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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
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Commission Registrant; State of Incorporation; IRS Employer
File Number Address; and Telephone Number Identification No.
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1-5611 CONSUMERS ENERGY COMPANY 38-0442310
(A Michigan Corporation)
212 West Michigan Avenue, Jackson, Michigan 49201
(517)788-0550
Indicate by check mark whether the Registrants (1) have filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrants were required to file such reports), and (2) have been subject to
such filing requirements for the past 90 days. Yes X No
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Number of shares outstanding of each of the issuer's classes of common stock at
October 31, 2002:
CONSUMERS ENERGY COMPANY, $10 par value, privately held by CMS Energy 84,108,789
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Consumers Energy Company
QUARTERLY REPORT ON FORM 10-Q/A TO THE UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2002
EXPLANATORY NOTE
This Form 10-Q/A amends Consumers' 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, Consumers' consolidated financial
statements for the quarterly period ending September 30, 2002 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,
reviews of the quarterly periods of 2002 of CMS Energy, Consumers' parent
company, which included audit and review work at Consumers.
In April 2002, Consumers' Board of Directors, upon the recommendation of the
Audit Committee of the Board, voted to discontinue using Arthur Andersen to
audit Consumers' financial statements for the year ending December 31, 2002.
Consumers had previously retained Arthur Andersen to review its financial
statements for the quarter ended March 31, 2002. In May 2002, Consumers' Board
of Directors engaged Ernst & Young to audit its 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, Arthur Andersen notified CMS Energy
that Arthur Andersen's historical opinions on CMS Energy's financial statements
for the fiscal years ended December 31, 2001 and December 31, 2000 could not be
relied upon. 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 for the
applicable years, the re-audit did include audit work at Consumers for these
years.
In connection with Ernst & Young's re-audit of the fiscal years ended December
31, 2001 and December 31, 2000, Consumers has made, in consultation with Ernst &
Young, certain adjustments 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. The three 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 and 3) as of September 30, 2002,
recognize a $29 million federal income tax sharing allocation from CMS Energy as
a dividend to be paid by Consumers to CMS Energy instead of income tax expense.
A summary of the principal effects of the restatement on Consumers' consolidated
financial statements for the quarterly periods ended September 30, 2002 and
September 30, 2001 is contained in Note 4, Restatement, and unaudited restated
financial statements for the first and second quarters of 2002, with comparable
restated
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periods for 2001, are contained in Note 6, 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 5,
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 6, Restated Financial Statements for First and Second Quarters, in the
notes to the consolidated financial statements. For further information about
Consumers' restated financial statements for December 31, 2001 and December 31,
2000, see Consumers' Form 10-K/A for the fiscal year ended December 31, 2001,
which was filed with the SEC on February 21, 2003.
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CONSUMERS ENERGY COMPANY
QUARTERLY REPORT ON FORM 10-Q/A TO THE
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
FOR THE QUARTER ENDED SEPTEMBER 30, 2002
TABLE OF CONTENTS
Page
Glossary................................................................................................ 5
PART I: FINANCIAL INFORMATION
Management's Discussion and Analysis
Change in Auditors and Restatements............................................................9
Forward-Looking Statements and Risk Factors...................................................10
Critical Accounting Policies..................................................................12
Results of Operations.........................................................................20
Capital Resources and Liquidity...............................................................27
Outlook.......................................................................................30
Other Matters.................................................................................39
Subsequent Events.............................................................................39
Consolidated Financial Statements -- As Restated
Consolidated Statements of Income.............................................................45
Consolidated Statements of Cash Flows.........................................................46
Consolidated Balance Sheets................................................................47-48
Consolidated Statements of Common Stockholder's Equity........................................49
Condensed Notes to Consolidated Financial Statements:
1. Corporate Structure and Summary of Significant Accounting Policies.......................51
2. Uncertainties............................................................................54
3. Short-Term Financings and Capitalization.................................................69
4. Restatement..............................................................................72
5. Subsequent Events........................................................................81
6. Restated Quarterly Financial Data (Unaudited)............................................86
Quantitative and Qualitative Disclosures about Market Risk..............................................96
PART II: OTHER INFORMATION
Item 1. Legal Proceedings..........................................................................96
Item 6. Exhibits and Reports on Form 8-K...........................................................97
Signatures..............................................................................................98
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GLOSSARY
Certain terms used in the text and financial statements are defined below.
ABATE......................................Association of Businesses Advocating Tariff Equity
AEP........................................American Electric Power Company
ALJ....................................... Administrative Law Judge
AMT....................................... Alternative Minimum Tax
APB....................................... Accounting Principles Board
APB Opinion No. 30........................ APB Opinion No. 30, "Reporting Results of Operations-- Reporting the Effects
of Disposal of a Segment of a Business"
Accumulated Benefit Obligation............ The liabilities of a pension plan based on service and pay to date. This
differs from the Projected Benefit Obligation that is typically disclosed in
that it does not reflect expected future salary increases
Alliance.................................. Alliance Regional Transmission Organization
Arthur Andersen........................... Arthur Andersen LLP
Articles.................................. Articles of Incorporation
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
CEO........................................Chief Executive Officer
CFO....................................... Chief Financial Officer
Clean Air Act............................. Federal Clean Air Act, as amended
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 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
Consumers..................................Consumers Energy Company, a subsidiary of CMS Energy
Consumers Campus Holdings..................Consumers Campus Holdings, L.L.C., a wholly owned subsidiary of Consumers
Consumers Receivables Funding............. Consumers Receivables Funding,, L.L.C., a wholly owned subsidiary of Consumers
Court of Appeals.......................... Michigan Court of Appeals
Customer Choice Act....................... Customer Choice and Electricity Reliability Act, a Michigan statute enacted in
June 2000 that allows all retail customers choice of alternative electric
suppliers as of January 1, 2002, provides for full recovery of net stranded
costs and implementation costs, establishes a five percent reduction in
residential rates, establishes rate freeze and rate cap, and allows for
Securitization
Detroit Edison.............................The Detroit Edison Company, a non-affiliated company
DOE....................................... U.S. Department of Energy
Dow....................................... The Dow Chemical Company, a non-affiliated company
Energy Michigan........................... Energy Michigan is a trade association for the cogeneration, independent power
and waste to energy industries in Michigan.
Enterprises............................... CMS Enterprises Company, a subsidiary of CMS Energy
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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 that holds a lessor interest
in the MCV facility
GCR........................................Gas cost recovery
GWh....................................... Gigawatt-hour
Health Care Plan.......................... The medical, dental, and prescription drug programs offered to eligible
employees of Panhandle, Consumers and CMS Energy
IPP........................................Independent Power Producer
ISO........................................Independent System Operator
kWh........................................Kilowatt-hour
LIBOR......................................London Inter-Bank Offered Rate
Ludington................................. Ludington pumped storage plant, jointly owned by Consumers and Detroit Edison
MACT.......................................Maximum Achievable Control Technology
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
MEPCC..................................... Michigan Electric Power Coordination Center
METC...................................... Michigan Electric Transmission Company, formally a subsidiary of Consumers
Energy and now an indirect subsidiary of Trans-Elect
Michigan Gas Storage...................... Michigan Gas Storage Company, a subsidiary of Consumers
MISO...................................... Midwest Independent System Operator
Moody's .................................. Moody's Investors Service, Inc.
MPSC...................................... Michigan Public Service Commission
MTH....................................... Michigan Transco Holdings, Limited Partnership
MW........................................ Megawatts
NEIL...................................... Nuclear Electric Insurance Limited, an industry mutual insurance company owned
by member utility companies
NMC........................................Nuclear Management Company, LLC, formed in 1999 by Northern States Power
Company (now Xcel Energy Inc.), Alliant Energy, Wisconsin Electric Power
Company, and Wisconsin Public Service Company to operate and manage nuclear
generating facilities owned by the four utilities
NRC........................................Nuclear Regulatory Commission
OATT.......................................Open Access Transmission Tariff
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OPEB...................................... Postretirement benefit plans other than pensions for retired employees
Palisades..................................Palisades nuclear power plant, which is owned by Consumers
Panhandle................................. Panhandle Eastern Pipe Line Company, including its subsidiaries Trunkline, Pan
Gas Storage, Panhandle Storage, and Panhandle Holdings. Panhandle is a wholly
owned subsidiary of CMS Gas Transmission
PCB....................................... Polychlorinated biphenyl
Pension Plan.............................. The trusteed, non-contributory, defined benefit pension plan of Panhandle,
Consumers and CMS Energy
PJM........................................Pennsylvania-Jersey-Maryland
PPA....................................... The Power Purchase Agreement between Consumers and the MCV Partnership with a
35-year term commencing in March 1990
Price-Anderson Act........................ Price-Anderson Act, enacted in 1957 as an amendment to the Atomic Energy Act
of 1954, as revised and extended over the years. This act stipulates between
nuclear licensees and the U.S. government the insurance, financial
responsibility, and legal liability for nuclear accidents
PSCR.......................................Power supply cost recovery
PUHCA..................................... Public Utility Holding Company Act of 1935
PURPA..................................... Public Utility Regulatory Policies Act of 1978
RTO....................................... Regional Transmission Organization
SEC....................................... U.S. Securities and Exchange Commission
Securitization............................ A financing method authorized by statute and approved by the MPSC which allows
a utility to set aside and pledge a portion of the rate payments received by
its customers for the repayment of Securitization bonds issued by a special
purpose entity affiliated with such utility
SERP...................................... Supplemental Executive Retirement Plan
SFAS...................................... Statement of Financial Accounting Standards
SFAS No. 5................................ SFAS No. 5, "Accounting for Contingencies"
SFAS No. 13............................... SFAS No. 13 "Accounting for Leases"
SFAS No. 71............................... SFAS No. 71, "Accounting for the Effects of Certain Types of Regulation"
SFAS No. 87............................... SFAS No. 87, "Employers' Accounting for Pensions"
SFAS No. 106.............................. SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than
Pensions"
SFAS No. 115.............................. SFAS No. 115, "Accounting for Certain Investments in Debt and Equity
Securities"
SFAS No. 121.............................. SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of"
SFAS No. 133.............................. SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities,
as amended and interpreted"
SFAS No. 142.............................. SFAS No. 142, "Goodwill and Other Intangible Assets"
SFAS No. 143.............................. SFAS No. 143, "Accounting for Asset Retirement Obligations"
SFAS No. 144.............................. SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets"
SFAS No. 145.............................. SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of
FASB Statement No. 13, and Technical Corrections"
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SFAS No. 146.............................. SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal
Activities"
SFAS No. 147.............................. SFAS No. 147, "Acquisitions of Certain Financial Institutions"
Special Committee......................... A special committee of independent directors, established by CMS Energy's
Board of Directors, to investigate matters surrounding round-trip trading
Stranded Costs............................ Costs incurred by utilities in order to serve their customers in a regulated
monopoly environment, which may not be recoverable in a competitive
environment because of customers leaving their systems and ceasing to
pay for their costs. These costs could include owned and purchased
generation and regulatory assets
Superfund................................. Comprehensive Environmental Response, Compensation and Liability Act
Transition Costs.......................... Stranded Costs, as defined, plus the costs incurred in the transition to
competition
Trust Preferred Securities................ Securities representing an undivided beneficial interest in the assets of
statutory business trusts, the interests of which have a preference with
respect to certain trust distributions over the interests of either CMS Energy
or Consumers, as applicable, as owner of the common beneficial interests of
the trusts
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
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Consumers Energy Company
CONSUMERS ENERGY COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS
CHANGE IN AUDITORS AND RESTATEMENT
Consumers' consolidated financial statements for the quarterly period ended
September 30, 2002 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, reviews of the quarterly periods of 2002 of CMS Energy,
Consumers' parent company, which included audit and review work at Consumers.
In April 2002, Consumers' Board of Directors, upon the recommendation of the
Audit Committee of the Board, voted to discontinue using Arthur Andersen to
audit Consumers' financial statements for the year ending December 31, 2002.
Consumers had previously retained Arthur Andersen to review its financial
statements for the quarter ended March 31, 2002. In May 2002, Consumers' Board
of Directors engaged Ernst & Young to audit its 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, Arthur Andersen notified CMS Energy
that Arthur Andersen's historical opinions on CMS Energy's financial statements
for the fiscal years ended December 31, 2001 and December 31, 2000 could not be
relied upon. 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 for the
applicable years, the re-audit did include audit work at Consumers for these
years.
In connection with Ernst & Young's re-audit of the fiscal years ended December
31, 2001 and December 31, 2000, Consumers has made, in consultation with Ernst &
Young, certain adjustments 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, Consumers believed that such accounting was
appropriate under generally accepted accounting principles and Arthur Andersen
concurred.
The audit adjustments: 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; and 2) recognize Consumers' new headquarters
lease as a capital lease, instead of an operating lease, and record the lease
obligation and capitalize costs incurred. Each of these transactions involved
estimates, assumptions, and judgment based on the best information available at
the time the transactions occurred. The audit adjustments reflect current
judgment on these matters. In addition, the audit adjustments recognize
immaterial reconciling adjustments to advertising costs, Consumers' OPEB
liability and related party receivables and payables. Consumers has also made an
additional adjustment associated with its financial statements as of September
30, 2002. This additional adjustment by Consumers recognizes the $29 million
federal income tax sharing allocation from CMS Energy as a dividend to be paid
by Consumers to CMS Energy instead of income tax expense as originally recorded
in September 2002. A summary of the principal effects of the restatement on
Consumers' consolidated financial statements for the quarterly period ended
September 30, 2002 and September 30, 2001 is contained in Note 4, Restatement,
and unaudited restated financial statements for the first and second
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Consumers Energy Company
quarters of 2002, with comparable restated periods for 2001 are contained in
Note 6, 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. For further information about Consumers' restated
financial statements for December 31, 2001 and December 31, 2000, see Consumers'
Form 10-K/A for the fiscal year ended December 31, 2001, which was filed with
the SEC on February 21, 2003.
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
combination with Consumers' consolidated financial statements and notes to those
statements included in this Form 10-Q/A, and Consumers' 2001 Form 10-K/A that
was previously filed with the SEC on February 21, 2003. All note references
within this MD&A refer to the notes to Consumers' consolidated financial
statements.
Consumers, a subsidiary of CMS Energy, a holding company, is an electric and gas
utility company that provides service to customers in Michigan's Lower
Peninsula. Consumers' customer base includes a mix of residential, commercial
and diversified industrial customers, the largest segment of which is the
automotive industry.
FORWARD-LOOKING STATEMENTS AND RISK FACTORS
The MD&A of this Form 10-Q/A should be read along with the MD&A and other parts
of Consumers' 2001 Form 10-K/A. This MD&A refers to, and in some sections
specifically incorporates by reference, Consumers' Condensed Notes to
Consolidated Financial Statements and should be read in conjunction with such
Consolidated Financial Statements and Notes. This Form 10-Q/A and other written
and oral statements that Consumers may make contain forward-looking statements
as defined by the Private Securities Litigation Reform Act of 1995. Consumers'
intentions with the use of the words, "anticipates," "believes," "estimates,"
"expects," "intends," and "plans," and variations of such words and similar
expressions, are solely to identify forward-looking statements that involve risk
and uncertainty. These forward-looking statements are subject to various factors
that could cause Consumers' actual results to differ materially from the results
anticipated in such statements. Consumers has no obligation to update or revise
forward-looking statements regardless of whether new information, future events
or any other factors affect the information contained in such statements.
Consumers does, however, discuss certain risk factors, uncertainties and
assumptions in this MD&A and in Item 1 of the 2001 Form 10-K/A in the section
entitled "Consumers 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:
- Ability to successfully access the capital markets;
- Achievement of operating synergies and revenue enhancements;
- 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;
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Consumers Energy Company
- CMS Energy, Consumers, Panhandle or any of their affiliates' securities
ratings;
- Market perception of the energy industry, CMS Energy, Consumers,
Panhandle or any of their affiliates;
- 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;
- National, regional and local economic, competitive and regulatory
conditions and developments;
- Adverse regulatory or legal decisions, including environmental laws and
regulations;
- Federal regulation of electric sales and transmission of electricity
including re-examination by Federal regulators of the market-based
sales authorizations by which Consumers and its affiliates participate
in wholesale power markets without price restrictions and proposals by
FERC to change the way it currently lets Consumers and other public
utilities and natural gas companies interact with each other;
- Energy markets, including the timing and extent of unanticipated
changes in commodity prices for oil, coal, natural gas liquids,
electricity and certain related products due to lower or higher demand,
shortages, transportation problems or other developments;
- Nuclear power plant performance, decommissioning, policies, security,
procedures, incidents, and regulation, including the availability of
spent nuclear fuel storage;
- Technological developments in energy production, delivery and usage;
- Changes in financial or regulatory accounting principles or policies;
- Outcome, cost and other effects of legal and administrative
proceedings, settlements, investigations and claims;
- Disruptions in the normal commercial insurance and surety bond markets
that may increase costs or reduce traditional insurance coverage,
particularly terrorism and sabotage insurance and performance bonds.
- Other business or investment considerations that may be disclosed from
time to time in CMS Energy's, Consumers' or Panhandle's SEC filings or
in other publicly disseminated written documents, which are difficult
to predict and many of which are beyond our control.
Consumers designed this discussion of potential risks and uncertainties, which
is by no means comprehensive, to highlight important factors that may impact
Consumers' business and financial outlook. This Form 10-Q/A also describes
material contingencies in Consumers Notes to Consolidated Financial Statements,
and Consumers encourages its readers to review these Notes.
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Consumers Energy Company
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 their Form 10-Q's, including
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 CEOs and CFOs of public companies to
make certain certifications relating to their Form 10-Q's, including the
financial statements. The certifications required by the Sarbanes-Oxley Act of
2002 relating to this Form 10-Q/A for the period ended September 30, 2002 are
filed herewith.
DISCLOSURE CONTROLS AND PROCEDURES
Consumers' CEO and CFO are responsible for establishing and maintaining
Consumers' disclosure controls and procedures. Management, under the direction
of Consumers' principal executive and financial officers, has evaluated the
effectiveness of Consumers' disclosure controls and procedures as of February
17, 2003. Based on this evaluation, Consumers' CEO and CFO have concluded that
Consumers' disclosure controls and procedures are effective to ensure that
material information was presented to them, particularly during the third
quarter of 2002. There have been no significant changes in Consumers' internal
controls or in other factors that could significantly affect internal controls
subsequent to February 17, 2003.
CRITICAL ACCOUNTING POLICIES
Presenting financial statements in accordance with accounting principles
generally accepted in the United States requires using estimates, assumptions,
and accounting methods that are often subject to judgment. Presented below, are
the accounting policies and assumptions that Consumers believes are most
critical to both the presentation and understanding of its financial statements.
Applying these accounting policies to financial statements can involve very
complex judgments. Accordingly, applying different judgments, estimates or
assumptions could result in a different financial presentation.
USE OF ESTIMATES IN ACCOUNTING FOR CONTINGENCIES
The principles in SFAS No. 5 guide the recording of estimated liabilities for
contingencies within the financial statements. SFAS No. 5 requires a company to
record estimated liabilities when it is probable that a current event will cause
a future loss payment and that loss amount can be reasonably estimated.
Consumers used this principle to record or disclose estimated liabilities for
the following significant events.
ELECTRIC ENVIRONMENTAL ESTIMATES: Consumers is subject to costly and
increasingly stringent environmental regulations. Consumers expects to incur
significant costs for future environmental compliance, especially compliance
with clean air laws.
The EPA has issued final regulations regarding nitrogen oxide emissions from
certain generators, including some of Consumers' electric generating facilities.
These regulations will require Consumers to make significant capital
expenditures estimated to be $770 million. As of September 2002, Consumers has
incurred $372 million in capital expenditures to comply with these regulations
and anticipates that the remaining capital expenditures will be incurred between
the remainder of 2002 and 2009. Additionally, Consumers will
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Consumers Energy Company
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 of $6 million per year, however,
the market for nitrogen oxide emissions credits is volatile and the price could
change significantly. At some point, if new environmental standards become
effective, Consumers may need additional capital expenditures to comply with the
standards. These and other required environmental expenditures, if not recovered
in Consumers' rates, may have a material adverse effect upon Consumers'
financial condition and results of operations. For further information see Note
2, Uncertainties, "Electric Contingencies - Electric Environmental Matters."
GAS ENVIRONMENTAL ESTIMATES: Under the Michigan Natural Resources and
Environmental Protection Act, Consumers expects that it will incur investigation
and remedial action costs at a number of sites. Consumers estimates the costs
for 23 former Manufactured Gas Plant sites will be between $82 million and $113
million, using the Gas Research Institute-Manufactured Gas Plant Probabilistic
Cost Model. These estimates are based on discounted 2001 costs and follow EPA
recommended use of discount rates between 3 and 7 percent. Consumers expects to
recover a significant portion of these costs through MPSC-approved rates charged
to its customers. Any significant change in assumptions, such as remediation
techniques, nature and extent of contamination, and legal and regulatory
requirements, could change the remedial action costs for the sites. For further
information see Note 2, Uncertainties, "Gas Contingencies -Gas Environmental
Matters."
MCV UNDERRECOVERIES: The MCV Partnership, which leases and operates the MCV
Facility, contracted to sell electricity to Consumers for a 35-year period
beginning in 1990 and to supply electricity and steam to Dow. Consumers, through
two wholly owned subsidiaries, holds a partnership interest in the MCV
Partnership, and a lessor interest in the MCV Facility.
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. Consumers has not been allowed full recovery of the capacity charges
in rates. After September 2007, the PPA's terms obligate Consumers to pay the
MCV Partnership only those capacity and energy charges that the MPSC has
authorized for recovery from electric customers.
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. The loss has been recorded in
the income statement and as a non-current liability on the balance sheet. The
PPA liability is expected to be depleted in late 2004.
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's generating availability remains 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:
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
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Consumers Energy Company
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 an increase to operating expenses associated with the PPA of $29
million in 2000, a net reduction of operating expenses associated with the PPA
of $12 million for 2001, 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 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)
-------------------------------------------------------------------------------------------------------------------------
For further information see "Change in Auditors and Restatement" above, Note 2,
Uncertainties "Other Electric Uncertainties - The Midland Cogeneration Venture,"
and Note 4, "Restatement" for additional detail.
ACCOUNTING FOR DERIVATIVE AND FINANCIAL INSTRUMENTS AND MARKET RISK INFORMATION
DERIVATIVE INSTRUMENTS: Consumers uses SFAS No. 133 criteria to determine which
contracts must be accounted for as derivative instruments. These rules, however,
are numerous and complex. As a result, significant judgment is required, and
similar contracts can sometimes be accounted for differently.
Consumers currently accounts for the following contracts as derivative
instruments: interest rate swaps,
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Consumers Energy Company
certain electric call options and fixed priced gas supply contracts with
embedded put options, gas fuel swaps, fixed priced weather-based gas supply call
options and fixed price gas supply put options. Consumers does not account for
the following contracts as derivative instruments: electric capacity and energy
contracts, gas supply contracts without embedded options, coal and nuclear fuel
supply contracts, and purchase orders for numerous supply items.
Consumers believes that certain of its electric capacity and energy contracts
are not derivatives due to the lack of an active energy market in the state of
Michigan, as defined by SFAS No. 133, and the transportation cost to deliver the
power under the contracts to the closest active energy market at the Cinergy hub
in Ohio. If a market develops in the future, Consumers may be required to
account for these contracts as derivatives. The mark-to-market impact on
earnings related to these contracts, particularly related to the PPA, could be
material to the financial statements.
If a contract is accounted for as a derivative instrument, it is recorded in the
financial statements as an asset or a liability, at the fair value of the
contract. Any difference between the recorded book value and the fair value is
reported either in earnings or other comprehensive income, depending on certain
qualifying criteria. The recorded fair value of the contract is then adjusted
quarterly to reflect any change in the market value of the contract.
In order to fair value the contracts that are accounted for as derivative
instruments, Consumers 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. At September 30, 2002, Consumers 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.
FINANCIAL INSTRUMENTS: Consumers accounts for its debt and equity investment
securities in accordance with SFAS No. 115. As such, debt and equity securities
can be classified into one of three categories: held-to-maturity, trading, or
available-for-sale securities. Consumers' investments in equity securities,
including its investment in CMS Energy Common Stock, are classified as
available-for-sale securities. They are reported at fair value, with any
unrealized gains or losses from changes in fair value reported in equity as part
of other comprehensive income and excluded from earnings. Unrealized gains or
losses from changes in the fair value of Consumers' nuclear decommissioning
investments are reported in accumulated depreciation. The fair value of these
investments is determined from quoted market prices.
MARKET RISK INFORMATION: Consumers is exposed to market risks including, but not
limited to, changes in interest rates, commodity prices, and equity security
prices. Consumers' market risk, and activities designed to minimize this risk,
are subject to the direction of an executive oversight committee consisting of
designated members of senior management and a risk committee, consisting of
business unit managers. The risk committee's role is to review the corporate
commodity position and ensure that net corporate exposures are within the
economic risk tolerance levels established by Consumers' Board of Directors.
Established policies and procedures are used to manage the risks associated with
market fluctuations.
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Consumers Energy Company
Consumers uses various contracts, including swaps, options, and forward
contracts to manage its risks associated with the variability in expected future
cash flows attributable to fluctuations in interest rates and commodity prices.
Contracts used to manage interest rate and commodity price risk may be
considered derivative instruments that are subject to derivative and hedge
accounting pursuant to SFAS No. 133. All risk management contracts are entered
to for purposes other than trading.
These instruments contain credit risk if the counterparties, including financial
institutions and energy marketers, fail to perform under the agreements.
Consumers minimizes such risk by performing financial credit reviews using,
among other things, publicly available credit ratings of such counterparties.
In accordance with SEC disclosure requirements, Consumers performs sensitivity
analyses to assess the potential loss in fair value, cash flows and earnings
based upon a hypothetical 10 percent adverse change in market rates or prices.
Management does not believe that sensitivity analyses alone provide an accurate
or reliable method for monitoring and controlling risks. Therefore, Consumers
relies on the experience and judgment of its senior management to revise
strategies and adjust positions, as it deems necessary. Losses in excess of the
amounts determined in sensitivity analyses could occur if market rates or prices
exceed the 10 percent shift used for the analyses.
INTEREST RATE RISK: Consumers is exposed to interest rate risk resulting from
the issuance of fixed-rate debt and variable-rate debt, and from interest rate
swap agreements. Consumers uses a combination of these instruments to manage and
mitigate interest rate risk exposure when it deems it appropriate, based upon
market conditions. These strategies attempt to provide and maintain the lowest
cost of capital. As of September 30, 2002, Consumers had outstanding $1.202
billion of variable-rate debt, including variable rate swaps. At September 30,
2002, assuming a hypothetical 10 percent adverse change in market interest
rates, Consumers' before tax earnings exposure on its variable rate debt would
be $2 million. As of September 30, 2002, Consumers had entered into
floating-to-fixed interest rate swap agreements for a notional amount of $75
million. These swaps exchange variable-rate interest payment obligations for
fixed-rate interest payment obligations in order to minimize the impact of
potential adverse interest rate changes. As of September 30, 2002, Consumers had
outstanding long-term fixed-rate debt, including fixed-rate swaps, of $2.768
billion, with a fair value of $2.702 billion. As of September 30, 2002, assuming
a hypothetical 10 percent adverse change in market rates, Consumers would have
an exposure of $136 million to the fair value of these instruments if it had to
refinance all of its long-term fixed-rate debt. Consumers does not intend to
refinance its fixed-rate debt in the near term and believes that any adverse
change in debt price and interest rates would not have a material effect on
either its consolidated financial position, results of operation or cash flows.
COMMODITY MARKET RISK: For purposes other than trading, Consumers enters into
electric call options, 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
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Consumers Energy Company
prices of gas supply-related call and put option contracts was $1 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 $300 thousand.
EQUITY SECURITY PRICE RISK: Consumers owns less than 20 percent of the
outstanding shares of CMS Energy Common Stock. At September 30, 2002, a
hypothetical 10 percent adverse change in market price would have resulted in a
$4 million change in its investment. This investment is currently
marked-to-market through equity. Consumers believes that such an adverse change
would not have a material effect on its consolidated financial position, results
of operation or cash flows.
For further information on market risk and derivative activities, see Note 1,
Corporate Structure and Summary of Significant Accounting Policies, "Risk
Management Activities and Derivative Transactions" and "Implementation of New
Accounting Standards", Note 2, Uncertainties, "Other Electric Uncertainties -
Derivative Activities", "Other Gas Uncertainties - Derivative Activities", and
Note 3, Short-Term Financings and Capitalization, "Derivative Activities."
ACCOUNTING FOR LEASES
Consumers uses SFAS No. 13 to account for any leases to which it may be a party.
Depending upon satisfaction of certain criteria, they are classified as
operating leases or capital leases. Under an operating lease, payments are
expensed as incurred, and there is no recognition of an asset or liability on
the balance sheet. Capital leases, on the other hand, require that an asset and
liability be recorded on the balance sheet at the inception of the lease for the
present value of the minimum lease payments required during the term of the
lease.
To determine whether to classify a lease as operating or capital under SFAS No.
13 and related statements, Consumers must use judgment. A lease must be
evaluated for transfer of ownership, provision for bargain purchase option, the
lease term relative to the estimated economic life of the leased property, and
the present value of the minimum lease payments at the beginning of the lease
term. Judgment is required for leases involving special purpose entities such as
trusts, sales and leasebacks and when the lessee is involved in the construction
of the property it will lease. Different financial presentations of leases could
result if different judgment, estimates or assumptions are made.
Consumers is party to a number of leases, the most significant are the leases
associated with its service vehicles, its new headquarters building, and its
railroad coal cars. For further information see "Contractual Obligations and
Commercial Commitments" in the Capital Resources and Liquidity section and Note
1, Corporate Structure and Summary of Significant Accounting Policies,
"Accounting for Headquarters Building Lease".
ACCOUNTING FOR THE EFFECTS OF INDUSTRY REGULATION
Because Consumers is involved in a regulated industry, regulatory decisions
affect the timing and recognition of revenues and expenses. Consumers uses SFAS
No. 71 to account for the effects of these regulatory decisions. As a result,
Consumers may defer or recognize revenues and expenses differently than a
non-regulated entity.
For example, items that a non-regulated entity would normally expense, Consumers
may capitalize as regulatory assets if the actions of the regulator indicate
such expenses will be recovered in future rates. Conversely, items that
non-regulated entities may normally recognize as revenues, Consumers may record
as regulatory liabilities if the actions of the regulator indicate they will
require such revenues to later be refunded to customers. Judgment is required to
discern the recoverability of items recorded as regulatory assets and
-17-
Consumers Energy Company
liabilities. As of September 30, 2002, Consumers had $1.104 billion recorded as
regulatory assets and $301 million recorded as regulatory liabilities.
ACCOUNTING FOR PENSION AND OPEB
Consumers provides postretirement benefits under its Pension Plan, and
postretirement health and life benefits under its OPEB plans to substantially
all its retired employees. Consumers uses SFAS No. 87 to account for pension
costs and uses SFAS No. 106 to account for other postretirement benefit costs.
These statements require liabilities to be recorded on the balance sheet at the
present value of these future obligations to employees net of any plan assets.
The calculation of these liabilities and associated expenses require the
expertise of actuaries and are subject to many assumptions including life
expectancies, present value discount rates, expected long-term rate of return on
plan assets, rate of compensation increase and anticipated health care costs.
Any change in these assumptions can significantly change the liability and
associated expenses recognized in any given year. As of January 2002, OPEB plan
claims are paid from the VEBA Trusts.
Pension and OPEB plan assets, net of contributions, have been 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, Consumers expects
to see an increase in pension and OPEB expense levels over the next several
years unless market performance of plan assets improves. Consumers anticipates
pension expense and OPEB expense to rise in 2002 by approximately $8 million and
$20 million, respectively, over 2001 expenses. For pension expense, this
increase is due to a downturn in value of pension assets during the past two
years, forecasted increases in pay and added service, 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, Consumers
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, Consumers Energy will be
required to recognize an additional minimum liability for this excess in
accordance with SFAS No. 87. Consumers cannot predict the future fair value of
the plan's assets but it is probable, without significant appreciation in the
plan's assets, that Consumers will need to book an additional minimum liability
through a charge to other comprehensive income. The value of the Plan assets and
the Accumulated Benefit Obligation are determined by the Plan's actuary in the
fourth quarter of each year.
In January 2002, Consumers contributed $62 million to the Plans' trust accounts.
This amount represents $47 million of pension related benefits and $15 million
of postretirement health care and life insurance benefits. In June 2002 and
September 2002, Consumers made additional contributions, in the amount of $21
million and $18 million, respectively, for postretirement health care and life
insurance benefits. Consumers expects to make an additional contribution to the
Pension Plan of approximately $187 million in the third quarter of 2003.
In order to keep health care benefits and costs competitive, Consumers has
announced several changes to the Health Care Plan. These changes are effective
January 1, 2003. The most significant change is that Consumers' future increases
in health care costs will be shared with employees.
Consumers also provides retirement benefits under a defined contribution 401(k)
plan. Consumers previously offered an employer's contribution match of 50
percent of the employee's contribution up to six percent (three percent
maximum), as well as an incentive match in years when Consumers' financial
performance exceeded
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Consumers Energy Company
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 $12 million and $8 million, respectively.
ACCOUNTING FOR NUCLEAR DECOMMISSIONING COSTS
Consumers' decommissioning cost estimates for the Big Rock and Palisades plants
assume that each plant site will eventually be restored to conform to the
adjacent landscape with all contaminated equipment and material removed and
disposed of in a licensed burial facility and the site released for unrestricted
use. A March 1999 MPSC order provided for fully funding the decommissioning
trust funds for both sites. The order set the annual decommissioning surcharge
for the Palisades decommissioning at $6 million a year. Consumers estimates that
at the time of the decommissioning of Palisades, its decommissioning trust fund
will also be fully funded. Earnings assumptions are that the trust funds are
invested in equities and fixed income investments that are then converted to
fixed income and cash before expenditures are made. Decommissioning costs have
been developed, in part, by independent contractors with expertise in
decommissioning. These costs estimates use various inflation rates for labor,
non-labor, and contaminated equipment disposal costs.
On December 31, 2000, the Big Rock trust fund was considered fully funded. A
portion of its current decommissioning cost is due to the failure of the DOE to
remove fuel from the site. These costs, and similar costs incurred at Palisades,
would not be necessary but for the failure of the DOE to take possession of the
spent fuel as required by the Nuclear Waste Policy Act of 1982. Consumers
anticipates future recoveries from the DOE, after litigation that has yet to be
commenced and successfully concluded, to defray the significant costs it will
incur for the storage of spent fuel until DOE takes possession as required by
law.
The funds provided by the trusts and added to from DOE litigation are expected
to fully fund the decommissioning costs. Variance from trust earnings, recovery
of costs from the DOE, changes in decommissioning technology, regulations,
estimates or assumptions could affect the cost of decommissioning these sites.
RELATED PARTY TRANSACTIONS
Consumers enters into a number of significant transactions with related parties.
These transactions include the purchase of capacity and energy from the MCV
Partnership and from affiliates of Enterprises, the purchase of electricity and
gas supply from CMS MST, the sale of electricity to CMS MST, the purchase of gas
transportation from CMS Bay Area Pipeline, L.L.C., the purchase of gas
transportation from Trunkline, a subsidiary of Panhandle, the payment of parent
company overhead costs to CMS Energy, the sale, storage and transportation of
natural gas and other services to the MCV Partnership, certain transactions
involving derivative instruments with CMS MST, and an investment in CMS Energy
Common Stock.
Transactions involving CMS Energy and its affiliates and the sale, storage and
transportation of natural gas and other services to the MCV Partnership are
based on regulated prices, market prices or competitive bidding. Transactions
involving the power supply purchases from the MCV Partnership, and certain
affiliates of CMS Enterprises, are based upon avoided costs under PURPA and
competitive bidding; and the payment of parent company overhead costs to CMS
Energy are based upon use or accepted industry allocation methodologies.
In 2002, Consumers also sold its transmission facilities to MTH, a
non-affiliated limited partnership whose general partner is a subsidiary of
Trans-Elect, Inc., an independent company, whose management includes former
executive employees of Consumers. The transaction was based on competitive
bidding.
For detailed information about related party transactions see Note 2,
Uncertainties, "Electric Rate Matters - Transmission", and "Other Electric
Uncertainties - The Midland Cogeneration Venture".
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Consumers Energy Company
RESULTS OF OPERATIONS
CONSUMERS CONSOLIDATED EARNINGS
In Millions
------------------------------------------------------------------------------
September 30 2002 Restated 2001 Restated Change
------------------------------------------------------------------------------
Three months ended $ 74 $11 $63
Nine months ended 267 145 122
==============================================================================
2002 COMPARED TO 2001: For the three months ended September 30, 2002, Consumers'
net income available to the common stockholder totaled $74 million, an increase
of $63 million from the comparable period in 2001. The earnings increase
reflects the after-tax benefit of decreased electric power costs of $65 million
from the comparable period in 2001. This reduction in power costs was primarily
due to higher replacement power supply costs in 2001, resulting from an outage
at Palisades in the third quarter of 2001 along with the lower volume and lower
cost of power options and dispatchable capacity contracts purchased for 2002.
Increased electric deliveries to the higher-margin residential and commercial
sectors also contributed to the earnings increase. Offsetting these increases is
a $9 million decrease resulting from the recognition of a 4 bcf loss of natural
gas from inventory along with increased other operating expenses for the period.
This loss recognition results from Consumers' refinement of its inventory
measurement techniques.
For the nine months ended September 30, 2002, Consumers' net income available to
the common stockholder totaled $267 million, an increase of $122 million from
the comparable period in 2001. The earnings increase reflects the after-tax
benefit of decreased electric power costs of $73 million from the comparable
period in 2001. This reduction in power costs was primarily due to the need to
purchase higher replacement power resulting from a refueling outage and an
unscheduled forced outage at Palisades in 2001. This reduction in power costs
also can be attributed to the lower price of power options and dispatchable
capacity contracts purchased for 2002. The increase in earnings reflects the $26
million gain from the May 2002 sale of Consumers' electric transmission system
to MTH. Also contributing to the earnings increase is a $22 million increase in
the fair value of certain long-term gas contracts held by the MCV Partnership.
The fair value of these contracts is adjusted, through earnings, on a quarterly
basis in accordance with SFAS No. 133. For further information on SFAS No. 133,
see Note 2, Uncertainties. Increased electric deliveries to the higher-margin
residential and commercial sectors also contributed to the earnings increase.
Offsetting these increases is a $9 million decrease resulting from the
recognition of a 4 bcf loss of natural gas from inventory along with increased
other operating expenses. This loss recognition results from Consumers'
refinement of its inventory measurement techniques.
In Millions
---------------------------------------------------------------------------
June 30 2002 Restated 2001 Restated Change
---------------------------------------------------------------------------
Three months ended $113 $ 35 $78
Six months ended 193 134 59
===========================================================================
2002 COMPARED TO 2001: For the three months ended June 30, 2002, Consumers' net
income available to the common stockholder totaled $113 million, an increase of
$78 million from the comparable period in 2001. The earnings increase reflects
the after-tax benefit of decreased electric power costs of $22 million from the
comparable period in 2001. This reduction in power costs was primarily due to
higher replacement power supply costs in 2001, resulting from outages at
Palisades in the second quarter of 2001. The increase in earnings also reflects
a $26 million gain from the May 2002, sale of Consumers' electric transmission
facilities to MTH, a non-affiliated limited partnership whose general partner is
a subsidiary of Trans-Elect Inc. Also contributing to the earnings increase is a
$22 million increase in the fair value of certain long-term gas
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Consumers Energy Company
contracts held by the MCV Partnership. The fair value of these contracts is
adjusted, through earnings, on a quarterly basis in accordance with SFAS No.
133. For further information on SFAS No. 133, see Note 2, Uncertainties. Also
contributing to this increase in earnings are reduced fixed charges due to
declining interest rates.
For the six months ended June 30, 2002, Consumers' net income available to the
common stockholder totaled $193 million, an increase of $59 million from the
comparable period in 2001. This increase includes the same items identified for
the second quarter and also reflects the benefit of an increase in gas
distribution tariff rates because of an interim rate increase, partially offset
by increased operating costs and higher replacement power costs resulting from a
plant outage at Palisades in early 2002.
In Millions
-----------------------------------------------------------------------------------------------------------------
March 31 2002 Restated 2001 Restated Change
-----------------------------------------------------------------------------------------------------------------
Three months ended $ 81 $ 99 $ (18)
=================================================================================================================
2002 COMPARED TO 2001: For the three months ended March 31, 2002, Consumers' net
income available to the common stockholder totaled $81 million, a decrease of
$18 million from the comparable period in 2001. The earnings decrease reflects
reduced electric and gas deliveries due to milder winter temperatures, the
continued economic downturn, and increased electric operating expense in 2002,
primarily for replacement power supply costs related to an unscheduled plant
outage. These decreases to net income are partially offset by the interim gas
rate increase granted in December of 2001.
For further information, see "Change in Auditors and Restatement" at the
beginning of this MD&A, the Electric and Gas Utility Results of Operations
sections and Note 2, Uncertainties.
ELECTRIC UTILITY RESULTS OF OPERATIONS
In Millions
----------------------------------------------------------------------------------------------------------------
September 30 2002 Restated 2001 Restated Change
----------------------------------------------------------------------------------------------------------------
Three months ended $ 89 $16 $73
Nine months ended 223 111 112
================================================================================================================
----------------------------------------------------------------------------------------------------------------
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) (28)
Gain on asset sales -- 38
Fixed charges 4 12
Income taxes (40) (53)
-------------------------------------------
Total change $ 73 $ 112
================================================================================================================
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
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Consumers Energy Company
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.
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 $28 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.
-22-
Consumers Energy Company
In Millions
----------------------------------------------------------------------------------------------------------------
June 30 2002 Restated 2001 Restated Change
----------------------------------------------------------------------------------------------------------------
Three months ended $ 84 $32 $52
Six months ended 134 95 39
================================================================================================================
----------------------------------------------------------------------------------------------------------------
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 (14) (18)
Gain on asset sales 38 38
Fixed charges 6 8
Income taxes (22) (13)
-------------------------------------------
Total change $ 52 39
================================================================================================================
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
decrease was also the result of the Palisades outage described for the current
quarter partially offset by a plant outage at Palisades in early 2002.
OTHER OPERATING EXPENSES AND NON-COMMODITY REVENUES: For the three months ended
2002, other operating expenses increased $14 million due to higher amortization
of securitized assets, increased depreciation expense resulting from higher
plant in service along with a decrease in miscellaneous revenues. For the six
months ended 2002, other operating expenses increased $18 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 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.
-23-
Consumers Energy Company
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
-------------------------------------------------------------------------
March 31 2002 Restated 2001 Restated Change
-------------------------------------------------------------------------
Three months ended $50 $63 $(13)
=========================================================================
Reasons for the change:
Electric deliveries $ (4)
Power supply costs and related revenue (16)
Other operating expenses and non-commodity revenue (4)
Fixed charges 2
Income taxes 9
----
Total change $(13)
=========================================================================
ELECTRIC DELIVERIES: For the period ending 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 ending March 31, 2002,
electric net income was adversely affected by lower power 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.
OTHER OPERATING EXPENSES: For the period ending March 31, 2002, other operating
expenses decreased by $4 million from the comparable period in 2001 due to lower
operating and maintenance costs resulting from cost controls throughout the
business unit.
-24-
Consumers Energy Company
GAS UTILITY RESULTS OF OPERATIONS
In Millions
-----------------------------------------------------------------------------------------------
September 30 2002 Restated 2001 Restated Change
-----------------------------------------------------------------------------------------------
Three months ended $ (18) $ (10) $(8)
Nine months ended 13 19 (6)
===============================================================================================
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 3 (2)
Income taxes 4 2
-----------------------------------
Total change $ (8) $ (6)
===============================================================================================
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 less 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.
-25-
Consumers Energy Company
In Millions
-----------------------------------------------------------------------------
June 30 2002 Restated 2001 Restated Change
-----------------------------------------------------------------------------
Three months ended $ 3 $ 1 $2
Six months ended 31 29 2
=============================================================================
-----------------------------------------------------------------------------
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 (4) (5)
Income taxes (2) (2)
-------------------------------
Total change $ 2 $ 2
==============================================================================
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 bcf or
..9 percent compared with 2001.
In Millions
-----------------------------------------------------------------------------
March 31 2002 Restated 2001 Restated Change
-----------------------------------------------------------------------------
Three months ended $28 $28 $-
=============================================================================
Reasons for the change:
Gas deliveries $(9)
Rate increase 7
Other operating expenses and non-commodity revenue 2
Fixed charges 1
Income taxes (1)
Total change $-
=============================================================================
For the period ending 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.
-26-
Consumers Energy Company
CAPITAL RESOURCES AND LIQUIDITY
CASH POSITION, INVESTING AND FINANCING
OPERATING ACTIVITIES: Consumers' principal source of liquidity is from cash
derived from operating activities involving the sale and transportation of
natural gas and the generation, delivery and sale of electricity. Cash from
operations totaled $420 million and $321 million for the first nine months of
2002 and 2001, respectively. The $99 million increase resulted primarily from an
increase in cash due to lower expenditures for natural gas and lower electric
power purchase costs as a result of Palisades return to service, partially
offset by a decrease in cash collected from customers and related parties.
Cash from operations totaled $435 million and $379 million for the first six
months of 2002 and 2001, respectively. The $56 million increase resulted
primarily from a $223 million increase in cash due to fewer expenditures for
natural gas inventories, partially offset by $144 million decrease in cash
collected from customers and related parties.
Cash from operations totaled $270 million and $479 million for the first three
months of 2002 and 2001, respectively. The $209 million decrease resulted
primarily from a $168 million decrease in cash collected from customers and
related parties and a $115 million decrease in sale of accounts receivable,
partially offset by a $70 million increase in cash due to fewer expenditures for
natural gas inventories.
Consumers primarily uses cash derived from operating activities to operate,
maintain, expand and construct its electric and gas systems, to retire portions
of long-term debt, and to pay dividends. A decrease in cash from operations
could reduce the availability of funds and result in additional short-term
financings, see Note 3, Short-Term Financings and Capitalization for additional
details about this source of funds.
INVESTING ACTIVITIES: Cash used for investing activities totaled $144 million
and $511 million for the first nine months of 2002 and 2001, respectively. The
change of $367 million is primarily the result of $298 million cash from the
sale of METC and other assets, and fewer capital expenditures to comply with the
Clean Air Act than the first nine months of 2001.
Cash used for investing activities totaled $7 million and $395 million for the
first six months of 2002 and 2001, respectively. The change of $388 million is
primarily the result of $293 million cash from the sale of METC and other
assets, and fewer capital expenditures to comply with the Clean Air Act than the
first six months of 2001.
Cash used for investing activities totaled $154 million and $204 million for the
first three months of 2002 and 2001, respectively. The change of $50 million is
primarily the result of fewer capital expenditures to comply with the Clean Air
Act than the first three months of 2001.
FINANCING ACTIVITIES: Cash used by financing activities totaled $168 million for
the first nine months of 2002 compared to $193 million provided in the first
nine months of 2001, respectively. The change of $361 million is primarily the
result of $407 million retirement of bonds and other long-term debt, $100
million decrease in stockholder's contribution and the absence of $121 million
proceeds from preferred securities, offset by $250 million of net proceeds from
issuance of senior notes.
Cash used by financing activities totaled $393 million for the first six months
of 2002 compared to $9 million provided in the first six months of 2001,
respectively. The change of $402 million is primarily the result of $371 million
retirement of bonds and other long-term debt, $178 million net decrease in notes
payable, the absence of $121 million proceeds from preferred securities and an
acceleration of $58 million in the payment of common stock dividends, offset by
$304 million of net proceeds from issuance of senior notes.
-27-
Consumers Energy Company
Cash used in financing activities totaled $105 million and $286 million for the
first three months of 2002 and 2001, respectively. The change of $181 million is
primarily the result of a $150 million cash infusion from CMS Energy, $298
million net proceeds from issuance of senior notes, and $94 million net increase
in notes payable, offset by a $344 million retirement of bonds and other
long-term debt.
OFF-BALANCE SHEET ARRANGEMENTS: Consumers' use of long-term contracts for the
purchase of commodities and services, the sale of its accounts receivables, and
operating leases are considered to be off-balance sheet arrangements. Consumers
has responsibility for the collectability of the accounts receivables sold, and
the full obligation of its leases become due in case of lease payment default.
Consumers uses these off-balance sheet arrangements in its normal business
operations.
CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS: The following schedule of
material contractual obligations and commercial commitments is provided to
aggregate information in a single location so that a picture of liquidity and
capital resources is readily available. For further information see Note 2,
Uncertainties, and Note 3, Short-Term Financings and Capitalization.
Contractual Obligations In Millions
--------------------------------------------------------------------------------------------------------------
Payments Due
------------------------------------------------------------
September 30 Total 2002 2003 2004 2005 2006 and beyond
--------------------------------------------------------------------------------------------------------------
On-balance sheet:
Long-term debt $ 2,912 $ 144 $ 333 $ 328 $470 $ 1,637
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.
Unconditional purchase obligations include natural gas, electricity, and coal
purchase contracts and their associated cost of transportation. These
obligations represent normal business operating contracts used to assure
adequate supply and to minimize exposure to market price fluctuations. Operating
leases are predominately railroad coal car leases, and capital leases are
predominately for leased service vehicles. 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 is not available to deliver electricity to Consumers, then Consumers
would not be obligated to make the capacity payment while the plant is
unavailable to deliver. See Electric Utility Results of Operations above and
Note 2, Uncertainties, "Electric Rate Matters - Power Supply Costs" and "Other
Electric Uncertainties - The Midland Cogeneration Venture" for further
information concerning power supply costs.
-28-
Consumers Energy Company
Commercial Commitments In Millions
--------------------------------------------------------------------------------------------------------------
Commitment Expiration
--------------------------------------------------------------------------------------------------------------
September 30 Total 2002 2003 2004 2005 2006 and beyond
--------------------------------------------------------------------------------------------------------------
Off-balance sheet:
Indemnities 16 - - - - 16
Letters of Credit 7 7 - - - -
==============================================================================================================
Indemnities are three-party agreements used to assure performance of contracts
by Consumers. Letters of credit are issued by banks guaranteeing Consumers'
payment of its drafts. Drafts are for a stated amount and for a specified
period; they substitute the bank's credit for Consumers' and eliminate the
credit risk for the other party.
As of September 2002, Consumers had a $250 million credit facility of which $235
million is outstanding and a $225 million term loan of which approximately $84
million is outstanding. In addition, Consumers has, through its wholly owned
subsidiary Consumers Receivables Funding, a $325 million trade receivable sale
program in place as anticipated sources of funds for general corporate purposes
and currently expected capital expenditures. At September 30, 2002 and 2001, the
receivables sold totaled $325 million for each year. During 2002, $248 million
cash proceeds were received under the trade receivables sale program. Accounts
receivable and accrued revenue in the Consolidated Balance Sheets have been
reduced to reflect receivables sold.
In July 2002, the credit rating of the publicly traded securities of Consumers
was downgraded by the major rating agencies. The rating downgrade is purported
to be 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, the special board committee investigation,
restatement and re-audit of 2000 and 2001 financial statements, and uncertain
future access to the capital markets.
As a result of certain of these downgrades, a few commodity suppliers to
Consumers have requested advance payments or other forms of assurances in
connection with maintenance of ongoing deliveries of gas and electricity.
Consumers is addressing these issues as required.
In July 2002, Consumers reached agreement with its lenders on two credit
facilities as follows: a $250 million revolving credit facility maturing July
11, 2003 and a $300 million term loan maturing July 11, 2003. In September 2002,
the term loan maturity was extended by one year at Consumers' option and now has
a maturity date of July 11, 2004. These two 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. The two new credit facilities are secured
with Consumers first mortgage bonds.
Consumers' $250 million revolving 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 also fluctuate depending on
the rating of Consumers' first mortgage bonds. Consumers' bank and legal fees
associated with arranging the facilities were $6 million. The term loan was
issued at a 4 percent discount.
-29-
Consumers Energy Company
The credit facilities have contractual restrictions that require Consumers to
maintain, as of the last day of each fiscal quarter, the following:
Required Ratio Limitation Ratio at September 30, 2002
---------------------------------------------------------------------------------------------------------------------
(Restated)
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 2.0 to 1.0 3.38 to 1.0
======================================================================================================================
(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.
Also pursuant to restrictive covenants in the new facilities, Consumers is
limited to dividend payments that will not exceed $300 million in any calendar
year. In 2001, Consumers paid $189 million in common stock dividends to CMS
Energy. Consumers' common dividend was $183 million and Consumers paid $154
million through September 2002.
In October 2002, Consumers entered into a new Term Loan Agreement collateralized
by First Mortgage Bonds and simultaneously, 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.
Consumers' debt maturities for 2003 includes $333 million of long-term debt, a
$250 million revolving credit agreement and an estimated remaining balance of
$207 million on the new Gas Inventory Term Loan Agreement. At a minimum, $500
million is expected to be refinanced. In addition, Consumers expects to put in
place a new gas inventory facility. Replacing this debt with new financing is
subject, in part, to capital market acceptance and receptivity to utility
industry securities in general and to Consumers securities issuance in
particular. Consumers cannot predict the capital market's acceptance of its
securities or the impact of its restatement of its consolidated financial
statements and is exploring other financing options.
For further information, see Note 3, Short-Term Financings and Capitalization.
OUTLOOK
LIQUIDITY AND CAPITAL RESOURCES
Consumers' liquidity and capital requirements are generally a function of its
results of operations, capital expenditures, contractual obligations, working
capital needs and collateral requirements. Consumers has historically met its
consolidated cash needs through its operating and financing activities through
access to bank financing and the capital markets. As discussed above, for the
remainder of year 2002 and during 2003, Consumers has contractual obligations
and planned capital expenditures that would require substantial amounts of cash.
Consumers also has approximately $800 million of publicly issued and credit
facility debt maturing in 2003, including the Consumers' credit facilities
described above. In addition, Consumers may also become subject to commercial
commitments as indicated above.
-30-
Consumers Energy Company
Consumers is addressing its near-to-mid-term liquidity and capital requirements
primarily through reduced capital expenditures. Consumers believes that its
current level of cash and borrowing capacity, along with anticipated cash flows
from operating and investing activities, will be sufficient to meet its
liquidity needs through 2003, including the approximate $800 million of debt
maturities in 2003.
On November 26, 2002, Consumers' various bank groups waived delivery of
financial statements for the period ended September 30, 2002 until February 28,
2003. Consumers provided the banks with the required financial statements before
the waivers expired.
As a result of the impact of the restatement, ratings downgrades and related
changes in its financial situation, Consumers' access to bank financing and the
capital markets and its ability to incur additional indebtedness may be
restricted. In the event Consumers is unable to access bank financing or the
capital markets to incur or refinance indebtedness it could have a material
adverse effect on Consumers' liquidity and operations. In such event, it would
be required to consider the full range of strategic measures available to
companies in similar circumstances.
SEC INVESTIGATION: As a result of the round-trip trading transactions at CMS
MST, CMS Energy's Board of Directors established a Special Committee of
independent directors to investigate matters surrounding the transactions and
retained outside counsel to assist in the investigation. The Special Committee
completed its investigation and reported its findings to the Board of Directors
in October 2002. The special committee concluded, based on an extensive
investigation, that the round-trip trades were undertaken to raise CMS MST's
profile as an energy marketer with the goal of enhancing its ability to promote
its services to new customers. The committee found no apparent effort to
manipulate the price of CMS Energy Common Stock or affect energy prices. The
special committee also made recommendations designed to prevent any reoccurrence
of this practice, 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.
CMS Energy is cooperating with other investigations concerning round-trip
trading, including an investigation by the SEC regarding round-trip trades and
the 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 Attorney's Office for the Southern District of New York and from
the United States Attorney's Office in Houston 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 Consumers is
unable to predict what effect, if any, these investigations will have on its
business.
-31-
Consumers Energy Company
SECURITIES CLASS ACTION LAWSUITS: Beginning on May 17, 2002, a number of
securities class action complaints have been filed against CMS Energy,
Consumers, and certain officers and directors of CMS Energy and its affiliates.
The complaints have been filed in the United States District Court for the
Eastern District of Michigan as purported class actions by individuals who
allege that they purchased CMS Energy's securities during a purported class
period. At least two of the complaints contain purported class periods beginning
on August 3, 2000 and running through May 10, 2002 or May 14, 2002. These
complaints generally seek unspecified damages based on allegations that the
defendants violated United States securities laws and regulations by making
allegedly false and misleading statements about the company's business and
financial condition. CMS Energy believes that additional suits might be
commenced against it and that all such suits against it will eventually be
consolidated. Consumers intends to vigorously defend against these actions.
Consumers cannot predict the outcome of this litigation.
ERISA CASES: Consumers is a named defendant, along with CMS Energy, CMS MST and
certain named and unnamed officers and directors in two lawsuits brought as
purported class actions on behalf of participants and beneficiaries of the
401(k) Plan. The two cases, filed in July 2002 in the United States District
Court for the Eastern District of Michigan, were consolidated by the trial
judge. Plaintiffs allege breaches of fiduciary duties under the ERISA and seek
restitution on behalf of the Plan with respect to a decline in value of the
shares of CMS Energy Common Stock held in the Plan. Plaintiffs also seek other
equitable relief and legal fees. These cases will be vigorously defended.
Consumers cannot predict the outcome of this litigation.
CAPITAL EXPENDITURES OUTLOOK
Consumers estimates the following capital expenditures, including new lease
commitments, by expenditure type and by business segments during 2002 through
2004. Consumers prepares these estimates for planning purposes and may revise
them.
In Millions
-------------------------------------------------------------------------
Years Ended December 31 2002 2003 2004
Restated Restated
-------------------------------------------------------------------------
Construction $583 $432 $511
Nuclear fuel 9 33 32
Other capital leases 89 38 32
-------------------------------
$681 $503 $575
=========================================================================
Electric utility operations (a)(b) $474 $352 $410
Gas utility operations (a) 207 151 165
-------------------------------
$681 $503 $575
=========================================================================
(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.
ELECTRIC BUSINESS OUTLOOK
GROWTH: Over the next five years, Consumers expects electric deliveries
(including both full service sales and delivery service to customers who choose
to buy generation service from an alternative electric supplier, but excluding
transactions with other wholesale market participants including other electric
utilities) to grow at an
-32-
Consumers Energy Company
average rate of approximately two percent per year based primarily on a steadily
growing customer base. This growth rate reflects a long-range expected trend of
growth. Growth from year to year may vary from this trend due to customer
response to abnormal weather conditions and changes in economic conditions
including, utilization and expansion of manufacturing facilities. Consumers has
experienced much stronger than expected growth in 2002 as a result of warmer
than normal summer weather. Assuming that normal weather conditions will occur
in 2003, electric deliveries are expected to grow less than one percent over the
strong 2002 electric deliveries.
COMPETITION AND REGULATORY RESTRUCTURING: The enactment in 2000 of Michigan's
Customer Choice Act and other developments will continue to result in increased
competition in the electric business. Generally, increased competition can
reduce profitability and threatens Consumers' market share for generation
services. The Customer Choice Act allowed all of the company's electric
customers to buy electric generation service from Consumers or from an
alternative electric supplier as of January 1, 2002. As a result, alternative
electric suppliers for generation services have entered Consumers' market. As of
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.
-33-
Consumers Energy Company
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 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
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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 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 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 2, Uncertainties, "Electric Rate Matters
- Transmission."
In July 2002, the FERC issued a 600-page notice of proposed rulemaking on
standard market design for electric
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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: The 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 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.
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Consumers Energy Company
PERFORMANCE STANDARDS: In July 2001, the MPSC proposed electric distribution
performance standards for Consumers and other Michigan electric distribution
utilities. The proposal would establish standards related to restoration after
an outage, safety, and customer relations. Failure to meet the standards would
result in customer bill credits. Consumers submitted comments to the MPSC. In
December 2001, the MPSC issued an order stating its intent to initiate a formal
rulemaking proceeding to develop and adopt performance standards. 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 Summary of Significant Accounting Policies, and Note 2, Uncertainties,
"Electric Rate Matters - Electric Restructuring" and "Electric Rate Matters -
Electric Proceedings."
UNCERTAINTIES: Several electric business trends or uncertainties may affect
Consumers' financial results and condition. These trends or uncertainties have,
or Consumers reasonably expects could have, a material impact on net sales,
revenues, or income from continuing electric operations. Such trends and
uncertainties include: 1) 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
2, Uncertainties.
GAS 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.
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 2, 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
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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 Consumers' 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 may 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.
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 2, Uncertainties.
OTHER OUTLOOK
See Outlook, "Pending Restatement", "Liquidity & Capital Resources", "SEC
Investigation", "Securities Class Action Lawsuits", and "ERISA Cases" above.
TAX LOSS ALLOCATIONS: The Job Creation and Worker Assistance Act of 2002
provided to corporate taxpayers a 5-year carryback of tax losses incurred in
2001 and 2002. As a result of this legislation, CMS Energy was able to carry
back 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 one-time non-cash reduction in AMT credit carryforwards was
originally reflected in the tax provisions of CMS Energy and each of its
consolidated subsidiaries as of September 2002, according to their contributions
to the consolidated CMS Energy tax loss, of which $29 million was allocated to
Consumers under the CMS Energy tax sharing agreement. As of September 30, 2002,
the $29 million tax sharing allocation has been restated for financial reporting
purposes and reflected as a dividend to be paid by Consumers to CMS Energy. In
December 2002, Consumers' estimated $29 million dividend was adjusted to $25
million upon calculation of the final tax allocation.
TERRORIST ATTACKS: Since the September 11, 2001 terrorist attacks in the United
States, Consumers has increased security at all facilities and over its
infrastructure, and will continue to evaluate security on an ongoing basis.
Consumers may be required to comply with federal and state regulatory security
measures promulgated
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Consumers Energy Company
in the future. As a result, Consumers anticipates increased operating costs for
security that could be significant. Consumers would try to recover these costs
from customers.
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."
OTHER MATTERS
NEW ACCOUNTING STANDARDS
SFAS NO. 143, ACCOUNTING FOR ASSET RETIREMENT OBLIGATIONS: Beginning January 1,
2003, companies must comply with SFAS No. 143. The standard requires companies
to record the fair value of the legal obligations related to an asset retirement
in the period in which it is incurred. 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 initial liability is
accreted to its present value each period and the capitalized cost is
depreciated over the related asset's useful life. Consumers is currently
inventorying assets that may have a retirement obligation and consulting with
counsel to determine if a legal retirement obligation exists. If one exists, any
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 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 in April 2002,
this standard rescinds SFAS No. 4, Reporting Gains and Losses from
Extinguishment of Debt, and SFAS No. 64, Extinguishment of Debt Made to Satisfy
Sinking-Fund Requirements. As a result, any gain or loss on extinguishment of
debt should be classified as an extraordinary item only if it meets the criteria
set forth in APB Opinion No. 30. The provisions of this section are applicable
to fiscal years beginning 2003. SFAS No. 145 amends SFAS No. 13, Accounting for
Leases, to require sale-leaseback accounting for certain lease modifications
that have similar economic impacts to sale-leaseback transactions. This
provision is effective for transactions occurring after May 15, 2002. Finally,
SFAS No. 145 amends other existing authoritative pronouncements to make various
technical corrections and rescinds SFAS No. 44, Accounting for Intangible Assets
of Motor Carriers. These provisions are effective for financial statements
issued on or after May 15, 2002. Consumers believes there will be no impact on
its financial statements upon adoption of the standard.
SFAS NO. 146, ACCOUNTING FOR COSTS ASSOCIATED WITH EXIT OR DISPOSAL ACTIVITIES:
Issued by the FASB in July 2002, this standard requires companies to recognize
costs associated with exit or disposal activities when they are incurred rather
than at the date of a commitment to an exit or disposal plan. This standard is
effective for exit or disposal activities initiated after December 31, 2002.
Consumers believes there will be no impact on its financial statements upon
adoption of the standard.
SUBSEQUENT EVENTS
Subsequent to November 14, 2002, the date of filing Consumers' Form 10-Q for the
third quarter 2002, a number of material events have occurred. Below is a
summary of these events:
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Consumers Energy Company
CHANGE IN EXECUTIVE OFFICERS
Subsequent to March 1, 2002, certain changes have occurred in Consumers'
executive officers. On May 24, 2002, the Board of Directors of Consumers elected
Kenneth Whipple as Chairman of the Board and Chief Executive Officer; on June
27, 2002, S. Kinnie Smith, Jr. was elected Vice Chairman of the Board; on July
22, 2002, Thomas J. Webb was elected Executive Vice President and Chief
Financial Officer; on August 2, 2002, John F. Drake was elected Senior Vice
President and on December 6, 2002, Michael T. Monahan and Joseph F. Paquette,
Jr. joined the Board of Directors of Consumers.
LIQUIDITY AND CAPITAL RESOURCES
During the summer months, Consumers purchases natural gas and stores it for
resale primarily during the winter heating season. Recently the market price for
natural gas has increased. If continued, this price increase could impose
liquidity needs beyond what was previously anticipated for 2003. Although
Consumers' natural gas purchases are recoverable from its customers, the amount
paid for natural gas stored as inventory could require additional liquidity due
to the timing of when those costs are recovered.
DIVIDENDS: Consumers paid $233 million in common stock dividends in 2002,
including the $25 million tax sharing allocation from CMS Energy.
FINANCING: 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. In November 2002, Consumers paid $80 million on the gas inventory
loan and drew $85 million under the term loan agreement. The bank and legal fees
associated with the agreements were $2 million. The first amortization payment
under these agreements occurred in December 2002 with monthly amortization
payments scheduled until full repayment is completed in mid-April of 2003. This
financing eliminated the need for Consumers to access the capital markets for
the remainder of 2002.
As of December 31, 2002, Consumers' debt maturities for 2003 include $305
million of long-term debt, the $250 million revolving credit facility and an
estimated remaining balance of $207 million on the new gas inventory term loan
agreement. Consumers expects to borrow approximately $1.1 billion in total in
2003, which includes an amount to refinance the majority of the maturing debt
described above. Replacing maturing debt with new financing is subject, in part,
to capital market acceptance and receptivity to utility industry securities in
general and to Consumers' securities issuances in particular. Consumers cannot
guarantee the capital market's acceptance of its securities or predict the
impact of the restatement of its consolidated financial statements on such
acceptance and is exploring other financing options which may include, but are
not limited to, first mortgage bond collateralized bank term loans and inventory
collateralized bank term loans.
ACCOUNTING FOR PENSION AND OPEB
The Pension Plan includes amounts for employees of CMS Energy and non-utility
affiliates, including Panhandle, which were not distinguishable from the Pension
Plan's total assets. On December 21, 2002, a definitive agreement was executed
to sell Panhandle. The sale is expected to close in 2003. No portion of the
Pension Plan will be transferred with the sale of Panhandle. At the closing of
the sale, all employees of Panhandle will no longer be eligible to accrue
additional benefits. The Pension Plan will retain pension payment obligations
under the Pension Plan for Panhandle employees who are vested under the Pension
Plan.
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Consumers Energy Company
The recent significant downturn in the equities markets has affected the value
of the Pension Plan's assets. The estimated fair value of the Pension Plan's
assets at December 31, 2002 was $607 million. The Accumulated Benefit Obligation
was estimated at $1.055 billion. The Pension Plan's Accumulated Benefit
Obligation exceeded the value of these assets at December 31, 2002, and as a
result, Consumers and the other participants of the plan were required to
recognize an additional minimum liability for this excess in accordance with
SFAS No. 87. As of December 31, 2002, the additional minimum liability allocated
to Consumers was $325 million, of which $40 million was recorded as an
intangible asset, and $285 million was charged to other comprehensive income
($185 million after-tax).
As of December 31, 2001, the balance of Pension Plan and OPEB plan assets was
$845 million and $475 million, respectively. These amounts consisted primarily
of stocks and bonds, including CMS Energy Common Stock of $126 million in the
Pension Plan's assets and $3 million in the OPEB plan's assets at December 31,
2001. As of January 31, 2003, the market value of CMS Energy Common Stock in
these plans was $30 million in the Pension Plan and $1 million in the OPEB plan.
In January 2002, Consumers' portion of contributions made to the plans' trust
accounts was $62 million. This amount represents $47 million for pension related
benefits and $15 million for postretirement health care and life insurance
benefits. In June 2002, September 2002, and December 2002, Consumers made
additional contributions, in the amount of $22 million, $18 million, and $18
million respectively, for postretirement health care and life insurance
benefits. Consumers expects similar contributions for postretirement health care
and life insurance benefits will be made in 2003, 2004, and 2005. Consumers
expects its share of additional contributions to the Pension Plan to be
approximately $158 million in the third quarter of 2003, $209 million in 2004,
and $24 million in 2005.
CAPITAL EXPENDITURES OUTLOOK
Consumers estimates the following revised capital expenditures, including new
lease commitments, as of December 31, 2002 by expenditure type and by business
segments during 2002 through 2004. Consumers prepares these estimates for
planning purposes and may revise them.
In Millions
--------------------------------------------------------------------------------
Years Ended December 31 2002 2003 2004
--------------------------------------------------------------------------------
Construction $561 $424 $520
Nuclear fuel 1 33 32
Other capital leases 55 28 23
-------------------------------
$617 $485 $575
================================================================================
Electric utility operations (a)(b) $436 $341 $408
Gas utility operations (a) 181 144 167
-------------------------------
$617 $485 $575
================================================================================
(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 2, Uncertainties.
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Consumers Energy Company
ELECTRIC OUTLOOK
STRANDED AND IMPLEMENTATION COSTS: In December 2002, the MPSC issued an order
finding that Consumers experienced zero "net" Stranded Costs in 2000 and 2001,
but declined to establish a defined methodology that would allow a reliable
prediction of the level of stranded costs for 2002 and future years. In January
2003, Consumers filed a petition for rehearing of the December 2002 stranded
cost order in which it asked the MPSC to grant a rehearing and revise certain
features of the order. Several other parties also filed rehearing petitions with
the MPSC. The request for regulatory asset accounting treatment for Clean Air
Act expenditures remains pending before the MPSC.
On March 4, 2003, Consumers filed an application with the MPSC seeking approval
of net stranded costs incurred in 2002, and for approval of a net stranded cost
recovery charge. In the application, Consumers indicated that if Consumers'
proposal to securitize Clean Air Act expenditures and post-2000 Palisades
expenditures were approved as proposed in its securitization case as discussed
below, then Consumers' net stranded costs incurred in 2002 are approximately $35
million. If the proposal to securitize those costs is not approved, then
Consumers indicated that the costs would be properly included in the 2002 net
stranded cost calculation, which would increase Consumers' 2002 net stranded
costs to approximately $103 million.
SECURITIZATION: On March 4, 2003, Consumers filed an application with the MPSC
seeking approval to issue additional securitization bonds in the amount of
approximately $1.084 billion. If approved, this would allow the recovery of
costs associated with Clean Air Act expenditures, post-2000 Palisades
expenditures, retail open access implementation costs, electric pension fund
costs, and expenses associated with the issuance of the bonds and the retirement
of existing Consumers' debt. Consumers will use the proceeds from securitization
for refinancing or retirement of debt.
CODE OF CONDUCT: In December 2002, Consumers filed a renewed request with the
MPSC for a temporary waiver until April 2004 for the appliance service plan,
which, in February 2003, was granted only until December 2003. The MPSC has
issued a notice inviting comments on this request. The full impact of the new
code of conduct on Consumers' business will remain uncertain until the appellate
courts issue definitive rulings.
TRANSMISSION: Consumers is a customer of AEP, holding 500 MW of transmission
service reservations through the AEP transmission system. AEP recently indicated
its intent to turn control of its transmission system over to the PJM RTO and
become part of the PJM market sometime after May 1, 2003, which requires
approval by FERC. This will require current AEP customers to become members
of, and resubmit reservation requests to, PJM. Consumers filed an intervention
requesting clarification in January 2003. Upon FERC's approval of this transfer,
Consumers will complete the application process to join PJM.
In addition to the potential cost impacts identified in the section entitled
"Electric Business Outlook - Transmission" in the original text above, and in
"Transmission" directly above, Consumers is evaluating whether or not there may
be impacts on electric reliability associated with the outcomes of the various
transmission related proceedings identified. Consumers cannot assure that all
risks to reliability can be avoided.
GAS OUTLOOK
GAS RATE CASE: On November 7, 2002, the MPSC issued a final order approving a
$56 million annual gas distribution service rate increase, which includes the
$15 million interim increase, with an 11.4 percent authorized return on equity,
for service effective November 8, 2002. As part of this order, the MPSC approved
Consumers' proposal to absorb the assets and liabilities of Michigan Gas Storage
Company into Consumers' rate base and rates. This has occurred through a
statutory merger of Michigan Gas Storage Company into Consumers and this is not
expected to have an impact on Consumers' consolidated financial statements.
-42-
Consumers Energy Company
On March 14, 2003, Consumers filed an application with the MPSC seeking an
increase in its gas delivery and transportation rates based on a 2004 test year.
If approved, the request would add about $6.40 per month, or about 9 percent, to
the typical residential customers' average monthly distribution bill. Consumers
is seeking a 13.5 percent authorized return on equity along with a $156 million
revenue deficiency. Contemproaneously with this filing, Consumers has requested
interim rate relief in the same amount.
OTHER OUTLOOK
TERRORIST ATTACKS: In December 2002, the Michigan legislature passed, and the
governor signed, a bill that would allow Consumers to seek recovery of
additional security costs incurred during the rate freeze and cap periods
imposed by the Customer Choice Act. On February 5, 2003, the MPSC adopted filing
requirements for the recovery of enhanced security costs.
OTHER MATTERS
NEW ACCOUNTING STANDARDS
SFAS NO. 143, ACCOUNTING FOR ASSET RETIREMENT OBLIGATIONS: Beginning January 1,
2003, companies must comply with SFAS No. 143. The standard requires companies
to record the fair value of the legal obligations related to an asset retirement
in the period in which it is incurred. 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 initial liability is
accreted to its present value each period and the capitalized cost is
depreciated over the related asset's useful life. Consumers has determined that
it has some legal asset retirement obligations, particularly in regard to its
nuclear plants, but has not as yet finalized its assessment of the obligation.
Once Consumers' assessment is finalized, its removal cost estimate will be
determined based on fair value cost estimates as required by the new standard.
The fair value of the legal retirement obligations will be present valued and
used to quantify the effects of adoption of this standard.
SFAS NO. 148, ACCOUNTING FOR STOCK-BASED COMPENSATION - TRANSITION AND
DISCLOSURE: Issued by the FASB in December 2002, this standard provides for
alternative methods of transition for a voluntary change to the fair value based
method of accounting for stock-based employee compensation. In addition, the
statement amends the disclosure requirements of SFAS No. 123 to require more
prominent and more frequent disclosures in financial statements about the
effects of stock-based compensation. The transition guidance and annual
disclosure provisions of the statement are effective as of December 31, 2002 and
interim disclosure provisions are effective for interim financial reports
starting in 2003. Consumers has decided to voluntarily adopt the fair value
based method of accounting for stock-based employee compensation effective
December 31, 2002, applying the prospective method of adoption which requires
recognition of all employee awards granted, modified, or settled after the
beginning of the year in which the recognition provisions are first
-43-
Consumers Energy Company
applied. Therefore, Consumers recorded expense for the fair value of stock
options issued in 2002. The implementation had an immaterial effect on
Consumers' financial statements upon adoption of the method.
FASB INTERPRETATION NO. 45, GUARANTOR'S ACCOUNTING AND DISCLOSURE REQUIREMENT
FOR GUARANTEES, INCLUDING INDIRECT GUARANTEES OF INDEBTEDNESS OF OTHERS: Issued
by the FASB in November 2002, the interpretation elaborates on existing
disclosures requirements for most guarantees, and clarifies that at the time a
company issues a guarantee, the company must recognize an initial liability for
the fair value, or market value, of the obligations it assumes under that
guarantee and must disclose that information in its interim and annual financial
statements. The interpretation is effective for guarantees issued or modified
after December 31, 2002. Consumers would be required to recognize a liability
for any guarantees it may issue on or after January 1, 2003, but will not change
the accounting for guarantees it may have issued before that date.
FASB INTERPRETATION NO. 46, CONSOLIDATION OF VARIABLE INTEREST ENTITIES: Issued
by the FASB in January 2003, the interpretation expands upon and strengthens
existing accounting guidance that addresses when a company should include in its
financial statements the assets, liabilities and activities of another entity.
The consolidation requirements of the interpretation apply immediately to
variable interest entities created after January 31, 2003. For Consumers, the
consolidation requirements apply to older entities beginning July 1, 2003.
Certain of the disclosure requirements apply to all financial statements
initially issued after January 31, 2003. Consumers will be required to
consolidate any entities that meet the requirements of the interpretation.
Consumers is in the process of studying the interpretation, and has yet to
determine the effects, if any, on its consolidated financial statements.
-44-
CONSUMERS ENERGY COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(AS RESTATED, SEE NOTE 4)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 2002 2001 2002 2001
----------------------------------------------------------------------------------------------------------------
In Millions
OPERATING REVENUE
Electric $ 775 $ 739 $2,015 $2,028
Gas 135 150 1,002 928
Other 11 11 66 36
------------------------------------------------
921 900 3,083 2,992
----------------------------------------------------------------------------------------------------------------
OPERATING EXPENSES
Operation
Fuel for electric generation 98 102 236 250
Purchased power - related parties 143 155 416 399
Purchased and interchange power 111 187 244 401
Cost of gas sold 20 40 528 470
Cost of gas sold - related parties 34 32 96 92
Other 182 151 487 445
------------------------------------------------
588 667 2,007 2,057
Maintenance 43 41 141 146
Depreciation, depletion and amortization 77 71 256 242
General taxes 43 44 144 142
------------------------------------------------
751 823 2,548 2,587
----------------------------------------------------------------------------------------------------------------
PRETAX OPERATING INCOME (LOSS)
Electric 175 69 406 294
Gas (14) (1) 68 80
Other 9 9 61 31
------------------------------------------------
170 77 535 405
----------------------------------------------------------------------------------------------------------------
OTHER INCOME (DEDUCTIONS)
Dividends and interest from affiliates - 2 2 6
Accretion expense (1) (2) (4) (8)
Other, net 1 - 37 2
------------------------------------------------
- - 35 -
----------------------------------------------------------------------------------------------------------------
INTEREST CHARGES
Interest on long-term debt 41 35 111 111
Other interest 5 14 16 35
Capitalized interest (3) (1) (8) (5)
------------------------------------------------
43 48 119 141
----------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 127 29 451 264
INCOME TAXES 42 6 150 88
------------------------------------------------
NET INCOME 85 23 301 176
PREFERRED STOCK DIVIDENDS - - 1 1
PREFERRED SECURITIES DISTRIBUTIONS 11 12 33 30
------------------------------------------------
NET INCOME AVAILABLE TO COMMON STOCKHOLDER $ 74 $ 11 $ 267 $ 145
================================================================================================================
THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
-45-
CONSUMERS ENERGY COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(AS RESTATED, SEE NOTE 4)
NINE MONTHS ENDED
SEPTEMBER 30 2002 2001
--------------------------------------------------------------------------------------------------------------------
In Millions
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 301 $ 176
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation, depletion and amortization (includes nuclear
decommissioning of $5 and $5, respectively) 256 242
Deferred income taxes and investment tax credit (18) 58
Capital lease and other amortization 11 16
Gain on sale of METC and other assets (38) --
Undistributed earnings of related parties (48) (10)
Changes in assets and liabilities
Increase in inventories (37) (340)
Decrease in accounts receivable and accrued revenue 98 257
Increase (decrease) in accounts payable (79) 12
Changes in other assets and liabilities (26) (90)
-----------------------
Net cash provided by operating activities 420 321
--------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (excludes assets placed under capital lease) (400) (495)
Cost to retire property, net (50) (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
Associated company preferred stock redemption -- 50
Proceeds from sale of METC, and other assets 298 --
-----------------------
Net cash used in investing activities (144) (511)
--------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Retirement of bonds and other long-term debt (409) (2)
Decrease in notes payable, net (182) (247)
Payment of common stock dividends (154) (134)
Redemption of preferred securities (30) --
Preferred securities distributions (33) (30)
Payment of capital lease obligations (11) (17)
Payment of preferred stock dividends (1) --
Proceeds from preferred securities -- 121
Stockholder's contribution, net 50 150
Proceeds from senior notes and bank loans 602 352
-----------------------
Net cash provided from (used) in financing activities (168) 193
--------------------------------------------------------------------------------------------------------------------
NET INCREASE IN CASH AND TEMPORARY CASH INVESTMENTS 108 3
CASH AND TEMPORARY CASH INVESTMENTS, BEGINNING OF PERIOD 17 21
-----------------------
CASH AND TEMPORARY CASH INVESTMENTS, END OF PERIOD $ 125 $ 24
====================================================================================================================
OTHER CASH FLOW ACTIVITIES AND NON-CASH INVESTING AND FINANCING ACTIVITIES WERE:
CASH TRANSACTIONS
Interest paid (net of amounts capitalized) $ 116 $ 129
Income taxes paid (net of refunds) 83 36
Pension and OPEB cash contribution 101 84
NON-CASH TRANSACTIONS
Nuclear fuel placed under capital lease $ -- $ 13
Other assets placed under capital leases 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.
-46-
CONSUMERS ENERGY COMPANY
CONSOLIDATED BALANCE SHEETS
(AS RESTATED, SEE NOTE 4)
ASSETS SEPTEMBER 30 SEPTEMBER 30
2002 DECEMBER 31 2001
(UNAUDITED) 2001 (UNAUDITED)
---------------------------------------------------------------------------------------------------------------
In Millions
PLANT (AT ORIGINAL COST)
Electric $ 7,504 $ 7,661 $ 7,513
Gas 2,692 2,593 2,566
Other 22 23 16
---------------------------------------
10,218 10,277 10,095
Less accumulated depreciation, depletion and amortization 5,856 5,934 5,873
---------------------------------------
4,362 4,343 4,222
Construction work-in-progress 463 480 424
---------------------------------------
4,825 4,823 4,646
----------------------------------------------------------------------------------------------------------------
INVESTMENTS
Stock of affiliates 21 59 54
First Midland Limited Partnership 250 253 249
Midland Cogeneration Venture Limited Partnership 370 300 296
---------------------------------------
641 612 599
----------------------------------------------------------------------------------------------------------------
CURRENT ASSETS
Cash and temporary cash investments at cost, which approximates market 125 17 24
Accounts receivable and accrued revenue, less allowances
of $4, $4 and $3, respectively 36 125 21
Accounts receivable - related parties 18 18 14
Inventories at average cost
Gas in underground storage 601 569 603
Materials and supplies 71 69 72
Generating plant fuel stock 49 52 49
Deferred property taxes 82 144 84
Regulatory assets 19 19 19
Other 27 14 13
---------------------------------------
1,028 1,027 899
----------------------------------------------------------------------------------------------------------------
NON-CURRENT ASSETS
Regulatory assets
Securitization costs 699 717 710
Postretirement benefits 191 209 214
Abandoned Midland Project 11 12 12
Other 173 167 169
Nuclear decommissioning trust funds 530 581 568
Other 108 173 182
---------------------------------------
1,712 1,859 1,855
----------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 8,206 $ 8,321 $ 7,999
================================================================================================================
-47-
(AS RESTATED, SEE NOTE 4)
STOCKHOLDERS' INVESTMENT AND LIABILITIES SEPTEMBER 30 SEPTEMBER 30
2002 DECEMBER 31 2001
(UNAUDITED) 2001 (UNAUDITED)
---------------------------------------------------------------------------------------------------------------
In Millions
CAPITALIZATION
Common stockholder's equity
Common stock $ 841 $ 841 $ 841
Paid-in capital 682 632 796
Other comprehensive income (8) 4 (4)
Retained earnings since December 31, 1992 525 441 441
---------------------------------------
2,040 1,918 2,074
Preferred stock 44 44 44
Company-obligated mandatorily redeemable preferred securities
of subsidiaries (a) 490 520 520
Long-term debt 2,701 2,472 2,452
Non-current portion of capital leases 110 72 61
---------------------------------------
5,385 5,026 5,151
----------------------------------------------------------------------------------------------------------------
CURRENT LIABILITIES
Current portion of long-term debt and capital leases 224 257 251
Notes payable 235 416 153
Accounts payable 212 282 247
Accrued taxes 162 214 115
Accounts payable - related parties 85 96 90
Notes Payable - related parties - - 2
Deferred income taxes 18 12 14
Current portion of purchase power agreement-MCV Partnership 22 24 22
Other 253 247 306
---------------------------------------
1,211 1,548 1,200
----------------------------------------------------------------------------------------------------------------
NON-CURRENT LIABILITIES
Deferred income taxes 752 784 707
Postretirement benefits 224 276 292
Regulatory liabilities for income taxes, net 282 276 270
Power purchase agreement - MCV Partnership 30 52 61
Deferred investment tax credit 92 102 104
Other 230 257 214
---------------------------------------
1,610 1,747 1,648
----------------------------------------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES (Notes 1 and 2)
TOTAL STOCKHOLDERS' INVESTMENT AND LIABILITIES $ 8,206 $ 8,321 $ 7,999
================================================================================================================
(a) See Note 3, Short-Term Financings and Capitalization
THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
-48-
CONSUMERS ENERGY COMPANY
CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDER'S EQUITY
(UNAUDITED)
(AS RESTATED, SEE NOTE 4)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 2002 2001 2002 2001
----------------------------------------------------------------------------------------------------------------
In Millions
COMMON STOCK
At beginning and end of period (a) $ 841 $ 841 $ 841 $ 841
-----------------------------------------------------------------------------------------------------------------
OTHER PAID-IN CAPITAL
At beginning of period 682 646 632 646
Stockholder's contribution - 150 150 150
Return of Stockholder's contribution - - (100) -
-------------------------------------------------
At end of period 682 796 682 796
-----------------------------------------------------------------------------------------------------------------
OTHER COMPREHENSIVE INCOME
Investments
At beginning of period (5) 26 16 33
Unrealized loss on investments (b) (4) (15) (25) (22)
-------------------------------------------------
At end of period (9) 11 (9) 11
Derivative Instruments
At beginning of period (c) (3) (10) (12) 18
Unrealized gain (loss) on derivative instruments (b) 1 (9) 6 (30)
Reclassification adjustments included in net income (b) 3 4 7 (3)
--------------------------------------------------
At end of period 1 (15) 1 (15)
------------------------------------------------------------------------------------------------------------------
RETAINED EARNINGS
At beginning of period 480 524 441 486
Net income 85 23 301 176
Cash dividends declared- Common Stock (29) (94) (183) (190)
Cash dividends declared- Preferred Stock - - (1) (1)
Preferred securities distributions (11) (12) (33) (30)
-------------------------------------------------
At end of period 525 441 525 441
-----------------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCKHOLDER'S EQUITY $ 2,040 $ 2,074 $ 2,040 $ 2,074
=================================================================================================================
(a) Number of shares of common stock outstanding was 84,108,789 for all periods presented.
(b) Disclosure of Comprehensive Income:
Other Comprehensive Income
Investments
Unrealized loss on investments, net of tax of
$3, $8, $14 and $12, respectively $ (4) $ (15) $ (25) $ (22)
Derivative Instruments
Unrealized gain (loss) on derivative instruments,
net of tax of $(1), $4, $(4) and $15, respectively 1 (9) 6 (30)
Reclassification adjustments included in net income,
net of tax of $(2), $(2), $(4) and $2, respectively 3 4 7 (3)
Net income 85 23 301 176
-------------------------------------------------
Total Comprehensive Income $ 85 $ 3 $ 289 $ 121
=================================================
(c) Nine Months Ended 2001 is the cumulative effect of change in accounting principle, as of 1/1/01 and
7/1/01, net of $(9) tax. (Note 1)
THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
-49-
Consumers Energy Company
CONSUMERS ENERGY COMPANY
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Consumers' consolidated financial statements for the quarterly period ended
September 30, 2002 have been restated, as discussed in Note 4, Restatement,
pursuant to audit adjustments resulting from the re-audit of the consolidated
financial statements for the years 2001 and 2000, as well as, reviews of the
quarterly periods of 2002 of CMS Energy, Consumers' parent company, which
included audit and review work at Consumers.
Except for the addition of Notes 4, 5, and 6 the following notes to the
consolidated financial statements have generally only been modified for the
effects of the restatement. For further information about Consumers' restated
financial statements for December 31, 2001 and December 31, 2000, see Consumers'
Form 10-K/A for the fiscal year ended December 31, 2001, which was filed with
the SEC on February 21, 2003.
MODIFIED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In April 2002, Consumers' Board of Directors, upon the recommendation of the
Audit Committee of the Board, voted to discontinue using Arthur Andersen to
audit the Consumers' financial statements for the year ending December 31, 2002.
Consumers previously retained Arthur Andersen to review its financial statements
for the quarter ended March 31, 2002. In May 2002, Consumers' Board of Directors
engaged Ernst & Young to audit its 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, Arthur Andersen notified CMS Energy
that Arthur Andersen's historical opinions on CMS Energy's financial statements
for the fiscal years ended December 31, 2001 and December 31, 2000 could not be
relied upon. 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 for the
applicable years, the re-audit did include audit work at Consumers for these
years.
In connection with Ernst & Young's re-audit of the fiscal years ended December
31, 2001 and December 31, 2000, Consumers has made, in consultation with Ernst &
Young, certain adjustments 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. A summary of the principal effects of
the restatement on Consumers' consolidated financial statements for the
quarterly periods ended September 30, 2002 and September 30, 2001 is contained
in Note 4, Restatement, and unaudited restated financial statements for the
first and second quarters of 2002, with comparable restated periods for 2001,
are contained in Note 6, Restated Financial Statements for First and Second
Quarters. For further information about Consumers' restated financial statements
for December 31, 2001 and December 31, 2000, see Consumers' Form 10-K/A for the
fiscal year ended December 31, 2001, which was filed with the SEC on February
21, 2003.
These interim Consolidated Financial Statements have been prepared by Consumers
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
-50-
Consumers Energy Company
Consolidated Financial Statements contained in the Consumers Form 10-K/A for the
year ended December 31, 2001. Consumers' electric and gas utility operations are
seasonal in nature. During the summer months, there is usually an increase in
demand for electric energy, principally due to the use of air conditioners and
other cooling equipment, thereby affecting revenues. Also during the summer
months, Consumers injects natural gas into storage for use during the winter
months when demand for natural gas is higher. Peak demand for natural gas
usually occurs in the winter due to colder temperatures and the resulting
increased demand for heating fuels. Due to the seasonal nature of Consumers
operations, the results as presented for this interim period are not necessarily
indicative of results to be achieved for the fiscal year.
1: CORPORATE STRUCTURE AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CORPORATE STRUCTURE: Consumers, a subsidiary of CMS Energy, a holding company,
is an electric and gas utility company that provides service to customers in
Michigan's Lower Peninsula. Consumers' customer base includes a mix of
residential, commercial and diversified industrial customers, the largest
segment of which is the automotive industry.
BASIS OF PRESENTATION: The consolidated financial statements include Consumers
and its wholly owned subsidiaries. Consumers prepared the financial statements
in conformity with accounting principles generally accepted in the United States
that include the use of management's estimates. Consumers uses the equity method
of accounting for investments in its companies and partnerships where it has
more than a twenty percent but less than a majority ownership interest and
includes these results in operating income.
REPORTABLE SEGMENTS: Consumers has two reportable segments: electric and gas.
The electric segment consists of activities associated with the generation and
distribution of electricity. The gas segment consists of activities associated
with the transportation, storage and distribution of natural gas. Consumers'
reportable segments are domestic strategic business units organized and managed
by the nature of the product and service each provides. The accounting policies
of the segments are the same as those described in Consumers' 2001 Form 10-K/A.
Consumers' management has changed its evaluation of the performance of the
electric and gas segments from pretax operating income to net income available
to common stockholder. The Consolidated Statements of Income show operating
revenue and pretax operating income by reportable segment. Intersegment sales
and transfers are accounted for at current market prices and are eliminated in
consolidated net income available to common stockholder by segment. The net
income available to common stockholder by reportable segment is as follows:
In Millions
------------------------------------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30 2002 2001 2002 2001
------------------------------------------------------------------------------------------------------------------
(Restated) (Restated) (Restated) (Restated)
Net income available to common stockholder
Electric $89 $16 $223 $111
Gas (18) (10) 13 19
Other 3 5 31 15
------------------------------------------------------------------------------------------------------------------
Total Consolidated $74 $11 $267 $145
==================================================================================================================
In Millions
------------------------------------------------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30 2002 2001 2002 2001
------------------------------------------------------------------------------------------------------------------
(Restated) (Restated) (Restated) (Restated)
Net income available to common stockholder
Electric $84 $32 $134 $95
Gas 3 1 31 29
Other 26 2 28 10
------------------------------------------------------------------------------------------------------------------
Total Consolidated $113 $35 $193 $134
==================================================================================================================
In Millions
------------------------------------------------------------------------------------------------------------------
Three Months Ended
March 31 2002 2001
------------------------------------------------------------------------------------------------------------------
(Restated) (Restated)
Net income available to common stockholder
Electric $50 $63
Gas 28 28
Other 3 8
------------------------------------------------------------------------------------------------------------------
Total Consolidated $81 $99
==================================================================================================================
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
-51-
Consumers Energy Company
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 2, Uncertainties,
"Electric Rate Matters - Electric Restructuring."
RISK MANAGEMENT ACTIVITIES AND DERIVATIVE TRANSACTIONS: Consumers is exposed to
market risks including, but not limited to, changes in interest rates, commodity
prices, and equity security prices. Consumers' market risk, and activities
designed to minimize this risk, are subject to the direction of an executive
oversight committee consisting of designated members of senior management and a
risk committee, consisting of business unit managers. The risk committee's role
is to review the corporate commodity position and ensure that net corporate
exposures are within the economic risk tolerance levels established by
Consumers' Board of Directors. Established policies and procedures are used to
manage the risks associated with market fluctuations.
Consumers uses various contracts, including swaps, options, and forward
contracts to manage its risks associated with the variability in expected future
cash flows attributable to fluctuations in interest rates and commodity prices.
Consumers enters into all risk management contracts for purposes other than
trading. Contracts to manage interest rate and commodity price risk may be
considered derivative instruments that are subject to derivative and hedge
accounting pursuant to SFAS No. 133.
For further discussion see "Implementation of New Accounting Standards" below,
Note 2, Uncertainties, "Other Electric Uncertainties - Derivative Activities",
"Other Gas Uncertainties - Derivative Activities" and Note 3, Short-Term
Financings and Capitalization, "Derivative Activities."
IMPLEMENTATION OF NEW ACCOUNTING STANDARDS: Consumers adopted SFAS No. 133 on
January 1, 2001. This standard requires Consumers to recognize at fair value all
contracts that meet the definition of a derivative instrument on the balance
sheet as either assets or liabilities. The standard also requires Consumers to
record all changes in fair value directly in earnings, or other comprehensive
income if the derivative meets certain qualifying hedge criteria. Consumers
determines fair value based upon quoted market prices and mathematical models
using current and historical pricing data. Any ineffective portion of all hedges
is recognized in earnings.
Consumers believes that the majority of its contracts are not subject to
derivative accounting because they qualify for the normal purchases and sales
exception of SFAS No. 133. Derivative accounting is required, however, for
certain contracts used to limit Consumers' exposure to electricity and gas
commodity price risk and interest rate risk.
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.
On January 1, 2001, upon initial adoption of the standard, Consumers recorded a
$21 million, net of tax, ($32 million, pretax) cumulative effect transition
adjustment as an unrealized gain increasing accumulated other comprehensive
income. Consumers then 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
-52-
Consumers Energy Company
million as an increase in other revenue for the twelve months ended December 31,
2001. The remaining $9 million difference between the initial transition
adjustment and the amounts reclassified to earnings has been reduced to zero,
decreasing other comprehensive income, and represents an unrealized loss in the
fair value of the derivative instruments since January 1, 2001. As a result, as
of December 31, 2001, there were no amounts remaining in accumulated other
comprehensive income related to the initial transition adjustment.
On January 1, 2001, upon initial adoption of SFAS No. 133, derivative and hedge
accounting for certain utility industry contracts, particularly electric call
option contracts and option-like contracts, and contracts subject to Bookouts
was uncertain. Consumers did not record these contracts on the balance sheet at
fair value, but instead accounted for these types of contracts as derivatives
that qualified for the normal purchase exception of SFAS No. 133. In June and
December 2001, the FASB issued guidance that resolved the accounting for these
contracts. As a result, on July 1, 2001, Consumers recorded a $3 million, net of
tax, cumulative effect adjustment as an unrealized loss, decreasing accumulated
other comprehensive income, and on December 31, 2001, recorded an $11 million,
net of tax, cumulative effect adjustment, as a decrease to earnings. These
adjustments relate to the difference between the fair value and the recorded
book value of certain 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 2, Uncertainties,
"Other Electric Uncertainties - Derivative Activities" and "Other Gas
Uncertainties - Derivative Activities" and Note 3, Short-Term Financings and
Capitalization, "Derivative Activities."
SFAS NO. 142, GOODWILL AND OTHER INTANGIBLE ASSETS: SFAS No. 142, issued in July
2001, requires that goodwill no longer be amortized to earnings, but instead be
reviewed for impairment. Effective, January 1, 2002, the provisions of SFAS No.
142 had no impact on Consumers' consolidated results of operations or financial
position.
SFAS NO. 143, ACCOUNTING FOR ASSET RETIREMENT OBLIGATIONS: Issued by the FASB in
August 2001, the provisions of SFAS No. 143 require adoption as of January 1,
2003. The standard requires entities to record the fair value of a liability for
an asset retirement obligation in the period in which it is incurred. When the
liability is initially recorded, the entity 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 while the capitalized cost
is depreciated over the useful life of the related asset. Consumers is currently
studying the new standard but has yet to quantify the effects of adoption on its
financial statements.
SFAS NO. 144, ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS:
This new standard was issued by the FASB in August 2001, and supersedes SFAS No.
121, and APB Opinion No. 30. SFAS No. 144 requires long-lived assets to be
measured at the lower of either the carrying amount or of the fair value less
the cost to sell, whether reported in continuing operations or in discontinued
operations. Therefore, discontinued operations will no longer be measured at net
realizable value or include amounts for operating losses that have not yet
occurred. SFAS No. 144 also broadens the reporting of discontinued operations to
include all components of an entity with operations that can be distinguished
from the rest of the entity and that will be eliminated from the ongoing
operations of the entity in a disposal transaction. The adoption of SFAS No.
144, effective January 1, 2002, will result in Consumers accounting for any
future impairment 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.
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Consumers Energy Company
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.
2: UNCERTAINTIES
UNCERTAINTIES RELATED TO RESTATEMENT
SEC AND OTHER INVESTIGATIONS: As a result of the round-trip trading transactions
at CMS MST, CMS Energy's Board of Directors established a special committee of
independent directors to investigate matters surrounding the transactions and
retained outside counsel to assist in the investigation. The special committee
completed its investigation and reported its findings to the Board of Directors
in October 2002. The special committee concluded, based on an extensive
investigation, that the round-trip trades were undertaken to raise CMS MST's
profile as an energy marketer with the goal of enhancing its ability to promote
its services to new customers. The special committee found no apparent effort to
manipulate the price of CMS Energy Common Stock or affect energy prices. The
special committee also made recommendations designed to prevent any reoccurrence
of this practice, 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.
CMS Energy is cooperating with other investigations concerning round-trip
trading, including an investigation by the SEC regarding round-trip trades and
the 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 Attorney's Office for the Southern District of New York and from
the United States Attorney's Office in Houston 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 Consumers is
unable to predict what effect, if any, these investigations will have on its
business.
SECURITIES CLASS ACTION LAWSUITS: Beginning on May 17, 2002, a number of
securities class action complaints have been filed against CMS Energy,
Consumers, and certain officers and directors of CMS Energy and its affiliates.
The complaints have been filed in the United States District Court for the
Eastern District of Michigan as purported class actions by individuals who
allege that they purchased CMS Energy's securities during a purported class
period. At least two of the complaints contain purported class periods beginning
on August 3, 2000 and running through May 10, 2002 or May 14, 2002. These
complaints generally seek unspecified damages based on allegations that the
defendants violated United States securities laws and regulations by making
allegedly false and misleading statements about the company's business and
financial condition. CMS Energy believes that additional suits might be
commenced against it and that all such suits
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against it will eventually be consolidated. Consumers intends to vigorously
defend against these actions. Consumers cannot predict the outcome of this
litigation.
ERISA CASES: Consumers is a named defendant, along with CMS Energy, CMS MST and
certain named and unnamed officers and directors in two lawsuits brought as
purported class actions on behalf of participants and beneficiaries of the
401(k) Plan. The two cases, filed in July 2002 in the United States District
Court for the Eastern District of Michigan, were consolidated by the trial
judge. Plaintiffs allege breaches of fiduciary duties under the ERISA and seek
restitution on behalf of the Plan with respect to a decline in value of the
shares of CMS Energy Common Stock held in the Plan. Plaintiffs also seek other
equitable relief and legal fees. These cases will be vigorously defended.
Consumers cannot predict the outcome of this litigation.
ELECTRIC CONTINGENCIES
ELECTRIC ENVIRONMENTAL MATTERS: Consumers is subject to costly and increasingly
stringent environmental regulations. Consumers expects that the cost of future
environmental compliance, especially compliance with clean air laws, will be
significant.
Clean Air - In 1998, the EPA issued 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 of $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 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
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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.
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' 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
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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.
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
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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 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
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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 $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.
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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.
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 ELECTRIC UNCERTAINTIES
THE MIDLAND COGENERATION VENTURE: The MCV Partnership, which leases and operates
the MCV Facility, contracted to sell electricity to Consumers for a 35-year
period beginning in 1990 and to supply electricity and steam to Dow. Consumers,
through two wholly owned subsidiaries, holds the following assets related to the
MCV Partnership and MCV Facility: 1) CMS Midland owns a 49 percent general
partnership interest in the MCV Partnership; and 2) CMS Holdings holds, through
FMLP, a 35 percent lessor interest in the MCV Facility.
Summarized Statements of Income for CMS Midland and CMS Holdings
In Millions
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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Consumers Energy Company
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.
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
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Consumers Energy Company
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.
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
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Consumers Energy Company
Anderson Act will not be reauthorized or changes may be made that significantly
affect the insurance provisions for nuclear plants.
CAPITAL EXPENDITURES: In 2002, 2003, and 2004, Consumers estimates electric
capital expenditures, including new lease commitments and environmental costs
under the Clean Air Act, of $474 million, $352 million, and $410 million.
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 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,
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Consumers Energy Company
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.
GAS CONTINGENCIES
GAS ENVIRONMENTAL MATTERS: Under the Michigan Natural Resources and
Environmental Protection Act, Consumers expects that it will ultimately incur
investigation and remedial action costs at a number of sites. These include 23
former manufactured gas plant facilities, which were operated by Consumers for
some part of their operating lives, including sites in which it has a partial or
no current ownership interest. Consumers has completed initial investigations at
the 23 sites. For sites where Consumers has received site-wide study plan
approvals, it will continue to implement these plans. It will also work toward
closure of environmental issues at sites as studies are completed. Consumers has
estimated its costs related to further investigation and remedial action for all
23 sites using the Gas Research Institute-Manufactured Gas Plant Probabilistic
Cost Model. The estimated total costs are between $82 million and $113 million;
these estimates are based on discounted 2001 costs and follow EPA recommended
use of discount rates between 3 and 7 percent for this type of activity.
Consumers expects to recover a significant portion of these costs through
insurance proceeds and through MPSC approved rates charged to its customers. As
of 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.
GAS 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.
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Consumers Energy Company
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 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 may 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 GAS UNCERTAINTIES
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Consumers Energy Company
CAPITAL EXPENDITURES: In 2002, 2003, and 2004, Consumers estimates gas capital
expenditures, including new lease commitments, of $207 million, $151 million,
and $165 million.
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.
OTHER UNCERTAINTIES
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, Consumers
Energy will be required to recognize an additional minimum liability for this
excess in accordance with SFAS No. 87. Consumers cannot predict the future fair
value of the plan's assets but it is possible, without significant appreciation
in the plan's assets, that Consumers will need to book an additional minimum
liability through a charge to other comprehensive income. The value of the Plan
assets and the Accumulated Benefits Obligation are determined by the Plan's
actuary in the fourth quarter of each year.
In addition to the matters disclosed in this note, Consumers and certain of its
subsidiaries are parties to certain lawsuits and administrative proceedings
before various courts and governmental agencies arising from the ordinary course
of business. These lawsuits and proceedings may involve personal injury,
property damage, contractual matters, environmental issues, federal and state
taxes, rates, licensing and other matters.
Consumers has accrued estimated losses for certain contingencies discussed in
this note. Resolution of these contingencies is not expected to have a material
adverse impact on Consumers' financial position, liquidity, or results of
operations.
TAX LOSS ALLOCATIONS: The Job Creation and Worker Assistance Act of 2002
provided to corporate taxpayers a 5-year carryback of tax losses incurred in
2001 and 2002. As a result of this legislation, CMS Energy was able to carry
back 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 one-time non-cash reduction in AMT credit carryforwards was
originally reflected in the tax provisions of CMS Energy and each of its
consolidated subsidiaries, as of September 2002, according to their
contributions to the consolidated CMS Energy tax loss, of which $29 million was
allocated to Consumers under the CMS Energy tax sharing agreement. As of
September 30, 2002, the $29 million tax sharing allocation has been restated
for financial reporting purposes and reflected as a dividend to be paid by
Consumers to CMS Energy. In December 2002, Consumers' estimated $29 million
dividend was adjusted to $25 million upon calculation of the final tax
allocation.
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Consumers Energy Company
3: SHORT-TERM FINANCINGS AND CAPITALIZATION
AUTHORIZATION: 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 June 2004 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.
SHORT-TERM FINANCINGS: 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.
In July 2002, the credit rating of the publicly traded securities of Consumers
was downgraded by the major rating agencies. The rating downgrade is purported
to be 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, the special board committee investigation,
restatement and re-audit of 2000 and 2001 financial statements and uncertain
future access to the capital markets.
As a result of certain of these downgrades, a few commodity suppliers to
Consumers have requested advance payments or other forms of assurances in
connection with maintenance of ongoing deliveries of gas and electricity.
Consumers is addressing these issues as required.
On July 12, 2002, Consumers reached agreement with its lenders on two credit
facilities as follows: a $250 million revolving credit facility maturing
July 11, 2003 and a $300 million term loan maturing July 11, 2003. In September
2002, the term loan maturity was extended by one year at Consumers' option and
now has a maturity date of July 11, 2004. These two 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. At
September 30, 2002, a total of $535 million was outstanding under these
facilities. The prior credit facilities and lines were unsecured. The two new
credit facilities are secured with Consumers First Mortgage Bonds.
Consumers $250 million revolving 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 also fluctuate depending on
the rating of Consumers' first mortgage bonds. The effective interest rate at
September 30, 2002 was 4.76 percent and 8.89 percent on the revolving credit
facility and the $300 million term loan, respectively. Consumers bank and legal
fees associated with arranging the facilities were $6 million.
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Consumers Energy Company
The credit facilities have contractual restrictions that require Consumers to
maintain, as of the last day of each fiscal quarter, the following:
Required Ratio Limitation Ratio at September 30, 2002
==================================================================================================================
(Restated)
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 2.0 to 1.0 3.38 to 1.0
==================================================================================================================
(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.
Also pursuant to restrictive covenants in its 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.
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 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.
LONG-TERM FINANCINGS: In March 2002, Consumers sold $300 million principal
amount of six percent senior notes, maturing in March 2005. Net proceeds from
the sale were $299 million. Consumers used the net proceeds to replace a first
mortgage bond that was to mature in 2003.
FIRST MORTGAGE BONDS: Consumers secures its First Mortgage Bonds by a mortgage
and lien on substantially all of its property. Consumers' ability to issue and
sell securities is restricted by certain provisions in its First Mortgage Bond
Indenture, its Articles of Incorporation and the need for regulatory approvals
to meet appropriate federal law.
MANDATORILY REDEEMABLE PREFERRED SECURITIES: Consumers has wholly owned
statutory business trusts that are consolidated within its financial statements.
Consumers created these trusts for the sole purpose of issuing Trust Preferred
Securities. The primary asset of the trusts is a note or debenture of Consumers.
The terms of the Trust Preferred Security parallel the terms of the related
Consumers' note or debenture. The term, rights and obligations of the Trust
Preferred Security and related note or debenture are also defined in the related
indenture through which the note or debenture was issued, Consumers' guarantee
of the related Trust Preferred Security and the declaration of trust for the
particular trust. All of these documents together with their related note or
debenture and Trust Preferred Security constitute a full and unconditional
guarantee by Consumers of the trust's obligations under the Trust Preferred
Security. In addition to the similar provisions previously discussed, specific
terms of the securities follow:
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Consumers Energy Company
In Millions
---------------------------------------------------------------------------------------------------------------
Earliest
Trust and Securities Rate Amount Outstanding Maturity Redemption
---------------------------------------------------------------------------------------------------------------
September 30 2002 2001 2000 Year
---------------------------------------------------------------------------------------------------------------
Consumers Power Company Financing I,
Trust Originated Preferred Securities 8.36% $ 70 $100 $100 2015 2000
Consumers Energy Company Financing II,
Trust Originated Preferred Securities 8.20% 120 120 120 2027 2002
Consumers Energy Company Financing III,
Trust Originated Preferred Securities 9.25% 175 175 175 2029 2004
Consumers Energy Company Financing IV,
Trust Preferred Securities 9.00% 125 125 - 2031 2006
---------------------------
Total $490 $520 $395
================================================================================================================
In March 2002, Consumers reduced its' outstanding debt to Consumers Power
Company Financing I, Trust Originated Preferred Securities by $30 million.
OTHER: 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.
On April 1, 2002, Consumers established a new subsidiary, Consumers Receivable
Funding. This consolidated subsidiary was established to sell accounts
receivable purchased from Consumers to an unrelated third party under a trade
receivables sale program. Prior to the establishment of Consumers Receivable
Funding, Consumers sold its accounts receivable directly to an unrelated third
party. Consumers, through Consumers Receivable Funding, currently has in place a
$325 million trade receivables sale program. At September 30, 2002 and 2001, the
receivables sold totaled $325 million for each year. During 2002, $248 million
cash proceeds were received under the trade receivables sale program. Accounts
receivable and accrued revenue in the Consolidated Balance Sheets have been
reduced to reflect receivables sold.
DERIVATIVE ACTIVITIES: Consumers uses interest rate swaps to hedge the risk
associated with forecasted interest payments on variable rate debt. These
interest rate swaps are designated as cash flow hedges. As such, Consumers will
record any change in the fair value of these contracts in other comprehensive
income unless the swap is sold. As of September 30, 2002, Consumers had entered
into a swap to fix the interest rate on $75 million of variable rate debt. This
swap will expire in June 2003. As of September 30, 2002, this interest rate swap
had a negative fair value of $2 million. This amount, if sustained, will be
reclassified to earnings, increasing interest expense when the swaps are settled
on a monthly basis. As of September 30, 2001, Consumers had entered into swaps
to fix the interest rate on $150 million of variable rate debt. The swaps
expired at varying times from June through December 2001. As of September 30,
2001, these interest rate swaps had a negative fair value of $4 million.
Consumers also uses interest rate swaps to hedge the risk associated with the
fair value of its debt. These interest rate swaps are designated as fair value
hedges. In March 2002, Consumers entered into a fair value hedge to hedge the
risk associated with the fair value of $300 million of fixed rate debt, issued
in March 2002. In June 2002, this swap was terminated and resulted in a $7
million gain that is deferred and recorded as part of the debt. It is
anticipated that this gain will be recognized over the remaining life of the
debt.
As of September 2001, Consumers had entered into interest rate swaps to hedge
the risk associated with the fair value of $400 million of fixed rate debt,
which expire in May 2003 and December 2006. As of September 30, 2001, these
interest rate swaps had a fair value of $1 million. Subsequently in November
2001, these
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Consumers Energy Company
swaps were terminated and resulted in a $4 million gain that will be deferred
and recorded as part of the debt. It is anticipated that this gain will be
recognized over the remaining life of the debt.
During the third quarter 2001, Consumers entered into fair value hedges to hedge
the risk associated with the fair value of $250 million of debt. These swaps
terminated in the third quarter 2001, and resulted in a $4 million gain that has
been deferred and recorded as part of the debt. It is anticipated that this gain
will be recognized over the remaining life of the debt.
In September 2001, Consumers entered into a cash flow hedge to fix the interest
rate on $100 million of debt to be issued. In September 2001, the swap
terminated and resulted in a $2 million loss that was recorded in other
comprehensive income and will be amortized to interest expense over the life of
the debt using the effective interest method.
4: RESTATEMENT
In April 2002, Consumers' Board of Directors, upon the recommendation of the
Audit Committee of the Board, voted to discontinue using Arthur Andersen to
audit Consumers' financial statements for the year ending December 31, 2002.
Consumers previously retained Arthur Andersen to review its financial statements
for the quarter ended March 31, 2002. In May 2002, Consumers' Board of Directors
engaged Ernst & Young to audit its 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, Arthur Andersen notified CMS Energy
that Arthur Andersen's historical opinions on CMS Energy's financial statements
for the fiscal years ended December 31, 2001 and December 31, 2000 could not be
relied upon. 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 for the
applicable years, the re-audit did include audit work at Consumers for these
years.
In connection with Ernst & Young's re-audit of the fiscal years ended December
31, 2001 and December 31, 2000, Consumers has made, in consultation with Ernst &
Young, certain adjustments 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, Consumers believed that such accounting was
appropriate under generally accepted accounting principles and Arthur Andersen
concurred.
The audit adjustments: 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; and 2) recognize Consumers' new headquarters
lease as a capital lease, instead of an operating lease, and record the lease
obligation and capitalize costs incurred. Each of these transactions involved
estimates, assumptions, and judgment based on the best information available at
the time the transactions occurred. The audit adjustments reflect current
judgment on these matters. In addition, the audit adjustments recognize
immaterial reconciling adjustments to advertising costs, Consumers' OPEB
liability and related party receivables and payables. Consumers has also made an
additional adjustment associated with its financial statements as of September
30, 2002. This additional adjustment by Consumers recognizes the $29 million
federal income tax sharing allocation from CMS Energy as a dividend to be paid
by Consumers to CMS Energy instead of income tax expense as originally recorded
in September 2002.
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Consumers Energy Company
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 statement 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 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)
--------------------------------------------------------------------------------------------------------------
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Consumers Energy Company
The following table reflects all audit and other adjustments by quarter for the
income statement including a non-re-audit adjustment by Consumers reclassifying
SERP unrealized losses to realized losses and an income tax adjustment during
the period ended September 30, 2002:
-------------------------------------------------------------------------------------------------------------------
In Millions (Unaudited)
-------------------------------------------------------------------------------------------------------------------
2002 2001
Quarters Ended March 31 June 30 Sept. 30 March 31 June 30 Sept. 30 Dec. 31
-------------------------------------------------------------------------------------------------------------------
Operating expenses $1,049 $748 $752 $1,006 $765 $953 $945
MCV PPA Adjustment (.5) - - (4) (4) (130) -
Advertising Expense - - - - - - 1
Intercompany items (.5) - (1) 1 - - -
Other - 1 - - - - -
Restated operating expenses $1,048 $749 $751 $1,003 $761 $823 $946
-------------------------------------------------------------------------------------------------------------------
Pretax operating income $187 $179 $169 $213 $108 $(53) $77
MCV PPA Adjustment .5 - 4 4 130 -
Advertising Expense - - - - - - (1)
Intercompany items .5 (1) - (1) - - -
Other - - 1 - - - -
Restated Pretax operating
Income $188 $178 $170 $216 $112 $77 $76
-------------------------------------------------------------------------------------------------------------------
Other income $(1) $36 $- $2 $- $- $(1)
MCV PPA Adjustment 1 2 3 (1) - - 1
Intercompany items (2) (1) - - 1 - (1)
SERP - (1) (3) - - - -
Restated other income $(2) $36 $- $1 $1 $- $(1)
-------------------------------------------------------------------------------------------------------------------
Income before taxes $146 $179 $126 $168 $63 $(102) $31
MCV PPA Adjustment - 2 3 4 4 130 -
Advertising Expense - - - - - - (1)
Intercompany items - (2) 1 (2) (1) 1 1
SERP - (1) (3) - - - -
Restated income before taxes $146 $178 $127 $170 $66 $29 $31
-------------------------------------------------------------------------------------------------------------------
Income (loss) before
cumulative effect of change
in accounting principle $92 $124 $55 $107 $43 $(62) $23
MCV PPA Adjustment - 2 2 2 2 85 1
Intercompany items - (1) 1 (1) - - (1)
SERP - (1) (2) - - - -
Income Tax - - 29 - - - -
Restated income (loss) before
cumulative effect of change
in accounting principle $92 $124 $85 $108 $45 $23 $23
------------------------------------------------------------------------------------------------------------------
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Consumers Energy Company
-------------------------------------------------------------------------------------------------------------------
In Millions (Unaudited)
-------------------------------------------------------------------------------------------------------------------
2002 2001
Quarters Ended March 31 June 30 Sept. 30 March 31 June 30 Sept. 30 Dec. 31
-------------------------------------------------------------------------------------------------------------------
Net income (loss) $92 $124 $55 $107 $43 $(62) $12
MCV PPA Adjustment - 2 2 2 2 85 1
Intercompany items - (1) 1 (1) - - (1)
SERP - (1) (2) - - - -
Income Tax - - 29 - - - -
Restated net income (loss) $92 $124 $85 $108 $45 $23 $12
-------------------------------------------------------------------------------------------------------------------
Net income (loss)
available to
common stockholder $81 $113 $44 $98 $33 $(74) $-
MCV PPA Adjustment - 2 2 2 2 85 1
Intercompany items - (1) 1 (1) - - (1)
SERP - (1) (2) - - - -
Income Tax - - 29 - - - -
Restated net income (loss)
available to
common stockholder $81 $113 $74 $99 $35 $11 $-
-------------------------------------------------------------------------------------------------------------------
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Consumers Energy Company
The following tables reflect the effects the audit adjustments have on Consumers
consolidated financial statements for the quarterly periods ended September 30,
2002 and 2001:
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) IN MILLIONS
-------------------------------------------------------------------------------------------------------------------------
Three Months Ended Three Months Ended
------------------ ------------------
2002 2001
---- ----
September 30 As Reported As Restated As Reported As Restated
-------------------------------------------------------------------------------------------------------------------------
OPERATING REVENUES
Electric $776 $775 $739 $739
Gas 134 135 149 150
Total Operating Revenue 921 921 899 900
OPERATING EXPENSES
Loss on MCV power purchases - - 126 -
Other 183 182 154 151
Total Operating Expenses 752 751 952 823
PRETAX OPERATING INCOME (LOSS)
Electric 175 175 (62) 69
Gas (15) (14) (1) (1)
Other 9 9 10 9
Total Pretax Operating Income (Loss) 169 170 (53) 77
OTHER INCOME (DEDUCTIONS)
Accretion expense (2) (1) (2) (2)
Other, net 2 1 - -
INCOME (LOSS) BEFORE INCOME TAXES 126 127 (101) 29
INCOME TAXES (BENEFITS) 71 42 (39) 6
NET INCOME (LOSS) 55 85 (62) 23
NET INCOME (LOSS) AVAILABLE TO COMMON STOCKHOLDER $44 $74 $(74) $11
-------------------------------------------------------------------------------------------------------------------------
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Consumers Energy Company
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) IN MILLIONS
------------------------------------------------------------------------------------------------------------------------
Nine Months Ended Nine Months Ended
------------------ ------------------
2002 2001
---- ----
September 30 As Reported As Restated As Reported As Restated
------------------------------------------------------------------------------------------------------------------------
OPERATING REVENUE
Electric $2,016 $2,015 $2,028 $2,028
Total Operating Revenue 3,084 3,083 2,992 2,992
OPERATING EXPENSES
Loss on MCV power purchases - - 126 -
Other 488 487 456 445
Total Operating Expenses 2,549 2,548 2,724 2,587
PRETAX OPERATING INCOME
Electric 406 406 157 294
Gas 68 68 81 80
Other 61 61 30 31
Total Pretax Operating Income 535 535 268 405
OTHER INCOME (DEDUCTIONS)
Accretion expense (7) (4) (6) (8)
Other, net 39 37 2 2
Total Other Income 34 35 2 -
INCOME BEFORE INCOME TAXES 450 451 129 264
INCOME TAXES 179 150 41 88
NET INCOME 271 301 88 176
NET INCOME AVAILABLE TO COMMON STOCKHOLDER $237 $267 $57 $145
------------------------------------------------------------------------------------------------------------------------
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Consumers Energy Company
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) IN MILLIONS
-------------------------------------------------------------------------------------------------------------------------
Nine Months Ended Nine Months Ended
------------------ ------------------
2002 2001
---- ----
September 30 As Reported As Restated As Reported As Restated
-------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $271 $301 $88 $176
Loss on power purchase agreement - MCV Partnership - - 126 -
Deferred income taxes and investment tax credit (20) (18) 1 58
Undistributed earnings of related parties (48) (48) (25) (10)
Decrease in accounts receivable and accrued revenue 97 98 251 257
Increase (decrease) in accounts payable (72) (79) 15 12
Changes in other assets and liabilities - (26) (53) (90)
CASH AND TEMPORARY CASH INVESTMENTS - BEGINNING OF 16 17 21 21
PERIOD
CASH AND TEMPORARY CASH INVESTMENTS - END OF PERIOD $124 $125 $24 $24
OTHER CASH FLOW ACTIVITIES AND NON-CASH INVESTING AND FINANCING
ACTIVITIES:
Cash transactions
Income taxes paid (net of refunds) 87 83 - -
NON-CASH TRANSACTIONS
Other assets placed under capital lease $65 $50 $15 $23
-------------------------------------------------------------------------------------------------------------------------
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Consumers Energy Company
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
Other $66 $22 $23 $23 $16 $16
Gross Plant 10,262 10,218 10,277 10,277 10,095 10,095
Less accumulated depreciation,
depletion and amortization 5,855 5,856 5,934 5,934 5,873 5,873
Plant, net 4,407 4,362 4,343 4,343 4,222 4,222
Construction work-in-progress 419 463 464 480 416 424
Total Plant 4,826 4,825 4,807 4,823 4,638 4,646
CURRENT ASSETS
Cash and temporary
cash investments 124 125 16 17 24 24
Accounts receivable and accrued
revenue 36 36 125 125 22 21
Accounts receivable -
related parties 18 18 17 18 13 14
Inventories at average cost
Materials and supplies 71 71 69 69 70 72
Generating plant fuel stock 49 49 52 52 50 49
Deferred property taxes 82 82 144 144 86 84
Other 27 27 14 14 12 13
Total Current Assets 1,027 1,028 1,025 1,027 899 899
NON-CURRENT ASSETS
Regulatory Assets - Other 173 173 167 167 89 169
Other 116 108 176 173 265 182
Total Non-current Assets 1,720 1,712 1,862 1,859 1,858 1,855
TOTAL ASSETS $8,214 $8,206 $8,306 $8,321 $7,994 $7,999
-------------------------------------------------------------------------------------------------------------------------
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Consumers Energy Company
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
-------------------------------------------------------------------------------------------------------------------------
STOCKHOLDER'S INVESTMENT AND
LIABILITIES
CAPITALIZATION
Common stockholder's equity
Retained earnings since
December 31, 1992 $456 $525 $373 $441 $373 $441
Total common stockholder's
equity 1,971 2,040 1,850 1,918 2,006 2,074
Non-current portion of
capital leases 110 110 56 72 53 61
Total Capitalization 5,316 5,385 4,942 5,026 5,075 5,151
CURRENT LIABILITIES
Note payable 235 235 416 416 155 153
Accounts payable 213 212 291 282 258 247
Accrued taxes 192 162 219 214 115 115
Accounts payable - related parties 83 85 80 96 78 90
Notes payable - related parties - - - - - 2
Current portion of purchase power
contracts - 22 - 24 - 22
Deferred income taxes 17 18 12 12 17 14
Other 239 253 260 247 319 306
Total Current Liabilities 1,203 1,211 1,535 1,548 1,193 1,200
NON-CURRENT LIABILITIES
Deferred income taxes 714 752 747 784 668 707
Postretirement benefits 227 224 279 276 294 292
Power purchase agreement -
MCV Partnership 150 30 169 52 175 61
Other 230 230 256 257 215 214
Total Non-current Liabilities
1,695 1,610 1,829 1,747 1,726 1,648
TOTAL STOCKHOLDER'S INVESTMENT AND
LIABILITIES $8,214 $8,206 $8,306 $8,321 $7,994 $7,999
-------------------------------------------------------------------------------------------------------------------------
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Consumers Energy Company
CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDER'S EQUITY (UNAUDITED) IN MILLIONS
------------------------------------------------------------------------------------------------------------------------
Three Months Ended 2002 Three Months Ended 2001
----------------------- -----------------------
September 30 As Reported As Restated As Reported As Restated
------------------------------------------------------------------------------------------------------------------------
OTHER COMPREHENSIVE INCOME
Investments
At beginning of period $(2) $(5) $26 $26
Unrealized loss on investments (7) (4) (15) (15)
RETAINED EARNINGS
At beginning of period 412 480 541 524
Net income (loss) 55 85 (62) 23
Cash dividends declared- Common Stock - (29) (94) (94)
At end of period 456 525 373 441
Total Common Stockholder's Equity $1,971 $2,040 $2,006 $2,074
------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDER'S EQUITY (UNAUDITED) IN MILLIONS
------------------------------------------------------------------------------------------------------------------------
Nine Months Ended 2002 Nine Months Ended 2001
---------------------- ----------------------
September 30 As Reported As Restated As Reported As Restated
------------------------------------------------------------------------------------------------------------------------
RETAINED EARNINGS
At beginning of period $373 $441 $506 $486
Net income 271 301 88 176
Cash dividends declared- Common Stock (154) (183) (190) (190)
At end of period 456 525 373 441
Total Common Stockholder's Equity $1,971 $2,040 $2,006 $2,074
------------------------------------------------------------------------------------------------------------------------
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
================================================================================================================
5: SUBSEQUENT EVENTS
Subsequent to November 14, 2002, the date of filing Consumers' Form 10-Q for the
third quarter 2002, a number of material events have occurred. Below is a
summary of these events:
CHANGE IN EXECUTIVE OFFICERS: Subsequent to March 1, 2002, certain changes have
occurred in Consumers' executive officers. On May 24, 2002, the Board of
Directors of Consumers elected Kenneth Whipple as Chairman of the Board and
Chief Executive Officer; on June 27, 2002, S. Kinnie Smith, Jr. was elected Vice
Chairman of the Board; on July 22, 2002, Thomas J. Webb was elected Executive
Vice President and Chief
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Consumers Energy Company
Financial Officer; on August 2, 2002, John F. Drake was elected Senior Vice
President and on December 6, 2002, Michael T. Monahan and Joseph F. Paquette,
Jr. joined the Board of Directors of Consumers.
NEW ACCOUNTING STANDARDS
SFAS NO. 143, ACCOUNTING FOR ASSET RETIREMENT OBLIGATIONS: Beginning January 1,
2003, companies must comply with SFAS No. 143. The standard requires companies
to record the fair value of the legal obligations related to an asset retirement
in the period in which it is incurred. 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 initial liability is
accreted to its present value each period and the capitalized cost is
depreciated over the related asset's useful life. Consumers has determined that
it has some legal asset retirement obligations, particularly in regard to its
nuclear plants, but has not as yet finalized its assessment of the obligation.
Once Consumers' assessment is finalized, its removal cost estimate will be
determined based on fair value cost estimates as required by the new standard.
The fair value of the legal retirement obligations will be present valued and
used to quantify the 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 in April 2002,
this standard rescinds SFAS No. 4, Reporting Gains and Losses from
Extinguishment of Debt, and SFAS No. 64, Extinguishment of Debt Made to Satisfy
Sinking-Fund Requirements. As a result, any gain or loss on extinguishment of
debt should be classified as an extraordinary item only if it meets the criteria
set forth in APB Opinion No. 30. The provisions of this section are applicable
to fiscal years beginning 2003. SFAS No. 145 amends SFAS No. 13, Accounting for
Leases, to require sale-leaseback accounting for certain lease modifications
that have similar economic impacts to sale-leaseback transactions. This
provision is effective for transactions occurring after May 15, 2002. Finally,
SFAS No. 145 amends other existing authoritative pronouncements to make various
technical corrections and rescinds SFAS No. 44, Accounting for Intangible Assets
of Motor Carriers. These provisions are effective for financial statements
issued on or after May 15, 2002. Upon adoption of the standard, there was no
impact on Consumers' financial statements.
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.
There will be no impact on Consumers' financial statements upon adoption of the
standard.
SFAS NO, 148, ACCOUNTING FOR STOCK-BASED COMPENSATION - TRANSITION AND
DISCLOSURE: Issued by the FASB in December 2002, this standard provides for
alternative methods of transition for a voluntary change to the fair value based
method of accounting for stock-based employee compensation. In addition, the
statement amends the disclosure requirements of SFAS No. 123 to require more
prominent and more frequent disclosures in financial statements about the
effects of stock-based compensation. The transition guidance and annual
disclosure provisions of the statement are effective as of December 31, 2002 and
interim disclosure provisions are effective for interim financial reports
starting in 2003. Consumers has decided to voluntarily adopt the fair value
based method of accounting for stock-based employee compensation effective
December 31, 2002, applying the prospective method of adoption which requires
recognition of all employee awards granted, modified, or settled after the
beginning of the year in which the recognition provisions are first applied.
Therefore, Consumers recorded expense for the fair value of stock options issued
in 2002. The implementation had an immaterial effect on Consumers' financial
statements upon adoption of the method.
FASB INTERPRETATION NO. 45, GUARANTOR'S ACCOUNTING AND DISCLOSURE REQUIREMENT
FOR GUARANTEES, INCLUDING INDIRECT GUARANTEES OF INDEBTEDNESS OF OTHERS: Issued
by the FASB in November 2002, the interpretation elaborates on existing
disclosures requirements for most guarantees, and clarifies that at the time
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Consumers Energy Company
a company issues a guarantee, the company must recognize an initial liability
for the fair value, or market value, of the obligations it assumes under that
guarantee and must disclose that information in its interim and annual financial
statements. The interpretation is effective for guarantees issued or modified
after December 31, 2002. Consumers would be required to recognize a liability
for any guarantees it may issue on or after January 1, 2003, but will not change
the accounting for guarantees it may have issued before that date.
FASB INTERPRETATION NO. 46, CONSOLIDATION OF VARIABLE INTEREST ENTITIES: Issued
by the FASB in January 2003, the interpretation expands upon and strengthens
existing accounting guidance that addresses when a company should include in its
financial statements the assets, liabilities and activities of another entity.
The consolidation requirements of the interpretation apply immediately to
variable interest entities created after January 31, 2003. For Consumers, the
consolidation requirements apply to older entities beginning July 1, 2003.
Certain of the disclosure requirements apply to all financial statements
initially issued after January 31, 2003. Consumers will be required to
consolidate any entities that meet the requirements of the interpretation.
Consumers is in the process of studying the interpretation, and has yet to
determine the effects, if any, on its consolidated financial statements.
ELECTRIC CONTINGENCIES
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.
ELECTRIC RATE MATTERS
ELECTRIC RESTRUCTURING: The Customer Choice Act requires Consumers, Detroit
Edison and American Electric Power to jointly expand their available
transmission capability by at least 2,000 MW. In July 2002, the MPSC issued an
order approving the plan to achieve the increased transmission capacity. In
November 2002, Consumers completed the transmission capacity projects identified
in the plan and in December 2002, submitted verification of this fact to the
MPSC. Consumers believes it is in full compliance with the requirement to expand
available transmission capability.
ELECTRIC PROCEEDINGS: In December 2002, the MPSC issued an order finding that
Consumers experienced zero stranded costs in 2000 and 2001, but declined to
establish a defined methodology that would allow a reliable prediction of the
level of stranded costs for 2002 and future years. In January 2003, Consumers
filed a petition for rehearing of the December 2002 stranded cost order in which
it asked the MPSC to grant a rehearing and revise certain features of the order.
Several other parties also filed rehearing petitions with the MPSC. The request
for regulatory asset accounting treatment for Clean Air Act expenditures remains
pending before the MPSC.
On March 4, 2003, Consumers filed an application with the MPSC seeking approval
of net stranded costs incurred in 2002, and for approval of a net stranded cost
recovery charge. In the application, Consumers indicated that if Consumers'
proposal to securitize Clean Air Act expenditures and post-2000 Palisades
expenditures were approved as proposed in its securitization case as discussed
below, then Consumers' net stranded costs incurred in 2002 are approximately $35
million. If the proposal to securitize those costs is not approved, then
Consumers indicated that the costs would be properly included in the 2002 net
stranded cost calculation, which would increase Consumers' 2002 net stranded
costs to approximately $103 million.
SECURITIZATION: On March 4, 2003, Consumers filed an application with the MPSC
seeking approval to issue additional securitization bonds in the amount of
approximately $1.084 billion. If approved, this would allow the recovery of
costs associated with Clean Air Act expenditures, post-2000 Palisades
expenditures, retail open access implementation costs, electric pension fund
costs, and expenses associated with the issuance of the bonds and retirement of
existing Consumers' debt. Consumers will use the proceeds from securitization
for refinancing or retirement of debt.
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Consumers Energy Company
NUCLEAR MATTERS: As of February 2003, Big Rock completed five of the seven dry
fuel storage canister loadings. The Price-Anderson Act expired in August 2002
but remained in effect for existing nuclear facilities. In February 2003,
Congress approved the extension of the Price-Anderson Act to expire on December
31, 2003.
OTHER ELECTRIC UNCERTAINTIES
CAPITAL EXPENDITURES: In 2002, 2003, and 2004, Consumers estimates electric
capital expenditures, including new lease commitments and environmental costs
under the Clean Air Act, of $436 million, $341 million, and $408 million.
GAS RATE MATTERS
GAS RATE CASE: On November 7, 2002, the MPSC issued a final order approving a
$56 million annual gas distribution service rate increase, which includes the
$15 million interim increase, with an 11.4 percent authorized return on equity,
effective for service November 8, 2002. As part of this order, the MPSC approved
Consumers' proposal to absorb the assets and liabilities of Michigan Gas Storage
Company into Consumers' rate base and rates. This has occurred through a
statutory merger of Michigan Gas Storage Company into Consumers and this is not
expected to have an impact on Consumers' consolidated financial statements.
On March 14, 2003, Consumers filed an application with the MPSC seeking an
increase in its gas delivery and transportation rates based on a 2004 test year.
If approved, the request would add about $6.40 per month, or about 9 percent, to
the typical residential customers' average monthly distribution bill. Consumers
is seeking a 13.5 percent authorized return on equity along with a $156 million
revenue deficiency. Contemporaneously with this filing, Consumers has requested
interim rate relief in the same amount.
OTHER GAS UNCERTAINTIES
CAPITAL EXPENDITURES: In 2002, 2003, and 2004, Consumers estimates gas capital
expenditures, including new lease commitments, of $181 million, $144 million,
and $167 million.
OTHER UNCERTAINTIES
PENSION: The recent significant downturn in the equities markets has affected
the value of the Pension Plan's assets. The estimated fair value of the Pension
Plan's assets at December 31, 2002 was $607 million. The Accumulated Benefit
Obligation was estimated at $1.055 billion. The Pension Plan's Accumulated
Benefit Obligation exceeded the value of these assets at December 31, 2002, and
as a result, Consumers and the other participants of the plan were required to
recognize an additional minimum liability for this excess in accordance with
SFAS No. 87. As of December 31, 2002, the additional minimum liability allocated
to Consumers was $325 million, of which $40 million was recorded as an
intangible asset, and $285 million was charged to other comprehensive income
($185 million after-tax).
PENSION AND OPEB PLAN ASSETS: As of December 31, 2001, the balance of Pension
Plan and OPEB plan assets was $845 million and $475 million, respectively. These
amounts consisted primarily of stocks and bonds, including CMS Energy Common
Stock of $126 million in the Pension Plan's assets and $3 million in the OPEB
plan's assets at December 31, 2001. As of January 31, 2003, the market value of
CMS Energy Common Stock in these plans was $30 million in the Pension Plan and
$1 million in the OPEB plan.
-84-
Consumers Energy Company
SHORT-TERM FINANCINGS AND CAPITALIZATION
RESTATEMENT: As a result of the restatement, ratings downgrades and related
changes in its financial situation, Consumers' access to bank financing and the
capital markets and its ability to incur additional indebtedness may be
restricted. In the event Consumers is unable to access bank financing or the
capital markets to incur or refinance indebtedness, there could be a material
adverse effect on Consumers' liquidity and operations. In such event, it would
be required to consider the full range of strategic measures available to
companies in similar circumstances.
FINANCING: 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. In November 2002, Consumers paid $80 million on the gas inventory
loan and drew $85 million under the term loan agreement. The bank and legal fees
associated with the agreements was $2 million. The first amortization payment
under these agreements occurred in December 2002 with monthly amortization
payments scheduled until full repayment is completed in mid-April of 2003. This
financing eliminated the need for Consumers to access the capital markets for
the remainder of 2002.
OTHER: 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. However, due to dividend restrictions included as part of an
agreement with its lenders, Consumers' dividends are not to exceed $300 million
in any calendar year. Consumers declared and paid $233 million in common stock
dividends in 2002, including the $25 million tax sharing allocation from CMS
Energy.
-85-
Consumers Energy Company
6: RESTATED FINANCIAL STATEMENTS FOR FIRST AND SECOND QUARTERS
CONSUMERS ENERGY COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(AS RESTATED, SEE NOTE 4)
THREE MONTHS ENDED
MARCH 31 2002 2001
----------------------------------------------------------------------------------------------------------------
In Millions
OPERATING REVENUE
Electric $ 609 $ 665
Gas 616 540
Other 11 14
--------------------
1,236 1,219
----------------------------------------------------------------------------------------------------------------
OPERATING EXPENSES
Operation
Fuel for electric generation 67 71
Purchased power - related parties 141 118
Purchased and interchange power 61 112
Cost of gas sold 396 318
Cost of gas sold - related parties 30 31
Other 139 139
--------------------
834 789
Maintenance 50 55
Depreciation, depletion and amortization 107 104
General taxes 57 55
--------------------
1,048 1,003
----------------------------------------------------------------------------------------------------------------
PRETAX OPERATING INCOME
Electric 115 139
Gas 64 64
Other 9 13
--------------------
188 216
----------------------------------------------------------------------------------------------------------------
OTHER INCOME (DEDUCTIONS)
Dividends and interest from affiliates 1 2
Accretion expense (2) (2)
Other, net (1) 1
--------------------
(2) 1
----------------------------------------------------------------------------------------------------------------
INTEREST CHARGES
Interest on long-term debt 33 38
Other interest 9 10
Capitalized interest (2) (1)
---------------------
40 47
----------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 146 170
INCOME TAXES 54 62
--------------------
NET INCOME 92 108
PREFERRED STOCK DIVIDENDS - -
PREFERRED SECURITIES DISTRIBUTIONS 11 9
--------------------
NET INCOME AVAILABLE TO COMMON STOCKHOLDER $ 81 $ 99
================================================================================================================
THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
-86-
Consumers Energy Company
CONSUMERS ENERGY COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(AS RESTATED, SEE NOTE 4)
THREE MONTHS ENDED
MARCH 31 2002 2001
----------------------------------------------------------------------------------------------------------------
In Millions
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 92 $ 108
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation, depletion and amortization (includes nuclear
decommissioning of $2 and $2, respectively) 107 104
Deferred income taxes and investment tax credit 31 12
Capital lease and other amortization 3 8
Undistributed earnings of related parties (10) (13)
Changes in assets and liabilities
Decrease (increase) in accounts receivable and accrued revenue (54) 230
Increase (decrease) in accounts payable (32) (11)
Decrease (increase) in inventories 193 123
Regulatory obligation - gas customer choice (7) (16)
Changes in other assets and liabilities (53) (66)
---------------------
Net cash provided by operating activities 270 479
----------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (excludes assets placed under capital lease) (142) (183)
Cost to retire property, net (15) (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
---------------------
Net cash used in investing activities (154) (204)
----------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Retirement of bonds and other long-term debt (344) --
Increase (decrease) in notes payable, net (109) (203)
Payment of common stock dividends (55) (66)
Redemption of preferred securities (30) --
Preferred securities distributions (11) (9)
Payment of capital lease obligations (3) (8)
Payment of preferred stock dividends (1) --
Stockholder's contribution 150 --
Proceeds from senior notes and bank loans 298 --
---------------------
Net cash used in financing activities (105) (286)
----------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND TEMPORARY CASH INVESTMENTS 11 (11)
CASH AND TEMPORARY CASH INVESTMENTS, BEGINNING OF PERIOD 17 21
---------------------
CASH AND TEMPORARY CASH INVESTMENTS, END OF PERIOD $ 28 $ 10
================================================================================================================
OTHER CASH FLOW ACTIVITIES AND NON-CASH INVESTING AND FINANCING ACTIVITIES WERE:
CASH TRANSACTIONS
Interest paid (net of amounts capitalized) $ 31 $ 47
Income taxes paid (net of refunds) -- --
NON-CASH TRANSACTIONS
Nuclear fuel placed under capital lease $ -- $ 2
Other assets placed under capital leases 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.
-87-
Consumers Energy Company
CONSUMERS ENERGY COMPANY
CONSOLIDATED BALANCE SHEETS
(AS RESTATED, SEE NOTE 4)
ASSETS MARCH 31 MARCH 31
2002 DECEMBER 31 2001
(UNAUDITED) 2001 (UNAUDITED)
---------------------------------------------------------------------------------------------------------------
In Millions
PLANT (AT ORIGINAL COST)
Electric $ 7,733 $ 7,661 $ 7,298
Gas 2,625 2,593 2,524
Other 21 23 21
---------------------------------------
10,379 10,277 9,843
Less accumulated depreciation, depletion and amortization 6,022 5,934 5,802
---------------------------------------
4,357 4,343 4,041
Construction work-in-progress 532 480 390
---------------------------------------
4,889 4,823 4,431
----------------------------------------------------------------------------------------------------------------
INVESTMENTS
Stock of affiliates 56 59 80
First Midland Limited Partnership 257 253 248
Midland Cogeneration Venture Limited Partnership 316 300 302
---------------------------------------
629 612 630
----------------------------------------------------------------------------------------------------------------
CURRENT ASSETS
Cash and temporary cash investments at cost, which approximates market 28 17 10
Accounts receivable and accrued revenue, less allowances
of $4, $4 and $3, respectively 183 125 43
Accounts receivable - related parties 15 18 68
Inventories at average cost
Gas in underground storage 378 569 143
Materials and supplies 69 69 67
Generating plant fuel stock 50 52 50
Deferred property taxes 120 144 113
Regulatory assets 19 19 19
Other 18 14 24
---------------------------------------
880 1,027 537
----------------------------------------------------------------------------------------------------------------
NON-CURRENT ASSETS
Regulatory assets
Securitization costs 714 717 709
Postretirement benefits 203 209 226
Abandoned Midland Project 11 12 15
Other 171 167 162
Nuclear decommissioning trust funds 576 581 585
Other 154 173 217
---------------------------------------
1,829 1,859 1,914
----------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 8,227 $ 8,321 $ 7,512
================================================================================================================
-88-
Consumers Energy Company
(AS RESTATED, SEE NOTE 4)
STOCKHOLDERS' INVESTMENT AND LIABILITIES MARCH 31 MARCH 31
2002 DECEMBER 31 2001
(UNAUDITED) 2001 (UNAUDITED)
---------------------------------------------------------------------------------------------------------------
In Millions
CAPITALIZATION
Common stockholder's equity
Common stock $ 841 $ 841 $ 841
Paid-in capital 782 632 646
Other comprehensive income 9 4 29
Retained earnings since December 31, 1992 467 441 519
---------------------------------------
2,099 1,918 2,035
Preferred stock 44 44 44
Company-obligated mandatorily redeemable preferred securities
of subsidiaries (a) 490 520 395
Long-term debt 2,433 2,472 2,097
Non-current portion of capital leases 85 72 51
----------------------------------------
5,151 5,026 4,622
----------------------------------------------------------------------------------------------------------------
CURRENT LIABILITIES
Current portion of long-term debt and capital leases 253 257 243
Notes payable 150 416 170
Notes payable- CMS Energy 157 - 30
Accounts payable 249 282 236
Accrued taxes 161 214 216
Accounts payable - related parties 97 96 77
Deferred income taxes 23 12 -
Current portion of purchased power contracts 24 24 22
Other 234 247 221
---------------------------------------
1,348 1,548 1,215
----------------------------------------------------------------------------------------------------------------
NON-CURRENT LIABILITIES
Deferred income taxes 808 784 701
Postretirement benefits 239 276 351
Regulatory liabilities for income taxes, net 276 276 260
Power purchase agreement - MCV Partnership 47 52 72
Deferred investment tax credit 100 102 107
Other 258 257 184
---------------------------------------
1,728 1,747 1,675
----------------------------------------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES (Notes 1 and 2)
TOTAL STOCKHOLDERS' INVESTMENT AND LIABILITIES $8,227 $8,321 $7,512
================================================================================================================
(a) See Note 3, Short-Term Financings and Capitalization
THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE BALANCE SHEETS.
-89-
Consumers Energy Company
CONSUMERS ENERGY COMPANY
CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDER'S EQUITY
(UNAUDITED)
(AS RESTATED, SEE NOTE 4)
THREE MONTHS ENDED
MARCH 31 2002 2001
-------------------------------------------------------------------------------------------------------------------------------
In Millions
COMMON STOCK
At beginning and end of period (a) $ 841 $ 841
-------------------------------------------------------------------------------------------------------------------------------
OTHER PAID-IN CAPITAL
At beginning of period 632 646
Stockholder's contribution 150 --
--------------------------
At end of period 782 646
-------------------------------------------------------------------------------------------------------------------------------
OTHER COMPREHENSIVE INCOME
Investments
At beginning of period 16 33
Unrealized loss on investments (b) (3) (5)
--------------------------
At end of period 13 28
--------------------------
Derivative Instruments
At beginning of period (c) (12) 21
Unrealized gain (loss) on derivative instruments (b) 5 (13)
Reclassification adjustments included in net income (b) 3 (7)
--------------------------
At end of period (4) 1
-------------------------------------------------------------------------------------------------------------------------------
RETAINED EARNINGS
At beginning of period 441 486
Net income (b) 92 108
Cash dividends declared- Common Stock (55) (66)
Cash dividends declared- Preferred Stock -- --
Preferred securities distributions (11) (10)
--------------------------
At end of period 467 518
-------------------------------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCKHOLDER'S EQUITY $ 2,099 $ 2,035
===============================================================================================================================
(a) Number of shares of common stock outstanding was 84,108,789 for all periods presented.
(b) Disclosure of Comprehensive Income:
Other comprehensive income
Investments
Unrealized loss on investments, net of tax of
$2 and $3, respectively $ (3) $ (5)
Derivative Instruments
Unrealized gain (loss) on derivative instruments,
net of tax of $(3) and $7, respectively 5 (13)
Reclassification adjustments included in net income,
net of tax of $(1) and $4, respectively 3 (7)
Net income 92 108
--------------------------
Total Comprehensive Income $ 97 $ 83
==========================
(c) Three Months Ended 2001 is the cumulative effect of change in accounting
principle, net of $(11) tax (Note 1)
THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
-90-
Consumers Energy Company
CONSUMERS ENERGY COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(AS RESTATED, SEE NOTE 4)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 2002 2001 2002 2001
----------------------------------------------------------------------------------------------------------------
In Millions
OPERATING REVENUE
Electric $ 631 $ 624 $1,240 $1,289
Gas 252 239 868 779
Other 44 10 55 25
------------------------------------------------
927 873 2,163 2,093
----------------------------------------------------------------------------------------------------------------
OPERATING EXPENSES
Operation
Fuel for electric generation 71 77 138 148
Purchased power - related parties 133 126 273 244
Purchased and interchange power 72 102 133 214
Cost of gas sold 113 112 508 430
Cost of gas sold - related parties 31 29 62 60
Other 166 155 306 294
------------------------------------------------
586 601 1,420 1,390
Maintenance 48 50 98 106
Depreciation, depletion and amortization 71 67 179 171
General taxes 44 43 101 98
------------------------------------------------
749 761 1,798 1,765
----------------------------------------------------------------------------------------------------------------
PRETAX OPERATING INCOME (LOSS)
Electric 116 87 231 226
Gas 19 17 82 81
Other 43 8 52 21
------------------------------------------------
178 112 365 328
----------------------------------------------------------------------------------------------------------------
OTHER INCOME (DEDUCTIONS)
Dividends and interest from affiliates 1 2 2 4
Accretion expense (1) (2) (3) (5)
Other, net 36 1 36 1
------------------------------------------------
36 1 35 -
----------------------------------------------------------------------------------------------------------------
INTEREST CHARGES
Interest on long-term debt 37 37 70 76
Other interest 2 12 11 20
Capitalized interest (3) (2) (5) (4)
------------------------------------------------
36 47 76 92
----------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 178 66 324 236
INCOME TAXES 54 21 108 83
------------------------------------------------
NET INCOME 124 45 216 153
PREFERRED STOCK DIVIDENDS - 1 1 1
PREFERRED SECURITIES DISTRIBUTIONS 11 9 22 18
------------------------------------------------
NET INCOME AVAILABLE TO COMMON STOCKHOLDER $ 113 $ 35 $ 193 $ 134
================================================================================================================
THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
-91-
Consumers Energy Company
CONSUMERS ENERGY COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(AS RESTATED, SEE NOTE 4)
SIX MONTHS ENDED
JUNE 30 2002 2001
----------------------------------------------------------------------------------------------------------------
In Millions
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 216 $ 153
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation, depletion and amortization (includes nuclear
decommissioning of $3 and $3, respectively) 179 171
Gain on sale of METC and other assets (38) --
Deferred income taxes and investment tax credit (19) 35
Capital lease and other amortization 8 14
Undistributed earnings of related parties (53) (22)
Changes in assets and liabilities
Decrease (increase) in inventories 128 (95)
Decrease (increase) in accounts receivable and accrued revenue 61 205
Increase (decrease) in accounts payable (69) 23
Regulatory obligation - gas customer choice (6) (16)
Changes in other assets and liabilities 28 (89)
---------------------
Net cash provided by operating activities 435 379
---------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (excludes assets placed under capital lease) (273) (345)
Cost to retire property, net (31) (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 METC and other assets 293 --
---------------------
Net cash used in investing activities (7) (395)
---------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Retirement of bonds and other long-term debt (372) (1)
Increase (decrease) in notes payable, net (161) 17
Payment of common stock dividends (154) (96)
Redemption of preferred securities (30) --
Preferred securities distributions (22) (18)
Payment of capital lease obligations (7) (13)
Payment of preferred stock dividends (1) (1)
Proceeds from preferred securities -- 121
Stockholder's contribution, net 50 --
Proceeds from senior notes and bank loans 304 --
---------------------
Net cash (used in)/provided by financing activities (393) 9
---------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND TEMPORARY CASH INVESTMENTS 35 (7)
CASH AND TEMPORARY CASH INVESTMENTS, BEGINNING OF PERIOD 17 21
---------------------
CASH AND TEMPORARY CASH INVESTMENTS, END OF PERIOD $ 52 $ 14
===============================================================================================================
OTHER CASH FLOW ACTIVITIES AND NON-CASH INVESTING AND FINANCING ACTIVITIES WERE:
CASH TRANSACTIONS
Interest paid (net of amounts capitalized) $ 47 $ 76
Income taxes paid (net of refunds) 52 36
Pension and OPEB cash contribution 83 72
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.
-92-
Consumers Energy Company
CONSUMERS ENERGY COMPANY
CONSOLIDATED BALANCE SHEETS
(AS RESTATED, SEE NOTE 4)
ASSETS JUNE 30 JUNE 30
2002 DECEMBER 31 2001
(UNAUDITED) 2001 (UNAUDITED)
---------------------------------------------------------------------------------------------------------------------
In Millions
PLANT (AT ORIGINAL COST)
Electric $ 7,396 $ 7,661 $ 7,482
Gas 2,651 2,593 2,539
Other 21 23 17
-------------------------------------
10,068 10,277 10,038
Less accumulated depreciation, depletion and amortization 5,822 5,934 5,847
-------------------------------------
4,246 4,343 4,191
Construction work-in-progress 477 480 347
-------------------------------------
4,723 4,823 4,538
---------------------------------------------------------------------------------------------------------------------
INVESTMENTS
Stock of affiliates 28 59 76
First Midland Limited Partnership 261 253 253
Midland Cogeneration Venture Limited Partnership 359 300 295
-------------------------------------
648 612 624
-------------------------------------
CURRENT ASSETS
Cash and temporary cash investments at cost, which approximates market 52 17 14
Accounts receivable and accrued revenue, less allowances
of $4, $4 and $3, respectively 76 125 74
Accounts receivable - related parties 15 18 63
Inventories at average cost
Gas in underground storage 431 569 359
Materials and supplies 67 69 71
Generating plant fuel stock 57 52 48
Deferred property taxes 99 144 101
Regulatory assets 19 19 19
Other 9 14 5
-------------------------------------
825 1,027 754
---------------------------------------------------------------------------------------------------------------------
NON-CURRENT ASSETS
Regulatory assets
Securitization costs 709 717 710
Postretirement benefits 197 209 220
Abandoned Midland Project 11 12 12
Other 173 167 173
Nuclear decommissioning trust funds 555 581 594
Other 137 173 230
-------------------------------------
1,782 1,859 1,939
---------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 7,978 $ 8,321 $ 7,855
=====================================================================================================================
-93-
Consumers Energy Company
(AS RESTATED, SEE NOTE 4)
STOCKHOLDERS' INVESTMENT AND LIABILITIES JUNE 30 JUNE 30
2002 DECEMBER 31 2001
(UNAUDITED) 2001 (UNAUDITED)
---------------------------------------------------------------------------------------------------------------
In Millions
CAPITALIZATION
Common stockholder's equity
Common stock $ 841 $ 841 $ 841
Paid-in capital 682 632 646
Other comprehensive income (8) 4 16
Retained earnings since December 31, 1992 480 441 524
---------------------------------------
1,995 1,918 2,027
Preferred stock 44 44 44
Company-obligated mandatorily redeemable preferred securities
of subsidiaries (a) 490 520 520
Long-term debt 2,441 2,472 2,098
Non-current portion of capital leases 97 72 55
---------------------------------------
5,067 5,026 4,744
----------------------------------------------------------------------------------------------------------------
CURRENT LIABILITIES
Current portion of long-term debt and capital leases 225 257 251
Notes payable 255 416 328
Notes payable- CMS Energy - - 92
Accounts payable 219 282 258
Accrued taxes 213 214 179
Accounts payable - related parties 87 96 89
Deferred income taxes 19 12 20
Current portion of purchase power contract 24 24 22
Other 247 247 248
---------------------------------------
1,289 1,548 1,487
----------------------------------------------------------------------------------------------------------------
NON-CURRENT LIABILITIES
Deferred income taxes 755 784 696
Postretirement benefits 230 276 304
Regulatory liabilities for income taxes, net 276 276 264
Power purchase agreement - MCV Partnership 41 52 67
Deferred investment tax credit 94 102 106
Other 226 257 187
---------------------------------------
1,622 1,747 1,624
----------------------------------------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES (Notes 1 and 2)
TOTAL STOCKHOLDERS' INVESTMENT AND LIABILITIES $ 7,978 $ 8,321 $ 7,855
================================================================================================================
(a) See Note 3, Short-Term Financings and Capitalization
THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE BALANCE SHEETS.
-94-
Consumers Energy Company
CONSUMERS ENERGY COMPANY
CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDER'S EQUITY
(UNAUDITED)
(AS RESTATED, SEE NOTE 4)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 2002 2001 2002 2001
----------------------------------------------------------------------------------------------------------------------------
In Millions
COMMON STOCK
At beginning and end of period (a) $ 841 $ 841 $ 841 $ 841
----------------------------------------------------------------------------------------------------------------------------
OTHER PAID-IN CAPITAL
At beginning and end of period 782 646 632 646
Stockholder's contribution -- -- 150 --
Return of Stockholder's contribution (100) -- (100) --
-------------------------------------------------------
At end of Period 682 646 682 646
----------------------------------------------------------------------------------------------------------------------------
OTHER COMPREHENSIVE INCOME
Investments
At beginning of period 13 28 16 33
Unrealized loss on investments (b) (18) (2) (21) (7)
-------------------------------------------------------
At end of period (5) 26 (5) 26
Derivative Instruments
At beginning of period (c) (4) 1 (12) 21
Unrealized gain (loss) on derivative instruments (b) -- (11) 5 (24)
Reclassification adjustments included in net income (b) 1 -- 4 (7)
-------------------------------------------------------
At end of period (3) (10) (3) (10)
----------------------------------------------------------------------------------------------------------------------------
RETAINED EARNINGS
At beginning of period 467 519 441 486
Net income 124 45 216 153
Cash dividends declared- Common Stock (100) (30) (154) (96)
Cash dividends declared- Preferred Stock -- (1) (1) (1)
Preferred securities distributions (11) (9) (22) (18)
-------------------------------------------------------
At end of period 480 524 480 524
----------------------------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCKHOLDER'S EQUITY $ 1,995 $ 2,027 $ 1,995 $ 2,027
============================================================================================================================
(a) Number of shares of common stock outstanding was 84,108,789 for all periods presented.
(b) Disclosure of Comprehensive Income:
Other comprehensive income
Investments
Unrealized loss on investments, net of tax of
$10, $1, $12 and $4, respectively $ (18) $ (2) $ (21) $ (7)
Derivative Instruments
Unrealized gain (loss) on derivative instruments,
net of tax of $-, $6, $3 and $13, respectively -- (11) 5 (24)
Reclassification adjustments included in net income,
net of tax of $1, $-, $2 and $4, respectively 1 -- 4 (7)
Net income 124 45 216 153
-------------------------------------------------------
Total Comprehensive Income $ 107 $ 32 $ 204 $ 115
=======================================================
(c) Six Months Ended 2001 is the cumulative effect of change in accounting
principle, net of $(11) tax (Note 1)
THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
-95-
QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
CONSUMERS
Quantitative and Qualitative Disclosures about Market Risk is contained in PART
I: CONSUMERS' ENERGY COMPANY'S MANAGEMENT'S DISCUSSION AND ANALYSIS, which is
incorporated by reference herein.
CONTROLS AND PROCEDURES
DISCLOSURE AND INTERNAL CONTROLS: Consumers' CEO and CFO is responsible for
establishing and maintaining disclosure controls and procedures. Management,
under the direction of its principal executive and financial officers, have
evaluated the effectiveness of Consumers' disclosure controls and procedures as
of February 17, 2003. Based on these evaluations, Consumers' CEO and CFO has
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 Consumers internal controls or in factors that
could significantly affect internal controls subsequent to February 17, 2003.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The discussion below is limited to an update of developments that have occurred
in various judicial and administrative proceedings, many of which are more fully
described in Consumers' Form 10-K/A for the year ended December 31, 2001.
Reference is also made to the Condensed Notes to the Consolidated Financial
Statements, in particular Note 2, Uncertainties for Consumers, included herein
for additional information regarding various pending administrative and judicial
proceedings involving rate, operating, regulatory and environmental matters.
EMPLOYMENT RETIREMENT INCOME SECURITY ACT CLASS ACTION LAWSUITS: CMS Energy is a
named defendant, along with Consumers, CMS MST and certain named and unnamed
officers and directors, in two lawsuits brought as purported class actions on
behalf of participants and beneficiaries of the CMS Employee's Savings and
Incentive Plan (the "Plan"). The two cases, filed in July 2002 in the U.S.
District Court, were consolidated by the trial judge. Plaintiffs allege breaches
of fiduciary duties under ERISA and seek restitution on behalf of the Plan with
respect to a decline in value of the shares of Common Stock held in the Plan.
Plaintiffs also seek other equitable relief and legal fees. These cases will be
vigorously defended. CMS Energy and Consumers cannot predict the outcome of this
litigation.
SECURITIES CLASS ACTION LAWSUITS: Between May and July 2002, eighteen separate
civil lawsuits were filed in the U.S. District Court 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. 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
business and financial condition of CMS Energy and Consumers. These cases will
be vigorously defended. CMS Energy and Consumers cannot predict the outcome of
this litigation.
ENVIRONMENTAL MATTERS: Consumers, and its subsidiaries and affiliates are
subject to various federal, state and local laws and regulations relating to the
environment. Several of these companies have been named parties to various
actions involving environmental issues. Based on their present knowledge and
subject to future legal and factual developments, Consumers believes that it is
unlikely that these actions, individually or in total, will
-96-
have a material adverse effect on its financial condition. See Consumers'
MANAGEMENT'S DISCUSSION AND ANALYSIS; and Consumers' CONDENSED NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) LIST OF EXHIBITS
(99) Certifications pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
(B) REPORTS ON FORM 8-K
During 3rd Quarter 2002, Consumers filed reports of Form 8-K on July 30, 2002
and August 8, 2002 covering matters pursuant to ITEM 5. OTHER EVENTS.
-97-
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, Consumers Energy Company has duly caused this Quarterly Report on
Form 10-Q/A to be signed on its behalf by the undersigned, thereunto duly
authorized, on the 14th day of March, 2003.
CONSUMERS ENERGY COMPANY
By: /s/ Thomas J. Webb
---------------------------
Thomas J. Webb
Executive Vice President and
Chief Financial Officer
-98-
CERTIFICATION OF KENNETH WHIPPLE
I, Kenneth Whipple, certify that:
1. I have reviewed this quarterly report on Form 10-Q/A of Consumers
Energy Company;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operation and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a) Designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) All significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data and
have identified for the registrant's auditors any material weaknesses
in internal controls; and
b) Any fraud, whether or not material, that involves management
or other employees who have a significant role in the registrant's
internal controls; and
-99-
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.
Date: March 14, 2003 By: /s/ Kenneth Whipple
-----------------------------
Kenneth Whipple
Chairman of the Board and
Chief Executive Officer
-100-
CERTIFICATION OF THOMAS J. WEBB
I, Thomas J. Webb, certify that:
1. I have reviewed this quarterly report on Form 10-Q/A of Consumers
Energy Company;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operation and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a) Designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) All significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data and
have identified for the registrant's auditors any material weaknesses
in internal controls; and
b) Any fraud, whether or not material, that involves management
or other employees who have a significant role in the registrant's
internal controls; and
-101-
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.
Date: March 14, 2003 By: /s/ Thomas J. Webb
------------------------------
Thomas J. Webb
Executive Vice President and
Chief Financial Officer
-102-
EXHIBIT INDEX
Exhibit Description
------- -----------
99 Certification of CEO and CFO