AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 12, 2004
REGISTRATION NO. 333-
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM S-4
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
CMS ENERGY CORPORATION
(Exact name of registrant as specified in its charter)
MICHIGAN 6719 38-2726431
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
ONE ENERGY PLAZA
JACKSON, MICHIGAN 49201
517-788-0351
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
THOMAS J. WEBB
EXECUTIVE VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
CMS ENERGY CORPORATION
One Energy Plaza
Jackson, Michigan 49201
517-788-0351
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
With copies to:
ROBERT C. SHROSBREE, ESQ.
ASSISTANT GENERAL COUNSEL
CMS ENERGY CORPORATION
One Energy Plaza
Jackson, Michigan 49201
517-768-7323
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If the only securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box: | |
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering: | |
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering: | |
CALCULATION OF REGISTRATION FEE
===================================================================================================
PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE PER AGGREGATE OFFERING REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED UNIT(1) PRICE(1) FEE
---------------------------------------------------------------------------------------------------
7.75% Senior Notes due 2010.... $300,000,000 100% $ 300,000,000 $ 38,010.00
===================================================================================================
(1) Estimated pursuant to Rule 457(f) solely for the purpose of calculating
the registration fee.
WE HEREBY AMEND THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE
NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL WE FILE A FURTHER AMENDMENT WHICH
SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME
EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL
THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE
COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT CONSUMMATE THE EXCHANGE OFFER UNTIL THE REGISTRATION STATEMENT FILED WITH
THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN
OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION, DATED MARCH 12, 2004
Preliminary Prospectus
$300,000,000
CMS ENERGY CORPORATION
Exchange Offer for all Outstanding
7.75% Senior Notes due 2010
The Exchange Offer will expire at 5:00 p.m., New York City time, on
____________, 2004 unless we extend it.
Terms of the Exchange Offer
---------------------------
We are offering to exchange new registered 7.75% Senior Notes due 2010 for all
of our old unregistered 7.75% Senior Notes due 2010.
The terms of the new notes will be identical in all material respects to the
terms of the old notes, except that the registration rights and related
liquidated damages provisions and the transfer restrictions applicable to the
old notes will not be applicable to the new notes. The new notes will have the
same financial terms and covenants as the old notes, and will be subject to the
same business and financial risks. Any outstanding old notes not validly
tendered will remain subject to existing transfer restrictions.
Subject to the satisfaction or waiver of specified conditions, we will exchange
the new notes for all old notes that are validly tendered and not withdrawn by
you at any time prior to the expiration of the Exchange Offer as described in
this prospectus.
The new notes will not be listed on any securities exchange or included in any
automatic quotation system.
We will not receive any proceeds for the exchange.
We are not asking you for a proxy and you are requested not to send us a proxy.
THIS INVESTMENT INVOLVES RISK. SEE "RISK FACTORS" BEGINNING ON PAGE 17.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
The date of this prospectus is _______________, 2004
TABLE OF CONTENTS
PAGE
Important Notice about Information in this Prospectus..................... 2
Where You Can Find More Information....................................... 2
Forward-Looking Statements and Information................................ 3
Summary................................................................... 5
Risk Factors.............................................................. 17
Use of Proceeds........................................................... 28
Ratio of Earnings to Fixed Charges........................................ 28
Description of the New Notes.............................................. 28
Ratings................................................................... 52
The Exchange Offer ....................................................... 52
Management's Discussion and Analysis of Financial Condition and Results of
Operations for the Fiscal Year Ended December 31, 2003.................... 63
Our Business.............................................................. 96
Legal Proceedings......................................................... 109
Our Management............................................................ 111
Affiliate Relationships and Transactions.................................. 120
Certain United States Federal Income Tax Consequences..................... 121
Plan of Distribution...................................................... 123
Legal Opinion............................................................. 124
Experts................................................................... 124
Glossary.................................................................. 126
Index to Consolidated Financial Statements................................ 131
IMPORTANT NOTICE ABOUT INFORMATION IN THIS PROSPECTUS
You should rely only on the information contained in this prospectus or to
which we have referred you. We have not authorized anyone to provide you with
information that is different or to make any representations about us or the
transactions we discuss in this prospectus. If you receive information about
these matters that is not included in this prospectus, you must not rely on that
information. This document may only be used where it is legal to sell these
securities. The information in this document may only be accurate on the date of
this document.
WHERE YOU CAN FIND MORE INFORMATION
We file reports, proxy statements and other information with the SEC under
File No. 1-9513. Our SEC filings are also available over the Internet at the
SEC's web site at http://www.sec.gov. You may also read and copy any document we
file at the SEC's public reference room at 450 Fifth Street N.W., Room 1024,
Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for more
information on the public reference rooms and their copy charges. You may also
inspect our SEC reports and other information at the New York Stock Exchange, 20
Broad Street, New York, New York 10005. You can find additional information
about us, including our Annual Report on Form 10-K for the year ended December
31, 2003, on our Web site at http://www.cmsenergy.com. The information on this
Web site is not a part of this prospectus.
We have filed with the SEC a registration statement on Form S-4 under the
Securities Act, and the rules and regulations promulgated under the Securities
Act of 1933 (the "SECURITIES ACT"),
2
with respect to the new notes offered for exchange under this prospectus. This
prospectus, which constitutes part of that registration statement, does not
contain all of the information set forth in the registration statement and the
attached exhibits and schedules. The statements contained in this prospectus as
to the contents of any contract, agreement or other document that is filed as an
exhibit to the registration statement are not necessarily complete. Accordingly,
each of those statements is qualified in all respects by reference to the full
text of the contract, agreement or document filed as an exhibit to the
registration statement or otherwise filed with the SEC.
FORWARD-LOOKING STATEMENTS AND INFORMATION
This prospectus contains forward-looking statements as defined in Rule
3b-6 of the Securities Exchange Act of 1934, as amended, Rule 175 of the
Securities Act of 1933, as amended, and relevant legal decisions. Our intention
with the use of such words as "may," "could," "anticipates," "believes,"
"estimates," "expects," "intends," "plans," and other similar words is to
identify forward-looking statements that involve risk and uncertainty. We
designed this discussion of potential risks and uncertainties to highlight
important factors that may impact our business and financial outlook. We have 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 the statements. These forward-looking statements are subject to
various factors that could cause our actual results to differ materially from
the results anticipated in these statements. Such factors include our inability
to predict and/or control:
- the efficient sale of non-strategic or under-performing domestic or
international assets and discontinuation of certain operations,
- achievement of capital expenditure reductions and cost savings,
- capital and financial market conditions, including the current price
of CMS Energy Common Stock and the effect on our pension plan,
interest rates and availability of financing to us and, Consumers
Energy Company ("CONSUMERS") our wholly owned gas and electric
utility subsidiary, or any of our affiliates, and the energy
industry,
- market perception of the energy industry, us or Consumers, or any of
our affiliates,
- our and Consumers' or any of our affiliates security ratings,
- currency fluctuations, transfer restrictions, and exchange controls,
- factors affecting utility and diversified energy operations such as
unusual weather conditions, catastrophic weather-related damage,
unscheduled generation outages, maintenance or repairs,
environmental incidents, or electric transmission or gas pipeline
system constraints,
- ability to access the capital markets successfully,
- international, national, regional, and local economic, competitive
and regulatory policies, conditions and developments,
- adverse regulatory or legal decisions, including environmental laws
and regulations,
3
- federal regulation of electric sales and transmission of electricity
including re-examination by federal regulators of the market-based
sales authorizations by which our subsidiaries participate in
wholesale power markets without price restrictions, and proposals by
FERC to change the way it currently lets our subsidiaries and other
public utilities and natural gas companies interact with each other,
- energy markets, including the timing and extent of unanticipated
changes in commodity prices for oil, coal, natural gas, natural gas
liquids, electricity, and certain related products due to lower or
higher demand, shortages, transportation problems or other
developments,
- potential disruption, expropriation or interruption of facilities or
operations due to accidents, war, terrorism, or changing political
conditions and the ability to obtain or maintain insurance coverage
for such events,
- nuclear power plant performance, decommissioning, policies,
procedures, incidents, and regulation, including the availability of
spent nuclear fuel storage,
- technological developments in energy production, delivery, and
usage,
- changes in financial or regulatory accounting principles or
policies,
- outcome, cost, and other effects of legal and administrative
proceedings, settlements, investigations and claims, including
particularly claims, damages, and fines resulting from round-trip
trading and inaccurate commodity price reporting,
- limitations on our ability to control the development or operation
of projects in which our subsidiaries have a minority interest,
- disruptions in the normal commercial insurance and surety bond
markets that may increase costs or reduce traditional insurance
coverage, particularly terrorism and sabotage insurance and
performance bonds,
- other business or investment considerations that may be disclosed
from time to time in our or Consumers' SEC filings or in other
publicly issued written documents, and
- other uncertainties that are difficult to predict, and many of which
are beyond our control.
The factors identified under "Risk Factors" on page 17 are also important
factors, but not necessarily all of the important factors, that could cause
actual results to differ materially from those expressed in any forward-looking
statement made by, or on behalf of, us or our subsidiaries.
4
SUMMARY
This summary may not contain all the information that may be important to
you. You should read this prospectus to which we refer you to in their entirety
before making an investment decision. The terms "CMS," "CMS ENERGY," "OUR," "US"
and "WE" as used in this prospectus refer to CMS Energy Corporation and its
subsidiaries as a combined entity, except where it is made clear that such term
means only CMS Energy Corporation.
In this document, "BCF" means billion cubic feet, "GWH" means
gigawatt-hour, "KWH" means kilowatt-hour, "MMBBLS" means million barrels,"MMCF"
means million cubic feet and "MW" means megawatts.
CMS ENERGY CORPORATION
CMS Energy, formed in Michigan in 1987, is an integrated energy holding
company operating through subsidiaries in the United States and in selected
markets around the world. Its two principal wholly-owned subsidiaries are
Consumers and CMS Enterprises Company ("CMS ENTERPRISES"). Consumers is a public
utility that provides natural gas and/or electricity to almost 6 million of
Michigan's 10 million residents and serves customers in all 68 of the state's
Lower Peninsula counties. Through subsidiaries, Enterprises is engaged in
several energy businesses in the United States and in selected international
markets.
Our assets and services include: electric and natural gas utility
operations; independent power production; natural gas transmission, storage and
processing; and international energy distribution. Our principal businesses are:
- Consumers' electric utility, which owns and operates 30 electric
generating plants with an aggregate of 6,431 MW of capacity and
serves 1.75 million customers in Michigan's Lower Peninsula;
- Consumers' gas utility, which owns and operates over 25,551 miles of
distribution mains and 1,624 miles of transmission lines throughout
the Lower Peninsula of Michigan, providing natural gas to 1.67
million customers;
- CMS Generation Co. ("CMS GENERATION"), a wholly owned subsidiary of
CMS Energy, that has ownership interests in independent power plants
with 8,749 gross MW (4,141 net MW) throughout the United States and
abroad. The plants are located in the U.S., Argentina, Australia,
Chile, Ghana, India, Jamaica, Morocco and the United Arab Emirates.
CMS Generation currently has ownership interests in the Shuweihat
power plant that is under construction in the United Arab Emirates
and the Saudi Petrochemical Company power plant which is in advanced
development and will be located in the Kingdom of Saudi Arabia.
These plants total approximately 1,784 gross MW (420 net MW) of
electric generation; and
- CMS Gas Transmission Company ("CMS GAS TRANSMISSION"), a wholly
owned subsidiary of CMS Energy, that owns an interest in over 5,085
miles of pipelines. The pipelines are located in the U.S.,
Argentina, Australia and Chile. It also owns gathering systems and
processing facilities.
5
RECENT DEVELOPMENTS
2003 RESULTS OF OPERATIONS
CMS ENERGY CONSOLIDATED NET LOSS
Our 2003 net loss was $44 million, an improvement of $606 million from
2002. We are continuing to restructure our business operations, and as our
financial plan moves forward, we will maintain our strategy of selling
under-performing or non-strategic assets in order to reduce our debt, to reduce
business risk, and to provide for more predictable future earnings.
RESTATED RESTATED
YEARS ENDED DECEMBER 31 2003 2002 2001
----------------------- -------- -------- --------
IN MILLIONS (EXCEPT FOR PER
SHARE AMOUNTS)
Net Loss ................................................. $ (44) $ (650) $ (459)
Basic loss per share ..................................... $ (0.30) $ (4.68) $ (3.51)
Diluted loss per share ................................... $ (0.30) $ (4.68) $ (3.51)
RESTATED RESTATED RESTATED
YEARS ENDED DECEMBER 31 2003 2002 CHANGE 2002 2001 CHANGE
----------------------- ----- -------- ------ -------- -------- ------
IN MILLIONS
Electric Utility .............. $ 167 $ 264 $ (97) $ 264 $ 120 $ 144
Gas Utility ................... 38 46 (8) 46 21 25
Enterprises ................... 8 (419) 427 (419) (272) (147)
Corporate Interest and Other .. (256) (285) 29 (285) (196) (89)
----- -------- ------ -------- -------- ------
Loss from Continuing
Operations................... (43) (394) 351 (394) (327) (67)
----- -------- ------ -------- -------- ------
Discontinued Operations ....... 23 (274) 297 (274) (128) (146)
Accounting Changes ............ (24) 18 (42) 18 (4) 22
----- -------- ------ -------- -------- ------
Net Loss ...................... $ (44) $ (650) $ 606 $ (650) $ (459) $ (191)
===== ======== ====== ======== ======== ======
2003 COMPARED TO 2002: Our net loss was reduced significantly from:
- absence of $379 million, net of tax, of goodwill write downs
recorded in 2002 associated with discontinued operations,
- an improvement of CMS Enterprises' earnings due to:
- decrease of $313 million, net of tax, in asset write downs
from planned and completed divestitures,
- lower expropriation and devaluation losses at the Argentine
facilities due to the stabilization of the Argentine Peso,
- absence of tax charges recorded in 2002 resulting from the
loss of indefinite tax deferral for several international
investments, and
- higher revenues and lower interest costs within IPP.
- decrease in corporate interest and other.
However, our progress was slowed by:
- Electric Utility earnings:
- higher electric operating costs resulting from higher pension
expense, greater depreciation expense reflecting higher levels
of plant in service, and increased amortization expense
associated with securitized regulatory assets,
6
- lower electric deliveries from milder weather during the
summer, and
- continuation of switching by commercial and industrial
customers to alternative electric suppliers.
- loss of $44 million, after-tax, on the sale of Panhandle,
- employee benefit plans net settlement and curtailment loss of $48
million, after tax, related to a large number of employees retiring
and exiting these plans, and
- cumulative effect of a change of accounting resulting in a charge of
$23 million, net of tax, due to energy trading contracts that did
not meet the definition of a derivative.
2002 COMPARED TO 2001: Our net loss increased $191 million from:
- after-tax charges in recognition of planned and completed
divestitures and reduced asset valuations,
- tax credit write-offs in 2002 at the parent level, and
- restructuring and other costs in 2002.
RECENT FINANCINGS AND SECURITIES OFFERINGS
We have initiated several transactions with various financial
institutions, lenders, banks, and others to provide liquidity:
- On July 16, 2003, we sold $150 million principal amount of senior
convertible notes in a private offering to institutional investors.
The senior convertible notes were issued at 3.375% and are
convertible into CMS Energy common stock at the option of the holder
upon certain circumstances. Net proceeds of approximately $145
million were used to discharge a portion of our 6 3/4% Senior Notes
Due 2004.
- On July 17, 2003, we sold $300 million principal amount of senior
notes in a private offering to institutional investors. The senior
notes were issued at 7.75% and mature on August 1, 2010. Net
proceeds of approximately $288 million were used to discharge a
portion of the $250 million tranche of the Second Amended and
Restated Senior Credit Agreement and to redeem a portion of our 6
3/4% Senior Notes Due 2004.
- On December 5, 2003, we sold 5 million shares of our 4.50%
cumulative convertible preferred stock in a private offering to
institutional investors. The preferred stock is convertible into CMS
Energy common stock at the option of the holder upon certain
circumstances. Net proceeds of approximately $218 million were used
to reduce long-term debt.
- On December 8, 2003, we entered into an amendment and restatement of
our then existing $5 million revolving credit facility. This Fourth
Amended and Restated Senior Credit Agreement is for $190 million
with a maturity of either November 14, 2004 or December 8, 2004
depending upon certain conditions. The facility is collateralized
primarily by the stock of Consumers, Enterprises and certain
subsidiaries of Enterprises. Proceeds of this facility will be used
for general corporate purposes.
7
SETTLEMENT WITH THE COMMODITY FUTURES TRADING COMMISSION
On November 25, 2003, we announced that we had reached a settlement
agreement with the Commodity Futures Trading Commission (the "CFTC") regarding
the inaccurate reporting of natural gas trading information to energy industry
publications. CMS Marketing, Services and Trading Company ("CMS MST") and CMS
Field Services, Inc. were the CMS Energy subsidiaries that were being
investigated by the CFTC. The affected subsidiaries will pay a fine to the CFTC
totaling $16 million in the settlement. We neither admitted nor denied the
findings of the CFTC in the CFTC's settlement order.
8
THE OLD NOTES
The Old Notes................ On July 17, 2003 we sold $300 million principal
amount of our 7.75% Senior Notes due 2010 (the
"OLD NOTES"). The old notes were offered to
qualified institutional buyers under Rule 144A.
Registration Rights
Agreement.................... We executed a Registration Rights Agreement that
provides that we would grant certain registration
and exchange rights to old note holders (the
"REGISTRATION RIGHTS AGREEMENT"). As a result, we
have filed a registration statement with the SEC
that will permit you to exchange the old notes
for new notes that are registered under the
Securities Act. The transfer restrictions and
liquidated damages provisions will be removed
from the new notes. We are conducting the
Exchange Offer to satisfy our obligations with
respect to certain exchange and registration
rights. Except for a few limited circumstances,
these rights will terminate when the Exchange
Offer ends.
THE EXCHANGE OFFER
Securities Offered........... $300 million principal amount of our 7.75% Senior
Notes due 2010 (the "NEW NOTES").
Exchange Offer............... We are offering to exchange (the "EXCHANGE
OFFER") up to $300 million principal amount of
our 7.75% Senior Notes due 2010 that have been
registered under the Securities Act for a like
principal amount of our 7.75% Senior Notes due
2010.
The new notes will be offered for all of the
outstanding old notes. The terms of the new notes
will be identical to the terms of the old notes,
except that the registration rights and related
liquidated damages provisions and the transfer
restrictions are not applicable to the new notes.
The old notes may be tendered only in integral
amounts of $1,000.
Resale of New Notes.......... Based on SEC no action letters, we believe that
after the Exchange Offer you may offer and sell
the new notes without registration under the
Securities Act so long as:
- You acquire the new notes in the ordinary
course of business.
- When the Exchange Offer begins you do not
have an arrangement with another person to
participate in a distribution of the new
notes.
9
- You are not distributing and do not intend
to distribute the new notes.
When you tender the old notes we will ask you to
represent to us that:
- You are not our affiliate.
- You will acquire the new notes in the
ordinary course of business.
- When the Exchange Offer begins you are not
distributing and you do not plan to
distribute with anyone else the new notes.
If you are unable to make these representations,
you will be required to comply with the
registration and prospectus delivery requirements
under the Securities Act in connection with any
secondary resale transaction.
If you are a broker-dealer and receive new notes
for your own account, you must acknowledge that
you will deliver a prospectus if you resell the
new notes. By acknowledging your intent and
delivering a prospectus you will not be deemed to
admit that you are an "underwriter" under the
Securities Act. You may use this prospectus as it
is amended from time to time when you resell new
notes that were acquired from market-making or
trading activities. For a year after the
Expiration Date we will make this prospectus
available to any Broker-dealer in connection with
such a resale. See "Plan of Distribution."
If necessary, we will cooperate with you to
register and qualify the new notes for offer or
sale without any restrictions or limitations
under state "blue sky" laws.
Consequences of Failure to
Exchange Old Notes........... If you do not exchange your old notes during the
Exchange Offer you will no longer be entitled to
registration rights. You will not be able to
offer or sell the old notes unless they are later
registered, sold pursuant to an exemption from
registration or sold in a transaction not subject
to the Securities Act or state securities laws.
See "The Exchange Offer--Consequences of Failure
to Exchange."
Expiration Date.............. 5:00 p.m., EST on _________ __, 2004 (the
"EXPIRATION DATE"). We may extend the exchange
offer.
10
Conditions to the Exchange
Offer........................ No minimum principal amount of old notes must be
tendered to complete the Exchange Offer. However,
the Exchange Offer is subject to certain
customary conditions that we may waive. See "The
Exchange Offer--Conditions." Other than United
States federal and state securities laws we do
not need to satisfy any regulatory requirements
or obtain any regulatory approval to conduct the
Exchange Offer.
Procedures for Tendering
Old Notes ................... If you wish to participate in the Exchange Offer
you must complete, sign and date the letter of
Transmittal (the "LETTER OF TRANSMITTAL") or a
facsimile copy and mail it or deliver it to the
Exchange Agent along with any necessary
documentation. Instructions and the address of
the Exchange Agent will be on the Letter of
Transmittal and can be found in this prospectus.
See "The Exchange Offer--Procedures for
Tendering" and; "--Exchange Agent." You must also
effect a tender of old notes pursuant to the
procedures for book-entry transfer as described
in this prospectus. See "The Exchange
Offer--Procedures for Tendering."
Guaranteed Delivery
Procedures................... If you cannot tender the old notes, complete the
Letter of Transmittal or provide the necessary
documentation prior to the termination of the
Exchange Offer, you may tender your old notes
according to the guaranteed delivery procedures
set forth in "The Exchange Offer--Guaranteed
Delivery Procedures."
Withdrawal Rights............ You may withdraw tendered old notes at any time
prior to the 5:00 p.m. EST on the Expiration
Date. You must send a written or facsimile
withdrawal notice to the Exchange Agent prior to
5:00 p.m. EST on the Expiration Date.
Acceptance of Old Notes and
Delivery of New Notes........ All old notes properly tendered to the Exchange
Agent by 5:00 p.m. EST on the Expiration Date
will be accepted for exchange. The new notes will
be delivered promptly after the Expiration Date.
See "The Exchange Offer-- Acceptance of Old Notes
for Exchange; Delivery of New Notes"
Certain United States Tax
Consequences................. Exchanging old notes for the new notes will not
be a taxable exchange for United States federal
income tax purposes. See "Certain United States
Federal Income Tax Consequences."
11
Exchange Agent............... J.P. Morgan Trust Company, N.A. is the exchange
agent (the "EXCHANGE AGENT") for the Exchange
Offer.
Fees and Expenses............ We will pay all fees and expenses associated with
the Exchange Offer and compliance with the
Registration Rights Agreement.
Use of Proceeds.............. We will receive no cash proceeds in connection
with the issuance of the new notes pursuant to
the Exchange Offer. See "Use of Proceeds."
THE NEW NOTES
Issuer....................... CMS Energy Corporation.
Securities Offered........... $300 million aggregate principal amount of 7.75%
Senior Notes due 2010 to be issued under the
senior debt indenture.
Maturity..................... August 1, 2010.
Interest Rate................ The new notes will bear interest at the rate of
7.75% per year, payable semiannually in arrears
on February 1 and August 1, commencing on August
1, 2004, and at maturity.
Use of Proceeds.............. We will receive no cash proceeds in connection
with the issuance of the new notes pursuant to
the Exchange Offer. See "Use of Proceeds."
Optional Redemption.......... The new notes will be redeemable at our option,
in whole or in part, at any time or from time to
time, upon not less than 30 nor more than 60
days' notice before the redemption date by mail
to the Trustee, the paying agent and each Holder
of the new notes, for a price equal to 100% of
the principal amount of the new notes to be
redeemed plus any accrued and unpaid interest,
and Applicable Premium owed, if any, to the
redemption date. See "Description of the New
Notes-- Optional Redemption."
Change in Control............ If a Change in Control (as defined under
"Description of the New Notes-- Purchase of Notes
Upon Change in Control") occurs, Holders will
have the right, at their option, to require us to
purchase any or all of their new notes for cash.
The cash price we are required to pay is equal to
101% of the principal amount of the new notes to
12
be purchased plus accrued and unpaid interest, if
any, to the Change in Control purchase date. See
"Description of the New Notes-- Purchase of New
Notes Upon Change in Control."
Ratings...................... B+ by Standard & Poor's Ratings Group, a division
of The McGraw Hill Companies, Inc. ("S&P"), B3 by
Moody's Investors Service, Inc. ("MOODY'S") and
B+ by Fitch, Inc. ("FITCH"). See "Ratings."
Ranking...................... The new notes will be unsecured and
unsubordinated senior debt securities of ours
ranking equally with our other unsecured and
unsubordinated indebtedness. As of January 31,
2004, we had outstanding approximately $3.2
billion aggregate principal amount of
indebtedness, including approximately $178
million of subordinated indebtedness relating to
our convertible preferred securities and $506
million of subordinated indebtedness relating to
Consumers' mandatorily redeemable preferred
securities, but excluding approximately $3.8
billion of indebtedness of our subsidiaries. None
of our indebtedness would be senior to the new
notes. In December 2003, CMS Energy entered into
the Fourth Amended and Restated Credit Agreement
in the amount of approximately $190 million. This
facility is secured and the new notes would not
be senior to such indebtedness. However, there is
currently no outstanding balance under the Fourth
Amended and Restated Credit Agreement. The new
notes will be senior to approximately $178
million of subordinated indebtedness relating to
our convertible preferred securities. The new
notes will be structurally subordinated to
approximately $3.8 billion of our subsidiaries'
debt and approximately $506 million of
subordinated indebtedness relating to Consumers'
mandatorily redeemable preferred securities.
Certain Covenants............ The senior debt indenture will contain covenants
that will, among other things, limit our ability
to pay dividends or distributions, incur
additional indebtedness, incur additional liens,
sell, transfer or dispose of certain assets,
enter into certain transactions with affiliates
or enter into certain mergers or consolidations.
Form of New Notes............ One or more global securities held in the name of
13
DTC in a minimum denomination of $1,000 and any
integral multiple thereof.
Trustee and Paying Agent..... J.P. Morgan Trust Company, N.A.
Trading...................... The new notes will not be listed on any
securities exchange or included in any automated
quotation system. The new notes are expected to
be eligible for trading in the Portal Market;
however, no assurance can be given as to the
liquidity of or trading market for the new notes.
14
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected financial data have been derived from our audited
consolidated financial statements, which have been audited by Ernst & Young LLP,
independent auditors, for the fiscal years ended December 31, 2003, 2002, 2001
and 2000 except for amounts included from the financial statements of Midland
Cogeneration Venture Limited Partnership ("MCV Partnership") and Jorf Lasfar
Energy Company S.C.A. ("Jorf Lasfar"), which represent investments accounted for
under the equity method of accounting, which were audited by other independent
auditors (Arthur Andersen LLP were the other independent auditors for 2001, 2000
and 1999 for MCV Limited Partnership and have ceased operations) and by Arthur
Andersen LLP, independent accountants (who have ceased operations), for the
fiscal year ended December 31, 1999. Please refer to our financial statements
for the fiscal year ended December 31, 2003 that are found on pages F-1 through
F-10 of this prospectus. The financial information set forth below should be
read in conjunction with our consolidated financial statements, related notes
and other financial information that can be found on pages F-1 through F-83 of
this prospectus. See "Where You Can Find More Information."
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------------------
2003 2002 2001 2000 1999
----------- ----------- ----------- ----------- -----------
AS RESTATED AS RESTATED AS RESTATED
(DOLLARS IN MILLIONS
EXCEPT PER SHARE AMOUNTS)
INCOME STATEMENT DATA:
Operating revenue ................... $ 5,513 $ 8,673 $ 8,006 $ 6,623 $ 5,114
Earnings from equity method investees 164 92 172 213 136
Operating expenses .................. 5,082 8,690 8,027 6,342 4,549
Operating income .................... 595 75 151 494 701
Income (loss) from continuing
operations........................... (43) (394) (327) (85) 191
Consolidated net income (loss) ...... $ (44) $ (650) $ (459) $ 5 $ 277
Earnings per average common share:
Income (loss) from continuing
operations
Basic ............................. $ (0.30) $ (2.84) $ (2.50) $ (0.76) $ 1.66
Income (loss) from continuing
operations
Diluted ........................... (0.30) (2.84) (2.50) (0.76) 1.66
CMS Energy Basic Net Income (Loss) .. (0.30) (4.68) (3.51) 0.04 2.18(h)
CMS Energy Diluted Net Income (Loss). (0.30) (4.68) (3.51) 0.04 2.17(h)
Dividends declared per average
common share:
CMS Energy .......................... $ -- $ 1.09 $ 1.46 $ 1.46 $ 1.39
BALANCE SHEET DATA:
Cash and cash equivalents(a) ........ $ 733 $ 389 $ 127 $ 142 $ 132
Net plant and property .............. 6,944 6,103 6,703 6,316 8,995
Total assets ........................ 13,838 14,781 17,633 17,801 16,336
Long-term debt, including current
maturities .......................... 6,529 5,990 6,846 6,271 7,503
Long-term debt - related parties .... 684 -- -- -- --
Non-current portion of capital leases 58 116 71 49 88
Notes payable ....................... -- 458 416 403 230
Other liabilities ................... 4,604 6,174 7,008 7,486 4,924
Minority interest ................... 73 38 43 82 222
Company-obligated mandatorily
redeemable trust preferred
securities of subsidiaries (b) .... -- 393 694 694 474
Company obligated convertible trust
preferred securities of Consumers'
subsidiaries (b) .................. -- 490 520 395 395
Preferred stock ..................... 261 -- -- -- --
Preferred stock of subsidiary ....... $ 44 $ 44 $ 44 $ 44 $ 44
15
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------------------
2003 2002 2001 2000 1999
----------- ----------- ----------- ----------- -----------
AS RESTATED AS RESTATED AS RESTATED
(DOLLARS IN MILLIONS
EXCEPT PER SHARE AMOUNTS)
Common stockholders' equity ......... 1,585 1,078 1,991 2,377 2,456
OTHER DATA:
Cash Flow:
From operating activities ........... $ (251) $ 614 $ 372 $ 600 $ 917
From investing activities ........... 203 829 (1,349) (1,220) (3,564)
From financing activities ........... 230 (1,223) 967 629 2,678
Ratio of earnings to combined fixed
charges and preference dividends(c) --(d) --(e) --(f) --(g) 1.28
------------
(a) Cash and cash equivalents for the years ended December 31, 2003, 2002 and
2001 includes restricted cash of $201 million, $38 million and $4 million,
respectively.
(b) CMS Energy and Consumers each formed various statutory wholly owned
business trusts for the sole purpose of issuing preferred securities and
lending the gross proceeds to the parent companies. The sole assets of the
trusts are debentures of the parent company with terms similar to those of
the preferred security. As a result of the adoption of FASB Interpretation
No. 46 "Consolidation of Variable Interest Entities", on December 31,
2003, we deconsolidated the trusts that hold the mandatorily redeemable
trust preferred securities. Therefore, $490 million, previously reported
by us as Company-obligated mandatorily redeemable preferred securities of
Consumers' subsidiaries, plus $16 million owed to the trusts and
previously eliminated in consolidation, is now included in the balance
sheet as Long-term debt - related parties. Additionally, $173 million,
previously reported by us as Company-obligated convertible trust preferred
securities of subsidiaries, plus $5 million owed to the trusts and
previously eliminated in consolidation, is now included in the balance
sheet as Long-term debt - related parties.
(c) For the purpose of computing the ratio, earnings represent net income
before income taxes and income from equity method investees, net interest
charges, the estimated interest portion of lease rentals and distributed
income of equity method investees.
(d) For the year ended December 31, 2003, fixed charges exceeded earnings by
$59 million. Earnings as defined include $95 million of asset revaluations
and other charges.
(e) For the year ended December 31, 2002, fixed charges exceeded earnings by
$472 million. Earnings as defined include $602 million of asset
revaluations and other charges.
(f) For the year ended December 31, 2001, fixed charges exceeded earnings by
$392 million. Earnings as defined include $323 million of asset
revaluations and other charges.
(g) For the year ended December 31, 2000, fixed charges exceeded earnings by
$224 million. Earnings as defined include a $329 million pretax impairment
loss on the Loy Yang A investment.
(h) Reflects the reallocation of net income and earnings per share as a result
of the premium on exchange of Class G Common Stock. As a result, CMS
Energy's basic and diluted earnings per share were reduced $0.26 and
$0.25, respectively, and Class G Common Stock's basic and diluted earnings
per share were increased $3.31.
16
RISK FACTORS
In considering whether to exchange the old notes for the new notes, you
should carefully consider all the information we have included this prospectus.
In particular, you should carefully consider the risk factors described below.
In addition, please read the information in "Forward- Looking Statements and
Information" beginning on page 3 of this prospectus, and see "Managements
Discussion and Analysis of Financial Condition and Results of Operations for the
Fiscal Year Ended December 31, 2003." Also see "Notes to Consolidated Financial
Statements For the Fiscal Year Ended December 31, 2003 -- Note 4 Uncertainties"
where we describe additional uncertainties associated with our business and the
forward-looking statements in this prospectus.
RISKS RELATING TO CMS ENERGY
WE DEPEND ON DIVIDENDS FROM OUR SUBSIDIARIES TO MEET OUR DEBT SERVICE
OBLIGATIONS. IF WE DO NOT RECEIVE ADEQUATE DIVIDENDS OR DISTRIBUTIONS FROM OUR
SUBSIDIARIES, WE MAY NOT BE ABLE TO MAKE PRINCIPAL OR INTEREST PAYMENTS ON THE
NEW NOTES.
Due to our holding company structure, we depend on dividends from our
subsidiaries to meet our debt obligations, including the payment of any
principal or interest on the new notes. None of these entities are or will be
obligated to pay any amounts due on the new notes. Therefore, the new notes are
effectively subordinated to the payment of interest, principal and preferred
distributions on the debt, preferred securities and other liabilities of
Consumers and Enterprises and each of their subsidiaries.
On June 2, 2003, the MPSC issued a financing order authorizing the
issuance of $554 million of securitization bonds. The order would prohibit
Consumers from paying any extraordinary dividends to us until further order of
the MPSC. Pursuant to the order, extraordinary dividends are considered any
amount over and above Consumers' earnings. On July 1, 2003, Consumers filed a
petition for rehearing and clarification of certain portions of the order with
the MPSC, including the portion dealing with dividend restrictions. In December
2003, the MPSC issued its order on rehearing which rejected our requests for
rehearing and clarification and remanded the proceeding to the administrative
law judge for additional proceedings.
In December 2003, the MPSC issued an order granting interim gas rate
relief in the amount of $19.34 million annually. In connection with this rate
relief, Consumers agreed to limit its dividends to CMS Energy to a maximum of
$190 million annually during the period in which Consumers receives the interim
relief. The MPSC stated in its order that it was not determining at that time
whether dividend restrictions should continue after the issuance of a final
order.
Restrictions contained in Consumers' preferred stock provisions and other
legal restrictions limit Consumers' ability to pay dividends or acquire its own
stock from us. As of December 31, 2003, the most restrictive provisions in its
financing documents allowed Consumers to pay an aggregate of $300 million in
dividends to us during any year.
For additional information concerning restrictions on Consumers' ability
to pay dividends to us, see "Description of the New Notes -- Primary Source of
Funds of CMS Energy; Restrictions on Sources of Dividends."
THE NEW NOTES ARE STRUCTURALLY SUBORDINATED TO THE DEBT AND PREFERRED STOCK OF
OUR SUBSIDIARIES.
17
Of the approximately $7.0 billion of our consolidated indebtedness as of
January 31, 2004, approximately $4.3 billion was indebtedness of our
subsidiaries including $506 million of Consumers' mandatorily redeemable
preferred securities. Payments on that indebtedness and preferred stock are
prior in right of payment to dividends paid to us by our subsidiaries. See
"Description of the New Notes -- Structural Subordination."
WE HAVE SUBSTANTIAL INDEBTEDNESS THAT COULD LIMIT OUR FINANCIAL FLEXIBILITY AND
HENCE OUR ABILITY TO MEET OUR DEBT SERVICE OBLIGATIONS UNDER THE NEW NOTES.
As of January 31, 2004, we had outstanding approximately $3.2 billion
aggregate principal amount of indebtedness, including approximately $178 million
of subordinated indebtedness relating to our convertible preferred securities
and $506 million of subordinated indebtedness relating to Consumers' mandatorily
redeemable preferred securities but excluding approximately $3.8 billion of
indebtedness of our subsidiaries. None such indebtedness would be senior to the
new notes. In December 2003, we entered into the Fourth Amended and Restated
Credit Agreement in the amount of approximately $190 million. This facility is
secured and the new notes would not be senior to such indebtedness. However,
there is currently no outstanding balance under the Fourth Amended and
Restated Credit Agreement. We and our subsidiaries may incur additional
indebtedness in the future.
The level of our present and future indebtedness could have several
important effects on our future operations, including, among others:
- a significant portion of our cash flow from operations will be
dedicated to the payment of principal and interest on our
indebtedness and will not be available for other purposes;
- covenants contained in our existing debt arrangements require us to
meet certain financial tests, which may affect our flexibility in
planning for, and reacting to, changes in our business;
- our ability to obtain additional financing for working capital,
capital expenditures, acquisitions, general corporate and other
purposes may be limited;
- we may be at a competitive disadvantage to our competitors that are
less leveraged; and
- our vulnerability to adverse economic and industry conditions may
increase.
Our ability to meet our debt service obligations and to reduce our total
indebtedness will be dependent upon our future performance, which will be
subject to general economic conditions, industry cycles and financial, business
and other factors affecting our operations, many of which are beyond our
control. We cannot assure you that our business will continue to generate
sufficient cash flow from operations to service our indebtedness. If we are
unable to generate sufficient cash flow from operations, we may be required to
sell additional assets or obtain additional financings. We also plan to
refinance a substantial amount of our indebtedness prior to its maturity. We
cannot assure you that any such refinancing will be possible or that additional
financing will be available on commercially acceptable terms or at all.
There can be no assurance that the requirements of our existing debt
arrangements or other indebtedness will be met in the future. Failure to comply
with such covenants may result in a default with respect to the related debt and
could lead to acceleration of such debt or any instruments evidencing
indebtedness that contain cross-acceleration or cross-default provisions.
18
In such a case, there can be no assurance that we would be able to refinance or
otherwise repay such indebtedness.
WE HAVE FINANCING NEEDS AND WE MAY BE UNABLE TO SUCCESSFULLY ACCESS BANK
FINANCING OR THE CAPITAL MARKETS.
As of January 31, 2004, we had approximately $422 million of debt
maturities in 2004 and 2005. These maturities include: approximately $176
million of senior notes due in November 2004; $180 million of senior notes due
in January 2005; and approximately $66 million of general term notes that mature
at various times in 2004 and 2005. In addition, we expect to incur significant
costs for future environmental regulation compliance, especially compliance with
clean air laws. See "We could incur significant capital expenditures to comply
with environmental standards and face difficulty in recovering these costs on a
current basis" below. These expenditures may total approximately $325 million
between 2004 and 2009. We could also become subject to liquidity demands
pursuant to commercial commitments under guarantees, indemnities and letters of
credit. After giving effect to recent issuances of securities, along with asset
sales, capital markets or bank financing and cash flow from operations, we
believe, but can make no assurance that we will have sufficient liquidity to
meet our debt maturities through 2005. Management is actively pursuing plans to
refinance debt and to sell assets. There can be no assurances that the financial
improvement plan will be successful and failure to achieve its goals could have
a material adverse effect on our liquidity and operations.
We continue to explore financing opportunities to supplement our
financial improvement plan. These potential opportunities include: refinancing
our bank credit facilities; entering into leasing arrangements and/or vendor
financing; refinancing and issuing new capital markets debt, preferred and/or
common equity; and negotiating private placement debt. We cannot guarantee the
capital market's acceptance of our securities or predict the impact of factors
beyond our control, such as actions of rating agencies. If we are unable to
access bank financing or the capital markets to incur or refinance
indebtedness, there could be a material adverse effect upon our liquidity and
operations.
Standard & Poor's Ratings Group, a division of The McGraw Hill Companies,
Inc. ("S&P"), has assigned the new notes a rating of B+, Moody's Investors
Service, Inc. has assigned the new notes a rating of B3 and Fitch, Inc. has
assigned the new notes a rating of B+. We cannot assure you that these credit
ratings will remain in effect for any given period of time or that one or more
of these ratings will not be lowered or withdrawn entirely by a rating agency.
We note that these credit ratings are not recommendations to buy, sell or hold
our securities. Each rating should be evaluated independently of any other
rating. Any future reduction or withdrawal of one or more of our credit ratings
could have a material adverse impact on our ability to access capital on
acceptable terms. We cannot assure you that any of our current ratings or those
of our affiliates, including Consumers, will remain in effect for any given
period of time or that a rating will not be lowered or withdrawn entirely by a
rating agency.
Consumers accesses debt and other capital from various sources and carries
its own credit ratings. Any downgrade or other event negatively affecting the
credit ratings of Consumers could make its cost of borrowing higher or access to
funding sources more limited, which in turn could increase the need of CMS
Energy to provide liquidity in the form of capital contributions or loans, thus
reducing the liquidity and borrowing availability of the consolidated group.
Further,
19
any adverse developments relating to Consumers, which provides dividends to us,
that result in a lowering of Consumers' credit ratings could have an adverse
effect on our credit ratings. Any lowering of the ratings on the new notes would
likely reduce the market value of the new notes.
WE MAY BE ADVERSELY AFFECTED BY REGULATORY INVESTIGATIONS AND LAWSUITS REGARDING
"ROUND TRIP" TRADING BY ONE OF OUR SUBSIDIARIES AS WELL AS CIVIL LAWSUITS
REGARDING PRICING INFORMATION THAT TWO OF OUR AFFILIATES PROVIDED TO MARKET
PUBLICATIONS.
As a result of round trip trading transactions at CMS MST, we are under
investigation by the SEC and the United States Department of Justice. We have
received subpoenas from U.S. Attorneys Offices regarding investigations of those
trades. CMS Energy and Consumers have also been named in numerous class action
lawsuits by individuals who allege that they purchased CMS Energy securities
during a purported class period. These complaints generally seek unspecified
damages based on allegations that the defendants violated United States
securities laws and regulations by making allegedly false and misleading
statements about the company's business and financial condition. The cases have
been consolidated into a single lawsuit and an amended and consolidated
complaint was filed on May 1, 2003.
Our Board of Directors has received a demand on behalf of a shareholder of
CMS Energy to commence civil actions (i) to remedy alleged breaches of fiduciary
duties by CMS Energy officers and directors in connection with round trip
trading at CMS MST and (ii) to recover damages sustained by CMS Energy as a
result of alleged insider trades alleged to have been made by certain current
and former officers of CMS Energy and its subsidiaries. In December 2002, two
new directors were appointed to our Board of Directors. A special litigation
committee was formed by the Board in January 2003 to determine whether it is in
the best interest of CMS Energy to bring the action demanded by the shareholder.
The disinterested members of the Board appointed the two new directors to serve
on the committee.
On December 2, 2003, during the continuing review by the special
litigation committee, we were served with a derivative complaint filed by the
shareholder in the Circuit Court of Jackson County, Michigan in furtherance of
his demands. The date for CMS Energy and other defendants to answer or otherwise
respond to the complaint was extended to June 1, 2004, subject to such further
extensions as may be mutually agreed upon by the parties and authorized by the
court.
We have notified appropriate regulatory and governmental agencies that
some employees at CMS MST and CMS Field Services, Inc. (now Cantera Gas Company)
appeared to have provided inaccurate information regarding natural gas trades to
various energy industry publications which compile and report index prices. CMS
Energy is cooperating with an investigation by the United States Department of
Justice regarding this matter. On November 25, 2003, the CFTC issued a
settlement order regarding this matter. CMS MST and CMS Field Services, Inc.
agreed to pay a fine to the CFTC totaling $16 million. In the settlement, CMS
Energy neither admits nor denies the findings of the CFTC in the settlement
order.
We have also been named as a defendant in several gas industry civil
lawsuits regarding inaccurate gas trade reporting that include a lawsuit
alleging violation of the Commodities Exchange Act and certain antitrust laws.
We cannot predict the outcome of the SEC and United States Department of
Justice investigations and the lawsuits. It is possible that the outcome in one
or more of the investigations or the lawsuits could adversely affect our
financial condition, liquidity or results of operations.
20
WE MAY BE NEGATIVELY IMPACTED BY THE RESULTS OF AN EMPLOYEE BENEFIT PLAN
LAWSUIT.
We are a 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 our 401(k) plan. The two
cases, filed in July 2002 in the United States District Court for the Eastern
District of Michigan, were consolidated by the trial judge and an amended and
consolidated complaint has been filed. Plaintiffs allege breaches of fiduciary
duties under the Employee Retirement Income Security Act of 1974 ("ERISA") and
seek restitution on behalf of the plan with respect to a decline in value of the
shares of our common stock held in the plan.
We cannot predict the outcome of the ERISA litigation and it is possible
that an adverse outcome in this lawsuit could adversely affect our financial
condition, liquidity or results of operations.
WE CANNOT PREDICT THE OUTCOME OF OTHER LITIGATION IN WHICH SUBSTANTIAL MONETARY
CLAIMS ARE MADE AGAINST US OR THE OUTCOME OF A SIGNIFICANT CUSTOMER AND SUPPLIER
BANKRUPTCY.
In addition to the litigation and proceedings discussed above, CMS Energy
or various of our subsidiaries are defendants in other pending litigation in
which substantial monetary damages are sought. These proceedings, certain of
which are described in CMS Energy's Annual Report on Form 10-K for the year
ended December 31, 2003 -- Notes to Consolidated Financial Statements -- Note 4
Uncertainties, include arbitration and litigation relating to the Dearborn
Industrial Generation project ("DIG") and claims from various provinces in
Argentina for stamp taxes and associated penalties and interest arising from
various gas transportation transactions. While we intend to vigorously defend
ourselves in these proceedings, the inherent nature of litigation is such that
we cannot predict the outcome of these matters. An adverse outcome in one or
more of these cases could, depending on the timing and size of any award and the
availability of insurance or reimbursement from third parties, have an adverse
effect on our financial condition, liquidity or results of operations.
REGULATORY CHANGES AND OTHER DEVELOPMENTS HAVE RESULTED AND WILL CONTINUE TO
RESULT IN INCREASED COMPETITION IN OUR DOMESTIC ENERGY BUSINESS. GENERALLY,
INCREASED COMPETITION THREATENS OUR MARKET SHARE IN CERTAIN SEGMENTS OF OUR
BUSINESS AND CAN REDUCE OUR PROFITABILITY.
Consumers has in the last several years experienced, and expects to
continue to experience, a significant increase in competition for generation
services with the introduction of retail open access in the State of Michigan.
Pursuant to the Customer Choice Act, as of January 1, 2002, all electric
customers have the choice of buying electric generation service from an
alternative electric supplier. We have noticed an upward trend over the last 18
months in the total volume of electric supply load lost to competitor suppliers.
However, we cannot predict the total amount of electric supply load that we may
lose to competitor suppliers in the future.
ELECTRIC INDUSTRY REGULATION COULD ADVERSELY AFFECT OUR BUSINESS, INCLUDING OUR
ABILITY TO RECOVER OUR EXPENSES FROM OUR CUSTOMERS.
Federal and state regulation of electric utilities has changed
dramatically in the last two decades and could continue to change over the next
several years. These changes could adversely affect our business, financial
condition and profitability.
21
In June 2000, the Michigan Legislature enacted the Customer Choice Act
that became effective June 5, 2000. Pursuant to the Customer Choice Act:
- residential rates were reduced by 5% and then capped through at
least December 31, 2005; and
- small commercial and industrial customer rates were capped through
at least December 31, 2004.
Ultimately, the rate caps could extend until December 31, 2013 depending
upon whether or not Consumers exceeds the market power supply test established
by the legislation (a requirement that Consumers believes itself to be in
compliance with at this time). Under circumstances specified in the Customer
Choice Act, certain costs can be deferred for future recovery after the
expiration of the rate cap period. The rate caps could, however, result in
Consumers being unable to collect customer rates sufficient to fully recover its
cost of conducting business. Some of these costs may be beyond Consumers'
ability to control. In particular, if Consumers needs to purchase power supply
from wholesale suppliers during the period when retail rates are frozen or
capped, the rate restrictions imposed by the Customer Choice Act may make it
impossible for Consumers to fully recover the cost of purchased power and
associated transmission costs through the rates it charges its customers. As a
result, it is not certain that Consumers can maintain its profit margins in its
electric utility business during the period of the rate freeze or rate caps.
There are multiple proceedings pending before FERC involving transmission
rates, regional transmission organizations and standard market design for
electric bulk power markets and transmission. We cannot predict the impact of
these electric industry-restructuring proceedings on our financial position,
liquidity or results of operations.
OUR ABILITY TO RECOVER OUR "NET" STRANDED COSTS IS UNCERTAIN AND MAY AFFECT OUR
FINANCIAL RESULTS.
The Customer Choice Act allows for the recovery, by an electric utility,
of the cost of implementing that act's requirements and "net" Stranded Costs,
without defining the term. According to the MPSC, "net" Stranded Costs are to be
recovered from retail open access customers through a Stranded Cost transition
charge.
In 2002 and 2001, the MPSC issued orders finding that Consumers
experienced zero "net" Stranded Costs from 1999 to 2001. The MPSC also declined
to resolve numerous issues regarding the "net" Stranded Cost methodology in a
way that would allow a reliable prediction of the level of Stranded Costs for
future years. Consumers is currently in the process of appealing these orders
with the Michigan Court of Appeals and the Michigan Supreme Court.
In March 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, our "net" Stranded Costs
incurred in 2002 are estimated to be approximately $38 million with the issuance
of securitization bonds that recover Clean Air Act investments, or approximately
$85 million without the issuance of securitization bonds that recover Clean Air
Act investments.
We cannot predict our ability to recover our "net" Stranded Costs,
including our costs related to electric utility restructuring.
22
WE COULD INCUR SIGNIFICANT CAPITAL EXPENDITURES TO COMPLY WITH ENVIRONMENTAL
STANDARDS AND FACE DIFFICULTY IN RECOVERING THESE COSTS ON A CURRENT BASIS.
We and our subsidiaries are subject to costly and increasingly stringent
environmental regulations. We expect that the cost of future environmental
compliance, especially compliance with clean air laws, will be significant.
In 1998, the Environmental Protection Agency ("EPA") issued regulations
requiring the State of Michigan to further limit nitrogen oxide emissions. The
Michigan Department of Environmental Quality finalized rules to comply with the
EPA regulations in December 2002 and submitted these rules for approval to the
EPA in the first quarter of 2003. In addition, the EPA has issued additional
regulations regarding nitrogen oxide emissions that require certain generators,
including some of Consumers' electric generating facilities, to achieve the same
emissions rate as that required by the 1998 regulations. The EPA and the State
of Michigan regulations will require us to make significant capital expenditures
estimated to be $771 million. As of December 31, 2003, Consumers has incurred
$446 million in capital expenditures to comply with the EPA regulations and
anticipates that the remaining capital expenditures will be incurred between
2004 and 2009. Additionally, Consumers currently expects it 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 average $6 million per year; however, the market for nitrogen
oxide emissions credits and their price could change significantly. As new
environmental standards become effective, Consumers will need additional capital
expenditures to comply with the standards.
Based on the Customer Choice Act, 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 require us to seek significant additional
financing to fund such expenditures and could strain our cash resources.
OUR PLANNED ASSET SALES MAY NOT BE ACHIEVED OR MAY RESULT IN LESS PROCEEDS THAN
WE EXPECT OR ADDITIONAL ACCOUNTING CHARGES.
We are executing an ongoing asset sales program encompassing the sale of
non-strategic and under-performing assets, the proceeds of which are being and
will be used primarily to reduce debt. While we have successfully sold several
of our major properties, including most recently Panhandle and CMS Field
Services, Inc., there are a number of additional assets we are targeting for
disposal through 2005. We cannot assure you that we will be successful in
selling these assets, a number of which are located outside the U.S. We also
cannot predict the value we will ultimately receive for these assets. Failure to
successfully execute the remainder of our asset sale program could have an
adverse effect on our liquidity and our ability to successfully execute our
financial improvement program.
We are required by generally accepted accounting principles to
periodically review the carrying value of our assets, including those we are
targeting for sale. Market conditions, the operational characteristics of the
assets that may be sold and other factors could result in our recording
additional impairment charges for our assets, which could have an adverse effect
on our stockholders' equity and our access to additional financing. In addition,
we may be required to
23
record impairment charges at the time we sell assets depending on the sale
prices we are able to secure.
WE RETAIN CONTINGENT LIABILITIES IN CONNECTION WITH OUR ASSET SALES.
The agreements we enter into for the sale of assets customarily include
provisions whereby we are required to:
- retain specified preexisting liabilities such as for taxes and
pensions;
- indemnify the buyers against specified risks, including the
inaccuracy of representations and warranties we make; and
- require payments to the buyers depending on the outcome of
post-closing adjustments, audits or other reviews.
Many of these contingent liabilities can remain open for extended periods
of time after the sales are closed. Depending on the extent to which the buyers
may ultimately seek to enforce their rights under these contractual provisions,
and the resolution of any disputes we may have concerning them, these
liabilities could have a material adverse effect on our financial condition,
liquidity and results of operations.
OUR REVENUES AND RESULTS OF OPERATIONS ARE SUBJECT TO RISKS THAT ARE BEYOND OUR
CONTROL, INCLUDING BUT NOT LIMITED TO FUTURE TERRORIST ATTACKS OR RELATED ACTS
OF WAR.
The cost of repairing damage to our facilities due to storms, natural
disasters, wars, terrorist acts and other catastrophic events, in excess of
reserves established for such repairs, may adversely impact our results of
operations, financial condition and cash flows. The occurrence or risk of
occurrence of future terrorist activity and the high cost or potential
unavailability of insurance to cover such terrorist activity may impact our
results of operations and financial condition in unpredictable ways. These
actions could also result in disruptions of power and fuel markets. In addition,
our natural gas distribution system and pipelines could be directly or
indirectly harmed by future terrorist activity.
WE HAVE MADE SUBSTANTIAL INTERNATIONAL INVESTMENTS THAT ARE SUBJECT TO POSSIBLE
NATIONALIZATION, EXPROPRIATION OR INABILITY TO CONVERT CURRENCY.
Our investments in selected international markets in electric generating
facilities, natural gas pipelines and electric distribution systems face a
number of risks inherent in acquiring, developing and owning these types of
international facilities. Although we maintain insurance for various risk
exposures, including political risk from possible nationalization, expropriation
or inability to convert currency, we are exposed to some risks that include
local political and economic factors over which we have no control, such as
changes in foreign governmental and regulatory policies (including changes in
industrial regulation and control and changes in taxation), changing political
conditions and international monetary fluctuations. In some cases an investment
may have to be abandoned or disposed of at a loss. These factors could
significantly adversely affect the financial results of the affected subsidiary
and our financial position and results of operations.
International investments of the type we have made are subject to the risk
that they may be expropriated or that the required agreements, licenses, permits
and other approvals may be
24
changed or terminated in violation of their terms. These kinds of changes could
result in a partial or total loss of our investment.
The local foreign currency may be devalued, the conversion of the currency
may be restricted or prohibited or other actions, such as increases in taxes,
royalties or import duties, may be taken which adversely affect the value and
the recovery of our investment.
OUR OWNERSHIP OF A NUCLEAR GENERATING FACILITY CREATES RISK RELATING TO NUCLEAR
ENERGY.
Consumers owns the Palisades nuclear power plant and we are, therefore,
subject to the risks of nuclear generation and the storage and disposal of spent
fuel and other radioactive waste. The Nuclear Regulatory Commission ("NRC") has
broad authority under federal law to impose licensing and safety-related
requirements for the operation of nuclear generation facilities. In the event of
non-compliance, the NRC has the authority to impose fines or shut down a unit,
or both, depending upon its assessment of the severity of the situation, until
compliance is achieved. In addition, although we have no reason to anticipate a
serious nuclear incident at Consumers' plant, if an incident did occur, it could
harm our results of operations and financial condition. A major incident at a
nuclear facility anywhere in the world could cause the NRC to limit or prohibit
the operation or licensing of any domestic nuclear unit.
CONSUMERS CURRENTLY UNDERRECOVERS IN ITS RATES ITS PAYMENTS TO THE MCV
PARTNERSHIP FOR CAPACITY AND ENERGY, AND IS ALSO EXPOSED TO FUTURE CHANGES IN
THE MCV PARTNERSHIP'S FINANCIAL CONDITION THROUGH ITS EQUITY AND LESSOR
INVESTMENTS.
Consumers' power purchase agreement with the MCV Partnership expires in
2025. We estimate that Consumers will incur estimated cash underrecoveries of
payments under the MCV Partnership power purchase agreement aggregating $206
million through 2007. For availability payments billed by the MCV Partnership
after September 15, 2007, and not recovered from customers, Consumers would
expect to claim a "regulatory out" under the MCV Partnership power purchase
agreement. The effect of any such action would be to reduce cash flow to the MCV
Partnership, which could in turn have an adverse effect on Consumers' equity and
lessor interests in the MCV Partnership facility. The book value of our
investments in the MCV Partnership and facility aggregated $643 million at
December 31, 2003.
Further, under the MCV Partnership power purchase agreement, energy
payments to the MCV Partnership are based on the cost of coal burned at
Consumers' coal plants and costs associated with fuel inventory, operations and
maintenance, and administrative and general expenses associated with Consumers'
coal plants. However, the MCV Partnership's costs of producing electricity are
tied, in large part, to the cost of natural gas. Because natural gas prices have
increased substantially in recent years, while energy charge payments to the MCV
Partnership have not, the MCV Partnership's financial performance has been
impacted negatively.
CMS Energy cannot estimate, at this time, the impact of these issues on
its future earnings or cash flow from its interest in the MCV Partnership. The
forward price of natural gas for the next 21 years and the MPSC decision in 2007
or later related to Consumers' recovery of capacity payments are the two most
significant variables in the analysis of the MCV Partnership's future financial
performance. Natural gas prices have historically been volatile and presently
there is no consensus in the marketplace on the price or range of prices of
natural gas beyond the next five years. Further, it is not presently possible
for Consumers to predict the actions of the MPSC in 2007 or later. For these
reasons, at this time Consumers cannot predict the impact of these issues on its
future earnings, cash flows, or on the value of its equity interest in the MCV
Partnership.
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THE RECENT ADOPTION OF FINANCIAL ACCOUNTING STANDARDS BOARD INTERPRETATION NO.
46, CONSOLIDATION OF VARIABLE INTEREST ENTITIES, REQUIRES US TO CONSOLIDATE
CERTAIN VARIABLE INTEREST ENTITIES IN OUR FINANCIAL STATEMENTS WHEN WE ARE THE
PRIMARY BENEFICIARY, AS DEFINED; THIS COULD AFFECT NEGATIVELY CERTAIN FINANCIAL
COVENANT RATIOS WE HAVE IN OUR FINANCING AGREEMENTS IF THE CONSOLIDATION RESULTS
IN ADDITIONAL DEBT ON OUR BALANCE SHEET.
The Financial Accounting Standards Board ("FASB") issued FASB Interpretation No.
46 in January 2003. The objective of the Interpretation is to assist in
determining when one party controls another entity in circumstances where a
controlling financial interest cannot be properly identified based on voting
interests. Entities with this characteristic are considered variable interest
entities. The Interpretation requires the party with the controlling financial
interest to consolidate the entity.
On December 24, 2003, the FASB issued Revised FASB Interpretation No. 46.
For entities that have not previously adopted FASB Interpretation No. 46,
Revised FASB Interpretation No. 46 provides an implementation deferral until the
first quarter of 2004. Revised FASB Interpretation No. 46 is effective for the
first quarter of 2004 for all entities other than special purpose entities.
Special purpose entities must apply either FASB Interpretation No. 46 or Revised
FASB Interpretation No. 46 for the first reporting period that ends after
December 15, 2003.
We have completed our analysis and have adopted FASB Interpretation
No. 46 for all entities other than the MCV Partnership and First Midland Limited
Partnership. We continue to evaluate and gather information regarding those
entities. We will adopt the provisions of Revised FASB Interpretation No. 46 for
all entities including the MCV Partnership and First Midland Limited Partnership
for the first reporting period ending after March 15, 2004.
If the completed analysis were to require us to disclose information about
or consolidate in our financial statements, the assets, liabilities and
activities of the MCV Partnership and the First Midland Limited Partnership,
including the recognition of approximately $700 million of debt of the MCV
Partnership and the First Midland Limited Partnership on our financial
statements, this could impact negatively CMS Energy's and Consumers' various
financial covenants under their respective financing agreements. As a result, we
and Consumers may have to seek amendments to the relevant financing agreements
to modify the terms of certain of these covenants in order to remove the effect
of this potential consolidation or refinance the relevant debt. As of December
31, 2003, Consumers' investments in the MCV Partnership and in the First Midland
Limited Partnership were $419 million and $224 million, respectively.
We have has determined that three electric generating plants partially
owned by Enterprises must be consolidated on our financial statements pursuant
to FASB Interpretation No. 46. As a result, approximately $128 million of debt
have been added to our balance sheet at December 31, 2003. We do not expect that
any financial covenants under existing financing agreements would need to be
amended as a result.
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RISKS RELATED TO THE NEW NOTES
IF YOU FAIL TO EXCHANGE YOUR OLD NOTES, YOU MAY BE UNABLE TO SELL THEM.
Because we did not register the old notes under the Securities Act or any
state securities laws, and we do not intend to do so after the Exchange Offer,
the old notes may only be transferred in limited circumstances under applicable
securities laws. If the holders of the old notes do not exchange their old notes
in the Exchange Offer, they may lose their right to have their old notes
registered under the Securities Act, subject to some limitations. As a holder of
old notes after the Exchange Offer, you may be unable to sell your old notes.
WE MAY BE UNABLE TO RAISE THE FUNDS NECESSARY TO PURCHASE THE NEW NOTES UPON A
CHANGE IN CONTROL.
In the event of a Change in Control of CMS Energy, each Holder of new
notes may require us to purchase all or a portion of its new notes at a purchase
price equal to 101% of the principal amount thereof, plus accrued interest. Our
ability to purchase the new notes will be limited by the terms of our other debt
agreements and our ability to finance the purchase. It is expected that we will
issue additional debt with similar change of control provisions in the future.
If this occurs, the financial requirements for any purchases could be increased
significantly. In addition, the terms of any debt securities issued to purchase
debt under these change of control provisions may be unfavorable to us. We
cannot assure Holders of new notes that we will be able to finance these
purchase obligations or obtain consents to do so from Holders of new notes under
other debt agreements restricting these purchases.
THERE IS NO PUBLIC MARKET FOR THE NEW NOTES, SO YOU MAY BE UNABLE TO SELL THEM.
The new notes are new securities for which there is currently no market.
Consequently, the new notes will be relatively illiquid, and you may be unable
to sell them. We do not intend to apply for listing of the new notes on any
securities exchange or for the inclusion of the new notes in any automated
quotation system. Accordingly, we cannot assure you that a liquid market for the
new notes will develop.
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USE OF PROCEEDS
The Exchange Offer is intended to satisfy our obligations under the
Registration Rights Agreement. We will not receive any cash proceeds from the
issuance of the new notes. The old notes that are surrendered in exchange for
the new notes will be retired and canceled and cannot be reissued. As a result,
the issuance of the new notes will not increase or decrease our indebtedness. We
have agreed to bear the expenses of the Exchange Offer to the extent indicated
in the Registration Rights Agreement. No underwriter is being used in connection
with the Exchange Offer. We used the net proceeds from the sale of the old notes
of approximately $288 million after deducting the offering discounts and
expenses, to discharge a portion of the $250 million tranche of the Second
Amended and Restated Senior Credit Agreement and to redeem a portion of our 6
3/4% Senior Notes Due 2004.
RATIO OF EARNINGS TO FIXED CHARGES
The ratio of earnings to fixed charges for each of the years ended
December 31, 1999 through December 31, 2003 is as follows:
YEAR ENDED DECEMBER 31,
---------------------------------------------
2003 2002 2001 2000 1999
----------- ----------- ----------- ----------- -----------
AS RESTATED AS RESTATED AS RESTATED
Ratio of earnings to fixed
charges ................ --(a) --(b) --(c) --(d) 1.28
(a) For the year ended December 31, 2003, fixed charges exceeded earnings by
$59 million. Earnings as defined include $95 million of asset revaluations
and other charges.
(b) For the year ended December 31, 2002, fixed charges exceeded earnings by
$472 million. Earnings as defined include $602 million of asset
revaluations and other charges.
(c) For the year ended December 31, 2001, fixed charges exceeded earnings by
$392 million. Earnings as defined include $323 million of asset
revaluations and other charges.
(d) For the year ended December 31, 2000, fixed charges exceeded earnings by
$224 million. Earnings as defined include a $329 million pretax impairment
loss on the Loy Yang A investment.
For the purpose of computing the ratio, earnings represent net income
before income taxes and income from equity method investees, net interest
charges, the estimated interest portion of lease rentals and distributed income
of equity method investees.
DESCRIPTION OF THE NEW NOTES
GENERAL
The new notes will be issued as a series of senior debentures under the
senior debt indenture as supplemented by the fourteenth supplemental indenture
thereto dated as of July 17, 2003 (the "SUPPLEMENTAL INDENTURE"), and will be
initially limited in aggregate principal amount to $300 million. The senior debt
indenture permits us to "re-open" this offering of the new notes without the
consent of the Holders of the new notes. Accordingly, the principal amount of
the new notes
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may be increased in the future on the same terms and conditions and with the
same CUSIP numbers as the new notes being offered by this prospectus. The new
notes will be unsecured and unsubordinated senior debt securities of CMS Energy.
As of January 31, 2004, CMS Energy had outstanding approximately $3.4
billion aggregate principal amount of indebtedness (excluding subsidiaries),
None of such indebtedness would be senior to the new notes. In December 2003,
CMS Energy entered into the Fourth Amended and Restated Credit Agreement in the
amount of approximately $190 million. This facility is secured and the new notes
would not be senior to such indebtedness. However, there is currently no
outstanding balance under the Fourth Amended and Restated Credit Agreement. The
new notes will be senior to certain subordinated debentures in aggregate
principal amount of approximately $173 million, issued in connection with
certain preferred securities outstanding of subsidiary trusts. The new notes
will rank equally in right of payment with all other unsecured and
unsubordinated senior indebtedness of CMS Energy (excluding subsidiaries).
We may issue debt securities from time to time in one or more series under
the senior debt indenture. There is no limitation on the amount of debt
securities we may issue under the senior debt indenture.
The statements herein concerning the new notes and the senior debt
indenture are a summary and do not purport to be complete and are subject to,
and qualified in their entirety by, all of the provisions of the senior debt
indenture, which is incorporated herein by this reference. They make use of
defined terms and are qualified in their entirety by express reference to the
senior debt indenture, including the Supplemental Indenture, a copy of which
will be available upon request to the Trustee.
STRUCTURAL SUBORDINATION
CMS Energy is a holding company that conducts substantially all of its
operations through its subsidiaries. Its only significant assets are the capital
stock of its subsidiaries, and its subsidiaries generate substantially all of
its operating income and cash flow. As a result, dividends or advances from its
subsidiaries are the principal source of funds necessary to meet its debt
service obligations. Contractual provisions or laws, as well as its
subsidiaries' financial condition and operating requirements, may limit CMS
Energy's ability to obtain cash from its subsidiaries that it may require to pay
its debt service obligations, including payments on the new notes. In addition,
the new notes will be effectively subordinated to all of the liabilities of CMS
Energy's subsidiaries with regard to the assets and earnings of CMS Energy's
subsidiaries. The subsidiaries are separate and distinct legal entities and have
no obligation, contingent or otherwise, to pay any amounts due pursuant to the
new notes or to make any funds available therefor, whether by dividends, loans
or other payments. CMS Energy's rights and the rights of its creditors,
including Holders of new notes, to participate in the distribution of assets of
any subsidiary upon the latter's liquidation or reorganization will be subject
to prior claims of the subsidiaries' creditors, including trade creditors.
Of the approximately $7.0 billion of our consolidated indebtedness as of
January 31, 2004, approximately $4.3 billion was indebtedness of our
subsidiaries. Payments on that indebtedness and preferred stock are prior in
right of payment to dividends paid to us by our subsidiaries.
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PRIMARY SOURCE OF FUNDS OF CMS ENERGY; RESTRICTIONS ON SOURCES OF DIVIDENDS
The ability of CMS Energy to pay (i) dividends on its capital stock and
(ii) its indebtedness, including the new notes, depends and will depend
substantially upon timely receipt of sufficient dividends or other distributions
from its subsidiaries, in particular Consumers and Enterprises. Each of
Consumers' and Enterprises' ability to pay dividends on its common stock depends
upon its revenues, earnings and other factors. Consumers' revenues and earnings
will depend substantially upon rates authorized by the MPSC.
Consumers' Restated Articles of Incorporation ("ARTICLES") provide two
restrictions on its payment of dividends on its common stock. First, prior to
the payment of any common stock dividend, Consumers must reserve retained
earnings after giving effect to such dividend payment of at least (i) $7.50 per
share on all then outstanding shares of its preferred stock, (ii) in respect to
its Class A Preferred Stock, 7.5% of the aggregate amount established by its
Board of Directors to be payable on the shares of each series thereof in the
event of involuntary liquidation of Consumers and (iii) $7.50 per share on all
then outstanding shares of all other stock over which its preferred stock and
Class A Preferred Stock do not have preference as to the payment of dividends
and as to assets. Second, dividend payments during the 12 month period ending
with the month the proposed payment is to be paid are limited to: (i) 50% of net
income available for the payment of dividends during the base period, if the
ratio of common stock and surplus to total capitalization and surplus for 12
consecutive calendar months within the 14 calendar months immediately preceding
the proposed dividend payment (the "BASE PERIOD"), adjusted to reflect the
proposed dividend, is less than 20%; and (ii) 75% of net income available for
the payment of dividends during the base period if the ratio of common stock and
surplus to total capitalization and surplus for the base period, adjusted to
reflect the proposed dividend, is at least 20% but less than 25%.
In addition, Consumers' indenture dated as of January 1, 1996, between
Consumers and The Bank of New York, as trustee (the "PREFERRED SECURITIES
INDENTURE"), and certain preferred securities guarantees by Consumers dated
January 23, 1996, September 11, 1997 and October 25, 1999 (collectively, the
"CONSUMERS PREFERRED SECURITIES GUARANTEES"), in connection with which the 8.36%
Trust Originated Preferred Securities of Consumers Power Company Financing I,
the 8.20% Trust Originated Preferred Securities of Consumers Energy Company
Financing II, the 9 1/4% Trust Originated Preferred Securities of Consumers
Energy Company Financing III and the 9.00% Trust Preferred Securities of
Consumers Energy Company Financing IV (collectively, the "CONSUMERS TRUST
PREFERRED SECURITIES") were issued, provide that Consumers shall not declare or
pay any dividend on, make any distributions with respect to, or redeem, purchase
or make a liquidation payment with respect to, any of its capital stock if (i)
there shall have occurred any event that would constitute an event of default
under the Preferred Securities Indenture or the trust agreements pursuant to
which the Consumers Trust Preferred Securities were issued, (ii) a default has
occurred with respect to its payment of any obligations under the Consumers
Preferred Securities Guarantees or certain Consumers common stock guarantees or
(iii) it gives notice of its election to extend the interest payment period on
the subordinated new notes issued under the Preferred Securities Indenture, at
any time for up to 20 consecutive quarters, provided, however, Consumers may
declare and pay stock dividends where the dividend stock is the same stock as
that on which the dividend is being paid.
Consumers' ability to pay dividends is also restricted by several existing
loan agreements. The loan agreements are:
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- the Term Loan Agreement dated as of March 26, 2003 between Consumers
and Beal Bank, S.S.B., as agent;
- the Amended and Restated Credit Agreement dated as of September 19,
2003 among Consumers, Bank One, N.A., as agent, and the financial
institutions named therein; and
- the Term Loan Agreement dated as of November 7, 2003 among
Consumers, Bank One, N.A., as agent, and the financial institutions
named therein.
Pursuant to these loan agreements, so long as there exists no event of
default under these agreements, Consumers may pay dividends in an aggregate
amount not to exceed $300 million during any calendar year.
On June 2, 2003, the MPSC issued a financing order authorizing the
issuance of $554 million of securitization bonds. The order would prohibit
Consumers from paying any extraordinary dividends to us until further order of
the MPSC. Pursuant to the order, extraordinary dividends are considered any
amount over and above Consumers' earnings. The order also directed that the
securitization charges be designed such that retail open access customers would
pay a significantly smaller charge than would full service customers. On July 1,
2003, Consumers filed a petition for rehearing and clarification of certain
portions of the order with the MPSC, including the portion dealing with the
design of the securitization charges. In December 2003, the MPSC issued its
order on rehearing which rejected our requests for rehearing and clarification
and remanded the proceeding to the administrative law judge for additional
proceedings.
In December 2003, the MPSC issued an order granting interim gas rate
relief in the amount of $19.34 million annually. In connection with this rate
relief, Consumers agreed to limit its dividends to CMS Energy to a maximum of
$190 million annually during the period in which Consumers receives the interim
relief. The MPSC stated in its order that it was not determining at that time
whether dividend restrictions should continue after the issuance of a final
order.
Consumers' Articles also prohibit the payment of cash dividends on its
common stock if Consumers is in arrears on preferred stock dividend payments.
In addition, Michigan law prohibits payment of a dividend if, after giving
it effect, Consumers or Enterprises would not be able to pay its debts as they
become due in the usual course of business, or its total assets would be less
than the sum of its total liabilities plus, unless the Articles permit
otherwise, the amount that would be needed, if Consumers or Enterprises were to
be dissolved at the time of the distribution, to satisfy the preferential rights
upon dissolution of shareholders whose preferential rights are superior to those
receiving the distribution. Currently, it is Consumers' policy to pay annual
dividends equal to 80% of its annual consolidated net income. Consumers' Board
of Directors reserves the right to change this policy at any time.
PAYMENT AND MATURITY
The new notes will mature on August 1, 2010, and will bear interest at the
rate of 7.75% per year. At maturity, CMS Energy will pay the aggregate principal
amount of the new notes then outstanding. Each new note will bear interest from
the original date of issue, payable semiannually in arrears on February 1 and
August 1, commencing on August 1, 2004, and at maturity. Interest will be paid
to the person in whose name the new notes are registered at the close of
business on the first calendar day of the month in which the interest payment
date occurs. Interest payable on any interest payment date or on the date of
maturity will be the amount of
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interest accrued from and including the date of original issuance or from and
including the most recent interest payment date on which interest has been paid
or duly made available for payment to but excluding such interest payment date
or the date of maturity, as the case may be. Interest will be computed on the
basis of a 360-day year consisting of twelve 30 day months.
The interest rate on the new notes will increase if:
- we do not file either:
- a registration statement to allow for an exchange offer; or
- a resale shelf registration statement for the new notes;
- the registration statement referred to above is not declared effective
on a timely basis; or
- other conditions summarized below are not satisfied.
You should refer to the description under the heading "The Exchange Offer"
for a more detailed description of the circumstances under which the interest
rate will increase.
In any case where any interest payment date, redemption date, repurchase
date or maturity date (including upon the occurrence of a Change in Control) of
any new note shall not be a Business Day (as defined herein) at any place of
payment, then payment of interest or principal (and premium, if any) need not be
made on such date, but may be made on the next succeeding Business Day at such
place of payment with the same force and effect as if made on the interest
payment date, redemption date, repurchase date or maturity date (including upon
the occurrence of a Change in Control); and no interest shall accrue on the
amount so payable for the period from and after such interest payment date,
redemption date, repurchase date or maturity date, as the case may be, to such
Business Day.
REGISTRATION, TRANSFER AND EXCHANGE
The new notes will be initially issued in the form of one or more new
notes in registered, global form, without coupons, in denominations of $1,000
and any integral multiple thereof as described under "Book-Entry System." The
global securities will be registered in the name of the nominee of DTC. Except
as described under "Book-Entry System," owners of beneficial interests in a
global new note will not be entitled to have new notes registered in their
names, will not receive or be entitled to receive physical delivery of any such
new notes and will not be considered the registered holder thereof under the
senior debt indenture.
OPTIONAL REDEMPTION
The new notes will be redeemable at CMS Energy's option, in whole or in
part, at any time or from time to time, at a redemption price equal to 100% of
the principal amount of such new notes being redeemed plus the Applicable
Premium (as defined below), if any, thereon at the time of redemption, together
with accrued interest, if any, thereon to the redemption date. In no event will
the redemption price be less than 100% of the principal amount of the new notes
plus accrued interest, if any, thereon to the redemption date.
The following definitions are used to determine the Applicable Premium:
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"APPLICABLE PREMIUM" means, with respect to a new note (or portion
thereof) being redeemed at any time, the excess of (A) the present value at such
time of the principal amount of such new note (or portion thereof) being
redeemed plus all interest payments due on such new note (or portion thereof)
after the redemption date, which present value shall be computed using a
discount rate equal to the Treasury Rate plus 50 basis points, over (B) the
principal amount of such new note (or portion thereof) being redeemed at such
time. For purposes of this definition, the present values of interest and
principal payments will be determined in accordance with generally accepted
principles of financial analysis.
"TREASURY RATE" means the yield to maturity at the time of computation of
United States Treasury securities with a constant maturity (as compiled and
published in the most recent Federal Reserve Statistical Release H.15(519) (the
"STATISTICAL RELEASE")) which has become publicly available at least two
Business Days prior to the redemption date or, in case of defeasance, prior to
the date of deposit (or, if such Statistical Release is no longer published, any
publicly available source of similar market data) most nearly equal to the then
remaining average life to stated maturity of the new notes; provided, however,
that if the average life to stated maturity of the new notes is not equal to the
constant maturity of a United States Treasury security for which a weekly
average yield is given, the Treasury Rate shall be obtained by linear
interpolation (calculated to the nearest one-twelfth of a year) from the weekly
average yields of United States Treasury securities for which such yields are
given.
If the original redemption date is on or after a record date and on or
before the relevant interest payment date, the accrued and unpaid interest, if
any, will be paid to the person or entity in whose name the new note is
registered at the close of business on the record date, and no additional
interest will be payable to Holders whose new notes shall be subject to
redemption.
If less than all of the new notes are to be redeemed, the Trustee under
the senior debt indenture shall select, in such manner as it shall deem
appropriate and fair, the particular new notes or portions thereof to be
redeemed. Notice of redemption shall be given by mail not less than 30 nor more
than 60 days prior to the date fixed for redemption to the Holders of new notes
to be redeemed (which, as long as the new notes are held in the book-entry only
system, will be DTC (or its nominee) or a successor depositary); provided,
however, that the failure to duly give such notice by mail, or any defect
therein, shall not affect the validity of any proceedings for the redemption of
new notes as to which there shall have been no such failure or defect. On and
after the date fixed for redemption (unless CMS Energy shall default in the
payment of the new notes or portions thereof to be redeemed at the applicable
redemption price, together with accrued interest, if any, thereon to such date),
interest on the new notes or the portions thereof so called for redemption shall
cease to accrue.
No sinking fund is provided for the new notes.
PURCHASE OF NEW NOTES UPON CHANGE IN CONTROL
In the event of any Change in Control (as defined below) each Holder of a
new note will have the right, at such Holder's option, subject to the terms and
conditions of the senior debt indenture, to require CMS Energy to repurchase all
or any part of such Holder's new note on a date selected by CMS Energy that is
no earlier than 60 days nor later than 90 days (the "CHANGE IN CONTROL PURCHASE
DATE") after the mailing of written notice by CMS Energy of the occurrence of
such Change in Control, at a repurchase price payable in cash equal to 101% of
the principal amount of
33
such new notes plus accrued interest, if any, thereon to the Change in Control
Purchase Date (the "CHANGE IN CONTROL PURCHASE PRICE").
Within 30 days after the Change in Control Purchase Date, CMS Energy is
obligated to mail to each Holder of a new note a notice regarding the Change in
Control, which notice shall state, among other things:
- that a Change in Control has occurred and that each such Holder has
the right to require CMS Energy to repurchase all or any part of
such Holder's new notes at the Change in Control Purchase Price;
- the Change in Control Purchase Price;
- the Change in Control Purchase Date;
- the name and address of the paying agent; and
- the procedures that Holders must follow to cause the new notes to be
repurchased.
To exercise this right, a Holder must deliver a written notice (the
"CHANGE IN CONTROL PURCHASE NOTICE") to the paying agent at its corporate trust
office in Detroit, Michigan, or any other office of the paying agent maintained
for such purposes, not later than 30 days prior to the Change in Control
Purchase Date. The Change in Control Purchase Notice shall state:
- the portion of the principal amount of any new notes to be
repurchased, which must be $1,000 or an integral multiple thereof;
- that such new notes are to be repurchased by CMS Energy pursuant to
the applicable change-in-control provisions of the senior debt
indenture; and
- unless the new notes are represented by one or more global
securities, the certificate numbers of the new notes to be
repurchased.
Any Change in Control Purchase Notice may be withdrawn by the Holder by a
written notice of withdrawal delivered to the paying agent not later than three
Business Days prior to the Change in Control Purchase Date. The notice of
withdrawal shall state the principal amount and, if applicable, the certificate
numbers of the new notes as to which the withdrawal notice relates and the
principal amount, if any, which remains subject to a Change in Control Purchase
Notice.
If a new note is represented by a global new note, DTC or its nominee will
be the holder of such new note and therefore will be the only entity that can
require CMS Energy to repurchase new notes upon a Change in Control. To obtain
repayment with respect to such new note upon a Change in Control, the beneficial
owner of such new note must provide to the broker or other entity through which
it holds the beneficial interest in such new note (1) the Change in Control
Purchase Notice signed by such beneficial owner, and such signature must be
guaranteed by a member firm of a registered national securities exchange or of
the National Association of Securities Dealers, Inc. ("NASD") or a commercial
bank or trust company having an office or correspondent in the United States and
(2) instructions to such broker or other entity to notify DTC of such beneficial
owner's desire to cause CMS Energy to repurchase such new notes. Such broker or
other entity will provide to the paying agent (1) a Change in Control Purchase
Notice received from such beneficial owner and (2) a certificate satisfactory to
the paying agent from
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such broker or other entity that it represents such beneficial owner. Such
broker or other entity will be responsible for disbursing any payments it
receives upon the repurchase of such new notes by CMS Energy.
Payment of the Change in Control Purchase Price for a new note in
registered, certificated form (a "CERTIFICATED NEW NOTE") for which a Change in
Control Purchase Notice has been delivered and not withdrawn is conditioned upon
delivery of such certificated new note (together with necessary endorsements) to
the paying agent at its office in Detroit, Michigan, or any other office of the
paying agent maintained for such purpose, at any time (whether prior to, on or
after the Change in Control Purchase Date) after the delivery of such Change in
Control Purchase Notice. Payment of the Change in Control Purchase Price for
such certificated new note will be made promptly following the later of the
Change in Control Purchase Date or the time of delivery of such certificated new
note.
If the Paying Agent holds, in accordance with the terms of the senior debt
indenture, money sufficient to pay the Change in Control Purchase Price of a new
note on the Business Day following the Change in Control Purchase Date for such
new note, then, on and after such date, interest on such new note will cease to
accrue, whether or not such new note is delivered to the Paying Agent, and all
other rights of the Holder shall terminate (other than the right to receive the
Change in Control Purchase Price upon delivery of the new note).
Under the senior debt indenture, a "CHANGE IN CONTROL" means an event or
series of events by which:
- CMS Energy ceases to beneficially own, directly or indirectly, at
least 80% of the total voting power of all classes of Capital Stock
then outstanding of Consumers (whether arising from issuance of
securities of CMS Energy or Consumers, any direct or indirect
transfer of securities by CMS Energy or Consumers, any merger,
consolidation, liquidation or dissolution of CMS Energy or Consumers
or otherwise); or any "person" or "group" (as such terms are used in
Sections 13(d) and 14(d) of the Exchange Act) becomes the
"beneficial owner" (as such term is used in Rules 13d-3 and 13d-5
under the Exchange Act, except that a person or group shall be
deemed to have "beneficial ownership" of all shares that such person
or group has the right to acquire, whether such right is exercisable
immediately or only after the passage of time), directly or
indirectly, of more than 35% of the Voting Stock of CMS Energy; or
- CMS Energy consolidates with or merges into another corporation or
directly or indirectly conveys, transfers or leases all or
substantially all of its assets to any person, or any corporation
consolidates with or merges into CMS Energy, in either event
pursuant to a transaction in which the outstanding Voting Stock of
CMS Energy is changed into or exchanged for cash, securities or
other property, other than any such transaction where (A) the
outstanding Voting Stock of CMS Energy is changed into or exchanged
for Voting Stock of the surviving corporation and (B) the holders of
the Voting Stock of CMS Energy immediately prior to such transaction
retain, directly or indirectly, substantially proportionate
ownership of the Voting Stock of the surviving corporation
immediately after such transaction.
The senior debt indenture requires CMS Energy to comply with the
provisions of Regulation 14E and any other tender offer rules under the Exchange
Act which may then be applicable in connection with any offer by CMS Energy to
purchase new notes at the option of Holders upon a Change in Control. The Change
in Control purchase feature of the new notes may in certain
35
circumstances make more difficult or discourage a takeover of CMS Energy and,
thus, the removal of incumbent management. The Change in Control purchase
feature, however, is not the result of management's knowledge of any specific
effort to accumulate shares of its common stock or to obtain control of CMS
Energy by means of a merger, tender offer, solicitation or otherwise, or part of
a plan by management to adopt a series of anti-takeover provisions. Instead, the
Change in Control purchase feature is a term contained in many similar debt
offerings and the terms of such feature result from negotiations between CMS
Energy and the initial purchasers. Management has no present intention to
propose any anti-takeover measures although it is possible that CMS Energy could
decide to do so in the future.
No new note may be repurchased by CMS Energy as a result of a Change in
Control if there has occurred and is continuing an Event of Default described
under "Events of Default" below (other than a default in the payment of the
Change in Control Purchase Price with respect to the new notes). In addition,
CMS Energy's ability to purchase new notes may be limited by its financial
resources and its inability to raise the required funds because of restrictions
on issuance of securities contained in other contractual arrangements.
CERTAIN RESTRICTIVE COVENANTS
The senior debt indenture contains the covenants described below. Certain
capitalized terms used below are defined under the heading "Certain Definitions"
below.
LIMITATION ON RESTRICTED PAYMENTS
Under the terms of the senior debt indenture, so long as any of the new
notes are outstanding and until the new notes are rated BBB-- or above (or an
equivalent rating) by S&P and one Other Rating Agency, at which time CMS Energy
will be permanently released from the provisions of this "Limitation on
Restricted Payments," CMS Energy will not, and will not permit any of its
Restricted Subsidiaries, directly or indirectly, to:
- declare or pay any dividend or make any distribution on the Capital
Stock of CMS Energy to the direct or indirect holders of its Capital
Stock (except dividends or distributions payable solely in its
Non-Convertible Capital Stock or in options, warrants or other
rights to purchase such Non-Convertible Capital Stock and except
dividends or distributions payable to CMS Energy or a Subsidiary);
- purchase, redeem or otherwise acquire or retire for value any
Capital Stock of CMS Energy; or
- purchase, repurchase, redeem, defease or otherwise acquire or retire
for value, prior to scheduled maturity or scheduled repayment
thereof, any Subordinated Indebtedness (any such dividend,
distribution, purchase, redemption, repurchase, defeasing, other
acquisition or retirement being hereinafter referred to as a
"RESTRICTED PAYMENT"),
if at the time CMS Energy or such Subsidiary makes such Restricted Payment: (1)
an Event of Default, or an event that with the lapse of time or the giving of
notice or both would constitute an Event of Default, shall have occurred and be
continuing (or would result therefrom); or (2) the aggregate amount of such
Restricted Payment and all other Restricted Payments made since May 6, 1997
would exceed the sum of (a) $100,000,000 plus 100% of Consolidated Net Income
from May 6, 1997 to the end of the most recent fiscal quarter ending at least 45
days prior to the date of such Restricted Payment (or, in case such sum shall be
a deficit, minus 100% of the deficit) and
36
(b) the aggregate Net Cash Proceeds received by CMS Energy from the issue or
sale of or contribution with respect to its Capital Stock after May 6, 1997.
The foregoing provisions will not prohibit:
- dividends or other distributions paid in respect of any class of
Capital Stock issued by CMS Energy in connection with the
acquisition of any business or assets by CMS Energy or a Restricted
Subsidiary where the dividends or other distributions with respect
to such Capital Stock are payable solely from the net earnings of
such business or assets;
- any purchase or redemption of Capital Stock of CMS Energy made by
exchange for, or out of the proceeds of the substantially concurrent
sale of, Capital Stock of CMS Energy (other than Redeemable Stock or
Exchangeable Stock);
- dividends paid within 60 days after the date of declaration thereof
if at such date of declaration such dividends would have complied
with this covenant; or
- payments pursuant to the Tax Sharing Agreement.
LIMITATION ON CERTAIN LIENS
Under the terms of the senior debt indenture, so long as any of the new
notes are outstanding, CMS Energy shall not create, incur, assume or suffer to
exist any Lien, provided, that no event of default shall have occurred and be
continuing (or result therefrom) at the time of payment of such dividend upon or
with respect to any of its property of any character, including without
limitation any shares of Capital Stock of Consumers or Enterprises, without
making effective provision whereby the new notes shall be (so long as any such
other creditor shall be so secured) equally and ratably secured. The foregoing
restrictions shall not apply to (a) Liens securing Indebtedness of CMS Energy,
provided that on the date such Liens are created, and after giving effect to
such Indebtedness, the aggregate principal amount at maturity of all the secured
Indebtedness of CMS Energy at such date shall not exceed 5% of Consolidated Net
Tangible Assets or (b) certain liens for taxes, pledges to secure workman's
compensation, other statutory obligations and Support Obligations, certain
materialman's, mechanic's and similar liens and certain purchase money liens.
LIMITATION ON ASSET SALES
Under the terms of the senior debt indenture, so long as any of the new
notes are outstanding, CMS Energy may not sell, transfer or otherwise dispose of
any property or assets of CMS Energy, including Capital Stock of any
Consolidated Subsidiary, in one transaction or a series of transactions in an
amount which exceeds $50,000,000 (an "ASSET SALE") unless CMS Energy shall (1)
apply an amount equal to such excess Net Cash Proceeds to permanently repay
Indebtedness of a Consolidated Subsidiary or Indebtedness of CMS Energy which is
pari passu with the new notes, (2) invest an equal amount not so used in clause
(1) in property or assets of related business within 24 months after the date of
the Asset Sale (the "APPLICATION PERIOD") or (3) apply such excess Net Cash
Proceeds not so used in clause (1) or (2) (the "EXCESS PROCEEDS") to make an
offer, within 30 days after the end of the Application Period, to purchase from
the Holders on a pro rata basis an aggregate principal amount of new notes on
the relevant purchase date equal to the Excess Proceeds on such date, at a
purchase price equal to 100% of the principal amount of the new notes on the
relevant purchase date and unpaid interest, if any, to the purchase
37
date. CMS Energy shall only be required to make an offer to purchase new notes
from Holders pursuant to clause (3) if the Excess Proceeds equal or exceed
$25,000,000 at any given time.
The procedures to be followed by CMS Energy in making an offer to purchase
new notes from the Holders with Excess Proceeds, and the acceptance of such
offer by the Holders, shall be the same as those set forth above in "Purchase of
new notes Upon Change in Control" with respect to a Change in Control.
LIMITATION ON CONSOLIDATION, MERGER, SALE OR CONVEYANCE
In addition to the terms of the senior debt indenture relating to
consolidations or mergers described below under "Consolidation, Merger or Sale
of Assets", so long as any of the new notes are outstanding and until the new
notes are rated BBB-- or above (or an equivalent rating) by S&P and one Other
Rating Agency, at which time CMS Energy will be permanently released from the
provisions of this "Limitation on Consolidation, Merger, Sale or Conveyance"
(but not from the provisions described below which permit a consolidation or
merger provided that the surviving corporation assumes the obligations of CMS
Energy under the new notes and the senior debt indenture and is organized and
existing under the laws of the United States, any state thereof or the District
of Columbia), CMS Energy shall not consolidate with or merge into any other
Person or sell, lease or convey the property of CMS Energy in the entirety or
substantially as an entirety, unless (1) immediately after giving effect to such
transaction the Consolidated Net Worth of the surviving entity is at least equal
to the Consolidated Net Worth of CMS Energy immediately prior to the transaction
and (2) after giving effect to such transaction, the surviving entity would be
entitled to incur at least one dollar of additional Indebtedness (other than
revolving Indebtedness to banks) pursuant to the first paragraph under
"Limitation on Consolidated Indebtedness." Notwithstanding the foregoing
provisions, such a transaction may constitute a Change in Control as described
in "Purchase of new notes Upon Change in Control" and give rise to the right of
a Holder to require CMS Energy to repurchase all or part of such Holder's Note.
LIMITATION ON CONSOLIDATED INDEBTEDNESS
Under the terms of the senior debt indenture, so long as any of the new
notes are outstanding and until the new notes are rated BBB-- or above (or an
equivalent rating) by S&P and one Other Rating Agency, at which time CMS Energy
will be permanently released from the provisions of this "Limitation on
Consolidated Indebtedness," CMS Energy will not, and will not permit any of its
Consolidated Subsidiaries to, issue, create, assume, guarantee, incur or
otherwise become liable for (collectively, for this purpose, "ISSUE"), directly
or indirectly, any Indebtedness unless the Consolidated Coverage Ratio of CMS
Energy and its Consolidated Subsidiaries for the four consecutive fiscal
quarters immediately preceding the issuance of such Indebtedness (as shown by a
pro forma consolidated income statement of CMS Energy and its Consolidated
Subsidiaries for the four most recent fiscal quarters ending at least 30 days
prior to the issuance of such Indebtedness after giving effect to (1) the
issuance of such Indebtedness and (if applicable) the application of the net
proceeds thereof to refinance other Indebtedness as if such Indebtedness was
issued at the beginning of the period, (2) the issuance and retirement of any
other Indebtedness since the first day of the period as if such Indebtedness was
issued or retired at the beginning of the period and (3) the acquisition of any
company or business acquired by CMS Energy or any Subsidiary since the first day
of the period (including giving effect to the pro forma historical earnings of
such company or business), including any acquisition which will be consummated
contemporaneously with the issuance of such Indebtedness, as if in each case
such acquisition occurred at the beginning of the period) exceeds a ratio of 1.6
to 1.0.
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The foregoing limitation is subject to exceptions for:
- Indebtedness of CMS Energy to banks not to exceed $1 billion in
aggregate outstanding principal amount at any time;
- Indebtedness outstanding on the date of the Supplemental Indenture
and certain refinancings thereof;
- certain refinancings and Indebtedness of CMS Energy to a Subsidiary
or by a Subsidiary to CMS Energy;
- Indebtedness of a Consolidated Subsidiary issued to acquire,
develop, improve, construct or provide working capital for a gas,
oil or electric generation, exploration, production, distribution,
storage or transmission facility and related assets; provided that
such Indebtedness is without recourse to any assets of CMS Energy,
Consumers, Enterprises, CMS Generation, CMS Electric and Gas, CMS
Gas Transmission, CMS MST or any other Designated Enterprises
Subsidiary;
- Indebtedness of a Person existing at the time at which such Person
became a Subsidiary and not incurred in connection with, or in
contemplation of, such Person becoming a Subsidiary;
- Indebtedness issued by CMS Energy not to exceed $150 million in
aggregate outstanding principal amount at any time; and
- Indebtedness of a Consolidated Subsidiary in respect of rate
reduction bonds issued to recover electric restructuring transition
costs of Consumers; provided that such Indebtedness is without
recourse to the assets of Consumers.
CERTAIN DEFINITIONS
Set forth below is a summary of certain defined terms used in the senior
debt indenture. Reference is made to the senior debt indenture for a full
definition of all terms as well as any other capitalized terms used herein and
not otherwise defined.
"BUSINESS DAY" means a day on which banking institutions in New York, New
York or Detroit, Michigan are not authorized or required by law or regulation to
close.
"CAPITAL LEASE OBLIGATION" of a Person means any obligation that is
required to be classified and accounted for as a capital lease on the face of a
balance sheet of such Person prepared in accordance with generally accepted
accounting principles; the amount of such obligation shall be the capitalized
amount thereof, determined in accordance with generally accepted accounting
principles; the stated maturity thereof shall be the date of the last payment of
rent or any other amount due under such lease prior to the first date upon which
such lease may be terminated by the lessee without payment of a penalty; and
such obligation shall be deemed secured by a Lien on any property or assets to
which such lease relates.
"CAPITAL STOCK" means any and all shares, interests, rights to purchase,
warrants, options, participations or other equivalents of or interests in
(however designated) corporate stock,
39
including any Preferred Stock or letter stock; provided that Hybrid Preferred
Securities are not considered Capital Stock for purposes of this definition.
"CMS ELECTRIC AND GAS" means CMS Electric and Gas Company, a Michigan
corporation and wholly-owned subsidiary of Enterprises.
"CONSOLIDATED ASSETS" means, at any date of determination, the aggregate
assets of CMS Energy and its Consolidated Subsidiaries determined on a
consolidated basis in accordance with generally accepted accounting principles.
"CONSOLIDATED COVERAGE RATIO" with respect to any period means the ratio
of (1) the aggregate amount of Operating Cash Flow for such period to (2) the
aggregate amount of Consolidated Interest Expense for such period.
"CONSOLIDATED CURRENT LIABILITIES" means, for any period, the aggregate
amount of liabilities of CMS Energy and its Consolidated Subsidiaries which may
properly be classified as current liabilities (including taxes accrued as
estimated), after (1) eliminating all inter-company items between CMS Energy and
any Consolidated Subsidiary and (2) deducting all current maturities of
long-term Indebtedness, all as determined in accordance with generally accepted
accounting principles.
"CONSOLIDATED INDEBTEDNESS" means, at any date of determination, the
aggregate Indebtedness of CMS Energy and its Consolidated Subsidiaries
determined on a consolidated basis in accordance with generally accepted
accounting principles; provided that Consolidated Indebtedness shall not include
any subordinated debt owned by any Hybrid Preferred Securities Subsidiary.
"CONSOLIDATED INTEREST EXPENSE" means, for any period, the total interest
expense in respect of Consolidated Indebtedness of CMS Energy and its
Consolidated Subsidiaries, including, without duplication:
- interest expense attributable to capital leases;
- amortization of debt discount;
- capitalized interest;
- cash and noncash interest payments;
- commissions, discounts and other fees and charges owed with respect
to letters of credit and bankers' acceptance financing;
- net costs under interest rate protection agreements (including
amortization of discount); and
- interest expense in respect of obligations of other Persons deemed
to be Indebtedness of CMS Energy or any Consolidated Subsidiaries
under the fifth or sixth bullet points of the definition of
Indebtedness;
provided, however, that Consolidated Interest Expense shall exclude (a) any
costs otherwise included in interest expense recognized on early retirement of
debt and (b) any interest expense in
40
respect of any Indebtedness of any Subsidiary of Consumers, CMS Generation, CMS
Electric and Gas, CMS Gas Transmission, CMS MST or any other Designated
Enterprises Subsidiary, provided that such Indebtedness is without recourse to
any assets of CMS Energy, Consumers, Enterprises, CMS Generation, CMS Electric
and Gas, CMS Gas Transmission, CMS MST or any other Designated Enterprises
Subsidiary.
"CONSOLIDATED NET INCOME" means, for any period, the net income of CMS
Energy and its Consolidated Subsidiaries determined on a consolidated basis in
accordance with generally accepted accounting principles; provided, however,
that there shall not be included in such Consolidated Net Income:
- any net income of any Person if such Person is not a Subsidiary,
except that (A) CMS Energy's equity in the net income of any such
Person for such period shall be included in such Consolidated Net
Income up to the aggregate amount of cash actually distributed by
such Person during such period to CMS Energy or a Consolidated
Subsidiary as a dividend or other distribution and (B) CMS Energy's
equity in a net loss of any such Person for such period shall be
included in determining such Consolidated Net Income;
- any net income of any Person acquired by CMS Energy or a Subsidiary
in a pooling of interests transaction for any period prior to the
date of such acquisition;
- any gain or loss realized upon the sale or other disposition of any
property, plant or equipment of CMS Energy or its Consolidated
Subsidiaries which is not sold or otherwise disposed of in the
ordinary course of business and any gain or loss realized upon the
sale or other disposition of any Capital Stock of any Person; and
- any net income of any Subsidiary of Consumers, CMS Generation, CMS
Electric and Gas, CMS Gas Transmission, CMS MST or any other
Designated Enterprises Subsidiary whose interest expense is excluded
from Consolidated Interest Expense, provided, however, that for
purposes of this bullet point, any cash, dividends or distributions
of any such Subsidiary to CMS Energy shall be included in
calculating Consolidated Net Income.
"CONSOLIDATED NET TANGIBLE ASSETS" means, for any period, the total amount
of assets (less accumulated depreciation or amortization, allowances for
doubtful receivables, other applicable reserves and other properly deductible
items) as set forth on the most recently available quarterly or annual
consolidated balance sheet of CMS Energy and its Consolidated Subsidiaries,
determined on a consolidated basis in accordance with generally accepted
accounting principles, and after giving effect to purchase accounting and after
deducting therefrom, to the extent otherwise included, the amounts of:
- Consolidated Current Liabilities;
- minority interests in Consolidated Subsidiaries held by Persons
other than CMS Energy or a Restricted Subsidiary;
- excess of cost over fair value of assets of businesses acquired, as
determined in good faith by the Board of Directors as evidenced by
Board resolutions;
- any revaluation or other write-up in value of assets subsequent to
December 31, 1996, as a result of a change in the method of
valuation in accordance with generally accepted accounting
principles;
41
- unamortized debt discount and expenses and other unamortized
deferred charges, goodwill, patents, trademarks, service marks,
trade names, copyrights, licenses organization or developmental
expenses and other intangible items;
- treasury stock; and
- any cash set apart and held in a sinking or other analogous fund
established for the purpose of redemption or other retirement of
Capital Stock to the extent such obligation is not reflected in
Consolidated Current Liabilities.
"CONSOLIDATED NET WORTH" of any Person means the total of the amounts
shown on the consolidated balance sheet of such Person and its consolidated
subsidiaries, determined on a consolidated basis in accordance with generally
accepted accounting principles, as of any date selected by such Person not more
than 90 days prior to the taking of any action for the purpose of which the
determination is being made (and adjusted for any material events since such
date), as (1) the par or stated value of all outstanding Capital Stock plus (2)
paid-in capital or capital surplus relating to such Capital Stock plus (3) any
retained earnings or earned surplus less (A) any accumulated deficit, (B) any
amounts attributable to Redeemable Stock and (C) any amounts attributable to
Exchangeable Stock.
"CONSOLIDATED SUBSIDIARY" means any Subsidiary whose accounts are or are
required to be consolidated with the accounts of CMS Energy in accordance with
generally accepted accounting principles.
"DESIGNATED ENTERPRISES SUBSIDIARY" means any wholly-owned subsidiary of
Enterprises formed after the date of the Supplemental Indenture which is
designated a Designated Enterprises Subsidiary by the Board of Directors.
"EXCHANGEABLE STOCK" means any Capital Stock of a corporation that is
exchangeable or convertible into another security (other than Capital Stock of
such corporation that is neither Exchangeable Stock nor Redeemable Stock).
"HOLDER" OR "HOLDER" means the Person in whose name a new or old note, as
the case may be, is registered in the security register kept by CMS Energy for
that purpose.
"HYBRID PREFERRED SECURITIES" means any preferred securities issued by a
Hybrid Preferred Securities Subsidiary, where such preferred securities have the
following characteristics:
- such Hybrid Preferred Securities Subsidiary lends substantially all
of the proceeds from the issuance of such preferred securities to
CMS Energy or Consumers in exchange for subordinated debt issued by
CMS Energy or Consumers, respectively;
- such preferred securities contain terms providing for the deferral
of distributions corresponding to provisions providing for the
deferral of interest payments on such subordinated debt; and
- CMS Energy or Consumers (as the case may be) makes periodic interest
payments on such subordinated debt, which interest payments are in
turn used by the Hybrid Preferred Securities Subsidiary to make
corresponding payments to the holders of the Hybrid Preferred
Securities.
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"HYBRID PREFERRED SECURITIES SUBSIDIARY" means any business trust (or
similar entity):
- all of the common equity interest of which is owned (either directly
or indirectly through one or more wholly-owned Subsidiaries of CMS
Energy or Consumers) at all times by CMS Energy or Consumers;
- that has been formed for the purpose of issuing Hybrid Preferred
Securities; and
- substantially all of the assets of which consist at all times solely
of subordinated debt issued by CMS Energy or Consumers (as the case
may be) and payments made from time to time on such subordinated
debt.
"INDEBTEDNESS" of any Person means, without duplication:
- the principal of and premium (if any) in respect of (A) indebtedness
of such Person for money borrowed and (B) indebtedness evidenced by
new notes, debentures, bonds or other similar instruments for the
payment of which such Person is responsible or liable;
- all Capital Lease Obligations of such Person;
- all obligations of such Person issued or assumed as the deferred
purchase price of property, all conditional sale obligations and all
obligations under any title retention agreement (but excluding trade
accounts payable arising in the ordinary course of business);
- all obligations of such Person for the reimbursement of any obligor
on any letter of credit, bankers' acceptance or similar credit
transaction (other than obligations with respect to letters of
credit securing obligations (other than obligations described in the
bullet points above) entered into in the ordinary course of business
of such Person to the extent such letters of credit are not drawn
upon or, if and to the extent drawn upon, such drawing is reimbursed
no later than the third Business Day following receipt by such
Person of a demand for reimbursement following payment on the letter
of credit);
- all obligations of the type referred to in the bullet points above
of other Persons and all dividends of other Persons for the payment
of which, in either case, such Person is responsible or liable as
obligor, guarantor or otherwise; and
- all obligations of the type referred to in the bullet points above
of other Persons secured by any Lien on any property or asset of
such Person (whether or not such obligation is assumed by such
Person), the amount of such obligation being deemed to be the lesser
of the value of such property or assets or the amount of the
obligation so secured.
"LIEN" means any lien, mortgage, pledge, security interest, conditional
sale, title retention agreement or other charge or encumbrance of any kind.
"NET CASH PROCEEDS" means (a) with respect to any Asset Sale, the
aggregate proceeds of such Asset Sale including the fair market value (as
determined by the Board of Directors and net of any associated debt and of any
consideration other than Capital Stock received in return) of property other
than cash, received by CMS Energy, net of (1) brokerage commissions and other
fees and expenses (including fees and expenses of counsel and investment
bankers) related to such Asset Sale, (2) provisions for all taxes (whether or
not such taxes will actually be paid or are
43
payable) as a result of such Asset Sale without regard to the consolidated
results of operations of CMS Energy and its Restricted Subsidiaries, taken as a
whole, (3) payments made to repay Indebtedness or any other obligation
outstanding at the time of such Asset Sale that either (A) is secured by a Lien
on the property or assets sold or (B) is required to be paid as a result of such
sale and (4) appropriate amounts to be provided by CMS Energy or any Restricted
Subsidiary of CMS Energy as a reserve against any liabilities associated with
such Asset Sale, including, without limitation, pension and other
post-employment benefit liabilities, liabilities related to environmental
matters and liabilities under any indemnification obligations associated with
such Asset Sale, all as determined in conformity with generally accepted
accounting principles and (b) with respect to any issuance or sale or
contribution in respect of Capital Stock, the aggregate proceeds of such
issuance, sale or contribution, including the fair market value (as determined
by the Board of Directors and net of any associated debt and of any
consideration other than Capital Stock received in return) of property other
than cash, received by CMS Energy, net of attorneys' fees, accountants' fees,
underwriters' or placement agents' fees, discounts or commissions and brokerage,
consultant and other fees incurred in connection with such issuance or sale and
net of taxes paid or payable as a result thereof, provided, however, that if
such fair market value as determined by the Board of Directors of property other
than cash is greater than $25 million, the value thereof shall be based upon an
opinion from an independent nationally recognized firm experienced in the
appraisal or similar review of similar types of transactions.
"NON-CONVERTIBLE CAPITAL STOCK" means, with respect to any corporation,
any non-convertible Capital Stock of such corporation and any Capital Stock of
such corporation convertible solely into non-convertible Capital Stock other
than Preferred Stock of such corporation; provided, however, that
Non-Convertible Capital Stock shall not include any Redeemable Stock or
Exchangeable Stock.
"OPERATING CASH FLOW" means, for any period, with respect to CMS Energy
and its Consolidated Subsidiaries, the aggregate amount of Consolidated Net
Income after adding thereto Consolidated Interest Expense (adjusted to include
costs recognized on early retirement of debt), income taxes, depreciation
expense, amortization expense and any noncash amortization of debt issuance
costs, any nonrecurring, noncash charges to earnings and any negative accretion
recognition.
"OTHER RATING AGENCY" shall mean any one of Fitch, Inc. or Moody's
Investors Service, Inc., and any successor to any of these organizations which
is a nationally recognized statistical rating organization.
"PAYING AGENT" means any person authorized by CMS Energy to pay the
principal of (and premium, if any) or interest on any of the new notes on behalf
of CMS Energy. Initially, the paying agent is the Trustee under the senior debt
indenture.
"PERSON" means any individual, corporation, partnership, joint venture,
association, joint-stock company, trust, unincorporated organization or
government or any agency or political subdivision of any government.
"PREFERRED STOCK" as applied to the Capital Stock of any corporation means
Capital Stock of any class or classes (however designated) that is preferred as
to the payment of dividends, or as to the distribution of assets upon any
voluntary or involuntary liquidation or dissolution of such corporation, over
shares of Capital Stock of any other class of such corporation; provided that
Hybrid Preferred Securities are not considered Preferred Stock for purposes of
this definition.
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"REDEEMABLE STOCK" means any Capital Stock that by its terms or otherwise
is required to be redeemed prior to the first anniversary of the stated maturity
of the outstanding new notes or is redeemable at the option of the Holders
thereof at any time prior to the first anniversary of the stated maturity of the
outstanding new notes.
"RESTRICTED SUBSIDIARY" means any Subsidiary (other than Consumers and its
subsidiaries) of CMS Energy which, as of the date of CMS Energy's most recent
quarterly consolidated balance sheet, constituted at least 10% of the total
Consolidated Assets of CMS Energy and its Consolidated Subsidiaries and any
other Subsidiary which from time to time is designated a Restricted Subsidiary
by the Board of Directors, provided that no Subsidiary may be designated a
Restricted Subsidiary if, immediately after giving effect thereto, an Event of
Default or event that, with the lapse of time or giving of notice or both, would
constitute an Event of Default would exist or CMS Energy and its Restricted
Subsidiaries could not incur at least one dollar of additional Indebtedness
pursuant to the first paragraph under "Description of the new notes --
Limitation on Consolidated Indebtedness," and (1) any such Subsidiary so
designated as a Restricted Subsidiary must be organized under the laws of the
United States or any State thereof, (2) more than 80% of the Voting Stock of
such Subsidiary must be owned of record and beneficially by CMS Energy or a
Restricted Subsidiary and (3) such Restricted Subsidiary must be a Consolidated
Subsidiary.
"S&P" shall mean Standard & Poor's Ratings Group, a division of The
McGraw-Hill Companies, Inc., and any successor thereto which is a nationally
recognized statistical rating organization, or if such entity shall cease to
rate the new notes or shall cease to exist and there shall be no such successor
thereto, any other nationally recognized statistical rating organization
selected by CMS Energy which is acceptable to the Trustee.
"SUBORDINATED INDEBTEDNESS" means any Indebtedness of CMS Energy (whether
outstanding on the date of the Supplemental Indenture or thereafter incurred)
which is contractually subordinated or junior in right of payment to the new
notes.
"SUBSIDIARY" means a corporation more than 50% of the outstanding voting
stock of which is owned, directly or indirectly, by CMS Energy or by one or more
other Subsidiaries, or by CMS Energy and one or more other Subsidiaries. For the
purposes of this definition, "voting stock" means stock which ordinarily has
voting power for the election of directors, whether at all times or only so long
as no senior class of stock has such voting power by reason of any contingency.
"SUPPORT OBLIGATIONS" means, for any person, without duplication, any
financial obligation, contingent or otherwise, of such person guaranteeing or
otherwise supporting any debt or other obligation of any other person in any
manner, whether directly or indirectly, and including, without limitation, any
obligation of such person, direct or indirect:
- to purchase or pay (or advance or supply funds for the purchase or
payment of) such debt or to purchase (or to advance or supply funds
for the purchase of) any security for the payment of such debt;
- to purchase property, securities or services for the purpose of
assuring the owner of such debt of the payment of such debt;
- to maintain working capital, equity capital, available cash or other
financial statement condition of the primary obligor so as to enable
the primary obligor to pay such debt;
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- to provide equity capital under or in respect of equity subscription
arrangements (to the extent that such obligation to provide equity
capital does not otherwise constitute debt); or
- to perform, or arrange for the performance of, any non-monetary
obligations or non-funded debt payment obligations of the primary
obligor.
"TAX SHARING AGREEMENT" means the Amended and Restated Agreement for the
Allocation of Income Tax Liabilities and Benefits, dated January 1, 1994, as
amended or supplemented from time to time, by and among CMS Energy, each of the
members of the Consolidated Group (as defined therein), and each of the
corporations that become members of the Consolidated Group.
"VOTING STOCK" means securities of any class or classes the holders of
which are ordinarily, in the absence of contingencies, entitled to vote for
corporate directors (or persons performing similar functions).
EVENTS OF DEFAULT
The occurrence of any of the following events with respect to the new
notes will constitute an "EVENT OF DEFAULT" with respect to the new notes:
- default for 30 days in the payment of any interest on any of the new
notes;
- default in the payment when due of any of the principal of or the
premium, if any, on any of the new notes, whether at maturity, upon
redemption, acceleration, purchase by CMS Energy at the option of
the Holders or otherwise;
- default for 60 days by CMS Energy in the observance or performance
of any other covenant or agreement contained in the senior debt
indenture relating to the new notes after written notice thereof as
provided in the senior debt indenture;
- certain events of bankruptcy, insolvency or reorganization relating
to CMS Energy or Consumers;
- entry of final judgments against CMS Energy or Consumers aggregating
in excess of $25,000,000 which remain undischarged or unbonded for
60 days;
- a default resulting in the acceleration of indebtedness of CMS
Energy or Consumers in excess of $25,000,000, which acceleration has
not been rescinded or annulled within ten days after written notice
of such default as provided in the senior debt indenture;
- a default in our obligation to redeem new notes after we exercised
our redemption option; or
- a default in our obligation to purchase new notes upon the
occurrence of a Change in Control or exercise by a Holder of its
option to require us to purchase such Holder's new notes.
If an Event of Default on the new notes shall have occurred and be
continuing, either the Trustee or the Holders of not less than 25% in aggregate
principal amount of the new notes then outstanding may declare the principal of
all the new notes and the premium thereon and interest, if any, accrued thereon
to be due and payable immediately.
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The senior debt indenture provides that the Trustee will be under no
obligation to exercise any of its rights or powers under the senior debt
indenture at the request, order or direction of the Holders of the new notes,
unless such Holders shall have offered to the Trustee reasonable indemnity.
Subject to such provisions for indemnity and certain other limitations contained
in the senior debt indenture, the Holders of a majority in aggregate principal
amount of the senior debentures of each affected series then outstanding (voting
as one class) will have the right to direct the time, method and place of
conducting any proceeding for any remedy available to the trustee, or exercising
any trust or power conferred on the Trustee, with respect to the senior
debentures of such affected series.
The senior debt indenture provides that no Holders of new notes may
institute any action against CMS Energy under the senior debt indenture (except
actions for payment of overdue principal, premium or interest) unless such
Holder previously shall have given to the Trustee written notice of default and
continuance thereof and unless the Holders of not less than 25% in aggregate
principal amount of senior debentures of the affected series then outstanding
(voting as one class) shall have requested the Trustee to institute such action
and shall have offered the Trustee reasonable indemnity, the Trustee shall not
have instituted such action within 60 days of such request and the Trustee shall
not have received direction inconsistent with such request by the Holders of a
majority in aggregate principal amount of the senior debentures of the affected
series then outstanding (voting as one class).
The senior debt indenture requires CMS Energy to furnish to the Trustee
annually a statement as to CMS Energy's compliance with all conditions and
covenants under the senior debt indenture. The senior debt indenture provides
that the Trustee may withhold notice to the Holders of the new notes of any
default affecting such new notes (except defaults as to payment of principal,
premium or interest on the new notes) if it considers such withholding to be in
the interests of the Holders of the new notes.
CONSOLIDATION, MERGER OR SALE OF ASSETS
The senior debt indenture provides that CMS Energy may consolidate with or
merge into, or sell, lease or convey its property as an entirety or
substantially as an entirety to, any other corporation if the new corporation
assumes the obligations of CMS Energy under the new notes and the Supplemental
Indenture and is organized and existing under the laws of the United States, any
U.S. State or the District of Columbia. Notwithstanding the foregoing
provisions, such a transaction may constitute a Change in Control as described
in "Purchase of New Notes Upon Change in Control".
MODIFICATION AND WAIVER
CMS Energy and the relevant trustee may enter into supplemental indentures
without the consent of the Holders of the new notes to establish the form and
terms of any series of securities under the senior debt indenture.
CMS Energy and the relevant trustee, with the consent of the Holders of at
least a majority in total principal amount of senior debentures of all series
then outstanding and affected (voting as one class), to change in any manner the
provisions of the senior debt indenture or modify in any manner the rights of
the holders of the senior debentures of each such affected series. CMS Energy
and the relevant trustee may not, without the consent of the holders of each
senior debenture affected, enter into any supplemental indenture to:
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- change the time of payment of the principal;
- reduce the principal amount of such senior debenture;
- reduce the rate or change the time of payment of interest on such
senior debenture;
- reduce the amount payable on any securities issued originally at a
discount upon acceleration or provable in bankruptcy;
- impair the right to institute suit for the enforcement of any
payment on any senior debenture when due;
- reduce the redemption price or Change in Control Purchase Price for
the new notes or change the terms applicable to redemption or
purchase in a manner adverse to the Holder;
- make any change that adversely affects the right to exchange any
debt security, including the new notes, or decreases the exchange
rate of any exchangeable debt security; or
- waive any default in any payment of redemption price or Change in
Control Purchase Price with respect to the new notes.
In addition, no such modification may reduce the percentage in principal
amount of the senior debenture of the affected series, the consent of whose
holders is required for any such modification or for any waiver provided for in
the senior debt indenture.
Prior to the acceleration of the maturity of any senior debenture, the
holders, voting as one class, of a majority in total principal amount of the
senior debentures with respect to which a default or event of default shall have
occurred and be continuing may on behalf of the holders of all such affected
senior debentures waive any past default or event of default and its
consequences, except a default or an event of default in respect of a covenant
or provision of the senior debt indenture or of any senior debenture which
cannot be modified or amended without the consent of the holders of each senior
debenture affected.
DEFEASANCE, COVENANT DEFEASANCE AND DISCHARGE
The senior debt indenture provides that, at the option of CMS Energy:
- CMS Energy will be discharged from all obligations in respect of the
new notes (except for certain obligations to register the transfer
of or exchange of the new notes, to replace stolen, lost or
mutilated new notes, to maintain paying agencies and to maintain the
trust described below); or
- CMS Energy need not comply with certain restrictive covenants of the
senior debt indenture (including those described under
"Consolidation, Merger or Sale of Assets"),
if CMS Energy in each case irrevocably deposits in trust with the relevant
trustee money and/or securities backed by the full faith and credit of the
United States which, through the payment of the principal thereof and the
interest thereon in accordance with their terms, will provide money in an amount
sufficient to pay all the principal and interest on the new notes on the stated
maturities of such new notes in accordance with the terms thereof.
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To exercise this option, CMS Energy is required to deliver to the relevant
trustee an opinion of independent counsel to the effect that:
- the exercise of such option would not cause the Holders of the new
notes to recognize income, gain or loss for United States federal
income tax purposes as a result of such defeasance, and such Holders
will be subject to United States federal income tax on the same
amounts, in the same manner and at the same times as would have been
the case if such defeasance had not occurred; and
- in the case of a discharge as described above, such opinion is to be
accompanied by a private letter ruling to the same effect received
from the Internal Revenue Service, a revenue ruling to such effect
pertaining to a comparable form of transaction published by the
Internal Revenue Service or appropriate evidence that since the date
of the senior debt indenture there has been a change in the
applicable federal income tax law.
In the event:
- CMS Energy exercises its option to effect a covenant defeasance with
respect to the new notes as described above;
- the new notes are thereafter declared due and payable because of the
occurrence of any event of default other than an event of default
caused by failing to comply with the covenants which are defeased;
or
- the amount of money and securities on deposit with the relevant
trustee would be insufficient to pay amounts due on the new notes at
the time of the acceleration resulting from such event of default,
CMS Energy would remain liable for such amounts.
THE TRUSTEE
J.P. Morgan Trust Company, N.A. (the "TRUSTEE") is the Trustee and paying
agent under the senior debt indenture for the new notes. CMS Energy and its
affiliates maintain lending depositary and other normal banking relationship
with J.P. Morgan Trust Company, N.A. J.P. Morgan Trust Company, N.A. is also a
lender to CMS Energy and its affiliates.
GOVERNING LAW
The senior debt indenture, the Supplemental Indenture and the new notes
will be governed by, and construed in accordance with, the laws of the State of
Michigan unless the laws of another jurisdiction shall mandatorily apply.
BOOK-ENTRY SYSTEM
The new notes will be represented by one or more global securities. Each
global security will be deposited with, or on behalf of, DTC and be registered
in the name of a nominee of DTC. Except under circumstances described below, the
new notes will not be issued in definitive form.
The following is based upon information furnished by DTC:
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DTC is a limited-purpose trust company organized under the New York
Banking Law, a "banking organization" within the meaning of the New York Banking
Law, a member of the Federal Reserve System, a "clearing corporation" within the
meaning of the New York Uniform Commercial Code, and a "clearing agency"
registered pursuant to the provisions of Section 17A of the Exchange Act. DTC
holds securities that its participants ("PARTICIPANTS") deposit with DTC. DTC
also facilitates the settlement among participants of securities transactions,
such as transfers and pledges, in deposited securities through electronic
computerized book-entry changes in participants' accounts, thereby eliminating
the need for physical movement of securities certificates. Direct participants
("DIRECT PARTICIPANTS") include securities brokers and dealers, banks, trust
companies, clearing corporations, and certain other organizations. DTC is owned
by a number of its direct participants and by the New York Stock Exchange, Inc.,
the American Stock Exchange, Inc., and the National Association of Securities
Dealers, Inc. Access to the DTC system is also available to others such as
securities brokers and dealers, banks and trust companies that clear through or
maintain a custodial relationship with a direct participant, either directly or
indirectly. The rules applicable to DTC and its participants are on file with
the SEC.
Investors who purchase new notes in offshore transactions in reliance on
Regulation S under the Securities Act may hold their interest in a global
security directly through Euroclear Bank S.A./N.V., as operator of the Euroclear
System ("EUROCLEAR"), and Clearstream Banking, societe anonyme ("CLEARSTREAM"),
if they are participants in such systems, or indirectly through organizations
that are participants in such systems. Euroclear and Clearstream will hold
interests in the global securities on behalf of their participants through their
respective depositaries, which in turn will hold such interests in the global
securities in customers' securities accounts in the depositaries' names on the
books of DTC.
Upon the issuance of a global security, DTC will credit on its book-entry
registration and transfer system the accounts of persons designated by the
initial purchaser with the respective principal amounts of the new notes
represented by the global security. Ownership of beneficial interests in a
global security will be limited to participants or persons that may hold
interests through participants. Ownership of beneficial interests in a global
security will be shown on, and the transfer of that ownership will be effected
only through, records maintained by DTC or its nominee (with respect to
interests of persons other than participants). The laws of some states require
that some purchasers of securities take physical delivery of the securities in
definitive form. Such limits and such laws may impair the ability to transfer
beneficial interests in a global security.
So long as DTC or its nominee is the registered owner of a global
security, DTC or its nominee, as the case may be, will be considered the sole
owner or Holder of the new notes represented by that global security for all
purposes under the senior debt indenture. Except as provided below, owners of
beneficial interests in a global security will not be entitled to have new notes
represented by that global security registered in their names, will not receive
or be entitled to receive physical delivery of new notes in definitive form and
will not be considered the owners or Holders thereof under the senior debt
indenture. Principal and interest payments, if any, on new notes registered in
the name of DTC or its nominee will be made to DTC or its nominee, as the case
may be, as the registered owner of the relevant global security. Neither we, the
Trustee, any paying agent or the security registrar for the new notes will have
any responsibility or liability for any aspect of the records relating to nor
payments made on account of beneficial interests in a global security or for
maintaining, supervising or reviewing any records relating to such beneficial
interests.
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We expect that DTC or its nominee, upon receipt of any payment of
principal or interest, will credit immediately participants' accounts with
payments in amounts proportionate to their respective beneficial interests in
the principal amount of the relevant global security as shown on the records of
DTC or its nominee. We also expect that payments by participants to owners of
beneficial interests in a global security held through these participants will
be governed by standing instructions and customary practices, as is the case
with securities held for the accounts of customers in bearer form or registered
in "street name," and will be the responsibility of the participants.
Unless and until they are exchanged in whole or in part for new notes in
definitive form, the global securities may not be transferred except as a whole
by DTC to a nominee of DTC or by a nominee of DTC to DTC or another nominee of
DTC. Transfers between participants in DTC will be effected in the ordinary way
in accordance with DTC rules and will be settled in same-day funds. Transfers
between participants in Euroclear and Clearstream will be effected in the
ordinary way in accordance with their respective rules and operating procedures.
Cross-market transfers between DTC, on the one hand, and directly or
indirectly through Euroclear or Clearstream participants, on the other, will be
effected in DTC in accordance with DTC rules on behalf of Euroclear or
Clearstream, as the case may be, by its respective depositary; however, such
cross-market transactions will require delivery of instructions to Euroclear or
Clearstream, as the case may be, by the counterparty in such system in
accordance with its rules and procedures and within its established deadlines
(Brussels time). Euroclear or Clearstream, as the case may be, will, if the
transaction meets its settlement requirements, deliver instructions to its
respective depositary to take action to effect final settlement on its behalf by
delivering or receiving interests in the global securities in DTC, and making or
receiving payment in accordance with normal procedures for same-day funds
settlement applicable to DTC. Euroclear participants and Clearstream
participants may not deliver instructions directly to the depositaries for
Euroclear or Clearstream.
Because of time zone differences, the securities account of a Euroclear or
Clearstream participant purchasing an interest in the global securities from a
DTC participant will be credited during the securities settlement processing day
(which must be a business day for Euroclear or Clearstream, as the case may be)
immediately following the DTC settlement date, and such credit of any
transactions interests in the global securities settled during such processing
day will be reported to the relevant Euroclear or Clearstream participant on
such day. Cash received by Euroclear or Clearstream as a result of sales of
interests in the global securities by or through a Euroclear or Clearstream
participant to a DTC participant will be received with value on the DTC
settlement date, but will be available in the relevant Euroclear or Clearstream
cash account only as of the business day following settlement in DTC.
If DTC at any time is unwilling or unable to continue as a depositary,
defaults in the performance of its duties as depositary or ceases to be a
clearing agency registered under the Exchange Act or other applicable statute or
regulation, and a successor depositary is not appointed by us within 90 days, we
will issue new notes in definitive form in exchange for the global securities
relating to the new notes. In addition, we may at any time and in our sole
discretion determine not to have the new notes or portions of the new notes
represented by one or more global securities and, in that event, will issue
individual new notes in exchange for the global security or securities
representing the new notes. Further, if we so specify with respect to any new
notes, an owner of a beneficial interest in a global security representing the
new notes may, on terms acceptable to us and the depositary for the global
security, receive individual new notes in exchange for the beneficial interest.
In any such instance, an owner of a beneficial
51
interest in a global security will be entitled to physical delivery in
definitive form of new notes represented by the global security equal in
principal amount to the beneficial interest, and to have the new notes
registered in its name. new notes so issued in definitive form will be issued as
registered new notes in denominations of $1,000 and integral multiples thereof,
unless otherwise specified by us.
LISTING
The new notes will be eligible to be traded on the Portal Market of the
National Association of Securities Dealers, Inc. at the time of issuance.
RATINGS
S&P has assigned each series of old notes a rating of B+, Moody's has
assigned each series of old notes a rating of B3 and Fitch has assigned each
series of old notes a rating of B+. The terms of the new notes will be identical
in all material respects to the terms of the old notes, except that the
registration rights and related liquidated damages provisions and the transfer
restrictions applicable to the old notes will not be applicable to the new
notes. The new notes will have the same financial terms and covenants as the old
notes, and will be subject to the same business and financial risks. The ratings
mentioned above reflect only the views of such ratings agencies, and do not
constitute a recommendation to buy, sell or hold securities. In general, ratings
address credit risk. Each rating should be evaluated independently of any other
rating. An explanation of the significance of such ratings may be obtained only
from such rating agencies at the following addresses: Standard & Poor's, 25
Broadway, New York, New York 10004; Moody's Investors Service, Inc., 99 Church
Street, New York, New York 10007; and Fitch, Inc., 1 State Street Plaza, New
York, New York 10004. The security rating may be subject to revision or
withdrawal at any time by the assigning rating organization, and, accordingly,
there can be no assurance that such ratings will remain in effect for any period
of time or that they will not be revised downward or withdrawn entirely by the
rating agencies if, in their judgment, circumstances warrant. Neither CMS nor
the Initial Purchasers have undertaken any responsibility to oppose any proposed
downward revision or withdrawal of a rating on the old notes. Any such downward
revision or withdrawal of such ratings may have an adverse effect on the market
price of the new notes.
THE EXCHANGE OFFER
PURPOSE OF THE EXCHANGE OFFER
We initially sold the old notes in a private offering to Citigroup Global
Markets Inc., Merrill Lynch, Pierce, Fenner & Smith Incorporated and Deutsche
Bank Securities Inc. (the "INITIAL PURCHASERS") pursuant to a purchase agreement
between us and them. The Initial Purchasers resold the old notes to qualified
institutional buyers in reliance on, and subject to the restrictions imposed
under, Rule 144A under the Securities Act. As of the date of this prospectus,
$300 million of the old notes are outstanding.
EXCHANGE OFFER REGISTRATION
In connection with the private offering of the old notes, we entered into
a registration rights agreement with the Initial Purchasers pursuant to which we
agreed, for the benefit of the Holders of the old notes, at our cost to:
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- within 240 days following the original issue date of the old notes,
prepare and file with the SEC an Exchange Offer registration
statement with respect to a proposed Exchange Offer and the issuance
and delivery to the Holders, in exchange for the old notes of new
notes, which will have terms identical in all material respects to
the old notes, except that the new notes will not contain terms with
respect to transfer restrictions and will not provide for the
payment of additional interest under the circumstances described
below;
- use our reasonable best efforts to cause the exchange offer
registration statement to be declared effective under the Securities
Act within 330 days of the original issue date of the new notes;
- use our reasonable best efforts to keep the exchange offer
registration statement effective until the closing of the Exchange
Offer; and
- use our reasonable best efforts to cause the Exchange Offer to be
consummated not later than 30 days following the effectiveness of
the exchange offer registration statement.
The new notes will be issued under the Indenture. Upon the effectiveness
of the exchange offer registration statement, we will offer the new notes in
exchange for surrender of the old notes. We will keep the Exchange Offer open
for not less than 20 business days after the date notice of the Exchange Offer
is mailed to the Holders of the old notes, or longer if required by applicable
law.
For each old note surrendered to us pursuant to the Exchange Offer and not
withdrawn by the Holder, the Holder of the old note will receive a new note
having a principal amount equal to that of the surrendered old note. Interest on
each new note will accrue from the last date on which interest was paid on the
old note surrendered in exchange or, if no interest has been paid on that old
note, from the original issue date of the new notes.
SEC INTERPRETATIONS
Based on existing interpretations of the Securities Act by the staff of
the SEC in several no-action letters to third parties, and subject to the
immediately following sentence, we believe that the new notes issued pursuant to
the Exchange Offer may be offered for resale, resold or otherwise transferred by
the Holders, other than Holders who are broker-dealers, without further
compliance with the registration and prospectus delivery provisions of the
Securities Act. Any purchaser of new notes, however, who is our affiliate or who
intends to participate in the Exchange Offer for the purpose of distributing the
new notes, or any participating broker-dealer who purchased the new notes for
its own account, other than as a result of market-making activities or other
trading activities, to resell pursuant to Rule 144A or any other available
exemption under the Securities Act:
- will not be able to rely on the interpretations by the staff of the
SEC;
- will not be able to tender its old notes in the Exchange Offer; and
- must comply with the registration and prospectus delivery
requirements of the Securities Act in connection with any sale or
transfer of the new notes, unless the sale or transfer is made under
an exemption from those requirements.
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We do not intend to seek our own interpretation regarding the Exchange
Offer, and we cannot assure you that the staff of the SEC would make a similar
determination with respect to the new notes as it has in other interpretations
to third parties.
Each Holder of old notes, other than specified Holders, who wishes to
exchange such old notes for the related new notes in the Exchange Offer will be
required to make representations that:
- it is not our affiliate;
- the old notes being exchanged, and any new notes to be received by
it, have been or will be acquired in the ordinary course of its
business; and
- it has no arrangement or understanding with any person to
participate in the distribution, within the meaning of the
Securities Act, of the new notes.
In addition, in connection with resales of new notes, any participating
broker-dealer must deliver a prospectus meeting the requirements of the
Securities Act. The staff of the SEC has taken the position that participating
broker-dealers may fulfill their prospectus delivery requirements with respect
to the new notes, other than a resale of an unsold allotment from the original
sale of the new notes, with the prospectus contained in the exchange offer
registration statement. Under the registration rights agreement, we have agreed,
for a period of one year following the consummation of the Exchange Offer, to
make available a prospectus meeting the requirements of the Securities Act to
any participating broker-dealer for use in connection with any resale of any new
notes acquired in the Exchange Offer.
SHELF REGISTRATION
If:
(1) we are not permitted to consummate the Exchange Offer because
the Exchange Offer is not permitted by applicable law or SEC policy; or
(2) upon notice to us by any Holder in specified circumstances, and
(3) we are eligible to use Securities Act Form S-3
we will, in addition to or instead of effecting the registration of
the new notes pursuant to the exchange offer registration statement, as
the case may be,
(1) on or prior to 180 days after the earlier of any event in (1) or
(2) above, file with the SEC a shelf registration statement covering
resales of the old notes;
(2) use our reasonable best efforts to cause the shelf registration
statement to be declared effective under the Securities Act not later than
270 days after the date of any event in (1) or (2) above;
(3) use our reasonable best efforts to keep the shelf registration
statement effective for two years; and
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(4) use our reasonable best efforts to ensure that the shelf
registration statement and any amendment to the shelf registration
statement and any prospectus included in the shelf registration statement
conforms with the requirements of the Securities Act.
We will, in the event of the filing of a shelf registration statement,
provide to each Holder of old notes that are covered by the shelf registration
statement copies of the prospectus that is a part of the shelf registration
statement and notify each Holder when the shelf registration statement has
become effective. A Holder of old notes that sells the old notes pursuant to the
shelf registration statement generally will be required to be named as a selling
security holder in the related prospectus, to deliver information to be used in
connection with the shelf registration, and to deliver a prospectus to
purchasers, will be subject to the civil liability provisions under the
Securities Act in connection with the sales and will be bound by the provisions
of the registration rights agreement that are applicable to the Holder,
including indemnification obligations.
ADDITIONAL INTEREST
We are making this Exchange Offer to satisfy our obligations and your
registration rights under the registration rights agreement. If a registration
default occurs, which means one of the following events occurs:
- the exchange offer registration statement is not filed with the SEC
on or prior to the 240th calendar day following the original issue
date of the old notes;
- the exchange offer registration statement is not declared effective
on or prior to the 330th calendar day following the original issue
date of the old notes;
- the Exchange Offer is not consummated on or prior to the 30th
calendar day following effectiveness of the exchange offer
registration statement;
- if required, a shelf registration statement with respect to the old
notes is not filed with the SEC on or prior to the date specified
above;
- if required, a shelf registration statement with respect to the old
notes is not declared effective on or prior to the date specified
above; or
- either the exchange offer registration statement or a shelf
registration statement has been filed and declared effective but
after its effective date ceases to be effective or is unusable for
its intended purpose without being succeeded within 15 business days
by a post-effective amendment to such registration statement that
cures such failure and that is itself declared effective by the SEC
within five business days;
then additional interest will accrue on the old notes, from and including the
date on which any such registration default shall occur to, but excluding, the
date on which the registration default has been cured, at the rate of 0.25% per
annum during the 90-day period immediately following the occurrence of such
registration default and shall increase by 0.25% per annum at the end of each
subsequent 90-day period, but in no event shall such rate exceed 0.50% per
annum. We will have no other liabilities for monetary damages with respect to
our registration obligations. The receipt of additional interest will be the
sole monetary remedy available to a Holder if we fail to meet these obligations.
EXPIRATION DATE; EXTENSIONS; AMENDMENTS; TERMINATION
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The term "EXPIRATION DATE" shall mean ________ __, 2004 unless we, in our
sole discretion, extend the Exchange Offer, in which case the term "EXPIRATION
DATE" shall mean the latest date to which the Exchange Offer is extended.
To extend the Expiration Date, we will notify the Exchange Agent of any
extension by oral or written notice and will notify the holders of the old notes
by means of a press release or other public announcement prior to 9:00 a.m., New
York City time, on the next business day after the previously scheduled
Expiration Date. Such announcement may state that we are extending the Exchange
Offer for a specified period of time.
We reserve the right :
- to delay acceptance of any old notes, extend the Exchange Offer or
terminate the Exchange Offer and not permit acceptance of the old
notes not previously accepted if any of the conditions set forth
herein under "--Conditions" shall have occurred and shall not have
been waived by us, by giving oral or written notice of such delay,
extension or termination to the Exchange Agent, or
- to amend the terms of the Exchange Offer in any manner deemed by it
to be advantageous to the holders of the old notes.
Any such delay in acceptance, extension, termination or amendment will be
followed as promptly as practicable by oral or written notice thereof to
the Exchange Agent. If the Exchange Offer is amended in a manner
determined by us to constitute a material change, we will promptly
disclose such amendment in a manner reasonably calculated to inform the
holders of the old notes of such amendment.
Without limiting the manner in which we may choose to make public
announcement of any delay, extension, amendment or termination of the Exchange
Offer, we shall have no obligations to publish, advertise, or otherwise
communicate any such public announcement, other than by making a timely release
to an appropriate news agency.
INTEREST ON THE NEW NOTES
Interest on the new notes will accrue from the last date on which interest was
paid on the old notes, or, if no interest has been paid on such old notes, from
the date of issuance of the new notes. Interest on the new notes is payable
semiannually on February 1 and August 1 commencing August 1, 2004.
PROCEDURES FOR TENDERING
To tender in the Exchange Offer, a holder must complete, sign and date the
Letter of Transmittal, or a facsimile thereof, have the signatures thereon
medallion guaranteed if required by the Letter of Transmittal, and mail or
otherwise deliver such Letter of Transmittal or such facsimile, together with
any other required documents, to the Exchange Agent prior to 5:00 p.m., New York
City time, on the Expiration Date. In addition, either (i) a timely confirmation
of a book-entry transfer (a "BOOK-ENTRY CONFIRMATION") of such old notes into
the Exchange Agent's account at The Depositary (the "BOOK-ENTRY TRANSFER
FACILITY") pursuant to the
56
procedure for book-entry transfer described below, must be received by the
Exchange Agent prior to the Expiration Date or (ii) the holder must comply with
the guaranteed delivery procedures described below. THE METHOD OF DELIVERY OF
LETTERS OF TRANSMITTAL AND ALL OTHER REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS
AT THE ELECTION AND RISK OF THE HOLDERS. IF SUCH DELIVERY IS BY MAIL, IT IS
RECOMMENDED THAT REGISTERED MAIL, PROPERLY INSURED, WITH RETURN RECEIPT
REQUESTED, BE USED. IN ALL CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO ASSURE
TIMELY DELIVERY TO THE EXCHANGE AGENT BEFORE THE EXPIRATION DATE. NO LETTERS OF
TRANSMITTAL OR OTHER REQUIRED DOCUMENTS SHOULD BE SENT TO CONSUMERS. Delivery of
all documents must be made to the Exchange Agent at its address set forth below.
Holders may also request their respective brokers, dealers, commercial banks,
trust companies or nominees to effect such tender for such holders.
The tender by a holder of old notes will constitute an agreement between
such holder and CMS in accordance with the terms and subject to the conditions
set forth herein and in the Letter of Transmittal. Any beneficial owner whose
old notes are registered in the name of a broker, dealer, commercial bank, trust
company or other nominee and who wishes to tender should contact such registered
holder promptly and instruct such registered holder to tender on his behalf.
Signatures on a Letter of Transmittal or a notice of withdrawal, as the
case may be, must be medallion guaranteed by any member firm of a registered
national securities exchange or of the National Association of Securities
Dealers, Inc., a commercial bank or trust company having an office or
correspondent in the United States or an "eligible guarantor" institution within
the meaning of Rule 17Ad-15 under the Exchange Act (each an "ELIGIBLE
INSTITUTION") unless the old notes tendered pursuant thereto are tendered for
the account of an Eligible Institution.
If the Letter of Transmittal is signed by trustees, executors,
administrators, guardians, attorneys-in-fact, officers of corporations, or
others acting in a fiduciary or representative capacity, such person should so
indicate when signing, and unless waived by CMS, evidence satisfactory to CMS of
their authority to so act must be submitted with the Letter of Transmittal.
All questions as to the validity, form, eligibility (including time of
receipt) and withdrawal of the tendered old notes will be determined by CMS, in
its sole discretion, which determination will be final and binding. CMS reserves
the absolute right to reject any and all old notes not properly tendered or any
old notes which, if accepted, would, in the opinion of counsel for CMS, be
unlawful. CMS also reserves the absolute right to waive any irregularities or
conditions of tender as to particular old notes. CMS's interpretation of the
terms and conditions of the Exchange Offer (including the instructions in the
Letter of Transmittal) will be final and binding on all parties. Unless waived,
any defects or irregularities in connection with tenders of old notes must be
cured within such time as CMS shall determine. Neither CMS, the Exchange Agent
nor any other person shall be under any duty to give notification of defects or
irregularities with respect to tenders of old notes, nor shall any of them incur
any liability for failure to give such notification. Tenders of old notes will
not be deemed to have been made until such irregularities have been cured or
waived. Any old notes received by the Exchange Agent that are not properly
tendered and as to which the defects or irregularities have not been cured or
waived will be returned without cost to such holder by the Exchange Agent,
unless otherwise provided in the Letter of Transmittal, as soon as practicable
following the Expiration Date.
In addition, CMS reserves the right, in its sole discretion, subject to
the provisions of the Indenture, to purchase or make offers for any old notes
that remain outstanding subsequent to the
57
Expiration Date or, as set forth under "--Conditions," to terminate the Exchange
Offer in accordance with the terms of the Registration Rights Agreement, and to
the extent permitted by applicable law, purchase old notes in the open market,
in privately negotiated transactions or otherwise. The terms of any such
purchases or offers could differ from the terms of the Exchange Offer.
ACCEPTANCE OF OLD NOTES FOR EXCHANGE; DELIVERY OF NEW NOTES
Upon satisfaction or waiver of all of the conditions to the Exchange
Offer, all old notes properly tendered will be accepted promptly after the
Expiration Date, and the new notes will be issued promptly after acceptance of
the old notes. See "--Conditions." For purposes of the Exchange Offer, the old
notes shall be deemed to have been accepted as validly tendered for exchange
when CMS gives oral or written notice to the Exchange Agent.
In all cases, issuance of new notes for old notes that are accepted for
exchange pursuant to the Exchange Offer will be made only after the Exchange
Agent has timely received a Book-Entry Confirmation of such old notes into its
account at the Book-Entry Transfer Facility and a properly completed and duly
executed Letter of Transmittal and all other required documents. If any tendered
old notes are not accepted for any reason set forth in the terms and conditions
of the Exchange Offer, such unaccepted or such nonexchanged old notes will be
credited to an account maintained with such Book- Entry Transfer Facility as
promptly as practicable after the expiration or termination of the Exchange
Offer.
BOOK-ENTRY TRANSFER
The Exchange Agent will make a request to establish an account with
respect to the old notes at the Book-Entry Transfer Facility for purposes of the
Exchange Offer within two business days after the date of this prospectus. Any
financial institution that is a participant in the Book-Entry Transfer
Facility's systems may make book-entry delivery of old notes by causing the
Book-Entry Transfer Facility to transfer such old notes into the Exchange
Agent's account at the Book-Entry Transfer Facility in accordance with such
Book-Entry Transfer Facility's procedures for transfer. However, the Letter of
Transmittal (or facsimile) thereof with any required signature guarantees and
any other required documents must, in any case, be transmitted to and received
by the Exchange Agent at one of the addresses set forth under "--Exchange Agent"
on or prior to the Expiration Date or the guaranteed delivery procedures
described below must be complied with.
GUARANTEED DELIVERY PROCEDURES
If the procedures for book-entry transfer cannot be completed on a timely
basis, a tender may be effected if:
- the tender is made through an Eligible Institution;
- prior to the Expiration Date, the Exchange Agent receives from
such Eligible Institution a properly completed and duly
executed Letter of Transmittal (or a facsimile thereof) and
Notice of Guaranteed Delivery, substantially in the form
provided by CMS (by facsimile transmission, mail or hand
delivery), setting forth the name and address of the holder of
old notes and the amount of old notes tendered, stating that
the tender is being made thereby and guaranteeing that within
three New York Stock Exchange, Inc. ("NYSE") trading days
after the date of execution of the
58
Notice of Guaranteed Delivery, a Book- Entry Confirmation and
any other documents required by the Letter of Transmittal will
be deposited by the Eligible Institution with the Exchange
Agent, and
- a Book-Entry Confirmation and all other documents required by
the Letter of Transmittal are received by the Exchange Agent
within three NYSE trading days after the date of execution of
the Notice of Guaranteed Delivery.
WITHDRAWAL OF TENDERS
Tenders of old notes may be withdrawn at any time prior to 5:00 p.m., New
York City time, on the Expiration Date.
For a withdrawal to be effective, a written notice of withdrawal must be
received by the Exchange Agent prior to 5:00 p.m., New York City time, on the
Expiration Date at one of the addresses set forth under "--Exchange Agent." Any
such notice of withdrawal must specify:
- the name and number of the account at the Book-Entry Transfer
Facility from which the old notes were tendered;
- identify the principal amount of the old notes to be
withdrawn; and
- specify the name and number of the account at the Book-Entry
Transfer Facility to be credited with the withdrawn old notes
and otherwise comply with the procedures of such Book-Entry
Transfer Facility.
All questions as to the validity, form and eligibility (including time of
receipt) of such notice will be determined by CMS, whose determination shall be
final and binding on all parties. Any old notes so withdrawn will be deemed not
to have been validly tendered for exchange for purposes of the Exchange Offer.
Any old notes which have been tendered for exchange but which are not exchanged
for any reason will be credited to an account maintained with such Book-Entry
Transfer Facility for the old notes as soon as practicable after withdrawal,
rejection of tender or termination of the Exchange Offer. Properly withdrawn old
notes may be retendered by following one of the procedures described under
"--Procedures for Tendering" and "--Book-Entry Transfer" at any time on or prior
to the Expiration Date.
CONDITIONS
Notwithstanding any other term of the Exchange Offer, old notes will not
be required to be accepted for exchange, nor will new notes be issued in
exchange for any old notes, and CMS may terminate or amend the Exchange Offer as
provided herein before the acceptance of such old notes, if, because of any
change in law, or applicable interpretations thereof by the SEC, CMS determines
that it is not permitted to effect the Exchange Offer. CMS has no obligation to,
and will not knowingly, permit acceptance of tenders of old notes from
affiliates of CMS or from any other holder or holders who are not eligible to
participate in the Exchange Offer under applicable law or interpretations
thereof by the staff of the SEC, or if the new notes to be received by such
holder or holders of old notes in the Exchange Offer, upon receipt, will not be
tradable by such holder without restriction under the Securities Act and the
Exchange Act and without material restrictions under the "blue sky" or
securities laws of substantially all of the states of the United
59
States. Other than the United States federal and state securities laws we do not
need to satisfy any regulatory requirements or obtain any regulatory approvals
to conduct the Exchange Offer.
EXCHANGE AGENT
J.P. Morgan Trust Company, N.A. has been appointed as Exchange Agent for
the Exchange Offer. Questions and requests for assistance and requests for
additional copies of this prospectus or of the Letter of Transmittal should be
directed to the Exchange Agent addressed as follows:
By Certified or Registered Mail: By Overnight Courier or Hand:
J.P. Morgan Trust Company, N.A. J.P. Morgan Trust Company, N.A.
Institutional Trust Services Institutional Trust Services
P.O. Box 2320 2001 Bryan Street, 9th Floor
Dallas, Texas 75221-2320 Dallas, Texas 75201
Attention: Frank Ivins Attention: Frank Ivins
Confirm By Telephone:
(800) 275-2048
FEES AND EXPENSES
The expenses of soliciting tenders pursuant to the Exchange Offer will be
borne by CMS. The principal solicitation for tenders pursuant to the Exchange
Offer is being made by mail; however, additional solicitations may be made by
telephone, facsimile or in person by officers and regular employees of CMS.
CMS will not make any payments to brokers, dealers or other persons
soliciting acceptances of the Exchange Offer. CMS, however, will pay the
Exchange Agent reasonable and customary fees for its services and will reimburse
the Exchange Agent for its reasonable out-of-pocket expenses in connection
therewith.
The expenses to be incurred in connection with the Exchange Offer will be
paid by CMS, including fees and expenses of the Exchange Agent and the Trustee,
and accounting, legal, printing and related fees and expenses.
CMS will pay all transfer taxes, if any, applicable to the exchange of old
notes pursuant to the Exchange Offer. If, however, new notes or old notes for
principal amounts not tendered or accepted for exchange are to be registered or
issued in the name of any person other than the registered holder of the old
notes tendered, or if tendered old notes are registered in the name of any
person other than the person signing the Letter of Transmittal, or if a transfer
tax is imposed for any reason other than the exchange of old notes pursuant to
the Exchange Offer, then the amount of any such transfer taxes (whether imposed
on the registered holder or any other persons) will be payable by the tendering
holder. If satisfactory evidence of payment of such taxes or exemption therefrom
is not submitted with the Letter of Transmittal, the amount of such transfer
taxes will be billed directly to such tendering holder.
60
RESALE OF NEW NOTES
Based on an interpretation by the staff of the SEC set forth in no-action
letters issued to third parties, CMS believes that new notes issued pursuant to
the Exchange Offer in exchange for old notes may be offered for resale, resold
and otherwise transferred by any owner of such new notes (other than any such
owner which is an "affiliate" of CMS within the meaning of Rule 405 under the
Securities Act) without compliance with the registration and prospectus delivery
provisions of the Securities Act, provided that such new notes are acquired in
the ordinary course of such owner's business and such owner does not intend to
participate, and has no arrangement or understanding with any person to
participate, in the distribution of such new notes. Any owner of old notes who
tenders in the Exchange Offer with the intention to participate, or for the
purpose of participating, in a distribution of the new notes may not rely on the
position of the staff of the SEC enunciated in Exxon Capital Holdings
Corporation (available May 13, 1988, as interpreted in the SEC's letter to
Shearman & Sterling dated July 2, 1993), Morgan Stanley & Co., Incorporated
(available June 5, 1991), Warnaco, Inc. (available June 5, 1991), and Epic
Properties, Inc. (available October 21, 1991) or similar no-action letters
(collectively the "NO-ACTION LETTERS") but rather must comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with any resale transaction. In addition, any such resale transaction
should be covered by an effective registration statement containing the selling
security holders information required by Item 507 of Regulation S-K of the
Securities Act. Each broker-dealer that receives new notes for its own account
in exchange for old notes, where such old notes were acquired by such
broker-dealer as a result of market-making activities or other trading
activities, may be a statutory underwriter and must acknowledge that it will
deliver a prospectus meeting the requirements of the Securities Act in
connection with any resale of such new notes.
By tendering in the Exchange Offer, each holder (or DTC participant, in
the case of tenders of interests in old notes held in a global security held by
DTC) will represent to CMS (which representation may be contained the Letter of
Transmittal) to the effect that (A) it is not an affiliate of CMS, (B) it is not
engaged in, and does not intend to engage in, and has no arrangement or
understanding with any person to participate in, a distribution of the new notes
to be issued in the Exchange Offer and (C) it is acquiring the new notes in its
ordinary course of business. Each holder will acknowledge and agree that any
broker-dealer and any such holder using the Exchange Offer to participate in a
distribution of the new notes acquired in the Exchange Offer (1) could not under
SEC policy as in effect on the date of the Registration Rights Agreements rely
on the position of the SEC enunciated in the No-Action Letters, and (2) must
comply with the registration and prospectus delivery requirements of the
Securities Act in connection with a secondary resale transaction and that such a
secondary resale transaction must be covered by an effective registration
statement containing the selling security holder information required by Item
507 or 508, as applicable, of Regulation S-K if the resales are of new notes
obtained by such holder in exchange for old notes acquired by such holder
directly from CMS or an affiliate thereof.
To comply with the securities laws of certain jurisdictions, it may be
necessary to qualify for sale or to register the new notes prior to offering or
selling such new notes. CMS has agreed, pursuant to the Registration Rights
Agreements and subject to certain specified limitations therein, to cooperate
with selling holders or underwriters in connection with the registration and
qualification of the new notes for offer or sale under the securities or "blue
sky" laws of such jurisdictions as may be necessary to permit the holders of new
notes to trade the new notes without any restrictions or limitations under the
securities laws of the several states of the United States.
61
CONSEQUENCES OF FAILURE TO EXCHANGE
Holders of old notes who do not exchange their old notes for new notes
pursuant to the Exchange Offer will continue to be subject to the restrictions
on transfer of such old notes as set forth in the legend thereon as a
consequence of the issuance of the old notes pursuant to exemptions from, or in
transactions not subject to, the registration requirements of the Securities Act
and applicable state securities laws. In general, the old notes may not be
registered under the Securities Act, except pursuant to a transaction not
subject to, the Securities Act and applicable state securities laws. CMS does
not currently anticipate that it will register the old notes under the
Securities Act. To the extent that old notes are tendered and accepted in the
Exchange Offer, the trading market for untendered and tendered but unaccepted
old notes could be adversely affected.
62
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS FOR THE FISCAL
YEAR ENDED DECEMBER 31, 2003
This Management's Discussion and Analysis of Financial Condition and Results of
Operations for the Fiscal Year Ended December 31, 2003(the "10-K MD&A") refers
to, and in some sections specifically incorporates by reference, CMS' Notes to
Consolidated Financial Statements and Notes for the fiscal year ended December
31, 2003 (the "DECEMBER 31, 2003 FINANCIAL STATEMENTS") beginning on page F-1.
They contain detailed information that should be referred to in conjunction with
the following 10-K MD&A. The 10-K MD&A also describes material contingencies in
CMS' Notes to the December 31, 2003 Financial Statements, and CMS encourages
readers to review these Notes. All note references within the 10-K MD&A refer to
CMS' Notes to the December 31, 2003 Financial Statements. Please refer to the
Glossary beginning on page 126 of this prospectus for definitions of certain
capitalized terms used in the 10-K MD&A.
EXECUTIVE OVERVIEW
CMS Energy is an integrated energy company with a business strategy focused
primarily in Michigan. We are the parent holding company of Consumers and
Enterprises. Consumers is a combination electric and gas utility company serving
Michigan's Lower Peninsula. Enterprises, through subsidiaries, is engaged in
domestic and international diversified energy businesses including: independent
power production; natural gas transmission, storage and processing; and energy
services. We manage our businesses by the nature of services each provides and
operate principally in three business segments: electric utility, gas utility,
and enterprises.
We earn our revenue and generate cash from operations by providing electric
and natural gas utility services, electric power generation, gas transmission,
storage, and processing, and other energy-related services. Our businesses are
affected by weather, especially during the key heating and cooling seasons,
economic conditions, particularly in Michigan, regulation and regulatory issues
that primarily affect our gas and electric utility operations, interest rates,
our debt credit rating, and energy commodity prices.
Our strategy involves rebuilding our balance sheet and refocusing on our
core strength: superior utility operation. Over the next few years, we expect
this strategy to reduce our parent company debt substantially, improve our debt
ratings, grow earnings at a mid-single digit rate, restore a meaningful
dividend, and position the company to make new investments consistent with our
strengths. In the near term, our new investments will focus on the utility.
In 2003, we continued to implement our "utility plus" strategy centered
around growing a healthy utility in Michigan and optimizing the contribution
from key Enterprises assets. We sold over $900 million worth of non-strategic
assets, enabling us to reduce debt by $1.1 billion. We have taken advantage of
historically low interest rates to extend maturities and refinance our debt at
lower cost. We completed over $3 billion of financing and refinancing
transactions to resolve short-term liquidity concerns at the start of 2003. In
addition to improving our capital structure, we contributed $560 million to our
defined benefit pension plan. This should result in lower pension costs in the
future.
At the foundation of our financial progress was exceptional operating
performance. For the second consecutive year, our Michigan gas utility earned
the J.D. Power and Associates award for highest residential customer
satisfaction with natural gas services in the Midwest. Independent evaluators,
like J.D. Power and Associates recognize value and our regulators do too. The
MPSC authorized an annual increase in our gas utility rates of $56 million in
late 2002, and an additional interim annualized $19 million rate increase in
2003.
Despite strong financial and operational performance in 2003, we face
important challenges in the future. We continue to lose industrial and
commercial customers to other electric suppliers without receiving compensation
for stranded costs caused by the lost sales. As of March 2004, we lost 735 MW or
nine percent of our electric business to these alternative electric suppliers.
We expect the loss to grow to over 1,000 MW in 2004. Existing state legislation
encourages competition and provides for recovery of stranded costs, but the MPSC
has not yet authorized stranded cost recovery. We continue to work cooperatively
with the MPSC to resolve this issue.
Further, higher natural gas prices have harmed the economics of the MCV and
we are seeking approval from the MPSC to change the way in which the facility is
used. Our proposal would reduce gas consumption by an estimated 30 to 40 bcf per
year while improving the MCV's financial performance with no change to customer
rates. A portion of the benefits from the proposal will support additional
renewable resource development in Michigan. Resolving the issue is critical for
our shareowners and customers, and we have asked the MPSC to approve it quickly.
63
We also are focused on further reducing our business risk and leverage,
while growing the equity base of our company. Much of our asset sales program is
complete; we are focused on selling the remaining businesses that are not
strategic to us. This creates volatility in earnings as we recognize foreign
currency translation account losses at the time of sale, but it is the right
strategic direction for our company.
Finally, we are working to resolve outstanding litigation that stemmed from
energy trading activities in 2001 and earlier. Doing so will permit us to devote
more attention to improving business growth. Our business plan is targeted at
predictable earnings growth along with reduction in our debt. We are a full year
into our five-year plan to reduce by half the debt of the CMS Energy holding
company.
The result of these efforts will be a strong, reliable energy company that
will be poised to take advantage of opportunities for further growth.
RESTATEMENT
Financial statements of prior years and quarterly data for all three
periods presented have been restated for the following events:
- International Energy Distribution, which includes SENECA and CPEE, is no
longer considered "discontinued operations",
- certain derivative accounting corrections, and
- Loy Yang deferred tax accounting correction.
For additional details on the effect of the restatements, see Note 18,
Restatement and Reclassification, and Note 19, Quarterly Financial and Common
Stock Information (Unaudited).
64
RESULTS OF OPERATIONS
CMS ENERGY CONSOLIDATED NET LOSS
Our 2003 net loss was $44 million, an improvement of $606 million from
2002. We are continuing to restructure our business operations, and as our
financial plan moves forward, we will maintain our strategy of
65
selling under-performing or non-strategic assets in order to reduce our debt, to
reduce business risk, and to provide for more predictable future earnings.
RESTATED RESTATED
YEARS ENDED DECEMBER 31 2003 2002 2001
----------------------- ---- -------- --------
IN MILLIONS (EXCEPT FOR PER
SHARE AMOUNTS)
Net Loss.................................................... $ (44) $ (650) $ (459)
Basic loss per share........................................ $(0.30) $(4.68) $(3.51)
Diluted loss per share...................................... $(0.30) $(4.68) $(3.51)
RESTATED RESTATED RESTATED
YEARS ENDED DECEMBER 31 2003 2002 CHANGE 2002 2001 CHANGE
----------------------- ---- -------- ------ -------- -------- ------
IN MILLIONS
Electric Utility............................ $ 167 $ 264 $(97) $ 264 $ 120 $ 144
Gas Utility................................. 38 46 (8) 46 21 25
Enterprises................................. 8 (419) 427 (419) (272) (147)
Corporate Interest and Other................ (256) (285) 29 (285) (196) (89)
----- ----- ---- ----- ----- -----
Loss from Continuing Operations............. (43) (394) 351 (394) (327) (67)
----- ----- ---- ----- ----- -----
Discontinued Operations..................... 23 (274) 297 (274) (128) (146)
Accounting Changes.......................... (24) 18 (42) 18 (4) 22
----- ----- ---- ----- ----- -----
Net Loss.................................... $ (44) $(650) $606 $(650) $(459) $(191)
===== ===== ==== ===== ===== =====
2003 COMPARED TO 2002: Our net loss was reduced significantly from:
- absence of $379 million, net of tax, of goodwill write downs recorded in
2002 associated with discontinued operations,
- an improvement of CMS Enterprises' earnings due to:
- decrease of $313 million, net of tax, in asset write downs from planned
and completed divestitures,
- lower expropriation and devaluation losses at the Argentine facilities
due to the stabilization of the Argentine Peso,
- absence of tax charges recorded in 2002 resulting from the loss of
indefinite tax deferral for several international investments, and
- higher revenues and lower interest costs within IPP.
- decrease in corporate interest and other.
However, our progress was slowed by:
- Electric Utility earnings:
- higher electric operating costs resulting from higher pension expense,
greater depreciation expense reflecting higher levels of plant in
service, and increased amortization expense associated with securitized
regulatory assets,
- lower electric deliveries from milder weather during the summer, and
- continuation of switching by commercial and industrial customers to
alternative electric suppliers.
- loss of $44 million, after-tax, on the sale of Panhandle,
- employee benefit plans net settlement and curtailment loss of $48
million, after tax, related to a large number of employees retiring and
exiting these plans, and
66
- cumulative effect of a change of accounting resulting in a charge of $23
million, net of tax, due to energy trading contracts that did not meet
the definition of a derivative.
2002 COMPARED TO 2001: Our net loss increased $191 million from:
- after-tax charges in recognition of planned and completed divestitures
and reduced asset valuations,
- tax credit write-offs in 2002 at the parent level, and
- restructuring and other costs in 2002.
ELECTRIC UTILITY RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31 2003 2002 CHANGE 2002 2001 CHANGE
----------------------- ---- ---- ------ ---- ---- ------
IN MILLIONS
Net income......................................... $167 $264 $(97) $264 $120 $144
==== ==== ==== ==== ==== ====
REASONS FOR THE CHANGE:
Electric deliveries................................ $(41) $ 41
Power supply costs and related revenue............. 26 149
Other operating expenses and non-commodity
revenue.......................................... (80) (21)
Gain on asset sales................................ (38) 38
General taxes...................................... 10 (3)
Fixed charges...................................... (22) 9
Income taxes....................................... 48 (69)
---- ----
Total change....................................... $(97) $144
==== ====
ELECTRIC DELIVERIES: In 2003, electric revenues decreased, reflecting lower
deliveries. Most significantly, sales volumes to commercial and industrial
customers were 5.6 percent lower than in 2002, a result of these sectors'
continued switching to alternative electric suppliers as allowed by the Customer
Choice Act. The decrease in revenue is also the result of reduced deliveries to
higher-margin residential customers, from a milder summer's impact on air
conditioning usage. Overall, electric deliveries, including transactions with
other wholesale marketers and other electric utilities, decreased 0.4 billion
kWh or 1.1 percent.
In 2002, electric revenue increased by $41 million from the previous year,
despite lower deliveries. This was due primarily to increased deliveries to
higher-margin residential customers as a result of a significantly warmer
summer's impact on air conditioning usage. Deliveries, including transactions
with other wholesale marketers and other electric utilities, decreased 0.3
billion kWh or 0.7 percent.
POWER SUPPLY COSTS AND RELATED REVENUE: In 2003, our recovery of power
supply costs was fixed, as required under the Customer Choice Act. Therefore,
power supply-related revenue in excess of actual power supply costs increased
operating income. By contrast, if power supply-related revenues had been less
than actual power supply costs, the impact would have decreased operating
income. In 2003, this difference between power supply-related revenues and
actual power supply costs benefited operating income by $26 million more than it
had in 2002. This increase is primarily the result of increased intersystem
revenues due to higher market prices and sales made from surplus capacity. The
efficient operation of our generating plants and lower priced purchased power
further decreased power supply costs.
In 2002, as compared to 2001, power supply costs and related revenues
increased operating income due primarily to reduced purchased power costs
because the Palisades plant returned to service in 2002, following an extended
2001 shutdown.
OTHER OPERATING EXPENSES AND NON-COMMODITY REVENUE: In 2003, net operating
expenses and non-commodity revenue decreased operating income by $80 million
versus 2002. This decrease relates to increased pension and other benefit costs
of $54 million, a scheduled refueling outage at Palisades, and higher
transmission costs. More plant in service increased depreciation costs by $8
million, and $11 million of higher amortization
67
expense from securitized assets further contributed to decreased operating
income. Slightly offsetting the increased operating expenses were higher
non-commodity revenues associated with other income.
In 2002, net operating expenses and non-commodity revenue decreased
operating income by $21 million compared with 2001. The decrease primarily
related to higher transmission expenses and increased depreciation costs from
more plant in service.
ASSET SALES: The reduction in operating income from asset sales for 2003
versus 2002, and the increase in operating income from asset sales for 2002
versus 2001 reflect the $31 million pretax gain associated with the 2002 sale of
our electric transmission system and the $7 million pretax gain associated with
the 2002 sale of nuclear equipment from the cancelled Midland project.
GENERAL TAXES: In 2003, general taxes decreased from 2002 due primarily to
reductions in MSBT expense, resulting primarily from a tax credit received from
the State of Michigan associated with construction of the new corporate
headquarters on a qualifying Brownfield site. In 2002, general taxes increased
over 2001 due to increases in MSBT and property tax accruals.
FIXED CHARGES: In 2003, fixed charges increased versus 2002 due primarily
to higher average debt levels, but also because of higher average interest
rates. In 2002, fixed charges decreased versus 2001 because of a reduction in
long-term debt.
INCOME TAXES: In 2003, income tax decreased versus 2002 due primarily to
lower earnings by the electric utility. In 2002, income tax expense increased
versus 2001 due primarily to increased earnings.
GAS UTILITY RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31 2003 2002 CHANGE 2002 2001 CHANGE
----------------------- ---- ---- ------ ---- ---- ------
IN MILLIONS
Net income............................................ $38 $46 $ (8) $46 $21 $ 25
=== === ==== === === ====
Reasons for the change:
Gas deliveries........................................ $ (1) $ 21
Gas rate increase..................................... 39 25
Gas wholesale and retail services and other gas
revenues............................................ 1 1
Operation and maintenance............................. (34) (14)
General taxes, depreciation, and other income......... (6) (3)
Fixed charges......................................... (5) 3
Income taxes.......................................... (2) (8)
---- ----
Total change.......................................... $ (8) $ 25
==== ====
GAS DELIVERIES: In 2003, gas deliveries, including miscellaneous
transportation, increased 4.1 bcf or 1.1 percent versus 2002. Despite increased
system deliveries, gas revenues actually declined by $1 million. Colder weather
during the first quarter of 2003 increased deliveries to the residential and
commercial sectors. Increased deliveries resulted in a $6 million increase in
gas revenues. However, the revenue increase was offset by a $7 million gas loss
adjustment recorded as a reduction to gas revenues.
In 2002, gas revenues increased by $21 million from the previous year.
System deliveries, including miscellaneous transportation, increased 9.4 bcf or
2.6 percent. The increase was due primarily to colder weather that increased
deliveries to the residential and commercial sectors.
GAS RATE INCREASE: In November 2002, the MPSC issued a final gas rate order
authorizing a $56 million annual increase to gas tariff rates. As a result of
this order, 2003 gas revenues increased $39 million. In 2002, gas rate increases
led to increased gas revenues of $25 million over 2001.
GAS WHOLESALE AND RETAIL SERVICES AND OTHER GAS REVENUES: In 2003, gas
wholesale and retail services and other gas revenues increased $1 million. The
$1 million increase includes primarily the following two items. In 2003, we
reversed a $4 million reserve, originally recorded in 2002, for non-physical gas
title tracking services.
68
In addition, in 2003, we reserved $11 million for the settlement agreement
associated with the 2002-2003 GCR disallowance. For additional details regarding
both of these issues, see the Gas Utility Business Uncertainties in the
"Outlook" section of this MD&A.
OPERATION AND MAINTENANCE: In 2003, operation and maintenance expenses
increased versus 2002 due to increases in pension and other benefits costs of
$27 million and additional expenditures on safety, reliability, and customer
service. In 2002, operation and maintenance expenses increased versus 2001 due
to the recognition of gas storage inventory losses and additional expenditures
on customer reliability and service.
GENERAL TAXES, DEPRECIATION, AND OTHER INCOME: In 2003, the net of general
tax expense, depreciation expense, and other income decreased operating income
primarily because of increases in depreciation expense from increased plant in
service. In 2002, the net of general tax expense, depreciation expense, and
other income decreased operating income primarily because of increases in MSBT
and property tax expense accruals.
FIXED CHARGES: In 2003, fixed charges increased versus 2002 due primarily
to higher average debt levels, but also because of higher average interest
rates. In 2002 versus 2001, fixed charges decreased due to lower long-term debt
levels.
INCOME TAXES: In 2003 versus 2002, income tax expense increased due to
reduced income tax expense in 2002. The 2002 reduction was attributable to
flow-through accounting on plant, property and equipment as required by past
MPSC rulings. In 2002, income tax expense increased versus 2001 due primarily to
increased earnings of the gas utility.
ENTERPRISES RESULTS OF OPERATIONS
RESTATED RESTATED RESTATED
YEARS ENDED DECEMBER 31 2003 2002 CHANGE 2002 2001 CHANGE
----------------------- ---- -------- ------ -------- -------- ------
IN MILLIONS
Net Income (Loss).............. $8 $(419) $427 $(419) $(272) $(147)
== ===== ==== ===== ===== =====
In 2003, Enterprises had earnings compared to a significant loss in 2002.
This year over year improvement resulted from the:
- elimination of $313 million of asset impairments, net of tax, in 2002 for
divestitures and reduced asset valuations,
- lower expropriation and devaluation losses at Argentine facilities, and
- elimination of tax charges in 2002 from the loss of indefinite tax
deferral for several international investments.
2002 losses increased by $147 million from 2001 resulting from the:
- increased asset impairments for divestitures and reduced asset
valuations, and
- discontinuing and selling several businesses.
OTHER RESULTS OF OPERATIONS
CORPORATE INTEREST AND OTHER:
RESTATED RESTATED RESTATED
YEARS ENDED DECEMBER 31 2003 2002 CHANGE 2002 2001 CHANGE
----------------------- ---- -------- ------ -------- -------- ------
IN MILLIONS
Net Loss...................... $(256) $(285) $29 $(285) $(196) $(89)
===== ===== === ===== ===== ====
Our 2003 corporate interest and other net expenses decreased $29 million
from 2002 primarily due to reduced restructuring costs and reduced taxes,
partially offset by increased interest allocation to continuing operations.
69
Our 2002 corporate interest and other net expenses increased $89 million
from 2001 primarily due to restructuring charges, including the relocation of
corporate offices from Dearborn to Jackson, Michigan, and increased taxes
resulting from the loss of certain AMT credit carryforwards.
DISCONTINUED OPERATIONS: For the years ended December 31, 2003 and 2002,
discontinued operations included Parmelia, and through their respective dates of
sale, Panhandle, CMS Viron, CMS Field Services, and Marysville. For additional
information, see Note 2, Discontinued Operations, Other Asset Sales,
Impairments, and Restructuring.
CRITICAL ACCOUNTING POLICIES
The following accounting policies are important to an understanding of our
results and financial condition and should be considered an integral part of our
MD&A:
- use of estimates in accounting for long-lived assets, equity method
investments, and contingencies,
- accounting for financial and derivative instruments,
- accounting for international operations and foreign currency,
- accounting for the effects of industry regulation,
- accounting for pension and postretirement benefits,
- accounting for asset retirement obligations, and
- accounting for nuclear decommissioning costs.
For additional accounting policies, see Note 1, Corporate Structure and
Accounting Policies.
USE OF ESTIMATES
In preparing our financial statements, we use estimates and assumptions
that may affect reported amounts and disclosures. Accounting estimates are used
for asset valuations, depreciation, amortization, financial and derivative
instruments, employee benefits, and contingencies. For example, we estimate the
rate of return on plan assets and the cost of future health-care benefits to
determine our annual pension and other postretirement benefit costs. There are
risks and uncertainties that may cause actual results to differ from estimated
results, such as changes in the regulatory environment, competition, foreign
exchange, regulatory decisions, and lawsuits.
LONG-LIVED ASSETS AND EQUITY METHOD INVESTMENTS: Our assessment of the
recoverability of long-lived assets and equity method investments involves
critical accounting estimates. Tests of impairment are performed periodically if
certain conditions that are other than temporary exist that may indicate the
carrying value may not be recoverable. Of our total assets, recorded at $13.838
billion at December 31, 2003, 60 percent represent long-lived assets and equity
method investments that are subject to this type of analysis. We base our
evaluations of impairment on such indicators as:
- the nature of the assets,
- projected future economic benefits,
- domestic and foreign regulatory and political environments,
- state and federal regulatory and political environments,
- historical and future cash flow and profitability measurements, and
- other external market conditions or factors.
If an event occurs or circumstances change in a manner that indicates the
recoverability of a long-lived asset should be assessed, we evaluate the asset
for impairment. An asset held-in-use is evaluated for impairment by calculating
the undiscounted future cash flows expected to result from the use of the asset
and its eventual disposition. If the undiscounted future cash flows are less
than the carrying amount, we recognize an impairment
70
loss. The impairment loss recognized is the amount by which the carrying amount
exceeds the fair value. We estimate the fair market value of the asset utilizing
the best information available. This information includes quoted market prices,
market prices of similar assets, and discounted future cash flow analyses. An
asset considered held-for-sale is recorded at the lower of its carrying amount
or fair value, less cost to sell.
We also assess our ability to recover the carrying amounts of our equity
method investments. This assessment requires us to determine the fair values of
our equity method investments. The determination of fair value is based on
valuation methodologies including discounted cash flows and the ability of the
investee to sustain an earnings capacity that justifies the carrying amount of
the investment. We also consider the existence of CMS Energy guarantees on
obligations of the investee or other commitments to provide further financial
support. If the fair value is less than the carrying value and the decline in
value is considered to be other than temporary, an appropriate write-down is
recorded.
Our assessments of fair value using these valuation methodologies represent
our best estimates at the time of the reviews and are consistent with our
internal planning. The estimates we use can change over time. If fair values
were estimated differently, they could have a material impact on the financial
statements.
In 2003, we analyzed impairment indicators related to our long-lived assets
and equity method investments. Following our analysis, we reduced the carrying
amount of our investment in Parmelia, our investment in SENECA, and an equity
investment at CMS Generation to reflect their fair values. We are still pursuing
the sale of our remaining non-strategic and under-performing assets, including
some assets that were not determined to be impaired. Upon the sale of these
assets, the proceeds realized may be materially different from the remaining
carrying values. Even though these assets have been identified for sale, we
cannot predict when, or make any assurances that, these asset sales will occur.
Further, we cannot predict the amount of cash or the value of consideration that
may be received. For additional details on asset sales, see Note 2, Discontinued
Operations, Other Asset Sales, Impairments, and Restructuring.
CONTINGENCIES: We are involved in various regulatory and legal proceedings
that arise in the ordinary course of our business. We record accruals for such
contingencies based upon our assessment that the occurrence is probable and an
estimate of the liability amount. The recording of estimated liabilities for
contingencies is guided by the principles in SFAS No. 5. We consider many
factors in making these assessments, including history and the specifics of each
matter. The most significant of these contingencies are our electric and gas
environmental estimates, which are discussed in the "Outlook" section included
in this MD&A, and the potential underrecoveries from our power purchase contract
with the MCV Partnership.
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. We hold a 49
percent partnership interest in the MCV Partnership, and a 35 percent lessor
interest in the MCV Facility.
Under our power purchase agreement with the MCV Partnership, we pay a
capacity charge based on the availability of the MCV Facility whether or not
electricity is actually delivered to us; a variable energy charge for kWh
delivered to us; and a fixed energy charge based on availability up to 915 MW
and based on delivery for the remaining contracted capacity. The cost that we
incur under the MCV Partnership power purchase agreement exceeds the recovery
amount allowed by the MPSC. As a result, we estimate cash underrecoveries of
capacity availability payments will aggregate $206 million from 2004 through
2007. For capacity and fixed energy payments billed by the MCV Partnership after
September 15, 2007, and not recovered from customers, we expect to claim a
regulatory out provision under the MCV Partnership power purchase agreement.
This provision obligates us to pay the MCV Partnership only those capacity and
energy charges that the MPSC has authorized for recovery from electric
customers. The effect of any such action would be to:
- reduce cash flow to the MCV Partnership, which could have an adverse
effect on our equity, and
- eliminate our underrecoveries for capacity and energy payments.
Further, under the PPA, variable energy payments to the MCV Partnership are
based on the cost of coal burned in our coal plants and operations and
maintenance expenses. However, the MCV Partnership's costs of
71
producing electricity are tied to the cost of natural gas. Because natural gas
prices have increased substantially in recent years, while the price the MCV
Partnership can charge us for energy has not, the MCV Partnership's financial
performance has been affected adversely.
As a result of returning to the PSCR process on January 1, 2004, we
returned to dispatching the MCV Facility on a fixed load basis, as permitted by
the MPSC, in order to maximize recovery from electric customers of our capacity
payments. This fixed load dispatch increases the MCV Facility's output and
electricity production costs, such as natural gas. As the spread between the MCV
Facility's variable electricity production costs and its energy payment revenue
widens, the MCV's Partnership's financial performance and our equity interest in
the MCV Partnership will be harmed.
In February 2004, we filed a resource conservation plan with the MPSC that
is intended to help conserve natural gas and thereby improve our equity
investment in the MCV Partnership, without raising the costs paid by our
electric customers. The plan's primary objective is to dispatch the MCV Facility
on an economic basis depending on natural gas market prices, which will reduce
the MCV Facility's annual natural gas consumption by an estimated 30 to 40 bcf.
This decrease in the quantity of high-priced natural gas consumed by the MCV
Facility will benefit Consumers' ownership interest in the MCV Partnership. We
requested that the MPSC provide interim approval while it conducts a full review
of the plan. The MPSC has scheduled a prehearing conference with respect to the
MCV resource conservation plan for April 2004. We cannot predict if or when the
MPSC will approve our request.
The two most significant variables in the analysis of the MCV Partnership's
future financial performance are the forward price of natural gas for the next
22 years and the MPSC's decision in 2007 or beyond related to our recovery of
capacity payments. Natural gas prices have been historically volatile.
Presently, there is no consensus in the marketplace on the price or range of
prices of natural gas in the short term or beyond the next five years.
Therefore, we cannot predict the impact of these issues on our future earnings,
cash flows, or on the value of our equity interest in the MCV Partnership.
For additional details, see Note 4, Uncertainties, "Other Consumers'
Electric Utility Uncertainties -- The Midland Cogeneration Venture."
ACCOUNTING FOR FINANCIAL AND DERIVATIVE INSTRUMENTS, TRADING ACTIVITIES, AND
MARKET RISK INFORMATION
FINANCIAL INSTRUMENTS: We account for investments in debt and equity
securities using SFAS No. 115. Debt and equity securities can be classified into
one of three categories: held-to-maturity, trading, or available-for-sale
securities. Our investments in equity securities are classified as
available-for-sale securities. They are reported at fair value, with any
unrealized gains or losses resulting from changes in fair value reported in
equity as part of accumulated other comprehensive income and are excluded from
earnings unless such changes in fair value are determined to be other than
temporary. Unrealized gains or losses resulting from changes in the fair value
of our nuclear decommissioning investments are reported as regulatory
liabilities. The fair value of these investments is determined from quoted
market prices.
DERIVATIVE INSTRUMENTS: We use the criteria in SFAS No. 133, as amended and
interpreted, to determine if certain contracts must be accounted for as
derivative instruments. The rules for determining whether a contract meets the
criteria for derivative accounting are numerous and complex. Moreover,
significant judgment is required to determine whether a contract requires
derivative accounting, and similar contracts can sometimes be accounted for
differently.
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. The recorded fair value of the contract is then adjusted quarterly to
reflect any change in the market value of the contract, a practice known as
marking the contract to market. The accounting for changes in the fair value of
a derivative (that is, gains or losses) is reported either in earnings or
accumulated other comprehensive income depending on whether the derivative
qualifies for special hedge accounting treatment. For additional details on the
accounting policies for derivative instruments, see Note 7, Financial and
Derivative Instruments.
72
The types of contracts we typically classify as derivative instruments are
interest rate swaps, foreign currency exchange contracts, electric call options,
gas fuel options, fixed priced weather-based gas supply call options, fixed
price gas supply call and put options, gas futures, gas and power swaps, and
forward purchases and sales. We generally do not account for electric capacity
and energy contracts, gas supply contracts, coal and nuclear fuel supply
contracts, or purchase orders for numerous supply items as derivatives.
Certain of our electric capacity and energy contracts are not accounted for
as derivatives due to the lack of an active energy market in the state of
Michigan, as defined by SFAS No. 133, and the transportation costs that would be
incurred 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, we 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 our financial statements.
To determine the fair value of contracts that are accounted for as
derivative instruments, we use a combination of quoted market prices and
mathematical valuation models. Valuation models require various inputs,
including forward prices, volatilities, interest rates, and exercise periods.
Changes in forward prices or volatilities could change significantly the
calculated fair value of certain contracts. At December 31, 2003, we assumed a
market-based interest rate of 1 percent (six-month U.S. Treasury rate) and
volatility rates ranging between 65 percent and 120 percent to calculate the
fair value of our electric and gas call options.
TRADING ACTIVITIES: Our wholesale power and gas trading activities are also
accounted for using the criteria in SFAS No. 133. Energy trading contracts that
meet the definition of a derivative are recorded as assets or liabilities in the
financial statements at the fair value of the contracts. Gains or losses arising
from changes in fair value of these contracts are recognized into earnings in
the period in which the changes occur. Energy trading contracts that do not meet
the definition of a derivative are accounted for as executory contracts (i.e.,
on an accrual basis).
The market prices we use to value our energy trading contracts reflect our
consideration of, among other things, closing exchange and over-the-counter
quotations. In certain contracts, long-term commitments may extend beyond the
period in which market quotations for such contracts are available. Mathematical
models are developed to determine various inputs into the fair value calculation
including price and other variables that may be required to calculate fair
value. Realized cash returns on these commitments may vary, either positively or
negatively, from the results estimated through application of the mathematical
model. We believe that our mathematical models utilize state-of-the-art
technology, pertinent industry data, and prudent discounting in order to
forecast certain elongated pricing curves. Market prices are adjusted to reflect
the impact of liquidating our position in an orderly manner over a reasonable
period of time under present market conditions.
In connection with the market valuation of our energy trading contracts, we
maintain reserves for credit risks based on the financial condition of
counterparties. We also maintain credit policies that management believes will
minimize its overall credit risk with regard to our counterparties.
Determination of our counterparties' credit quality is based upon a number of
factors, including credit ratings, disclosed financial condition, and collateral
requirements. Where contractual terms permit, we employ standard agreements that
allow for netting of positive and negative exposures associated with a single
counterparty. Based on these policies, our current exposures, and our credit
reserves, we do not anticipate a material adverse effect on our financial
position or results of operations as a result of counterparty nonperformance.
73
The following tables provide a summary of the fair value of our energy
trading contracts as of December 31, 2003.
IN MILLIONS
Fair value of contracts outstanding as of December 31,
2002...................................................... $ 81
Fair value of new contracts when entered into during the
period.................................................... --
Implementation of EITF Issue No. 02-03(a)................... (36)
Fair value of derivative contracts sold and received from
asset sales(b)............................................ (30)
Changes in fair value attributable to changes in valuation
techniques and assumptions................................ --
Contracts realized or otherwise settled during the period... (10)
Other changes in fair value(c).............................. 10
----
Fair value of contracts outstanding as of December 31,
2003...................................................... $ 15
====
-------------------------
(a) Reflects the removal of contracts that do not qualify as derivatives under
SFAS No. 133 as of January 1, 2003. See Note 17, Implementation of New
Accounting Standards.
(b) Reflects $60 million decrease for price risk management assets sold and $30
million increase for price risk management assets received related to the
sales of the gas and power books.
(c) Reflects changes in price and net increase/(decrease) of forward positions
as well as changes to mark-to-market and credit reserves.
FAIR VALUE OF CONTRACTS AT DECEMBER 31, 2003
-------------------------------------------------
MATURITY (IN YEARS)
TOTAL -------------------------------------------------
SOURCE OF FAIR VALUE FAIR VALUE LESS THAN 1 1 TO 3 4 TO 5 GREATER THAN 5
-------------------- ---------- ----------- ------ ------ --------------
IN MILLIONS
Prices actively quoted........................ $(23) $ 2 $(7) $(16) $(2)
Prices based on models and other valuation
methods..................................... 38 11 13 13 1
---- --- --- ---- ---
Total......................................... $ 15 $13 $ 6 $ (3) $(1)
==== === === ==== ===
MARKET RISK INFORMATION: We are exposed to market risks including, but not
limited to, changes in interest rates, commodity prices, currency exchange
rates, and equity security prices. We manage these risks using established
policies and procedures, under the direction of both an executive oversight
committee consisting of senior management representatives and a risk committee
consisting of business-unit managers. We may use various contracts to manage
these risks, including swaps, options, and forward contracts.
Contracts used to manage market risks may be considered derivative
instruments that are subject to derivative and hedge accounting pursuant to SFAS
No. 133. We intend that any gains or losses on these contracts will be offset by
an opposite movement in the value of the item at risk. We enter into all risk
management contracts for purposes other than trading. These contracts contain
credit risk if the counterparties, including financial institutions and energy
marketers, fail to perform under the agreements. We minimize such risk by
performing financial credit reviews using, among other things, publicly
available credit ratings of such counterparties.
We perform sensitivity analyses to assess the potential loss in fair value,
cash flows, or future earnings based upon a hypothetical 10 percent adverse
change in market rates or prices. We do not believe that sensitivity analyses
alone provide an accurate or reliable method for monitoring and controlling
risks. Therefore, we use our experience and judgment to revise strategies and
modify assessments. Changes 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. These risk sensitivities are shown in "Interest Rate Risk,"
"Commodity Price Risk," "Trading Activity Commodity Price Risk," "Currency
Exchange Risk," and "Equity Securities Price Risk" within this section.
Interest Rate Risk: We are exposed to interest rate risk resulting from
issuing fixed-rate and variable-rate financing instruments and from interest
rate swap agreements. We use a combination of these instruments to
74
manage this risk as deemed appropriate, based upon market conditions. These
strategies are designed to provide and maintain a balance between risk and the
lowest cost of capital.
Interest Rate Risk Sensitivity Analysis (assuming a 10 percent adverse
change in market interest rates):
AS OF DECEMBER 31 2003 2002
----------------- ---- ----
IN MILLIONS
Variable-rate financing -- before tax annual earnings
exposure.................................................. $ 1 $ 2
Fixed-rate financing -- potential loss in fair value(a)..... 242 293
-------------------------
(a) Fair value exposure could only be realized if we repurchased all of our
fixed-rate financing.
As discussed in "Electric Utility Business Uncertainties -- Competition and
Regulatory Restructuring -- Securitization" within this MD&A, we have filed an
application with the MPSC to securitize certain expenditures. Upon final
approval, we intend to use the proceeds from the securitization to retire
higher-cost debt, which could include a portion of our current fixed-rate debt.
We do not believe that any adverse change in debt price and interest rates would
have a material adverse effect on either our consolidated financial position,
results of operations or cash flows.
Certain equity method investees have issued interest rate swaps. These
instruments are not required to be included in the sensitivity analysis, but can
have an impact on financial results. See discussion of these instruments in Note
18, Restatement and Reclassification.
Commodity Price Risk: For purposes other than trading, we enter into
electric call options, fixed-priced weather-based gas supply call options, and
fixed-priced gas supply call and put options. The electric call options are used
to protect against the risk of fluctuations in the market price of electricity,
and to ensure a reliable source of capacity to meet our customers' electric
needs. The weather-based gas supply call options, along with the gas supply call
and put options, are used to purchase reasonably priced gas supply. Call options
give us the right, but not the obligation, to purchase gas supply at
predetermined fixed prices. Put options give third-party suppliers the right,
but not the obligation, to sell gas supply to us at predetermined fixed prices.
The commodity price risk sensitivity analysis was not material for the
years ending December 31, 2003 and December 31, 2002.
Trading Activity Commodity Price Risk: We are exposed to market
fluctuations in the price of energy commodities. We employ established policies
and procedures to manage these risks and may use various commodity derivatives,
including futures, options, and swap contracts. The prices of these energy
commodities can fluctuate because of, among other things, changes in the supply
of and demand for those commodities.
Trading Activity Commodity Price Risk Sensitivity Analysis (assuming a 10
percent adverse change in market prices):
AS OF DECEMBER 31 2003
----------------- ----
IN MILLIONS
Potential reduction in fair value:
Gas-related swaps and forward contracts..................... $3
Electricity-related forward contracts....................... 2
Electricity-related call option contracts................... 1
A sensitivity analysis was not performed for the year ended December 31,
2002. There has been a significant change in trading activity in 2003 from the
prior year. As noted in "Trading Activities" within this section, the fair value
of contracts outstanding has decreased from $81 million at December 31, 2002 to
$15 million at December 31, 2003. For further information, see "Trading
Activities" within this section.
Currency Exchange Risk: We are exposed to currency exchange risk arising
from investments in foreign operations as well as various international projects
in which we have an equity interest and which have debt denominated in U.S.
dollars. We typically use forward exchange contracts and other risk mitigating
instruments
75
to hedge currency exchange rates. The impact of hedges on our investments in
foreign operations is reflected in accumulated other comprehensive income as a
component of the foreign currency translation adjustment. Gains or losses from
the settlement of these hedges are maintained in the foreign currency
translation adjustment until we sell or liquidate the investments on which the
hedges were taken. At December 31, 2003, we had no foreign exchange hedging
contracts outstanding. As of December 31, 2003, the total foreign currency
translation adjustment was a net loss of $419 million, which included a net
hedging loss of $18 million related to settled contracts.
Equity Securities Price Risk: We are exposed to price risk associated with
investments in equity securities. As discussed in "Financial Instruments" within
this section, our investments in equity securities are classified as
available-for-sale securities. They are reported at fair value, with any
unrealized gains or losses resulting from changes in fair value reported in
equity as part of accumulated other comprehensive income and are excluded from
earnings unless such changes in fair value are determined to be other than
temporary. Unrealized gains or losses resulting from changes in the fair value
of our nuclear decommissioning investments are reported as regulatory
liabilities.
Equity Securities Price Risk Sensitivity Analysis (assuming a 10 percent
adverse change in market prices):
AS OF DECEMBER 31 2003 2002
----------------- ---- ----
IN MILLIONS
Potential reduction in fair value:
Nuclear decommissioning investments....................... $57 $49
Equity investments........................................ 7 6
For additional details on market risk and derivative activities, see Note
7, Financial and Derivative Instruments.
INTERNATIONAL OPERATIONS AND FOREIGN CURRENCY
We have investments in energy-related projects throughout the world. As a
result of a change in business strategy, over the last two years we have been
selling certain foreign investments. For additional details on the divestiture
of foreign investments see Note 2, Discontinued Operations, Other Asset Sales,
Impairments, and Restructuring.
BALANCE SHEET: Our subsidiaries and affiliates whose functional currency is
other than the U.S. dollar translate their assets and liabilities into U.S.
dollars at the exchange rates in effect at the end of the fiscal period. Gains
or losses that result from this translation and gains or losses on long-term
intercompany foreign currency transactions are reflected as a component of
stockholders' equity in the Consolidated Balance Sheets as "Foreign Currency
Translation." As of December 31, 2003, cumulative foreign currency translation
decreased stockholders' equity by $419 million. We translate the revenue and
expense accounts of these subsidiaries and affiliates into U.S. dollars at the
average exchange rate during the period.
Australia: At December 31, 2003, the net foreign currency loss due to the
exchange rate of the Australian dollar recorded in the Foreign Currency
Translation component of stockholders' equity using an exchange rate of 1.335
Australian dollars per U.S. dollars was $95 million. This amount includes an
unrealized loss related to our investment in Loy Yang. This unrealized loss, and
the impact of certain deferred taxes associated with the Loy Yang investment,
will be realized upon sale, full liquidation, or other disposition of our
investment in Loy Yang for a total loss of approximately $110 million. In July
2003, we executed a conditional share sale agreement for our investment in Loy
Yang. For additional details, see "Outlook -- Enterprises Outlook" section
within this MD&A.
Argentina: In January 2002, the Republic of Argentina enacted the Public
Emergency and Foreign Exchange System Reform Act. This law repealed the fixed
exchange rate of one U.S. dollar to one Argentina peso, converted all
dollar-denominated utility tariffs and energy contract obligations into pesos at
the same one-to-one exchange rate, and directed the President of Argentina to
renegotiate such tariffs.
Effective April 30, 2002, we adopted the Argentine peso as the functional
currency for our Argentine investments. We had used previously the U.S. dollar
as the functional currency. As a result, we translated the assets and
liabilities of our Argentine entities into U.S. dollars using an exchange rate
of 3.45 pesos per
76
U.S. dollar, and recorded an initial charge to the Foreign Currency Translation
component of stockholders' equity of $400 million.
While we cannot predict future peso-to-U.S. dollar exchange rates, we do
expect that these non-cash charges reduce substantially the risk of further
material balance sheet impacts when combined with anticipated proceeds from
international arbitration currently in progress, political risk insurance, and
the eventual sale of these assets. At December 31, 2003, the net foreign
currency loss due to the unfavorable exchange rate of the Argentine peso
recorded in the Foreign Currency Translation component of stockholders' equity
using an exchange rate of 2.94 pesos per U.S. dollar was $264 million. This
amount also reflects the effect of recording, at December 31, 2002, U.S. income
taxes on temporary differences between the book and tax bases of foreign
investments, including the foreign currency translation associated with our
Argentine investments that were no longer considered permanent. For additional
details, see Note 8, Income Taxes.
INCOME STATEMENT: We use the U.S. dollar as the functional currency of
subsidiaries operating in highly inflationary economies and of subsidiaries that
meet the U.S. dollar functional currency criteria outlined in SFAS No. 52. Gains
and losses that arise from transactions denominated in a currency other than the
U.S. dollar, except those that are hedged, are included in determining net
income.
HEDGING STRATEGY: We may use forward exchange and option contracts to hedge
certain receivables, payables, long-term debt, and equity value relating to
foreign investments. The purpose of our foreign currency hedging activities is
to reduce risk associated with adverse changes in currency exchange rates that
could affect cash flow materially. These contracts would not subject us to risk
from exchange rate movements because gains and losses on such contracts are
inversely correlated with the losses and gains, respectively, on the assets and
liabilities being hedged.
ACCOUNTING FOR THE EFFECTS OF INDUSTRY REGULATION
Because we are involved in a regulated industry, regulatory decisions
affect the timing and recognition of revenues and expenses. We use SFAS No. 71
to account for the effects of these regulatory decisions. As a result, we may
defer or recognize revenues and expenses differently than a non-regulated
entity.
For example, items that a non-regulated entity normally would expense, we
may record 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, we may record as
regulatory liabilities if the actions of the regulator indicate they will
require such revenues be refunded to customers. Judgment is required to
determine the recoverability of items recorded as regulatory assets and
liabilities. As of December 31, 2003, we had $1.105 billion recorded as
regulatory assets and $1.467 billion recorded as regulatory liabilities.
For additional details on industry regulation, see Note 1, Corporate
Structure and Accounting Policies, "Utility Regulation."
ACCOUNTING FOR PENSION AND OPEB
Pension: We have established external trust funds to provide retirement
pension benefits to our employees under a non-contributory, defined benefit
Pension Plan. We have implemented a cash balance plan for employees hired after
June 30, 2003. We use SFAS No. 87 to account for pension costs.
OPEB: We provide postretirement health and life benefits under our OPEB
plan to substantially all our retired employees. We use SFAS No. 106 to account
for other postretirement benefit costs.
Liabilities for both pension and OPEB are recorded on the balance sheet at
the present value of their future obligations, net of any plan assets. The
calculation of the liabilities and associated expenses requires the expertise of
actuaries. Many assumptions are made including:
- life expectancies,
- present-value discount rates,
- expected long-term rate of return on plan assets,
77
- rate of compensation increases, and
- anticipated health care costs.
Any change in these assumptions can change significantly the liability and
associated expenses recognized in any given year.
The following table provides an estimate of our pension expense, OPEB
expense, and cash contributions for the next three years:
PENSION EXPENSE OPEB EXPENSE CONTRIBUTIONS
--------------- ------------ -------------
IN MILLIONS
2004................................................. $21 $66 $ 98
2005................................................. 44 63 123
2006................................................. 67 61 131
Actual future pension expense and contributions will depend on future
investment performance, changes in future discount rates, and various other
factors related to the populations participating in the Pension Plan.
Lowering the expected long-term rate of return on the Pension Plan assets
by 0.25 percent (from 8.75 percent to 8.50 percent) would increase estimated
pension expense for 2004 by $2 million. Lowering the discount rate by 0.25
percent (from 6.25 percent to 6.00 percent) would increase estimated pension
expense for 2004 by $4 million.
In August 2003, we made a planned contribution of $210 million to the
Pension Plan. In December 2003, we made an additional contribution of $350
million. As a result of these contributions, we reversed the additional minimum
liability and the resulting decrease in equity that we charged in 2002. As of
December 31, 2003, we have a prepaid pension asset of $408 million recorded on
our consolidated balance sheets.
Market-Related Valuation: We determine pension expense based on a
market-related valuation of assets, which reduces year-to-year volatility. The
market-related valuation recognizes investment gains or losses over a five-year
period from the year in which the gains or losses occur. Investment gains or
losses for this purpose are the difference between the expected return
calculated using the market-related value of assets and the actual return based
on the market value of assets. Since the market-related value of assets
recognizes gains or losses over a five-year period, the future value of assets
will be impacted as previously deferred gains or losses are recorded.
Due to the unfavorable performance of the equity markets in the past few
years, as of December 31, 2003, we had cumulative losses of approximately $239
million that remain to be recognized in the calculation of the market-related
value of assets. These unrecognized net actuarial losses may result in increases
in future pension expense in accordance with SFAS No. 87.
The Medicare Prescription Drug, Improvement and Modernization Act of 2003
was signed into law in December 2003. This Act establishes a prescription drug
benefit under Medicare (Medicare Part D), and a federal subsidy to sponsors of
retiree health care benefit plans that provide a benefit that is actuarially
equivalent to Medicare Part D. We are deferring recognizing the effects of the
Act in our 2003 financial statements, as permitted by FASB Staff Position No.
106-1. When accounting guidance is issued, our retiree health benefit obligation
may be adjusted.
For additional details on postretirement benefits, see Note 10, Retirement
Benefits.
ACCOUNTING FOR ASSET RETIREMENT OBLIGATIONS
SFAS No. 143, Accounting for Asset Retirement Obligations, became effective
January 2003. It requires companies to record the fair value of the cost to
remove assets at the end of their useful lives, if there is a legal obligation
to remove them. We have legal obligations to remove some of our assets,
including our nuclear plants, at the end of their useful lives. As required by
SFAS No. 71, we accounted for the implementation of this standard by recording a
regulatory asset and liability for regulated entities instead of a cumulative
effect of a change in
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accounting principle. Accretion of $1 million related to the Big Rock and
Palisades' profit component included in the estimated cost of removal was
expensed for 2003.
The fair value of ARO liabilities has been calculated using an expected
present value technique. This technique reflects assumptions, such as costs,
inflation, and profit margin that third parties would consider to assume the
settlement of the obligation. Fair value, to the extent possible, should include
a market risk premium for unforeseeable circumstances. No market risk premium
was included in our ARO fair value estimate since a reasonable estimate could
not be made.
If a reasonable estimate of fair value cannot be made in the period the
asset retirement obligation is incurred, such as assets with indeterminate
lives, the liability is to be recognized when a reasonable estimate of fair
value can be made. Generally, transmission and distribution assets have
indeterminate lives. Retirement cash flows cannot be determined. There is a low
probability of a retirement date, so no liability has been recorded for these
assets. No liability has been recorded for assets that have insignificant
cumulative disposal costs, such as substation batteries. The measurement of the
ARO liabilities for Palisades and Big Rock are based on decommissioning studies
that are based largely on third-party cost estimates.
Reclassification of Non-Legal Cost of Removal: Beginning in December 2003,
the SEC requires the quantification and reclassification of the estimated cost
of removal obligations arising from other than legal obligations. These
obligations have been accrued through depreciation charges. We estimate that we
had $983 million in 2003 and $907 million in 2002 of previously accrued asset
removal costs related to our regulated operations, for other than legal
obligations. These obligations, which were previously classified as a component
of accumulated depreciation, were reclassified as regulatory liabilities in the
accompanying consolidated balance sheets.
For additional details on ARO, see Note 16, Asset Retirement Obligations.
ACCOUNTING FOR NUCLEAR DECOMMISSIONING COSTS
The MPSC and FERC regulate the recovery of costs to decommission our Big
Rock and Palisades nuclear plants. They require, and we have established,
external trust funds to finance the decommissioning of both plants. Our electric
customers pay a surcharge to fund these trusts. We record the trust fund
balances as a non-current asset on our balance sheet.
Our decommissioning cost estimates for the Big Rock and Palisades plants
assume:
- each plant site will be restored to conform to the adjacent landscape,
- all contaminated equipment and material will be removed and disposed of
in a licensed burial facility, and
- the site will be released for unrestricted use.
Independent contractors with expertise in decommissioning have helped us
develop decommissioning cost estimates. Various inflation rates for labor,
non-labor, and contaminated equipment disposal costs are used to escalate these
cost estimates to the future decommissioning cost. A portion of future
decommissioning cost will result from the failure of the DOE to remove fuel from
the sites, as required by the Nuclear Waste Policy Act of 1982. Spent fuel
storage costs would not be incurred if the DOE took possession of the spent
fuel. There is litigation underway to recover these costs.
The decommissioning trust funds include equities and fixed income
investments. Equities will be converted to fixed income investments during
decommissioning, and fixed income investments are converted to cash as needed.
In December 2000, funding of the Big Rock trust fund was stopped since it was
considered fully funded, subject to further MPSC review. The funds provided by
the trusts, additional customer surcharges, and potential
79
funds from DOE litigation are all required to cover fully the decommissioning
costs, and we currently expect that to happen. The costs of decommissioning
these sites and the adequacy of the trust funds could be affected by:
- variances from expected trust earnings,
- a lower recovery of costs from the DOE and lower rate recovery from
customers, and
- changes in decommissioning technology, regulations, estimates or
assumptions.
For additional details on nuclear decommissioning, see Note 1, Corporate
Structure and Accounting Policies, "Nuclear Plant Decommissioning."
CAPITAL RESOURCES AND LIQUIDITY
Our liquidity and capital requirements are a function of our results of
operations, capital expenditures, contractual obligations, debt maturities,
working capital needs, and collateral requirements. During the summer months, we
purchase natural gas and store it for resale primarily during the winter heating
season. Recently, the market price for natural gas has increased. Although our
natural gas purchases are recoverable from our customers, the amount paid for
natural gas stored as inventory could require additional liquidity due to the
timing of the cost recoveries. In addition, a few of our commodity suppliers
have requested advance payment or other forms of assurances, including margin
calls, in connection with maintenance of ongoing deliveries of gas and
electricity.
At the beginning of 2003, we had debt maturities and capital expenditures
that required substantial amounts of cash. We were also subject to liquidity
demands of various commercial commitments, such as guarantees, indemnities, and
letters of credit. As a result, in 2003, we executed a financial improvement
plan to address these critical liquidity issues.
In January 2003, we suspended payment of the common stock dividend and
increased our efforts to reduce operating expenses and capital expenditures. We
continued to sell non-strategic assets and we used the proceeds to reduce debt.
Gross proceeds from asset sales were $939 million in 2003. Finally, we explored
financing opportunities, such as refinancing debt, issuing new debt and
preferred equity, and negotiating private placement debt. Together, all of these
steps enabled us to meet our liquidity demands.
In 2004, we will continue to monitor our operating expenses and capital
expenditures, evaluate market conditions for financing opportunities, and sell
assets that are not consistent with our strategy. We do not anticipate paying
dividends in the foreseeable future. The Board of Directors may reconsider or
revise this policy from time to time based upon certain conditions, including
our results of operations, financial condition, and capital requirements, as
well as other relevant factors. We believe our current level of cash and
borrowing capacity, along with anticipated cash flows from operating and
investing activities, will be sufficient to meet our liquidity needs through
2005.
CASH POSITION, INVESTING, AND FINANCING
Consolidated cash needs are met by our operating, investing and financing
activities. At December 31, 2003, $733 million consolidated cash was on hand
which includes $201 million of restricted cash. For additional details on
restricted cash, see Note 1, Corporate Structure and Accounting Policies.
Our primary ongoing source of cash is dividends and other distributions
from our subsidiaries, including proceeds from asset sales. In 2003, Consumers
paid $218 million in common stock dividends and Enterprises paid $536 million in
common stock dividends and other distributions to us. Enterprises' other
distributions include a transfer of 1,967,640 shares of CMS Energy Common Stock,
valued at $16 million, in the form of a stock dividend. There was no impact on
shares outstanding or the consolidated income statement from this distribution.
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SELECTED MEASURES OF LIQUIDITY AND CAPITAL RESOURCES:
2003
----
Working capital (in millions)............................... $ 844
Current ratio............................................... 1.51:1
Working capital in 2003 was primarily driven by the following:
- cash proceeds from long-term debt issuance -- $2.080 billion,
- cash proceeds from asset sales -- $939 million, and
- cash proceeds from preferred stock issuance/sale -- $272 million.
partially offset by:
- cash used for long-term debt retirements, excluding current
portion -- $1.531 billion,
- cash used for pension contributions -- $560 million, and
- cash used for purchase of property, plant and equipment -- $535 million.
SUMMARY OF CASH FLOWS:
RESTATED RESTATED
2003 2002 2001
---- -------- --------
IN MILLIONS
Net cash provided by (used in):
Operating activities...................................... $(251) $ 614 $ 372
Investing activities...................................... 203 829 (1,349)
Financing activities...................................... 230 (1,223) 967
Effect of exchange rates on cash............................ (1) 8 (10)
----- ------- -------
Net increase (decrease) in cash and temporary cash
investments............................................... $ 181 $ 228 $ (20)
===== ======= =======
OPERATING ACTIVITIES:
2003: Net cash used in operating activities was $251 million in 2003
compared to net cash provided by operating activities of $614 million in 2002.
The change of $865 million was primarily due to an increase in pension plan
contributions of $496 million, an increase in inventories of $428 million due to
higher gas purchases at higher prices by our gas utility operations, and a
decrease in accounts payable and accrued expenses of $232 million due primarily
to the sale of CMS MST's wholesale gas and power contracts. This change was
partially offset by a decrease in accounts receivable and accrued revenue of
$101 million due primarily to the sale of CMS MST's wholesale gas and power
contracts.
2002: Net cash provided by operating activities increased $242 million in
2002 primarily due to a decrease in inventories of $479 million due to a lower
volume of gas purchased at lower prices, combined with increased sales volumes
at higher prices at our gas utility. This increase was partially offset by a
smaller decrease in accounts receivable and accrued revenues of $238 million.
INVESTING ACTIVITIES:
2003: Net cash provided by investing activities decreased $626 million in
2003 due primarily to a decrease in asset sale proceeds of $720 million,
primarily from the sale of Equatorial Guinea, Powder River, and CMS Oil and Gas
in 2002, offset by a decrease in 2003 versus 2002 capital expenditures of $212
million as a result of our strategic plan to reduce capital expenditures.
2002: Net cash provided by investing activities increased $2.178 billion in
2002 due primarily to a decrease in capital expenditures of $492 million as a
result of our strategic plan to reduce capital expenditures, and an
81
increase in asset sale proceeds of $1.525 billion, resulting primarily from the
sales of Equatorial Guinea, Powder River, and CMS Oil and Gas.
FINANCING ACTIVITIES:
2003: Net cash provided by financing activities increased $1.453 billion in
2003 due primarily to an increase in net proceeds from borrowings of $988
million and net proceeds from preferred securities issuances/ sale of $272
million. For additional details on long-term debt activity, see Note 5,
Financings and Capitalization.
2002: Net cash used in financing activities increased $2.190 billion in
2002 due primarily to a decrease in net proceeds from borrowings of $1.733
billion and a decrease in net proceeds from common stock and preferred
securities of $454 million.
OBLIGATIONS AND COMMITMENTS
The following information on our contractual obligations, off-balance sheet
arrangements, and commercial commitments is provided to collect information in a
single location so that a picture of liquidity and capital resources is readily
available. For additional information on our obligations and commitments see
Note 5, Financings and Capitalization.
PAYMENTS DUE
----------------------------------------------------------------
DECEMBER 31 TOTAL 2004 2005 2006 2007 2008 BEYOND
----------- ----- ---- ---- ---- ---- ---- ------
IN MILLIONS
CONTRACTUAL OBLIGATIONS
On-balance sheet:
Long-term debt....................... $ 6,529 $ 509 $ 696 $ 490 $516 $987 $ 3,331
Long-term debt -- related parties.... 684 -- -- -- -- -- 684
Capital lease obligations............ 68 10 11 10 10 8 19
------- ------ ------ ------ ---- ---- -------
Total on-balance sheet................. $ 7,281 $ 519 $ 707 $ 500 $526 $995 $ 4,034
------- ------ ------ ------ ---- ---- -------
Off-balance sheet:
Non-recourse debt.................... $ 2,909 $ 233 $ 123 $ 170 $ 85 $101 $ 2,197
Capital lease obligation -- MCV...... 144 16 9 8 8 8 95
Operating leases..................... 78 12 10 10 9 7 30
Sale of accounts receivable.......... 297 297 -- -- -- -- --
Unconditional purchase
obligations(a).................... 16,370 1,895 1,258 892 711 670 10,944
------- ------ ------ ------ ---- ---- -------
Total off-balance sheet................ $19,798 $2,453 $1,400 $1,080 $813 $786 $13,266
======= ====== ====== ====== ==== ==== =======
-------------------------
(a) This excludes purchase obligations that Consumers has with Genesee,
Grayling, and Filer City generating plants because these entities are
consolidated under FASB Interpretation No. 46. Purchase obligations related
to the MCV Facility PPA assume that the regulatory out provision is
exercised in 2007. For additional details, see Note 4, Uncertainties,
"Other Consumers' Electric Utility Uncertainties -- The Midland
Cogeneration Venture."
REGULATORY AUTHORIZATION FOR FINANCINGS: Consumers must obtain FERC
authority to issue short and long-term securities. For additional details of
Consumers' existing authority, see Note 5, Financings and Capitalization.
LONG-TERM DEBT: Details on long-term debt and preferred securities
issuances, retirements, and outstanding balances are presented in Note 5,
Financings and Capitalization.
SHORT-TERM FINANCINGS: CMS Energy has $190 million available and Consumers
has $390 million available under revolving credit facilities. At December 31,
2003, the lines are available for general corporate purposes, working capital,
and letters of credit. Additional details are in Note 5, Financings and
Capitalization.
CAPITAL LEASE OBLIGATIONS: Our capital leases are comprised mainly of
leased service vehicles and office furniture. The full obligation of our leases
could become due in the event of lease payment default.
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OFF-BALANCE SHEET ARRANGEMENTS: We use off-balance sheet arrangements in
the normal course of business. Our off-balance sheet arrangements include:
- operating leases,
- non-recourse debt,
- sale of accounts receivable, and
- unconditional purchase obligations.
Operating Leases: Our leases of railroad cars, certain vehicles, and
miscellaneous office equipment are accounted for as operating leases.
Non-recourse Debt: Our share of unconsolidated debt associated with
partnerships and joint ventures in which we have a minority interest is
non-recourse.
Sale of Accounts Receivable: Under a revolving accounts receivable sales
program, we currently sell up to $325 million of certain accounts receivable.
For additional details, see Note 5, Financings and Capitalization.
Unconditional Purchase Obligations: Long-term contracts for purchase of
commodities and services are unconditional purchase obligations. These
obligations represent operating contracts used to assure adequate supply with
generating facilities that meet PURPA requirements. The commodities and services
include:
- natural gas,
- electricity,
- coal purchase contracts and their associated cost of transportation, and
- electric transmission.
Included in unconditional purchase obligations are long-term power purchase
agreements with various generating plants including the MCV Facility. These
contracts require us to make monthly capacity payments based on the plants'
availability or deliverability. These payments will approximate $43 million per
month during 2004, including $34 million related to the MCV Facility. If a plant
is not available to deliver electricity, we are not obligated to make the
capacity payments to the plant for that period of time. For additional details
on power supply costs, see "Electric Utility Results of Operations" within this
MD&A and Note 4, Uncertainties, "Consumers' Electric Utility Rate
Matters -- Power Supply Costs," and "Other Consumers' Electric Utility
Uncertainties -- The Midland Cogeneration Venture."
COMMERCIAL COMMITMENTS: Our commercial commitments include indemnities and
letters of credit. Indemnities are agreements to reimburse other companies, such
as an insurance company, if those companies have to complete our contractual
performance in a third party contract. Banks, on our behalf, issue letters of
credit guaranteeing payment to a third party. Letters of credit substitute the
bank's credit for ours and reduce credit risk for the third party beneficiary.
We monitor and approve these obligations and believe it is unlikely that we
would be required to perform or otherwise incur any material losses associated
with these guarantees.
COMMITMENT EXPIRATION
-------------------------------------------------------
DECEMBER 31 TOTAL 2004 2005 2006 2007 2008 BEYOND
----------- ----- ---- ---- ---- ---- ---- ------
IN MILLIONS
COMMERCIAL COMMITMENTS
Off-balance sheet:
Guarantees...................................... $239 $ 20 $36 $4 $-- $-- $179
Indemnities..................................... 28 8 -- -- -- -- 20
Letters of Credit(a)............................ 254 215 10 5 5 5 14
---- ---- --- -- --- --- ----
Total............................................. $521 $243 $46 $9 $ 5 $ 5 $213
==== ==== === == === === ====
-------------------------
(a) At December 31, 2003, we had $175 million of cash collateralized letters of
credit and the cash used to collateralize the letters of credit is included
in Restricted Cash on the Consolidated Balance Sheets.
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DIVIDEND RESTRICTIONS: Under the provisions of its articles of
incorporation, at December 31, 2003, Consumers had $373 million of unrestricted
retained earnings available to pay common dividends. However, covenants in
Consumers debt facilities cap common stock dividend payments at $300 million in
a calendar year. Through December 31, 2003, we received the following common
stock dividend payments from Consumers:
IN MILLIONS
January..................................................... $ 78
May......................................................... 31
June........................................................ 53
November.................................................... 56
----
Total common stock dividends paid to CMS Energy............. $218
====
As of December 18, 2003, Consumers is also under an annual dividend cap of
$190 million imposed by the MPSC during the current interim gas rate relief
period. Because all of the $218 million of common stock dividends to CMS energy
were paid prior to December 18, 2003, Consumers was not out of compliance with
this new restriction for 2003. In February 2004, Consumers paid a $78 million
common stock dividend.
For additional details on the potential cap on common dividends payable
included in the MPSC Securitization order see Note 4, Uncertainties, "Consumers'
Electric Utility Rate Matters -- Securitization." Also, for additional details
on the cap on common dividends payable during the current interim gas rate
relief period, see Note 4, Uncertainties, "Consumers' Gas Utility Rate
Matters -- 2003 Gas Rate Case."
CAPITAL EXPENDITURES
We estimate the following capital expenditures, including new lease
commitments, by expenditure type and by business segments during 2004 through
2006. We prepare these estimates for planning purposes and may revise them.
YEARS ENDING DECEMBER 31 2004 2005 2006
------------------------ ---- ---- ----
IN MILLIONS
Electric utility operations(a)(b)........................... $395 $370 $570
Gas utility operations(a)................................... 155 185 170
Enterprises................................................. 85 5 5
---- ---- ----
$635 $560 $745
==== ==== ====
-------------------------
(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.
OUTLOOK
CORPORATE OUTLOOK
During 2003, we continued to implement a back-to-basics strategy that
focuses on growing a healthy utility and divesting under-performing or other
non-strategic assets. The strategy is designed to generate cash to pay down
debt, reduce business risk, and provide for more predictable future operating
revenues and earnings.
Consistent with our back-to-basics strategy, we are pursuing actively the
sale of non-strategic and under-performing assets and have received $3.6 billion
of cash from asset sales, securitization proceeds and proceeds from LNG
monetization since 2001. For additional details, see Note 2, Discontinued
Operations, Other Asset Sales, Impairments, and Restructuring. Some of these
assets are recorded at estimates of their current fair value. Upon the sale of
these assets, the proceeds realized may be different from the recorded values if
market conditions have changed. Even though these assets have been identified
for sale, we cannot predict when, nor
84
make any assurance that, these sales will occur. We anticipate that the sales,
if any, will result in additional cash proceeds that will be used to retire
existing debt.
As we continue to implement our back-to-basics strategy and further reduce
our ownership of non-utility assets, the percentage of our future earnings
relating to Jorf Lasfar and the MCV Partnership may increase and our total
future earnings may depend more significantly upon the performance of Jorf
Lasfar and the MCV Partnership. For the year ended December 31, 2003, earnings
from our equity method investment in Jorf Lasfar were $61 million and earnings
from our equity method investment in the MCV Partnership were $29 million.
ELECTRIC UTILITY BUSINESS OUTLOOK
GROWTH: Over the next five years, we expect electric deliveries to grow at
an average rate of approximately two percent per year based primarily on a
steadily growing customer base and economy. This growth rate includes both full
service sales and delivery service to customers who choose to buy generation
service from an alternative electric supplier, but excludes transactions with
other wholesale market participants and other electric utilities. 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.
For 2003, our electric deliveries, including delivery to customers who
chose to buy generation service from an alternative electric supplier, declined
1.4 percent from 2002. This was due to a combination of warmer than normal
summer weather in 2002, cooler than normal summer weather in 2003, and a decline
in manufacturing activity during 2003. In 2004, we project electric deliveries
to grow more than three percent. This short-term outlook for 2004 assumes higher
levels of manufacturing activity than in 2003 and normal weather conditions
throughout the year.
ELECTRIC UTILITY BUSINESS UNCERTAINTIES
Several electric business trends or uncertainties may affect our financial
results and condition. These trends or uncertainties have, or we reasonably
expect could have, a material impact on revenues or income from continuing
electric operations. Such trends and uncertainties include:
Environmental
- increasing capital expenditures and operating expenses for Clean Air Act
compliance, and
- potential environmental liabilities arising from various environmental
laws and regulations, including potential liability or expenses relating
to the Michigan Natural Resources and Environmental Protection Acts and
Superfund.
Restructuring
- response of the MPSC and Michigan legislature to electric industry
restructuring issues,
- ability to meet peak electric demand requirements at a reasonable cost,
without market disruption,
- ability to recover any of our net Stranded Costs under the regulatory
policies being followed by the MPSC,
- recovery of electric restructuring implementation costs,
- effects of lost electric supply load to alternative electric suppliers,
and
- status as an electric transmission customer instead of an electric
transmission owner-operator.
Regulatory
- effects of conclusions about the causes of the August 14, 2003 blackout,
including exposure to liability, increased regulatory requirements, and
new legislation,
- successful implementation of initiatives to reduce exposure to purchased
power price increases,
85
- effects of potential performance standards payments, and
- responses from regulators regarding the storage and ultimate disposal of
spent nuclear fuel.
Other
- effects of commodity fuel prices such as natural gas and coal,
- pending litigation filed by PURPA qualifying facilities,
- potential rising pension costs due to market losses and lump sum
payments. For additional details, see "Accounting for Pension and OPEB"
section within this MD&A.
- pending litigation and government investigations.
For additional details about these trends or uncertainties, see Note 4,
Uncertainties.
ELECTRIC ENVIRONMENTAL ESTIMATES: Our operations are subject to
environmental laws and regulations. Costs to operate our facilities in
compliance with these laws and regulations generally have been recovered in
customer rates.
Compliance with the federal Clean Air Act and resulting regulations has
been, and will continue to be, a significant focus for us. The Title I
provisions of the Clean Air Act require significant reductions in nitrogen oxide
emissions. To comply with the regulations, we expect to incur capital
expenditures totaling $771 million. The key assumptions included in the capital
expenditure estimate include:
- construction commodity prices, especially construction material and
labor,
- project completion schedules,
- cost escalation factor used to estimate future years' costs, and
- allowance for funds used during construction (AFUDC) rate.
Our current capital cost estimates include an escalation rate of 2.6
percent and an AFUDC capitalization rate of 8.1 percent. As of December 31,
2003, we have incurred $446 million in capital expenditures to comply with these
regulations and anticipate that the remaining $325 million of capital
expenditures will be made between 2004 and 2009. These expenditures include
installing catalytic reduction technology on coal-fired electric plants. In
addition to modifying the coal-fired electric plants, we expect to purchase
nitrogen oxide emissions credits for years 2004 through 2008. The cost of these
credits is estimated to average $8 million per year and is accounted for as
inventory.
The EPA has alleged that some utilities have incorrectly classified plant
modifications as "routine maintenance" rather than seek modification permits
from the EPA. We have received and responded to information requests from the
EPA on this subject. We believe that we have properly interpreted the
requirements of "routine maintenance." If our interpretation is found to be
incorrect, we may be required to install additional pollution controls at some
or all of our coal-fired electric plants.
Future clean air regulations requiring emission controls for sulfur
dioxide, nitrogen oxides, mercury, and nickel may require additional capital
expenditures. Total expenditures will depend upon the final makeup of the new
regulations.
The EPA continues to make new rules. The EPA has proposed changes to the
rules that govern generating plant cooling water intake systems. The proposed
rules are scheduled to be final in the first quarter of 2004. We are studying
the proposed rules to determine the most cost-effective solutions for
compliance.
For additional details on electric environmental matters, see Note 4,
Uncertainties, "Consumers' Electric Utility Contingencies -- Electric
Environmental Matters."
COMPETITION AND REGULATORY RESTRUCTURING: Michigan's Customer Choice Act
and other developments will continue to result in increased competition in the
electric business. Generally, increased competition reduces profitability and
threatens market share for generation services. As of January 1, 2002, the
Customer Choice Act
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allowed all of our electric customers to buy electric generation service from us
or from an alternative electric supplier. As a result, alternative electric
suppliers for generation services have entered our market. As of March 2004,
alternative electric suppliers are providing 735 MW of generation supply to ROA
customers. This amount represents nine percent of our distribution load and an
increase of 42 percent compared to March 2003. We anticipate this upward trend
to continue and expect over 1,000 MW of generation supply to ROA customers in
2004. We cannot predict the total amount of electric supply load that may be
lost to competitor suppliers.
In February 2004, the MPSC issued an order on Detroit Edison's request for
rate relief for costs associated with customers leaving under electric customer
choice. The MPSC order allows Detroit Edison to charge a transition surcharge of
approximately 0.4 cent per kWh to ROA customers and eliminates securitization
offsets of 0.7 cents per kWh for primary service customers and 0.9 cents per kWh
for secondary service customers. We are seeking similar recovery of Stranded
Costs due to ROA customers leaving our system and are encouraged by this ruling.
This ruling may change significantly the anticipated number of customers who
choose ROA.
Securitization: In March 2003, we filed an application with the MPSC
seeking approval to issue Securitization bonds. In June 2003, the MPSC issued a
financing order authorizing the issuance of Securitization bonds in the amount
of approximately $554 million. In July 2003, we filed for rehearing and
clarification on a number of features in the financing order.
In December 2003, the MPSC issued its order on rehearing, which rejected
our requests for clarification and modification to the dividend payment
restriction, failed to rule directly on the accounting clarifications requested,
and remanded the proceeding to the ALJ for additional proceedings to address
rate design. We filed testimony regarding the remanded proceeding in February
2004. The financing order will become effective after acceptance by us and
resolution of any appeals.
Stranded Costs: To the extent we experience net Stranded Costs as
determined by the MPSC, the Customer Choice Act allows us to recover such costs
by collecting a transition surcharge from customers who switch to an alternative
electric supplier. We cannot predict whether the Stranded Cost recovery method
adopted by the MPSC will be applied in a manner that will fully offset any
associated margin loss.
In 2002 and 2001, the MPSC issued orders finding that we experienced zero
net Stranded Costs from 1999 to 2001. The MPSC also declined to resolve numerous
issues regarding the net Stranded Cost methodology in a way that would allow a
reliable prediction of the level of Stranded Costs for future years. We
currently are in the process of appealing these orders with the Michigan Court
of Appeals and the Michigan Supreme Court.
In March 2003, we 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. Our net Stranded Costs incurred in 2002 are estimated to be $38
million with the issuance of Securitization bonds that include Clean Air Act
investments, or $85 million without the issuance of Securitization bonds that
include Clean Air Act investments.
Once the MPSC issues a final financing order on Securitization, we will
know the amount of our request for net Stranded Cost recovery for 2002. We
cannot predict how the MPSC will rule on our request for the recoverability of
Stranded Costs. Therefore, we have not recorded regulatory assets to recognize
the future recovery of such costs.
Implementation Costs: Since 1997, we have incurred significant costs to
implement the Customer Choice Act. The Customer Choice Act allows electric
utilities to recover the Act's implementation costs. The MPSC has reviewed and
allowed certain of the implementation costs incurred through 2001, but has not
authorized recovery. Depending upon the outcome of the remanded Securitization
proceeding, a significant portion of the implementation costs could be recovered
through the Securitization process.
Our application for $2 million of implementation costs in 2002 is currently
pending approval by the MPSC. We deferred these costs as a regulatory asset. In
addition to the implementation costs filed with the MPSC, as of December 31,
2003, we recorded an additional $2 million for total implementation costs of $91
million. Included in total implementation costs is $19 million associated with
the cost of money. We believe the implementation costs and the associated cost
of money are fully recoverable in accordance with the Customer Choice Act. Cash
recovery from customers is expected to begin after the rate cap period has
expired. For additional information on
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rate caps, see "Rate Caps" within this section. Once a final financing order by
the MPSC on Securitization is issued, the recoverability of the implementation
costs requested will be known. We cannot predict the amounts the MPSC will
approve as allowable costs.
Also, we are pursuing authorization at the FERC for MISO to reimburse us
for approximately $8 million in certain electric utility restructuring
implementation costs related to our former participation in the development of
the Alliance RTO, a portion of which has been expensed. In May 2003, the FERC
issued an order denying MISO's request for authorization to reimburse us. We
appealed the FERC ruling at the United States Court of Appeals for the District
of Columbia. In addition, we continue to pursue other potential means of
recovery with FERC. We cannot predict the outcome of the appeal process or the
ultimate amount, if any, the FERC will allow us to collect for implementation
costs.
Rate Caps: The Customer Choice Act imposes certain limitations on electric
rates that could result in us being unable to collect our full cost of
conducting business from electric customers. Such limitations include:
- a rate freeze effective through December 31, 2003, and
- rate caps effective through December 31, 2004 for small commercial and
industrial customers, and through December 31, 2005 for residential
customers.
As a result, we may be unable to maintain our profit margins in our
electric utility business during the rate cap periods. In particular, if we
needed to purchase power supply from wholesale suppliers while retail rates are
capped, the rate restrictions may make it impossible for us to fully recover
purchased power and associated transmission costs.
PSCR: 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
us, 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, effective through 2001. As a result of the rate freeze imposed by the
Customer Choice Act, frozen rates remained in effect until December 31, 2003,
and the PSCR process remained suspended. Therefore, changes in power supply
costs due to fluctuating electricity prices were not reflected in rates charged
to our customers during the rate freeze period.
As a result of meeting the transmission capability expansion requirements
and the market power test, we have met the requirements under the Customer
Choice Act to return to the PSCR process. For additional details see Note 4,
Uncertainties, "Consumers' Electric Utility Restructuring Matters -- Electric
Restructuring Legislation."
Accordingly, in September 2003, we submitted a PSCR filing to the MPSC that
reinstates the PSCR process for customers whose rates are no longer frozen or
capped as of January 1, 2004. The proposed PSCR charge allows us to recover a
portion of our increased power supply costs from large commercial and industrial
customers, and subject to the overall rate cap, from other customers. We
estimate the recovery of increased power supply costs from large commercial and
industrial customers to be approximately $30 million in 2004. As allowed under
current regulation, we self-implemented the proposed PSCR charge on January 1,
2004. The revenues received from the PSCR charge are also subject to subsequent
reconciliation at the end of the year after actual costs have been reviewed for
reasonableness and prudence. We cannot predict the outcome of this filing.
Decommissioning Surcharge: When our electric retail rates were frozen in
June 2000, a nuclear decommissioning surcharge related to the decommissioning of
Big Rock was included. We continued to collect the equivalent to the Big Rock
nuclear decommissioning surcharge consistent with the Customer Choice Act rate
freeze in effect through December 31, 2003. Collection of the surcharge stopped,
effective January 1, 2004, when the electric rate freeze expired. As a result,
our electric revenues will be reduced by $35 million in 2004. However, we expect
a portion of this reduction to be offset with increased electric revenues from
returning to the PSCR process.
Industrial Contracts: We entered into multi-year electric supply contracts
with certain large industrial customers. The contracts provide electricity at
specially negotiated prices, usually at a discount from tariff prices. The MPSC
approved these special contracts totaling approximately 685 MW of load. Unless
terminated or
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restructured, the majority of these contracts are in effect through 2005. As of
December 31, 2003, contracts for 301 MW of load have terminated. Of the
contracts that have terminated, contracts for 64 MW have gone to an alternative
electric supplier and contracts for 237 MW have returned to bundled tariff
rates. In January 2004, new special contracts for 91 MW, with the State of
Michigan and three universities, were approved by the MPSC. Other new special
contracts for 101 MW received interim approval from the MPSC and are awaiting
final approval. All new special contracts end by January 1, 2006. We cannot
predict the ultimate financial impact of changes related to these power supply
contracts, or whether additional special contracts will be necessary or
advisable.
Transmission Sale: In May 2002, we sold our electric transmission system
for $290 million to MTH. We are currently in arbitration with MTH regarding
property tax items used in establishing the selling price of our electric
transmission system. We cannot predict whether the remaining open items will
impact materially the sale proceeds previously recognized.
There are multiple proceedings and a proposed rulemaking pending before the
FERC regarding transmission pricing mechanisms and standard market design for
electric bulk power markets and transmission. The results of these proceedings
and proposed rulemakings could significantly affect:
- transmission cost trends,
- delivered power costs to us, and
- delivered power costs to our retail electric customers.
The financial impact of such proceedings, rulemaking and trends are not
currently quantifiable. In addition, we are evaluating whether or not there may
be impacts on electric reliability associated with the outcomes of these various
transmission related proceedings.
August 14, 2003 Blackout: On August 14, 2003, the electric transmission
grid serving parts of the Midwest and the Northeast experienced a significant
disturbance that impacted electric service to millions of homes and businesses.
Approximately 100,000 of our 1.7 million electric customers were without power
for approximately 24 hours as a result of the disturbance. We incurred $1
million of immediate expense as a result of the blackout. We continue to
cooperate with investigations of the blackout by several federal and state
agencies. We cannot predict the outcome of these investigations.
In November 2003, the MPSC released its report on the blackout. The MPSC
report found no evidence to suggest that the events in Michigan, or actions
taken by the Michigan utilities or transmission operators, were factors
contributing to the cause of the blackout. Also in November 2003, the United
States and Canadian power system outage taskforce preliminarily reported that
the primary cause of the blackout was due to transmission line contact with
trees in areas outside of Consumers' operating territory. In December 2003, the
MPSC issued an order requiring Consumers to report by April 1, 2004, the status
of lines used to serve our customers, including details of vegetation trimming
practices in calendar year 2003. Consumers intends to comply with the MPSC's
request.
In February 2004, the Board of Trustees of NERC approved recommendations to
improve electric transmission reliability. The key recommendations are as
follows:
- strengthen the NERC compliance enforcement program,
- evaluate vegetation management procedures, and
- improve technology to prevent or mitigate future blackouts.
These recommendations require transmission operators, which Consumers is
not, to submit annual reports on vegetation management beginning March 2005 and
improve technology over various milestones throughout 2004. These
recommendations could result in increased transmission costs payable by
transmission customers in the future. The financial impacts of these
recommendations are not currently quantifiable.
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For additional details and material changes relating to the rate matters
and restructuring of the electric utility industry, see Note 4, Uncertainties,
"Consumers' Electric Utility Restructuring Matters," and "Consumers' Electric
Utility Rate Matters."
PERFORMANCE STANDARDS: Electric distribution performance standards
developed by the MPSC became effective in February 2004. The performance
standards establish standards related to restoration after an outage, safety,
and customer relations. Financial incentives and penalties are contained within
the performance standards. An incentive is possible if all of the established
performance standards have been exceeded for a calendar year. However, the value
of such incentive cannot be determined at this point as the performance
standards do not contain an approved incentive mechanism. Financial penalties in
the form of customer credits are also possible. These customer credits are based
on duration and repetition of outages. We cannot predict the likely effects of
the financial incentive or penalties, if any, on us.
GAS UTILITY BUSINESS OUTLOOK
GROWTH: Over the next five years, we expect gas deliveries to grow at an
average rate of less than one percent per year. Actual gas deliveries in future
periods may be affected by:
- abnormal weather,
- use by independent power producers,
- competition in sales and delivery,
- Michigan economic conditions,
- gas consumption per customer, and
- increases in gas commodity prices.
GAS UTILITY BUSINESS UNCERTAINTIES
Several gas business trends or uncertainties may affect our financial
results and conditions. These trends or uncertainties could have a material
impact on net sales, revenues, or income from gas operations. The trends and
uncertainties include:
Environmental
- potential environmental cost at a number of sites, including sites
formerly housing manufactured gas plant facilities.
Regulatory
- inadequate regulatory response to applications for requested rate
increases,
- potential adverse appliance service plan ruling or related legislation,
and
- response to increases in gas costs, including adverse regulatory response
and reduced gas use by customers,
Other
- potential rising pension costs due to market losses and lump sum payments
as discussed in the "Accounting for Pension and OPEB" section within this
MD&A, and
- pending litigation and government investigations.
Consumers sells gas to retail customers under tariffs approved by the MPSC.
These tariffs measure the gas delivered to customers based on the volume (i.e.
mcf) of gas delivered. However, Consumers purchases gas for resale on a Btu
basis. The Btu content of the gas available for purchase has increased and may
result in customers using less gas for the same heating requirement. Consumers
fully recovers what it spends to purchase the gas through the approved GCR.
However, since the customer is using less gas on a volumetric basis, the revenue
from
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the distribution charge (the non-gas cost portion of the customer bill) would be
reduced. This could affect adversely Consumers' earnings from it gas utility.
The amount of the earnings loss in future periods cannot be estimated at this
time.
In September 2002, the FERC issued an order rejecting our filing to assess
certain rates for non-physical gas title tracking services we offered. In
December 2003, the FERC ruled that no refunds were at issue and we reversed a $4
million reserve related to this matter. In January 2004, three companies filed
with FERC for clarification or rehearing of FERC's December 2003 order. We
cannot predict the outcome of this filing.
GAS ENVIRONMENTAL ESTIMATES: We expect to incur investigation and remedial
action costs at a number of sites, including 23 former manufactured gas plant
sites. We expect our remaining remedial action costs to be between $37 million
and $90 million. 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
additional details, see Note 4, Uncertainties, "Consumers' Gas Utility
Contingencies -- Gas Environmental Matters."
GAS COST RECOVERY: The MPSC is required by law to allow us to charge
customers for our actual cost of purchased natural gas. The GCR process is
designed to allow us to recover all of our gas costs; however, the MPSC reviews
these costs for prudency in an annual reconciliation proceeding. In January
2004, the MPSC staff and intervenors filed direct testimony in our 2002-2003 GCR
case proposing GCR recovery disallowances. In February 2004, the parties in the
case reached a tentative settlement agreement that would result in a GCR
disallowance of $11 million for the GCR period plus $1 million accrued interest
through February 2004. A reserve was recorded in December 2003. For additional
details, see Note 4, Uncertainties, "Consumers' Gas Utility Rate Matters -- Gas
Cost Recovery."
2003 GAS RATE CASE: In March 2003, we filed an application with the MPSC
for a $156 million annual increase in our gas delivery and transportation rates
that included a 13.5 percent return on equity. In September 2003, we filed an
update to our gas rate case that lowered the requested revenue increase from
$156 million to $139 million and reduced the return on common equity from 13.5
percent to 12.75 percent. The MPSC authorized an interim gas rate increase of
$19 million annually. The interim increase is under bond and subject to refund
if the final rate relief is a lesser amount. The interim increase order includes
a $34 million reduction in book depreciation expense and related income taxes
effective only during the period that we receive the interim relief. The MPSC
order allowed us to increase our rates beginning December 19, 2003. As part of
the interim rate order, Consumers agreed to restrict its dividend payments to
CMS Energy, to a maximum of $190 million annually during the period that
Consumers receives the interim relief. On March 5, 2004, the ALJ issued a
Proposal for Decision recommending that the MPSC not rely upon the projected
test year data included in our filing and supported by the MPSC Staff and
further recommended that the application be dismissed. The MPSC is not bound by
these recommendations and will consider the issues anew after receipt of
exceptions and replies to the exception filed by the parties in response to the
Proposal for Decision.
2001 GAS DEPRECIATION CASE: In December 2003, we filed an update to our gas
utility plant depreciation case originally filed in June 2001. This case is
independent of the 2003 gas rate case. The original filing was based on December
2000 plant balances and historical data. The December 2003 filing updates the
gas depreciation case to include December 2002 plant balances. The proposed
depreciation rates, if approved, will result in an annual increase of $12
million in depreciation expense.
OTHER CONSUMERS' OUTLOOK
CODE OF CONDUCT: In December 2000, the MPSC issued a new code of conduct
that applies to utilities and alternative electric suppliers. The code of
conduct seeks to prevent financial support, information sharing, and
preferential treatment between a utility's regulated and non-regulated services.
The new code of conduct is broadly written and could affect our:
- retail gas business energy related services,
- retail electric business energy related services,
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- marketing of non-regulated services and equipment to Michigan customers,
and
- transfer pricing between our departments and affiliates.
We appealed the MPSC orders related to the code of conduct and sought a
deferral of the orders until the appeal was complete. We also sought waivers
available under the code of conduct to continue utility activities that provide
approximately $50 million in annual electric and gas revenues. In October 2002,
the MPSC denied waivers for three programs including the appliance service plan
offered by us, which generated $34 million in gas revenue in 2003. In March
2004, the Michigan Court of Appeals upheld the MPSC's implementation of the code
of conduct without modification. We are in the process of filing an application
for leave to appeal with the Michigan Supreme Court, but we cannot predict
whether the Michigan Supreme Court will accept the case or the outcome of any
appeal.
The Michigan House of Representatives is scheduled to review the proposed
legislation in 2004 that would allow us to remain in the appliance service
business. In the interim, the legislature passed a bill to extend to July 1,
2004, the deadline for exiting this business. The full impact of the new code of
conduct on our business will remain uncertain until the final judicial
resolution of our appeal or the Michigan legislature enacts clarifying
legislation.
OTHER CONSUMERS' MATTERS
2001 GAS RATE CASE: In June 2001, we filed an application with the MPSC for
a distribution service rate increase. In November 2002, the MPSC approved a $56
million annual distribution service rate increase, with an 11.4 percent
authorized return on equity.
ENTERPRISES OUTLOOK
INDEPENDENT POWER PRODUCTION: We plan to complete the restructuring of our
IPP business by narrowing the focus of our existing operations and commitments
to North America and the Middle East/North Africa. Accordingly, we will continue
to sell designated assets and investments that are under-performing or are not
synergistic with our other business units. We will continue to operate and
manage our remaining portfolio of assets in a manner that maximizes their
contribution to our earnings and that maintains our reputation for solid
performance in the construction and operation of power plants.
CMS ERM: CMS ERM has continued to streamline its portfolio in order to
reduce its business risk and outstanding credit guarantees. Our future
activities will be centered around meeting contractual obligations, as well as
purchasing fuel for and marketing the merchant power from DIG, Michigan Power,
LLC, and other IPPs as their current power purchase agreements expire.
CMS GAS TRANSMISSION: CMS Gas Transmission continues to narrow its scope of
existing operations. We plan to continue to sell international assets and
businesses. Future operations will be mainly in Michigan.
UNCERTAINTIES: The results of operations and the financial position of our
diversified energy businesses may be affected by a number of trends or
uncertainties. Those that could have a material impact on our income, cash
flows, or balance sheet and credit improvement include:
- our ability to sell or to improve the performance of assets and
businesses in accordance with our financial plan,
- changes in exchange rates or local economic conditions, particularly in
Argentina, Venezuela, Brazil, and Australia,
- changes in foreign laws or in governmental or regulatory policies that
could reduce significantly the tariffs charged and revenues recognized by
certain foreign subsidiaries, or increase expenses,
- imposition of stamp taxes on South American contracts that could increase
substantially project expenses,
- impact of any future rate cases, or FERC actions, or orders on regulated
businesses, and
- impact of ratings downgrades on our liquidity, operating costs, and cost
of capital.
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PENDING ASSET SALE: Affiliates of CMS Generation and CMS Gas Transmission
own a 49.6 percent interest in the Loy Yang Power Partnership ("LYPP"), which
owns the 2,000 MW Loy Yang coal-fired power project in Victoria, Australia. Due
to unfavorable power prices in the Australian market, the LYPP is not generating
cash flow sufficient to meet its debt-service obligations. LYPP has A$500
million of term bank debt that, pursuant to extensions from the lenders, is
scheduled to mature on March 31, 2004. The partners in LYPP (including
affiliates of CMS Generation, CMS Gas Transmission, NRG Energy Inc. and Horizon
Energy Australia Investments) have been exploring the possible sale of the
project (or control of the project) and a restructuring of the finances of LYPP.
In July 2003, a conditional share sale agreement was executed by the LYPP
partners and partners of the Great Energy Alliance Corporation ("GEAC") to sell
the project to GEAC for A$3.5 billion ($2.8 billion in U.S. dollars), including
A$165 million for the project equity. The partners in GEAC are the Australian
Gas Light Company, the Tokyo Electric Power Company, and a group of financial
investors led by the Commonwealth Bank of Australia. A recent resolution of an
Australian Competition and Consumer Commission objection to the sale has led to
an extension of the exclusive arrangement with GEAC to allow enough time to
complete the sale. The conditions to completion of the sale to GEAC include
consents from LYPP's lenders to a restructuring of the debt and rulings on tax
and stamp duty obligations. The project equity portion of the sale price has
been reduced to A$155 million ($122 million in U.S. dollars) as a result of
working capital and other adjustments, and closing is targeted for March 2004.
The share sale agreement and subsequent extensions provide GEAC a period of
exclusivity while the conditions of the purchase are satisfied. The ultimate net
proceeds to CMS Energy for its equity share in LYPP may be subject to a
reduction based on the ultimate resolution of many of the factors described
above as conditions to completion of the sale, as well as closing adjustments
and transaction costs, and could likely range between $20 million and a nominal
amount.
We cannot predict whether this sale to GEAC will be consummated or, if not,
whether any of the other initiatives will be successful, and it is possible that
CMS Generation may lose all or a substantial part of its remaining equity
investment in the LYPP. We previously have written off our equity investment in
the LYPP, and further write-offs would be limited to cumulative net foreign
currency translation losses. The amount of such cumulative net foreign currency
translation losses is approximately $110 million at December 31, 2003. Any such
write-off would flow through our income statement but would not result in a
reduction in shareholders' equity or cause us to be in noncompliance with our
financing agreements.
OTHER OUTLOOK
LITIGATION AND REGULATORY INVESTIGATIONS: We are the subject of various
investigations as a result of round-trip trading transactions by CMS MST,
including investigations by the United States Department of Justice and the SEC.
Additionally, we are a party to various litigation including a shareholder
derivative lawsuit, a securities class action lawsuit, a class action lawsuit
alleging ERISA violations, several lawsuits regarding alleged false natural gas
price reporting, and a lawsuit surrounding the possible sale of CMS Pipeline
Assets. For additional details regarding these investigations and litigation,
see Note 4, Uncertainties.
OTHER MATTERS
CONTROL WEAKNESSES AT CMS MST
In late 2001 and during 2002, we identified a number of deficiencies in CMS
MST's systems of internal accounting controls. The internal control deficiencies
related to, among other things, a lack of account reconciliations, unidentified
differences between subsidiary ledgers and the general ledger, and procedures
and processes surrounding our accounting for energy trading contracts, including
mark-to-market accounting.
Senior management, the Audit Committee of the Board of Directors, the Board
of Directors, and the independent auditors were notified of these deficiencies
as they were discovered, and we commenced a plan of remediation that included
replacing certain key personnel and deploying additional internal and external
accounting personnel to CMS MST. While a number of these control improvements
and changes were implemented in late 2002, the most important ones occurred in
the first quarter of 2003.
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We believe that the improvements to our system of internal accounting
controls were appropriate and responsive to the internal control deficiencies
that were identified. We monitored the operation of the improved internal
controls throughout 2003 and have concluded that they were effective.
NEW ACCOUNTING STANDARDS
See Note 17, Implementation of New Accounting Standards, for discussion of
new standards.
ACCOUNTING STANDARDS NOT YET EFFECTIVE
FASB INTERPRETATION NO. 46, CONSOLIDATION OF VARIABLE INTEREST
ENTITIES: FASB issued this interpretation in January 2003. The objective of the
Interpretation is to assist in determining when one party controls another
entity in circumstances where a controlling financial interest cannot be
properly identified based on voting interests. Entities with this characteristic
are considered variable interest entities. The Interpretation requires the party
with the controlling financial interest to consolidate the entity.
On December 24, 2003, the FASB issued Revised FASB Interpretation No. 46.
For entities that have not previously adopted FASB Interpretation No. 46,
Revised FASB Interpretation No. 46 provides an implementation deferral until the
first quarter of 2004. Revised FASB Interpretation No. 46 is effective for the
first quarter of 2004 for all entities other than special purpose entities.
Special purpose entities must apply either FASB Interpretation No. 46 or Revised
FASB Interpretation No. 46 for the first reporting period that ends after
December 15, 2003.
As of December 31, 2003, we have completed our analysis for and have
adopted Revised FASB Interpretation No. 46 for all entities other than the MCV
Partnership and FMLP. We continue to evaluate and gather information regarding
those entities. We will adopt the provisions of Revised FASB Interpretation No.
46 for the MCV Partnership and FMLP in the first quarter of 2004.
If our completed analysis shows we have the controlling financial interest
in the MCV Partnership and FMLP, we would consolidate their assets, liabilities,
and activities, including $700 million of non-recourse debt, into our financial
statements. Financial covenants under our financing agreements could be impacted
negatively after such a consolidation. As a result, it may become necessary to
seek amendments to the relevant financing agreements to modify the terms of
certain of these covenants to remove the effect of this consolidation, or to
refinance the relevant debt. As of December 31, 2003, our investment in the MCV
Partnership was $419 million and our investment in the FMLP was $224 million.
We determined that we have the controlling financial interest in three
entities that are determined to be variable interest entities. We have 50
percent partnership interest in T.E.S Filer City Station Limited Partnership,
Grayling Generating Station Limited Partnership, and Genesee Power Station
Limited Partnership. Additionally, we have operating and management contracts
and are the primary purchaser of power from each partnership through long-term
power purchase agreements. Collectively, these interests provide us with the
controlling financial interest as defined by the Interpretation. Therefore, we
have consolidated these partnerships into our consolidated financial statements
for the first time as of December 31, 2003. At December 31, 2003, total assets
consolidated for these entities are $227 million and total liabilities are $164
million, including $128 million of non-recourse debt. At December 31, 2003, CMS
Energy has outstanding letters of credit and guarantees of $5 million relating
to these entities. At December 31, 2003, minority interest recorded for these
entities totaled $36 million.
We also determined that we do not hold the controlling financial interest
in our trust preferred security structures. Accordingly, those entities have
been deconsolidated as of December 31, 2003. Company obligated Trust Preferred
Securities totaling $663 million that were previously included in mezzanine
equity have been eliminated due to deconsolidation. As a result of the
deconsolidation, we have reflected $684 million of long-term debt -- related
parties and have reflected an investment in related parties of $21 million.
We are not required to, and have not, restated prior periods for the impact
of this accounting change.
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Additionally, we have non-controlling interests in four other variable
interest entities. FASB Interpretation No. 46 requires us to disclose certain
information about these entities. The chart below details our involvement in
these entities at December 31, 2003:
INVESTMENT OPERATING TOTAL
NATURE OF INVOLVEMENT BALANCE AGREEMENT WITH GENERATING
NAME (OWNERSHIP INTEREST) THE ENTITY COUNTRY DATE (IN MILLIONS) CMS ENERGY CAPACITY
------------------------- ---------- ------- ----------- ------------- -------------- ----------
Loy Yang Power (49%).... Power
Generator Australia 1997 $ -- Yes 2,000 MW
Taweelah (40%).......... Power
Generator United Arab
Emirates 1999 $ 83 Yes 777 MW
Jubail (25%)............ Generator --
Under
Construction Saudi Arabia 2001 $ -- Yes 250 MW
Shuweihat (20%)......... Generator --
Under
Construction United Arab
Emirates 2001 $(24)(a) Yes 1,500 MW
------------- ----------
Total................... $ 59 4,527 MW
============= ==========
-------------------------
(a) At December 31, 2003, we recorded a negative investment in Shuweihat. The
balance is comprised of our investment of $3 million reduced by our
proportionate share of the negative fair value of derivative instruments of
$27 million. We are required to record the negative investment due to our
future commitment to make an equity investment in Shuweihat.
Our maximum exposure to loss through our interests in these variable
interest entities is limited to our investment balance of $59 million, Loy Yang
currency translation losses of $110 million, net of tax, and letters of credit,
guarantees, and indemnities relating to Taweelah and Shuweihat totaling $146
million. Included in the $146 million is a letter of credit relating to our
required initial investment in Shuweihat of $70 million. We plan to contribute
our initial investment when the project becomes commercially operational in
2004.
STATEMENT OF POSITION, ACCOUNTING FOR CERTAIN COSTS AND ACTIVITIES RELATED
TO PROPERTY, PLANT, AND EQUIPMENT: At its September 9, 2003 meeting, the
Accounting Standards Executive Committee, of the American Institute of Certified
Public Accountants voted to approve the Statement of Position, Accounting for
Certain Costs and Activities Related to Property, Plant, and Equipment. The
Statement of Position is expected to be presented for FASB clearance in 2004 and
would be applicable for fiscal years beginning after December 15, 2004. An asset
classified as property, plant, and equipment often comprises multiple parts and
costs. A component accounting policy determines the level at which those parts
are recorded. Capitalization of certain costs related to property, plant, and
equipment are included in the total cost. The Statement of Position could impact
our component and capitalization accounting for property, plant, and equipment.
We continue to evaluate the impact, if any, this Statement of Position will have
upon adoption.
95
OUR BUSINESS
GENERAL
CMS ENERGY
CMS Energy was formed in Michigan in 1987 and is an energy holding company
operating through subsidiaries in the United States and in selected markets
around the world. Its two principal subsidiaries are Consumers and Enterprises.
Consumers is a public utility that provides natural gas and/or electricity to
almost 6 million of Michigan's 10 million residents and serves customers in all
68 of the state's Lower Peninsula counties. Through various subsidiaries,
Enterprises is engaged in energy businesses in the United States and in selected
international markets.
In 2003, CMS Energy's consolidated operating revenue was approximately $5.5
billion.
CONSUMERS
Consumers was formed in Michigan in 1968 and is the successor to a
corporation organized in Maine in 1910 that conducted business in Michigan from
1915 to 1968. In 1997, Consumers changed its name from Consumers Power Company
to Consumers Energy Company to better reflect its integrated electricity and gas
businesses.
Consumers' service areas include automotive, metal, chemical and food
products as well as a diversified group of other industries. Consumers'
consolidated operations account for a majority of CMS Energy's total assets and
income, as well as a substantial portion of its operating revenue. At year-end
2003, Consumers' customer base and operating revenues were as follows:
CUSTOMERS OPERATING 2003 VS. 2002
SERVED REVENUE OPERATING REVENUE
(MILLIONS) (MILLIONS) % INCREASE/(DECREASE)
---------- ---------- ---------------------
Electric Utility Business.............................. 1.75 $2,590 (2.2)
Gas Utility Business................................... 1.67 1,845 21.5
Total................................................ 2.85(a) $4,435 6.4
-------------------------
(a) Reflects total number of customers, taking into account the approximately
0.6 million combination electric and gas customers that are included in each
of the Electric Utility Business and Gas Utility Business numbers above.
Consumers' rates and certain other aspects of its business are subject to
the jurisdiction of the MPSC and FERC, as described in CMS ENERGY AND CONSUMERS
REGULATION below.
CONSUMERS' PROPERTIES -- GENERAL: Consumers and its subsidiaries own their
principal properties in fee, except that most electric lines and gas mains are
located in public roads or on land owned by others pursuant to easements and
other rights. Almost all of Consumers' properties are subject to the lien of its
First Mortgage Bond Indenture. For additional information on Consumers'
properties see BUSINESS SEGMENTS -- Consumers' Electric Utility
Operations -- Electric Utility Properties, and -- Consumers' Gas Utility
Operations -- Gas Utility Properties, below.
BUSINESS SEGMENTS
CMS ENERGY FINANCIAL INFORMATION
For information with respect to operating revenue, net operating income,
identifiable assets and liabilities attributable to all of CMS Energy's business
segments and international and domestic operations, The December 31, 2003
Financial Statements and the Notes thereto.
96
CONSUMERS' ELECTRIC UTILITY OPERATIONS
Based on the average number of customers, Consumers' electric utility
operations, if independent, would be the thirteenth largest electric utility
company in the United States. Consumers' electric utility operations include the
generation, purchase, distribution and sale of electricity. At year-end 2003, it
served customers in 61 of the 68 counties of Michigan's Lower Peninsula.
Principal cities served include Battle Creek, Flint, Grand Rapids, Jackson,
Kalamazoo, Midland, Muskegon and Saginaw. Consumers' electric utility customer
base includes a mix of residential, commercial and diversified industrial
customers, the largest segment of which is the automotive industry. Consumers'
electric utility operations are not dependent upon a single customer, or even a
few customers, and the loss of any one or even a few of such customers is not
reasonably likely to have a material adverse effect on its financial condition.
Consumers' electric utility operations are seasonal. The summer months
usually increase demand for electric energy, principally due to the use of air
conditioners and other cooling equipment, thereby affecting revenues. In 2003,
Consumers' electric sales were 36 billion kWh and retail open access deliveries
were 3 billion kWh, for total electric deliveries of 39 billion kWh. In 2002,
Consumers' electric sales were 37 billion kWh and retail open access deliveries
were 2 billion kWh, for total electric deliveries of 39 billion kWh.
Consumers' 2003 summer peak demand was 7,721 MW (excluding retail open
access loads) and 8,170 MW (including retail open access loads). For the 2002-03
winter period, Consumers' winter peak demand was 5,862 MW (excluding retail open
access loads) and 6,140 MW (including retail open access loads). In December
2003, Consumers experienced peak demand of 5,657 MW (excluding retail open
access loads) and 6,093 MW (including retail open access loads). Based on its
summer 2003 forecast, Consumers carried an 11 percent reserve margin target.
However, as a result of lower than forecasted peak loads, Consumers' ultimate
reserve margin was 14.7 percent compared to 20.6 percent in 2002. Currently,
Consumers has a reserve margin of 5.0 percent, or supply resources equal to 105
percent of projected summer peak load for summer 2004 and is in the process of
securing the additional capacity needed to meet its summer 2004 reserve margin
target of 11 percent (111 percent of projected summer peak load). The ultimate
use of the reserve margin will depend primarily on summer weather conditions,
the level of retail open access requirements being served by others during the
summer, and any unscheduled plant outages.
ELECTRIC UTILITY PROPERTIES
GENERATION: At December 31, 2003, Consumers' electric generating system
consists of the following:
2003 NET
2003 SUMMER NET GENERATION
SIZE AND YEAR DEMONSTRATED (MILLIONS
NAME AND LOCATION (MICHIGAN) ENTERING SERVICE CAPABILITY (MWS) OF KWHS)
---------------------------- ---------------- ---------------- ----------
COAL GENERATION
J H Campbell 1 & 2 -- West Olive........... 2 Units, 1962-1967 615 4,253
J H Campbell 3 -- West Olive............... 1 Unit, 1980 765(a) 5,657
D E Karn -- Essexville..................... 2 Units, 1959-1961 511 3,429
B C Cobb -- Muskegon....................... 2 Units, 1956-1957 312 2,166
J R Whiting -- Erie........................ 3 Units, 1952-1953 326 2,256
J C Weadock -- Essexville.................. 2 Units, 1955-1958 302 2,330
----- ------
Total coal generation........................ 2,831 20,091
----- ------
OIL/GAS GENERATION
B C Cobb -- Muskegon....................... 3 Units, 1999-2000(b) 183 6
D E Karn -- Essexville..................... 2 Units, 1975-1977 1,276 352
----- ------
Total oil/gas generation..................... 1,459 358
----- ------
97
2003 NET
2003 SUMMER NET GENERATION
SIZE AND YEAR DEMONSTRATED (MILLIONS
NAME AND LOCATION (MICHIGAN) ENTERING SERVICE CAPABILITY (MWS) OF KWHS)
---------------------------- ---------------- ---------------- ----------
HYDROELECTRIC
Conventional Hydro Generation.............. 13 Plants, 1906-1949 74 335
Ludington Pumped Storage................... 6 Units, 1973 955(c) (517)(d)
----- ------
Total Hydroelectric.......................... 1,029 (182)
----- ------
NUCLEAR GENERATION
Palisades -- South Haven................... 1 Unit, 1971 767 6,151
----- ------
GAS/OIL COMBUSTION TURBINE
Generation................................. 7 Plants, 1966-1971 345 13
----- ------
Total owned generation....................... 6,431 26,431
===== ======
PURCHASED AND INTERCHANGE POWER
Capacity................................... 1,991(e)
-----
Total........................................ 8,422
=====
-------------------------
(a) Represents Consumers' share of the capacity of the J H Campbell 3 unit, net
of 6.69 percent (ownership interests of the Michigan Public Power Agency
and Wolverine Power Supply Cooperative, Inc.).
(b) Cobb 1-3 are retired coal fired units that were converted to gas fired.
Units were placed back into service in the years indicated.
(c) Represents Consumers' share of the capacity of Ludington. Consumers and
Detroit Edison have 51 percent and 49 percent undivided ownership,
respectively, in the plant.
(d) Represents Consumers' share of net pumped storage generation. This facility
electrically pumps water during off-peak hours for storage to later
generate electricity during peak-demand hours.
(e) Includes 1,240 MW of purchased contract capacity from the MCV Facility.
In 2003, through long-term purchase contracts, options, spot market and
other seasonal purchases, Consumers purchased up to 2,353 MW of net capacity
from other power producers (the largest of which was the MCV Partnership), which
amounted to 30.5 percent of Consumers' total system requirements.
DISTRIBUTION:
Consumers' distribution system includes:
- 347 miles of high-voltage distribution radial lines operating at 120
kilovolts and above;
- 4,164 miles of high-voltage distribution overhead lines operating at 23
kilovolts and 46 kilovolts;
- 16 subsurface miles of high-voltage distribution underground lines
operating at 23 kilovolts and 46 kilovolts;
- 54,922 miles of electric distribution overhead lines;
- 8,526 subsurface miles of underground distribution lines; and
- substations having an aggregate transformer capacity of 20,605,680
kilovoltamperes.
Consumers formerly owned a high-voltage transmission system that
interconnects Consumers' electric generating plants at many locations with
transmission facilities of unaffiliated systems, including those of other
utilities in Michigan and Indiana. The interconnections permit a sharing of the
reserve capacity of the connected systems. This allows mutual assistance during
emergencies and substantially reduces investment in utility plant facilities. On
May 1, 2002, Consumers transferred its investment in the high-voltage
transmission system to a third party, Michigan Electric Transmission Company,
LLC. Consequently, Consumers no longer owns or controls transmission facilities
either directly or indirectly. For additional information on the sale of the
98
transmission assets, see Note 4 of the Notes to the December 31, 2003 Financial
Statements. UNCERTAINTIES -- CONSUMERS' ELECTRIC UTILITY RESTRUCTURING
MATTERS -- TRANSMISSION SALE
FUEL SUPPLY: Consumers has four generating plant sites that burn coal.
These plants constitute 76 percent of Consumers' baseload supply, the capacity
used to serve a constant level of customer demand. In 2003, these plants
produced a combined total of 20,091 million kWhs of electricity and burned 10.1
million tons of coal. On December 31, 2003, Consumers had on hand a 28-day
supply of coal.
Consumers owns Palisades, an operating nuclear power plant located near
South Haven, Michigan. In May 2001, with the approval of the NRC, Consumers
transferred its authority to operate Palisades to the NMC. During 2003,
Palisades' net generation was 6,151 million kWhs, constituting 23.3 percent of
Consumers' baseload supply. Palisades' nuclear fuel supply responsibilities are
under NMC's control as agent for Consumers. New fuel contracts are being written
as NMC agreements. Consumers/NMC currently have sufficient contracts for uranium
concentrates to provide up to 42 percent of its fuel supply requirements for the
fall 2004 reload. A mix of spot and medium-term uranium concentrates contracts
are currently being negotiated to provide for the remaining open requirements
for the 2004 and 2006 reloads. Consumers/NMC also have contracts for conversion
services with quantity flexibility to provide up to 100 percent of the
requirements for the 2004 reload and approximately 10 percent of the
requirements for the 2006 reload. Contracts to provide for the future Consumers/
NMC requirements are currently being pursued with all suppliers of conversion
services. Enrichment services contracts with quantity flexibility ranging up to
100 percent of the requirements for the 2004 and 2006 reloads are in place. NMC
is currently negotiating a contract for supply of enrichment services beyond
2006.
NMC also has contracts for nuclear fuel services and for fabrication of
nuclear fuel assemblies. The fuel contracts are with major private industrial
suppliers of nuclear fuel and related services and with uranium producers,
converters and enrichers who participate in the world nuclear fuel marketplace.
The fabrication contract is effective for the 2004 reload with options to extend
the contract for an additional two reloads in 2006 and 2007.
As shown below, Consumers generates electricity principally from coal and
nuclear fuel.
MILLIONS OF KWHS
------------------------------------------------
POWER GENERATED 2003 2002 2001 2000 1999
--------------- ---- ---- ---- ---- ----
Coal.............................................. 20,091 19,361 19,203 17,926 19,085
Nuclear........................................... 6,151 6,358 2,326(a) 5,724 5,105
Oil............................................... 242 347 331 645 809
Gas............................................... 129 354 670 400 441
Hydro............................................. 335 387 423 351 365
Net pumped storage................................ (517) (486) (553) (541) (476)
------ ------ ------ ------ ------
Total net generation.............................. 26,431 26,321 22,400 24,505 25,329
====== ====== ====== ====== ======
-------------------------
(a) On June 20, 2001, the Palisades reactor was shut down so technicians could
inspect a small steam leak on a control rod drive assembly. The defective
components were replaced and the plant returned to service on January 21,
2002.
99
The cost of all fuels consumed, shown below, fluctuates with the mix of
fuel burned.
COST PER MILLION BTU
-----------------------------------------
FUEL CONSUMED 2003 2002 2001 2000 1999
------------- ---- ---- ---- ---- ----
Coal..................................................... $1.33 $1.34 $1.38 $1.34 $1.38
Oil...................................................... 3.92 3.49 4.02 3.30 2.69
Gas...................................................... 7.62 3.98 4.05 4.80 2.74
Nuclear.................................................. 0.34 0.35 0.39 0.45 0.52
All Fuels(a)............................................. 1.16 1.19 1.44 1.27 1.28
-------------------------
(a) Weighted average fuel costs.
The Nuclear Waste Policy Act of 1982 made the federal government
responsible for the permanent disposal of spent nuclear fuel and high-level
radioactive waste by 1998. The DOE has not arranged for storage facilities and
it does not expect to receive spent nuclear fuel for storage in 2004. Palisades
currently has spent nuclear fuel that exceeds its temporary on-site storage pool
capacity. Therefore, Consumers is storing spent nuclear fuel in NRC-approved
steel and concrete vaults known as "dry casks." For additional information on
disposal of nuclear fuel and Consumers' use of dry casks, see Note 4 of the
Notes to the December 31, 2003 Financial Statements -- UNCERTAINTIES -- OTHER
CONSUMERS' ELECTRIC UTILITY UNCERTAINTIES -- NUCLEAR MATTERS.
CONSUMERS' GAS UTILITY OPERATIONS
Based on the average number of customers, Consumers' gas utility
operations, if independent, would be the 10th largest gas utility company in the
United States. Consumers' gas utility operations purchase, transport, store,
distribute and sell natural gas. As of December 31, 2003, it was authorized to
provide service in 54 of the 68 counties in Michigan's Lower Peninsula.
Principal cities served include Bay City, Flint, Jackson, Kalamazoo, Lansing,
Pontiac and Saginaw, as well as the suburban Detroit area, where nearly 900,000
of the gas customers are located. Consumers' gas utility operations are not
dependent upon a single customer, or even a few customers, and the loss of any
one or even a few of such customers is not reasonably likely to have a material
adverse effect on its financial condition.
Consumers' gas utility operations are seasonal. Consumers injects natural
gas into storage during the summer months for use during the winter months when
the demand for natural gas is higher. Peak demand usually occurs in the winter
due to colder temperatures and the resulting increased demand for heating fuels.
In 2003, total deliveries of natural gas sold by Consumers and by other sellers
who deliver natural gas to customers (including the MCV Partnership) through
Consumers' pipeline and distribution network totaled 388 bcf.
During the winter months of 2002-03, cold weather caused heavy withdrawals
from Consumers' gas storage fields. As a result, water and other liquids entered
certain of Consumers' pipelines. The existence of water and other liquids in the
pipelines could cause pipe corrosion, which in turn may increase future
maintenance problems and costs.
GAS UTILITY PROPERTIES: Consumers' gas distribution and transmission system
consists of:
- 25,551 miles of distribution mains throughout Michigan's Lower Peninsula;
- 1,624 miles of transmission lines throughout Michigan's Lower Peninsula;
- 7 compressor stations with a total of 162,000 installed horsepower; and
- 14 gas storage fields located across Michigan with an aggregate storage
capacity of 331 bcf and a working storage capacity of 130 bcf.
100
GAS SUPPLY: In 2003, Consumers purchased 3 percent of its gas from Michigan
producers, 66 percent from United States producers outside Michigan and 22
percent from Canadian producers. Authorized suppliers in the gas customer choice
program supplied the remaining 9 percent of gas that Consumers delivered.
Consumers' firm transportation agreements are with ANR Pipeline Company,
Great Lakes Gas Transmission, L.P., Trunkline Gas Co. and Panhandle Eastern Pipe
Line Company. Consumers uses these agreements to deliver gas to Michigan for
ultimate deliveries to market. Consumers' firm transportation and city gate
arrangements are capable of delivering over 95 percent of Consumers' total gas
supply requirements. As of December 31, 2003, Consumers' portfolio of firm
transportation from pipelines to Michigan is as follows:
VOLUME
(DEKATHERMS/DAY) EXPIRATION
---------------- ----------
ANR Pipeline Company........................................ 84,054 March 2004
ANR Pipeline Company (starting 04/01/04).................... 50,000 March 2006
ANR Pipeline Company (starting 04/01/04).................... 40,000 October 2004
Great Lakes Gas Transmission, L.P. ......................... 85,092 April 2004
Great Lakes Gas Transmission, L.P. (starting 04/01/04)...... 50,000 March 2007
Great Lakes Gas Transmission, L.P. ......................... 90,000 March 2004
Great Lakes Gas Transmission, L.P. (starting 04/01/04)...... 100,000 March 2007
Trunkline Gas Co. .......................................... 336,375 October 2005
Trunkline Gas Co. .......................................... 40,106 March 2004
Panhandle Eastern Pipe Line Company (starting 04/01/04)..... 50,000 October 2004
Vector Pipeline............................................. 50,000 March 2007
Consumers purchases the balance of its required gas supply under firm city
gate contracts and as needed, interruptible contracts. The amount of
interruptible transportation service and its use varies primarily with the price
for such service and the availability and price of the spot supplies being
purchased and transported. Consumers' use of interruptible transportation is
generally in off-peak summer months and after Consumers has fully utilized the
services under the firm transportation agreements.
NATURAL GAS TRANSMISSION
CMS Gas Transmission was formed in 1988 and owns, develops and manages
domestic and international natural gas facilities. In 2003, CMS Gas
Transmission's operating revenue was $22 million.
In 1999, CMS Gas Transmission acquired Panhandle, which was primarily
engaged in the interstate transmission and storage of natural gas and also
provided LNG terminalling and regasification services. Panhandle operated a
large natural gas pipeline network, which provided customers in the Midwest and
Southwest with a comprehensive array of transportation services. Panhandle's
major customers included 25 utilities located primarily in the United States
Midwest market area, which encompassed large portions of Illinois, Indiana,
Michigan, Missouri, Ohio and Tennessee.
In February 2003, Panhandle sold its one-third equity interest in
Centennial for $40 million to Centennial's two other partners, MAPL and TE
Products Pipeline Company, Limited Partnership, through its general partner,
TEPPCO.
In March 2003, Panhandle transferred $63 million previously committed to
collateralize a letter of credit and its one-third ownership interest in
Guardian to CMS Gas Transmission. CMS Gas Transmission sold its interest in
Guardian to a subsidiary of WPS Resources Corporation in May 2003. Proceeds from
the sale were $26 million and the $63 million of cash collateral was released.
In June 2003, CMS Gas Transmission sold Panhandle to Southern Union
Panhandle Corp., a newly formed entity owned by Southern Union. Southern Union
Panhandle Corp. purchased all of Panhandle's outstanding capital stock for
approximately $582 million in cash and 3 million shares of Southern Union common
stock. Southern Union Panhandle Corp. also assumed approximately $1.166 billion
in debt. In July 2003, Southern Union declared a five percent common stock
dividend resulting in an additional 150,000 shares of common stock
101
for CMS Gas Transmission. In October 2003, CMS Gas Transmission sold its 3.15
million shares to a private investor for $17.77 per share.
In July 2003, CMS Gas Transmission completed the sale of CMS Field Services
to Cantera Natural Gas, Inc. for gross cash proceeds of approximately $113
million, subject to post closing adjustments, and a $50 million face value note
of Cantera Natural Gas, Inc. The note is payable to CMS Energy for up to $50
million subject to the financial performance of the Fort Union and Bighorn
natural gas gathering systems from 2004 through 2008.
NATURAL GAS TRANSMISSION PROPERTIES: CMS Gas Transmission has a total of
288 miles of gathering and transmission pipelines located in the state of
Michigan, with a daily capacity of 0.95 bcf. At December 31, 2003, CMS Gas
Transmission had nominal processing capabilities of approximately 0.33 bcf per
day of natural gas in Michigan.
At December 31, 2003, CMS Gas Transmission has ownership interests in the
following international pipelines:
LOCATION OWNERSHIP INTEREST (%) MILES OF PIPELINES
-------- ---------------------- ------------------
Argentina................................................. 29.42 3,362
Argentina to Brazil....................................... 20.00 262
Argentina to Chile........................................ 50.00 707
Australia (Western Australia)............................. 40.00(a) 927
Australia (Western Australia)............................. 100.00 259
-------------------------
(a) CMS Gas Transmission has a 45 percent interest in a consortium that
acquired an 88 percent interest in the pipeline.
Properties of certain CMS Gas Transmission subsidiaries are subject to
liens of creditors of the respective subsidiaries.
INDEPENDENT POWER PRODUCTION
CMS Generation was formed in 1986. It invests in, acquires, develops,
constructs and operates non-utility power generation plants in the United States
and abroad. In 2003, the independent power production business segment's
operating revenue, which includes revenues from CMS Generation, CMS Operating,
S.A., the MCV Facility and the MCV Partnership, was $204 million.
INDEPENDENT POWER PRODUCTION PROPERTIES: As of December 31, 2003, CMS
Generation had ownership interests in operating power plants totaling 8,766
gross MW (4,149 net MW). At December 31, 2003, additional plants totaling
approximately 1,784 gross MW (420 net MW) were under construction or in advanced
stages of development. These plants include the Shuweihat power plant, which is
under construction in the United Arab Emirates, and the Saudi Petrochemical
Company power plant, which is under advanced development and will be located in
the Kingdom of Saudi Arabia. In 2004, CMS Generation plans to complete the
restructuring of its operations by narrowing the scope of its existing
operations and commitments from four to two regions: the U.S. and the Middle
East/North Africa. In addition, it plans to sell designated assets and
investments that are under-performing, non-region focused and non-synergistic
with other CMS Energy business units.
102
The following table details CMS Generation's interest in independent power
plants as of year-end 2003 (excluding the plants owned by CMS Operating, S.R.L.
and CMS Electric and Gas and the MCV facility, discussed further below):
PERCENTAGE OF
GROSS CAPACITY
UNDER LONG-TERM
OWNERSHIP INTEREST GROSS CAPACITY CONTRACT
LOCATION FUEL TYPE (%) (MW) (%)
-------- --------- ------------------ -------------- ---------------
California..................... Wood 37.8 36 100
Connecticut.................... Scrap tire 100 31 100
Michigan....................... Coal 50 70 100
Michigan....................... Natural gas 100 710 85
Michigan....................... Natural gas 100 224 0
Michigan....................... Wood 50 40 100
Michigan....................... Wood 50 38 100
New York....................... Hydro 0.3 14 100
North Carolina................. Wood 50 50 100
Oklahoma....................... Natural gas 8.8 124 100
-----
DOMESTIC TOTAL................. 1,337
Argentina...................... Hydro 17.2 1,320 20(a)
Australia...................... Coal 49.6 2,000 55
Chile.......................... Natural gas 50 720 100(b)
Ghana.......................... Crude oil 90 224 100
India.......................... Coal 50 250 100
India.......................... Natural gas 33.2 235 100
Jamaica........................ Diesel 42.3 63 100
Latin America.................. Various Various 484 51
Morocco........................ Coal 50 1,356 100
United Arab Emirates........... Natural gas 40 777 100
-----
INTERNATIONAL TOTAL............ 7,429
TOTAL DOMESTIC AND
INTERNATIONAL................ 8,766
=====
PROJECTS UNDER CONSTRUCTION/
ADVANCED DEVELOPMENT......... 1,784
-------------------------
(a) El Chocon is primarily on a spot market basis, however, it has a high
dispatch rate due to low cost.
(b) Atacama is not allowed to sell more than 440 MW to the grid. 100 percent of
the 440 MW is under contract.
Through a CMS International Ventures subsidiary called CMS Operating,
S.R.L., CMS Enterprises, CMS Gas Transmission and CMS Generation have a 100
percent ownership interest in a 128 MW natural gas power plant and a 92.6
percent ownership interest in a 540 MW natural gas power plant, each in
Argentina.
Through CMS Electric and Gas, CMS Enterprises has an 86 percent ownership
interest in 287 MW of gas turbine and diesel generating capacity in Venezuela.
CMS Midland owns a 49 percent general partnership interest in the MCV
Partnership, which was formed to construct and operate the MCV Facility. The MCV
Facility was sold to five owner trusts and leased back to the MCV Partnership.
CMS Holdings is a limited partner in the FMLP, which is a beneficiary of one of
these trusts. Through FMLP, CMS Holdings has a 35 percent Lessor interest in the
MCV Facility. The MCV Facility has a net electrical generating capacity of
approximately 1,500 MW.
CMS Generation has ownership interests in certain facilities such as Loy
Yang, Jorf Lasfar and El Chocon. The Loy Yang assets are owned in fee, but are
subject to the security interests of its lenders. CMS Energy is actively working
to sell its interest in the Loy Yang facility. The Jorf Lasfar facility is held
pursuant to a right of
103
possession agreement with the Moroccan state-owned Office National de
l'Electricite. The El Chocon facility is held pursuant to a 30-year possession
agreement.
For information on capital expenditures, see The 10-K MD&A -- CAPITAL
RESOURCES AND LIQUIDITY and Note 5 of the Notes to the December 31, 2003
Financial Statements -- FINANCINGS AND CAPITALIZATION.
OIL AND GAS EXPLORATION AND PRODUCTION
CMS Energy used to own an oil and gas exploration and production company.
In October 2002, CMS Energy completed its exit from the oil and gas exploration
and production business.
ENERGY RESOURCE MANAGEMENT
In 2003, CMS ERM moved its headquarters from Houston, Texas to Jackson,
Michigan. In February 2004, CMS ERM changed its name from CMS Marketing,
Services and Trading Company to CMS Energy Resource Management Company. CMS ERM
has reduced its business focus and in the future will concentrate on the
purchase and sale of energy commodities in support of CMS Energy's generating
facilities. CMS ERM previously provided gas, oil, and electric marketing, risk
management and energy management services to industrial, commercial, utility and
municipal energy users throughout the United States. In January 2003, CMS ERM
closed the sale of a major portion of its wholesale natural gas trading book to
Sempra Energy Trading. The cash proceeds were approximately $17 million. In
April 2003, CMS ERM sold its wholesale electric power business to Constellation
Power Source, Inc. Also in April 2003, CMS ERM sold the federal business of CMS
Viron, its energy management service provider, to Pepco Energy Services, Inc. In
July 2003, CMS ERM sold CMS Viron's non-federal business to Chevron Energy
Solutions Company, a division of Chevron U.S.A. In 2003, CMS ERM marketed
approximately 85 bcf of natural gas and 5,314 GWh of electricity and its 2003
operating revenue was $711 million.
INTERNATIONAL ENERGY DISTRIBUTION
In October 2001, CMS Energy discontinued the operations of its
international energy distribution business. In 2002, CMS Energy discontinued all
new development outside North America, which included closing all non-U.S.
development offices. In 2003, CMS Energy reclassified to continuing operations
SENECA, which is its energy distribution business in Venezuela, and CPEE, which
is its energy distribution business in Brazil, due to its inability to sell
these assets.
CMS ENERGY REGULATION
CMS Energy is a public utility holding company that is exempt from
registration under PUHCA. CMS Energy and its subsidiaries are subject to
regulation by various federal, state, local and foreign governmental agencies,
including those described below.
MICHIGAN PUBLIC SERVICE COMMISSION
Consumers is subject to the MPSC's jurisdiction, which regulates public
utilities in Michigan with respect to retail utility rates, accounting, utility
services, certain facilities and various other matters. The MPSC also has rate
jurisdiction over several limited liability companies in which CMS Gas
Transmission has ownership interests. These companies own, or will own, and
operate intrastate gas transmission pipelines.
The Attorney General, ABATE, and the MPSC staff typically intervene in MPSC
electric- and gas-related proceedings concerning Consumers. For many years,
almost every significant MPSC order affecting Consumers has been appealed.
Certain appeals from the MPSC orders are pending in the Court of Appeals.
RATE PROCEEDINGS: In 1996, the MPSC issued an order that established the
electric authorized rate of return on common equity at 12.25 percent. In 2002,
the MPSC issued an order that established the gas authorized rate of return on
common equity at 11.4 percent.
104
MPSC REGULATORY AND MICHIGAN LEGISLATIVE CHANGES: State regulation of the
retail electric and gas utility businesses has undergone significant changes. In
2000, the Michigan Legislature enacted the Customer Choice Act. The Customer
Choice Act provides that as of January 2002, all electric customers have the
choice to buy generation service from an alternative electric supplier. The
Customer Choice Act also imposes rate reductions, rate freezes and rate caps.
For additional information regarding the Customer Choice Act, see Note 4 of the
Notes to the December 31, 2003 Financial Statements -- UNCERTAINTIES
UNCERTAINTIES -- CONSUMERS' ELECTRIC UTILITY
RESTRUCTURING MATTERS.
As a result of regulatory changes in the natural gas industry, Consumers
transports the natural gas commodity that is sold to some customers by
competitors like gas producers, marketers and others. Pursuant to a gas customer
choice program that Consumers implemented, as of April 2003 all of Consumers'
gas customers are eligible to select an alternative gas commodity supplier.
Consumers' current GCR mechanism allows it to recover from its customers all
prudently incurred costs to purchase natural gas commodity and transport it to
Consumers' facilities. For additional information, see Note 4 of the Notes to
the December 31, 2003 Financial Statements UNCERTAINTIES -- CONSUMERS' GAS
UTILITY RATE MATTERS.
FEDERAL ENERGY REGULATORY COMMISSION
FERC has exercised limited jurisdiction over several independent power
plants in which CMS Generation has ownership interests, as well as over CMS ERM.
Among other things, FERC jurisdiction relates to the acquisition, operation and
disposal of assets and facilities and to the service provided and rates charged.
Some of Consumers' gas business is also subject to regulation by FERC, including
a blanket transportation tariff pursuant to which Consumers can transport gas in
interstate commerce.
FERC also regulates certain aspects of Consumers' electric operations
including compliance with FERC accounting rules, wholesale rates, operation of
licensed hydro-electric generating plants, transfers of certain facilities, and
corporate mergers and issuance of securities. FERC is currently soliciting
comments on whether it should exercise jurisdiction over power marketers like
CMS ERM, requiring them to follow FERC's uniform system of accounts and seek
authorization for issuance of securities and assumption of liabilities. These
issues are pending before the agency.
NUCLEAR REGULATORY COMMISSION
Under the Atomic Energy Act of 1954, as amended, and the Energy
Reorganization Act of 1974, Consumers is subject to the jurisdiction of the NRC
with respect to the design, construction, operation and decommissioning of its
nuclear power plants. Consumers is also subject to NRC jurisdiction with respect
to certain other uses of nuclear material. These and other matters concerning
Consumers' nuclear plants are more fully discussed in Note 1 of the Notes to the
December 31, 2003 Financial Statements -- CORPORATE STRUCTURE AND ACCOUNTING
POLICIES and Note 4 of the December 31, 2003 Financial Statements --
UNCERTAINTIES.
OTHER REGULATION
The Secretary of Energy regulates the importation and exportation of
natural gas and has delegated various aspects of this jurisdiction to FERC and
the DOE's Office of Fossil Fuels.
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Pipelines owned by system companies are subject to the Natural Gas Pipeline
Safety Act of 1968 and the Pipeline Safety Improvement Act of 2002, which
regulates the safety of gas pipelines. Consumers is also subject to the
Hazardous Liquid Pipeline Safety Act of 1979, which regulates oil and petroleum
pipelines.
CMS ENERGY ENVIRONMENTAL COMPLIANCE
CMS Energy and its subsidiaries are subject to various federal, state and
local regulations for environmental quality, including air and water quality,
waste management, zoning and other matters.
Consumers has installed and is currently installing modern emission
controls at its electric generating plants and has converted and is converting
electric generating units to burn cleaner fuels. Consumers expects that the cost
of future environmental compliance, especially compliance with clean air laws,
will be significant because of EPA regulations regarding nitrogen oxide and
particulate-related emissions. These regulations will require Consumers to make
significant capital expenditures.
Consumers is in the process of closing older ash disposal areas at two
plants. Construction, operation, and closure of a modern solid waste disposal
area for ash can be expensive, because of strict federal and state requirements.
In order to significantly reduce ash field closure costs, Consumers has worked
with others to use bottom ash and fly ash as part of temporary and final cover
for ash disposal areas instead of native materials, in cases where such use of
bottom ash and fly ash is compatible with environmental standards. To reduce
disposal volumes, Consumers sells coal ash for use as a filler for asphalt, for
incorporation into concrete products and for other environmentally compatible
uses. The EPA has announced its intention to develop new nationwide standards
for ash disposal areas. Consumers intends to work through industry groups to
help ensure that any such regulations require only the minimum cost necessary to
adhere to standards that are consistent with protection of the environment.
Like most electric utilities, Consumers has PCB in some of its electrical
equipment. During routine maintenance activities, Consumers identified PCB as a
component in certain paint, grout and sealant materials at the Ludington Pumped
Storage facility. Consumers removed and replaced part of the PCB material.
Consumers has proposed a plan to the EPA to deal with the remaining materials
and is waiting for a response from the EPA.
Certain environmental regulations affecting CMS Energy and Consumers
include, but are not limited to, the Clean Air Act Amendments of 1990 and
Superfund. Superfund can require any individual or entity that may have owned or
operated a disposal site, as well as transporters or generators of hazardous
substances that were sent to such site, to share in remediation costs for the
site.
CMS Energy's and Consumers' current insurance coverage does not extend to
certain environmental clean-up costs, such as claims for air pollution, some
past PCB contamination and for some long-term storage or disposal of pollutants.
For additional information concerning environmental matters, including
estimated capital expenditures to reduce nitrogen oxide related emissions, see
Note 4 of the Notes of the December 31, 2003 Financial Statements --
UNCERTAINTIES.
CMS ENERGY COMPETITION
ELECTRIC COMPETITION
Consumers' electric utility business experiences actual and potential
competition from many sources, both in the wholesale and retail markets, as well
as in electric generation, electric delivery and retail services.
In the wholesale electricity markets, Consumers competes with other
wholesale suppliers, marketers and brokers. Electric competition in the
wholesale markets increased significantly since 1996 due to FERC Order 888.
While Consumers is still active in wholesale electricity markets, wholesale for
resale transactions by Consumers
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generated an immaterial amount of Consumers' 2003 revenues from electric utility
operations. Consumers believes future loss of wholesale for resale transactions
will be insignificant.
A significant increase in retail electric competition has occurred because
of the Customer Choice Act and the availability of retail open access. Price is
the principal method of competition for generation services. The Customer Choice
Act gives all electric customers the right to buy generation service from an
alternative electric supplier. As of March 2004, alternative electric suppliers
are providing 735 MW of generation supply to retail open access customers. This
represents nine percent of Consumers' total generating load and an increase of
approximately 42 percent in generation supply being purchased from alternative
electric suppliers by retail open access customers. Consumers has applied for,
but has not yet been granted, reimbursement for implementation costs incurred
for the Electric Customer Choice program. The MPSC is supposed to adopt a
mechanism pursuant to the Customer Choice Act to provide for recovery of
stranded costs. In 2000 and 2001, the MPSC determined the stranded cost recovery
was zero, contrary to Consumers' position. Consumers continues to work toward
the adoption of a stranded cost recovery mechanism that will offset margin loss.
Consumers cannot predict the total amount of electric supply load that may be
lost to competitor suppliers, whether the stranded cost recovery method adopted
by the MPSC will be applied in a manner that will fully offset any associated
margin loss, or whether implementation costs will be fully recovered.
In addition to retail electric customer choice, Consumers also has
competition or potential competition from:
- the threat of customers relocating outside Consumers' service territory;
- the possibility of municipalities owning or operating competing electric
delivery systems;
- customer self-generation; and
- adjacent municipal utilities that extend lines to customers near service
territory boundaries.
Consumers addresses this competition by offering special contracts,
providing additional non-energy services, and monitoring and enforcing
compliance with MPSC and FERC rules.
Consumers offers non-energy revenue services to electric customers,
municipalities and other utilities in an effort to offset costs. These services
include engineering and consulting, construction of customer-owned distribution
facilities, equipment sales (such as transformers), power quality analysis,
fiber optic line construction, meter reading and joint construction for phone
and cable. Consumers faces competition from many sources, including energy
management services companies, other utilities, contractors, and retail
merchandisers.
CMS ERM, which is a non-utility electric subsidiary, has modified its focus
toward optimization of CMS Energy's independent power production portfolio. CMS
Energy's independent power production business segment, another non-utility
electric subsidiary, faces competition from generators, marketers and brokers,
as well as lower power prices on the wholesale market.
For additional information concerning electric competition, see
the 10-K MD&A -- OUTLOOK -- ELECTRIC UTILITY BUSINESS UNCERTAINTIES.
GAS COMPETITION
Competition has existed for the past decade in various aspects of
Consumers' gas utility business, and is likely to increase. Competition
traditionally comes from alternate fuels and energy sources, such as propane,
oil and electricity.
INSURANCE
CMS Energy and its subsidiaries, including Consumers, maintain insurance
coverage similar to comparable companies in the same lines of business. The
insurance policies are subject to terms, conditions, limitations and exclusions
that might not fully compensate CMS Energy for all losses. As CMS Energy renews
its policies it is
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possible that full insurance coverage may not be obtainable on commercially
reasonable terms due to restrictive insurance markets.
EMPLOYEES
As of December 31, 2003, CMS Energy and its subsidiaries, including
Consumers, had 8,411 full-time equivalent employees, of whom 8,353 are full-time
employees and 58 are full-time equivalent employees associated with the
part-time work force. Included in the total are 3,800 employees who are covered
by union contracts.
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LEGAL PROCEEDINGS
CMS Energy and some of its subsidiaries and affiliates are parties to
certain routine lawsuits and administrative proceedings incidental to their
businesses involving, for example, claims for personal injury and property
damage, contractual matters, various taxes, and rates and licensing. For
additional information regarding various pending administrative and judicial
proceedings involving regulatory, operating and environmental matters, see OUR
BUSINESS -- CMS ENERGY AND CONSUMERS REGULATION, as well as the 10-K MD & A and
Notes to the December 31, 2003 Financial Statements.
DEMAND FOR ACTIONS AGAINST OFFICERS AND DIRECTORS
In May 2002, the Board of Directors of CMS Energy received a demand on
behalf of a shareholder of CMS Energy Common Stock, that it commence civil
actions (i) to remedy alleged breaches of fiduciary duties by certain CMS Energy
officers and directors in connection with round-trip trading by CMS MST, and
(ii) to recover damages sustained by CMS Energy as a result of alleged insider
trades alleged to have been made by certain current and former officers of CMS
Energy and its subsidiaries. In December 2002, two new directors were appointed
to the Board. The Board formed a special litigation committee in January 2003 to
determine whether it is in the best interest of CMS Energy to bring the action
demanded by the shareholder. The disinterested members of the Board appointed
the two new directors to serve on the special litigation committee.
In December 2003, during the continuing review by the special litigation
committee, CMS Energy was served with a derivative complaint filed on behalf of
the shareholder in the Circuit Court of Jackson County, Michigan in furtherance
of his demands. The date for CMS Energy and other defendants to answer or
otherwise respond to the complaint was extended to June 1, 2004, subject to such
further extensions as may be mutually agreed upon by the parties and authorized
by the Court. CMS Energy cannot predict the outcome of this matter.
INTEGRUM LAWSUIT
Integrum filed a complaint in Wayne County, Michigan Circuit Court in July
2003 against CMS Energy, CMS Enterprises and APT. Integrum alleges several
causes of action against APT, CMS Energy and CMS Enterprises in connection with
an offer by Integrum to purchase the CMS Pipeline Assets. In addition to seeking
unspecified money damages, Integrum is seeking an order enjoining CMS Energy and
CMS Enterprises from selling and APT from purchasing the CMS Pipeline Assets and
an order of specific performance mandating that CMS Energy, CMS Enterprises and
APT complete the sale of the CMS Pipeline Assets to APT and Integrum. A
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certain officer and director of Integrum is a former officer and director of CMS
Energy, Consumers and their subsidiaries. CMS Energy, Consumers or their
subsidiaries did not employ the individual when Integrum made the offer to
purchase the CMS Pipeline Assets. CMS Energy believes that Integrum's claims are
without merit. CMS Energy will vigorously defend itself but cannot predict the
outcome of this lawsuit.
GAS INDEX PRICE REPORTING LITIGATION
In August 2003, Cornerstone Propane Partners, L.P. ("Cornerstone") filed a
putative class action complaint in the United States District Court for the
Southern District of New York against CMS Energy and dozens of other energy
companies. The court ordered the Cornerstone complaint to be consolidated with
similar complaints filed by Dominick Viola and Roberto Calle Gracey. The
plaintiffs filed a consolidated complaint on January 20, 2004. The consolidated
complaint alleges that false natural gas price reporting by the defendants
manipulated the prices of NYMEX natural gas futures and options. The complaint
contains two counts under the Commodity Exchange Act, one for manipulation and
one for aiding and abetting violations. CMS Energy is no longer a defendant,
however, CMS MST and CMS Field Services are named as defendants. CMS Energy sold
CMS Field Services to Cantera Natural Gas, Inc. in July 2003, but is required to
indemnify Cantera Natural Gas, Inc. with respect to this action.
In a similar but unrelated matter, Texas-Ohio Energy, Inc. filed a putative
class action lawsuit in the United States District Court for the Eastern
District of California against a number of energy companies engaged in the sale
of natural gas in the United States. CMS Energy is named as a defendant. The
complaint alleges defendants entered into a price-fixing conspiracy by engaging
in activities to manipulate the price of natural gas in California. The
complaint contains counts alleging violations of the Sherman Act, Cartwright Act
(a California statute), and the California Business and Profession Code relating
to unlawful, unfair and deceptive business practices. The plaintiff in the
Texas-Ohio case has agreed to extend the time for all defendants to answer or
otherwise respond to the complaint until after the multi-district court
litigation ("MDL") panel decides whether to take the case. There is currently
pending in the Nevada federal district court a MDL matter involving seven
complaints originally filed in various state courts in California. These
complaints make allegations similar to those in the Texas-Ohio case regarding
price reporting, although none contain a Sherman Act claim. Some of the
defendants in the MDL matter who are also defendants in the Texas-Ohio case are
trying to have the Texas-Ohio case transferred to the MDL proceeding.
Benscheidt v. AEP Energy Services, Inc., et al, a new class action
complaint containing allegations similar to those made in the Texas-Ohio case
(albeit limited to California state law claims), was filed in California state
court in February 2004. CMS Energy and CMS MST are named as defendants.
Defendants are likely to seek to remove this action to California federal
district court and have it transferred to the MDL proceeding in Nevada.
CMS Energy and its subsidiaries will vigorously defend themselves but
cannot predict the outcome of these matters.
SEC INVESTIGATION
The SEC is conducting an investigation regarding round-trip trades at CMS
MST. For additional details about this investigation, see Note 4 of the Notes to
the December 31, 2003 Financial Statements -- UNCERTAINTIES -- SEC AND OTHER
INVESTIGATIONS.
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 Employees'
Savings and Incentive Plan (the "Plan"). The trial judge consolidated the two
cases that were originally filed in July 2002 in United States District Court
for the Eastern District of Michigan, and plaintiffs filed an amended
consolidated complaint. Plaintiffs allege breaches of fiduciary duties
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under ERISA and seek restitution on behalf of the Plan with respect to a decline
in value of the shares of CMS Energy Common Stock held in the Plan. Plaintiffs
also seek other equitable relief and legal fees. CMS Energy and Consumers will
vigorously defend themselves but cannot predict the outcome of this litigation.
SECURITIES CLASS ACTION LAWSUITS
Beginning on May 17, 2002, a number of securities class action complaints
were filed against CMS Energy, Consumers, and certain officers and directors of
CMS Energy and its affiliates. The complaints were filed as purported class
actions in the United States District Court for the Eastern District of
Michigan, by shareholders who allege that they purchased CMS Energy's securities
during a purported class period. The cases were consolidated into a single
lawsuit and an amended and consolidated class action complaint was filed on May
1, 2003. The consolidated complaint contains a purported class period beginning
on May 1, 2000 and running through March 31, 2003. It generally seeks
unspecified damages based on allegations that the defendants violated United
States securities laws and regulations by making allegedly false and misleading
statements about CMS Energy's business and financial condition, particularly
with respect to revenues and expenses recorded in connection with round-trip
trading by CMS MST. CMS Energy and its affiliates will vigorously defend
themselves but cannot predict the outcome of this litigation.
ENVIRONMENTAL MATTERS
CMS Energy and its subsidiaries and affiliates are subject to various
federal, state and local laws and regulations relating to the environment.
Several of these companies have been named parties to various actions involving
environmental issues. Based on their present knowledge and subject to future
legal and factual developments, they believe it is unlikely that these actions,
individually or in total, will have a material adverse effect on their financial
condition or future results of operations. For additional information, see both
the 10-K MD&A's and the Notes to the December 31, 2003 Financial Statement.
OUR MANAGEMENT
The following table sets forth the names, ages, positions and five-year
employment history of our executive officers as of March 1, 2004.
EXECUTIVE OFFICERS
NAME AGE POSITION PERIOD
-------------------- --- --------------------------------------------------------------------- ------------
Kenneth Whipple 69 Chairman of the Board, Chief Executive Officer of CMS Energy 2002-Present
Chairman of the Board, Chief Executive Officer of Consumers 2002-Present
Chairman of the Board of CMS Enterprises 2002-2003
Director of CMS Energy 1993-Present
Director of Consumers 1993-Present
Chairman, Chief Executive Officer of Ford Credit Company 1997-1999
Executive Vice President, President of Ford Financial Services Group 1989-1999
S. Kinnie Smith, Jr. 73 Vice Chairman of the Board of CMS Enterprises 2003-Present
Vice Chairman of the Board, General Counsel of CMS Energy 2002-Present
Vice Chairman of the Board of Consumers 2002-Present
Executive Vice President of CMS Enterprises 2002-2003
Director of CMS Energy 2002-Present
Director of Consumers 2002-Present
Director of Enterprises 2003-Present
Vice Chairman of Trans-Elect, Inc. 2002
Senior Counsel at Skadden, Arps, Slate, Meagher, & Flom LLP 1995-2002
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David W. Joos 50 Chairman of the Board, Chief Executive Officer of CMS Enterprises 2003-Present
President, Chief Operating Officer of CMS Energy 2001-Present
President, Chief Operating Officer of Consumers 2001-Present
President, Chief Operating Officer of CMS Enterprises 2001-2003
Director of CMS Energy 2001-Present
Director of Consumers 2001-Present
Director of Enterprises 2000-Present
Executive Vice President, Chief Operating Officer - Electric
of CMS Energy 2000-2001
Executive Vice President, Chief Operating Officer - Electric
of CMS Enterprises 2000-2001
Executive Vice President, President and Chief Executive Officer -
Electric of Consumers 1997-2001
Thomas J. Webb 51 Executive Vice President, Chief Financial Officer of CMS Energy 2002-Present
Executive Vice President, Chief Financial Officer of Consumers 2002-Present
Executive Vice President, Chief Financial Officer of CMS Enterprises 2002-Present
Director of Enterprises 2002-Present
Executive Vice President, Chief Financial Officer of Panhandle
Eastern Pipe Line Company 2002-2003
Executive Vice President, Chief Financial Officer of Kellogg Company 1999-2002
Vice President, Chief Financial Officer of Visteon, a division of
Ford Motor Company 1996-1999
Thomas W. Elward 55 President, Chief Operating Officer of CMS Enterprises 2003-Present
President, Chief Executive Officer of CMS Generation Co. 2002-Present
Director of Enterprises 2003-Present
Senior Vice President of CMS Enterprises 2002-2003
Senior Vice President of CMS Generation Co. 1998-2001
Carl L. English 57 Executive Vice President, President and Chief Executive Officer -
Gas of Consumers 1999-Present
Vice President of Consumers 1990-1999
David G. Mengebier* 46 Senior Vice President of CMS Enterprises 2003-Present
Senior Vice President of CMS Energy 2001-Present
Senior Vice President of Consumers 2001-Present
Vice President of CMS Energy 1999-2001
Vice President of Consumers 1999-2001
John G. Russell** 46 Executive Vice President, President and Chief Executive Officer -
Electric of Consumers 2001-Present
Senior Vice President of Consumers 2000-2001
Vice President of Consumers 1999-2000
John F. Drake 55 Senior Vice President of CMS Enterprises 2003-Present
Senior Vice President of CMS Energy 2002-Present
Senior Vice President of Consumers 2002-Present
Vice President of CMS Energy 1997-2002
Vice President of Consumers 1998-2002
Glenn P. Barba 38 Vice President, Chief Accounting Officer of CMS Enterprises 2003-Present
Vice President, Controller and Chief Accounting Officer of CMS Energy 2003-Present
Vice President, Controller and Chief Accounting Officer of Consumers 2003-Present
Vice President and Controller of Consumers 2001-2003
Controller of CMS Generation 1997-2001
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----------
* From 1997 to 1999, Mr. Mengebier served as Executive Director of Federal
Governmental Affairs for CMS Enterprises.
** From July 1997 until October 1999, Mr. Russell served as Manager --
Electric Customer Operations of Consumers.
There are no family relationships among executive officers and directors
of CMS Energy.
DIRECTORS
JAMES J. DUDERSTADT, 61, has been President Emeritus and University Professor of
Science and Engineering at the University of Michigan, Ann Arbor, Michigan,
since 1996. He served as the President of the University of Michigan from 1988
to 1996. He is a director of Unisys Corporation and chairs numerous studies for
various federal agencies and the National Academy of Sciences. He has been a
director of CMS and of Consumers since 1993.
KATHLEEN R. FLAHERTY, 52, served from 1999 to 2001 as President and Chief
Operating Officer of WinStar International. She served from 1998 to 1999 as
President and Chief Operating Officer of WinStar Communications, Europe, from
1997 to 1998 as Senior Vice President, Product Architecture for MCI
Communications Corporation, and from 1995 to 1997 as National Business Marketing
Director for British Telecom. She has been a director of CMS and of Consumers
since 1995.
EARL D. HOLTON, 70, has served since 1999 as Vice Chairman of Meijer, Inc., a
Grand Rapids, Michigan based operator of food and general merchandise centers.
He served from 1980 to 1999 as President of Meijer, Inc. He is a director of
Meijer, Inc. and Steelcase, Inc. He has been a director of CMS and of Consumers
since 1989.
DAVID W. JOOS, 51, has served since 2001 as President and Chief Operating
Officer of CMS and Consumers. He served from 2000 to 2001 as Executive Vice
President and Chief Operating Officer -- Electric of CMS and from 1997 to 2000
as President and Chief Executive Officer -- Electric of Consumers. He is a
director of Steelcase, Inc., the Michigan Colleges Foundation, Michigan Economic
Development Corporation, is a director and Chairman of Nuclear Management Co.,
and is a director and Chairman of the Michigan Manufacturers Association. He has
been a director of CMS and of Consumers since 2001.
MICHAEL T. MONAHAN, 65, has served since 1999 as President of Monahan
Enterprises, LLC, a Bloomfield Hills, Michigan based consulting firm. He was
Chairman of Munder Capital Management, an investment management company, from
October 1999 to December 2000 and Chairman and Chief Executive Officer of Munder
from October 1999 until January 2000. Prior to that, he was President and a
director of Comerica Bank from 1992 to 1999 and President and a director of
Comerica Inc., from 1993 to 1999. He is a director of The Munder Funds, Inc.,
Chairman of the Board of Guilford Mills, Inc., a member of the board of trustees
of Henry Ford Health Systems, Inc., and a member of the board of trustees of the
Community Foundation for Southeastern Michigan. He has been a director of CMS
and Consumers since December 2002.
JOSEPH F. PAQUETTE, JR., 69, served from 1988 to 1995 as Chairman of the Board
and Chief Executive Officer and from 1995 until his retirement in 1997 as
Chairman of the Board of PECO
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Energy, formerly the Philadelphia Electric Company, a major supplier of electric
and gas energy. He is a director of USEC, Inc. and Mercy Health Systems. He has
been a director of CMS and Consumers since December 2002. He had previously
served as a director of CMS and Consumers and as President of CMS from 1987 to
1988.
WILLIAM U. PARFET, 57, has served since 1999 as Chairman and Chief Executive
Officer of MPI Research, Inc., Mattawan, Michigan, a contract research
laboratory conducting risk assessment toxicology studies. He served from 1995 to
1999 as Co-Chairman of MPI Research. He is a director of Stryker Corporation,
PAREXEL International Corporation, and Monsanto Company. He is also a
commissioner of the Michigan Department of Natural Resources. He has been a
director of CMS and of Consumers since 1991.
PERCY A. PIERRE, 65, has served since 1990 as Professor of Electrical
Engineering, Michigan State University, East Lansing, Michigan. He also served
as Vice President for Research and Graduate Studies at Michigan State University
from 1990 to 1995. Dr. Pierre is a former Assistant Secretary of the Army for
Research, Development and Acquisition. He is also a former President of Prairie
View A&M University. He is a director of Fifth Third Bank (Western Michigan). He
also serves as a member of the Boards of Trustees for the University of Notre
Dame and Hampshire College. He has been a director of CMS and of Consumers since
1990.
S. KINNIE SMITH, JR., 73, has served as Vice Chairman and General Counsel of CMS
since June 2002. He served as Senior Counsel for the law firm Skadden, Arps,
Slate, Meagher & Flom from 1996 to 2002. He has been a director of CMS and
Consumers since August 2002. He had held the positions of Vice Chairman and
President of CMS and Vice Chairman of Consumers and served as a director of CMS
and Consumers from 1987 to 1996. In May and June of 2002, he served as Vice
Chairman and as a director of Trans-Elect, Inc.
KENNETH L. WAY, 64, served from 1988 through 2002 as Chairman of the Board of
Lear Corporation, a Southfield, Michigan based supplier of automotive interior
systems to the automotive industry. He remains a director of Lear Corporation.
In addition, he served from 1988 to 2000 as Chief Executive Officer of Lear
Corporation. He is a director of Comerica, Inc. and WESCO International, Inc. He
also serves as a member of the Boards of Trustees for Kettering University and
the Henry Ford Health Systems. He has been a director of CMS and of Consumers
since 1998.
KEN WHIPPLE, 69, has served since May of 2002 as Chairman of the Board and Chief
Executive Officer of CMS and Consumers. He served from 1988 until his retirement
in 1999 as Executive Vice President of Ford Motor Company, Dearborn, Michigan, a
world-wide automotive manufacturer, and President of the Ford Financial Services
Group. In addition, he served from 1997 to 1999 as Chairman and Chief Executive
Officer of Ford Motor Credit Company. He had previously served as Chairman and
Chief Executive Officer of Ford of Europe, Inc. from 1986 to 1988. He is a
director of AB Volvo and a trustee of 13 J.P.Morgan Chase mutual funds. He has
been a director of CMS and of Consumers since 1993.
JOHN B. YASINSKY, 64, served from 1999 until his retirement in 2000 as Chairman
of the Board and Chief Executive Officer and continued as Chairman until
February 2001 of OMNOVA Solutions Inc., Fairlawn, Ohio, a developer,
manufacturer, and marketer of emulsion polymers, specialty chemicals, and
building products. He served from 1995 to 1999 as Chairman, Chief Executive
Officer and President of GenCorp. He is a director of A. Schulman, Inc. He has
been a director of CMS and of Consumers since 1994.
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MANAGEMENT SECURITY OWNERSHIP
The following chart shows the ownership of CMS Common Stock by the
directors and executive officers:
SHARES
NAME BENEFICIALLY OWNED*
James J. Duderstadt........................... 7,791
Kathleen R. Flaherty.......................... 8,504
Earl D. Holton................................ 26,916
David W. Joos................................. 211,171
Michael T. Monahan............................ 3,943
Joseph F. Paquette, Jr........................ 21,345
William U. Parfet............................. 15,800
Percy A. Pierre............................... 8,215
S. Kinnie Smith, Jr........................... 155,046
Kenneth L. Way................................ 49,613
Kenneth Whipple............................... 356,011
John B. Yasinsky.............................. 16,485
Thomas J. Webb................................ 100,278
Thomas W. Elward.............................. 44,620
David A. Mikelonis ........................... 42,045
William J. Haener ............................ 73,224
All Directors and Executive Officers**........ 1,480,328
* All shares shown above are as of December 31, 2003. In addition to the shares
shown above, Mr. Joos, Mr. Smith, Mr. Webb, Mr. Elward, Mr. Mikelonis, Mr.
Haener and all other executive officers of CMS and Consumers own options to
acquire 473,000; 165,000; 150,000; 146,000; 137,000; 224,500; and 1,213,520
shares, respectively. Mr. Whipple does not own any options to acquire CMS Common
Stock. All options identified in this footnote are as of December 31, 2003.
** All Directors and Executive Officers include executive officers of both CMS
and Consumers.
Shares shown as beneficially owned include (1) shares to which a person has or
shares voting power and/or investment power, and (2) the number of shares and
share equivalents represented by interests in the Employee Savings Plan, the
Deferred Salary Savings Plan, the Performance Incentive Stock Plan, the
Directors' Deferred Compensation Plan, Salaried Employees' Merit Plan and
employment agreements. Dr. Duderstadt, Ms. Flaherty, Mr. Holton, Mr. Parfet, Mr.
Smith, Mr. Way, Mr. Whipple, and Mr. Yasinsky each own 10 shares of Preferred
Stock of Consumers. The directors and executive officers of CMS and Consumers
together own less than 1% of the outstanding shares of CMS.
SECTION 16(A) BENEFICIAL OWNERSHIP REGARDING COMPLIANCE
Federal securities laws require CMS directors and executive officers, and
persons who own more than 10% of CMS Common Stock, to file with the SEC reports
of ownership and changes in ownership of any securities or derivative securities
of CMS. To CMS' knowledge, during the year ended December 31, 2003, CMS'
officers and directors made all required Section 16(a) filings on a timely
basis.
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COMPENSATION OF DIRECTORS
Directors who are not officers of CMS or Consumers received in 2003 an
annual retainer fee of $30,000, $1,500 for attendance at each Board meeting and
$750 for attendance at each committee meeting. Committee chairs received $1,000
for attendance at each committee meeting. These figures have remained unchanged
for several years, and are relatively low by industry standards. In 2003, all
directors who were not officers of CMS or Consumers were granted 850 restricted
shares of CMS Common Stock with a fair market value at time of grant of $6,468.
These restricted shares must be held for at least three years from the date of
grant. These restricted shares must be held for at least three years from the
date of grant Directors are reimbursed for expenses incurred in attending Board
or committee meetings. Directors who are officers of CMS or Consumers do not
receive retainers or meeting fees for service on the Board or as a member of any
Board committee. Pursuant to the Directors' Deferred Compensation Plan, a
director of CMS or Consumers who is not an officer may, at any time prior to a
calendar year in which a retainer and fees are to be earned, or at any time
during the year prior to the month in which a retainer and fees are earned,
irrevocably elect to defer payment for that year, or a portion thereof, through
written notice to CMS or Consumers, of all or half of any of the retainer and
fees which would otherwise be paid to the director, to a time following the
director's retirement from the Board of Directors. Any amount deferred will
either (a) accrue interest at either the prime rate or the rate for 10-year
Treasury Notes (whichever is greater), (b) be treated as if it were invested as
an optional cash payment in CMS' Stock Purchase Plan, or (c) be treated as if it
were invested in a Standard & Poor's 500 stock index fund. Accrued amounts will
be distributed in a lump sum or in five or ten annual installments in cash.
Outside directors who retire with five years of service on the Board will
receive retirement payments equal to the retainer. These payments will continue
for a period of time equal to their years of service on the Board. All benefits
will cease at the death of the retired director. Outside directors are offered
optional life insurance coverage, business-related travel accident insurance,
and optional health care insurance, and CMS and Consumers pay the premiums
associated with participation by directors. The imputed income for the life
insurance coverage in 2003 was: Messrs. Duderstadt, $753: Holton, $2,715;
Monahan, $726; Paquette, $2,553; Parfet, $663; Pierre, $726; Whipple, $2,553;
Yasinsky, $744; and Ms. Flaherty, $399. The imputed income for health insurance
coverage in 2003 was: Ms. Flaherty, $9,289.
EXECUTIVE COMPENSATION
The following charts contain information concerning annual and long-term
compensation and awards of stock options and restricted stock under CMS'
Performance Incentive Stock Plan. The charts include the Chairman of the Board
and Chief Executive Officer and the next four most highly compensated executive
officers in 2003.
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SUMMARY COMPENSATION TABLE
LONG-TERM
COMPENSATION(1)
---------------------------------------
AWARDS PAYOUTS
ANNUAL --------------------------- ---------
COMPENSATION RESTRICTED SECURITIES LONG-TERM
--------------------------- STOCK UNDERLYING INCENTIVE ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS AWARDS(2) OPTIONS PAYOUTS(3) COMPENSATION
---------------------------- ---- -------------- ---------- -------------- ---------- ---------- ---------------
Current Officers
KENNETH WHIPPLE ............ 2003 $1,156,431(4a) $ (5) $1,015,000(4b) 0 $ 0 $ [0]
Chairman and CEO, CMS 2002 639,060(4c) 0 0 0 0 0
and Consumers 2001 0 0 0 0 0 0
DAVID W. JOOS .............. 2003 750,000 (5) 635,000(7) 100,000 0 0
President and COO, 2002 750,000 0 406,000(7) 165,000 0 15,000(6)
CMS and Consumers 2001 637,500 0 0 100,000 35,907 19,125(6)
S KINNIE SMITH, JR ......... 2003 600,000 (5) 381,000(7) 100,000 0 0
Vice Chairman and General 2002 300,000 0 263,900(7) 65,000 0 3,000(6)
Counsel of CMS 2001 0 0 0 0 0 0
THOMAS J. WEBB ............. 2003 500,000 (5) 381,000(7) 100,000 0 0
Chief Financial Officer, CMS 2002 208,333 0 203,000(7) 50,000 0 0
and Consumers 2001 0 0 0 0 0 0
THOMAS W. ELWARD ........... 2003 320,040 (5) 127,000(7) 76,000 0 0
President and COO 2002 320,040 0 81,200(7) 36,000 0 6,401(6)
CMS Enterprises 2001 270,000 0 0 14,000 13,453 8,100(6)
DAVID A. MIKELONIS ......... 2003 355,000 (5) 76,200(7) 59,000
Senior Vice President and 2002 355,000 0 56,840(7) 28,000 0 7,100(6)
General Counsel, Consumers 2001 355,000 0 0 14,000 17,978 10,650(6)
Former Officer
WILLIAM J. HAENER .......... 2003 530,000 (5) 0 0 0
Executive Vice President, 2002 530,000 0 178,640(7) 82,500 0 10,600(6)
And COO - Natural Gas, CMS 2001 509,167 0 0 40,000 26,930 15,275(6)
(1) Aggregate non-performance based restricted stock held as of December
31, 2003 by named officers was: Mr. Whipple, 900 shares, with a
year-end market value of $7,668; Mr. Joos, 150,000 shares, with a
year-end market value of $1,278,000; Mr. Smith, 92,500 shares, with
a year-end market value of $788,100; Mr. Webb, 85,000 shares, with a
year-end market value of $724,200; Mr. Elward, 30,000 shares, with a
year-end market value of $255,600; Mr. Mikelonis, 19,000 shares,
with a year-end market value of $161,880; and Mr. Haener, 22,318
shares, with year-end market value of $190,149. No dividends were
paid on such restricted stock.
(2) 2003 restricted stock awards granted August 22, 2003. These shares
vest at a rate of 25% per year beginning August 22, 2005. The 2003
dollar values shown above are based on the August 22, 2003 grant
date closing price of $6.35 per share.
(3) Market value of CMS Common Stock paid under CMS' Performance
Incentive Stock Plan for three-year performance periods.
(4) (a) Mr. Whipple's 2003 salary consisted of $134,933 in cash
compensation and $1,021,498 in deferred compensation in the form of
phantom stock units payable in cash. The payout value of the
deferred salary will be based on the future price of CMS Common
Stock.
(b) Mr. Whipple's 2003 restricted stock value consisted of 125,000
restricted phantom stock units awarded on October 31, 2003 and
payable in cash upon vesting at a rate of 25% per year beginning
September 1, 2005. The dollar value of this award upon vesting will
be
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based upon the future price of CMS Common Stock. The 2003 dollar
value shown is based on the grant date closing price of CMS Common
Stock of $8.12 per share. These phantom stock units were awarded
pursuant to the terms of Mr. Whipple's employment agreement in lieu
of the restricted stock and options awarded to other officers under
CMS' Performance Incentive Stock Plan. At December 31, 2003, these
125,000 phantom stock units had a market value of $1,065,000 at
$8.52 per share.
(c) Mr. Whipple's 2002 salary consisted of $2,125 in cash
compensation and $636,935 in deferred compensation in the form of
phantom stock units payable in cash. The payout value of the
deferred salary will be based on the future price of CMS Common
Stock.
(5) The Organization and Compensation Committee of the Board has
determined that 2003 bonuses will be paid. However as of March 12,
2003, the bonus awards have not been finalized or paid. The 2003
bonuses to be paid to Mr. Joos, Mr. Smith, Mr. Webb and Mr. Elward
will be deferred and will be paid out in the first quarter of 2005
consistent with the anticipated payouts from the Salaried Employees'
Merit Plan. The 2003 bonuses for Mr. Mikelonis and Mr. Haener will
be paid out in the first quarter of 2004. Bonus information for 2003
will be provided later either in an amendment to this registration
statement or upon effectiveness of this registration statement in
the filing of a 424(b) PROSPECTUS.
(6) Employer matching contribution to defined contribution plans. No
employer matching contributions were made in 2003.
(7) Mr. Joos, Mr. Smith, Mr. Webb, Mr. Elward, Mr. Mikelonis and Mr.
Haener were awarded 50,000, 32,500, 25,000, 10,000, 7,000 and 22,000 restricted
shares, respectively, in 2002 and 100,000, 60,000, 60,000, 20,000, 12,000 and
zero restricted shares, respectively in 2003.
EMPLOYMENT ARRANGEMENTS
Agreements with the executive officers named above provide for payments
equal to three times annual cash compensation if there is a change of control
and adverse change of responsibilities, as well as payments equal to two times
annual cash compensation if employment is terminated by the company, other than
for cause, in the absence of a change of control. CMS and Consumers also provide
long-term disability insurance policies for all executive officers which would
provide payment of up to 60% of compensation in the event of disability. CMS
does not have a "poison pill" plan and is not considering the adoption of such a
plan.
OPTION GRANTS IN 2003
NUMBER OF SECURITIES PERCENTAGE OF TOTAL EXERCISE GRANT DATE
UNDERLYING OPTIONS OPTIONS GRANTED TO PRICE PER EXPIRATION PRESENT
NAME GRANTED EMPLOYEES IN 2003 SHARE DATE VALUE(1)
--------------------- -------------------- ------------------- ---------- ---------- ----------
Kenneth Whipple ...... 0 0 $ 0 $ 0
David W. Joos ........ 100,000 6.3 6.35 9-21-13 296,000
S Kinnie Smith, Jr ... 100,000 6.3 6.35 9-21-13 296,000
Thomas J. Webb ....... 100,000 6.3 6.35 9-21-13 296,000
Thomas W. Elward ..... 76,000 4.8 6.35 9-21-13 224,960
David A. Mikelonis ... 59,000 3.7 6.35 9-21-13 174,640
William J. Haener .... 0 0 0
(1) The present value is based on the Black-Scholes Model, a mathematical
formula used to value options traded on securities exchanges. The model
utilizes a number of assumptions, including the exercise price, the
underlying CMS Common Stock's volatility using weekly
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closing prices for a four and one half year period prior to grant date,
the dividend rate, the term of the option, and the level of interest rates
equivalent to the yield of four-year Treasury Notes. However, the Model
does not take into account a significant feature of options granted to
employees under CMS' Plan, the non-transferability of options awarded. For
those options above with an expiration date of 9-21-13 (granted 8-22-03),
the volatility was 55.46%, the dividend rate at the time was $0.00 per
quarter, and the interest rate was 3.02%.
AGGREGATED OPTION EXERCISES IN 2003 AND YEAR-END OPTIONS VALUES
NUMBER OF SECURITIES VALUE OF UNEXERCISED
SHARES ACQUIRED VALUE UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
NAME ON EXERCISE REALIZED OPTIONS AT YEAR END AT YEAR END(1)(2)
---------------------- --------------- -------- ---------------------- --------------------
Kenneth Whipple ...... 0 $ 0 0 $ 0
David W. Joos ........ 0 0 473,000 257,000
S Kinnie Smith, Jr ... 0 0 165,000 243,000
Thomas J. Webb ....... 0 0 150,000 237,000
Thomas W. Elward ..... 0 0 146,000 172,920
David A. Mikelonis ... 0 0 137,000 133,630
William J. Haener .... 0 0 224,500 17,000
(1) All options listed in this table are exercisable. The named officers have
no unexercisable options.
(2) Based on the December 31, 2003 closing price of CMS Common Stock as shown
in the report of the NYSE Composite Transactions ( $8.52 ).
PENSION PLAN TABLE
The following table shows the aggregate annual pension benefits at normal
retirement date presented on a straight life annuity basis under CMS' qualified
Pension Plan and non-qualified Supplemental Executive Retirement Plan (offset by
a portion of Social Security benefits).
YEARS OF SERVICE
--------------------------------------------------------------
COMPENSATION 15 20 25 30 35
---------------
$ 500,000 ..... $ 157,500 $ 210,000 $ 247,500 $ 285,000 $ 322,500
800,000 ..... 252,000 336,000 396,000 456,000 516,000
1,100,000 ..... 346,500 462,000 544,500 627,000 709,500
1,400,000 ..... 441,000 588,000 693,000 798,000 903,000
1,700,000 ..... 535,500 714,000 891,500 969,000 1,096,500
2,000,000 ..... 630,000 840,000 990,000 1,140,000 1,290,000
"Compensation" in this table is the average of Salary plus Bonus, as shown
in the Summary Compensation Table, for the five years of highest earnings. The
estimated years of service for each named executive is: Mr. Whipple, 3.56 years;
Mr. Joos, 32.33 years; Mr. Smith, 20.82 years; Mr. Webb, 2.99 years; Mr. Elward
35.00 years; Mr. Mikelonis, 35.00 years; and Mr. Haener, 20.00 years.
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SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
PLAN CATEGORY NUMBER OF WEIGHTED-AVERAGE NUMBER OF SECURITIES
SECURITIES TO EXERCISE PRICE OF OUTSTANDING REMAINING AVAILABLE
BE ISSUED UPON OPTIONS, WARRANTS AND RIGHTS FOR FUTURE ISSUANCE
UPON EXERCISE OF UNDER EQUITY COMPENSATION
OUTSTANDING OPTIONS, PLANS
WARRANTS AND RIGHTS (EXCLUDING SECURITIES
REFLECTED IN COLUMN (A))
--------------------- -------------------- ----------------------------- -------------------------
(a) (b) (c)
Equity compensation 5,821,576 $21.27 2,240,247
plans approved by
security holders
-------------------- ----------------------------- -------------------------
Equity compensation 0 0 0
plans not approved by
security holders
-------------------- ----------------------------- -------------------------
Total 5,821,576 $21.27 2,240,247
-------------------- ----------------------------- -------------------------
The Performance Incentive Stock Plan reserves for award not more than five
percent of Common Stock outstanding on January 1 of each year, less (i) the
number of shares of restricted Common Stock awarded and (ii) Common Stock
subject to options granted under the plan during the immediately preceding four
calendar years. The number of shares of restricted Common Stock awarded under
this plan cannot exceed 20 percent of the aggregate number of shares reserved
for award. Any forfeitures of shares previously awarded will increase the number
of shares available to be awarded under the plan. At December 31, 2003, awards
of up to 2,240,247 shares of CMS Common Stock may be issued..
AFFILIATE RELATIONSHIPS AND TRANSACTIONS
On May 1, 2002, Consumers sold its electric transmission system to
Michigan Transmission Holdings, LLP, a non-affiliated limited partnership whose
general partner is a subsidiary of Trans-Elect, Inc. A Trans-Elect, Inc.
subsidiary provides interstate electric transmission service to Consumers
pursuant to agreements entered into at the time of the sale. The rates and other
terms of the service were approved by the Federal Energy Regulatory Commission
prior to the sale and remain subject to the Commissions' jurisdiction. From May
15, 2002 until June 30, 2002, S. Kinnie Smith, Jr. served as Vice Chairman of
Trans-Elect, Inc. Mr. Smith served as a director of Trans-Elect, Inc. since its
organization in 1998. Mr. Smith resigned as Vice Chairman and director of
Trans-Elect, Inc. upon becoming Vice Chairman, General Counsel, and a director
of CMS. Mr. Smith owns 20,000 shares of Convertible Preferred A Stock of
Trans-Elect, Inc., or approximately 10% of the outstanding voting securities of
Trans-Elect, Inc. Mr. Smith also has an option to acquire an additional 250
shares of this security.
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The Consumers electric transmission system was sold in a competitive
bidding process to Trans-Elect, Inc's subsidiary for approximately $290 million
in cash. Consumers did not provide any financial or credit support for the sale
to Trans-Elect, Inc. As a result of the sale, Consumers experienced an after-tax
earnings increase of approximately $17 million in 2002 due to the recognition of
a $26 million gain on the sale. During the calendar year 2003, Consumers paid a
total of $74 million to Trans-Elect, Inc's subsidiary for electric transmission
services.
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSEQUENSES
DESCRIPTION OF CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE EXCHANGE OF OLD
NOTES FOR NEW NOTES
The following summary describes the principal United States federal income
tax consequences to holders who exchange old notes for new notes pursuant to the
Exchange Offer. This summary is intended to address the beneficial owners of old
notes that are citizens or residents of the United States, corporations,
partnerships or other entities created or organized in or under the laws of the
United States or any State or the District of Columbia, or estates or trusts
that are not foreign estates or trusts for United States federal income tax
purposes, in each case, that hold the old notes as capital assets.
The exchange of old notes for new notes pursuant to the Exchange Offer
will not constitute a taxable exchange for United States federal income tax
purposes. As a result, a holder of an old note whose old note is accepted in the
Exchange Offer will not recognize gain or loss on the exchange. A tendering
holder's tax basis in the new notes received pursuant to the Exchange Offer will
be the same as such holder's tax basis in the old notes surrendered therefor. A
tendering holder's holding period for the new notes received pursuant to the
Exchange Offer-will include its holding period for the old notes surrendered
therefor.
ALL HOLDERS OF OLD NOTES ARE ADVISED TO CONSULT THEIR OWN TAX ADVISORS
REGARDING THE UNITED STATES FEDERAL, STATE AND LOCAL TAX CONSEQUENCES OF THE
EXCHANGE OF OLD NOTES FOR NEW NOTES, AND OF THE OWNERSHIP AND DISPOSITION OF NEW
NOTES RECEIVED IN THE EXCHANGE OFFER IN LIGHT OF THEIR OWN PARTICULAR
CIRCUMSTANCES.
DESCRIPTION OF CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF AN INVESTMENT IN THE
NEW NOTES
The following is a summary of the material United States federal income
tax consequences of the acquisition, ownership and disposition of the old notes
or the new notes by a United States Holder (as defined below). This summary
deals only with the United States Holders that will hold the old notes or the
new notes as capital assets. The discussion does not cover-all aspects of
federal taxation that may be relevant to, or the actual tax effect that any of
the matters described herein will have on, the acquisition, ownership or
disposition of the old notes or the new notes by particular investors, and does
not address state, local, foreign or other tax laws. In particular, this summary
does not discuss all of the tax considerations that may be relevant to certain
types of investors subject to special treatment under the federal income tax
laws (such as banks, insurance companies, investors liable for the alternative
minimum tax, individual retirement accounts and other tax-deferred accounts,
tax-exempt organizations, dealers in securities or currencies, investors that
will hold the old notes or the new notes as part of straddles, hedging
transactions or
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conversion transactions for federal tax purposes or investors whose functional
currency is not United States Dollars). Furthermore, the discussion below is
based on provisions of the Internal Revenue Code of 1986, as amended (the
"CODE"), and regulations, rulings, and judicial decisions thereunder as of the
date hereof, and such authorities may be repealed, revoked or modified so as to
result in U.S. federal income tax consequences different from those discussed
below.
PERSONS CONSIDERING THE PURCHASE, OWNERSHIP, OR DISPOSITION OF NEW NOTES
SHOULD CONSULT THEIR OWN TAX ADVISORS CONCERNING THE U.S. FEDERAL INCOME TAX
CONSEQUENCES IN LIGHT OF THEIR PARTICULAR SITUATIONS AS WELL AS ANY CONSEQUENCES
ARISING UNDER THE LAWS OF ANY STATE, LOCAL OR INTERNATIONAL TAXING JURISDICTION.
As used herein, the term "UNITED STATES HOLDER" means a beneficial owner
of the old notes or the new notes that is (i) a citizen or resident of the
United States for United States federal income tax purposes, (ii) a corporation
created or organized under the laws of the United States or any State thereof,
(iii) a person or entity that is otherwise subject to United States federal
income tax on a net income basis in respect of income derived from the old notes
or the new notes, or (iv) a partnership to the extent the interest therein is
owned by a person who is described in clause (i), (ii) or (iii) of this
paragraph.
INTEREST
Interest paid on an old note or a new note will be taxable to a United
States Holder as ordinary income at the time it is received or accrued,
depending on the holder's method of accounting for tax purposes.
PURCHASE, SALE, EXCHANGE, RETIREMENT AND REDEMPTION OF THE NEW NOTES
In general (with certain exceptions described below) a United States
Holder's tax basis in a new note will equal the price paid for the old notes for
which such new note was exchanged pursuant to the Exchange Offer. A United
States Holder generally will recognize gain or loss on the sale, exchange,
retirement, redemption or other disposition of an old note or a new note (or
portion thereof) equal to the difference between the amount realized on such
disposition and the United States Holder's tax basis in the old note or the new
note (or portion thereof). Except to the extent attributable to accrued but
unpaid interest, gain or loss recognized on such disposition of an old note or a
new note will be capital gain or loss. Such capital gain or loss will generally
be long-term capital gain or loss if the United States Holder held such note
(including in the holding period of the new note, the period during which the
United Stated Holder held the old notes surrendered for it) for more than one
year immediately prior to such disposition. Long-term capital gains of
individuals are eligible for preferential rates of taxation, which have been
reduced for long-term capital gains recognized on or after May 6, 2003 and
before January 1, 2009. The deductibility of capital losses is subject to
limitations.
NOTE PREMIUM
If a United States Holder acquires a new note or has acquired an old note,
in each case, for an amount more than its redemption price, the Unites States
Holder may elect to amortize such note premium on a yield to maturity basis.
Once made, such an election applies to all notes (other than notes the interest
on which is excludable from gross income) held by the United States Holder at
the beginning of the first taxable year to which the election applies or
thereafter acquired by the
122
United States Holder, unless the IRS consents to a revocation of the election.
The basis of a new note will be reduced by any amortizable note premium taken as
a deduction.
MARKET DISCOUNT
The purchase of a new note or the purchase of an old note other than at
original issue may be affected by the market discount provisions of the Code.
These rules generally provide that, if a United States Holder purchases a new
note (or purchased an old note) at a "market discount," as defined below, and
thereafter recognizes gain upon a disposition of the new note (including
dispositions by gift or redemption), the lesser of such gain (or appreciation,
in the case of a gift) or the portion of the market discount that has accrued
("ACCRUED MARKET DISCOUNT") while the new note (and its predecessor old note, if
any) was held by such United States Holder will be treated as ordinary interest
income at the time of disposition rather than as capital gain. For a new note or
an old note, "MARKET DISCOUNT" is the excess of the stated redemption price at
maturity over the tax basis immediately after its acquisition by a United States
Holder. Market discount generally will accrue ratably during the period from the
date of acquisition to the maturity date of the new note, unless the United
States Holder elects to accrue such discount on the basis of the constant yield
method. Such an election applies only to the new note with respect to which it
is made and is irrevocable.
In lieu of including the accrued market discount income at the time of
disposition, a United States Holder of a new note acquired at a market discount
(or acquired in exchange for an old note acquired at a market discount) may
elect to include the accrued market discount in income currently either ratably
or using the constant yield method. Once made, such an election applies to all
other obligations that the United States Holder purchases at a market discount
during the taxable year for which the election is made and in all subsequent
taxable years of the United States Holder, unless the Internal Revenue Service
consents to a revocation of the election. If an election is made to include
accrued market discount in income currently, the basis of a new note (or, where
applicable, a predecessor old note) in the hands of the United States Holder
will be increased by the accrued market discount thereon as it is includible in
income. A United States Holder of a market discount new note who does not elect
to include market discount in income currently generally will be required to
defer deductions for interest on borrowings allocable to such new note, if any,
in an amount not exceeding the accrued market discount on such new note until
the maturity or disposition of such new note.
BACKUP WITHHOLDING AND INFORMATION REPORTING
Payments of interest and principal on, and the proceeds of sale or other
disposition of the old notes or the new notes payable to a United States Holder,
may be subject to information reporting requirements and backup withholding at
the applicable statutory rate will apply to such payments if the United States
Holder fails to provide an accurate taxpayer identification number or to report
all interest and dividends required to be shown on its federal income tax
returns. Certain United States Holders (including, among others, corporations)
are not subject to backup withholding. United States Holders should consult
their tax advisors as to their qualification for exemption from backup
withholding and the procedure for obtaining such an exemption.
PLAN OF DISTRIBUTION
Each broker-dealer that receives new notes for its own account pursuant
the Exchange Offer must acknowledge that it will deliver a prospectus in
connection with any resale of such new
123
notes. This prospectus, as it may be amended or supplemented from time to time,
may be used by a broker-dealer in connections with resales of the new notes
received in exchange for the old notes where such old notes were acquired as a
result of market-making activities or other trading activities. CMS has agreed
that, starting on the Expiration Date and ending on the close of business on the
first anniversary of the Expiration Date, it will make this prospectus, as
amended or supplemented, available to any broker-dealer for use in connection
with any such resale.
CMS will not receive any proceeds from any sale of the new notes by
broker-dealers. The new notes received by broker-dealers for their own account
pursuant to the Exchange Offer may be sold from time to time in one or more
transactions in the over-the counter market, in negotiated transaction, through
the writing of options on the new notes or a combination of such methods of
resale, at market prices or negotiated prices. Any such resale may be made
directly to purchasers or to or through brokers or dealers who may receive
compensation in the form of commissions or concessions from any such
broker-dealer and/or the purchasers of any such new notes. Any broker-dealer
that resells new notes that were received by it for its own account pursuant to
the Exchange Offer and any broker or dealer that participates in a distribution
of such new notes may be deemed to be an "UNDERWRITER" within the meaning of the
Securities Act and any profit of any such resale of new notes and any
commissions or concessions received by any such persons may be deemed to be
underwriting compensation under the Securities Act. The Letter of Transmittal
states that by acknowledging that it will deliver and by delivering a
prospectus, a broker-dealer will not be deemed to admit that it is an
"UNDERWRITER" within the meaning of the Securities Act.
For a period of one year after the Expiration Date, CMS will promptly send
additional copies of this prospectus and any amendment or supplement to this
prospectus to any broker-dealer that requests such documents in the Letter of
Transmittal. CMS has agreed to pay all expenses incident to the Exchange Offer
and will indemnify the holders of the new notes against certain liabilities,
including liabilities under the Securities Act.
LEGAL OPINION
Robert C. Shrosbree, Assistant General Counsel for CMS Energy Corporation,
will render opinions as to the legality of the new notes for CMS.
EXPERTS
The consolidated financial statements and schedule of CMS at December 31,
2003 and 2002, and for each of the three years in the period ended December 31,
2003, appearing in this prospectus and registration statement have been audited
by Ernst & Young LLP, independent auditors, as set forth in their report thereon
appearing elsewhere herein which are based in part on the reports of Price
Waterhouse for Jorf Lasfar and PricewaterhouseCoopers LLP for 2003 and 2002 and
Arthur Andersen LLP (who have ceased operations) for 2001 for the MCV
Partnership, independent auditors. The consolidated financial statements and
schedule referred to above are included in reliance upon such reports given on
the authority of such firms as experts in accounting and auditing.
The financial statements of Jorf Lasfar as of December 31, 2003 and 2002
and for each of the three years in the period ended December 31, 2003 included
in this prospectus have been so included in reliance on the report of Price
Waterhouse, independent accountants, given on the authority of said firm as
experts in auditing and accounting.
124
The consolidated financial statements of the MCV Partnership as of and for
the years ended December 31, 2003 and 2002 included in this Prospectus have been
so included in reliance on the report of PricewaterhouseCoopers LLP, independent
accountants, given on the authority of said firm as experts in auditing and
accounting.
The audited consolidated financial statements of the MCV Partnership for
the year ended December 31, 2001, included in this prospectus, have been audited
by Arthur Andersen LLP, independent accountants. Arthur Andersen LLP has not
consented to the inclusion of their report on the financial statements of the
MCV Partnership for the year ended December 31, 2001 in this prospectus, and we
have dispensed with the requirement to file their consent in reliance upon Rule
437a of the Securities Act of 1933. Because Arthur Andersen LLP has not
consented to the incorporation by reference of their report in this prospectus,
you will not be able to recover against Arthur Andersen LLP under Section 11 of
the Securities Act of 1933 for any untrue statements of a material fact
contained in the financial statements audited by Arthur Andersen LLP or any
omissions to state a material fact required to be stated therein.
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GLOSSARY
Certain terms used in the text of "Our Business, the 10-K MD&A and the
December 31, 2003 Financial Statements are defined below.
ABATE..................................... Association of Businesses Advocating Tariff Equity
Accumulated Benefit Obligation............ The liabilities of a pension plan based on service and
pay to date. This differs from the Projected Benefit
Obligation that is typically disclosed in that it does
not reflect expected future salary increases.
AEP....................................... American Electric Power, a non-affiliated company
AFUDC..................................... Allowance for Funds Used During Construction
ALJ....................................... Administrative Law Judge
Alliance RTO.............................. Alliance Regional Transmission Organization
AMT....................................... Alternative minimum tax
APB....................................... Accounting Principles Board
APB Opinion No. 18........................ APB Opinion No. 18, "The Equity Method of Accounting for
Investments in Common Stock"
APB Opinion No. 30........................ APB Opinion No. 30, "Reporting Results of Operations --
Reporting the Effects of Disposal of a Segment of a
Business"
APT....................................... Australian Pipeline Trust
ARO....................................... Asset retirement obligation
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
Brownfield credit......................... Provides for a tax incentive for the redevelopment or
improvement of a facility (contaminated property), or
functionally obsolete or blighted property, provided
that certain conditions are met.
Btu....................................... British thermal unit
Centennial................................ Centennial Pipeline, LLC, in which Panhandle, formerly a
wholly owned subsidiary of CMS Gas Transmission, owned a
one-third interest
CEO....................................... Chief Executive Officer
CFO....................................... Chief Financial Officer
CFTC...................................... Commodity Futures Trading Commission
Clean Air Act............................. Federal Clean Air Act, as amended
CMS Electric and Gas...................... CMS Electric and Gas Company, a subsidiary of
Enterprises
CMS Energy................................ CMS Energy Corporation, the parent of Consumers and
Enterprises
CMS Energy Common Stock or common stock... Common stock of CMS Energy, par value $.01 per share
CMS ERM................................... CMS Energy Resource Management Company, formerly CMS
MST, a subsidiary of Enterprises
CMS Field Services........................ CMS Field Services, formerly a wholly owned subsidiary
of CMS Gas Transmission. The sale of this subsidiary
closed in July 2003.
CMS Gas Transmission...................... CMS Gas Transmission Company, a subsidiary of
Enterprises
CMS Generation............................ CMS Generation Co., a subsidiary of Enterprises
CMS Holdings.............................. CMS Midland Holdings Company, a subsidiary of Consumers
CMS Land.................................. CMS Land Company, a subsidiary of Enterprises
CMS Midland............................... CMS Midland Inc., a subsidiary of Consumers
126
CMS MST................................... CMS Marketing, Services and Trading Company, a wholly
owned subsidiary of Enterprises, whose name was changed
to CMS ERM effective January 2004
CMS Oil and Gas........................... CMS Oil and Gas Company, formerly a subsidiary of
Enterprises
CMS Pipeline Assets....................... CMS Enterprises pipeline assets in Michigan and
Australia
CMS Viron................................. CMS Viron Energy Services, formerly a wholly owned
subsidiary of CMS MST. The sale of this subsidiary
closed in June 2003.
Common Stock.............................. All classes of Common Stock of CMS Energy and each of
its subsidiaries, or any of them individually, at the
time of an award or grant under the Performance
Incentive Stock Plan
Consumers................................. Consumers Energy Company, a subsidiary of CMS Energy
Consumers Funding......................... Consumers Funding LLC, a wholly-owned special purpose
subsidiary of Consumers for the issuance of
securitization bonds dated November 8, 2001
Consumers Receivables Funding II.......... Consumers Receivables Funding II LLC, a wholly-owned
subsidiary of Consumers
Court of Appeals.......................... Michigan Court of Appeals
CPEE...................................... Companhia Paulista de Energia Eletrica, a subsidiary of
Enterprises
Customer Choice Act....................... Customer Choice and Electricity Reliability Act, a
Michigan statute enacted in June 2000 that allows all
retail customers choice of alternative electric
suppliers as of January 1, 2002, provides for full
recovery of net stranded costs and implementation costs,
establishes a five percent reduction in residential
rates, establishes rate freeze and rate cap, and allows
for Securitization
Detroit Edison............................ The Detroit Edison Company, a non-affiliated company
DIG....................................... Dearborn Industrial Generation, LLC, a wholly owned
subsidiary of CMS Generation
DOE....................................... U.S. Department of Energy
DOJ....................................... U.S. Department of Justice
Dow....................................... The Dow Chemical Company, a non-affiliated company
EISP...................................... Executive Incentive Separation Plan
EITF...................................... Emerging Issues Task Force
EITF Issue No. 02-03...................... Issues Involved in Accounting for Derivative Contracts
Held for Trading Purposes and Contracts Involved in
Energy Trading and Risk Management Activities
EITF Issue No. 97-04...................... Deregulation of the Pricing of Electricity -- Issues
Related to the Application of FASB Statements No. 71 and
101
El Chocon................................. The 1,200 MW hydro power plant located in Argentina, in
which CMS Generation holds a 17.23 percent ownership
interest
Enterprises............................... CMS Enterprises Company, a subsidiary of CMS Energy
EPA....................................... U.S. Environmental Protection Agency
EPS....................................... Earnings per share
ERISA..................................... Employee Retirement Income Security Act
Ernst & Young............................. Ernst & Young LLP
Exchange Act.............................. Securities Exchange Act of 1934, as amended
FASB...................................... Financial Accounting Standards Board
FERC...................................... Federal Energy Regulatory Commission
FMB....................................... First Mortgage Bonds
FMLP...................................... First Midland Limited Partnership, a partnership that
holds a lessor interest in the MCV facility
GCR....................................... Gas cost recovery
127
Guardian.................................. Guardian Pipeline, LLC, in which CMS Gas Transmission
owned a one-third interest
Health Care Plan.......................... The medical, dental, and prescription drug programs
offered to eligible employees of Consumers and CMS
Energy
HL Power.................................. H.L. Power Company, a California Limited Partnership,
owner of the Honey Lake generation project in Wendel,
California
Integrum.................................. Integrum Energy Ventures, LLC
IPP....................................... Independent Power Production
ITC....................................... Investment tax credit
JOATT..................................... Joint Open Access Transmission Tariff
Jorf Lasfar............................... The 1,356 MW coal-fueled power plant in Morocco, jointly
owned by CMS Generation and ABB Energy Ventures, Inc.
kWh....................................... Kilowatt-hour
LIBOR..................................... London Inter-Bank Offered Rate
Loy Yang.................................. The 2,000 MW brown coal fueled Loy Yang A power plant
and an associated coal mine in Victoria, Australia, in
which CMS Generation holds a 50 percent ownership
interest
LNG....................................... Liquefied natural gas
Ludington................................. Ludington pumped storage plant, jointly owned by
Consumers and Detroit Edison
MAPL...................................... Marathon Ashland Petroleum, LLC, partner in Centennial
Marysville................................ CMS Marysville Gas Liquids Company, a Michigan
corporation and a subsidiary of CMS Gas Transmission
that held a 100 percent interest in Marysville
Fractionation Partnership and a 51 percent interest in
St. Clair Underground Storage Partnership
mcf....................................... Thousand cubic feet
MCV Expansion, LLC........................ An agreement entered into with General Electric Company
to expand the MCV Facility
MCV Facility.............................. A natural gas-fueled, combined-cycle cogeneration
facility operated by the MCV Partnership
MCV Partnership........................... Midland Cogeneration Venture Limited Partnership in
which Consumers has a 49 percent interest through CMS
Midland
MD&A...................................... Management's Discussion and Analysis
METC...................................... Michigan Electric Transmission Company, formerly a
subsidiary of Consumers Energy and now an indirect
subsidiary of Trans-Elect
Michigan Gas Storage...................... Michigan Gas Storage Company, a former subsidiary of
Consumers that merged into Consumers in November 2002
Michigan Power............................ CMS Generation Michigan Power, LLC, owner of the
Kalamazoo River Generating Station and the Livingston
Generating Station
MISO...................................... Midwest Independent System Operator
Moody's................................... Moody's Investors Service, Inc.
MPSC...................................... Michigan Public Service Commission
MSBT...................................... Michigan Single Business Tax
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
128
NERC...................................... North American Electric Reliability Council
NRC....................................... Nuclear Regulatory Commission
NYMEX..................................... New York Mercantile Exchange
OATT...................................... Open Access Transmission Tariff
OPEB...................................... Postretirement benefit plans other than pensions for retired
employees
Palisades................................. Palisades nuclear power plant, which is owned by Consumers
Panhandle Eastern Pipe Line or
Panhandle............................... Panhandle Eastern Pipe Line Company, including its subsidiaries
Trunkline, Pan Gas Storage, Panhandle Storage, and Panhandle
Holdings. Panhandle was a wholly owned subsidiary of CMS Gas
Transmission. The sale of this subsidiary closed in June 2003.
Parmelia.................................. A business located in Australia comprised of a pipeline, processing
facilities, and a gas storage facility, a subsidiary of CMS Gas
Transmission
PCB....................................... Polychlorinated biphenyl
Pension Plan.............................. The trusteed, non-contributory, defined benefit pension plan of
Panhandle, Consumers and CMS Energy
Powder River.............................. CMS Oil & Gas previously owned a significant interest in coalbed
methane fields or projects developed within the Powder River Basin
which spans the border between Wyoming and Montana. The Powder River
properties have been sold.
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
ROA....................................... Retail Open Access
SCP....................................... Southern Cross Pipeline in Australia, in which CMS Gas Transmission
holds a 45 percent ownership interest
SEC....................................... U.S. Securities and Exchange Commission
Securitization............................ A financing method authorized by statute and approved by the MPSC
which allows a utility to sell its right to receive a portion of the
rate payments received from its customers for the repayment of
Securitization bonds issued by a special purpose entity affiliated
with such utility
SENECA.................................... Sistema Electrico del Estado Nueva Esparta, C.A., a subsidiary of
Enterprises
SERP...................................... Supplemental Executive Retirement Plan
SFAS...................................... Statement of Financial Accounting Standards
SFAS No. 5................................ SFAS No. 5, "Accounting for Contingencies"
SFAS No. 52............................... SFAS No. 52, "Foreign Currency Translation"
SFAS No. 71............................... SFAS No. 71, "Accounting for the Effects of Certain Types of
Regulation"
SFAS No. 87............................... SFAS No. 87, "Employers' Accounting for Pensions"
129
SFAS No. 88............................... SFAS No. 88, "Employers' Accounting for Settlements and Curtailments
of Defined Benefit Pension Plans and for Termination Benefits"
SFAS No. 106.............................. SFAS No. 106, "Employers' Accounting for Postretirement Benefits
Other Than Pensions"
SFAS No. 109.............................. SFAS No. 109, "Accounting for Income Taxes"
SFAS No. 115.............................. SFAS No. 115, "Accounting for Certain Investments in Debt and Equity
Securities"
SFAS No. 123.............................. SFAS No. 123, "Accounting for Stock-Based Compensation"
SFAS No. 133.............................. SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities, as amended and interpreted"
SFAS No. 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. 148.............................. SFAS No. 148, "Accounting for Stock-Based Compensation -- Transition
and Disclosure"
SFAS No. 149.............................. SFAS No. 149, "Amendment of Statement No. 133 on Derivative
Instruments and Hedging Activities"
SFAS No. 150.............................. SFAS No. 150, "Accounting for Certain Financial Instruments with
Characteristics of Both Liabilities and Equity"
Southern Union............................ Southern Union Company, a non-affiliated company
Special Committee......................... A special committee of independent directors, established by CMS
Energy's Board of Directors, to investigate matters surrounding
round-trip trading
Stranded Costs............................ Costs incurred by utilities in order to serve their customers in a
regulated monopoly environment, which may not be recoverable in a
competitive environment because of customers leaving their systems
and ceasing to pay for their costs. These costs could include owned
and purchased generation and regulatory assets.
Superfund................................. Comprehensive Environmental Response, Compensation and Liability Act
Taweelah.................................. Al Taweelah A2, a power and desalination plant of Emirates CMS Power
Company, in which CMS Generation holds a forty percent interest
TEPPCO.................................... Texas Eastern Products Pipeline Company, LLC
Toledo Power.............................. Toledo Power Company, the 135 MW coal and fuel oil power plant
located on Cebu Island, Phillipines, in which CMS Generation held a
47.5 percent interest.
Transition Costs.......................... Stranded Costs, as defined, plus the costs incurred in the transition
to competition
Trunkline................................. Trunkline Gas Company, LLC, formerly a subsidiary of CMS Panhandle
Holdings, LLC
Trunkline LNG............................. Trunkline LNG Company, LLC, formerly a subsidiary of LNG Holdings,
LLC
Trust Preferred Securities................ Securities representing an undivided beneficial interest in the
assets of statutory business trusts, the interests of which have a
preference with respect to certain trust distributions over the
interests of either CMS Energy or Consumers, as applicable, as owner
of the common beneficial interests of the trusts
Union..................................... Utility Workers of America, AFL-CIO
VEBA Trusts............................... VEBA (voluntary employees' beneficiary association) Trusts accounts
established to specifically set aside employer contributed assets to
pay for future expenses of the OPEB plan
130
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003 FINANCIAL STATEMENTS
Selected Financial Information......................................................... F-1
Consolidated Statements of Income...................................................... F-3
Consolidated Statements of Cash Flows.................................................. F-5
Consolidated Balance Sheets............................................................ F-7
Consolidated Statements of Common Stockholder's Equity................................. F-9
Notes to Consolidated Financial Statements............................................. F-11
Reports of Independent Auditors........................................................ F-87
Quarterly Financial Information (Found in Note 19 of Notes to Consolidated
Financial Statements)
JORF LASFAR ENERGY COMPANY DECEMBER 31, 2003 FINANCIAL STATEMENTS
Report of Independent Auditors......................................................... F-92
Balance Sheets......................................................................... F-93
Statement of Income.................................................................... F-94
Statement of Stockholders' Equity...................................................... F-95
Statement of Cash Flows................................................................ F-96
Notes to U.S. GAAP Financial Statements................................................ F-97
MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP DECEMBER 31, 2003 FINANCIAL STATEMENTS
Report of Independent Public Auditors - PricewaterhouseCoopers LLP..................... F-120
Report of Independent Public Accountants - Arthur Andersen, LLP........................ F-121
Consolidated Balance Sheets............................................................ F-122
Consolidated Statements of Operations.................................................. F-123
Consolidated Statements of Partners' Equity............................................ F-124
Consolidated Statements of Cash Flows.................................................. F-125
Notes to Consolidated Financial Statements............................................. F-126
Pursuant to Regulation S-X, Rule 3-09, the financial statements for the fiscal
year ended December 31, 2001, 2002, 2003 for Emirates CMS Power Company which is
a foreign business will be filed by CMS Energy by June 30, 2004. Also pursuant
to Regulation S-X, Rule 3-09, the financial statements for the fiscal years
ended June 30, 2002, 2003 and 2004 for SCP Investments (1) PTY. LTD. which is a
foreign business will be filed by CMS Energy by December 31, 2004.
131
[CMS ENERGY LOGO]
2003 FINANCIAL STATEMENTS
CMS ENERGY CORPORATION
SELECTED FINANCIAL INFORMATION
CMS ENERGY CORPORATION
-----------------------------------------------------------------------------
RESTATED RESTATED RESTATED
2003 2002(E) 2001(E) 2000(E) 1999
---- -------- -------- -------- ----
Operating revenue (in millions)......... ($) 5,513 8,673 8,006 6,623 5,114
Earnings from equity method investees
(in millions)......................... ($) 164 92 172 213 136
Income (loss) from continuing operations
(in millions)......................... ($) (43) (394) (327) (85) 191
Cumulative effect of change in
accounting (in millions).............. ($) (24) 18 (4) -- --
Consolidated net income (loss) (in
millions)............................. ($) (44) (650) (459) 5 277
Average common shares outstanding (in
thousands)............................ 150,434 139,047 130,758 113,128 110,140
Income (loss) from continuing operations
per average common share
CMS Energy -- Basic................... ($) (0.30) (2.84) (2.50) (0.76) 1.66(a)
-- Diluted................. ($) (0.30) (2.84) (2.50) (0.76) 1.66(a)
Class G -- Basic and Diluted....... ($) -- -- -- -- 4.21(a)
Cumulative effect of change in
accounting per average common share
CMS Energy -- Basic................... ($) (0.16) 0.13 (0.03) -- --(a)
-- Diluted................. ($) (0.16) 0.13 (0.03) -- --(a)
Net income (loss) per average common
share
CMS Energy -- Basic................... ($) (0.30) (4.68) (3.51) 0.04 2.18(a)
-- Diluted................. ($) (0.30) (4.68) (3.51) 0.04 2.17(a)
Class G -- Basic and Diluted....... ($) -- -- -- -- 4.21(a)
Cash from (used in) operations (in
millions)............................. ($) (251) 614 372 600 917
Capital expenditures, excluding
acquisitions, capital lease additions
and DSM (in millions)................. ($) 535 747 1,239 1,032 1,124
Total assets (in millions)(f)........... ($) 13,838 14,781 17,633 17,801 16,336
Long-term debt, excluding current
maturities (in millions).............. ($) 6,020 5,357 5,842 6,052 6,428
Long-term debt, related parties (in
millions)(b).......................... ($) 684 -- -- -- --
Non-current portion of capital leases
(in millions)......................... ($) 58 116 71 49 88
Total preferred stock (in millions)..... ($) 305 44 44 44 44
Total Trust Preferred Securities (in
millions)............................. ($) --(b) 883 1,214 1,088 1,119
Cash dividends declared per common share
CMS Energy............................ ($) -- 1.09 1.46 1.46 1.39
Class G............................... ($) -- -- -- -- 0.99
Market price of common stock at year-end
CMS Energy............................ ($) 8.52 9.44 24.03 31.69 31.19
Class G............................... ($) -- -- -- -- 24.56(c)
Book value per common share at year-end
CMS Energy............................ ($) 9.84 7.48 14.98 19.62 21.17
Number of employees at year-end
(full-time equivalents)............... 8,411 10,477 11,510 11,652 11,462
F-1
CMS ENERGY CORPORATION
-----------------------------------------------------------------------------
RESTATED RESTATED RESTATED
2003 2002(E) 2001(E) 2000(E) 1999
---- -------- -------- -------- ----
ELECTRIC UTILITY STATISTICS
Sales (billions of kWh)............... 38.8 39.3 39.6 41.0 41.0
Customers (in thousands).............. 1,754 1,734 1,712 1,691 1,665
Average sales rate per kWh............ cents 6.91 6.88 6.65 6.56 6.54
GAS UTILITY STATISTICS
Sales and transportation deliveries
(bcf).............................. 380 376 367 410 389
Customers (in thousands)(d)........... 1,671 1,652 1,630 1,611 1,584
Average sales rate per mcf............ ($) 6.72 5.67 5.34 4.39 4.52
-------------------------
(a) 1999 earnings per average common share includes allocation of the premium
on redemption of Class G Common Stock of $(0.26) per CMS Energy basic
share, $(0.25) per CMS Energy diluted share and $3.31 per Class G basic and
diluted share.
(b) Effective December 31, 2003, Trust Preferred Securities are classified on
the balance sheet as Long term debt -- related parties.
(c) Reflects closing price at the October 25, 1999 exchange date.
(d) Excludes off-system transportation customers.
(e) For additional details, see Note 18, Restatement and Reclassification.
(f) For additional details on the reclassification of non-legal
cost-of-removal, see Note 16, Asset Retirement Obligations,
"Reclassification of Non-Legal Cost of Removal." Following is the amount of
cost of removal reclassified from accumulated depreciation to a regulatory
liability by year: $983 million in 2003; $907 million in 2002; $870 million
in 2001; $896 million in 2000; and $874 million in 1999.
F-2
CMS ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
YEARS ENDED DECEMBER 31
-------------------------------
RESTATED RESTATED
2003 2002 2001
---- -------- --------
IN MILLIONS
OPERATING REVENUE........................................... $ 5,513 $ 8,673 $ 8,006
EARNINGS FROM EQUITY METHOD INVESTEES....................... 164 92 172
OPERATING EXPENSES
Fuel for electric generation.............................. 256 341 297
Purchased and interchange power........................... 689 2,677 1,834
Purchased power -- related parties........................ 455 564 555
Cost of gas sold.......................................... 1,791 2,745 3,233
Other operating expenses.................................. 951 915 932
Maintenance............................................... 226 212 225
Depreciation, depletion and amortization.................. 428 412 408
General taxes............................................. 191 222 220
Asset impairment charges.................................. 95 602 323
------- ------- -------
5,082 8,690 8,027
------- ------- -------
OPERATING INCOME (LOSS)..................................... 595 75 151
OTHER INCOME (DEDUCTIONS)
Accretion expense......................................... (29) (31) (37)
Gain (loss) on asset sales, net........................... (3) 37 (2)
Interest and dividends.................................... 28 15 23
Other, net................................................ 18 (21) 3
------- ------- -------
14 -- (13)
------- ------- -------
FIXED CHARGES
Interest on long-term debt................................ 473 404 420
Interest on long-term debt -- related parties............. 58 -- --
Other interest............................................ 59 32 83
Capitalized interest...................................... (9) (16) (35)
Preferred dividends....................................... 3 2 2
Preferred securities distributions........................ 10 86 96
------- ------- -------
594 508 566
------- ------- -------
INCOME (LOSS) BEFORE INCOME TAXES AND MINORITY INTERESTS.... 15 (433) (428)
INCOME TAX EXPENSE (BENEFIT)................................ 58 (41) (94)
MINORITY INTERESTS.......................................... -- 2 (7)
------- ------- -------
LOSS FROM CONTINUING OPERATIONS............................. (43) (394) (327)
INCOME (LOSS) FROM DISCONTINUED OPERATIONS, NET OF $50 TAX
EXPENSE IN 2003, $118 TAX BENEFIT IN 2002 AND $92 TAX
EXPENSE IN 2001........................................... 23 (274) (128)
------- ------- -------
LOSS BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE................................................. (20) (668) (455)
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING, NET OF $13 TAX
BENEFIT IN 2003, $10 TAX EXPENSE IN 2002 AND $-- IN 2001
DERIVATIVES (NOTE 7 AND NOTE 15).......................... (23) 18 (4)
ASSET RETIREMENT OBLIGATION, SFAS NO. 143 (NOTE 16)....... (1) -- --
------- ------- -------
(24) 18 (4)
------- ------- -------
NET LOSS.................................................... $ (44) $ (650) $ (459)
======= ======= =======
F-3
YEARS ENDED DECEMBER 31
------------------------------
RESTATED RESTATED
2003 2002 2001
---- -------- --------
IN MILLIONS,
EXCEPT PER SHARE AMOUNTS
CMS ENERGY
NET LOSS
Net Loss Available to Common Stock..................... $ (44) $ (650) $ (459)
====== ====== ======
BASIC LOSS PER AVERAGE COMMON SHARE
Loss from Continuing Operations........................ $(0.30) $(2.84) $(2.50)
Income (Loss) from Discontinued Operations............. 0.16 (1.97) (0.98)
Income (Loss) from Changes in Accounting............... (0.16) 0.13 (0.03)
------ ------ ------
Net Loss Attributable to Common Stock.................. $(0.30) $(4.68) $(3.51)
====== ====== ======
DILUTED LOSS PER AVERAGE COMMON SHARE
Loss from Continuing Operations........................ $(0.30) $(2.84) $(2.50)
Income (Loss) from Discontinued Operations............. 0.16 (1.97) (0.98)
Income (Loss) from Changes in Accounting............... (0.16) 0.13 (0.03)
------ ------ ------
Net Loss Attributable to Common Stock.................. $(0.30) $(4.68) $(3.51)
====== ====== ======
DIVIDENDS DECLARED PER COMMON SHARE....................... $ -- $ 1.09 $ 1.46
------ ------ ------
The accompanying notes are an integral part of these statements.
F-4
CMS ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31
-------------------------------
RESTATED RESTATED
2003 2002 2001
---- -------- --------
IN MILLIONS
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss.................................................. $ (44) $ (650) $ (459)
Adjustments to reconcile net loss to net cash provided
by operating activities
Depreciation, depletion and amortization (includes
nuclear decommissioning of $6, $6, and $6,
respectively)....................................... 428 412 408
Depreciation and amortization of discontinued
operations.......................................... 34 73 186
Loss (gain) on disposal of discontinued operations
(Note 2)............................................ 46 237 (8)
Asset writedowns (Note 2)............................ 95 602 323
Capital lease and debt discount amortization......... 25 18 11
Accretion expense.................................... 29 31 37
Bad debt expense..................................... 28 22 22
Distributions from related parties in excess of (less
than) earnings...................................... (41) (39) 68
Loss (gain) on sale of assets........................ 3 (37) 2
Cumulative effect of accounting changes.............. 24 (18) 4
Pension contribution................................. (560) (64) (65)
Changes in assets and liabilities:
Decrease in accounts receivable and accrued
revenue........................................ 200 99 337
Decrease (increase) in inventories................ (288) 140 (339)
Decrease in accounts payable and accrued
expenses....................................... (280) (48) (388)
Deferred income taxes and investment tax credit... 242 (398) 228
Changes in other assets and liabilities........... (192) 234 5
------- ------- -------
Net cash provided by (used in) operating
activities.......................................... (251) 614 372
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (excludes assets placed under capital
lease)................................................. (535) (747) (1,239)
Investments in partnerships and unconsolidated
subsidiaries........................................... -- (55) (111)
Cost to retire property................................... (72) (66) (118)
Restricted cash........................................... (163) (34) (4)
Investments in Electric Restructuring Implementation
Plan................................................... (8) (8) (13)
Investments in nuclear decommissioning trust funds........ (6) (6) (6)
Proceeds from nuclear decommissioning trust funds......... 34 30 29
Proceeds from sale of assets.............................. 939 1,659 134
Other investing........................................... 14 56 (21)
------- ------- -------
Net cash provided by (used in) investing
activities.......................................... 203 829 (1,349)
------- ------- -------
F-5
YEARS ENDED DECEMBER 31
-------------------------------
RESTATED RESTATED
2003 2002 2001
---- -------- --------
IN MILLIONS
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from notes, bonds and other long-term debt....... 2,080 725 2,021
Proceeds from trust preferred securities.................. -- -- 125
Issuance of common stock.................................. -- -- 326
Issuance of preferred stock............................... 272 -- --
Retirement of bonds and other long-term debt.............. (1,656) (1,834) (1,343)
Common stock repurchased.................................. -- (8) (5)
Payment of common stock dividends......................... -- (149) (190)
Payment of capital lease obligations...................... (13) (15) (20)
Increase (decrease) in notes payable...................... (470) 75 21
Other financing........................................... 17 (17) 32
------- ------- -------
Net cash provided by (used in) financing
activities.......................................... 230 (1,223) 967
------- ------- -------
EFFECT OF EXCHANGE RATES ON CASH............................ (1) 8 (10)
NET INCREASE (DECREASE) IN CASH AND TEMPORARY CASH
INVESTMENTS............................................... 181 228 (20)
CASH AND TEMPORARY CASH INVESTMENTS, BEGINNING OF PERIOD.... 351 123 143
------- ------- -------
CASH AND TEMPORARY CASH INVESTMENTS, END OF PERIOD.......... $ 532 $ 351 $ 123
======= ======= =======
OTHER CASH FLOW ACTIVITIES AND NON-CASH INVESTING AND
FINANCING ACTIVITIES WERE:
CASH TRANSACTIONS
Interest paid (net of amounts capitalized)................ $ 564 $ 409 $ 447
Income taxes paid (net of refunds)........................ (33) (217) (60)
OPEB cash contribution.................................... 76 84 57
NON-CASH TRANSACTIONS
Nuclear fuel placed under capital leases.................. $ -- $ -- $ 13
Other assets placed under capital lease................... 19 62 37
======= ======= =======
The accompanying notes are an integral part of these statements.
F-6
CMS ENERGY CORPORATION
CONSOLIDATED BALANCE SHEETS
DECEMBER 31
-------------------
RESTATED
2003 2002
---- --------
IN MILLIONS
ASSETS
PLANT AND PROPERTY (AT COST)
Electric utility.......................................... $ 7,600 $ 7,523
Gas utility............................................... 2,875 2,719
Enterprises............................................... 895 644
Other..................................................... 32 45
------- -------
11,402 10,931
Less accumulated depreciation, depletion and amortization
(Note 16).............................................. 4,846 5,385
------- -------
6,556 5,546
Construction work-in-progress............................. 388 557
------- -------
6,944 6,103
------- -------
INVESTMENTS
Enterprises Investments................................... 724 724
Midland Cogeneration Venture Limited Partnership.......... 419 388
First Midland Limited Partnership......................... 224 255
Other..................................................... 23 2
------- -------
1,390 1,369
------- -------
CURRENT ASSETS
Cash and temporary cash investments at cost, which
approximates market.................................... 532 351
Restricted cash........................................... 201 38
Accounts receivable, notes receivable and accrued revenue,
less allowances of $29 in 2003 and $15 in 2002......... 367 349
Accounts receivable -- Marketing, services and trading,
less allowances of $11 in 2003 and $8 in 2002.......... 36 248
Accounts receivable and notes receivable -- related
parties................................................ 73 186
Inventories at average cost
Gas in underground storage............................. 741 491
Materials and supplies................................. 110 96
Generating plant fuel stock............................ 41 37
Assets held for sale...................................... 24 595
Price risk management assets.............................. 102 115
Prepayments and other..................................... 267 233
------- -------
2,494 2,739
------- -------
NON-CURRENT ASSETS
Regulatory Assets
Securitized costs...................................... 648 689
Postretirement benefits................................ 162 185
Abandoned Midland project.............................. 10 11
Other.................................................. 266 168
Assets held for sale...................................... 2 2,084
Price risk management assets.............................. 177 135
Nuclear decommissioning trust funds....................... 575 536
Prepaid pension costs..................................... 388 --
Goodwill.................................................. 25 31
Notes receivable -- related parties....................... 242 160
Notes receivable.......................................... 125 126
Other..................................................... 390 445
------- -------
3,010 4,570
------- -------
TOTAL ASSETS................................................ $13,838 $14,781
======= =======
The accompanying notes are an integral part of these statements.
F-7
CMS ENERGY CORPORATION
DECEMBER 31
-------------------
RESTATED
2003 2002
---- --------
IN MILLIONS
STOCKHOLDERS' INVESTMENT AND LIABILITIES
CAPITALIZATION
Common stockholders' equity
Common stock, authorized 250.0 shares; outstanding 161.1
shares in 2003 and 144.1 shares in 2002................ $ 2 $ 1
Other paid-in capital..................................... 3,846 3,605
Accumulated other comprehensive loss...................... (419) (728)
Retained deficit.......................................... (1,844) (1,800)
------- -------
1,585 1,078
Preferred stock of subsidiary (Note 5).................... 44 44
Preferred stock........................................... 261 --
Company-obligated convertible Trust Preferred Securities
of subsidiaries (Note 5)............................... -- 393
Company-obligated mandatorily redeemable Trust Preferred
Securities of Consumers' subsidiaries (Note 5)......... -- 490
Long-term debt............................................ 6,020 5,357
Long-term debt -- related parties (Note 5)................ 684 --
Non-current portion of capital leases..................... 58 116
------- -------
8,652 7,478
------- -------
MINORITY INTERESTS.......................................... 73 38
------- -------
CURRENT LIABILITIES
Current portion of long-term debt and capital leases...... 519 646
Notes payable............................................. -- 458
Accounts payable.......................................... 296 377
Accounts payable -- Marketing, services and trading....... 21 119
Accounts payable -- related parties....................... 40 53
Accrued interest.......................................... 130 131
Accrued taxes............................................. 285 291
Liabilities held for sale................................. 2 427
Price risk management liabilities......................... 89 96
Current portion of purchase power contracts............... 27 26
Current portion of gas supply contract obligations........ 29 25
Deferred income taxes..................................... 27 15
Other..................................................... 185 225
------- -------
1,650 2,889
------- -------
NON-CURRENT LIABILITIES
Postretirement benefits................................... 265 725
Deferred income taxes..................................... 615 438
Deferred investment tax credit............................ 85 91
Regulatory liabilities for income taxes, net.............. 312 297
Regulatory liabilities for cost of removal (Note 16)...... 983 907
Other regulatory liabilities.............................. 172 4
Asset retirement obligation............................... 359 --
Liabilities held for sale................................. -- 1,218
Price risk management liabilities......................... 175 135
Gas supply contract obligations........................... 208 241
Power purchase agreement -- MCV Partnership............... -- 27
Other..................................................... 289 293
------- -------
3,463 4,376
------- -------
Commitments and Contingencies (Notes 2, 4, 5, 8, 10,
11)
TOTAL STOCKHOLDERS' INVESTMENT AND LIABILITIES.............. $13,838 $14,781
======= =======
F-9
CMS ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31
----------------------------------------------------------------
RESTATED RESTATED
2003 2002 2001 2003 2002 2001
---- ---- ---- ---- -------- --------
NUMBER OF SHARES IN THOUSANDS IN MILLIONS
COMMON STOCK
At beginning and end of period........ $ 2 $ 1 $ 1
OTHER PAID-IN CAPITAL
At beginning of period................ 144,088 132,989 121,201 3,605 3,257 2,936
Common stock repurchased.............. (14) (39) (232) -- (8) (5)
Common stock reacquired............... (217) (220) (11) (5) (1) (1)
Common stock issued................... 17,273 11,358 11,681 234 357 320
Common stock reissued................. -- -- 350 1 -- 7
Issuance cost of preferred stock...... -- -- -- (8) -- --
Deferred gain (Note 5)................ -- -- -- 19 -- --
------- ------- ------- ------- ------- -------
At end of period................. 161,130 144,088 132,989 3,846 3,605 3,257
------- ------- ------- ------- ------- -------
ACCUMULATED OTHER COMPREHENSIVE LOSS
Minimum Pension Liability
At beginning of period............. (241) -- --
Minimum pension liability
adjustments(a)................... 241 (241) --
------- ------- -------
At end of period................. -- (241) --
------- ------- -------
Investments
At beginning of period............. 2 (5) (2)
Unrealized gain (loss) on
investments(a)................... 6 -- (3)
Realized gain on investments(a).... -- 7 --
------- ------- -------
At end of period................. 8 2 (5)
------- ------- -------
Derivative Instruments
At beginning of period(b).......... (31) (28) 10
Unrealized gain (loss) on
derivative instruments(a)........ 4 (7) (31)
Reclassification adjustments
included in consolidated net
income (loss)(a)................. 19 4 (7)
------- ------- -------
At end of period................. (8) (31) (28)
------- ------- -------
FOREIGN CURRENCY TRANSLATION
At beginning of period................ (458) (233) (206)
Change in foreign currency
translation(a)..................... 39 (225) (27)
------- ------- -------
At end of period................. (419) (458) (233)
------- ------- -------
At end of period.............. (419) (728) (266)
------- ------- -------
RETAINED DEFICIT
At beginning of period(c)............. (1,800) (1,001) (352)
Consolidated net loss(a).............. (44) (650) (459)
Common stock dividends declared....... -- (149) (190)
------- ------- -------
At end of period................. (1,844) (1,800) (1,001)
------- ------- -------
TOTAL COMMON STOCKHOLDERS' EQUITY....... $ 1,585 $ 1,078 $ 1,991
======= ======= =======
F-9
YEARS ENDED DECEMBER 31
-----------------------------
RESTATED RESTATED
2003 2002 2001
---- -------- --------
IN MILLIONS
(a) DISCLOSURE OF OTHER COMPREHENSIVE INCOME (LOSS):
Minimum pension liability
Minimum pension liability adjustments, net of tax
(tax benefit) of $132, $(132), and $--,
respectively...................................... $ 241 $ (241) $ --
Investments
Unrealized gain (loss) on investments, net of tax
(tax benefit) of $3, $--, and $(2),
respectively...................................... 6 -- (3)
Realized gain on investments, net of tax of $--, $--,
and $--, respectively............................. -- 7 --
Derivative Instruments
Unrealized gain (loss) on derivative instruments,
net of tax (tax benefit) of $--, $(4), and
$(13), respectively............................. 4 (7) (31)
Reclassification adjustments included in net loss,
net of tax (tax benefit) of $11, $2, and $(3),
respectively.................................... 19 4 (7)
Foreign currency translation, net...................... 39 (225) (27)
Consolidated net loss.................................. (44) (650) (459)
------- ------- -------
Total Other Comprehensive Income (Loss).............. $ 265 $(1,112) $ (527)
======= ======= =======
(b) YEAR ENDED DECEMBER 31, 2001 REFLECTS THE CUMULATIVE
CHANGE IN ACCOUNTING PRINCIPLE, NET OF $7 TAX (NOTE 7.)
(c) BEGINNING BALANCE FOR YEAR ENDED DECEMBER 31, 2001 WAS
DECREASED BY $38 MILLION DUE TO AN ADJUSTMENT TO
DEFERRED TAXES RELATED TO LOY YANG (NOTE 8.)
The accompanying notes are an integral part of these statements.
F-10
CMS ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
We have determined the need to make certain adjustments to our consolidated
financial statements for the fiscal years ended December 31, 2002, December 31,
2001, and December 31, 2000. Therefore, the consolidated financial statements
for 2002 and 2001 have been restated from amounts previously reported. See Note
18, Restatement and Reclassification.
1: CORPORATE STRUCTURE AND ACCOUNTING POLICIES
CORPORATE STRUCTURE: CMS Energy is the parent holding company of Consumers
and Enterprises. Consumers is a combination electric and gas utility company
serving Michigan's Lower Peninsula. Enterprises, through subsidiaries, is
engaged in domestic and international diversified energy businesses including
independent power production, natural gas transmission, storage and processing,
and energy services.
PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include
the accounts of CMS Energy, Consumers and Enterprises and all other entities in
which we have a controlling financial interest, in accordance with Revised FASB
Interpretation No. 46. Intercompany transactions and balances have been
eliminated. We use the equity method of accounting for investments in companies
and partnerships that are not consolidated where we have significant influence
over operations and financial policies, but not a controlling financial
interest.
USE OF ESTIMATES: We prepare our financial statements in conformity with
accounting principles generally accepted in the United States. Management is
required to make estimates using assumptions that affect the reported amounts
and disclosures. Actual results could differ from those estimates.
We are required to record estimated liabilities in the financial statements
when it is probable that a loss will be incurred in the future as a result of a
current event, and when an amount can be reasonably estimated. We have used this
accounting principle to record estimated liabilities as discussed in Note 4,
Uncertainties.
REVENUE RECOGNITION POLICY: We recognize revenues from deliveries of
electricity and natural gas, and the transportation, processing, and storage of
natural gas when services are provided. Sales taxes are recorded as liabilities
and are not included in revenues. Revenues on sales of marketed electricity,
natural gas, and other energy products are recognized at delivery.
Mark-to-market changes in the fair values of energy trading contracts that
qualify as derivatives are recognized as revenues in the periods in which the
changes occur.
CAPITALIZED INTEREST: We are required to capitalize interest on certain
qualifying assets that are undergoing activities to prepare them for their
intended use. Capitalization of interest for the period is limited to the actual
interest cost that is incurred, and our non-regulated businesses are prohibited
from imputing interest costs on any equity funds. Our regulated businesses are
permitted to capitalize an allowance for funds used during construction on
regulated construction projects and to include such amounts in plant in service.
CASH EQUIVALENTS AND RESTRICTED CASH: All highly liquid investments with an
original maturity of three months or less are considered cash equivalents. At
December 31, 2003, our restricted cash on hand was $201 million. Restricted cash
primarily includes cash collateral for letters of credit to satisfy certain debt
agreements and cash dedicated for repayment of securitization bonds. It is
classified as a current asset as the related letters of credit mature within one
year and the payments on the related securitization bonds occur within one year.
COAL INVENTORY: We use the weighted average cost method for valuing coal
inventory.
EARNINGS PER SHARE: Basic and diluted earnings per share are based on the
weighted average number of shares of common stock and potential common stock
outstanding during the period. Potential common stock, for purposes of
determining diluted earnings per share, includes the effects of dilutive stock
options and convertible securities. The effect on number of shares of such
potential common stock is computed using the treasury stock method or the
if-converted method, as applicable. For earnings per share computation, see Note
6, Earnings Per Share and Dividends.
F-11
CMS ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FINANCIAL INSTRUMENTS: We account for investments in debt and equity
securities in accordance with SFAS No. 115. These debt and equity securities are
classified into three categories: held-to-maturity, trading, or
available-for-sale. Our investments in equity securities are classified as
available-for-sale. They are reported at fair value, with any unrealized gains
or losses resulting from changes in fair value reported in equity as part of
accumulated other comprehensive income, and are excluded from earnings unless
such changes in fair value are determined to be other than temporary. Unrealized
gains or losses from changes in the fair value of our nuclear decommissioning
investments are reported as regulatory liabilities. The fair value of these
investments is determined from quoted market prices. For additional details
regarding financial instruments, see Note 7, Financial and Derivative
Instruments.
FOREIGN CURRENCY TRANSLATION: Our subsidiaries and affiliates whose
functional currency is not the U.S. dollar translate their assets and
liabilities into U.S. dollars at the exchange rates in effect at the end of the
fiscal period. We translate revenue and expense accounts of such subsidiaries
and affiliates into U.S. dollars at the average exchange rates that prevailed
during the period. The gains or losses that result from this process, and gains
and losses on intercompany foreign currency transactions that are long-term in
nature that we do not intend to settle in the foreseeable future, are shown in
the stockholders' equity section of the balance sheet. For subsidiaries
operating in highly inflationary economies, the U.S. dollar is considered to be
the functional currency, and transaction gains and losses are included in
determining net income. Gains and losses that arise from exchange rate
fluctuations on transactions denominated in a currency other than the functional
currency, except those that are hedged, are included in determining net income.
The change in the foreign currency translation adjustment increased equity by
$39 million for the year ended December 31, 2003. The change in the foreign
currency translation adjustment decreased equity by $225 million for the year
ended December 31, 2002.
GAS INVENTORY: Consumers uses the weighted average cost method for valuing
working gas and recoverable cushion gas in underground storage facilities.
GOODWILL: Goodwill represents the excess of the purchase price over the
fair value of the net assets of acquired companies. Goodwill is not amortized,
but is tested annually for impairment. For additional information, see Note 3,
Goodwill.
IMPAIRMENT OF INVESTMENTS AND LONG-LIVED ASSETS: We evaluate potential
impairments of our investments in long-lived assets other than goodwill based on
various analyses, including the projection of undiscounted cash flows, whenever
events or changes in circumstances indicate that the carrying amount of the
assets may not be recoverable. If the carrying amount of the asset exceeds its
estimated undiscounted future cash flows, an impairment loss is recognized and
the asset is written down to its estimated fair value.
MAINTENANCE AND DEPRECIATION: We charge property repairs and minor property
replacements to maintenance expense. We also charge planned major maintenance
activities to operating expense unless the cost represents the acquisition of
additional components or the replacement of an existing component. We capitalize
the cost of plant additions and replacements. We depreciate utility property on
straight-line and units-of-production rates approved by the MPSC. The composite
depreciation rates for our properties are:
YEARS ENDED
DECEMBER 31
---------------------
2003 2002 2001
---- ---- ----
Electric utility property................................... 3.1% 3.1% 3.1%
Gas utility property........................................ 4.6% 4.5% 4.4%
Other property.............................................. 8.1% 7.2% 11.2%
NUCLEAR FUEL COST: We amortize nuclear fuel cost to fuel expense based on
the quantity of heat produced for electric generation. For nuclear fuel used
after April 6, 1983, we charge disposal costs to nuclear fuel expense, recover
these costs through electric rates, and remit them to the DOE quarterly. We
elected to defer payment for
F-12
CMS ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
disposal of spent nuclear fuel burned before April 7, 1983. As of December 31,
2003, we have recorded a liability to the DOE for $139 million, including
interest, which is payable upon the first delivery of spent nuclear fuel to the
DOE. The amount of this liability, excluding a portion of interest, was
recovered through electric rates. For additional details on disposal of spent
nuclear fuel, see Note 4, Uncertainties, "Other Consumers' Electric Utility
Uncertainties -- Nuclear Matters."
NUCLEAR PLANT DECOMMISSIONING: Our site-specific decommissioning cost
estimates for Big Rock and Palisades assume that each plant site will eventually
be restored to conform to the adjacent landscape and all contaminated equipment
will be disassembled and disposed of in a licensed burial facility.
Trust Funds: MPSC orders, received in March 1999 for Big Rock and December
1999 for Palisades, provided for fully funding the decommissioning trust funds
for both sites. The December 1999 order set the annual decommissioning surcharge
for Palisades at $6 million. In 2003, we collected $6 million from our electric
customers for the decommissioning of our Palisades nuclear plant. Amounts
collected from electric retail customers and deposited in trusts, including
trust earnings, are credited to a regulatory liability.
In December 2000, we stopped depositing funds in the Big Rock trust fund
based on its funding status at that time. However, the current level of funds
provided by the trust may not be adequate to fully fund the decommissioning of
Big Rock. This is due in part to the DOE's failure to accept spent nuclear fuel
and lower returns on the trust fund. We are attempting to recover our additional
costs for storing spent nuclear fuel through litigation, as discussed in Note 4,
Uncertainties, "Other Consumers' Electric Utility Uncertainties -- Nuclear
Matters." To the extent the funds are not sufficient, we would seek additional
relief from the MPSC. We can make no assurance that the MPSC would grant this
request.
In March 2001, we filed with the MPSC a "Report on the Adequacy of the
Existing Provision for Nuclear Plant Decommissioning" for each plant reflecting
decommissioning cost estimates of $349 million for Big Rock, excluding spent
nuclear fuel storage costs, and $739 million for Palisades, in 2000 dollars. We
are required to file the next such reports with the MPSC by March 31, 2004 for
Big Rock and Palisades and we are in the process of preparing updated cost
estimates.
Big Rock: In 1997, Big Rock closed permanently and plant decommissioning
began. We estimate that the Big Rock site will be returned to a natural state by
the end of 2012 if the DOE begins removing the spent nuclear fuel by 2010. The
following table shows our Big Rock decommissioning activities:
YEAR-TO-DATE ACCUMULATIVE
DECEMBER 31, 2003 TOTAL-TO-DATE
----------------- -------------
IN MILLIONS
Decommissioning expenditures................................ $45 $263
Withdrawals from trust funds................................ 34 243
These activities had no material impact on net income. At December 31,
2003, we have an investment in nuclear decommissioning trust funds of $88
million for Big Rock. In addition, at December 31, 2003, we have charged $7
million to our FERC jurisdictional depreciation reserve for the decommissioning
of Big Rock.
Palisades: In December 2000, the NRC extended the Palisades operating
license to March 2011 and the impact of this extension was included as part of
our March 2001 filing with the MPSC.
At December 31, 2003, we have an investment in the MPSC nuclear
decommissioning trust funds of $477 million for Palisades. In addition, at
December 31, 2003, we have a FERC decommissioning trust fund with a balance of
$10 million. For additional details on decommissioning costs accounted for as
asset retirement obligations, see Note 16, Asset Retirement Obligations.
PROPERTY, PLANT, AND EQUIPMENT: We record property, plant and equipment at
original cost when placed into service. When regulated assets are retired, or
otherwise disposed of in the ordinary course of business, the
F-13
CMS ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
original cost is charged to accumulated depreciation and cost of removal, less
salvage is recorded as a regulatory liability. For additional details, see Note
16, Asset Retirement Obligations. An allowance for funds used during
construction is capitalized on regulated construction projects. With respect to
the retirement or disposal of non-regulated assets, the resulting gains or
losses are recognized in income.
Property, plant, and equipment at December 31, 2003 and 2002, was as
follows:
ESTIMATED
DEPRECIABLE
YEARS ENDED DECEMBER 31 LIFE IN YEARS(e) 2003 2002
----------------------- ---------------- ---- ----
IN MILLIONS
Electric:
Generation................................................ 13-75 $3,332 $3,489
Distribution.............................................. 12-85 3,799 3,619
Other..................................................... 5-50 388 300
Capital leases(a)......................................... 81 115
Gas:
Underground storage facilities(b)......................... 30-75 232 217
Transmission.............................................. 15-75 342 310
Distribution.............................................. 35-75 1,976 1,899
Other..................................................... 5-48 300 237
Capital leases(a)......................................... 25 56
Enterprises:
IPP....................................................... 3-40 511 250
CMS Gas Transmission...................................... 5-40 119 120
CMS Electric and Gas...................................... 2-30 241 227
Other..................................................... 4-25 24 47
Other:...................................................... 7-71 32 45
Construction work-in-progress(c)............................ 388 557
Less accumulated depreciation, depletion, and
amortization.............................................. 4,846 5,385
------ ------
Net property, plant, and equipment(d)....................... $6,944 $6,103
====== ======
-------------------------
(a) Capital leases presented in this table are gross amounts. Amortization of
capital leases was $38 million in 2003 and $96 million in 2002.
(b) Includes unrecoverable base natural gas in underground storage of $23
million at December 31, 2003 and $23 million at December 31, 2002, which is
not subject to depreciation.
(c) Included in construction costs at December 31, 2002 was $54 million,
relating to the capital lease of our main headquarters. We purchased the
main headquarters in November 2003.
(d) Included in net property, plant and equipment are intangible assets
primarily related to software development costs, consents, and rights of
way. The estimated amortization life for software development costs is seven
years and other intangible amortization lives range from 50 to 75 years.
Intangible assets at December 31, 2003 and 2002 were as follows:
F-14
CMS ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31 2003 2002
----------------------- ---- ----
IN MILLIONS
------------
Intangible assets at cost................................... $419 $479
Less accumulated amortization............................... 211 236
---- ----
Net intangible assets....................................... $208 $243
==== ====
(e) The following table illustrates the depreciable life for electric and gas
structures and improvements.
ESTIMATED ESTIMATED
DEPRECIABLE DEPRECIABLE
ELECTRIC LIFE IN YEARS GAS LIFE IN YEARS
-------- ------------- --- -------------
Generation: Underground storage facilities 45
Coal 39-43 Transmission 60
Nuclear 25 Distribution 60
Hydroelectric 55-71 Other 42-48
Other 32
Distribution 50-60
Other 40-42
RECLASSIFICATIONS: Certain prior year amounts have been reclassified for
comparative purposes. These reclassifications did not affect consolidated net
income for the years presented.
RELATED-PARTY TRANSACTIONS: Consumers paid $64 million in 2003, $67 million
in 2002, and $71 million in 2001 for electric generating capacity and energy
from affiliates of Enterprises. CMS Energy recorded interest charges on
long-term debt to related parties of $58 million in 2003. Affiliates of CMS
Energy sold, stored and transported natural gas and provided other services to
the MCV Partnership totaling $17 million in 2003, $41 million in 2002, and $35
million in 2001. We expensed purchases of capacity and energy from the MCV
Partnership totaling $455 million in 2003, $497 million in 2002, and $488
million in 2001. For additional discussion of related-party transactions with
the MCV Partnership and the FMLP, see Note 4, Uncertainties and Note 15,
Summarized Financial Information of Significant Related Energy Supplier. Other
related-party transactions are immaterial.
TRADE RECEIVABLES: We record our accounts receivable at fair value.
Accounts deemed uncollectable are charged to operating expense.
UNAMORTIZED DEBT PREMIUM, DISCOUNT AND EXPENSE: We amortize premiums,
discounts and expenses incurred in connection with the issuance of outstanding
long-term debt over the terms of the issues. For the regulated portions of our
businesses, if debt is refinanced, we amortize any unamortized premiums,
discounts and expenses over the term of the new debt.
UTILITY REGULATION: We account for the effects of regulation based on the
regulated utility accounting standard SFAS No. 71. As a result, the actions of
regulators affect when we recognize revenues, expenses, assets, and liabilities.
In 1999, we received MPSC electric restructuring orders, which, among other
things, identified the terms and timing for implementing electric restructuring
in Michigan. Consistent with these orders and EITF No. 97-4, we discontinued the
application of SFAS No. 71 for the energy supply portion of our business because
we expected to implement ROA at competitive market based rates for our electric
customers.
F-15
CMS ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Since 1999, there have been significant legislative and regulatory changes
in Michigan that has resulted in:
- electric supply customers of utilities remaining on cost-based rates, and
- utilities being provided the opportunity to recover Stranded Costs
associated with electric restructuring, from customers who choose an
alternative electric supplier.
During 2002, we re-evaluated the criteria used to determine if an entity or
a segment of an entity meets the requirements to apply regulated utility
accounting, and determined that the energy supply portion of our business could
meet the criteria if certain regulatory events occurred. In December 2002, we
received a MPSC Stranded Cost order that allowed us to re-apply regulatory
accounting standard SFAS No. 71 to the energy supply portion of our business.
Re-application of SFAS No. 71 had no effect on the prior discontinuation
accounting, but allowed us to apply regulatory accounting treatment to the
energy supply portion of our business beginning in the fourth quarter of 2002,
including regulatory accounting treatment of costs required to be recognized in
accordance with SFAS No. 143. For additional details, see Note 12, Asset
Retirement Obligations.
SFAS No. 144 imposes strict criteria for retention of regulatory-created
assets by requiring that such assets be probable of future recovery at each
balance sheet date. Management believes these assets are probable of future
recovery.
The following regulatory assets and liabilities, which include both current
and non-current amounts, are reflected in the Consolidated Balance Sheets. We
expect to recover these costs through rates over periods of up to 14 years. We
recognized an OPEB transition obligation in accordance with SFAS No. 106 and
established a regulatory asset for this amount that we expect to recover in
rates over the next nine years.
DECEMBER 31
----------------
2003 2002
---- ----
IN MILLIONS
Securitized costs (Note 4).................................. $ 648 $ 689
Postretirement benefits (Note 10)........................... 181 204
Electric Restructuring Implementation Plan (Note 4)......... 91 83
Manufactured gas plant sites (Note 4)....................... 67 69
Abandoned Midland project................................... 10 11
Unamortized debt............................................ 51 14
Asset retirement obligation (Note 16)....................... 49 --
Other....................................................... 8 2
------ ------
Total regulatory assets..................................... $1,105 $1,072
====== ======
Cost of removal (Note 16)................................... $ 983 $ 907
Income taxes (Note 8)....................................... 312 297
Asset retirement obligation (Note 16)....................... 168 --
Other....................................................... 4 4
------ ------
Total regulatory liabilities................................ $1,467 $1,208
====== ======
In October 2000, we received an MPSC order authorizing us to securitize
certain regulatory assets up to $469 million, net of tax, see Note 4,
Uncertainties, "Consumers' Electric Utility Restructuring Matters --
Securitization." Accordingly, in December 2000, we established a regulatory
asset for securitized costs of $709 million, before tax, that had previously
been recorded in other regulatory asset accounts. To prepare for the financing
of the securitized assets and the subsequent retirement of debt with
Securitization proceeds, issuance
F-16
CMS ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
fees were capitalized as a part of Securitization costs. These issuance costs
are amortized each month for up to fourteen years. The components of the
unamortized securitized costs are illustrated below.
DECEMBER 31
------------
2003 2002
---- ----
IN MILLIONS
Unamortized nuclear costs................................... $405 $405
Postretirement benefits..................................... 84 84
Income taxes................................................ 203 203
Uranium enrichment facility................................. 16 16
Other....................................................... 12 12
Accumulated Securitization cost amortization................ (72) (31)
---- ----
Total unamortized securitized costs......................... $648 $689
==== ====
2: DISCONTINUED OPERATIONS, OTHER ASSET SALES, IMPAIRMENTS, AND RESTRUCTURING
Our continued focus on financial improvement has led to discontinuing
operations, completing many asset sales, impairing some assets, and incurring
costs to restructure our business. Gross cash proceeds received from the sale of
assets totaled $939 million in 2003 and $1.659 billion in 2002.
DISCONTINUED OPERATIONS
We have discontinued the following operations:
PRETAX AFTER-TAX
BUSINESS/PROJECT DISCONTINUED GAIN(LOSS) GAIN(LOSS) STATUS
---------------- ------------ ---------- ---------- ------
IN MILLIONS
Equatorial Guinea(a)................ December 2001 $ 497 $310 Sold January 2002
Powder River........................ March 2002 17 11 Sold May 2002
Zirconium Recovery.................. June 2002 (47) (31) Abandoned
CMS Viron........................... June 2002 (14) (9) Sold June 2003
Oil and Gas(b)...................... September 2002 (126) (82) Sold September 2002
Panhandle(c)........................ December 2002 (39) (44) Sold June 2003
Field Services...................... December 2002 (5) (1) Sold July 2003
Marysville.......................... June 2003 2 1 Sold November 2003
Parmelia(d)......................... December 2003 -- -- Held for sale
(a) In the first quarter of 2003, we settled a liability with the purchaser of
Equatorial Guinea and reversed the remaining excess reserve. This
settlement resulted in a gain of $6 million after-tax, which is included in
discontinued operations.
(b) As a result of the sale of CMS Oil and Gas, we recorded liabilities for
certain sale indemnification obligations and other matters. In September
2003, we re-evaluated our exposure to the obligations and reduced the
carrying value of these liabilities by $8 million after-tax. This
adjustment is reported in discontinued operations.
(c) The Pension Plan retained pension payment obligations for Panhandle
employees who were vested under the Pension Plan. Panhandle employees are
no longer eligible to accrue additional benefits. Because of the
significant change in the makeup of the plan, a remeasurement of the
obligation at the date of sale was required. The remeasurement resulted in
a $4 million increase in our 2003 OPEB expense, as well as an additional
charge to accumulated other comprehensive income of approximately $34
million ($22 million after-tax) as a result of the increase in the
additional minimum pension liability. Additionally, a significant
F-17
CMS ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
number of Panhandle employees elected to retire as of July 1, 2003 under the CMS
Energy Employee Pension Plan. As a result, we have recorded a $25 million ($16
million after-tax) settlement loss, and a $10 million ($7 million
after-tax) curtailment gain, pursuant to the provisions of SFAS No. 88,
which is reflected in discontinued operations.
(d) In December 2003, we began reporting the operations of our Parmelia
business in discontinued operations and reduced the carrying amount of our
Parmelia business to reflect fair value. The $26 million after-tax
adjustment is reported in discontinued operations. We expect the sale of
Parmelia to occur in 2004.
Due to lack of progress on the sale, we reclassified our international
energy distribution business, which includes CPEE and SENECA, from discontinued
operations to continuing operations for the years 2003, 2002, and 2001. When we
initially reported the international energy distribution business as a
discontinued operation in 2001, we applied APB Opinion No. 30, which allowed us
to record a provision for anticipated operating losses. We currently apply FASB
No. 144, which does not allow us to record a provision for future operating
losses. Therefore, in the process of reclassifying the international energy
distribution business to continuing operations and reversing such provisions, we
increased our net loss by $3 million in 2002 and decreased our net loss by $3
million in 2001. In 2003, there was an increase to net income of $75 million as
a result of reversing the previously recognized impairment loss in discontinued
operations.
At December 31, 2003, "Assets held for sale" includes Parmelia, Bluewater
Pipeline, and our investment in the American Gas Index fund. Although Bluewater
Pipeline and the American Gas Index fund are considered held for sale, they did
not meet the criteria for discontinued operations. At December 31, 2002, "Assets
held for sale" includes Panhandle, CMS Viron, CMS Field Services, Marysville,
and Parmelia. The major classes of assets and liabilities held for sale are as
follows:
AS OF
DECEMBER 31
----------------
RESTATED
2003 2002
---- --------
IN MILLIONS
Assets
Cash...................................................... $ 7 $ 82
Accounts receivable....................................... 2 133
Property, plant and equipment -- net...................... 2 2,003
Goodwill.................................................. -- 117
Other..................................................... 15 344
--- ------
Total assets held for sale.................................. $26 $2,679
=== ======
Liabilities
Accounts payable.......................................... $ 2 $ 74
Long-term debt............................................ -- 1,150
Minority interest......................................... -- 45
Other..................................................... -- 376
--- ------
Total liabilities held for sale............................. $ 2 $1,645
=== ======
F-18
CMS ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following amounts are reflected in the Consolidated Statements of
Income (Loss) for discontinued operations:
YEARS ENDED DECEMBER 31
----------------------------
RESTATED RESTATED
2003 2002 2001
---- -------- --------
IN MILLIONS
Revenues.................................................... $504 $ 891 $1,453
==== ===== ======
Discontinued operations:
Pretax gain (loss) from discontinued operations........... $115 $ (38) $ (53)
Income tax expense (benefit).............................. 46 (1) 83
---- ----- ------
Income (loss) from discontinued operations................ 69 (37) (136)
==== ===== ======
Pretax gain (loss) on disposal of discontinued
operations............................................. (42) (354) 17
Income tax expense (benefit).............................. 4 (117) 9
---- ----- ------
Gain (loss) on disposal of discontinued operations........ (46) (237) 8
---- ----- ------
Income (loss) from discontinued operations.................. $ 23 $(274) $ (128)
==== ===== ======
The income (loss) from discontinued operations includes a reduction in
asset values, a provision for anticipated closing costs, and a portion of the
Parent Company's interest expense. Interest expense of $22 million for 2003, $71
million for 2002 and $86 million for 2001 has been allocated based on a ratio of
the expected proceeds for the asset to be sold divided by the Parent Company's
total capitalization of each discontinued operation times the Parent Company's
interest expense.
OTHER ASSET SALES
Our other asset sales include the following non-strategic and
under-performing assets. The impacts of these sales are included in "Gain (loss)
on asset sales, net" in the Consolidated Statements of Income (Loss).
In 2003, we sold the following assets that did not meet the definition of,
and therefore were not reported as, discontinued operations:
PRETAX AFTER-TAX
DATE SOLD BUSINESS/PROJECT GAIN (LOSS) GAIN (LOSS)
--------- ---------------- ----------- -----------
IN MILLIONS
January CMS MST Wholesale Gas....................................... $(6) $(4)
March CMS MST Wholesale Power..................................... 2 1
June Guardian Pipeline........................................... (4) (3)
December CMS Land -- Arcadia......................................... 3 2
Various Other....................................................... 2 1
--- ---
Total loss on asset sales................................... $(3) $(3)
=== ===
In June 2003, we received three million shares of Southern Union common
stock worth $49 million from the sale of Panhandle, a discontinued operation. In
July 2003, Southern Union declared a five percent common stock dividend payable
July 31, 2003, to shareholders of record as of July 17, 2003. As a result of the
stock dividend, on September 30, 2003, we held 3.15 million shares of Southern
Union common stock worth $54 million based on the closing price of $17.00 per
share. The $2 million increase in value was recorded in dividend income. In
October 2003, we sold our 3.15 million shares of Southern Union common stock to
a private investor for $17.77 per share. The additional $5 million gain was
recorded in other income in 2003.
F-19
CMS ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In 2002, we sold the following assets that did not meet the definition of,
and therefore were not reported as, discontinued operations:
PRETAX AFTER-TAX
DATE SOLD BUSINESS/PROJECT GAIN (LOSS) GAIN (LOSS)
--------- ---------------- ----------- -----------
IN MILLIONS
January Equatorial Guinea -- methanol plant......................... $ 19 $ 12
April Toledo Power................................................ (11) (5)
May Electric Transmission System................................ 38 31
August National Power Supply....................................... 15 30
October Vasavi Power Plant.......................................... (25) (24)
Various Other....................................................... 1 --
---- ----
Total gain on asset sales................................... $ 37 $ 44
==== ====
In 2001, we sold miscellaneous assets for a pretax loss of $2 million.
In February 2004, we sold Bluewater Pipeline, a 24.9 mile pipeline that
extends from Marysville, Michigan to Armada, Michigan to Bluewater Gas Storage,
LLC, a subsidiary of Sempra Energy Trading Corporation. We do not expect the
gain or loss on the sale to be significant.
ASSET IMPAIRMENTS
We record an asset impairment when we determine that the expected future
cash flows from an asset would be insufficient to provide for recovery of the
asset's carrying value. An asset held-in-use is evaluated for impairment by
calculating the undiscounted future cash flows expected to result from the use
of the asset and its eventual disposition. If the undiscounted future cash flows
are less than the carrying amount, we recognize an impairment loss. The
impairment loss recognized is the amount by which the carrying amount exceeds
the fair value. We estimate the fair market value of the asset utilizing the
best information available. This information includes quoted market prices,
market prices of similar assets, and discounted future cash flow analyses. The
assets written down include both domestic and foreign electric power plants, gas
processing facilities, and certain equity method and other investments. In
addition, we have written off the carrying value of projects under development
that will no longer be pursued.
F-20
CMS ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The table below summarizes our asset impairments:
YEARS ENDED DECEMBER 31
-----------------------------------------------------------------
RESTATED RESTATED
------------------- -------------------
PRETAX AFTER-TAX PRETAX AFTER-TAX PRETAX AFTER-TAX
2003 2003 2002 2002 2001 2001
------ --------- ------ --------- ------ ---------
IN MILLIONS
Asset impairments:
Consumers.................................. $-- $-- $ -- $ -- $ 3 $ 2
Enterprises:
International Energy Distribution(a).... 72 53 4 3 95 62
CMS Generation
DIG(b)................................ -- -- 460 299 -- --
Michigan Power........................ -- -- 62 40 -- --
Craven................................ -- -- 23 15 -- --
National Power Supply................. -- -- -- -- 89 88
El Chocon............................. -- -- -- -- 45 42
HL Power.............................. -- -- -- -- 30 18
Other(c).............................. 16 11 20 13 16 11
Natural Gas Transmission................ -- -- -- -- 31 20
Marketing, Services and Trading......... -- -- 18 11 -- --
Other(d)................................ 7 4 15 10 14 9
--- --- ---- ---- ---- ----
Total asset impairments...................... $95 $68 $602 $391 $323 $252
=== === ==== ==== ==== ====
-------------------------
(a) In September 2003, we wrote down our investment in CMS Electric and Gas'
Venezuelan electric distribution utility and an associated equipment lease
to reflect fair value. The impairment was based on estimates of the
utility's future cash flows, incorporating certain assumptions about
Venezuela's regulatory, political, and economic environment.
(b) DIG's reduced valuation was primarily a reflection of the unfavorable terms
of its power purchase agreement.
(c) At CMS Generation, we determined that the fair value of our equity
investments was lower than its carrying amount, and that this decline in
value was other than temporary. Therefore, in accordance with APB No. 18,
we recognized an impairment charge of $16 million ($11 million, net of
tax).
(d) Includes development projects of $7 million ($4 million, net of tax) in
2003 that would no longer be pursued.
RESTRUCTURING AND OTHER COSTS
In June 2002, we announced a series of initiatives to reduce our annual
operating costs by an estimated $50 million. As such, we:
- relocated CMS Energy's corporate headquarters from Dearborn, Michigan to
a new combined CMS Energy and Consumers headquarters in Jackson, Michigan
in July 2003,
- implemented changes to our 401(k) savings program,
- implemented changes to our health care plan, and
- terminated 64 employees, including five officers. Prior to December 31,
2002, 123 employees elected severance arrangements. Of these 187 officers
and employees, 65 had been terminated as of December 31, 2002. All
remaining terminations were completed in 2003.
F-21
CMS ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table shows the amount charged to expense for restructuring
costs, the payments made, and the unpaid balance of accrued costs at December
31, 2002 and December 31, 2003.
INVOLUNTARY LEASE
TERMINATION TERMINATION TOTAL
----------- ----------- -----
IN MILLIONS
Beginning accrual balance, January 1, 2002.................. $ -- $-- $ --
Expense..................................................... 22 11 33
Payments.................................................... (10) (3) (13)
---- --- ----
Ending accrual balance at December 31, 2002................. $ 12 $ 8 $ 20
---- --- ----
Expense..................................................... 3 -- 3
Payments.................................................... (12) (2) (14)
---- --- ----
Ending accrual balance at December 31, 2003................. $ 3 $ 6 $ 9
==== === ====
Restructuring costs for the year ended December 31, 2003, which are
included in operating expenses, include $3 million of involuntary employee
termination benefits.
3: GOODWILL
Our goodwill balance was $25 million at December 31, 2003 and $31 million
at December 31, 2002.
CMS GAS TRANSMISSION: We recorded goodwill as an asset when we purchased
Panhandle and began, over time, to expense a portion of goodwill. Effective
January 1, 2002, a new accounting standard went into effect that required us to
stop expensing goodwill and to test for impairment. We tested the value of the
goodwill related to Panhandle for impairment by comparing the fair value of
goodwill, as determined by independent appraisers, to the value on our books.
The test results showed that the goodwill was impaired. We recorded a loss of
$601 million ($369 million, after-tax), that was the amount by which the value
on our books exceeded the fair value. In 2002, we also discontinued the
operations of Panhandle; therefore, the $369 million after-tax goodwill
impairment is reflected in discontinued operations. In 2003, we sold Panhandle.
CMS MST: During the third quarter of 1999, we purchased a 100 percent
interest in CMS Viron and recorded goodwill. In 2002, we performed an impairment
test, which determined our goodwill related to CMS Viron was impaired. In the
first quarter of 2002, we recorded a loss of $15 million ($10 million,
after-tax) for goodwill impairment. In 2002, we also discontinued the operations
of CMS Viron; therefore, the $10 million after-tax goodwill impairment is
reflected in discontinued operations. In 2003, we sold CMS Viron.
F-22
CMS ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Additionally, the following table represents net loss for the year 2001
without goodwill amortization expense.
RESTATED
2001
--------
IN MILLIONS
Reported net loss........................................... $ (459)
Add: goodwill amortization expense(a)....................... 13
------
Adjusted net loss........................................... $ (446)
Adjusted basic and diluted loss per share................... $(3.41)
======
-------------------------
(a) Net of tax of $7 million.
4: UNCERTAINTIES
Several business trends or uncertainties may affect our financial results.
These trends or uncertainties have, or we reasonably expect could have, a
material impact on net sales, revenues, or income from continuing operations.
Such trends and uncertainties are discussed in detail below.
SEC AND OTHER INVESTIGATIONS: As a result of round-trip trading
transactions by CMS MST, CMS Energy's Board of Directors established a Special
Committee to investigate matters surrounding the transactions and retained
outside counsel to assist in the investigation. The Special Committee completed
its investigation and reported its findings to the Board of Directors in October
2002. The Special Committee concluded, based on an extensive investigation, that
the round-trip trades were undertaken to raise CMS MST's profile as an energy
marketer with the goal of enhancing its ability to promote its services to new
customers. The Special Committee found no effort to manipulate the price of CMS
Energy Common Stock or affect energy prices. The Special Committee also made
recommendations designed to prevent any reoccurrence of this practice.
Previously, CMS Energy terminated its speculative trading business and revised
its risk management policy. The Board of Directors adopted, and CMS Energy has
implemented the recommendations of the Special Committee.
CMS Energy is cooperating with other investigations concerning round-trip
trading, including an investigation by the SEC regarding round-trip trades and
CMS Energy's financial statements, accounting policies and controls, and an
investigation by the DOJ. CMS Energy is unable to predict the outcome of these
matters, and what effect, if any, these investigations will have on its
business.
SECURITIES CLASS ACTION LAWSUITS: Beginning on May 17, 2002, a number of
securities class action complaints were filed against CMS Energy, Consumers, and
certain officers and directors of CMS Energy and its affiliates. The complaints
were filed as purported class actions in the United States District Court for
the Eastern District of Michigan, by shareholders who allege that they purchased
CMS Energy's securities during a purported class period. The cases were
consolidated into a single lawsuit and an amended and consolidated class action
complaint was filed on May 1, 2003. The consolidated complaint contains a
purported class period beginning on May 1, 2000 and running through March 31,
2003. It generally seeks unspecified damages based on allegations that the
defendants violated United States securities laws and regulations by making
allegedly false and misleading statements about CMS Energy's business and
financial condition, particularly with respect to revenues and expenses recorded
in connection with round-trip trading by CMS MST. CMS Energy, Consumers, and
their affiliates will defend themselves vigorously but cannot predict the
outcome of this litigation.
DEMAND FOR ACTIONS AGAINST OFFICERS AND DIRECTORS: In May 2002, the Board
of Directors of CMS Energy received a demand, on behalf of a shareholder of CMS
Energy Common Stock, that it commence civil actions (i) to remedy alleged
breaches of fiduciary duties by certain CMS Energy officers and directors in
connection with round-trip trading by CMS MST, and (ii) to recover damages
sustained by CMS Energy as a result of alleged insider trades alleged to have
been made by certain current and former officers of CMS Energy
F-23
CMS ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
and its subsidiaries. In December 2002, two new directors were appointed to the
Board. The Board formed a special litigation committee in January 2003 to
determine whether it is in the best interest of CMS Energy to bring the action
demanded by the shareholder. The disinterested members of the Board appointed
the two new directors to serve on the special litigation committee.
In December 2003, during the continuing review by the special litigation
committee, CMS Energy was served with a derivative complaint filed on behalf of
the shareholder in the Circuit Court of Jackson County, Michigan in furtherance
of his demands. The date for CMS Energy and other defendants to answer or
otherwise respond to the complaint was extended to June 1, 2004, subject to such
further extensions as may be mutually agreed upon by the parties and authorized
by the Court. CMS Energy cannot predict the outcome of this matter.
ERISA 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 Employees' Savings and Incentive Plan (the "Plan"). The two cases,
filed in July 2002 in United States District Court for the Eastern District of
Michigan, were consolidated by the trial judge and an amended consolidated
complaint was filed. Plaintiffs allege breaches of fiduciary duties under ERISA
and seek restitution on behalf of the Plan with respect to a decline in value of
the shares of CMS Energy Common Stock held in the Plan. Plaintiffs also seek
other equitable relief and legal fees. CMS Energy and Consumers will defend
themselves vigorously but cannot predict the outcome of this litigation.
GAS INDEX PRICE REPORTING INVESTIGATION: CMS Energy has notified
appropriate regulatory and governmental agencies that some employees at CMS MST
and CMS Field Services appeared to have provided inaccurate information
regarding natural gas trades to various energy industry publications which
compile and report index prices. CMS Energy is cooperating with an investigation
by the DOJ regarding this matter. In November 2003, CMS MST and CMS Field
Services (now Cantera Gas Company) entered into a settlement with the CFTC
pursuant to which they paid a $16 million civil monetary penalty in connection
with the inaccurate reporting of natural gas trading data to publications that
compile and publish price indices. The settlement resolves all matters
investigated by the CFTC involving CMS Energy, including round-trip trading. CMS
Energy neither admits nor denies the CFTC's findings in the settlement order.
CMS Energy is unable to predict the outcome of the DOJ investigation and what
effect, if any, this investigation will have on its business.
GAS INDEX PRICE REPORTING LITIGATION: In August 2003, Cornerstone Propane
Partners, L.P. ("Cornerstone") filed a putative class action complaint in the
United States District Court for the Southern District of New York against CMS
Energy and dozens of other energy companies. The court ordered the Cornerstone
complaint to be consolidated with similar complaints filed by Dominick Viola and
Roberto Calle Gracey. The plaintiffs filed a consolidated complaint on January
20, 2004. The consolidated complaint alleges that false natural gas price
reporting by the defendants manipulated the prices of NYMEX natural gas futures
and options. The complaint contains two counts under the Commodity Exchange Act,
one for manipulation and one for aiding and abetting violations. CMS Energy is
no longer a defendant, however, CMS MST and CMS Field Services are named as
defendants. (CMS Energy sold CMS Field Services to Cantera Natural Gas, Inc. but
is required to indemnify Cantera Natural Gas, Inc. with respect to this action.)
In a similar but unrelated matter, Texas-Ohio Energy, Inc. filed a putative
class action lawsuit in the United States District Court for the Eastern
District of California against a number of energy companies engaged in the sale
of natural gas in the United States. CMS Energy is named as a defendant. The
complaint alleges defendants entered into a price-fixing conspiracy by engaging
in activities to manipulate the price of natural gas in California. The
complaint contains counts alleging violations of the Sherman Act, Cartwright Act
(a California Statute), and the California Business and Profession Code relating
to unlawful, unfair and deceptive business practices. The plaintiff in the
Texas-Ohio case has agreed to extend the time for all defendants to answer or
otherwise respond until after the multi district court litigation ("MDL") panel
decides whether to take the case. There is currently pending in the Nevada
federal district court a MDL matter involving seven complaints originally filed
in various state courts in California. These complaints make allegations similar
to those in the
F-24
CMS ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Texas-Ohio case regarding price reporting, although none contain a Sherman Act
claim. Some of the defendants in the MDL matter who are also defendants in the
Texas-Ohio case are trying to have the Texas-Ohio case transferred to the MDL
proceeding.
Benscheidt v. AEP Energy Services, Inc., et al., a new class action
complaint containing allegations similar to those made in the Texas-Ohio case,
albeit limited to California state law claims, was filed in California state
court in February 2004. CMS Energy and CMS MST are named as defendants.
Defendants are likely to seek to remove this action from the California federal
district court and have it transferred to the MDL proceeding in Nevada.
CMS Energy and the other CMS defendants will defend themselves vigorously,
but cannot predict the outcome of these matters.
CONSUMERS' UNCERTAINTIES
Several business trends or uncertainties may affect Consumers' financial
results and condition. These trends or uncertainties have, or we expect could
have, a material impact on revenues or income from continuing electric and gas
operations. Such trends and uncertainties include:
Environmental
- increased capital expenditures and operating expenses for Clean Air Act
compliance, and
- potential environmental liabilities arising from various environmental
laws and regulations, including potential liability or expenses relating
to the Michigan Natural Resources and Environmental Protection Acts,
Superfund, and at former manufactured gas plant facilities.
Restructuring
- response of the MPSC and Michigan legislature to electric industry
restructuring issues,
- ability to meet peak electric demand requirements at a reasonable cost,
without market disruption,
- ability to recover any of our net Stranded Costs under the regulatory
policies being followed by the MPSC,
- recovery of electric restructuring implementation costs,
- effects of lost electric supply load to alternative electric suppliers,
and
- status as an electric transmission customer, instead of an electric
transmission owner-operator.
Regulatory
- effects of conclusions about the causes of the August 14, 2003 blackout,
including exposure to liability, increased regulatory requirements, and
new legislation,
- effects of potential performance standards payments,
- successful implementation of initiatives to reduce exposure to purchased
power price increases,
- responses from regulators regarding the storage and ultimate disposal of
spent nuclear fuel,
- potential adverse appliance service plan ruling or related legislation,
- inadequate regulatory response to applications for requested rate
increases, and
- response to increases in gas costs, including adverse regulatory response
and reduced gas use by customers.
F-25
CMS ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Other
- pending litigation regarding PURPA qualifying facilities, and
- pending litigation and government investigations.
CONSUMERS' ELECTRIC UTILITY CONTINGENCIES
ELECTRIC ENVIRONMENTAL MATTERS: Our operations are subject to environmental
laws and regulations. Costs to operate our facilities in compliance with these
laws and regulations generally have been recovered in customer rates.
Clean Air: In 1998, the EPA issued regulations requiring the state of
Michigan to further limit nitrogen oxide emissions at our coal-fired electric
plants. The Michigan Department of Environmental Quality finalized its rules to
comply with the EPA regulations in December 2002. It submitted these rules to
the EPA for approval in the first quarter of 2003. The EPA has yet to approve
the Michigan rules. If the EPA does not approve the Michigan rules, similar
federal regulations will take effect.
The EPA and the state regulations require us to make significant capital
expenditures estimated to be $771 million. As of December 31, 2003, we have
incurred $446 million in capital expenditures to comply with the EPA regulations
and anticipate that the remaining $325 million of capital expenditures will be
incurred between 2004 and 2009. These expenditures include installing catalytic
reduction technology on some of our coal-fired electric plants. 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 a MPSC prudency
hearing.
The EPA has alleged that some utilities have incorrectly classified plant
modifications as "routine maintenance" rather than seek modification permits
from the EPA. We have received and responded to information requests from the
EPA on this subject. We believe that we have properly interpreted the
requirements of "routine maintenance." If our interpretation is found to be
incorrect, we may be required to install additional pollution controls at some
or all of our coal-fired electric plants.
In addition to modifying the coal-fired electric plants, we expect to
purchase nitrogen oxide emissions credits for years 2004 through 2008. The cost
of these credits is estimated to average $8 million per year and is accounted
for as inventory. The credit inventory is expensed as the coal-fired electric
plants generate electricity. The price for nitrogen oxide emissions credits is
volatile and could change substantially.
Future clean air regulations requiring emission controls for sulfur
dioxide, nitrogen oxides, mercury, and nickel may require additional capital
expenditures. Total expenditures will depend upon the final makeup of the new
regulations.
Water: The EPA has proposed changes to the rules that govern generating
plant cooling water intake systems. The proposed rules will require significant
reduction in fish killed by operating equipment. The proposed rules are
scheduled to become final in the first quarter of 2004 and some of our
facilities would be required to comply by 2006. We are studying the proposed
rules to determine the most cost-effective solutions for compliance.
Cleanup and Solid Waste: Under the Michigan Natural Resources and
Environmental Protection Act, we expect that we will ultimately incur
investigation and remedial action costs at a number of sites. We believe that
these costs will be recoverable in rates under current ratemaking policies.
We are a potentially responsible party at several contaminated sites
administered under Superfund. Superfund liability is joint and several, meaning
that many other creditworthy parties with substantial assets are potentially
responsible with respect to the individual sites. Based on past experience, we
estimate that our share of
F-26
CMS ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
the total liability for the known Superfund sites will be between $1 million and
$9 million. As of December 31, 2003, we have recorded a liability for the
minimum amount of our estimated Superfund liability.
In October 1998, during routine maintenance activities, we identified PCB
as a component in certain paint, grout, and sealant materials at the Ludington
Pumped Storage facility. We removed and replaced part of the PCB material. We
have proposed a plan to deal with the remaining materials and are awaiting a
response from the EPA.
LITIGATION: In October 2003, a group of eight PURPA qualifying facilities
selling power to us filed a lawsuit in Ingham County Circuit Court. The lawsuit
alleges that we incorrectly calculated the energy charge payments made pursuant
to power purchase agreements with qualifying facilities. More specifically, the
lawsuit alleges that we should be basing the energy charge calculation on the
cost of more expensive eastern coal, rather than on the cost of the coal
actually burned by us for use in our coal-fired generating plants. We believe we
have been performing the calculation in the manner prescribed by the power
purchase agreements, and have filed a request with the MPSC (as a supplement to
the PSCR plan) that asks the MPSC to review this issue and to confirm that our
method of performing the calculation is correct. We filed a motion to dismiss
the lawsuit in the Ingham County Circuit Court due to the pending request at the
MPSC in regard to the PSCR plan case. In February 2004, the judge ruled on the
motion and deferred to the primary jurisdiction of the MPSC. This ruling
effectively suspends the lawsuit until the MPSC rules. Although only eight
qualifying facilities have raised the issue, the same energy charge methodology
is used in the PPA with the MCV Partnership and in approximately 20 additional
power purchase agreements with us, representing a total of 1,670 MW of electric
capacity. We cannot predict the outcome of this matter.
CONSUMERS' ELECTRIC UTILITY RESTRUCTURING MATTERS
ELECTRIC RESTRUCTURING LEGISLATION: In June 2000, the Michigan legislature
passed electric utility restructuring legislation known as the Customer Choice
Act. This act:
- allows all customers to choose their electric generation supplier
effective January 1, 2002,
- provides a one-time five percent residential electric rate reduction,
- froze all electric rates through December 31, 2003, and established 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,
- 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,
- allows for the use of Securitization bonds to refinance qualified costs,
- allows recovery of net Stranded Costs and implementation costs incurred
as a result of the passage of the act,
- requires Michigan utilities to join a FERC-approved RTO or sell their
interest in transmission facilities to an independent transmission owner,
- requires Consumers, Detroit Edison, and AEP to jointly expand their
available transmission capability by at least 2,000 MW, and
- establishes a market power supply test that, if not met, may require
transferring control of generation resources in excess of that required
to serve retail sales requirements.
The following summarizes our status under the last three provisions of the
Customer Choice Act. First, we chose to sell our interest in our transmission
facilities to an independent transmission owner in order to comply with the
Customer Choice Act; for additional details regarding the sale of the
transmission facility, see "Transmission Sale" within this section. Second, in
July 2002, the MPSC issued an order approving our plan to
F-27
CMS ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
achieve the increased transmission capacity required under the Customer Choice
Act. The MPSC found that once the planned projects were completed and
verification was submitted, a utility was in technical compliance. We have
completed the transmission capacity projects identified in the plan and have
submitted verification of this fact to the MPSC. We believe we are in full
compliance. Lastly, in September 2003, the MPSC issued an order finding that we
are in compliance with the market power supply test set forth in the Customer
Choice Act.
ELECTRIC ROA PLAN: In 1998, we submitted a plan for electric ROA 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:
- allow electric customers to choose their supplier,
- authorize recovery of net Stranded Costs from ROA customers and
implementation costs from all customer classes, and
- confirm any voluntary commitments of electric utilities.
The MPSC approved revised tariffs that establish the rates, terms, and
conditions under which retail customers are permitted to choose an electric
supplier. These revised tariffs allow ROA customers, upon as little as 30 days
notice to us, to return to our generation service at current tariff rates. If
any class of customers' (residential, commercial, or industrial) ROA load
reaches ten percent of our total load for that class of customers, then
returning ROA customers for that class must give 60 days notice to return to our
generation service at current tariff rates. However, we may not have capacity
available to serve returning ROA customers that is sufficient or reasonably
priced. As a result, we may be forced to purchase electricity on the spot market
at higher prices than we can recover from our customers during the rate cap
periods.
We cannot predict the total amount of electric supply load that may be lost
to competitor suppliers. As of March 2004, alternative electric suppliers are
providing 735 MW of load. This amount represents nine percent of the total
distribution load and an increase of 42 percent compared to March 2003.
We cannot predict whether the Stranded Cost recovery method adopted by the
MPSC will be applied in a manner that will fully offset any associated margin
loss from ROA. In February 2004, the MPSC issued an order on Detroit Edison's
request for rate relief for costs associated with customers leaving under
electric customer choice. The MPSC order allows Detroit Edison to charge a
transition surcharge of approximately 0.4 cent per kWh to ROA customers and
eliminates securitization offsets of 0.7 cents per kWh for primary service
customers and 0.9 cents per kWh for secondary service customers. We are seeking
similar recovery of Stranded Costs due to ROA customers leaving our system and
are encouraged by this ruling.
ELECTRIC RESTRUCTURING PROCEEDINGS: Below is a discussion of our electric
restructuring proceedings. They are:
- Securitization,
- Stranded Costs,
- implementation costs, and
- transmission.
Securitization: The Customer Choice Act allows for the use of
Securitization bonds to refinance certain qualified costs. Since Securitization
involves issuing bonds secured by a revenue stream from rates collected directly
from customers to service the bonds, Securitization bonds typically have a
higher credit rating than
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CMS ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
conventional utility corporate financing. In 2000 and 2001, the MPSC issued
orders authorizing us to issue Securitization bonds. We issued our first
Securitization bonds in late 2001. Securitization resulted in:
- lower interest costs, and
- longer amortization periods for the securitized assets.
We 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 scheduled bond maturity date, and no more than
quarterly thereafter. The December 2003 true up modified the total
Securitization and related tax charges from 1.746 mills per kWh to 1.718 mills
per kWh. There will be no impact on customer bills from Securitization for most
of our electric customers until the Customer Choice Act cap period expires, and
an electric rate case is processed. Securitization charge collections, $50
million for the twelve months ended December 31, 2003, and $52 million for the
twelve months ended December 31, 2002, are remitted to a trustee. Securitization
charge collections are restricted to the repayment of the principal and interest
on the Securitization bonds and payment of the ongoing expenses of Consumers
Funding. Consumers Funding is legally separate from Consumers. The assets and
income of Consumers Funding, including the securitized property, are not
available to creditors of Consumers or CMS Energy.
In March 2003, we filed an application with the MPSC seeking approval to
issue additional Securitization bonds. In June 2003, the MPSC issued a financing
order authorizing the issuance of Securitization bonds in the amount of $554
million. This amount relates to Clean Air Act expenditures and associated return
on those expenditures through December 31, 2002; ROA implementation costs, and
previously authorized return on those expenditures through December 31, 2000;
and other up front qualified costs related to issuance of the Securitization
bonds. The MPSC rejected the portion of the application related to pension
costs. The MPSC based its decision on the reasoning that a rebounding economy
and stock market could potentially reverse recent Pension Plan losses. Also, the
MPSC rejected Palisades expenditures previously not securitized as eligible
securitized costs; therefore, these costs will be included in a future electric
rate case proceeding with the MPSC and as a component of the 2002 net Stranded
Cost calculation. In July 2003, we filed for rehearing and clarification on a
number of features in the financing order.
In December 2003, the MPSC issued its order on rehearing, which rejected
our requests for clarification and modification to the dividend payment
restriction, failed to rule directly on the accounting clarifications requested,
and remanded the proceeding to the ALJ for additional proceedings to address
rate design. We filed testimony regarding the remanded proceeding in February
2004. The financing order will become effective after acceptance by us and
resolution of any appeals.
Stranded Costs: The Customer Choice Act allows electric utilities to
recover their 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 Staff recommended a
methodology, which calculated net Stranded Costs as the shortfall between:
- the revenue required to cover the costs associated with fixed generation
assets and capacity payments associated with purchase power agreements,
and
- the revenues received from customers under existing rates available to
cover the revenue requirement.
We are authorized by the MPSC to use deferred accounting to recognize the
future recovery of costs determined to be stranded. According to the MPSC, net
Stranded Costs are to be recovered from ROA customers through a Stranded Cost
transition charge. However, the MPSC has not yet allowed such a transition
charge and we have not recorded regulatory assets to recognize the future
recovery of such costs.
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CMS ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In 2002 and 2001, the MPSC issued orders finding that we experienced zero
net Stranded Costs from 1999 to 2001. The MPSC also declined to resolve numerous
issues regarding the net Stranded Cost methodology in a way that would allow a
reliable prediction of the level of Stranded Costs for future years. We are
currently in the process of appealing these orders with the Michigan Court of
Appeals and the Michigan Supreme Court.
In March 2003, we 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. Our net Stranded Costs incurred in 2002 are estimated to be $38
million with the issuance of Securitization bonds that include Clean Air Act
investments, or $85 million without the issuance of Securitization bonds that
include Clean Air Act investments. The MPSC scheduled hearings for our 2002
Stranded Cost application to take place during the second quarter of 2004.
Once a final financing order on Securitization is reached, we will know the
amount of our request for net Stranded Cost recovery for 2002. We cannot predict
how the MPSC will rule on our request for the recoverability of Stranded Costs.
Implementation Costs: Since 1997, we have incurred significant electric
utility restructuring implementation costs. The Customer Choice Act allows
electric utilities to recover their implementation costs. The following table
outlines the applications filed by us with the MPSC and the status of recovery
for these costs.
YEAR FILED YEAR INCURRED REQUESTED PENDING ALLOWED DISALLOWED
---------- ------------- --------- ------- ------- ----------
IN MILLIONS
1999...................................... 1997 & 1998 $20 $ -- $15 $5
2000...................................... 1999 30 -- 25 5
2001...................................... 2000 25 -- 20 5
2002...................................... 2001 8 -- 8 --
2003...................................... 2002 2 2 Pending Pending
The MPSC disallowed certain costs, determining that these amounts did not
represent costs incremental to costs already reflected in electric rates. In the
order received for the year 2001, the MPSC also reserved the right to reevaluate
the implementation costs depending upon the progress and success of the ROA
program, and ruled that due to the rate freeze imposed by the Customer Choice
Act, it was premature to establish a cost recovery method for the allowable
implementation costs. In addition to the amounts shown above, we incurred and
deferred as a regulatory asset, as of December 31, 2003, $2 million of
additional implementation costs and $19 million for the cost of money associated
with total implementation costs. We believe the implementation costs and
associated cost of money are fully recoverable in accordance with the Customer
Choice Act. Cash recovery from customers is expected to begin after the rate cap
period expires. The rate cap expired for large commercial and industrial
customers on December 31, 2003. We have asked to include implementation costs
through December 31, 2000 in the pending Securitization case. If approved, the
sale of Securitization bonds will allow for the recovery of a significant
portion of these costs. We cannot predict the amount the MPSC will approve as
allowable costs.
Also, we are pursuing authorization at the FERC for MISO to reimburse us
for $8 million in certain electric utility restructuring implementation costs
related to our former participation in the development of the Alliance RTO, a
portion of which has been expensed. In May 2003, the FERC issued an order
denying MISO's request for authorization to reimburse us. In June 2003, we filed
a joint petition with MISO for rehearing with the FERC, which the FERC denied in
September 2003. We appealed the FERC ruling at the United States Court of
Appeals for the District of Columbia and are pursuing other potential means of
recovery at the FERC. In conjunction with our appeal of the September order
denying recovery, MISO agreed to file a request with the FERC seeking authority
to reimburse METC. As part of the contract for the sale of our former
transmission system, should the FERC approve the new MISO filing, METC is
contractually obligated to flow-through to us the full amount of any Alliance
RTO start-up costs that it is authorized to recover by FERC. We cannot predict
the outcome of the
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
appeal process, the MISO request, or the ultimate amount, if any, FERC will
allow us to collect for implementation costs.
Transmission Rates: Our application of JOATT transmission rates to
customers during past periods is under FERC review. The rates included in these
tariffs were applied to certain transmission transactions affecting both Detroit
Edison's and our transmission systems between 1997 and 2002. We believe our
reserve is sufficient to satisfy our refund obligation to any of our former
transmission customers under our former JOATT.
TRANSMISSION SALE: In May 2002, we sold our electric transmission system
for $290 million to MTH, a non-affiliated limited partnership whose general
partner is a subsidiary of Trans-Elect, Inc. The pretax gain was $31 million
($26 million, net of tax). We are currently in arbitration with MTH regarding
property tax items used in establishing the selling price of our electric
transmission system. We cannot predict whether the remaining open items will
impact materially the recorded gain on the sale.
As a result of the sale, after-tax earnings have decreased due to a loss of
revenue from wholesale and ROA customers who will buy services directly from
MTH.
METC has completed the capital program to expand the transmission system's
capability to import electricity into Michigan, as required by the Customer
Choice Act. We will continue to maintain the system until May 1, 2007 under a
contract with METC.
Under an agreement with MTH, transmission rates charged to us are fixed by
contract at current levels through December 31, 2005, and are subject to FERC
ratemaking thereafter. However, we are subject to certain additional MISO
surcharges, which are estimated to be $15 million in 2004.
CONSUMERS' ELECTRIC UTILITY RATE MATTERS
AUGUST 14, 2003 BLACKOUT: On August 14, 2003, the electric transmission
grid serving parts of the Midwest and the Northeast experienced a significant
disturbance that impacted electric service to millions of homes and businesses.
Approximately 100,000 of our 1.7 million electric customers were without power
for approximately 24 hours as a result of the disturbance. We incurred $1
million of immediate expense as a result of the blackout. We continue to
cooperate with investigations of the blackout by several federal and state
agencies. We cannot predict the outcome of these investigations.
In November 2003, the MPSC released its report on the blackout. The MPSC
report found no evidence to suggest that the events in Michigan or actions taken
by the Michigan utilities or transmission operators were factors contributing to
the cause of the blackout. Also in November 2003, the United States and Canadian
power system outage task force preliminarily reported that the primary cause of
the blackout was due to transmission line contact with trees in areas outside of
Consumers' operating territory. In December 2003, the MPSC issued an order
requiring Michigan investor-owned utilities to file reports by April 1, 2004, on
the status of the transmission and distribution lines used to serve their
customers, including details on vegetation trimming practices in calendar year
2003. Consumers intends to comply with the MPSC's request.
In February 2004, the Board of Trustees of NERC approved recommendations to
improve electric transmission reliability. The key recommendations are as
follows:
- strengthen the NERC compliance enforcement program,
- evaluate vegetation management procedures, and
- improve technology to prevent or mitigate future blackouts.
These recommendations require transmission operators, which Consumers is
not, to submit annual reports on vegetation management beginning March 2005 and
improve technology over various milestones throughout
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CMS ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2004. These recommendations could result in increased transmission costs payable
by transmission customers in the future. The financial impacts of these
recommendations are not currently quantifiable.
PERFORMANCE STANDARDS: Electric distribution performance standards
developed by the MPSC were in proposal status during 2002 and 2003. The
performance standards were placed into Michigan law in January 2004 and became
effective on February 9, 2004. They relate to restoration after an outage,
safety, and customer relations. During 2002 and 2003, Consumers monitored and
reported to the MPSC its performance relative to the performance standards.
Year-end results for both 2002 and 2003 resulted in compliance with the
acceptable level of performance as established by the approved standards.
Financial incentives and penalties are contained within the performance
standards. An incentive is possible if all of the established performance
standards have been exceeded for a calendar year. However, the value of such
incentive cannot be determined at this point as the performance standards do not
contain an approved incentive mechanism. Financial penalties in the form of
customer credits are also possible. These customer credits are based on duration
and repetition of outages. We cannot predict the likely effects of the financial
incentive or penalties, if any, on us.
POWER SUPPLY COSTS: We were required to provide backup service to ROA
customers on a best efforts basis. In October 2003, we provided notice to the
MPSC that we would terminate the provision of backup service in accordance with
the Customer Choice Act, effective January 1, 2004.
To reduce the risk of high electric prices during peak demand periods and
to achieve our reserve margin target, we employ a strategy of purchasing
electric call option and capacity and energy contracts for the physical delivery
of electricity primarily in the summer months and to a lesser degree in the
winter months. As of December 31, 2003, we purchased capacity and energy
contracts partially covering the estimated reserve margin requirements for 2004
through 2007. As a result, we have recognized an asset of $20 million for
unexpired capacity and energy contracts. Currently, we have a reserve margin of
5 percent, or supply resources equal to 105 percent of projected summer peak
load for summer 2004. We are in the process of securing the additional capacity
needed to meet our summer 2004 reserve margin target of 11 percent (111 percent
of projected summer peak load). The total premium costs of electricity call
option and capacity and energy contracts for 2003 were approximately $10
million.
As a result of meeting the transmission capability expansion requirements
and the market power test, as discussed in this note, we have met the
requirements under the Customer Choice Act to return to the PSCR process. The
PSCR process provides for the reconciliation of actual power supply costs with
power supply revenues. This process assures recovery of all reasonable and
prudent power supply costs actually incurred by us. In September 2003, we
submitted a PSCR filing to the MPSC that reinstates the PSCR process for
customers whose rates are no longer frozen or capped as of January 1, 2004. The
proposed PSCR charge allows us to recover a portion of our increased power
supply costs from large commercial and industrial customers, and subject to the
overall rate cap, from other customers. We estimate the recovery of increased
power supply costs from large commercial and industrial customers to be
approximately $30 million in 2004. As allowed under current regulation, we
self-implemented the proposed PSCR charge on January 1, 2004. The revenues
received from the PSCR charge are also subject to subsequent reconciliation at
the end of the year after actual costs have been reviewed for reasonableness and
prudence. We cannot predict the outcome of this filing.
OTHER CONSUMERS' ELECTRIC UTILITY UNCERTAINTIES
THE MIDLAND COGENERATION VENTURE: The MCV Partnership, which leases and
operates the MCV Facility, contracted to sell electricity to Consumers for a
35-year period beginning in 1990 and to supply electricity and
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CMS ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
steam to Dow. We hold, through two wholly owned subsidiaries, the following
assets related to the MCV Partnership and MCV Facility:
- CMS Midland owns a 49 percent general partnership interest in the MCV
Partnership, and
- CMS Holdings holds, through FMLP, a 35 percent lessor interest in the MCV
Facility.
Our consolidated retained earnings include undistributed earnings from the
MCV Partnership, which at December 31, 2003 are $245 million and at December 31,
2002 are $226 million.
Summarized Statements of Income for CMS Midland and CMS Holdings
YEARS ENDED
DECEMBER 31
--------------------
2003 2002 2001
---- ---- ----
IN MILLIONS
Earnings from equity method investees....................... $42 $52 $38
Operating expenses, taxes and other......................... 22 18 13
--- --- ---
Income before cumulative effect of accounting change........ $20 $34 $25
Cumulative effect of change in method of accounting for
derivatives, net of $10 million tax expense in 2002 (Note
15)....................................................... -- 18 --
--- --- ---
Net income.................................................. $20 $52 $25
=== === ===
Power Supply Purchases from the MCV Partnership: Our annual obligation to
purchase capacity from the MCV Partnership is 1,240 MW through the term of the
PPA ending in 2025. The PPA requires us to pay, based on the MCV Facility's
availability, a levelized average capacity charge of 3.77 cents per kWh and a
fixed energy charge. We also pay a variable energy charge based on our average
cost of coal consumed for all kWh delivered. Effective January 1999, we reached
a settlement agreement with the MCV Partnership that capped payments made on the
basis of availability that may be billed by the MCV Partnership at a maximum
98.5 percent availability level.
Since January 1993, the MPSC has permitted us to recover capacity charges
averaging 3.62 cents per kWh for 915 MW, plus fixed and variable energy charges.
Since January 1996, the MPSC has also permitted us 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 frozen retail rates required by the
Customer Choice Act, the capacity charge for the 325 MW was frozen at 3.17 cents
per kWh until December 31, 2003. Recovery of both the 915 MW and 325 MW portions
of the PPA are subject to certain limitations discussed below.
In 1992, we recognized a loss and established a liability for the present
value of the estimated future underrecoveries of power supply costs under the
PPA based on MPSC cost-recovery orders. The remaining liability associated with
the loss totaled $27 million at December 31, 2003, $53 million at December 31,
2002, and $77 million at December 31, 2001. We expect the PPA liability to be
depleted in late 2004.
We estimate that 51 percent of the actual cash underrecoveries for 2004
will be charged to the PPA liability, with the remaining portion charged to
operating expense as a result of our 49 percent ownership in the MCV
Partnership. We will expense all cash underrecoveries directly to income once
the PPA liability is depleted. If the
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CMS ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MCV Facility's generating availability remains at the maximum 98.5 percent
level, our cash underrecoveries associated with the PPA could be as follows:
2004 2005 2006 2007
---- ---- ---- ----
IN MILLIONS
Estimated cash underrecoveries at 98.5%..................... $56 $56 $55 $39
Amount to be charged to operating expense................... 29 56 55 39
Amount to be charged to PPA liability....................... 27 -- -- --
Beginning January 1, 2004, the rate freeze for large industrial customers
was no longer in effect and we returned to the PSCR process. Under the PSCR
process, we will recover from our customers the capacity and fixed energy
charges based on availability, up to an availability cap of 88.7 percent as
established in previous MPSC orders.
Effects on Our Ownership Interest in the MCV Partnership and MCV
Facility: As a result of returning to the PSCR process, we returned to
dispatching the MCV Facility on a fixed load basis, as permitted by the MPSC, in
order to maximize recovery of our capacity payments. This fixed load dispatch
increases the MCV Facility's output and electricity production costs, such as
natural gas. As the spread between the MCV Facility's variable electricity
production costs and its energy payment revenue widens, the MCV's Partnership's
financial performance and our equity interest in the MCV Partnership may be
affected negatively.
Under the PPA, variable energy payments to the MCV Partnership are based on
the cost of coal burned at our coal plants and operation and maintenance
expenses. However, the MCV Partnership's costs of producing electricity are tied
to the cost of natural gas. Because natural gas prices have increased
substantially in recent years, while the price the MCV Partnership can charge us
for energy has not, the MCV Partnership's financial performance has been
impacted negatively.
Until September 2007, the PPA and settlement require us to pay capacity and
fixed energy charges based on the MCV Facility's actual availability up to the
98.5 percent cap. After September 2007, we expect to exercise the regulatory out
provision in the PPA, limiting our capacity and fixed energy payments to the MCV
Partnership to the amount collected from our customers. The MPSC's future
actions on the capacity and fixed energy payments recoverable from customers
subsequent to September 2007 may affect negatively the earnings of the MCV
Partnership and the value of our equity interest in the MCV Partnership.
In February 2004, we filed a resource conservation plan with the MPSC that
is intended to help conserve natural gas and thereby improve our equity
investment in the MCV Partnership. This plan seeks approval to:
- dispatch the MCV Facility on an economic basis depending on natural gas
market prices without increased costs to electric customers,
- give Consumers a priority right to buy excess natural gas as a result of
the reduced dispatch of the MCV Facility, and
- fund $5 million annually for renewable energy sources such as wind power
projects.
The resource conservation plan will reduce the MCV Facility's annual
natural gas consumption by an estimated 30 to 40 billion cubic feet. This
decrease in the quantity of high-priced natural gas consumed by the MCV Facility
will benefit Consumers' ownership interest in the MCV Partnership. The amount of
PPA capacity and fixed energy payments recovered from retail electric customers
would remain capped at 88.7 percent. Therefore, customers will not be charged
for any increased power supply costs, if they occur. Consumers and the MCV
Partnership have reached an agreement that the MCV Partnership will reimburse
Consumers for any incremental power costs incurred to replace the reduction in
power dispatched from the MCV Facility. We requested that the MPSC provide
interim approval while it conducts a full review of the plan. The MPSC has
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CMS ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
scheduled a prehearing conference with respect to the MCV resource conservation
plan for April 2004. We cannot predict if or when the MPSC will approve our
request.
The two most significant variables in the analysis of the MCV Partnership's
future financial performance are the forward price of natural gas for the next
22 years and the MPSC's decision in 2007 or beyond on our recovery of capacity
payments. Natural gas prices have been historically volatile. Presently, there
is no consensus in the marketplace on the price or range of prices of natural
gas in the short term or beyond the next five years. Therefore, we cannot
predict the impact of these issues on our future earnings, cash flows, or on the
value of our equity interest in the MCV Partnership.
NUCLEAR MATTERS: Big Rock: Significant progress continues to be made in the
decommissioning of Big Rock. We submitted the License Termination Plan to the
NRC staff for review in April 2003. System dismantlement and building demolition
are on schedule to return the 560-acre site to a natural setting for
unrestricted use in early 2006. The NRC and Michigan Department of Environmental
Quality continue to find that all decommissioning activities at Big Rock are
being performed in accordance with applicable regulatory and license
requirements.
Seven transportable dry casks have been loaded with spent nuclear fuel and
an eighth cask has been loaded with high-level radioactive waste material. These
dry casks will remain onsite until the DOE moves the material to a national
spent nuclear fuel repository.
Palisades: In July 2003, the NRC completed its mid-cycle plant performance
assessment of Palisades. The mid-cycle assessment for Palisades covered the
period from January 1, 2003 through the end of July 2003. The NRC determined
that Palisades was operated in a manner that preserved public health and safety
and fully met all cornerstone objectives. Based on the plant's performance, only
regularly scheduled inspections are planned through September 2004.
The amount of spent nuclear fuel exceeds Palisades' temporary onsite
storage pool capacity. We are using dry casks for temporary onsite storage. As
of December 31, 2003, we have loaded 18 dry casks with spent nuclear fuel and we
will need to load additional dry casks by the fall of 2004 in order to continue
operation. Palisades currently has three empty dry casks onsite, with storage
pad capacity for up to seven additional loaded dry casks. We anticipate that
transportable dry casks, along with more storage pad capacity, will be available
by fall 2004.
DOE Litigation: In 1997, a U.S. Court of Appeals decision confirmed that
the DOE was to begin accepting deliveries of spent nuclear fuel for disposal by
January 1998. Subsequent U.S. Court of Appeals litigation, in which we and other
utilities participated, has not been successful in producing more specific
relief for the DOE's failure to accept the spent nuclear fuel.
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 nuclear fuel. A number of utilities have initiated
litigation in the United States Court of Claims; we filed our complaint in
December 2002. If our litigation against the DOE is successful, we anticipate
future recoveries from the DOE. The recoveries will be used to pay the cost of
spent nuclear fuel storage until the DOE takes possession as required by law. We
can make no assurance that the litigation against the DOE will be successful.
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.
Spent nuclear fuel complaint: In March 2003, the Michigan Environmental
Council, the Public Interest Research Group in Michigan, and the Michigan
Consumer Federation filed a complaint with the MPSC, which was served on us by
the MPSC in April 2003. The complaint asks the MPSC to initiate a generic
investigation
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CMS ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
and contested case to review all facts and issues concerning costs associated
with spent nuclear fuel storage and disposal. The complaint seeks a variety of
relief with respect to Consumers, Detroit Edison, Indiana & Michigan Electric
Company, Wisconsin Electric Power Company, and Wisconsin Public Service
Corporation. The complaint states that amounts collected from customers for
spent nuclear storage and disposal should be placed in an independent trust. The
complaint also asks the MPSC to take additional actions. In May 2003, Consumers
and other named utilities each filed motions to dismiss the complaint. We are
unable to predict the outcome of this matter.
Insurance: We maintain nuclear insurance coverage on our nuclear plants. At
Palisades, we maintain nuclear property insurance from NEIL, totaling $2.750
billion and insurance that would partially cover the cost of replacement power
during certain prolonged accidental outages. Because NEIL is a mutual insurance
company, we could be subject to assessments of up to $26 million in any policy
year if insured losses in excess of NEIL's maximum policyholders surplus occur
at our, or any other member's, nuclear facility. NEIL's policies include
coverage for acts of terrorism.
At Palisades, we maintain nuclear liability insurance for third-party
bodily injury and off-site property damage resulting from a nuclear hazard for
up to approximately $10.862 billion, the maximum insurance liability limits
established by the Price-Anderson Act. The United States Congress enacted the
Price-Anderson Act to provide financial liability protection for those parties
who may be liable for a nuclear accident or incident. Part of the Price-Anderson
Act's financial protection is a mandatory industry-wide program where owners of
nuclear generating facilities could be assessed if a nuclear incident occurs at
any nuclear generating facility. The maximum assessment against us could be $101
million per occurrence, limited to maximum annual installment payments of $10
million.
We also maintain insurance under a program that covers tort claims for
bodily injury to nuclear workers caused by nuclear hazards. The policy contains
a $300 million nuclear industry aggregate limit. Under a previous insurance
program providing coverage for claims brought by nuclear workers, we remain
responsible for a maximum assessment of up to $6 million.
Big Rock remains insured for nuclear liability by a combination of
insurance and a NRC indemnity totaling $544 million and a nuclear property
insurance policy from NEIL.
Insurance policy terms, limits, and conditions are subject to change during
the year as we renew our policies.
COMMITMENTS FOR FUTURE PURCHASES: We enter into a number of unconditional
purchase obligations that represent normal business operating contracts. These
contracts are used to assure an adequate supply of goods and services necessary
for the operation of our business and to minimize exposure to market price
fluctuations. We believe that these future costs are prudent and reasonably
assured of recovery in future rates.
Coal Supply and Transportation: We have entered into coal supply contracts
with various suppliers for our coal-fired generating stations. Under the terms
of these agreements, we are obligated to take physical delivery of the coal and
make payment based upon the contract terms. Our coal supply contracts expire
from 2004 to 2005, and total an estimated $177 million. Our coal transportation
contracts expire from 2004 to 2007, and total an estimated $139 million.
Long-term coal supply contracts account for approximately 60 to 90 percent of
our annual coal requirements. In 2003, coal purchases totaled $265 million of
which $207 million (78 percent of the tonnage requirement) was under long-term
contract. We supplement our long-term contracts with spot-market purchases.
Power Supply, Capacity, and Transmission: As of December 31, 2003, we had
future unrecognized commitments to purchase power transmission services under
fixed price forward contracts for 2004 and 2005 totaling $8 million. We also had
commitments to purchase capacity and energy under long-term power purchase
agreements with various generating plants including the MCV Facility. These
contracts require monthly capacity payments based on the plants' availability or
deliverability. These payments for 2004 through 2030 total an
F-36
CMS ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
estimated $14.483 billion, undiscounted, which includes $11.381 billion related
to the MCV Facility. These payments exclude the obligations that Consumers has
with the Genesee, Grayling, and Filer City generating plants because these
entities are consolidated for CMS Energy under FASB Interpretation No. 46. This
amount may vary depending upon plant availability and fuel costs. If a plant was
not available to deliver electricity to us, then we would not be obligated to
make the capacity payment until the plant could deliver.
CONSUMERS' GAS UTILITY CONTINGENCIES
GAS ENVIRONMENTAL MATTERS: We expect to have investigation and remedial
costs at a number of sites under the Michigan Natural Resources and
Environmental Protection Act, a Michigan statute that covers environmental
activities including remediation. These sites include 23 former manufactured gas
plant facilities. We operated the facilities on these sites for some part of
their operating lives. For some of these sites, we have no current ownership or
may own only a portion of the original site. We have completed initial
investigations at the 23 sites. We will continue to implement remediation plans
for sites where we have received MDEQ remediation plan approval. We will also
work toward resolving environmental issues at sites as studies are completed.
We have estimated our costs for investigation and remedial action at all 23
sites using the Gas Research Institute-Manufactured Gas Plant Probabilistic Cost
Model. We expect our remaining costs to be between $37 million and $90 million.
The range reflects multiple alternatives with various assumptions for resolving
the environmental issues at each site. The estimates are based on discounted
2003 costs using a discount rate of three percent. The discount rate represents
a ten-year average of U.S. Treasury bond rates reduced for increases in the
consumer price index. We expect to fund most of these costs through insurance
proceeds and through MPSC approved rates charged to our customers. As of
December 31, 2003, we have recorded a liability of $44 million, net of $38
million of expenditures incurred to date, and a regulatory asset of $67 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 our estimate of remedial action
costs.
In its November 2002 gas distribution rate order, the MPSC authorized us to
continue to recover approximately $1 million of manufactured gas plant
facilities environmental clean-up costs annually. This amount will continue to
be offset by $2 million to reflect amounts recovered from all other sources. We
defer and amortize, over a period of 10 years, manufactured gas plant facilities
environmental clean-up costs above the amount currently included in rates.
Additional amortization of the expense in our rates cannot begin until after a
prudency review in a gas rate case.
CONSUMERS' GAS UTILITY RATE MATTERS
GAS COST RECOVERY: The MPSC is required by law to allow us to charge
customers for our actual cost of purchased natural gas. The GCR process is
designed to allow us to recover all of our gas costs; however, the MPSC reviews
these costs for prudency in an annual reconciliation proceeding. In June 2003,
we filed a reconciliation of GCR costs and revenues for the 12-months ended
March 2003. We proposed to recover from our customers approximately $6 million
of under-recovered gas costs using a roll-in methodology. The roll-in
methodology incorporates the GCR under-recovery in the next GCR plan year. The
approach was approved by the MPSC in a November 2002 order.
In January 2004, intervenors filed their positions in our 2003 GCR case.
Their positions were that not all of our gas purchasing decisions were prudent
during April 2002 through March 2003 and they proposed disallowances. In
February 2004, the parties in the case reached a tentative settlement agreement
that would result in a GCR disallowance of $11 million for the GCR period.
Interest on the disallowed amount from April 1, 2003 through February 2004, at
the Consumers' authorized rate of return, adds $1 million to the cost of the
settlement. We believe this settlement agreement will be executed by the parties
in the case in the near future and approved by the MPSC. A reserve was recorded
in December 2003.
F-37
CMS ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In July 2003, the MPSC approved a settlement agreement authorizing us to
increase our gas cost recovery for the remainder of the current GCR plan year
(August 2003 through March 2004) and to apply a quarterly ceiling price
adjustment, based on a formula that tracks changes in NYMEX natural gas prices.
The terms of the settlement allow a GCR ceiling price of $6.11 per mcf. Our GCR
is $5.36 per mcf for March 2004 bills.
2003 GAS RATE CASE: In March 2003, we filed an application with the MPSC
for a $156 million annual increase in our gas delivery and transportation rates
that included a 13.5 percent return on equity. In September 2003, we filed an
update to our gas rate case that lowered the requested revenue increase from
$156 million to $139 million and reduced the return on common equity from 13.5
percent to 12.75 percent. The MPSC authorized an interim gas rate increase of
$19 million annually. The interim increase is under bond and subject to refund
if the final rate relief is a lesser amount. The interim increase order includes
a $34 million reduction in book depreciation expense and related income taxes
effective only during the period that we receive the interim relief. The MPSC
order allowed us to increase our rates beginning December 19, 2003. As part of
the interim order, Consumers agreed to restrict its dividend payments to CMS
Energy, to a maximum of $190 million annually during the period that Consumers
receives the interim relief. On March 5, 2004, the ALJ issued a Proposal for
Decision recommending that the MPSC not rely upon the projected test year data
included in our filing and supported by the MPSC Staff and further recommended
that the application be dismissed. The MPSC is not bound by these
recommendations and will consider the issues anew after receipt of exceptions
and replies to the exception filed by the parties in response to the Proposal
for Decision.
2001 GAS DEPRECIATION CASE: In December 2003, we filed an update to our gas
utility plant depreciation case originally filed in June 2001. This case is
independent of the 2003 gas rate case. The original filing was based on December
2000 plant balances and historical data. The December 2003 filing updates the
gas depreciation case to include December 2002 plant balances. The proposed
depreciation rates, if approved, will result in an annual increase of $12
million in depreciation expense.
OTHER CONSUMERS' GAS UTILITY UNCERTAINTIES
COMMITMENTS FOR GAS SUPPLIES: We enter into contracts to purchase gas and
gas transportation from various suppliers for our natural gas business. These
contracts have expiration dates that range from 2004 to 2007. Our 2003 gas
purchases totaled 248 bcf at a cost of $1.379 billion. At the end of 2003, we
estimate our gas purchases for 2004 to be 235 bcf, of which 22 percent is
covered by existing fixed price contracts and 37 percent is covered by indexed
price contracts that are subject to price variations. The remaining 2004 gas
purchases will be made at market prices at the time of purchase.
OTHER CONSUMERS' UNCERTAINTIES
In addition to the matters disclosed in this note, we 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.
We have accrued estimated losses for certain contingencies discussed in
this note. Resolution of these contingencies is not expected to have a material
adverse impact on our financial position, liquidity, or results of operations.
OTHER UNCERTAINTIES
INTEGRUM LAWSUIT: Integrum filed a complaint in Wayne County, Michigan
Circuit Court in July 2003 against CMS Energy, Enterprises and APT. Integrum
alleges several causes of action against APT, CMS Energy, and Enterprises in
connection with an offer by Integrum to purchase the CMS Pipeline Assets. In
addition to seeking unspecified money damages, Integrum is seeking an order
enjoining CMS Energy and Enterprises from
F-38
CMS ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
selling and APT from purchasing the CMS Pipeline Assets and an order of specific
performance mandating that CMS Energy, Enterprises, and APT complete the sale of
the CMS Pipeline Assets to APT and Integrum. A certain officer and director of
Integrum is a former officer and director of CMS Energy, Consumers, and their
subsidiaries. The individual was not employed by CMS Energy, Consumers or their
subsidiaries when Integrum made the offer to purchase the CMS Pipeline Assets.
CMS Energy believes that Integrum's claims are without merit. CMS Energy will
defend itself vigorously but cannot predict the outcome of this lawsuit.
CMS GENERATION-OXFORD TIRE RECYCLING: In an administrative order, the
California Regional Water Control Board of the state of California named CMS
Generation as a potentially responsible party for the clean up of the waste from
the fire that occurred in September 1999 at the Filbin Tire Pile, which the
State claims was owned by Oxford Tire Recycling of North Carolina, Inc. CMS
Generation reached a settlement with the state, which the court approved,
pursuant to which CMS Generation paid the state $5.5 million, $1.6 million of
which it had paid the state prior to the settlement. CMS Generation continues to
negotiate to have the insurance company pay a portion of the settlement amount,
as well as a portion of its attorney fees.
At the request of the DOJ in San Francisco, CMS Energy and other parties
contacted by the DOJ in San Francisco entered into separate Tolling Agreements
with the DOJ in San Francisco in September 2002. The Tolling Agreement stops the
running of any statute of limitations during the ninety-day period between
September 13, 2002 and (through several extensions of the tolling period) March
30, 2004, to facilitate settlement discussions between all the parties in
connection with federal claims arising from the fire at the Filbin Tire Pile. On
September 23, 2002, CMS Energy received a written demand from the U.S. Coast
Guard for reimbursement of approximately $3.5 million in costs incurred by the
U.S. Coast Guard in fighting the fire. It is CMS Energy's understanding that
these costs, together with any accrued interest, are the sole basis of any
federal claims. CMS Energy has reached an agreement in principle with the U.S.
Coast Guard to settle this matter for $475,000.
DEARBORN INDUSTRIAL GENERATION: In October 2001, Duke/Fluor Daniel (DFD)
presented DIG with a change order to their construction contract and filed an
action in Michigan state court claiming damages in the amount of $110 million,
plus interest and costs, which DFD states represents the cumulative amount owed
by DIG for delays DFD believes DIG caused and for prior change orders that DIG
previously rejected. DFD also filed a construction lien for the $110 million.
DIG, in addition to drawing down on three letters of credit totaling $30 million
that it obtained from DFD, has filed an arbitration claim against DFD asserting
in excess of an additional $75 million in claims against DFD. The judge in the
Michigan state court case entered an order staying DFD's prosecution of its
claims in the court case and permitting the arbitration to proceed. DFD has
appealed the decision by the judge in the Michigan state court case to stay the
litigation. DIG will continue to defend itself vigorously and pursue its claims.
DIG cannot predict the outcome of this matter.
DIG CUSTOMER DISPUTES: As a result of the continued delays in the DIG
project becoming fully operational, DIG's customers, Ford Motor Company, and
Rouge Industries, asserted claims that the continued delays relieve them of
certain contractual obligations, totaling $43 million. In addition, Ford and/or
Rouge asserted several other commercial claims against DIG relating to operation
of the DIG plant. In February 2003, Rouge filed an Arbitration Demand against
DIG and CMS MST Michigan L.L.C. with the American Arbitration Association. Rouge
was seeking a total of approximately $27 million, plus additional accrued
damages at the time of any award, plus interest. More specifically, Rouge was
seeking at least $20 million under a Blast Furnace Gas Delivery Agreement in
connection with DIG's purported failure to declare a Blast Furnace Gas Delivery
Date within a reasonable time period, plus approximately $7 million for assorted
damage claims under several legal theories. As part of this arbitration, DIG
filed claims against Rouge and Ford, and Ford filed claims for unspecified
amounts against DIG. In October 2003, Rouge filed bankruptcy under Chapter 11 of
the United States Bankruptcy Code and as a result, the arbitration was subject
to the automatic stay imposed by the Bankruptcy Code. OAO Severstal, which has
acquired substantially all of Rouge's assets, has indicated it will continue
operations at the Rouge site and will honor the contractual obligations to pay
for the steam and electricity DIG and CMS MST Michigan L.L.C. provide. In
January 2004, DIG and CMS MST Michigan L.L.C. entered into a
F-39
CMS ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
settlement agreement with Ford and Rouge to resolve all outstanding claims
between the parties, including the arbitration claims and DIG and CMS MST
Michigan L.L.C.'s claims in the Rouge bankruptcy. The settlement was approved by
the bankruptcy court. Under the settlement, Ford paid DIG $12 million cash and
Rouge and Ford paid DIG and CMS MST Michigan L.L.C. a total of $3.8 million owed
by Rouge for steam and electricity supplied to Rouge prior to the filing of the
bankruptcy petition.
DIG NOISE ABATEMENT LAWSUIT: In February 2003, DIG was served with a
three-count first amended complaint filed in Wayne County Circuit Court in the
matter of Ahmed, et al v. Dearborn Industrial Generation, LLC. The complaint
seeks damages "in excess of $25,000" and injunctive relief based upon
allegations of excessive noise and vibration created by operation of the power
plant. The first amended complaint was filed on behalf of six named plaintiffs,
all alleged to be adjacent or nearby resident or property owners. The damages
alleged are injury to persons and property of the landowners. Certification of a
class of "potentially thousands" who have been similarly affected is requested.
DIG intends to defend this action aggressively but cannot predict the outcome of
this matter.
MCV EXPANSION, LLC: Under an agreement entered into with General Electric
Company ("GE") in October 2002, MCV Expansion, LLC has a remaining contingent
obligation to GE in the amount of $2.2 million that may become payable in the
fourth quarter of 2004. The agreement provides that this contingent obligation
is subject to a pro rata reduction under a formula based upon certain purchase
orders being entered into with GE by June 30, 2003. MCV Expansion, LLC
anticipates but cannot assure that purchase orders will be executed with GE
sufficient to eliminate contingent obligations of $2.2 million.
FORMER CMS OIL AND GAS OPERATIONS: A Michigan trial judge granted Star
Energy, Inc. and White Pine Enterprises, LLC a declaratory judgment in an action
filed in 1999 that claimed Terra Energy Ltd., a former CMS Oil and Gas
subsidiary, violated an oil and gas lease and other arrangements by failing to
drill wells it had committed to drill. A jury then awarded the plaintiffs a $7.6
million award. Terra appealed this matter to the Michigan Court of Appeals. The
Michigan Court of Appeals reversed the trial court judgment with respect to the
appropriate measure of damages and remanded the case for a new trial on damages.
The trial judge reinstated the judgment against Terra and awarded Terra title to
the minerals. CMS Energy will appeal this judgment.
ARGENTINA ECONOMIC SITUATION: In January 2002, the Republic of Argentina
enacted the Public Emergency and Foreign Exchange System Reform Act. This law
repealed the fixed exchange rate of one U.S. dollar to one Argentine peso,
converted all dollar-denominated utility tariffs and energy contract obligations
into pesos at the same one-to-one exchange rate, and directed the President of
Argentina to renegotiate such tariffs.
Effective April 30, 2002, we adopted the Argentine peso as the functional
currency for our Argentine investments. We had previously used the U.S. dollar
as the functional currency for these investments. As a result, on April 30,
2002, we translated the assets and liabilities of our Argentine entities into
U.S. dollars, in accordance with SFAS No. 52, using an exchange rate of 3.45
pesos per U.S. dollar, and recorded an initial charge to the Foreign Currency
Translation component of Common Stockholders' Equity of approximately $400
million.
While we cannot predict future peso-to-U.S. dollar exchange rates, we do
expect that these non-cash charges reduce substantially the risk of further
material balance sheet impacts when combined with anticipated proceeds from
international arbitration currently in progress, political risk insurance, and
the eventual sale of these assets. At December 31, 2003, the net foreign
currency loss due to the unfavorable exchange rate of the Argentine peso
recorded in the Foreign Currency Translation component of Common Stockholders'
Equity using an exchange rate of 2.94 pesos per U.S. dollar was $264 million.
This amount also reflects the effect of recording U.S. income taxes with respect
to temporary differences between the book and tax basis of foreign investments,
including the foreign currency translation associated with our Argentine
investments, that were determined to no longer be essentially permanent in
duration.
OTHER: Certain CMS Gas Transmission and CMS Generation affiliates in
Argentina received notice from various Argentine provinces claiming stamp taxes
and associated penalties and interest arising from various gas
F-40
CMS ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
transportation transactions. Although these claims total approximately $24
million, we believe the claims are without merit and will continue to contest
them vigorously.
CMS Generation does not currently expect to incur significant capital costs
at its power facilities for compliance with current U.S. environmental
regulatory standards.
In addition to the matters disclosed in this Note, Consumers and certain
other subsidiaries of CMS Energy are parties to certain lawsuits and
administrative proceedings before various courts and governmental agencies
arising from the ordinary course of business. These lawsuits and proceedings may
involve personal injury, property damage, contractual matters, environmental
issues, federal and state taxes, rates, licensing, and other matters.
We have accrued estimated losses for certain contingencies discussed in
this Note. Resolution of these contingencies is not expected to have a material
adverse impact on our financial position, liquidity, or results of operations.
F-41
CMS ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5: FINANCINGS AND CAPITALIZATION
CMS Energy's Long-term debt as of December 31 follows:
INTEREST RATE (%) MATURITY 2003 2002
----------------- -------- ---- ----
IN MILLIONS
CMS ENERGY CORPORATION
Senior notes..................................... 6.750 2004 $ -- $ 287
7.625 2004 176 176
9.875 2007 468 468
8.900 2008 260 260
7.500 2009 409 409
7.750 2010 300 --
8.500 2011 300 300
8.375 2013 -- 150
3.375(a) 2023 150 --
------ ------
2,063 2,050
------ ------
General term notes:
Series D....................................... 6.938(b)(c) 2004-2008 65 94
Series E....................................... 7.788(b)(c) 2004-2009 139 227
Series F....................................... 7.487(b)(c) 2004-2016 292 298
------ ------
496 619
------ ------
Extendible tenor rate adjusted securities........ 7.000 2005 180 180
Revolving credit facilities and other............ 7 320
------ ------
Total -- CMS Energy Corporation............. 2,746 3,169
------ ------
CONSUMERS ENERGY COMPANY
First mortgage bonds............................. 4.250 2008 250 --
4.800 2009 200 --
4.000 2010 250 --
5.375 2013 375 --
6.000 2014 200 --
7.375 2023 208 208
------ ------
1,483 208
------ ------
Senior notes..................................... 6.000 2005 300 300
6.250 2006 332 332
6.375 2008 159 159
6.200 2008 -- 250
6.875 2018 180 180
6.500(d) 2018 141 141
6.500(e) 2028 142 142
------ ------
1,254 1,504
------ ------
Securitization bonds............................. 5.097(c) 2005-2015 426 453
Long-term bank debt.............................. Variable 2006-2009 200 328
Nuclear fuel disposal liability.................. (f) 139 138
Pollution control revenue bonds.................. Various 2010-2018 126 126
Other............................................ 4 8
------ ------
Total -- Consumers Energy Company........... 3,632 2,765
------ ------
OTHER SUBSIDIARIES................................. 191 84
------ ------
Total principal amount outstanding................. 6,569 6,018
Current amounts.................................. (509) (633)
Net unamortized discount......................... (40) (28)
------ ------
Total consolidated long-term debt.................. $6,020 $5,357
====== ======
-------------------------
(a) These notes are putable to CMS Energy by the note holders at par on July
15, 2008, July 15, 2013 and July 15, 2018, and are convertible at the
holder's option into CMS Energy Common Stock at $10.671 per share under
certain circumstances, none of which currently are probable to occur. CMS
Energy intends to file a registration statement with the SEC by October 16,
2004, relating to the resale of the notes and the convertibility into
common stock.
F-42
CMS ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(b) $29 million Series D, $112 million Series E, and $104 million Series F have
been called and redeemed through February 15, 2004.
(c) Represents the weighted average interest rate at December 31, 2003.
(d) 2018 maturity is subject to successful remarketing by Consumers after June
15, 2005.
(e) Callable at par.
(f) Maturity date uncertain.
LONG-TERM DEBT -- RELATED PARTIES:
Long-term debt -- related parties as of December 31, 2003 follows:
DEBENTURE AND RELATED PARTY INTEREST RATE MATURITY 2003
--------------------------- ------------- -------- ----
IN MILLIONS
Convertible subordinated debentures, CMS Energy Trust I..... 7.75% 2027 $178
Subordinated deferrable interest notes, Consumers Power
Company Financing I....................................... 8.36% 2015 73
Subordinated deferrable interest notes, Consumers Energy
Company Financing II...................................... 8.20% 2027 124
Subordinated debentures, Consumers Energy Company Financing
III....................................................... 9.25% 2029 180
Subordinated debentures, Consumers Energy Company Financing
IV........................................................ 9.00% 2031 129
----
Total amount outstanding.................................... $684
====
DEBT ISSUANCES: The following is a summary of long-term debt issuances
during 2003:
PRINCIPAL USE OF
FACILITY TYPE (IN MILLIONS) ISSUE RATE ISSUE DATE MATURITY DATE PROCEEDS COLLATERAL
------------- ------------- ---------- ---------- ------------- -------- ----------
CMS ENERGY
Senior notes(a)...... $ 150 3.375% July 2003 July 2023 (c) Unsecured
Senior notes(b)...... 300 7.750% July 2003 August 2010 (c) Unsecured
CONSUMERS ENERGY
Term loan............ 140 LIBOR + March 2003 March 2009 GCP FMB(h)
475 bps
Term loan............ 150 LIBOR + March 2003 March 2006 GCP FMB(h)
450 bps (paid off)(f)
FMB(i)............... 375 5.375% April 2003 April 2013 (d) --
FMB(i)............... 250 4.250% April 2003 April 2008 (d) --
FMB(i)............... 250 4.000% May 2003 May 2010 (e) --
FMB(i)............... 200 4.800% August 2003 February 2009 (f) --
FMB(i)............... 200 6.000% August 2003 February 2014 (f) --
Term loan............ 60 LIBOR + November 2003 November 2006 (g) FMB(h)
135 bps
------
Total......... $2,075
======
-------------------------
(bps -- basis points), (GCP -- General corporate purposes)
(a) These notes are putable to CMS Energy by the note holders at par on July
15, 2008, July 15, 2013 and July 15, 2018, and are convertible at the
holder's option into CMS Energy Common Stock at $10.671 per share under
certain circumstances, none of which currently are probable to occur. CMS
Energy intends to file a registration statement with the SEC by October 16,
2004, relating to the resale of the notes and the convertibility into
common stock.
F-43
CMS ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(b) CMS Energy intends to file a registration statement with the SEC by March
14, 2004, to permit note holders to exchange their securities for ones that
will be registered under the Securities Act of 1933.
(c) CMS Energy used the net proceeds to retire revolving debt and redeem a
portion of a 6.75 percent Senior note due January 2004.
(d) Consumers used the net proceeds to fund the maturity of a $250 million
bond, to fund a $32 million option call payment, and for general corporate
purposes.
(e) Consumers used the net proceeds to prepay a portion of a term loan that was
due to mature in July 2004.
(f) Consumers used the net proceeds to pay off a $150 million term loan, to pay
off $50 million balance on a term loan that was due to mature in July 2004,
and for general corporate purposes.
(g) Consumers used the net proceeds to purchase its headquarters building and
pay off the capital lease.
(h) Refer to "Regulatory Authorization for Financings" below for details about
Consumers' FERC debt authorization.
(i) Consumers filed a registration statement with the SEC in December 2003 to
permit holders of these FMBs to exchange their bonds for FMBs that are
registered under the Securities Act of 1933. The exchange offer was
completed on February 13, 2004.
DEBT MATURITIES: The aggregate annual maturities for long-term debt for the
next five years are:
PAYMENTS DUE DECEMBER 31
------------------------------------
2004 2005 2006 2007 2008
---- ---- ---- ---- ----
IN MILLIONS
Long-term debt.............................................. $509 $696 $490 $516 $987
DEBT COVENANT RESTRICTIONS: The indenture pursuant to our GTNs contains
certain provisions that can trigger a limitation on our consolidated
indebtedness. The limitation can be activated when our consolidated leverage
ratio, as defined in the indenture (essentially the ratio of consolidated debt
to consolidated capital), exceeds 0.75 to 1.0. At June 30 and September 30,
2003, our consolidated leverage ratio was 0.76 to 1.0. As a result, we were
subject to certain debt limitations. At December 31, 2003, the ratio was 0.72 to
1, and we were no longer subject to the debt limitations.
The indenture under which Senior notes are issued and certain other debt
agreements contain provisions requiring us to maintain interest coverage ratios,
and debt to earnings ratios. We were in compliance with these ratios, as
defined, at December 31, 2003.
CMS ENERGY CREDIT FACILITY: CMS Energy has a $185 million revolving credit
facility with banks. This facility matures on May 21, 2005. This facility
provides letter of credit support for Enterprises' subsidiary activities,
principally credit support for project debt. Enterprises provides funds to cash
collateralize the letters of credit issued through this facility. As of December
31, 2003, approximately $165 million of letters of credit were issued under this
facility and the cash used to collateralize the letters of credit is included on
the Consolidated Balance Sheet as Restricted cash.
REGULATORY AUTHORIZATION FOR FINANCINGS: At December 31, 2003, Consumers
had remaining FERC authorization to issue or guarantee up to $500 million of
short-term securities and up to $700 million of short-term first mortgage bonds
as collateral for such short-term securities.
At December 31, 2003, Consumers had remaining FERC authorization to issue
up to $740 million of long-term securities for refinancing or refunding
purposes, $560 million of long-term securities for general corporate purposes,
and $2 billion of long-term first mortgage bonds to be issued solely as
collateral for other long-term securities.
F-44
CMS ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
With the granting of authorization, FERC waived its competitive
bid/negotiated placement requirements applicable to the long-term securities
authorization. The authorizations expire on June 30, 2004.
SHORT-TERM FINANCINGS: CMS Energy has a $190 million revolving credit
facility with banks. The facility is secured by our investment in Enterprises
and Consumers. The interest rate of the facility is LIBOR plus 325 basis points.
This facility expires in November 2004. At December 31, 2003, all of the $190
million is available.
Consumers has a $400 million revolving credit facility with banks. The
facility is secured with first mortgage bonds. The interest rate of the facility
is LIBOR plus 175 basis points. This facility expires in March 2004 with two
annual extensions at Consumers' option, which would extend the maturity to March
2006. At December 31, 2003, $390 million is available for general corporate
purposes, working capital, and letters of credit.
At December 31, 2002, Consumers had $457 million of bank notes outstanding
at a weighted average interest rate of 4.50 percent.
FIRST MORTGAGE BONDS: Consumers secures its first mortgage bonds by a
mortgage and lien on substantially all of its property. Its ability to issue and
sell securities is restricted by certain provisions in the first mortgage bond
indenture, its articles of incorporation, and the need for regulatory approvals
under federal law.
POLLUTION CONTROL REVENUE BONDS: In January 2004, Consumers amended the
PCRB indentures to add an auction rate interest mode and switched to that mode
for the two floating rate bonds. Under the auction rate mode, the bonds'
interest rate will be reset every 35 days. While in the auction rate mode, no
letter of credit liquidity facility is required and investors do not have a put
right.
PREFERRED STOCK ISSUANCE: In December 2003, CMS Energy issued 5 million
shares of 4.50 percent cumulative convertible preferred stock. Each share has a
liquidation value of $50.00 and is convertible into CMS Energy common stock at
the option of the holder under certain circumstances. The initial conversion
price is $9.893 per share, which translates into 5.0541 shares of common stock
for each share of preferred stock converted. The annual dividend of $2.25 per
share is payable quarterly, in cash, in arrears commencing March 1, 2004. We
used the net proceeds of $242 million to retire other long-term debt in January
2004 and February 2004. We have agreed to file a shelf registration with the SEC
by November 5, 2004, covering resales of the preferred stock and of common stock
issuable upon conversion of the preferred stock.
SALE OF SUBSIDIARY INTEREST: In December 2003, we sold, in a private
placement, a non-voting preferred interest in an indirect subsidiary of CMS
Enterprises that owns certain gas pipeline and power generation assets. CMS
Energy received $30 million for the preferred interest, of which $19 million has
been recorded as an addition to other paid-in capital (deferred gain) and $11
million has been recorded as a preferred stock issuance.
WARRANTS: We granted warrants to purchase 204,000 shares of our common
stock to a third party and expensed $1 million in 2003. The warrants which are
fully vested are exercisable for seven years at an exercise price of $8.25 per
share.
CAPITALIZATION: The authorized capital stock of CMS Energy consists of 250
million shares of CMS Energy Common Stock and 10 million shares of CMS Energy
Preferred Stock, $.01 par value.
F-45
CMS ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
PREFERRED STOCK OF SUBSIDIARY: The follow table describes Consumers'
Preferred Stock outstanding:
OPTIONAL NUMBER OF SHARES
REDEMPTION -----------------
DECEMBER 31 SERIES PRICE 2003 2002 2003 2002
----------- ------ ---------- ---- ---- ---- ----
IN MILLIONS
PREFERRED STOCK
Cumulative, $100 par value, authorized
7,500,000 shares, with no mandatory
redemption.............................. $4.16 $103.25 68,451 68,451 $ 7 $ 7
4.50 110.00 373,148 373,148 37 37
--- ---
TOTAL PREFERRED STOCK........................ $44 $44
=== ===
COMPANY-OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF
SUBSIDIARIES: CMS Energy and Consumers each formed various statutory wholly
owned business trusts for the sole purpose of issuing preferred securities and
lending the gross proceeds to the parent companies. The sole assets of the
trusts are debentures of the parent company with terms similar to those of the
preferred security. Summarized information for company-obligated mandatorily
redeemable preferred securities is as follows:
AMOUNT
OUTSTANDING EARLIEST
TRUST AND SECURITIES --------------- OPTIONAL
DECEMBER 31 RATE 2003 2002 MATURITY REDEMPTION(B)
-------------------- ---- ---- ---- -------- -------------
IN MILLIONS
CMS Energy Trust I(c)............................. 7.75% $ --(a) $173 2027 2001
CMS Energy Trust III.............................. 7.25% --(d) 220 2004 2003
Consumers Power Company Financing I, Trust
Originated Preferred Securities................. 8.36% --(a) 70 2015 2000
Consumers Energy Company Financing II, Trust
Originated Preferred Securities................. 8.20% --(a) 120 2027 2002
Consumers Energy Company Financing III, Trust
Originated Preferred Securities................. 9.25% --(a) 175 2029 2004
Consumers Energy Company Financing IV, Trust
Preferred Securities............................ 9.00% --(a) 125 2031 2006
----- ----
Total amount outstanding.......................... $ -- $883
===== ====
-------------------------
(a) We determined that we do not hold the controlling financial interest in our
trust preferred security structures. Accordingly, those entities have been
deconsolidated as of December 31, 2003. Company obligated Trust Preferred
Securities totaling $663 million that were previously included in mezzanine
equity, have been eliminated due to deconsolidation and are reflected in
Long-term debt -- related parties. For additional details, see "Long-Term
Debt -- Related Parties" within this Note and Note 17, Implementation of
New Accounting Standards.
(b) The trusts must redeem the securities at a liquidation value of $25 per
share ($50 per share for QUIPS (c)), which is equivalent to the carrying
cost, plus accrued but unpaid distributions when the securities are paid at
maturity or upon any earlier redemption. Prior to an early redemption date,
the securities could be redeemed at market value.
(c) Represents 3,450,000 shares of Quarterly Income Preferred Securities
(QUIPS) that are convertible into 1.2255 shares of CMS Energy Common Stock
(equivalent to a conversion price of $40.80). Conversion is unlikely as of
December 31, 2003, based on the market price of CMS Energy's Common Stock
of $8.52. If conversion were to occur in the future, the securities would
be converted into 4,227,975 shares of CMS Energy Common Stock. Effective
July 2001, we can revoke the conversion rights if certain conditions are
met.
F-46
CMS ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(d) In August 2003, 8,800,000 units of outstanding 7.25 percent Premium Equity
Participating Security Units (CMS Energy Trust III) were converted to
16,643,440 newly issued shares of CMS Energy Common Stock.
Each trust receives payments on the debenture it holds. Those receipts are
used to make cash distributions on the preferred securities the trust has
issued.
The securities allow CMS Energy and Consumers the right to defer interest
payment on the debentures, and, as a consequence, the trusts would defer
dividend payments on the preferred securities. Should the parent companies
exercise this right, they cannot declare or pay dividends on, or redeem,
purchase or acquire, any of their capital stock during the deferral period until
all deferred dividends are paid in full.
In the event of default, holders of the preferred securities would be
entitled to exercise and enforce the trusts' creditor rights against CMS Energy
and Consumers, which may include acceleration of the principal amount due on the
debentures. The parent companies have issued certain guarantees with respect to
payments on the preferred securities. These guarantees, when taken together with
each parent company's obligations under the debentures, related indenture and
trust documents, provide full and unconditional guarantees for the trust's
obligations under the preferred securities.
SALE OF ACCOUNTS RECEIVABLE: Under a revolving accounts receivable sales
program, we currently sell certain accounts receivable to a wholly owned,
consolidated, bankruptcy remote special purpose entity. In turn, the special
purpose entity may sell an undivided interest in up to $325 million of the
receivables. The amounts sold were $297 million at December 31, 2003 and $325
million at December 31, 2002. The Consolidated Balance Sheets exclude these
amounts from accounts receivable. We continue to service the receivables sold.
The purchaser of the receivables has no recourse against our other assets for
failure of a debtor to pay when due and the purchaser has no right to any
receivables not sold. No gain or loss has been recorded on the receivables sold
and we retain no interest in the receivables sold.
Certain cash flows received from and paid to us under our accounts
receivable sales program are shown below:
YEARS ENDED
DECEMBER 31
----------------
2003 2002
---- ----
IN MILLIONS
Proceeds from sales (remittance of collections) under the
program................................................... $ (28) $ (9)
Collections reinvested under the program.................... 4,361 4,080
DIVIDEND RESTRICTIONS: Under the provisions of its articles of
incorporation, at December 31, 2003, Consumers had $373 million of unrestricted
retained earnings available to pay common dividends. However, covenants in
Consumers' debt facilities cap common stock dividend payments at $300 million in
a calendar year. Through December 31, 2003, we received the following common
stock dividend payments from Consumers:
IN MILLIONS
January..................................................... $ 78
May......................................................... 31
June........................................................ 53
November.................................................... 56
----
Total common stock dividends paid to CMS Energy............. $218
====
As of December 18, 2003, Consumers is also under an annual dividend cap of
$190 million imposed by the MPSC during the current interim gas rate relief
period. Because all of the $218 million of common stock dividends to CMS Energy
were paid prior to December 18, 2003, Consumers was not out of compliance with
this new restriction for 2003. In February 2004, Consumers paid a $78 million
common stock dividend.
F-47
CMS ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For additional details on the potential cap on common dividends payable
included in the MPSC Securitization order, see Note 4, Uncertainties,
"Consumers' Electric Utility Rate Matters -- Securitization." Also, for
additional details on the cap on common dividends payable during the current
interim gas rate relief period, see Note 4, Uncertainties, "Consumers' Gas
Utility Rate Matters -- 2003 Gas Rate Case."
FASB INTERPRETATION NO. 45, GUARANTOR'S ACCOUNTING AND DISCLOSURE
REQUIREMENTS FOR GUARANTEES, INCLUDING INDIRECT GUARANTEES OF INDEBTEDNESS OF
OTHERS: This interpretation became effective January 2003. It describes the
disclosure to be made by a guarantor about its obligations under certain
guarantees that it has issued. At the beginning of a guarantee, it requires a
guarantor to recognize a liability for the fair value of the obligation
undertaken in issuing the guarantee. The initial recognition and measurement
provision of this interpretation does not apply to some guarantee contracts,
such as warranties, derivatives, or guarantees between either parent and
subsidiaries or corporations under common control, although disclosure of these
guarantees is required. For contracts that are within the recognition and
measurement provision of this interpretation, the provisions were to be applied
to guarantees issued or modified after December 31, 2002.
The following table describe our guarantees at December 31, 2003:
ISSUE EXPIRATION MAXIMUM CARRYING RECOURSE
GUARANTEE DESCRIPTION DATE DATE OBLIGATION AMOUNT(B) PROVISION(C)
--------------------- ----- ---------- ---------- --------- ------------
IN MILLIONS
Indemnifications from asset sales and other
agreements(a)............................ Various Various $1,955 $ 3 $--
Letters of credit.......................... Various Various 254 -- --
Surety bonds and other indemnifications.... Various Various 28 -- --
Other guarantees........................... Various Various 239 -- --
Nuclear insurance retrospective premiums... Various Various 133 -- --
-------------------------
(a) The majority of this amount arises from routine provisions in stock and
asset sales agreements under which we indemnify the purchaser for losses
resulting from events such as failure of title to the assets or stock sold
by us to the purchaser. Included in this amount is a $739 million
indemnification obligation related to the sale of CMS Oil and Gas
facilities in Equatorial Guinea which expired January 3, 2004, and for
which no loss occurred. We believe the likelihood of a loss for any
remaining indemnifications to be remote.
(b) The carrying amount represents the fair market value of guarantees and
indemnities on our balance sheet that are entered into subsequent to
January 1, 2003. In addition, $25 million has been recorded prior to 2003
in accordance with SFAS No. 5.
(c) Recourse provision indicates the approximate recovery from third parties
including assets held as collateral.
The following table provides additional information regarding our
guarantees at December 31, 2003:
EVENTS THAT WOULD
GUARANTEE DESCRIPTION HOW GUARANTEE AROSE REQUIRE PERFORMANCE
--------------------- ------------------- -------------------
Indemnifications from asset Stock and asset sales Findings of
sales and other agreements agreements misrepresentation, breach
of warranties, and other
specific events or
circumstances
Standby letters of credit Normal operations of coal Noncompliance with
power plants environmental regulations
Self-insurance requirement Nonperformance
Surety bonds Normal operating activity, Nonperformance
permits and license
Nuclear insurance Normal operations of nuclear Call by NEIL and Price
retrospective premiums plants Anderson Act for nuclear
incident
F-48
CMS ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
We have entered into typical tax indemnity agreements in connection with a
variety of transactions including transactions for the sale of subsidiaries and
assets, equipment leasing, and financing agreements. These indemnity agreements
generally are not limited in amount and, while a maximum amount of exposure
cannot be identified, the amount and probability of liability is considered
remote.
We have guaranteed payment of obligations through letters of credit,
indemnities, surety bonds, and other guarantees of unconsolidated affiliates and
related parties of $521 million as of December 31, 2003. We monitor and approve
these obligations and believe it is unlikely that we would be required to
perform or otherwise incur any material losses associated with the above
obligations. The off-balance sheet commitments expire as follows:
COMMITMENT EXPIRATION
-------------------------------------------------------
DECEMBER 31 TOTAL 2004 2005 2006 2007 2008 BEYOND
----------- ----- ---- ---- ---- ---- ---- ------
IN MILLIONS
COMMERCIAL COMMITMENTS
Off-balance sheet:
Guarantees..................................... $239 $ 20 $36 $4 $-- $-- $179
Indemnities.................................... 28 8 -- -- -- -- 20
Letters of Credit(a)........................... 254 215 10 5 5 5 14
---- ---- --- -- --- --- ----
Total..................................... $521 $243 $46 $9 $ 5 $ 5 $213
==== ==== === == === === ====
-------------------------
(a) At December 31, 2003, we had $175 million of cash collateralized letters of
credit and the cash used to collateralize the letters of credit is included
in Restricted cash on the Consolidated Balance Sheets.
6: EARNINGS PER SHARE AND DIVIDENDS
The following table presents the basic and diluted earnings per share
computations.
YEAR ENDED DECEMBER 31
------------------------------
RESTATED RESTATED
2003 2002 2001
---- -------- --------
IN MILLIONS,
EXCEPT PER SHARE AMOUNTS
NET LOSS ATTRIBUTABLE TO COMMON STOCK:
CMS Energy -- Basic....................................... $ (44) $ (650) $ (459)
Add conversion of Trust Preferred Securities (net of
tax)................................................... --(a) --(a) --(a)
------ ------ ------
CMS Energy -- Diluted..................................... $ (44) $ (650) $ (459)
====== ====== ======
AVERAGE COMMON SHARES OUTSTANDING APPLICABLE TO BASIC AND
DILUTED EPS
CMS Energy:
Average Shares -- Basic................................ 150.4 139.0 130.7
Add conversion of Trust Preferred Securities........... --(a) --(a) --(a)
Stock Options and Warrants............................. --(b) -- --(b)
------ ------ ------
Average Shares -- Diluted.............................. 150.4 139.0 130.7
====== ====== ======
LOSS PER AVERAGE COMMON SHARE
Basic..................................................... $(0.30) $(4.68) $(3.51)
Diluted................................................... $(0.30) $(4.68) $(3.51)
-------------------------
(a) Due to antidilution, the computation of diluted earnings per share excluded
the conversion of Trust Preferred Securities.
(b) Due to antidilution, the computation of diluted earnings per share excluded
shares of outstanding stock options and warrants of 0.3 million for the
year ended 2003 and 0.2 million for the year ended 2001.
F-49
CMS ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In January 2003, the Board of Directors suspended the payment of common
stock dividends. However, in 2002, we paid the following dividends per share:
CMS ENERGY COMMON STOCK
DIVIDENDS PER SHARE PAYOUT
--------------------------
February.................................................... $0.365
April....................................................... $0.365
August...................................................... $0.180
November.................................................... $0.180
7: FINANCIAL AND DERIVATIVE INSTRUMENTS
FINANCIAL INSTRUMENTS: The carrying amounts of cash, short-term
investments, and current liabilities approximate their fair values because of
their short-term nature. We estimate the fair values of long-term investments
based on quoted market prices or, in the absence of specific market prices, on
quoted market prices of similar investments or other valuation techniques. The
carrying amount of all long-term financial instruments, except as shown below,
approximate fair value. For additional details, see Note 1, Corporate Structure
and Accounting Policies.
DECEMBER 31
-----------------------------------------------------------------
2003 2002
------------------------------- ------------------------------
FAIR UNREALIZED FAIR UNREALIZED
COST VALUE GAIN (LOSS) COST VALUE GAIN
---- ----- ----------- ---- ----- ----------
IN MILLIONS
Long-term debt(a)....................... $6,020 $6,225 $(205) $5,357 $5,027 $330
Long-term debt -- related parties(b).... 684 648 36 -- -- --
Trust Preferred Securities(b)........... -- -- -- 883 704 179
Available for sale securities:
Nuclear decommissioning(c).............. 442 575 133 458 536 78
SERP.................................... 54 66 12 54 57 3
-------------------------
(a) Settlement of long-term debt is generally not expected until maturity.
(b) We determined that we do not hold the controlling financial interest in our
trust preferred security structures. Accordingly, those entities have been
deconsolidated as of December 31, 2003. Company obligated Trust Preferred
Securities totaling $663 million that were previously included in mezzanine
equity, have been eliminated due to deconsolidation and are reflected in
Long-term debt -- related parties on the Consolidated Balance Sheets. For
additional details, refer to Note 5, Financings and Capitalization,
"Long-Term Debt -- Related Parties" and Note 17, Implementation of New
Accounting Standards. In addition, company obligated Trust Preferred
Securities totaling $220 million have been converted to Common Stock as of
August 2003.
(c) On January 1, 2003, we adopted SFAS No. 143 and began classifying our
unrealized gains and losses on nuclear decommissioning investments as
regulatory liabilities. We previously classified the unrealized gains and
losses on these investments in accumulated depreciation.
DERIVATIVE INSTRUMENTS: We are exposed to market risks including, but not
limited to, changes in interest rates, commodity prices, currency exchange
rates, and equity security prices. We manage these risks using established
policies and procedures, under the direction of both an executive oversight
committee consisting of senior management representatives and a risk committee
consisting of business-unit managers. We may use various contracts to manage
these risks including swaps, options, and forward contracts.
F-50
CMS ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
We intend that any gains or losses on these contracts will be offset by an
opposite movement in the value of the item at risk. We enter into all risk
management contracts for purposes other than trading. These contracts contain
credit risk if the counterparties, including financial institutions and energy
marketers, fail to perform under the agreements. We minimize such risk by
performing financial credit reviews using, among other things, publicly
available credit ratings of such counterparties.
Contracts used to manage interest rate, foreign currency, and commodity
price risk may be considered derivative instruments that are subject to
derivative and hedge accounting pursuant to SFAS No. 133. 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. The
recorded fair value of the contract is then adjusted quarterly to reflect any
change in the market value of the contract, a practice known as marking the
contract to market. The accounting for changes in the fair value of a derivative
(that is, gains or losses) is reported either in earnings or accumulated other
comprehensive income depending on whether the derivative qualifies for special
hedge accounting treatment.
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. We use a combination of quoted market
prices and mathematical valuation models to determine fair value of those
contracts requiring derivative accounting. The ineffective portion, if any, of
all hedges is recognized in earnings.
The majority of our contracts are not subject to derivative accounting
because they qualify for the normal purchases and sales exception of SFAS No.
133 or are not derivatives because there is not an active market for the
commodity. Derivative accounting is required for certain contracts used to limit
our exposure to electricity and gas commodity price risk and interest rate risk.
The following table reflects the fair value of all contracts requiring
derivative accounting:
DECEMBER 31
------------------------------------------------------------
2003 2002
---------------------------- ----------------------------
FAIR UNREALIZED FAIR UNREALIZED
DERIVATIVE INSTRUMENTS COST VALUE GAIN (LOSS) COST VALUE GAIN (LOSS)
---------------------- ---- ----- ----------- ---- ----- -----------
IN MILLIONS
Other than trading
Electric -- related contracts................ $-- $ -- $ -- $ 8 $ 1 $ (7)
Gas contracts................................ 3 2 (1) -- 1 1
Interest rate risk contracts................. -- (3) (3) -- (28) (28)
Derivative contracts associated with equity
investments in:
Shuweihat.................................... -- (27) (27) -- (30) (30)
Taweelah..................................... -- (26) (26) -- (33) (33)
MCV Partnership.............................. -- 15 15 -- 13 13
Jorf Lasfar.................................. -- (11) (11) -- (11) (11)
Other........................................ -- 1 1 -- (2) (2)
Trading
Electric -- related contracts................ (2) -- 2 -- 43 43
Gas contracts................................ -- 15 15 -- 38 38
F-51
CMS ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The fair value of other than trading derivative contracts is included in
either Other Assets or Other Liabilities on the Consolidated Balance Sheets. The
fair value of trading derivative contracts is included in either Price Risk
Management Assets or Price Risk Management Liabilities on the Consolidated
Balance Sheets. The fair value of derivative contracts associated with our
equity investment in the MCV Partnership is included in Investments -- Midland
Cogeneration Venture Limited Partnership on the Consolidated Balance Sheets.
Effective April 1, 2002, the MCV Partnership changed its accounting for
derivatives. For additional details see Note 15, Summarized Financial
Information of Significant Related Energy Supplier. The fair value of derivative
contracts associated with other equity investments is included in Enterprises
Investments on the Consolidated Balance Sheets.
Cumulative Effect of Change in Accounting Principle: On January 1, 2001,
upon initial adoption of the derivatives standard, we recorded a $10 million,
net of tax, cumulative effect adjustment as an increase in accumulated other
comprehensive income. This adjustment relates to the difference between the fair
value and recorded book value of contracts related to gas call options, gas fuel
for generation swap contracts, and interest rate swap contracts that qualified
for hedge accounting prior to the initial adoption of SFAS No. 133 and our
proportionate share of the effects of adopting SFAS No. 133 related to our
equity investments in the MCV Partnership and Taweelah. Based on the initial
transition adjustment of $21 million, net of tax, recorded in accumulated other
comprehensive income at January 1, 2001, Consumers reclassified to earnings $12
million as a reduction to the cost of gas, $1 million as a reduction to the cost
of power supply, $2 million as an increase in interest expense, and $8 million
as an increase in other revenues for the twelve months ended December 31, 2001.
CMS Energy recorded $12 million as an increase in interest expense during 2001,
which includes the $2 million of additional interest expense at Consumers. The
difference between the initial transition adjustment and the amounts
reclassified to earnings represents an unrealized loss in the fair value of the
derivative instruments since January 1, 2001, resulting in a decrease of
accumulated other comprehensive income. We also recorded a $7 million, net of
tax, cumulative effect adjustment as an increase to earnings. This adjustment
relates to our proportionate share of the difference between the fair value and
the recorded book value of interest rate swaps at Taweelah, and financial gas
and supply contracts that were required to be accounted for as derivatives as of
January 1, 2001.
In June and December 2001, the FASB issued guidance that resolved the
accounting for certain utility industry contracts. As a result, we 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.
Effective, January 1, 2003, EITF Issue No. 98-10 was rescinded by EITF
Issue No. 02-03 and as a result, only energy contracts that meet the definition
of a derivative in SFAS No. 133 can be carried at fair value. The impact of this
change was recognized as a cumulative effect of a change in accounting principle
loss of $23 million, net of tax. For additional details regarding this loss see
Note 17, Implementation of New Accounting Standards.
ELECTRIC CONTRACTS: Our electric utility business uses purchased electric
call option contracts to meet, in part, our regulatory obligation to serve. This
obligation requires us 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.
Certain of our electric capacity and energy contracts are not accounted for
as derivatives due to the lack of an active energy market in the state of
Michigan, as defined by SFAS No. 133, and the transportation costs that would be
incurred 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, we 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.
F-52
CMS ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Our electric business also uses gas option and 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 contracts are financial contracts that
are used to offset increases in the price of potential gas purchases. These
contracts do not qualify for hedge accounting. Therefore, we record any change
in the fair value of these contracts directly in earnings as part of power
supply costs.
For the year ended December 31, 2003, the unrealized gain in accumulated
other comprehensive income related to our proportionate share of the effects of
derivative accounting related to our equity investment in the MCV Partnership is
$10 million, net of tax. We expect to reclassify this gain, if this value
remains, as an increase to earnings from equity method investees during the next
12 months.
GAS CONTRACTS: Our gas utility business uses fixed price gas supply
contracts, fixed price weather-based gas supply call options, fixed price gas
supply call and put options, and other types of contracts, to meet our
regulatory obligation to provide gas to our customers at a reasonable and
prudent cost. Unrealized gains and losses associated with these options are
reported directly in earnings as part of other income, and then directly offset
in earnings and recorded on the balance sheet as a regulatory asset or
liability.
ENERGY TRADING ACTIVITIES: Through December 31, 2002, CMS MST's wholesale
power and gas trading activities were accounted for under the mark-to-market
method of accounting. Under mark-to-market accounting, energy-trading contracts
are reflected at fair market value, net of reserves, with unrealized gains and
losses recorded as an asset or liability in the Consolidated Balance Sheets.
These assets and liabilities are affected by the timing of settlements related
to these contracts, current-period changes from newly originated transactions
and the impact of price movements. Changes in fair value are recognized as
revenues in the Consolidated Statements of Income in the period in which the
changes occur. The market prices we use to value our energy trading contracts
reflect our consideration of, among other things, closing exchange and
over-the-counter quotations. In certain contracts, long-term commitments may
extend beyond the period in which market quotations for such contracts are
available. Mathematical models are developed to determine various inputs into
the fair value calculation including price and other variables that may be
required to calculate fair value. Realized cash returns on these commitments may
vary, either positively or negatively, from the results estimated through
application of the mathematical model. We believe that our mathematical models
use state-of-the-art technology, pertinent industry data, and prudent
discounting in order to forecast certain elongated pricing curves. Market prices
are adjusted to reflect the impact of liquidating our position in an orderly
manner over a reasonable period of time under present market conditions.
In connection with the market valuation of our energy trading contracts, we
maintain reserves for credit risks based on the financial condition of
counterparties. We also maintain credit policies that management believes
minimize overall credit risk with regard to our counterparties. Determination of
our counterparties' credit quality is based upon a number of factors, including
credit ratings, disclosed financial condition, and collateral requirements.
Where contractual terms permit, we employ standard agreements that allow for
netting of positive and negative exposures associated with a single
counterparty. Based on these policies, our current exposures, and our credit
reserves, we do not anticipate a material adverse effect on our financial
position or results of operations as a result of counterparty nonperformance.
INTEREST RATE RISK CONTRACTS: We use interest rate swaps to hedge the risk
associated with forecasted interest payments on variable-rate debt. Most of our
interest rate swaps are designated as cash flow hedges. As such, we record any
change in the fair value of these contracts in accumulated other comprehensive
income unless the swaps are sold. For interest rate swaps that did not qualify
for hedge accounting treatment, we record any change in the fair value of these
contracts in earnings.
We have entered into floating-to-fixed interest rate swap agreements to
reduce the impact of interest rate fluctuations. The difference between the
amounts paid and received under the swaps is accrued and recorded as an
adjustment to interest expense over the term of the agreement. We were able to
apply the shortcut method to all
F-53
CMS ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
interest rate swaps that qualified for hedge accounting treatment; therefore,
there was no ineffectiveness associated with these hedges.
The following table reflects the outstanding floating-to-fixed interest
rates swaps at year end:
FLOATING TO FIXED NOTIONAL MATURITY FAIR
INTEREST RATE SWAPS AMOUNT DATE VALUE
------------------- -------- -------- -----
IN MILLIONS
December 31, 2003........................................... $ 28 2005-2006 $ (3)
December 31, 2002........................................... 493 2003-2007 (28)
Notional amounts reflect the volume of transactions but do not represent
the amount exchanged by the parties to the financial instruments. Accordingly,
notional amounts do not necessarily reflect our exposure to credit or market
risks. The weighted average interest rate associated with outstanding swaps was
approximately 7.4 percent at December 31, 2003 and 4.0 percent at December 31,
2002.
Certain equity method investees have issued interest rate swaps. These
instruments are not included in this analysis, but can have an impact on
financial results. See discussion of these instruments in Note 18, Restatement
and Reclassification.
FOREIGN EXCHANGE DERIVATIVES: We may use forward exchange and option
contracts to hedge certain receivables, payables, long-term debt, and equity
value relating to foreign investments. The purpose of our foreign currency
hedging activities is to protect the company from the risk associated with
adverse changes in currency exchange rates that could affect cash flow
materially. These contracts would not subject us to risk from exchange rate
movements because gains and losses on such contracts offset losses and gains,
respectively, on assets and liabilities being hedged.
There were no outstanding foreign exchange contracts at December 31, 2003.
The notional amount of the outstanding foreign exchange contracts at December
31, 2002 was $1 million Canadian. The estimated fair value of the foreign
exchange and option contracts at December 31, 2002 was zero.
8: INCOME TAXES
CMS Energy and its subsidiaries file a consolidated federal income tax
return. Income taxes generally are allocated based on each company's separate
taxable income. We practice deferred tax accounting for temporary differences in
accordance with SFAS No. 109, Accounting for Income Taxes.
U.S. income taxes are not recorded on the undistributed earnings of foreign
subsidiaries that have been or are intended to be reinvested indefinitely. Upon
distribution, those earnings may be subject to both U.S. income taxes (adjusted
for foreign tax credits or deductions) and withholding taxes payable to various
foreign countries. We annually determine the amount of undistributed foreign
earnings that we expect will remain invested indefinitely in foreign
subsidiaries. Cumulative undistributed earnings of foreign subsidiaries for
which income taxes have not been provided totaled approximately $106 million at
December 31, 2003. It is impractical to estimate the amount of unrecognized
deferred income taxes or withholding taxes on these undistributed earnings.
Also, at December 31, 2003 and 2002, we recorded U.S. income taxes with respect
to temporary differences between the book and tax bases of foreign investments
that were determined to be no longer essentially permanent in duration.
The Job Creation and Worker Assistance Act of 2002 provided corporate
taxpayers a 5-year carryback of tax losses incurred in 2001 and 2002. As a
result of this legislation, we carried back consolidated 2001 and 2002 tax
losses to tax years 1996 through 1999 to obtain refunds totaling $250 million.
The tax loss carryback, however, resulted in a reduction in AMT credit
carryforwards that previously had been recorded as deferred tax assets in the
amount of $47 million. This non-cash reduction in AMT credit carryforwards was
reflected in our tax provision in 2002.
F-54
CMS ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
We use ITC to reduce current income taxes payable, and amortize ITC over
the life of the related property. AMT paid generally becomes a tax credit that
we can carry forward indefinitely to reduce regular tax liabilities in future
periods when regular taxes paid exceed the tax calculated for AMT. At December
31, 2003, we had AMT credit carryforwards in the amount of $214 million that do
not expire, tax loss carryforwards in the amount of $1.151 billion that expire
from 2021 through 2023. In addition, we had capital loss carryforwards in the
amount of $29 million that expire in 2007, and general business credit
carryforwards in the amount of $42 million that primarily expire in 2005, for
which valuation allowances have been provided.
During the fourth quarter of 2000, we wrote down the value of our
investment in Loy Yang by $329 million ($268 million after-tax). We have now
concluded the tax benefit associated with the write-down should have been
reduced by $38 million. Accordingly, retained earnings as of January 1, 2001
have been reduced by this amount. For additional details, see Note 18,
Restatement and Reclassification.
The significant components of income tax expense (benefit) on continuing
operations consisted of:
YEARS ENDED DECEMBER 31
-----------------------------
RESTATED RESTATED
2003 2002 2001
---- -------- --------
IN MILLIONS
Current income taxes:
Federal................................................... $ (17) $(171) $(209)
State and local........................................... 1 (8) 6
Foreign................................................... 17 28 8
----- ----- -----
$ 1 $(151) $(195)
Deferred income taxes
Federal................................................... $ 54 $ 107 $ 97
State..................................................... 4 7 3
Foreign................................................... 5 2 8
----- ----- -----
$ 63 $ 116 $ 108
Deferred ITC, net........................................... (6) (6) (7)
----- ----- -----
Tax expense (benefit)....................................... $ 58 $ (41) $ (94)
===== ===== =====
F-55
CMS ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The principal components of deferred tax assets (liabilities) recognized in
the consolidated balance sheet are as follows:
DECEMBER 31
-------------------
RESTATED
2003 2002
---- --------
IN MILLIONS
Property.................................................... $ (842) $ (814)
Securitization costs........................................ (186) (192)
Prepaid pension............................................. (136) --
Unconsolidated investments.................................. (254) 55
Postretirement benefits..................................... (70) (72)
Gas inventories............................................. (100) (74)
Employee benefit obligations................................ 130 265
Tax credit carryforwards.................................... 255 247
Tax loss carryforwards...................................... 413 190
Valuation allowances........................................ (54) (4)
Regulatory liabilities...................................... 120 115
Other, net.................................................. 82 (169)
------- -------
Net deferred tax liabilities.............................. $ (642) $ (453)
======= =======
Deferred tax liabilities.................................... $(1,581) $(1,339)
Deferred tax assets, net of valuation reserves.............. 939 886
------- -------
Net deferred tax liabilities.............................. $ (642) $ (453)
======= =======
F-56
CMS ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The actual income tax expense (benefit) on continuing operations differs
from the amount computed by applying the statutory federal tax rate of 35
percent to income before income taxes as follows:
YEARS ENDED DECEMBER 31
----------------------------
RESTATED RESTATED
2003 2002 2001
---- -------- --------
IN MILLIONS
Income (loss) from continuing operations before income taxes
and minority interests
Domestic.................................................. $(73) $(527) $(320)
Foreign................................................... 88 94 (108)
---- ----- -----
Total................................................ 15 (433) (428)
Statutory federal income tax rate........................... x 35% x 35% x 35%
---- ----- -----
Expected income tax expense (benefit)....................... 5 (152) (150)
Increase (decrease) in taxes from:
Property differences...................................... 18 18 23
Income tax effect of foreign investments.................. (18) 47 52
Tax credits............................................... (6) 51 (8)
State and local income taxes, net of federal benefit...... -- (7) 3
Tax return accrual adjustments............................ (1) (7) (4)
Minority interests........................................ -- (5) (9)
Valuation allowance provision (reversal).................. 50 -- (1)
Other, net................................................ 10 14 --
---- ----- -----
Recorded income tax expense (benefit)(a).................... $ 58 $ (41) $ (94)
---- ----- -----
Effective tax rate(b)....................................... (b) 9.5% 22.0%
==== ===== =====
-------------------------
(a) The increased income tax expense for 2003 is primarily attributable to the
valuation reserve provisions for the possible loss of general business
credit, capital loss, and charitable contributions carryforwards.
(b) Because of the small size of the net income in 2003, the effective tax rate
is not meaningful. Changes in the effective tax rate in 2002 from 2001
resulted principally from the reduction in AMT credit carryforwards and the
recording of U.S. taxes on undistributed earnings and basis differences of
foreign subsidiaries.
9: EXECUTIVE INCENTIVE COMPENSATION
We provide a Performance Incentive Stock Plan to key management employees
based on their contributions to the successful management of the Company. The
Plan includes the following type of awards for common stock:
- restricted shares of common stock,
- stock options, and
- stock appreciation rights.
Restricted shares of common stock are outstanding shares with full voting
and dividend rights. These awards vest over five years at the rate of 25 percent
per year after two years. Some restricted shares are subject to achievement of
specified levels of total shareholder return and are subject to forfeiture if
employment terminates before vesting. Restricted shares vest fully if control of
CMS Energy changes, as defined by the plan.
Stock options give the holder the right to purchase common stock at a given
price over an extended period of time. Stock appreciation rights give the holder
the right to receive common stock appreciation, which is defined
F-57
CMS ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
as the excess of the market price of the stock at the date of exercise over the
grant date price. Our stock options and stock appreciation rights are valued at
market price when granted. All options and rights may be exercised upon grant
and they expire up to ten years and one month from the date of grant.
Our Performance Incentive Stock Plan was amended in January 1999. It uses
the following formula to grant awards:
- Up to five percent of our common stock outstanding at January 1 each year
less:
+ the number of shares of restricted common stock awarded, and
+ common stock subject to options granted under the plan during the
immediately preceding four calendar years.
- the number of shares of restricted common stock awarded under this plan
cannot exceed 20 percent of the aggregate number of shares reserved for
awards, and
- forfeiture of shares previously awarded will increase the number of
shares available to be awarded under the plan.
Awards of up to 2,240,247 shares of CMS Energy Common Stock may be issued
as of December 31, 2003.
The following table summarizes the restricted stock and stock options
granted to our key employees under the Performance Incentive Stock Plan:
RESTRICTED
STOCK OPTIONS
---------- -----------------------------
NUMBER OF NUMBER OF WEIGHTED AVERAGE
SHARES SHARES EXERCISE PRICE
--------- --------- ----------------
CMS ENERGY COMMON STOCK
Outstanding at January 1, 2001.......................... 786,427 3,058,186 $31.47
Granted............................................... 266,500 1,036,000 $30.21
Exercised or Issued................................... (82,765) (150,174) $19.11
Forfeited or Expired.................................. (182,177) (31,832) $35.10
--------- --------- ------
Outstanding at December 31, 2001........................ 787,985 3,912,180 $31.58
Granted............................................... 512,726 1,492,200 $15.64
Exercised or Issued................................... (116,562) (39,600) $17.07
Forfeited or Expired.................................. (225,823) (243,160) $28.91
--------- --------- ------
Outstanding at December 31, 2002........................ 958,326 5,121,620 $27.18
Granted............................................... 600,000 1,593,000 $ 6.35
Exercised or Issued................................... (80,425) (8,000) $ 8.12
Forfeited or Expired.................................. (213,873) (885,044) $28.66
--------- --------- ------
Outstanding at December 31, 2003........................ 1,264,028 5,821,576 $21.27
========= ========= ======
At December 31, 2003, 186,522 of the 1,264,028 shares of restricted common
stock outstanding are subject to performance objectives. Compensation expense
included in income for restricted stock was $2 million for 2003, less than $1
million in 2002, and $1 million in 2001.
F-58
CMS ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table summarizes our stock options outstanding at December
31, 2003:
NUMBER OF
SHARES WEIGHTED AVERAGE WEIGHTED AVERAGE
OUTSTANDING REMAINING LIFE EXERCISE PRICE
----------- ---------------- ----------------
Range of Exercise Prices
CMS ENERGY COMMON STOCK:
$6.35 -- $6.35..................................... 1,593,000 9.72 years $ 6.35
$8.12 -- $22.00.................................... 1,184,300 6.94 years $13.43
$22.20 -- $31.04................................... 1,785,772 6.65 years $27.06
$34.80 -- $43.38................................... 1,255,504 4.92 years $39.31
$44.06 -- $44.06................................... 3,000 4.91 years $44.06
--------- ---------- ------
$6.35 -- $44.06.................................... 5,821,576 7.17 years $21.27
The number of stock options exercisable was 5,795,145 at December 31, 2003,
5,007,329 at December 31, 2002 and 3,760,883 at December 31, 2001.
In December 2002, we adopted the fair value based method of accounting for
stock-based employee compensation, under SFAS No. 123, as amended by SFAS No.
148. We elected to adopt the prospective method recognition provisions of this
Statement, which applies the recognition provisions to all awards granted,
modified, or settled after the beginning of the fiscal year that the recognition
provisions are first applied.
The following table summarizes the weighted average fair value of stock
options granted:
OPTIONS GRANT DATE 2003 2002(A) 2001
------------------ ---- ------- ----
Fair value at grant date.................................... $2.96 $3.84, $1.44 $6.43
-------------------------
(a) For 2002, there were two stock option grants.
The stock options fair value is estimated using the Black-Scholes model, a
mathematical formula used to value options traded on securities exchanges. The
following assumptions were used in the Black-Scholes model:
YEARS ENDED DECEMBER 31 2003 2002(A) 2001
----------------------- ---- ------- ----
CMS ENERGY COMMON STOCK OPTIONS
Risk-free interest rate.............................. 3.02% 3.95%, 3.16% 4.77%
Expected stock price volatility...................... 55.46% 32.44%, 40.81% 30.59%
Expected dividend rate............................... -- $0.365, $0.1825 $0.365
Expected option life (years)......................... 4.2 4.2 4.2 4.2
-------------------------
(a) For 2002, there were two stock option grants.
F-59
CMS ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
We recorded $5 million as stock-based employee compensation cost for 2003
and $4 million for 2002. All stock options vest at date of grant. If stock-based
compensation costs had been determined under SFAS No. 123 for the year ended
December 31, 2001, consolidated net loss and pro forma net loss would have been
as follows:
YEARS ENDED DECEMBER 31
-----------------------------
RESTATED 2001
-----------------------------
NET LOSS BASIC DILUTED
-------- ----- -------
IN MILLIONS,
EXCEPT PER SHARE AMOUNTS
Net loss, as reported....................................... $(459) $(3.51) $(3.51)
Add: Stock-based employee compensation expense included in
reported net loss, net of related taxes................ -- -- --
Deduct: Total stock-based employee compensation expense
determined under fair value based method for all
awards, net of related taxes........................... (4) (0.03) (0.03)
----- ------ ------
Pro forma net loss.......................................... $(463) $(3.54) $(3.54)
===== ====== ======
10: RETIREMENT BENEFITS
We provide retirement benefits to our employees under a number of different
plans, including:
- non-contributory, defined benefit Pension Plan,
- a cash balance pension plan for certain employees hired after June 30,
2003,
- benefits to certain management employees under SERP,
- health care and life insurance benefits under OPEB,
- benefits to a select group of management under EISP, and
- a defined contribution 401(k) plan.
Pension Plan: The Pension Plan includes funds for all of our employees, and
the employees of our subsidiaries, including Panhandle. The Pension Plan's
assets are not distinguishable by company.
In June 2003, we sold Panhandle to Southern Union Panhandle Corp. No
portion of the Pension Plan assets were transferred with the sale and Panhandle
employees are no longer eligible to accrue additional benefits. The Pension Plan
retained pension payment obligations for Panhandle employees that were vested
under the Pension Plan.
The sale of Panhandle resulted in a significant change in the makeup of the
Pension Plan. A remeasurement of the obligation was required at the date of
sale. The remeasurement further resulted in the following:
- an increase in OPEB expense of $4 million for 2003, and
- an additional charge to accumulated other comprehensive income of $34
million ($22 million after-tax) as a result of the increase in the
additional minimum pension liability. Due to large contributions, the
additional minimum pension liability was eliminated as of December 31,
2003.
Additionally, a significant number of Panhandle employees elected to retire
as of July 1, 2003 under the CMS Energy Employee Pension Plan. As a result, we
have recorded a $25 million ($16 million after-tax) settlement loss, and a $10
million ($7 million after-tax) curtailment gain, pursuant to the provisions of
SFAS No. 88, which is reflected in discontinued operations.
In 2003, a substantial number of non-Panhandle retiring employees also
elected a lump sum payment instead of receiving pension benefits as an annuity
over time. Lump sum payments constitute a settlement under SFAS
F-60
CMS ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
No. 88. A settlement loss must be recognized when the cost of all settlements
paid during the year exceeds the sum of the service and interest costs for that
year. We recorded settlement loss of $59 million ($39 million after-tax) in
December 2003.
SERP: SERP benefits are paid from a trust established in 1988. SERP is not
a qualified plan under the Internal Revenue Code; SERP trust earnings are
taxable and trust assets are included in consolidated assets. Trust assets were
$66 million at December 31, 2003, and $57 million at December 31, 2002. The
assets are classified as other non-current assets. The Accumulated Benefit
Obligation for SERP was $62 million at December 31, 2003 and $54 million at
December 31, 2002.
OPEB: Retiree health care costs at December 31, 2003 are based on the
assumption that costs would increase 8.5 percent in 2003. The rate of increase
is expected to be 7.5 percent for 2004. The rate of increase is expected to slow
to an estimated 5.5 percent by 2010 and thereafter.
The health care cost trend rate assumption significantly affects the
estimated costs recorded. A one-percentage point change in the assumed health
care cost trend assumption would have the following effects:
ONE PERCENTAGE ONE PERCENTAGE
POINT INCREASE POINT DECREASE
-------------- --------------
IN MILLIONS
Effect on total service and interest cost component......... $ 15 $ (12)
Effect on postretirement benefit obligation................. $149 $(129)
We adopted SFAS No. 106, effective as of the beginning of 1992. Consumers
recorded a liability of $466 million for the accumulated transition obligation
and a corresponding regulatory asset for anticipated recovery in utility rates
(see Note 1, Corporate Structure and Accounting Policies, "Utility Regulation.")
The MPSC authorized recovery of the electric utility portion of these costs in
1994 over 18 years and the gas utility portion in 1996 over 16 years.
EISP: We implemented an EISP in 2002 to provide flexibility in separation
of employment by officers, a select group of management, or other highly
compensated employees. Terms of the plan may include payment of a lump sum,
payment of monthly benefits for life, payment of premium for continuation of
health care, or any other legally permissible term deemed to be in our best
interest to offer. EISP expense was $1 million in 2003 and $2 million in 2002.
As of December 31, 2003, the Accumulated Benefit Obligation of the EISP was $3
million.
The measurement date for all plans is December 31.
Assumptions: The following table recaps the weighted-average assumptions
used in our retirement benefits plans to determine benefit obligations and net
periodic benefit cost:
YEARS ENDED DECEMBER 31
--------------------------------------------------
PENSION & SERP OPEB
----------------------- -----------------------
2003 2002 2001 2003 2002 2001
---- ---- ---- ---- ---- ----
Discount rate................................. 6.25% 6.75% 7.25% 6.25% 6.75% 7.25%
Expected long-term rate of return on plan
assets(a)................................... 8.75% 8.75% 9.75%
Union....................................... 8.75% 8.75% 9.75%
Non-Union................................... 6.00% 6.00% 6.00%
Rate of compensation increase:
Pension..................................... 3.25% 3.50% 5.25%
SERP........................................ 5.50% 5.50% 5.50%
-------------------------
(a) We determine our long-term rate of return by considering historical market
returns, the current and future economic environment, the capital market
principles of risk and return, and the expertise of individuals and firms
with financial market knowledge. We use the asset allocation of the
portfolio to forecast the future
F-61
CMS ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
expected total return of the portfolio. The goal is to determine a long-term
rate of return that can be incorporated into the planning of future cash
flow requirements in conjunction with the change in the liability. The use
of forecasted returns for various classes of assets used to construct an
expected return model is reviewed periodically for reasonability and
appropriateness.
Costs: The following table recaps the costs incurred in our retirement
benefits plans:
YEARS ENDED DECEMBER 31
---------------------------------------------
PENSION & SERP OPEB
--------------------- --------------------
2003 2002 2001 2003 2002 2001
---- ---- ---- ---- ---- ----
IN MILLIONS
Service cost.......................................... $ 40 $ 44 $ 39 $ 21 $ 20 $ 16
Interest expense...................................... 79 89 88 66 69 62
Expected return on plan assets........................ (81) (103) (98) (42) (43) (41)
Plan amendments....................................... -- 4 -- -- -- --
Curtailment credit.................................... (2) -- -- (8) -- --
Settlement charge..................................... 84 -- -- -- -- --
Amortization of:
Net transition (asset).............................. -- -- (5) -- -- --
Prior service cost.................................. 7 8 8 (7) (1) (1)
Other............................................... 9 (1) (1) 19 10 1
---- ----- ---- ---- ---- ----
Net periodic pension and postretirement benefit
cost................................................ $136 $ 41 $ 31 $ 49 $ 55 $ 37
==== ===== ==== ==== ==== ====
Plan Assets: The following table recaps the categories of plan assets in
our retirement benefits plans:
YEARS ENDED DECEMBER 31
-------------------------------
PENSION OPEB
------------ ------------
2003 2002 2003 2002
---- ---- ---- ----
Asset Category:
Fixed Income.............................................. 52% 32%(b) 51% 55%
Equity Securities......................................... 44% 60% 48% 44%
CMS Energy Common Stock(a)............................. 4% 8% 1% 1%
-------------------------
(a) At December 31, 2003, there were 4,970,000 shares of CMS Energy Common Stock
in the Pension Plan assets with a fair value of $42 million, and 414,000
shares in the OPEB plan assets with a fair value of $4 million. At December
31, 2002, there were 5,099,000 shares of CMS Energy Common Stock in the
Pension Plan assets with a fair value of $48 million, and 284,000 shares in
the OPEB plan assets with a fair value of $3 million.
(b) At February 29, 2004, the Pension Plan assets were 66 percent equity, 34
percent fixed income. We plan to contribute $72 million to our OPEB plan in
2004. We estimate a contribution of $26 million to our Pension Plan in 2004.
We have established a target asset allocation for our Pension Plan assets
of 65 percent equity and 35 percent fixed income investments to maximize the
long-term return on plan assets, while maintaining a prudent level of risk. The
level of acceptable risk is a function of the liabilities of the plan. Equity
investments are diversified mostly across the Standard & Poor's 500 Index, with
a lesser allocation to the Standard & Poor's Mid Cap and Small Cap Indexes and a
Foreign Equity Index Fund. Fixed income investments are diversified across
investment grade instruments of both government and corporate issuers. Annual
liability measurements, quarterly portfolio reviews, and periodic
asset/liability studies are used to evaluate the need for adjustments to the
portfolio allocation.
F-62
CMS ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
We have established union and non-union VEBA trusts to fund our future
retiree health and life insurance benefits. These trusts are funded through the
rate making process for Consumers, and through direct contributions from the
non-utility subsidiaries. The equity portions of the union and non-union health
care VEBA trusts are invested in an Standard & Poor's 500 Index fund. The fixed
income portion of the union health care VEBA trust is invested in domestic
investment grade taxable instruments. The fixed income portion of the non-union
health care VEBA trust is invested in a diversified mix of domestic tax-exempt
securities. The investment selections of each VEBA are influenced by the tax
consequences, as well as the objective of generating asset returns that will
meet the medical and life insurance costs of retirees.
Reconciliations: The following table reconciles the funding of our
retirement benefit plans with our retirement benefit plans' liability:
YEARS ENDED DECEMBER 31
---------------------------------------------------
PENSION PLAN SERP OPEB
---------------- ------------ ---------------
2003 2002 2003 2002 2003 2002
---- ---- ---- ---- ---- ----
IN MILLIONS
Benefit obligation January 1..................... $1,256 $1,195 $ 81 $ 73 $ 982 $ 956
Service cost..................................... 38 40 2 4 21 20
Interest cost.................................... 74 84 5 5 66 69
Plan amendment................................... (19) 3 -- -- (47) (64)
Actuarial loss (gain)............................ 55 72 (10) 1 91 41
Business combinations............................ -- -- -- -- (42) --
Benefits paid.................................... (215) (138) (2) (2) (42) (40)
------ ------ ---- ---- ------ -----
Benefit obligation December 31(a)................ 1,189 1,256 76 81 1,029 982
------ ------ ---- ---- ------ -----
Plan assets at fair value at January 1........... 607 845 -- -- 508 508
Actual return on plan assets..................... 115 (164) -- -- 75 (43)
Company contribution............................. 560 64 2 2 76 83
Actual benefits paid............................. (215) (138) (2) (2) (41) (40)
------ ------ ---- ---- ------ -----
Plan assets at fair value at December 31......... 1,067 607 -- -- 618 508
------ ------ ---- ---- ------ -----
Benefit obligation in excess of plan assets...... (122) (649) (76) (81) (411) (474)
Unrecognized net loss from experience different
than assumed................................... 501 573 3 13 313 313
Unrecognized prior service cost (benefit)........ 29 60 1 1 (112) (77)
Panhandle adjustment............................. -- (7) -- -- -- --
------ ------ ---- ---- ------ -----
Net Balance Sheet Asset (Liability).............. 408 (23) (72) (67) (210) (238)
Additional minimum liability adjustment(b)....... -- (426) -- -- -- --
------ ------ ---- ---- ------ -----
Total Net Balance Sheet Asset (Liability)...... $ 408 $ (449) $(72) $(67) $ (210) $(238)
====== ====== ==== ==== ====== =====
-------------------------
(a) The Medicare Prescription Drug, Improvement and Modernization Act of 2003
was signed into law in December 2003. This Act establishes a prescription
drug benefit under Medicare (Medicare Part D), and a federal subsidy to
sponsors of retiree health care benefit plans that provide a benefit that
is actuarially equivalent to Medicare Part D. Accounting guidance for the
subsidy is not yet available, therefore, we have decided to defer
recognizing the effects of the Act in our 2003 financial statements, as
permitted by FASB Staff Position No. 106-1. When accounting guidance is
issued, our retiree health benefit obligation may be adjusted.
(b) The Pension Plan's Accumulated Benefit Obligation of $1.055 billion
exceeded the value of the Pension Plan assets and net balance sheet
liability at December 31, 2002. As a result, we recorded an additional
minimum liability, including an intangible asset of $53 million, and $373
million of accumulated other
F-63
CMS ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
comprehensive income. In August 2003, we made our planned contribution of $210
million to the Pension Plan. In December 2003, we made an additional
contribution of $350 million to the Pension Plan that eliminated the
additional minimum liability. The Accumulated Benefit Obligation for the
pension plan was $1.019 billion at December 31, 2003.
11: LEASES
We lease various assets including vehicles, railcars, construction
equipment, an airplane, computer equipment, and buildings. We have both
full-service and net leases. A net lease requires us to pay for taxes,
maintenance, operating costs, and insurance. Most of our leases contain options
at the end of the initial lease term to:
- purchase the asset at the then fair value of the asset, or
- renew the lease at the then fair rental value.
Minimum annual rental commitments under our non-cancelable leases at
December 31, 2003 were:
CAPITAL LEASES OPERATING LEASES
-------------- ----------------
IN MILLIONS
2004........................................................ $13 $12
2005........................................................ 12 10
2006........................................................ 12 10
2007........................................................ 11 9
2008........................................................ 9 7
2009 and thereafter......................................... 21 30
--- ---
Total minimum lease payments................................ 78 $78
===
Less imputed interest....................................... 10
---
Present value of net minimum lease payments................. 68
Less current portion........................................ 10
---
Non-current portion......................................... $58
===
Consumers is authorized by the MPSC to record both capital and operating
lease payments as operating expense and recover the total cost from our
customers. Operating lease charges were $14 million in 2003, $13 million in
2002, and $15 million in 2001.
Capital lease expenses were $17 million in 2003, $20 million, in 2002 and
$26 million in 2001. Included in the $26 million for 2001 is $7 million of
nuclear fuel lease expense. In November 2001, our nuclear fuel capital leasing
arrangement expired. At termination of the lease, we paid the lessor $48
million, which was the lessor's remaining investment at that time.
In April 2001, we entered into a lease agreement for the construction of an
office building to be used as the main headquarters for CMS Energy and Consumers
in Jackson, Michigan. In November 2003, we exercised our purchase option under
the lease agreement and bought the office building with proceeds from a $60
million term loan.
F-64
CMS ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12: JOINTLY OWNED REGULATED UTILITY FACILITIES
We are required to provide only our share of financing for the jointly
owned utility facilities. The direct expenses of the jointly owned plants are
included in operating expenses. Operation, maintenance, and other expenses of
these jointly owned utility facilities are shared in proportion to each
participant's undivided ownership interest. The following table indicates the
extent of our investment in jointly owned regulated utility facilities:
DECEMBER 31
----------------------------
NET ACCUMULATED
INVESTMENT DEPRECIATION
------------ ------------
2003 2002 2003 2002
---- ---- ---- ----
IN MILLIONS
Campbell Unit 3 -- 93.3 percent............................. $299 $298 $328 $313
Ludington -- 51 percent..................................... 84 83 87 85
Distribution -- various..................................... 74 77 32 31
13: EQUITY METHOD INVESTMENTS
Where ownership is more than 20 percent but less than a majority, we
account for certain investments in other companies, partnerships and joint
ventures by the equity method of accounting in accordance with APB Opinion No.
18. The most significant of these investments is our 50 percent interest in Jorf
Lasfar, and our 49 percent interest in the MCV Partnership (Note 15). Our
investment in Jorf Lasfar is $256 million at December 31, 2003 and $240 million
at December 31, 2002. Net income from these investments included undistributed
earnings of $41 million in 2003 and $39 million in 2002 and distributions in
excess of earnings of $68 million in 2001. Summarized financial information of
the MCV Partnership is disclosed separately in
F-65
CMS ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Note 15, Summarized Financial Information of Significant Related Energy
Supplier. Listed below is the summarized income and balance sheet information
for these investments.
Income Statement Data
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------
2003
-------------------------------------------------------------
JORF SCP ALL
LASFAR FMLP TAWEELAH INVESTMENTS OTHERS TOTAL
------ ---- -------- ----------- ------ -----
IN MILLIONS
Operating revenue.......................... $369 $79 $99 $74 $1,135 $1,756
Operating expenses......................... 191 4 38 18 1,006 1,257
---- --- --- --- ------ ------
Operating income........................... 178 75 61 56 129 499
Other expense, net......................... 58 43 18 25 35 179
---- --- --- --- ------ ------
Net income (loss).......................... $120 $32 $43 $31 $ 94 $ 320
==== === === === ====== ======
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------
2002
-------------------------------------------------------------
JORF SCP ALL
LASFAR FMLP TAWEELAH INVESTMENTS OTHERS TOTAL
------ ---- -------- ----------- ------ -----
IN MILLIONS
Operating revenue.......................... $364 $91 $101 $43 $3,376 $3,975
Operating expenses......................... 176 4 33 13 3,209 3,435
---- --- ---- --- ------ ------
Operating income........................... 188 87 68 30 167 540
Other expense, net......................... 56 49 86 16 206 413
---- --- ---- --- ------ ------
Net income (loss).......................... $132 $38 $(18) $14 $ (39) $ 127
==== === ==== === ====== ======
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------
2001
-------------------------------------------------------------
JORF SCP ALL
LASFAR FMLP TAWEELAH INVESTMENTS OTHERS TOTAL
------ ---- -------- ----------- ------ -----
IN MILLIONS
Operating revenue.......................... $357 $99 $ 44 $39 $3,814 $4,353
Operating expenses......................... 151 6 17 12 3,459 3,645
---- --- ---- --- ------ ------
Operating income........................... 206 93 27 27 355 708
Other expense, net......................... 45 63 42 16 237 403
---- --- ---- --- ------ ------
Net income................................. $161 $30 $(15) $11 $ 118 $ 305
==== === ==== === ====== ======
F-66
CMS ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Balance Sheet Data
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------
2003
--------------------------------------------------------------
JORF SCP ALL
LASFAR FMLP TAWEELAH INVESTMENTS OTHERS TOTAL
------ ---- -------- ----------- ------ -----
IN MILLIONS
Assets
Current assets.......................... $ 277 $ -- $ 93 $ 60 $ 434 $ 864
Property, plant and equipment, net...... 10 -- 638 383 2,475 3,506
Other assets............................ 1,152 893 10 -- 1,159 3,214
------ ---- ---- ---- ------ ------
$1,439 $893 $741 $443 $4,068 $7,584
====== ==== ==== ==== ====== ======
Liabilities
Current liabilities..................... $ 314 $ 21 $ 81 $ 19 $ 425 $ 860
Long-term debt and other non-current
liabilities.......................... 612 411 509 225 3,121 4,878
Equity.................................... 513 461 151 199 522 1,846
------ ---- ---- ---- ------ ------
$1,439 $893 $741 $443 $4,068 $7,584
====== ==== ==== ==== ====== ======
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------
2002
--------------------------------------------------------------
JORF SCP ALL
LASFAR FMLP TAWEELAH INVESTMENTS OTHERS TOTAL
------ ---- -------- ----------- ------ -----
Assets
Current assets.......................... $ 225 $ -- $ 91 $ 36 $ 676 $1,028
Property, plant and equipment, net...... 7 -- 656 291 2,695 3,649
Other assets............................ 1,118 998 10 -- 1,076 3,202
------ ---- ---- ---- ------ ------
$1,350 $998 $757 $327 $4,447 $7,879
====== ==== ==== ==== ====== ======
Liabilities
Current liabilities..................... $ 249 $ 22 $ 95 $ 18 $ 692 $1,076
Long-term debt and other non-current
liabilities.......................... 622 428 530 172 2,896 4,648
Equity.................................... 479 548 132 137 859 2,155
------ ---- ---- ---- ------ ------
$1,350 $998 $757 $327 $4,447 $7,879
====== ==== ==== ==== ====== ======
14: REPORTABLE SEGMENTS
Our reportable segments consist of business units organized and managed by
their products and services. We evaluate performance based upon the net income
of each segment. We operate principally in three reportable segments: electric
utility, gas utility, and enterprises.
The electric utility segment consists of the generation and distribution of
electricity in the state of Michigan through its subsidiary, Consumers. The gas
utility segment consists of regulated activities like transportation, storage,
and distribution of natural gas in the state of Michigan through its subsidiary,
Consumers. The enterprises segment consists of:
- investing in, acquiring, developing, constructing, managing, and
operating non-utility power generation plants and natural gas facilities
in the United States and abroad, and
- providing gas, oil, and electric marketing services to energy users.
F-67
CMS ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The tables below show financial information by reportable segment. The
"Other" net income segment includes corporate interest and other, discontinued
operations, and the cumulative effect of accounting changes. We restated 2002
and 2001 information due to the management reorganization and the change in our
business strategy in 2003 from five to three operating segments.
Reportable Segments
YEARS ENDED DECEMBER 31
-------------------------------
RESTATED RESTATED
2003 2002 2001
---- -------- --------
IN MILLIONS
Revenues
Electric utility.......................................... $ 2,583 $ 2,644 $ 2,630
Gas utility............................................... 1,845 1,519 1,338
Enterprises............................................... 1,085 4,508 4,034
Other..................................................... -- 2 4
------- ------- -------
$ 5,513 $ 8,673 $ 8,006
======= ======= =======
Earnings from Equity Method Investees
Enterprises............................................... $ 164 $ 92 $ 172
------- ------- -------
$ 164 $ 92 $ 172
======= ======= =======
Depreciation, Depletion, and Amortization
Electric utility.......................................... $ 247 $ 228 $ 219
Gas utility............................................... 128 118 118
Enterprises............................................... 52 64 70
Other..................................................... 1 2 1
------- ------- -------
$ 428 $ 412 $ 408
======= ======= =======
Income Taxes
Electric utility.......................................... $ 90 $ 138 $ 69
Gas utility............................................... 35 33 25
Enterprises............................................... 14 (155) (83)
Other..................................................... (81) (57) (105)
------- ------- -------
$ 58 $ (41) $ (94)
======= ======= =======
Net Income (Loss)
Electric utility.......................................... $ 167 $ 264 $ 120
Gas utility............................................... 38 46 21
Enterprises............................................... 8 (419) (272)
Other..................................................... (257) (541) (328)
------- ------- -------
$ (44) $ (650) $ (459)
======= ======= =======
Investments in Equity Method Investees
Enterprises............................................... $ 1,366 $ 1,367 $ 1,912
Other..................................................... 24 2 36
------- ------- -------
$ 1,390 $ 1,369 $ 1,948
======= ======= =======
F-68
CMS ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31
-------------------------------
RESTATED RESTATED
2003 2002 2001
---- -------- --------
IN MILLIONS
Identifiable Assets
Electric utility(a)....................................... $ 6,831 $ 6,058 $ 5,784
Gas utility(a)............................................ 2,983 2,586 2,734
Enterprises............................................... 3,670 5,724 8,891
Other..................................................... 354 413 224
------- ------- -------
$13,838 $14,781 $17,633
======= ======= =======
Capital Expenditures(b)
Electric utility.......................................... $ 310 $ 437 $ 623
Gas utility............................................... 135 181 145
Enterprises............................................... 49 235 427
Other..................................................... -- 8 263
------- ------- -------
$ 494 $ 861 $ 1,458
======= ======= =======
Geographic Areas(c)
RESTATED RESTATED
2003 2002 2001
---- -------- --------
IN MILLIONS
United States
Operating Revenue......................................... $ 5,222 $ 8,361 $ 7,639
Operating Income (Loss)................................... 511 (36) 189
Identifiable Assets....................................... 12,372 13,355 14,770
International
Operating Revenue......................................... $ 291 $ 312 $ 367
Operating Income (Loss)................................... 84 111 (38)
Identifiable Assets....................................... 1,466 1,426 2,863
-------------------------
(a) Amounts includes a portion of Consumers' assets for both the Electric and
Gas utility units.
(b) Amounts include electric restructuring implementation plan, capital leases
for nuclear fuel, purchase of nuclear fuel and other assets and electric
DSM costs. Amounts also include a portion of Consumers' capital
expenditures for plant and equipment that both the electric and gas utility
units use.
(c) Revenues are based on the country location of customers.
F-69
CMS ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15: SUMMARIZED FINANCIAL INFORMATION OF SIGNIFICANT RELATED ENERGY SUPPLIER
Under the PPA with the MCV Partnership discussed in Note 4, Uncertainties,
our 2003 obligation to purchase electric capacity from the MCV Partnership
provided 15 percent of our owned and contracted electric generating capacity.
Summarized financial information of the MCV Partnership follows:
Statements of Income
YEARS ENDED
DECEMBER 31
--------------------
2003 2002 2001
---- ---- ----
IN MILLIONS
Operating revenue(a)........................................ $584 $597 $611
Operating expenses.......................................... 416 409 453
---- ---- ----
Operating income............................................ 168 188 158
Other expense, net.......................................... 108 114 110
---- ---- ----
Income before cumulative effect of accounting change........ 60 74 48
Cumulative effect of change in method of accounting for
derivative options contracts(b)........................... -- 58 --
---- ---- ----
Net Income.................................................. $ 60 $132 $ 48
==== ==== ====
Balance Sheets
DECEMBER 31
---------------
2003 2002
---- ----
IN MILLIONS
ASSETS
Current assets(c)........ $ 389 $ 358
Plant, net............... 1,494 1,550
Other assets............. 187 190
------ ------
$2,070 $2,098
====== ======
DECEMBER 31
---------------
2003 2002
---- ----
IN MILLIONS
LIABILITIES AND EQUITY
Current liabilities...... $ 250 $ 209
Non-current
liabilities(d)......... 1,021 1,155
Partners' equity(e)...... 799 734
------ ------
$2,070 $2,098
====== ======
-------------------------
(a) Revenue from Consumers totaled $514 million in 2003, $557 million in 2002,
and $550 million in 2001.
(b) On April 1, 2002, the MCV Partnership implemented a new accounting standard
for derivatives. As a result, the MCV Partnership began accounting for
several natural gas contracts containing an option component at fair value.
The MCV Partnership recorded a $58 million cumulative effect adjustment for
the change in accounting principle as an increase to earnings. CMS
Midland's 49 percent ownership share was $28 million ($18 million
after-tax), which is reflected as a change in accounting principle on our
Consolidated Statements of Income (Loss).
(c) Receivables from Consumers totaled $40 million for December 31, 2003 and
$44 million for December 31, 2002.
(d) FMLP is the sole beneficiary of a trust that is the lessor in a long-term
direct finance lease with the MCV Partnership. CMS Holdings holds a 46.4
percent ownership interest in FMLP. The MCV Partnership's
F-70
CMS ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
lease obligations, assets, and operating revenues secure FMLP's debt. The
following table summarizes obligation and payment information regarding the
direct finance lease.
DECEMBER 31
------------
2003 2002
---- ----
IN MILLIONS
Balance Sheet:
MCV Partnership: Lease obligation........................................ $894 $975
FMLP: Non-recourse debt....................................... 431 449
Lease payment to service non-recourse debt (including
interest)............................................... 158 370
CMS Holdings: Share of interest portion of lease payment.............. 37 34
Share of principle portion of lease payment............. 36 65
YEARS ENDED
DECEMBER 31
--------------------
2003 2002 2001
---- ---- ----
IN MILLIONS
Income Statement:
FMLP: Earnings............................................. $32 $38 $30
(e) CMS Midland's recorded investment in the MCV Partnership includes
capitalized interest, which we are expensing over the life of our
investment in the MCV Partnership. The financing agreements prohibit the
MCV Partnership from distributing any cash to its owners until it meets
certain financial test requirements. We do not anticipate receiving a cash
distribution in the near future.
16: ASSET RETIREMENT OBLIGATIONS
SFAS NO. 143, ACCOUNTING FOR ASSET RETIREMENT OBLIGATIONS: This standard
became effective January 2003. It requires companies to record the fair value of
the cost to remove assets at the end of their useful life, if there is a legal
obligation to do so. We have legal obligations to remove some of our assets,
including our nuclear plants, at the end of their useful lives.
Before adopting this standard, we classified the removal cost of assets
included in the scope of SFAS No. 143 as part of the reserve for accumulated
depreciation. For these assets, the removal cost of $448 million that was
classified as part of the reserve at December 31, 2002, was reclassified in
January 2003, in part, as:
- $364 million ARO liability,
- $134 million regulatory liability,
- $42 million regulatory asset, and
- $7 million net increase to property, plant, and equipment as prescribed
by SFAS No. 143.
We are reflecting a regulatory asset and liability as required by SFAS No.
71 for regulated entities instead of a cumulative effect of a change in
accounting principle. Accretion of $1 million related to the Big Rock and
Palisades' profit component included in the estimated cost of removal was
expensed for 2003.
The fair value of ARO liabilities has been calculated using an expected
present value technique. This technique reflects assumptions, such as costs,
inflation, and profit margin that third parties would consider to assume the
settlement of the obligation. Fair value, to the extent possible, should include
a market risk premium for unforeseeable circumstances. No market risk premium
was included in our ARO fair value estimate since a
F-71
CMS ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
reasonable estimate could not be made. If a five percent market risk premium
were assumed, our ARO liability would be $381 million.
If a reasonable estimate of fair value cannot be made in the period the
asset retirement obligation is incurred, such as assets with indeterminate
lives, the liability is to be recognized when a reasonable estimate of fair
value can be made. Generally, transmission and distribution assets have
indeterminate lives. Retirement cash flows cannot be determined. There is a low
probability of a retirement date, so no liability has been recorded for these
assets. No liability has been recorded for assets that have insignificant
cumulative disposal costs, such as substation batteries. The measurement of the
ARO liabilities for Palisades and Big Rock are based on decommissioning studies
that are based largely on third-party cost estimates.
In addition, in 2003, we recorded an ARO liability for certain pipelines
and non-utility generating plants and a $1 million, net of tax, cumulative
effect of change in accounting for accretion and depreciation expense for ARO
liabilities incurred prior to 2003. The pro forma effect on results of
operations would not have been material for the year ended December 31, 2002.
The following tables describe our assets that have legal obligations to be
removed at the end of their useful life.
IN SERVICE TRUST
ARO DESCRIPTION DATE LONG LIVED ASSETS FUND
--------------- ---------- ----------------- -----
IN MILLIONS
December 31, 2003
Palisades-decommission plant site..... 1972 Palisades nuclear plant $487
Big Rock-decommission plant site...... 1962 Big Rock nuclear plant 88
JHCampbell intake/discharge water
line............................... 1980 Plant intake/discharge water line --
Closure of coal ash disposal areas.... Various Generating plants coal ash areas --
Closure of wells at gas storage
fields............................. Various Gas storage fields --
Indoor gas services equipment
relocations........................ Various Gas meters located inside structures --
Closure of gas pipelines.............. Various Gas transmission pipelines --
Dismantle natural gas-fired power
plant.............................. 1997 Gas fueled power plant --
PRO FORMA ARO LIABILITY ARO
ARO LIABILITY ----------------------------- CASH FLOW LIABILITY
ARO DESCRIPTION 1/1/02 1/1/03 INCURRED SETTLED ACCRETION REVISIONS 12/31/03
--------------- ------------- ------ -------- ------- --------- --------- ---------
IN MILLIONS
December 31, 2003
Palisades-decommission...... $232 $249 $-- $ -- $19 $-- $268
Big Rock-decommission....... 94 61 -- (39) 13 -- 35
JHCampbell intake line...... -- -- -- -- -- -- --
Coal ash disposal areas..... 46 51 -- (4) 5 -- 52
Wells at gas storage
fields................... 2 2 -- -- -- -- 2
Indoor gas services
relocations.............. 1 1 -- -- -- -- 1
Closure of gas
pipelines(a)............. 7 8 -- (8) -- -- --
Dismantle natural gas-fired
power plant.............. 1 1 -- -- -- -- 1
---- ---- --- ---- --- --- ----
Total.................. $383 $373 $-- $(51) $37 $-- $359
==== ==== === ==== === === ====
-------------------------
(a) ARO Liability was settled in 2003 as a result of the sales of Panhandle and
CMS Field Services.
Reclassification of Non-Legal Cost of Removal: Beginning in December 2003,
the SEC requires the quantification and reclassification of the estimated cost
of removal obligations arising from other than legal obligations. These
obligations have been accrued through depreciation charges. We estimate that we
had $983 million in 2003 and $907 million in 2002 of previously accrued asset
removal costs related to our regulated operations, for other than legal
obligations. These obligations, which were previously classified as a component
of
F-72
CMS ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
accumulated depreciation, were reclassified as regulatory liabilities in the
accompanying consolidated balance sheets.
17: IMPLEMENTATION OF NEW ACCOUNTING STANDARDS
SFAS NO. 149, AMENDMENT OF STATEMENT 133 ON DERIVATIVE INSTRUMENTS AND
HEDGING ACTIVITIES: Amends and clarifies financial accounting and reporting for
derivative instruments, including certain derivative instruments embedded in
other contracts and for hedging activities under SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities. This statement is effective for
contracts entered into or modified after June 30, 2003. Implementation of this
statement has not impacted our Consolidated Financial Statements.
SFAS NO. 150, ACCOUNTING FOR CERTAIN FINANCIAL INSTRUMENTS WITH
CHARACTERISTICS OF BOTH LIABILITIES AND EQUITY: Establishes standards for how
we classify and measure certain financial instruments with characteristics of
both liabilities and equity. The statement requires us to classify financial
instruments within its scope as liabilities rather than mezzanine equity, the
area between liabilities and equity. SFAS No. 150 became effective July 1, 2003.
We have five Trust Preferred Securities outstanding as of December 31, 2003
that are issued by our affiliated trusts. Each trust holds a subordinated
debenture from the parent company. The terms of the debentures are identical to
those of the trust-preferred securities, except that the debenture has an
explicit maturity date. The trust documents, in turn, require that the trust be
liquidated upon the repayment of the debenture. The preferred securities are
redeemable upon the liquidation of the subsidiary; therefore, are considered
equity in the financial statements of the subsidiary.
At their October 29, 2003 Board meeting, the FASB deferred the
implementation of the portion of SFAS No. 150 relating to mandatorily redeemable
noncontrolling interests in subsidiaries when the noncontrolling interests are
classified as equity in the financial statements of the subsidiary. Our Trust
Preferred Securities are included in the deferral action.
Upon adoption of FASB Interpretation No. 46, we determined that our trusts
that issue Trust Preferred Securities should be deconsolidated and reported as
long-term debt -- related parties. Refer to further discussion under FASB
Interpretation No. 46, Consolidation of Variable Interest Entities.
EITF ISSUE NO. 02-03, RECOGNITION AND REPORTING OF GAINS AND LOSSES ON
ENERGY TRADING CONTRACTS UNDER EITF ISSUES NO. 98-10 AND 00-17: At the October
25, 2002 meeting, the EITF reached a consensus to rescind EITF Issue No. 98-10,
Accounting for Contracts Involved in Energy Trading and Risk Management
Activities. As a result, only energy contracts that meet the definition of a
derivative in SFAS No. 133 will be carried at fair value. Energy trading
contracts that do not meet the definition of a derivative must be accounted for
as executory contracts. We recognized a cumulative effect of change in
accounting principle loss of $23 million, net of tax, for the year ended
December 31, 2003.
EITF ISSUE NO. 01-08, DETERMINING WHETHER AN ARRANGEMENT CONTAINS A
LEASE: In May 2003, the EITF reached consensus in EITF Issue No. 01-08
requiring both parties to a transaction, such as power purchase agreements, to
determine whether a service contract or similar arrangement is or includes a
lease within the scope of SFAS No. 13, Accounting for Leases. The consensus is
to be applied prospectively to arrangements agreed to, modified, or acquired in
business combinations in fiscal periods beginning July 1, 2003.
Prospective accounting under EITF Issue No. 01-08, could affect the timing
and classification of revenue and expense recognition. Certain product sales and
service revenue and expenses may be required to be reported as rental or leasing
income and/or expenses. Transactions deemed to be capital lease arrangements
would be included on our balance sheet. The adoption of EITF Issue No. 01-08 has
not impacted our results of operations, cash flows, or financial position.
F-73
CMS ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
EITF ISSUE NO. 03-04, ACCOUNTING FOR CASH BALANCE PENSION PLANS: In May
2003, the EITF reached consensus in EITF Issue No. 03-04 to specifically address
the accounting for certain cash balance pension plans. EITF Issue No. 03-04
concluded that certain cash balance plans be accounted for as defined benefit
plans under SFAS No. 87, Employers' Accounting for Pensions. The EITF
requirements must be applied as of our next plan measurement date after
issuance, which is December 31, 2003. In 2003, we started a cash balance pension
plan that covers employees hired after June 30, 2003. We do account for this
plan as a defined benefit plan under SFAS No. 87 and comply with EITF Issue No.
03-04. For further information, see Note 10, Retirement Benefits.
ACCOUNTING STANDARDS NOT YET EFFECTIVE
FASB INTERPRETATION NO. 46, CONSOLIDATION OF VARIABLE INTEREST
ENTITIES: FASB issued this interpretation in January 2003. The objective of the
Interpretation is to assist in determining when one party controls another
entity in circumstances where a controlling financial interest cannot be
properly identified based on voting interests. Entities with this characteristic
are considered variable interest entities. The Interpretation requires the party
with the controlling financial interest to consolidate the entity.
On December 24, 2003, the FASB issued Revised FASB Interpretation No. 46.
For entities that have not previously adopted FASB Interpretation No. 46,
Revised FASB Interpretation No. 46 provides an implementation deferral, until
the first quarter of 2004. Revised FASB Interpretation No. 46 is effective for
the first quarter of 2004 for all entities other than special purpose entities.
Special-purpose entities must apply either FASB Interpretation No. 46 or Revised
FASB Interpretation No. 46 for the first reporting period that ends after
December 15, 2003.
As of December 31, 2003, we have completed our analysis for and have
adopted Revised FASB Interpretation No. 46 for all entities other than the MCV
Partnership and FMLP. We continue to evaluate and gather information regarding
those entities. We will adopt the provisions of Revised FASB Interpretation No.
46 for the MCV Partnership and FMLP in the first quarter of 2004.
If our completed analysis shows we have the controlling financial interest
in the MCV Partnership and FMLP, we would consolidate their assets, liabilities,
and activities, including $700 million of non-recourse debt, into our financial
statements. Financial covenants under our financing agreements could be impacted
negatively after such a consolidation. As a result, it may become necessary to
seek amendments to the relevant financing agreements to modify the terms of
certain of these covenants to remove the effect of this consolidation, or to
refinance the relevant debt. As of December 31, 2003, our investment in the MCV
Partnership was $419 million and our investment in the FMLP was $224 million.
We determined that we have the controlling financial interest in three
entities that are determined to be variable interest entities. We have
50-percent partnership interest in T.E.S Filer City Station Limited Partnership,
Grayling Generating Station Limited Partnership, and Genesee Power Station
Limited Partnership. Additionally, we have operating and management contracts
and are the primary purchaser of power from each partnership through long-term
power purchase agreements. Collectively, these interests provide us with the
controlling financial interest as defined by the Interpretation. Therefore, we
have consolidated these partnerships into our consolidated financial statements
for the first time as of December 31, 2003. At December 31, 2003, total assets
consolidated for these entities are $227 million and total liabilities are $164
million, including $128 million of non-recourse debt. At December 31, 2003, CMS
Energy has outstanding letters of credit and guarantees of $5 million relating
to these entities. At December 31, 2003, minority interest recorded for these
entities totaled $36 million.
We also determined that we do not hold the controlling financial interest
in our trust preferred security structures. Accordingly, those entities have
been deconsolidated as of December 31, 2003. Company obligated Trust Preferred
Securities totaling $663 million that were previously included in mezzanine
equity, have been
F-74
CMS ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
eliminated due to deconsolidation. As a result of the deconsolidation, we have
reflected $684 million of long-term debt -- related parties and have reflected
an investment in related parties of $21 million.
We are not required to, and have not, restated prior periods for the impact
of this accounting change.
Additionally, we have non-controlling interests in four other variable
interest entities. FASB Interpretation No. 46 requires us to disclose certain
information about these entities. The chart below details our involvement in
these entities at December 31, 2003:
INVESTMENT OPERATING
NAME INVOLVEMENT BALANCE AGREEMENT WITH
(OWNERSHIP INTEREST) NATURE OF THE ENTITY COUNTRY DATE (IN MILLIONS) CMS ENERGY
-------------------- -------------------- ------- ----------- ------------- --------------
Loy Yang Power (49%) Power Generator Australia 1997 $ -- Yes
Taweelah (40%) Power Generator United Arab Emirates 1999 $ 83 Yes
Jubail (25%) Generator -- Saudi Arabia 2001 $ -- Yes
Under Construction
Shuweihat (20%) Generator -- United Arab Emirates 2001 $(24)(a) Yes
Under Construction
----
Total $ 59
====
TOTAL
NAME GENERATING
(OWNERSHIP INTEREST) CAPACITY
-------------------- ----------
Loy Yang Power (49%) 2,000 MW
Taweelah (40%) 777 MW
Jubail (25%) 250 MW
Shuweihat (20%) 1,500 MW
--------
Total 4,527 MW
========
-------------------------
(a) At December 31, 2003, we recorded a negative investment in Shuweihat. The
balance is comprised of our investment of $3 million reduced by our
proportionate share of the negative fair value of derivative instruments of
$27 million. We are required to record the negative investment due to our
future commitment to make an equity investment in Shuweihat.
Our maximum exposure to loss through our interests in these variable
interest entities is limited to our investment balance of $59 million, Loy Yang
currency translation losses of $110 million, net of tax, and letters of credit,
guarantees, and indemnities relating to Taweelah and Shuweihat totaling $146
million. Included in the $146 million is a letter of credit relating to our
required initial investment in Shuweihat of $70 million. We plan to contribute
our initial investment when the project becomes commercially operational in
2004.
STATEMENT OF POSITION, ACCOUNTING FOR CERTAIN COSTS AND ACTIVITIES RELATED
TO PROPERTY, PLANT, AND EQUIPMENT: At its September 9, 2003 meeting, the
Accounting Standards Executive Committee, of the American Institute of Certified
Public Accountants voted to approve the Statement of Position, Accounting for
Certain Costs and Activities Related to Property, Plant, and Equipment. The
Statement of Position is expected to be presented for FASB clearance in 2004 and
would be applicable for fiscal years beginning after December 15, 2004. An asset
classified as property, plant, and equipment asset often comprises multiple
parts and costs. A component accounting policy determines the level at which
those parts are recorded. Capitalization of certain costs related to property,
plant, and equipment are included in the total cost. The Statement of Position
could impact our component and capitalization accounting for property, plant,
and equipment. We continue to evaluate the impact, if any, this Statement of
Position will have upon adoption.
F-75
CMS ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
18: RESTATEMENT AND RECLASSIFICATION
We have determined the need to make certain adjustments to our consolidated
financial statements for the fiscal years ended December 31, 2002, December 31,
2001, and December 31, 2000. Therefore, the consolidated financial statements
for 2002 and 2001 have been restated from amounts previously reported. The table
below summarizes the significant adjustments and the effects on our consolidated
net loss.
NET LOSS (INCREASE) DECREASE 2002 2001 TOTAL
---------------------------- ---- ---- -----
IN MILLIONS
Interest allocation reclassification for International
Energy Distribution....................................... $ (3) $ 3 $ --
Derivatives related to the equity method investments........ (27) (14) (41)
---- ---- ----
Total....................................................... $(30) $(11) $(41)
==== ==== ====
INTEREST ALLOCATION RECLASSIFICATION FOR INTERNATIONAL ENERGY
DISTRIBUTION: Due to lack of progress on the sale, we reclassified our
international energy distribution business, which includes CPEE and SENECA, from
discontinued operations to continuing operations for the years 2003, 2002, and
2001. When we initially reported the international energy distribution business
as a discontinued operation in 2001, we applied APB Opinion No. 30, which
allowed us to record a provision for anticipated operating losses. We currently
apply FASB No. 144 which does not allow us to record a provision for future
operating losses. Therefore, in the process of reclassifying the international
energy distribution business to continuing operations and reversing such
provisions, we increased our net loss by $3 million in 2002 and decreased our
net loss by $3 million in 2001.
DERIVATIVES RELATED TO THE EQUITY METHOD INVESTMENTS: Some of our equity
affiliates hold derivative instruments, including interest rate swaps and other
similar instruments. Some of these instruments have been accounted for as cash
flow hedges, with changes in the fair value of the hedges reported in
accumulated other comprehensive income in 2003, 2002 and 2001. However, in late
2003 it was determined that certain of our equity affiliates did not formally
designate their instruments as hedges, or did not do so in a timely manner, in
accordance with SFAS No. 133. Therefore, the changes in the fair value of the
hedges should have been reported in earnings in 2003, 2002, and 2001. As a
result, the effects of the changes in the fair value of the hedges require
restatement. Our proportionate share of the adjustments increased our net loss
by $27 million in 2002 and increased our net loss by $14 million in 2001.
BALANCE SHEET IMPACTS: The most significant effects on our consolidated
balance sheets include the reclassification of International Energy Distribution
from "held for sale" to continuing operations and the change in our investments
due to the correction of the derivatives discussed above.
During the fourth quarter of 2000, we wrote down the value of our
investment in Loy Yang by $329 million ($268 million after-tax). We have now
concluded that the tax benefit associated with the write-down should have been
reduced by $38 million. Accordingly, our retained deficit as of January 1, 2001
increased by this amount.
F-76
CMS ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following tables present the effects of the adjustments we made to our
consolidated financial statements for the fiscal years ended December 31, 2002
and December 31, 2001, as well as effects of reclassifying Marysville and
Parmelia into discontinued operations.
CONSOLIDATED STATEMENTS OF INCOME
2002 2001
-------------------------- --------------------------
AS REPORTED AS RESTATED AS REPORTED AS RESTATED
----------- ----------- ----------- -----------
IN MILLIONS
Operating Revenue............................... $8,561 $8,673 $7,878 $8,006
Earnings from Equity Method Investees........... 126 92 185 172
Operating expenses
Operation..................................... 7,177 7,242 6,762 6,851
Maintenance................................... 211 212 224 225
Depreciation, depletion and amortization...... 403 412 398 408
General taxes................................. 199 222 196 220
Asset impairment charges...................... 598 602 240 323
------ ------ ------ ------
Total Operating Expenses...................... 8,588 8,690 7,820 8,027
------ ------ ------ ------
Operating Income................................ 99 75 243 151
------ ------ ------ ------
Other Income (Deductions):
Accretion expense............................. (31) (31) (37) (37)
Gain (loss) on asset sales, net............... 37 37 - (2)
Other, net.................................... (4) (6) 25 26
------ ------ ------ ------
Total Other Income (Deductions)............... 2 -- (12) (13)
------ ------ ------ ------
Fixed Charges................................... 504 508 562 566
Loss From Continuing Operations Before Income
Taxes and Minority Interests.................. (403) (433) (331) (428)
------ ------ ------ ------
Income Tax Expense (Benefit).................... 13 (41) (98) (94)
Minority Interests.............................. -- 2 3 (7)
------ ------ ------ ------
Loss From Continuing Operations................. (416) (394) (236) (327)
------ ------ ------ ------
Loss From Discontinued Operations............... (222) (274) (210) (128)
------ ------ ------ ------
Loss Before Cumulative Effect of Change in
Accounting Principle.......................... (638) (668) (446) (455)
------ ------ ------ ------
Cumulative Effect of Change in Accounting....... 18 18 (2) (4)
------ ------ ------ ------
Consolidated Net Loss........................... $ (620) $ (650) $ (448) $ (459)
====== ====== ====== ======
Basic and Diluted Loss Per Share................ $(4.46) $(4.68) $(3.42) $(3.51)
====== ====== ====== ======
F-77
CMS ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CONSOLIDATED STATEMENTS OF CASH FLOWS
2002 2001
-------------------------- --------------------------
AS REPORTED AS RESTATED AS REPORTED AS RESTATED
----------- ----------- ----------- -----------
IN MILLIONS
Consolidated net loss........................... $ (620) $ (650) $ (448) $ (459)
Net cash provided by operating activities....... 624 614 366 372
Net cash provided by (used in) investing
activities.................................... 863 829 (1,348) (1,349)
Net cash provided by (used in) financing
activities.................................... (1,237) (1,223) 968 967
Effect of Exchange Rate on Cash................. -- 8 -- (10)
Net Increase (Decrease) in Cash and Temporary
Cash Investments.............................. 250 228 (14) (20)
------- ------- ------- -------
Cash and Cash Investments, End of Period........ $ 377 $ 351 $ 127 $ 123
======= ======= ======= =======
CONSOLIDATED BALANCE SHEETS
2002 2001
-------------------------- --------------------------
AS REPORTED AS RESTATED AS REPORTED AS RESTATED
----------- ----------- ----------- -----------
IN MILLIONS
ASSETS
Plant and Property (at cost).................... $ 5,234 $ 6,103 $ 5,848 $ 6,703
------- ------- ------- -------
Investments..................................... 1,398 1,369 1,961 1,960
------- ------- ------- -------
Current Assets:
Cash and temporary cash investments........... 377 351 127 123
Restricted cash............................... -- 38 -- 4
Accounts receivable, notes receivable, and
accrued revenue............................ 757 783 704 743
Assets held for sale.......................... 644 595 471 412
Price risk management assets.................. 115 115 327 327
Prepayments, inventories, and other........... 855 857 931 951
------- ------- ------- -------
Total Current Assets............................ 2,748 2,739 2,560 2,560
------- ------- ------- -------
Non-current Assets:
Regulatory assets............................. 1,053 1,053 1,105 1,105
Assets held for sale.......................... 2,081 2,084 3,480 3,438
Price risk management assets.................. 135 135 368 368
Other......................................... 1,266 1,298 1,453 1,499
------- ------- ------- -------
Total Non-current Assets........................ 4,535 4,570 6,406 6,410
------- ------- ------- -------
Total Assets.................................... $13,915 $14,781 $16,775 $17,633
======= ======= ======= =======
F-78
CMS ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2002 2001
-------------------------- --------------------------
AS REPORTED AS RESTATED AS REPORTED AS RESTATED
----------- ----------- ----------- -----------
IN MILLIONS
STOCKHOLDERS' INVESTMENT AND LIABILITIES
Capitalization:
Common stockholders' equity..................... $ 1,133 $ 1,078 $ 2,038 $ 1,991
Long-term debt.................................. 5,356 5,357 5,840 5,842
Non-current portion of capital leases........... 116 116 71 71
Other........................................... 927 927 1,258 1,258
------- ------- ------- -------
Total Capitalization............................ 7,532 7,478 9,207 9,162
------- ------- ------- -------
Minority Interests.............................. 21 38 24 43
------- ------- ------- -------
Current Liabilities:
Current portion of long-term debt and capital
leases..................................... 640 646 1,016 1,016
Notes payable................................. 458 458 416 416
Accounts payable.............................. 482 496 595 614
Accrued taxes................................. 291 291 111 111
Liabilities held for sale..................... 465 427 639 605
Price risk management liabilities............. 96 96 367 367
Deferred income taxes......................... 15 15 49 49
Other......................................... 451 460 478 494
------- ------- ------- -------
Total Current Liabilities....................... 2,898 2,889 3,671 3,672
------- ------- ------- -------
Non-current Liabilities:
Deferred income taxes......................... 414 438 824 864
Regulatory liabilities for cost of removal.... -- 907 -- 870
Liabilities held for sale..................... 1,243 1,218 1,376 1,354
Price risk management liabilities............. 135 135 287 287
Other......................................... 1,672 1,678 1,386 1,381
------- ------- ------- -------
Total Non-current Liabilities................... 3,464 4,376 3,873 4,756
------- ------- ------- -------
Total Stockholders' Investment and
Liabilities................................... $13,915 $14,781 $16,775 $17,633
======= ======= ======= =======
F-79
CMS ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS' EQUITY
2002 2001
-------------------------- --------------------------
AS REPORTED AS RESTATED AS REPORTED AS RESTATED
----------- ----------- ----------- -----------
IN MILLIONS
Retained Deficit
At beginning of period........................ $ (951) $(1,001) $ (313) $ (352)
Consolidated net loss......................... (620) (650) (448) (459)
Common stock dividends declared............... (149) (149) (190) (190)
------- ------- ------ -------
At end of period........................... (1,720) (1,800) (951) (1,001)
------- ------- ------ -------
Accumulated Other Comprehensive Loss
At beginning of period........................ (269) (266) (201) (198)
Minimum pension liability..................... (241) (241) -- --
Investments................................... 7 7 (3) (3)
Derivative instruments........................ (25) (3) (38) (38)
Foreign currency translation.................. (225) (225) (27) (27)
------- ------- ------ -------
At end of period........................... (753) (728) (269) (266)
------- ------- ------ -------
Common stock.................................... 1 1 1 1
Other paid-in capital........................... 3,605 3,605 3,257 3,257
------- ------- ------ -------
Total Common Stockholders' Equity............... $ 1,133 $ 1,078 $2,038 $ 1,991
======= ======= ====== =======
Total Other Comprehensive Loss.................. $(1,104) $(1,112) $ (516) $ (527)
======= ======= ====== =======
F-80
CMS ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
19: QUARTERLY FINANCIAL AND COMMON STOCK INFORMATION (UNAUDITED)
We have determined the need to make certain adjustments to our consolidated
financial statements for the quarterly periods of 2003 and 2002. Therefore, the
consolidated financial statements for the quarterly periods of 2003 and 2002
have been restated from amounts previously reported.
2003 (RESTATED)
------------------------------------------
QUARTERS ENDED MARCH 31 JUNE 30 SEPT. 30 DEC. 31
-------------- -------- ------- -------- -------
IN MILLIONS, EXCEPT PER SHARE AMOUNTS
Operating revenue.......................................... $1,968 $1,126 $1,047 $1,372
Operating income........................................... 236 176 78 105
Income (loss) from continuing operations................... 75 (12) (71) (35)
Discontinued operations(a)................................. 31 (53) 2 43
Cumulative effect of change in accounting principles(a).... (24) -- -- --
Consolidated net income (loss)............................. 82 (65) (69) 8
Income (loss) from continuing operations per average common
share -- basic........................................... 0.52 (0.08) (0.47) (0.22)
Income (loss) from continuing operations per average common
share -- diluted......................................... 0.47 (0.08) (0.47) (0.22)
Basic earnings (loss) per average common share(b).......... 0.57 (0.45) (0.46) 0.05
Diluted earnings (loss) per average common share(b)........ 0.52 (0.45) (0.46) 0.05
Dividends declared per common share........................ -- -- -- --
Common stock prices(c)
High..................................................... 10.59 8.50 7.99 8.63
====== ====== ====== ======
Low...................................................... 3.49 4.58 6.11 7.44
====== ====== ====== ======
2002 (RESTATED)
------------------------------------------
QUARTERS ENDED MARCH 31 JUNE 30 SEPT. 30 DEC. 31
-------------- -------- ------- -------- -------
IN MILLIONS, EXCEPT PER SHARE AMOUNTS
Operating revenue.......................................... $2,248 $2,123 $2,566 $1,736
Operating income (loss).................................... 283 136 178 (522)
Income (loss) from continuing operations................... 103 17 (1) (513)
Discontinued operations(a)................................. (52) (128) 26 (120)
Cumulative effect of change in accounting principles(a).... -- 17 1 --
Consolidated net income (loss)............................. 51 (94) 26 (633)
Income (loss) from continuing operations per average common
share -- basic........................................... 0.77 0.14 -- (3.57)
Income (loss) from continuing operations per average common
share -- diluted......................................... 0.77 0.14 -- (3.57)
Basic earnings (loss) per average common share(b).......... 0.38 (0.69) 0.18 (4.40)
Diluted earnings (loss) per average common share(b)........ 0.38 (0.69) 0.18 (4.40)
Dividends declared per common share........................ 0.365 0.365 0.18 0.18
Common stock prices(c)
High..................................................... 24.62 22.24 11.28 10.48
====== ====== ====== ======
Low...................................................... 21.27 10.46 7.49 5.79
====== ====== ====== ======
-------------------------
(a) Net of tax
(b) Sum of the quarters may not equal the annual earnings per share due to
changes in shares outstanding
(c) Based on New York Stock Exchange -- Composite transactions
F-81
CMS ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following tables present the effects of the adjustments we made to our
consolidated financial statements for the quarterly periods of 2003 and 2002, as
well as the effects of reclassifying Marysville and Parmelia into discontinued
operations.
2003
-----------------------------------------
QUARTERS ENDED -- REPORTED VS. RESTATED MARCH 31 JUNE 30 SEPT. 30
--------------------------------------- -------- ------- --------
IN MILLIONS, EXCEPT PER SHARE AMOUNTS
Operating revenue as reported............................... $1,992 $1,154 $1,016
Operating revenue as restated............................... 1,968 1,126 1,047
Operating income as reported................................ 239 183 129
Operating income as restated................................ 236 176 78
Income (loss) from continuing operations as reported........ 76 (5) (34)
Income (loss) from continuing operations as restated........ 75 (12) (71)
Discontinued operations as reported......................... 27 (40) (43)
Discontinued operations as restated......................... 31 (53) 2
Consolidated net income (loss) as reported.................. 79 (45) (77)
Consolidated net income (loss) as restated.................. 82 (65) (69)
Basic earnings (loss) per average common share as
reported.................................................. 0.55 (0.31) (0.51)
Basic earnings (loss) per average common share as
restated.................................................. 0.57 (0.45) (0.46)
Diluted earnings (loss) per average common share as
reported.................................................. 0.51 (0.31) (0.51)
Diluted earnings (loss) per average common share as
restated.................................................. 0.52 (0.45) (0.46)
2002
------------------------------------------
QUARTERS ENDED -- REPORTED VS. RESTATED MARCH 31 JUNE 30 SEPT. 30 DEC. 31
--------------------------------------- -------- ------- -------- -------
IN MILLIONS, EXCEPT PER SHARE AMOUNTS
Operating revenue as reported.............................. $2,263 $2,135 $2,534 $1,708
Operating revenue as restated.............................. 2,248 2,123 2,566 1,736
Operating income (loss) as reported........................ 275 152 190 (520)
Operating income (loss) as restated........................ 283 136 178 (522)
Income (loss) from continuing operations as reported....... 93 36 11 (557)
Income (loss) from continuing operations as restated....... 103 17 (1) (513)
Discontinued operations as reported........................ (51) (127) 25 (68)
Discontinued operations as restated........................ (52) (128) 26 (120)
Consolidated net income (loss) as reported................. 42 (74) 37 (625)
Consolidated net income (loss) as restated................. 51 (94) 26 (633)
Basic earnings (loss) per average common share as
reported................................................. 0.32 (0.55) 0.26 (4.34)
Basic earnings (loss) per average common share as
restated................................................. 0.38 (0.69) 0.18 (4.40)
Diluted earnings (loss) per average common share as
reported................................................. 0.32 (0.55) 0.26 (4.34)
Diluted earnings (loss) per average common share as
restated................................................. 0.38 (0.69) 0.18 (4.40)
F-82
CMS ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The table below summarizes the significant adjustments and the effect on
consolidated net income (loss) by quarter.
2003 2002
------------------------------ -----------------------------------------
QUARTERS ENDED MAR. 31 JUNE 30 SEPT. 30 MAR. 31 JUNE 30 SEPT. 30 DEC. 31
-------------- ------- ------- -------- ------- ------- -------- -------
IN MILLIONS
Consolidated net income (loss) as
reported............................... $79 $(45) $(77) $42 $(74) $37 $(625)
Discontinued operations reclass(a)....... -- -- -- (1) (1) (1) --
Derivative accounting changes(b)......... 3 (6) 8 10 (19) (10) (8)
Panhandle sale adjustment(c)............. -- (14) -- -- -- -- --
--- ---- ---- --- ---- --- -----
Consolidated net income (loss) as
restated............................... $82 $(65) $(69) $51 $(94) $26 $(633)
=== ==== ==== === ==== === =====
-------------------------
(a) We continue to pursue the sale of International Energy Distribution, which
includes CPEE and SENECA, but due to the slow progress on the sale, we have
reclassified this entity from discontinued operations to continuing
operations for the years 2003, 2002, and 2001. When we initially reported
the international energy distribution business as a discontinued operation
in 2001, we applied APB Opinion No. 30, which allowed us to record a
provision for anticipated closing costs and operating losses. We currently
apply FASB No. 144 which does not allow us to record a provision for future
operating losses. Therefore, in the process of reclassifying the
international energy distribution business to continuing operations and
reversing such provisions, we increased our net loss by $3 million in 2002
and decreased our net loss by $3 million in 2001. In 2003, there was an
increase to net income of $75 million as a result of reversing the
previously recognized impairment loss in discontinued operations.
(b) We determined that certain equity method investees inappropriately
accounted for interest rate swaps as hedges. For additional details, see
Note 18, Restatement and Reclassification.
(c) We determined the net loss recorded in the second quarter of 2003 relating
to the sale of Panhandle, reflected as Discontinued Operations, was
understated by approximately $14 million, net of tax. The understatement
occurred because we did not recognize through our second quarter 2003
earnings an unrealized loss related to certain Panhandle interest rate
hedging derivative instruments. Pursuant to SFAS No. 133, the unrealized
loss was accounted for in Other Comprehensive Income, but needed to be
recognized through earnings upon the sale of Panhandle.
F-83
(This page intentionally left blank)
F-84
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
CMS Energy Corporation
We have audited the accompanying consolidated balance sheets of CMS Energy
Corporation (a Michigan corporation) and subsidiaries as of December 31, 2003
and 2002, and the related consolidated statements of income (loss), common
stockholders' equity and cash flows for each of three years in the period ended
December 31, 2003. Our audits also included the financial statement schedule
listed in the Index at Item 15(a)(2). These financial statements and schedule
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements and schedule based on our
audits. The financial statements of Midland Cogeneration Venture Limited
Partnership and Jorf Lasfar Energy Company S.C.A., which represent investments
accounted for under the equity method of accounting, have been audited by other
auditors (the other auditors for 2001 for Midland Cogeneration Venture Limited
Partnership have ceased operations) whose reports have been furnished to us;
insofar as our opinion on the consolidated financial statements relates to the
amounts included for Midland Cogeneration Venture Limited Partnership and Jorf
Lasfar Energy Company S.C.A., respectively, it is based solely on their reports.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits and the reports of other
auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the reports of other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the consolidated financial position of CMS Energy Corporation
and subsidiaries at December 31, 2003 and 2002, and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended December 31, 2003 in conformity with accounting principles generally
accepted in the United States. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
As discussed in Notes 16 and 17 to the consolidated financial statements,
in 2003, the Company adopted the provisions of Statement of Financial Accounting
Standards (SFAS) No. 143, "Accounting for Asset Retirement Obligations", EITF
Issue No. 02-03, "Recognition and Reporting of Gains and Losses on Energy
Trading Contracts" and of Financial Accounting Standards Board Interpretation
No. 46, "Consolidation of Variable Interest Entities". As discussed in Notes 3,
9 and 15 to the consolidated financial statements, in 2002, the Company adopted
the provisions of SFAS No. 142, "Goodwill and Other Intangibles", SFAS No. 148,
"Accounting for Stock-Based Compensation" and Midland Cogeneration Venture
Limited Partnership adopted the provisions of SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities", as amended and interpreted.
As discussed in Note 18 to the consolidated financial statements, the
Company restated its 2002 and 2001 financial statements.
/s/ ERNST & YOUNG LLP
Detroit, Michigan
February 27, 2004
F-85
REPORT OF INDEPENDENT AUDITORS
We have audited the accompanying balance sheets of Jorf Lasfar Energy
Company S.C.A (the "Company") as of December 31, 2003, 2002 and 2001, and the
related statements of income, of stockholders' equity and of cash flows for the
years then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statements presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Jorf Lasfar Energy Company
S.C.A at December 31, 2003, 2002 and 2001, and the results of its operations and
its cash flows for the years then ended, in conformity with accounting
principles generally accepted in the United States of America.
/s/Price Waterhouse
Casablanca, Morocco,
February 10, 2004
F-86
REPORT OF INDEPENDENT AUDITORS
To the Partners and the Management Committee of
Midland Cogeneration Venture Limited Partnership:
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, partners' equity and cash flows
present fairly, in all material respects, the financial position of the Midland
Cogeneration Limited Partnership (a Michigan limited partnership) and its
subsidiaries (MCV) at December 31, 2003 and 2002, and the results of their
operations and their cash flows for the each of the two years ended December 31,
2003 and 2002 in conformity with accounting principles generally accepted in the
United States of America. These financial statements are the responsibility of
MCV's management; our responsibility is to express an opinion on these financial
statements based on our audit. We conducted our audits of these statements in
accordance with auditing standards generally accepted in the United States of
America, which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion. The financial statements of
MCV for the year ended December 31, 2001, were audited by other independent
accountants who have ceased operations. Those independent accountants expressed
an unqualified opinion on those financial statements in their report dated
January 18, 2002.
As explained in Note 2 to the financial statements, effective April 1,
2002, Midland Cogeneration Venture Limited Partnership changed its method of
accounting for derivative and hedging activities in accordance with Derivative
Implementation Group ("DIG") Issue C-16.
/s/ PricewaterhouseCoopers LLP
Detroit, Michigan
February 18, 2004
F-87
THIS REPORT IS A COPY OF THE PREVIOUSLY ISSUED
ARTHUR ANDERSEN REPORT AND THIS REPORT HAS NOT BEEN
REISSUED BY ARTHUR ANDERSEN LLP
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Partners and the Management Committee of the
Midland Cogeneration Venture Limited Partnership:
We have audited the accompanying consolidated balance sheets of the MIDLAND
COGENERATION VENTURE LIMITED PARTNERSHIP (a Michigan limited partnership) and
subsidiaries (MCV) as of December 31, 2001 and 2000, and the related
consolidated statements of operations, partners' equity and cash flows for each
of the three years in the period ended December 31, 2001. These financial
statements are the responsibility of MCV's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of the Midland
Cogeneration Venture Limited Partnership and subsidiaries as of December 31,
2001 and 2000, and the consolidated results of their operations and their cash
flows for each of the three years in the period ended December 31, 2001, in
conformity with accounting principles generally accepted in the United States.
As explained in Note 2 to the financial statements, effective January 1,
2001, Midland Cogeneration Venture Limited Partnership changed its method of
accounting related to derivatives and hedging activities.
/s/Arthur Andersen LLP
Detroit, Michigan,
January 18, 2002
F-88
Jorf Lasfar Energy Company S.C.A
JLEC
CENTRALE THERMIQUE DE JORF LASFAR
B P 99 SIDI BOUZID
EL JADIDA
MOROCCO
Tel : 212 23 34 53 71
Fax : 212 23 34 54 05
US GAAP
FINANCIAL STATEMENTS
AS OF
DECEMBER 31, 2003, 2002 AND 2001
AUDITED
--------------------------------------------------------------------------------
R.C. n(degree)86655 - Patente n(degree)35511273 - Identification Fiscale
(I.S TVA) n(degree)1021595
F-90
JORF LASFAR ENERGY COMPANY
INDEX TO FINANCIAL STATEMENTS
Page(s)
-------------
Balance Sheet
As of December 31, 2003, 2002, and 2001 ........................................ 4
Statement of Income
For year ending December 31, 2003, 2002, and 2001 .............................. 5
Statement of Stockholders' Equity
For year ending December 31, 2003, 2002, and 2001 .............................. 6
Statement of Cash Flows
For year ending December 31, 2003, 2002, and 2001 .............................. 7
Notes to US GAAP Financial Statements ....................................................... 8-29
F-91
Report of Independent Auditors
We have audited the accompanying balance sheets of Jorf Lasfar Energy
Company S.C.A (the "Company") as of December 31, 2003, 2002 and 2001, and the
related statements of income, of stockholders' equity and of cash flows for the
years then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statements presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Jorf Lasfar Energy Company
S.C.A at December 31, 2003, 2002 and 2001, and the results of its operations and
its cash flows for the years then ended, in conformity with accounting
principles generally accepted in the United States of America.
Price Waterhouse
Casablanca, Morocco,
February 10, 2004
F-92
JORF LASFAR ENERGY COMPANY
BALANCE SHEET
Note December 31, 2003 December 31, 2002 December 31, 2001
---- ----------------- ----------------- -----------------
(000) U.S. Dollars (000) U.S. Dollars (000) U.S. Dollars
ASSETS
Current Assets
Cash .............................................. 3.1 65,611 46,683 67,106
Inventories ....................................... 2.c & 4 38,548 40,615 31,759
Account Receivable ................................ 5 85,486 76,175 86,515
Prepayments ....................................... 6 8,138 10,431 4,477
Net investment from $ DFL model ................... 2.b & 17.3 38,461 20,206 56,061
Net investment from Euro DFL model ................ 2.b & 17.3 40,942 31,298 21,301
Other ............................................. 0 0 0
---------- ---------- ----------
Total current assets ....................... 277,186 225,408 267,219
Long Term Assets, net
Restricted Cash ................................... 3.2 83,049 53,778 17,140
Fixed Assets ...................................... 7 9,603 6,554 6,284
Net investment from $ DFL model ................... 2.b & 17.3 638,004 678,549 686,660
Net investment from Euro DFL model ................ 2.b & 17.3 411,100 374,509 339,492
$ Capacity Charges less than $ DFL model .......... 13.1 713 0 9,907
Euro Capacity Charges less than Euro DFL model .... 13.2 0 0 4,225
Other Long Term Assets ............................ 9 19,058 10,968 9,445
---------- ---------- ----------
Total Long Term Assets ..................... 1,161,527 1,124,357 1,073,153
---------- ---------- ----------
Total assets ............................... 1,438,713 1,349,765 1,340,372
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable to third parties ................. 10 47,851 25,498 34,764
Accounts payable to related parties ............... 11 176,693 145,065 74,704
VAT Liability .................................... 8 3,972 2,871 3,078
Taxes payable ..................................... 12 7,527 4,866 873
Current part of Long-term loans in US Dollars ..... 15 25,749 25,749 24,873
Current part of Long-term loans in Euro ........... 15 44,491 36,855 31,167
Other current liabilities ......................... 14 7,739 7,955 18,607
---------- ---------- ----------
Total current liabilities .................. 314,023 248,859 188,066
Non-Current Liabilities
Long-term loans in US Dollars ..................... 15 212,426 238,174 251,667
Long-term loans in Euro ........................... 15 367,052 340,912 319,457
$ Capacity Charges greater than $ DFL model ....... 13.1 0 2,441 0
Euro Capacity Charges greater than Euro DFL model.. 13.2 422 236 0
Deferred Tax Liability ............................ 2.f 0 13,005 6,097
Derivative Instrument Liability ................... 20 22,050 21,410 10,665
Unfunded Pension Obligations ...................... 19.1 9,878 5,693 0
---------- ---------- ----------
Total non-current liabilities .............. 611,828 621,872 587,886
Commitment and Contingencies .......................... 22
Stockholders' Equity
Common Stock ...................................... 16.1 58 58 58
Convertible Stockholders' Securities .............. 16.2 201,425 201,425 201,425
Preferred Stock ................................... 16.3 185,930 185,930 185,930
Retained Earnings ................................. 16.4 147,499 113,031 187,672
Other Comprehensive Income or (Loss) .............. 20 (22,050) (21,410) (10,665)
---------- ---------- ----------
Total stockholders' equity ................. 512,862 479,033 564,420
---------- ---------- ----------
Total liabilities and stockholders' equity.. 1,438,713 1,349,765 1,340,372
The accompanying Notes 1 to 23 are an integral part of these financial
statements.
F-93
JORF LASFAR ENERGY COMPANY
STATEMENT OF INCOME
January 1, 2003 January 1, 2002 January 1, 2001
to to to
Note December 31, 2003 December 31, 2002 December 31, 2001
-------- ------------------ ------------------ ------------------
(000) U.S. Dollars (000) U.S. Dollars (000) U.S. Dollars
REVENUE
Lease Revenue from $ DFL model ......... 2.b 17.2 81,793 88,464 100,679
Lease Revenue from Euro DFL model ...... 2.b 17.2 104,635 95,078 94,545
Energy Payments ........................ 128,981 130,446 116,709
O&M Revenue ............................ 45,066 42,930 38,809
Supplemental Capacity Charges .......... 3,949 4,017 3,887
Sale of Fly Ash ........................ 214 247 303
License Tax Reimbursement .............. 4,102 0 0
Others ................................. 138 3,090 2,364
-------- -------- --------
TOTAL REVENUE 368,878 364,272 357,296
OPERATING EXPENSES
Coal Cost .............................. 129,935 126,957 115,066
Fuel Oil Cost .......................... 1,280 910 754
O&M Costs .............................. 33,554 25,057 20,329
Operator's Incentive ................... 2,784 3,721 2,099
Generator Costs ........................ 11,994 11,397 12,547
License Tax Costs ...................... 4,102 0 0
Amortization of Major Maintenance ...... 9.1 1,935 1,128 261
Depreciation of Other Assets ........... 2,093 1,624 470
Provision For Future Pension Obligations 2,902 5,427 0
-------- -------- --------
TOTAL OPERATING EXPENSES 190,580 176,222 151,525
OPERATING INCOME ............................. 178,299 188,050 205,771
FINANCIAL ITEMS
Financial Income ....................... 2,025 1,764 4,735
Exchange Gain (+) or Loss (-) .......... 2.d (8,605) (1,558) 8,197
Financial Expenses ..................... 18 (49,425) (44,834) (50,617)
-------- -------- --------
TOTAL FINANCIAL ITEMS (56,005) (44,628) (37,685)
INCOME BEFORE TAXES 122,293 143,422 168,086
Income Taxes
Current ......................... 2.e 15,448 4,226 603
Deferred ........................ 2.f (13,005) 6,908 6,097
-------- -------- --------
NET INCOME 16.4 & 21 119,850 132,288 161,386
The accompanying Notes 1 to 23 are an integral part of these financial
statements.
F-94
JORF LASFAR ENERGY COMPANY
STATEMENT OF STOCKHOLDERS' EQUITY
January 1, 2003 January 1, 2002 January 1, 2001
to to to
Note December 31, 2003 December 31, 2002 December 31, 2001
------ ----------------- ------------------ -----------------
COMMON STOCK
At beginning and end of period in number of shares 16.1 5,500 5,500 5,500
At beginning and end of period in thousands of USD 16.1 58 58 58
(000) U.S. Dollars
CONVERTIBLE STOCKHOLDERS' SECURITIES ------------------
At beginning of period 201,425 201,425 387,355
Conversion of Convertible Stockholders' Securities
to Preferred Stock 0 0 (185,930)
Conversion of Convertible Stockholders' Securities
to Common Stock 0 0 0
----------------- ----------------- ----------------
At end of period 16.2 201,425 201,425 201,425
PREFERRED STOCK
At beginning of period 185,930 185,930 0
Conversion of Convertible Stockholders' Securities
to Preferred Stock 0 0 185,930
Conversion of Preferred Stock to Common Stock 0 0 0
----------------- ----------------- ----------------
At end of period 16.3 185,930 185,930 185,930
RETAINED EARNINGS (DEFICIT)
At beginning of period 113,031 187,672 296,409
Net income 119,850 132,288 161,386
Common stock dividend (64,973) (184,891) (270,123)
Preferred stock dividend (9,796) (9,942) 0
Convertible stockholders' securities (10,613) (12,096) 0
----------------- ----------------- ----------------
At end of period 16.4 147,499 113,031 187,672
OTHER COMPREHENSIVE INCOME (LOSS) (a)
Derivative Instruments
At beginning of period (21,410) (10,665) 0
Reclassification of gains (losses) included in net income 6,871 5,811 699
Unrealized gain (loss) on derivative instruments (7,511) (16,556) (11,364)
----------------- ----------------- ----------------
At end of period 20 (22,050) (21,410) (10,665)
----------------- ----------------- ----------------
512,862 479,034 564,420
================= ================= ================
(a) Disclosure of Comprehensive Income (Loss)
Net income 119,850 132,288 161,386
Derivative instruments
Reclassification of gains (losses) in net income 6,871 5,811 699
Unrealized gain (loss) on derivative instruments (7,511) (16,556) (11,364)
----------------- ----------------- ----------------
Total Comprehensive Income 119,211 121,543 150,721
================= ================= ================
The accompanying Notes 1 to 23 are an integral part of these financial
statements.
F-95
JORF LASFAR ENERGY COMPANY
STATEMENT OF CASH FLOWS
January 1, 2003 January 1, 2002 January 1, 2001
to to to
December 31, 2003 December 31, 2002 December 31, 2001
------------------ ------------------ ------------------
Note (000) U.S. Dollars (000) U.S. Dollars (000) U.S. Dollars
------
CASH FLOWS FROM OPERATING ACTIVITIES
Payments received from ONE ....................... $ 426,250 $ 471,044 $ 411,872
Interest received ................................ 1,870 1,748 4,543
Insurance Payments ............................... (5,699) (5,665) (7,104)
Payments of Operating Costs ...................... (233,068) (249,255) (228,771)
Cash Effect of Value Added Tax ................... 2,463 (321) 4,430
--------- --------- ---------
Net cash provided by operating activities.. 21 191,816 217,551 184,970
CASH FLOWS USED FOR INVESTING ACTIVITIES
Net (increase) in restricted cash ................ (25,942) (36,638) (17,140)
Acquisition of fixed assets ...................... (2,300) (3,957) (5,501)
Payment of Major Maintenance costs ............... (6,261) (93) (21,504)
--------- --------- ---------
Net cash used in investing activities ..... (34,503) (40,688) (44,145)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from loans .............................. 0 0 92,589
Proceeds of share capital payments ............... 0 0 0
Repayment of loans ............................... (65,639) (57,964) (41,961)
Payment of Convertible Securities interest ....... (11,417) (12,386) 0
Payment of Preferred Stock dividend .............. (10,539) (10,181) 0
Payment of Common Stock dividend ................. (54,877) (121,933) (189,600)
Repayment of Stockholders loans .................. 0 0 0
Purchase of Preferred Stock shares ............... 0 0 0
Purchase of Common Stock shares .................. 0 0 0
--------- --------- ---------
Net cash provided by financing activities.. (142,472) (202,464) (138,972)
Effect of exchange rate changes on cash .......... 4,087 5,178 (1,950)
CASH AT BEGINNING OF PERIOD ............................. 46,683 67,106 67,203
NET INCREASE (DECREASE) IN CASH DURING PERIOD ........... 18,928 (20,422) (97)
--------- --------- ---------
CASH AT END OF PERIOD ................................... 3.1 $ 65,611 $ 46,683 $ 67,106
========= ========= =========
SUPPLEMENTAL CASH FLOWS INFORMATION
Cash paid during the year-
Interest 49,136 56,054 45,486
Income taxes 12,826 5,150 6,173
The accompanying Notes 1 to 23 are an integral part of these financial
statements.
F-96
JORF LASFAR ENERGY COMPANY
NOTES TO US GAAP FINANCIAL STATEMENTS DATED DECEMBER 31, 2003
1. GENERAL
A. BACKGROUND
The power station at Jorf Lasfar is located on the Atlantic coast of Morocco,
adjacent to the Port of Jorf Lasfar, in the Province of El Jadida. This location
is approximately 127 km south--west of Casablanca. Units 1 and 2 of the power
station were constructed by GEC Alstom for the Moroccan Electricity Company,
Office National de l'Electricite ("ONE"), and are now in commercial operation.
Each of these existing Units is 330 MW, fired by coal. In October of 1994, the
ONE issued a public tender for international companies to expand the power
station at Jorf Lasfar. In February of 1995, the ONE selected the "Consortium"
of ABB Energy Ventures and CMS Generation as the preferred bidder and exclusive
partner for negotiation. In April of 1996, the Consortium and the ONE reached
agreement in principle, and initialed the necessary Project Agreements.
B. ESTABLISHMENT
In order to officially conclude and implement these Project Agreements, the
Consortium established the Jorf Lasfar Energy Company (the "Company" or "JLEC")
on January 20, 1997. The Company was established as a limited partnership
("societe en commandite par actions") in accordance with the Laws of the Kingdom
of Morocco, with Commercial Registration Number 86655, Fiscal Identification
Number 1021595, and Patente Number 35511274. In accordance with its charter
documents, the Company's objective and purpose is to construct, operate, manage
and maintain the power station at Jorf Lasfar, including the development,
financing, engineering, design, construction, commissioning, testing, operation
and maintenance of two (2) new coal-fired Units, which are very similar in size
and technology to the existing Units. In order to secure its fuel supply the
Company also operates and maintains the coal-unloading pier in the Port of Jorf
Lasfar. For these activities, the Company received a "right of possession"
("droit de jouissance") for the Site, the existing Units, the new Units and coal
unloading pier. This "right of possession" will continue for the duration of the
Project Agreements, which is anticipated to be in the range from 15 to 30 years.
C. COMPANY LOAN, TRANSFER OF POSSESSION, PROJECT FINANCING AND INITIAL
DISBURSEMENT
On September 12, 1997, all Project Agreements were signed, the Company Loan
Agreement was executed and the first disbursement of the Company Loan was used
to pay the TPA fee to ONE. As a consequence, JLEC received possession of the
power station at Jorf Lasfar on September 13, 1997, and began to sell its
available capacity and net generation to ONE. All remaining requirements for
project financing were completed in November, and initial disbursement of the
Project Loans occurred on November 25, 1997.
D. CONSTRUCTION, COMMERCIAL OPERATION, PURCHASE OF COMPANY LOAN AND REPAYMENT OF
PROJECT LOANS
After a period of construction lasting 33 months and 41 months, Unit 3 and 4
began normal commercial operation on June 9, 2000, and February 2, 2001,
respectively. Consequently, the JLEC stockholders purchased 100% of the Company
Loan Notes on December 11, 2000, and JLEC began the repayment of all Project
Loans on May 15, 2001. After JLEC completes the repayment of all Project Loans
(which is scheduled for February 15, 2013), ONE has the option to pay JLEC the
Termination Amount, and then terminate all Project Agreements and retake
possession of the Site and power station at Jorf Lasfar.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. BASIS OF PREPARATION OF FINANCIAL STATEMENTS
The Company's financial statements are prepared using the historical cost
convention. The accounting and reporting policies of the Company are in
accordance with the generally accepted accounting principles of Morocco, which
are called "Code General de Normalisation Comptable" or "CGNC". Financial
statements are prepared in accordance with these CGNC standards, and expressed
in Dirhams. In addition to and separately from Moroccan (CGNC) financial
statements in Dirhams, the Company uses the U.S Dollar as functional currency,
and has prepared these financial statements in accordance with generally
accepted accounting principles of the United States.
F-97
JORF LASFAR ENERGY COMPANY
NOTES TO US GAAP FINANCIAL STATEMENTS DATED DECEMBER 31, 2003
B. REVENUE RECOGNITION
On September 12, 1997, the Company and the Office National de L'Electricite
executed a set of contracts related to the power station at Jorf Lasfar. In
accordance with Statement of Financial Accounting Standard (SFAS) No. 13, these
contracts are accounted for as a direct financing lease. Accordingly, JLEC (the
"Lessor") will receive a stream of payments from ONE (the "Lessee") over the
term of the lease. The term of the lease is determined in accordance with SFAS
No. 13 Section (5)(f) which has been superseded by SFAS No. 98 Section 22(a).
The following policies are used to calculate the minimum lease payments and the
unearned income from the lease.
MINIMUM LEASE PAYMENTS are determined in accordance with SFAS
No. 13 Section 5(j), and are based on the capacity payments
that ONE will take to JLEC. These minimum lease payments do
not include reimbursable or executory costs such as the
reimbursement of coal costs. The sum of these capacity
payments equal the gross investment under the lease.
This gross investment minus the net investment in the plants
is defined to be the UNEARNED INTEREST INCOME. This unearned
interest income will be accreted and recognized into earnings
as LEASE REVENUE over the lease term using the effective
interest method so as to produce a constant periodic rate of
return on the net investment.
The NET INVESTMENT represents the cost of acquiring and
constructing the leased assets. These ACQUISITION AND
CONSTRUCTION COSTS include the following items which are
capitalized and allocated to Units 1 and 2 and Units 3 and 4
based upon appropriate allocation methodologies:
TRANSFER OF POSSESSION AGREEMENT (TPA): The TPA
payment is included in the cost basis of the leased
assets.
DIRECT CONSTRUCTION COSTS: All direct costs related
to construction are included in the cost basis of the
leased assets.
CAPITALIZED COSTS: Interest and financing costs
incurred during construction are capitalized and
included in the cost of the constructed units.
PROJECT DEVELOPMENT COSTS AND FEES: These costs and
fees are also capitalized and included in the cost
basis of the leased assets.
FINANCING COSTS: Interest expense is recognized on the
effective interest method over the life of the debt. Other
financing costs such as commitment fees, guarantee fees, etc.
are considered a component of the interest expense of the
related debt or financing. As such, they are amortized into
expense using the effective interest method over the life of
the related debt or financing.
C. INVENTORIES
The Company accounts for inventories by consistently applying the FIFO or
average cost method to each item, and uses the conservatism principle (lesser of
market value or cost) in its procedures for valuing inventories.
F-98
JORF LASFAR ENERGY COMPANY
NOTES TO US GAAP FINANCIAL STATEMENTS DATED DECEMBER 31, 2003
D. FOREIGN CURRENCY TRANSACTIONS
The books and records of the Company for U.S. GAAP are maintained in U.S.
Dollars, which is both the reporting and functional currency. Transactions in
other currencies are translated to U.S. Dollars at the spot rate for current
period expenses and at the settlement rate for non-period transactions. Monetary
assets and monetary liabilities outstanding in other foreign currencies on
balance sheet dates are translated into U.S. Dollars at rates prevailing on such
balance sheet dates. Exchange gains and losses on those foreign currency
operations are included in determining net income for the period in which
exchange rates change.
E. CORPORATE TAX
Current Income tax is determined under Moroccan Income tax rules. In 1997, JLEC
signed a "tax incentive" convention with the Moroccan tax authorities. The main
principles of this convention are summarized below:
- Income is subject to corporate tax and "Produit de Solidarite National" tax
(PSN)
- PSN tax rate is 8.75% and is not subject of any tax holiday
- Income tax holiday period is ten years
- income tax holiday period starts on the "commercial operation date" for
each unit
- income tax holiday is 100% during the first five-year period then at 50% of
the income tax rate during the second five-year period
- income not related to the sale of electricity is subject to a tax rate of
35%
The "commercial operation date" for Units 1 and 2, Unit 3 and Unit 4 were
September 1997, June 2000 and February 2001, respectively. On September 13,
2002, income related to Units 1 and 2 became taxable at 17.5%. Unit 3 and Unit 4
are still in the 100% tax holiday period. The PSN tax was eliminated on January
1, 2001.
F. DEFERRED INCOME TAX
Starting September 13, 2002, JLEC tax rate on Units 1&2 is 17.5%. JLEC
determines and books the current income tax (US$ 15,448,426 for 2003 ) as
required by the tax laws and regulations of Morocco. Temporary differences
between the US GAAP and the CGNC balance sheets are creating the need to record
deferred income taxes. The main temporary differences result from the use of the
Direct Financing Lease method under US GAAP. In particular, the treatment of Net
Investment and revenue recognition (as disclosed in note 2.b above) under US
GAAP are quite different from the treatment of these items under Moroccan GAAP .
The total of all the deferred tax liabilities is $ 0 ($13,005,298 as of December
31, 2002 minus $13,005,298 for 2003).
G. OFF BALANCE SHEET COMMITMENTS
The Company discloses all off-balance sheet commitments, if any, on balance
sheet dates.
H. USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of revenue and expenses during the
reported period. Actual result could differ from these estimates and
assumptions.
F-99
JORF LASFAR ENERGY COMPANY
NOTES TO US GAAP FINANCIAL STATEMENTS DATED DECEMBER 31, 2003
3. CASH
3.1 Cash
The Company's cash as of December 31, 2003, includes the initial capital
deposits of the Company's stockholders, as explained further in Note 16.1 . Such
cash is held in Moroccan Dirhams in accounts at CITIBANK MAGHREB, which is
located at Zenith Millenium Immeuble 1, Lotissement Attaoufik, Sidi Maarouf,
Casablanca Morocco. The remainder of the company's cash is held by the Offshore
Collateral Agent, Deutsche Bank Trust Company Americas in US$ and Euro, and by
the Onshore Collateral Agent, BMCI - Banque Marocaine pour le Commerce et
l'Industrie in Morocain Dirhams and US$.
The cash balances includes the following categories:
12/31/03 12/31/02 12/31/01
US$ US$ US$
--------------- ----------------- --------------------
Off-shore Revenue in US$ 24,426,875 22,666,875 36,223,422
Off-shore Revenue in Euro 6,590,224 5,331,124 5,000,414
-------------- ----------------- --------------------
Total Off-Shore Revenue 31,017,099 27,997,998 41,223,836
On-shore O&M Account - Generator 6,946,245 793,293 2,899,102
On-shore O&M Account - Operator 4,279,000 3,258,836 2,298,642
Off-shore O&M Accounts 4,546 10,607 8,464
-------------- ----------------- --------------------
Total O&M Accounts 11,229,792 4,062,735 5,206,208
Fuel & Spare Part Accounts 12,929,694 5,289,381 12,080,028
On-shore Construction Accounts 0 0 1,100,363
Off-shore Debt Service Accrual Accounts in US$ 3,734,278 3,843,187 3,540,479
Off-shore Debt Service Accrual Accounts in Euro 6,637,737 5,433,301 3,898,143
-------------- ----------------- --------------------
Total Debt Service Accrual Accounts 10,372,015 9,276,488 7,438,623
Stockholder capital deposits 62,863 56,624 56,624
-------------- ----------------- --------------------
Total 65,611,462 46,683,227 67,105,682
============== ================= ====================
3.2 Restricted Cash
The Reserve Accounts are as follow:
Major Maintenance Reserve Account in US$ 3.4 a 2,500,000 2,500,000 5,000,000
Fixed O&M Reserve Account in US$ 3.4 b 4,800,000 4,800,000 9,600,000
Debt Service Reserve Account in US$ 3.4 c 11,200,000 11,730,000 730,000
Super Reserve Account in US$ 3.4 d 45,600,000 18,100,000 0
Distribution Account in US$ 0 0 0
-------------- ----------------- --------------------
Off-shore Reserve Accounts in US$ 64,100,000 37,130,000 15,330,000
Fixed O&M Reserve Account in Euro 243,656 197,262 161,372
Debt Service Reserve Account in Euro 3.4 e 18,705,220 16,450,805 1,649,031
-------------- ----------------- --------------------
Off-shore Reserve Accounts in Euro 18,948,876 16,648,067 1,810,404
-------------- ----------------- --------------------
Total Reserve Accounts 83,048,876 53,778,067 17,140,404
============== ================= ====================
3.3 Total Cash
Cash 3.1 65,611,462 46,683,227 67,105,682
Restricted Cash in Reserve Accounts 3.2 83,048,876 53,778,067 17,140,404
-------------- ----------------- --------------------
148,660,339 100,461,294 84,246,086
============== ================= ====================
3.4 Letters of Credit
Additional liquidity is available, if needed for debt service, from
Sponsor (CMS and ABB) Letters of Credit in the following accounts:
12/31/03 12/31/02 12/31/01
-------------------- ------------------- --------------------
a. Major Maintenance Reserve Account US$ 2,500,000 2,500,000 0
b. Fixed O&M Reserve Account US$ 4,800,000 4,800,000 0
c. Debt Service Reserve Account US$ 11,300,000 11,300,000 22,600,000
d. Super Reserve Account US$ 39,086,700 47,900,000 36,800,000
e. Debt Service Reserve Account Euro 15,000,000 15,000,000 30,000,000
F-100
JORF LASFAR ENERGY COMPANY
NOTES TO US GAAP FINANCIAL STATEMENTS DATED DECEMBER 31, 2003
4. INVENTORIES
The inventories are detailed as follows for the year ending:
12/31/03 12/31/02 12/31/01
US$ US$ US$
------------------ ------------------- -------------------
Stock of Coal 4.1 24,763,321 22,499,748 23,305,684
Stock of Fuel-oil 4.2 1,638,256 2,078,600 2,988,752
Stock of Spare Parts 4.3 10,940,862 15,081,606 4,952,377
Other Stocks (Chemicals, Oils,...) 1,205,566 954,692 512,445
------------------ ------------------- -------------------
38,548,005 40,614,646 31,759,259
================== =================== ===================
4.1 The stock of coal represents the value of 397,745 tones existing in the
coal storage area plus 184,318 tones in transit to Jorf Lasfar, for a total
inventory of 582,063 tones as of December 31, 2003 (606,115 tones total
as of December 31, 2002 and 643,042 tones total as of December 31, 2001).
4.2 The stock of fuel oil represents 9,471 m3 existing in the fuel tanks as of
December 31, 2003 (12,300 m3 as of December 31, 2002).
4.3 The stock of Spare Parts represents the value of spare parts as of December
31, 2003, that were purchased after the close-out of the Net Investment on
December 31, 2000. ($ 15,081,606 as of December 31, 2002).
5. RECEIVABLES
The "Accounts Receivables" as of December 31, 2003 are detailed as follows:
12/31/03 12/31/02 12/31/01
US$ US$ US$
------------------ ------------------- -------------------
Account Receivable - ONE 5.1 85,214,510 76,098,673 85,811,099
Account Receivable - Others 5.2 271,345 76,097 704,024
------------------ ------------------- -------------------
85,485,855 76,174,769 86,515,123
================== =================== ===================
5.1 The account receivable - ONE includes November 2003 and December 2003
invoices
The account receivable balance as of December 31, 2002 was US$ 76,098,673
(Nov. and Dec. Invoices).
5.2 The other receivables include a) invoices to Valcen Gie (association of
Moroccan cement companies) for purchases of fly ash during 4Q 2003 (US$
71,101), b) accrued interest earned by investment of JLEC's cash balances
($ 67,425), and c) other receivable (US$ 132,819).
6. PREPAYMENTS
The "Prepayments" as of December 31, 2003 are detailed as follows:
12/31/03 12/31/02 12/31/01
US$ US$ US$
----------------- ------------------- -------------------
Prepaid Insurance 3,599,349 3,582,404 3,822,746
Prepayments for Income Tax 3,929,580 5,194,869 0
Other Prepayments 609,277 1,653,537 653,896
----------------- ------------------- -------------------
8,138,206 10,430,810 4,476,641
================= =================== ===================
7. FIXED ASSETS
The "Fixed Assets" are detailed as follows for year ending:
12/31/03 12/31/02 12/31/01
US$ US$ US$
------------------ ------------------- -------------------
Fixed Asset - Gross 11,694,954 7,455,511 5,314,528
Depreciation -2,516,437 -1,884,137 -260,099
Construction in Progress 424,902 982,455 1,229,571
------------------ ------------------- -------------------
9,603,420 6,553,829 6,284,000
================== =================== ===================
8. V.A.T LIABILITY
The "V.A.T Liability" account represents the net amount of Value Added Tax as
shown below:
12/31/03 12/31/02 12/31/01
US$ US$ US$
------------------ ---------------- -------------------
Value Added Tax received from ONE to be declared 5,179,969 4,805,614 8,415,330
Value Added Tax to be paid & declared -1,207,918 -1,934,168 -5,337,662
------------------ ---------------- -------------------
3,972,052 2,871,446 3,077,668
================== ================ ===================
9. OTHER LONG TERM ASSETS
The Other Long Term Assets are as follows:
12/31/03 12/31/02 12/31/01
US$ US$ US$
-------------- ------------- -------------
Long Term Receivables Loan 3,372,930 2,754,540 2,016,161
Long Term Ash Disposal Site 1,389,307 1,913,308 0
Major Maintenance capitalized during 2001 Unit 1 turbine overhaul outage 7,898,850 7,898,850 7,898,850
Less: Amortization of Unit 1 Major Maintenance in 2001 and 2002 -1,598,577 -470,170 -470,170
9.1 Less: Amortization of Unit 1 Major Maintenance in 2003 -1,036,582 -1,128,407 0
Less: Adjustments due to changes in methodes -599,070 0 0
Major Maintenance capitalized during 2003 - Unit 2 turbine overhaul outage 10,529,148 0 0
9.1 Less: Amortization of Unit 2 Major Maintenance in 2003 -898,320 0 0
-------------- ------------- ------------
19,057,685 10,968,120 9,444,841
============== ============= ============
9.1 Capitalized major maintenance costs are amortized over the estimated
useful life of the investment, which for the turbine overhauls is 7 years
(84 months).
F-101
JORF LASFAR ENERGY COMPANY
NOTES TO US GAAP FINANCIAL STATEMENTS DATED DECEMBER 31, 2003
10. ACCOUNTS PAYABLE TO THIRD PARTIES
The "Account Payable to Third Parties" includes the main suppliers of JLEC as of
December 31, 2003 and are detailed as follows:
12/31/03 12/31/02 12/31/01
US$ US$ US$
---------------------------------------------
Billiton (coal supplier) 2,800,790 4,119,817 16,060,510
Anglo (coal supplier) 6,320,391 2,245,218 5,281,412
RAG Trading (coal supplier) 0 4,499,958 0
Glencore (coal supplier) 20,030,571 2,187,744 0
BULK (coal supplier) 4,470,349 0 0
Total (coal supplier) 0 0 2,267,178
Alstom Power 1,507,931 2,845,357 2,607,834
ONE - Rebate 4,139,908 2,767,010 3,547,774
Other suppliers 8,581,419 6,832,615 4,999,250
---------------------------------------------
Total 47,851,359 25,497,718 34,763,957
=============================================
11. RELATED PARTY TRANSACTIONS
During the year 2003, JLEC has booked a number of related parties transactions
as follows:
-----------------------------------------------------------------------------------------------------
ABB ABB CMS CMS CMS Total
EV MAROC MOPCO MOPCO RD & GEN
Currencies US$ MAD MAD MAD US$ US$
Acc. Payable 12/31/02 105,764 125,880 -1,452,394 46,253,345 82,686
2003:
Management Fees 32,938,795
Incentive Accrual 29,320,319
Other 214,644 237,916 3,582,315
Total Payments 2003 230,400 363,796 30,311,126 46,253,688 82,686
Acc. Payable 90,007 0 4,757,590 29,319,976 0
Acc. Pay. in US$ 90,007 0 542,101 3,340,851 0 3,972,960
Jorf Lasfar Jorf Lasfar Tre Kronor
Common Stock Energiaktie- Power Energy Jorf Lasfar Investment AB Cythere 61 AB Cythere 63
bolag AB Handelsbolag AB Total
Currencies MAD MAD MAD MAD MAD MAD MAD
Acc. Payable 12/31/02 220,166,565 202,553,239 17,613,325 39,682,115 2,164,464 950,199,532 1,432,379,240
Dividend Payable Oct 30, 2003 151,250,000 139,150,000 12,100,000 12,100,000 660,000 289,740,000 605,000,000
Total Payments 2003 156,487,853 143,968,825 12,519,028 8,343,124 455,079 199,779,902 521,553,812
Acc. Payable 214,928,711 197,734,415 17,194,297 43,438,991 2,369,384 1,040,159,631 1,515,825,428
B/S FX Rate MAD/USD 8.776 8.776 8.776 8.776 8.776 8.776 8.776
Acc. Pay. in US$ 24,489,951 22,530,755 1,959,196 4,949,635 269,978 118,520,502 172,720,019
Preferred Stock & Convertible Jorf Lasfar Jorf Lasfar Tre Kronor AB AB
Securities Energiaktie- Power Energy Jorf Lasfar Investment Cythere 61 Cythere 63 Total
bolag AB Handelsbolag AB
Currencies MAD MAD MAD MAD MAD MAD MAD
Preferred Stock Dividend payable 0 0 0 0 226,840 99,666,957 99,893,797
Convertible Securities Interest payable 52,028,019 47,865,778 4,162,242 4,162,242 0 0 108,218,281
Total Payments 2003 52,028,019 47,865,778 4,162,242 4,162,242 226,840 99,666,957 208,112,078
Acc. Payable 0 0 0 0 0 0 0
B/S FX Rate MAD/USD 8.776 8.776 8.776 8.776 8.776 8.776 8.776
Acc. Pay. in US$ 0 0 0 0 0 0 0
-----------
Total Accounts Payable to Related Parties 176,692,979
F-102
JORF LASFAR ENERGY COMPANY
NOTES TO US GAAP FINANCIAL STATEMENTS DATED DECEMBER 31, 2003
11. RELATED PARTY TRANSACTIONS (CONTINUED)
During 2002, related party transactions consisted of the following:
ABB ABB CMS CMS CMS Total
EV MAROC MOPCO MOPCO RD & GEN
Currencies US$ MAD MAD MAD US$ US$
Acc. Payable 12/31/01 137,581 78,576 7,726,314 44,598,493 76,753
Management Fees 35,654,033
Incentive Accrual 46,253,517
Other 207,059 778,086 6,139,521 114,510
Total Payments 2002 238,876 730,782 38,693,220 44,598,665 108,577
Acc. Payable 12/31/02 105,764 125,880 1,452,394 46,253,345 82,686
Acc. Pay. in US$ 12/31/02 105,764 12,345 142,433 4,535,976 82,686 4,594,337
Jorf Lasfar Jorf Lasfar Tre Kronor
Common Stock Energiaktie- Power Energy Jorf Lasfar Investment AB Cythere 61 AB Cythere 63 Total
bolag AB Handelsbolag AB
Currencies MAD MAD MAD MAD MAD MAD MAD
Acc. Payable 12/31/01 202,826,993 186,600,834 16,226,160 16,226,160 885,063 388,542,764 811,307,973
Dividend Payable Oct 29, 2002 495,000,000 455,400,000 39,600,000 39,600,000 2,160,000 948,240,000 1,980,000,000
Total Payments 2002 477,660,429 439,447,594 38,212,834 16,144,045 880,600 386,583,232 1,358,928,734
Acc. Payable 12/31/02 220,166,565 202,553,239 17,613,325 39,682,115 2,164,464 950,199,532 1,432,379,240
B/S FX Rate MAD/USD 10.197 10.197 10.197 10.197 10.197 10.197 10.197
Acc. Pay. in US$ 12/31/02 21,591,308 19,864,003 1,727,305 3,891,548 212,265 93,184,224 140,470,652
Preferred Stock & Jorf Lasfar Jorf Lasfar Tre Kronor
Convertible Securities Energiaktie- Power Energy Jorf Lasfar Investment AB Cythere 61 AB Cythere 63 Total
bolag AB Handelsbolag AB
Currencies MAD MAD MAD MAD MAD MAD MAD
Preferred Stock
Dividend payable 0 0 0 0 261,774 115,016,078 115,277,852
Convertible Securities
Interest payable 63,882,171 58,771,597 5,110,574 5,110,574 16,749 7,359,167 140,250,832
Total Payments 2002 63,882,171 58,771,597 5,110,574 5,110,574 278,523 122,375,245 255,528,684
Acc. Payable 12/31/02 0 0 0 0 0 0 0
B/S FX Rate MAD/USD 10.197 10.197 10.197 10.197 10.197 10.197 10.197
Acc. Pay. in US$ 12/31/02 0 0 0 0 0 0 0
Total Accounts Payable to Related Parties 145,064,990
During 2001, related party transactions consisted of the following:
ABB ABB ABB ABB CMS CMS CMS Total
EV Secheron Secheron MAROC MOPCO MOPCO RD & GEN
Currencies US$ DEM CHF MAD MAD MAD US$ US$
Acc. Payable 12/31/00 43,545 - - - 16,747,904 96,757,074 200,667
Management Fees 35,287,098
Incentive Accrual 44,314,093
Other 331,716 375,000 25,200 469,461 5,873,718 471,870
Total Payments 2001 237,679 375,000 25,200 390,885 38,434,970 96,472,673 595,784
Acc. Payable 12/31/01 137,581 - - 78,576 7,726,314 44,598,493 76,753
Acc. Pay. in US$ 12/31/01 137,581 - - 6,777 666,349 3,846,356 76,753 4,733,816
Jorf Lasfar Jorf Lasfar Tre Kronor Jorf Lasfar AB
AB Cythere 63 Energiaktie- Power Energy Investment Handels- Cythere Total
bolag AB AB bolag 61
Currencies MAD MAD MAD MAD MAD MAD MAD
Dividend Payable Apr 24, 2001 790,200,000 412,500,000 379,500,000 33,000,000 33,000,000 1,800,000 1,650,000,000
Dividend Payable Oct 29, 2001 650,598,000 339,625,000 312,455,000 27,170,000 27,170,000 1,482,000 1,358,500,000
Total Payments 2001 1,052,255,236 549,298,007 505,354,166 43,943,841 43,943,841 2,396,937 2,197,192,027
Acc. Payable 12/31/01 388,542,764 202,826,993 186,600,834 16,226,160 16,226,160 885,063 811,307,973
B/S FX Rate MAD/USD 11.60 11.60 11.60 11.60 11.60 11.60 11.60
Acc. Pay. in US$ 12/31/01 33,509,510 17,492,626 16,093,216 1,399,410 1,399,410 76,331 69,970,502
Total Accounts Payable to Related Parties 74,704,318
F-103
JORF LASFAR ENERGY COMPANY
NOTES TO US GAAP FINANCIAL STATEMENTS DATED DECEMBER 31, 2003
12. TAXES PAYABLE:
The "taxes payable" includes the following items as of December 31, 2003:
12/31/03 12/31/02 12/31/01
US$ US$ US$
--------------- ---------------- --------------
Value Added Tax on behalf of foreign suppliers 309,190 299,199 312,044
Income Tax 2001 0 0 186,202
Income Tax 2002 0 4,226,098 0
Income Tax 2003 5,393,931 0 0
Withholding Tax 260,841 155,281 192,380
Payroll Tax 237,358 185,575 182,715
Licence Tax 1,325,971 0 0
--------------- ---------------- --------------
Total 7,527,291 4,866,153 873,340
=============== ================ ==============
13. CAPACITY CHARGES
13.1 $ Capacity Charges greater than $ DFL Model Actual DFL model
--------------- ----------------
$ Capacity Min Lease
--------------- ----------------
Charges Payments Difference
--------------- ---------------- --------------
CGNC US GAAP US GAAP
--------------- ---------------- --------------
USD USD USD
--------------- ---------------- --------------
$ Capacity Charges 103,690,956 104,516,335 -825,379
$ O.N.E Rebate -2,761,910 -2,874,199 112,289
--------------- ---------------- --------------
2003 in USD 100,929,046 101,642,136 -713,090
$ Capacity Charges greater than $ DFL Model -713,090
--------
Actual DFL model
--------------- ----------------
13.2 Euro Capacity Charges greater than Euro DFL Model Euro Capacity Min Lease
--------------- ----------------
Charges Payments Difference
--------------- ---------------- --------------
CGNC US GAAP US GAAP
--------------- ---------------- --------------
Euro Euro Euro/USD
--------------- ---------------- --------------
Euro Capacity Charges 125,149,979 124,917,610 232,369
Euro O.N.E Rebate -3,333,492 -3,435,234 101,742
--------------- ---------------- --------------
2003 in Euro 121,816,487 121,482,376 334,111
B/S FX Rate X 1.263417
--------------
Euro Capacity Charges greater than Euro DFL Model in USD 422,122
13.1 $ Capacity Charges greater than $ DFL Model Actual DFL model
--------------- ----------------
$ Capacity Min Lease
--------------- ----------------
Charges Payments Difference
--------------- ---------------- --------------
CGNC US GAAP US GAAP
--------------- ---------------- --------------
USD USD USD
--------------- ---------------- --------------
$ Capacity Charges 152,243,461 148,653,918 3,589,543
$ O.N.E Rebate -7,466,514 -6,317,791 -1,148,723
--------------- ---------------- --------------
2002 in USD 144,776,947 142,336,127 2,440,820
$ Capacity Charges greater than $ DFL Model 2,440,820
---------
Actual DFL model
--------------- ----------------
13.2 Euro Capacity Charges greater than Euro DFL Model Euro Capacity Min Lease
--------------- ----------------
Charges Payments Difference
--------------- ---------------- --------------
CGNC US GAAP US GAAP
--------------- ---------------- --------------
Euro Euro Euro/USD
--------------- ---------------- --------------
Euro Capacity Charges 131,283,947 130,150,792 1,133,155
Euro O.N.E Rebate -6,438,591 -5,531,409 -907,183
--------------- ---------------- --------------
2002 in Euro 124,845,355 124,619,384 225,971
------------
B/S FX Rate X 1.046582
--------------
Euro Capacity Charges greater than Euro DFL Model in USD 236,497
F-104
JORF LASFAR ENERGY COMPANY
NOTES TO US GAAP FINANCIAL STATEMENTS DATED DECEMBER 31, 2003
13. CAPACITY CHARGES (CONTINUED)
13.1 $ Capacity Charges greater than $ DFL Model Actual DFL model
--------------- ----------------
$ Capacity Min Lease
--------------- ----------------
Charges Payments Difference
--------------- ---------------- ---------------
CGNC US GAAP US GAAP
--------------- ---------------- ---------------
USD USD USD
--------------- ---------------- ---------------
$ Capacity Charges 167,725,226 174,863,943 -7,138,718
$ O.N.E Rebate -4,643,978 -1,876,144 -2,767,834
--------------- ---------------- ---------------
2001 in USD 163,081,248 172,987,799 -9,906,551
$ Capacity Charges greater than $ DFL Model -9,906,551
----------
Actual DFL model
--------------- ----------------
13.2 Euro Capacity Charges greater than Euro DFL Model Euro Capacity Min Lease
--------------- ----------------
Charges Payments Difference
--------------- ---------------- ---------------
CGNC US GAAP US GAAP
--------------- ---------------- ---------------
Euro Euro Euro/USD
--------------- ---------------- ---------------
Euro Capacity Charges 114,874,856 117,731,467 -2,856,611
Euro O.N.E Rebate -3,180,600 -1,263,161 -1,917,440
--------------- ---------------- ---------------
2001 in Euro 111,694,256 116,468,307 -4,774,051
------------
B/S FX Rate X 0.88504
---------------
Euro Capacity Charges greater than Euro DFL Model in USD -4,225,210
14. OTHER CURRENT LIABILITIES
The "Other Current Liabilities" as of December 31, 2003 are detailed as follows:
12/31/03 12/31/02 12/31/01
US$ US$ US$
--------------- ---------------- ---------------
Accrued Expenses: interest, swaps and fees 14.1 5,904,937 6,072,924 17,293,488
Accrued salaries expense 1,198,164 1,390,179 986,669
Liability for Compensated Absences 298,523 307,449 108,027
Other Liabilities 337,780 184,470 218,670
--------------- ---------------- ---------------
7,739,404 7,955,022 18,606,854
=============== ================ ===============
14.1 The accrued interests and fee expenses are detailed by loans as follows:
12/31/03 12/31/02 12/31/01
US$ US$ US$
--------------- ---------------- ---------------
OPIC 728,141 807,914 907,733
SACE 1,586,760 1,522,740 1,413,325
WB 1,712,739 1,629,541 1,146,864
US EXIM - Exposure Fees 0 0 12,255,922
US EXIM 1,574,138 1,823,435 1,370,400
ERG 303,158 289,295 199,245
--------------- ---------------- ---------------
5,904,937 6,072,924 17,293,488
=============== ================ ===============
F-105
JORF LASFAR ENERGY COMPANY
NOTES TO US GAAP FINANCIAL STATEMENTS DATED DECEMBER 31, 2003
15. LONG TERM LOANS
Long term loans are detailed as follows as of December 31, 2003:
Interest Reimbursement
Borrowing Principal --------------- Interest --------------------------
Loan Date Currency Amount Type Rate Payment Maturity Periodicity
---- --------- -------- --------- ---- ---- ------- -------- -----------
US EXIM 9/12/02 US$ 181,363,762 Fixed 7.2000% Quarterly Feb. 15, 2013 Quarterly
OPIC Note A 11/25/97 US$ 46,635,417 Fixed 10.2300% Quarterly Feb. 15, 2013 Quarterly
OPIC Note B 02/11/98 US$ 10,175,000 Fixed 9.9200% Quarterly Feb. 15, 2013 Quarterly
-----------
56,810,417
-----------
Total L.T loan in US$ 238,174,179
-----------
Current part in USD 25,748,560
-----------
Non-Current part in USD 212,425,619
-----------
Interest Reimbursement
Borrowing Principal --------------- Interest --------------------------
Loan Date Currency Amount Type Rate Payment Maturity Periodicity
---- --------- -------- --------- ---- ---- ------- -------- -----------
SACE 11/17/03 Euro 179,332,929 Fixed 5.7300% Quarterly Feb. 15, 2013 Quarterly
ERG 11/17/03 Euro 23,045,939 Variable 4.16888% Quarterly Feb. 15, 2013 Quarterly
World Bank 11/17/03 Euro 123,359,818 Variable 3.9189% Quarterly Feb. 15, 2013 Quarterly
-----------
Total L.T loan in Euro 325,738,687
-----------
B/S FX Rate Euro/USD 1.26342
-----------
Total L.T loan in USD 411,543,784
-----------
Current part in USD 44,491,219
-----------
Non-Current part in USD 367,052,565
-----------
Total principal repayments for the next five years are detailed below. Forecasts
of interest payments, interest-rate swap payments and guarantee fees are also
shown below. For further information regarding swaps, see Note 20.
Remaining Remaining Remaining
Principal Principal Principal Principal Principal Interest Swap Guarantee
Repayment in Repayment in Repayment in Repayment in Repayment in Payments Payments Fees
2004 2005 2006 2007 2008 2004-2013 2004-2013 2004-2013
In USD
US EXIM 19,606,893 19,606,893 19,606,893 19,606,893 19,606,893 62,017,946 0 0
OPIC A 5,041,667 5,041,666 5,041,666 5,041,666 5,041,666 22,657,888 0 0
OPIC B 1,100,000 1,100,000 1,100,000 1,100,000 1,100,000 4,793,735 0 0
Total in USD 25,748,560 25,748,559 25,748,559 25,748,559 25,748,559 89,469,569 0 0
In Euro
SACE 19,387,344 19,387,344 19,387,344 19,387,344 19,387,344 49,481,105 0 0
ERG 2,491,452 2,491,452 2,491,452 2,491,452 2,491,452 4,730,553 4,774,063 0
WB 13,336,197 13,336,197 13,336,197 13,336,197 13,336,197 22,600,374 25,202,063 5,472,842
Total in Euro 35,214,993 35,214,993 35,214,993 35,214,993 35,214,993 76,812,032 29,976,126 5,472,842
B/S FX Rate
Euro/USD 1.26342 1.26342 1.26342 1.26342 1.26342 1.26342 1.26342 1.26342
Total in USD 44,491,219 44,491,219 44,491,219 44,491,219 44,491,219 97,045,624 37,872,347 6,914,481
F-106
JORF LASFAR ENERGY COMPANY
NOTES TO US GAAP FINANCIAL STATEMENTS DATED DECEMBER 31, 2003
15. LONG TERM LOANS (CONTINUED)
Long term loans are detailed as follows as of December 31, 2002:
Interest Reimbursement
Borrowing Principal ---------------- Interest ---------------------------
Loan Date Currency Amount Type Rate Payment Maturity Periodicity
US EXIM 9/12/02 US$ 200,971,655 Fixed 7.2% Quarterly Feb. 15, 2013 Quarterly
OPIC Note A 11/25/97 US$ 51,677,083 Fixed 10.23% Quarterly Feb. 15, 2013 Quarterly
OPIC Note B 02/11/98 US$ 11,275,000 Fixed 9.92% Quarterly Feb. 15, 2013 Quarterly
-----------
62,952,083
-----------
Total L.T loan in US$ 263,923,738
-----------
Current part in USD 25,748,560
-----------
Non-Current part in USD 238,175,178
-----------
Interest Reimbursement
Borrowing Principal ---------------- Interest ---------------------------
Loan Date Currency Amount Type Rate Payment Maturity Periodicity
SACE 11/15/02 Euro 198,720,273 Fixed 5.73% Quarterly Feb. 15, 2013 Quarterly
ERG 11/15/02 Euro 25,537,392 Variable 5.14% Quarterly Feb. 15, 2013 Quarterly
World Bank 11/15/02 Euro 136,696,015 Variable 4.89% Quarterly Feb. 15, 2013 Quarterly
-----------
Total L.T loan in Euro 360,953,680
-----------
B/S FX Rate Euro/USD 1.04658
-----------
Total L.T loan in USD 377,767,743
-----------
Current part in USD 36,855,389
-----------
Non-Current part in USD 340,912,354
-----------
Total principal repayments for the next five years are detailed below. Forecasts
of interest payments, interest-rate swap payments and guarantee fees are also
shown below. For further information regarding swaps, see Note 20.
Remaining Remaining Remaining
Principal Principal Principal Principal Principal Interest Swap Guarantee
Repayment in Repayment in Repayment in Repayment in Repayment in Payments Payments Fees
2003 2004 2005 2006 2007 2003-2013 2003-2013 2003-2013
In USD
US EXIM 19,606,893 19,606,893 19,606,893 19,606,893 19,606,893 76,033,383 0 0
OPIC A 5,041,667 5,041,666 5,041,666 5,041,666 5,041,666 27,754,052 0 0
OPIC B 1,100,000 1,100,000 1,100,000 1,100,000 1,100,000 5,871,955 0 0
Total in USD 25,748,560 25,748,559 25,748,559 25,748,559 25,748,559 109,659,390 0 0
In Euro
SACE 19,387,344 19,387,344 19,387,344 19,387,344 19,387,344 60,663,342 0 0
ERG 2,491,452 2,491,452 2,491,452 2,491,452 2,491,452 7,093,552 4,535,473 0
WB 13,336,197 13,336,197 13,336,197 13,336,197 13,336,197 36,148,188 23,844,995 6,757,469
Total in Euro 35,214,993 35,214,993 35,214,993 35,214,993 35,214,993 103,905,082 28,380,468 6,757,469
B/S FX Rate
Euro/USD 1.04658 1.04658 1.04658 1.04658 1.04658 1.04658 1.04658 1.04658
Total in USD 36,855,389 36,855,389 36,855,389 36,855,389 36,855,389 108,745,223 29,702,496 7,072,248
F-107
JORF LASFAR ENERGY COMPANY
NOTES TO US GAAP FINANCIAL STATEMENTS DATED DECEMBER 31, 2003
15. LONG TERM LOANS (CONTINUED)
Long term loans are detailed as follows as of December 31, 2001:
Drawdown Drawdown Interest Interest Reimbursement
Loan Date Currency Amount Type Rate Payment Maturity Periodicity
US EXIM 11/15/2001 US$ 207,446,204 Variable 4.14% Quarterly Feb. 15, 2013 Quarterly
OPIC Note A 11/25/97 US$ 56,718,750 Fixed 10.48% Quarterly Feb. 15, 2013 Quarterly
OPIC Note B 02/11/98 US$ 12,375,000 Fixed 10.17% Quarterly Feb. 15, 2013 Quarterly
69,093,750
Total L.T loan in US$ 276,539,954
Current part in USD 24,873,137
Non-Current part in USD 251,666,817
Drawdown Drawdown Interest Interest Reimbursement
Loan Date Currency Amount Type Rate Payment Maturity Periodicity
SACE 11/15/2001 Euro 218,107,617 Fixed 5.73% Quarterly Feb. 15, 2013 Quarterly
ERG 11/15/2001 Euro 28,028,845 Variable 5.34% Quarterly Feb. 15, 2013 Quarterly
World Bank 11/15/2001 Euro 150,032,211 Variable 5.09% Quarterly Feb. 15, 2013 Quarterly
Total L.T loan in Euro 396,168,673
B/S FX Rate Euro/USD 0.885
Total L.T loan in USD 350,623,797
Current part in USD 31,166,559
Non-Current part in USD 319,457,237
Total principal repayments for the next five years are detailed below. Forecast
interest payments, interest-rate swap payments and guarantee fees are also
shown below. For further information regarding swaps, see Note 20.
Principal Principal Principal Principal Principal Remaining Remaining Remaining
Repayment in Repayment in Repayment in Repayment in Repayment in Interest Swap Guarantee
2002 2003 2004 2005 2006 Payments Payments Fees
2002-2013 2002-2013 2002-2013
In USD
US EXIM 18,731,470 19,606,893 19,606,893 19,606,893 19,606,893 87,235,810 0 1,176,315
OPIC A 5,041,667 5,041,666 5,041,666 5,041,666 5,041,666 33,499,497 0 0
OPIC B 1,100,000 1,100,000 1,100,000 1,100,000 1,100,000 7,088,426 0 0
Total in USD 24,873,137 25,748,559 25,748,559 25,748,559 25,748,559 127,823,733 0 1,176,315
In Euro
SACE 19,387,344 19,387,344 19,387,344 19,387,344 19,387,344 72,907,871 0 0
ERG 2,491,452 2,491,452 2,491,452 2,491,452 2,491,452 8,830,924 4,982,063 0
WB 13,336,197 13,336,197 13,336,197 13,336,197 13,336,197 45,081,853 25,824,728 8,173,329
Total in Euro 35,214,993 35,214,993 35,214,993 35,214,993 35,214,993 126,820,648 30,806,791 8,173,329
B/S FX Rate
USD/Euro 0.88504 0.88504 0.88504 0.88504 0.88504 0.88504 0.88504 0.88504
Total in USD 31,166,559 31,166,559 31,166,559 31,166,559 31,166,559 112,240,922 27,265,139 7,233,696
F-108
JORF LASFAR ENERGY COMPANY
NOTES TO US GAAP FINANCIAL STATEMENTS DATED DECEMBER 31, 2003
15. LONG TERM LOANS (CONTINUED)
PLEADGE OF STOCK AND OTHER ASSETS
As security for the repayment of the loans, and the payment of all related
interest, fees and swap obligations, JLEC and its stockholders have entered into
various pledge agreements with Deutsche Bank Trust Company Americas, as Offshore
Collateral Agent, and with Banque Marocaine pour le Commerce et l'Industrie, as
Onshore Collateral Agent, for the benefit of such lenders and other secured
parties. Such security shall continue in effect until the repayment in full of
all outstanding principal amounts and the payment in full of all related
interest, fee and swap obligations, which is scheduled to occur in February of
2013. The principle pledge agreements are:
1. The Stockholder Pledge and Security Agreements, in which each of JLEC's
stockholders pledges all of its shares, claims, rights and interests in JLEC to
the Offshore Collateral Agent.
2. The Security and Assignment Agreement, in which JLEC assigns to the Offshore
Collateral Agent a security interest in all of JLEC's rights, title and interest
in the following collateral, among others:
a. all of JLEC's contractual rights,
b. all rents, profits, income and revenues derived by JLEC from its ownership
of the Project,
c. all cash deposits and other assets in any of JLEC's accounts with financial
institutions,
d. all permits, licenses and other governmental authorizations obtained by
JLEC in connection with its ownership of the Project,
e. all of JLEC's insurance policies and related claims and proceeds, and
f. all personal property and inventories of JLEC.
3. The Agreement for Pledge of Shares, in which each of JLEC's stockholders
pledges all of its shares, claims, rights and interests in JLEC to the Onshore
Collateral Agent, and assigns to the Onshore Collateral Agent the direct payment
by JLEC of all dividends and other stockholder distributions if and whenever a
Default has occurred and is continuing.
4. The General Delegation of Contract Claims, in which JLEC assigns to the
Onshore Collateral Agent the direct payment of any and all contract claims due
to JLEC if and whenever a Default has occurred and is continuing.
5. The Pledge over General Operating Accounts, in which JLEC pledges to the
Onshore Collateral Agent any and all monies in JLEC's accounts with the Onshore
Collateral Agent.
6. The Master Agreement for Assignment of Accounts Receivable as Security, in
which JLEC assigns to the Onshore Collateral Agent a security interest in all of
the accounts receivable payable by ONE to JLEC under the Power Purchase
Agreement.
COVENANTS
The covenants on the loans also place restrictions on JLEC's payment of
dividends and other distributions to JLEC's stockholders.
Specifically, JLEC may not:
1. Pay any dividends to its stockholders, or
2. Make any distribution, payment or delivery of property or cash to
its stockholders, or
3. Redeem, retire, purchase or otherwise acquire any shares of its
capital stock, or
4. Purchase or redeem any subordinated debt except, on quarterly
repayment dates and only then after first satisfying all debt
service obligations and satisfying all of the following conditions,
among others:
a. No default shall have occurred,
b. The cash balance in all JLEC reserve and accrual accounts shall equal or
exceed required levels,
c. JLEC's actual debt service coverage ratios for the current quarter and
preceding four quarters have all been greater than 1.3, and
d. JLEC's forecasted debt service coverage ratios for the next succeeding two
quarters are greater than 1.3 JLEC has complied with these covenants since May
2001, when the loans began to be repaid.
F-109
JORF LASFAR ENERGY COMPANY
NOTES TO US GAAP FINANCIAL STATEMENTS DATED DECEMBER 31, 2003
16. STOCKHOLDERS' EQUITY
The composition of Stockholders' Equity as of December 31, 2003 was:
16.1 COMMON STOCK
Common Stock
---------------------------------------------
Number Par value Par value
Stockholders of Shares Dirham US Dollar
----------------------- ---------------------------------------------
AB Cythere 63, Sweden.................. 2,634 263,400 27,668
Jorf Lasfar Energiaktiebolag, Sweden... 1,375 137,500 14,443
Jorf Lasfar Power Energy AB, Sweden.... 1,265 126,500 13,288
Tre Kronor Investment AB, Sweden....... 110 11,000 1,155
Jorf Lasfar Handelsbolag, Sweden....... 110 11,000 1,155
AB Cythere 61, Sweden 6 600 63
---------------------------------------------
Total 5,500 550,000 57,773
16.2 CONVERTIBLE STOCKHOLDERS' SECURITIES
On December 11, 2000, the JLEC stockholders purchased 100% of all Company Loan
Notes for $387,355,000, and amended the Company Loan Agreement to make such
stockholder securities convertible into Preferred Stock or Common Stock. On
January 1, 2001, the convertible securities (Company Loan Principal) held by AB
Cythere 61 and AB Cythere 63 were converted into Preferred Stock as shown below
on Note 16.3. Such conversions shall be made into a fixed number of JLEC shares
as listed below:
----------------------------------------------
Number Par value Par value
Stockholders of Shares Dirham US Dollar
---------------------- ----------------------------------------------
AB Cythere 63, Sweden................... 0 0 0
Jorf Lasfar Energiaktiebolag, Sweden.... 10,537,024 1,053,702,400 96,838,750
Jorf Lasfar Power Energy AB, Sweden..... 9,694,062 969,406,200 89,091,650
Tre Kronor Investment AB, Sweden........ 842,962 84,296,200 7,747,100
Jorf Lasfar Handelsbolag, Sweden........ 842,962 84,296,200 7,747,100
AB Cythere 61, Sweden................... 0 0 0
----------------------------------------------
Total 21,917,010 2,191,701,000 201,424,600
Under the terms of the amended Company Loan Agreement summarized below, these
convertible securities constitute an hybrid instrument which are delt with in
accordance with the substance of the transaction, i.e. as a Preferred Stock
equivalent:
(a) Expression of the Loan in MAD
The outstanding USD 201,424,600 principal amount is expressed as MAD
2,191,701,000 for the purpose of computing interest and principal payments due
under this Agreement. However, interest and principal payments will be paid to
the stockholders in USD, provided that the Company is not responsible for any
losses realized by the stockholders resulting from the depreciation of the value
of the MAD relative to the USD.
(b) Repayment or conversion into Stock
Under the terms of the amended Agreement:
- the Security may only be repaid, in whole or in part, at the Company's option;
- the part of the Security principal held by other Company Lenders listed above
may be converted into Common Stock at any time, using the same conversion ratio
used for the conversion of the parts of AB Cythere 61 and AB Cythere 63;
- the shares of Preferred Stock issued to AB Cythere 61 and AB Cythere 63 may be
converted into Common Stock. In this case, all outstanding Security principal
held by other Company Lenders will be mandatorily converted into Common Stock at
the same conversion ratio.
(c) Interest payment and accruals as Retained Earning
In accordance with Amendment N(degree).2, the Company will pay interest on the
unpaid principal amount once per year, at the interest rate per annum equal to
the greater of (1) the Moroccan maximum deductible rate, and (2) 4.00%. The
applicable interest rate for 2003 is 4.00%. Accruals for such interest payments
are reported as part of the Retained Earning allocation in Note 16.4, and are
not expensed.
F-110
JORF LASFAR ENERGY COMPANY
NOTES TO US GAAP FINANCIAL STATEMENTS DATED DECEMBER 31, 2003
16.3 PREFERRED STOCK
In accordance with Section 3.01 par.(b) of the amended Company Loan Agreement
(see note 16.2 above), the Company as converted on January 1, 2001, all
outstanding Company Loan principal held by AB Cythere 61 and AB Cythere 63, at
the conversion ratio of one (1) share of Preferred Stock for each one hundred
(100) MAD of such Company Loan principal converted into Preferred Stock, as
follows:
Preferred Stock
-------------------------------------------------
Number Par value Par value
Stockholders of Shares Dirham US Dollar
-------------------------------------------- -------------------------------------------------
AB Cythere 63, Sweden....................... 20,185,145 2,018,514,500 185,508,183
Jorf Lasfar Energiaktiebolag, Sweden ....... 0 0 0
Jorf Lasfar Power Energy AB, Sweden......... 0 0 0
Tre Kronor Investment AB, Sweden............ 0 0 0
Jorf Lasfar Handelsbolag, Sweden............ 0 0 0
AB Cythere 61, Sweden....................... 45,941 4,594,100 422,217
-------------------------------------------------
Total 20,231,086 2,023,108,600 185,930,400
Such shares are non-participating voting shares of convertible Preferred Stock
of the Company, and:
- are convertible at any moment into shares of Common Stock;
- give right to the collection of a minimum priority dividend, at least equal to
4% of the aggregate par value of the preferred shares,
- do not participate in the distribution of the remaining balance of Retained
Earning, which is divided among the shares of Common Stock as shown in Note
16.4.
16.4 RECONCILIATION AND ALLOCATION OF RETAINED EARNINGS
US$
----------------
2003
----
Retained Earnings as of December 31, 2002 113,030,506
Retained Earnings increase during 2003 119,850,319
Retained Earnings decrease during 2003
Convertible Securities interest payable as of January 1, 2003 -10,612,757
108,218,281 Dirhams
10.1970 Dirhams per US Dollar
Preferred Stock Dividend payable as of January 1, 2003 -9,796,391
99,893,797 Dirhams
10.1970 Dirhams per US Dollar
Common Stock Dividend payable as of October 30, 2003 -64,972,722
5,500 Common Stock Shares
110,000 Dirhams per share
605,000,000 Dirhams
9.3116 Dirhams per US Dollar on October 30, 2003
----------------
Total Retained Earnings 147,498,955
The Retained Earnings are allocated among the stockholders as follows:
Common
Convertible Securities Preferred Stock Stock Total
---------------------------------------------------------------------------------------
Stockholders Dirhams US Dollars Dirhams US Dollars US Dollars US Dollars
----------------------------------------- ---------------------------------------------------------------------------------------
AB Cythere 63, Sweden.................... 0 0 81,861,977 9,327,725 61,310,884 70,638,608
Jorf Lasfar Energiaktiebolag, Sweden..... 42,733,486 4,869,247 0 0 32,005,492 36,874,739
Jorf Lasfar Power Energy AB, Sweden...... 39,314,807 4,479,707 0 0 29,445,052 33,924,760
Tre Kronor Investment AB, Sweden......... 3,418,679 389,540 0 0 2,560,439 2,949,979
Jorf Lasfar Handelsbolag, Sweden......... 3,418,679 389,540 0 0 2,560,439 2,949,979
AB Cythere 61, Sweden.................... 0 0 186,316 21,230 139,660 160,890
---------------------------------------------------------------------------------------
Total 88,885,652 10,128,034 82,048,293 9,348,954 128,021,967 147,498,955
The allocations for Convertible Securities (88,885,652 Dirhams) and Preferred
Stock (82,048,293 Dirhams) are payable as of January 1, 2004, and are scheduled
for payment on May 17, 2004.
F-111
JORF LASFAR ENERGY COMPANY
NOTES TO US GAAP FINANCIAL STATEMENTS DATED DECEMBER 31, 2003
16.4 RECONCILIATION AND ALLOCATION OF RETAINED EARNINGS (CONTINUED)
2002 US$
---- --------------
Retained Earnings as of December 31, 2001 187,671,644
Retained Earnings increase during 2002 132,287,908
Retained Earnings decrease during 2002:
Convertible Securities interest payable as of January 1, 2002 -12,095,803
140,250,832 Dirhams
11.5950 Dirhams per US Dollar
Preferred Stock Dividend payable as of January 1, 2002 -9,942,031
115,277,852 Dirhams
11.5950 Dirhams per US Dollar
Common Stock Dividend payable as of October 29, 2002 -184,891,213
5,500 Common Stock Shares
360,000 Dirhams per share
1,980,000,000 Dirhams
10.7090 Dirhams per US Dollar on October 29, 2002
--------------
Total Retained Earnings 113,030,506
The Retained Earnings are allocated among the shareholders as follows:
Common
Convertible Securities Preferred Stock Stock Total
------------------------------------------------------------------------------------------
Shareholders Dirhams US Dollars Dirhams US Dollars US Dollars US Dollars
------------------------------------------------------------------------------------------------------------------------------------
AB Cythere 63, Sweden.................... 0 0 99,666,957 9,774,145 44,357,210 54,131,355
Jorf Lasfar Energiaktiebolag, Sweden..... 52,028,019 5,102,287 0 0 23,155,340 28,257,626
Jorf Lasfar Power Energy AB, Sweden...... 47,865,778 4,694,104 0 0 21,302,912 25,997,016
Tre Kronor Investment AB, Sweden......... 4,162,242 408,183 0 0 1,852,427 2,260,610
Jorf Lasfar Handelsbolag, Sweden......... 4,162,242 408,183 0 0 1,852,427 2,260,610
AB Cythere 61, Sweden 0 0 226,840 22,246 101,041 123,287
------------------------------------------------------------------------------------------
Total 108,218,281 10,612,757 99,893,797 9,796,391 92,621,358 113,030,506
2001 USD
---- --------------
Retained Earnings as of December 31, 2000 296,408,600
Retained Earnings increase during 2001 161,385,686
Retained Earnings decrease during 2001
Common Stock dividend declared payable on April 24, 2001 -151,362,260
5,500 Common Stock Shares
300,000 Dirhams per share
1,650,000,000 Dirhams
10.9010 Dirhams per US Dollar on April 24, 2001
Common Stock dividend declared payable on October 29, 2001 -118,760,381
5,500 Common Stock Shares
247,000 Dirhams per share
1,358,500,000 Dirhams
11.4390 Dirhams per US Dollar on October 29, 2001
--------------
Total Retained Earnings 187,671,644
The Retained Earnings are allocated among the shareholders as follows:
Common
Convertible Securities Preferred Stock Stock Total
-------------------------------------------------------------------------------------------
Shareholders Dirhams US Dollars Dirhams US Dollars US Dollars US Dollars
------------------------------------------------------------------------------------------------------------------------------------
AB Cythere 63, Sweden.................. 7,359,167 634,685 115,016,078 9,919,455 79,323,538 89,877,677
Jorf Lasfar Energiaktiebolag, Sweden... 63,882,171 5,509,458 0 0 41,408,453 46,917,911
Jorf Lasfar Power Energy AB, Sweden.... 58,771,597 5,068,702 0 0 38,095,776 43,164,478
Tre Kronor Investment AB, Sweden....... 5,110,574 440,757 0 0 3,312,676 3,753,433
Jorf Lasfar Handelsbolag, Sweden....... 5,110,574 440,757 0 0 3,312,676 3,753,433
AB Cythere 61, Sweden.................. 16,749 1,445 261,774 22,576 180,691 204,712
-------------------------------------------------------------------------------------------
Total 140,250,833 12,095,803 115,277,852 9,942,031 165,633,810 187,671,644
F-112
JORF LASFAR ENERGY COMPANY
NOTES TO US GAAP FINANCIAL STATEMENTS DATED DECEMBER 31, 2003
17. DIRECT FINANCING LEASE - (D.F.L)
As explained in Note 2b, JLEC is using the Direct Financing Lease methodology.
Specific accounts were created to reflect this method. These accounts are
detailed below.
Direct Financing Lease - (D.F.L) as of December 31, 2003
17.1 LONG TERM RECEIVABLES AS OF DECEMBER 31, 2003
US$ Euro
---------------- ------------------
Units 1 to 4 Units 1 to 4
---------------- ------------------
Total Minimum Lease Payments 1,283,596,155 956,285,785
Minimum Lease Payments for 2003 -101,642,136 -121,482,375
--------------- -----------------
Total of Future Minimum Lease Payments 1,181,954,019 834,803,410
X 1.263417
--------------- -----------------
Total of Future Minimum Lease Payments in US$ 17.3 1,181,954,019 1,054,704,794
============= =============
The minimum lease payments under the US GAAP model for the next five years are
as follows:
US$ Euro
---------------- ----------------
Year Units 1 to 4 Units 1 to 4
--------------- ---------------- ----------------
2004 116,664,592 116,635,941
2005 116,371,118 107,167,144
2006 108,749,430 92,362,540
2007 96,617,923 85,060,254
2008 104,467,842 84,500,888
17.2 UNEARNED INCOME AS OF DECEMBER 31, 2003
US$ Euro
---------------- ----------------
Units 1 to 4 Units 1 to 4
---------------- ----------------
Total Unearned Income 587,282,368 568,767,180
----------------
Lease Revenue 2003 -81,792,828 -91,756,966 X 1.14035 104,635,053
--------------- --------------- ----------------
505,489,540 477,010,214
X 1.263417
--------------- ---------------
Total Remaining Unearned Income in US$ 17.3 505,489,540 602,662,799
=========== ===========
The minimum lease payments under the US GAAP model for the next five years are
as follows:
US$ Euro
---------------- ----------------
Year Units 1 to 4 Units 1 to 4
--------------- ---------------- ----------------
2004 78,203,985 84,230,456
2005 73,392,008 76,117,547
2006 68,172,214 69,587,224
2007 64,172,868 64,534,124
2008 59,591,568 58,711,491
17.3 NET INVESTMENT IN DIRECT FINANCING LEASES AS OF DECEMBER 31, 2003
US$ Euro
---------------- ----------------
Units 1 to 4 Units 1 to 4
---------------- ----------------
Total of Future Minimum Lease Payments in US$ 17.1 1,181,954,019 1,054,704,794
Total Remaining Unearned Income in US$ 17.2 -505,489,540 -602,662,799
-------------- ---------------
Net investment in direct financing leases in US$ 676,464,479 452,041,995
=========== ===========
Current part in US$ 38,460,607 40,941,639
Non-Current part in US$ 638,003,872 411,100,356
F-113
JORF LASFAR ENERGY COMPANY
NOTES TO US GAAP FINANCIAL STATEMENTS DATED DECEMBER 31, 2003
Direct Financing Lease - (D.F.L) as of December 31, 2002
17.1 LONG TERM RECEIVABLES AS OF DECEMBER 31, 2002
US$ Euro
---------------- -----------------
Units 1 to 4 Units 1 to 4
---------------- -----------------
Total Minimum Lease Payments 1,426,008,468 1,081,037,348
Minimum Lease Payments for 2002 -142,336,127 -124,619,384
--------------- ----------------
Total of Future Minimum Lease Payments 1,283,672,341 956,417,964
------------- -----------
X 1.046582
--------------- ----------------
Total of Future Minimum Lease Payments in US$ 17.3 1,283,672,341 1,000,970,139
============= =============
The minimum lease payments under the US GAAP model for the next five years are
as follows:
US$ Euro
---------------- ----------------
Year Units 1 to 4 Units 1 to 4
--------------- ---------------- ----------------
2003 101,642,136 121,482,376
2004 116,664,592 116,635,941
2005 116,371,118 107,167,144
2006 106,872,046 90,768,049
2007 96,617,923 85,060,254
17.2 UNEARNED INCOME AS OF DECEMBER 31, 2002
US$ Euro
---------------- -----------------
Units 1 to 4 Units 1 to 4
---------------- -----------------
Total Unearned Income 673,381,447 668,603,895
----------------
Lease Revenue 2002 -88,463,713 -99,930,507 X 0.95144 95,077,872
--------------- ---------------- ----------------
584,917,734 568,673,388
----------- -----------
X 1.046582
--------------- ----------------
Total Remaining Unearned Income in US$ 17.3 584,917,734 595,163,517
=========== ===========
The Lease Revenue under the US GAAP model for the next five years are as
follows:
US$ Euro
---------------- ----------------
Year Units 1 to 4 Units 1 to 4
--------------- ---------------- ----------------
2003 81,436,213 91,576,926
2004 77,831,811 84,020,822
2005 73,012,360 75,871,769
2006 67,896,425 69,487,000
2007 64,019,517 64,661,480
17.3 NET INVESTMENT IN DIRECT FINANCING LEASES AS OF DECEMBER 31, 2002
US$ Euro
---------------- -----------------
Units 1 to 4 Units 1 to 4
---------------- -----------------
Total of Future Minimum Lease Payments in US$ 17.1 1,283,672,341 1,000,970,139
Total Remaining Unearned Income in US$ 17.2 -584,917,734 -595,163,517
--------------- ----------------
Net investment in direct financing leases in US$ 698,754,607 405,806,622
=========== ===========
Current part in US$ 20,205,960 31,298,090
Non-Current part in US$ 678,548,647 374,508,532
F-114
JORF LASFAR ENERGY COMPANY
NOTES TO US GAAP FINANCIAL STATEMENTS DATED DECEMBER 31, 2003
Direct Financing Lease - (D.F.L) as of December 31, 2001
17.1 LONG TERM RECEIVABLES AS OF DECEMBER 31, 2001
US$ Euro
---------------- ----------------
Units 1 to 4 Units 1 to 4
---------------- ----------------
Total Minimum Lease Payments 1,638,683,000 1,210,483,496
Minimum Lease Payments for 2001 -172,987,799 -116,468,307
--------------- ----------------
Total of Future Minimum Lease Payments 1,465,695,201 1,094,015,189
------------- -------------
X 0.88504
--------------- ----------------
Total of Future Minimum Lease Payments in US$ 17.3 1,465,695,201 968,243,542
============= ===========
The minimum lease payments under the US GAAP model for the next five years are
as follows:
US$ Euro
---------------- ----------------
Year Units 1 to 4 Units 1 to 4
--------------- ---------------- ----------------
2002 147,453,739 125,654,878
2003 108,352,169 125,448,188
2004 121,415,209 118,233,920
2005 120,444,202 108,413,086
2006 109,842,978 91,398,693
17.2 UNEARNED INCOME AS OF DECEMBER 31, 2001
US$ Euro
---------------- ----------------
Units 1 to 4 Units 1 to 4
---------------- ----------------
Total Unearned Income 823,653,897 792,223,192
------------
Lease Revenue 2001 -100,679,205 -105,867,406 X 0.89305 94,544,727
---------------- ---------------- ------------
722,974,692 686,355,786
----------- -----------
91,398,693
---------------- ----------------
Total Remaining Unearned Income in US$ 17.3 722,974,692 607,450,028
=========== ===========
The Lease Revenue under the US GAAP model for the next five years are as
follows:
US$ Euro
---------------- ----------------
Year Units 1 to 4 Units 1 to 4
--------------- ---------------- ----------------
2002 91,392,805 101,298,144
2003 87,462,185 94,047,617
2004 83,519,951 86,014,881
2005 78,375,499 77,627,453
2006 73,017,083 71,189,178
17.3 NET INVESTMENT IN DIRECT FINANCING LEASES AS OF DECEMBER 31, 2001
US$ Euro
---------------- ----------------
Units 1 to 4 Units 1 to 4
---------------- ----------------
Total of Future Minimum Lease Payments in US$ 17.1 1,465,695,201 968,243,542
Total Remaining Unearned Income in US$ 17.2 -722,974,692 -607,450,028
---------------- ----------------
Net investment in direct financing leases in US$ 742,720,509 360,793,514
=========== ===========
Current part in US$ 56,060,930 21,301,261
Non-Current part in US$ 686,659,570 339,492,340
F-115
JORF LASFAR ENERGY COMPANY
NOTES TO US GAAP FINANCIAL STATEMENTS DATED DECEMBER 31, 2003
18. FINANCIAL EXPENSES
The Financial Expenses are detailed as follows, for the year ending:
12/31/03 12/31/02 12/31/01
US$ US$ US$
----------- ----------- -----------
Interest, Fees and Swaps incurred from inception to December 31, 2003
Up-Front Fees 25,609,073 25,609,073 25,609,073
Interest Costs 287,290,576 246,526,514 210,187,205
Premiums 23,808,481 23,808,481 23,808,481
Commitment Fees 19,312,672 19,312,672 18,136,357
Arrangement Fees 2,396,273 2,396,273 2,396,273
Other Fees (acceptance fees, Agent fees...etc) 9,754,617 9,297,751 8,875,953
Guarantee Fees 20,598,822 19,101,732 5,496,128
Swaps 37,238,114 30,362,978 25,851,201
----------- ----------- -----------
426,008,628 376,415,474 320,360,671
Accrued Interest, Fees, Swaps (see Note 14.1) 5,904,937 6,072,924 17,293,488
----------- ----------- -----------
Total Interest, Fees and Swaps 431,913,565 382,488,398 337,654,159
Interest, fees and swaps capitalized as part of
the project construction for Units 3&4 -210,949,363 -210,949,363 -210,949,363
----------- ----------- -----------
Interest and swaps expensed - Total 220,964,202 171,539,035 126,704,796
Interest and swaps expensed from 1997 through 2002 -171,539,035 -126,704,796 -76,088,286
----------- ----------- -----------
Interest and swaps expensed 49,425,167 44,834,239 50,616,510
=========== =========== ===========
19. PENSION PLANS
JLEC contributes to the following pension plans:
19.1 COMMON FUND FOR RETIREMENT (CAISSE COMMUNE DES RETRAITES OR CCR)
As required by PPA Section 23.2.4, most of JLEC's employees (259 employees of
313, or 84%) plus 1 recent retiree are participants in the CCR defined benefit
pension plan. This plan is funded by employee payroll deductions equal to 9% of
the employee's gross pay, plus JLEC contributions equal to 18% of the
participating employee's gross pay. In 2003, 2002 and 2001, JLEC contributed to
the CCR US$ 350,071, US$ 291,036 and US$ 266,972, respectively.
Benefits provided under this plan include pension and retiree health insurance.
As of December 31, 2003, the benefit obligation totalled US$ 14,584,092 (MAD
127,992,907/8.7762). The fair value of assets contributed to the CCR was US$
4,705,965 (MAD 41,300,493/8.7762) as of December 31, 2003. The net unfunded
benefit obligation as of December 31, 2003 reflected in the accompanying balance
sheet was US$ 9,878,126 (MAD 86,692,413/8.7762).
The following assumptions were used to perform the actuarial valuations:
2003 2002 2001
---- ---- ----
Discount rate 6.00% 7.58% 7.58%
Rate of compensation increase 6.50% 6.50% 6.50%
19.2 MOROCCAN RETIREMENT FUND FOR PROFESSIONALS (CAISSE INTERPROFESSIONNELLE
MAROCAINE DE RETRAITES OR CIMR)
Employees of JLEC not covered by CCR participate in a fund to which the employer
contributes an amount equal to 12 percent of the employee's gross pay. This fund
is carried in the employee's name, and the pension benefits an employee will
receive depend only on the amount contributed to this account and the returns
earned on investments of those contributions. In 2003, JLEC's contribution to
that fund amounted to USD 145,677 (USD 109,147 in 2002, and USD 105,912 in 2001)
F-116
JORF LASFAR ENERGY COMPANY
NOTES TO US GAAP FINANCIAL STATEMENTS DATED DECEMBER 31, 2003
20. DERIVATIVE INSTRUMENT LIABILITY / OTHER COMPREHENSIVE INCOME
JLEC adopted SFAS N(degree). 133 on January 1, 2001. This standard requires
JLEC to recognize at fair value on the balance sheet, as assets or
liabilities, all contracts that meet the definition of a derivative
instrument. Details of all JLEC derivative instruments (interest rate
swaps) are provided in the following table as of December 31, 2003, and all
such swaps qualify with 100% effectiveness as cash flow hedge for JLEC's
variable interest rate loans. Therefore, in accordance with SFAS N(degree).
133, the changes in fair value of these interest rate swaps are reflected
directly in Stockholders' Equity under "Other Comprehensive Income or
(Loss)". JLEC determines fair value based upon market price estimations
provided by the swap providers.
2003
------------------------------------------------------------------------------------------------------------------------------------
Fixed Rate Current Current Settlement Forecast of Valuation
Credit Swap Paid by Libor Paid Notional and Termination Remaining in
Facility Providers Currency JLEC to JLEC Amount Amortization Date Payments Euro
------------------------------------------------------------------------------------------------------------------------------------
World Bank BNP Euro 6.4115% 2.16888% 41,119,939 Quarterly 2/15/2013 8,400,358 4,942,789
ABN Euro 6.4175% 2.16888% 41,119,939 Quarterly 2/15/2013 8,412,238 4,940,969
CSFB Euro 6.4060% 2.16888% 41,119,939 Quarterly 2/15/2013 8,389,468 4,733,058
----------- ---------- ----------
123,359,818 25,202,063 14,616,816
------------------------------------------------------------------------------------------------------------------------------------
ERG BNP Euro 6.4700% 2.16888% 7,681,980 Quarterly 2/15/2013 1,590,984 942,887
ABN Euro 6.4750% 2.16888% 7,681,980 Quarterly 2/15/2013 1,592,834 942,179
CSFB Euro 6.4680% 2.16888% 7,681,980 Quarterly 2/15/2013 1,590,245 950,471
----------- ---------- ----------
23,045,940 4,774,063 2,835,537
-----------------------------------------------------------------------------------------------------------------------------------
Total in Euro 17,452,353
----------
B/S FX rate X 1.26342
Total in USD 22,049,599
==========
2002
------------------------------------------------------------------------------------------------------------------------------------
Fixed Rate Current Current Settlement Forecast of Valuation
Credit Swap Paid by Libor Paid Notional and Termination Remaining in
Facility Providers Currency JLEC to JLEC Amount Amortization Date Payments Euro
------------------------------------------------------------------------------------------------------------------------------------
World Bank BNP Euro 6.4115% 3.13725% 45,565,338 Quarterly 2/15/2013 7,947,927 5,729,083
ABN Euro 6.4175% 3.13725% 45,565,338 Quarterly 2/15/2013 7,962,491 5,739,581
CSFB Euro 6.4060% 3.13725% 45,565,338 Quarterly 2/15/2013 7,934,576 5,719,459
----------- ---------- ----------
136,696,014 23,844,995 17,188,122
-----------------------------------------------------------------------------------------------------------------------------------
ERG BNP Euro 6.4700% 3.13725% 8,512,464 Quarterly 2/15/2013 1,511,371 1,089,437
ABN Euro 6.4750% 3.13725% 8,512,464 Quarterly 2/15/2013 1,513,638 1,091,072
CSFB Euro 6.4680% 3.13725% 8,512,464 Quarterly 2/15/2013 1,510,464 1,088,783
----------- ---------- ----------
25,537,392 4,535,473 3,269,292
------------------------------------------------------------------------------------------------------------------------------------
Total in Euro 20,457,415
----------
B/S FX rate X 1.04658
Total in USD 21,410,369
==========
2001
------------------------------------------------------------------------------------------------------------------------------------
Fixed Rate Current Current Settlement Forecast of Valuation
Credit Swap Paid by Libor Paid Notional and Termination Remaining in
Facility Providers Currency JLEC to JLEC Amount Amortization Date Payments Euro
------------------------------------------------------------------------------------------------------------------------------------
World Bank BNP Euro 6.4300% 3.34000% 48,899,387 Quarterly 12/17/2012 8,614,748 3,369,696
ABN Euro 6.4300% 3.34000% 48,899,387 Quarterly 12/17/2012 8,614,748 3,369,696
CSFB Euro 6.4230% 3.34000% 48,899,387 Quarterly 12/17/2012 8,595,232 3,362,062
----------- ---------- ----------
146,698,162 25,824,728 10,101,454
-----------------------------------------------------------------------------------------------------------------------------------
ERG BNP Euro 6.3600% 3.34000% 9,654,551 Quarterly 12/17/2012 1,662,339 650,231
ABN Euro 6.3600% 3.34000% 9,654,551 Quarterly 12/17/2012 1,662,339 650,231
CSFB Euro 6.3510% 3.34000% 9,654,551 Quarterly 12/17/2012 1,657,385 648,293
----------- ---------- ----------
28,963,653 4,982,063 1,948,755
------------------------------------------------------------------------------------------------------------------------------------
Total in Euro 12,050,209
----------
B/S FX rate X 0.88504
Total is USD 10,664,877
==========
F-117
JORF LASFAR ENERGY COMPANY
NOTES TO US GAAP FINANCIAL STATEMENTS DATED DECEMBER 31, 2003
21. CASH FLOWS FOR 2003
Reconciliation of net income to net cash from operating activities under the
Direct Method is as follows :
2003 2002 2001
US$ US$ US$
--------------------------------------------
Net Income ..................................................................... 119,850,319 132,287,908 161,385,686
Adjustment to reconcile Net Income to cash provided from operating activities :
Depreciation and amortization ......................................... 4,028,115 2,752,641 731,003
Deferred taxes ........................................................ (13,005,297) 6,908,298 6,097,093
Lease Revenue ......................................................... (186,427,881) (183,541,585) (195,223,932)
Finance tariff cash revenue ........................................... 246,405,730 263,559,812 262,829,803
Changes in operating assets and liabilities:
Inventories ........................................................... 2,066,641 (8,855,387) (9,242,424)
Accounts receivable ................................................... (9,311,086) 10,340,353 (22,975,149)
Prepayments ........................................................... 2,292,604 (5,954,169) 979,429
Accounts payable ...................................................... 22,353,640 (9,266,000) (20,701,000)
Unfunded pension obligation ........................................... 4,185,183 5,692,943 --
Other liabilities ..................................................... (2,445,519) (608,934) 3,093,490
Effect of exchange rate changes ....................................... 1,824,028 4,235,487 (2,003,877)
--------------------------------------------
Net cash provided by operating activities ...................................... 191,816,478 217,551,367 184,970,122
22. UNCERTAINTIES AS OF DECEMBER 31, 2003
22.1 JLEC's corporate tax return, payroll tax and VAT returns for the years 2000
to 2003 are open to audit by the Moroccan Tax Authorities. JLEC is periodically
involved in other legal, tax and other proceedings regarding matters arising in
the ordinary course of business. JLEC believes that the outcome of these matters
will not materially affect its results of operations or liquidity.
22.2 Discussions are currently underway between JLEC and ONE, which may result
in amendments of the Power Purchase Agreement (PPA) and the Transfer of
Possession Agreement (TPA). As currently drafted, such amendments would
eliminate ONE's right of termination for convenience (which right ONE could
otherwise exercise starting on September 13, 2012) and reduce ONE's right of
termination due to adverse economic circumstances (which right ONE might
otherwise be entitled to exercise after all of the principal amount of JLEC's
indebtedness to the project lenders has been repaid); and thereby, the proposed
amendments would increase the likelihood that the PPA and TPA continue in effect
until their scheduled expiration on September 13, 2027. In exchange, it is
proposed that the PPA's gross capacity charges be reduced by means of a new
rebate (to be paid by JLEC to ONE on a quarterly basis, and calculated starting
from September 13, 2003) and future tariff reductions (starting from September
13, 2014). These possible PPA and TPA amendments are still under negotiation,
and such negotiations may or may not converge on agreements acceptable to both
JLEC and ONE. Furthermore, any potential PPA and TPA amendments agreed between
JLEC and ONE would still be subject to change by and the approval of ONE's Board
of Directors, JLEC's shareholders and JLEC's lenders before coming into effect.
This process of negotiation, review and approval will require several months at
least, and may possibly never result in any amendments. This uncertainty exists
as of the date of these financial statements.
23. NEW ACCOUNTING STANDARDS
In June 2002, FASB issued SFAS No 146, "Accounting for Costs Associated with
Exit or Disposal Activities.". This statement addresses the recognition,
measurement and reporting of costs that are associated with exit and disposal
activities and nullifies EITF 94-3 "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to exit an Activity (Including Certain
costs incurred in a Restructuring)". Under SFAS 146, the cost associated with an
exit or disposal activity is recognized in the periods in which it is incurred
rather than at the date the company committed to the exit plan. This statement
became effective for exit or disposal activities initiated after December 31,
2002. The adoption of SFAS No 146 did not have a material impact on JLEC's
results of operations or its financial position.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity." The Standard
specifies that instruments within its scope embody obligations of the issuer and
that, therefore, the issuer must classify them as liabilities. The Standard is
effective for interim or fiscal periods ending after June 15, 2003. JLEC is
currently assessing the new standard and has not yet determined the impact on
its financial statements.
F-118
MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP
FINANCIAL STATEMENTS
F-119
Report of Independent Auditors
To the Partners and the Management Committee Of
Midland Cogeneration Venture Limited Partnership:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, partners' equity and cash flows present
fairly, in all material respects, the financial position of the Midland
Cogeneration Limited Partnership (a Michigan limited partnership) and its
subsidiaries (MCV) at December 31, 2003 and 2002, and the results of their
operations and their cash flows for the each of the two years ended December 31,
2003 and 2002 in conformity with accounting principles generally accepted in the
United States of America. These financial statements are the responsibility of
MCV's management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with auditing standards generally accepted in the United States of
America, which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion. The financial statements of
MCV for the year ended December 31, 2001, were audited by other independent
accountants who have ceased operations. Those independent accountants expressed
an unqualified opinion on those financial statements in their report dated
January 18, 2002.
As explained in Note 2 to the financial statements, effective April 1, 2002,
Midland Cogeneration Venture Limited Partnership changed its method of
accounting for derivative and hedging activities in accordance with Derivative
Implementation Group ("DIG") Issue C-16.
Detroit, Michigan
February 18, 2004
F-120
THE FOLLOWING REPORT IS A COPY OF A PREVIOUSLY ISSUED REPORT BY ARTHUR
ANDERSEN LLP (ANDERSEN). THIS REPORT HAS NOT BEEN REISSUED BY ANDERSEN, AND
ANDERSEN DID NOT CONSENT TO THE INCLUSION OF THIS REPORT INTO THIS FORM 10-K.
THE FOOTNOTE SHOWN BELOW WAS NOT PART OF ANDERSEN'S REPORT.
ARTHUR ANDERSEN LLP
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Partners and the Management Committee of the
Midland Cogeneration Venture Limited Partnership:
We have audited the accompanying consolidated balance sheets of the MIDLAND
COGENERATION VENTURE LIMITED PARTNERSHIP (a Michigan limited partnership) and
subsidiaries (MCV) as of December 31, 2001 and 2000*, and the related
consolidated statements of operations, partners' equity and cash flows for each
of the three years in the period ended December 31, 2001*. These financial
statements are the responsibility of MCV's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of the Midland
Cogeneration Venture Limited Partnership and subsidiaries as of December 31,
2001 and 2000*, and the consolidated results of their operations and their cash
flows for each of the three years in the period ended December 31, 2001*, in
conformity with accounting principles generally accepted in the United States.
As explained in Note 2 to the financial statements, effective January 1, 2001,
Midland Cogeneration Venture Limited Partnership changed its method of
accounting related to derivatives and hedging activities.
ARTHUR ANDERSEN LLP
Detroit, Michigan
January 18, 2002
*The MCV's consolidated balance sheets as of December 31, 2001 and 2000 and the
consolidated statements of operations, partners' equity and cash flows for the
years ended December 31, 1999 and 2000 are not included in this Annual Report on
Form 10-K.
F-121
MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP
CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31,
(IN THOUSANDS)
2003 2002
----------- -----------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 173,651 $ 160,425
Accounts and notes receivable - related parties 43,805 48,448
Accounts receivable 38,333 32,479
Gas inventory 20,298 19,566
Unamortized property taxes 17,672 18,355
Derivative assets 86,825 73,819
Broker margin accounts and prepaid expenses 8,101 5,165
----------- -----------
Total current assets 388,685 358,257
----------- -----------
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment 2,463,931 2,449,148
Pipeline 21,432 21,432
----------- -----------
Total property, plant and equipment 2,485,363 2,470,580
Accumulated depreciation (991,556) (920,614)
----------- -----------
Net property, plant and equipment 1,493,807 1,549,966
----------- -----------
OTHER ASSETS:
Restricted investment securities held-to-maturity 139,755 138,701
Derivative assets non-current 18,100 31,037
Deferred financing costs, net of accumulated
amortization of $17,285 and $15,930,
respectively 7,680 9,035
Prepaid gas costs, materials and supplies 21,623 11,077
----------- -----------
Total other assets 187,158 189,850
----------- -----------
TOTAL ASSETS $ 2,069,650 $ 2,098,073
=========== ===========
LIABILITIES AND PARTNERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued liabilities $ 57,368 $ 58,080
Gas supplier funds on deposit 4,517 --
Interest payable 53,009 56,386
Current portion of long-term debt 134,576 93,928
----------- -----------
Total current liabilities 249,470 208,394
----------- -----------
NON-CURRENT LIABILITIES:
Long-term debt 1,018,645 1,153,221
Other 2,459 2,148
----------- -----------
Total non-current liabilities 1,021,104 1,155,369
----------- -----------
COMMITMENTS AND CONTINGENCIES
TOTAL LIABILITIES 1,270,574 1,363,763
----------- -----------
PARTNERS' EQUITY 799,076 734,310
----------- -----------
TOTAL LIABILITIES AND PARTNERS' EQUITY $ 2,069,650 $ 2,098,073
=========== ===========
The accompanying notes are an integral part of these statements.
F-122
MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31,
(IN THOUSANDS)
2003 2002 2001
--------- --------- ---------
OPERATING REVENUES:
Capacity $ 404,681 $ 404,713 $ 409,633
Electric 162,093 177,569 184,707
Steam 17,638 14,537 16,473
--------- --------- ---------
Total operating revenues 584,412 596,819 610,813
--------- --------- ---------
OPERATING EXPENSES:
Fuel costs 254,988 255,142 288,167
Depreciation 89,437 88,963 92,176
Operations 16,943 16,642 16,082
Maintenance 15,107 12,666 13,739
Property and single business taxes 30,040 27,087 26,410
Administrative, selling and general 9,959 8,195 16,404
--------- --------- ---------
Total operating expenses 416,474 408,695 452,978
--------- --------- ---------
OPERATING INCOME 167,938 188,124 157,835
--------- --------- ---------
OTHER INCOME (EXPENSE):
Interest and other income 5,100 5,555 16,725
Interest expense (113,247) (119,783) (126,296)
--------- --------- ---------
Total other income (expense), net (108,147) (114,228) (109,571)
--------- --------- ---------
NET INCOME BEFORE CUMULATIVE EFFECT OF
ACCOUNTING CHANGE 59,791 73,896 48,264
Cumulative effect of change in method of accounting for
derivative option contracts (to April 1, 2002) (Note 2) -- 58,131 --
--------- --------- ---------
NET INCOME $ 59,791 $ 132,027 $ 48,264
========= ========= =========
The accompanying notes are an integral part of these statements.
F-123
MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF PARTNERS' EQUITY FOR THE YEARS ENDED DECEMBER 31,
(IN THOUSANDS)
GENERAL LIMITED
PARTNERS PARTNERS TOTAL
--------- --------- ---------
BALANCE, DECEMBER 31, 2000 $ 448,100 $ 79,638 $ 527,738
Comprehensive Income
Net Income 42,020 6,244 48,264
Other Comprehensive Income
Cumulative effect of accounting change 13,688 2,034 15,722
Unrealized loss on hedging activities (42,444) (6,307) (48,751)
Reclassification adjustments recognized in net income above 7,608 1,131 8,739
--------- --------- ---------
Total other comprehensive income (21,148) (3,142) (24,290)
--------- --------- ---------
Total Comprehensive Income 20,872 3,102 23,974
--------- --------- ---------
BALANCE, DECEMBER 31, 2001 $ 468,972 $ 82,740 $ 551,712
Comprehensive Income
Net Income 114,947 17,080 132,027
Other Comprehensive Income
Unrealized gain on hedging activities since beginning of period 33,311 4,950 38,261
Reclassification adjustments recognized in net income above 10,717 1,593 12,310
--------- --------- ---------
Total other comprehensive income 44,028 6,543 50,571
--------- --------- ---------
Total Comprehensive Income 158,975 23,623 182,598
--------- --------- ---------
BALANCE, DECEMBER 31, 2002 $ 627,947 $ 106,363 $ 734,310
Comprehensive Income
Net Income 52,056 7,735 59,791
Other Comprehensive Income
Unrealized gain on hedging activities since beginning of period 34,484 5,125 39,609
Reclassification adjustments recognized in net income above (30,153) (4,481) (34,634)
--------- --------- ---------
Total other comprehensive income 4,331 644 4,975
--------- --------- ---------
Total Comprehensive Income 56,387 8,379 64,766
--------- --------- ---------
BALANCE, DECEMBER 31, 2003 $ 684,334 $ 114,742 $ 799,076
========= ========= =========
The accompanying notes are an integral part of these statements.
F-124
MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31,
(IN THOUSANDS)
2003 2002 2001
--------- --------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 59,791 $ 132,027 $ 48,264
Adjustments to reconcile net income to net cash provided by operating
activities
Depreciation and amortization 90,792 90,430 93,835
Cumulative effect of change in accounting principle -- (58,131) --
(Increase) decrease in accounts receivable (1,211) 48,343 55,127
(Increase) decrease in gas inventory (732) 133 (5,225)
(Increase) decrease in unamortized property taxes 683 (1,730) (415)
(Increase) decrease in broker margin accounts and prepaid expenses (4,778) 31,049 (26,587)
(Increase) decrease in derivative assets 4,906 (20,444) --
(Increase) decrease in prepaid gas costs, materials and supplies (8,704) 1,376 8,414
Increase (decrease) in accounts payable and accrued liabilities (712) 8,774 (43,704)
Increase in gas supplier funds on deposit 4,517 -- --
Decrease in interest payable (3,377) (3,948) (7,082)
Increase (decrease) in other non-current liabilities 311 (24) 245
--------- --------- ---------
Net cash provided by operating activities 141,486 227,855 122,872
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Plant modifications and purchases of plant equipment (33,278) (29,529) (30,530)
Maturity of restricted investment securities held-to-maturity 601,225 377,192 538,327
Purchase of restricted investment securities held-to-maturity (602,279) (374,426) (539,918)
--------- --------- ---------
Net cash used in investing activities (34,332) (26,763) (32,121)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of financing obligation (93,928) (182,084) (155,632)
--------- --------- ---------
Net cash used in financing activities (93,928) (182,084) (155,632)
--------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 13,226 19,008 (64,881)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 160,425 141,417 206,298
--------- --------- ---------
CASH AND EQUIVALENTS AT END OF PERIOD $ 173,651 $ 160,425 $ 141,417
========= ========= =========
The accompanying notes are an integral part of these statements.
F-125
MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) THE PARTNERSHIP AND ASSOCIATED RISKS
MCV was organized to construct, own and operate a combined-cycle, gas-fired
cogeneration facility (the "Facility") located in Midland, Michigan. MCV
was formed on January 27, 1987, and the Facility began commercial operation
in 1990.
In 1992, MCV acquired the outstanding common stock of PVCO Corp., a
previously inactive company. MCV and PVCO Corp. entered into a partnership
agreement to form MCV Gas Acquisition General Partnership ("MCV GAGP") for
the purpose of buying and selling natural gas on the spot market and other
transactions involving natural gas activities. Currently, MCV GAGP is not
actively engaged in any business activity.
The Facility has a net electrical generating capacity of approximately 1500
MW and approximately 1.5 million pounds of process steam capacity per hour.
MCV has entered into three principal energy sales agreements. MCV has
contracted to (i) supply up to 1240 MW of electric capacity ("Contract
Capacity") to Consumers Energy Company ("Consumers") under the Power
Purchase Agreement ("PPA"), for resale to its customers through 2025, (ii)
supply electricity and steam to The Dow Chemical Company ("Dow") under the
Steam and Electric Power Agreement ("SEPA") through 2015 and (iii) supply
steam to Dow Corning Corporation ("DCC") under the Steam Purchase Agreement
("SPA") through 2011. From time to time, MCV enters into other sales
agreements for the sale of excess capacity and/or energy available above
MCV's internal use and obligations under the PPA, SEPA and SPA. Results of
operations are primarily dependent on successfully operating the Facility
at or near contractual capacity levels and on Consumers' ability to perform
its obligations under the PPA. Sales pursuant to the PPA have historically
accounted for over 90% of MCV's revenues.
The PPA permits Consumers, under certain conditions, to reduce the capacity
and energy charges payable to MCV and/or to receive refunds of capacity and
energy charges paid to MCV if the Michigan Public Service Commission
("MPSC") does not permit Consumers to recover from its customers the
capacity and energy charges specified in the PPA (the "regulatory-out"
provision). Until September 15, 2007, however, the capacity charge may not
be reduced below an average capacity rate of 3.77 cents per kilowatt-hour
for the available Contract Capacity notwithstanding the "regulatory-out"
provision. Consumers and MCV are required to support and defend the terms
of the PPA.
The Facility is a qualifying cogeneration facility ("QF") originally
certified by the Federal Energy Regulatory Commission ("FERC") under the
Public Utility Regulatory Policies Act of 1978, as amended ("PURPA"). In
order to maintain QF status, certain operating and efficiency standards
must be maintained on a calendar-year basis and certain ownership
limitations must be met. In the case of a topping-cycle generating plant
such as the Facility, the applicable operating standard requires that the
portion of total energy output that is put to some useful purpose other
than facilitating the production of power (the "Thermal Percentage") be at
least 5%. In addition, the Facility must achieve a PURPA efficiency
standard (the sum of the useful power output plus one-half of the useful
thermal energy output, divided by the energy input (the "Efficiency
Percentage")) of at least 45%. If the Facility maintains a Thermal
Percentage of 15% or higher, the required Efficiency Percentage is reduced
to 42.5%. Since 1990, the Facility has achieved the app licable Thermal and
Efficiency Percentages. For the twelve months ended December 31, 2003, the
Facility achieved a Thermal Percentage of 21.0% and an Efficiency
Percentage of 47.4%. The loss of QF status could, among other things, cause
the Facility to lose its rights under PURPA to sell power to Consumers at
Consumers' "avoided cost" and subject the Facility to additional federal
and state regulatory requirements. MCV believes that the Facility will meet
the required Thermal Percentage and the corresponding Efficiency Percentage
in 2003 and beyond, as well as the PURPA ownership limitations.
The Facility is wholly dependent upon natural gas for its fuel supply and a
substantial portion of the Facility's operating expenses consist of the
costs of natural gas. MCV recognizes that its existing gas contracts are
not sufficient to satisfy the anticipated gas needs over the term of the
PPA and, as such, no assurance can be given as to the availability or price
of natural gas after the expiration of the existing gas contracts. In
addition, to the extent that the costs associated with production of
electricity rise faster than the energy charge payments, MCV's financial
performance will be negatively affected. The extent of such impact will
depend upon the
F-126
MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
amount of the average energy charge payable under the PPA, which is based
upon costs incurred at Consumers' coal-fired plants and upon the amount of
energy scheduled by Consumers for delivery under the PPA. However, given
the unpredictability of these factors, the overall economic impact upon MCV
of changes in energy charges payable under the PPA and in future fuel costs
under new or existing contracts cannot accurately be predicted.
At both the state and federal level, efforts continue to restructure the
electric industry. A significant issue to MCV is the potential for future
regulatory denial of recovery by Consumers from its customers of above
market PPA costs Consumers pays MCV. At the state level, the MPSC entered a
series of orders from June 1997 through February 1998 (collectively the
"Restructuring Orders"), mandating that utilities "wheel" third-party power
to the utilities' customers, thus permitting customers to choose their
power provider. MCV, as well as others, filed an appeal in the Michigan
Court of Appeals to protect against denial of recovery by Consumers of PPA
charges. The Michigan Court of Appeals found that the Restructuring Orders
do not unequivocally disallow such recovery by Consumers and, therefore,
MCV's issues were not ripe for appellate review and no actual controversy
regarding recovery of costs could occur until 2008, at the earliest. In
June 2000, the State of Michigan enacted legislation which, among other
things, states that the Restructuring Orders (being voluntarily implemented
by Consumers) are in compliance with the legislation and enforceable by the
MPSC. The legislation provides that the rights of parties to existing
contracts between utilities (like Consumers) and QFs (like MCV), including
the rights to have the PPA charges recovered from customers of the
utilities, are not abrogated or diminished, and permits utilities to
securitize certain stranded costs, including PPA charges.
In 1999, the U.S. District Court granted summary judgment to MCV declaring
that the Restructuring Orders are preempted by federal law to the extent
they prohibit Consumers from recovering from its customers any charge for
avoided costs (or "stranded costs") to be paid to MCV under PURPA pursuant
to the PPA. In 2001, the United States Court of Appeals ("Appellate Court")
vacated the U.S. District Court's 1999 summary judgment and ordered the
case dismissed based upon a finding that no actual case or controversy
existed for adjudication between the parties. The Appellate Court
determined that the parties' dispute is hypothetical at this time and the
QFs' (including MCV) claims are premised on speculation about how an order
might be interpreted by the MPSC, in the future.
MCV continues to monitor and participate in these industry restructuring
matters as appropriate, and to evaluate potential impacts on both cash
flows and recoverability of the carrying value of property, plant and
equipment. MCV management cannot, at this time, predict the impact or
outcome of these matters.
(2) SIGNIFICANT ACCOUNTING POLICIES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to
make estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates. Following is a discussion of MCV's significant accounting
policies.
Principles of Consolidation
The consolidated financial statements include the accounts of MCV and its
wholly owned subsidiaries. All material transactions and balances among
entities, which comprise MCV, have been eliminated in the consolidated
financial statements.
Revenue Recognition
MCV recognizes revenue for the sale of variable energy and fixed energy
when delivered. Capacity and other installment revenues are recognized
based on plant availability or other contractual arrangements.
F-127
MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Fuel Costs
MCV's fuel costs are those costs associated with securing natural gas,
transportation and storage services necessary to generate electricity and
steam from the Facility. These costs are recognized in the income statement
based upon actual volumes burned to produce the delivered energy. In
addition, MCV engages in certain cost mitigation activities to offset the
fixed charges MCV incurs for these activities. The gains or losses
resulting from these activities have resulted in net gains of approximately
$7.7 million, $3.9 million and $5.5 million for the years ended 2003, 2002
and 2001, respectively. These net gains are reflected as a component of
fuel costs.
In July 2000, in response to rapidly escalating natural gas prices and
since Consumers electric rates were frozen, MCV entered into transactions
with Consumers whereby Consumers agreed to reduce MCV's dispatch level and
MCV agreed to share with Consumers the savings realized by not having to
generate electricity ("Dispatch Mitigation"). For the years ended 2003,
2002 and 2001, MCV estimates that Dispatch Mitigation resulted in net
savings of approximately $13.0 million, $2.5 million and $7.6 million,
respectively, a portion of which will be realized in reduced maintenance
expenditures in future years.
Subsequently, on January 1, 2004, Dispatch Mitigation ceased and Consumers
began dispatching MCV pursuant to the 915 MW Settlement and the 325 MW
Settlement "availability caps" provision (i.e., minimum dispatch of 1100 MW
on- and off-peak ("Forced Dispatch")). On February 12, 2004, MCV and
Consumers entered into a Resource Conservation Agreement ("RCA") which,
among other things, provides that Consumers will economically dispatch MCV,
if certain conditions are met. Such dispatch is expected to reduce electric
production from what would have occurred under the Forced Dispatch, as well
as decrease gas consumption by MCV. The RCA provides that Consumers has a
right of first refusal to purchase, at market prices, the gas conserved
under the RCA. The RCA further provides for the parties to enter into
another agreement implementing the terms of the RCA including the sharing
of savings realized by not having to generate electricity. The RCA is
subject to MPSC approval and MCV and Consumers must accept the terms of the
MPSC order as a condition precedent to the RCA becoming effective. The MPSC
has not yet acted upon Consumers' application for approval of the RCA. MCV
cannot predict the outcome of the MPSC proceedings necessary to effectuate
the RCA.
Inventory
MCV's inventory of natural gas is stated at the lower of cost or market,
and valued using the last-in, first-out ("LIFO") method. Inventory includes
the costs of purchased gas, variable transportation and storage. The amount
of reserve to reduce inventories from first-in, first-out ("FIFO") basis to
the LIFO basis at December 31, 2003 and 2002, was $8.4 million and $7.4
million, respectively. Inventory cost, determined on a FIFO basis,
approximates current replacement cost.
Materials and Supplies
Materials and supplies are stated at the lower of cost or market using the
weighted average cost method. The majority of MCV's materials and supplies
are considered replacement parts for MCV's Facility.
Depreciation
Original plant, equipment and pipeline were valued at cost for the
constructed assets and at the asset transfer price for purchased and
contributed assets, and are depreciated using the straight-line method over
an estimated useful life of 35 years, which is the term of the PPA, except
for the hot gas path components of the GTGs which are primarily being
depreciated over a 25-year life. Plant construction and additions, since
commercial operations in 1990, are depreciated using the straight-line
method over the remaining life of the plant which currently is 22 years.
Major renewals and replacements, which extend the useful life of plant and
equipment
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MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
are capitalized, while maintenance and repairs are expensed when incurred.
Major equipment overhauls are capitalized and amortized to the next
equipment overhaul. Personal property is depreciated using the
straight-line method over an estimated useful life of 5 to 15 years. The
cost of assets and related accumulated depreciation are removed from the
accounts when sold or retired, and any resulting gain or loss reflected in
operating income.
Federal Income Tax
MCV is not subject to Federal or State income taxes. Partnership earnings
are taxed directly to each individual partner.
Statement of Cash Flows
All liquid investments purchased with a maturity of three months or less at
time of purchase are considered to be current cash equivalents.
Fair Value of Financial Instruments
The carrying amounts of cash and cash equivalents and short-term
investments approximate fair value because of the short maturity of these
instruments. MCV's short-term investments, which are made up of investment
securities held-to-maturity, as of December 31, 2003 and December 31, 2002
have original maturity dates of approximately one year or less. The unique
nature of the negotiated financing obligation discussed in Note 6 makes it
unnecessary to estimate the fair value of the Owner Participants'
underlying debt and equity instruments supporting such financing
obligation, since SFAS No. 107 "Disclosures about Fair Value of Financial
Instruments" does not require fair value accounting for the lease
obligation.
Accounting for Derivative Instruments and Hedging Activities
Effective January 1, 2001, MCV adopted SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities" which was issued in June
1998 and then amended by SFAS No. 137, "Accounting for Derivative
Instruments and Hedging Activities - Deferral of the Effective Date of SFAS
No. 133," SFAS No. 138 "Accounting for Certain Derivative Instruments and
Certain Hedging Activities - An amendment of FASB Statement No. 133" and
SFAS No. 149 "Amendment of Statement 133 on Derivative Instruments and
Hedging Activity (collectively referred to as "SFAS No. 133"). SFAS No. 133
establishes accounting and reporting standards requiring that every
derivative instrument be recorded on the balance sheet as either an asset
or liability measured at its fair value. SFAS No. 133 requires that changes
in a derivative's fair value be recognized currently in earnings unless
specific hedge accounting criteria are met. Special accounting for
qualifying hedges in some cases allows a derivative's gains and losses to
offset related results on the hedged item in the income statement or
permits recognition of the hedge results in other comprehensive income, and
requires that a company formally document, designate and assess the
effectiveness of transactions that receive hedge accounting.
Electric Sales Agreements
MCV believes that its electric sales agreements currently do not qualify as
derivatives under SFAS No. 133, 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 and as such does not record
the fair value of these contracts on its balance sheet. If an active energy
market emerges, MCV intends to apply the normal purchase, normal sales
exception under SFAS No. 133 to its electric sales agreements, to the
extent such exception is applicable.
Forward Foreign Exchange Contracts
An amended service agreement was entered into between MCV and Alstom Power
Company ("Alstom") (the "Amended Service Agreement"), under which Alstom
will provide hot gas path parts for MCV's twelve
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MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
gas turbines. The payments due to Alstom under the Amended Service
Agreement are adjusted annually based on the U.S. dollar to Swiss franc
currency exchange rate.
To manage this currency exchange rate risk and hedge against adverse
currency fluctuations impacting the payments under the Amended Service
Agreement, MCV maintained a foreign currency hedging program whereby MCV
periodically entered into forward purchase contracts for Swiss francs.
Under SFAS No. 133, the forward foreign currency exchange contracts
qualified as fair value hedges, since they hedged the identifiable foreign
currency commitment of the Amended Service Agreement. As of December 31,
2003, MCV did not have any such transactions outstanding and does not
anticipate any future transactions since the Alstom Agreement is expected
to be terminated in the near future. As of December 31, 2002, MCV had a
forward purchase contract involving Swiss francs in the notional amount of
$5.0 million. This hedge was considered highly effective, therefore, there
was no material gain or loss recognized in earnings during the twelve
months ended December 31, 2002.
Natural Gas Supply Contracts
MCV management believes that its long-term natural gas contracts which do
not contain volume optionality qualify under SFAS No. 133 for the normal
purchases and normal sales exception. Therefore, these contracts are
currently not recognized at fair value on the balance sheet.
The FASB issued DIG Issue C-16, which became effective April 1, 2002,
regarding natural gas commodity contracts that combine an option component
and a forward component. This guidance requires either that the entire
contract be accounted for as a derivative or the components of the contract
be separated into two discrete contracts. Under the first alternative, the
entire contract considered together would not qualify for the normal
purchases and sales exception under the revised guidance. Under the second
alternative, the newly established forward contract could qualify for the
normal purchases and sales exception, while the option contract would be
treated as a derivative under SFAS No. 133 with changes in fair value
recorded through earnings. At April 1, 2002, MCV had nine long-term gas
contracts that contained both an option and forward component. As such,
they were no longer accounted for under the normal purchases and sales
exception and MCV began mark-to-market accounting of these nine contracts
through earnings. Based on the natural gas prices, at the beginning of
April 2002, MCV recorded a $58.1 million gain for the cumulative effect of
this accounting change. During the fourth quarter of 2002, MCV removed the
option component from three of the nine long-term gas contracts, which
should reduce some of the earnings volatility. Since April 2002, MCV has
recorded an additional mark-to-market gain of $16.9 million for these gas
contracts for a cumulative mark-to-market gain through December 31, 2003 of
$75.0 million, which will reverse over the remaining life of these gas
contracts, ranging from 2004 to 2007.
For the twelve months ended December 31, 2003, MCV recorded in "Fuel costs"
a $5.0 million net mark-to-market loss in earnings associated with these
contracts. In addition, as of December 31, 2003 and December 31, 2002, MCV
recorded "Derivative assets" in Current Assets in the amount of $56.9
million and $48.9 million, respectively, and for the same periods recorded
"Derivative assets" in Other Assets in the amount of $18.1 million and
$31.0 million, respectively, representing the mark-to-market gain on these
long-term natural gas contracts.
Natural Gas Supply Futures and Options
To manage market risks associated with the volatility of natural gas
prices, MCV maintains a gas hedging program. MCV enters into natural gas
futures and option contracts in order to hedge against unfavorable changes
in the market price of natural gas in future months when gas is expected to
be needed. These financial instruments are being utilized principally to
secure anticipated natural gas requirements necessary for projected
electric and steam sales, and to lock in sales prices of natural gas
previously obtained in order to optimize MCV's existing gas supply, storage
and transportation arrangements.
These financial instruments are derivatives under SFAS No. 133 and the
contracts that are utilized to secure the anticipated natural gas
requirements necessary for projected electric and steam sales qualify as
cash flow
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MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
hedges under SFAS No. 133, since they hedge the price risk associated with
the cost of natural gas. MCV also engages in cost mitigation activities to
offset the fixed charges MCV incurs in operating the Facility. These cost
mitigation activities include the use of futures and options contracts to
purchase and/or sell natural gas to maximize the use of the transportation
and storage contracts when it is determined that they will not be needed
for Facility operation. Although these cost mitigation activities do serve
to offset the fixed monthly charges, these cost mitigation activities are
not considered a normal course of business for MCV and do not qualify as
hedges under SFAS No. 133. Therefore, the resulting mark-to-market gains
and losses from cost mitigation activities are flowed through MCV's
earnings.
Cash is deposited with the broker in a margin account at the time futures
or options contracts are initiated. The change in market value of these
contracts requires adjustment of the margin account balances. The margin
account balance as of December 31, 2003 and December 31, 2002 was recorded
as a current asset in "Broker margin accounts and prepaid expenses," in the
amount of $4.1 million and $.8 million, respectively.
For the twelve months ended December 31, 2003, MCV has recognized in other
comprehensive income, an unrealized $5.0 million increase on the futures
contracts, which are hedges of forecasted purchases for plant use of market
priced gas. This resulted in a net $31.3 million gain in other
comprehensive income as of December 31, 2003. This balance represents
natural gas futures and options with maturities ranging from January 2004
to December 2007, of which $21.8 million of this gain is expected to be
reclassified into earnings within the next twelve months. MCV also has
recorded, as of December 31, 2003, a $29.9 million current derivative asset
in "Derivative assets," representing the mark-to-market gain on natural gas
futures for anticipated projected electric and steam sales accounted for as
hedges. In addition, for the twelve months ended December 31, 2003, MCV has
recorded a net $35.0 million gain in earnings included in fuel costs from
hedging activities related to MCV natural gas requirements for Facility
operations and a net $1.0 million gain in earnings from cost mitigation
activities. For the twelve months ended December 31, 2002, MCV recognized
an unrealized $50.6 million increase in other comprehensive income on the
futures contracts, which are hedges of forecasted purchases for plant use
of market priced gas, resulting in a $26.3 million gain balance in other
comprehensive income as of December 31, 2002. As of December 31, 2002, MCV
had recorded a $24.9 million current derivative asset in "Derivative
assets." For the twelve months ended December 31, 2002, MCV had recorded a
net $12.2 million loss in earnings from hedging activities related to MCV
natural gas requirements for Facility operations and a net $.4 million gain
in earnings from cost mitigation activities.
Interest Rate Swaps
To manage the effects of interest rate volatility on interest income while
maximizing return on permitted investments, MCV established an interest
rate hedging program. The notional amounts of the hedges are tied directly
to MCV's anticipated cash investments, without physically exchanging the
underlying notional amounts. Cash is deposited with the broker in a margin
account at the time the interest rate swap transactions are initiated. The
change in market value of these contracts may require further adjustment of
the margin account balance. The margin account balance at December 31,
2002, of approximately $25,000, which was recorded as a current asset in
"Broker margin accounts and prepaid expenses," was returned to MCV during
the month of January 2003 since MCV currently does not have any outstanding
interest rate swap transactions.
As of December 31, 2002, MCV had one interest rate swap, with a notional
amount of $20.0 million with a period of performance that extended to
December 1, 2002, which did not qualify as a hedge under SFAS No. 133. The
gains and losses on this swap were recorded currently in earnings. For the
twelve months ended December 31, 2002, MCV recorded an immaterial loss in
earnings.
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MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Reclassification
Certain prior period amounts have been reclassified to conform to the
current year financial statement presentation.
New Accounting Standards
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." This SFAS amends SFAS No.
133 for decisions made (1) as part of the Derivative Implementations Group
process that effectively required amendments to SFAS No. 133, (2) for other
Financial Accounting Standards Board projects dealing with financial
instruments and (3) for implementation issues raised in relation to the
application of this definition of a derivative. The changes in this SFAS
No. 149 improve financial reporting by requiring that contracts with
comparable characteristics be accounted for similarly, which will result in
more consistent reporting of contracts as either derivatives or hybrid
instruments. This standard is effective for contracts entered into or
modified after June 30, 2003, with some exceptions. MCV has adopted this
standard and does not expect the application to materially affect its
financial position or results of operations.
(3) RESTRICTED INVESTMENT SECURITIES HELD-TO-MATURITY
Non-current restricted investment securities held-to-maturity have carrying
amounts that approximate fair value because of the short maturity of these
instruments and consist of the following at December 31 (in thousands):
2003 2002
---------- ----------
Funds restricted for rental payments pursuant to the
Overall Lease Transaction $ 137,296 $ 136,554
Funds restricted for management non-qualified plans 2,459 2,147
---------- ----------
Total $ 139,755 $ 138,701
========== ==========
(4) ACCOUNTS PAYABLE AND ACCRUED LIABILITIES Accounts payable and accrued
liabilities consist of the following at December 31 (in thousands):
2003 2002
---------- ----------
Accounts payable
Related parties $ 7,386 $ 12,224
Trade creditors 34,786 27,935
Property and single business taxes 12,548 14,842
Other 2,648 3,079
---------- ----------
Total $ 57,368 $ 58,080
========== ==========
(5) GAS SUPPLIER FUNDS ON DEPOSIT Pursuant to individual gas contract terms
with counterparties, deposit amounts may be required by one party to the
other based upon the net amount of exposure. The net amount of exposure
will vary with changes in market prices, credit provisions and various
other factors. Collateral paid or received will be posted by one party to
F-132
MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
the other based upon the net amount of exposure. The net amount of exposure
will vary with changes in market prices, credit provisions and various
other factors. Collateral paid or received will be posted by one party to
the other based on the net amount of the exposure. Interest is earned on
funds on deposit. As of December 31, 2003 MCV was not supplying any credit
support in the form of cash or letters of credit. As of December 31, 2003
MCV was holding $4.5 million of cash on deposit and letters of credit
totaling $116.6 million from two gas suppliers as collateral support. (6)
LONG-TERM DEBT Long-term debt consists of the following at December 31 (in
thousands):
2003 2002
-------------- -------------
Financing obligation, maturing through 2015, payable in semi-
annual installments of principal and interest, collateralized by
property, plant and equipment $ 1,153,221 $ 1,247,149
Less current portion (134,576) (93,928)
------------- -------------
Total long-term debt $ 1,018,645 $ 1,153,221
============= =============
Financing Obligation
In June 1990, MCV obtained permanent financing for the
Facility by entering into sale and leaseback agreements ("Overall Lease
Transaction") with a lessor group, related to substantially all of MCV's fixed
assets. Proceeds of the financing were used to retire borrowings outstanding
under existing loan commitments, make a capital distribution to the Partners and
retire a portion of notes issued by MCV to MEC Development Corporation ("MDC")
in connection with the transfer of certain assets by MDC to MCV. In accordance
with SFAS No. 98, "Accounting For Leases," the sale and leaseback transaction
has been accounted for as a financing arrangement.
The financing obligation
utilizes the effective interest rate method, which is based on the minimum lease
payments required through the end of the basic lease term of 2015 and
management's estimate of additional anticipated obligations after the end of the
basic lease term. The effective interest rate during the remainder of the basic
lease term is approximately 9.4%.
Under the terms of the Overall Lease
Transaction, MCV sold undivided interests in all of the fixed assets of the
Facility for approximately $2.3 billion, to five separate owner trusts ("Owner
Trusts") established for the benefit of certain institutional investors ("Owner
Participants"). U.S. Bank National Association (formerly known as State Street
Bank and Trust Company) serves as owner trustee ("Owner Trustee") under each of
the Owner Trusts, and leases undivided interests in the Facility on behalf of
the Owner Trusts to MCV for an initial term of 25 years. CMS Midland Holdings
Company ("CMS Holdings"), currently a wholly owned subsidiary of Consumers,
acquired a 35% indirect equity interest in the Facility through its purchase of
an interest in one of the Owner Trusts.
The Overall Lease Transaction requires
MCV to achieve certain rent coverage ratios and other financial tests prior to a
distribution to the Partners. Generally, these financial tests become more
restrictive with the passage of time. Further, MCV is restricted to making
permitted investments and incurring permitted indebtedness as specified in the
Overall Lease Transaction. The Overall Lease Transaction also requires filing of
certain periodic operating and financial reports, notification to the lessors of
events constituting a material adverse change, significant litigation or
governmental investigation, and change in status as a qualifying facility under
FERC proceedings or court decisions, among others. Notification and approval is
required for plant modification, new business activities, and other significant
changes, as defined. In addition,
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MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
MCV has agreed to indemnify various parties to the sale and leaseback
transaction against any expenses or environmental claims asserted, or certain
federal and state taxes imposed on the Facility, as defined in the Overall Lease
Transaction.
Under the terms of the Overall Lease Transaction and refinancing of the
tax-exempt bonds, approximately $25.0 million of transaction costs were a
liability of MCV and have been recorded as a deferred cost. Financing costs
incurred with the issuance of debt are deferred and amortized using the interest
method over the remaining portion of the 25-year lease term. Deferred financing
costs of approximately $1.4 million, $1.5 million and $1.7 million were
amortized in the years 2003, 2002 and 2001, respectively. Interest and fees
incurred related to long-term debt arrangements during 2003, 2002 and 2001 were
$111.9 million, $118.3 million and $124.6 million, respectively.
Interest and fees paid during 2003, 2002 and 2001 were $115.4 million, $122.1
million and $131.7 million, respectively. Minimum payments due under these
long-term debt arrangements over the next five years are (in thousands):
PRINCIPAL INTEREST TOTAL
------------- ----------- ----------
2004 $134,576 $108,233 $242,809
2005 76,547 97,836 174,383
2006 63,459 92,515 155,974
2007 62,916 87,988 150,904
2008 67,753 83,163 150,916
-------- -------- --------
$405,251 $469,735 $874,986
======== ======== ========
Revolving Credit Agreement
MCV has also entered into a working capital line ("Working Capital Facility"),
which expires August 29, 2004. Under the terms of the existing agreement, MCV
can borrow up to the $50 million commitment, in the form of short-term
borrowings or letters of credit collateralized by MCV's natural gas inventory
and earned receivables. At any given time, borrowings and letters of credit are
limited by the amount of the borrowing base, defined as 90% of earned
receivables and 50% of natural gas inventory, capped at $15 million. During
2003, MCV did not utilize the Working Capital Facility. At December 31, 2003,
MCV had no outstanding borrowings or letters of credit.
Intercreditor Agreement
MCV has also entered into an Intercreditor Agreement with the Owner Trustee,
Working Capital Lender, U.S. Bank National Association as Collateral Agent
("Collateral Agent") and the Senior and Subordinated Indenture Trustees. Under
the terms of this agreement, MCV is required to deposit all revenues derived
from the operation of the Facility with the Collateral Agent for purposes of
paying operating expenses and rent. In addition, these funds are required to pay
construction modification costs and to secure future rent payments. As of
December 31, 2003, MCV has deposited $137.3 million into the reserve account.
The reserve account is to be maintained at not less than $40 million nor more
than $137 million (or debt portion of next succeeding basic rent payment,
whichever is greater). Excess funds in the reserve account are periodically
transferred to MCV. This agreement also contains provisions governing the
distribution of revenues and rents due under the Overall Lease Transaction, and
establishes the priority of payment among the Owner Trusts, creditors of the
Owner Trusts, creditors of MCV and the Partnership.
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MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
(7) COMMITMENTS AND OTHER AGREEMENTS
MCV has entered into numerous commitments and other agreements related to
the Facility. Principal agreements are summarized as follows: Power Purchase
Agreement
MCV and Consumers have executed the PPA for the sale to Consumers of a
minimum amount of electricity, subject to the capacity requirements of Dow
and any other permissible electricity purchasers. Consumers has the right to
terminate and/or withhold payment under the PPA if the Facility fails to
achieve certain operating levels or if MCV fails to provide adequate fuel
assurances. In the event of early termination of the PPA, MCV would have a
maximum liability of approximately $270 million if the PPA were terminated
in the 12th through 24th years. The term of this agreement is 35 years from
the commercial operation date and year-to-year thereafter.
Steam and Electric Power Agreement
MCV and Dow executed the SEPA for the sale to Dow of certain minimum amounts
of steam and electricity for Dow's facilities.
If the SEPA is terminated, and Consumers does not fulfill MCV's commitments
as provided in the Backup Steam and Electric Power Agreement, MCV will be
required to pay Dow a termination fee, calculated at that time, ranging from
a minimum of $60 million to a maximum of $85 million. This agreement
provides for the sale to Dow of steam and electricity produced by the
Facility for terms of 25 years and 15 years, respectively, commencing on the
commercial operation date and year-to-year thereafter.
Steam Purchase Agreement
MCV and DCC executed the SPA for the sale to DCC of certain minimum amounts
of steam for use at the DCC Midland site. Steam sales under the SPA
commenced in July 1996. Termination of this agreement, prior to expiration,
requires the terminating party to pay to the other party a percentage of
future revenues, which would have been realized had the initial term of 15
years been fulfilled. The percentage of future revenues payable is 50% if
termination occurs prior to the fifth anniversary of the commercial
operation date and 33-1/3% if termination occurs after the fifth anniversary
of this agreement. The term of this agreement is 15 years from the
commercial operation date of steam deliveries under the contract and
year-to-year thereafter. Gas Supply Agreements
MCV has entered into gas purchase agreements with various producers for the
supply of natural gas. The current contracted volume totals 227,561 MMBtu
per day annual average for 2004. As of January 1, 2004, gas contracts with
U.S. suppliers provide for the purchase of 149,423 MMBtu per day while gas
contracts with Canadian suppliers provide for the purchase of 78,138 MMBtu
per day. Some of these contracts require MCV to pay for a minimum amount of
natural gas per year, whether or not taken. The estimated minimum
commitments under these contracts based on current long term prices for gas
for the years 2004 through 2008 are $267.3 million, $338.6 million, $344.1
million, $340.4 million and $283.9 million, respectively. A portion of these
payments may be utilized in future years to offset the cost of quantities of
natural gas taken above the minimum amounts. Gas Transportation Agreements
MCV has entered into firm natural gas transportation agreements with various
pipeline companies. These agreements require MCV to pay certain reservation
charges in order to reserve the transportation capacity.
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MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
MCV incurred reservation charges in 2003, 2002 and 2001, of $34.8 million,
$35.1 million and $36.2 million, respectively. The estimated minimum
reservation charges required under these agreements for each of the years
2004 through 2008 are $34.9 million, $33.8 million, $30.0 million, $21.6
million and $21.6 million, respectively. These projections are based on
current commitments.
Gas Turbine Service Agreement
MCV entered into a Service Agreement, as amended, with Alstom, which
commenced on January 1, 1990 and was set to expire upon the earlier of the
completion of the sixth series of major GTG inspections or December 31,
2009. Under the terms of this agreement, Alstom sold MCV an initial
inventory of spare parts for the GTGs and provides qualified service
personnel and supporting staff to assist MCV, to perform scheduled
inspections on the GTGs, and to repair the GTGs at MCV's request. Upon
termination of the Service Agreement (except for nonperformance by Alstom),
MCV must pay a cancellation payment. MCV and Alstom amended the Service
Agreement, effective December 31, 1993, to include the supply of hot gas
path parts. Under the amended Service Agreement, Alstom provides hot gas
path parts for MCV's twelve gas turbines through the fourth series of major
GTG inspections, which were completed in 2002. In January 1998, MCV and
Alstom amended the length of the amended Service Agreement to extend through
the sixth series of major GTG inspections, which are expected to be
completed by year end 2008, for a lump sum fixed price covering the entire
term of the amended Service Agreement of $266.5 million (in 1993 dollars,
which is adjusted based on exchange rates and Swiss inflation indices),
payable on the basis of operating hours as they occur over the same period.
MCV has made payments totaling approximately $200.7 million under this
amended Service Agreement through December 31, 2003.
MCV signed a new maintenance service and parts agreement with General
Electric International, Inc. ("GEII"), effective December 31, 2002 ("GEII
Agreement"). GEII will provide maintenance services and hot gas path parts
for MCV's twelve GTG's. Under terms and conditions similar to the MCV/Alstom
Service Agreement, as described above the GEII Agreement will cover four
rounds of major GTG inspections, which are expected to be completed by the
year 2015, at a savings to MCV as compared to the Service Agreement with
Alstom. The GEII Agreement is expected to replace the current Alstom Service
Agreement commencing July 1, 2004. The GEII Agreement can be terminated by
either party for cause or convenience. Should termination for convenience
occur, a buy out amount will be paid by the terminating party with payments
ranging from approximately $19.0 million to $.9 million, based upon the
number of operating hours utilized since commencement of the GEII Agreement.
MCV terminated the Alstom Service Agreement in February 2004, for cause and
therefore does not owe the approximately $5.8 million termination payment to
Alstom. MCV has a claim against Alstom for approximately $3.0 million for
adjustments due to reduced equivalent operating hours experienced under the
Service Agreement, that was paid by MCV and a claim against Alstom for one
set of hot gas path spare parts (valued within a range of $3.0 million to
$7.0 million). These matters may be disputed by Alstom and other disputes
may arise. MCV will seek final resolution of all claims that may arise
between the parties. At this time, MCV has not recognized any liability to
or receivable from Alstom in connection with these claims or termination.
Steam Turbine Service Agreement
MCV entered into a nine year Steam Turbine Maintenance Agreement with
General Electric Company effective January 1, 1995, which is designed to
improve unit reliability, increase availability and minimize unanticipated
maintenance costs. In addition, this contract includes performance
incentives and penalties, which are based on the length of each scheduled
outage and the number of forced outages during a calendar year. Effective
February 1, 2004, MCV and GE amended this contract to extend its term
through August 31, 2007. MCV will continue making monthly payments over the
life of the contract, which will total
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MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
$22.3 million (subject to escalation based on defined indices). The parties
have certain termination rights without incurring penalties or damages for
such termination. Upon termination, MCV is only liable for payment of
services rendered or parts provided prior to termination. Site Lease
In December 1987, MCV leased the land on which the Facility is located from
Consumers ("Site Lease"). MCV and Consumers amended and restated the Site
Lease to reflect the creation of five separate undivided interests in the
Site Lease as of June 1, 1990. Pursuant to the Overall Lease Transaction,
MCV assigned these undivided interests in the Site Lease to the Owner
Trustees, which in turn subleased the undivided interests back to MCV under
five separate site subleases. The Site Lease is for a term which commenced
on December 29, 1987, and ends on December 31, 2035, including two renewal
options of five years each. The rental under the Site Lease is $.6 million
per annum, including the two five-year renewal terms.
Gas Turbine Generator Compressor Blade Agreement
MCV entered into an agreement with MTS Machinery Tools & Services AG
("MTS"), in January 2002. Under this agreement MTS redesigned and will
manufacture and install new design compressor blades for MCV's twelve GTG's,
which is expected to increase the overall electrical capacity and efficiency
of each GTG. MCV has purchased three sets of such blades and has the option
to purchase an additional nine sets. The first set of compressor blades was
installed in the second quarter of 2003 for approximately $4.2 million. At
this time, an additional two sets have been ordered at a cost of $4.1
million.
(8) PROPERTY TAXES
In 1997, MCV filed a property tax appeal against the City of Midland at the
Michigan Tax Tribunal contesting MCV's 1997 property taxes. Subsequently,
MCV filed appeals contesting its property taxes for tax years 1998 through
2003 at the Michigan Tax Tribunal. A trial was held for tax years 1997 -
2000. The appeals for tax years 2001-2003 are being held in abeyance. On
January 23, 2004, the Michigan Tax Tribunal issued its decision in MCV's tax
appeal against the City of Midland for tax years 1997 through 2000. MCV
management has estimated that the decision will result in a refund to MCV
for the tax years 1997 through 2000 of approximately $29 million in taxes
plus $7 million of interest. The decision is subject to reconsideration at
the Tribunal and may be appealed to the Michigan Appellate Court and
Michigan Supreme Court. The City of Midland has filed a motion for
reconsideration at the Michigan Tax Tribunal, asking the Tribunal to make
certain technical corrections, as well as substantive changes to the
decision. MCV has opposed this motion. MCV management cannot predict the
outcome of these further legal proceedings. MCV has not recognized any of
the above stated refunds (net of approximately $15.5 million of deferred
expenses) in earnings at this time.
(9) RETIREMENT BENEFITS
Postretirement Health Care Plans
In 1992, MCV established defined cost postretirement health care plans
("Plans") that cover all full-time employees, excluding key management. The
Plans provide health care credits, which can be utilized to purchase medical
plan coverage and pay qualified health care expenses. Participants become
eligible for the benefits if they retire on or after the attainment of age
65 or upon a qualified disability retirement, or if they have 10 or more
years of service and retire at age 55 or older. The Plans granted
retroactive benefits for all employees hired prior to January 1, 1992. This
prior service cost has been amortized to expense over a five
F-137
MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
year period. MCV annually funds the current year service and interest cost as
well as amortization of prior service cost to both qualified and non-qualified
trusts. The MCV accounts for retiree medical benefits in accordance with SFAS
106, "Employers Accounting for Postretirement Benefits Other Than Pensions."
This standard required the full accrual of such costs during the years that the
employee renders service to the MCV until the date of full eligibility. The
accumulated benefit obligation of the Plans were $3.3 million at December 31,
2003 and $2.7 million at December 31, 2002. The measurement date of these Plans
was December 31, 2003.
On December 8, 2003, President Bush signed into law the Medicare Prescription
Drug, Improvement and Modernization Act of 2003 (the "Act"). The Act expanded
Medicare to include, for the first time, coverage for prescription drugs. At
this time, because of various uncertainties related to this legislation and the
appropriate accounting methodology, MCV has elected to defer financial
recognition of this legislation until the FASB issues final accounting guidance.
When issued, that final guidance could require MCV to change previously reported
information. This deferral election is permitted under SFAS 106-1.
The following table reconciles the change in the Plans' benefit obligation and
change in Plan assets as reflected on the balance sheet as of December 31 (in
thousands):
2003 2002
-------- --------
Change in benefit obligation:
Benefit obligation at beginning of year $ 2,741.9 $ 2,405.1
Service cost 212.5 197.3
Interest cost 178.2 188.7
Actuarial gain (loss) 147.4 (44.6)
Benefits paid during year (4.0) (4.6)
-------- --------
Benefit obligation at end of year 3,276.0 2,741.9
-------- --------
Change in Plan assets:
Fair value of Plan assets at beginning of year 2,045.8 2,088.0
Actual return on Plan assets 527.5 (270.9)
Employer contribution 257.5 233.3
Benefits paid during year (4.0) (4.6)
-------- --------
Fair value of Plan assets at end of year 2,826.8 2,045.8
-------- --------
Unfunded (funded) status 449.2 696.1
Unrecognized prior service cost (170.3) (184.6)
Unrecognized net gain (loss) (278.9) (511.5)
-------- --------
Accrued benefit cost $ -- $ --
======== ========
Net periodic postretirement health care cost for years ending December 31,
included the following components (in thousands):
2003 2002 2001
-------- -------- --------
Components of net periodic benefit cost:
Service cost $ 212.5 $ 197.3 $ 173.5
Interest cost 178.2 188.7 142.9
Expected return on Plan assets (163.7) (167.0) (171.3)
Amortization of unrecognized net (gain)
or loss 30.5 14.3 (12.6)
------ ------ ------
Net periodic benefit cost $ 257.5 $ 233.3 $ 132.5
====== ====== ======
F-138
MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Assumed health care cost trend rates have a significant effect on the amounts
reported for the health care plans. A one-percentage-point change in assumed
health care cost trend rates would have the following effects (in thousands):
1-PERCENTAGE-POINT 1-PERCENTAGE-POINT
INCREASE DECREASE
-------- --------
Effect on total of service and
interest cost components $ 48.6 $ 41.8
Effect on postretirement
benefit obligation $ 358.1 $ 310.9
Assumptions used in accounting for the Post-Retirement Health Care Plan were as
follows:
2003 2002 2001
---- ---- ----
Discount rate 6.00% 6.75% 7.25%
Long-term rate of return on Plan
assets 8.00% 8.00% 8.00%
Inflation benefit amount
1998 through 2004 0.00% 0.00% 0.00%
2005 and later years 4.00% 4.00% 4.00%
The long-term rate of return on Plan assets is established based on MCV's
expectations of asset returns for the investment mix in its Plan (with some
reliance on historical asset returns for the Plans). The expected returns for
various asset categories are blended to derive one long-term assumption. Plan
Assets. Citizens Bank has been appointed as trustee ("Trustee") of the Plan. The
Trustee serves as investment consultant, with the responsibility of providing
financial information and general guidance to the MCV Benefits Committee. The
Trustee shall invest the assets of the Plan in the separate investment options
in accordance with instructions communicated to the Trustee from time to time by
the MCV Benefit Committee. The MCV Benefits Committee has the fiduciary and
investment selection responsibility for the Plan. The MCV Benefits Committee
consists of MCV Officers (excluding the President and Chief Executive Officer).
The MCV has a target allocation of 80% equities and 20% debt instruments. These
investments emphasis total growth return, with a moderate risk level. The MCV
Benefits Committee reviews the performance of the Plan investments quarterly,
based on a long-term investment horizon and applicable benchmarks, with
rebalancing of the investment portfolio, at the discretion of the MCV Benefits
Committee.
MCV's Plan's weighted-average asset allocations, by asset category are as
follows as of December 31:
2003 2002
---- ----
Asset Category:
Cash and cash equivalents 11% 1%
Fixed income 17% 23%
Equity securities 72% 76%
--- ---
Total 100% 100%
--- ---
Contributions. MCV expects to contribute approximately $.2 million to the Plan
in 2004. Retirement and Savings Plans
MCV sponsors a defined contribution retirement plan covering all employees.
Under the terms of the plan, MCV makes contributions to the plan of either five
or ten percent of an employee's eligible annual compensation dependent upon the
employee's age. MCV also sponsors a 401(k) savings plan for employees.
Contributions and costs for this plan are based on matching an employee's
savings up to a maximum level. In
F-139
MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
2003, 2002 and 2001, MCV contributed $1.3 million, $1.2 million and $1.1
million, respectively under these plans.
Supplemental Retirement Benefits
MCV provides supplemental retirement, postretirement health care and excess
benefit plans for key management. These plans are not qualified plans under the
Internal Revenue Code; therefore, earnings of the trusts maintained by MCV to
fund these plans are taxable to the Partners and trust assets are included in
the assets of MCV.
F-140
MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
(10) PARTNERS' EQUITY AND RELATED PARTY TRANSACTIONS The following table
summarizes the nature and amount of each of MCV's Partner's equity
interest, interest in profits and losses of MCV at December 31, 2003, and
the nature and amount of related party transactions or agreements that
existed with the Partners or affiliates as of December 31, 2003, 2002 and
2001, and for each of the twelve month periods ended December 31 (in
thousands).
BENEFICIAL OWNER, EQUITY PARTNER,
RELATED PARTY
EQUITY TRANSACTIONS AND
TYPE OF PARTNER AND NATURE OF RELATED PARTY INTEREST INTEREST AGREEMENTS 2003 2002 2001
------------------------------------------------------------------------------------------------------------------------------------
CMS ENERGY COMPANY
Power purchase
CMS Midland, Inc. agreements $513,774 $557,149 $550,477
General Partner; wholly-owned Purchases under gas
subsidiary of Consumers Energy transportation
Company agreements 14,294 23,552 24,059
Purchases under
spot gas agreements 663 3,631 3,756
Purchases under gas
supply agreements 2,330 11,306 10,725
Gas storage
agreement 2,563 2,563 2,563
Land lease/easement
agreements 600 600 600
Accounts receivable 40,373 44,289 48,843
Accounts payable 1,025 3,502 4,772
Sales under spot
$391,546 49.0% gas agreements 3,260 1,084 7,107
======== =====
El Paso Corporation
Source Midland Limited Partnership ("SMLP") Purchase under gas
General Partner; owned by subsidiaries of El transportation
Paso Corporation(1) agreements 13,023 12,463 13,653
Purchases under
spot gas agreement 610 15,655 45,130
Purchases under gas
supply agreement 54,308 47,136 5,912
Gas agency 238 365 1,989
agreement
Deferred
reservation charges
under gas purchase
agreement 4,728 -- 7,880
Accounts receivable -- 523 --
Accounts payable 5,751 7,706 5,198
Sales under spot
gas agreements 3,474 14,007 28,451
Partner cash
withdrawal
(including accrued
$139,421 18.1% interest)(2) -- -- 56,714
El Paso Midland, Inc. ("El Paso Midland") See related party
General Partner; wholly-owned subsidiary of El activity listed
Paso Corporation(1) under SMLP.
83,653 10.9
See related party
activity listed
MEI Limited Partnership ("MEI") under SMLP.
A General and Limited Partner; 50%
interest owned by El Paso Midland,
Inc. and 50% interest owned by
SMLP(1)
General Partnership Interest 69,714 9.1
Limited Partnership Interest 6,969 .9
See related party
activity listed
Micogen Limited Partnership 34,854 4.5 under SMLP.
("MLP") Limited Partner, owned
subsidiaries of El Paso
Corporation(1)
-------- ----
Total El Paso
Corporation $334,611 43.5%
======== =====
The Dow Chemical Company
Steam and electric
The Dow Chemical Company power agreement 36,207 29,385 33,727
Steam purchase
agreement - Dow
Corning Corp
Limited Partner (affiliate) 4,017 3,746 3,781
Purchases under
demineralized water
supply agreement 6,396 6,605 6,913
Accounts receivable 3,431 3,635 3,191
Accounts payable 610 1,016 948
Standby and backup
fees 731 734 696
Sales of gas under
$ 72,918 7.5% tolling agreement -- 6,442 --
======== =====
Alanna Corporation
Alanna Corporation Note receivable 1 1 1
Limited Partner; wholly-owned
subsidiary of Alanna Holdings
Corporation $ 1(3) .00001%
======== ====
Footnotes to Partners' Equity and Related Party Transactions
(1) On January 29, 2001, El Paso Corporation ("El Paso") announced that it had
completed its merger with The Coastal Corporation ("Coastal"). Coastal was
the previous parent company of El Paso Midland (formerly known as Coastal
Midland, Inc.), SMLP, MLP and, through SMLP, MEI. After the merger, Coastal
became a wholly-owned subsidiary of El Paso and has changed its name to El
Paso CGP Company.
(2) A letter of credit has been issued and recorded as a note receivable from El
Paso Midland, this amount includes their share of cash available, as well
as, cash available to MEI, MLP and SMLP.
(3) Alanna's capital stock is pledged to secure MCV's obligation under the lease
and other overall lease transaction documents.
F-141
SUPPLEMENTAL INFORMATION
Supplemental information is to be furnished with reports filed pursuant to
Section 15 (d) of the Act by registrants, which have not registered securities
pursuant to Section 12 of the Act. No such annual report or proxy statement has
been sent to security holders.
F-142
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
MIDLAND COGENERATION VENTURE
LIMITED PARTNERSHIP
Date: March 1, 2004 By /s/ James M. Kevra
-------------------------------
James M. Kevra
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the date indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ James M. Kevra President and Chief Executive Officer March 1, 2004
----------------------------- (Principal Executive Officer)
James M. Kevra
/s/ James M. Rajewski Chief Financial Officer, Vice President March 1, 2004
----------------------------- and Controller (Principal Accounting
James M. Rajewski Officer)
/s/ John J. O'Rourke Chairman, Management Committee March 1, 2004
-----------------------------
John J. O'Rourke
/s/ David W. Joos Member, Management Committee March 1, 2004
-----------------------------
David W. Joos
F-143
================================================================================
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFERING MADE HEREBY, AND, IF GIVEN OR MADE,
SUCH INFORMATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY CMS
ENERGY, THE INITIAL PURCHASERS OR ANY OTHER PERSON. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF ANY OFFER TO BUY THE NEW NOTES
BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT
AUTHORIZED, OR IN WHICH THE PERSON MAKING THE OFFER OR SOLICITATION IS NOT
QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER
OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
--------
TABLE OF CONTENTS
PAGE
----
Important Notice about Information in this
Prospectus....................................... 2
Where You Can Find More Information.................. 2
Forward-Looking Statements and Information........... 3
Summary.............................................. 5
Risk Factors......................................... 17
Use of Proceeds...................................... 28
Ratio of Earnings to Fixed Charges................... 28
Description of the New Notes......................... 28
Ratings.............................................. 52
The Exchange Offer .................................. 52
Management's Discussion and Analysis of
Financial Condition and Results of Operations
for the Fiscal Year Ended December 31, 2003...... 63
Our Business......................................... 96
Legal Proceedings.................................... 109
Our Management....................................... 111
Affiliate Relationships and Transactions............. 120
Certain United States Federal Income Tax Consequences 121
Plan of Distribution................................. 123
Legal Opinions....................................... 124
Experts.............................................. 124
Glossary............................................. 126
Index to Consolidated Financial Statements........... 131
================================================================================
OFFER TO EXCHANGE
7.75% SENIOR NOTES DUE 2010
WHICH HAVE BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933,
AS AMENDED
FOR ANY AND ALL OF THE
OUTSTANDING
7.75% SENIOR NOTES DUE 2010
[CMS ENERGY LOGO]
================================================================================
PART II. INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The following resolution was adopted by the Board of Directors of CMS Energy on
May 6, 1987:
RESOLVED: That effective March 1, 1987 the Corporation shall
indemnify to the full extent permitted by law every person (including the
estate, heirs and legal representatives of such person in the event of the
decease, incompetency, insolvency or bankruptcy of such person) who is or
was a director, officer, partner, trustee, employee or agent of the
Corporation, or is or was serving at the request of the Corporation as a
director, officer, partner, trustee, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise,
against all liability, costs, expenses, including attorneys' fees,
judgments, penalties, fines and amounts paid in settlement, incurred by or
imposed upon the person in connection with or resulting from any claim or
any threatened, pending or completed action, suit or proceeding whether
civil, criminal, administrative, investigative or of whatever nature,
arising from the person's service or capacity as, or by reason of the fact
that the person is or was, a director, officer, partner, trustee, employee
or agent of the Corporation or is or was serving at the request of the
Corporation as a director, officer, partner, trustee, employee or agent of
another corporation, partnership, joint venture, trust or other
enterprise. Such right of indemnification shall not be deemed exclusive of
any other rights to which the person may be entitled under statute, bylaw,
agreement, vote of shareholders or otherwise.
CMS Energy's Bylaws provide:
The Corporation may purchase and maintain liability insurance, to
the full extent permitted by law, on behalf of any person who is or was a
director, officer, employee or agent of the Corporation, or is or was
serving at the request of the Corporation as a director, officer, employee
or agent of another corporation, partnership, joint venture, trust or
other enterprise against any liability asserted against such person and
incurred by such person in any such capacity.
Article VIII of CMS Energy's Articles of Incorporation, as amended
reads:
A director shall not be personally liable to the Corporation or its
shareholders for monetary damages for breach of duty as a director except
(i) for a breach of the director's duty of loyalty to the Corporation or
its shareholders, (ii) for acts or omissions not in good faith or that
involve intentional misconduct or a knowing violation of law, (iii) for a
violation of Section 551(1) of the Michigan Business Corporation Act, and
(iv) any transaction from which the director derived an improper personal
benefit. No amendment to or repeal of this Article VIII, and no
modification to its provisions by law, shall apply to, or have any effect
upon, the liability or alleged liability of any director of the
Corporation for or with respect to any acts or omissions of such director
occurring prior to such amendment, repeal or modification.
Article IX of CMS Energy's Articles of Incorporation, as amended reads:
Each director and each officer of the Corporation shall be
indemnified by the Corporation to the fullest extent permitted by law
against expenses (including attorneys' fees), judgments, penalties, fines
and amounts paid in settlement actually and reasonably incurred by him or
her in connection with the defense of any proceeding in which he or she
was or is a party or is threatened to be made a party by reason of being
or having been a director or an officer of the Corporation. Such right of
indemnification is not exclusive of any other rights to which such
director or officer may be entitled under any now or
II-1
thereafter existing statute, any other provision of these Articles, bylaw,
agreement, vote of shareholders or otherwise. If the Business Corporation
Act of the State of Michigan is amended after approval by the shareholders
of this Article IX to authorize corporate action further eliminating or
limiting the personal liability of directors, then the liability of a
director of the Corporation shall be eliminated or limited to the fullest
extent permitted by the Business Corporation Act of the State of Michigan,
as so amended. Any repeal or modification of this Article IX by the
shareholders of the Corporation shall not adversely affect any right or
protection of a director of the Corporation existing at the time of such
repeal or modification.
Sections 561 through 571 of the Michigan Business Corporation Act provides CMS
Energy with the power to indemnify directors, officers, employees and agents
against certain expenses and payments, and to purchase and maintain insurance on
behalf of directors, officers, employees and agents.
Officers and directors are covered within specified monetary limits by
insurance against certain losses arising from claims made by reason of their
being directors or officers of CMS Energy or of CMS Energy's subsidiaries and
CMS Energy's officers and directors are indemnified against such losses by
reason of their being or having been directors of officers of another
corporation, partnership, joint venture, trust or other enterprise at CMS
Energy's request. In addition, CMS Energy has indemnified each of its present
directors by contracts that contain affirmative provisions essentially similar
to those in sections 561 through 571 of the Michigan Business Corporation Act
cited above.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
EXHIBITS
PREVIOUSLY FILED
-------------------------
WITH FILE AS EXHIBIT
EXHIBITS NUMBER NUMBER DESCRIPTION
-------- ---------- ------------ -----------
(3)(a) 333-51932 (3)(a) -- Restated Articles of Incorporation of CMS Energy (Form S-3 filed December 15,
2000)
(3)(b) 333-45556 (3)(b) -- By-Laws of CMS Energy (Form S-3 filed September 11, 2000)
(3)(c) 1-5611 3(c) -- Restated Articles of Incorporation dated May 26, 2000, of Consumers (2000 Form
10-K)
(3)(d) 1-5611 (3)(d) -- By-Laws of Consumers (1st qtr. 2003 Form 10-Q)
(4)(a) 2-65973 (b)(1)-4 -- Indenture dated as of September 1, 1945, between Consumers and Chemical Bank
(successor to Manufacturers Hanover Trust Company), as Trustee, including
therein indentures supplemental thereto through the Forty-third Supplemental
Indenture dated as of May 1, 1979
-- Indentures Supplemental thereto:
33-41126 (4)(c) -- 68th dated as of 06/15/93
1-5611 (4) -- 69th dated as of 09/15/93 (Form 8-K dated Sep. 21, 1993)
1-5611 (4)(a) -- 70th dated as of 02/01/98 (1997 Form 10-K)
1-5611 (4)(a) -- 71st dated as of 03/06/98 (1997 Form 10-K)
333-58943 (4)(d) -- 73rd dated as of 06/15/98 (Form S-4 dated July 13, 1998)
1-5611 (4)(b) -- 74th dated as of 10/29/98 (3rd qtr. 1998 Form 10-Q)
1-5611 (4)(b) -- 75th dated as of 10/1/99 (1999 Form 10-K)
1-5611 (4)(d) -- 77th dated as of 10/1/99 (1999 Form 10-K)
1-5611 4(b) -- 79th dated as of 9/26/01 (3rd qtr 2001 10-Q)
1-5611 4(a)(i) -- 80th dated as of 3/22/02 (2001 Form 10-K)
1-5611 (4)(a) -- 87th dated as of 3/26/03 (1st qtr. 2003 Form 10-Q)
1-5611 (4)(d) -- 90th dated as of 3/30/03 (1st qtr. 2003 Form 10-Q)
1-5611 (4)(a) -- 91st dated as of 5/23/03 (3rd qtr. 2003 Form 10-Q)
1-5611 (4)(b) -- 92nd dated as of 8/26/03 (3rd qtr. 2003 Form 10-Q)
1-5611 (4)(c) -- 93rd dated as of 9/17/03 (3rd qtr. 2003 Form 10-Q)
333-111220 (4)(a)(i) -- 94th dated as of 11/7/03 (Consumers Form S-4 dated December 16, 2003)
(4)(b) 1-5611 (4)(b) -- Indenture dated as of January 1, 1996 between Consumers and The Bank of New
York, as Trustee (1995 Form 10-K)
-- Indentures Supplemental thereto:
II-2
PREVIOUSLY FILED
-------------------------
WITH FILE AS EXHIBIT
EXHIBITS NUMBER NUMBER DESCRIPTION
-------- ---------- ------------ -----------
1-5611 (4)(b) -- 1st dated as of 01/18/96 (1995 Form 10-K)
1-5611 (4)(a) -- 2nd dated as of 09/04/97 (3rd qtr 1997 Form 10-Q)
1-9513 (4)(a) -- 3rd 11/04/99 (3rd qtr 1999 Form 10-Q)
(4)(c) 1-5611 (4)(c) -- Indenture dated as of February 1, 1998 between Consumers and JPMorgan Chase
(formerly "The Chase Manhattan Bank), as Trustee (1997 Form 10-K)
1-5611 (4)(a) -- 1st dated as of 05/01/98 (1st Qtr. 1998 Form 10-Q)
333-58943 (4)(b) -- 2nd dated as of 06/15/98
1-5611 (4)(a) -- 3rd 10/29/98 (3rd qtr. 1998 Form 10-Q)
4(d) 1-5611 (4)(e) -- $140 million Term Loan Agreement dated March 26, 2003 between Consumers Energy
Company and the Bank/Agent, as defined therein (1st qtr. 2003 Form 10-Q)
(4)(e) 33-47629 (4)(a) -- Indenture dated as of September 15, 1992 between CMS Energy and NBD Bank, as
Trustee (Form S-3 filed May 1, 1992)
-- Indentures Supplemental thereto:
333-37241 (4)(a) -- 4th dated as of 09/26/97 (Form S-3 filed October 6, 1997)
1-9513 (4)(d) -- 6th dated as of 01/13/98 (1997 Form 10-K)
1-9513 (4)(d)(i) -- 7th dated as of 01/25/99 (1998 Form 10-K)
333-48276 (4) -- 10th dated as of 10/12/00 (Form S-3 filed October 19, 2000)
333-58686 (4) -- 11th dated as of 03/29/01 (Form S-8 filed April 11, 2001)
333-51932 (4)(a) -- 12th dated as of 07/02/01 (Form POS AM filed August 8, 2001)
4(e)(i) 1-9513 (4)(e)(i) -- 13th dated as of 07/16/03 (2003 Form 10-K)
4(e)(ii) 1-9513 (4)(e)(ii) -- 14th dated as of 07/17/03 (2003 Form 10-K)
(4)(f) 1-9513 (4)(b) -- Indenture between CMS Energy and JPMorgan Chase (formerly "The Chase Manhattan
Bank"), as Trustee, dated as of January 15, 1994 (Form 8-K dated March 29,
1994)
-- Indentures Supplemental thereto:
1-9513 (4b) -- 1st dated as of 01/20/94 (Form 8-K dated March 29, 1994)
1-9513 (4) -- 2nd dated as of 03/19/96 (1st qtr 1996 Form 10-Q)
1-9513 (4)(a)(iv) -- 3rd dated as of 03/17/97 (Form 8-K dated May 1, 1997)
333-36115 (4)(d) -- 4th dated as of 09/17/97 (Form S-3 filed September 22, 1997)
333-63229 (4)(c) -- 5th dated as of 08/26/98 (Form S-4 filed September 10, 1998)
1-9513 (4) -- 6th dated as of 11/9/00 (3rd qtr 2000 Form 10-Q)
333-74958 (4)(a)(viii) -- Form of Seventh Indenture (Form S-3 filed December 12, 2001)
(4)(g) 1-9513 (4a) -- Indenture dated as of June 1, 1997, between CMS Energy and The Bank of New
York, as trustee (Form 8-K filed July 1, 1997) Indentures Supplemental
thereto:
1-9513 (4)(b) -- 1st dated as of 06/20/97 (Form 8-K filed July 1, 1997)
333-45556 (4)(e) -- 4th dated as of 08/22/00 (Form S-3 filed September 11, 2000)
(4)(h) -- Form of 7.75% Senior Notes due 2010
(4)(i) 1-9513 (4)(i) -- Certificate of Designation of 4.50% Cumulative Convertible Preferred Stock
dated as of December 2, 2003 (2003 Form 10-K)
(4)(j) 1-9513 (4)(j) -- Registration Rights Agreement dated as of July 16, 2003 between CMS Energy and
the Initial Purchasers, all as defined therein (2003 Form 10-K)
(4)(k) 1-9513 (4)(k) -- Registration Rights Agreement dated as of July 17, 2003 between CMS Energy and
the Initial Purchasers, all as defined therein (2003 Form 10-K)
(4)(l) 1-9513 (4)(l) -- Registration Rights Agreement dated as of December 5, 2003 between CMS Energy
and the Initial Purchasers, all as defined therein (2003 Form 10-K)
(4)(m) 1-9513 (4)(m) -- $190 million Fourth Amended and Restated Credit Agreement dated as of December
8, 2003 among CMS Energy, CMS Enterprises, the Banks, and the Administrative
Agent and Collection Agent, all defined therein (2003 Form 10-K)
(4)(n) 1-9513 4.9 -- Pledge and Security Agreement dated as of July 12, 2002 among CMS Energy,
Grantors and the Collateral Agent, all as defined therein (Form 8-K filed July
30, 2002)
(4)(o) 1-9513 (4)(o) -- Third Amended and Restated Pledge and Security Agreement dated as of December
8, 2003 among CMS Energy and the Collateral Agent, as defined therein (2003
Form 10-K)
(4)(p) 1-9513 (4)(p) -- Amended and Restated Guaranty dated as of December 8, 2003 by the Guarantor in
favor of the Lenders, all as defined therein (2003 Form 10-K)
II-3
PREVIOUSLY FILED
-------------------------
WITH FILE AS EXHIBIT
EXHIBITS NUMBER NUMBER DESCRIPTION
-------- ---------- ------------ -----------
(4)(q) 1-9513 (4)(h) -- $185 million Credit Agreement, as amended, dated May 22, 2003 among CMS Energy
and the Financial Institutions, Documentation Agent and Administrative Agent,
as defined therein (2003 Form 10-K)
(5) -- Opinion of Robert C. Shrosbree, Assistant General Counsel for CMS Energy
(8) -- Opinion of Jay M. Silverman, Tax Counsel for CMS Energy regarding tax matters
(10)(a) 1-9513 (10)(b) -- Form of Employment Agreement entered into by CMS Energy's and Consumers'
executive officers (1999 Form 10-K)
(10)(b) 1-9513 (10)(a) -- Acknowledgement of Resignation between Tamela W. Pallas and CMS Energy
Corporation (3rd qtr 2002 Form 10-Q)
(10)(c) 1-5611 (10)(g) -- Consumers' Executive Stock Option and Stock Appreciation
Rights Plan effective December 1, 1989 (1990 Form 10-K)
(10)(d) 1-9513 (10)(b) -- Employment, Separation and General Release Agreement between William T.
McCormick and CMS Energy Corporation (3rd qtr 2002 Form 10-Q)
(10)(e) 1-9513 (10)(d) -- CMS Energy's Performance Incentive Stock Plan effective
February 3, 1988, as amended December 3, 1999 (1999 Form 10-K)
(10)(f) 1-9513 (10)(c) -- Employment, Separation and General Release Agreement between Alan M. Wright
and CMS Energy Corporation (3rd qtr 2002 Form 10-Q)
(10)(g) 1-9513 (10)(g) -- CMS Energy's Salaried Employees Merit Program for 2003 effective January 1,
2003 (2003 Form 10-K)
(10)(h) 1-9513 (10)(m) -- CMS Deferred Salary Savings Plan effective January 1, 1994 (1993 Form 10-K)
(10)(i) 1-9513 (10)(i) -- Annual Officer Incentive Compensation Plan for CMS Energy Corporation and its
Subsidiaries effective January 1, 2003 (2003 Form 10-K)
(10)(j) 1-9513 (10)(h) -- Supplemental Executive Retirement Plan for Employees of CMS Energy/Consumers
Energy Company effective January 1, 1982, as amended December 3, 1999 (1999
Form 10-K)
(10)(k) 33-37977 4.1 -- Senior Trust Indenture, Leasehold Mortgage and Security Agreement dated as of
June 1, 1990 between The Connecticut National Bank and United States Trust
Company of New York (MCV Partnership)
Indenture Supplemental thereto:
33-37977 4.2 -- Supplement No. 1 dated as of June 1, 1990 (MCV Partnership)
(10)(l) 1-9513 (28)(b) -- Collateral Trust Indenture dated as of June 1, 1990 among Midland Funding
Corporation I, MCV Partnership and United States Trust Company of New York,
Trustee (3rd qtr 1990 Form 10-Q)
Indenture Supplemental thereto:
33-37977 4.4 -- Supplement No. 1 dated as of June 1, 1990 (MCV Partnership)
(10)(m) 1-9513 (10)(v) -- Amended and Restated Investor Partner Tax Indemnification Agreement dated as
of June 1, 1990 among Investor Partners, CMS Midland as Indemnitor and CMS
Energy as Guarantor (1990 Form 10-K)
(10)(n) 1-9513 (19)(d)* -- Environmental Agreement dated as of June 1, 1990 made by CMS Energy to The
Connecticut National Bank and Others (1990 Form 10-K)
(10)(o) 1-9513 (10)(z)* -- Indemnity Agreement dated as of June 1, 1990 made by CMS Energy to Midland
Cogeneration Venture Limited Partnership (1990 Form 10-K)
(10)(p) 1-9513 (10)(aa)* -- Environmental Agreement dated as of June 1, 1990 made by CMS Energy to United
States Trust Company of New York, Meridian Trust Company, each Subordinated
Collateral Trust Trustee and Holders from time to time of Senior Bonds and
Subordinated Bonds and Participants from time to time in Senior Bonds and
Subordinated Bonds (1990 Form 10-K)
(10)(q) 33-37977 10.4 -- Amended and Restated Participation Agreement dated as of June 1, 1990 among
MCV Partnership, Owner Participant, The Connecticut National Bank, United
States Trust Company, Meridian Trust Company, Midland Funding Corporation I,
Midland Funding Corporation II, MEC Development Corporation and Institutional
Senior Bond Purchasers (MCV Partnership)
II-4
PREVIOUSLY FILED
-------------------------
WITH FILE AS EXHIBIT
EXHIBITS NUMBER NUMBER DESCRIPTION
-------- ---------- ------------ -----------
(10)(r) 33-3797 10.4 -- Power Purchase Agreement dated as of July 17, 1986 between MCV Partnership and
Consumers (MCV Partnership)
Amendments thereto:
33-37977 10.5 -- Amendment No. 1 dated September 10, 1987 (MCV Partnership)
33-37977 10.6 -- Amendment No. 2 dated March 18, 1988 (MCV Partnership)
33-37977 10.7 -- Amendment No. 3 dated August 28, 1989 (MCV Partnership)
33-37977 10.8 -- Amendment No. 4A dated May 25, 1989 (MCV Partnership)
(10)(s) 1-5611 (10)(y) -- Unwind Agreement dated as of December 10, 1991 by and among CMS Energy,
Midland Group, Ltd., Consumers, CMS Midland, Inc., MEC Development Corp. and
CMS Midland Holdings Company (1991 Form 10-K)
(10)(t) 1-5611 (10)(z) -- Stipulated AGE Release Amount Payment Agreement dated as of June 1, 1990,
among CMS Energy, Consumers and The Dow Chemical Company (1991 Form 10-K)
(10)(u) 1-5611 (10)(aa)* -- Parent Guaranty dated as of June 14, 1990 from CMS Energy to MCV, each of the
Owner Trustees, the Indenture Trustees, the Owner Participants and the Initial
Purchasers of Senior Bonds in the MCV Sale Leaseback transaction, and MEC
Development (1991 Form 10-K)
(10)(v) 1-8157 10.41 -- Contract for Firm Transportation of Natural Gas between Consumers Power
Company and Trunkline Gas Company, dated November 1, 1989, and Amendment,
dated November 1, 1989 (1989 Form 10-K of PanEnergy Corp.)
(10)(w) 1-8157 10.41 -- Contract for Firm Transportation of Natural Gas between Consumers Power
Company and Trunkline Gas Company, dated November 1, 1989 (1991 Form 10-K of
PanEnergy Corp.)
(10)(x) 1-2921 10.03 -- Contract for Firm Transportation of Natural Gas between Consumers Power
Company and Trunkline Gas Company, dated September 1, 1993 (1993 Form 10-K)
(10)(y) 1-9513 (10)(y) -- Purchase Agreement dated July 16, 2003 between CMS Energy and the Initial
Purchasers, as defined therein (2003 Form 10-K)
(10)(z) 1-9513 (10)(z) -- Purchase Agreement dated July 17, 2003 between CMS Energy and the Initial
Purchasers, as defined therein (2003 Form 10-K)
(10)(aa) 1-9513 (10)(aa) -- Purchase Agreement dated December 1, 2003 between CMS Energy and the Initial
Purchasers, as defined therein (2003 Form 10-K)
(10)(bb) 1-5611 10 -- First Amended and Restated Employment Agreement between Kenneth Whipple and
CMS Energy Corporation effective as of September 1, 2003 (8-K dated October
24, 2003)
(10)(cc) 1-9513 (10)(cc) -- Annual Management Incentive Compensation Plan for CMS Energy Corporation and
its Subsidiaries effective January 1, 2003 (2003 Form 10-K)
(10)(dd) 1-9513 (10)(dd) -- Annual Employee Incentive Compensation Plan for CMS Energy Corporation and its
Subsidiaries effective January 1, 2003 (2003 Form 10-K)
(12) 1-9513 12(a) -- Statement regarding computation of CMS Energy's Ratio of Earnings to Fixed
Charges (2003 Form 10-K)
(16) 1-5611 16.1 -- Letter from Arthur Andersen LLP to the Securities and Exchange Commission
dated April 29, 2002 regarding change in certifying accountant (Form 8-K
filed April 29, 2002)
(21) 1-9513 -- Subsidiaries of CMS Energy (Form U-3A-2 filed February 27, 2004)
(23)(a) -- Consent of Robert C. Shrosbree, Assistant General Counsel for CMS Energy
(included in Exhibit 5 above)
(23)(b) -- Consent of Jay M. Silverman, Tax Counsel for CMS Energy (included in Exhibit 8
above)
(23)(c) -- Consent of Ernst & Young LLP
(23)(d) -- Consent of PricewaterhouseCoopers LLP
(23)(e) -- Consent of Price Waterhouse
II-5
PREVIOUSLY FILED
-------------------------
WITH FILE AS EXHIBIT
EXHIBITS NUMBER NUMBER DESCRIPTION
-------- ---------- ------------ -----------
(24) -- Power of Attorney for CMS Energy
(25) -- Statement of Eligibility and Qualification of J.P. Morgan Trust Company, N.A.
(99)(a) -- Form of Letter of Transmittal
(99)(b) -- Certification of Taxpayer Identification Number on Substitute Form W-9
(99)(c) -- Form of Notice of Guaranteed Delivery
----------
* Obligations of only CMS Holdings and CMS Midland, second tier subsidiaries
of Consumers, and of CMS Energy but not of Consumers.
Exhibits listed above that have heretofore been filed with the Securities
and Exchange Commission pursuant to various acts administered by the Commission,
and which were designated as noted above, are hereby incorporated herein by
reference and made a part hereof with the same effect as if filed herewith.
Exhibits listed above that have been filed with the Securities and
Exchange Commission are incorporated herein by reference with the same effect as
if filed with this Registration Statement.
ITEM 22. UNDERTAKINGS.
The undersigned registrants hereby undertake:
(1) That, for purposes of determining any liability under the Securities
Act of 1933, each filing of the registrant's annual report pursuant to section
13(a) or section 15(d) of the Securities Exchange Act of 1934 that is
incorporated by reference in this registration statement shall be deemed to be a
new registration statement relating to the securities offered herein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(2) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the registrant pursuant to the provisions described under Item 20
above, or otherwise, the registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Act and is, therefore, unenforceable. In the event that as
claim for indemnification against such liabilities (other than the payment by
the registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
be governed by the final adjudication of such issue.
(3) To respond to requests for information that is incorporated by
reference in to the prospectus pursuant to Item 4, 10(b), 11, or 13 of this
form, within one business day of receipt of such request, and to send the
incorporated documents by first class mail or other equally prompt means. This
includes information contained in documents filed subsequent to the effective
date of the registration statement through the date of responding to the
request.
II-6
(4) To supply by means of a post-effective amendment all information
concerning a transaction, and the company being acquired involved therein, that
was not the subject of and included in the registration statement when it became
effective.
II-7
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, there unto duly authorized, in the City of Jackson, and State of
Michigan, on the 12th day of March, 2004.
CMS ENERGY CORPORATION
By: /s/ Thomas J. Webb
-------------------------
Thomas J. Webb
Executive Vice President and
Chief Financial Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities indicated on March 12, 2004.
NAME TITLE
(i) PRINCIPAL EXECUTIVE OFFICER:
/s/ KENNETH WHIPPLE Chairman of the Board
----------------------------------- and Chief Executive Officer
Kenneth Whipple
(ii) PRINCIPAL FINANCIAL OFFICER:
/s/ THOMAS J. WEBB Executive Vice President and
----------------------------------- Chief Financial Officer
Thomas J. Webb
(iii) CONTROLLER OR PRINCIPAL ACCOUNTING OFFICER
/s/ GLENN P. BARBA Vice President, Controller
----------------------------------- and Chief Accounting Officer
Glenn P. Barba
*
-----------------------------------
(James J. Duderstadt) Director
*
-----------------------------------
(Kathleen R. Flaherty) Director
*
-----------------------------------
(Earl D. Holton) Director
II-8
*
-----------------------------------
(David W. Joos) Director
*
-----------------------------------
(Michael T. Monahan) Director
*
-----------------------------------
(Joseph F. Paquette, Jr.) Director
-----------------------------------
(William U. Parfet) Director
*
-----------------------------------
(Percy A. Pierre) Director
*
-----------------------------------
(S. Kinnie Smith, Jr.) Director
*
-----------------------------------
(Kenneth L. Way) Director
*
-----------------------------------
(Kenneth Whipple) Director
*
-----------------------------------
(John B. Yasinsky) Director
*By: /s/ THOMAS J. WEBB
-------------------------------
Thomas J. Webb
Attorney in-fact
II-9
EXHIBIT INDEX
PREVIOUSLY FILED
-------------------------
WITH FILE AS EXHIBIT
EXHIBITS NUMBER NUMBER DESCRIPTION
-------- ---------- ------------ -----------
(3)(a) 333-51932 (3)(a) -- Restated Articles of Incorporation of CMS Energy (Form S-3 filed December 15,
2000)
(3)(b) 333-45556 (3)(b) -- By-Laws of CMS Energy (Form S-3 filed September 11, 2000)
(3)(c) 1-5611 3(c) -- Restated Articles of Incorporation dated May 26, 2000, of Consumers (2000 Form
10-K)
(3)(d) 1-5611 (3)(d) -- By-Laws of Consumers (1st qtr. 2003 Form 10-Q)
(4)(a) 2-65973 (b)(1)-4 -- Indenture dated as of September 1, 1945, between Consumers And Chemical Bank
(successor to Manufacturers Hanover Trust Company), as Trustee, including
therein indentures supplemental thereto through the Forty-third Supplemental
Indenture dated as of May 1, 1979
-- Indentures Supplemental thereto:
33-41126 (4)(c) -- 68th dated as of 06/15/93
1-5611 (4) -- 69th dated as of 09/15/93 (Form 8-K dated Sep. 21, 1993)
1-5611 (4)(a) -- 70th dated as of 02/01/98 (1997 Form 10-K)
1-5611 (4)(a) -- 71st dated as of 03/06/98 (1997 Form 10-K)
333-58943 (4)(d) -- 73rd dated as of 06/15/98 (Form S-4 dated July 13, 1998)
1-5611 (4)(b) -- 74th dated as of 10/29/98 (3rd qtr. 1998 Form 10-Q)
1-5611 (4)(b) -- 75th dated as of 10/1/99 (1999 Form 10-K)
1-5611 (4)(d) -- 77th dated as of 10/1/99 (1999 Form 10-K)
1-5611 4(b) -- 79th dated as of 9/26/01 (3rd qtr 2001 10-Q)
1-5611 4(a)(i) -- 80th dated as of 3/22/02 (2001 Form 10-K)
1-5611 (4)(a) -- 87th dated as of 3/26/03 (1st qtr. 2003 Form 10-Q)
1-5611 (4)(d) -- 90th dated as of 3/30/03 (1st qtr. 2003 Form 10-Q)
1-5611 (4)(a) -- 91st dated as of 5/23/03 (3rd qtr. 2003 Form 10-Q)
1-5611 (4)(b) -- 92nd dated as of 8/26/03 (3rd qtr. 2003 Form 10-Q)
1-5611 (4)(c) -- 93rd dated as of 9/17/03 (3rd qtr. 2003 Form 10-Q)
333-111220 (4)(a)(i) -- 94th dated as of 11/7/03 (Consumers Form S-4 dated December 16, 2003)
(4)(b) 1-5611 (4)(b) -- Indenture dated as of January 1, 1996 between Consumers and The Bank of New
York, as Trustee (1995 Form 10-K)
-- Indentures Supplemental thereto:
1-5611 (4)(b) -- 1st dated as of 01/18/96 (1995 Form 10-K)
1-5611 (4)(a) -- 2nd dated as of 09/04/97 (3rd qtr 1997 Form 10-Q)
1-9513 (4)(a) -- 3rd 11/04/99 (3rd qtr 1999 Form 10-Q)
(4)(c) 1-5611 (4)(c) -- Indenture dated as of February 1, 1998 between Consumers and JPMorgan Chase
(formerly "The Chase Manhattan Bank), as Trustee (1997 Form 10-K)
1-5611 (4)(a) -- 1st dated as of 05/01/98 (1st Qtr. 1998 Form 10-Q)
333-58943 (4)(b) -- 2nd dated as of 06/15/98
1-5611 (4)(a) -- 3rd 10/29/98 (3rd qtr. 1998 Form 10-Q)
4(d) 1-5611 (4)(e) -- $140 million Term Loan Agreement dated March 26, 2003 between Consumers Energy
Company and the Bank/Agent, as defined therein (1st qtr. 2003 Form 10-Q)
(4)(e) 33-47629 (4)(a) -- Indenture dated as of September 15, 1992 between CMS Energy and NBD Bank, as
Trustee (Form S-3 filed May 1, 1992)
-- Indentures Supplemental thereto:
333-37241 (4)(a) -- 4th dated as of 09/26/97 (Form S-3 filed October 6, 1997)
1-9513 (4)(d) -- 6th dated as of 01/13/98 (1997 Form 10-K)
1-9513 (4)(d)(i) -- 7th dated as of 01/25/99 (1998 Form 10-K)
333-48276 (4) -- 10th dated as of 10/12/00 (Form S-3 filed October 19, 2000)
333-58686 (4) -- 11th dated as of 03/29/01 (Form S-8 filed April 11, 2001)
333-51932 (4)(a) -- 12th dated as of 07/02/01 (Form POS AM filed August 8, 2001)
4(e)(i) 1-9513 (4)(e)(i) -- 13th dated as of 07/16/03 (2003 Form 10-K)
4(e)(ii) 1-9513 (4)(e)(ii) -- 14th dated as of 07/17/03 (2003 Form 10-K)
(4)(f) 1-9513 (4)(b) -- Indenture between CMS Energy and JPMorgan Chase (formerly "The Chase Manhattan
Bank"), as Trustee, dated as of January 15, 1994 (Form 8-K dated March 29,
1994)
-- Indentures Supplemental thereto:
1-9513 (4b) -- 1st dated as of 01/20/94 (Form 8-K dated March 29, 1994)
1-9513 (4) -- 2nd dated as of 03/19/96 (1st qtr 1996 Form 10-Q)
II-10
PREVIOUSLY FILED
-------------------------
WITH FILE AS EXHIBIT
EXHIBITS NUMBER NUMBER DESCRIPTION
-------- ---------- ------------ -----------
1-9513 (4)(a)(iv) -- 3rd dated as of 03/17/97 (Form 8-K dated May 1, 1997)
333-36115 (4)(d) -- 4th dated as of 09/17/97 (Form S-3 filed September 22, 1997)
333-63229 (4)(c) -- 5th dated as of 08/26/98 (Form S-4 filed September 10, 1998)
1-9513 (4) -- 6th dated as of 11/9/00 (3rd qtr 2000 Form 10-Q)
333-74958 (4)(a)(viii) -- Form of Seventh Indenture (Form S-3 filed December 12, 2001)
(4)(g) 1-9513 (4a) -- Indenture dated as of June 1, 1997, between CMS Energy and The Bank of New
York, as trustee (Form 8-K filed July 1, 1997) Indentures Supplemental
thereto:
1-9513 (4)(b) -- 1st dated as of 06/20/97 (Form 8-K filed July 1, 1997)
333-45556 (4)(e) -- 4th dated as of 08/22/00 (Form S-3 filed September 11, 2000)
(4)(h) -- Form of 7.75% Senior Notes due 2010
(4)(i) 1-9513 (4)(i) -- Certificate of Designation of 4.50% Cumulative Convertible Preferred Stock
dated as of December 2, 2003 (2003 Form 10-K)
(4)(j) 1-9513 (4)(j) -- Registration Rights Agreement dated as of July 16, 2003 between CMS Energy and
the Initial Purchasers, all as defined therein (2003 Form 10-K)
(4)(k) 1-9513 (4)(k) -- Registration Rights Agreement dated as of July 17, 2003 between CMS Energy and
the Initial Purchasers, all as defined therein (2003 Form 10-K)
(4)(l) 1-9513 (4)(l) -- Registration Rights Agreement dated as of December 5, 2003 between CMS Energy
and the Initial Purchasers, all as defined therein (2003 Form 10-K)
(4)(m) 1-9513 (4)(m) -- $190 million Fourth Amended and Restated Credit Agreement dated as of December
8, 2003 among CMS Energy, CMS Enterprises, the Banks, and the Administrative
Agent and Collection Agent, all defined therein (2003 Form 10-K)
(4)(n) 1-9513 4.9 -- Pledge and Security Agreement dated as of July 12, 2002 among CMS Energy,
Grantors and the Collateral Agent, all as defined therein (Form 8-K filed July
30, 2002)
(4)(o) 1-9513 (4)(o) -- Third Amended and Restated Pledge and Security Agreement dated as of December
8, 2003 among CMS Energy and the Collateral Agent, as defined therein (2003
Form 10-K)
(4)(p) 1-9513 (4)(p) -- Amended and Restated Guaranty dated as of December 8, 2003 by the Guarantor in
favor of the Lenders, all as defined therein (2003 Form 10-K)
(4)(q) 1-9513 (4)(h) -- $185 million Credit Agreement, as amended, dated May 22, 2003 among CMS Energy
and the Financial Institutions, Documentation Agent and Administrative Agent,
as defined therein (2003 Form 10-K)
(5) -- Opinion of Robert C. Shrosbree, Assistant General Counsel for CMS Energy
(8) -- Opinion of Jay M. Silverman, Tax Counsel for CMS Energy regarding tax matters
(10)(a) 1-9513 (10)(b) -- Form of Employment Agreement entered into by CMS Energy's and Consumers'
executive officers (1999 Form 10-K)
(10)(b) 1-9513 (10)(a) -- Acknowledgement of Resignation between Tamela W. Pallas and CMS Energy
Corporation (3rd qtr 2002 Form 10-Q)
(10)(c) 1-5611 (10)(g) -- Consumers' Executive Stock Option and Stock Appreciation Rights Plan effective
December 1, 1989 (1990 Form 10-K)
(10)(d) 1-9513 (10)(b) -- Employment, Separation and General Release Agreement between William T.
McCormick and CMS Energy Corporation (3rd qtr 2002 Form 10-Q)
(10)(e) 1-9513 (10)(d) -- CMS Energy's Performance Incentive Stock Plan effective February 3, 1988, as
amended December 3, 1999 (1999 Form 10-K)
(10)(f) 1-9513 (10)(c) -- Employment, Separation and General Release Agreement between Alan M. Wright
and CMS Energy Corporation (3rd qtr 2002 Form 10-Q)
(10)(g) 1-9513 (10)(g) -- CMS Energy's Salaried Employees Merit Program for 2003 effective January 1,
2003 (2003 Form 10-K)
(10)(h) 1-9513 (10)(m) -- CMS Deferred Salary Savings Plan effective January 1, 1994 (1993 Form 10-K)
(10)(i) 1-9513 (10)(i) -- Annual Officer Incentive Compensation Plan for CMS Energy Corporation and its
Subsidiaries effective January 1, 2003 (2003 Form 10-K)
II-11
PREVIOUSLY FILED
-------------------------
WITH FILE AS EXHIBIT
EXHIBITS NUMBER NUMBER DESCRIPTION
-------- ---------- ------------ -----------
(10)(j) 1-9513 (10)(h) -- Supplemental Executive Retirement Plan for Employees of CMS Energy/Consumers
Energy Company effective January 1, 1982, as amended December 3, 1999 (1999
Form 10-K)
(10)(k) 33-37977 4.1 -- Senior Trust Indenture, Leasehold Mortgage and Security Agreement dated as of
June 1, 1990 between The Connecticut National Bank and United States Trust
Company of New York (MCV Partnership)
Indenture Supplemental thereto:
33-37977 4.2 -- Supplement No. 1 dated as of June 1, 1990 (MCV Partnership)
(10)(l) 1-9513 (28)(b) -- Collateral Trust Indenture dated as of June 1, 1990 among Midland Funding
Corporation I, MCV Partnership and United States Trust Company of New York,
Trustee (3rd qtr 1990 Form 10-Q)
Indenture Supplemental thereto:
33-37977 4.4 -- Supplement No. 1 dated as of June 1, 1990 (MCV Partnership)
(10)(m) 1-9513 (10)(v) -- Amended and Restated Investor Partner Tax Indemnification Agreement dated as
of June 1, 1990 among Investor Partners, CMS Midland as Indemnitor and CMS
Energy as Guarantor (1990 Form 10-K)
(10)(n) 1-9513 (19)(d)* -- Environmental Agreement dated as of June 1, 1990 made by CMS Energy to The
Connecticut National Bank and Others (1990 Form 10-K)
(10)(o) 1-9513 (10)(z)* -- Indemnity Agreement dated as of June 1, 1990 made by CMS Energy to Midland
Cogeneration Venture Limited Partnership (1990 Form 10-K)
(10)(p) 1-9513 (10)(aa)* -- Environmental Agreement dated as of June 1, 1990 made by CMS Energy to United
States Trust Company of New York, Meridian Trust Company, each Subordinated
Collateral Trust Trustee and Holders from time to time of Senior Bonds and
Subordinated Bonds and Participants from time to time in Senior Bonds and
Subordinated Bonds (1990 Form 10-K)
(10)(q) 33-37977 10.4 -- Amended and Restated Participation Agreement dated as of June 1, 1990 among
MCV Partnership, Owner Participant, The Connecticut National Bank, United
States Trust Company, Meridian Trust Company, Midland Funding Corporation I,
Midland Funding Corporation II, MEC Development Corporation
and Institutional Senior Bond Purchasers (MCV Partnership)
(10)(r) 33-3797 10.4 -- Power Purchase Agreement dated as of July 17, 1986 between MCV Partnership and
Consumers (MCV Partnership) Amendments thereto:
33-37977 10.5 -- Amendment No. 1 dated September 10, 1987 (MCV Partnership)
33-37977 10.6 -- Amendment No. 2 dated March 18, 1988 (MCV Partnership)
33-37977 10.7 -- Amendment No. 3 dated August 28, 1989 (MCV Partnership)
33-37977 10.8 -- Amendment No. 4A dated May 25, 1989 (MCV Partnership)
(10)(s) 1-5611 (10)(y) -- Unwind Agreement dated as of December 10, 1991 by and among CMS Energy,
Midland Group, Ltd., Consumers, CMS Midland, Inc., MEC Development Corp. and
CMS Midland Holdings Company (1991 Form 10-K)
(10)(t) 1-5611 (10)(z) -- Stipulated AGE Release Amount Payment Agreement dated as of June 1, 1990,
among CMS Energy, Consumers and The Dow Chemical Company (1991 Form 10-K)
(10)(u) 1-5611 (10)(aa)* -- Parent Guaranty dated as of June 14, 1990 from CMS Energy to MCV, each of the
Owner Trustees, the Indenture Trustees, the Owner Participants and the Initial
Purchasers of Senior Bonds in the MCV Sale Leaseback transaction, and MEC
Development (1991 Form 10-K)
(10)(v) 1-8157 10.41 -- Contract for Firm Transportation of Natural Gas between Consumers Power
Company and Trunkline Gas Company, dated November 1, 1989, and Amendment,
dated November 1, 1989 (1989 Form 10-K of PanEnergy Corp.)
(10)(w) 1-8157 10.41 -- Contract for Firm Transportation of Natural Gas between Consumers Power
Company and Trunkline Gas Company, dated November 1, 1989 (1991 Form 10-K of
PanEnergy Corp.)
II-12
PREVIOUSLY FILED
-------------------------
WITH FILE AS EXHIBIT
EXHIBITS NUMBER NUMBER DESCRIPTION
-------- ---------- ------------ -----------
(10)(x) 1-2921 10.03 -- Contract for Firm Transportation of Natural Gas between Consumers Power
Company and Trunkline Gas Company, dated September 1, 1993 (1993 Form 10-K)
(10)(y) 1-9513 (10)(y) -- Purchase Agreement dated July 16, 2003 between CMS Energy and the Initial
Purchasers, as defined therein (2003 Form 10-K)
(10)(z) 1-9513 (10)(z) -- Purchase Agreement dated July 17, 2003 between CMS Energy and the Initial
Purchasers, as defined therein (2003 Form 10-K)
(10)(aa) 1-9513 (10)(aa) -- Purchase Agreement dated December 1, 2003 between CMS Energy and the Initial
Purchasers, as defined therein (2003 Form 10-K)
(10)(bb) 1-5611 10 -- First Amended and Restated Employment Agreement between Kenneth Whipple and
CMS Energy Corporation effective as of September 1, 2003 (8-K dated October
24, 2003)
(10)(cc) 1-9513 (10)(cc) -- Annual Management Incentive Compensation Plan for CMS Energy Corporation and
its Subsidiaries effective January 1, 2003 (2003 Form 10-K)
(10)(dd) 1-9513 (10)(dd) -- Annual Employee Incentive Compensation Plan for CMS Energy Corporation and its
Subsidiaries effective January 1, 2003 (2003 Form 10-K)
(12) 1-9513 12(a) -- Statement regarding computation of CMS Energy's Ratio of Earnings to Fixed
Charges (2003 Form 10-K)
(16) 1-5611 16.1 -- Letter from Arthur Andersen LLP to the Securities and Exchange Commission
dated April 29, 2002 regarding change in certifying accountant (Form 8-K
filed April 29, 2002)
(21) 1-9513 -- Subsidiaries of CMS Energy (Form U-3A-2 filed February 27, 2004)
(23)(a) -- Consent of Robert C. Shrosbree, Assistant General Counsel for CMS Energy
(included in Exhibit 5 above)
(23)(b) -- Consent of Jay M. Silverman, Tax Counsel for CMS Energy (included in Exhibit 8
above)
(23)(c) -- Consent of Ernst & Young LLP
(23)(d) -- Consent of PricewaterhouseCoopers LLP
(23)(e) -- Consent of Price Waterhouse
(24) -- Power of Attorney for CMS Energy
(25) -- Statement of Eligibility and Qualification of J.P. Morgan Trust Company, N.A.
(99)(a) -- Form of Letter of Transmittal
(99)(b) -- Certification of Taxpayer Identification Number on Substitute Form W-9
(99)(c) -- Form of Notice of Guaranteed Delivery
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* Obligations of only CMS Holdings and CMS Midland, second tier subsidiaries
of Consumers, and of CMS Energy but not of Consumers.
Exhibits listed above that have heretofore been filed with the Securities
and Exchange Commission pursuant to various acts administered by the Commission,
and which were designated as noted above, are hereby incorporated herein by
reference and made a part hereof with the same effect as if filed herewith.
Exhibits listed above that have been filed with the Securities and
Exchange Commission are incorporated herein by reference with the same effect as
if filed with this Registration Statement.
II-13