER PRODUCTION OUTLOOK: CMS Energy's independent power production
subsidiary plans to complete the restructuring of its operations during 2002 and
into 2003 by narrowing the scope of its existing operations and commitments from
four regions to two regions: the U.S. 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. CMS Energy
is actively pursuing the sale, full 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.
MARKETING, SERVICES AND TRADING OUTLOOK: 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. A sale of CMS
MST's wholesale structured power and gas business is expected to be complete by
the first quarter of 2003. The sale of the company's non-core retail offices and
its energy conservation unit, CMS Viron, are expected to be complete by the
first quarter of 2003, however, management cannot make any assurances as to when
these asset sales will actually occur.
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CMS Energy Corporation
In September 2002, CMS MST sold its 50 percent equity interest in Enline Energy
Solutions LLC at book value. The proceeds received were immaterial.
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 as well as 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) the increased
competition in the market for transmission of natural gas to the Midwest causing
pressure on prices charged by Panhandle; 7) the impact of ratings downgrades on
CMS Energy's liquidity, costs of operating, current limited access to capital
markets, and cost of capital; and 8) actual amount of goodwill impairment and
related impact on earnings and balance sheet which could negatively impact CMS
Energy's borrowing capacity.
OTHER OUTLOOK
GAS INDEX PRICING REPORTING: On November 4, 2002, CMS Energy announced that it
is conducting an internal review of the natural gas trade information provided
by CMS MST and CMS Field Services to energy industry publications that compile
and report index prices. A preliminary analysis indicates that some employees
provided inaccurate information in the voluntary reports. CMS Energy and its
subsidiaries no longer provide natural gas trade information to energy industry
publications. CMS Energy has notified the appropriate regulatory and
governmental agencies of this review. On November 5, 2002, CMS Energy received
an information request from the Commodity Futures Trading Commission pursuant to
a prior subpoena relating to round-trip trading. The Commodity Futures Trading
Commission requested certain information regarding the employees involved in
providing the inaccurate natural gas trade data to industry publications as well
as details of the information provided. CMS Energy has produced documents and
information responsive to the November 5, 2002 request.
SEC INVESTIGATION: CMS Energy is cooperating with 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 the United States Attorneys Offices regarding investigations of these
trades and has received a number of shareholder class action lawsuits. 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: Eighteen separate civil lawsuits have been
filed in federal court in Michigan in connection with round-trip trading,
alleging (i) violation of Section 10(b) and Rule 10b-5 of the Securities
Exchange Act of 1934 ("Exchange Act") and (ii) violation of Section 20(a) of the
Exchange Act. All suits name Messrs. McCormick and Wright and CMS Energy as
defendants. Consumers Energy, Mr. Joos and Ms. Pallas are named as defendants on
certain of the suits. The cases will be consolidated into a single lawsuit.
These complaints generally seek unspecified damages based on allegations that
the defendants violated United
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States securities laws and regulations by making allegedly false and misleading
statements about the Company's business and financial condition. The Company
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 of CMS
Energy 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 is
seeking to elect two new members to its Board of Directors to serve as an
independent investigation 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: On July 11, 2002 and July 18, 2002, two Consumers employees filed
separate alleged class action lawsuits on behalf of the participants and
beneficiaries of the CMS Employees' Savings and Incentive Plan in the United
States District Court for the Eastern District of Michigan. CMS Energy,
Consumers and CMS MST are defendants in one action, and CMS Energy, Consumers,
and other alleged fiduciaries are defendants in the other. The complaints allege
various counts arising under the ERISA. The two cases will be consolidated into
a single lawsuit and a single consolidated amended complaint will be filed. CMS
Energy intends to vigorously defend against these actions. CMS Energy cannot
predict the outcome of this litigation.
TERRORIST ATTACKS: Since the September 11, 2001 terrorist attacks in the United
States, CMS Energy has increased security at substantially all facilities and
infrastructure, and will continue to evaluate security on an ongoing basis. CMS
Energy may be required to comply with federal and state regulatory security
measures promulgated in the future. As a result, CMS Energy anticipates that
increased operating costs related to security after September 11, 2001 could be
significant. It is not certain that any additional costs will be recovered in
Consumers' or Panhandle's rates.
OTHER: Rouge Steel Company, with whom DIG has contracted to sell steam for
industrial use and purchase blast furnace gas as fuel at prices significantly
less than the cost of natural gas, is considering altering certain of its
operational processes as early as mid-2004. These alterations could have an
adverse operational and financial impact on DIG by significantly reducing Rouge
Steel Company's demands for steam from DIG and its ability to provide DIG with
economical blast furnace gas. However, these alterations may result in
additional electric sales to Rouge Steel Company. CMS Energy is currently
assessing these potential operational and financial impacts and DIG is
evaluating alternatives to its current contractual arrangements with Rouge Steel
Company, but CMS Energy cannot predict the ultimate outcome of these matters at
this time.
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
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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
November 2002, 446 MW of generation services were being provided by such
suppliers. 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.
Stranded and Implementation Costs: The Customer Choice Act allows electric
utilities to recover the act's implementation costs and "net" Stranded Costs
(without defining the term). The act directs the MPSC to establish a method of
calculating "net" Stranded Costs and of conducting related true-up adjustments.
In December 2001, the MPSC adopted a methodology which calculated "net" Stranded
Costs as the shortfall between: (a) the revenue required to cover the costs
associated with fixed generation assets, generation-related regulatory assets,
and capacity payments associated with purchase power agreements, and (b) the
revenues received from customers under existing rates available to cover the
revenue requirement. Consumers has initiated an appeal at the Michigan Court of
Appeals related to the MPSC's December 2001 "net" Stranded Cost order, as a
result of the uncertainty associated with the outcome of the proceeding
described in the following paragraph.
According to the MPSC, "net" Stranded Costs are to be recovered from retail open
access customers through a Stranded Cost transition charge. Even though the MPSC
set Consumers' Stranded Cost transition charge at zero for calendar year 2000,
those costs for 2000 will be subject to further review in the context of the
MPSC's subsequent determinations of "net" Stranded Costs for 2001 and later
years. The MPSC authorized Consumers to use deferred accounting to recognize the
future recovery of costs determined to be stranded. 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. After a series
of appeals and hearings, 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 of all costs
associated with expenditures required by the Clean Air Act. Consumers, in a
separate filing, requested regulatory asset accounting treatment for its Clean
Air Act expenditures through 2003. The outcome of these proceedings before the
MPSC is uncertain at this time.
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.
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In Millions
--------------------------------------------------------------------------------------------------------------
Year Filed Year Incurred Requested Pending Allowed Disallowed
--------------------------------------------------------------------------------------------------------------
1999 1997 & 1998 $20 $ - $15 $5
2000 1999 30 - 25 5
2001 2000 25 - 20 5
2002 2001 8 8 - -
==============================================================================================================
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, as of September 2002, Consumers incurred and deferred as a
regulatory asset, $3 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 recovery, through the MISO of approximately $7
million in certain electric utility restructuring implementation costs related
to its former participation in the development of the Alliance RTO. However,
Consumers cannot predict the amounts it will be reimbursed by the MISO.
Rate Caps: The Customer Choice Act imposes certain limitations on electric rates
that could result in Consumers being unable to collect from 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, 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
these contracts are in effect through 2005. As of September 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
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October 2001, the new code of conduct was reaffirmed 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. The waivers denied included all
waivers associated with the appliance service plan program that has been offered
by Consumers for many years. Consumers has 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 is continuing to explore
its options, which may include seeking an appeal of the Michigan Court of
Appeals' ruling. 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.
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 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 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
anticipates that its after-tax earnings will increase by approximately $17
million in 2002, due to the recognition of a $26 million one time gain on the
sale of the electric transmission system. This one time gain 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,
contract transmission rates charged to Consumers will be fixed at current levels
through December 31, 2005, and subject to FERC ratemaking thereafter. MTH will
complete the capital program to expand the transmission system's
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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. For further information, see Note 5, Uncertainties, "Electric
Rate Matters -- Transmission."
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 proposal is subject to public comment until November 15, 2002 and
January 10, 2003 for certain standard market design issues. Consumers is
currently studying the effects of the proposed rulemaking and intends to file
comments with the FERC. 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.
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 could 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 are not currently quantifiable.
Wholesale Market Competition: In 1996, Detroit Edison gave Consumers its
four-year notice to terminate their joint operating agreements for the MEPCC.
Detroit Edison and Consumers restructured and continued certain parts of the
MEPCC control area and joint transmission operations, but expressly excluded any
merchant operations (electricity purchasing, sales, and dispatch operations). On
April 1, 2001, Detroit Edison and Consumers began separate merchant operations.
This opened Detroit Edison and Consumers to wholesale market competition as
individual companies. Consumers has successfully operated its independent
merchant system since April 1, 2001. Although Consumers cannot predict the
long-term financial impact of terminating these joint merchant operations, this
change places Consumers in the same competitive position as all other wholesale
market participants.
Wholesale Market Pricing: FERC authorizes Consumers to sell electricity at
wholesale market prices. In authorizing sales at market prices, the FERC
considers the seller's level of "market power," due to the seller's dominance of
generation resources and surplus generation resources in adjacent wholesale
markets. To continue its authorization to sell at market prices, Consumers filed
a traditional market
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dominance analysis and indicated its compliance therewith in October 2001. In
November 2001, the FERC issued an order modifying the traditional method of
determining market power. In September 2002, a Consumers' affiliate, CMS MST,
was required by the FERC to file an updated market power study to determine if
CMS MST or any of its affiliates, including Consumers, had market power. The
study, using FERC's modified method, found that neither CMS MST nor its
affiliates possess market power.
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 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. On November 7,
2002, the MPSC issued an order initiating the formal rulemaking proceeding.
Consumers 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 Basis of Presentation, and Note 5, 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) the need to make additional capital expenditures and
increase operating expenses for Clean Air Act compliance; 2) 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; 3)
uncertainties relating to the storage and ultimate disposal of spent nuclear
fuel and the successful operation of Palisades by NMC; 4) electric industry
restructuring issues, including those described above; 5) Consumers' ability to
meet peak electric demand requirements at a reasonable cost, without market
disruption, and successfully implement initiatives to reduce exposure to
purchased power price increases; 6) the recovery of electric restructuring
implementation costs; 7) Consumers new status as an electric transmission
customer and not as an electric transmission owner/operator; 8) sufficient
reserves for OATT rate refunds; 9) the effects of derivative accounting and
potential earnings volatility, and 10) Consumers' continuing ability to raise
funds at reasonable rates in order to meet the cash requirements of its electric
business. For further information about these trends or uncertainties, see Note
5, Uncertainties.
CONSUMERS' GAS UTILITY BUSINESS OUTLOOK
GROWTH: Over the next five years, Consumers expects gas deliveries, including
gas customer choice deliveries (excluding transportation to the MCV Facility and
off-system deliveries), to grow at an average rate of approximately one 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,
use of gas by independent power producers, changes in competitive and economic
conditions, and the level of natural gas consumption per customer.
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GAS RATE CASE: In June 2001, Consumers filed an application with the MPSC
seeking a $140 million distribution service rate increase. Contemporaneously
with this filing, Consumers requested partial and immediate relief in the annual
amount of $33 million. In October 2001, Consumers revised its filing to reflect
lower operating costs and requested a $133 million annual distribution service
rate increase. In December 2001, the MPSC authorized a $15 million annual
interim increase in distribution service revenues. In February 2002, Consumers
revised its filing to reflect lower estimated gas inventory prices and revised
depreciation expense and requested a $105 million 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. See Note 5, Uncertainties "Gas Rate Matters
-- Gas Rate Case" for further information.
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 subject is likely to remain the topic of
further study by the utilities in 2002 and 2003 and further consideration by the
MPSC. Consumers cannot predict the outcome of unbundling costs on its financial
results and conditions.
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 Consumer' arguments to the contrary, the Commission 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 6 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. Consumers has made no reservations for refunds in this matter.
If refunds were ordered they might include interest that would increase the
refund liability to more than the $3 million collected. 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) potential environmental costs at a number of sites,
including sites formerly housing manufactured gas plant facilities; 2) future
gas industry restructuring initiatives; 3) any initiatives undertaken to protect
customers against gas price increases; 4) an inadequate regulatory response to
applications for requested rate increases; 5) market and regulatory responses to
increases in gas costs, including a reduced average use per residential
customer; 6) increased costs for pipeline integrity and safety and homeland
security initiatives that are not recoverable on a timely basis from customers;
and 7) Consumers' continuing ability to raise funds at reasonable rates in order
to meet the cash requirements of its gas business. For further information about
these uncertainties, see Note 5, Uncertainties.
CONSUMERS' OTHER OUTLOOK
TAX LOSS ALLOCATION: 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 a
consolidated 2001 tax loss to tax years 1996 through 1999 and obtain refunds of
prior
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years tax payments totaling $217 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 $41 million. This
non-cash reduction in AMT credit carryforwards has been reflected in the tax
provision of CMS Energy as of September 30, 2002.
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."
SUBSEQUENT EVENTS
Subsequent to November 14, 2002, the date of filing CMS Energy's Form 10-Q for
the third quarter 2002, a number of material events have occurred. These
material events have been disclosed in CMS Energy's Form 10-K/A Amendment No. 2
for the fiscal year ended December 31, 2002, filed with the SEC on July 1, 2003,
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, each of which is 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 July 1, 2003, the date of filing CMS
Energy's Form 10-K/A Amendment No. 2 with the SEC.
DISCLOSURE 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 as of a date
within 90 days of the filing of this quarterly report on Form 10-Q/A. Based on
these evaluations, 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 and properly disclosed. 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.
LIQUIDITY AND CAPITAL RESOURCES
CMS ENERGY PARENT LEVEL LIQUIDITY
In July 2003, CMS Energy paid down $150 million principal amount of CMS Energy's
8.375% Reset Put Securities due 2013. As a result, CMS Energy recorded 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.
In July, 2003, CMS Energy issued $150 million of 3.375% convertible senior notes
due 2023 and $300 million of 7.75% senior notes due 2010. The securities,
offered in a private placement under Rule 144A of the Securities Act of 1933,
were purchased at closing by certain financial institutions as initial
purchasers.
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CMS Energy has granted the initial purchasers an option to purchase up to an
additional $50 million of the convertible senior notes for a period of 45 days
after closing. Closing on the sales of the notes occurred on July 16, 2003 for
the convertible senior notes and July 17, 2003 for the senior notes.
CMS Energy may redeem all or part of the senior notes at any time, for a price
equal to 100 percent of the principal amount of the senior notes to be redeemed
plus any accrued and unpaid interest, and additional amounts, if any, to the
redemption date. CMS Energy may redeem all or part of the convertible senior
notes on or after July 15, 2008, for a price equal to 100 percent of the
principal amount of the convertible senior notes to be redeemed plus any accrued
and unpaid interest, and additional amounts owed, if any, to the redemption
date.
Holders of the convertible senior notes will have the right to require CMS
Energy to repurchase all or any part of their convertible senior notes at a
repurchase price equal to 100 percent of the principal amount of the convertible
senior notes, plus accrued and unpaid interest and additional amounts, if any,
on July 15, 2008, July 15, 2013 and July 15, 2018.
Holders of the convertible senior notes may convert their notes prior to
maturity into shares of CMS Energy Common Stock under certain circumstances at a
conversion price of $10.671 per share (subject to adjustment in certain events).
The senior notes and convertible senior notes, as well as the underlying CMS
Energy Common Stock issuable upon conversion, have not been registered under the
Securities Act of 1933, although CMS Energy is contractually committed to
register the replacement senior notes and convertible senior notes, as well as
the CMS Energy Common Stock.
The approximately $433 million of net proceeds from these offerings will be
applied to retire a portion of debt outstanding under CMS Energy's Second
Amended and Restated Senior Credit Agreement and to redeem a portion of CMS
Energy's 6.75% Senior Notes due January 2004. If exercised, the proceeds from
the initial purchasers' option for the additional $50 million convertible senior
notes would be used to refinance existing indebtedness.
CORPORATE OUTLOOK
In July 2003, CMS Energy completed the sale of CMS Field Services to Cantera
Resources Inc. for approximately $112.6 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 2005 through 2009. The net sales proceeds of
approximately $100.4 million were used to reduce debt.
Effective June 30, 2003, CMS Energy completed the sale of CMS Viron to Chevron
Energy Solutions as part of its ongoing asset sale program.
CONSUMERS' ELECTRIC UTILITY BUSINESS OUTLOOK
Securitization: In June 2003, the MPSC issued a financing order authorizing the
issuance of $554 million of Securitization bonds. The order approved Consumers'
request to securitize costs associated with federal Clean Air Act expenditures,
retail open access implementation costs and expenses associated with the
issuance of the securitization bonds. The order also directed that the
securitization charges be designed such that retail open access customers would
pay a significantly smaller charge than would full
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service customers. On July 1, 2003, Consumers filed a petition for rehearing and
clarification of certain portions of the order with the MPSC, including the
portion dealing with the design of the securitization charges. Depending upon
the results and timing of the rehearing and if there are no court appeals and no
delays in the offering process, Consumers anticipates, but cannot assure, that
securitization bonds could be issued during the first quarter of 2004.
CONSUMERS' GAS UTILITY BUSINESS OUTLOOK
In July 2003, the MPSC approved a settlement agreement authorizing Consumers to
increase its GCR factor for the remainder of their current GCR plan year and to
implement a quarterly ceiling price adjustment mechanism. This order will
increase the likelihood that Consumers will recover the higher costs associated
with its gas purchases in a more timely manner.
ENTERPRISES' OUTLOOK
An affiliate of CMS Generation owns a 49.6 percent interest in the Loy Yang
Power Partnership ("LYPP"), which owns the 2,000 megawatts Loy Yang coal-fired
power project in Victoria, Australia. Due to unfavorable power prices in the
Australian market, the LYPP is not generating cash flow sufficient to meet its
operating and debt-service obligations. LYPP currently has A$500 million of term
bank debt that, pursuant to prior extensions from the lenders, was scheduled to
mature on July 11, 2003. A further extension was received such that this debt
now is scheduled to mature on November 11, 2003. The partners in LYPP (including
affiliates of CMS Generation, NRG Energy Inc. and Horizon Energy Australia
Investments) have been exploring the possible sale of the project (or control of
the project) or a restructuring of the finances of LYPP.
In July 2003, a conditional share sale agreement was executed by the LYPP
partners and partners of the Great Energy Alliance Corporation ("GEAC") to sell
the project to GEAC for about A$3.5 billion (approximately $2.4 billion in U.S.
dollars), including A$165 million (approximately $111 million in U.S. dollars)
for the project equity. The Australian Gas Light Company, the Tokyo Electric
Power Company, Inc. and a group of financial investors led by the Commonwealth
Bank of Australia formed GEAC earlier this year to explore the possible
acquisition of Loy Yang. The conditions to completion of the sale to GEAC
include consents from LYPP's lenders to a restructuring of the project's debt,
satisfactory resolution of regulatory issues and approvals, rulings on tax and
stamp duty obligations, and approvals from the investors in Horizon Energy
Australia Investments and the creditors committee of NRG Energy Inc. It should
be noted in particular that the Australian federal antitrust regulator has
indicated its concern with the potential anticompetitive effects of this
transaction. Closing is targeted for early September 2003, however, given the
regulatory uncertainties, the parties to the share sale agreement have agreed to
extend the date for resolution of the regulatory conditions to closing to not
later than November 2, 2003, assuming satisfactory interim resolution of other
closing conditions. The share sale agreement provides GEAC a period of
exclusivity while the conditions of the purchase are satisfied. The signing of
the share sale agreement allows GEAC to begin discussions with LYPP's lenders to
pursue a debt restructuring. The proceeds to CMS Energy for its equity share of
LYPP are estimated to be approximately $55 million. However, the ultimate net
proceeds to CMS Energy for its equity share in LYPP may be subject to reduction
based on the ultimate resolution of many of the factors described above as
conditions to completion of the sale, as well as closing adjustments and
transaction costs.
CMS Energy cannot predict whether this sale to GEAC will be consummated or, if
not, whether any of the other initiatives will be successful, and it is possible
that CMS Generation may lose all or a substantial part of its equity investment
in the LYPP. CMS Energy has previously written off its equity investment in the
67
CMS Energy Corporation
LYPP, 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 June 30, 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 CMS Energy to be in noncompliance with its
financing agreements.
In July 2003, CMS Energy and The National Power Company, through their joint
venture Jubail Energy Company (JEC), closed a $170 million limited recourse
project financing for construction of a co-generation plant designed to produce
up to 250 MW and 510 tons of industrial steam per hour. The plant will be
located within the Saudi Petrochemical Company's (SADAF) complex at the Jubail
Industrial City in Saudi Arabia. CMS Energy owns 25 percent of JEC, which has
entered into a long-term contract with SADAF for the entire output of the plant.
The plant is expected to be in operation in 2005 and will be the first
independent power plant in Saudi Arabia.
NEW ACCOUNTING STANDARD
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 is 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 mandatorily 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.
68
CMS ENERGY CORPORATION
Consolidated Statements of Income
(Unaudited)
(As Restated, See Note 10)
THREE MONTHS ENDED NINE MONTHS ENDED
September 30 2002 2001 2002 2001
-----------------------------------------------------------------------------------------------------------------
In Millions, Except Per Share Amounts
OPERATING REVENUE
Electric utility $ 774 $ 738 2,013 $ 2,026
Gas utility 134 150 1,002 928
Natural gas transmission 13 20 38 59
Independent power production 91 97 282 314
Marketing, services and trading 1,557 910 3,581 2,951
Other 10 (17) 63 (32)
-----------------------------------------
2,579 1,898 6,979 6,246
-----------------------------------------------------------------------------------------------------------------
OPERATING EXPENSES
Operation
Fuel for electric generation 87 67 264 210
Purchased and interchange power - Marketing, services and trading 1,067 349 1,993 770
Purchased and interchange power 157 222 348 488
Purchased power - related parties 143 155 416 399
Cost of gas sold - Marketing, services and trading 429 524 1,380 1,993
Cost of gas sold 71 92 708 716
Other 249 211 646 671
-----------------------------------------
2,203 1,620 5,755 5,247
Maintenance 49 46 157 161
Depreciation, depletion and amortization 89 89 297 285
General taxes 46 44 151 147
Reduced asset valuations - 228 - 228
-----------------------------------------
2,387 2,027 6,360 6,068
-----------------------------------------------------------------------------------------------------------------
OPERATING INCOME (LOSS)
Electric utility 175 69 406 294
Gas utility (14) (1) 68 80
Natural gas transmission (3) (31) (8) (20)
Independent power production 38 (124) 103 (70)
Marketing, services and trading 15 (8) 25 (40)
Other (19) (34) 25 (66)
-----------------------------------------
192 (129) 619 178
-----------------------------------------------------------------------------------------------------------------
OTHER INCOME (DEDUCTIONS)
Accretion expense (8) (10) (23) (28)
Gain (loss) on asset sales, net 13 - 61 (2)
Other, net (3) 14 (4) 26
-----------------------------------------
2 4 34 (4)
-----------------------------------------------------------------------------------------------------------------
EARNINGS (LOSS) BEFORE INTEREST AND TAXES 194 (125) 653 174
-----------------------------------------------------------------------------------------------------------------
FIXED CHARGES
Interest on long-term debt 109 96 305 307
Other interest 5 18 19 46
Capitalized interest (5) (5) (12) (32)
Preferred dividends - - 1 1
Preferred securities distributions 18 25 68 71
-----------------------------------------
127 134 381 393
-----------------------------------------------------------------------------------------------------------------
INCOME (LOSS) BEFORE INCOME TAXES AND MINORITY INTERESTS 67 (259) 272 (219)
INCOME TAXES (BENEFITS) 55 (84) 130 (79)
MINORITY INTERESTS - 1 1 2
-----------------------------------------
INCOME (LOSS) FROM CONTINUING OPERATIONS 12 (176) 141 (142)
INCOME (LOSS) FROM DISCONTINUED OPERATIONS, NET OF TAX
BENEFIT OF $7 AND $101 IN 2002, AND TAX BENEFIT OF $25 AND
TAX EXPENSE OF $14 IN 2001, RESPECTIVELY 24 (202) (154) (154)
-----------------------------------------
INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE 36 (378) (13) (296)
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING FOR DERIVATIVE
INSTRUMENTS, NET OF TAX EXPENSE OF $1, $-, $10 AND
$6, RESPECTIVELY 1 - 18 9
-----------------------------------------
CONSOLIDATED NET INCOME (LOSS) $ 37 $ (378) $ 5 $ (287)
=================================================================================================================
THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
69
(AS RESTATED, SEE NOTE 10)
THREE MONTHS ENDED
SEPTEMBER 30 2002 2001
----------------------------------------------------------------------------------------------------------------------------
In Millions, Except Per Share Amounts
CMS ENERGY
NET INCOME (LOSS)
Net Income (Loss) Available to Common Stock $ 37 $ (378)
========================
BASIC EARNINGS PER AVERAGE COMMON SHARE
Income (Loss) from Continuing Operations $ 0.08 $ (1.33)
Income (Loss) from Discontinued Operations 0.17 (1.52)
Income from Cumulative Effect of Change in Accounting 0.01 -
------------------------
Net Income (Loss) Attributable to Common Stock $ 0.26 $ (2.85)
========================
DILUTED EARNINGS PER AVERAGE COMMON SHARE
Income (Loss) from Continuing Operations $ 0.08 $ (1.33)
Income (Loss) from Discontinued Operations 0.17 (1.52)
Income from Cumulative Effect of Change in Accounting 0.01 -
------------------------
Net Income (Loss) Attributable to Common Stock $ 0.26 $ (2.85)
========================
DIVIDENDS DECLARED PER COMMON SHARE $ 0.18 $ 0.365
----------------------------------------------------------------------------------------------------------------------------
(AS RESTATED, SEE NOTE 10)
NINE MONTHS ENDED
SEPTEMBER 30 2002 2001
--------------------------------------------------------------------------------------------------------------------------
In Millions, Except Per Share Amounts
CMS ENERGY
NET INCOME (LOSS)
Net Income (Loss) Available to Common Stock $ 5 $ (287)
======================
BASIC EARNINGS PER AVERAGE COMMON SHARE
Income (Loss) from Continuing Operations $ 1.03 $ (1.09)
Income (Loss) from Discontinued Operations (1.12) (1.18)
Income from Cumulative Effect of Change in Accounting 0.13 0.07
----------------------
Net Income (Loss) Attributable to Common Stock $ 0.04 $ (2.20)
======================
DILUTED EARNINGS PER AVERAGE COMMON SHARE
Income (Loss) from Continuing Operations $ 1.03 $ (1.09)
Loss from Discontinued Operations (1.12) (1.18)
Income from Cumulative Effect of Change in Accounting 0.13 0.07
----------------------
Net Income (Loss) Attributable to Common Stock $ 0.04 $ (2.20)
======================
DIVIDENDS DECLARED PER COMMON SHARE $ 0.91 $ 1.095
--------------------------------------------------------------------------------------------------------------------------
THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
70
CMS Energy Corporation
CMS ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(AS RESTATED, SEE NOTE 10)
NINE MONTHS ENDED
SEPTEMBER 30 2002 2001
------------------------------------------------------------------------------------------------------------------------------------
In Millions
CASH FLOWS FROM OPERATING ACTIVITIES
Consolidated net income (loss) $ 5 $ (287)
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation, depletion and amortization (includes nuclear
decommissioning of $5 and $5, respectively) 297 285
Reduced asset valuations - 228
Discontinued operations (Note 2) 127 187
Capital lease and debt discount amortization 14 7
Accretion expense 23 28
Deferred income taxes and investment tax credit (294) 36
Undistributed earnings from related parties (71) (37)
(Gain) loss on the sale of assets (61) 2
Cumulative effect of an accounting change (18) (9)
Changes in other assets and liabilities:
Decrease in accounts receivable and accrued revenues 322 393
Increase in inventories (47) (321)
Decrease in accounts payable and accrued expenses (130) (554)
Changes in other assets and liabilities 166 223
----------------------------
Net cash provided by operating activities 333 181
------------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (excludes assets placed under capital lease) (538) (848)
Investments in partnerships and unconsolidated subsidiaries (49) (165)
Cost to retire property, net (53) (73)
Investment in Electric Restructuring Implementation Plan (6) (9)
Investments in nuclear decommissioning trust funds (5) (5)
Proceeds from nuclear decommissioning trust funds 19 21
Proceeds from sale of assets 1,533 122
Other (17) (2)
----------------------------
Net cash provided by (used in) investing activities 884 (959)
------------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from notes, bonds, and other long-term debt 726 1,771
Proceeds from trust preferred securities - 125
Issuance of common stock 362 334
Retirement of bonds and other long-term debt (1,453) (1,050)
Retirement of trust preferred securities (331) -
Repurchase of common stock - (5)
Payment of common stock dividends (124) (140)
Decrease in notes payable, net (163) (250)
Payment of capital lease obligations (11) (17)
Other financing - 2
----------------------------
Net cash provided by (used in) financing activities (994) 770
-------------------------------------------------------------- ---------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND TEMPORARY CASH INVESTMENTS 223 (8)
CASH AND TEMPORARY CASH INVESTMENTS, BEGINNING OF PERIOD 127 141
----------------------------
CASH AND TEMPORARY CASH INVESTMENTS, END OF PERIOD $ 350 $ 133
====================================================================================================================================
71
CMS Energy Corporation
(AS RESTATED, SEE NOTE 10)
NINE MONTHS ENDED
SEPTEMBER 30 2002 2001
------------------------------------------------------------------------------------------------------------------------------------
OTHER CASH FLOW ACTIVITIES AND NON-CASH INVESTING AND FINANCING ACTIVITIES WERE: IN MILLIONS
CASH TRANSACTIONS
Interest paid (net of amounts capitalized) $ 326 $ 295
Income taxes paid (net of refunds) (42) (6)
Pension and OPEB cash contributions 126 103
NON-CASH TRANSACTIONS
Nuclear fuel placed under capital lease $ - $ 13
Other assets placed under capital lease 50 23
====================================================================================================================================
All highly liquid investments with an original maturity of three months or less
are considered cash equivalents.
THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
72
CMS ENERGY CORPORATION
CONSOLIDATED BALANCE SHEETS
(AS RESTATED, SEE NOTE 10)
ASSETS SEPTEMBER 30 SEPTEMBER 30
2002 DECEMBER 31 2001
(UNAUDITED) 2001 (UNAUDITED)
------------------------------------------------------------------------------------------------------------------------------------
In Millions
PLANT AND PROPERTY (AT COST)
Electric utility $ 7,504 $ 7,661 $ 7,513
Gas utility 2,692 2,593 2,566
Natural gas transmission 208 205 201
Independent power production 699 916 888
Other 125 110 88
---------------------------------------
11,228 11,485 11,256
Less accumulated depreciation, depletion and amortization 6,060 6,158 6,086
---------------------------------------
5,168 5,327 5,170
Construction work-in-progress 466 521 463
---------------------------------------
5,634 5,848 5,633
------------------------------------------------------------------------------------------------------------------------------------
INVESTMENTS
Independent power production 703 714 753
Natural gas transmission 176 577 597
Midland Cogeneration Venture Limited Partnership 370 300 296
First Midland Limited Partnership 250 253 249
Other 74 117 118
---------------------------------------
1,573 1,961 2,013
------------------------------------------------------------------------------------------------------------------------------------
CURRENT ASSETS
Cash and temporary cash investments at cost, which approximates market 350 127 133
Accounts receivable, notes receivable and accrued revenue, less
allowances of $5, $5 and $6, respectively 102 219 165
Accounts receivable - Marketing, services and trading,
less allowances of $9, $9 and $10, respectively 276 295 300
Accounts receivable and notes receivable - related parties 103 190 153
Inventories at average cost
Gas in underground storage 635 590 617
Materials and supplies 87 89 84
Generating plant fuel stock 49 52 49
Assets held for sale 338 471 518
Price risk management assets 211 327 384
Prepayments and other 139 200 131
---------------------------------------
2,290 2,560 2,534
------------------------------------------------------------------------------------------------------------------------------------
NON-CURRENT ASSETS
Regulatory Assets
Securitized costs 699 717 710
Postretirement benefits 191 209 214
Abandoned Midland Project 11 12 12
Other 173 167 169
Assets held for sale 2,249 3,480 3,430
Price risk management assets 276 368 329
Nuclear decommissioning trust funds 530 581 568
Notes receivable - related party 203 177 163
Notes receivable 126 130 137
Other 442 565 636
---------------------------------------
4,900 6,406 6,368
---------------------------------------
TOTAL ASSETS $14,397 $16,775 $16,548
====================================================================================================================================
73
STOCKHOLDERS' INVESTMENT AND LIABILITIES (AS RESTATED, SEE NOTE 10)
September 30 SEPTEMBER 30
2002 December 31 2001
(Unaudited) 2001 (Unaudited)
--------------------------------------------------------------------------------------------------------------
In Millions
CAPITALIZATION
Common stockholders' equity
Common stock, authorized 250.0 shares; outstanding 144.1 shares,
133.0 shares and 132.6 shares, respectively $ 1 $ 1 $ 1
Other paid-in-capital 3,619 3,257 3,265
Other comprehensive loss (721) (269) (300)
Retained deficit (1,070) (951) (790)
--------------------------------------
$ 1,829 $ 2,038 $ 2,176
Preferred stock of subsidiary 44 44 44
Company-obligated convertible Trust Preferred Securities
of subsidiaries (a) 393 694 694
Company-obligated mandatorily redeemable preferred securities
of Consumers' subsidiaries (a) 490 520 520
Long-term debt 5,648 5,840 6,222
Non-current portion of capital leases 110 71 61
--------------------------------------
8,514 9,207 9,717
-------------------------------------------------------------------------------------------------------------
MINORITY INTERESTS 12 24 28
--------------------------------------
CURRENT LIABILITIES
Current portion of long-term debt and capital leases 601 1,016 801
Notes payable 235 416 153
Accounts payable 308 359 360
Accounts payable - Marketing, services and trading 170 236 144
Accrued interest 114 135 142
Accrued taxes 259 111 42
Accounts payable - related parties 56 54 62
Liabilities held for sale 317 639 553
Price risk management liabilities 180 367 468
Current portion of purchase power contracts 29 24 22
Current portion of gas supply contract obligations 24 22 22
Deferred income taxes 11 49 6
Other 243 243 283
--------------------------------------
2,547 3,671 3,058
-------------------------------------------------------------------------------------------------------------
NON-CURRENT LIABILITIES
Postretirement benefits 306 356 331
Deferred income taxes 570 824 718
Deferred investment tax credit 92 102 104
Regulatory liabilities for income taxes, net 282 276 270
Liabilities held for sale 1,321 1,376 1,420
Price risk management liabilities 178 287 278
Gas supply contract obligations 246 266 271
Power purchase agreement - MCV Partnership 30 52 61
Other 299 334 292
--------------------------------------
3,324 3,873 3,745
-------------------------------------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES (Notes 1 and 5)
TOTAL STOCKHOLDERS' INVESTMENT AND LIABILITIES $ 14,397 $ 16,775 $ 16,548
=============================================================================================================
(a) FOR FURTHER DISCUSSION, SEE NOTE 6 OF THE CONDENSED NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS.
THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
74
CMS ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS' EQUITY
(UNAUDITED)
(AS RESTATED, SEE NOTE 10)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 2002 2001 2002 2001
------------------------------------------------------------------------------------------------------------------------------
In Millions
COMMON STOCK
At beginning and end of period $ 1 $ 1 $ 1 $ 1
------------------------------------------------------------------------------------------------------------------------------
OTHER PAID-IN CAPITAL
At beginning of period 3,317 3,264 3,257 2,936
Common stock repurchased - (5) - (5)
Common stock reacquired (1) - (2) -
Common stock issued 303 6 364 334
----------------------------------------
At end of period 3,619 3,265 3,619 3,265
------------------------------------------------------------------------------------------------------------------------------
OTHER COMPREHENSIVE INCOME (LOSS)
Investments
At beginning of period (7) (4) (5) (2)
Unrealized gain (loss) on investments (a) 1 (1) (1) (3)
----------------------------------------
At end of period (6) (5) (6) (5)
Derivative Instruments (c)
At beginning of period (b) (29) (24) (31) 13
Unrealized gain (loss) on derivative instruments (a) (21) (15) (22) (44)
Reclassification adjustments included in consolidated net income (loss) (a) 2 - 5 (8)
----------------------------------------
At end of period (48) (39) (48) (39)
------------------------------------------------------------------------------------------------------------------------------
FOREIGN CURRENCY TRANSLATION
At beginning of period (650) (253) (233) (206)
Change in foreign currency translation (a) (17) (3) (434) (50)
----------------------------------------
At end of period (667) (256) (667) (256)
------------------------------------------------------------------------------------------------------------------------------
RETAINED EARNINGS (DEFICIT)
At beginning of period (1,080) (316) (951) (313)
Consolidated net income (loss) (a) 37 (378) 5 (287)
Common stock dividends declared (27) (96) (124) (190)
----------------------------------------
At end of period (1,070) (790) (1,070) (790)
----------------------------------------
TOTAL COMMON STOCKHOLDERS' EQUITY $ 1,829 $ 2,176 $ 1,829 $ 2,176
==============================================================================================================================
(a) Disclosure of Comprehensive Income (Loss):
Investments
Unrealized gain (loss) on investments, net of tax of
$(1), $1, $- and $1, respectively $ 1 $ (1) $ (1) $ (3)
Derivative Instruments
Unrealized loss on derivative instruments,
net of tax of $3, $2, $2 and $13, respectively (21) (15) (22) (44)
Reclassification adjustments included in consolidated net income (loss),
net of tax of $(2), $-, $(3) and $4, respectively 2 - 5 (8)
Foreign currency translation, net (17) (3) (434) (50)
Consolidated net income (loss) 37 (378) 5 (287)
----------------------------------------
Total Consolidated Comprehensive Income (Loss) $ 2 $ (397) $ (447) $ (392)
========================================
(b) Nine months ended September 30, 2001 is the cumulative effect of change in
accounting principle, net of $(8) tax (Note 1).
(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 $ 1 $ (6) $ (8) $ -
Cumulative effect of change in accounting for derivative instruments - - - 5
Unrealized gain (loss) on derivative instruments 1 (3) 7 (15)
Reclassification adjustments included in net income 2 (1) 5 -
----------------------------------------
At the end of the period $ 4 $(10) $ 4 $(10)
========================================
Taweelah:
At the beginning of the period $ - $ - $ - $ -
Unrealized gain (loss) on derivative instruments (24) - (24) -
----------------------------------------
At the end of the period $ (24) $ - $ (24) $ -
========================================
THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
75
CMS Energy Corporation
CMS ENERGY CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
CMS Energy's consolidated financial statements for the quarterly periods ended
September 30, 2002 and 2001 have been restated, as discussed in Note 10,
Restatement, pursuant to audit adjustments resulting from the re-audit of the
consolidated financial statements for the years 2001 and 2000, as well as,
completion of its restatement of the consolidated financial statements for the
quarters of 2002 and 2001.
Except for the addition of Notes 10, 11, 12 and 13 the following notes to the
consolidated financial statements have generally only been modified for the
effects of the restatement. This document should be read in conjunction with CMS
Energy's Form 10-K/A Amendment No. 2 for the fiscal year ended December 31,
2002, CMS Energy's Form 10-Q for the quarterly period ended March 31, 2003 and
CMS Energy's Form 8-K, each of which is incorporated by reference herein, and
were filed with the SEC on July 1, 2003, May 14, 2003 and June 24, 2003,
respectively.
MODIFIED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
In May 2002, as a result of certain financial reporting issues surrounding
round-trip trading transactions at CMS MST, CMS Energy announced that it would
restate its consolidated financial statements for 2000 and 2001 to eliminate the
effects of round-trip energy trades and form a Special Committee to investigate
these trades. Following this announcement, 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 were completed. As a
result, Ernst & Young began the process of re-auditing CMS Energy's consolidated
financial statements for each of the fiscal years ended December 31, 2001 and
December 31, 2000. Although Arthur Andersen's notification did not apply to
separate, audited financial statements of Consumers and Panhandle for the
applicable years, the re-audit did include audit work at Consumers and Panhandle
for these years.
In connection with Ernst & Young's re-audit of the financial statements for the
fiscal years ended December 31, 2001 and December 31, 2000, CMS Energy has made,
in consultation with Ernst & Young, 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, which affect the results of the
quarterly periods within 2001 and 2002. Therefore, the consolidated financial
statements for the quarters of 2001, the years ended December 31, 2001 and 2000,
and the quarters of 2002 have been restated from amounts previously reported. At
76
CMS Energy Corporation
the time it adopted the accounting treatment for these items, CMS Energy
believed that such accounting was appropriate under accounting principles
generally accepted in the United States.
A summary of the principal effects of the restatement on CMS Energy's
consolidated financial statements for the quarterly periods ended March 31, June
30, and September 30, 2002 and are contained in Note 10, Restatement, and
unaudited restated financial statements for the first and second quarters of
2002, with comparable restated periods for 2001, are contained in Note 12,
Restated Financial Statements for First and Second Quarters, in the notes to the
consolidated financial statements.
These interim Consolidated Financial Statements have been prepared by CMS Energy
in accordance with SEC rules and regulations, and reflect all normal recurring
adjustments, which in the opinion of management, are necessary for the fair
presentation of the results of the interim periods presented. In accordance with
SEC rules and regulations, certain information and footnote disclosures normally
included in full year financial statements prepared in accordance with
accounting principles generally accepted in the United States have been
condensed or omitted. Certain prior year amounts have been reclassified to
conform to the presentation in the current year. The Condensed Notes to
Consolidated Financial Statements and the related Consolidated Financial
Statements should be read in conjunction with the Consolidated Financial
Statements and Notes to Consolidated Financial Statements contained in CMS
Energy's Form 10-K for the year ended December 31, 2001. Due to the seasonal
nature of CMS Energy's operations, the results as presented for this interim
period are not necessarily indicative of results to be achieved for the fiscal
year.
1: CORPORATE STRUCTURE AND BASIS OF PRESENTATION
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.
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. For the three and nine months ended September 30, 2002,
undistributed equity earnings were $14 million and $71 million, respectively
compared to $40 million and $37 million for the three and nine months ended
September 30, 2001. 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 judgments, 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
materially differ from those estimates.
The recording of estimated liabilities for contingent losses within the
financial statements is guided by the principles in SFAS No. 5. 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
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CMS Energy Corporation
amount can be reasonably estimated. CMS Energy has used this accounting
principle to record estimated liabilities discussed in Note 5, Uncertainties.
UTILITY REGULATION: Consumers accounts for the effects of regulation based on
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 and, as a
result, discontinued application of SFAS No. 71 for the electric supply portion
of its business. Discontinuation of SFAS No. 71 for the electric supply portion
of Consumers' business resulted in Consumers reducing the carrying value of its
Palisades plant-related assets by approximately $535 million and establishing a
regulatory asset for a corresponding amount. According to current accounting
standards, Consumers can continue to carry its electric supply-related
regulatory assets if legislation or an MPSC rate order allows the collection of
cash flows to recover these regulatory assets from its regulated distribution
customers. As of September 30, 2002, Consumers had a net investment in electric
supply facilities of $1.426 billion included in electric plant and property. See
Note 5, Uncertainties, "Consumers Electric Rate Matters -- Electric
Restructuring."
IMPLEMENTATION OF SFAS NO. 133: 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 hedge criteria, in which case the changes in fair value
would be reflected in other comprehensive income. CMS Energy 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.
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.
The financial statement impact of recording the SFAS No. 133 transition
adjustment on January 1, 2001 is as follows:
---------------------------------------------------------------------------------------
In Millions
---------------------------------------------------------------------------------------
Fair value of derivative assets $35
Fair value of derivative liabilities 14
Increase in accumulated other comprehensive income, net of tax 7
---------------------------------------------------------------------------------------
Consumers believes that certain of its electric capacity and energy contracts do
not qualify as derivatives due to the lack of an active energy market 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 purchase power agreement with the MCV,
could be material to the financial statements.
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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 accounted for these types of contracts as derivatives that
qualified for the normal purchase exception of SFAS No. 133 and, therefore, did
not record these contracts on the balance sheet at fair value. 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, 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.
As of September 30, 2002, Consumers recorded a total of $5 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.
For further discussion of derivative activities, see Note 5, Uncertainties,
"Other Consumers' Electric Utility Uncertainties -- Derivative Activities" and
"Other Consumers' Gas Utility Uncertainties -- Derivative Activities".
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
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CMS Energy Corporation
fluctuations on transactions denominated in a currency other than the functional
currency, except those that are hedged, are included in determining net income.
RECLASSIFICATIONS: CMS Energy has reclassified certain prior year amounts for
comparative purposes. For the three and nine months ended September 30, 2002 and
2001, CMS Energy reclassified a portion of cost of gas sold in 2001 to other
operating expenses, reclassified various operations to discontinued operations,
and reclassified the gain on the sale of CMS Oil and Gas' Equatorial Guinea
properties to discontinued operations. These reclassifications did not affect
consolidated net income for the years presented.
RESTRUCTURING AND OTHER COSTS: CMS Energy began a series of initiatives in the
aftermath of CMS Energy's round-trip trading disclosure and the sharp drop of
the company's stock price. Significant expenses associated with these
initiatives have been incurred and are considered restructuring and other costs.
These actions include: termination of five officers, 18 CMS Field Services
employees and 37 CMS MST trading group employees, renegotiating a number of debt
agreements, responding to many investigation and litigation matters, re-audit of
the 2000 and 2001 financial statements and plans to relocate the corporate
headquarters to Jackson, Michigan.
Restructuring and other costs for the year-to-date September 30, 2002, which are
reported in operating expenses ($41 million) and fixed charges ($12 million)
includes:
o Involuntary termination benefits of $17 million for officers and
employees.
o Consulting and restructuring fees of $12 million to assist CMS
Energy to arrange credit facilities related to the July 2002 debt
renegotiations.
o The $12 million of expense associated with responding to and/or
defending against investigations and lawsuits related to round-trip
trading. These expenses could total $21 million for attorneys' fees and
costs. Potential insurance proceeds may total $12 million, reducing
these expenses to $9 million.
o Expenses for future rentals of $7 million have been accrued in
connection with relocating the corporate headquarters to Jackson,
Michigan. The relocation is expected to be complete by June 2003.
o Other expenses, including the cost of re-auditing 2000 and 2001 total
$5 million.
Of the above $53 million, $12 million has been paid for consulting and
restructuring fees and $10 million has been paid for severance and benefits as
of September 30, 2002.
Additional restructuring and other costs are expected in the fourth quarter of
2002 of approximately $5 million related to relocating the corporate
headquarters, terminating approximately 30 employees, and additional legal
expenses for litigation issues. In the first half of 2003, restructuring and
other costs related to relocating employees and other headquarters expenses are
expected to be $2 million. The relocation is expected to occur between March and
June 2003.
TAX LOSS ALLOCATION: 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 a
consolidated 2001 tax loss to tax years 1996 through 1999 and obtain refunds of
prior years tax payments totaling $217 million. The tax loss carryback, however,
resulted in a
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CMS Energy Corporation
reduction in AMT credit carryforwards that previously had been recorded by CMS
Energy as deferred tax assets in the amount of $41 million. This non-cash
reduction in AMT credit carryforwards has been reflected in the tax provision of
CMS Energy as of September 30, 2002.
ACCOUNTING FOR HEADQUARTERS BUILDING LEASE: 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.
Consumers' current headquarters building lease expires in June 2003. The new
office building lessor has committed to fund up to $65 million for construction
of the building, which is due to be completed during March 2003. Consumers is
acting as the construction agent of the lessor for this project. During
construction, the lessor has a maximum recourse of 89.9 percent against
Consumers in the event of certain defaults, which Consumers believes are
unlikely. For several events of default, primarily bankruptcy or intentional
misapplication of funds, there could be full recourse for the amounts expended
by the lessor at that time. The agreement also includes a common change in
control provision, which could trigger full payment of construction costs by
Consumers. As a result of this provision, Consumers elected to classify this
lease as a capital lease during the second quarter of 2002. This classification
represents the total obligation of Consumers under this agreement. As such,
Consumers' balance sheet as of September 30, 2002, reflects a capital lease
asset and an offsetting non-current liability equivalent to the cost of
construction at that date of $45 million.
EITF ISSUE NO. 02-3, "RECOGNITION AND REPORTING OF GAINS AND LOSSES ON ENERGY
TRADING CONTRACTS UNDER EITF ISSUES NO. 98-10 AND 00-17": In September 2002, the
EITF reaffirmed the consensus originally reached in June 2002 that requires all
gains and losses, including mark-to-market gains and losses and physical
settlements, related to energy trading activities within the scope of EITF Issue
No. 98-10 be presented as a net amount in the income statement. This consensus
is applicable to financial statement periods ending after July 15, 2002 and
requires the reclassification of comparable reporting periods.
At the October 25, 2002 meeting, the EITF reached a 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 25, 2002. As a
result of these recent changes, CMS Energy will evaluate its existing energy
contracts to determine if any changes in the method of reporting the results of
these contracts will be required effective January 1, 2003.
SFAS NO. 142, GOODWILL AND OTHER INTANGIBLE ASSETS: SFAS No. 142, issued in July
2001, requires that goodwill and other intangible assets no longer be amortized
to earnings, but instead be reviewed for impairment on an annual basis. Goodwill
represents the excess of the fair value of the net assets of acquired companies
and was amortized using the straight-line method, up to a forty-year life,
through December 31, 2001. Effective January 1, 2002, CMS Energy adopted SFAS
No. 142 (see Note 4, Goodwill).
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CMS Energy Corporation
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 that long-lived assets be
measured at the lower of either the carrying amount or 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, has resulted in CMS Energy accounting for
impairments or disposal of long-lived assets under the provisions of SFAS No.
144, but has not changed the accounting used for previous asset impairments or
disposals.
2: 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 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'
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 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 at September
30, 2002.
In June 2002, CMS Energy announced its plan to sell CMS MST's energy performance
contracting subsidiary, CMS Viron. CMS Viron enables building owners to improve
their facilities with equipment upgrades and retrofits and finance the work with
guaranteed energy and operational savings. CMS Viron's strongest markets are in
the mid Atlantic, Midwest and California. CMS MST, upon announcing its intention
to put CMS Viron up for sale, was required to measure the assets and liabilities
of CMS Viron at the lower of the carrying value or the fair value less cost to
sell in accordance with SFAS No. 144. After evaluating all of the relevant facts
and circumstances including third-party bid data and liquidation analysis, an
impairment charge of $6 million, net of tax, was reflected as an estimated loss
on discontinued operations in accordance with the provisions of SFAS No. 144.
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 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)
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CMS Energy Corporation
in discontinued operations.
In May 2002, CMS Energy closed on the sale of CMS Oil and Gas' coalbed 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 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 Equatorial Guinea properties of $497 million
($310 million, net of tax) is included in discontinued operations.
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.
The summary of balance sheet information below represents those entities that,
as of September 30, 2002, are still in the disposal process, including
Panhandle, CMS Viron, Field Services, and International Energy Distribution. The
assets and liabilities of the discontinued operations are shown as separate
components in the consolidated balance sheets of CMS Energy.
In Millions
----------------------------------------------------------------------------------------------------------------
Restated Restated
September 30 2002 2001
----------------------------------------------------------------------------------------------------------------
ASSETS
Cash $ 60 $ 62
Accounts receivable, net 139 300
Materials and supplies 86 62
Other 53 94
----------------------------------------------------------------------------------------------------------------
Total Current Assets Held For Sale $ 338 $ 518
----------------------------------------------------------------------------------------------------------------
Property, plant and equipment, net $ 1,958 $ 2,466
Unconsolidated investments 104 83
Goodwill 136 752
Other 51 129
----------------------------------------------------------------------------------------------------------------
Total Non-Current Assets Held For Sale $ 2,249 $ 3,430
----------------------------------------------------------------------------------------------------------------
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CMS Energy Corporation
In Millions
----------------------------------------------------------------------------------------------------------------
Restated Restated
September 30 2002 2001
----------------------------------------------------------------------------------------------------------------
LIABILITIES
Accounts payable $ 95 $ 188
Current portion of long-term debt 3 1
Accrued taxes 16 30
Other current liabilities 203 334
----------------------------------------------------------------------------------------------------------------
Total Current Liabilities Held For Sale $ 317 $ 553
----------------------------------------------------------------------------------------------------------------
Long-term debt $1,155 $1,305
Minority interest 91 81
Other non-current liabilities 75 34
----------------------------------------------------------------------------------------------------------------
Total Non-Current Liabilities Held For Sale $1,321 $1,420
----------------------------------------------------------------------------------------------------------------
Revenues from such operations were $653 million and $1,121 million for the nine
months ended September 30, 2002 and 2001, 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 income (loss) related
to discontinued operations includes a reduction in asset values, a provision for
anticipated closing costs, and a portion of CMS Energy's interest expense.
Interest expense of $55 million and $73 million for the nine months ended
September 30, 2002 and 2001, respectively, has been allocated to discontinued
operations based on the ratio of total capital of each discontinued operation to
that of CMS Energy. See the table below for income statement components of the
discontinued operations.
In Millions
----------------------------------------------------------------------------------------------------------------
Restated Restated
Nine months ended September 30 2002 2001
----------------------------------------------------------------------------------------------------------------
Discontinued operations:
Income (loss) from discontinued operations, net of taxes $ (27) $ 33
of $34 and $30
Loss on disposal of discontinued operations, net
of tax benefit of $68 and $16 (127) (187)
-----------------------------------------------------------------------------------------------------------------
Total $(154) $(154)
=================================================================================================================
3: ASSET DISPOSITIONS
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 (loss) on asset sales,
net" on 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 pretax gain on the sale was $516 million ($322 million, net
of tax). The gain on the Equatorial Guinea properties of $497 million ($310
million, net of tax) is
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CMS Energy Corporation
included in "Income (Loss) From Discontinued Operations" and the gain on the
methanol plant of $19 million ($12 million, net of tax) is included in "Gain
(loss) on asset sales, net" on the Consolidated Statements of Income.
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, net" on the
Consolidated Statements of Income.
In May 2002, Consumers 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. These
sales totaled approximately $295 million. The pretax gains on these sales, which
totaled $38 million ($31 million, net of tax) are included in "Gain (loss) on
asset sale, net" on the 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, net" on the Consolidated Statements of Income.
In October 2002, CMS Land executed a settlement agreement abandoning its 50%
ownership interest in Bay Harbor Company, LLC, a real estate development company
located in the northwestern region of Michigan's lower peninsula. The settlement
agreement requires CMS Land to pay $16 million to Bay Harbor in consideration
for certain indemnities and past liabilities assumed by Bay Harbor. CMS Land's
investment in Bay Harbor at September 30, 2002 was $9 million.
Also 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.
4: 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.
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CMS Energy Corporation
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 September 30, 2002 and 2001 was $66
million and $62 million, respectively. Additionally, the following table
represents pro forma net income for the nine months ended September 30, 2002 and
2001, exclusive of amortization expense.
Restated Restated
2002 2001
--------- ---------
In Millions
Reported Net Income (Loss).................................... $ 5 $ (287)
Add: goodwill amortization expense, net of tax of $ --
and $5, respectively........................................ -- 9
-------- --------
Adjusted Net Income (Loss).................................... $ 5 $ (278)
======== =========
Adjusted Net Income (Loss) Per Share.......................... $ 0.04 $ (2.14)
======== =========
5: UNCERTAINTIES
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, filed 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 the U.S.
Attorney's Office for the Southern District of New York and from the U.S.
Attorney's Office in Houston regarding investigations of these trades and has
received a number of shareholder class action lawsuits. 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.
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CMS Energy Corporation
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, some of which have already been implemented,
including the termination of the speculative trading business and revisions to
CMS Energy's risk management policy. The Board of Directors adopted, and CMS
Energy has begun implementing, the remaining recommendations of the Special
Committee.
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 is in the process of finalizing rules to comply with the
EPA final regulations. Rules are expected to be promulgated and submitted to the
EPA by the end of 2002. In addition, the EPA 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 September 2002, Consumers has
incurred $372 million in capital expenditures to comply with the EPA final
regulations and anticipates that the remaining capital expenditures will be
incurred between 2002 and 2009. Additionally, Consumers will 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 be an 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.
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
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CMS Energy Corporation
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 September 30, 2002, Consumers had accrued the
minimum amount of the range for its estimated Superfund liability.
In October 1998, 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. In April 2000, Consumers proposed a plan to deal with the remaining
materials and is awaiting a response from the EPA.
CONSUMERS' ELECTRIC RATE MATTERS
ELECTRIC RESTRUCTURING: In June 2000, the Michigan Legislature passed electric
utility restructuring legislation known as the Customer Choice Act. This act: 1)
permits all customers to choose their electric generation supplier beginning
January 1, 2002; 2) cut residential electric rates by five percent; 3) freezes
all electric rates through December 31, 2003, and establishes a rate cap for
residential customers through at least December 31, 2005, and a rate cap for
small commercial and industrial customers through at least December 31, 2004; 4)
allows for the use of low-cost Securitization bonds to refinance qualified
costs, as defined by the act; 5) establishes a market power supply test that may
require transferring control of generation resources in excess of that required
to serve firm retail sales requirements (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. Once
the increased transmission capacity projects identified in the plan are
completed, verification of compliance is required to be sent to the MPSC. Upon
submittal of verification of compliance, Consumers expects to be deemed in
compliance with the MPSC statute. Consumers is highly confident that it will
meet the conditions of items 5 and 7 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'
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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.
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
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 LLC, a special purpose consolidated
subsidiary of Consumers formed to issue the bonds, 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. 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 LLC 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 was issued 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 revenues are remitted to a trustee
for the Securitization bonds and are not available to Consumers' creditors.
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 amortization
amount is expected to be approximately $31 million and the securitized assets
will be fully amortized by the end of 2015.
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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 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
anticipates that its after-tax earnings will increase by approximately $17
million in 2002, due to the recognition of a $26 million one time gain on the
sale of the electric transmission system. This one time gain 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,
contract transmission rates charged to Consumers will be fixed at current levels
through December 31, 2005, and be subject to FERC ratemaking thereafter. MTH
will complete 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.
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. METC has asserted that Consumers may be
liable for interest on the IPP payments to be credited if interest provisions
are added to these agreements.
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
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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. Traditionally, Consumers has planned for a reserve margin
of approximately 15 percent. However, in light of the addition of new in-state
generating capacity, additional transmission import capability, and FERC's
standard market design notice of proposed rulemaking, which calls for a minimum
reserve margin of 12 percent, Consumers is currently evaluating the appropriate
reserve margin for 2003 and beyond. 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 November 2002, alternative electric suppliers
are providing 446 MW of generation supply to customers.
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 September 30, 2002, Consumers had purchased or had commitments to
purchase electric call option and capacity contracts partially covering the
estimated reserve margin requirements for 2002 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 is approximately $13 million, which is subject to change
based upon potential changes in fair value for certain unexpired call options.
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. Consumers has initiated an appeal at the Michigan Court of
Appeals related to the MPSC's December 2001 "net" Stranded Cost order, as a
result of the uncertainty associated with the outcome of the proceeding
described in the following paragraph.
According to the MPSC, "net" Stranded Costs are to be recovered from retail open
access customers through a Stranded Cost transition charge. Even though the MPSC
set Consumers' Stranded Cost transition charge at zero for calendar year 2000,
those costs for 2000 will be subject to further review in the context of the
MPSC's subsequent determinations of "net" Stranded Costs for 2001 and later
years. The MPSC authorized Consumers to use deferred accounting to recognize the
future recovery of costs determined to be stranded. In April 2002, Consumers
made "net" Stranded Cost filings with the MPSC for
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$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. After a series of appeals and hearings, 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 of all costs associated with expenditures required by the Clean
Air Act. Consumers, in a separate filing, requested regulatory asset accounting
treatment for its Clean Air Act expenditures through 2003. The outcome of these
proceedings before the MPSC is uncertain at this time.
Since 1997, Consumers has incurred significant electric utility restructuring
implementation costs. The following table outlines the applications filed by
Consumers with the MPSC and the status of recovery for these costs.
In Millions
--------------------------------------------------------------------------------------------------------------
Year Filed Year Incurred Requested Pending Allowed Disallowed
--------------------------------------------------------------------------------------------------------------
1999 1997 & 1998 $ 20 $ - $ 15 $ 5
2000 1999 30 - 25 5
2001 2000 25 - 20 5
2002 2001 8 8 - -
==============================================================================================================
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, as of September 2002, Consumers incurred and deferred as a
regulatory asset, $3 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 recovery, through the MISO, of approximately $7
million in certain electric utility restructuring implementation costs related
to its former participation in the development of the Alliance RTO. However,
Consumers cannot predict the amounts it will be reimbursed by the MISO.
In 1996, Consumers filed new OATT transmission rates with the FERC for approval.
Interveners contested these rates, and hearings were held before an ALJ in 1998.
In 1999, the ALJ made an initial decision that was largely upheld by the FERC in
March 2002, which requires Consumers to refund, with interest, over-collections
for past services as measured by the FERC's finally approved OATT rates. Since
the initial decision, Consumers has been reserving a portion of revenues billed
to customers under the filed 1996 OATT rates. Consumers submitted revised rates
to comply with the FERC final order in June 2002. Those revised rates were
accepted by the FERC in August 2002 and Consumers is in the process of computing
refund amounts for individual customers. Consumers believes its reserve is
sufficient to satisfy its estimated refund obligation.
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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 believes that such action may 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.
Summarized Statements of Income for CMS Midland and CMS Holdings
In Millions
------------------------------------------------------------------------------------------------------------------
Nine Months Ended
September 30 2002 2001
------------------------------------------------------------------------------------------------------------------
Pretax operating income $63 $31
Income taxes and other 21 9
------------------------------------------------------------------------------------------------------------------
Net Income $42 $ 22
------------------------------------------------------------------------------------------------------------------
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Summarized Statements of Income for the MCV Partnership
In Millions
------------------------------------------------------------------------------------------------------------------
Nine Months Ended
September 30 2002 2001
------------------------------------------------------------------------------------------------------------------
Operating revenue $451 $454
Operating expenses 318 329
------------------------------
Operating income 133 125
Other expense, net 86 81
------------------------------
Income before cumulative effect of accounting change 47 44
Cumulative effect of change in method of accounting for
derivative option contracts 58 -
------------------------------
Net Income $105 $ 44
------------------------------------------------------------------------------------------------------------------
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. 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 September 30, 2002 and 2001, the remaining after-tax present
value of the estimated future PPA liability associated with the loss totaled $38
million and $54 million, respectively. The PPA liability is expected to be
depleted in late 2004. For further discussion on the impact of the frozen PSCR,
see "Electric Rate Matters" in this Note.
In March 1999, Consumers and the MCV Partnership reached an agreement effective
January 1, 1999, that capped availability payments to the MCV Partnership at
98.5 percent. If the MCV Facility generates electricity at the maximum 98.5
percent level during the next six years, Consumers' after-tax cash
underrecoveries associated with the PPA could be as follows:
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In Millions
--------------------------------------------------------------------------------------------------------------------
2002 2003 2004 2005 2006 2007
--------------------------------------------------------------------------------------------------------------------
Estimated cash underrecoveries at 98.5%, net of tax $38 $37 $36 $36 $36 $25
====================================================================================================================
It is currently estimated that 51 percent of the actual cash underrecoveries for
the years 2002 through 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 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 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 effects for the periods ended December 31,
2001 and December 31, 2000:
---------------------------------------------------------------------------------------------------------
In Millions 2001 2000
---------------------------------------------------------------------------------------------------------
Income Increase/(Decrease)
---------------------------------------------------------------------------------------------------------
Reverse the original operating charge associated with continuing
losses on the MCV PPA $ 39 $ -
Charge 49 percent 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)
---------------------------------------------------------------------------------------------------------
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In February 1998, the MCV Partnership appealed the January 1998 and February
1998 MPSC orders related to electric utility restructuring. At the same time,
MCV Partnership filed suit in the United States District Court in Grand Rapids
seeking a declaration that the MPSC's failure to provide Consumers and MCV
Partnership a certain source of recovery of capacity payments after 2007
deprived MCV Partnership of its rights under the Public Utilities Regulatory
Policies Act of 1978. In July 1999, the District Court granted MCV Partnership's
motion for summary judgment. The Court permanently prohibited enforcement of the
restructuring orders in any manner that denies any utility the ability to
recover amounts paid to qualifying facilities such as the MCV Facility or that
precludes the MCV Partnership from recovering the avoided cost rate. The MPSC
appealed the Court's order to the 6th Circuit Court of Appeals in Cincinnati. In
June 2001, the 6th Circuit overturned the lower court's order and dismissed the
case against the MPSC. The appellate court determined that the case was
premature and concluded that the qualifying facilities needed to wait until 2008
for an actual factual record to develop before bringing claims against the MPSC
in federal court. The MCV Partnership has requested rehearing of the appellate
court's order.
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
remits them to the DOE quarterly. Consumers elected to defer payment for
disposal of spent nuclear fuel burned before April 7, 1983. As of September 30,
2002, Consumers has a recorded liability to the DOE of $137 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. 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 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. Consumers is
evaluating its options with respect to its contract with the DOE and plans to
pursue recovery of the nuclear fuel removal costs at its Big Rock and Palisades
plants.
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.
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NUCLEAR MATTERS: In April 2002, Palisades received its annual performance review
in which the NRC stated that Palisades operated in a manner that preserved
public health and safety. With the exception of a single finding related to a
fire protection smoke detector location with low safety significance, the NRC
classified all inspection findings as having very low safety significance. Other
than the follow-up fire protection inspection associated with this one finding,
the NRC plans to conduct only baseline inspections at the facility through May
31, 2003.
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, commonly known as "dry casks", for
temporary on-site storage. As of September 30, 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 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 and the plant
returned to service and has been operating since January 21, 2002. 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.
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Consumers maintains insurance against property damage, debris removal, personal
injury liability and other risks that are present at its nuclear facilities.
Consumers also maintains coverage for replacement power supply costs during
certain prolonged accidental outages at Palisades. Insurance would not cover
such costs during the first 12 weeks of any outage, but would cover most of such
costs during the next 52 weeks of the outage, followed by reduced coverage to 80
percent for 110 additional weeks. The June 2001 through January 2002 Palisades
outage, however, was not an insured event. If certain covered losses occur at
its own or other nuclear plants similarly insured, Consumers could be required
to pay maximum assessments of $25.8 million in any one year to NEIL; $88 million
per occurrence under the nuclear liability secondary financial protection
program, limited to $10 million per occurrence in any year; and $6 million if
nuclear workers claim bodily injury from radiation exposure. Consumers considers
the possibility of these assessments to be remote. NEIL limits its coverage from
multiple acts of terrorism during a twelve-month period to a maximum aggregate
of $3.24 billion, allocated among the claimants, plus recoverable reinsurance,
indemnity and other sources, which could affect the amount of loss coverage for
Consumers should multiple acts of terrorism occur. The Price Anderson Act is
currently in the process of reauthorization by the U. S. Congress. It is
possible that the Price Anderson Act will not be reauthorized or changes may be
made that significantly affect the insurance provisions for nuclear plants.
DERIVATIVE ACTIVITIES: 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. These contracts are subject to SFAS No. 133
derivative accounting, and are required to be recorded on the balance sheet at
fair value, with changes in fair value recorded directly in earnings or other
comprehensive income, if the contract meets qualifying hedge criteria. 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
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option contracts. Consumers will record any change in fair value subsequent to
December 31, 2001, directly in earnings, which could cause earnings volatility.
As of September 30, 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.
Consumers' electric business also uses 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 are financial contracts that will be
used to offset increases in the price of probable forecasted gas purchases.
These contracts do not qualify for hedge accounting. Therefore, Consumers
records any change in the fair value of these contracts directly in earnings as
part of power supply costs, which could cause earnings volatility. As of
September 30, 2002, a mark-to-market gain of $1 million has been recorded for
2002, which represents the fair value of these contracts at September 30, 2002.
These contracts expire in December 2002.
As of September 30, 2001, Consumers' electric business also used purchased gas
call option and gas swap contracts to hedge against price risk due to the
fluctuations in the market price of gas used as fuel for generation of
electricity. These contracts were financial contracts that were used to offset
increases in the price of probable forecasted gas purchases. These contracts
were designated as cash flow hedges and, therefore, Consumers recorded any
change in the fair value of these contracts in other comprehensive income until
the forecasted transaction occurs. Once the forecasted gas purchases occurred,
the net gain or loss on these contracts were reclassified to earnings and
recorded as part of the cost of power. These contracts were highly effective in
achieving offsetting cash flows of future gas purchases, and no component of the
gain or loss was excluded from the assessment of the hedge's effectiveness. As a
result, no net gain or loss was recognized in earnings as a result of hedge
ineffectiveness as of September 30, 2001. At September 30, 2001, Consumers had a
derivative liability with a fair value of $0.4 million. These contracts expired
in 2001.
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
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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 September 30, 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 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 a settlement agreement approved by the MPSC in
July 2001, Consumers agreed not to bill a price in excess of $4.69 per mcf of
natural gas under the GCR factor mechanism through March 2002. This agreement is
not expected to affect Consumers' earnings outlook because Consumers recovers
from customers the amount that it actually pays for natural gas in the
reconciliation process. The settlement does not affect Consumers' June 2001
request to the MPSC for a distribution service rate increase. The MPSC also
approved a methodology to adjust bills for market price increases quarterly
without returning to the MPSC for approval. In December 2001, Consumers filed
its GCR Plan for the period April 2002 through March 2003. Consumers is
requesting authority to bill a GCR factor up to $3.50 per mcf for this period.
The Company also requested the MPSC approve the same methodology which adjusts
bills for market price increases that the MPSC approved, through settlement, in
the previous plan year. A settlement with all parties in the proceeding was
signed and submitted to the Commission in March 2002. The settlement stipulated
to all requests of Consumers and the MPSC approved the settlement, as filed, in
July 2002. Consistent with the terms of the settlement, Consumers filed in June
of 2002 to raise the GCR factor cap to $3.66 for the period July through
September and Consumers proceeded to bill its customers at this new rate. In
September, Consumers filed to raise the GCR factor cap to $3.79 for October
through December, but expects to be able to continue billing at the $3.66 rate.
GAS RATE CASE: In June 2001, Consumers filed an application with the MPSC
seeking a $140 million distribution service rate increase. Consumers requested a
12.25 percent authorized return on equity. Contemporaneously with this filing,
Consumers requested partial and immediate relief in the annual amount of $33
million. The relief was primarily for higher carrying costs on more expensive
natural gas inventory than is currently included in rates. In October 2001,
Consumers revised its filing to reflect lower operating costs and requested a
$133 million annual distribution service rate increase. In December 2001, the
MPSC
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authorized a $15 million annual interim increase in distribution service
rate revenues. The order authorized Consumers to apply the interim increase on
its gas sales customers' bills for service effective December 21, 2001. In
February 2002, Consumers revised its filing to reflect lower estimated gas
inventory prices and revised depreciation expense and requested an annual $105
million 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, effective for service November 8, 2002.
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 Consumer' arguments to the contrary, the Commission 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 6 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. Consumers has made no reservations for refunds in this matter.
If refunds were ordered they might include interest which would increase the
refund liability to more than the $3 million collected. 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 believes that such action may 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
DERIVATIVE ACTIVITIES: Consumers' gas business uses fixed price gas supply
contracts, and fixed price weather-based gas supply call options and fixed price
gas supply put options, and other types of contracts, to meet its regulatory
obligation to provide gas to its customers at a reasonable and prudent cost.
Some of the fixed price gas supply contracts require derivative accounting
because they contain embedded put options that disqualify the contracts from the
normal purchase exception of SFAS No. 133. As of September 30, 2002, Consumers'
gas supply contracts requiring derivative accounting had a fair value of $1
million, representing 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. These contracts expire in October 2002.
As of September 30, 2002, weather-based gas call options and gas put options
requiring derivative accounting had a net fair value of $1 million. The change
in value since inception in August 2002 is immaterial. Any change in fair value
will be recorded in a similar manner as stated above for the change in fair
value for fixed price gas supply contracts requiring derivative accounting.
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PANHANDLE MATTERS
REGULATORY MATTERS: In conjunction with a FERC order issued in September 1997,
FERC required certain natural gas producers to refund previously collected
Kansas ad-valorem taxes to interstate natural gas pipelines, including Panhandle
Eastern Pipe Line. FERC ordered the pipelines to refund these amounts to their
customers. In June 2001, Panhandle Eastern Pipe Line filed a proposed settlement
with the FERC which was supported by most of the customers and affected
producers. In October 2001, the FERC approved that settlement. The settlement
provided for a resolution of the Kansas ad valorem tax matter on the Panhandle
Eastern Pipe Line system for a majority of refund amounts. Certain producers and
the state of Missouri elected to not participate in the settlement. At September
30, 2002 and December 31, 2001, accounts receivable included $8 million due from
natural gas producers, and other current liabilities included $12 million and
$11 million, respectively, for related obligations. Remaining amounts collected
but not refunded are subject to refund pending resolution of issues remaining in
the FERC docket and Kansas intrastate proceeding.
In July 2001, Panhandle Eastern Pipe Line filed a settlement with customers on
Order 637 matters to resolve issues including capacity release and imbalance
penalties, among others. On October 12, 2001 and December 19, 2001 FERC issued
orders approving the settlement, with modifications. The settlement changes
became final effective February 1, 2002, resulting in a non-recurring gain
associated with previously collected penalties of $4 million in Other revenue
and a $2 million reversal of related interest expense. Prospectively, penalties
will be credited to customers.
In August 2001, an offer of settlement of Trunkline LNG rates sponsored jointly
by Trunkline LNG, BG LNG Services and Duke LNG Sales was filed with the FERC and
was approved on October 11, 2001. The settlement was placed into effect on
January 1, 2002. As part of the settlement, Trunkline LNG reduced its maximum
rates.
In December 2001, Trunkline LNG, now partially owned by Panhandle, filed with
the FERC a certificate application to expand the Lake Charles facility to
approximately 1.2 billion cubic feet per day of sendout capacity versus the
current capacity of 630 million cubic feet per day. The BG Group has contract
rights for all of this additional capacity. Storage capacity will also be
expanded to 9 billion cubic feet, from its current capacity of 6.3 billion cubic
feet. On August 27, 2002 the FERC issued a "Preliminary Determination on
Non-Environmental Issues" recommending approval of the planned expansion
project. The FERC's July 2002 Environmental Assessment determined that the
Trunkline LNG expansion facilities do not constitute a major federal action
significantly affecting the environment and recommended certain compliance and
mitigation measures. Comments on the Environmental Assessment were filed on
August 30, 2002. The application for a certificate of public convenience and
necessity of the expansion is still pending final FERC action. The expansion
expenditures are currently expected to be funded by Panhandle loans or equity
contributions to LNG Holdings.
Panhandle has sought refunds from the State of Kansas concerning certain
corporate income tax issues for the years 1981 through 1984. On January 25, 2002
the Kansas Supreme Court entered an order affirming a previous Board of Tax
Court finding that Panhandle was entitled to refunds which with interest total
approximately $26 million. Pursuant to the provisions of the purchase agreement
between CMS Energy and a subsidiary of Duke Energy, Duke retains the benefits of
any tax refunds or liabilities for periods prior to the date of the sale of
Panhandle to CMS Energy.
In February 2002, Trunkline Gas filed a settlement with customers on Order 637
matters to resolve issues including capacity release and imbalance penalties,
among others. On July 5, 2002 FERC issued an order approving the settlement,
with modifications. On October 18, 2002 Trunkline Gas filed tariff sheets with
the FERC to implement the Order 637 changes which will become effective November
1, 2002.
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ENVIRONMENTAL MATTERS: Panhandle is subject to federal, state and local
regulations regarding air and water quality, hazardous and solid waste disposal
and other environmental matters. Panhandle has identified environmental
contamination at certain sites on its systems and has undertaken cleanup
programs at these sites. The contamination resulted from the past use of
lubricants containing PCBs in compressed air systems and the prior use of
wastewater collection facilities and other on-site disposal areas. Panhandle
communicated with the EPA and appropriate state regulatory agencies on these
matters. Under the terms of the sale of Panhandle to CMS Energy, a subsidiary of
Duke Energy is obligated to complete the Panhandle cleanup programs at certain
agreed-upon sites and to indemnify against certain future environmental
litigation and claims. Duke Energy's cleanup activities have been completed on
all but one of the agreed-upon sites. Should additional information be requested
regarding sites where compliance information has been submitted, Panhandle would
be obligated to respond to these requests.
As part of the cleanup program resulting from contamination due to the use of
lubricants containing PCBs in compressed air systems, Panhandle Eastern Pipe
Line and Trunkline have identified PCB levels above acceptable levels inside the
auxiliary building that houses the air compressor equipment at one of its
compressor station sites. Panhandle has developed and is implementing an
EPA-approved process to remediate this PCB contamination. Panhandle is also
implementing a plan to assess the interior of auxiliary buildings at other
compressor stations with similar histories of PCB containing lubricants and will
remediate as required. The results of this assessment and remediation will be
managed in accordance with federal, state and local regulations.
At some locations, PCBs have been identified in paint that was applied many
years ago. In accordance with EPA regulations, Panhandle is implementing a
program to remediate sites where such issues have been identified during
painting activities. If PCBs are identified above acceptable levels, the paint
is removed and disposed of in an EPA-approved manner. Approximately 15 percent
of the paint projects in the last few years have required this special
procedure.
The Illinois EPA notified Panhandle Eastern Pipe Line and Trunkline, together
with other non-affiliated parties, of contamination at former waste oil disposal
sites in Illinois. Panhandle and 21 other non-affiliated parties are conducting
an investigation of one of the sites. Final reports are expected in the fourth
quarter of 2002. Panhandle Eastern Pipe Line's and Trunkline's share for the
costs of assessment and remediation of the sites, based on the volume of waste
sent to the facilities, is approximately 17 percent.
Panhandle expects these cleanup programs to continue for several years and has
estimated its share of remaining cleanup costs not indemnified by Duke Energy to
be approximately $21 million. Such costs have been accrued for and are reflected
in Panhandle's Consolidated Balance Sheet in Other Non-current Liabilities.
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AIR QUALITY CONTROL: In 1998, the EPA issued a final rule on regional ozone
control that requires revised SIPS for 22 states, including five states in which
Panhandle operates. This EPA ruling was challenged in court by various states,
industry and other interests, including the INGAA, an industry group to which
Panhandle belongs. In March 2000, the court upheld most aspects of the EPA's
rule, but agreed with INGAA's position and remanded to the EPA the sections of
the rule that affected Panhandle. Based on EPA guidance to these states for
development of SIPs, Panhandle expects future compliance costs to range from $15
million to $20 million for capital improvements to be incurred from 2004 through
2007.
As a result of the 1990 Clean Air Act Amendments, the EPA must issue MACT rules
controlling hazardous air pollutants from internal combustion engines and
turbines. These rules are expected in early 2003. Beginning in 2002, the Texas
Natural Resource Conservation Commission enacted the Houston/Galveston SIP
regulations requiring reductions in nitrogen oxide emissions in an eight county
area surrounding Houston. Trunkline's Cypress Compressor Station is affected and
may require the installation of emission controls. In 2003, the new regulations
will also require all "grand fathered" facilities to enter into the new source
permit program which may require the installation of emission controls at five
additional facilities. The company expects future capital costs for these
programs to range from $14 million to $29 million.
In 1997, the Illinois Environmental Protection Agency initiated an enforcement
proceeding relating to alleged air quality permit violations at Panhandle's
Glenarm Compressor Station. On November 15, 2001 the Illinois Pollution Control
Board approved an order imposing a penalty of $850 thousand, plus fees and cost
reimbursements of $116 thousand. Under terms of the sale of Panhandle to CMS
Energy, a subsidiary of Duke Energy was obligated to indemnify Panhandle against
this environmental penalty. The state issued a permit in February of 2002
requiring the installation of certain capital improvements at the facility at a
cost of approximately $3 million. It is expected that the capital improvements
will occur in 2002 and 2003.
OTHER UNCERTAINTIES
CREDIT RATING: 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 is largely a function of the uncertainties
associated with CMS Energy's financial condition and liquidity pending
resolution of the round-trip trading investigations and lawsuits, financial
statement restatement and re-audit, and directly affects and limits 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. More
specifically, a loan to Panhandle made in connection with the December 2001 LNG
off-balance sheet monetization transaction is subject to repayment demand by the
unaffiliated equity partner in the LNG Holdings joint venture. At September 30,
2002, Panhandle's remaining balance on the $75 million note payable to LNG
Holdings was approximately $66 million. Dekatherm Investor Trust has agreed not
to make demand for payment before November 22, 2002 in return for a fee and an
agreement for Panhandle to acquire Dekatherm Investor Trust's interest in LNG
Holdings. When Panhandle acquires Dekatherm Investor Trust's interest, it will
then own 100 percent of LNG Holdings and will not demand payment on the note
payable to LNG Holdings.
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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 will be
paid credit fees by Panhandle on the outstanding balance of the guarantees for
any periods for which they are in effect. This additional credit support does
not remove Panhandle from its original $50 million obligation. 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. As
of September 30, 2002, Panhandle has also provided $16 million of equity
contributions to Guardian.
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. This issuer has
commenced litigation against Enterprises and CMS MST in Michigan federal
district court and is seeking to require Enterprises and CMS MST to provide
acceptable collateral and to prevent them from disposing of or transferring any
corporate assets outside the ordinary course of business before the Court has an
opportunity to fully adjudicate the issuer's claim. Enterprises and CMS MST
continue to work with the issuer to find mutually satisfactory arrangements. The
second issuer of the $187 million bond has similar rights in conjunction with
surety bonds supporting two other CMS MST gas supply contracts, aggregating
approximately $112 million. That surety bond issuer has entered discussions with
CMS MST about the possible posting of acceptable collateral for all three
additional surety bonds. CMS Energy has reached a settlement in principle that
would provide the issuers with acceptable collateral and resolve one part of the
issuer's litigation. However, the settlement is subject to final documentation
as well as approval by the banks that are party to the CMS Energy secured credit
facilities.
GAS INDEX PRICING REPORTING: On November 4, 2002, CMS Energy announced that it
is conducting an internal review of the natural gas trade information provided
by CMS MST and CMS Field Services to energy industry publications that compile
and report index prices. A preliminary analysis indicates that some employees
provided inaccurate information in the voluntary reports. CMS Energy and its
subsidiaries no longer provide natural gas trade information to energy industry
publications. CMS Energy has notified the appropriate regulatory and
governmental agencies of this review. On November 5, 2002, CMS Energy received
an information request from the Commodity Futures Trading Commission pursuant
to a prior subpoena relating to round-trip trading. The Commodity Futures
Trading Commission requested certain information regarding the employees
involved in providing the inaccurate natural gas trade data to industry
publications as well as details of the information provided. CMS Energy has
produced documents and information responsive to the November 5, 2002 request.
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SECURITIES CLASS ACTION LAWSUITS: Eighteen separate civil lawsuits have been
filed in federal court in Michigan in connection with round-trip trading,
alleging (i) violation of Section 10(b) and Rule 10b-5 of the Securities
Exchange Act of 1934 ("Exchange Act") and (ii) violation of Section 20(a) of the
Exchange Act. (See Exhibit 99(d) for case names, dates instituted and principal
parties). All suits name Messrs. McCormick and Wright and CMS Energy as
defendants. Consumers Energy, Mr. Joos and Ms. Pallas are named as defendants on
certain of the suits. The cases will be consolidated into a single lawsuit.
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 Company 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 is seeking to
elect 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: On July 11, 2002 and July 18, 2002, two Consumers employees filed
separate alleged class action lawsuits on behalf of the participants and
beneficiaries of the CMS Employees' Savings and Incentive Plan in the United
States District Court for the Eastern District of Michigan. CMS Energy,
Consumers and CMS MST are defendants in one action, and CMS Energy, Consumers,
and other alleged fiduciaries are defendants in the other. The complaints allege
various counts arising under the ERISA. The two cases will be consolidated into
a single lawsuit and a single consolidated amended complaint will be filed. CMS
Energy intends to vigorously defend against these actions. CMS Energy cannot
predict the outcome of this litigation.
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 to facilitate the settlement discussions between all the
parties in connection with federal
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CMS Energy Corporation
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. CMS Energy
believes the claims are without merit and will continue to vigorously contest
them, but any change order costs ultimately paid would be capitalized as a
project construction cost.
Ford Motor Company and Rouge Steel Company, the customers of the DIG facility,
continue to be in discussion with DIG regarding several commercial issues that
have arisen between the parties.
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,
which referred the case to its settlement program. After Star Energy refused to
participate meaningfully in the settlement program, the parties completed
briefing and oral argument was heard on October 2, 2002. The parties are now
waiting for a decision from the Court of Appeals. A reserve has been established
for this matter.
ARGENTINA ECONOMIC EMERGENCY: 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.
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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 nine months ended September 30, 2002, CMS Energy recorded losses of $40
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 U.S. Dollars.
While CMS Energy's management cannot predict the most likely future, average, or
end of period 2002 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. As a result of the change in functional currency, and the ongoing
translation of revenue and expense accounts of these investments into U.S.
Dollars, an additional $6 million assuming exchange rates ranging from 3.00 to
4.00 Pesos per U.S. Dollar may adversely affect 2002 earnings for CMS Energy. At
September 30, 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 Stockholders' Equity using an exchange rate of 3.665 Pesos
per U.S. Dollar was approximately $400 million.
CAPITAL EXPENDITURES: CMS Energy estimates capital expenditures, including
investments in unconsolidated subsidiaries and new lease commitments, of $910
million for 2002, $500 million for 2003 and $655 million for 2004. The 2002
amount includes Panhandle's estimated expenditures of $124 million, which
includes expenditures associated with the LNG terminal expansion for which an
application was filed with the FERC on December 26, 2001, estimated at $8
million. The 2003 and 2004 amounts exclude Panhandle's expenditures, estimated
at $112 million in 2003 and $124 million in 2004, which include expenditures
associated with the LNG terminal expansion of $33 million in 2003 and $66
million in 2004. CMS Energy is exploring the sale of Panhandle. For further
information, see the Outlook section of the MD&A.
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PENSION: The recent significant downturn in the equities markets has affected
the value of the Pension Plan assets. If the plan's Accumulated Benefit
Obligation exceeds the value of these assets at December 31, 2002, CMS Energy
will be required to recognize an additional minimum liability for this excess in
accordance with SFAS No 87. CMS Energy cannot predict the future fair value of
the plan's assets but it is probable, without significant appreciation in the
plan's assets, that CMS Energy will need to book an additional minimum liability
through a charge to other comprehensive income. The Accumulated Benefit
Obligation is determined by the plan's actuary in the fourth quarter of each
year.
GUARANTEES: 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 $1.5 billion as of
September 30, 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 September 30, 2002, the
actual amount of financial exposure covered by these guarantees was $473
million. This amount excludes the guarantees associated with CMS MST's natural
gas sales arrangements totaling $270 million, which are recorded as liabilities
on the Consolidated Balance Sheet at September 30, 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.
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 $75 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 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.
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6: SHORT-TERM AND LONG-TERM FINANCINGS, AND CAPITALIZATION
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 are
as follows: a $295.8 million revolving credit facility by CMS Energy, maturing
March 31, 2003; a $300 million revolving credit facility by CMS Energy, maturing
December 15, 2003; a $150 million short-term loan by Enterprises, maturing
December 13, 2002; a $250 million revolving credit facility by Consumers,
maturing July 11, 2003; and a $300 million term loan by Consumers, maturing July
11, 2003.
In September 2002, Consumers' exercised its extension option on the $300 million
term loan to move the maturity date to July 11, 2004. Also in September 2002,
CMS Energy retired the $150 million short-term loan by Enterprises using
proceeds from the sale of CMS Oil and Gas. 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. Consumers drew $220
million of the capacity upon execution of the Agreements and is expected to be
in a position to draw the full $225 million by mid-November of 2002. The
interest rate under the Agreements is LIBOR plus 300 basis points, but will
increase by 100 basis points for any period after December 1, 2002 during which
the banks thereunder have not yet received, among other deliveries, certified
restated financial statements for CMS Energy's 2000 and 2001 fiscal years. The
bank and legal fees associated with the Agreement were $2 million. The first net
amortization payment under these Agreements currently is scheduled to occur at
the end of 2002 with monthly amortization scheduled until full repayment is
completed in mid-April of 2003. This financing should eliminate the need for
Consumers to access the capital markets for the remainder of 2002.
CMS ENERGY: As of September 30, 2002, bank commitments under CMS Energy's $295.8
million credit agreement had been reduced to $259.9 million as a result of
mandatory prepayments with proceeds of various asset sales. CMS Energy had the
full $259.9 million outstanding as of that date. Also on September 30, 2002, CMS
Energy had $88.7 million of borrowings and $210.9 million of letter-of-credit
usage outstanding under the $300 million credit agreement.
In the first nine months of 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 September 30, 2002, CMS Energy had
remaining $110 million Series D GTNs, $241 million Series E GTNs and $299
million of Series F GTNs issued and outstanding with weighted average interest
rates of 6.9 percent, 7.8 percent and 7.6 percent, respectively.
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 November 1, 2002, no Series G GTNs had been issued.
Under its most restrictive debt covenant, CMS Energy has approximately $1
billion available for the payment of common dividends at September 30, 2002.
Pursuant to restrictive covenants in the CMS Energy $295.8 million facility, CMS
Energy is limited to quarterly dividend payments of $0.1825 per share and
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CMS Energy Corporation
must receive $250 million in net cash proceeds from the planned issuance of
equity or equity-linked securities by December 31, 2002 in order to continue to
pay a dividend thereafter. Further cost-cutting steps and sales of non-strategic
assets are expected to eliminate the need for CMS Energy to access the capital
markets for the remainder of 2002. Asset sale proceeds are expected to be used
to repay the balance of CMS Energy's $295.8 million facility, but management can
make no assurances that such payment will be made or that dividends will be
declared by the Board of Directors.
CONSUMERS: At September 30, 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 September 2002 up to $500 million of long-term securities for
refinancing or refunding purposes, $690 million for general corporate purposes,
and $900 million of First Mortgage Bonds to be issued solely as security for the
long-term securities.
At September 30, 2002, Consumers had a $250 million credit facility secured by
First Mortgage Bonds. This facility is available to finance seasonal working
capital requirements and to pay for capital expenditures between long-term
financings. At September 30, 2002, a total of $235 million was outstanding at a
weighted average interest rate of 3.7 percent, compared with $153 million
outstanding on a revolving credit facility at September 30, 2001, at a weighted
average interest rate of 3.5 percent.
On April 1, 2002, Consumers established a new subsidiary, Consumers Receivables
Funding. This consolidated subsidiary was established to sell accounts
receivable purchased from Consumers to an unrelated third party under the trade
receivables sale program. Consumers, through Consumers Receivable Funding,
currently has in place a $325 million trade receivables sale program. At
September 30, 2002 and 2001, receivables sold under the program totaled $325
million for each year. During 2002, $248 million cash proceeds were received
under the trade receivables sales program. Accounts receivable and accrued
revenue in the Consolidated Balance Sheets have been reduced to reflect
receivables sold.
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.
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.
Pursuant to restrictive covenants in its bank facilities, Consumers is limited
to dividend payments that will not exceed $300 million in any calendar year. In
2001, Consumers paid $190 million in common stock dividends to CMS Energy.
Consumers declared $183 million and paid $154 million in common dividends
through September 2002.
Under the provisions of its Articles of Incorporation, Consumers had $345
million of unrestricted retained earnings available to pay common dividends at
September 30, 2002.
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CMS Energy Corporation
REQUIRED RATIOS: The 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 September 30, 2002
---------------------------------------------------------------------------------------------------------
(Restated)
CMS ENERGY:
Consolidated Leverage Ratio (a) not more than 5.75 to 1.00 5.43 to 1.00
Cash Dividend Coverage Ratio (a) not less than 1.25 to 1.00 2.15 to 1.00
Dividend Coverage Ratio not less than 1.15 to 1.00 4.14 to 1.00
Restricted Payments Ratio (a) not less than 1.05 to 1.00 2.30 to 1.00
CONSUMERS:
Debt to Capital Ratio (a) not more than 0.65 to 1.00 0.52 to 1.00
Interest Coverage Ratio (a) not less than 2.00 to 1.00 3.38 to 1.00
---------------------------------------------------------------------------------------------------------
(a) Violation of this ratio would constitute an event of default under the
facilities which provides the lender, among other remedies, the right to declare
the principal and interest immediately due and payable.
In 1994, CMS Energy executed an indenture (the "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. Upon activation of the limitation, CMS Energy will not and will not
permit certain material subsidiaries, excluding Consumers and its subsidiaries,
to become liable for new indebtedness. However, 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 at CMS Energy and at the
material subsidiaries. At September 30, 2002, CMS Energy's consolidated leverage
ratio was 0.75 to 1.0. CMS Energy expects that the aggregate effect of non-cash
charges to equity and the reconsolidation of debt on the balance sheet
anticipated to occur in the fourth quarter of 2002 would result in a year-end
debt ratio in excess of 75 percent. This debt ratio could be significantly
reduced if CMS Energy decides to proceed with its sale of Panhandle, its sale of
CMS Field Services, other asset sales or other options such as the
securitization of additional assets at Consumers.
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:
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CMS Energy Corporation
CMS Energy Trust and Securities In Millions
--------------------------------------------------------------------------------
Amount
Outstanding Earliest
September 30 Rate (%) 2002 2001 Maturity Redemption
--------------------------------------------------------------------------------
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.
(b) Represents 7,250,000 Adjustable Convertible Preferred Securities that were
converted to 8,787,725 newly issued shares of CMS Energy Common Stock on July 1,
2002. (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.
Consumers Energy Trust and Securities In Millions
-----------------------------------------------------------------------------------------
Amount
Outstanding Earliest
September 30 Rate (%) 2002 2001 Maturity Redemption
-----------------------------------------------------------------------------------------
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 Originated Preferred Securities by $30 million.
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7: EARNINGS PER SHARE AND DIVIDENDS
The following tables present a reconciliation of the numerators and denominators
of the basic and diluted earnings per share computations.
COMPUTATION OF EARNINGS (LOSS) PER SHARE:
In Millions, Except Per Share Amounts
-------------------------------------------------------------------------------------------------------
Three Months Ended September 30 2002 2001
-------------------------------------------------------------------------------------------------------
(As Restated) (As Restated)
NET INCOME (LOSS) APPLICABLE TO BASIC AND DILUTED EPS
Consolidated Net Income (Loss) $ 37 $ (378)
==================================
Net Income (Loss) Attributable to Common Stock:
CMS Energy -- Basic 37 (378)
Add conversion of 7.75% Trust
Preferred Securities (net of tax) - (a) - (a)
----------------------------------
CMS Energy -- Diluted $ 37 $ (378)
==================================
AVERAGE COMMON SHARES OUTSTANDING
APPLICABLE TO BASIC AND DILUTED EPS
CMS Energy:
Average Shares -- Basic 143.9 132.6
Add conversion of 7.75% Trust
Preferred Securities - (a) - (a)
Stock Options - (b) - (b)
----------------------------------
Average Shares -- Diluted 143.9 132.6
==================================
EARNINGS (LOSS) PER AVERAGE COMMON SHARE
Basic $ 0.26 $ (2.85)
Diluted $ 0.26 $ (2.85)
=======================================================================================================
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In Millions, Except Per Share Amounts
-----------------------------------------------------------------------------------------------
Nine Months Ended September 30 2002 2001
-----------------------------------------------------------------------------------------------
(As Restated) (As Restated)
NET INCOME (LOSS) APPLICABLE TO BASIC AND DILUTED EPS
Consolidated Net Income (Loss) $ 5 $ (287)
=======================================
Net Income (Loss) Attributable to Common Stock:
CMS Energy -- Basic $ 5 $ (287)
Add conversion of 7.75% Trust
Preferred Securities (net of tax) - (a) - (a)
---------------------------------------
CMS Energy -- Diluted $ 5 $ (287)
=======================================
AVERAGE COMMON SHARES OUTSTANDING
APPLICABLE TO BASIC AND DILUTED EPS
CMS Energy:
Average Shares -- Basic 137.4 130.0
Add conversion of 7.75% Trust
Preferred Securities - (a) - (a)
Stock Options - (b) - (b)
----------------------------------------
Average Shares -- Diluted 137.4 130.0
=======================================
EARNINGS (LOSS) PER AVERAGE COMMON SHARE
Basic $ .04 $ (2.20)
Diluted $ .04 $ (2.20)
===============================================================================================
(a) The effect 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 0.1 million for the three months
ended September 30, 2002 and 0.3 million for the nine months ended
September 30, 2002 were not included in the computation of diluted earnings
per share because to do so would have been antidilutive.
In February, April and August 2002, CMS Energy paid dividends of $0.365, $0.365
and $0.18 per share, respectively on CMS Energy Common Stock. In October 2002,
the Board of Directors declared a quarterly dividend of $0.18 per share on CMS
Energy Common Stock, payable in November 2002.
8: 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 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
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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. As of January 1, 2001, commodity contracts are now 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.
Consumers' electric business uses purchased electric call option contracts to
meet 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. These
contracts are subject to SFAS No. 133 derivative accounting, and are required to
be recorded on the balance sheet at fair value, with changes in fair value
recorded directly in earnings or other comprehensive income, if the contract
meets qualifying hedge criteria. 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
will record any change in fair value subsequent to December 31, 2001, directly
in earnings, which could cause earnings volatility. As of September 30, 2002,
Consumers recorded on the balance sheet all of its purchased electric call
option contracts subject to derivative accounting, at a fair value of $1
million.
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CMS Energy Corporation
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 power purchase
agreement with the MCV Partnership, could be material to the financial
statements.
Consumers' electric business also uses 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 are financial contracts that will be
used to offset increases in the price of probable forecasted gas purchases.
These contracts do not qualify for hedge accounting. Therefore, Consumers
records any change in the fair value of these contracts directly in earnings as
part of power supply costs, which could cause earnings volatility. As of
September 30, 2002, a mark-to-market gain of $1 million has been recorded for
2002, which represents the fair value of these contracts at September 30, 2002.
These contracts expire in December 2002.
As of September 30, 2001, Consumers' electric business also used purchased gas
call option and gas swap contracts to hedge against price risk due to the
fluctuations in the market price of gas used as fuel for generation of
electricity. These contracts were financial contracts that were used to offset
increases in the price of probable forecasted gas purchases. These contracts
were designated as cash flow hedges and, therefore, Consumers recorded any
change in the fair value of these contracts in other comprehensive income until
the forecasted transaction occurs. Once the forecasted gas purchases occurred,
the net gain or loss on these contracts were reclassified to earnings and
recorded as part of the cost of power. These contracts were highly effective in
achieving offsetting cash flows of future gas purchases, and no component of the
gain or loss was excluded from the assessment of the hedge's effectiveness. As a
result, no net gain or loss was recognized in earnings as a result of hedge
ineffectiveness as of September 30, 2001. At September 30, 2001, Consumers had a
derivative liability with a fair value of $0.4 million. These contracts expired
in 2001.
Consumers' gas business uses fixed price gas supply contracts, and fixed price
weather-based gas supply call options and fixed price gas supply put options,
and other types of contracts, to meet its regulatory obligation to provide gas
to its customers at a reasonable and prudent cost. Some of the fixed price gas
supply contracts require derivative accounting because they contain embedded put
options that disqualify the contracts from the normal purchase exception of SFAS
No. 133. As of September 30, 2002, Consumers' gas supply contracts requiring
derivative accounting had a fair value of $1 million, representing 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. These contracts expire in
October 2002.
As of September 30, 2002, weather-based gas call options and gas put options
requiring derivative accounting had a net fair value of $1 million. The change
in value since inception in August 2002 is immaterial. Any change in fair value
will be recorded in a similar manner as stated above for the change in fair
value for fixed price gas supply contracts requiring derivative accounting.
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ENERGY TRADING ACTIVITIES: CMS Energy, through its subsidiary CMS MST, engages
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 trading activities are accounted for
under the mark-to-market method of accounting consistent with guidance provided
by EITF No. 98-10. 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. The lack of long-term
pricing liquidity requires the use of mathematical models to value these
commitments under the accounting method employed. Mathematical models are
developed to determine various inputs into 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 forecasted pricing curves
generated 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 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.
For the nine months ended September 30, 2002 and 2001, CMS Energy reflected $129
million and ($33) million net price risk management asset (liability),
respectively, net of reserves, related to the unrealized mark-to-market gains
and losses on existing wholesale power contracts, gas contracts and economic
hedges for retail activities that are marked as derivatives.
The following tables provide a summary of the fair value of CMS Energy's energy
commodity contracts as of September 30, 2002.
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In Millions
-----------------------------------------------------------------------------------------------------
Total Maturity (in years)
---------------------------------------------------
Source of Fair Value Fair Value Less than 1 1 to 3 4 to 5 Greater than 5
-----------------------------------------------------------------------------------------------------
Prices actively quoted $ 7 $ 7 $ - $ - $ -
Prices provided by other
external sources 23 7 16 - -
Prices based on models and
other valuation 99 13 54 22 10
-----------------------------------------------------------------------------------------------------
Total $129 $27 $70 $22 $10
=====================================================================================================
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 September 30,
2002, these swaps had a negative fair value of $9 million that if sustained,
will be reclassified to earnings as the swaps are settled on a quarterly basis.
No ineffectiveness was recognized during the third 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 September 30, 2002 and 2001, the weighted average interest
rate associated with outstanding swaps was approximately 5.2 percent and 6.5
percent, respectively.
In Millions
-------------------------------------------------------------------------------
Floating to Fixed Notional Maturity Fair Unrealized
Interest Rate Swaps Amount Date Value Gain (Loss)
-------------------------------------------------------------------------------
September 30, 2002 $ 294 2003-2006 $ (9) $ -
September 30, 2001 $1,419 2001-2006 $(14) $ 3
===============================================================================
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 September 30, 2002.
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 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 offset
losses and gains, respectively, on assets and liabilities being hedged. The
estimated fair value of the foreign exchange and option contracts at September
30, 2002 and 2001 was approximately zero and $18 million, respectively;
representing the amount CMS Energy would receive or (pay) upon settlement.
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CMS Energy Corporation
The notional amount of the outstanding foreign exchange contracts at September
30, 2002 was $1 million Canadian contracts. Foreign exchange contracts
outstanding as of September 30, 2001 had a total notional amount of $223
million, which was related to CMS Energy's investments in Argentina. The
Argentine contracts matured at various times during the fourth quarter of 2001
and 2002.
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 September 30, 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.
In Millions
----------------------------------------------------------------------------------------------------------
As of September 30 2002 Restated 2001 Restated
----------------------------------------------------------------------------------------------------------
Carrying Fair Unrealized Carrying Fair Unrealized
Cost Value Gain Cost Value Gain
----------------------------------------------------------------------------------------------------------
Long-Term Debt (a) $5,648 $5,206 $442 $6,222 $6,193 $29
Preferred Stock and
Trust Preferred Securities 927 699 228 1,258 1,162 96
----------------------------------------------------------------------------------------------------------
(a) Settlement of long-term debt is generally not expected until maturity.
9: REPORTABLE SEGMENTS
CMS Energy operates principally in the following five reportable segments:
electric utility; gas utility; independent power production; natural gas
transmission; and marketing, services and trading.
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. 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.
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 domestic and international
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 throughout the
United States and abroad.
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CMS Energy Corporation
The Consolidated Statements of Income show operating revenue and operating
income (loss) by reportable segment. Revenues from a land development business
fall below the quantitative thresholds for reporting, and have never met any of
the quantitative thresholds for determining reportable segments. The table below
shows net income (loss) by reportable segment.
In Millions
--------------------------------------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30 2002 2001 2002 2001
--------------------------------------------------------------------------------------------------------------------
(Restated) (Restated) (Restated) (Restated)
Net income (loss) available to common stockholder
Electric Utility $ 88 $ 15 $ 222 $ 108
Gas Utility (18) (11) 13 16
Independent Power Production 49 (89) 83 (44)
Natural Gas Transmission - (20) 8 (16)
Marketing, Services, and Trading 8 (7) 13 (27)
Corporate Interest and Other (115) (64) (198) (179)
---------------------------------------------------------------------------------------------------------------------
Income (Loss) From Continuing Operations 12 (176) 141 (142)
Discontinued Operations 24 (202) (154) (154)
Cumulative Accounting Change 1 - 18 9
--------------------------------------------------------------------------------------------------------------------
CONSOLIDATED NET INCOME (LOSS) $ 37 $(378) $ 5 $(287)
====================================================================================================================
In Millions
------------------------------------------------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30 2002 2001 2002 2001
------------------------------------------------------------------------------------------------------------------
(Restated) (Restated) (Restated) (Restated)
Net income (loss) available to common stockholder
Electric Utility $ 84 $ 31 $ 134 $ 93
Gas Utility 3 - 31 27
Independent Power Production 17 20 34 45
Natural Gas Transmission (4) (1) 8 4
Marketing, Services, and Trading (20) (16) 5 (20)
Corporate Interest and Other (44) (52) (83) (115)
-------------------------------------------------------------------------------------------------------------------
Income (Loss) From Continuing Operations 36 (18) 129 34
Discontinued Operations (127) 21 (178) 48
Cumulative Accounting Change 17 - 17 9
-------------------------------------------------------------------------------------------------------------------
CONSOLIDATED NET INCOME (LOSS) $ (74) $ 3 $ (32) $ 91
===================================================================================================================
121
CMS Energy Corporation
In Millions
------------------------------------------------------------------------------
Three Months Ended
March 31 2002 2001
------------------------------------------------------------------------------
(Restated) (Restated)
Net income available to common stockholder
Electric Utility $ 50 $ 62
Gas Utility 28 27
Independent Power Production 17 25
Natural Gas Transmission 12 5
Marketing, Services, and Trading 25 (4)
Corporate Interest and Other (39) (63)
--------------------------------------------------------------------------------
Income From Continuing Operations 93 52
Discontinued Operations (51) 27
Cumulative Accounting Change - 9
-------------------------------------------------------------------------------
CONSOLIDATED NET INCOME $ 42 $ 88
==============================================================================
10: RESTATEMENT
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.
In May 2002, as a result of certain financial reporting issues surrounding
round-trip trading transactions at CMS MST, CMS Energy announced that it would
restate its consolidated financial statements for 2000 and 2001 to eliminate the
effects of round-trip energy trades and form a Special Committee to investigate
these trades. Following this announcement, 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 were completed. As a
result, Ernst & Young began the process of re-auditing CMS Energy's consolidated
financial statements for each of the fiscal years ended December 31, 2001 and
December 31, 2000. Although Arthur Andersen's notification did not apply to
separate, audited financial statements of Consumers and Panhandle for the
applicable years, the re-audit did include audit work at Consumers and Panhandle
for these years.
In connection with Ernst & Young's re-audit of the financial statements for the
fiscal years ended December 31, 2001 and December 31, 2000, CMS Energy has made,
in consultation with Ernst & Young, 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, which affect the results of the
quarterly periods within 2001 and 2002. Therefore, the consolidated financial
statements for the quarters of 2001, the years ended December 31, 2001 and 2000,
and the quarters of 2002 have been restated from amounts previously reported. At
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CMS ENERGY CORPORATION
the time it adopted the accounting treatment for these items, CMS Energy
believed that such accounting was appropriate under accounting principles
generally accepted in the United States.
The primary restated items: 1) change the accounting associated with the PPA
reserve, which results in: the reversal of the 2001 increase to the PPA reserve
of $126 million; the reversal of a net $12 million charged to operating expenses
associated with the PPA in 2001; and the reversal of $29 million of the amount
charged to the PPA reserve in 2000; 2) recognize Consumers' new headquarters
lease as a capital lease, instead of an operating lease, and record the lease
obligation and capitalize costs incurred; 3) reverse a 2001 charge for a
contract loss associated with the DIG complex; 4) eliminate mark-to-market gains
and losses on inter-book and intercompany transactions at CMS MST; 5) record
adjustments associated with account reconciliations at CMS MST; 6) reverse
deferred income tax benefits recorded in association with the write-down of
certain foreign investments; 7) record an additional write-down of
system-balancing gas at Panhandle; 8) change the accounting treatment for CMS
Energy's and Panhandle's interest in the LNG business; and 9) change the
accounting treatment for CMS Energy's financing of its methanol plant.
The tables below summarize the significant audit adjustments and the effects on
CMS Energy's consolidated financial statements as of December 31, 2001 and
December 31, 2000:
In Millions
------------------------------
NET INCOME INCREASE (DECREASE) 2001 2000 TOTAL
------------------------------ ---- ---- -----
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
==== ==== =====
In Millions
------------------------------
BALANCE SHEET: INCREASE IN CONSOLIDATED DEBT 2001 2000
-------------------------------------------- ---- ----
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.
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CMS ENERGY CORPORATION
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 for the periods ended
December 31, 2001 and December 31, 2000:
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.
124
CMS ENERGY CORPORATION
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,
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CMS ENERGY CORPORATION
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.
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
Dispositions). 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.
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.
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CMS ENERGY CORPORATION
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.
AMORTIZATION OF DEBT COSTS: CMS Energy had been amortizing debt issuance costs
on a straight-line basis over the term of the debt. In connection with the
re-audit, CMS Energy changed the accounting for debt issuance costs pursuant to
the effective interest method. The changes reduced 2002 net income by $2
million; the quarterly impacts are shown in the accompanying table.
OTHER: Other adjustments reflected in the table below include the effects of
intercompany out of balance corrections and foreign currency transaction
adjustments.
In addition to the audit adjustments described above, goodwill write-downs of
$601 million ($369 million after-tax) and $15 million ($10 million after-tax)
reflected retroactively to the first quarter of 2002 as a
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CMS ENERGY CORPORATION
cumulative effect of change in accounting for goodwill, pursuant to the
requirements of SFAS No. 142, primarily due to changes in market conditions and
the value of Panhandle and Viron since acquisition by CMS Energy. (See Note 4,
Goodwill). The goodwill write-downs are included in discontinued operations.
REVENUES RECLASSIFICATIONS: EITF Issue No. 02-3, Recognition And Reporting Of
Gains And Losses On Energy Trading Contracts Under EITF Issues No. 98-10 and
00-17: In September 2002, the EITF reaffirmed the consensus originally reached
in June 2002 that requires all gains and losses, including mark-to-market gains
and losses and physical settlements, related to energy trading activities within
the scope of EITF Issue No 98-10 be presented as a net amount in the income
statement. At the October 25, 2002 meeting, the EITF reached a consensus to
rescind EITF Issue No. 98-10, Accounting for Contracts Involved In Energy
Trading and Risk Management Activities. As a result, at December 31, 2002 and
2001, these transactions were presented gross, and the third quarter 2002 and
2001 were reclassified accordingly. The reclassification had no impact on
previously reported net income or stockholders' equity.
DISCONTINUED OPERATIONS: In accordance with SFAS No. 144, discontinued
operations include components of entities or entire entities that have been
eliminated from the ongoing operations of CMS Energy. Upon implementation, prior
periods were reclassified. (See Note 2, Discontinued Operations).
MCV MTM ACCOUNTING CHANGE: 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 ($17 million in the second quarter 2002 and $1
million in the third quarter 2002). This accounting was originally reported in
revenues and income taxes; it is now reported as a cumulative effect of
accounting change, net of tax.
EARLY EXTINGUISHMENT OF DEBT: In April 2002 the FASB issued SFAS No. 145,
Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No.
13, and Technical Corrections. 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 criteria set forth in APB Opinion No. 30. The provisions of this statement
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, in the accompanying
Consolidated Statement 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.
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CMS ENERGY CORPORATION
The following table reflects all adjustments to the quarterly income statements
for the first three quarters in 2002 and 2001 as reported in each of CMS
Energy's 2002 Form 10-Qs.
---------------------------------------------------------------------------------------------------------
In Millions (Unaudited)
---------------------------------------------------------------------------------------------------------
2002 2001
Quarters Ended March 31 June 30 Sept. 30 March 31 June 30 Sept. 30
---------------------------------------------------------------------------------------------------------
Operating revenues $2,525 $2,368 $1,333 $2,853 $2,165 $1,333
EITF Reclassifications - - 1,382 - - 730
Discontinued Operations (246) (164) (157) (413) (278) (161)
MTM Inter-book
Transactions and MST
Account Reconciliations (39) (43) 14 (18) 60 11
MTM Gains and
Losses on Intercompancy
Transactions 22 (1) 10 (10) (18) (19)
MCV MTM Accounting Change - (25) (3)
Other 1 2 - 4 3 4
Restated operating revenues $2,263 $2,137 $2,579 $2,416 $1,932 $1,898
---------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------
In Millions (Unaudited)
---------------------------------------------------------------------------------------------------------
2002 2001
Quarters Ended March 31 June 30 Sept. 30 March 31 June 30 Sept. 30
---------------------------------------------------------------------------------------------------------
Operating income (loss) $292 $233 $211 $327 $225 $(378)
Discontinued Operations (67) (42) (44) (99) (41) (42)
MCV PPA Adjustment - - - 4 4 130
DIG Loss Contract (9) (8) (5) - - 200
MTM Inter-book
Transactions and MST
Account Reconciliations 35 - 19 (14) (77) (27)
MTM Gains and
Losses on Intercompany
Transactions 22 (1) 10 (10) (18) (19)
MCV MTM Accounting Change - (25) (3) - - -
Panhandle System Gas - - - - (6) 3
Other 2 (5) 4 6 6 4
Restated operating Income (loss) $275 $152 $192 $214 $ 93 $(129)
---------------------------------------------------------------------------------------------------------
Income (loss) from continuing
operations $400 $73 $ 6 $108 $ 34 $(363)
Discontinued Operations (332) (8) (6) (31) - (8)
MCV PPA Adjustment 1 - 1 2 2 85
DIG Loss Contract (6) (5) (3) - - 130
MTM Inter-book
Transactions and MST
Account Reconciliations 20 2 10 (8) (49) (18)
MTM Gains and
Losses on Intercompany
Transactions 14 (1) 6 (6) (12) (12)
129
CMS ENERGY CORPORATION
MCV MTM Accounting Change - (17) (1) - - -
Panhandle System Gas - - - - (3) 2
Amortization of Debt Costs - - - (11) 8 2
Early Extinguishment of Debt (1) (7) - - - -
Income Tax Adjustments - - - - - -
Other (3) (1) (1) (2) 2 6
Restated income (loss) from
continuing operations $ 93 $36 $12 $ 52 $(18) $(176)
--------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------
In Millions (Unaudited)
---------------------------------------------------------------------------------------------------------
2002 2001
Quarters Ended March 31 June 30 Sept. 30 March 31 June 30 Sept. 30
---------------------------------------------------------------------------------------------------------
Discontinued Operations $ - $(141) $17 $ 1 $19 $(206)
Discontinued Operations (47) 8 6 31 - 8
MTM Inter-book
Transactions and MST
Account Reconciliations (3) 6 (1) (4) 1 -
MTM Gains and
Losses on Intercompany
Transactions - - 3 - - -
Early Extinguishment of Debt - - - - - -
Income Tax Adjustments - - - - - -
Other (1) - (1) (1) 1 (4)
Restated Discontinued
Operations $ (51) $(127) $24 $27 $21 $(202)
--------------------------------------------------------------------------------------------------------
Cumulative effect of a
Change in accounting
principle $ - $ - $ - $ - - $ -
MTM Inter-book
Transactions and MST
Account Reconciliations - - - 9 - -
MCV MTM Accounting Change - 17 1 - - -
Restated Cumulative effect of a
Change in accounting
principle $ - $ 17 $ 1 $ 9 $ - $ -
------------ -------------------------------------------------------------------------------------------
Extraordinary Item $ (1) $ (7) $ - $ - $ - $ -
Early Extinguishment of Debt 1 7 - - - -
Restated Extraordinary Item $ - $ - $ - $ - $ - $ -
--------------------------------------------------------------------------------------------------------
130
CMS ENERGY CORPORATION
-------------------------------------------------------------------------------------------------------------
In Millions (Unaudited)
-------------------------------------------------------------------------------------------------------------
2002 2001
Quarters Ended March 31 June 30 Sept. 30 March 31 June 30 Sept. 30
-------------------------------------------------------------------------------------------------------------
Consolidated net income (loss) $399 $(75) $23 $109 $53 $(569)
Discontinued Operations (379) - - - - -
MCV PPA Adjustment 1 - 1 2 2 85
DIG Loss Contract (6) (5) (3) - - 130
MTM Inter-book
Transactions and MST
Account Reconciliations 17 8 9 (3) (48) (18)
MTM Gains and
Losses on Intercompany
Transactions 14 (1) 9 (6) (12) (12)
Panhandle System Gas - - - - (3) 2
Amortization of Debt Costs (11) 8 2
Income Tax Adjustments - - - - - -
Other (4) (1) (2) (3) 3 2
Restated consolidated net
income (loss) $ 42 $(74) $37 $ 88 $3 $(378)
-------------------------------------------------------------------------------------------------------------
131
CMS Energy Corporation
The following tables reflect the effects of the restatement on CMS Energy's
consolidated financial statements for the quarterly periods ended March 31, June
30, and, September 30, 2002 and 2001:
------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) Three Months Ended Three Months Ended
------------------ ------------------
In Millions, Except Per Share Amounts 2002 2001
---- ----
March 31 As Reported As Restated As Reported As Restated
------------------------------------------------------------------------------------------------------------------------
Operating Revenue $ 2,525 $ 2,263 $ 2,853 $ 2,416
----------------------------------------------------
Operating Expenses 1,964 1,754 2,242 1,968
Maintenance 63 55 66 59
Depreciation, depletion and amortization 140 122 149 117
General taxes 66 57 69 58
----------------------------------------------------
Total Operating Expenses 2,233 1,988 2,526 2,202
----------------------------------------------------
OPERATING INCOME (LOSS)
Electric utility 114 115 135 139
Gas utility 63 64 65 64
Natural gas transmission 61 - 93 8
Independent power production 38 28 25 24
Oil and gas exploration and production - - 11 -
Marketing, services and trading 11 42 7 (7)
Other 5 26 (9) (14)
----------------------------------------------------
292 275 327 214
OTHER INCOME (DEDUCTIONS)
Accretion expense (9) (8) (9) (9)
Gain on asset sales, net 520 22 - -
Other, net 10 - 13 8
----------------------------------------------------
521 14 4 (1)
------------------------------------------------------------------------------------------------------------------------
EARNINGS BEFORE INTEREST AND INCOME TAXES 813 289 331 213
------------------------------------------------------------------------------------------------------------------------
FIXED CHARGES
Interest on long-term debt 131 95 145 122
Other interest 8 11 12 12
Capitalized interest (4) (3) (14) (14)
Preferred securities distributions 25 25 23 23
------------------------------------------------------------------------------------------------------------------------
160 128 166 143
------------------------------------------------------------------------------------------------------------------------
Earnings Before Income Taxes and Minority Interests 653 161 165 70
Income Taxes 253 68 56 17
Minority Interests - - 1 1
----------------------------------------------------
Income From Continuing Operations 400 93 108 52
Income (Loss) From Discontinued Operations - (51) 1 27
----------------------------------------------------
Income Before Cumulative Effect of Change in Accounting
Principle and Extraordinary Item 400 42 109 79
Cumulative Effect of Change in Accounting for Derivative
Instruments - - - 9
----------------------------------------------------
Earnings Before Extraordinary Item 400 42 109 88
Extraordinary Item (1) - - -
----------------------------------------------------
Consolidated Net Income $ 399 $ 42 $ 109 $ 88
========================================================================================================================
Basic Earnings Per Average Common Share $ 2.99 $ .32 $ .87 $ .70
========================================================================================================================
Diluted Earnings Per Average Common Share $ 2.92 $ .32 $ .85 $ .70
========================================================================================================================
Dividends Declared Per Common Share $ .365 $ .365 $.365 $ .365
========================================================================================================================
132
CMS Energy Corporation
---------------------------------------------------------------------------------------------------------------------------
Three Months Ended Three Months Ended
------------------- ------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) 2002 2001
In Millions ---- ----
March 31 As Reported As Restated As Reported As Restated
---------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Consolidated net income $ 399 $ 42 $ 109 $ 88
Adjustments to reconcile net income to net cash provided by
operating activities
Depreciation, depletion and amortization 140 122 149 117
Discontinued operations (Note 2) - - (1) -
Capital lease and debt discount amortization 4 4 9 2
Deferred income taxes and investment tax credit (31) (245) 31 26
Accretion expense 9 8 9 9
Undistributed earnings of related parties (31) (36) (32) (37)
Gain on the sale of assets (520) (22) - -
Cumulative effect of an accounting change - - - (9)
Changes in other assets and liabilities:
Decrease in accounts receivable and accrued revenue 250 36 169 162
Decrease in inventories 179 185 125 167
Increase (Decrease) in accounts payable and accrued expenses (86) 84 (160) (194)
Regulatory obligation --gas customer choice (7) - (16) -
Change in postretirement benefits, net (47) - (28) -
Changes in other assets and liabilities (7) 68 (3) (76)
---------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 252 246 361 255
---------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (excludes assets placed under capital lease)
(192) (156) (273) (258)
Investments in partnerships and unconsolidated subsidiaries (17) (16) (31) (32)
Cost to retire property, net (15) (20) (26) (26)
Investments in Electric Restructuring Implementation Plan - (3) - (3)
Investments in nuclear decommissioning trust funds (2) (2) (2) (2)
Proceeds from nuclear decommissioning trust funds 8 8 10 10
Net proceeds from sale of assets 878 878 - 23
Other (31) (42) (10) 5
---------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities 629 647 (332) (283)
---------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from notes, bonds, and other long-term debt 299 311 373 455
Issuance of common stock 29 42 316 316
Retirement of bonds and other long-term debt (902) (912) (389) (471)
Retirement of trust preferred securities (30) (30) - -
Payment of common stock dividends (48) (49) (45) (45)
Decrease in notes payable, net (252) (249) (233) (233)
Payment of capital lease obligations (3) (3) (8) (8)
Other financing (3) (1) (3) 3
---------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities (910) (891) 11 17
---------------------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND TEMPORARY CASH INVESTMENTS (29) 2 40 (11)
CASH AND TEMPORARY CASH INVESTMENTS, BEGINNING OF PERIOD 189 127 182 141
---------------------------------------------------------------------------------------------------------------------------
CASH AND TEMPORARY CASH INVESTMENTS, END OF PERIOD $ 160 $ 129 $ 222 $ 130
===========================================================================================================================
OTHER CASH FLOW ACTIVITIES AND NON-CASH INVESTING AND
FINANCING ACTIVITIES:
CASH TRANSACTIONS
Interest paid (net of amounts capitalized) $ 139 $ 94 $ 166 $ 118
Income taxes paid (net of refunds) (42) (42) (6) (6)
Pension and OPEB cash contribution - 61 - 14
NON-CASH TRANSACTIONS
Nuclear fuel placed under capital lease - - 2 2
Other assets placed under capital lease 8 17 7 7
133
CMS Energy Corporation
----------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS March 31, 2002 December 31, 2001 March 31, 2001
-------------- ----------------- --------------
(Unaudited) (Unaudited)
----------------------------------------------------------------------------------------------------------------------------
In Millions As Reported As Restated As Reported As Restated As Reported As Restated
----------------------------------------------------------------------------------------------------------------------------
ASSETS
PLANT AND PROPERTY (AT COST) $ 14,574 $ 11,591 $ 14,631 $ 11,485 $ 13,400 $ 10,518
--------------------------------------------------------------------------------
Less accumulated depreciation,
depletion and amortization 6,950 6,259 6,833 6,158 6,317 5,957
--------------------------------------------------------------------------------
Plant, net 7,624 5,332 7,798 5,327 7,083 4,561
Construction work-in-progress 611 580 564 521 905 816
--------------------------------------------------------------------------------
Total Plant 8,235 5,912 8,362 5,848 7,988 5,377
----------------------------------------------------------------------------------------------------------------------------
INVESTMENTS
Independent power production 745 741 718 714 1,002 949
Natural gas transmission 423 350 501 577 457 570
Midland Cogeneration Venture Limited
Partnership 316 316 300 300 302 302
First Midland Limited Partnership 257 257 253 253 248 248
Other 80 77 123 117 75 93
--------------------------------------------------------------------------------
1,821 1,741 1,895 1,961 2,084 2,162
----------------------------------------------------------------------------------------------------------------------------
CURRENT ASSETS
Cash and temporary cash
investments at cost 160 129 189 127 222 130
Accounts receivable, notes receivable
and accrued revenue 587 275 681 219 726 261
Accounts receivable -- Marketing,
services and trading 445 276 683 295 536 315
Accounts receivable and notes
receivable - related parties - 115 - 190 - 157
Inventories at average cost
Gas in underground storage 402 407 587 590 150 160
Materials and supplies 175 92 174 89 142 84
Generating plant fuel stock 50 50 52 52 50 50
Assets held for sale - 385 - 471 - 577
Price risk management assets 417 366 461 327 1,094 259
Deferred income taxes - - - - 41 41
Prepayments and other 252 168 206 200 250 165
--------------------------------------------------------------------------------
Total Current Assets 2,488 2,263 3,033 2,560 3,211 2,199
----------------------------------------------------------------------------------------------------------------------------
NON-CURRENT ASSETS
Regulatory Assets
Securitized costs 714 714 717 717 709 709
Postretirement benefits 203 203 209 209 226 226
Abandoned Midland Project 11 11 12 12 15 15
Other 171 171 167 167 84 162
Assets held for sale - 2,697 - 3,480 - 3,536
Price risk management assets 549 434 424 368 350 260
Goodwill, net 811 - 811 - 880 -
Nuclear decommissioning trust funds 576 576 581 581 585 585
Notes receivable -- related parties 213 213 177 177 161 161
Notes receivable 129 126 134 130 151 142
Other 558 543 580 565 733 678
--------------------------------------------------------------------------------
Total Non-current Assets 3,935 5,688 3,812 6,406 3,894 6,474
--------------------------------------------------------------------------------
TOTAL ASSETS $ 16,479 $ 15,604 $ 17,102 $16,775 $ 17,177 $ 16,212
============================================================================================================================
134
CMS Energy Corporation
-------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS March 31, 2002 December 31, 2001 March 31, 2001
-------------- ----------------- --------------
(Unaudited) (Unaudited)
-------------------------------------------------------------------------------------------------------------------------
In Millions As Reported As Restated As Reported As Restated As Reported As Restated
-------------------------------------------------------------------------------------------------------------------------
STOCKHOLDERS' INVESTMENT AND
LIABILITIES
CAPITALIZATION
Common Stockholders' equity $ 2,289 $ 2,080 $ 1,890 $ 2,038 $ 2,703 $ 2,737
Preferred stock of subsidiary 44 44 44 44 44 44
Company-obligated convertible Trust
Preferred Securities of
subsidiaries (a) 694 694 694 694 694 694
Company-obligated mandatorily
redeemable preferred securities of
Consumers' subsidiaries (a) 490 490 520 520 395 395
Long-term debt 6,543 5,475 6,923 5,840 7,150 5,984
Non-current portion of capital
leases 60 84 60 71 58 51
-------------------------------------------------------------------------------------------------------------------------
Total Capitalization 10,120 8,867 10,131 9,207 11,044 9,905
-------------------------------------------------------------------------------------------------------------------------
Minority Interests 87 24 86 24 86 24
-------------------------------------------------------------------------------------------------------------------------
CURRENT LIABILITIES
Current portion of long-term debt
and capital leases 743 736 981 1,016 302 298
Notes payable 179 164 416 416 170 170
Accounts payable 538 296 547 359 576 315
Accounts payable -- Marketing,
services and trading 323 211 574 236 321 172
Accrued taxes 314 111 125 111 288 229
Accrued interest 155 142 163 135 137 125
Accounts payable -- related parties 67 59 62 54 69 62
Liabilities held for sale - 603 - 639 - 562
Price risk management liabilities 396 356 381 367 1,061 224
Current portion of purchase power
contracts - 24 - 24 - 22
Current portion of gas supply
contract obligations - 23 - 22 - 21
Deferred income taxes 14 15 51 49 - -
Other 430 245 510 243 557 285
-------------------------------------------------------------------------------
Total Current Liabilities 3,159 2,985 3,810 3,671 3,481 2,485
-------------------------------------------------------------------------------------------------------------------------
NON-CURRENT LIABILITIES
Deferred income taxes 781 609 773 824 758 751
Postretirement benefits 280 298 333 356 404 387
Deferred investment tax credit 100 100 102 102 108 108
Liabilities held for sale - 1,475 - 1,376 - 1,448
Regulatory liabilities for income
taxes, net 276 276 276 276 260 260
Price risk management liabilities 461 341 352 287 341 251
Power loss contract reserves 341 - 354 - 52 -
Gas supply contract obligations 277 254 287 266 300 278
Power purchase agreement -- MCV
Partnership - 47 - 52 - 72
Other 597 328 598 334 343 243
-------------------------------------------------------------------------------
TOTAL NON-CURRENT LIABILITIES 3,113 3,728 3,075 3,873 2,566 3,798
-------------------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' INVESTMENT AND
LIABILITIES $ 16,479 $ 15,604 $ 17,102 $16,775 $17,177 $16,212
=========================================================================================================================
135
CMS Energy Corporation
CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS' EQUITY (UNAUDITED)
----------------------------------------------------------------------------------------------------------------------
Three Months Ended Three Months Ended
------------------- ------------------
2002 2001
---- ----
March 31
In Millions As Reported As Restated As Reported As Restated
----------------------------------------------------------------------------------------------------------------------
COMMON STOCK
At beginning and end of period $ 1 $ 1 $ 1 $ 1
----------------------------------------------------------------------------------------------------------------------
OTHER PAID-IN CAPITAL
At beginning of period 3,269 3,257 2,936 2,936
Common stock issued 29 42 316 316
----------------------------------------------------
At end of period 3,298 3,299 3,252 3,252
----------------------------------------------------------------------------------------------------------------------
OTHER COMPREHENSIVE INCOME (LOSS)
Investments
At beginning of period (4) (5) (2) (2)
Unrealized gain (loss) on investments (a) 5 - (1) (1)
----------------------------------------------------
At end of period 1 (5) (3) (3)
----------------------------------------------------------------------------------------------------------------------
Derivative Instruments (c)
At beginning of period (b) (26) (31) 13 13
Unrealized gain (loss) on derivative instruments (a) 7 12 (14) (14)
Reclassification adjustments included in consolidated
net income (a) 2 2 (6) (6)
----------------------------------------------------
At end of period (17) (17) (7) (7)
----------------------------------------------------------------------------------------------------------------------
FOREIGN CURRENCY TRANSLATION
At beginning of period (295) (233) (254) (206)
Change in foreign currency translation (a) 5 (8) (30) (30)
----------------------------------------------------
At end of period (290) (241) (284) (236)
----------------------------------------------------------------------------------------------------------------------
RETAINED EARNINGS (DEFICIT)
At beginning of period (1,055) (951) (320) (313)
Consolidated net income (a) 399 42 109 88
Common stock dividends declared (48) (48) (45) (45)
----------------------------------------------------
At end of period (704) (957) (256) (270)
----------------------------------------------------------------------------------------------------------------------
Total Common Stockholders' Equity $ 2,289 $ 2,080 $ 2,703 $ 2,737
======================================================================================================================
(a) Disclosure of Consolidated Comprehensive Income:
Investments
Unrealized gain (loss) on investments $ 5 $ - $ (1) $ (1)
Derivative Instruments
Unrealized gain (loss) on derivative instruments 7 12 (14) (14)
Reclassification adjustments included in
consolidated net income 2 2 (6) (6)
Foreign currency translation, net 5 (8) (30) (30)
Consolidated net income 399 42 109 88
----------------------------------------------------
Total Consolidated Comprehensive Income $ 418 $ 48 $ 58 $ 37
====================================================
(b) Cumulative effect of change in accounting principle,
net of $(8) tax in 2001.
(c) Included in these amounts is CMS Energy's
proportionate share of the effects of derivative
accounting relating to its equity investment in the MCV
Partnership as follows:
MCV Partnership:
At the beginning of the period $ - $ (8) $ - $ -
Cumulative effect of change in accounting for
derivative instruments - - - 5
Unrealized gain/(loss) on derivative instruments - 5 - (4)
Reclassification adjustments included in net income - 2 - 1
----------------------------------------------------
At the end of the period $ - $ (1) $ - $ 2
======================================================================================================================
136
CMS Energy Corporation
--------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) Three Months Ended Three Months Ended
------------------ ------------------
In Millions, Except Per Share Amounts 2002 2001
---- ----
June 30 As Reported As Restated As Reported As Restated
--------------------------------------------------------------------------------------------------------------------------
Operating Revenue $ 2,368 $ 2,137 $ 2,165 $ 1,932
------------------------------------------------------
Operating Expenses 1,926 1,798 1,724 1,659
Maintenance 61 53 63 56
Depreciation, depletion and amortization 95 86 101 79
General taxes 53 48 52 45
------------------------------------------------------
Total Operating Expenses 2,135 1,985 1,940 1,839
------------------------------------------------------
OPERATING INCOME (LOSS)
Electric utility 116 116 82 86
Gas utility 20 18 16 17
Natural gas transmission 38 (5) 44 3
Independent power production 73 37 28 30
Marketing, services and trading (33) (32) 51 (25)
Other 19 18 4 (18)
------------------------------------------------------
233 152 225 93
OTHER INCOME (DEDUCTIONS)
Accretion expense (8) (7) (8) (9)
Gain (loss) on asset sales, net 26 26 (1) (2)
Other, net (1) (1) - 4
------------------------------------------------------
17 18 (9) (7)
--------------------------------------------------------------------------------------------------------------------------
EARNINGS BEFORE INTEREST AND INCOME TAXES 250 170 216 86
--------------------------------------------------------------------------------------------------------------------------
FIXED CHARGES
Interest on long-term debt 119 101 133 89
Other interest 5 3 17 16
Capitalized interest (5) (4) (13) (13)
Preferred dividends - 1 - 1
Preferred securities distributions 25 25 24 23
--------------------------------------------------------------------------------------------------------------------------
144 126 161 116
--------------------------------------------------------------------------------------------------------------------------
Earnings (Loss) Before Income Taxes and Minority
Interests 106 44 55 (30)
Income Taxes (Benefits) 32 7 20 (12)
Minority Interests 1 1 1 -
------------------------------------------------------
Income (Loss) From Continuing Operations 73 36 34 (18)
Income (Loss) From Discontinued Operations (141) (127) 19 21
------------------------------------------------------
Income (Loss) Before Cumulative Effect of Change in
Accounting Principle and Extraordinary Item (68) (91) 53 3
Cumulative Effect of Change in Accounting Principle - 17 - -
------------------------------------------------------
Income (Loss) Before Extraordinary Item (68) (74) 53 3
Extraordinary Item (7) - - -
------------------------------------------------------
Consolidated Net Income (Loss) $ (75) $ (74) $ 53 $ 3
==========================================================================================================================
Basic Earnings (Loss) Per Average Common Share $ (.56) $ (.55) $ .40 $ .02
==========================================================================================================================
Diluted Earnings (Loss) Per Average Common Share $ (.56) $ (.55) $ .40 $ .02
==========================================================================================================================
Dividends Declared Per Common Share .365 $ .365 $ .365 $ .365
==========================================================================================================================
137
CMS Energy Corporation
----------------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) Six Months Ended Six Months Ended
----------------- ----------------
In Millions, Except Per Share Amounts 2002 2001
---- ----
June 30 As Reported As Restated As Reported As Restated
-----------------------------------------------------------------------------------------------------------------------
Operating Revenue $ 4,834 $ 4,400 $ 4,973 $ 4,348
-------------------------------------------------------
Operating Expenses 3,847 3,552 3,944 3,627
Maintenance 123 108 129 115
Depreciation, depletion and amortization 226 208 240 196
General taxes 118 105 119 103
-------------------------------------------------------
Total Operating Expenses 4,314 3,973 4,432 4,041
-------------------------------------------------------
OPERATING INCOME (LOSS)
Electric utility 231 231 216 225
Gas utility 83 82 80 81
Natural gas transmission 99 (5) 136 11
Independent power production 111 65 52 54
Marketing, services and trading (26) 10 57 (32)
Other 22 44 - (32)
-------------------------------------------------------
520 427 541 307
OTHER INCOME (DEDUCTIONS)
Accretion expense (17) (15) (17) (18)
Gain (loss) on asset sales, net 48 48 (1) (2)
Other, net 9 (1) 14 12
-------------------------------------------------------
40 32 (4) (8)
-----------------------------------------------------------------------------------------------------------------------
EARNINGS BEFORE INTEREST AND INCOME TAXES 560 459 537 299
-----------------------------------------------------------------------------------------------------------------------
FIXED CHARGES
Interest on long-term debt 243 196 270 211
Other interest 14 14 29 28
Capitalized interest (9) (7) (27) (27)
Preferred dividends 1 1 1 1
Preferred securities distributions 50 50 46 46
-----------------------------------------------------------------------------------------------------------------------
299 254 319 259
-----------------------------------------------------------------------------------------------------------------------
Earnings Before Income Taxes and Minority Interests 261 205 218 40
Income Taxes 97 75 75 5
Minority Interests 2 1 1 1
-------------------------------------------------------
Income From Continuing Operations 162 129 142 34
Income (Loss) From Discontinued Operations 169 (178) 20 48
-------------------------------------------------------
Income (Loss) Before Cumulative Effect of Change in
Accounting Principle and Extraordinary Item 331 (49) 162 82
Cumulative Effect of Change in Accounting Principle (9) 17 - 9
-------------------------------------------------------
Income (Loss) Before Extraordinary Item 322 (32) 162 91
Extraordinary Item (8) - - -
-------------------------------------------------------
Consolidated Net Income (Loss) $ 314 $ (32) $ 162 $ 91
=======================================================================================================================
Basic Earnings (Loss) Per Average Common Share $ 2.34 $ (.24) $ 1.27 $ .70
=======================================================================================================================
Diluted Earnings (Loss) Per Average Common Share $ 2.30 $ (.24) $ 1.25 $ .70
=======================================================================================================================
Dividends Declared Per Common Share $ .73 $ .73 $ .73 $ .73
=======================================================================================================================
138
CMS Energy Corporation
---------------------------------------------------------------------------------------------------------------------------
Six Months Ended Six Months Ended
----------------- ----------------
2002 2001
---- ----
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
June 30
---------------------------------------------------------------------------------------------------------------------------
In Millions As Reported As Restated As Reported As Restated
---------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Consolidated net income (loss) $ 314 $(32) $ 162 $ 91
Adjustments to reconcile net income to net cash provided by
operating activities
Depreciation, depletion and amortization 226 208 240 196
Discontinued operations (Note 2) (169) 132 (20) -
Capital lease and debt discount amortization 11 10 16 7
Deferred income taxes and investment tax credit (126) (325) 99 72
Accretion expense 17 15 17 18
Distributions from related parties in excess of (less than)
earnings (81) (57) 26 3
(Gain) loss on the sale of assets (48) (48) 1 2
Cumulative effect of an accounting change 9 (17) - (9)
Extraordinary item 8 - - -
Changes in other assets and liabilities:
Decrease in accounts receivable and accrued revenues 205 150 49 279
Decrease (increase) in inventories 90 99 (103) (59)
Increase (decrease) in accounts payable and accrued expenses 116 138 (85) (252)
Regulatory obligation - gas choice (6) - (16) -
Changes in other assets and liabilities (65) 139 (58) (69)
---------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 501 412 328 279
---------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (excludes assets placed under capital lease) (361) (357) (554) (554)
Investments in partnerships and unconsolidated subsidiaries (29) (29) (146) (147)
Cost to retire property, net (31) (33) (55) (55)
Investment in Electric Restructuring Implementation Plan - (5) - (6)
Investments in nuclear decommissioning trust funds (3) (3) (3) (3)
Proceeds from nuclear decommissioning trust funds 12 12 14 14
Proceeds from sale of assets 1,188 1,286 99 122
Other (24) (16) (14) 12
---------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities 752 855 (659) (617)
---------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from notes, bonds, and other long-term debt 349 390 457 570
Proceeds from trust preferred securities - - 121 125
Issuance of common stock 49 60 328 328
Retirement of bonds and other long-term debt (1,313) (1,346) (401) (515)
Retirement of trust preferred securities (30) (30) - -
Payment of common stock dividends (97) (97) (94) (94)
Decrease in notes payable, net (150) (143) (74) (74)
Payment of capital lease obligations (7) (7) (13) (13)
Other financing 21 1 1 3
---------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities (1,178) (1,172) 325 330
---------------------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND TEMPORARY CASH INVESTMENTS 75 95 (6) (8)
CASH AND TEMPORARY CASH INVESTMENTS, BEGINNING OF PERIOD 189 127 182 141
---------------------------------------------------------------------------------------------------------------------------
CASH AND TEMPORARY CASH INVESTMENTS, END OF PERIOD $ 264 $ 222 $ 176 $ 133
===========================================================================================================================
OTHER CASH FLOW ACTIVITIES AND NON-CASH INVESTING AND FINANCING
ACTIVITIES:
CASH TRANSACTIONS
Interest paid (net of amounts capitalized) $ 232 $ 185 $ 238 $ 188
Income taxes paid (net of refunds) (42) (42) (6) (6)
Pension and OPEB cash contribution 106 106 89 89
NON-CASH TRANSACTIONS
Nuclear fuel placed under capital lease $ - $ - $ 12 $ 12
Other assets placed under capital lease 15 35 10 14
===========================================================================================================================
139
CMS Energy Corporation
----------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS June 30, 2002 December 31, 2001 June 30, 2001
------------- ----------------- -------------
(Unaudited) (Unaudited)
----------------------------------------------------------------------------------------------------------------------------
In Millions As Reported As Restated As Reported As Restated As Reported As Restated
----------------------------------------------------------------------------------------------------------------------------
ASSETS
PLANT AND PROPERTY (AT COST) $ 13,983 $ 11,044 $ 14,631 $ 11,485 $ 13,603 $ 10,716
-----------------------------------------------------------------------------------
Less accumulated depreciation,
depletion and amortization 6,873 6,016 6,833 6,158 6,398 6,011
-----------------------------------------------------------------------------------
Plant, net 7,110 5,028 7,798 5,327 7,205 4,705
Construction work-in-progress 515 482 564 521 934 810
-----------------------------------------------------------------------------------
Total Plant 7,625 5,510 8,362 5,848 8,139 5,515
----------------------------------------------------------------------------------------------------------------------------
INVESTMENTS
Independent power production 733 728 718 714 943 889
Natural gas transmission 257 179 501 577 538 595
Midland Cogeneration Venture Limited
Partnership 359 359 300 300 295 295
First Midland Limited Partnership 261 261 253 253 253 253
Other 91 75 135 117 66 102
-----------------------------------------------------------------------------------
1,701 1,602 1,907 1,961 2,095 2,134
----------------------------------------------------------------------------------------------------------------------------
CURRENT ASSETS
Cash and temporary cash
investments at cost 264 222 189 127 176 133
Accounts receivable, notes receivable
and accrued revenue 408 135 681 219 710 253
Accounts receivable -- Marketing,
services and trading 547 340 561 295 638 279
Accounts receivable and notes
receivable - related parties - 111 - 190 - 168
Inventories at average cost
Gas in underground storage 473 476 587 590 389 369
Materials and supplies 186 77 174 89 133 82
Generating plant fuel stock 57 57 52 52 48 48
Assets held for sale - 410 - 471 - 532
Price risk management assets 255 226 461 327 1,092 492
Prepayments and other 217 143 206 200 262 137
-----------------------------------------------------------------------------------
Total Current Assets 2,407 2,197 2,911 2,560 3,448 2,493
----------------------------------------------------------------------------------------------------------------------------
NON-CURRENT ASSETS
Regulatory Assets
Securitized costs 709 709 717 717 710 710
Postretirement benefits 197 197 209 209 220 220
Abandoned Midland Project 11 11 12 12 12 12
Other 173 173 167 167 91 173
Assets held for sale - 2,452 - 3,480 - 3,605
Price risk management assets 510 382 424 368 350 350
Goodwill, net 747 - 811 - 849 -
Nuclear decommissioning trust funds 555 555 581 581 594 594
Notes receivable -- related party 203 203 177 177 166 166
Notes receivable 129 126 134 130 143 135
Other 506 470 568 565 829 719
-----------------------------------------------------------------------------------
Total Non-current Assets 3,740 5,278 3,800 6,406 3,964 6,684
-----------------------------------------------------------------------------------
TOTAL ASSETS $ 15,473 $ 14,587 $ 16,980 $16,775 $ 17,646 $ 16,826
============================================================================================================================
140
CMS Energy Corporation
-------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS June 30, 2002 December 31, 2001 June 30, 2001
------------- ----------------- -------------
(Unaudited) (Unaudited)
-------------------------------------------------------------------------------------------------------------------------
In Millions As Reported As Restated As Reported As Restated As Reported As Restated
-------------------------------------------------------------------------------------------------------------------------
STOCKHOLDERS' INVESTMENT AND
LIABILITIES
CAPITALIZATION
Common Stockholders' equity $ 1,757 $ 1,552 $ 1,890 $ 2,038 $ 2,684 $ 2,668
Preferred stock of subsidiary 44 44 44 44 44 44
Company-obligated convertible Trust
Preferred Securities of
subsidiaries 694 694 694 694 694 694
Company-obligated mandatorily
redeemable preferred securities of
Consumers' subsidiaries 490 490 520 520 520 520
Long-term debt 6,307 5,367 6,923 5,840 7,193 6,012
Non-current portion of capital
leases 96 97 60 71 55 54
-------------------------------------------------------------------------------------------------------------------------
Total Capitalization 9,388 8,244 10,131 9,207 11,190 9,992
-------------------------------------------------------------------------------------------------------------------------
Minority Interests 77 13 86 24 89 24
-------------------------------------------------------------------------------------------------------------------------
CURRENT LIABILITIES
Current portion of long-term debt
and capital leases 644 639 981 1,016 341 339
Notes payable 280 269 416 416 328 328
Accounts payable 526 270 547 359 632 359
Accounts payable -- Marketing,
services and trading 380 233 452 236 378 140
Accrued taxes 337 223 125 111 222 168
Accrued interest 173 150 163 135 177 144
Accounts payable -- related parties 66 57 62 54 72 67
Liabilities held for sale - 579 - 639 - 629
Price risk management liabilities 198 178 381 367 1,060 511
Current portion of purchase
power contracts - 24 - 24 - 22
Current portion of gas supply
contract obligations - 24 - 22 - 21
Deferred income taxes 12 13 51 49 21 21
Other 438 223 510 243 622 288
-------------------------------------------------------------------------------
Total Current Liabilities 3,054 2,882 3,688 3,671 3,853 3,037
-------------------------------------------------------------------------------------------------------------------------
NON-CURRENT LIABILITIES
Deferred income taxes 694 529 773 824 772 727
Postretirement benefits 271 296 333 356 350 334
Liabilities held for sale - 1,350 - 1,376 - 1,441
Deferred investment tax credit 94 94 102 102 107 107
Regulatory liabilities for income
taxes, net 276 276 276 276 264 264
Price risk management liabilities 457 321 352 287 340 325
Gas supply contract obligations 272 249 287 266 292 273
Power loss contract reserves 327 - 354 - 50 -
Power purchase agreement -- MCV
Partnership - 41 - 52 - 67
Other 563 292 598 334 339 235
-------------------------------------------------------------------------------
TOTAL NON-CURRENT LIABILITIES 2,954 3,448 3,075 3,873 2,514 3,773
-------------------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' INVESTMENT AND
LIABILITIES $ 15,473 $ 14,587 $ 16,980 $ 16,775 $ 17,646 $ 16,826
=========================================================================================================================
141
CMS Energy Corporation
CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS' EQUITY (UNAUDITED)
------------------------------------------------------------------------------------------------------------------------
June 30 Three Months Ended Three Months Ended
------------------ ------------------
2002 2001
---- ----
-----------------------------------------------------------------------------------------------------------------------
In Millions As Reported As Restated As Reported As Restated
-----------------------------------------------------------------------------------------------------------------------
COMMON STOCK
At beginning and end of period $ 1 $ 1 $ 1 $ 1
------------------------------------------------------------------------------------------------------------------------
OTHER PAID-IN CAPITAL
At beginning of period 3,298 3,299 3,252 3,252
Common stock reacquired (1) (1) - -
Common stock issued 20 19 12 12
--------------------------------------------------------
At end of period 3,317 3,317 3,264 3,264
------------------------------------------------------------------------------------------------------------------------
OTHER COMPREHENSIVE INCOME (LOSS)
Investments
At beginning of period 1 (5) (3) (3)
Unrealized loss on investments (a) (1) (2) (1) (1)
--------------------------------------------------------
At end of period - (7) (4) (4)
------------------------------------------------------------------------------------------------------------------------
Derivative Instruments (b)
At beginning of period (17) (17) (7) (7)
Unrealized loss on derivative instruments (a) (10) (13) (15) (15)
Reclassification adjustments included in consolidated
net income (loss) (a) 2 1 (2) (2)
--------------------------------------------------------
At end of period (25) (29) (24) (24)
------------------------------------------------------------------------------------------------------------------------
FOREIGN CURRENCY TRANSLATION
At beginning of period (290) (241) (284) (236)
Change in foreign currency translation (a) (408) (409) (17) (17)
--------------------------------------------------------
At end of period (698) (650) (301) (253)
------------------------------------------------------------------------------------------------------------------------
RETAINED EARNINGS (DEFICIT)
At beginning of period (714) (957) (256) (270)
Consolidated net income (loss) (a) (75) (74) 53 3
Common stock dividends declared (49) (49) (49) (49)
--------------------------------------------------------
At end of period (838) (1,080) (252) (316)
------------------------------------------------------------------------------------------------------------------------
Total Common Stockholders' Equity $1,757 $ 1,552 $ 2,684 $ 2,668
========================================================================================================================
(a) Disclosure of Comprehensive Income (Loss):
Investments
Unrealized loss on investments $ (1) $ (2) $ (1) $ (1)
Derivative Instruments
Unrealized loss on derivative instruments (10) (13) (15) (15)
Reclassification adjustments included in 2 1 (2) (2)
consolidated net income (loss)
Foreign currency translation, net (408) (409) (17) (17)
Consolidated net income (loss) (75) (74) 53 3
--------------------------------------------------------
Total Consolidated Comprehensive Income (Loss) $ (492) $ (497) $ 18 $ (32)
========================================================
(b) Included in these amounts is CMS Energy's proportionate share of the effects
of derivative accounting relating to its equity investment in the MCV
Partnership as follows:
MCV Partnership:
At the beginning of the period $ - $ (1) $ - $ 2
Unrealized gain (loss) on derivative instruments - 1 - (8)
Reclassification adjustments included in
consolidated net income - 1 - -
--------------------------------------------------------
At the end of the period $ - $ 1 $ - $ (6)
========================================================================================================================
142
CMS Energy Corporation
CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS' EQUITY (UNAUDITED)
IN MILLIONS
----------------------------------------------------------------------------------------------------------------------
Six Months Ended 2002 Six Months Ended 2001
--------------------- ---------------------
June 30 As Reported As Restated As Reported As Restated
----------------------------------------------------------------------------------------------------------------------
COMMON STOCK $ 1 $ 1 $ 1 $ 1
At beginning and end of period
----------------------------------------------------------------------------------------------------------------------
OTHER PAID-IN CAPITAL
At beginning of period 3,269 3,257 2,936 2,936
Common stock reacquired (1) (1) - -
Common stock issued 49 61 328 328
-------------------------------------------------------
At end of period 3,317 3,317 3,264 3,264
----------------------------------------------------------------------------------------------------------------------
OTHER COMPREHENSIVE INCOME (LOSS)
Investments
At beginning of period (4) (5) (2) (2)
Unrealized loss on investments (a) 4 (2) (2) (2)
-------------------------------------------------------
At end of period - (7) (4) (4)
----------------------------------------------------------------------------------------------------------------------
Derivative Instruments (c)
At beginning of period (b) (26) (31) 13 13
Unrealized loss on derivative instruments (a) (3) (1) (29) (29)
Reclassification adjustments included in consolidated
net income (loss) (a) 4 3 (8) (8)
-------------------------------------------------------
At end of period (25) (29) (24) (24)
----------------------------------------------------------------------------------------------------------------------
FOREIGN CURRENCY TRANSLATION
At beginning of period (295) (233) (254) (206)
Change in foreign currency translation (a) (403) (417) (47) (47)
-------------------------------------------------------
At end of period (698) (650) (301) (253)
----------------------------------------------------------------------------------------------------------------------
RETAINED EARNINGS (DEFICIT)
At beginning of period (1,055) (951) (320) (313)
Consolidated net income (loss) (a) 314 (32) 162 91
Common stock dividends declared (97) (97) (94) (94)
-------------------------------------------------------
At end of period (838) (1,080) (252) (316)
----------------------------------------------------------------------------------------------------------------------
Total Common Stockholders' Equity $ 1,757 $ 1,552 $ 2,684 $ 2,668
======================================================================================================================
(a) Disclosure of Comprehensive Income (Loss):
Investments
Unrealized gain (loss) on investments $ 4 $ (2) $ (2) $ (2)
Derivative Instruments
Unrealized loss on derivative instruments (3) (1) (29) (29)
Reclassification adjustments included in 4 3 (8) (8)
consolidated net income (loss)
Foreign currency translation, net (403) (417) (47) (47)
Consolidated net income (loss) 314 (32) 162 91
-------------------------------------------------------
Total Consolidated Comprehensive Income (Loss) $ (84) $ (449) $ 76 $ 5
=======================================================
(b) Cumulative effect of change in accounting principle, net of $(8) tax in
2001.
(c) Included in these amounts is CMS Energy's
proportionate share of the effects of derivative accounting
relating to its equity investment in the MCV Partnership
as follows:
MCV Partnership:
At the beginning of the period $ - $ (8) $ - $ -
Cumulative effect of change in accounting for
derivative instruments - - - 5
Unrealized gain (loss) on derivative instruments - 6 - (12)
Reclassification adjustments included in
consolidated net income - 3 - 1
-------------------------------------------------------
At the end of the period $ - $ 1 $ - $ (6)
======================================================================================================================
143
CMS Energy Corporation
---------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) Three Months Ended Three Months Ended
In Millions, Except Per Share Amounts ------------------ ------------------
September 30 2002 2001
---- ----
As Reported As Restated As Reported As Restated
---------------------------------------------------------------------------------------------------------------
Operating Revenue 1,333 2,579 1,333 1,898
----------------------------------------------------------
Operating Expenses 910 2,203 933 1,620
Maintenance 57 49 59 46
Depreciation, depletion and amortization 103 89 113 89
General taxes 52 46 52 44
Loss contracts and reduced asset valuations - - 554 228
----------------------------------------------------------
Total Operating Expenses 1,122 2,387 1,711 2,027
----------------------------------------------------------
OPERATING INCOME (LOSS)
Electric utility 175 175 (63) 69
Gas utility (15) (14) (2) (1)
Natural gas transmission 41 (3) 7 (31)
Independent power production 43 38 (328) (124)
Marketing, services and trading (4) 15 18 (8)
Other (29) (19) (10) (34)
----------------------------------------------------------
211 192 (378) (129)
OTHER INCOME (DEDUCTIONS)
Accretion expense (9) (8) (9) (10)
Gain on asset sales, net 12 13 - -
Other, net 6 (3) 8 14
----------------------------------------------------------
9 2 (1) 4
----------------------------------------------------------
EARNINGS (LOSS) BEFORE INTEREST AND INCOME TAXES 220 194 (379) (125)
---------------------------------------------------------------------------------------------------------------
FIXED CHARGES
Interest on long-term debt 142 109 130 96
Other interest 7 5 18 18
Capitalized interest (5) (5) (7) (5)
Preferred securities distributions 18 18 25 25
---------------------------------------------------------------------------------------------------------------
162 127 166 134
---------------------------------------------------------------------------------------------------------------
Earnings (Loss) Before Income Taxes and Minority
Interests 58 67 (545) (259)
Income Taxes (Benefits) 50 55 (184) (84)
Minority Interests 2 - 2 1
----------------------------------------------------------
Income (Loss) From Continuing Operations 6 12 (363) (176)
Income (Loss) From Discontinued Operations 17 24 (206) (202)
----------------------------------------------------------
Income (Loss) Before Cumulative Effect of Change in
Accounting Principle 23 36 (569) (378)
Cumulative Effect of Change in Accounting Principle - 1 - -
----------------------------------------------------------
Consolidated Net Income (Loss) $ 23 $ 37 $ (569) $ (378)
===============================================================================================================
Basic Earnings (Loss) Per Average Common Share $ .16 $ .26 $ (4.29) $ (2.85)
===============================================================================================================
Diluted Earnings (Loss) Per Average Common Share $ .16 $ .26 $ (4.29) $ (2.85)
===============================================================================================================
Dividends Declared Per Common Share $ .18 $ .18 $ .365 $ .365
===============================================================================================================
144
-------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) Nine Months Ended Nine Months Ended
In Millions, Except Per Share Amounts ------------------ -----------------
September 30 2002 2001
---- ----
As Reported As Restated As Reported As Restated
-------------------------------------------------------------------------------------------------------------------------
Operating Revenue $ 4,285 $ 6,979 $ 4,728 $ 6,246
---------------------------------------------------------
Operating Expenses 2,875 5,755 3,298 5,247
Maintenance 180 157 189 161
Depreciation, depletion and amortization 329 297 353 285
General taxes 170 151 171 147
Loss contracts and reduced asset valuations - - 554 228
---------------------------------------------------------
Total Operating Expenses 3,554 6,360 4,565 6,068
---------------------------------------------------------
OPERATING INCOME (LOSS)
Electric utility 406 406 153 294
Gas utility 68 68 78 80
Natural gas transmission 140 (8) 143 (20)
Independent power production 154 103 (276) (70)
Marketing, services and trading (29) 25 75 (40)
Other (8) 25 (10) (66)
---------------------------------------------------------
731 619 163 178
OTHER INCOME (DEDUCTIONS)
Accretion expense (26) (23) (26) (28)
Gain (loss) on asset sales, net 60 61 (1) (2)
Other, net 15 (4) 22 26
---------------------------------------------------------
49 34 (5) (4)
-------------------------------------------------------------------------------------------------------------------------
EARNINGS BEFORE INTEREST AND INCOME TAXES 780 653 158 174
-------------------------------------------------------------------------------------------------------------------------
FIXED CHARGES
Interest on long-term debt 385 305 400 307
Other interest 21 19 47 46
Capitalized interest (14) (12) (34) (32)
Preferred dividends 1 1 1 1
Preferred securities distributions 68 68 71 71
-------------------------------------------------------------------------------------------------------------------------
461 381 485 393
-------------------------------------------------------------------------------------------------------------------------
Earnings (Loss) Before Income Taxes and Minority
Interests 319 272 (327) (219)
Income Taxes (Benefits) 147 130 (109) (79)
Minority Interests 4 1 3 2
---------------------------------------------------------
Income (Loss) From Continuing Operations 168 141 (221) (142)
Income (Loss) From Discontinued Operations 186 (154) (186) (154)
---------------------------------------------------------
Income (Loss) Before Cumulative Effect of Change in 354 (13) (407) (296)
Accounting Principle and Extraordinary Item
Cumulative Effect of Change in Accounting Principle (9) 18 - 9
---------------------------------------------------------
Income (Loss) Before Extraordinary Item 345 5 (407) (287)
Extraordinary Item (8) - - -
---------------------------------------------------------
Consolidated Net Income (Loss) $ 337 $ 5 $ (407) $ (287)
=========================================================================================================================
Basic Earnings (Loss) Per Average Common Share $ 2.45 $ .04 $ (3.13) $ (2.20)
=========================================================================================================================
Diluted Earnings (Loss) Per Average Common Share $ 2.42 $ .04 $ (3.13) $ (2.20)
=========================================================================================================================
Dividends Declared Per Common Share $ .91 $ .91 $ 1.095 $ 1.095
=========================================================================================================================
145
CMS Energy Corporation
Nine Months Ended Nine Months Ended
------------------ -----------------
2002 2001
---- ----
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
September 30
In Millions As Reported As Restated As Reported As Restated
------------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Consolidated net income (loss) $ 337 $ 5 $ (407) $ (287)
Adjustments to reconcile net income to net cash provided by
operating activities
Depreciation, depletion and amortization 329 297 353 285
Reduced asset valuations - - 554 228
Discontinued operations (Note 2) (186) 127 186 187
Capital lease and debt discount amortization 17 14 17 7
Deferred income taxes and investment tax credit (105) (294) (30) 36
Accretion expense 26 23 26 28
Undistributed earnings from related parties (102) (71) (2) (37)
(Gain) loss on the sale of assets (60) (61) 1 2
Cumulative effect of an accounting change 9 (18) - (9)
Extraordinary item 8 - - -
Changes in other assets and liabilities:
Decrease in accounts receivable and accrued revenues 415 322 180 393
Increase in inventories (48) (47) (365) (321)
Decrease in accounts payable and accrued expenses (175) (130) (334) (554)
Change in postretirement benefits, net (46) - - -
Changes in other assets and liabilities (96) 166 67 223
------------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 323 333 246 181
------------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (excludes assets placed under capital lease) (523) (538) (862) (848)
Investments in partnerships and unconsolidated subsidiaries (49) (49) (163) (165)
Cost to retire property, net (50) (53) (73) (73)
Investments in Electric Restructuring Implementation Plan - (6) - (9)
Investments in nuclear decommissioning trust funds (5) (5) (5) (5)
Proceeds from nuclear decommissioning trust funds 19 19 21 21
Proceeds from sale of assets 1,527 1,533 109 122
Other (20) (17) (21) (2)
------------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities 899 884 (994) (959)
------------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from notes, bonds, and other long-term debt 688 726 1,644 1,771
Proceeds from trust preferred securities - - 121 125
Issuance of common stock 350 362 334 334
Retirement of bonds and other long-term debt (1,421) (1,453) (923) (1,050)
Retirement of trust preferred securities (331) (331) - -
Repurchase of common stock - - (5) (5)
Payment of common stock dividends (124) (124) (135) (140)
Decrease in notes payable, net (185) (163) (250) (250)
Payment of capital lease obligations (11) (11) (17) (17)
Other financing 30 - 10 2
------------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities (1,004) 994 779 770
------------------------------------------------------------------------------------------------------------------------------------
NET INCREASE IN CASH AND TEMPORARY CASH INVESTMENTS 218 223 31 (8)
CASH AND TEMPORARY CASH INVESTMENTS, BEGINNING OF PERIOD 189 127 182 141
------------------------------------------------------------------------------------------------------------------------------------
CASH AND TEMPORARY CASH INVESTMENTS, END OF PERIOD $ 407 $ 350 $ 213 $ 133
====================================================================================================================================
OTHER CASH FLOW ACTIVITIES AND NON-CASH INVESTING AND
FINANCING ACTIVITIES:
CASH TRANSACTIONS
Interest paid (net of amounts capitalized) $ 421 $ 326 $ 450 $ 295
Income taxes paid (net of refunds) (42) (42) (6) (6)
Pension and OPEB cash contributions 126 126 103 103
NON-CASH TRANSACTIONS
Nuclear fuel placed under capital lease $ - $ - $ 13 $ 13
Other assets placed under capital lease 65 50 15 23
146
CMS Energy Corporation
CONSOLIDATED BALANCE SHEETS September 30, 2002 December 31, 2001 September 30, 2001
------------------ ----------------- ------------------
(Unaudited) (Unaudited)
------------------------------------------------------------------------------------------------------------------------------------
In Millions As Reported As Restated As Reported As Restated As Reported As Restated
------------------------------------------------------------------------------------------------------------------------------------
ASSETS
PLANT AND PROPERTY (AT COST) $13,593 $11,228 $14,631 $11,485 $14,263 $11,256
Less accumulated depreciation,
depletion and amortization 6,523 6,060 6,833 6,158 6,735 6,086
-------------------------------------------------------------------------------
Plant, net 7,070 5,168 7,798 5,327 7,528 5,170
Construction work-in-progress 488 466 564 521 567 463
-------------------------------------------------------------------------------
Total Plant 7,558 5,634 8,362 5,848 8,095 5,633
------------------------------------------------------------------------------------------------------------------------------------
INVESTMENTS
Independent power production 706 703 718 714 781 753
Natural gas transmission 269 176 501 577 540 597
Midland Cogeneration Venture Limited
Partnership 370 370 300 300 296 296
First Midland Limited Partnership 250 250 253 253 249 249
Other 86 74 135 117 105 118
-------------------------------------------------------------------------------
1,681 1,573 1,907 1,961 1,971 2,013
------------------------------------------------------------------------------------------------------------------------------------
CURRENT ASSETS
Cash and temporary cash 407 350 189 127 213 133
investments at cost
Accounts receivable, notes receivable 309 102 681 219 585 165
and accrued revenue
Accounts receivable -- Marketing, 441 276 561 295 634 300
services and trading
Accounts receivable and notes - 103 - 190 - 153
receivable - related parties
Inventories at average cost
Gas in underground storage 630 635 587 590 630 617
Materials and supplies 163 87 174 89 145 84
Generating plant fuel stock 49 49 52 52 50 49
Assets held for sale - 338 - 471 - 518
Price risk management assets 240 211 461 327 1,093 384
Prepayments and other 200 139 206 200 252 131
-------------------------------------------------------------------------------
Total Current Assets 2,439 2,290 2,911 2,560 3,602 2,534
------------------------------------------------------------------------------------------------------------------------------------
NON-CURRENT ASSETS
Regulatory Assets
699 699 717 717 710 710
Securitized costs
Postretirement benefits 191 191 209 209 214 214
Abandoned Midland Project 11 11 12 12 12 12
Other 173 173 167 167 89 169
Assets held for sale - 2,249 - 3,480 - 3,430
Price risk management assets 386 276 424 368 350 329
Goodwill, net 740 - 811 - 824 -
Nuclear decommissioning trust funds
530 530 581 581 568 568
Notes receivable -- related party 203 203 177 177 163 163
Notes receivable 126 126 134 130 142 137
Other 485 442 568 565 749 636
-------------------------------------------------------------------------------
Total Non-current Assets 3,544 4,900 3,800 6,406 3,821 6,368
-------------------------------------------------------------------------------
TOTAL ASSETS $15,222 $14,397 $16,980 $16,775 $17,489 $16,548
====================================================================================================================================
147
CMS Energy Corporation
CONSOLIDATED BALANCE SHEETS September 30, 2002 December 31, 2001 September 30, 2001
------------------ ----------------- ------------------
(Unaudited) (Unaudited)
------------------------------------------------------------------------------------------------------------------------------------
In Millions As Reported As Restated As Reported As Restated As Reported As Restated
------------------------------------------------------------------------------------------------------------------------------------
STOCKHOLDERS' INVESTMENT AND
LIABILITIES
CAPITALIZATION
Common Stockholders' equity $ 2,022 $ 1,829 $ 1,890 $ 2,038 $ 1,987 $ 2,176
Preferred stock of subsidiary 44 44 44 44 44 44
Company-obligated convertible Trust
Preferred Securities of
subsidiaries 393 393 694 694 694 694
Company-obligated mandatorily
redeemable preferred securities of
Consumers' subsidiaries 490 490 520 520 520 520
Long-term debt 6,585 5,648 6,923 5,840 7,402 6,222
Non-current portion of capital
leases 110 110 60 71 57 61
------------------------------------------------------------------------------------------------------------------------------------
Total Capitalization 9,644 8,514 10,131 9,207 10,704 9,717
------------------------------------------------------------------------------------------------------------------------------------
Minority Interests 74 12 86 24 82 28
------------------------------------------------------------------------------------------------------------------------------------
CURRENT LIABILITIES
Current portion of long-term debt 604 601 981 1,016 802 801
and capital leases
Notes payable 246 235 416 416 153 153
Accounts payable 435 308 547 359 593 360
Accounts payable -- Marketing, 274 170 452 236 392 144
services and trading
Accrued taxes 292 259 125 111 72 42
Accrued interest 125 114 163 135 155 142
Accounts payable -- related parties 65 56 62 54 68 62
Liabilities held for sale - 317 - 639 - 553
Price risk management liabilities 208 180 381 367 1,060 468
Current portion of purchase - 29 - 24 - 22
power contracts
Current portion of gas supply - 24 - 22 - 22
contract obligations
Deferred income taxes 11 11 51 49 9 6
Other 444 243 510 243 657 283
-------------------------------------------------------------------------------
Total Current Liabilities 2,704 2,547 3,688 3,671 3,961 3,058
------------------------------------------------------------------------------------------------------------------------------------
NON-CURRENT LIABILITIES
Deferred income taxes 712 570 773 824 646 718
Postretirement benefits 266 306 333 356 347 331
Liabilities held for sale - 1,321 - 1,376 - 1,420
Deferred investment tax credit 92 92 102 102 104 104
Regulatory liabilities for income 282 282 276 276 270 270
taxes, net
Price risk management liabilities 301 178 352 287 340 278
Power loss contract reserves 312 - 354 - 365 -
Gas supply contract obligations 270 246 287 266 291 271
Power purchase agreement -- MCV - 30 - 52 - 61
Partnership
Other 565 299 598 334 379 292
-------------------------------------------------------------------------------
TOTAL NON-CURRENT LIABILITIES 2,800 3,324 3,075 3,873 2,742 3,745
------------------------------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' INVESTMENT AND LIABILITIES $15,222 $14,397 $16,980 $16,775 $17,489 $16,548
====================================================================================================================================
148
CMS Energy Corporation
CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS' EQUITY (UNAUDITED)
-------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------
September 30 Three Months Ended Three Months Ended
------------------ ------------------
2002 2001
---- ----
In Millions As Reported As Restated As Reported As Restated
-----------------------------------------------------------------------------------------------------------------------
COMMON STOCK
At beginning and end of period $ 1 $ 1 $ 1 $ 1
-----------------------------------------------------------------------------------------------------------------------
OTHER PAID-IN CAPITAL
At beginning of period 3,317 3,317 3,264 3,264
Common stock repurchased - - (5) (5)
Common stock reacquired (1) (1) - -
Common stock issued 303 303 6 6
-----------------------------------------------------
At end of period 3,619 3,619 3,265 3,265
-----------------------------------------------------------------------------------------------------------------------
OTHER COMPREHENSIVE INCOME (LOSS)
Investments
At beginning of period - (7) (4) (4)
Unrealized gain (loss) on investments (a) (5) 1 (1) (1)
-----------------------------------------------------
At end of period (5) (6) (5) (5)
-----------------------------------------------------------------------------------------------------------------------
Derivative Instruments (b)
At beginning of period (25) (29) (24) (24)
Unrealized loss on derivative instruments (a) (12) (21) (15) (15)
Reclassification adjustments included in consolidated
net income (loss) (a) 1 2 - -
-----------------------------------------------------
At end of period (36) (48) (39) (39)
-----------------------------------------------------------------------------------------------------------------------
FOREIGN CURRENCY TRANSLATION
At beginning of period (698) (650) (301) (253)
Change in foreign currency translation (a) (17) (17) (17) (3)
-----------------------------------------------------
At end of period (715) (667) (318) (256)
-----------------------------------------------------------------------------------------------------------------------
RETAINED EARNINGS (DEFICIT)
At beginning of period (838) (1,080) (252) (316)
Consolidated net income (loss) (a) 23 37 (569) (378)
Common stock dividends declared (27) (27) (96) (96)
-----------------------------------------------------
At end of period (842) (1,070) (917) (790)
-----------------------------------------------------------------------------------------------------------------------
Total Common Stockholders' Equity $2,022 $1,829 $1,987 $2,176
=======================================================================================================================
(a) Disclosure of Comprehensive Income (Loss):
Investments
Unrealized gain (loss) on investments, $ (5) $1 $ (1) $ (1)
Derivative Instruments
Unrealized gain (loss) on derivative instruments (12) (21) (15) (15)
Reclassification adjustments included in
consolidated net income (loss) 1 2 - -
Foreign currency translation, net (17) (17) (17) (3)
Consolidated net income (loss) 23 37 (569) (378)
-----------------------------------------------------
Total Consolidated Comprehensive Income (Loss) $ (10) $ 2 $(602) $(397)
=====================================================
(b) Included in these amounts is CMS Energy's
proportionate share of the effects of derivative
accounting relating to its equity investment in
the MCV Partnership and Taweelah as follows:
MCV Partnership:
At the beginning of the period $ - $ 1 $ - $ (6)
Unrealized gain (loss) on derivative
instruments - 1 - (3)
Reclassification adjustments included in
consolidated net income - 2 - (1)
-----------------------------------------------------
At the end of the period $ - $ 4 $ - $ (10)
=====================================================
Taweelah:
At the beginning of the period $ - $ - $ - $ -
Unrealized gain (loss) on derivative
instruments - (24) - -
-----------------------------------------------------
At the end of the period $ - $(24) $ - $ -
=======================================================================================================================
149
CMS Energy Corporation
CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS' EQUITY (UNAUDITED)
-----------------------------------------------------------------------------------------------------------------------
September 30 Nine Months Ended 2002 Nine Months Ended 2001
---------------------- ----------------------
In Millions As Reported As Restated As Reported As Restated
-----------------------------------------------------------------------------------------------------------------------
COMMON STOCK
At beginning and end of period $ 1 $ 1 $ 1 $ 1
-----------------------------------------------------------------------------------------------------------------------
OTHER PAID-IN CAPITAL
At beginning of period 3,269 3,257 2,936 2,936
Common stock repurchased - - (5) (5)
Common stock reacquired (2) (2) - -
Common stock issued 352 364 334 334
------------------------------------------------------
At end of period 3,619 3,619 3,265 3,265
-----------------------------------------------------------------------------------------------------------------------
OTHER COMPREHENSIVE INCOME (LOSS)
Investments
At beginning of period (4) (5) (2) (2)
Unrealized loss on investments (a) (1) (1) (3) (3)
------------------------------------------------------
At end of period (5) (6) (5) (5)
-----------------------------------------------------------------------------------------------------------------------
Derivative Instruments (c)
At beginning of period (b) (26) (31) 13 13
Unrealized loss on derivative instruments (a) (15) (22) (44) (44)
Reclassification adjustments included in consolidated
net income (loss) (a) 5 5 (8) (8)
------------------------------------------------------
At end of period (36) (48) (39) (39)
-----------------------------------------------------------------------------------------------------------------------
FOREIGN CURRENCY TRANSLATION
At beginning of period (295) (233) (254) (206)
Change in foreign currency translation (a) (420) (434) (64) (50)
------------------------------------------------------
At end of period (715) (667) (318) (256)
-----------------------------------------------------------------------------------------------------------------------
RETAINED EARNINGS
At beginning of period (1,055) (951) (320) (313)
Consolidated net income (loss) (a) 337 5 (407) (287)
Common stock dividend declared (124) (124) (190) (190)
------------------------------------------------------
At end of period (842) (1,070) (917) (790)
-----------------------------------------------------------------------------------------------------------------------
Total Common Stockholders' Equity $2,022 $1,829 $1,987 $2,176
=======================================================================================================================
(a) Disclosure of Comprehensive Income (Loss):
Investments
Unrealized loss on investments $ (1) $ (1) $ (3) $ (3)
Derivative Instruments
Unrealized loss on derivative instruments (15) (22) (44) (44)
Reclassification adjustments included in
consolidated net income (loss) 5 5 (8) (8)
Foreign currency translation, net (420) (434) (64) (50)
Consolidated net income (loss) 337 5 (407) (287)
------------------------------------------------------
Total Consolidated Comprehensive (Loss) $ (94) $ (447) $ (526) $(392)
======================================================
(b) Cumulative effect of change in accounting principle, net of $(8) tax in 2001.
(c) Included in these amounts is CMS Energy's
proportionate share of the effects of derivative accounting
relating to its equity investment in the MCV Partnership
and Taweelah as follows:
MCV Partnership:
At the beginning of the period $ - $ (8) $ - $ -
Cumulative effect of change in accounting for
derivative instruments - - - 5
Unrealized gain (loss) on derivative instruments - 7 - (15)
Reclassification adjustments included in
consolidated net income - 5 - -
------------------------------------------------------
At the end of the period $ - $ 4 $ - $ (10)
======================================================
Taweelah:
At the beginning of the period $ - $ - $ - $ -
Unrealized gain (loss) on derivative instruments - (24) - -
------------------------------------------------------
At the end of the period $ - $ (24) $ - $ -
=======================================================================================================================
150
CMS Energy Corporation
In addition, as a result of Consumers reclassifying its headquarters' lease from
an operating lease to a capital lease the following table illustrates the amount
of capital leases included in Consumers' restated balance sheet plant accounts:
In Millions
----------------------------------------------------------------------------------------------------------------
September 30 December 31 September 30
2002 2001 2001
(Unaudited) (Unaudited)
Capital leases As Restated As Restated As Restated
----------------------------------------------------------------------------------------------------------------
Electric $ 101 $ 93 $ 90
Gas 42 39 39
Other 75 46 39
---- ---- ----
218 178 168
Less accumulated amortization 96 93 95
---- ---- ----
Net capital lease $ 122 $ 85 $ 73
================================================================================================================
151
CMS Energy Corporation
11: SUBSEQUENT EVENTS
Subsequent to November 14, 2002, the date of filing CMS Energy's Form 10-Q for
the third quarter 2002, a number of material events have occurred. These
material events have been disclosed in CMS Energy's Form 10-K/A Amendment No. 2
for the fiscal year ended December 31, 2002, filed with the SEC on July 1, 2003,
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, each of which is 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 July 1, 2003, the date of filing CMS
Energy's Form 10-K/A Amendment No. 2 with the SEC.
DISCLOSURE 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 as of a date
within 90 days of the filing of this quarterly report on Form 10-Q/A. Based on
these evaluations, 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 and properly disclosed. 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.
DISCONTINUED OPERATIONS
In July 2003, CMS Energy completed the sale of CMS Field Services to Cantera
Resources Inc. for approximately $112.6 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 2005 through 2009. The net sale proceeds of
approximately $100.4 million were used to reduce debt.
Effective June 30, 2003, CMS Energy completed the sale of CMS Viron to Chevron
Energy Solutions as part of its ongoing asset sale program.
UNCERTAINTIES
CONSUMERS' ELECTRIC UTILITY RATE MATTERS
SECURITIZATION: In June 2003, the MPSC issued a financing order authorizing the
issuance of $554 million of Securitization bonds. The order approved Consumers'
request to securitize costs associated with federal Clean Air Act expenditures,
retail open access implementation costs and expenses associated with the
issuance of the securitization bonds. The order also directed that the
securitization charges be designed such that retail open access customers would
pay a significantly smaller charge than would full service customers. On July 1,
2003, Consumers filed a petition for rehearing and clarification of certain
portions of the order with the MPSC, including the portion dealing with the
design of the securitization charges. Depending upon the results and timing of
the rehearing and if there are no court appeals and no delays in the offering
process, Consumers anticipates, but
152
CMS Energy Corporation
cannot assure, that securitization bonds could be issued during the first
quarter of 2004.
CONSUMERS' GAS UTILITY BUSINESS OUTLOOK
In July 2003, the MPSC approved a settlement agreement authorizing Consumers to
increase its GCR factor for the remainder of their current GCR plan year and to
implement a quarterly ceiling price adjustment mechanism. This order will
increase the likelihood that Consumers will recover the higher costs associated
with its gas purchases in a more timely manner.
ENTERPRISES' OUTLOOK
An affiliate of CMS Generation owns a 49.6 percent interest in the Loy Yang
Power Partnership ("LYPP"), which owns the 2,000 megawatts Loy Yang coal-fired
power project in Victoria, Australia. Due to unfavorable power prices in the
Australian market, the LYPP is not generating cash flow sufficient to meet its
operating and debt-service obligations. LYPP currently has A$500 million of term
bank debt that, pursuant to prior extensions from the lenders, was scheduled to
mature on July 11, 2003. A further extension was received such that this debt
now is scheduled to mature on November 11, 2003. The partners in LYPP (including
affiliates of CMS Generation Co., NRG Energy Inc. and Horizon Energy Australia
Investments) have been exploring the possible sale of the project (or control of
the project) or a restructuring of the finances of LYPP.
In July 2003, a conditional share sale agreement was executed by the LYPP
partners and partners of the Great Energy Alliance Corporation ("GEAC") to sell
the project to GEAC for about A$3.5 billion (approximately $2.4 billion in U.S.
dollars), including A$165 million (approximately $111 million in U.S. dollars)
for the project equity. The Australian Gas Light Company, the Tokyo Electric
Power Company, Inc. and a group of financial investors led by the Commonwealth
Bank of Australia formed GEAC earlier this year to explore the possible
acquisition of Loy Yang. The conditions to completion of the sale to GEAC
include consents from LYPP's lenders to a restructuring of the project's debt,
satisfactory resolution of regulatory issues and approvals, rulings on tax and
stamp duty obligations, and approvals from the investors in Horizon Energy
Australia Investments and the creditors committee of NRG Energy Inc. It should
be noted in particular that the Australian federal antitrust regulator has
indicated its concern with the potential anticompetitive effects of this
transaction. Closing is targeted for early September 2003, however, given the
regulatory uncertainties, the parties to the share sale agreement have agreed to
extend the date for resolution of the regulatory conditions to closing to not
later than November 2, 2003, assuming satisfactory interim resolution of other
closing conditions. The share sale agreement provides GEAC a period of
exclusivity while the conditions of the purchase are satisfied. The signing of
the share sale agreement allows GEAC to begin discussions with LYPP's lenders to
pursue a debt restructuring. The proceeds to CMS Energy for its equity share of
LYPP are estimated to be approximately $55 million. However, the ultimate net
proceeds to CMS Energy for its equity share in LYPP may be subject to reduction
based on the ultimate resolution of many of the factors described above as
conditions to completion of the sale, as well as closing adjustments and
transaction costs.
CMS Energy cannot predict whether this sale to GEAC will be consummated or, if
not, whether any of the other initiatives will be successful, and it is possible
that CMS Generation may lose all or a substantial part of its equity investment
in the LYPP. CMS Energy has previously written off its equity investment in the
LYPP, 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 June 30, 2003. Any
153
CMS Energy Corporation
such write-off would flow through CMS Energy's income statement but would not
result in a reduction in shareholders' equity or cause CMS Energy to be in
noncompliance with its financing agreements.
In July 2003, CMS Energy and the National Power Company, through their joint
venture Jubail Energy Company (JEC) closed a $170 million limited recourse
project financing for construction of a co-generation plant designed to produce
up to 250 MW and 510 tons of industrial steam per hour. The plant will be
located within the Saudi Petrochemical Company's (SADAF) complex at Jubail
Industrial City in Saudi Arabia. CMS Energy owns 25 percent of JEC, which has
entered into a long-term contract with SADAF for the entire output of the plant.
The plant is expected to be in operation in 2005 and will be the first
independent power plant in Saudi Arabia.
SHORT-TERM AND LONG-TERM FINANCINGS AND CAPITALIZATION
In July 2003, CMS Energy paid down $150 million principal amount of CMS Energy's
8.375% Reset Put Securities due 2013. As a result, CMS Energy recorded 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.
In July 2003, CMS Energy issued $150 million of 3.375 % convertible senior notes
due 2023 and $300 million of 7.75 % senior notes due 2010. The securities,
offered in a private placement under Rule 144A of the Securities Act of 1933,
were purchased at closing by certain financial institutions as initial
purchasers. CMS Energy has granted the initial purchasers an option to purchase
up to an additional $50 million of the convertible senior notes for a period of
45 days after closing. Closing of the sales of the notes occurred on July 16,
2003 for the convertible senior notes and July 17, 2003 for the senior notes.
CMS Energy may redeem all or part of the senior notes at any time, for a price
equal to 100 percent of the principal amount of the senior notes to be redeemed
plus any accrued and unpaid interest, and additional amounts, if any, to the
redemption date. CMS Energy may redeem all or part of the convertible senior
notes on or after July 15, 2008, for a price equal to 100 percent of the
principal amount of the convertible senior notes to be redeemed plus any accrued
and unpaid interest, and additional amounts owed, if any, to the redemption
date.
Holders of the convertible senior notes will have the right to require CMS
Energy to repurchase all or any part of their convertible senior notes at a
repurchase price equal to 100 percent of the principal amount of the convertible
senior notes, plus accrued and unpaid interest and additional amounts, if any,
on July 15, 2008, July 15, 2013 and July 15, 2018.
Holders of the convertible senior notes may convert their notes prior to
maturity into shares of CMS Energy Common Stock under certain circumstances at a
conversion price of $10.671 per share (subject to adjustment in certain events).
The senior notes and convertible senior notes, as well as the underlying CMS
Energy Common Stock issuable upon conversion, have not been registered under the
Securities Act of 1933, although CMS Energy is contractually committed to
register the replacement senior notes and convertible senior notes, as well as
the CMS Energy Common Stock.
The approximately $433 million of net proceeds from these offerings will be
applied to retire a portion of debt outstanding under CMS Energy's Second
Amended and Restated Senior Credit Agreement and to redeem a portion of CMS
Energy's 6.75 % Senior Notes due January 2004. If exercised, the proceeds from
the initial purchasers' option for the additional $50 million convertible senior
notes would be used to refinance existing indebtedness.
NEW ACCOUNTING STANDARD:
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
154
CMS Energy Corporation
requires an issuer to classify financial instruments within its scope as
liabilities. Those instruments were previously classified as mezzanine equity.
SFAS No. 150 is 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 mandatorily 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.
155
12. RESTATED FINANCIAL STATEMENTS FOR FIRST AND SECOND QUARTERS
CMS ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(AS RESTATED, SEE NOTE 10)
THREE MONTHS ENDED
MARCH 31 2002 2001
---------------------------------------------------------------------------------------------------------------------
In Millions, Except Per Share Amounts
OPERATING REVENUE
Electric utility $ 608 $ 665
Gas utility 616 539
Natural gas transmission 16 22
Independent power production 89 109
Marketing, services and trading 908 1,085
Other 26 (4)
----------------------
2,263 2,416
---------------------------------------------------------------------------------------------------------------------
OPERATING EXPENSES
Operation
Fuel for electric generation 86 83
Purchased and interchange power - Marketing, services and trading 378 175
Purchased and interchange power 88 120
Purchased power - related parties 140 118
Cost of gas sold - Marketing, services and trading 439 830
Cost of gas sold 451 418
Other operating expenses 172 224
----------------------
1,754 1,968
Maintenance 55 59
Depreciation, depletion and amortization 122 117
General taxes 57 58
----------------------
1,988 2,202
---------------------------------------------------------------------------------------------------------------------
OPERATING INCOME (LOSS)
Electric utility 115 139
Gas utility 64 64
Natural gas transmission - 8
Independent power production 28 24
Marketing, services and trading 42 (7)
Other 26 (14)
----------------------
275 214
---------------------------------------------------------------------------------------------------------------------
OTHER INCOME (DEDUCTIONS)
Accretion expense (8) (9)
Gain on asset sales 22 -
Other, net - 8
----------------------
14 (1)
---------------------------------------------------------------------------------------------------------------------
EARNINGS BEFORE INTEREST AND TAXES 289 213
---------------------------------------------------------------------------------------------------------------------
FIXED CHARGES
Interest on long-term debt 95 122
Other interest 11 12
Capitalized interest (3) (14)
Preferred securities distributions 25 23
----------------------
128 143
---------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES AND MINORITY INTERESTS 161 70
INCOME TAXES 68 17
MINORITY INTERESTS - 1
----------------------
INCOME FROM CONTINUING OPERATIONS 93 52
INCOME (LOSS) FROM DISCONTINUED OPERATIONS, NET OF $33 TAX
BENEFIT IN 2002 AND $24 TAX EXPENSE IN 2001 (51) 27
----------------------
INCOME BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING 42 79
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING FOR DERIVATIVE INSTRUMENTS,
NET OF $6 TAX EXPENSE - 9
----------------------
CONSOLIDATED NET INCOME $ 42 $ 88
=====================================================================================================================
THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
156
(AS RESTATED, SEE NOTE 10)
THREE MONTHS ENDED
MARCH 31 2002 2001
-----------------------------------------------------------------------------------------------------------
In Millions, Except Per Share Amounts
CMS ENERGY
NET INCOME
Net Income Available to Common Stock $ 42 $ 88
=====================
BASIC EARNINGS PER AVERAGE COMMON SHARE
Income from Continuing Operations $ 0.70 $ 0.42
Income (Loss) from Discontinued Operations (0.38) 0.21
Income from Cumulative Effect of Change in Accounting - 0.07
---------------------
Net Income Attributable to Common Stock $ 0.32 $ 0.70
=====================
DILUTED EARNINGS PER AVERAGE COMMON SHARE
Income from Continuing Operations $ 0.70 $ 0.42
Income (Loss) from Discontinued Operations (0.38) 0.21
Income from Cumulative Effect of Change in Accounting - 0.07
---------------------
Net Income Attributable to Common Stock $ 0.32 $ 0.70
=====================
DIVIDENDS DECLARED PER COMMON SHARE $0.365 $0.365
----------------------------------------------------------------------------------------------------------
THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
157
CMS ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(AS RESTATED, SEE NOTE 10)
THREE MONTHS ENDED
March 31 2002 2001
----------------------------------------------------------------------------------------------------------------------------
In Millions
CASH FLOWS FROM OPERATING ACTIVITIES
Consolidated net income $ 42 $ 88
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation, depletion and amortization (includes nuclear
decommissioning of $2 and $2, respectively) 122 117
Capital lease and debt discount amortization 4 2
Deferred income taxes and investment tax credit (245) 26
Accretion expense 8 9
Undistributed earnings from related parties (36) (37)
Gain on the sale of assets (22) -
Cumulative effect of accounting change - (9)
Changes in other assets and liabilities:
Decrease in accounts receivable and accrued revenues 36 162
Decrease in inventories 185 167
Increase (decrease) in accounts payable and accrued expenses 84 (194)
Changes in other assets and liabilities 68 (76)
-------------------
Net cash provided by operating activities 246 255
----------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (excludes assets placed under capital lease) (156) (258)
Investments in partnerships and unconsolidated subsidiaries (16) (32)
Cost to retire property, net (20) (26)
Investment in Electric Restructuring Implementation Plan (3) (3)
Investments in nuclear decommissioning trust funds (2) (2)
Proceeds from nuclear decommissioning trust funds 8 10
Proceeds from sale of assets 878 23
Other investing (42) 5
-------------------
Net cash provided by (used in) investing activities 647 (283)
----------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from notes, bonds, and other long-term debt 311 455
Issuance of common stock 42 316
Retirement of bonds and other long-term debt (912) (471)
Retirement of trust preferred securities (30) -
Payment of common stock dividends (49) (45)
Decrease in notes payable, net (249) (233)
Payment of capital lease obligations (3) (8)
Other financing (1) 3
-------------------
Net cash provided by (used in) financing activities (891) 17
----------------------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND TEMPORARY CASH INVESTMENTS 2 (11)
CASH AND TEMPORARY CASH INVESTMENTS, BEGINNING OF PERIOD 127 141
----------------------------------------------------------------------------------------------------------------------------
CASH AND TEMPORARY CASH INVESTMENTS, END OF PERIOD $ 129 $ 130
============================================================================================================================
158
(AS RESTATED, SEE NOTE 10)
THREE MONTHS ENDED
MARCH 31 2002 2001
----------------------------------------------------------------------------------------------------------------------------
OTHER CASH FLOW ACTIVITIES AND NON-CASH INVESTING AND FINANCING ACTIVITIES WERE:
CASH TRANSACTIONS
Interest paid (net of amounts capitalized) $ 94 $ 118
Income taxes paid (net of refunds) (42) (6)
Pension and OPEB cash contributions 61 14
NON-CASH TRANSACTIONS
Nuclear fuel placed under capital lease $ - $ 2
Other assets placed under capital lease 17 7
============================================================================================================================
All highly liquid investments with an original maturity of three months or less
are considered cash equivalents.
THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
159
CMS ENERGY CORPORATION
CONSOLIDATED BALANCE SHEETS
(AS RESTATED, SEE NOTE 10)
ASSETS
MARCH 31 MARCH 31
2002 DECEMBER 31 2001
(UNAUDITED) 2001 (UNAUDITED)
-------------------------------------------------------------------------------------------------------------------------------
PLANT AND PROPERTY (AT COST)
Electric utility $ 7,733 $ 7,661 $ 7,298
Gas utility 2,625 2,593 2,524
Natural gas transmission 206 205 203
Independent power production 918 916 395
Other 109 110 98
------------------------------------------------
11,591 11,485 10,518
Less accumulated depreciation, depletion and amortization 6,259 6,158 5,957
------------------------------------------------
5,332 5,327 4,561
Construction work-in-progress 580 521 816
------------------------------------------------
5,912 5,848 5,377
-------------------------------------------------------------------------------------------------------------------------------
INVESTMENTS
Independent power production 741 714 949
Natural gas transmission 350 577 570
Midland Cogeneration Venture Limited Partnership 316 300 302
First Midland Limited Partnership 257 253 248
Other 77 117 93
------------------------------------------------
1,741 1,961 2,162
-------------------------------------------------------------------------------------------------------------------------------
CURRENT ASSETS
Cash and temporary cash investments at cost, which approximates market 129 127 130
Accounts receivable, notes receivable and accrued revenue, less
allowances of $5, $5 and $6, respectively 275 219 261
Accounts receivable - Marketing, services and trading,
less allowances of $10, $9 and $6, respectively 276 295 315
Accounts receivable and notes receivable - related parties 115 190 157
Inventories at average cost
Gas in underground storage 407 590 160
Materials and supplies 92 89 84
Generating plant fuel stock 50 52 50
Assets held for sale 385 471 577
Price risk management assets 366 327 259
Deferred income taxes - - 41
Prepayments and other 168 200 165
------------------------------------------------
2,263 2,560 2,199
-------------------------------------------------------------------------------------------------------------------------------
NON-CURRENT ASSETS
Regulatory Assets
Securitized costs 714 717 709
Postretirement benefits 203 209 226
Abandoned Midland project 11 12 15
Other 171 167 162
Assets held for sale 2,697 3,480 3,536
Price risk management assets 434 368 260
Nuclear decommissioning trust funds 576 581 585
Notes receivable - related parties 213 177 161
Notes receivable 126 130 142
Other 543 565 678
------------------------------------------------
5,688 6,406 6,474
------------------------------------------------
TOTAL ASSETS $15,604 $16,775 $16,212
===============================================================================================================================
160
STOCKHOLDERS' INVESTMENT AND LIABILITIES
(AS RESTATED, SEE NOTE 10)
MARCH 31 MARCH 31
2002 DECEMBER 31 2001
(UNAUDITED) 2001 (UNAUDITED)
------------------------------------------------------------------------------------------------------------------------------
In Millions
CAPITALIZATION
Common stockholders' equity
Common stock, authorized 250.0 shares; outstanding 134.2 shares,
133.0 shares and 131.9 shares, respectively $ 1 $ 1 $ 1
Other paid-in-capital 3,299 3,257 3,252
Other comprehensive loss (263) (269) (246)
Retained deficit (957) (951) (270)
--------------------------------------------
2,080 2,038 2,737
Preferred stock of subsidiary 44 44 44
Company-obligated convertible Trust Preferred Securities
of subsidiaries (a) 694 694 694
Company-obligated mandatorily redeemable preferred securities
of Consumers' subsidiaries (a) 490 520 395
Long-term debt 5,475 5,840 5,984
Non-current portion of capital leases 84 71 51
--------------------------------------------
8,867 9,207 9,905
----------------------------------------------------------------------------------------------------------------------------
MINORITY INTERESTS 24 24 24
----------------------------------------------------------------------------------------------------------------------------
CURRENT LIABILITIES
Current portion of long-term debt and capital leases 736 1,016 298
Notes payable 164 416 170
Accounts payable 296 359 315
Accounts payable - Marketing, services and trading 211 236 172
Accrued interest 142 135 125
Accrued taxes 111 111 229
Accounts payable - related parties 59 54 62
Liabilities held for sale 603 639 562
Price risk management liabilities 356 367 224
Current portion of purchase power contracts 24 24 22
Current portion of gas supply contract obligations 23 22 21
Deferred income taxes 15 49 -
Other 245 243 285
--------------------------------------------
2,985 3,671 2,485
----------------------------------------------------------------------------------------------------------------------------
NON-CURRENT LIABILITIES
Postretirement benefits 298 356 387
Deferred income taxes 609 824 751
Deferred investment tax credit 100 102 108
Regulatory liabilities for income taxes, net 276 276 260
Liabilities held for sale 1,475 1,376 1,448
Price risk management liabilities 341 287 251
Gas supply contract obligations 254 266 278
Power purchase agreement - MCV Partnership 47 52 72
Other 328 334 243
--------------------------------------------
3,728 3,873 3,798
----------------------------------------------------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES (Notes 1 and 5)
TOTAL STOCKHOLDERS' INVESTMENT AND LIABILITIES $ 15,604 $ 16,775 $ 16,212
============================================================================================================================
(A) FOR FURTHER DISCUSSION, SEE NOTE 6 OF THE CONDENSED NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS.
THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
161
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162
CMS ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS' EQUITY
(UNAUDITED)
(AS RESTATED, SEE NOTE 10)
THREE MONTHS ENDED
MARCH 31 2002 2001
-----------------------------------------------------------------------------------------------------------------
In Millions
COMMON STOCK
At beginning and end of period $ 1 $ 1
--------------------------
OTHER PAID-IN CAPITAL
At beginning of period 3,257 2,936
Common stock issued 42 316
--------------------------
At end of period 3,299 3,252
--------------------------
OTHER COMPREHENSIVE INCOME (LOSS)
Investments
At beginning of period (5) (2)
Unrealized gain (loss) on investments (a) - (1)
--------------------------
At end of period (5) (3)
--------------------------
Derivative Instruments (c)
At beginning of period (b) (31) 13
Unrealized gain (loss) on derivative instruments (a) 12 (14)
Reclassification adjustments included in consolidated net income (a) 2 (6)
--------------------------
At end of period (17) (7)
--------------------------
FOREIGN CURRENCY TRANSLATION
At beginning of period (233) (206)
Change in foreign currency translation (a) (8) (30)
--------------------------
At end of period (241) (236)
--------------------------
RETAINED EARNINGS (DEFICIT)
At beginning of period (951) (313)
Consolidated net income (a) 42 88
Common stock dividends declared (48) (45)
--------------------------
At end of period (957) (270)
--------------------------
TOTAL COMMON STOCKHOLDERS' EQUITY $ 2,080 $ 2,737
==================================================================================================================
(a) Disclosure of Comprehensive Income (Loss):
Investments
Unrealized loss on investments, net of tax of
$- and $-, respectively $ - $ (1)
Derivative Instruments
Unrealized gain (loss) on derivative instruments,
net of tax of $(3) and $8, respectively 12 (14)
Reclassification adjustments included in net income,
net of tax of $(1) and $4, respectively 2 (6)
Foreign currency translation, net (8) (30)
Net income 42 88
--------------------------
Total Comprehensive Income $ 48 $ 37
==========================
(b) Cumulative effect of change in accounting principle, net of $(8) tax in 2001
(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 as follows:
MCV Partnership:
At the beginning of the period $ (8) $ -
Cumulative effect of change in accounting for derivative
instruments - 5
Unrealized gain (loss) on derivative instruments 5 (4)
Reclassification adjustments included in net income 2 1
--------------------------
At the end of the period $ (1) $ 2
==========================
THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
163
CMS ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(AS RESTATED, SEE NOTE 10)
THREE MONTHS ENDED SIX MONTHS ENDED
June 30 2002 2001 2002 2001
------------------------------------------------------------------------------------------------------------------------------------
In Millions, Except Per Share Amounts
OPERATING REVENUE
Electric utility $ 631 $ 623 $ 1,239 $ 1,288
Gas utility 252 239 868 778
Natural gas transmission 9 17 25 39
Independent power production 102 108 191 217
Marketing, services and trading 1,116 956 2,024 2,041
Other 27 (11) 53 (15)
-----------------------------------------------
2,137 1,932 4,400 4,348
------------------------------------------------------------------------------------------------------------------------------------
OPERATING EXPENSES
Operation
Fuel for electric generation 91 60 177 143
Purchased and interchange power - Marketing, services and trading 548 246 926 421
Purchased and interchange power 103 146 191 266
Purchased power - related parties 133 126 273 244
Cost of gas sold - Marketing, services and trading 512 639 951 1,469
Cost of gas sold 186 206 637 624
Other 225 236 397 460
-----------------------------------------------
1,798 1,659 3,552 3,627
Maintenance 53 56 108 115
Depreciation, depletion and amortization 86 79 208 196
General taxes 48 45 105 103
-----------------------------------------------
1,985 1,839 3,973 4,041
------------------------------------------------------------------------------------------------------------------------------------
OPERATING INCOME (LOSS)
Electric utility 116 86 231 225
Gas utility 18 17 82 81
Natural gas transmission (5) 3 (5) 11
Independent power production 37 30 65 54
Marketing, services and trading (32) (25) 10 (32)
Other 18 (18) 44 (32)
-----------------------------------------------
152 93 427 307
------------------------------------------------------------------------------------------------------------------------------------
OTHER INCOME (DEDUCTIONS)
Accretion expense (7) (9) (15) (18)
Gain (loss) on asset sales, net 26 (2) 48 (2)
Other, net (1) 4 (1) 12
-----------------------------------------------
18 (7) 32 (8)
------------------------------------------------------------------------------------------------------------------------------------
EARNINGS BEFORE INTEREST AND TAXES 170 86 459 299
------------------------------------------------------------------------------------------------------------------------------------
FIXED CHARGES
Interest on long-term debt 101 89 196 211
Other interest 3 16 14 28
Capitalized interest (4) (13) (7) (27)
Preferred dividends 1 1 1 1
Preferred securities distributions 25 23 50 46
-----------------------------------------------
126 116 254 259
------------------------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) BEFORE INCOME TAXES AND MINORITY INTERESTS 44 (30) 205 40
INCOME TAXES (BENEFITS) 7 (12) 75 5
MINORITY INTERESTS 1 - 1 1
-----------------------------------------------
INCOME (LOSS) FROM CONTINUING OPERATIONS 36 (18) 129 34
INCOME (LOSS) FROM DISCONTINUED OPERATIONS, NET OF TAX
BENEFIT OF $61 AND $94 IN 2002, AND TAX EXPENSE OF $15 AND
$39 IN 2001, RESPECTIVELY (127) 21 (178) 48
-----------------------------------------------
INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING (91) 3 (49) 82
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING FOR DERIVATIVE
INSTRUMENTS, NET OF TAX EXPENSE OF $9, $-, $9 AND
$6, RESPECTIVELY 17 - 17 9
-----------------------------------------------
CONSOLIDATED NET INCOME (LOSS) $ (74) $ 3 $ (32) $ 91
====================================================================================================================================
THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
164
(AS RESTATED, SEE NOTE 10)
THREE MONTHS ENDED
JUNE 30 2002 2001
------------------------------------------------------------------------------------------------------------------------------------
In Millions, Except Per Share Amounts
CMS ENERGY
NET INCOME (Loss)
Net Income (Loss) Available to Common Stock $ (74) $ 3
==================================
BASIC EARNINGS PER AVERAGE COMMON SHARE
Income (Loss) from Continuing Operations $ 0.27 $ (0.14)
Income (Loss) from Discontinued Operations (0.94) 0.16
Income from Cumulative Effect of Change in Accounting 0.12 -
----------------------------------
Net Income (Loss) Attributable to Common Stock $ (0.55) $ 0.02
==================================
DILUTED EARNINGS PER AVERAGE COMMON SHARE
Income (Loss) from Continuing Operations $ 0.27 $ (0.14)
Income (Loss) from Discontinued Operations (0.94) 0.16
Income from Cumulative Effect of Change in Accounting 0.12 -
----------------------------------
Net Income (Loss) Attributable to Common Stock $ (0.55) $ 0.02
==================================
DIVIDENDS DECLARED PER COMMON SHARE $ 0.365 $ 0.365
------------------------------------------------------------------------------------------------------------------------------------
(AS RESTATED, SEE NOTE 10)
SIX MONTHS ENDED
JUNE 30 2002 2001
------------------------------------------------------------------------------------------------------------------------------------
In Millions, Except Per Share Amounts
CMS ENERGY
NET INCOME (Loss)
Net Income (Loss) Available to Common Stock $ (32) $ 91
==================================
BASIC EARNINGS PER AVERAGE COMMON SHARE
Income from Continuing Operations $ 0.97 $ 0.26
Income (Loss) from Discontinued Operations (1.33) 0.37
Income from Cumulative Effect of Change in Accounting 0.12 0.07
----------------------------------
Net Income (Loss) Attributable to Common Stock $ (0.24) $ 0.70
==================================
DILUTED EARNINGS PER AVERAGE COMMON SHARE
Income from Continuing Operations $ 0.97 $ 0.26
Income (Loss) from Discontinued Operations (1.33) 0.37
Income from Cumulative Effect of Change in Accounting 0.12 0.07
----------------------------------
Net Income (Loss) Attributable to Common Stock $ (0.24) $ 0.70
==================================
DIVIDENDS DECLARED PER COMMON SHARE $ 0.73 $ 0.73
------------------------------------------------------------------------------------------------------------------------------------
THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
165
CMS ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(AS RESTATED, SEE NOTE 10)
SIX MONTHS ENDED
JUNE 30 2002 2001
----------------------------------------------------------------------------------------------------------
In Millions
CASH FLOWS FROM OPERATING ACTIVITIES
Consolidated net income (loss) $ (32) $ 91
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation, depletion and amortization (includes nuclear
decommissioning of $3 and $3, respectively) 208 196
Discontinued operations 132 -
Capital lease and debt discount amortization 10 7
Deferred income taxes and investment tax credit (325) 72
Accretion expense 15 18
Distributions from related parties in excess of (less than) earnings (57) 3
Loss (gain) on the sale of assets (48) 2
Cumulative effect of an accounting change (17) (9)
Changes in other assets and liabilities:
Decrease in accounts receivable and accrued revenues 150 279
Decrease (increase) in inventories 99 (59)
Increase (decrease) in accounts payable and accrued expenses 138 (252)
Changes in other assets and liabilities 139 (69)
-------------------------
Net cash provided by operating activities 412 279
----------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (excludes assets placed under capital lease) (357) (554)
Investments in partnerships and unconsolidated subsidiaries (29) (147)
Cost to retire property, net (33) (55)
Investment in Electric Restructuring Implementation Plan (5) (6)
Investments in nuclear decommissioning trust funds (3) (3)
Proceeds from nuclear decommissioning trust funds 12 14
Proceeds from sale of assets 1,286 122
Other (16) 12
-------------------------
Net cash provided by (used in) investing activities 855 (617)
----------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from notes, bonds, and other long-term debt 390 570
Proceeds from trust preferred securities - 125
Issuance of common stock 60 328
Retirement of bonds and other long-term debt (1,346) (515)
Retirement of trust preferred securities (30) -
Payment of common stock dividends (97) (94)
Decrease in notes payable, net (143) (74)
Payment of capital lease obligations (7) (13)
Other financing 1 3
-------------------------
Net cash provided by (used in) financing activities (1,172) 330
----------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND TEMPORARY CASH INVESTMENTS 95 (8)
CASH AND TEMPORARY CASH INVESTMENTS, BEGINNING OF PERIOD 127 141
-------------------------
CASH AND TEMPORARY CASH INVESTMENTS, END OF PERIOD $ 222 $ 133
==========================================================================================================
(AS RESTATED, SEE NOTE 10)
SIX MONTHS ENDED
JUNE 30 2002 2001
---------------------------------------------------------------------------------------------------------------
OTHER CASH FLOW ACTIVITIES AND NON-CASH INVESTING AND FINANCING ACTIVITIES WERE: In Millions
CASH TRANSACTIONS
Interest paid (net of amounts capitalized) $ 185 $ 188
Income taxes paid (net of refunds) (42) (6)
Pension and OPEB cash contributions 106 89
NON-CASH TRANSACTIONS
Nuclear fuel placed under capital lease $ - $ 12
Other assets placed under capital leases 35 14
===============================================================================================================
All highly liquid investments with an original maturity of three months or less
are considered cash equivalents.
THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
166
CMS ENERGY CORPORATION
CONSOLIDATED BALANCE SHEETS
(AS RESTATED, SEE NOTE 10)
ASSETS
JUNE 30 JUNE 30
2002 DECEMBER 31 2001
(UNAUDITED) 2001 (UNAUDITED)
---------------------------------------------------------------------------------------------------------------------------------
In Millions
PLANT AND PROPERTY (AT COST)
Electric utility $ 7,396 $ 7,661 $ 7,482
Gas utility 2,651 2,593 2,539
Natural gas transmission 208 205 206
Independent power production 689 916 395
Other 100 110 94
-------------------------------------------------
11,044 11,485 10,716
Less accumulated depreciation, depletion and amortization 6,016 6,158 6,011
-------------------------------------------------
5,028 5,327 4,705
Construction work-in-progress 482 521 810
-------------------------------------------------
5,510 5,848 5,515
---------------------------------------------------------------------------------------------------------------------------------
INVESTMENTS
Independent power production 728 714 889
Natural gas transmission 179 577 595
Midland Cogeneration Venture Limited Partnership 359 300 295
First Midland Limited Partnership 261 253 253
Other 75 117 102
-------------------------------------------------
1,602 1,961 2,134
---------------------------------------------------------------------------------------------------------------------------------
CURRENT ASSETS
Cash and temporary cash investments at cost, which approximates market 222 127 133
Accounts receivable, notes receivable and accrued revenue, less
allowances of $4, $5 and $6, respectively 135 219 253
Accounts receivable - Marketing, services and trading,
less allowances of $11, $9 and $8, respectively 340 295 279
Accounts receivable and notes receivable - related parties 111 190 168
Inventories at average cost
Gas in underground storage 476 590 369
Materials and supplies 77 89 82
Generating plant fuel stock 57 52 48
Assets held for sale 410 471 532
Price risk management assets 226 327 492
Prepayments and other 143 200 137
-------------------------------------------------
2,197 2,560 2,493
---------------------------------------------------------------------------------------------------------------------------------
NON-CURRENT ASSETS
Regulatory Assets
Securitized costs 709 717 710
Postretirement benefits 197 209 220
Abandoned Midland Project 11 12 12
Other 173 167 173
Assets held for sale 2,452 3,480 3,605
Price risk management assets 382 368 350
Nuclear decommissioning trust funds 555 581 594
Notes receivable - related party 203 177 166
Notes receivable 126 130 135
Other 470 565 719
-------------------------------------------------
5,278 6,406 6,684
-------------------------------------------------
TOTAL ASSETS $ 14,587 $ 16,775 $ 16,826
=================================================================================================================================
167
STOCKHOLDERS' INVESTMENT AND LIABILITIES (AS RESTATED, SEE NOTE 10)
JUNE 30 JUNE 30
2002 DECEMBER 31 2001
(UNAUDITED) 2001 (UNAUDITED)
-----------------------------------------------------------------------------------------------------------------------------
In Millions
CAPITALIZATION
Common stockholders' equity
Common stock, authorized 250.0 shares; outstanding 135.1 shares,
133.0 shares and 132.4 shares, respectively $ 1 $ 1 $ 1
Other paid-in-capital 3,317 3,257 3,264
Other comprehensive loss (686) (269) (281)
Retained deficit (1,080) (951) (316)
---------------------------------------------
$ 1,552 $ 2,038 $ 2,668
Preferred stock of subsidiary 44 44 44
Company-obligated convertible Trust Preferred Securities
of subsidiaries (a) 694 694 694
Company-obligated mandatorily redeemable preferred securities
of Consumers' subsidiaries (a) 490 520 520
Long-term debt 5,367 5,840 6,012
Non-current portion of capital leases 97 71 54
---------------------------------------------
8,244 9,207 9,992
-----------------------------------------------------------------------------------------------------------------------------
MINORITY INTERESTS 13 24 24
-----------------------------------------------------------------------------------------------------------------------------
CURRENT LIABILITIES
Current portion of long-term debt and capital leases 639 1,016 339
Notes payable 269 416 328
Accounts payable 270 359 359
Accounts payable - Marketing, services and trading 233 236 140
Accrued interest 150 135 144
Accrued taxes 223 111 168
Accounts payable - related parties 57 54 67
Liabilities held for sale 579 639 629
Price risk management liabilities 178 367 511
Current portion of purchase power contracts 24 24 22
Current portion of gas supply contract obligations 24 22 21
Deferred income taxes 13 49 21
Other 223 243 288
---------------------------------------------
2,882 3,671 3,037
-----------------------------------------------------------------------------------------------------------------------------
NON-CURRENT LIABILITIES
Postretirement benefits 296 356 334
Deferred income taxes 529 824 727
Deferred investment tax credit 94 102 107
Regulatory liabilities for income taxes, net 276 276 264
Liabilities held for sale 1,350 1,376 1,441
Price risk management liabilities 321 287 325
Gas supply contract obligations 249 266 273
Power purchase agreement - MCV Partnership 41 52 67
Other 292 334 235
---------------------------------------------
3,448 3,873 3,773
-----------------------------------------------------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES (Notes 1 and 5)
TOTAL STOCKHOLDERS' INVESTMENT AND LIABILITIES $ 14,587 $ 16,775 $ 16,826
=============================================================================================================================
(A) FOR FURTHER DISCUSSION, SEE NOTE 6 OF THE CONDENSED NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS.
THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
168
CMS ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS' EQUITY
(UNAUDITED)
(AS RESTATED, SEE NOTE 10)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 2002 2001 2002 2001
---------------------------------------------------------------------------------------------------------------------------------
In Millions
COMMON STOCK
At beginning and end of period $ 1 $ 1 $ 1 $ 1
---------------------------------------------------------------------------------------------------------------------------------
OTHER PAID-IN CAPITAL
At beginning of period 3,299 3,252 3,257 2,936
Common stock reacquired (1) - (1) -
Common stock issued 19 12 61 328
-------------------------------------------
At end of period 3,317 3,264 3,317 3,264
---------------------------------------------------------------------------------------------------------------------------------
OTHER COMPREHENSIVE INCOME (LOSS)
Investments
At beginning of period (5) (3) (5) (2)
Unrealized gain (loss) on investments (a) (2) (1) (2) (2)
-------------------------------------------
At end of period (7) (4) (7) (4)
-------------------------------------------
Derivative Instruments (c)
At beginning of period (b) (17) (7) (31) 13
Unrealized gain (loss) on derivative instruments (a) (13) (15) (1) (29)
Reclassification adjustments included in consolidated net income (loss) (a) 1 (2) 3 (8)
-------------------------------------------
At end of period (29) (24) (29) (24)
-------------------------------------------
FOREIGN CURRENCY TRANSLATION
At beginning of period (241) (236) (233) (206)
Change in foreign currency translation (a) (409) (17) (417) (47)
-------------------------------------------
At end of period (650) (253) (650) (253)
-------------------------------------------
RETAINED EARNINGS (DEFICIT)
At beginning of period (957) (270) (951) (313)
Consolidated net income (loss) (a) (74) 3 (32) 91
Common stock dividends declared (49) (49) (97) (94)
-------------------------------------------
At end of period (1,080) (316) (1,080) (316)
-------------------------------------------
TOTAL COMMON STOCKHOLDERS' EQUITY $ 1,552 $ 2,668 $ 1,552 $ 2,668
=================================================================================================================================
(a) Disclosure of Comprehensive Income (Loss):
Investments
Unrealized loss on investments, net of tax of
$1, $-, $1 and $-, respectively $ (2) $ (1) $ (2) $ (2)
Derivative Instruments
Unrealized loss on derivative instruments,
net of tax of $2, $5, $(1) and $13, respectively (13) (15) (1) (29)
Reclassification adjustments included in consolidated net income (loss),
net of tax of $-, $-, $(1) and $4, respectively 1 (2) 3 (8)
Foreign currency translation, net (409) (17) (417) (47)
Consolidated net income (loss) (74) 3 (32) 91
-------------------------------------------
Total Consolidated Comprehensive Income (Loss) $ (497) $ (32) $ (449) $ 5
===========================================
(b) Six months ended June 30, 2001 is the cumulative effect of change in
accounting principle, net of $(8) tax (Note 1)
(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 as follows:
MCV Partnership:
At the beginning of the period $ (1) $ 2 $ (8) -
Cumulative effect of change in accounting for derivative instruments - - - 5
Unrealized gain/(loss) on derivative instruments 1 (8) 6 (12)
Reclassification adjustments included in net income 1 - 3 1
----------------------------------------
At the end of the period $ 1 $ (6) $ 1 $ (6)
==============================================================================================================================
THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
169
CMS Energy Corporation
13: 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. For the nine months ended September 30, 2002 and 2001, net income
included undistributed earnings of $71 million and $37 million, respectively,
from these investments. The most significant of these investments is CMS
Energy's 50 percent interest in Jorf Lasfar and its 49 percent interest in the
MCV Partnership. Summarized income statement information of CMS Energy's most
significant equity method investments follows.
THREE MONTHS ENDED SEPTEMBER 30, 2002 JORF LASFAR MCV TOTAL
-------------------------------------------------------------------------------------------------------------------
IN MILLIONS
Operating revenue $ 87 $ 156 $ 243
Operating expenses 47 120 167
---------------------------------------
Operating income 40 36 76
Other Expense, net (14) (27) (41)
Cumulative Effect of Change in Method of
Accounting for Derivative Options Contracts - - -
---------------------------------------
Net Income $ 26 $ 9 $ 35
=======================================
THREE MONTHS ENDED SEPTEMBER 30, 2001 JORF LASFAR MCV TOTAL
-------------------------------------------------------------------------------------------------------------------
IN MILLIONS
Operating revenue $ 88 $ 165 $ 253
Operating expenses 37 125 162
---------------------------------------
Operating income 51 40 91
Other Expense, net (13) (27) (40)
Cumulative Effect of Change in Method of
Accounting for Derivative Options Contracts - - -
---------------------------------------
Net Income $ 38 $ 13 $ 51
=======================================
NINE MONTHS ENDED SEPTEMBER 30, 2002 JORF LASFAR MCV TOTAL
-------------------------------------------------------------------------------------------------------------------
IN MILLIONS
Operating revenue $ 274 $ 451 $ 725
Operating expenses 136 318 454
----------------------------------------
Operating income 138 133 271
Other Expense, net (36) (86) (122)
Cumulative Effect of Change in Method of
Accounting for Derivative Options Contracts - 58 58
----------------------------------------
Net Income $ 102 $ 105 $ 207
========================================
170
CMS Energy Corporation
NINE MONTHS ENDED SEPTEMBER 30, 2001 JORF LASFAR MCV TOTAL
-------------------------------------------------------------------------------------------------------------------
IN MILLIONS
Operating revenue $ 264 $ 454 $ 718
Operating expenses 107 329 436
----------------------------------------
Operating income 157 125 282
Other Expense, net (34) (81) (115)
Cumulative Effect of Change in Method of
Accounting for Derivative Options Contracts - - -
----------------------------------------
Net Income $ 123 $ 44 $ 167
========================================
THREE MONTHS ENDED JUNE 30, 2002 JORF LASFAR MCV TOTAL
-------------------------------------------------------------------------------------------------------------------
IN MILLIONS
Operating revenue $ 91 $ 145 $ 236
Operating expenses 41 88 129
---------------------------------------
Operating income 50 57 107
Other Expense, net (11) (30) (41)
Cumulative Effect of Change in Method of
Accounting for Derivative Options Contracts - 58 58
---------------------------------------
Net Income $ 39 $ 85 $ 124
=======================================
THREE MONTHS ENDED JUNE 30, 2001 JORF LASFAR MCV TOTAL
-------------------------------------------------------------------------------------------------------------------
IN MILLIONS
Operating revenue $ 89 $ 147 $ 236
Operating expenses 34 109 143
---------------------------------------
Operating income 55 38 93
Other Income (Expense), net 2 (28) (26)
Cumulative Effect of Change in Method of
Accounting for Derivative Options Contracts - - -
---------------------------------------
Net Income $ 57 $ 10 $ 67
=======================================
SIX MONTHS ENDED JUNE 30, 2002 JORF LASFAR MCV TOTAL
-------------------------------------------------------------------------------------------------------------------
IN MILLIONS
Operating revenue $ 187 $ 295 $ 482
Operating expenses 89 198 287
----------------------------------------
Operating income 98 97 195
Other Expense, net (22) (59) (81)
Cumulative Effect of Change in Method of
Accounting for Derivative Options Contracts - 58 58
----------------------------------------
Net Income $ 76 $ 96 $ 172
========================================
171
CMS Energy Corporation
SIX MONTHS ENDED JUNE 30, 2001 JORF LASFAR MCV TOTAL
-------------------------------------------------------------------------------------------------------------------
IN MILLIONS
Operating revenue $176 $ 289 $ 465
Operating expenses 70 204 274
---------------------------------------
Operating income 106 85 191
Other Expense, net (21) (55) (76)
Cumulative Effect of Change in Method of
Accounting for Derivative Options Contracts - - -
---------------------------------------
Net Income $ 85 $ 30 $ 115
=======================================
THREE MONTHS ENDED MARCH 31, 2002 JORF LASFAR MCV TOTAL
-------------------------------------------------------------------------------------------------------------------
IN MILLIONS
Operating revenue $ 96 $ 149 $ 245
Operating expenses 48 109 157
---------------------------------------
Operating income 48 40 88
Other Expense, net (11) (29) (40)
Cumulative Effect of Change in Method of
Accounting for Derivative Options Contracts - - -
---------------------------------------
Net Income $ 37 $ 11 $ 48
=======================================
THREE MONTHS ENDED MARCH 31, 2001 JORF LASFAR MCV TOTAL
-------------------------------------------------------------------------------------------------------------------
IN MILLIONS
Operating revenue $ 87 $ 142 $ 229
Operating expenses 36 95 131
---------------------------------------
Operating income 51 47 98
Other Expense, net (23) (27) (50)
Cumulative Effect of Change in Method of
Accounting for Derivative Options Contracts - - -
---------------------------------------
Net Income $ 28 $ 20 $ 48
=======================================
172
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Quantitative and Qualitative Disclosures about Market Risk is contained in
MANAGEMENT'S DISCUSSION AND ANALYSIS, which is incorporated by reference herein.
CONTROLS AND PROCEDURES
DISCLOSURE AND INTERNAL CONTROLS
CMS Energy's CEO and CFO are responsible for establishing and maintaining
disclosure controls and procedures. Management, under the direction of its
principal executive and financial officers, has evaluated the effectiveness of
CMS Energy's disclosure controls and procedures as of a date within ninety days
of the filing of this quarterly report on Form 10-Q/A. Based on these
evaluations, 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 that could significantly affect
internal controls subsequent to such evaluation.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The discussion below is limited to an update of developments that have occurred
in various judicial and administrative proceedings, many of which are more fully
described in CMS Energy's Form 10-K for the year ended December 31, 2001.
Reference is also made to the CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS, in particular Note 5 - Uncertainties, included herein for additional
information regarding various pending administrative and judicial proceedings
involving rate, operating, regulatory and environmental matters.
AMERICAN HOME ASSURANCE COMPANY LITIGATION
American Home Assurance Company ("AHA") is one of the issuers of a joint and
several surety bond, with a remaining surety amount of approximately $190
million, supporting a CMS MST gas supply contract. Under an Indemnification
Agreement with CMS Enterprises and CMS MST, AHA may demand that CMS Enterprises
and CMS MST post acceptable collateral if CMS Energy's Standard & Poors senior
debt rating falls below BB. Following the credit rating downgrade by Standard &
Poors in July 2002, AHA demanded that CMS Enterprises and CMS MST post
acceptable collateral for the remaining surety amount, and on August 9, 2002,
AHA filed a lawsuit against CMS Enterprises and CMS MST in the United States
District Court for the Eastern District of Michigan. In its lawsuit, AHA is
seeking to require CMS Enterprises and CMS MST to post acceptable collateral and
to enjoin CMS Enterprises and CMS MST from disposing of or transferring any
corporate assets outside the ordinary course of business until AHA's claim is
fully adjudicated. AHA's request for a temporary restraining order was denied on
August 9th.
St. Paul Fire and Marine Insurance Company ("St. Paul"), the co-surety on the
bond with the AHA, has similar rights in connection with surety bonds supporting
two other CMS MST gas supply contracts, where the remaining surety amounts total
approximately $112 million. In addition, the recent credit rating downgrade of
St Paul has triggered an obligation under the gas supply contracts for
173
CMS MST to replace St. Paul's surety bond by September 16, 2002. Discussions
with St. Paul are ongoing. St. Paul has not yet made a formal demand for
collateral or commenced any legal action.
CMS and AIG have reached a settlement in principle that would provide AHA and
St. Paul's with collateral and resolve AHA's litigation. However, the settlement
is subject to final documentation as well as approval by the banks party to the
CMS Energy secured credit lines.
DEMAND FOR ACTIONS AGAINST OFFICERS AND DIRECTORS
The Board of Directors of CMS Energy received a demand, on behalf of a
shareholder of CMS common stock, that it commence civil actions (i) to remedy
alleged breaches of fiduciary duties by CMS officers and directors in connection
with round-trip trading at CMS, and (ii) to recover damages sustained by CMS as
a result of alleged insider trades alleged to have been made by certain current
and former officers of CMS 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. Winston & Strawn has
been retained as counsel to the CMS Energy Board's Special Investigative
Committee, and the Committee and its counsel are in the process of completing
their investigation. Counsel for the shareholder has agreed to extend the time
for CMS to respond to the demand.
EMPLOYMENT RETIREMENT INCOME SECURITY ACT ("ERISA") CLASS ACTION LAWSUITS
CMS Energy is a named defendant, along with Consumers Energy, CMS MST and
certain named and unnamed officers and directors in two lawsuits brought as
purported class actions on behalf of participants and beneficiaries of the
401(k) Plan. The two cases, filed in July 2002 in the U.S. District Court for
the Eastern District of Michigan, were consolidated by the trial judge.
Plaintiffs allege breaches of fiduciary duties under the Employee Retirement
Security Act ("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 cannot predict the outcome of this litigation.
SECURITIES CLASS ACTION LAWSUITS
Eighteen separate civil lawsuits have been filed in federal court in Michigan in
connection with round-trip trading, alleging (i) violation of Section 10(b) and
Rule 10b-5 of the Securities Exchange Act of 1934 ("Exchange Act") and (ii)
violation of Section 20(a) of the Exchange Act. All suits name Messrs. McCormick
and Wright and CMS Energy as defendants. Consumers, Mr. Joos and Ms. Pallas are
named as defendants on certain of the suits. The cases will be consolidated into
a single lawsuit.
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 environmental issues. Based on its present knowledge and
subject to future legal and factual developments, CMS Energy believes that it is
unlikely that these actions, individually or in total, will have a material
adverse effect on its financial condition. See MANAGEMENT'S DISCUSSION AND
ANALYSIS and CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
174
ITEM 5. OTHER INFORMATION
In order for a shareholder to submit a proposal for a vote at the CMS Energy
2003 Annual Meeting, the shareholder must assure that CMS Energy receives the
proposal on or before March 6, 2003. CMS Energy will not include shareholder's
proposals in the CMS Energy's proxy statement. The shareholder must address the
proposal to: Mr. Michael VanHemert, Corporate Secretary, Fairlane Plaza South,
Suite 1100, 330 Town Center Drive, Dearborn, Michigan 48126. If the shareholder
fails to submit the proposal on or before March 6, 2003, then management may use
its discretionary voting authority to decide if it will submit the proposal to
vote when the shareholder raises the proposal at the CMS Energy 2003 Annual
Meeting.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) LIST OF EXHIBITS
(4)(a) 91st Supplemental Indenture, dated as of May 23, 2003, between
Consumers Energy Company and JP Morgan Chase Bank as Trustee
(4)(b) 13th Supplemental Indenture, dated as of July 16, 2003, between
CMS Energy Corporation and Bank One Trust Company, N.A. as Trustee
(4)(c) 14th Supplemental Indenture, dated as of July 17, 2003, between
CMS Energy Corporation and Bank One Trust Company, N.A. as Trustee
(99) CMS Energy Corporation's certifications pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
(b) REPORTS ON FORM 8-K
During 3rd Quarter 2002, CMS Energy filed reports of Form 8-K on July 30, 2002,
August 8, 2002 and November 4, 2002 covering matters pursuant to ITEM 5. OTHER
EVENTS.
175
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: July 23, 2003 By: /s/ Thomas J. Webb
-------------------------------
Thomas J. Webb
Executive Vice President and
Chief Financial Officer
176
CERTIFICATION OF KENNETH WHIPPLE
I, Kenneth Whipple, certify that:
1. I have reviewed this quarterly report on Form 10-Q/A of CMS Energy
Corporation;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operation and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a) Designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) Presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and
the audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) All significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data and
have identified for the registrant's auditors any material weaknesses
in internal controls; and
b) Any fraud, whether or not material, that involves
management or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes
in internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Dated: July 23, 2003 By: /s/ Kenneth Whipple
----------------------------
Kenneth Whipple
Chairman of the Board and
Chief Executive Officer
177
CERTIFICATION OF THOMAS J. WEBB
I, Thomas J. Webb, certify that:
1. I have reviewed this quarterly report on Form 10-Q/A of CMS Energy
Corporation;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operation and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a) Designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) Presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and
the audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) All significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data and
have identified for the registrant's auditors any material weaknesses
in internal controls; and
b) Any fraud, whether or not material, that involves
management or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes
in internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Dated: July 23, 2003 By: /s/ Thomas J. Webb
----------------------------
Thomas J. Webb
Executive Vice President and
Chief Financial Officer
178
EXHIBITS
EXHIBIT NUMBER DESCRIPTION
(4)(a) 91st Supplemental Indenture, dated as of May 23, 2003,
between Consumers Energy Company and JPMorgan Chase Bank
as Trustee
(4)(b) 13th Supplemental Indenture, dated as of July 16, 2003,
between CMS Energy Corporation and Bank One Trust
Company, N.A. as Trustee
(4)(c) 14th Supplemental Indenture, dated as of July 17, 2003,
between CMS Energy Corporation and Bank One Trust
Company, N.A. as Trustee
(99) CMS Energy Corporation's certifications pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002