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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___ to ___
<TABLE>
<S> <C> <C>
Commission Registrant; State of Incorporation; IRS Employer
File Number Address; and Telephone Number Identification No.
1-9513 CMS ENERGY CORPORATION 38-2726431
(A Michigan Corporation)
Fairlane Plaza South, Suite 1100
330 Town Center Drive, Dearborn, Michigan 48126
(313)436-9200
1-5611 CONSUMERS ENERGY COMPANY 38-0442310
(A Michigan Corporation)
212 West Michigan Avenue, Jackson, Michigan 49201
(517)788-0550
1-2921 PANHANDLE EASTERN PIPE LINE COMPANY 44-0382470
(A Delaware Corporation)
5400 Westheimer Court, P.O. Box 4967, Houston, Texas 77210-4967
(713)627-5400
</TABLE>
Indicate by check mark whether the Registrants (1) have filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrants were required to file such reports), and (2) have been subject to
such filing requirements for the past 90 days. Yes X No ___
Panhandle Eastern Pipe Line Company meets the conditions set forth in General
Instructions H(1)(a) and (b) of Form 10-Q and is therefore filing this Form 10-Q
with the reduced disclosure format. In accordance with Instruction H, Part I,
Item 2 has been reduced and Part II, Items 2, 3 and 4 have been omitted.
Number of shares outstanding of each of the issuer's classes of common stock at
July 31, 1999:
<TABLE>
<CAPTION>
CMS ENERGY CORPORATION:
<S> <C>
CMS Energy Common Stock, $.01 par value 109,393,114
CMS Energy Class G Common Stock, no par value 8,662,417
CONSUMERS ENERGY COMPANY, $10 par value, privately held by CMS Energy 84,108,789
PANHANDLE EASTERN PIPE LINE COMPANY, no par value,
indirectly privately held by CMS Energy 1,000
</TABLE>
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CMS ENERGY CORPORATION
AND
CONSUMERS ENERGY COMPANY
AND
PANHANDLE EASTERN PIPE LINE COMPANY
QUARTERLY REPORTS ON FORM 10-Q TO THE SECURITIES
AND EXCHANGE COMMISSION FOR THE QUARTER ENDED JUNE 30, 1999
This combined Form 10-Q is separately filed by each of CMS Energy Corporation,
Consumers Energy Company and Panhandle Eastern Pipe Line Company. Information
contained herein relating to each individual registrant is filed by such
registrant on its own behalf. Accordingly, except for their respective
subsidiaries, Consumers Energy Company and Panhandle Eastern Pipe Line Company
make no representation as to information relating to any other companies
affiliated with CMS Energy Corporation.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
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<S> <C>
Glossary .......................................................... 3
PART I:
CMS Energy Corporation
Management's Discussion and Analysis ......................... CMS-1
Consolidated Statements of Income ............................ CMS-16
Consolidated Statements of Cash Flows ........................ CMS-18
Consolidated Balance Sheets .................................. CMS-20
Consolidated Statements of Common Stockholders' Equity ....... CMS-22
Condensed Notes to Consolidated Financial Statements ......... CMS-23
Report of Independent Public Accountants ..................... CMS-41
Consumers Energy Company
Management's Discussion and Analysis ......................... CE-1
Consolidated Statements of Income ............................ CE-11
Consolidated Statements of Cash Flows ........................ CE-12
Consolidated Balance Sheets .................................. CE-14
Consolidated Statements of Common Stockholder's Equity ....... CE-16
Condensed Notes to Consolidated Financial Statements ......... CE-17
Report of Independent Public Accountants ..................... CE-28
Panhandle Eastern Pipe Line Company
Management's Discussion and Analysis ......................... PE-1
Consolidated Statements of Income ............................ PE-7
Consolidated Statements of Cash Flows ........................ PE-8
Consolidated Balance Sheets .................................. PE-9
Consolidated Statements of Common Stockholder's Equity ....... PE-11
Condensed Notes to Consolidated Financial Statements ......... PE-13
Report of Independent Public Accountants ..................... PE-20
Quantitative and Qualitative Disclosures about Market Risk ........ CO-1
PART II:
Item 1. Legal Proceedings .................................... CO-1
Item 4. Submission of Matters to a Vote of Security Holders .. CO-2
Item 5. Other Information .................................... CO-2
Item 6. Exhibits and Reports on Form 8-K ..................... CO-3
Signatures ........................................................ CO-4
</TABLE>
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GLOSSARY
Certain terms used in the text and financial statements are defined below.
<TABLE>
<S> <C>
ABATE..................................... Association of Businesses Advocating Tariff Equity
ALJ....................................... Administrative Law Judge
Anadarko.................................. Anadarko Petroleum Corporation, a non-affiliated company
Articles.................................. Articles of Incorporation
Attorney General.......................... Michigan Attorney General
Aux Sable................................. Aux Sable Liquids Products, L.P., a non-affiliated company
bcf....................................... Billion cubic feet
Big Rock.................................. Big Rock Point nuclear power plant, owned by Consumers
Board of Directors........................ Board of Directors of CMS Energy
Btu....................................... British thermal unit
Class G Common Stock...................... One of two classes of common stock of CMS Energy, no par value, which
reflects the separate performance of the Consumers Gas Group
Clean Air Act............................. Federal Clean Air Act, as amended
CMS Energy................................ CMS Energy Corporation, the parent of Consumers and Enterprises
CMS Energy Common Stock................... One of two classes of common stock of CMS Energy, par value $.01 per
share
CMS Gas Transmission...................... CMS Gas Transmission and Storage Company, a subsidiary of Enterprises
CMS Generation............................ CMS Generation Co., a subsidiary of Enterprises
CMS Holdings.............................. CMS Midland Holdings Company, a subsidiary of Consumers
CMS Midland............................... CMS Midland Inc., a subsidiary of Consumers
CMS MST................................... CMS Marketing, Services and Trading Company, a subsidiary of
Enterprises
CMS Oil and Gas .......................... CMS Oil and Gas Company, a subsidiary of Enterprises
CMS Panhandle Holding .................... CMS Panhandle Holding Company, a subsidiary of CMS Gas Transmission
Common Stock.............................. CMS Energy Common Stock and Class G Common Stock
Consumers................................. Consumers Energy Company, a subsidiary of CMS Energy
Consumers Gas Group....................... The gas distribution, storage and transportation businesses currently
conducted by Consumers and Michigan Gas Storage
Court of Appeals.......................... Michigan Court of Appeals
Detroit Edison............................ The Detroit Edison Company, a non-affiliated company
Dow....................................... The Dow Chemical Company, a non-affiliated company
Duke Energy............................... Duke Energy Corporation, a non-affiliated company
EITF...................................... Emerging Issues Task Force
Enterprises............................... CMS Enterprises Company, a subsidiary of CMS Energy
EPA....................................... Environmental Protection Agency
EPS....................................... Earning per share
Exchange Notes............................ $300 million 6.125% senior notes due 2004, $200 million 6.5% senior
notes due 2009 and $300 million 7% senior notes due 2029 issued by
Panhandle Eastern Pipeline Company for outstanding notes issued by
CMS Panhandle Holding Company
</TABLE>
3
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<TABLE>
<S> <C>
FASB...................................... Financial Accounting Standards Board
FERC...................................... Federal Energy Regulatory Commission
FMLP...................................... First Midland Limited Partnership, a partnership which operates a
marketing center for natural gas
GCR....................................... Gas cost recovery
GTNs...................................... CMS Energy General Term Notes(R), $250 million Series A, $125 million
Series B, $150 million Series C, $200 million Series D and $400
million Series E
IT........................................ Information technology
Jorf Lasfar............................... The 1,356 MW (660 MW in operation and 696 MW under construction)
coal-fueled power plant in Morocco, jointly owned by CMS Generation
and ABB Energy Venture, Inc.
kWh....................................... Kilowatt-hour
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
mcf....................................... Thousand cubic feet
MCV Facility.............................. A natural gas-fueled, combined-cycle cogeneration facility operated by
the MCV Partnership
MCV Partnership........................... Midland Cogeneration Venture Limited Partnership in which Consumers
has a 49 percent interest through CMS Midland
MD&A...................................... Management's Discussion and Analysis
Mdth/d.................................... Million dekatherms per day
MichCon................................... Michigan Consolidated Gas Company, a non-affiliated company
Michigan Gas Storage...................... Michigan Gas Storage Company, a subsidiary of Consumers
MMBtu..................................... Million British thermal unit
MPSC...................................... Michigan Public Service Commission
MW........................................ Megawatts
NEIL...................................... Nuclear Electric Insurance Limited, an industry mutual insurance
company owned by member utility companies
NOI....................................... Notice of inquiry
NOPR...................................... Notice of proposed rulemaking
Northern Border........................... Northern Border Pipeline Company
NRC....................................... Nuclear Regulatory Commission
Order 888 and Order 889................... FERC final rules issued on April 24, 1996
Outstanding Shares........................ Outstanding shares of Class G Common Stock
Palisades................................. Palisades nuclear power plant, owned by Consumers
Pan Gas Storage........................... Pan Gas Storage Company, a subsidiary of Panhandle Eastern Pipe Line
Company
Panhandle................................. Panhandle Eastern Pipe Line Company, including its subsidiaries
Trunkline, Pan Gas Storage, Panhandle Storage, and Trunkline
</TABLE>
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<TABLE>
<S> <C>
LNG. Panhandle is a wholly owned subsidiary of CMS Gas Transmission
Panhandle Storage......................... CMS Panhandle Storage Company, a subsidiary of Panhandle Eastern Pipe
Line Company
PCBs...................................... Poly chlorinated biphenyls
PECO...................................... PECO Energy Company, a non-affiliated company
PPA....................................... The Power Purchase Agreement between Consumers and the MCV Partnership
with a 35-year term commencing in March 1990
PSCR...................................... Power supply cost recovery
SEC....................................... Securities and Exchange Commission
Senior Credit Facilities.................. $725 million senior credit facilities consisting of a $600 million
three-year revolving credit facility and a five-year $125 million term
loan facility
SFAS...................................... Statement of Financial Accounting Standards
SOP....................................... Statement of position
Superfund................................. Comprehensive Environmental Response, Compensation and Liability Act
Transition Costs.......................... Costs incurred by utilities in order to serve their customers in a
regulated monopoly environment, but which may not be recoverable in a
competitive environment because of customers leaving their systems and
ceasing to pay for their costs. These costs could include owned and
purchased generation, regulatory assets, and costs incurred in the
transition to competition.
Trunkline................................. Trunkline Gas Company, a subsidiary of Panhandle Eastern Pipe Line
Company
Trunkline LNG............................. Trunkline LNG Company, a subsidiary of Panhandle Eastern Pipe Line
Company
Trust Preferred Securities................ Securities representing an undivided beneficial interest in the assets
of statutory business trusts, which interests have a preference with
respect to certain trust distributions over the interests of either
CMS Energy or Consumers, as applicable, as owner of the common
beneficial interests of the trusts
</TABLE>
5
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CMS ENERGY CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
CMS Energy is the parent holding company of Consumers and Enterprises. Consumers
is a combination electric and gas utility company serving the Lower Peninsula of
Michigan and is the principal subsidiary of CMS Energy. Enterprises, through
subsidiaries, is engaged in several domestic and international energy-related
businesses including: natural gas transmission, storage and processing;
independent power production; oil and gas exploration and production; energy
marketing, services and trading; and international energy distribution. On March
29, 1999, CMS Energy completed the acquisition of Panhandle from Duke Energy, as
further discussed in the Capital Resources and Liquidity section of this MD&A
and Note 1. Panhandle is primarily engaged in the interstate transportation and
storage of natural gas.
The MD&A of this Form 10-Q should be read along with the MD&A and other parts of
CMS Energy"s 1998 Form 10-K. This MD&A also refers to, and in some sections
specifically incorporates by reference, CMS Energy"s Condensed Notes to
Consolidated Financial Statements and should be read in conjunction with such
Statements and Notes. This report contains forward-looking statements, as
defined by the Private Securities Litigation Reform Act of 1995. While
forward-looking statements are based on assumptions and such assumptions are
believed to be reasonable and are made in good faith, CMS Energy cautions that
assumed results almost always vary from actual results and differences between
assumed and actual results can be material. The type of assumptions that could
materially affect the actual results are discussed in the Forward-Looking
Statements section in this MD&A. More specific risk factors are contained in
various public filings made by CMS Energy with the SEC. This report also
describes material contingencies in the Notes to Consolidated Financial
Statements and the readers are encouraged to read such Notes.
RESULTS OF OPERATIONS
CMS ENERGY CONSOLIDATED EARNINGS
<TABLE>
<CAPTION>
In Millions, Except Per Share Amounts
-----------------------------------------------------
June 30 1999 1998 Change
- ------- ---- ---- ------
<S> <C> <C> <C>
THREE MONTHS ENDED
Consolidated Net Income $ 75 $ 65 $ 10
Net Income Attributable to Common Stocks:
CMS Energy 74 64 10
Class G 1 1 --
Earnings Per Average Common Share:
CMS Energy
Basic .68 .63 .05
Diluted .67 .62 .05
Class G
Basic and Diluted .10 .12 (.02)
SIX MONTHS ENDED (a)
Consolidated Net Income $ 173 $ 153 $ 20
Net Income Attributable to Common Stocks:
CMS Energy 162 143 19
Class G 11 10 1
</TABLE>
CMS-1
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<TABLE>
<S> <C> <C> <C>
Earnings Per Average Common Share:
CMS Energy
Basic 1.50 1.42 .08
Diluted 1.48 1.39 .09
Class G
Basic and Diluted 1.28 1.20 .08
TWELVE MONTHS ENDED (a)
Consolidated Net Income $ 305 $ 272 $ 33
Net Income Attributable to Common Stocks:
CMS Energy 291 258 33
Class G 14 14 --
Earnings Per Average Common Share:
CMS Energy
Basic 2.75 2.60 .15
Diluted 2.71 2.57 .14
Class G
Basic and Diluted 1.65 1.71 (.06)
</TABLE>
(a) Includes the cumulative effect of an accounting change for property taxes
which increased net income by $43 million or $.40 per share - basic and diluted
- - for CMS Energy Common Stock and $12 million or $.36 per share basic and
diluted - for Class G Common Stock.
The increase in consolidated net income for the second quarter of 1999 over the
comparable period in 1998 resulted from increased earnings from the electric
utility; the natural gas transmission, storage and processing business as a
result of the Panhandle acquisition; and the international energy distribution
business. Partially offsetting these increases were lower earnings from the gas
utility, independent power production, oil and gas exploration and production,
and marketing services and trading businesses; and higher interest expense.
The increase in consolidated net income for the six months ended June 30, 1999
over the comparable period in 1998 resulted from increased earnings in the
electric and gas utilities; independent power production; natural gas
transmission, storage and processing as a result of the Panhandle acquisition;
and international energy distribution businesses; and the recognition in 1998 of
a $37 million loss ($24 million after-tax) for the underrecovery of power costs
under the PPA. Partially offsetting these increases were the 1998 cumulative
effect of the accounting change for property taxes and higher interest expense
in the current period.
The increase in consolidated net income for the twelve months ended June 30,
1999 over the comparable 1998 period reflects increased earnings from the
electric and gas utilities; independent power production; natural gas
transmission, storage and processing as a result of the Panhandle acquisition;
and marketing, services and trading businesses. Partially offsetting these
increases were lower earnings from the oil and gas exploration and production
and international energy distribution businesses coupled with higher interest
expense.
For further information, see the individual results of operations for each CMS
Energy business segment in this MD&A.
CMS-2
<PAGE> 8
CONSUMERS' ELECTRIC UTILITY RESULTS OF OPERATIONS
ELECTRIC PRETAX OPERATING INCOME:
<TABLE>
<CAPTION>
In Millions
---------------------------------------------------------
Three Months Six Months Twelve Months
Ended June 30 Ended June 30 Ended June 30
Change Compared to Prior Year 1999 vs 1998 1999 vs 1998 1999 vs 1998
- ----------------------------- ------------ ------------ ------------
<S> <C> <C> <C>
Electric deliveries $ 12 $ 23 $ 50
Power supply costs 14 18 39
Rate increases and other non-commodity revenue (3) (4) (6)
Operations and maintenance (5) (3) (17)
General taxes and depreciation (3) (4) (9)
---- ---- ----
Total change $ 15 $ 30 $ 57
==== ==== ====
</TABLE>
ELECTRIC DELIVERIES: Total electric deliveries for the three months, six months
and twelve months ended June 30, 1999, increased in all customer classes.
Electric deliveries were 10.3 billion kWh for the three months ended June 30,
1999, an increase of 6.0 percent. Electric deliveries were 20.3 billion kWh for
the six months ended June 30, 1999, an increase of 5.0 percent. Electric
deliveries were 41 billion kWh for the twelve months ended June 30, 1999, an
increase of 4.6 percent.
POWER COSTS:
<TABLE>
<CAPTION>
In Millions
-------------------------------------------------
June 30 1999 1998 Change
- ------- ---- ---- ------
<S> <C> <C> <C>
Three months ended $ 293 $ 312 $ (19)
Six months ended 571 583 (12)
Twelve months ended 1,164 1,170 (6)
</TABLE>
Power costs decreased for the three month period ended June 30, 1999 compared to
the same 1998 period as a result of lower power purchase costs. Power costs also
decreased for the six months and twelve months ended June 30, 1999 compared to
the same period in 1998 for the same reason.
UNCERTAINTIES: CMS Energy's financial position may be affected by a number of
trends or uncertainties that have, or CMS Energy reasonably expects could have,
a material impact on net sales, revenues, or income from continuing electric
operations. Such uncertainties include: 1) capital expenditures for compliance
with the Clean Air Act; 2) environmental liabilities arising from compliance
with various federal, state and local environmental laws and regulations,
including potential liability or expenses relating to the Michigan Natural
Resources and Environmental Protection Act and Superfund; 3) cost recovery
relating to the MCV Facility; 4) electric industry restructuring; 5)
implementation of a frozen PSCR and initiatives to be undertaken to reduce
exposure to high energy prices; 6) underrecoveries associated with power
purchases from the MCV Partnership; and 7) decommissioning issues and ongoing
issues relating to the storage of spent fuel and the operating life of
Palisades. For detailed information about these trends or uncertainties, see
Note 2, Uncertainties, incorporated by reference herein.
CMS-3
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CONSUMERS GAS GROUP RESULTS OF OPERATIONS
GAS PRETAX OPERATING INCOME:
<TABLE>
<CAPTION>
In Millions
---------------------------------------------------------
Three Months Six Months Twelve Months
Ended June 30 Ended June 30 Ended June 30
Change Compared to Prior Year 1999 vs 1998 1999 vs 1998 1999 vs 1998
- ----------------------------- ------------ ------------ ------------
<S> <C> <C> <C>
Gas deliveries $ 2 $ 22 $ 10
Gas cost (2) 12 24
Gas wholesale and retail services activities 1 2 5
Operation and maintenance (5) (5) 4
General taxes, depreciation and other (1) (12) (25)
---- ---- ----
Total increase (decrease) in pretax operating income $ (5) $ 19 $ 18
==== ==== ====
</TABLE>
GAS DELIVERIES: System deliveries for the three month period ended June 30,
1999, including miscellaneous transportation, were 62.5 bcf compared to 61.3 bcf
for the same 1998 period. This increase of 1.8 percent was primarily due to
growth during the period. System deliveries for the six month period ended June
30, 1999, including miscellaneous transportation, were 228.7 bcf compared to
207.8 bcf for the same 1998 period. This increase of 20.9 bcf or 10.1 percent
was primarily due to colder temperatures during the 1999 heating season. System
deliveries for the twelve month period ended June 30, 1999, including
miscellaneous transportation, were 380.7 bcf compared to 383.6 bcf for the same
1998 period. This decrease of 0.7 percent was primarily the result of reduced
gas transported to the MCV Facility.
COST OF GAS SOLD:
<TABLE>
<CAPTION>
In Millions
------------------------------------------------
June 30 1999 1998 Change
- ------- ---- ---- ------
<S> <C> <C> <C>
Three months ended $ 78 $ 74 $ 4
Six months ended 384 338 46
Twelve months ended 609 600 9
</TABLE>
The cost increases for the three month period ended June 30, 1999 was the result
of increased gas deliveries due to growth during this period. The cost increases
for the six month period and the twelve month period ended June 30, 1999 was the
result of increased sales due to colder overall temperatures during the winter
heating season partially offset by lower gas prices.
UNCERTAINTIES: CMS Energy's financial position may be affected by a number of
trends or uncertainties that have, or CMS Energy reasonably expects could have,
a material impact on net sales or revenues or income from continuing gas utility
operations. Such uncertainties include: 1) potential environmental costs at a
number of sites, including sites formerly housing manufactured gas plant
facilities; 2) a statewide experimental gas restructuring program; and 3)
implementation of a suspended GCR and initiatives undertaken to protect against
gas price increases. For detailed information about these uncertainties see Note
2, Uncertainties, incorporated by reference herein.
CMS-4
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INDEPENDENT POWER PRODUCTION RESULTS OF OPERATIONS
PRETAX OPERATING INCOME: Pretax operating income for the three months ended June
30, 1999 decreased $8 million (16 percent) from the comparable period in 1998.
This decrease primarily reflects the 1998 gain on the sale of a biomass power
purchase agreement and the scheduled reduction of the industry expertise service
fee income earned in connection with the purchase of Loy Yang, partially offset
by increased operating income from international and domestic plant earnings and
fees, reduced net operating expenses and a gain on the sale of two hydro plants.
Pretax operating income for the six months ended June 30, 1999 increased $4
million (6 percent) from the comparable period in 1998. This increase primarily
reflects increased operating income from international and domestic plant
earnings and fees, reduced net operating expenses and increased earnings from
the MCV Partnership, partially offset by a 1998 gain on the sale of a power
purchase agreement, the scheduled reduction of the industry expertise service
fee income earned in connection with the purchase of Loy Yang, and the
settlement of a lawsuit. Pretax operating income for the twelve months ended
June 30, 1999 increased $21 million (17 percent) from the comparable period in
1998, primarily reflecting increased international and domestic earnings and
gains on the sale of plant assets and power purchase agreements, partially
offset by higher operating expenses, the settlement of a lawsuit and a scheduled
reduction of the industry expertise service fee income earned in connection with
the purchase of Loy Yang.
OIL AND GAS EXPLORATION AND PRODUCTION RESULTS OF OPERATIONS
PRETAX OPERATING INCOME: Pretax operating income for the three months ended June
30, 1999 decreased $1 million (14 percent) from the comparable period in 1998 as
a result of increased expenses relating to the centralization of certain
functions from a district to home office, partially offset by lower exploration
expenses. Pretax operating income for the six months ended June 30, 1999
decreased $1 million (11 percent) from the comparable period in 1998 due to
lower gas and natural gas liquid prices. Pretax operating income for the twelve
months ended June 30, 1999 decreased $27 million (84 percent) from the
comparable period in 1998 as a result of lower oil and gas prices and a gain in
the prior period from the sale of CMS Oil and Gas' entire interest in oil and
gas properties in Yemen, partially offset by lower operating expenses.
NATURAL GAS TRANSMISSION, STORAGE AND PROCESSING RESULTS OF OPERATIONS
PRETAX OPERATING INCOME: Pretax operating income for the three months ended June
30, 1999 increased $39 million (433 percent) from the comparable period in 1998.
The increase reflects earnings from Panhandle, which was acquired in March 1999,
and increased earnings from international operations, partially offset by a gain
in the prior period on the sale of Australian gas reserves and increased net
operating expenses primarily relating to the Panhandle acquisition. Pretax
operating income for the six months ended June 30, 1999 increased $29 million
(132 percent) primarily due to earnings from Panhandle and increased earnings
from international operations, partially offset by gains in the prior period on
the sale of Petal Gas Storage Company and Australian gas reserves, decreased
other domestic earnings, and increased net operating expenses primarily relating
to the Panhandle acquisition. Pretax operating income for the twelve months
ended June 30, 1999 increased $29 million (88 percent) from the comparable
period in 1998. The increase primarily reflects earnings from Panhandle and
increased earnings from international operations, partially offset by a gain in
the prior period on the sale of Petal Gas Storage Company, decreased other
domestic earnings, and increased net operating expenses primarily relating to
the Panhandle acquisition.
CMS-5
<PAGE> 11
UNCERTAINTIES: CMS Energy's financial position may be affected by a number of
trends or uncertainties that have, or CMS Energy reasonably expects could have,
a material impact on net sales or revenues or income from continuing gas
operations. For detailed information about Panhandle's regulatory uncertainties
see Note 2, Uncertainties - Panhandle Regulatory Matters, incorporated by
reference herein.
MARKETING, SERVICES AND TRADING RESULTS OF OPERATIONS
PRETAX OPERATING INCOME: Pretax operating income for the three months ended June
30, 1999 decreased $5 million from the comparable period in 1998. The decrease
is the result of lower margins in the electric wholesale market, increased price
volatility in the gas markets, and additional growth-related operating costs.
Pretax operating income for the six months ended June 30, 1999 increased $1
million from the comparable period in 1998. The increase is due to improved
commodity margins and the effect of the accounting change that recognizes
currently the fair market value of trading contracts. Pretax operating income
for the twelve months ended June 30, 1999 increased $12 million from the
comparable period in 1998. The increase is a result of improved margins on
electric and gas sales, increased electric volumes and the mark-to-market
adjustments of trading contracts, partially offset by increased expenses related
to growth objectives. Gas managed and marketed for end users totaled 181 bcf and
156 bcf for the six months ended June 30, 1999 and 1998, respectively.
MARKET RISK INFORMATION
CMS Energy is exposed to market risks including, but not limited to, changes in
interest rates, currency exchange rates, and certain commodity and equity
prices. Management employs established policies and procedures to manage its
risks associated with these market fluctuations including the use of various
derivative instruments such as futures, swaps, options and forward contracts.
Management believes that any losses incurred on derivative instruments used to
hedge risk would be offset by an opposite movement of the value of the hedged
item.
In accordance with SEC disclosure requirements, CMS Energy has performed
sensitivity analyses to assess the potential loss in fair value, cash flows and
earnings based upon hypothetical 10 percent increases and decreases in market
exposures. Management does not believe that sensitivity analyses alone provide
an accurate or reliable method for monitoring and controlling risks. Therefore,
CMS Energy and its subsidiaries rely on the experience and judgment of senior
management and traders to revise strategies and adjust positions as they deem
necessary. Losses in excess of the amounts determined in the sensitivity
analyses could occur if market rates or prices exceed the 10 percent shift used
for the analyses.
COMMODITY PRICE RISK: Management uses commodity futures contracts, options and
swaps (which require a net cash payment for the difference between a fixed and
variable price) to manage commodity price risk. The prices of energy commodities
fluctuate due to changes in the supply of and demand for those commodities. To
reduce price risk caused by these market fluctuations, CMS Energy hedges certain
inventory and purchases and sales contracts. A hypothetical 10 percent adverse
shift in quoted commodity prices in the near term would not have had a material
impact on CMS Energy's consolidated financial position, results of operations or
cash flows as of June 30, 1999. The analysis assumes that the maximum exposure
associated with purchased options is limited to premiums paid. The analysis also
does not quantify short-term exposure to hypothetically adverse price
fluctuations in inventories.
INTEREST RATE RISK: Management uses a combination of fixed-rate and
variable-rate debt to reduce interest rate exposure. Interest rate swaps and
rate locks may be used to adjust exposure when deemed appropriate, based upon
market conditions. These strategies attempt to provide and maintain the lowest
cost of capital. The carrying amount of long-term debt was $6.7 billion at June
30, 1999 with a fair value of $6.6 billion. The fair value of CMS Energy's
financial derivative instruments at June 30, 1999, with a notional amount
CMS-6
<PAGE> 12
of $790 million, was $300,000, representing the amount CMS Energy would pay upon
settlement. A hypothetical 10 percent adverse shift in interest rates in the
near term would not have a material effect on CMS Energy's consolidated
financial position, results of operations or cash flows as of June 30, 1999.
CURRENCY EXCHANGE RISK: Management uses forward exchange and option contracts to
hedge certain net investments in foreign operations. A hypothetical 10 percent
adverse shift in currency exchange rates would not have a material effect on CMS
Energy's consolidated financial position or results of operations as of June 30,
1999, but would result in a net cash settlement of approximately $121 million.
The estimated fair value of the foreign exchange and option contracts at June
30, 1999 was $21 million, representing the amount CMS Energy would pay upon
settlement.
EQUITY SECURITY PRICE RISK: CMS Energy and certain of its subsidiaries have
equity investments in companies in which they hold less than a 20 percent
interest. A hypothetical 10 percent adverse shift in equity security prices
would not have a material effect on CMS Energy's consolidated financial
position, results of operations or cash flows as of June 30, 1999.
For a discussion of accounting policies related to derivative transactions, see
Note 5.
CAPITAL RESOURCES AND LIQUIDITY
CASH POSITION, INVESTING AND FINANCING
CMS Energy's primary ongoing source of operating cash is dividends and
distributions from subsidiaries. For the first six months of 1999, Consumers
paid $173 million in common dividends and Enterprises paid $33 million in common
dividends to CMS Energy. In July 1999, Consumers declared a $35 million dividend
payable in August 1999 to CMS Energy. In June 1999, CMS Energy contributed $150
million of paid-in capital to Consumers. CMS Energy's consolidated operating
cash requirements are met by its operating and financing activities.
OPERATING ACTIVITIES: CMS Energy's consolidated net cash provided by operating
activities is derived mainly from the processing, storage, transportation and
sale of natural gas; the generation, transmission, distribution and sale of
electricity; and the sale of oil. Consolidated cash from operations totaled $440
million and $309 million for the first six months of 1999 and 1998,
respectively. The $131 million increase resulted from increased earnings and
higher depreciation, coupled with a $29 million net increase due to the absence
of the 1998 accounting change for property taxes and the increased 1998
provision for underrecoveries under the PPA. CMS Energy uses its operating cash
primarily to expand its international and domestic businesses, to maintain and
expand electric and gas systems of Consumers, to pay interest on and retire
portions of its long-term debt, and to pay dividends.
INVESTING ACTIVITIES: CMS Energy's consolidated net cash used in investing
activities totaled $2.441 billion and $467 million for the first six months of
1999 and 1998, respectively. The increase of $1.974 billion primarily reflects
the acquisition of Panhandle in March 1999. CMS Energy's expenditures during the
first six months of 1999 for its utility and international businesses were $197
million and $2.256 billion, respectively, compared to $181 million and $292
million, respectively, during the comparable period in 1998.
FINANCING ACTIVITIES: CMS Energy's net cash provided by financing activities
totaled $2.113 billion and $319 million for the first six months of 1999 and
1998, respectively. The increase of $1.794 billion in net cash provided by
financing activities resulted from an increase of $3.823 billion in the issuance
of new securities (see table below) and a decrease in the retirement of bonds
and other long-term debt ($428
CMS-7
<PAGE> 13
million), partially offset by an increase in the repayment of bank loans ($2.319
billion), and an increase in the retirement of existing securities ($194
million).
<TABLE>
<CAPTION>
In Millions
-----------
Distribution/ Principal
Month Issued Maturity Interest Rate Amount Use of Proceeds
------------ -------- ------------- --------- ---------------
CMS ENERGY
<S> <C> <C> <C> <C> <C>
GTNs Series E (1) (1) 7.0%(1) $ 114 General corporate purposes
Senior Notes January 2009 7.5% $ 480 Repay debt and general
corporate purposes
Senior Notes February 2004 6.75% $ 300 Repay debt and general
corporate purposes
Trust Preferred Securities June 2001 (2) $ 250 To refinance acquisition
of Panhandle
Senior Notes June 2011 8.0%(4) $ 250 To refinance acquisition of
Panhandle
Senior Notes June 2013 8.375%(5) $ 150 To refinance acquisition of
Panhandle
------
Subtotal $1,544
PANHANDLE
Senior Notes (3) March 2004 6.125% $ 300 To fund acquisition of
Panhandle
Senior Notes (3) March 2009 6.5% $ 200 To fund acquisition of
Panhandle
Senior Notes (3) March 2029 7.0% $ 300 To fund acquisition of
Panhandle
------
Subtotal $ 800
------
Total $2,344
======
</TABLE>
(1) GTNs are issued from time to time with varying maturity dates. The rate
shown herein is a weighted average interest rate.
(2) The Trust Preferred Securities pay quarterly distributions at a
floating rate of LIBOR plus 1.75 percent. For detailed information, see
Note 3, incorporated by reference herein.
CMS-8
<PAGE> 14
(3) These notes were privately placed by CMS Panhandle Holding on March 29,
1999, with an irrevocable and unconditional guarantee by Panhandle. On
June 15, 1999, CMS Panhandle Holding merged into Panhandle, at which
point the notes became direct obligations of Panhandle. In August 1999,
Panhandle initiated an exchange offer which will replace the $800
million of notes originally issued by CMS Panhandle Holding with
substantially identical SEC-registered notes. Panhandle expects to
complete the exchange offer by early September 1999.
(4) The interest rate may be reset in July 2001. For detailed information,
see Note 3, incorporated by reference herein.
(5) The interest rate may be reset in July 2003. For detailed information,
see Note 3, incorporated by reference herein.
For the first six months of 1999, CMS Energy paid $71 million in cash dividends
to holders of CMS Energy Common Stock and $6 million in cash dividends to
holders of Class G Common Stock. In July 1999, the Board of Directors declared a
quarterly dividend of $.365 per share on CMS Energy Common Stock and $.34 per
share on Class G Common Stock, payable in August 1999. This represents an
annualized increase in the dividend on CMS Energy Common Stock to $1.46 per
share from the previous $1.32 per share (a 10.6 percent increase), and an
annualized increase in the dividend on Class G Common Stock to $1.36 per share
from the previous $1.30 per share (a 4.6 percent increase).
OTHER INVESTING AND FINANCING MATTERS: At June 30, 1999, the book value per
share of CMS Energy Common Stock and Class G Common Stock was $20.96 and $12.01,
respectively.
At June 30, 1999, CMS Energy had an aggregate $1.8 billion in securities
registered for future issuance, which may include the issuance of up to $600
million of CMS Energy Common Stock during the next twelve months.
CMS Energy's Senior Credit Facilities consist of a $600 million three-year
revolving credit facility and a five-year $125 million term loan facility.
Additionally, CMS Energy has unsecured lines of credit and letters of credit in
an aggregate amount of $306 million. These credit facilities are available to
finance working capital requirements and to pay for capital expenditures between
long-term financings. At June 30, 1999, the total amount utilized under the
Senior Credit Facilities was $700 million, including $41 million of contingent
obligations, and under the unsecured lines of credit and letters of credit was
$75 million. For detailed information, see Note 3, incorporated by reference
herein.
In April 1999, Consumers redeemed all eight million outstanding shares of its
$2.08 preferred stock at $25.00 per share for a total of $200 million. Consumers
is authorized by FERC to issue securities and guarantees. Consumers has credit
facilities, lines of credit and a trade receivable sale program in place as
anticipated sources of funds needed to fulfill its currently expected capital
expenditures. For detailed information about these sources of funds, see Note 3.
In March 1999, CMS Energy acquired Panhandle from Duke Energy for a cash payment
of $1.9 billion and existing Panhandle debt of $300 million. The acquisition of
Panhandle initially was financed with a $600 million bridge loan negotiated with
domestic banks, proceeds from CMS Energy long-term debt, and approximately $800
million of notes privately placed by CMS Panhandle Holding. As of June 30, 1999,
the entire bridge loan had been repaid from proceeds of the sale of $250 million
of Trust Preferred Securities and $400 million of senior notes discussed below.
In July 1999, 7.25 million units of 8.75 percent Adjustable Convertible Trust
Securities were sold by CMS Energy and CMS Energy Trust II, a Delaware statutory
business trust established by CMS Energy. Each security consists of a Trust
Preferred Security of CMS Energy Trust II maturing in five years and a contract
for the purchase of CMS Energy Common Stock in three years at a conversion
premium up to 28
CMS-9
<PAGE> 15
percent or an effective price of $53 per common share. Net proceeds from the
sale totaled $291 million and were used to repay portions of various lines of
credit and the revolving credit facility.
CAPITAL EXPENDITURES
CMS Energy estimates that capital expenditures, including new lease commitments
and investments in partnerships and unconsolidated subsidiaries, will total $7.1
billion during 1999 through 2001. These estimates are prepared for planning
purposes and are subject to revision. This total includes approximately $2.2
billion for the acquisition of Panhandle as described above. A substantial
portion of the remaining capital expenditures is expected to be satisfied by
cash from operations. CMS Energy will continue to evaluate capital markets in
1999 as a potential source of financing its subsidiaries' investing activities.
CMS Energy estimates capital expenditures by business segment over the next
three years as follows:
<TABLE>
<CAPTION>
In Millions
--------------------------------------------
Years Ended December 31 1999 2000 2001
- ----------------------- ------- ------- -------
<S> <C> <C> <C>
Consumers electric operations (a) $ 375 $ 435 $ 520
Consumers gas operations (a) 125 130 130
Independent power production 525 591 293
Oil and gas exploration and production 135 160 210
Natural gas transmission and storage 2,540(b) 247 200
International energy distribution 120 150 150
Marketing, services and trading 5 12 12
Other 10 - -
------ ------ ------
$3,835 $1,725 $1,515
====== ====== ======
</TABLE>
(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) This amount includes approximately $2.2 billion for the acquisition of
Panhandle.
CMS Energy currently plans investments from 1999 to 2001: i) in oil and gas
exploration and production operations, primarily in North and South America,
offshore West Africa and North Africa; ii) in acquisitions and development of
electric generating plants in the United States, Latin America, Asia, Australia,
the Pacific Rim region, North Africa and the Middle East; iii) to continue
development of nonutility natural gas storage, gathering and pipeline operations
of CMS Gas Transmission in North and South America, Australia and Africa; iv) to
acquire, develop and expand international energy distribution businesses; and v)
to provide gas, electric, oil and coal marketing, risk management and energy
management services throughout the United States and eventually worldwide.
OUTLOOK
As the deregulation and privatization of the energy industry takes place in the
United States and in foreign countries, CMS Energy has positioned itself to be a
leading international diversified energy company acquiring, developing and
operating energy facilities and providing energy services in major world growth
markets. CMS Energy provides a complete range of international energy expertise
from energy production to consumption.
CMS-10
<PAGE> 16
INTERNATIONAL OPERATIONS OUTLOOK
CMS Energy will continue to grow internationally by investing in multiple
projects in several countries as well as by developing synergistic projects
across its lines of business. CMS Energy believes these integrated projects will
create more opportunities and greater value than individual investments. Also,
CMS Energy will achieve this growth through strategic partnering where
appropriate.
CMS Energy seeks to minimize operational and financial risks when operating
internationally by working with local partners, utilizing multilateral financing
institutions, procuring political risk insurance and hedging foreign currency
exposure where appropriate.
CONSUMERS' ELECTRIC UTILITY OUTLOOK
GROWTH: Consumers expects average annual growth of 2.3 percent per year in
electric system deliveries over the next five years, absent the impact of
restructuring on the industry and changed regulation in Michigan. Abnormal
weather, changing economic conditions, or the developing competitive market for
electricity may affect actual electric sales in future periods.
RESTRUCTURING: Consumers' retail electric business is affected by competition.
To meet its challenges, Consumers entered into multi-year contracts with some of
its largest industrial customers to serve certain facilities. The MPSC approved
these contracts as part of its phased introduction to competition. Some
customers have the option of terminating their contracts early.
FERC Orders 888 and 889, as amended, require utilities to provide direct access
to the interstate transmission grid for wholesale transactions. Consumers and
Detroit Edison disagree on the effect of the orders on the Michigan Electric
Power Coordination Center pool. Consumers proposes to maintain the benefits of
the pool through at least December 2000, while Detroit Edison contends that the
pool agreement should be terminated immediately. Among Consumers' alternatives
in the event of the pool being terminated would be joining an independent system
operator. FERC has indicated this preference for structuring the operations of
the electric transmission grid.
For material changes relating to the restructuring of the electric utility
industry, see Note 1, Corporate Structure and Basis of Presentation, "Utility
Regulation" and Note 2, Uncertainties, "Consumers' Electric Utility Matters
Electric Restructuring", incorporated by reference herein.
RATE MATTERS: In November 1997, ABATE filed a complaint with the MPSC alleging
that Consumers' earnings are in excess of its authorized rate of return and
seeking an immediate reduction in Consumers' electric rates. In May 1999, the
MPSC issued an order reversing an April 1999 decision of an ALJ which explicitly
restricted the scope of the current proceeding to a determination of whether
there should be a subsequent rate case proceeding to examine Consumers' electric
rates, however, the order confirmed that ABATE and intervenors bear the burden
of persuading the MPSC in this matter that a rate reduction is warranted. In the
absence of meeting that burden, Consumers' rates will remain unchanged. CMS
Energy is unable to predict the outcome of this matter.
CONSUMERS GAS GROUP OUTLOOK
GROWTH: Consumers currently anticipates gas deliveries, including gas customer
choice deliveries excluding transportation to the MCV Facility and off-system
deliveries, to grow at an average annual rate of between one and two percent
over the next five years based primarily on a steadily growing customer base.
Actual gas deliveries in future periods may be affected by abnormal weather,
alternative energy prices, changes in competitive conditions, particularly as a
result of industry restructuring, and the level
CMS-11
<PAGE> 17
of natural gas consumption. Consumers also offers a variety of energy-related
services to its customers focused upon appliance maintenance, home safety,
commodity choice and assistance to customers purchasing heating, ventilation and
air conditioning equipment.
RESTRUCTURING: In December 1997, the MPSC approved Consumers' application to
implement a statewide three-year experimental gas transportation program,
eventually allowing 300,000 residential, commercial and industrial retail gas
sales customers to choose their gas supplier. For further information regarding
restructuring of the Gas Business, see Note 2, Uncertainties, "Consumers Gas
Group Matters-Gas Restructuring," incorporated by reference herein.
PANHANDLE OUTLOOK
The market for transmission of natural gas to the Midwest is increasingly
competitive and may become more so in light of projects in progress to increase
Midwest transmission capacity for gas originating in Canada and the Rocky
Mountain region. As a result, there continues to be pressure on prices charged
by Panhandle and an increasing necessity to discount the prices charged from the
legal maximum. Panhandle continues to be selective in offering discounts to
maximize revenues from existing capacity and to advance projects that provide
expanded services to meet the specific needs of customers. As a result of
Panhandle's new cost basis resulting from the merger with CMS Panhandle Holding,
which includes costs not likely to be considered for regulatory recovery, in
addition to the level of discounting being experienced by Panhandle, it no
longer meets the criteria of SFAS 71 and has discontinued application of SFAS
71. The discontinuance is not expected to materially affect Panhandle's future
operating results.
REGULATORY MATTERS: For detailed information about Panhandle's regulatory
uncertainties see Note 2, Uncertainties - Panhandle Regulatory Matters,
incorporated by reference herein.
OTHER MATTERS
NEW ACCOUNTING RULES
Effective January 1, 1999, CMS Energy adopted EITF Issue 98-10, Accounting for
Energy Trading and Risk Management Activities, which requires mark-to-market
accounting for energy contracts entered into for trading purposes. Under
mark-to-market accounting, gains and losses resulting from changes in market
prices on contracts entered into for trading purposes are reflected in current
earnings. The after-tax mark-to-market adjustment resulting from the adoption of
EITF 98-10 has had an immaterial effect on CMS Energy's consolidated financial
position, results of operations and cash flows as of June 30, 1999. For energy
contracts that are hedges of non-trading activities, CMS Energy will continue to
use accrual accounting until it adopts SFAS 133, Accounting for Derivative
Instruments and Hedging Activities, which will be effective January 1, 2001. CMS
Energy is currently studying SFAS 133 and has not yet quantified the effects of
adoption on its financial statements and has not determined the timing of or
method of adoption.
YEAR 2000 COMPUTER MODIFICATIONS
CMS Energy uses software and related technologies throughout its domestic and
international businesses that the year 2000 date change could affect and, if
uncorrected, could cause CMS Energy to, among other things, delay issuance of
bills or reports, issue inaccurate bills, report inaccurate data, incur
generating plant outages, or create energy delivery uncertainties. In 1995, CMS
Energy established a Year 2000 Program to ensure the continued operation of its
businesses at the turn of the century. CMS Energy's efforts included dividing
the programs requiring modification between critical and noncritical programs.
CMS-12
<PAGE> 18
A formal methodology was established to identify critical business functions and
risk scenarios, to correct problems identified, to develop test plans and
expected results, and to test the corrections made. CMS Energy's Year 2000
Program involves an aggressive, comprehensive four-phase approach, including
impact analysis, remediation, compliance review, and monitoring/contingency
planning.
The impact analysis phase includes the analysis, inventory, prioritization and
remediation plan development for all technology essential to core business
processes. The remediation phase involves testing and implementation of
remediated technology. A mainframe test environment was established in 1997 and
a test environment for network servers and stand-alone personal computers was
established in mid-1998. All essential corporate business systems have been, or
will be, tested in these test environments. The compliance review phase includes
the assembling of compliance documentation for each technology component as
remediation efforts are completed, and additional verification testing of
essential technology where necessary. The monitoring/contingency planning phase
includes compliance monitoring to ensure that year 2000 problems are not
reintroduced into remediated technology, as well as the development of
contingency plans to address reasonably likely risk scenarios.
On March 29, 1999, CMS Energy acquired Panhandle. As part of CMS Energy's
acquisition due diligence, CMS Energy evaluated Panhandle's year 2000 compliance
program, which had been initiated in 1996. Management believes Panhandle is
devoting the necessary resources to achieve year 2000 readiness in a timely
manner. The status of Panhandle's Year 2000 Program by phase as of June 30,
1999, with target dates for completion and current percentage complete, are
included within the data presented for natural gas transmission.
STATE OF READINESS: CMS Energy is managing traditional Information Technology
(IT), which consists of essential business systems such as payroll, billing and
purchasing; and infrastructure, including mainframe, wide area network, local
area networks, personal computers, radios and telephone systems. CMS Energy is
also managing process control computers and embedded systems contained in
buildings, equipment and energy supply and delivery systems.
Essential goods and services for CMS Energy are electric fuel supply, gas fuel
supply, independent electric power supplies, facilities, electronic commerce,
telecommunications network carriers, financial institutions, purchasing vendors,
and software and hardware technology vendors. CMS Energy is addressing the
preparedness of these businesses and their risk through readiness assessment
questionnaires.
The status of CMS Energy's Year 2000 Program by phase, with target dates for
completion and current percentage complete based upon software and hardware
inventory counts as of June 30, 1999, is as follows:
<TABLE>
<CAPTION>
Monitoring/
Impact Compliance Contingency
Analysis Remediation Review Planning
-------- ----------- ------ --------
(a) (b) (a) (b) (a) (b) (a) (b)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Electric utility 3/98 100% 6/99 100% 6/99 100% 6/99 100%
Gas utility 3/98 100% 6/99 100% 6/99 100% 6/99 100%
Independent power production 6/99 99% 9/99 97% 9/99 74% 9/99 100%
Oil and gas 6/99 99% 9/99 94% 9/99 84% 9/99 10%
Natural gas transmission 6/99 100% 9/99 99% 9/99 98% 9/99 10%
Marketing, services and trading 6/99 100% 9/99 99% 9/99 17% 9/99 10%
Essential goods and services 6/99 56% N/A N/A (c)
</TABLE>
(a) Target date for completion.
CMS-13
<PAGE> 19
(b) Current percentage complete.
(c) Contingency planning for essential goods and services is incorporated into
contingency planning for each segment presented.
COST OF REMEDIATION: CMS Energy expenses spending for software modifications as
incurred, and capitalizes and amortizes the cost for new software and equipment
over its useful life. The total estimated cost of the Year 2000 Program is
approximately $30 million. Costs incurred through June 30, 1999 were
approximately $25 million. CMS Energy's annual Year 2000 Program costs have
represented approximately 2 percent to 10 percent of CMS Energy's annual IT
budget through 1998 and are expected to represent approximately 25 percent of
CMS Energy's annual IT budget in 1999. Year 2000 compliance work is being funded
primarily from operations. To date, the commitment of CMS Energy resources to
the year 2000 issue has not deferred any material IT projects which could have a
material adverse affect on CMS Energy's financial position, liquidity or results
of operations.
RISK ASSESSMENT: CMS Energy considers the most reasonably likely worst-case
scenarios to be: i) a lack of communications to dispatch crews to electric or
gas emergencies; ii) a lack of communications to generating units to balance
electrical load; iii) power shortages due to the lack of stability of the
electric grid; and iv) a failure of fuel suppliers to deliver fuel to generating
facilities. These scenarios could result in CMS Energy not being able to
generate or distribute enough energy to meet customer demand for a period of
time, which could result in lost sales and profits, as well as legal liability.
Year 2000 remediation and testing efforts are concentrating on these risk areas
and will continue through the end of 1999. Contingency plans are being revised
and executed to further mitigate the risks associated with these scenarios.
CONTINGENCY PLANS: Contingency planning efforts are currently underway for all
business systems and providers of essential goods and services. Extensive
contingency plans are already in place in many locations and are currently being
revised for reasonably likely worst-case scenarios related to year 2000 issues.
In many cases, Consumers already has arrangements with multiple vendors of
similar goods and services so that in the event that one cannot meet its
commitments, others may be able to. Current contingency plans provide for manual
dispatching of crews and manual coordination of electrical load balancing and
are being revised to provide for radio or satellite communications. Coordinated
contingency planning efforts are in progress with third parties to minimize risk
to electric generation, transmission and distribution systems.
EXPECTATIONS: CMS Energy does not expect that the cost of these modifications
will materially affect its financial position, liquidity, or results of
operations. There can be no guarantee, however, that these costs, plans or time
estimates will be achieved, and actual results could differ materially.
Because of the integrated nature of CMS Energy's business with other energy
companies, utilities, jointly owned facilities operated by other entities, and
business conducted with suppliers and large customers, CMS Energy may be
indirectly affected by year 2000 compliance complications.
FOREIGN CURRENCY TRANSLATION
CMS Energy adjusts common stockholders' equity to reflect foreign currency
translation adjustments for the operation of long-term investments in foreign
countries. The adjustment is primarily due to the exchange rate fluctuations
between the U.S. dollar and each of the Australian dollar, Brazilian real and
Argentine peso. From January 1, 1999 through June 30, 1999, the change in the
foreign currency translation adjustment totaled $10 million, net of after-tax
hedging proceeds. Although management currently believes that the currency
exchange rate fluctuations over the long term will not have a material adverse
affect on CMS Energy's financial position, liquidity or results of operations,
CMS Energy has
CMS-14
<PAGE> 20
hedged its exposure to the Australian dollar, the Brazilian real and the
Argentine peso. CMS Energy uses forward exchange contracts and collared options
to hedge certain receivables, payables, long-term debt and equity value relating
to foreign investments. The notional amount of the outstanding foreign exchange
contracts was $1.3 billion at June 30, 1999, which includes $515 million, $250
million and $440 million for Australian, Brazilian and Argentine foreign
exchange contracts, respectively. The estimated fair value of the foreign
exchange and option contracts at June 30, 1999 was $21 million, representing the
amount CMS Energy would pay upon settlement.
FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements as defined by the Private
Securities Litigation Reform Act of 1995. The words "anticipates," "believes,"
"estimates," "expects," "intends," and "plans," as well as variations of such
words and similar expressions, are intended to identify forward-looking
statements that involve risk and uncertainty. These statements are necessarily
based upon various assumptions involving judgements with respect to the future
including, among others, the ability to achieve operating synergies and revenue
enhancements; international, national, regional and local economic, competitive
and regulatory conditions and developments; capital and financial market
conditions, including currency exchange controls and interest rates; weather
conditions and other natural phenomena; adverse regulatory or legal decisions,
including environmental laws and regulations; the pace of deregulation of the
natural gas and electric industries; energy markets, including the timing and
extent of changes in commodity prices for oil, coal, natural gas, natural gas
liquids, electricity and certain related products; the timing and success of
business development efforts; potential disruption, expropriation or
interruption of facilities or operations due to accidents or political events;
nuclear power performance and regulation; technological developments in energy
production, delivery, and usage; the effect of changes in accounting policies;
year 2000 readiness; and other uncertainties, all of which are difficult to
predict and many of which are beyond the control of CMS Energy. Accordingly,
while CMS Energy believes that the assumed results are reasonable, there can be
no assurance that they will approximate actual results. CMS Energy disclaims any
obligation to update or revise forward-looking statements, whether as a result
of new information, future events or otherwise. Certain risk factors are
detailed from time to time in various public filings made by CMS Energy with the
SEC.
CMS-15
<PAGE> 21
CMS ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED TWELVE MONTHS ENDED
JUNE 30 1999 1998 1999 1998 1999 1998
- ------- ---- ---- ---- ---- ---- ----
In Millions, Except Per Share Amounts
<S> <C> <C> <C> <C> <C> <C>
OPERATING REVENUE
Electric utility $ 663 $ 649 $ 1,299 $ 1,261 $ 2,644 $ 2,558
Gas utility 175 170 681 599 1,133 1,085
Natural gas transmission, storage and processing 209 22 313 49 424 93
Independent power production 85 75 158 119 316 216
Oil and gas exploration and production 25 19 44 31 76 87
Marketing, services and trading 146 196 304 443 800 922
Other 50 1 92 4 133 9
----- ----- ----- ----- ----- -----
1,353 1,132 2,891 2,506 5,526 4,970
----- ----- ----- ----- ----- -----
OPERATING EXPENSES
Operation
Fuel for electric generation 106 85 199 164 394 334
Purchased power - related parties 139 144 278 290 562 592
Purchased and interchange power 103 160 206 244 546 394
Cost of gas sold 276 182 772 645 1,338 1,335
Other 250 176 457 358 862 729
----- ----- ----- ----- ----- -----
874 747 1,912 1,701 3,702 3,384
Maintenance 49 42 88 79 185 171
Depreciation, depletion and amortization 138 107 288 235 537 468
General taxes 60 48 126 106 235 208
----- ----- ----- ----- ----- -----
1,121 944 2,414 2,121 4,659 4,231
----- ----- ----- ----- ----- -----
PRETAX OPERATING INCOME (LOSS)
Electric utility 122 107 256 226 505 448
Gas utility 16 21 94 75 145 127
Independent power production 42 50 70 66 148 127
Natural gas transmission, storage and processing 48 9 51 22 62 33
Oil and gas exploration and production 6 7 8 9 5 32
Marketing, services and trading (4) 1 1 -- 5 (7)
Other 2 (7) (3) (13) (3) (21)
----- ----- ----- ----- ----- -----
232 188 477 385 867 739
----- ----- ----- ----- ----- -----
OTHER INCOME (DEDUCTIONS)
Accretion income 1 1 2 3 5 7
Accretion expense (4) (4) (7) (8) (15) (17)
Loss on MCV power purchases -- -- -- (37) -- (37)
Other, net 15 3 18 6 13 2
----- ----- ----- ----- ----- -----
12 -- 13 (36) 3 (45)
----- ----- ----- ----- ----- -----
FIXED CHARGES
Interest on long-term debt 134 78 230 154 394 300
Other interest 9 13 21 25 43 52
Capitalized interest (13) (7) (23) (11) (41) (18)
Preferred dividends -- 5 5 10 15 21
Preferred securities distributions 9 8 17 16 32 29
----- ----- ----- ----- ----- -----
139 97 250 194 443 384
----- ----- ----- ----- ----- -----
INCOME BEFORE INCOME TAXES 105 91 240 155 427 310
INCOME TAXES 30 26 67 45 122 81
_____ _____ _____ _____ _____ _____
CONSOLIDATED NET INCOME BEFORE CUMULATIVE EFFECT
OF CHANGE IN ACCOUNTING PRINCIPLE 75 65 173 110 305 229
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING FOR
PROPERTY TAXES, NET OF $23 TAX -- -- -- 43 -- 43
----- ----- ----- ----- ----- -----
CONSOLIDATED NET INCOME $ 75 $ 65 $ 173 $ 153 $ 305 $ 272
======= ======= ======= ======= ======= =======
</TABLE>
CMS-16
<PAGE> 22
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JUNE 30 1999 1998
- ------- ---- ----
<S> <C> <C> <C>
NET INCOME ATTRIBUTABLE TO COMMON STOCKS CMS ENERGY $ 74 $ 64
CLASS G $ 1 $ 1
-------- --------
AVERAGE COMMON SHARES OUTSTANDING CMS ENERGY 109 101
CLASS G 9 8
-------- --------
BASIC EARNINGS PER AVERAGE COMMON SHARE CMS ENERGY $ .68 $ .63
BEFORE CHANGE IN ACCOUNTING PRINCIPLE CLASS G $ .10 $ .12
-------- --------
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE, NET OF TAX, PER AVERAGE CMS ENERGY $ -- $ --
COMMON SHARE CLASS G $ -- $ --
-------- --------
BASIC EARNINGS PER AVERAGE COMMON SHARE CMS ENERGY $ .68 $ .63
CLASS G $ .10 $ .12
-------- --------
DILUTED EARNINGS PER AVERAGE COMMON SHARE CMS ENERGY $ .67 $ .62
CLASS G $ .10 $ .12
-------- --------
DIVIDENDS DECLARED PER COMMON SHARE CMS ENERGY $ .33 $ .30
CLASS G $ .325 $ .31
======== ========
<CAPTION>
SIX MONTHS ENDED TWELVE MONTHS ENDED
JUNE 30 1999 1998 1999 1998
- ------- ---- ---- ---- ----
In Millions, Except Per Share Amounts
<S> <C> <C> <C> <C>
NET INCOME ATTRIBUTABLE TO COMMON STOCKS $ 162 $ 143 $ 291 $ 258
$ 11 $ 10 $ 14 $ 14
-------- -------- -------- --------
AVERAGE COMMON SHARES OUTSTANDING 108 101 106 99
9 8 8 8
-------- -------- -------- --------
BASIC EARNINGS PER AVERAGE COMMON SHARE $ 1.50 $ 1.02 $ 2.75 $ 2.20
BEFORE CHANGE IN ACCOUNTING PRINCIPLE $ 1.28 $ .84 $ 1.65 $ 1.35
-------- -------- -------- --------
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE, NET OF TAX, PER AVERAGE $ -- $ .40 $ -- $ .40
COMMON SHARE $ -- $ .36 $ -- $ .36
-------- -------- -------- --------
BASIC EARNINGS PER AVERAGE COMMON SHARE $ 1.50 $ 1.42 $ 2.75 $ 2.60
$ 1.28 $ 1.20 $ 1.65 $ 1.71
-------- -------- -------- --------
DILUTED EARNINGS PER AVERAGE COMMON SHARE $ 1.48 $ 1.39 $ 2.71 $ 2.57
$ 1.28 $ 1.20 $ 1.65 $ 1.71
-------- -------- -------- --------
DIVIDENDS DECLARED PER COMMON SHARE $ .66 $ .60 $ 1.32 $ 1.20
$ .65 $ .62 $ 1.30 $ 1.24
======== ======== ======== ========
</TABLE>
THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
CMS-17
<PAGE> 23
CMS ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED TWELVE MONTHS ENDED
JUNE 30 1999 1998 1999 1998
- ------- ---- ---- ---- ----
In Millions
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Consolidated net income $ 173 $ 153 $ 305 $ 272
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation, depletion and amortization (includes nuclear
decommissioning of $24, $25, $51 and $50, respectively) 288 235 537 468
Loss on MCV power purchases -- 37 -- 37
Capital lease and debt discount amortization 26 29 48 51
Accretion expense 7 8 15 17
Accretion income - abandoned Midland project (2) (3) (5) (7)
Cumulative effect of accounting change -- (66) -- (66)
MCV power purchases (28) (32) (60) (64)
Undistributed earnings of related parties (46) (34) (107) (72)
Deferred income taxes and investment tax credit 43 84 13 92
Other 12 3 15 (1)
Changes in other assets and liabilities (33) (105) (114) (152)
------ ----- ------ -----
Net cash provided by operating activities 440 309 647 575
------ ----- ------ -----
CASH FLOWS FROM INVESTING ACTIVITIES
Aquisition of companies net of cash acquired (1,899) -- (1,899) --
Capital expenditures (excludes assets placed under capital lease) (291) (289) (1,297) (625)
Investments in partnerships and unconsolidated subsidiaries (258) (162) (441) (458)
Cost to retire property, net (39) (44) (78) (61)
Other 44 (40) 116 (66)
Proceeds from sale of property 2 68 (9) 104
------ ----- ------ -----
Net cash used in investing activities (2,441) (467) (3,608) (1,106)
------ ----- ------ -----
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from bank loans, notes and bonds 5,356 1,554 6,150 2,187
Issuance of common stock 51 30 290 224
Retirement of bonds and other long-term debt (48) (476) (233) (948)
Repayment of bank loans (2,893) (574) (2,893) (581)
Increase (decrease) in notes payable, net (64) (127) 10 9
Payment of common stock dividends (77) (66) (151) (129)
Payment of capital lease obligations (18) (22) (32) (45)
Retirement of preferred stock (194) -- (194) (120)
Retirement of common stock -- -- (3) (2)
Proceeds from preferred securities -- -- -- 113
------ ----- ------ -----
Net cash provided by financing activities 2,113 319 2,944 708
------ ----- ------ -----
NET INCREASE (DECREASE) IN CASH AND TEMPORARY CASH INVESTMENTS 112 161 (17) 177
CASH AND TEMPORARY CASH INVESTMENTS, BEGINNING OF PERIOD 101 69 230 53
------ ----- ------ -----
CASH AND TEMPORARY CASH INVESTMENTS, END OF PERIOD $ 213 $ 230 $ 213 $ 230
====== ===== ====== =====
</TABLE>
CMS-18
<PAGE> 24
OTHER CASH FLOW ACTIVITIES AND NON-CASH INVESTING AND FINANCING ACTIVITIES WERE:
<TABLE>
<S> <C> <C> <C> <C>
CASH TRANSACTIONS
Interest paid (net of amounts capitalized) $ 186 $ 160 $ 339 $ 318
Income taxes paid (net of refunds) 41 31 55 52
NON-CASH TRANSACTIONS
Nuclear fuel placed under capital lease $ (2) $ 15 $ 28 $ 16
Other assets placed under capital leases 7 7 7 10
Common stock issued to acquire companies -- -- 61 --
Assumption of debt 305 -- 393 --
===== ===== ===== =====
</TABLE>
All highly liquid investments with an original maturity of three months or less
are considered cash equivalents.
THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
CMS-19
<PAGE> 25
CMS ENERGY CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS JUNE 30 JUNE 30
1999 DECEMBER 31 1998
(UNAUDITED) 1998 (UNAUDITED)
----------- ----------- -----------
In Millions
<S> <C> <C> <C>
PLANT AND PROPERTY (AT COST)
Electric utility $ 6,832 $ 6,720 $ 6,579
Gas utility 2,394 2,360 2,307
Natural gas transmission, storage and processing 1,882 341 171
Oil and gas properties (successful efforts method) 706 670 588
Independent power production 575 518 125
Other 417 373 46
------- ------- -------
12,806 10,982 9,816
Less accumulated depreciation, depletion and amortization 5,917 5,213 4,975
------- ------- -------
6,889 5,769 4,841
Construction work-in-progress 363 271 307
------- ------- -------
7,252 6,040 5,148
------- ------- -------
INVESTMENTS
Independent power production 1,017 888 890
Natural gas transmission, storage and processing 498 494 305
International energy distribution 146 209 259
First Midland Limited Partnership 238 240 247
Midland Cogeneration Venture Limited Partnership 230 209 189
Other 35 33 36
------- ------- -------
2,164 2,073 1,926
------- ------- -------
CURRENT ASSETS
Cash and temporary cash investments at cost, which approximates market 213 101 230
Accounts receivable, notes receivable and accrued revenue, less
allowances of $15, $13 and $7, respectively 939 720 509
Inventories at average cost
Gas in underground storage 167 219 178
Materials and supplies 145 99 89
Generating plant fuel stock 32 43 35
Deferred income taxes 1 -- 2
Prepayments and other 197 225 214
------- ------- -------
1,694 1,407 1,257
------- ------- -------
NON-CURRENT ASSETS
Nuclear decommissioning trust funds 581 557 521
Unamortized nuclear costs 521 -- --
Postretirement benefits 358 373 389
Abandoned Midland project 60 71 83
Other 1,517 789 534
------- ------- -------
3,037 1,790 1,527
------- ------- -------
TOTAL ASSETS $14,147 $11,310 $ 9,858
======= ======= =======
</TABLE>
CMS-20
<PAGE> 26
<TABLE>
<CAPTION>
STOCKHOLDERS' INVESTMENT AND LIABILITIES JUNE 30 JUNE 30
1999 DECEMBER 31 1998
(UNAUDITED) 1998 (UNAUDITED)
----------- ----------- -----------
In Millions
<S> <C> <C> <C>
CAPITALIZATION
Common stockholders' equity $ 2,390 $ 2,216 $ 1,877
Preferred stock of subsidiary 44 238 238
Company-obligated mandatorily redeemable Trust Preferred Securities of:
Consumers Power Company Financing I (a) 100 100 100
Consumers Energy Company Financing II (a) 120 120 120
Company-obligated convertible Trust Preferred Securities of
CMS Energy Trust I (b) 173 173 173
Company-obligated Trust Preferred Securities of CMS RHINOS Trust(c) 250 -- --
Long-term debt 7,079 4,726 4,294
Non-current portion of capital leases 92 105 78
------- ------- -------
10,248 7,678 6,880
------- ------- -------
CURRENT LIABILITIES
Current portion of long-term debt and capital leases 306 293 126
Notes payable 264 328 255
Accounts payable 397 501 302
Accrued taxes 261 272 160
Accrued interest 106 65 56
Accounts payable - related parties 73 79 114
Power purchases 47 47 47
Accrued refunds 14 11 11
Other 363 211 178
------- ------- -------
1,831 1,807 1,249
------- ------- -------
NON-CURRENT LIABILITIES
Deferred income taxes 661 652 693
Postretirement benefits 488 489 504
Deferred investment tax credit 131 135 146
Regulatory liabilities for income taxes, net 115 87 59
Power purchases 101 121 146
Other 572 341 181
------- ------- -------
2,068 1,825 1,729
------- ------- -------
COMMITMENTS AND CONTINGENCIES (Notes 1 and 2)
TOTAL STOCKHOLDERS' INVESTMENT AND LIABILITIES $14,147 $11,310 $ 9,858
======= ======= =======
</TABLE>
(a) The primary asset of Consumers Power Company Financing I is $103 million
principal amount of 8.36 percent subordinated deferrable interest notes due 2015
from Consumers. The primary asset of Consumers Energy Company Financing II is
$124 million principal amount of 8.20 percent subordinated deferrable interest
notes due 2027 from Consumers. For further discussion, see Note 3 to the
Consolidated Financial Statements.
(b) As described in Note 3, the primary asset of CMS Energy Trust I is $178
million principal amount of 7.75 percent convertible subordinated debentures due
2027 from CMS Energy.
(c) As described in Note 3, the primary asset of CMS RHINOS Trust is $258
million principal amount of LIBOR plus 1.75 percent subordinated debentures due
September 2001 from CMS Energy.
THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
CMS-21
<PAGE> 27
CMS ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS' EQUITY
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED TWELVE MONTHS ENDED
JUNE 30 1999 1998 1999 1998 1999 1998
- ------- ---- ---- ---- ---- ---- ----
In Millions
<S> <C> <C> <C> <C> <C> <C>
COMMON STOCK
At beginning and end of period $ 1 $ 1 $ 1 $ 1 $ 1 $ 1
------- ------- ------- ------- ------- -------
OTHER PAID-IN CAPITAL
At beginning of period 2,619 2,287 2,594 2,267 2,297 2,075
Redemption of affiliate's preferred stock -- -- (2) -- (2) --
Common stock reacquired -- -- -- -- (3) (2)
Common stock issued:
CMS Energy 21 9 47 27 344 216
Class G 3 1 4 3 7 8
------- ------- ------- ------- ------- -------
At end of period 2,643 2,297 2,643 2,297 2,643 2,297
------- ------- ------- ------- ------- -------
REVALUATION CAPITAL
At beginning of period (13) (3) (9) (6) (6) (6)
Change in unrealized investment-gain (loss) (a) 23 (3) 19 -- 16 --
------- ------- ------- ------- ------- -------
At end of period 10 (6) 10 (6) 10 (6)
------- ------- ------- ------- ------- -------
FOREIGN CURRENCY TRANSLATION
At beginning of period (141) (94) (136) (96) (123) --
Change in foreign currency translation (a) 15 (29) 10 (27) (3) (123)
------- ------- ------- ------- ------- -------
At end of period (126) (123) (126) (123) (126) (123)
------- ------- ------- ------- ------- -------
RETAINED EARNINGS (DEFICIT)
At beginning of period (174) (324) (234) (379) (292) (435)
Consolidated net income (a) 75 65 173 153 305 272
Common stock dividends declared:
CMS Energy (36) (31) (71) (61) (139) (118)
Class G (3) (2) (6) (5) (12) (11)
------- ------- ------- ------- ------- -------
At end of period (138) (292) (138) (292) (138) (292)
------- ------- ------- ------- ------- -------
TOTAL COMMON STOCKHOLDERS' EQUITY $ 2,390 $ 1,877 $ 2,390 $ 1,877 $ 2,390 $ 1,877
======= ======= ======= ======= ======= =======
(a) DISCLOSURE OF COMPREHENSIVE INCOME:
Revaluation capital
Unrealized investment-gain (loss),
net of tax of $(12), $2, $(10),
$-, $(8) and $-, respectively $ 23 $ (3) $ 19 $ -- $ 16 $ --
Foreign currency translation 15 (29) 10 (27) (3) (123)
Consolidated net income 75 65 173 153 305 272
------- ------- ------- ------- ------- -------
Total Consolidated Comprehensive Income $ 113 $ 33 $ 202 $ 126 $ 318 $ 149
======= ======= ======= ======= ======= =======
</TABLE>
THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
CMS-22
<PAGE> 28
CMS ENERGY CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
These Condensed Notes and their related Consolidated Financial Statements should
be read along with the Consolidated Financial Statements and Notes contained in
the 1998 Form 10-K of CMS Energy, which includes the Reports of Independent
Public Accountants. Certain prior year amounts have been reclassified to conform
with the presentation in the current year. In the opinion of management, the
unaudited information herein reflects all adjustments necessary to assure the
fair presentation of financial position, results of operations and cash flows
for the periods presented.
1: CORPORATE STRUCTURE AND BASIS OF PRESENTATION
CORPORATE STRUCTURE AND BASIS OF PRESENTATION
CMS Energy Corporation is the parent holding company of Consumers and
Enterprises. Consumers, a combination electric and gas utility company serving
the Lower Peninsula of Michigan, is the principal subsidiary of CMS Energy.
Enterprises, through subsidiaries, is engaged in several domestic and
international energy-related businesses including: natural gas transmission,
interstate transportation, storage and processing; independent power production;
oil and gas exploration and production; energy marketing, services and trading;
and international energy distribution. In March 1999, CMS Energy completed the
acquisition of Panhandle from Duke Energy, as discussed further below. Panhandle
is primarily engaged in the interstate transportation, storage and processing of
natural gas.
The consolidated financial statements include CMS Energy, Consumers and
Enterprises and their majority owned subsidiaries. The financial statements are
prepared in conformity with generally accepted accounting principles and use
management's estimates where appropriate. Affiliated companies (where CMS Energy
has more than 20 percent but less than a majority ownership interest) are
accounted for by the equity method. For the three, six and twelve-month periods
ended June 30, 1999, undistributed equity earnings were $30 million, $46 million
and $107 million, respectively, compared to $17 million, $34 million and $72
million for the three, six and twelve-month periods ended June 30, 1998.
Foreign currency translation adjustments relating to the operation of CMS
Energy's long-term investments in foreign countries are included in common
stockholders' equity. From January 1, 1999 through June 30, 1999, the change in
the foreign currency translation adjustment totaled $10 million, net of
after-tax hedging proceeds.
NEW ACCOUNTING RULES
In 1999, CMS Energy implemented SOP 98-1, Accounting for the Costs of Computer
Software Developed for Internal Use, and SOP 98-5, Reporting on the Costs of
Start-Up Activities. Application of these standards has not had a material
effect on CMS Energy's financial position, liquidity, or results of operations.
Effective January 1, 1999, CMS Energy adopted EITF Issue 98-10, Accounting for
Energy Trading and Risk Management Activities, which requires mark-to-market
accounting for energy contracts entered into for trading purposes. Under
mark-to-market accounting, gains and losses resulting from
CMS-23
<PAGE> 29
changes in market prices on contracts entered into for trading purposes are
reflected in current earnings. The after-tax mark-to-market adjustment resulting
from the adoption of EITF 98-10 had an immaterial effect on CMS Energy's
consolidated financial position, results of operations and cash flows as of June
30, 1999. For energy contracts that are hedges of non-trading activities, CMS
Energy will continue to use accrual accounting until it adopts SFAS 133,
Accounting for Derivative Instruments and Hedging Activities, which will be
effective January 1, 2001.
OIL AND GAS PROPERTIES
CMS Oil and Gas follows the successful efforts method of accounting for its
investments in oil and gas properties. CMS Oil and Gas capitalizes the costs of
property acquisitions, successful exploratory wells, all development costs, and
support equipment and facilities when incurred. It expenses unsuccessful
exploratory wells when they are determined to be non-productive. CMS Oil and Gas
also charges to expense production costs, overhead, and all exploration costs
other than exploratory drilling as incurred. Depreciation, depletion and
amortization of proved oil and gas properties is determined on a field-by-field
basis using the units-of-production method over the life of the remaining proved
reserves.
UTILITY REGULATION
Consumers accounts for the effects of regulation based on a regulated utility
accounting standard (SFAS 71). As a result, the actions of regulators affect
when revenues, expenses, assets and liabilities are recognized.
In March 1999, Consumers received MPSC electric restructuring orders which,
among other things, identified the terms and timing for implementing electric
restructuring in Michigan. Consistent with these orders, Consumers expects to
implement retail open access for its electric customers in September 1999, and
therefore, Consumers discontinued application of SFAS 71 for the energy supply
portion of its business in the first quarter of 1999. Discontinuation of SFAS 71
for the energy supply portion of Consumers' business resulted in Consumers
reducing the carrying value of its Palisades plant-related assets by
approximately $535 million and established a regulatory asset for a
corresponding amount. The regulatory asset is collectible as part of the
Transition Costs which are recoverable through the regulated transmission and
distribution portion of Consumers' business as approved by an MPSC order in
1998. This order also allowed Consumers to recover any energy supply-related
regulatory assets, plus a return on any unamortized balance of those assets,
from its transmission and distribution customers. According to current
accounting standards, Consumers can continue to carry its energy supply-related
regulatory assets or liabilities for the part of the business subject to
regulatory change if legislation or an MPSC rate order allows the collection of
cash flows, to recover specific costs or to settle obligations, from its
regulated transmission and distribution customers. At June 30, 1999, Consumers
had a net investment in energy supply facilities of $924 million included in
electric plant and property.
ACQUISITION
In March 1999, CMS Energy completed the acquisition of Panhandle from Duke
Energy for a cash payment of $1.9 billion and existing Panhandle debt of $300
million. The acquisition has been accounted for using the purchase method of
accounting. Accordingly, the purchase price has been preliminarily allocated to
the assets purchased and the liabilities assumed based upon their fair values at
the date of acquisition, with the tentative excess purchase price of
approximately $700 million classified as goodwill to be amortized on a
straight-line basis over a period of forty years.
CMS-24
<PAGE> 30
The following unaudited pro forma amounts for operating revenue, consolidated
net income, basic earnings per share, diluted earnings per share and total
assets, as if the acquisition had occurred on January 1, 1998, illustrate the
effects of: (1) various restructuring, realignment, and elimination of
activities between Panhandle and Duke Energy prior to the closing of the
acquisition by CMS Energy; (2) the adjustments resulting from the acquisition by
CMS Energy; and (3) financing transactions which include the public issuance of
$800 million of senior notes by Panhandle, $850 million of senior notes by CMS
Energy, and the private sale of $250 million of Trust Preferred Securities by
CMS Energy. The Trust Preferred Securities and $350 million of the CMS Energy
senior notes replace the initial pro forma assumption that included the issuance
of $600 million of CMS Energy Common Stock. The differences in the unaudited pro
forma amounts presented below as compared to those obtained utilizing the
issuance of $600 million of CMS Energy Common Stock assumption are an increase
in basic and diluted earnings per share of $.04 and a decrease in consolidated
net income of approximately $31 million.
<TABLE>
<CAPTION>
In Millions, except per share amounts
-------------------------------------------------------------------------------------
Three Months Six Months Year ended
Ended June 30, Ended June 30, December 31,
1999 1998 1999 1998 1998
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Operating revenue $ 1,353 $ 1,224 $ 3,004 $ 2,719 $ 5,566
Consolidated net income 73 61 184 165 289
Basic earnings per share .66 .59 1.59 1.53 2.70
Diluted earnings per share .66 .59 1.57 1.51 2.67
--------- --------- -------- --------- ---------
</TABLE>
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998 1998
------- ------- -------
<S> <C> <C> <C>
Total assets $14,147 $12,323 $13,784
------- ------- -------
</TABLE>
2: UNCERTAINTIES
CONSUMERS' ELECTRIC UTILITY CONTINGENCIES
ELECTRIC ENVIRONMENTAL MATTERS: The Clean Air Act limits emissions of sulfur
dioxide and nitrogen oxides and requires emissions and air quality monitoring.
Consumers currently operates within these limits and meets current emission
requirements. The Clean Air Act requires the EPA to periodically review the
effectiveness of the national air quality standards in preventing adverse health
effects, and in 1997 the EPA revised these standards. The anticipated effect of
these revisions was to impose further limitations on nitrogen oxide and small
particulate-related emissions. A United States Court of Appeals recently ruled
however, that the EPA's revision of the standards was an unconstitutional
delegation of legislative power. As a result, the standards will not be
implemented unless the issue relating to the unconstitutional delegation of
legislative power is resolved. The EPA has requested a rehearing of this ruling.
In September 1998, based in part upon the 1997 standards, the EPA Administrator
signed final regulations requiring the State of Michigan to further limit
nitrogen oxide emissions. Fossil-fueled emitters, such as
CMS-25
<PAGE> 31
Consumers' generating units, anticipated a reduction in nitrogen oxide emissions
by 2003 to only 32 percent of levels allowed for the year 2000. The State of
Michigan had one year to submit an implementation plan. The State of Michigan
filed a lawsuit objecting to the extent of the required emission reductions and
requesting an extension of the submission date. The United States Court of
Appeals recently granted an indefinite stay of the submission date for the
implementation plan. Based upon the recent court rulings, it is unlikely that
the State of Michigan will establish Consumers' nitrogen oxide emissions
reduction target until late 1999. Until this target is established, the
estimated cost of compliance discussed below is subject to revision. If a court
were to order the EPA to adopt the State of Michigan's proposed positions then
compliance costs could be less than the preliminary estimated amounts.
The preliminary estimate of capital expenditures to reduce nitrogen
oxide-related emissions for Consumers' fossil-fueled generating units is
approximately $290 million. Consumers anticipates that these capital
expenditures will be incurred between 1999 and 2004. Consumers may need an
equivalent amount of capital expenditures, plus $10 million per year for
operation and maintenance costs, to comply with the new small particulate
standards.
Consumers' coal-fueled electric generating units burn low-sulfur coal and are
currently operating at or near the sulfur dioxide emission limits that will be
effective in the year 2000. During the past few years, in order to comply with
the Clean Air Act, Consumers incurred capital expenditures totaling $55 million
to install equipment at certain generating units. Consumers estimates an
additional $16 million of capital expenditures for ongoing and proposed
modifications at the remaining coal-fueled units to meet year 2000 requirements.
Management believes that these expenditures will not materially affect
Consumers' annual operating costs.
Under the Michigan Natural Resources and Environmental Protection Act, Consumers
expects that it will ultimately incur investigation and remedial action costs at
a number of sites. Nevertheless, it believes that these costs are properly
recoverable in rates under current ratemaking policies.
Consumers is a so-called potentially responsible party at several contaminated
sites administered under Superfund. Superfund liability is joint and several;
along with Consumers, many other creditworthy, potentially responsible parties
with substantial assets cooperate with respect to the individual sites. Based
upon past negotiations, Consumers estimates that its share of the total
liability for the known Superfund sites will be between $2 million and $9
million. At June 30, 1999, Consumers has accrued the minimum amount of the range
for its estimated Superfund liability.
While decommissioning Big Rock, Consumers found that some areas of the plant
have coatings that contain both metals and PCBs. The cost of removal and
disposal of these materials is currently unknown. There may be some radioactive
portion of these materials, which no facility in the United States will
currently accept. The cost of removal and disposal will constitute part of the
cost to decommission the plant and will be paid from the decommissioning fund.
Consumers is studying the extent of the contamination and reviewing options.
ANTITRUST: In October 1997, two independent power producers sued Consumers in a
federal court. The suit alleged antitrust violations relating to contracts,
which Consumers entered into with some of its customers and claims relating to
power facilities. On March 31, 1999, the court issued an opinion and order
granting Consumers' motion for summary judgment, resulting in the dismissal of
the case. The plaintiffs have appealed this decision.
CMS-26
<PAGE> 32
CONSUMERS' ELECTRIC UTILITY RATE MATTERS
ELECTRIC PROCEEDINGS: In 1996, the MPSC issued a final order that authorized
Consumers to recover costs associated with the purchase of the additional 325 MW
of MCV Facility capacity (see "Power Purchases from the MCV Partnership" in this
Note) and to recover its nuclear plant investment by increasing prospective
annual nuclear plant depreciation expense by $18 million, with a corresponding
decrease in fossil-fueled generating plant depreciation expense. It also
established an experimental direct-access program. Customers having a maximum
demand of 2 MW or greater are eligible to purchase generation services directly
from any eligible third-party power supplier and Consumers will transmit the
power for a fee. The direct-access program is limited to 134 MW of load. In
accordance with the MPSC order, Consumers held a lottery in April 1997 to select
the customers to participate in the direct-access program. Subsequently, direct
access for a portion of this 134 MW began in late 1997. The program was
substantially filled by the end of March 1999. The Attorney General, ABATE, the
MCV Partnership and other parties filed appeals with the Court of Appeals
challenging the MPSC's 1996 order. In August 1999, the Court of Appeals
affirmed the MPSC's 1996 order in all respects.
In January 1998, the Court of Appeals affirmed an MPSC conclusion that the MPSC
has statutory authority to authorize an experimental electric retail wheeling
program. In June 1999, the Michigan Supreme Court reversed the Court of Appeals
and vacated the 1995 MPSC retail wheeling orders. The Court found that the MPSC
does not have the statutory authority to order a mandatory retail wheeling
program.
ELECTRIC RESTRUCTURING: As part of ongoing proceedings relating to the
restructuring of the electric utility industry in Michigan, the MPSC in June
1997 issued an order proposing that beginning January 1, 1998 Consumers transmit
and distribute energy on behalf of competing power suppliers to retail
customers. Further restructuring orders issued in late 1997 and early 1998
provide for: 1) recovery of estimated Transition Costs of $1.755 billion through
a charge to all customers purchasing their power from other sources until the
end of the transition period in 2007, subject to an adjustment through a true-up
mechanism; 2) commencement of the phase-in of retail open access in 1998; 3)
suspension of the PSCR clause as discussed below; and 4) all customers to choose
their power suppliers on January 1, 2002. The recovery of costs of implementing
a retail open access program, preliminarily estimated at an additional $200
million, would be reviewed for prudence and recovered via a charge approved by
the MPSC. Nuclear decommissioning costs will also continue to be collected
through a separate surcharge to all customers.
In June 1998, Consumers submitted its plan for implementing retail open access
to the MPSC. The primary issues addressed in the plan are: 1) the implementation
schedule; 2) the retail open access service options available to customers and
suppliers; 3) the process and requirements for customers and others to obtain
retail open access service; and 4) the roles and responsibilities for Consumers,
customers and suppliers. In the plan, Consumers proposed to phase in 750 MW of
retail customer open access load over the 1998-2001 period. In March 1999,
Consumers received MPSC electric restructuring orders, which generally supported
Consumers' implementation plan. Consumers is in the process of implementing
electric customer retail open access.
There are numerous appeals pending at the Court of Appeals relating to the
MPSC's restructuring orders, including appeals by Consumers. Because of the June
1999 Michigan Supreme Court decision described above in "Electric Proceedings",
Consumers believes that the MPSC lacks statutory authority to mandate industry
restructuring, and its appeal generally is limited to this jurisdictional issue.
Subsequent to the June 1999 Michigan Supreme Court decision, the MPSC requested
comments from any interested party concerning the effect of the Supreme Court's
decision on these matters. The MPSC is expected to issue an order addressing
this subject in the third quarter 1999. CMS Energy cannot predict the outcome of
CMS-27
<PAGE> 33
electric restructuring on it's financial position, liquidity, or results of
operations.
As a result of a 1998 MPSC order in connection with the electric restructuring
program, the PSCR process was suspended. Under this program, customers buying
electricity from Consumers as traditional customers will not have their rates
adjusted to reflect the actual costs of fuel and purchased and interchanged
power during the 1998-2001 period. In prior years, any change in power supply
costs was passed through to such customers. In order to reduce the risk of high
energy prices during peak demand periods, Consumers has agreements to purchase,
in 1999, approximately $19 million of options to insure a reliable source of
capacity during the months of June through September 1999. Consumers is planning
to have sufficient generation and purchased capacity for approximately a 16
percent reserve margin in order to provide reliable service to its electric
service customers and to protect itself against unscheduled plant outages. Under
certain circumstances, the cost of purchasing capacity and energy on the spot
market could be substantial.
In June 1999, Consumers and four other electric utility companies sought
approval from the FERC to form the Alliance Regional Transmission Organization.
The proposed structure will provide for the creation of an independent
transmission entity that would control, operate and own transmission facilities
of one or more of the member companies, and would control and operate - but not
own - the transmission facilities of other companies. The proposal is structured
to give the member companies the flexibility to maintain or divest ownership of
their transmission facilities while ensuring independent operation of the
regional transmission system. The member companies have requested the FERC to
approve the proposed request expeditiously. Consumers is uncertain of the
outcome of this matter.
OTHER CONSUMERS' ELECTRIC UTILITY UNCERTAINTIES
THE MIDLAND COGENERATION VENTURE: The MCV Partnership, which leases and operates
the MCV Facility, contracted to sell electricity to Consumers for a 35-year
period beginning in 1990 and to supply electricity and steam to Dow. Consumers,
through two wholly owned subsidiaries, holds the following assets related to the
MCV Partnership and MCV Facility: 1) CMS Midland owns a 49 percent general
partnership interest in the MCV Partnership; and 2) CMS Holdings holds, through
FMLP, a 35 percent lessor interest in the MCV Facility.
Summarized Statements of Income for CMS Midland and CMS Holdings-
<TABLE>
<CAPTION>
In Millions
--------------------------------------------
Six Months Ended Twelve Months Ended
June 30 1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Pretax operating income $26 $23 $51 $51
Income taxes and other 8 7 16 16
--- --- --- ---
Net income $18 $16 $35 $35
=== === === ===
</TABLE>
Power Purchases from the MCV Partnership- Consumers' annual obligation to
purchase capacity from the MCV Partnership is 1,240 MW through the termination
of the PPA in 2025. The PPA provides that Consumers is to pay, based on the MCV
Facility's availability, a levelized average capacity charge of 3.77 cents per
kWh, a fixed energy charge, and a variable energy charge based primarily on
Consumers'
CMS-28
<PAGE> 34
average cost of coal consumed for all kWh delivered. Since January 1, 1993,
Consumers has been permitted by the MPSC to recover capacity charges averaging
3.62 cents per kWh for 915 MW, plus a substantial portion of the fixed and
variable energy charges. Since January 1, 1996, Consumers also has been
permitted 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. Because
the MPSC has already approved recovery of this capacity, Consumers expects to
recover these increases through an adjustment to the currently frozen PSCR
level, which is currently under consideration by the MPSC. After September 2007,
under the terms of the PPA, Consumers will only be required to pay the MCV
Partnership capacity and energy charges that the MPSC has authorized for
recovery from electric customers.
In March 1999, Consumers signed a long-term power sales agreement to supply PECO
with electric generating capacity under the PPA until September 2007. After a
three-year transition period during which 100 to 150 MW will be sold to PECO,
beginning in 2002 Consumers will sell all 1,240 MW of PPA capacity and
associated energy to PECO. In March 1999, Consumers also filed an application
with the MPSC for accounting and ratemaking approvals related to the
transaction. In an order issued on April 30, 1999, the MPSC conditionally
approved the requests for accounting and rate-making treatment to the extent
that customer rates are not increased from their level absent the agreement and
as modified by the order. Consumers and other parties have filed petitions for
clarification and rehearing which request that the MPSC clarify certain aspects
of its order. The MPSC has not yet acted on this request.
Consumers recognized a loss in 1992 for the present value of the estimated
future underrecoveries of power costs under the PPA based on MPSC recovery
orders. At June 30, 1999 and June 30, 1998, the remaining after-tax present
value of the estimated future PPA liability associated with the 1992 loss
totaled $96 million and $126 million, respectively. At June 30, 1999, the
undiscounted after-tax amount associated with this liability totaled $153
million. These after-tax cash underrecoveries are based on the assumption that
the MCV Facility would be available to generate electricity 91.5 percent of the
time over its expected life. Historically the MCV Facility has operated above
the 91.5 percent level. Accordingly, in 1998, Consumers increased its PPA
liability by $37 million. Because the MCV Facility operated above the 91.5
percent level in 1998 and thus far in 1999, Consumers has an accumulated
unrecovered after-tax shortfall of $17 million as of June 30, 1999. Consumers
believes that this shortfall will be resolved as part of the electric
restructuring effort. If the MCV Facility generates electricity at the 91.5
percent level during the next five years, Consumers' after-tax cash
underrecoveries associated with the PPA would be as follows.
<TABLE>
<CAPTION>
In Millions
---------------------------------------------------------------
1999 2000 2001 2002 2003
----- ----- ----- ----- ----
<S> <C> <C> <C> <C> <C>
Estimated cash underrecoveries, net of tax $ 29 $ 21 $ 20 $ 19 $18
===== ===== ===== ===== ===
</TABLE>
If the MCV Facility operates at availability levels above management's 91.5
percent estimate made in 1992 for the remainder of the PPA, Consumers will need
to recognize additional losses for future underrecoveries. In March 1999,
Consumers and the MCV Partnership reached an agreement effective January 1, 1999
that will cap availability payments to the MCV Partnership at 98.5 percent. For
further discussion on the impact of the frozen PSCR, see "Electric
Restructuring" in this Note. Management is evaluating the adequacy of the
contract loss liability considering actual MCV Facility operations and any other
relevant circumstances.
CMS-29
<PAGE> 35
In February 1998, the MCV Partnership filed a claim of appeal from the January
1998 and February 1998 MPSC orders in the electric utility industry
restructuring. At the same time, the MCV Partnership filed suit in the U.S.
District Court seeking a declaration that the MPSC's failure to provide
Consumers and the MCV Partnership a certain source of recovery of capacity
payments after 2007 deprived the MCV Partnership of its rights under the Public
Utilities Regulatory Policies Act of 1978. In July 1999, the U.S. District Court
issued an order granting the MCV Partnership's motion for summary judgment. The
order permanently prohibits two of the incumbent commissioners from enforcing
the restructuring orders in any manner which denies any utility the ability to
recover amounts paid to qualifying facilities such as the MCV Facility or which
precludes the MCV Partnership from recovering the avoided cost rate.
NUCLEAR MATTERS: In January 1997, the NRC issued its Systematic Assessment of
Licensee Performance report for Palisades. The report rated all areas as good.
The NRC suspended this same assessment process for all licensees in 1998. Until
such time as the NRC completes its review of processes for assessing performance
at nuclear power plants, the Plant Performance Review is being used to provide
an assessment of licensee performance. Palisades received its performance review
dated March 26, 1999 in which the NRC stated that the overall performance at
Palisades was acceptable.
Palisades' temporary on-site storage pool for spent nuclear fuel is at capacity.
Consequently, Consumers is using NRC-approved steel and concrete vaults,
commonly known as "dry casks", for temporary on-site storage. As of June 30,
1999 Consumers had loaded 14 dry storage casks with spent nuclear fuel at
Palisades and plans to load four additional casks in 1999 pending approval by
the NRC. In June 1997, the NRC approved Consumers' process for unloading spent
fuel from a cask previously discovered to have minor weld flaws. Consumers
intends to transfer the spent fuel to a new transportable cask when one is
available.
Consumers maintains insurance against property damage, debris removal, personal
injury liability and other risks that are present at its nuclear generating
facilities. Consumers also maintains coverage for replacement power costs during
prolonged accidental outages at Palisades. Insurance would not cover such costs
during the first 17 weeks of any outage, but would cover most of such costs
during the next 58 weeks of the outage, followed by reduced coverage to 80
percent for two additional years. If certain covered losses occur at its own or
other nuclear plants similarly insured, Consumers could be required to pay
maximum assessments of $15 million in any one year to NEIL; $88 million per
occurrence under the nuclear liability secondary financial protection program,
limited to $10 million per occurrence in any year; and $6 million if nuclear
workers claim bodily injury from radiation exposure. Consumers considers the
possibility of these assessments to be remote.
The NRC requires Consumers to make certain calculations and report on the
continuing ability of the Palisades reactor vessel to withstand postulated
pressurized thermal shock events during its remaining license life, considering
the embrittlement of reactor materials. In December 1996, Consumers received an
interim Safety Evaluation Report from the NRC indicating that the reactor vessel
can be safely operated through 2003 before reaching the NRC's screening criteria
for reactor embrittlement. Consumers believes that with fuel management designed
to minimize embrittlement, it can operate Palisades to the end of its license
life in the year 2007 without annealing the reactor vessel. Nevertheless,
Consumers will continue to monitor the matter.
NUCLEAR PLANT DECOMMISSIONING: Consumers collected $51 million in 1998 from its
electric customers for decommissioning of its two nuclear plants. Amounts
collected from electric retail customers and deposited in trusts (including
trust earnings) are credited to accumulated depreciation. On March 22, 1999,
CMS-30
<PAGE> 36
Consumers received a decommissioning order from the MPSC that approved estimated
decommissioning costs for Big Rock and Palisades of $304 million and $541
million (in 1998 dollars), respectively. Consumers' site-specific
decommissioning cost estimates for Big Rock and Palisades assume that each plant
site will eventually be restored to conform to the adjacent landscape, and all
contaminated equipment will be disassembled and disposed of in a licensed burial
facility. The MPSC order also reduced annual decommissioning surcharges by $4
million a year and required Consumers to file revised decommissioning surcharges
for Palisades that incorporate a gradual reduction in the decommissioning
trust's equity investments following the plant's retirement. On April 21, 1999,
Consumers filed with the MPSC a revised decommissioning surcharge for Palisades
and anticipates a revised MPSC order in early 2000. If approved, the annual
decommissioning surcharges for Palisades would be reduced by an additional $4
million a year. After retirement of Palisades, Consumers plans to maintain the
facility in protective storage if radioactive waste disposal facilities are not
available. Consumers will incur most of the Palisades decommissioning costs
after the plant's NRC operating license expires. When the Palisades' NRC license
expires in 2007, the trust funds are currently estimated to have accumulated
$677 million, assuming current surcharge levels. Consumers estimates that at the
time Palisades is fully decommissioned in the year 2046, the trust funds will
have provided $1.9 billion, including trust earnings, over this decommissioning
period. As of June 30, 1999, Consumers had an investment in nuclear
decommissioning trust funds of $400 million for Palisades and $181 million for
Big Rock.
Big Rock was closed permanently in 1997 because management determined that it
would be uneconomical to operate in an increasingly competitive environment. The
plant was originally scheduled to close on May 31, 2000, at the end of the
plant's operating license. The MPSC has allowed Consumers to continue collecting
decommissioning surcharges through December 31, 2000. Plant decommissioning
began in 1997 and it may take five to ten years to return the site to its
original condition. For the first six months of 1999, Consumers spent $24
million for the decommissioning and withdrew $21 million from the Big Rock
nuclear decommissioning trust fund. In total, Consumers has spent $99 million
for the decommissioning and withdrew $90 million from the Big Rock nuclear
decommissioning trust fund. These activities had no impact on net income.
CONSUMERS GAS GROUP CONTINGENCIES
GAS ENVIRONMENTAL MATTERS: Under the Michigan Natural Resources and
Environmental Protection Act, Consumers expects that it will ultimately incur
investigation and remedial action costs at a number of sites, including some 23
sites that formerly housed manufactured gas plant facilities, even those in
which it has a partial or no current ownership interest. By late 1999, Consumers
expects to have completed sufficient investigation of the 23 sites to make a
more accurate estimate of remediation methods and costs. On sites where
Consumers has received site-wide study plan approvals, it will continue to
implement these plans. It will also work toward closure of environmental issues
at sites as studies are completed. Consumers estimates its costs related to
investigation and remedial action for all 23 sites between $48 million and $98
million, of which Consumers accrued a liability for $48 million. These estimates
are based on undiscounted 1998 costs. As of June 30, 1999, Consumers has an
accrued liability of $48 million and a regulatory asset for approximately the
same amount. Any significant change in assumptions, such as remediation
techniques, nature and extent of contamination, and legal and regulatory
requirements, could affect the estimate of remedial action costs for the sites.
Consumers defers and amortizes over a period of ten years, environmental
clean-up costs above the amount currently being recovered in rates. Rate
recognition of amortization expense will not begin until after a prudence review
in a general rate case. Consumers is allowed current recovery of $1 million
annually. Consumers has initiated lawsuits against certain insurance companies
regarding coverage for some or all of the costs that it may incur for these
sites.
CMS-31
<PAGE> 37
CONSUMERS GAS GROUP MATTERS
GAS RESTRUCTURING: In December 1997, the MPSC approved Consumers' application to
implement an experimental gas transportation program, which will extend over a
three-year period, eventually allowing 300,000 residential, commercial and
industrial retail gas sales customers to choose their gas commodity supplier.
The program is voluntary and participating natural gas customers are selected on
a first-come, first-served basis, up to a limit of 100,000 per year. As of July
1, 1999, more than 165,000 customers chose alternative gas suppliers,
representing approximately 40 bcf of gas load. Under traditional regulation,
Consumers had not been allowed to benefit from reducing its cost of the
commodity supplied to its customers, so the loss of commodity sales to these
customers will not have any impact on net income. Customers choosing to remain
as sales customers of Consumers will not see a rate change in their natural gas
rates. This three-year program: 1) suspends Consumers' GCR clause, effective
April 1, 1998, establishing a gas commodity cost at a fixed rate of $2.84 per
mcf, allowing Consumers the opportunity to benefit by reducing its cost of the
commodity; 2) establishes an earnings sharing mechanism with customers if
Consumers' earnings exceed certain pre-determined levels; and 3) establishes a
gas transportation code of conduct that addresses the relationship between
Consumers and marketers, including its affiliated marketers. In January 1998,
the Attorney General, ABATE and other parties filed claims of appeal regarding
the program with the Court of Appeals.
Consumers uses gas purchase contracts to limit its risk associated with
increases in its gas price above the $2.84 per mcf during the three-year
experimental gas program. It is management's intent to take physical delivery of
the commodity and failure could result in a significant penalty for
nonperformance. At June 30, 1999, Consumers had an exposure to gas price
increases if the ultimate cost of gas was to exceed $2.84 per mcf for the
following volumes: 7 percent of its 1999 requirements; 55 percent of its 2000
requirements; and 55 percent of its first quarter 2001 requirements. Additional
contract coverage is currently under review. The gas purchase contracts
currently in place were consummated at prices less than $2.84 per mcf. The gas
purchase contracts are being used to protect against gas price increases in the
three-year experimental gas program where Consumers is recovering from its
customers $2.84 per mcf for gas.
PANHANDLE REGULATORY MATTERS
Effective August 1996, Trunkline placed into effect a general rate increase,
subject to refund. Hearings were completed in October of 1997 and initial
decisions by a FERC ALJ were issued on certain matters in May 1998 and on the
remainder of the rate proceedings in November 1998. Responses to the initial
decisions were provided by Trunkline to FERC following the issuance of the
initial decisions. In May 1999, FERC issued an order remanding certain matters
back to the ALJ for further proceedings.
In conjunction with a FERC order issued in September 1997, certain natural gas
producers were required to refund previously collected Kansas ad-valorem taxes
to interstate natural gas pipelines. These pipelines were ordered to refund
these amounts to their customers. All payments are to be made in compliance with
prescribed FERC requirements. At June 30, 1999 and December 31, 1998, accounts
receivable included $52 million and $50 million, respectively, due from natural
gas producers, and other current liabilities included $52 million and $50
million, respectively, for related obligations.
In June 1998, Trunkline filed a petition with the FERC to abandon 720 miles of
its 26-inch diameter pipeline that extends from Longville, Louisiana to Bourbon,
Illinois. Trunkline requested permission to transfer the pipeline to an
affiliate, which had entered into an option agreement with Aux Sable for
potential conversion of the line
CMS-32
<PAGE> 38
to allow transportation of hydrocarbon vapors. Trunkline requested FERC to grant
the abandonment authorization in time to separate the pipeline from existing
facilities and allow Aux Sable to convert the pipeline to hydrocarbon vapor
service by October 1, 2000, if the option was exercised. The option expired on
July 1, 1999 and was not renewed by Aux Sable. The filing status is currently
under review by Trunkline and by FERC.
On May 19, 1999, Trunkline and Trunkline LNG submitted a compliance filing
advising the FERC that the acquisition by CMS Energy of Trunkline LNG triggered
certain provisions of a 1992 settlement. The settlement resolved issues related
to minimum bill provisions of the Trunkline LNG Rate Schedule PLNG-1, as well as
pending rate matters for Trunkline and refund matters for Trunkline LNG.
Specifically, the settlement provisions require Trunkline LNG, and Trunkline in
turn, to make refunds to customers, including Panhandle Eastern Pipe Line
Company and Consumers, who were parties to the settlement, if the ownership of
all or portion of the LNG terminal is transferred to an unaffiliated entity.
Therefore, the total refund due customers of approximately $17 million will be
paid within 30 days of final FERC approval of the compliance filing. In
conjunction with the acquisition of Panhandle by CMS Energy, Duke Energy
indemnified Panhandle for this refund obligation. In conjunction with the
settlement, Panhandle Eastern Pipe Line Company and its customers entered into
an agreement, whereby upon FERC approval of the compliance filing described
above, Panhandle Eastern Pipe Line Company will file to flow through its portion
of the settlement amounts to its customers.
OTHER UNCERTAINTIES
CMS GENERATION ENVIRONMENTAL MATTERS: CMS Generation does not currently expect
to incur significant capital costs at its power facilities to comply with
current environmental regulatory standards.
CAPITAL EXPENDITURES: CMS Energy estimates capital expenditures, including
investments in unconsolidated subsidiaries and new lease commitments, of $3.835
billion for 1999, which includes approximately $2.2 billion for the acquisition
of Panhandle, $1.725 billion for 2000, and $1.515 billion for 2001. For further
information, see Capital Resources and Liquidity-Capital Expenditures in the
MD&A.
OTHER: As of June 30, 1999, CMS Energy and Enterprises have guaranteed up to
$557 million in contingent obligations of unconsolidated affiliates and related
parties.
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.
CMS Energy has accrued estimated losses for certain contingencies discussed in
this Note. Resolution of these contingencies is not expected to have a material
adverse impact on CMS Energy's financial position, liquidity, or results of
operations.
3: SHORT-TERM AND LONG-TERM FINANCINGS, AND CAPITALIZATION
CMS-33
<PAGE> 39
CMS ENERGY: CMS Energy's Senior Credit Facilities consist of a $600 million
three-year revolving credit facility and a five-year $125 million term loan
facility. Additionally, CMS Energy has unsecured lines of credit and letters of
credit in an aggregate amount of $306 million. At June 30, 1999, the total
amount utilized under the Senior Credit Facilities was $700 million, including
$41 million of contingent obligations, and under the unsecured lines of credit
and letters of credit was $75 million.
In January 1999, CMS Energy received net proceeds of approximately $473 million
from the sale of $480 million of senior notes. In February 1999, CMS Energy
received net proceeds of approximately $296 million from the sale of $300
million of senior notes. Proceeds from these offerings were used to repay debt
and for general corporate purposes.
CMS Energy had utilized $600 million of a bridge loan facility to partially fund
the acquisition of Panhandle. As of June 30, 1999, this entire bridge loan
facility had been repaid.
At June 30, 1999, CMS Energy had $116 million of Series A GTNs, $117 million of
Series B GTNs, $150 million of Series C GTNs, $200 million of Series D GTNs, and
$148 million of Series E GTNs issued and outstanding with weighted average
interest rates of 7.9 percent, 8.0 percent, 7.7 percent, 7.0 percent, and 7.0
percent, respectively.
In June 1999, a Delaware statutory business trust established by CMS Energy
privately sold $250 million of Trust Preferred Securities to an entity organized
by Banc of America Securities LLC. The Trust Preferred Securities pay quarterly
distributions at a floating rate. Net proceeds of approximately $244 million
were used to pay down a portion of the bridge loan obtained for the acquisition
of Panhandle. In exchange for these proceeds, CMS Energy sold subordinated notes
to the trust. In connection with this financing, CMS Energy also agreed to sell
$250 million of CMS Energy Common Stock at prevailing market prices through Banc
of America Securities LLC within twenty-four months.
In June 1999, CMS Energy sold $250 million of senior notes, 8 percent Reset Put
Securities, due July 1, 2011 and $150 million of senior notes, 8.375 percent
Reset Put Securities, due July 1, 2013. The $250 million senior notes and the
$150 million senior notes are subject to a call option and mandatory put on July
1, 2001 and July 1, 2003, respectively. The call option allows the callholder to
purchase the notes, at which point the coupon rate will be reset for the
remaining term of the notes. If the call option is not exercised by the
callholder, the notes will be mandatorily put to CMS Energy at a price equal to
100 percent of the principal amount. Net proceeds of approximately $404 million,
which includes approximately $9 million for the sale of the call options, were
also used to pay down the remaining portion of the bridge loan obtained for the
acquisition of Panhandle.
In July 1999, 7.25 million units of 8.75 percent Adjustable Convertible Trust
Securities were sold by CMS Energy and CMS Energy Trust II, a Delaware statutory
business trust established by CMS Energy. Each security consists of a Trust
Preferred Security of CMS Energy Trust II maturing in five years and a contract
for the purchase of CMS Energy Common Stock in three years at a conversion
premium up to 28 percent or an effective price of $53 per common share. Net
proceeds from the sale totaled $291 million and were used to repay portions of
various lines of credit and the revolving credit facility.
CMS-34
<PAGE> 40
CONSUMERS: At June 30, 1999, Consumers had FERC authorization to issue or
guarantee, through June 2000, up to $900 million of short-term securities
outstanding at any one time and to guarantee, through 1999, up to $25 million in
loans made by others to residents of Michigan for making energy-related home
improvements. Consumers also had remaining FERC authorization to issue, through
June 2000, up to $475 million and $425 million of long-term securities with
maturities up to 30 years for refinancing purposes and for general corporate
purposes, respectively.
Consumers had an unsecured $425 million credit facility. In July 1999, Consumers
renegotiated this facility in the reduced amount of $300 million. Consumers also
has unsecured lines of credit aggregating $120 million. These facilities are
available to finance seasonal working capital requirements and to pay for
capital expenditures between long-term financings. At June 30, 1999, a total of
$264 million was outstanding at a weighted average interest rate of 6.1 percent,
compared with $255 million outstanding at June 30, 1998, at a weighted average
interest rate of 6.0 percent. In January 1999, Consumers renegotiated a
variable-to-fixed interest rate swap totaling $175 million in order to reduce
the impact of interest rate fluctuations.
Consumers also has in place a $325 million trade receivables sale program. At
June 30, 1999 and 1998, receivables sold under the program totaled $266 million
and $236 million, respectively. Accounts receivable and accrued revenue in the
Consolidated Balance Sheets have been reduced to reflect receivables sold.
Consumers issued long-term bank debt of $15 million in February 1999, maturing
in February 2002, at an initial interest rate of 5.3 percent. Proceeds from this
issuance were used for general corporate purposes.
On April 1, 1999, Consumers redeemed all eight million outstanding shares of its
$2.08 preferred stock at $25.00 per share for a total of $200 million.
Under the provisions of its Articles of Incorporation, Consumers had $319
million of unrestricted retained earnings available to pay common dividends at
June 30, 1999. In May 1999, Consumers declared and paid a $76 million common
dividend. In July 1999, Consumers declared a $35 million common dividend payable
in August 1999.
PANHANDLE: In March 1999, CMS Energy, through its subsidiary CMS Panhandle
Holding, received net proceeds of approximately $789 million from the sale of
$800 million of senior notes issued by CMS Panhandle Holding. Proceeds from this
offering were used to initially fund the acquisition of Panhandle. On June 15,
1999 CMS Panhandle Holding merged into Panhandle, at which point the notes
became direct obligations of Panhandle. In August 1999, Panhandle initiated an
exchange offer which will replace the $800 million of notes originally issued by
CMS Panhandle Holding with substantially identical SEC-registered notes.
Panhandle expects to complete the exchange offer by early September 1999.
CMS OIL AND GAS: In May 1999, CMS Oil and Gas executed a $225 million credit
facility. Borrowings under the credit facility are revolving credit loans for
three years, ending in May 2002. The credit facility provides various options to
CMS Oil and Gas relative to interest rates and also requires a facility fee.
CMS-35
<PAGE> 41
4: EARNINGS PER SHARE AND DIVIDENDS
Earnings per share attributable to Common Stock for the three, six and twelve
months ended June 30, 1999 reflect the performance of the Consumers Gas Group.
The allocation of earnings attributable to each class of Common Stock and the
related amounts per share are computed by considering the weighted average
number of shares outstanding.
Earnings attributable to the Outstanding Shares are equal to Consumers Gas Group
net income multiplied by a fraction; the numerator is the weighted average
number of Outstanding Shares during the period and the denominator is the
weighted average number of Outstanding Shares and authorized but unissued shares
of Class G Common Stock not held by holders of the Outstanding Shares during the
period. The earnings attributable to Class G Common Stock on a per share basis
for the three months ended June 30, 1999 and 1998 are based on 25.87 percent and
25.27 percent, respectively, of the income of Consumers Gas Group.
CMS-36
<PAGE> 42
COMPUTATION OF EARNINGS PER SHARE:
<TABLE>
<CAPTION>
In Millions, Except Per Share Amounts
-----------------------------------------------------------
Three Months Six Months Twelve Months
Ended June 30 Ended June 30 Ended June 30
1999 1998 1999 1998 1999 1998
---- ---- ---- ---- ---- ----
(a) (a)
<S> <C> <C> <C> <C> <C> <C>
NET INCOME APPLICABLE TO BASIC AND DILUTED EPS
Consolidated Net Income $ 75 $ 65 $173 $153 $305 $272
==== ==== ==== ==== ==== ====
Net Income Attributable to Common Stocks:
CMS Energy - Basic EPS $ 74 $ 64 $162 $143 $291 $258
Add conversion of 7.75% Trust
Preferred Securities (net of tax) 2 2 4 4 9 9
---- ---- ---- ---- ---- ----
CMS Energy - Diluted EPS $ 76 $ 66 $166 $147 $300 $267
==== ==== ==== ==== ==== ====
Class G:
Basic and Diluted EPS $ 1 $ 1 $ 11 $ 10 $ 14 $ 14
==== ==== ==== ==== ==== ====
AVERAGE COMMON SHARES OUTSTANDING
APPLICABLE TO BASIC AND DILUTED EPS
CMS Energy:
Average Shares - Basic 109 101 108 101 106 99
Add conversion of 7.75% Trust
Preferred Securities 4 4 4 4 4 4
Options-Treasury Shares 1 1 1 1 1 1
---- ---- ---- ---- ---- ----
Average Shares - Diluted 114 106 113 106 111 104
==== ==== ==== ==== ==== ====
Class G:
Average Shares
Basic and Diluted 9 8 9 8 8 8
==== ==== ==== ==== ==== ====
EARNINGS PER AVERAGE COMMON SHARE
CMS Energy:
Basic $.68 $.63 $1.50 $1.42 $2.75 $2.60
Diluted $.67 $.62 $1.48 $1.39 $2.71 $2.57
Class G:
Basic and Diluted $.10 $.12 $1.28 $1.20 $1.65 $1.71
==== ==== ==== ==== ==== ====
</TABLE>
(a) Includes the cumulative effect of an accounting change in the first quarter
of 1998 which increased net income attributible to CMS Energy Common Stock $43
million ($.40 per share - basic and diluted) and Class G Common Stock $12
million ($.36 per share - basic and diluted).
In February and May 1999, CMS Energy paid dividends of $.33 per share on CMS
Energy Common Stock and $.325 per share on Class G Common Stock. In July 1999,
the Board of Directors declared a quarterly dividend of $.365 per share on CMS
Energy Common Stock and $.34 per share on Class G Common Stock, payable in
August 1999.
CMS-37
<PAGE> 43
5: RISK MANAGEMENT ACTIVITIES AND DERIVATIVES TRANSACTIONS
CMS Energy and its subsidiaries use a variety of derivative instruments
(derivatives), including futures contracts, swaps, options and forward
contracts, to manage exposure to fluctuations in commodity prices, interest
rates and foreign exchange rates. To qualify for hedge accounting, derivatives
must meet the following criteria: i) the item to be hedged exposes the
enterprise to price, interest or exchange rate risk; and ii) the derivative
reduces that exposure and is designated as a hedge.
Derivative instruments contain credit risk if the counter parties, including
financial institutions and energy marketers, fail to perform under the
agreements. CMS Energy minimizes such risk by performing financial credit
reviews using, among other things, publicly available credit ratings of such
counter parties. Nonperformance by counter parties is not expected to have a
material adverse impact on CMS Energy's financial position, liquidity, or
results of operations.
COMMODITY PRICE HEDGES: CMS Energy engages in commodity price risk management
activities for both energy trading and non-trading activities as defined by EITF
98-10, Accounting for Energy Trading and Risk Management Activities. CMS Energy
accounts for its non-trading commodity price derivatives as hedges and, as such,
defers any changes in market value and gains and losses resulting from
settlements until the hedged transaction is complete. If there was a loss of
correlation between the changes in the market value of the commodity price
contracts and the market price ultimately received for the hedged item, and the
impact was material, the open commodity price contracts would be
marked-to-market and gains and losses would be recognized in the income
statement currently. Effective January 1, 1999, CMS Energy adopted
mark-to-market accounting for energy trading contracts in accordance with EITF
98-10. Mark-to-market accounting requires gains and losses resulting from
changes in market prices on contracts entered into for trading purposes to be
reflected in earnings currently. The after-tax mark-to-market adjustment
resulting from the adoption of EITF 98-10 had an immaterial effect on CMS
Energy's financial position, results of operations and cash flows as of June 30,
1999.
Consumers enters into electric option contracts to ensure a reliable source of
capacity to meet its customers' electricity requirements and to limit its risk
associated with electricity price increases. It is management's intent to take
physical delivery of the commodity. Consumers continuously evaluates its daily
capacity needs and sells the option contracts, if marketable, when it has excess
daily capacity. Consumers' maximum exposure associated with these options is
limited to premiums paid.
CMS Oil and Gas has one arrangement which is used to fix the prices that CMS Oil
and Gas will pay for gas supplied to the MCV Facility for the years 2001 through
2006 by purchasing the economic equivalent of 10,000 MMBtu per day at a fixed
price, escalating at 8 percent per year thereafter, starting at $2.82 per MMBtu
in 2001. The settlement periods are each a one-year period ending December 31,
2001 through 2006 on 3.65 million MMBtu. If the floating price, essentially the
then-current Gulf Coast spot price, for a period is higher than the fixed price,
the seller pays CMS Oil and Gas the difference, and vice versa.
The contract with the seller provides a calculation of exposure for the purpose
of requiring an exposed party to post a standby letter of credit. Under this
calculation, if a party's exposure at any time exceeds $5 million, that party is
required to obtain a letter of credit in favor of the other party for the excess
over $5 million and up to $10 million. At June 30, 1999, no letter of credit was
posted by either party to the agreement. As of June 30, 1999, the fair value of
this contract is $11 million.
CMS-38
<PAGE> 44
A subsidiary of CMS Gas Transmission uses natural gas futures contracts and CMS
Marketing, Services and Trading Company uses natural gas and oil futures
contracts, options and swaps (which require a net cash payment for the
difference between a fixed and variable price).
INTEREST RATE HEDGES: CMS Energy and some of its subsidiaries enter into
interest rate swap agreements to exchange variable rate interest payment
obligations to fixed rate obligations without exchanging the underlying notional
amounts. These agreements convert variable rate debt to fixed rate debt to
reduce the impact of interest rate fluctuations. The notional amounts parallel
the underlying debt levels and are used to measure interest to be paid or
received and do not represent the exposure to credit loss. The notional amount
of CMS Energy's and its subsidiaries' interest rate swaps was $790 million at
June 30, 1999. The difference between the amounts paid and received under the
swaps is accrued and recorded as an adjustment to interest expense over the life
of the hedged agreement.
FOREIGN EXCHANGE HEDGES: CMS Energy uses forward exchange contracts and collared
options to hedge certain receivables, payables, long-term debt and equity value
relating to foreign investments. The purpose of CMS Energy's foreign currency
hedging activities is to protect the company from the risk that U.S. dollar net
cash flows resulting from sales to foreign customers and purchases from foreign
suppliers and the repayment of non-U.S. dollar borrowings as well as equity
reported on the company's balance sheet, may be adversely affected by changes in
exchange rates. These contracts do not subject CMS Energy to risk from exchange
rate movements because gains and losses on such contracts offset losses and
gains, respectively, on assets and liabilities being hedged. The notional amount
of the outstanding foreign exchange contracts was $1.3 billion at June 30, 1999,
which includes $515 million, $250 million and $440 million for Australian,
Brazilian and Argentine foreign exchange contracts, respectively. The estimated
fair value of the foreign exchange and option contracts at June 30, 1999 was $21
million, representing the amount CMS Energy would pay upon settlement.
6: REPORTABLE SEGMENTS
CMS Energy operates principally in the following six reportable segments:
electric utility; gas utility; independent power production; oil and gas
exploration and production; natural gas transmission, storage and processing;
and energy marketing, services and trading.
The electric utility segment consists of regulated activities associated with
the generation, transmission and distribution of electricity in the State of
Michigan. The gas utility segment consists of regulated activities associated
with the production, transportation, storage and distribution of natural gas in
the State of Michigan. The other reportable segments consist of the development
and management of electric, gas and other energy-related projects in the United
States and internationally, including energy trading and marketing. CMS Energy's
reportable segments are strategic business units organized and managed by the
nature of the products and services each provides. The accounting policies of
each reportable segment are the same as those described in the summary of
significant accounting policies. CMS Energy's management evaluates performance
based on pretax operating income. Intersegment sales and transfers are accounted
for at current market prices and are eliminated in consolidated pretax operating
income by segment.
The Consolidated Statements of Income show operating revenue and pretax
operating income by reportable segment. Revenues from an international energy
distribution business and a land development business
CMS-39
<PAGE> 45
fall below the quantitative thresholds for reporting. Neither of these segments
has ever met any of the quantitative thresholds for determining reportable
segments. Amounts shown for the natural gas transmission, storage and processing
segment include Panhandle, which was acquired in March 1999. Other financial
data for reportable segments are as follows:
Reportable Segments
<TABLE>
<CAPTION>
In Millions
----------------------
June 30, December 31,
1999 1998
------- -------
<S> <C> <C>
Identifiable Assets
Electric utility (a) $ 4,610 $ 4,640
Gas utility (a) 1,636 1,726
Independent power production 2,585 2,252
Oil and gas exploration and production 567 547
Natural gas transmission, storage and processing 3,388 971
Marketing, services and trading 167 152
Other 1,194 1,022
------- -------
$14,147 $11,310
======= =======
</TABLE>
(a) Amounts include an attributed portion of Consumers' other common assets to
both the electric and gas utility businesses.
CMS-40
<PAGE> 46
ARTHUR ANDERSEN LLP
Report of Independent Public Accountants
To CMS Energy Corporation:
We have reviewed the accompanying consolidated balance sheets of CMS ENERGY
CORPORATION (a Michigan corporation) and subsidiaries as of June 30, 1999 and
1998, and the related consolidated statements of income and common stockholders'
equity for the three-month, six-month and twelve-month periods then ended and
the related consolidated statements of cash flows for the six-month and
twelve-month periods then ended. These financial statements are the
responsibility of the Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which is the
expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the financial statements referred to above for them to be in
conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet and consolidated statement of
preferred stock of CMS Energy Corporation and subsidiaries as of December 31,
1998, and the related consolidated statements of income, common stockholders'
equity and cash flows for the year then ended (not presented herein), and, in
our report dated January 26, 1999 (except with respect to the matters disclosed
in Note 3, "Consumers' Electric Utility Rate Matters", and Note 19, as to which
the date is March 29, 1999), we expressed an unqualified opinion on those
statements. In our opinion, the information set forth in the accompanying
consolidated balance sheet as of December 31, 1998, is fairly stated, in all
material respects, in relation to the consolidated balance sheet from which it
has been derived.
Arthur Andersen LLP
Detroit, Michigan,
August 12, 1999.
CMS-41
<PAGE> 47
CONSUMERS ENERGY COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS
Consumers is a combination electric and gas utility company serving the Lower
Peninsula of Michigan and is the principal subsidiary of CMS Energy, a holding
company. Consumers' customer base includes a mix of residential, commercial and
diversified industrial customers, the largest segment of which is the automotive
industry.
The MD&A of this Form 10-Q should be read along with the MD&A and other parts of
Consumers' 1998 Form 10-K. This MD&A also refers to, and in some sections
specifically incorporates by reference, Consumers' Condensed Notes to
Consolidated Financial Statements and should be read in conjunction with such
Statements and Notes.
This report contains forward-looking statements, as defined by the Private
Securities Litigation Reform Act of 1995. While forward-looking statements are
based upon assumptions and such assumptions are believed to be reasonable and
are made in good faith, Consumers cautions that assumed results almost always
vary from actual results and the difference between assumed and actual results
can be material. The type of assumptions that could materially affect the actual
results are discussed in the Forward-Looking Statements section in this MD&A.
More specific risk factors are contained in various public filings made by
Consumers with the SEC. This report also describes material contingencies in
Consumers' Condensed Notes to Consolidated Financial Statements and the readers
are encouraged to read such Notes.
RESULTS OF OPERATIONS
CONSUMERS CONSOLIDATED EARNINGS
<TABLE>
<CAPTION>
In Millions
------------------------------------------------
June 30 1999 1998 Change
- ------- ---- ---- -----------
<S> <C> <C> <C>
Three months ended $ 68 $ 60 $ 8
Six months ended 177 162 15
Twelve months ended 327 305 22
==== ==== ===========
</TABLE>
Net income available to the common stockholder was $68 million for the three
months ended June 30, 1999 compared to $60 million for the same 1998 period. The
$8 million earnings increase was due to higher electric and gas deliveries
resulting from growth and lower electric power supply costs. The increased
deliveries were partially offset by higher operating costs related to the
additional electric and gas deliveries. Net income for the six months ended June
30, 1999 was $177 million compared to $162 million for the same period in 1998.
The $15 million earnings increase was due to higher electric deliveries
resulting from growth and above-average temperatures, higher gas deliveries as a
result of a more normal heating season compared to 1998, reduced power supply
costs, and changes in regulation which allow Consumers to benefit from reduced
gas costs. These increases were partially offset by higher operating costs
related to the additional deliveries and the absence of an accounting change for
property taxes, which occurred in 1998. The accounting change in 1998 resulted
in a benefit of $66 million ($43 million after-tax) that was partially offset by
the recognition of a $37 million dollar loss ($24 million after tax) for the
underrecovery of power costs under the PPA. Net income for the twelve months
ended June 30, 1999 was $327 million compared to $305 million for the same
period in 1998. The $22 million earnings increase was due to higher electric and
gas deliveries and from changes in
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<PAGE> 48
regulation which allow Consumers to benefit from lower electric power supply
costs and reduced gas costs. Partially offsetting these increases in earnings
were additional operating expenses, the absence of the 1998 change in accounting
for property taxes and the loss from the PPA as discussed above. For further
information, see the Electric and Gas Utility Results of Operations sections and
Note 2, Uncertainties.
ELECTRIC UTILITY RESULTS OF OPERATIONS
ELECTRIC PRETAX OPERATING INCOME:
<TABLE>
<CAPTION>
In Millions
-------------------------------------------------
June 30 1999 1998 Change
- ------- ----- ----- -----------
<S> <C> <C> <C>
Three months ended $ 122 $ 107 $ 15
Six months ended 256 226 30
Twelve months ended 505 448 57
===== ===== ===========
</TABLE>
Electric pretax operating income was $122 million for the three months ended
June 30, 1999 compared to $107 million for the same period in 1998. The $15
million earnings increase was due to higher electric deliveries and reduced
power supply costs. The earnings increase was partially offset by increased
operating expenses, as a result of additional electric deliveries, and
depreciation costs for new property and equipment. Electric pretax operating
income was $256 million for the six months ended June 30, 1999 compared to $226
million for the same period in 1998. The $30 million earnings increase was due
to higher electric deliveries and reduced power supply costs. This earnings
increase was partially offset by increased operating expenses as a result of
additional electric deliveries and depreciation costs for new property and
equipment. Electric pretax operating income was $505 million for the twelve
months ended June 30, 1999 compared to $448 million for the same period in 1998.
The $57 million earnings increase was due to higher electric deliveries and
changes in regulation, which after 1997 provided Consumers the opportunity to
benefit from reduced power supply costs. The earnings increase for the twelve
months ended June 30, 1999 was also partially offset by increased operating
expenses and depreciation as discussed above. The following table quantifies
these impacts on Pretax Operating Income:
<TABLE>
<CAPTION>
In Millions
---------------------------------------------------------
Three Months Six Months Twelve Months
Ended June 30 Ended June 30 Ended June 30
Change Compared to Prior Year 1999 vs 1998 1999 vs 1998 1999 vs 1998
- ----------------------------- ------------- ------------- -------------
<S> <C> <C> <C>
Electric deliveries $ 12 $ 23 $ 50
Power supply costs 14 18 39
Rate increases and other non-commodity revenue (3) (4) (6)
Operations and maintenance (5) (3) (17)
General taxes and depreciation (3) (4) (9)
---- ---- ----
Total change $ 15 $ 30 $ 57
==== ==== ====
</TABLE>
ELECTRIC DELIVERIES: Total electric deliveries for the three months, six months
and twelve months ended June 30, 1999, increased in all customer classes.
Electric deliveries were 10.3 billion kWh for the three months ended June 30,
1999, an increase of 6.0 percent. Electric deliveries were 20.3 billion kWh for
the six months ended June 30, 1999, an increase of 5.0 percent. Electric
deliveries were 41 billion kWh for the twelve months ended June 30, 1999, an
increase of 4.6 percent.
CE-2
<PAGE> 49
POWER COSTS:
<TABLE>
<CAPTION>
In Millions
--------------------------------------------------
June 30 1999 1998 Change
- ------- ------ ------ ------
<S> <C> <C> <C>
Three months ended $ 293 $ 312 $ (19)
Six months ended 571 583 (12)
Twelve months ended 1,164 1,170 (6)
====== ====== =====
</TABLE>
Power costs decreased for the three month period ended June 30, 1999 compared to
the same 1998 period as a result of lower power purchase costs. Power costs also
decreased for the six months and twelve months ended June 30, 1999 compared to
the same period in 1998 for the same reason.
UNCERTAINTIES: Consumers' financial position may be affected by a number of
trends or uncertainties that have, or Consumers reasonably expects could have, a
material impact on net sales, revenues, or income from continuing electric
operations. Such uncertainties include: 1) capital expenditures for compliance
with the Clean Air Act; 2) environmental liabilities arising from compliance
with various federal, state and local environmental laws and regulations,
including potential liability or expenses relating to the Michigan Natural
Resources and Environmental Protection Act and Superfund; 3) cost recovery
relating to the MCV Facility; 4) electric industry restructuring; 5)
implementation of a frozen PSCR and initiatives to be undertaken to reduce
exposure to high energy prices; 6) underrecoveries associated with power
purchases from the MCV Partnership; and 7) decommissioning issues and ongoing
issues relating to the storage of spent fuel and the operating life of
Palisades. For detailed information about these trends or uncertainties, see
Note 2, Uncertainties, incorporated by reference herein.
GAS UTILITY RESULTS OF OPERATIONS
GAS PRETAX OPERATING INCOME:
<TABLE>
<CAPTION>
In Millions
-------------------------------------------------
June 30 1999 1998 Change
- ------- ---- ---- ------
<S> <C> <C> <C>
Three months ended $ 16 $ 21 $ (5)
Six months ended 94 75 19
Twelve months ended 145 127 18
==== ==== ====
</TABLE>
Gas pretax operating income was $16 million for the three months ended June 30,
1999 compared to $21 million for the same period in 1998. The decrease of $5
million was primarily the result of increased operating costs related to higher
gas deliveries and higher depreciation cost for new property and equipment. For
the six months ended June 30, 1999, gas pretax operating income was $94 million
compared to $75 million for the same period in 1998. The increase of $19 million
was the result of increased gas deliveries due to colder temperatures during the
1999 heating season and changes in gas regulation, which suspended Consumers'
GCR clause in April 1998. This suspension provided Consumers the opportunity to
benefit from lower gas prices. In the past, reductions or increases in gas costs
would have had no impact on gas pretax operating income because any changes in
gas costs were passed on to Consumers' gas customers. The increased deliveries
were partially offset by increased depreciation costs and general tax expense
associated with new property and equipment and higher
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<PAGE> 50
operation and maintenance costs for the additional deliveries. Gas pretax
operating income was $145 million for the twelve month period ended June 30,
1999 compared to $127 million for the same period in 1998. The increase of $18
million was the result of increased gas sales during the winter heating season,
the suspension of Consumers' GCR clause during 1998 as discussed above,
increased wholesale and retail services activities, and lower operation and
maintenance costs due to cost controls. This increase in pretax operating income
for the twelve month period ended June 30, 1999 was partially offset by higher
depreciation costs and general tax expense associated with new property and
equipment. The following table quantifies these impacts on Pretax Operating
Income:
<TABLE>
<CAPTION>
In Millions
---------------------------------------------------------
Three Months Six Months Twelve Months
Ended June 30 Ended June 30 Ended June 30
Change Compared to Prior Year 1999 vs 1998 1999 vs 1998 1999 vs 1998
- ----------------------------- ------------- ------------- -------------
<S> <C> <C> <C>
Gas deliveries $ 2 $ 22 $ 10
Gas cost (2) 12 24
Gas wholesale and retail services activities 1 2 5
Operation and maintenance (5) (5) 4
General taxes, depreciation and other (1) (12) (25)
---- ---- ----
Total increase (decrease) in pretax operating income $ (5) $ 19 $ 18
==== ==== ====
</TABLE>
GAS DELIVERIES: System deliveries for the three month period ended June 30,
1999, including miscellaneous transportation, were 62.5 bcf compared to 61.3 bcf
for the same 1998 period. This increase of 1.8 percent was primarily due to
growth during the period. System deliveries for the six month period ended June
30, 1999, including miscellaneous transportation, were 228.7 bcf compared to
207.8 bcf for the same 1998 period. This increase of 20.9 bcf or 10.1 percent
was primarily due to colder temperatures during the 1999 heating season. System
deliveries for the twelve month period ended June 30, 1999, including
miscellaneous transportation, were 380.7 bcf compared to 383.6 bcf for the same
1998 period. This decrease of 0.7 percent was primarily the result of reduced
gas transported to the MCV Facility.
COST OF GAS SOLD:
<TABLE>
<CAPTION>
In Millions
-------------------------------------------------
June 30 1999 1998 Change
- ------- ---- ---- ------
<S> <C> <C> <C>
Three months ended $ 78 $ 74 $ 4
Six months ended 384 338 46
Twelve months ended 609 600 9
==== ==== ===
</TABLE>
The cost increases for the three month period ended June 30, 1999 was the result
of increased gas deliveries due to growth during this period. The cost increases
for the six month period and the twelve month period ended June 30, 1999 was the
result of increased sales due to colder overall temperatures during the winter
heating season partially offset by lower gas prices.
UNCERTAINTIES: Consumers' financial position may be affected by a number of
trends or uncertainties that have, or Consumers reasonably expects could have, a
material impact on net sales or revenues or income from continuing gas
operations. Such uncertainties include: 1) potential environmental costs at a
number of sites, including sites formerly housing manufactured gas plant
facilities; 2) a statewide experimental gas restructuring program; and 3)
implementation of a suspended GCR and initiatives
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<PAGE> 51
undertaken to protect against gas price increases. For detailed information
about these uncertainties see Note 2, Uncertainties, incorporated by reference
herein.
CAPITAL RESOURCES AND LIQUIDITY
CASH POSITION, INVESTING AND FINANCING
OPERATING ACTIVITIES: Consumers derives cash from operations, from the sale and
transportation of natural gas and the generation, transmission and sale of
electricity. Cash from operations totaled $460 million and $325 million for the
first six months of 1999 and 1998, respectively. The $135 million increase
resulted primarily from higher electric and gas sales, a $61 million decrease in
gas and coal inventories and a $59 million increase in the sale of accounts
receivable. Consumers uses operating cash primarily to maintain and expand
electric and gas systems, to retire portions of long-term debt, and to pay
dividends.
INVESTING ACTIVITIES: Cash used in investing activities totaled $(238) million
and $(174) million for the first six months of 1999 and 1998, respectively. The
change of $64 million was primarily the result of a $33 million increase in
capital expenditures and the absence of $27 million proceeds from the 1998 sale
of two non-utility partnerships.
FINANCING ACTIVITIES: Cash used in financing activities totaled $(218) million
for the first six months of 1999 compared to zero in the first six months of
1998. The change of $218 million is primarily the result of a $129 million net
decrease in proceeds from the refinancing and issuance of Consumers' debt in
1998, $200 million retirement of preferred stock, a $44 million increase in the
payment of common stock dividends offset by $150 million of paid in capital by
Consumers' common stockholder.
OTHER INVESTING AND FINANCING MATTERS: On April 1, 1999, Consumers redeemed all
eight million outstanding shares of its $2.08 preferred stock at $25.00 per
share for a total of $200 million. Consumers is authorized by FERC to issue
securities and guarantees. Consumers has credit facilities, lines of credit and
a trade receivable sale program in place as anticipated sources of funds needed
to fulfill its currently expected capital expenditures. For detailed information
about these sources of funds, see Note 3, Short-Term Financings and
Capitalization.
OUTLOOK
CAPITAL EXPENDITURES OUTLOOK
Consumers estimates the following capital expenditures, including new lease
commitments, by type and by business segment over the next three years. These
estimates are prepared for planning purposes and are subject to revision.
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<PAGE> 52
<TABLE>
<CAPTION>
In Millions
-------------------------------------------------
Years Ended December 31 1999 2000 2001
- ----------------------- ---- ---- ----
<S> <C> <C> <C>
Construction $470 $539 $609
Nuclear fuel lease 11 - 19
Capital leases other than nuclear fuel 19 26 22
---- ---- ----
$500 $565 $650
==== ==== ====
Electric utility operations (a) $375 $435 $520
Gas utility operations (a) 125 130 130
---- ---- ----
$500 $565 $650
==== ==== ====
</TABLE>
(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.
ELECTRIC BUSINESS OUTLOOK
GROWTH: Consumers expects average annual growth of 2.3 percent per year in
electric system deliveries over the next five years, absent the impact of
restructuring on the industry and changed regulation in Michigan. Abnormal
weather, changing economic conditions, or the developing competitive market for
electricity may affect actual electric sales in future periods.
RESTRUCTURING: Consumers' retail electric business is affected by competition.
To meet its challenges, Consumers entered into multi-year contracts with some of
its largest industrial customers to serve certain facilities. The MPSC approved
these contracts as part of its phased introduction to competition. Some
customers have the option of terminating their contracts early.
FERC Orders 888 and 889, as amended, require utilities to provide direct access
to the interstate transmission grid for wholesale transactions. Consumers and
Detroit Edison disagree on the effect of the orders on the Michigan Electric
Power Coordination Center pool. Consumers proposes to maintain the benefits of
the pool through at least December 2000, while Detroit Edison contends that the
pool agreement should be terminated immediately. Among Consumers' alternatives
in the event of the pool being terminated would be joining an independent system
operator. FERC has indicated this preference for structuring the operations of
the electric transmission grid.
For material changes relating to the restructuring of the electric utility
industry, see Note 1, Corporate Structure and Summary of Significant Accounting
Policies, "Utility Regulation" and Note 2, Uncertainties, "Electric Rate Matters
- - Electric Restructuring", incorporated by reference herein.
RATE MATTERS: In November 1997, ABATE filed a complaint with the MPSC alleging
that Consumers' earnings are in excess of its authorized rate of return and
seeking an immediate reduction in Consumers' electric rates. In May 1999, the
MPSC issued an order reversing an April 1999 decision of an ALJ which explicitly
restricted the scope of the current proceeding to a determination of whether
there should be a subsequent rate case proceeding to examine Consumers' electric
rates, however, the order confirmed that ABATE and intervenors bear the burden
of persuading the MPSC in this matter that a rate reduction is warranted. In the
absence of meeting that burden, Consumers' rates will remain unchanged.
Consumers is unable to predict the outcome of this matter.
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<PAGE> 53
GAS BUSINESS OUTLOOK
GROWTH: Consumers currently anticipates gas deliveries, including gas customer
choice deliveries excluding transportation to the MCV Facility and off-system
deliveries, to grow at an average annual rate of between one and two percent
over the next five years based primarily on a steadily growing customer base.
Actual gas deliveries in future periods may be affected by abnormal weather,
alternative energy prices, changes in competitive conditions, particularly as a
result of industry restructuring, and the level of natural gas consumption.
Consumers also offers a variety of energy-related services to its customers
focused upon appliance maintenance, home safety, commodity choice and assistance
to customers purchasing heating, ventilation and air conditioning equipment.
RESTRUCTURING: In December 1997, the MPSC approved Consumers' application to
implement a statewide three-year experimental gas transportation program,
eventually allowing 300,000 residential, commercial and industrial retail gas
sales customers to choose their gas supplier. For further information regarding
restructuring of the Gas Business, see Note 2, Uncertainties, "Gas Rate
Matters-Gas Restructuring," incorporated by reference herein.
OTHER MATTERS
YEAR 2000 COMPUTER MODIFICATIONS
Consumers uses software and related technologies throughout its businesses that
the year 2000 date change could affect and, if uncorrected, could cause
Consumers to, among other things, delay issuance of bills or reports, issue
inaccurate bills, report inaccurate data, incur generating plant outages, or
create energy delivery uncertainties. In 1995, Consumers established a Year 2000
Program to ensure the continued operation of its businesses at the turn of the
century. Consumers' efforts included dividing the programs requiring
modification between critical and noncritical programs. A formal methodology was
established to identify critical business functions and risk scenarios, to
correct problems identified, to develop test plans and expected results, and to
test the corrections made. Consumers' Year 2000 Program involves an aggressive,
comprehensive four-phase approach, including impact analysis, remediation,
compliance review, and monitoring/contingency planning.
The impact analysis phase includes the analysis, inventory, prioritization and
remediation plan development for all technology essential to core business
processes. The remediation phase involves testing and implementation of
remediated technology. A mainframe test environment was established in 1997 and
a test environment for network servers and stand-alone personal computers was
established in mid-1998. All essential corporate business systems have been
tested in these test environments. The compliance review phase includes the
assembling of compliance documentation for each technology component, as
remediation efforts are completed, and additional verification testing of
essential technology where necessary. The monitoring/contingency planning phase
includes compliance monitoring to ensure that year 2000 problems are not
reintroduced into remediated technology, as well as the development of
contingency plans to address reasonably likely risk scenarios.
STATE OF READINESS: Consumers is managing traditional information technology,
which consists of essential business systems (such as payroll, billing and
purchasing) and infrastructure (including mainframe, wide area network, local
area networks, personal computers, radios and telephone systems). Consumers is
also managing process control computers and embedded systems contained in
buildings, equipment and energy supply and delivery systems, in addition to
essential goods and services. Essential goods and services include electric fuel
supply, gas fuel supply, independent electric power supplies, buildings and
other facilities, electronic commerce, telecommunications
CE-7
<PAGE> 54
network carriers, financial institutions, purchasing vendors, and software and
hardware technology vendors. Consumers is addressing the preparedness of these
businesses and their risk through readiness assessment questionnaires.
The status of Consumers' Year 2000 Program by phase, with target dates for
completion and current percentage complete based upon software and hardware
inventory counts as of June 30, 1999, is as follows:
<TABLE>
<CAPTION>
Monitoring/
Impact Compliance Contingency
Analysis Remediation Review Planning
------------- ------------- ------------- -------------
Systems (a) (b) (a) (b) (a) (b) (a) (b)
- ---------------------- ----- ----- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Electric 3/98 100% 6/99 100% 6/99 100% 6/99 100%
Gas 3/98 100% 6/99 100% 6/99 100% 6/99 100%
Corporate 3/98 100% 9/99 96% 9/99 95% 6/99 100%
Operating Services 3/98 100% 6/99 100% 9/99 99% 6/99 100%
Information Technology 3/98 100% 9/99 99% 9/99 99% 6/99 100%
Essential Goods
& Services 7/99 75% N/A N/A (c)
</TABLE>
(a) Target date for completion.
(b) Current percentage complete.
(c) Contingency planning for essential goods and services is incorporated into
contingency planning for each major system presented.
COST OF REMEDIATION: Consumers expenses cost for software modifications as
incurred, and capitalizes and amortizes the cost for new software and equipment
over its useful life. The total estimated cost of the Year 2000 Program is $22
million. Costs incurred through June 30, 1999 were $18 million. Consumers'
annual Year 2000 Program costs represent approximately 1% to 10% of a typical
Consumers' annual information technology budget. Year 2000 compliance work is
being funded primarily from operations. To date, the commitment of Consumers
resources to the year 2000 issue has not deferred any information technology
projects which could have a material adverse affect on Consumers' financial
position, liquidity or results of operations.
RISK ASSESSMENT: Consumers considers the most reasonably likely worst-case
scenarios to be: (1) a lack of communications to dispatch crews to electric or
gas emergencies; (2) a lack of communications to generating units to balance
electrical load; and (3) power shortages due to the lack of stability of the
regional or national electric grid. These scenarios could result in Consumers
not being able to generate or distribute enough energy to meet customer demand
for a period of time, which could result in lost sales and profits, as well as
legal liability. Year 2000 remediation and testing efforts are concentrating on
these risk areas and will continue through the end of 1999. Contingency plans
are in place and will be executed, if necessary, to further mitigate the risks
associated with these scenarios.
CONTINGENCY PLANS: Contingency plans are in place for all systems and providers
of essential goods and services and for reasonably likely worst-case scenarios
related to year 2000 issues. In many cases, Consumers has arrangements with
multiple vendors of similar goods and services so that in the event that one
cannot meet its commitments, others may be able to. Current contingency plans
provide for manual dispatching of crews and manual coordination of electrical
load balancing and have been revised to provide for radio or satellite
communications. Coordinated contingency planning efforts are in progress with
national electric and gas industry associations, other Michigan utilities and
state
CE-8
<PAGE> 55
government agencies to address external factors which could affect energy
delivery and to minimize risk to energy generation, transmission and
distribution systems.
EXPECTATIONS: Consumers does not expect that the cost of modifications will
materially affect its financial position, liquidity, or results of operations.
There can be no guarantee, however, that these costs, plans or time estimates
will be achieved, and actual results could differ materially.
Because of the integrated nature of Consumers' business with other energy
companies, utilities, jointly owned facilities operated by other entities, and
business conducted with suppliers and large customers, Consumers may be
indirectly affected by year 2000 compliance complications.
DERIVATIVES AND HEDGES
MARKET RISK INFORMATION: Consumers' exposure to market risk sensitive
instruments and positions include, but are not limited to, changes in interest
rates, debt prices and equity prices in which Consumers holds less than a 20
percent interest. In accordance with the SEC's disclosure requirements,
Consumers performed a 10 percent sensitivity analysis on its derivative and
non-derivative financial instruments. The analysis measures the change in the
net present values based on a hypothetical 10 percent adverse change in the
market rates to determine the potential loss in fair values, cash flows and
earnings. Losses in excess of the amounts determined could occur if market rates
or prices exceed the 10 percent change used for the analysis. Management does
not believe that a sensitivity analysis alone provides an accurate or reliable
method for monitoring and controlling risk. Therefore, Consumers relies on the
experience and judgment of senior management to revise strategies and adjust
positions, as they deem necessary.
For purposes of the analysis below, Consumers has not quantified short-term
exposures to hypothetically adverse changes in the price or nominal amounts
associated with inventories or trade receivables and payables. Furthermore, all
derivative financial instruments are entered into for purposes other than
trading. In the case of hedges, management believes that any losses incurred on
derivative instruments used as a hedge would be offset by the opposite movement
of the underlying hedged item.
EQUITY SECURITY PRICE RISK: Consumers has an equity investment in companies in
which it holds less than a 20 percent interest in the entity. A hypothetical 10
percent adverse change in market price would result in a $15 million change in
its investment and equity since this equity instrument is currently
marked-to-market through equity. Consumers believes that such an adverse change
would not have a material effect on its consolidated financial position, results
of operation or cash flows.
DEBT PRICE AND INTEREST RATE RISK: Management uses a combination of fixed-rate
and variable-rate debt to reduce interest rate exposure. Interest rate swaps and
rate locks may be used to adjust exposure when deemed appropriate, based upon
market conditions. These strategies attempt to provide and maintain the lowest
cost of capital.
As of June 30, 1999, Consumers had outstanding $485 million of variable-rate
debt. In order to minimize adverse interest-rate changes, Consumers entered into
fixed interest-rate swaps for a notional amount of $190 million. Assuming a
hypothetical 10 percent adverse change in market interest rates, Consumers'
exposure to earnings is limited to $3 million. As of June 30, 1999, Consumers
has outstanding fixed-rate debt including fixed-rate swaps of $2.143 billion
with a fair value of $2.104 billion. Assuming a hypothetical 10 percent adverse
change in market rates, Consumers would have an exposure of $120 million to its
fair value. Consumers believes that any adverse change in debt price
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<PAGE> 56
and interest rates would not have a material effect on its consolidated
financial position, results of operation or cash flows.
FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements as defined by the Private
Securities Litigation Reform Act of 1995. The words "anticipates," "believes,"
"estimates," "expects," "intends," and "plans," as well as variations of such
words and similar expressions, are intended to identify forward-looking
statements that involve risk and uncertainty. These statements are based upon
various assumptions involving judgments with respect to the future including,
among others, the ability to achieve revenue enhancements; national, regional,
and local economic competitive and regulatory conditions and developments;
capital and financial market conditions including interest rates; weather
conditions and other natural phenomena; adverse regulatory or legal decisions,
including environmental laws and regulations; the pace of deregulation of the
natural gas and electric industries; energy markets, including the timing and
extent of changes in commodity prices for oil, coal, natural gas, natural gas
liquids, electricity and certain related products; the timing and success of
business development efforts; potential disruption or interruption of facilities
or operations due to accidents or political events; nuclear power performance
and regulation; technological developments in energy production, delivery, and
usage; the effect of changes in accounting policies; year 2000 readiness; and
other uncertainties, all of which are difficult to predict and many of which
are beyond the control of Consumers. Accordingly, while Consumers believes
that the assumed results are reasonable, there can be no assurance that they
will approximate actual results. Consumers disclaims any obligation to update
or revise forward-looking statements, whether as a result of new information,
future events or otherwise. Certain risk factors are detailed from time to
time in various public filings made by Consumers with the SEC.
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<PAGE> 57
CONSUMERS ENERGY COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED TWELVE MONTHS ENDED
JUNE 30 1999 1998 1999 1998 1999 1998
- ---------------------------------------------------------------------------------------------------------------------
In Millions
<S> <C> <C> <C> <C> <C> <C>
OPERATING REVENUE
Electric $ 663 $ 649 $1,299 $1,261 $2,644 $2,558
Gas 175 170 681 599 1,133 1,085
Other 12 13 27 23 55 53
-------------------------------------------------------------------
850 832 2,007 1,883 3,832 3,696
- ---------------------------------------------------------------------------------------------------------------------
OPERATING EXPENSES
Operation
Fuel for electric generation 88 80 164 151 330 308
Purchased power - related parties 139 144 278 290 562 592
Purchased and interchange power 66 88 129 142 272 270
Cost of gas sold 78 74 384 338 609 600
Other 152 130 281 262 563 544
-------------------------------------------------------------------
523 516 1,236 1,183 2,336 2,314
Maintenance 41 42 79 78 174 168
Depreciation, depletion and amortization 92 88 213 198 417 390
General taxes 45 45 103 100 204 197
-------------------------------------------------------------------
701 691 1,631 1,559 3,131 3,069
- ---------------------------------------------------------------------------------------------------------------------
PRETAX OPERATING INCOME
Electric 122 107 256 226 505 448
Gas 16 21 94 75 145 127
Other 11 13 26 23 51 52
-------------------------------------------------------------------
149 141 376 324 701 627
- ---------------------------------------------------------------------------------------------------------------------
OTHER INCOME (DEDUCTIONS)
Loss on MCV power purchases - - - (37) - (37)
Dividends and interest from affiliates 3 4 6 8 13 22
Accretion income 1 1 2 3 5 7
Accretion expense (4) (4) (7) (8) (15) (17)
Other, net 7 - 8 2 5 1
-------------------------------------------------------------------
7 1 9 (32) 8 (24)
- ----------------------------------------------------------------------------------------------------------------------
INTEREST CHARGES
Interest on long-term debt 35 35 70 68 139 137
Other interest 9 8 17 19 36 39
Capitalized interest - - - - (1) (1)
-------------------------------------------------------------------
44 43 87 87 174 175
- ---------------------------------------------------------------------------------------------------------------------
NET INCOME BEFORE INCOME TAXES 112 99 298 205 535 428
INCOME TAXES 39 30 107 67 175 129
-------------------------------------------------------------------
NET INCOME BEFORE CUMULATIVE EFFECT OF CHANGE
IN ACCOUNTING PRINCIPLE 73 69 191 138 360 299
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING FOR
PROPERTY TAXES, NET OF $23 TAX - - - 43 - 43
-------------------------------------------------------------------
NET INCOME 73 69 191 181 360 342
PREFERRED STOCK DIVIDENDS - 5 5 10 15 21
PREFERRED SECURITIES DISTRIBUTIONS 5 4 9 9 18 16
-------------------------------------------------------------------
NET INCOME AVAILABLE TO COMMON STOCKHOLDER $ 68 $ 60 $ 177 $ 162 $ 327 $ 305
=====================================================================================================================
</TABLE>
THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
CE-11
<PAGE> 58
CONSUMERS ENERGY COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED TWELVE MONTHS ENDED
JUNE 30 1999 1998 1999 1998
- -------------------------------------------------------------------------------------------------------------------------
In Millions
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 191 $ 181 $ 360 $ 342
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation, depletion and amortization (includes nuclear
decommissioning of $24, $25, $51 and $50, respectively) 213 198 417 390
Loss on MCV power purchases - 37 - 37
Capital lease and other amortization 20 21 34 44
Accretion expense 7 8 15 17
Deferred income taxes and investment tax credit 6 27 - 24
Accretion income - abandoned Midland project (2) (3) (5) (7)
Undistributed earnings of related parties (27) (24) (53) (50)
MCV power purchases (28) (32) (60) (64)
Cumulative effect of accounting change - (66) - (66)
Changes in other assets and liabilities 80 (22) 55 6
--------------------------------------------
Net cash provided by operating activities 460 325 763 673
- -------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (excludes assets placed under capital lease) (192) (159) (401) (355)
Cost to retire property, net (39) (44) (79) (61)
Investments in nuclear decommissioning trust funds (24) (25) (51) (50)
Investment in Electric Restructuring Implementation Plan (11) (3) (28) (6)
Proceeds from FMLP 7 - 19 -
Proceeds from nuclear decommissioning trust funds 21 27 47 27
Proceeds from the sale of two non-utility partnerships - 27 - 27
Associated company preferred stock redemption - - 50 -
Other - 3 2 54
--------------------------------------------
Net cash used in investing activities (238) (174) (441) (364)
- -------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Retirement of preferred stock (200) - (200) (118)
Payment of common stock dividends (173) (129) (285) (278)
Retirement of bonds and other long-term debt (23) (622) (206) (673)
Payment of capital lease obligations (18) (22) (29) (46)
Payment of preferred stock dividends (9) (10) (19) (25)
Preferred securities distributions (9) (9) (18) (16)
Proceeds from bank loans 15 - 15 -
Increase (decrease) in notes payable, net 49 (122) 9 14
Proceeds from senior notes - 914 132 914
Contribution from (return of equity to) stockholder 150 - 150 (50)
Proceeds from Trust Preferred Securities - - - 116
--------------------------------------------
Net cash provided by (used in) financing activities (218) - (451) (162)
- -------------------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND
TEMPORARY CASH INVESTMENTS 4 151 (129) 147
CASH AND TEMPORARY CASH INVESTMENTS, BEGINNING OF PERIOD 25 7 158 11
--------------------------------------------
CASH AND TEMPORARY CASH INVESTMENTS, END OF PERIOD $ 29 $ 158 $ 29 $ 158
=========================================================================================================================
</TABLE>
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<PAGE> 59
<TABLE>
<CAPTION>
SIX MONTHS ENDED TWELVE MONTHS ENDED
JUNE 30 1999 1998 1999 1998
- ------------------------------------------------------------------------------------------------
In Millions
<S> <C> <C> <C> <C>
OTHER CASH FLOW ACTIVITIES AND NON-CASH INVESTING
AND FINANCING ACTIVITIES WERE:
CASH TRANSACTIONS
Interest paid (net of amounts capitalized) $ 82 $ 83 $160 $166
Income taxes paid (net of refunds) 95 79 170 113
NON-CASH TRANSACTIONS
Nuclear fuel placed under capital lease $ (2) $ 15 $ 28 $ 16
Other assets placed under capital leases 7 7 14 10
================================================================================================
</TABLE>
All highly liquid investments with an original maturity of three months or less
are considered cash equivalents.
THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
CE-13
<PAGE> 60
CONSUMERS ENERGY COMPANY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS JUNE 30 JUNE 30
1999 DECEMBER 31 1998
(UNAUDITED) 1998 (UNAUDITED)
- -----------------------------------------------------------------------------------------------------------------
In Millions
<S> <C> <C> <C>
PLANT (AT ORIGINAL COST)
Electric $6,832 $6,720 $6,579
Gas 2,394 2,360 2,307
Other 25 25 23
----------------------------------
9,251 9,105 8,909
Less accumulated depreciation, depletion and amortization 5,493 4,862 4,707
----------------------------------
3,758 4,243 4,202
Construction work-in-progress 171 165 166
----------------------------------
3,929 4,408 4,368
- -----------------------------------------------------------------------------------------------------------------
INVESTMENTS
Stock of affiliates 222 241 278
First Midland Limited Partnership 238 240 247
Midland Cogeneration Venture Limited Partnership 230 209 189
----------------------------------
690 690 714
- -----------------------------------------------------------------------------------------------------------------
CURRENT ASSETS
Cash and temporary cash investments at cost, which approximates market 29 25 158
Accounts receivable and accrued revenue, less allowances
of $4, $5 and $5, respectively 102 114 76
Accounts receivable - related parties 59 63 71
Inventories at average cost
Gas in underground storage 166 219 178
Materials and supplies 51 67 63
Generating plant fuel stock 32 43 35
Postretirement benefits 25 25 25
Prepaid property taxes and other 82 162 148
----------------------------------
546 718 754
- -----------------------------------------------------------------------------------------------------------------
NON-CURRENT ASSETS
Regulatory assets
Unamortized nuclear costs 521 - -
Postretirement benefits 356 372 388
Abandoned Midland Project 60 71 83
Other 116 133 135
Nuclear decommissioning trust funds 581 557 521
Other 206 214 113
----------------------------------
1,840 1,347 1,240
- -----------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $7,005 $7,163 $7,076
=================================================================================================================
</TABLE>
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<PAGE> 61
<TABLE>
<CAPTION>
STOCKHOLDERS' INVESTMENT AND LIABILITIES JUNE 30 JUNE 30
1999 DECEMBER 31 1998
(UNAUDITED) 1998 (UNAUDITED)
- ------------------------------------------------------------------------------------------------------------------
In Millions
<S> <C> <C> <C>
CAPITALIZATION
Common stockholder's equity
Common stock $ 841 $ 841 $ 841
Paid-in capital 645 502 452
Revaluation capital 57 68 59
Retained earnings since December 31, 1992 438 434 396
-----------------------------------------
1,981 1,845 1,748
Preferred stock 44 238 238
Company-obligated mandatorily redeemable preferred securities of:
Consumers Power Company Financing I (a) 100 100 100
Consumers Energy Company Financing II (a) 120 120 120
Long-term debt 2,008 2,007 2,159
Non-current portion of capital leases 88 100 77
-----------------------------------------
4,341 4,410 4,442
- ------------------------------------------------------------------------------------------------------------------
CURRENT LIABILITIES
Current portion of long-term debt and capital leases 148 152 94
Notes payable 264 215 255
Accounts payable 157 190 150
Accrued taxes 160 238 154
Accounts payable - related parties 82 79 76
Power purchases 47 47 47
Accrued interest 35 36 31
Deferred income taxes 9 9 12
Accrued refunds 14 11 11
Other 151 138 139
-----------------------------------------
1,067 1,115 969
- ------------------------------------------------------------------------------------------------------------------
NON-CURRENT LIABILITIES
Deferred income taxes 641 666 680
Post-retirement benefits 436 456 474
Deferred investment tax credit 129 134 144
Regulatory liabilities for income taxes, net 115 87 59
Power purchases 101 121 146
Other 175 174 162
-----------------------------------------
1,597 1,638 1,665
- ------------------------------------------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES (Notes 1 and 2)
TOTAL STOCKHOLDERS' INVESTMENT AND LIABILITIES $ 7,005 $ 7,163 $ 7,076
==================================================================================================================
</TABLE>
(a) The primary asset of Consumers Power Company Financing I is $103 million
principal amount of 8.36% subordinated deferrable interest notes due 2015 from
Consumers. The primary asset of Consumers Energy Company Financing II is $124
million principal amount of 8.20% subordinated deferrable interest notes due
2027 from Consumers.
THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE BALANCE SHEETS.
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<PAGE> 62
CONSUMERS ENERGY COMPANY
CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDER'S EQUITY
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED TWELVE MONTHS ENDED
JUNE 30 1999 1998 1999 1998 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------------
In Millions
<S> <C> <C> <C> <C> <C> <C>
COMMON STOCK
At beginning and end of period $ 841 $ 841 $ 841 $ 841 $ 841 $ 841
----------------------------------------------------------------------------------
OTHER PAID-IN CAPITAL
At beginning of period 495 452 502 452 452 504
Stockholder's contribution 150 - 150 - 250 -
Return of stockholder's contribution - - - - (50) (50)
Capital stock reacquired - - (7) - (7) (2)
----------------------------------------------------------------------------------
At end of period 645 452 645 452 645 452
- ------------------------------------------------------------------------------------------------------------------------------------
REVALUATION CAPITAL
At beginning of period 54 65 68 58 59 41
Change in unrealized investment -
gain (loss) (a) 3 (6) (11) 1 (2) 18
----------------------------------------------------------------------------------
At end of period 57 59 57 59 57 59
- ------------------------------------------------------------------------------------------------------------------------------------
RETAINED EARNINGS
At beginning of period 446 385 434 363 396 368
Net income (a) 73 69 191 181 360 342
Common stock dividends declared (76) (49) (173) (129) (285) (277)
Preferred stock dividends declared - (5) (5) (10) (15) (21)
Preferred securities distributions (5) (4) (9) (9) (18) (16)
----------------------------------------------------------------------------------
At end of period 438 396 438 396 438 396
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCKHOLDER'S EQUITY $ 1,981 $ 1,748 $ 1,981 $ 1,748 $ 1,981 $ 1,748
====================================================================================================================================
(a) DISCLOSURE OF COMPREHENSIVE INCOME:
Revaluation capital
Unrealized investment - gain (loss),
net of tax of $2, $(3), $(6), $-,
$(1) and $10, respectively $ 3 $ (6) $ (11) $ 1 $ (2) $ 18
Net income 73 69 191 181 360 342
----------------------------------------------------------------------------------
Total Comprehensive Income $ 76 $ 63 $ 180 $ 182 $ 358 $ 360
==================================================================================
</TABLE>
THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
CE-16
<PAGE> 63
CONSUMERS ENERGY COMPANY
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
These Condensed Notes and their related Consolidated Financial Statements should
be read along with the Consolidated Financial Statements and Notes contained in
the Consumers 1998 Form 10-K that includes the Report of Independent Public
Accountants. In the opinion of management, the unaudited information herein
reflects all adjustments necessary to assure the fair presentation of financial
position, results of operations and cash flows for the periods presented.
1: CORPORATE STRUCTURE AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CORPORATE STRUCTURE: Consumers is a combination electric and gas utility company
serving the Lower Peninsula of Michigan and is the principal subsidiary of CMS
Energy, a holding company. Consumers' customer base includes a mix of
residential, commercial and diversified industrial customers, the largest
segment of which is the automotive industry.
RISK MANAGEMENT ACTIVITIES AND DERIVATIVES TRANSACTIONS: Consumers and its
subsidiaries use derivative instruments, including swaps and options, to manage
exposure to fluctuations in interest rates and commodity prices, respectively.
To qualify for hedge accounting, derivatives must meet the following criteria:
(1) the item to be hedged exposes the enterprise to price and interest rate
risk; and (2) the derivative reduces that exposure and is designated as a hedge.
Derivative instruments contain credit risk if the counter parties, including
financial institutions and energy marketers, fail to perform under the
agreements. Consumers minimizes such risk by performing financial credit reviews
using, among other things, publicly available credit ratings of such counter
parties. The risk of nonperformance by the counter parties is considered remote.
Consumers enters into interest rate swap agreements to exchange variable-rate
interest payment obligations for fixed-rate obligations without exchanging the
underlying notional amounts. These agreements convert variable-rate debt to
fixed-rate debt in order to reduce the impact of interest rate fluctuations. The
notional amounts parallel the underlying debt levels and are used to measure
interest to be paid or received and do not represent the exposure to credit
loss.
Consumers enters into electric option contracts to ensure a reliable source of
capacity to meet its customers' electricity requirements and to limit its risk
associated with electricity price increases. It is management's intent to take
physical delivery of the commodity. Consumers continuously evaluates its daily
capacity needs and sells the option contracts, if marketable, when it has excess
daily capacity. Consumers' maximum exposure associated with these options is
limited to premiums paid.
UTILITY REGULATION: Consumers accounts for the effects of regulation based on a
regulated utility accounting standard (SFAS 71). As a result, the actions of
regulators affect when revenues, expenses, assets and liabilities are
recognized.
In March 1999, Consumers received MPSC electric restructuring orders which,
among other things, identified the terms and timing for implementing electric
restructuring in Michigan.
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<PAGE> 64
Consistent with these orders, Consumers expects to implement retail open access
for its electric customers in September 1999, and therefore, Consumers
discontinued application of SFAS 71 for the energy supply portion of its
business in the first quarter of 1999. Discontinuation of SFAS 71 for the energy
supply portion of Consumers' business resulted in Consumers reducing the
carrying value of its Palisades plant-related assets by approximately $535
million and established a regulatory asset for a corresponding amount. The
regulatory asset is collectible as part of the Transition Costs which are
recoverable through the regulated transmission and distribution portion of
Consumers' business as approved by an MPSC order in 1998. This order also
allowed Consumers to recover any energy supply-related regulatory assets, plus a
return on any unamortized balance of those assets, from its transmission and
distribution customers. According to current accounting standards, Consumers can
continue to carry its energy supply-related regulatory assets or liabilities for
the part of the business subject to regulatory change if legislation or an MPSC
rate order allows the collection of cash flows, to recover specific costs or to
settle obligations, from its regulated transmission and distribution customers.
At June 30, 1999, Consumers had a net investment in energy supply facilities of
$924 million included in electric plant and property.
REPORTABLE SEGMENTS: Consumers has two reportable segments: electric and gas.
The electric segment consists of activities associated with the generation,
transmission and distribution of electricity. The gas segment consists of
activities associated with the production, transportation, storage and
distribution of natural gas. Consumers' reportable segments are domestic
strategic business units organized and managed by the nature of the product and
service each provides. The accounting policies of the segments are the same as
those described in Consumers' 1998 Form 10-K. Consumers' management evaluates
performance based on pretax operating income. The Consolidated Statements of
Income show operating revenue and pretax operating income by reportable segment.
Intersegment sales and transfers are accounted for at current market prices and
are eliminated in consolidated pretax operating income by segment.
IMPLEMENTATION OF NEW ACCOUNTING STANDARDS: In 1998, the American Institute of
Certified Public Accountants issued Statement of Position 98-1, Accounting for
the Costs of Computer Software Developed or Obtained for Internal Use, and
Statement of Position 98-5, Reporting on the Costs of Start-Up Activities. Also
in 1998, the Emerging Issues Task Force published Issue 98-10, Accounting for
Energy Trading and Risk Management Activities. Each of these statements is
effective for 1999. Application of these standards has not had a material affect
on Consumers' financial position, liquidity or results of operations.
2: UNCERTAINTIES
ELECTRIC CONTINGENCIES
ELECTRIC ENVIRONMENTAL MATTERS: The Clean Air Act limits emissions of sulfur
dioxide and nitrogen oxides and requires emissions and air quality monitoring.
Consumers currently operates within these limits and meets current emission
requirements. The Clean Air Act requires the EPA to periodically review the
effectiveness of the national air quality standards in preventing adverse health
effects, and in 1997 the EPA revised these standards. The anticipated effect of
these revisions was to impose further limitations on nitrogen oxide and small
particulate-related emissions. A United States Court of Appeals recently ruled
however, that the EPA's revision of the standards was an unconstitutional
delegation of legislative power. As a result, the standards will not be
implemented unless the issue relating to the
CE-18
<PAGE> 65
unconstitutional delegation of legislative power is resolved. The EPA has
requested a rehearing of this ruling.
In September 1998, based in part upon the 1997 standards, the EPA Administrator
signed final regulations requiring the State of Michigan to further limit
nitrogen oxide emissions. Fossil-fueled emitters, such as Consumers' generating
units, anticipated a reduction in nitrogen oxide emissions by 2003 to only 32
percent of levels allowed for the year 2000. The State of Michigan had one year
to submit an implementation plan. The State of Michigan filed a lawsuit
objecting to the extent of the required emission reductions and requesting an
extension of the submission date. The United States Court of Appeals recently
granted an indefinite stay of the submission date for the implementation plan.
Based upon the recent court rulings, it is unlikely that the State of Michigan
will establish Consumers' nitrogen oxide emissions reduction target until late
1999. Until this target is established, the estimated cost of compliance
discussed below is subject to revision. If a court were to order the EPA to
adopt the State of Michigan's proposed positions then compliance costs could be
less than the preliminary estimated amounts.
The preliminary estimate of capital expenditures to reduce nitrogen
oxide-related emissions for Consumers' fossil-fueled generating units is
approximately $290 million. Consumers anticipates that these capital
expenditures will be incurred between 1999 and 2004. Consumers may need an
equivalent amount of capital expenditures, plus $10 million per year for
operation and maintenance costs, to comply with the new small particulate
standards.
Consumers' coal-fueled electric generating units burn low-sulfur coal and are
currently operating at or near the sulfur dioxide emission limits that will be
effective in the year 2000. During the past few years, in order to comply with
the Clean Air Act, Consumers incurred capital expenditures totaling $55 million
to install equipment at certain generating units. Consumers estimates an
additional $16 million of capital expenditures for ongoing and proposed
modifications at the remaining coal-fueled units to meet year 2000 requirements.
Management believes that these expenditures will not materially affect
Consumers' annual operating costs.
Under the Michigan Natural Resources and Environmental Protection Act, Consumers
expects that it will ultimately incur investigation and remedial action costs at
a number of sites. Nevertheless, it believes that these costs are properly
recoverable in rates under current ratemaking policies.
Consumers is a so-called potentially responsible party at several contaminated
sites administered under Superfund. Superfund liability is joint and several;
along with Consumers, many other creditworthy, potentially responsible parties
with substantial assets cooperate with respect to the individual sites. Based
upon past negotiations, Consumers estimates that its share of the total
liability for the known Superfund sites will be between $2 million and $9
million. At June 30, 1999, Consumers has accrued the minimum amount of the range
for its estimated Superfund liability.
While decommissioning Big Rock, Consumers found that some areas of the plant
have coatings that contain both metals and PCBs. The cost of removal and
disposal of these materials is currently unknown. There may be some radioactive
portion of these materials, which no facility in the United States will
currently accept. The cost of removal and disposal will constitute part of the
cost to decommission the plant and will be paid from the decommissioning fund.
Consumers is studying the extent of the contamination and reviewing options.
CE-19
<PAGE> 66
ANTITRUST: In October 1997, two independent power producers sued Consumers in a
federal court. The suit alleged antitrust violations relating to contracts,
which Consumers entered into with some of its customers and claims relating to
power facilities. On March 31, 1999, the court issued an opinion and order
granting Consumers' motion for summary judgment, resulting in the dismissal of
the case. The plaintiffs have appealed this decision.
ELECTRIC RATE MATTERS
ELECTRIC PROCEEDINGS: In 1996, the MPSC issued a final order that authorized
Consumers to recover costs associated with the purchase of the additional 325 MW
of MCV Facility capacity (see "Power Purchases from the MCV Partnership" in this
Note) and to recover its nuclear plant investment by increasing prospective
annual nuclear plant depreciation expense by $18 million, with a corresponding
decrease in fossil-fueled generating plant depreciation expense. It also
established an experimental direct-access program. Customers having a maximum
demand of 2 MW or greater are eligible to purchase generation services directly
from any eligible third-party power supplier and Consumers will transmit the
power for a fee. The direct-access program is limited to 134 MW of load. In
accordance with the MPSC order, Consumers held a lottery in April 1997 to select
the customers to participate in the direct-access program. Subsequently, direct
access for a portion of this 134 MW began in late 1997. The program was
substantially filled by the end of March 1999. The Attorney General, ABATE, the
MCV Partnership and other parties filed appeals with the Court of Appeals
challenging the MPSC's 1996 order. In August 1999, the Court of Appeals
affirmed the MPSC's 1996 order in all respects.
In January 1998, the Court of Appeals affirmed an MPSC conclusion that the MPSC
has statutory authority to authorize an experimental electric retail wheeling
program. In June 1999, the Michigan Supreme Court reversed the Court of Appeals
and vacated the 1995 MPSC retail wheeling orders. The Court found that the MPSC
does not have the statutory authority to order a mandatory retail wheeling
program.
ELECTRIC RESTRUCTURING: As part of ongoing proceedings relating to the
restructuring of the electric utility industry in Michigan, the MPSC in June
1997 issued an order proposing that beginning January 1, 1998 Consumers transmit
and distribute energy on behalf of competing power suppliers to retail
customers. Further restructuring orders issued in late 1997 and early 1998
provide for: 1) recovery of estimated Transition Costs of $1.755 billion through
a charge to all customers purchasing their power from other sources until the
end of the transition period in 2007, subject to an adjustment through a true-up
mechanism; 2) commencement of the phase-in of retail open access in 1998; 3)
suspension of the PSCR clause as discussed below; and 4) all customers to choose
their power suppliers on January 1, 2002. The recovery of costs of implementing
a retail open access program, preliminarily estimated at an additional $200
million, would be reviewed for prudence and recovered via a charge approved by
the MPSC. Nuclear decommissioning costs will also continue to be collected
through a separate surcharge to all customers.
In June 1998, Consumers submitted its plan for implementing retail open access
to the MPSC. The primary issues addressed in the plan are: 1) the implementation
schedule; 2) the retail open access service options available to customers and
suppliers; 3) the process and requirements for customers and others to obtain
retail open access service; and 4) the roles and responsibilities for Consumers,
customers and suppliers. In the plan, Consumers proposed to phase in 750 MW of
retail customer open access load over the 1998-2001 period. In March 1999,
Consumers received MPSC electric restructuring orders, which generally supported
Consumers' implementation plan. Consumers is in the process of implementing
electric customer retail open access.
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<PAGE> 67
There are numerous appeals pending at the Court of Appeals relating to the
MPSC's restructuring orders, including appeals by Consumers. Because of the June
1999 Michigan Supreme Court decision described above in "Electric Proceedings",
Consumers believes that the MPSC lacks statutory authority to mandate industry
restructuring, and its appeal generally is limited to this jurisdictional issue.
Subsequent to the June 1999 Michigan Supreme Court decision, the MPSC requested
comments from any interested party concerning the effect of the Supreme Court's
decision on these matters. The MPSC is expected to issue an order addressing
this subject in the third quarter 1999. Consumers cannot predict the outcome of
electric restructuring on it's financial position, liquidity, or results of
operations.
As a result of a 1998 MPSC order in connection with the electric restructuring
program, the PSCR process was suspended. Under this program, customers buying
electricity from Consumers as traditional customers will not have their rates
adjusted to reflect the actual costs of fuel and purchased and interchanged
power during the 1998-2001 period. In prior years, any change in power supply
costs was passed through to such customers. In order to reduce the risk of high
energy prices during peak demand periods, Consumers has agreements to purchase,
in 1999, approximately $19 million of options to insure a reliable source of
capacity during the months of June through September 1999. Consumers is planning
to have sufficient generation and purchased capacity for approximately a 16
percent reserve margin in order to provide reliable service to its electric
service customers and to protect itself against unscheduled plant outages. Under
certain circumstances, the cost of purchasing capacity and energy on the spot
market could be substantial.
In June 1999, Consumers and four other electric utility companies sought
approval from the FERC to form the Alliance Regional Transmission Organization.
The proposed structure will provide for the creation of an independent
transmission entity that would control, operate and own transmission facilities
of one or more of the member companies, and would control and operate - but not
own - the transmission facilities of other companies. The proposal is structured
to give the member companies the flexibility to maintain or divest ownership of
their transmission facilities while ensuring independent operation of the
regional transmission system. The member companies have requested the FERC to
approve the proposed request expeditiously. Consumers is uncertain of the
outcome of this matter.
OTHER ELECTRIC UNCERTAINTIES
THE MIDLAND COGENERATION VENTURE: The MCV Partnership, which leases and operates
the MCV Facility, contracted to sell electricity to Consumers for a 35-year
period beginning in 1990 and to supply electricity and steam to Dow. Consumers,
through two wholly owned subsidiaries, holds the following assets related to the
MCV Partnership and MCV Facility: 1) CMS Midland owns a 49 percent general
partnership interest in the MCV Partnership; and 2) CMS Holdings holds, through
FMLP, a 35 percent lessor interest in the MCV Facility.
CE-21
<PAGE> 68
Summarized Statements of Income for CMS Midland and CMS Holdings-
<TABLE>
<CAPTION>
In Millions
-----------------------------------------------
Six Months Ended Twelve Months Ended
June 30 1999 1998 1999 1998
- ------- ---- ---- ---- ----
<S> <C> <C> <C> <C>
Pretax operating income $ 26 $ 23 $ 51 $ 51
Income taxes and other 8 7 16 16
---- ---- ---- ----
Net income $ 18 $ 16 $ 35 $ 35
==== ==== ==== ====
</TABLE>
Power Purchases from the MCV Partnership- Consumers' annual obligation to
purchase capacity from the MCV Partnership is 1,240 MW through the termination
of the PPA in 2025. The PPA provides that Consumers is to pay, based on the MCV
Facility's availability, a levelized average capacity charge of 3.77 cents per
kWh, a fixed energy charge, and a variable energy charge based primarily on
Consumers' average cost of coal consumed for all kWh delivered. Since January 1,
1993, Consumers has been permitted by the MPSC to recover capacity charges
averaging 3.62 cents per kWh for 915 MW, plus a substantial portion of the fixed
and variable energy charges. Since January 1, 1996, Consumers also has been
permitted 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. Because
the MPSC has already approved recovery of this capacity, Consumers expects to
recover these increases through an adjustment to the currently frozen PSCR
level, which is currently under consideration by the MPSC. After September 2007,
under the terms of the PPA, Consumers will only be required to pay the MCV
Partnership capacity and energy charges that the MPSC has authorized for
recovery from electric customers.
In March 1999, Consumers signed a long-term power sales agreement to supply PECO
with electric generating capacity under the PPA until September 2007. After a
three-year transition period during which 100 to 150 MW will be sold to PECO,
beginning in 2002 Consumers will sell all 1,240 MW of PPA capacity and
associated energy to PECO. In March 1999, Consumers also filed an application
with the MPSC for accounting and ratemaking approvals related to the
transaction. In an order issued on April 30, 1999, the MPSC conditionally
approved the requests for accounting and rate-making treatment to the extent
that customer rates are not increased from their level absent the agreement and
as modified by the order. Consumers and other parties have filed petitions for
clarification and rehearing which request that the MPSC clarify certain aspects
of its order. The MPSC has not yet acted on this request.
Consumers recognized a loss in 1992 for the present value of the estimated
future underrecoveries of power costs under the PPA based on MPSC recovery
orders. At June 30, 1999 and June 30, 1998, the remaining after-tax present
value of the estimated future PPA liability associated with the 1992 loss
totaled $96 million and $126 million, respectively. At June 30, 1999, the
undiscounted after-tax amount associated with this liability totaled $153
million. These after-tax cash underrecoveries are based on the assumption that
the MCV Facility would be available to generate electricity 91.5 percent of the
time over its expected life. Historically the MCV Facility has operated above
the 91.5 percent level. Accordingly, in 1998, Consumers increased its PPA
liability by $37 million. Because the MCV Facility operated above the 91.5
percent level in 1998 and thus far in 1999, Consumers has an accumulated
unrecovered after-tax shortfall of $17 million as of June 30, 1999. Consumers
CE-22
<PAGE> 69
believes that this shortfall will be resolved as part of the electric
restructuring effort. If the MCV Facility generates electricity at the 91.5
percent level during the next five years, Consumers' after-tax cash
underrecoveries associated with the PPA would be as follows.
<TABLE>
<CAPTION>
In Millions
--------------------------------------------------
1999 2000 2001 2002 2003
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Estimated cash underrecoveries, net of tax $ 29 $ 21 $ 20 $ 19 $ 18
==== ==== ==== ==== ====
</TABLE>
If the MCV Facility operates at availability levels above management's 91.5
percent estimate made in 1992 for the remainder of the PPA, Consumers will need
to recognize additional losses for future underrecoveries. In March 1999,
Consumers and the MCV Partnership reached an agreement effective January 1, 1999
that will cap availability payments to the MCV Partnership at 98.5 percent. For
further discussion on the impact of the frozen PSCR, see "Electric
Restructuring" in this Note. Management is evaluating the adequacy of the
contract loss liability considering actual MCV Facility operations and any other
relevant circumstances.
In February 1998, the MCV Partnership filed a claim of appeal from the January
1998 and February 1998 MPSC orders in the electric utility industry
restructuring. At the same time, the MCV Partnership filed suit in the U.S.
District Court seeking a declaration that the MPSC's failure to provide
Consumers and the MCV Partnership a certain source of recovery of capacity
payments after 2007 deprived the MCV Partnership of its rights under the Public
Utilities Regulatory Policies Act of 1978. In July 1999, the U.S. District Court
issued an order granting the MCV Partnership's motion for summary judgment. The
order permanently prohibits two of the incumbent commissioners from enforcing
the restructuring orders in any manner which denies any utility the ability to
recover amounts paid to qualifying facilities such as the MCV Facility or which
precludes the MCV Partnership from recovering the avoided cost rate.
NUCLEAR MATTERS: In January 1997, the NRC issued its Systematic Assessment of
Licensee Performance report for Palisades. The report rated all areas as good.
The NRC suspended this same assessment process for all licensees in 1998. Until
such time as the NRC completes its review of processes for assessing performance
at nuclear power plants, the Plant Performance Review is being used to provide
an assessment of licensee performance. Palisades received its performance review
dated March 26, 1999 in which the NRC stated that the overall performance at
Palisades was acceptable.
Palisades' temporary on-site storage pool for spent nuclear fuel is at capacity.
Consequently, Consumers is using NRC-approved steel and concrete vaults,
commonly known as "dry casks", for temporary on-site storage. As of June 30,
1999 Consumers had loaded 14 dry storage casks with spent nuclear fuel at
Palisades and plans to load four additional casks in 1999 pending approval by
the NRC. In June 1997, the NRC approved Consumers' process for unloading spent
fuel from a cask previously discovered to have minor weld flaws. Consumers
intends to transfer the spent fuel to a new transportable cask when one is
available.
Consumers maintains insurance against property damage, debris removal, personal
injury liability and other risks that are present at its nuclear generating
facilities. Consumers also maintains coverage for replacement power costs during
prolonged accidental outages at Palisades. Insurance would not cover such costs
during the first 17 weeks of any outage, but would cover most of such costs
during the next 58 weeks of the outage, followed by reduced coverage to 80
percent for two additional years. If certain covered losses occur at its own or
other nuclear plants similarly insured, Consumers could be required to pay
maximum
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<PAGE> 70
assessments of $15 million in any one year to NEIL; $88 million per occurrence
under the nuclear liability secondary financial protection program, limited to
$10 million per occurrence in any year; and $6 million if nuclear workers claim
bodily injury from radiation exposure. Consumers considers the possibility of
these assessments to be remote.
The NRC requires Consumers to make certain calculations and report on the
continuing ability of the Palisades reactor vessel to withstand postulated
pressurized thermal shock events during its remaining license life, considering
the embrittlement of reactor materials. In December 1996, Consumers received an
interim Safety Evaluation Report from the NRC indicating that the reactor vessel
can be safely operated through 2003 before reaching the NRC's screening criteria
for reactor embrittlement. Consumers believes that with fuel management designed
to minimize embrittlement, it can operate Palisades to the end of its license
life in the year 2007 without annealing the reactor vessel. Nevertheless,
Consumers will continue to monitor the matter.
NUCLEAR PLANT DECOMMISSIONING: Consumers collected $51 million in 1998 from its
electric customers for decommissioning of its two nuclear plants. Amounts
collected from electric retail customers and deposited in trusts (including
trust earnings) are credited to accumulated depreciation. On March 22, 1999,
Consumers received a decommissioning order from the MPSC that approved estimated
decommissioning costs for Big Rock and Palisades of $304 million and $541
million (in 1998 dollars), respectively. Consumers' site-specific
decommissioning cost estimates for Big Rock and Palisades assume that each plant
site will eventually be restored to conform to the adjacent landscape, and all
contaminated equipment will be disassembled and disposed of in a licensed burial
facility. The MPSC order also reduced annual decommissioning surcharges by $4
million a year and required Consumers to file revised decommissioning surcharges
for Palisades that incorporate a gradual reduction in the decommissioning
trust's equity investments following the plant's retirement. On April 21, 1999,
Consumers filed with the MPSC a revised decommissioning surcharge for Palisades
and anticipates a revised MPSC order in early 2000. If approved, the annual
decommissioning surcharges for Palisades would be reduced by an additional $4
million a year. After retirement of Palisades, Consumers plans to maintain the
facility in protective storage if radioactive waste disposal facilities are not
available. Consumers will incur most of the Palisades decommissioning costs
after the plant's NRC operating license expires. When the Palisades' NRC license
expires in 2007, the trust funds are currently estimated to have accumulated
$677 million, assuming current surcharge levels. Consumers estimates that at the
time Palisades is fully decommissioned in the year 2046, the trust funds will
have provided $1.9 billion, including trust earnings, over this decommissioning
period. As of June 30, 1999, Consumers had an investment in nuclear
decommissioning trust funds of $400 million for Palisades and $181 million for
Big Rock.
Big Rock was closed permanently in 1997 because management determined that it
would be uneconomical to operate in an increasingly competitive environment. The
plant was originally scheduled to close on May 31, 2000, at the end of the
plant's operating license. The MPSC has allowed Consumers to continue collecting
decommissioning surcharges through December 31, 2000. Plant decommissioning
began in 1997 and it may take five to ten years to return the site to its
original condition. For the first six months of 1999, Consumers spent $24
million for the decommissioning and withdrew $21 million from the Big Rock
nuclear decommissioning trust fund. In total, Consumers has spent $99 million
for the decommissioning and withdrew $90 million from the Big Rock nuclear
decommissioning trust fund. These activities had no impact on net income.
CE-24
<PAGE> 71
CAPITAL EXPENDITURES: Consumers estimates electric capital expenditures,
including new lease commitments, of $375 million for 1999, $435 million for
2000, and $520 million for 2001. For further information, see the Capital
Expenditures Outlook section in the MD&A.
GAS CONTINGENCIES
GAS ENVIRONMENTAL MATTERS: Under the Michigan Natural Resources and
Environmental Protection Act, Consumers expects that it will ultimately incur
investigation and remedial action costs at a number of sites, including some 23
sites that formerly housed manufactured gas plant facilities, even those in
which it has a partial or no current ownership interest. By late 1999, Consumers
expects to have completed sufficient investigation of the 23 sites to make a
more accurate estimate of remediation methods and costs. On sites where
Consumers has received site-wide study plan approvals, it will continue to
implement these plans. It will also work toward closure of environmental issues
at sites as studies are completed. Consumers estimates its costs related to
investigation and remedial action for all 23 sites between $48 million and $98
million, of which Consumers accrued a liability for $48 million. These estimates
are based on undiscounted 1998 costs. As of June 30, 1999, Consumers has an
accrued liability of $48 million and a regulatory asset for approximately the
same amount. Any significant change in assumptions, such as remediation
techniques, nature and extent of contamination, and legal and regulatory
requirements, could affect the estimate of remedial action costs for the sites.
Consumers defers and amortizes over a period of ten years, environmental
clean-up costs above the amount currently being recovered in rates. Rate
recognition of amortization expense will not begin until after a prudence review
in a general rate case. Consumers is allowed current recovery of $1 million
annually. Consumers has initiated lawsuits against certain insurance companies
regarding coverage for some or all of the costs that it may incur for these
sites.
GAS RATE MATTERS
GAS RESTRUCTURING: In December 1997, the MPSC approved Consumers' application to
implement an experimental gas transportation program, which will extend over a
three-year period, eventually allowing 300,000 residential, commercial and
industrial retail gas sales customers to choose their gas commodity supplier.
The program is voluntary and participating natural gas customers are selected on
a first-come, first-served basis, up to a limit of 100,000 per year. As of July
1, 1999, more than 165,000 customers chose alternative gas suppliers,
representing approximately 40 bcf of gas load. Under traditional regulation,
Consumers had not been allowed to benefit from reducing its cost of the
commodity supplied to its customers, so the loss of commodity sales to these
customers will not have any impact on net income. Customers choosing to remain
as sales customers of Consumers will not see a rate change in their natural gas
rates. This three-year program: 1) suspends Consumers' GCR clause, effective
April 1, 1998, establishing a gas commodity cost at a fixed rate of $2.84 per
mcf, allowing Consumers the opportunity to benefit by reducing its cost of the
commodity; 2) establishes an earnings sharing mechanism with customers if
Consumers' earnings exceed certain pre-determined levels; and 3) establishes a
gas transportation code of conduct that addresses the relationship between
Consumers and marketers, including its affiliated marketers. In January 1998,
the Attorney General, ABATE and other parties filed claims of appeal regarding
the program with the Court of Appeals.
Consumers uses gas purchase contracts to limit its risk associated with
increases in its gas price above the $2.84 per mcf during the three-year
experimental gas program. It is management's intent to take physical delivery of
the commodity and failure could result in a significant
CE-25
<PAGE> 72
penalty for nonperformance. At June 30, 1999, Consumers had an exposure to gas
price increases if the ultimate cost of gas was to exceed $2.84 per mcf for the
following volumes: 7 percent of its 1999 requirements; 55 percent of its 2000
requirements; and 55 percent of its first quarter 2001 requirements. Additional
contract coverage is currently under review. The gas purchase contracts
currently in place were consummated at prices less than $2.84 per mcf. The gas
purchase contracts are being used to protect against gas price increases in the
three-year experimental gas program where Consumers is recovering from its
customers $2.84 per mcf for gas.
OTHER GAS UNCERTAINTIES
CAPITAL EXPENDITURES: Consumers estimates gas capital expenditures, including
new lease commitments, of $125 million for 1999, and $130 million for each of
2000 and 2001. For further information, see the Capital Expenditures Outlook
section in the MD&A.
In addition to the matters disclosed in this note, Consumers and certain of its
subsidiaries are parties to certain lawsuits and administrative proceedings
before various courts and governmental agencies arising from the ordinary course
of business. These lawsuits and proceedings may involve personal injury,
property damage, contractual matters, environmental issues, federal and state
taxes, rates, licensing and other matters.
Consumers has accrued estimated losses for certain contingencies discussed in
this Note. Resolution of these contingencies is not expected to have a material
adverse impact on Consumers' financial position, liquidity, or results of
operations.
3: SHORT-TERM FINANCINGS AND CAPITALIZATION
AUTHORIZATION: At June 30, 1999, Consumers had FERC authorization to issue or
guarantee, through June 2000, up to $900 million of short-term securities
outstanding at any one time and to guarantee, through 1999, up to $25 million in
loans made by others to residents of Michigan for making energy-related home
improvements. Consumers also had remaining FERC authorization to issue, through
June 2000, up to $475 million and $425 million of long-term securities with
maturities up to 30 years for refinancing purposes and for general corporate
purposes, respectively.
SHORT-TERM FINANCING: Consumers had an unsecured $425 million credit facility.
In July 1999, Consumers renegotiated this facility in the reduced amount of $300
million. Consumers also has unsecured lines of credit aggregating $120 million.
These facilities are available to finance seasonal working capital requirements
and to pay for capital expenditures between long-term financings. At June 30,
1999, a total of $264 million was outstanding at a weighted average interest
rate of 6.1 percent, compared with $255 million outstanding at June 30, 1998, at
a weighted average interest rate of 6.0 percent. In January 1999, Consumers
renegotiated a variable-to-fixed interest rate swap totaling $175 million in
order to reduce the impact of interest rate fluctuations.
Consumers also has in place a $325 million trade receivables sale program. At
June 30, 1999 and 1998, receivables sold under the program totaled $266 million
and $236 million, respectively. Accounts receivable and accrued revenue in the
Consolidated Balance Sheets have been reduced to reflect receivables sold.
CE-26
<PAGE> 73
LONG-TERM FINANCINGS: Consumers issued long-term bank debt of $15 million in
February 1999, maturing in February 2002, at an initial interest rate of 5.3
percent. Proceeds from this issuance were used for general corporate purposes.
On April 1, 1999, Consumers redeemed all eight million outstanding shares of its
$2.08 preferred stock at $25.00 per share for a total of $200 million.
Under the provisions of its Articles of Incorporation, Consumers had $319
million of unrestricted retained earnings available to pay common dividends at
June 30, 1999. In May 1999, Consumers declared and paid a $76 million common
dividend. In July 1999, Consumers declared a $35 million common dividend payable
in August 1999.
CE-27
<PAGE> 74
ARTHUR ANDERSEN LLP
Report of Independent Public Accountants
To Consumers Energy Company:
We have reviewed the accompanying consolidated balance sheets of CONSUMERS
ENERGY COMPANY (a Michigan corporation and wholly owned subsidiary of CMS Energy
Corporation) and subsidiaries as of June 30, 1999 and 1998, and the related
consolidated statements of income and common stockholder's equity for the
three-month, six-month and twelve-month periods then ended, and the related
statements of cash flows for the six-month and twelve month periods then ended.
These financial statements are the responsibility of the Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which is the
expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the financial statements referred to above for them to be in
conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet and consolidated statements of
long-term debt and preferred stock of Consumers Energy Company and subsidiaries
as of December 31, 1998, and the related consolidated statements of income,
common stockholder's equity and cash flows for the year then ended (not
presented herein), and, in our report dated January 26, 1999 (except with
respect to the matter disclosed in Note 2, "Electric Rate Matters", as to which
the date is March 29, 1999), we expressed an unqualified opinion on those
statements. In our opinion, the information set forth in the accompanying
consolidated balance sheet as of December 31, 1998, is fairly stated, in all
material respects, in relation to the consolidated balance sheet from which it
has been derived.
Arthur Andersen LLP
Detroit, Michigan,
August 12, 1999.
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<PAGE> 75
PANHANDLE EASTERN PIPE LINE COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS
Panhandle is primarily engaged in the interstate transportation and storage of
natural gas. Panhandle owns an LNG regasification plant and related tanker port
unloading facilities and LNG and gas storage facilities. The rates and
conditions of service of interstate natural gas transmission, storage and LNG
operations of Panhandle are subject to the rules and regulations of the FERC.
The MD&A of this Form 10-Q should be read along with the MD&A and other parts of
Panhandle's 1998 Form 10-K. This MD&A also refers to, and in some sections
specifically incorporates by reference, Panhandle's Condensed Notes to
Consolidated Financial Statements and should be read in conjunction with such
Statements and Notes. This report contains forward-looking statements, as
defined by the Private Securities Litigation Reform Act of 1995. While
forward-looking statements are based on assumptions and such assumptions are
believed to be reasonable and are made in good faith, Panhandle cautions that
assumed results almost always vary from actual results and differences between
assumed and actual results can be material. The type of assumptions that could
materially affect the actual results are discussed in the Forward-Looking
Information section in this MD&A. More specific risk factors are contained in
various public filings made by Panhandle with the SEC. This report also
describes material contingencies in the Notes to Consolidated Financial
Statements and the readers are encouraged to read such Notes.
On March 29, 1999, Panhandle Eastern Pipe Line Company and its principal
consolidated subsidiaries, Trunkline and Pan Gas Storage, as well as Panhandle
Eastern Pipe Line Company's affiliates, Trunkline LNG and Panhandle Storage,
were acquired from subsidiaries of Duke Energy by CMS Panhandle Holding, which
was an indirect wholly owned subsidiary of CMS Energy. Immediately following the
acquisition, Trunkline LNG and Panhandle Storage became direct wholly owned
subsidiaries of Panhandle Eastern Pipe Line Company.
Prior to the acquisition, Panhandle's interests in Northern Border Pipeline
Company, Panhandle Field Services Company, Panhandle Gathering Company, and
certain other assets, including the Houston corporate headquarters building,
were transferred to other subsidiaries of Duke Energy; certain intercompany
accounts and notes between Panhandle and Duke Energy subsidiaries were
eliminated; with respect to certain other liabilities, including tax,
environmental and legal matters, CMS Energy was indemnified for any resulting
losses. In addition, Duke Energy agreed to continue its environmental clean-up
program at certain properties and to defend and indemnify Panhandle against
certain future environmental litigation and claims with respect to certain
agreed-upon sites or matters.
CMS Panhandle Holding privately placed $800 million of senior unsecured notes
and received a $1.1 billion initial capital contribution from CMS Energy to fund
the acquisition of Panhandle. On June 15, 1999, CMS Panhandle Holding was merged
into Panhandle, at which point the CMS Panhandle Holding notes became direct
obligations of Panhandle. In August 1999, Panhandle initiated an exchange offer
which replaced the $800 million of notes originally issued by CMS Panhandle
Holding with substantially identical SEC-registered notes issued by Panhandle.
Panhandle expects to complete the exchange offer by early September 1999. The
acquisition by CMS Panhandle Holding was accounted for using the purchase method
of accounting, with Panhandle preliminarily allocating the purchase price paid
by CMS Panhandle Holding to Panhandle's net assets as of the acquisition date.
Accordingly, the post-acquisition financial statements reflect a new basis of
accounting, and pre-
PE-1
<PAGE> 76
acquisition period and post-acquisition period financial results are presented
but are not comparable (See Note 1).
The final determination of the fair market value of Panhandle's net assets
acquired and the associated estimated remaining useful lives of the property,
plant and equipment are pending the results of ongoing studies. Accordingly, the
amounts presented are subject to change, but any differences in the final
purchase price allocation are not expected to have a material effect on
Panhandle's financial statements.
RESULTS OF OPERATIONS
NET INCOME:
<TABLE>
<CAPTION>
In Millions
-------------------------
June 30 1999 1998 Change
- ------- ---- ---- ------
<S> <C> <C> <C>
Six Months Ended $ 48 $ 53 $( 5)
==== ==== ====
</TABLE>
For the three months ended June 30, 1999, net income was $14 million, down $4
million from the comparable period in 1998. Total natural gas transportation
volumes for the three months ended June 30, 1999 decreased 9 percent from the
same period in 1998. For the six months ended June 30, 1999, net income was $48
million, down $5 million from the comparable period in 1998. Total natural gas
transportation volumes for the six months ended June 30, 1999 decreased 5
percent from the same period in 1998.
Revenues for the three months and the six months ended June 30, 1999 decreased
$8 million and $15 million, respectively, from the comparable periods in 1998
due primarily to decreased reservation revenues, the transfer of Panhandle Field
Services to Duke Energy in March 1999, and lower transportation volumes in 1999.
Operating expenses for the three months and the six months ended June 30, 1999
decreased $6 million and $12 million, respectively, from the comparable periods
in 1998, primarily as a result of the transfer of Panhandle Field Services to
Duke Energy and lower administrative costs.
Interest on long-term debt for the three months and six months ended June 30,
1999 increased $13 million from the comparable periods in 1998 primarily due to
interest on the new debt assumed by Panhandle (See Note 11). Other interest
decreased $13 million for the three months and six months ended June 30, 1999
from the comparable periods in 1998 primarily due to interest on the
intercompany note with PanEnergy, which was eliminated with the sale of
Panhandle to CMS Panhandle Holding (See Note 1 and Note 3).
OPERATING INCOME:
<TABLE>
<CAPTION>
In Millions
-------------
Six Months
Ended June 30
Change Compared to Prior Year 1999 vs. 1998
- ----------------------------- -------------
<S> <C>
</TABLE>
PE-2
<PAGE> 77
<TABLE>
<S> <C>
Commodity revenue $ (2)
Reservation and other revenues (13)
Operations and maintenance 13
General taxes (1)
-----
Total Change $ (3)
=====
</TABLE>
CASH POSITION AND INVESTING
OPERATING ACTIVITIES: Panhandle's consolidated net cash provided by operating
activities is derived mainly from the transportation and storage of natural gas.
Consolidated cash from operations totaled $81 million and $85 million for the
first six months of 1999 and 1998, respectively. Panhandle uses operating cash
primarily to maintain and expand its gas systems.
INVESTING ACTIVITIES: Panhandle's consolidated net cash used in investing
activities totaled $1.9 billion and $85 million for the first six months of 1999
and 1998, respectively. The increase of $1.8 billion primarily reflects proceeds
paid for the acquisition of Panhandle from subsidiaries of Duke Energy partially
offset by decreased capital expenditures due to the 1998 expenditures related to
the Terrebonne expansion project in the Gulf of Mexico and the transfer of
Panhandle Field Services to Duke Energy.
FINANCING ACTIVITIES: Panhandle's consolidated net cash provided by financing
activities totaled $1.8 billion for the first six months of 1999. The $1.8
billion increase in cash sources primarily reflects the proceeds from capital
contributions and senior notes utilized to acquire Panhandle, offset by loans to
parent and dividends paid.
CAPITAL EXPENDITURES
Panhandle estimates capital expenditures and investments, including allowance
for funds used during construction, for the next three years to be approximately
$60 million for each year. These estimates are prepared for planning purposes
and are subject to revision. Capital expenditures for 1999 are expected to be
satisfied by cash from operations.
OUTLOOK
The market for transmission of natural gas to the Midwest is increasingly
competitive and may become more so in light of projects in progress to increase
Midwest transmission capacity for gas originating in Canada and the Rocky
Mountain region. As a result, there continues to be pressure on prices charged
by Panhandle and an increasing necessity to discount the prices charged from the
legal maximum. Panhandle continues to be selective in offering discounts to
maximize revenues from existing capacity and to advance projects that provide
expanded services to meet the specific needs of customers. As a result of
Panhandle's new cost basis resulting from the merger with CMS Panhandle Holding,
which includes costs not likely to be considered for regulatory recovery, in
addition to the level of discounting being experienced by Panhandle, it no
longer meets the criteria of SFAS 71 and has discontinued application of SFAS 71
(See Note 10). The discontinuance is not expected to materially affect
Panhandle's future operating results.
PE-3
<PAGE> 78
OTHER MATTERS
REGULATORY MATTERS
The interstate natural gas transmission industry currently is regulated on a
basis designed to recover the costs (including depreciation and return on
investment) of providing services to customers. In July 1998, the FERC issued a
NOPR on short-term interstate natural gas transportation services, which
proposed an integrated package of revisions to its regulations governing such
services. "Short term" has been defined in the NOPR as all transactions of less
than one year. Under the proposed approach, cost-based regulation would be
eliminated for short-term transportation and replaced by regulatory policies
intended to maximize competition in the short-term transportation market,
mitigate the ability of companies to exercise residual monopoly power and
provide opportunities for greater flexibility providing pipeline services. The
proposed changes include initiatives to revise pipeline scheduling procedures,
receipt and delivery point policies and penalty policies, and require pipelines
to auction short-term capacity. Other proposed changes would improve the FERC's
reporting requirements, permit pipelines to negotiate rates and terms of
services, and revise certain rate and certificate policies that affect
competition.
In conjunction with the NOPR, the FERC also issued a NOI on its pricing policies
for the long-term markets. The NOI sought comments on whether FERC's policies
are biased toward either short-term or long-term service, provide accurate price
signals and the right incentives for pipelines to provide optimal transportation
services and construct facilities that meet future demand, and do not result in
over-building and excess capacity.
Comments on the NOPR and NOI were filed by Panhandle in April 1999. Because
these notices are at a very early stage and ultimate resolution is unknown,
management cannot estimate the effects of these matters on future consolidated
results of operations or financial position.
For detailed information about other uncertainties, see Note 2, Regulatory
Matters, incorporated by reference herein.
NEW ACCOUNTING RULES
In 1998, SFAS 133, Accounting for Derivative Instruments and Hedging Activities,
was issued. Panhandle is required to adopt this standard by January 1, 2001.
SFAS 133 requires that all derivatives be recognized as either assets or
liabilities and measured at fair value, and it defines the accounting for
changes in the fair value of the derivatives depending on the intended use of
the derivative. Panhandle is currently reviewing the expected impact of SFAS 133
on its financial statements and has not yet determined the timing of or method
of adoption.
YEAR 2000 COMPUTER MODIFICATIONS
STATE OF READINESS: In 1996, Panhandle initiated its Year 2000 Readiness Program
and began a formal review of computer-based systems and devices that are used in
its business operations. These systems and devices include customer information,
financial, materials management and personnel systems, as well as components of
natural gas production, gathering, processing and transmission.
PE-4
<PAGE> 79
Panhandle is using a three-phase approach to address year 2000 issues: 1)
inventory and preliminary assessment of computer systems, equipment and devices;
2) detailed assessment and remediation planning; and 3) conversion, testing and
contingency planning. Panhandle is employing a combination of systems repair and
planned systems replacement activities to achieve year 2000 readiness for its
business and process control systems, equipment and devices. As of June 30,
1999, Panhandle has achieved Year 2000 readiness of its critical systems,
equipment and devices. Business acquisitions routinely involve an analysis of
year 2000 readiness and are incorporated into Panhandle's overall program as
necessary.
Panhandle is actively evaluating and tracking year 2000 readiness of third
parties with which it has a significant relationship. Such third parties include
vendors, customers, governmental agencies and other business associates. While
the year 2000 readiness of third parties cannot be controlled, Panhandle is
attempting to assess the readiness of third parties and any potential
implications to its operations. Alternative suppliers of critical products,
goods and services are being identified, where necessary.
COSTS: Management believes it is devoting the resources necessary to achieve
year 2000 readiness in a timely manner. Current estimates for total costs of the
program, including internal labor as well as consulting and contract costs, are
approximately $500,000 of which the majority of the costs have already been
incurred as of June 30, 1999. The costs exclude replacement systems that, in
addition to being year 2000 ready, provide significantly enhanced capabilities
which will benefit operations in future periods.
RISKS: Management believes it has an effective program in place to manage the
risks associated with the year 2000 issue in a timely manner. Nevertheless,
since it is not possible to anticipate all future outcomes, especially when
third parties are involved, there could be circumstances in which Panhandle
would temporarily be unable to deliver services to its customers. Management
believes that the most reasonably likely worst case scenario would be minor,
localized interruptions of service, which likely would be rapidly restored. In
addition, there could be a temporary reduction in the service needs of customers
due to their own year 2000 problems. In the event that such a scenario occurs,
it is not expected to have a material adverse impact on results of operations or
financial position.
CONTINGENCY PLANS: Year 2000 contingency planning addresses continuity of
business operations for all periods during which year 2000 impacts may occur.
Panhandle is participating in multiple industry efforts to facilitate effective
year 2000 contingency plans, and has completed its own year 2000 contingency
plans. These plans address various year 2000 risk scenarios that cross
departmental, business unit and industry lines as well as specific risks from
various internal and external sources, including supplier readiness. The plans
will be updated throughout the remainder of the year to address new or changing
information.
Based on assessments completed to date and compliance plans in process,
management believes that year 2000 issues, including the cost of making critical
systems, equipment and devices ready, will not have a material adverse effect on
Panhandle's business operation, results of operations or financial position.
Nevertheless, achieving year 2000 readiness is subject to risks and
uncertainties, including those described above. While management believes the
possibility is remote, if Panhandle's internal systems, or the internal systems
of third parties with which it has a significant relationship, fail to achieve
year 2000 readiness in a timely manner, Panhandle's business operation, results
of operations or financial position could be adversely affected.
PE-5
<PAGE> 80
FORWARD-LOOKING INFORMATION
From time to time, Panhandle may make statements regarding its assumptions,
projections, expectations, intentions or beliefs about future events. These
statements are intended as "forward-looking statements" under the Private
Securities Litigation Reform Act of 1995. Panhandle cautions that assumptions,
projections, expectations, intentions or beliefs about future events may and
often do vary from actual results and the differences between assumptions,
projections, expectations, intentions or beliefs and actual results can be
material. Accordingly, there can be no assurance that actual results will not
differ materially from those expressed or implied by the forward-looking
statements. The following are some of the factors that could cause actual
achievements and events to differ materially from those expressed or implied in
such forward-looking statements: entry of competing pipelines into Panhandle's
markets and competitive strategies of competing pipelines, including rate and
other pricing practices; state and federal legislative and regulatory
initiatives that affect cost and investment recovery, have an impact on rate
structures, and affect the speed and degree to which competition enters the
natural gas industry; the weather and other natural phenomena; the timing and
extent of changes in prices of commodities (primarily natural gas and competing
fuels) and interest rates; changes in environmental and other laws and
regulations to which Panhandle is subject or other external factors over which
Panhandle has no control; the results of financing efforts; expansion and other
growth opportunities; year 2000 readiness; and the effect of accounting policies
issued periodically by accounting standard-setting bodies.
PE-6
<PAGE> 81
PANHANDLE EASTERN PIPE LINE COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(IN MILLIONS)
<TABLE>
<CAPTION>
Six
THREE MONTHS ENDED Months
JUNE 30 Mar. 29- Jan. 1 - Ended
------------------- June 30, Mar. 28, June 30,
1999 1998 1999 1999 1998
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
OPERATING REVENUE
Transportation and storage of natural gas $ 97 $105 $101 $123 $237
Other 6 6 6 5 13
---- ---- ---- ---- ----
Total operating revenue 103 111 107 128 250
---- ---- ---- ---- ----
OPERATING EXPENSES
Operation and maintenance 38 45 40 40 93
Depreciation and amortization 16 16 16 14 30
General taxes 7 6 7 7 13
---- ---- ---- ---- ----
Total operating expenses 61 67 63 61 136
---- ---- ---- ---- ----
OPERATING INCOME 42 44 44 67 114
OTHER, NET 1 3 1 4 9
---- ---- ---- ---- ----
EARNINGS BEFORE INTEREST AND TAXES 43 47 45 71 123
---- ---- ---- ---- ----
FIXED CHARGES
Interest on long-term debt 20 6 20 5 12
Other interest - 13 - 13 26
---- ---- ---- ---- ----
Total Fixed Charges 20 19 20 18 38
---- ---- ---- ---- ----
NET INCOME BEFORE INCOME TAXES 23 28 25 53 85
INCOME TAXES 9 10 10 20 32
---- ---- ---- ---- ----
CONSOLIDATED NET INCOME $ 14 $ 18 $ 15 $ 33 $ 53
==== ==== ==== ==== ====
</TABLE>
The accompanying condensed notes are an integral part of these statements.
PE-7
<PAGE> 82
PANHANDLE EASTERN PIPE LINE COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN MILLIONS)
<TABLE>
<CAPTION>
March 29 - January 1 - Six Months Ended
June 30, 1999 March 28, 1999 June 30, 1998
------------- -------------- ----------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 15 $ 33 $ 53
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 16 14 30
Deferred income taxes 8 - (6)
Changes in current assets and liabilities 25 (29) 7
Other, net (4) 3 1
------- ------- -------
Net cash provided by operating activities 60 21 85
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of Panhandle (1,900) - -
Capital and investment expenditures (8) (4) (41)
Net decrease (increase) in advances receivable - parent - (17) (42)
Retirements and other - - (2)
------- ------- -------
Net cash used in investing activities (1,908) (21) (85)
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Contribution from parent 1,116 - -
Proceeds from senior notes 785 - -
Net decrease (increase) in note receivable - parent (40) - -
Dividends paid (13) - -
------- ------- -------
Net cash provided by financing activities 1,848 - -
------- ------- -------
Net Increase (Decrease) in Cash and Temporary Cash Investments - - -
CASH AND TEMPORARY CASH INVESTMENTS, BEGINNING OF PERIOD - - -
------- ------- -------
CASH AND TEMPORARY CASH INVESTMENTS, END OF PERIOD $ - $ - $ -
======= ======= =======
OTHER CASH FLOW ACTIVITIES WERE:
Interest paid (net of amounts capitalized) $ - $ 12 $ 38
Income taxes paid (net of refunds) 2 37 56
</TABLE>
The accompanying condensed notes are an integral part of these statements.
PE-8
<PAGE> 83
PANHANDLE EASTERN PIPE LINE COMPANY
CONSOLIDATED BALANCE SHEETS
(IN MILLIONS)
<TABLE>
<CAPTION>
June 30,
1999 December 31,
(Unaudited) 1998
--------- ------------
<S> <C> <C>
ASSETS
PROPERTY, PLANT AND EQUIPMENT
Cost $1,495 $2,760
Less accumulated depreciation and amortization 25 1,798
------ ------
Sub-total 1,470 962
Construction work-in-progress 13 17
------ ------
Net property, plant and equipment 1,483 979
------ ------
INVESTMENTS
Advances receivable - related parties - 738
Investment in affiliates 1 44
Other - 6
------ ------
Total investments and other assets 1 788
------ ------
CURRENT ASSETS
Receivables 84 94
Inventory and supplies 54 55
Deferred income taxes 11 2
Current portion of regulatory assets - 6
Note receivable - related parties 40 -
Other 25 23
------ ------
Total current assets 214 180
------ ------
NON-CURRENT ASSETS
Goodwill, net 695 -
Deferred income taxes 6 -
Debt expense 12 11
Other 2 15
------ ------
Total non-current assets 715 26
------ ------
TOTAL ASSETS $2,413 $1,973
====== ======
</TABLE>
The accompanying condensed notes are an integral part of these statements.
PE-9
<PAGE> 84
<TABLE>
<CAPTION>
June 30,
1999 December 31,
(Unaudited) 1998
----------- ------------
<S> <C> <C>
STOCKHOLDER'S INVESTMENT AND LIABILITIES
CAPITALIZATION
Common stockholder's equity
Common stock, no par, 1,000 shares authorized, issued and outstanding $ 1 $ 1
Paid-in capital 1,127 466
Retained earnings 2 91
------ ------
Total common stockholder's equity 1,130 558
Long-term debt 1,094 299
------ ------
Total capitalization 2,224 857
------ ------
CURRENT LIABILITIES
Note payable - PanEnergy - 675
Accounts payable 2 56
Accrued taxes 7 58
Accrued interest 22 8
Other 107 117
------ ------
Total current liabilities 138 914
------ ------
NON-CURRENT LIABILITIES
Deferred income taxes - 99
Other 51 103
------ ------
Total non-current liabilities 51 202
------ ------
COMMITMENTS AND CONTINGENCIES (NOTES 6 AND 7)
TOTAL STOCKHOLDER'S INVESTMENT AND LIABILITIES $2,413 $1,973
====== ======
</TABLE>
The accompanying condensed notes are an integral part of these statements.
PE-10
<PAGE> 85
PANHANDLE EASTERN PIPE LINE COMPANY
CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDER'S EQUITY
(UNAUDITED)
(IN MILLIONS)
<TABLE>
<CAPTION>
March 29 - January 1 - Six Months Ended
June 30, 1999 March 28, 1999 June 30, 1998
------------- -------------- ----------------
<S> <C> <C> <C>
COMMON STOCK
At beginning and end of period $ 1 $ 1 $ 1
------- ------- -------
OTHER PAID-IN CAPITAL
At beginning of period 466 466 466
Acquisition adjustment to eliminate original
paid-in capital (466) - -
Capital contribution of acquisition costs by parent 11 - -
Cash capital contribution by parent 1,116 - -
------- ------- -------
At end of period 1,127 466 466
------- ------- -------
RETAINED EARNINGS
At beginning of period 101 92 34
Acquisition adjustment to eliminate original
retained earnings (101) - -
Net Income 15 33 53
Assumption of net liability by PanEnergy - 57 -
Common stock dividends (13) (81) (2)
------- ------- -------
At end of period 2 101 85
------- ------- -------
TOTAL COMMON STOCKHOLDER'S EQUITY $ 1,130 $ 568 $ 552
======= ======= =======
</TABLE>
The accompanying condensed notes are an integral part of these statements.
PE-11
<PAGE> 86
Intentionally Blank
PE-12
<PAGE> 87
PANHANDLE EASTERN PIPE LINE COMPANY
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
These Condensed Notes and their related Consolidated Financial Statements should
be read along with the Consolidated Financial Statements and Notes contained in
the 1998 Form 10-K of Panhandle Eastern Pipe Line Company, which include the
Reports of Independent Public Accountants. Certain prior year amounts have been
reclassified to conform with the presentation in the current year. In the
opinion of management, the unaudited information herein reflects all adjustments
necessary to assure the fair presentation of financial position, results of
operations and cash flows for the periods presented.
1. CORPORATE STRUCTURE
Panhandle Eastern Pipe Line Company is a wholly owned subsidiary of CMS Gas
Transmission, which is an indirect wholly owned subsidiary of CMS Energy.
Panhandle Eastern Pipe Line Company was incorporated in Delaware in 1929.
Panhandle is primarily engaged in interstate transportation and storage of
natural gas, which are subject to the rules and regulations of the FERC.
On March 29, 1999, Panhandle Eastern Pipe Line Company and its principal
consolidated subsidiaries, Trunkline and Pan Gas Storage, as well as its
affiliates, Trunkline LNG and Panhandle Storage, were acquired from subsidiaries
of Duke Energy by CMS Panhandle Holding for $1.9 billion in cash and existing
Panhandle debt of $300 million. Immediately following the acquisition, CMS
Panhandle Holding contributed the stock of Trunkline LNG and Panhandle Storage
to Panhandle Eastern Pipe Line Company. As a result, Trunkline LNG and Panhandle
Storage became wholly owned subsidiaries of Panhandle Eastern Pipe Line Company.
In conjunction with the acquisition, Panhandle's interests in Northern Border
Pipeline Company, Panhandle Field Services Company, Panhandle Gathering Company,
and certain other assets, including the Houston corporate headquarters building,
were transferred to other subsidiaries of Duke Energy; certain intercompany
accounts and notes between Panhandle and Duke Energy subsidiaries were
eliminated; and with respect to certain other liabilities, including tax,
environmental and legal matters, CMS Energy was indemnified for any resulting
losses. In addition, Duke Energy agreed to continue its environmental clean-up
program at certain properties and to defend and indemnify Panhandle against
certain future environmental litigation and claims with respect to certain
agreed-upon sites or matters.
CMS Panhandle Holding privately placed $800 million of senior unsecured notes
and received a $1.1 billion initial capital contribution from CMS Energy to fund
the acquisition of Panhandle. On June 15, 1999, CMS Panhandle Holding was merged
into Panhandle, at which point the CMS Panhandle Holding notes became direct
obligations of Panhandle. In August 1999, Panhandle initiated an exchange offer
which replaced the $800 million of notes originally issued by CMS Panhandle
Holding with substantially identical SEC-registered notes. Panhandle expects to
complete the exchange offer by early September 1999.
PE-13
<PAGE> 88
The acquisition by CMS Panhandle Holding was accounted for using the purchase
method of accounting in accordance with generally accepted accounting
principles, with Panhandle preliminarily allocating the purchase price paid by
CMS Panhandle Holding to Panhandle's net assets as of the acquisition date.
Accordingly, the post-acquisition financial statements reflect a new basis of
accounting, and pre-acquisition period and post-acquisition period financial
results (separated by a heavy black line) are presented but are not comparable.
The final determination of the fair market value of Panhandle's net assets
acquired and the associated estimated remaining useful lives of the property,
plant and equipment are pending the results of ongoing studies. Upon completion
of these studies, the financial statements will be adjusted to reflect the final
purchase price allocations and estimated remaining useful lives.
The excess purchase price over the prior carrying amount of Panhandle's net
assets as of March 29, 1999 totaled $1.3 billion, and was preliminarily
allocated as follows:
<TABLE>
<CAPTION>
In Millions
-----------
<S> <C>
Property, Plant and Equipment $ 650
Accounts Receivable 3
Inventory (8)
Goodwill 699
Regulatory Assets, Net (15)
Liabilities (25)
Other 5
-----------
Total $ 1,309
===========
</TABLE>
Goodwill of approximately $699 million was recognized by Panhandle and will be
amortized on a straight-line basis over 40 years. This amount represents the
excess of the purchase price over Panhandle's net assets after fair value
adjustments, and will be adjusted after the completion of the ongoing studies
over the twelve months following the acquisition. The estimated average
remaining useful life of transmission and underground storage facilities, the
major components of Property, Plant and Equipment, has been revised to 40 years
based on preliminary internal studies.
Proforma results of operations for 1999 and 1998 as though Panhandle had been
acquired and purchase accounting applied at the beginning of 1999 and 1998,
respectively, are as follows:
<TABLE>
<CAPTION>
In Millions
-------------------------------------------------------------------
Six Months Ended Six Months Ended Year Ended
June 30, 1998 June 30, 1998 December 31, 1998
---------------- ---------------- -----------------
<S> <C> <C> <C>
Revenues $ 231 $ 235 $ 470
Net Income 41 39 60
Total Assets 2,413 2,465 2,477
------- ------- ------
</TABLE>
PE-14
<PAGE> 89
2. REGULATORY MATTERS
Effective August 1996, Trunkline placed into effect a general rate increase,
subject to refund. Hearings were completed in October of 1997 and initial
decisions by a FERC ALJ were issued on certain matters in May 1998 and on the
remainder of the rate proceedings in November 1998. Responses to the initial
decisions were provided by Trunkline to FERC following the issuance of the
initial decisions. In May 1999, FERC issued an order remanding certain matters
back to the ALJ for further proceedings.
In conjunction with a FERC order issued in September 1997, certain natural gas
producers were required to refund previously collected Kansas ad-valorem taxes
to interstate natural gas pipelines. These pipelines were ordered to refund
these amounts to their customers. All payments are to be made in compliance with
prescribed FERC requirements. At June 30, 1999 and December 31, 1998, accounts
receivable included $52 million and $50 million, respectively, due from natural
gas producers, and other current liabilities included $52 million and $50
million, respectively, for related obligations.
In June 1998, Trunkline filed a petition with the FERC to abandon 720 miles of
its 26-inch diameter pipeline that extends from Longville, Louisiana to Bourbon,
Illinois. Trunkline requested permission to transfer the pipeline to an
affiliate, which had entered into an option agreement with Aux Sable for
potential conversion of the line to allow transportation of hydrocarbon vapors.
Trunkline requested FERC to grant the abandonment authorization in time to
separate the pipeline from existing facilities and allow Aux Sable to convert
the pipeline to hydrocarbon vapor service by October 1, 2000, if the option was
exercised. The option expired on July 1, 1999 and was not renewed by Aux Sable.
The filing status is currently under review by Trunkline and by FERC.
On May 19, 1999, Trunkline and Trunkline LNG submitted a compliance filing
advising the FERC that the acquisition by CMS Energy of Trunkline LNG triggered
certain provisions of a 1992 settlement. The settlement resolved issues related
to minimum bill provisions of the Trunkline LNG Rate Schedule PLNG-1, as well as
pending rate matters for Trunkline and refund matters for Trunkline LNG.
Specifically, the settlement provisions require Trunkline LNG, and Trunkline in
turn, to make refunds to customers, including Panhandle Eastern Pipe Line
Company and Consumers, who were parties to the settlement, if the ownership of
all or portion of the LNG terminal is transferred to an unaffiliated entity.
Therefore, the total refund due customers of approximately $17 million will be
paid within 30 days of final FERC approval of the compliance filing. In
conjunction with the acquisition of Panhandle by CMS Energy, Duke Energy
indemnified Panhandle for this refund obligation. In conjunction with the
settlement, Panhandle Eastern Pipe Line Company and its customers entered into
an agreement, whereby upon FERC approval of the compliance filing described
above, Panhandle Eastern Pipe Line Company will file to flow through its portion
of the settlement amounts to its customers.
PE-15
<PAGE> 90
3. RELATED PARTY TRANSACTIONS
A summary of certain balances due to or due from related parties included in the
Consolidated Balance Sheets is as follows:
<TABLE>
<CAPTION>
In Millions
------------------------------
June 30, December 31,
1999 1998
-------- ------------
<S> <C> <C>
Receivables $ 6 $ 2
Accounts payable - 46
Taxes accrued (1) 35
---- ----
</TABLE>
Interest charges included $14 million for the three months ended June 30, 1998;
$13 million and $28 million for the six months ended June 30, 1999 and 1998,
respectively, for interest associated with notes payable to a subsidiary of Duke
Energy.
In conjunction with the acquisition of Panhandle by a subsidiary of CMS Energy,
all intercompany advance and note balances between Panhandle and subsidiaries of
Duke Energy were eliminated. Transactions with prior affiliates before the
acquisition are now reflected as receivables on the Consolidated Balance Sheets.
4. GAS IMBALANCES
The Consolidated Balance Sheets include in-kind balances as a result of
differences in gas volumes received and delivered. At June 30, 1999 and December
31, 1998, other current assets included $18 million and $20 million,
respectively, and other current liabilities included $23 million and $22
million, respectively, related to gas imbalances.
5. INVESTMENT IN AFFILIATES
NORTHERN BORDER PARTNERS, L.P. Northern Border Partners, L.P. is a master
limited partnership that owns 70 percent of Northern Border Pipeline Company, a
partnership operating a pipeline transporting natural gas from Canada to the
Midwest area of the United States. At December 31, 1998, Panhandle held a 7.0
percent limited partnership interest in Northern Border Partners, L.P., and
thus, an indirect 4.9 percent ownership interest in Northern Border Pipeline
Company. In conjunction with the acquisition of Panhandle by CMS Energy,
Panhandle transferred its interest in Northern Border to a subsidiary of Duke
Energy in the first quarter of 1999.
6. COMMITMENTS AND CONTINGENCIES
CAPITAL EXPENDITURES: Panhandle estimates capital expenditures and investments,
including allowance for funds used during construction, for the next three years
to be approximately $60 million for each year. These estimates are prepared for
planning purposes and are subject to revision. Capital expenditures for 1999 are
expected to be satisfied by cash from operations.
PE-16
<PAGE> 91
LITIGATION: Under the terms of the sale of Panhandle to CMS Energy discussed in
Note 1 to the Consolidated Financial Statements, subsidiaries of Duke Energy
indemnified CMS Energy from losses resulting from certain legal and tax
liabilities of Panhandle, including the matter specifically discussed below:
In May 1997, Anadarko filed suits against Panhandle and other PanEnergy
affiliates, as defendants, both in the United States District Court for the
Southern District of Texas and State District Court of Harris County, Texas.
Pursuing only the federal court claim, Anadarko claims that it was effectively
indemnified by the defendants against any responsibility for refunds of Kansas
ad valorem taxes which are due from purchasers of gas from Anadarko, retroactive
to 1983. In October 1998 and January 1999, the FERC issued orders on ad valorem
tax issues, finding that first sellers of gas were primarily liable for refunds.
The FERC also noted that claims for indemnity or reimbursement among the parties
would be better addressed by the United States District Court for the Southern
District of Texas. Panhandle believes the resolution of this matter will not
have a material adverse effect on consolidated results of operations or
financial position.
Panhandle is also involved in other legal, tax and regulatory proceedings before
various courts, regulatory commissions and governmental agencies regarding
matters arising in the ordinary course of business, some of which involve
substantial amounts. Where appropriate, Panhandle has made accruals in
accordance with SFAS 5, Accounting for Contingencies, in order to provide for
such matters. Management believes the final disposition of these proceedings
will not have a material adverse effect on consolidated results of operations or
financial position.
OTHER COMMITMENTS AND CONTINGENCIES: In 1993, the U.S. Department of the
Interior announced its intention to seek additional royalties from gas producers
as a result of payments received by such producers in connection with past
take-or-pay settlements, and buyouts and buydowns of gas sales contracts with
natural gas pipelines. Panhandle's pipelines, with respect to certain producer
contract settlements, may be contractually required to reimburse or, in some
instances, to indemnify producers against such royalty claims. The potential
liability of the producers to the government and of the pipelines to the
producers involves complex issues of law and fact which are likely to take
substantial time to resolve. If required to reimburse or indemnify the
producers, Panhandle's pipelines will file with FERC to recover a portion of
these costs from pipeline customers. Management believes these commitments and
contingencies will not have a material adverse effect on consolidated results of
operations or financial position.
Under the terms of a settlement related to a transportation agreement between
Panhandle and Northern Border Pipeline Company, Panhandle guarantees payment to
Northern Border Pipeline Company under a transportation agreement held by a
third party. The transportation agreement requires estimated total payments of
$48 million for the remainder of 1999 through 2001. Management believes the
probability that Panhandle will be required to perform under this guarantee is
remote.
PE-17
<PAGE> 92
7. ENVIRONMENTAL MATTERS
Panhandle is subject to federal, state and local regulations regarding air and
water quality, hazardous and solid waste disposal and other environmental
matters.
Panhandle has identified environmental contamination at certain sites on its
systems and has undertaken clean-up programs at these sites. The contamination
resulted from the past use of lubricants in compressed air systems containing
PCBs and the prior use of wastewater collection facilities and other on-site
disposal areas. Soil and sediment testing to date has detected no significant
off-site contamination. Panhandle has communicated with the EPA and appropriate
state regulatory agencies on these matters. Under the terms of the sale of
Panhandle to CMS Energy, as discussed in Note 1 to the Consolidated Financial
Statements, a subsidiary of Duke Energy is obligated to complete the Panhandle
clean-up programs at certain agreed-upon sites and to defend and indemnify
Panhandle against certain future environmental litigation and claims. These
clean-up programs are expected to continue until 2001.
8. BENEFIT PLANS
RETIREMENT PLAN: Following the acquisition of Panhandle by CMS Energy described
in Note 1, Panhandle now participates in CMS Energy's non-contributory defined
benefit retirement plan covering most employees with a minimum of one year
vesting service.
Under the terms of the acquisition of Panhandle by CMS Energy, benefit
obligations related to active employees and certain plan assets were transferred
to CMS Energy. Benefit obligations related to existing retired employees and
remaining plan assets were retained by a subsidiary of Duke Energy.
OTHER POSTRETIREMENT BENEFITS: Panhandle, in conjunction with CMS Energy,
provides certain health care and life insurance benefits for retired employees
on a contributory and noncontributory basis. Substantially all employees may
become eligible for these benefits if they have met certain age and service
requirements as defined in the plans.
Under the terms of the acquisition of Panhandle by CMS Energy as discussed in
Note 1 to the Consolidated Financial Statements, benefit obligations related to
active employees were transferred to CMS Energy and are reflected in the
financial statements of Panhandle, and benefit obligations related to existing
retired employees and plan assets were retained by a subsidiary of Duke Energy.
9. TAXES
As described in Note 1, the stock of Panhandle was acquired from subsidiaries of
Duke Energy by CMS Panhandle Holding for a total of $2.2 billion in cash and
acquired debt. The acquisition was treated as an asset acquisition for tax
purposes, which eliminated Panhandle's deferred tax liability and gave rise to a
new tax basis in Panhandle's assets equal to the purchase price. This tax basis
in excess of Panhandle's current book basis created deferred tax assets and
associated paid-in-capital of approximately $477 million. When CMS Panhandle
Holding was merged with Panhandle, approximately $462 million of Panhandle's
deferred tax assets were eliminated.
PE-18
<PAGE> 93
10. SFAS 71
As a result of Panhandle's new cost basis resulting from the merger with CMS
Panhandle Holding, which includes costs not likely to be considered for
regulatory recovery, in addition to the level of discounting being experienced
by Panhandle, it no longer meets the criteria of SFAS 71 and has discontinued
application of SFAS 71. Accordingly, upon acquisition by CMS Panhandle Holding,
the remaining net regulatory assets of approximately $15 million were eliminated
in purchase accounting (See Note 1).
11. LONG TERM DEBT
On March 29, 1999, CMS Panhandle Holding Company privately placed $800 million
of senior notes (See Note 1) including: $300 million of 6.125 percent senior
notes due 2004; $200 million of 6.5 percent senior notes due 2009; and $300
million of 7.0 percent senior notes due 2029. On June 15, 1999, CMS Panhandle
Holding was merged into Panhandle and the obligations of CMS Panhandle Holding
under the notes and the indenture were assumed by Panhandle. In August 1999,
Panhandle initiated an exchange offer which replaced the $800 million of notes
originally issued by CMS Panhandle Holding with substantially identical
SEC-registered notes. Panhandle expects to complete the exchange offer by early
September 1999.
In conjunction with the purchase accounting, Panhandle's existing notes totaling
$300 million were revalued resulting in a net premium recorded of approximately
$5 million.
PE-19
<PAGE> 94
ARTHUR ANDERSEN LLP
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Panhandle Eastern Pipe Line Company:
We have reviewed the accompanying consolidated balance sheet of Panhandle
Eastern Pipe Line Company (a Delaware corporation) and subsidiaries as of June
30, 1999, and the related consolidated statements of income, common
stockholder's equity and cash flows for the three-month and six-month periods
then ended. These financial statements are the responsibility of the Company's
management. The consolidated financial statements of Panhandle Eastern Pipe Line
Company as of December 31, 1998, were audited by other auditors whose report
dated February 12, 1999, expressed an unqualified opinion on those statements.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which is the
expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the consolidated financial statements referred to above for them to
be in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
August 5, 1999
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<PAGE> 95
QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
CMS ENERGY
Quantitative and Qualitative Disclosures About Market Risk is contained in PART
I: CMS ENERGY CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS which is
incorporated by reference herein.
CONSUMERS
Quantitative and Qualitative Disclosures About Market Risk is contained in PART
I: CONSUMERS ENERGY COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS which is
incorporated by reference herein.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The discussion below is limited to an update of developments that have occurred
in various judicial and administrative proceedings, many of which are more fully
described in CMS Energy's, Consumers' and Panhandle Eastern Pipe Line Company's
Form 10-K for the year ended December 31, 1998, and in their Form 10-Q for the
quarter ended March 31, 1999. Reference is made to the Notes to the Consolidated
Financial Statements included herein for additional information regarding
various pending administrative and judicial proceedings involving rate,
operating, regulatory and environmental matters.
CONSUMERS
ANTITRUST LITIGATION
For a discussion of Consumers' antitrust litigation see Note 2 subsection
"Antitrust" of the Condensed Notes to the Consolidated Financial Statements in
Part I of this Report, incorporated by reference herein.
PANHANDLE
REGULATORY MATTERS
For a discussion of certain Panhandle regulatory matters see Note 2 "Regulatory
Matters" of the Condensed Notes to the Consolidated Financial Statements in Part
I of this Report, incorporated by reference herein.
OTHER MATTERS
For a discussion of Panhandle's other litigation matters see Note 6 subsection
"Litigation" of the Condensed Notes to the Consolidated Financial Statements in
Part I of this Report, incorporated by reference herein.
CO-1
<PAGE> 96
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the CMS Energy Annual Meeting of Shareholders held on May 28, 1999, the
shareholders ratified the appointment of Arthur Andersen LLP as independent
auditors of CMS Energy for the year ended December 31, 1999. The vote was
103,854,969 shares in favor and 386,829 against, with 318,133 abstaining. The
CMS Energy shareholders voted on a proposal to amend CMS Energy Corporation's
Performance Incentive Stock Plan. The vote was 72,326,489 shares in favor and
23,208,873 against, with 812,690 abstaining. The CMS Energy shareholders also
elected all eleven nominees for the office of director. The votes for individual
nominees were as follows:
CMS ENERGY CORPORATION
<TABLE>
<CAPTION>
Number of Votes: For Against Total
------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
William T. McCormick, Jr. 103,776,899 783,033 104,559,932
John M. Deutch 103,804,227 755,705 104,559,932
James J. Duderstadt 103,834,522 725,410 104,559,932
Kathleen R. Flaherty 103,859,538 700,394 104,559,932
Victor J. Fryling 103,831,308 728,624 104,559,932
Earl D. Holton 103,851,428 708,504 104,559,932
William U. Parfet 103,825,925 734,007 104,559,932
Percy A. Pierre 103,855,888 704,044 104,559,932
Kenneth L. Way 103,866,848 693,084 104,559,932
Kenneth Whipple 103,856,196 703,736 104,559,932
John B. Yasinsky 103,868,050 691,882 104,559,932
</TABLE>
Consumers did not solicit proxies for the matters submitted to votes at the
contemporaneous May 28, 1999 Consumers' Annual Meeting of Shareholders. All
84,108,789 shares of Consumers Common Stock were voted in favor of re-electing
the above-named individuals as directors of Consumers and in favor of ratifying
the appointment of Arthur Andersen LLP as independent auditors of Consumers for
the year ended December 31, 1999. None of the 441,599 shares of Consumers
Preferred Stock were voted at the Annual Meeting.
ITEM 5. OTHER INFORMATION
A shareholder who intends to submit a proposal for a vote at CMS Energy's 2000
Annual Meeting of Shareholders but which will not be included in CMS Energy's
2000 proxy statement must send the proposal to reach CMS Energy on or before
March 6, 2000. The proposals should be addressed to: Mr. Thomas A. McNish,
Corporate Secretary, Fairlane Plaza South, Suite 1100, 330 Town Center Drive,
Dearborn, Michigan 48126. Failure to timely submit the proposal will allow
management to use discretionary voting authority when the proposal is raised at
the Annual Meeting.
CO-2
<PAGE> 97
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) LIST OF EXHIBITS
<TABLE>
<S> <C>
(4)(a) - Ninth Supplemental Indenture dated as of June 22, 1999 to the
Indenture dated September 15, 1992 between CMS Energy and Bank
One Trust Company, NA (successor to NBD Bank), as Trustee.
(4)(b) - Second Supplemental Indenture dated as of June 1, 1999 to the
Indenture dated as of June 1, 1997 between CMS Energy and The
Bank of New York, as Trustee. Pursuant to Item 601(b)(4)(iii)
of Regulation S-K, in lieu of filing a copy of such agreement,
CMS Energy agrees to furnish a copy of such agreement to the
Commission upon request.
(10)(a) - Amendment No. 3 dated as of June 22, 1999 to the Credit
Agreement dated July 2, 1997, among CMS Energy, the Adminis-
trative Agent, Collateral Agent, Documentation Agent, Syndi-
cation Agent, Co-Agents and Lead Manager, all as defined
therein, and the Exhibits and Schedules thereto.
(10)(b) - Employment Agreement dated March 20, 1996 between CMS Energy
and Preston D. Hopper
(10)(c) - Employment Agreement dated April 29, 1998 between CMS Energy
and Bradley W. Fischer
(10)(d) - Employment Agreement dated March 29, 1999 between Panhandle
Eastern Pipe Line and Christopher A. Helms
(12) - CMS Energy: Statements regarding computation of Ratio of
Earnings to Fixed Charges
(15)(a) - CMS Energy: Letter of Independent Public Accountant
(27)(a) - CMS Energy: Financial Data Schedule
(27)(b) - Consumers: Financial Data Schedule
(27)(c) - Panhandle: Financial Data Schedule
(99) - CMS Energy: Consumers Gas Group Financials
</TABLE>
(b) REPORTS ON FORM 8-K
CMS Energy filed Current Reports on Form 8-K on April 6, 1999 covering matters
pursuant to "Item 2. Acquisition of Assets" and "Item 7. Exhibits," on June 29,
1999 covering matters pursuant to "Item 7. Exhibits," on July 1, 1999 covering
matters pursuant to "Item 5. Other Events" and "Item 7. Exhibits" and on July
13, 1999 covering matters pursuant to "Item 7. Exhibits."
Panhandle Eastern Pipe Line Company filed a Current Report on Form 8-K on April
5, 1999 covering matters pursuant to "Item 1. Acquisition of Assets," "Item 4.
Changes in Registrant's Certifying Accountant," and "Item 7. Exhibits" and filed
an amendment to a Current Report on Form 8-K on July 19, 1999 covering matters
pursuant to "Item 1. Acquisition of Assets," "Item 4. Changes in Registrant's
Certifying Accountant," and "Item 7. Exhibits."
Consumers filed a Current Report on Form 8-K on July 1, 1999 covering matters
pursuant to "Item 5. Other Events" and Item 7. Exhibits."
CO-3
<PAGE> 98
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, each
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized. The signature for each undersigned
company shall be deemed to relate only to matters having reference to such
company or its subsidiary.
CMS ENERGY CORPORATION
--------------------------------------
(Registrant)
Dated: August 12, 1999 By: /s/ A.M. Wright
-----------------------------------
Alan M. Wright
Senior Vice President and
Chief Financial Officer
CONSUMERS ENERGY COMPANY
--------------------------------------
(Registrant)
Dated: August 12, 1999 By: /s/ A.M. Wright
-----------------------------------
Alan M. Wright
Senior Vice President and
Chief Financial Officer
PANHANDLE EASTERN PIPE LINE COMPANY
--------------------------------------
(Registrant)
Dated: August 12, 1999 By: /s/ A.M. Wright
-----------------------------------
Alan M. Wright
Senior Vice President and
Chief Financial Officer
CO-4
<PAGE> 99
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<S> <C>
(4)(a) - Ninth Supplemental Indenture dated as of June 22, 1999 to the
Indenture dated September 15, 1992 between CMS Energy and Bank
One Trust Company, NA (successor to NBD Bank), as Trustee.
(4)(b) - Second Supplemental Indenture dated as of June 1, 1999 to the
Indenture dated as of June 1, 1997 between CMS Energy and The
Bank of New York, as Trustee. Pursuant to Item 601(b)(4)(iii)
of Regulation S-K, in lieu of filing a copy of such agreement,
CMS Energy agrees to furnish a copy of such agreement to the
Commission upon request.
(10)(a) - Amendment No. 3 dated as of June 22, 1999 to the Credit
Agreement dated July 2, 1997, among CMS Energy, the Adminis-
trative Agent, Collateral Agent, Documentation Agent, Syndi-
cation Agent, Co-Agents and Lead Manager, all as defined
therein, and the Exhibits and Schedules thereto.
(10)(b) - Employment Agreement dated March 20, 1996 between CMS Energy
and Preston D. Hopper
(10)(c) - Employment Agreement dated April 29, 1998 between CMS Energy
and Bradley W. Fischer
(10)(d) - Employment Agreement dated March 29, 1999 between Panhandle
Eastern Pipe Line and Christopher A. Helms
(12) - CMS Energy: Statements regarding computation of Ratio of
Earnings to Fixed Charges
(15)(a) - CMS Energy: Letter of Independent Public Accountant
(27)(a) - CMS Energy: Financial Data Schedule
(27)(b) - Consumers: Financial Data Schedule
(27)(c) - Panhandle: Financial Data Schedule
(99) - CMS Energy: Consumers Gas Group Financials
</TABLE>
<PAGE> 1
EXHIBIT (4)(a)
NINTH SUPPLEMENTAL INDENTURE
DATED AS OF JUNE 22, 1999
--------------------
This Ninth Supplemental Indenture, dated as of June 22, 1999
between CMS Energy Corporation, a corporation duly organized and existing under
the laws of the State of Michigan (hereinafter called the "Issuer") and having
its principal office at Fairlane Plaza South, Suite 1100, 330 Town Center Drive,
Dearborn, Michigan 48126, and Bank One Trust Company, NA (successor to NBD Bank,
a Michigan banking corporation (hereinafter called the "Trustee") and having its
Corporate Trust Office at 611 Woodward Avenue, Detroit, Michigan 48226.
WITNESSETH:
WHEREAS, the Issuer and the Trustee entered into an Indenture,
dated as of September 15, 1992 (the "Original Indenture"), pursuant to which one
or more series of debt securities of the Issuer (the "Securities") may be issued
from time to time; and
WHEREAS, Section 2.3 of the Original Indenture permits the
terms of any series of Securities to be established in an indenture supplemental
to the Original Indenture; and
WHEREAS, Section 8.1(e) of the Original Indenture provides
that a supplemental indenture may be entered into by the Issuer and the Trustee
without the consent of any Holders of the Securities to establish the form and
terms of the Securities of any series; and
WHEREAS, the Issuer has requested the Trustee to join with it
in the execution and delivery of this Ninth Supplemental Indenture in order to
supplement and amend the Original Indenture by, among other things, establishing
the form and terms of a series of Securities to be known as the Issuer's
"$250,000,000 Senior Notes, 8% Reset Put Securities, Due 2011 and the
$150,000,000 Senior Note, 8 3/8% Reset Put Securities, Due 2013 (individually
the "2011 Notes" and the "2013 Notes" and collectively the "Notes"), providing
for the issuance of the Notes and amending and adding certain provisions thereof
for the benefit of the Holders of the Notes; and
WHEREAS, the Issuer and the Trustee desire to enter into this
Ninth Supplemental Indenture for the purposes set forth in Sections 2.3 and
8.1(e) of the Original Indenture as referred to above; and
WHEREAS, the Issuer has furnished the Trustee with a copy of
the resolutions of its Board of Directors certified by its Secretary or
Assistant Secretary authorizing the execution of this Ninth Supplemental
Indenture; and
<PAGE> 2
WHEREAS, all things necessary to make this Ninth Supplemental
Indenture a valid agreement of the Issuer and the Trustee and a valid supplement
to the Original Indenture have been done,
NOW, THEREFORE, THIS NINTH SUPPLEMENTAL INDENTURE
WITNESSETH:
For and in consideration of the premises and the purchase of
the Notes to be issued hereunder by holders thereof, the Issuer and the Trustee
mutually covenant and agree, for the equal and proportionate benefit of the
respective holders from time to time of the Notes, as follows:
ARTICLE I
STANDARD PROVISIONS; DEFINITIONS
SECTION 1.01. Standard Provisions. The Original Indenture
together with this Ninth Supplemental Indenture and all previous indentures
supplemental thereto entered into pursuant to the applicable terms thereof are
hereinafter sometimes collectively referred to as the "Indenture." All
capitalized terms which are used herein and not otherwise defined herein are
defined in the Indenture and are used herein with the same meanings as in the
Indenture.
SECTION 1.02. Definitions. Section 1.1 of the Original
Indenture is amended to insert the new definitions applicable to the Notes, in
the appropriate alphabetical sequence, as follows:
"Amortization Expense" means, for any period, amounts
recognized during such period as amortization of capital leases, depletion,
nuclear fuel, goodwill and assets classified as intangible assets in accordance
with generally accepted accounting principles.
"Applicable Premium" means, with respect to a 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 Note (or portion thereof) being redeemed
plus all interest payments due on such 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 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.
"Average Life" means, as of the date of determination, with
respect to any Indebtedness, the quotient obtained by dividing (i) the sum of
the products of (x) the number of years from the date of determination to the
dates of each successive scheduled principal payment of such Indebtedness and
(y) the amount of such principal payment by (ii) the sum of all such principal
payments.
"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
2-
<PAGE> 3
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, including any Preferred Stock or Letter
Stock; provided that Hybrid Preferred Securities shall not be considered Capital
Stock for purposes of this definition.
"Change in Control" means an event or series of events by
which (i) the Issuer ceases to own beneficially, 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 the
Issuer or Consumers, any direct or indirect transfer of securities by the Issuer
or Consumers, any merger, consolidation, liquidation or dissolution of the
Issuer or Consumers or otherwise); (ii) 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 the
Issuer; or (iii) the Issuer 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
the Issuer, in either event pursuant to a transaction in which the outstanding
Voting Stock of the Issuer is changed into or exchanged for cash, securities, or
other property, other than any such transaction in which (A) the outstanding
Voting Stock of the Issuer is changed into or exchanged for Voting Stock of the
surviving corporation and (B) the holders of the Voting Stock of the Issuer
immediately prior to such transaction retain, directly or indirectly,
substantially proportionate ownership of the Voting Stock of the surviving
corporation immediately after such transaction.
"CMS Electric and Gas" means CMS Electric and Gas Company, a
Michigan corporation and wholly-owned subsidiary of Enterprises.
"CMS Gas Transmission and Storage" means CMS Gas Transmission
and Storage Company, a Michigan corporation and wholly-owned subsidiary of
Enterprises.
"CMS Generation" means CMS Generation Co., a Michigan
corporation and wholly-owned subsidiary of Enterprises.
"CMS MST" means CMS Marketing, Services and Trading Company, a
Michigan corporation and wholly-owned subsidiary of Enterprises.
3-
<PAGE> 4
"CMS Oil & Gas" means CMS Oil & Gas Co. (formerly known as CMS
NOMECO Oil & Gas Co.), a Michigan corporation and wholly-owned subsidiary of
Enterprises.
"Consolidated Assets" means, at any date of determination, the
aggregate assets of the Issuer 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 (i) the aggregate amount of Operating Cash Flow for such period to
(ii) the aggregate amount of Consolidated Interest Expense for such period.
"Consolidated Current Liabilities" means, for any period, the
aggregate amount of liabilities of the Issuer and its Consolidated Subsidiaries
which may properly be classified as current liabilities (including taxes accrued
as estimated), after (i) eliminating all inter-company items between the Issuer
and any Consolidated Subsidiary and (ii) 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 the Issuer 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 the Issuer and
its Consolidated Subsidiaries, including, without duplication, (i) interest
expense attributable to capital leases, (ii) amortization of debt discount,
(iii) capitalized interest, (iv) cash and noncash interest payments, (v)
commissions, discounts and other fees and charges owed with respect to letters
of credit and bankers' acceptance financing, (vi) net costs under Interest Rate
Protection Agreements (including amortization of discount) and (vii) interest
expense in respect of obligations of other Persons deemed to be Indebtedness of
the Issuer or any Consolidated Subsidiaries under clause (v) or (vi) 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 respect
of any Indebtedness of any Subsidiary of Consumers, CMS Generation, CMS Oil &
Gas, CMS Electric and Gas, CMS Gas Transmission and Storage, CMS MST or any
other Designated Enterprises Subsidiary, provided that such Indebtedness is
without recourse to any assets of the Issuer, Consumers, Enterprises, CMS
Generation, CMS Oil & Gas, CMS Electric and Gas, CMS Gas Transmission and
Storage, CMS MST or any other Designated Enterprises Subsidiary.
"Consolidated Net Income" means, for any period, the net
income of the Issuer 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:
4-
<PAGE> 5
(i) any net income of any Person if such Person is not a
Subsidiary, except that (A) the Issuer'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 the Issuer or a Consolidated
Subsidiary as a dividend or other distribution and (B) the Issuer's
equity in a net loss of any such Person for such period shall be
included in determining such Consolidated Net Income;
(ii) any net income of any Person acquired by the Issuer or a
Subsidiary in a pooling of interests transaction for any period prior
to the date of such acquisition;
(iii) any gain or loss realized upon the sale or other
disposition of any property, plant or equipment of the Issuer 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
(iv) any net income of any Subsidiary of Consumers, CMS
Generation, CMS Oil & Gas, CMS Electric and Gas, CMS Gas Transmission
and Storage, CMS MST or any other Designated Enterprises Subsidiary
whose interest expense is excluded from Consolidated Interest Expense,
provided, however, that for purposes of this subsection (iv), any cash,
dividends or distributions of any such Subsidiary to the Issuer 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 the Issuer 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:
(i) Consolidated Current Liabilities; (ii) minority interests in Consolidated
Subsidiaries held by Persons other than the Issuer or a Restricted Subsidiary;
(iii) 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; (iv) 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; (v)
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; (vi) treasury
stock; and (vii) 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
5-
<PAGE> 6
which the determination is being made (and adjusted for any material events
since such date), as (i) the par or stated value of all outstanding Capital
Stock plus (ii) paid-in capital or capital surplus relating to such Capital
Stock plus (iii) 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 the Issuer in
accordance with generally accepted accounting principles.
"Consumers" means Consumers Energy Company, a Michigan
corporation, all of whose common stock is on the date hereof owned by the
Issuer.
"Designated Enterprises Subsidiary" means any wholly-owned
subsidiary of Enterprises formed after the date of this Ninth Supplemental
Indenture which is designated a Designated Enterprises Subsidiary by the Board
of Directors.
"Enterprises" means CMS Enterprises Company, a Michigan
corporation and wholly-owned subsidiary of the Issuer.
"Event of Default" with respect to the Notes has the meaning
specified in Article V of this Ninth Supplemental Indenture.
"Exchange Act" means the Securities Exchange Act of 1934, as
amended.
"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 or Redeemable
Stock).
"Hybrid Preferred Securities" means any preferred securities
issued by a Hybrid Preferred Securities Subsidiary, where such preferred
securities have the following characteristics:
(i) such Hybrid Preferred Securities Subsidiary lends
substantially all of the proceeds from the issuance of such
preferred securities to the Company or Consumers in exchange
for subordinated debt issued by the Company or Consumers
respectively;
(ii) 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
(iii) the Company 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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<PAGE> 7
"Hybrid Preferred Securities Subsidiary" means any business
trust (or similar entity) (i) all of the common equity interest of which is
owned (either directly or indirectly through one or more wholly-owned
Subsidiaries of the Company or Consumers) at all times by the Company or
Consumers, (ii) that has been formed for the purpose of issuing Hybrid Preferred
Securities and (iii) substantially all of the assets of which consist at all
times solely of subordinated debt issued by the Company 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,
(i) the principal of and premium (if any) in respect of (A)
indebtedness of such Person for money borrowed and (B) indebtedness
evidenced by notes, debentures, bonds or other similar instruments for
the payment of which such Person is responsible or liable;
(ii) all Capital Lease Obligations of such Person;
(iii) 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);
(iv) 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
clauses (i) through (iii) 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);
(v) all obligations of the type referred to in clauses (i)
through (iv) 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
(vi) all obligations of the type referred to in clauses (i)
through (v) 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.
"Interest Payment Date" means January 1, 2000 and each July 1
and January 1 in each year thereafter.
"Interest Rate Protection Agreement" means any interest rate
swap agreement, interest rate cap agreement or other financial agreement or
arrangement designed to protect the Issuer or any Subsidiary against
fluctuations in interest rates.
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"Letter Stock", as applied to the Capital Stock of any
corporation, means Capital Stock of any class or classes (however designated)
which is intended to reflect the separate performance of certain of the
businesses or operations conducted by such corporation or any of its
subsidiaries.
"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 the Issuer, net of (i) brokerage commissions and other
fees and expenses (including fees and expenses of counsel and investment
bankers) related to such Asset Sale, (ii) provisions for all taxes (whether or
not such taxes will actually be paid or are payable) as a result of such Asset
Sale without regard to the consolidated results of operations of the Issuer and
its Restricted Subsidiaries, taken as a whole, (iii) 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 (iv) appropriate amounts to be
provided by the Issuer or any Restricted Subsidiary of the Issuer 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 the Issuer, 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
the Issuer 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
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issuance costs, any nonrecurring, noncash charges to earnings and any negative
accretion recognition.
"Other Rating Agency" shall mean any one of Duff & Phelps
Credit Rating Co., Fitch Investors Service, L.P. 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 the Issuer to
pay the principal of (and premium, if any) or interest on any of the Notes on
behalf of the Issuer. Initially, the Paying Agent shall be the Trustee.
"Predecessor Note" of any particular previous Note evidencing
all or a portion of the same debt as that evidenced by such particular Note;
and, for the purposes of the definition, any Note authenticated and delivered
under Section 2.9 of the Indenture in exchange for or in lieu of a mutilated,
destroyed, lost or stolen Note shall be deemed to evidence the same debt as the
mutilated, destroyed, lost or stolen Note.
"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 shall not be considered
Preferred Stock for purposes of this definition.
"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 Notes or is redeemable at the option of the
holder thereof at any time prior to the first anniversary of the Stated Maturity
of the outstanding Notes.
"Restricted Subsidiary" means any Subsidiary (other than
Consumers and its subsidiaries) of the Issuer which, as of the date of the
Issuer's most recent quarterly consolidated balance sheet, constituted at least
10% of the total Consolidated Assets of the Issuer 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 the Issuer
and its Restricted Subsidiaries could not incur at least one dollar of
additional Indebtedness under Section 4.04, and (i) any such Subsidiary so
designated as a Restricted Subsidiary must be organized under the laws of the
United States or any State thereof, (ii) more than 80% of the Voting Stock of
such Subsidiary must be owned of record and beneficially by the Issuer or a
Restricted Subsidiary and (iii) such Restricted Subsidiary must be a
Consolidated Subsidiary.
"Standard & Poor's" shall mean Standard & Poor's Ratings
Group, a division of McGraw Hill Inc., and any successor thereto which is a
nationally recognized statistical rating organization, or if such entity shall
cease to rate the Notes or shall cease to exist and there shall be
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no such successor thereto, any other nationally recognized statistical rating
organization selected by the Issuer which is acceptable to the Trustee.
"Subordinated Indebtedness" means any Indebtedness of the
Issuer (whether outstanding on the date of this Ninth Supplemental Indenture or
thereafter incurred) which is contractually subordinated or junior in right of
payment to the Notes.
"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, (i) 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, (ii) to purchase property, securities or services for
the purpose of assuring the owner of such debt of the payment of such debt,
(iii) 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, (iv) 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 (v) 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
Issuer, each of the members of the Consolidated Group (as defined therein), and
each of the corporations that become members of the Consolidated Group.
"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) which has become publicly available at least two Business Days prior
to the redemption date or, in the 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 Notes; provided, however, that
if the average life to stated maturity of the 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.
"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).
Certain terms, used principally in Articles Three, Four and
Seven of this Ninth Supplemental Indenture, are defined in those Articles.
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ARTICLE II
DESIGNATION AND TERMS OF THE NOTES; FORMS
SECTION 2.01. Establishment of 2011 Notes. (a) There is hereby
created a series of Securities to be known and designated as the "Senior Notes,
8% Reset Put Securities, Due 2011" and limited in aggregate principal amount
(except as contemplated in Section 2.3(f)(2) of the Indenture) to $250,000,000.
The Stated Maturity of the 2011 Notes is July 1, 2011.
(b) The 2011 Notes will bear interest from the Original Issue
Date, or from the most recent date to which interest has been paid or duly
provided for, at the rate of 8% per annum stated therein until the principal
thereof is paid or made available for payment. Interest will be payable
semiannually on each Interest Payment Date and at Maturity, as provided in the
form of the 2011 Note in Section 2.03 hereof.
(c) The Record Date referred to in Section 2.3(f)(4) of the
Indenture for the payment of the interest on any 2011 Note payable on any
Interest Payment Date (other than at Maturity) shall be the 15th day (whether or
not a Business Day) of the calendar month preceding the month in which such
Interest Payment Date occurs and, in the case of interest payable at Maturity,
the Record Date shall be the date of Maturity.
(d) The payment of the principal of, premium (if any) and
interest on the 2011 Notes shall not be secured by a security interest in any
property.
(e) NationsBank, N.A. has the right to purchase the 2011 Notes
on July 1, 2001 for 100% of the then outstanding principal amount. If
NationsBank, N.A. does not purchase the Notes on July 1, 2001, the Trustee must
on behalf of the Holders exercise the right to require the Issuer to Purchase
all of the 2011 Notes for 100% of the then outstanding principal amount.
(f) The 2011 Notes shall not be convertible.
(g) The 2011 Notes will not be subordinated to the payment of
Senior Debt.
(h) The Issuer will not pay any additional amounts on the 2011
Notes held by a Person who is not a U.S. Person in respect of any tax,
assessment or government charge withheld or deducted.
(i) The events specified in Events of Default with respect to
the 2011 Notes shall include the events specified in Article Five of this Ninth
Supplemental Indenture. In addition to the covenants set forth in Article Three
of the Original Indenture, the Holders of the 2011 Notes shall have the benefit
of the covenants of the Issuer set forth in Article Four hereto.
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SECTION 2.02. Forms Generally. The 2011 Notes and Trustee's
certificates of authentication shall be in substantially the form set forth in
this Article, with such appropriate insertions, omissions, substitutions and
other variations as are required or permitted by the Indenture, and may have
such letters, numbers or other marks of identification and such legends or
endorsements placed thereon as may be required to comply with the rules of any
securities exchange or as may, consistently herewith, be determined by the
officers executing such 2011 Notes, as evidenced by their execution thereof.
The definitive 2011 Notes shall be printed, lithographed or
engraved on steel engraved borders or may be produced in any other manner, all
as determined by the officers executing such 2011 Notes, as evidenced by their
execution thereof.
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SECTION 2.03. Form of Face of 2011 Note.
CMS ENERGY CORPORATION
SENIOR NOTES, 8% RESET PUT SECURITIES, DUE 2011
No. ________ $__________
CMS Energy Corporation, a corporation duly organized and
existing under the laws of the State of Michigan (herein called the "Issuer",
which term includes any successor Person under the Indenture hereinafter
referred to), for value received, hereby promises to pay to __________, or
registered assigns, the principal sum of ___________________ United States
Dollars ($___________) on July 1, 2011 ("Maturity") and to pay interest thereon
from June 22, 1999 (the "Original Issue Date") or from the most recent Interest
Payment Date to which interest has been paid or duly provided for, semi-annually
on January 1 and July 1 in each year, commencing January 1, 2000, and at
Maturity at the rate of 8% per annum, until the principal hereof is paid or made
available for payment. The amount of interest payable on any Interest Payment
Date, shall be computed on the basis of a 360-day year of twelve 30-day months.
The interest so payable, and punctually paid or duly provided for, on any
Interest Payment Date will, as provided in such Indenture, be paid to the Person
in whose name this 2011 Note (or one or more Predecessor 2011 Notes) is
registered at the close of business on the Record Date for such interest, which
shall be the 15th day of the calendar month preceding the month in which such
Interest Payment Date occurs (whether or not a Business Day) except that the
Record Date for interest payable at Maturity shall be the date of Maturity. Any
such interest not so punctually paid or duly provided for will forthwith cease
to be payable to the Holder on such Record Date and may either be paid to the
Person in whose name this 2011 Note (or one or more Predecessor 2011 Notes) is
registered at the close of business on a subsequent Record Date (which shall be
not less than five Business Days prior to the date of payment of such defaulted
interest) for the payment of such defaulted interest to be fixed by the Trustee,
notice whereof shall be given to Holders of 2011 Notes not less than 15 days
preceding such subsequent Record Date.
Payment of the principal of (and premium, if any) and
interest, if any, on this 2011 Note will be made at the office or agency of the
Issuer maintained for that purpose in New York, New York (the "Place of
Payment"), in such coin or currency of the United States of America as at the
time of payment is legal tender for payment of public and private debts;
provided, however, that at the option of the Issuer payment of interest (other
than interest payable at Maturity) may be made by check mailed to the address of
the Person entitled thereto as such address shall appear in the Security
Register or by wire transfer to an account designated by such Person not later
than ten days prior to the date of such payment.
Reference is hereby made to the further provisions of this
2011 Note set forth on the reverse hereof, which further provisions shall for
all purposes have the same effect as if set forth at this place.
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Unless the certificate of authentication hereon has been
executed by the Trustee referred to on the reverse hereof by manual signature,
this 2011 Note shall not be entitled to any benefit under the Indenture or be
valid or obligatory for any purpose.
IN WITNESS WHEREOF, the Issuer has caused this instrument to
be duly executed under its corporate seal.
Dated:
CMS ENERGY CORPORATION
By____________________________
Its: Senior Vice President and
Chief Financial Officer
By____________________________
Its: Vice President and Treasurer
SECTION 2.04. Form of Reverse of 2011 Note.
This Senior Note, 8% Reset Put Securities, Due 2011 is one of a duly
authorized issue of securities of the Issuer (herein called the "2011 Notes"),
issued and to be issued under an Indenture, dated as of September 15, 1992, as
supplemented by certain supplemental indentures, including the Ninth
Supplemental Indenture, dated as of June 22, 1999 (herein collectively referred
to as the "Indenture"), between the Issuer and Bank One Trust Company, NA, a
national banking association (successor to NBD Bank), as Trustee (herein called
the "Trustee", which term includes any successor trustee under the Indenture),
to which Indenture and all indentures supplemental thereto reference is hereby
made for a statement of the respective rights, limitations of rights, duties and
immunities thereunder of the Issuer, the Trustee, and the Holders of the 2011
Notes and of the terms upon which the 2011 Notes are, and are to be,
authenticated and delivered. This 2011 Note is one of the series designated on
the face hereof, limited in aggregate principal amount to $250,000,000.
INTEREST RATE AND INTEREST PAYMENT DATES
The 2011 Notes will bear interest at the rate of 8% from and including
June 22, 1999 to but excluding July 1, 2001 (the "Coupon Reset Date"). Interest
on the 2011 Notes will be payable semi-annually on January 1 and July 1 of each
year, commencing January 1, 2000 (each, an "Interest Payment Date"). Interest
will be calculated based on a 360-day year consisting of twelve 30-day months.
"Business Day" means any day other than a Saturday, a Sunday or a day on which
banking institutions in The City of New York are authorized or required by law
or regulation to be closed.
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If NationsBank, N.A. (the "Callholder") elects to purchase the 2011
Notes pursuant to the Call Option (as defined below), the Calculation Agent (as
defined below) will reset the interest rate for the 2011 Notes effective on the
Coupon Reset Date, pursuant to the Coupon Reset Process described below. In such
circumstance, (i) this Note will be purchased by the Callholder at 100% of the
principal amount hereof on the Coupon Reset Date, on the terms and subject to
the conditions described herein (interest accrued to but excluding the Coupon
Reset Date will be paid by the Issuer on such date to the Holder hereof on the
most recent Record Date), and (ii) from and including the Coupon Reset Date, the
2011 Notes will bear interest at the rate determined by the Calculation Agent in
accordance with the procedures set forth under "Coupon Reset Process if 2011
Notes are Called" below.
MATURITY DATE
The 2011 Notes will mature on July 1, 2011 (the "Maturity Date"). On
the Coupon Reset Date, the Holder hereof will be entitled to receive 100% of the
principal amount hereof from either (i) the Callholder, if the Callholder
purchases this Note pursuant to the Call Option, or (ii) the Issuer, by exercise
of the Put Option (as defined below) by the Trustee for and on behalf of the
Holder hereof, if the Callholder does not purchase this Note pursuant to the
Call Option.
CALL OPTION; PUT OPTION
(i) Call Option. The Callholder, by giving notice to the Trustee (the
"Call Notice"), has the right to purchase the aggregate principal amount of this
Note, in whole but not in part (the "Call Option"), on the Coupon Reset Date, at
a price equal to 100% of the principal amount hereof (the "Call Price")
(interest accrued to but excluding the Coupon Reset Date will be paid by the
Issuer on such date to the Holder hereof on the most recent Record Date). The
Call Notice is required to be given to the Trustee, in writing, prior to 4:00
p.m., New York time, no later than fifteen calendar days prior to the Coupon
Reset Date for the 2011 Notes. The Call Notice must contain the requisite
delivery details, including the identity of the Callholder's Depositary account.
The Call Notice may be revoked by the Callholder at any time prior to 2:00 p.m.,
New York time, on the Business Day prior to the Coupon Reset Date.
If the Callholder exercises the Call Option, unless terminated in
accordance with its terms, (i) not later than 2:00 p.m., New York time, on the
Business Day prior to the Coupon Reset Date, the Callholder will deliver the
Call Price in immediately available funds to the Trustee for payment of the Call
Price on the Coupon Reset Date and (ii) the Holder hereof will be required to
deliver and will be deemed to have delivered this Note to the Callholder against
payment therefor on the Coupon Reset Date through the facilities of the
Depositary. No holder of any 2011 Notes or any interest in such 2011 Notes will
have any right or claim against the Callholder as a result of the Callholder's
decision whether or not to exercise the Call Option or performance or
nonperformance of its obligations with respect thereto.
The Callholder may at any time assign its rights and obligations under
its Call Option; provided, however, that (i) such rights and obligations are
assigned in whole and not in part and (ii)
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it provides the Trustee and the Issuer with notice of such assignment
contemporaneously with such assignment. Upon receipt of notice of assignment,
the Trustee will treat the assignee as Callholder for all purposes hereunder.
The Callholder may assign its rights under the Call Option without notice to, or
consent of, the holders of the 2011 Notes (including, if applicable, the Holder
hereof).
Except as otherwise specified in clause (i) below, the Call Option will
automatically and immediately terminate, no payment will be due hereunder from
the Callholder, and the Coupon Reset Process will terminate, if any of the
following occurs: (i) an Event of Default occurs under Section 5.1(a), (b), (c),
(d), (g) or (h) under the Indenture (in such event, termination is at the
Callholder's option) or under Section 5.1(e) or (f) under the Indenture (in such
event, termination is automatic); (ii) the Callholder fails to deliver the Call
Notice to the Trustee prior to 4:00 p.m., New York time, on the fifteenth
calendar day prior to the Coupon Reset Date or revokes the Call Notice; (iii) on
the Bid Date (as defined below), fewer than two Dealers (as defined below)
submit timely Bids (as defined below) substantially as provided below; or (iv)
the Callholder fails to pay the Call Price by 2:00 p.m., New York time, on the
Business Day prior to the Applicable Coupon Reset Date.
If the Call Option is terminated by the Callholder or the Issuer,
notice of such termination will be immediately given in writing to the Trustee
by the Callholder or the Issuer, as the case may be. If the Call Option so
terminates or is automatically terminated, the Trustee will exercise the Put
Option described below with respect to the 2011 Notes.
(ii) Put Option. If the Call Option is not exercised or if the Call
Option otherwise terminates, the Trustee will exercise the right of the holders
of the 2011 Notes (including, if applicable, the Holder hereof) to require the
Issuer to purchase the aggregate principal amount of 2011 Notes, in whole but
not in part (the "Put Option"), on the Coupon Reset Date at a price equal to
100% of the principal amount thereof (the "Put Price"), plus accrued but unpaid
interest to but excluding the Coupon Reset Date, in each case, to be paid by the
Issuer to the Holders of the 2011 Notes (including, if applicable, the Holder
hereof) in immediately available funds on the Coupon Reset Date. If the Trustee
exercises the Put Option then the Issuer will deliver the Put Price in
immediately available funds to the Trustee by no later than 10:00 a.m., New York
time, on the Coupon Reset Date and the holders of the 2011 Notes will be
required to deliver and will be deemed to have delivered the 2011 Notes to the
Issuer against payment therefor on the Coupon Reset Date through the facilities
of the Depositary. By its purchase of 2011 Notes, each Holder irrevocably agrees
that the Trustee shall exercise the Put Option relating to such 2011 Notes for
or on behalf of the 2011 Notes as provided herein. No holder of any 2011 Notes
or any interest therein has the right to consent or object to the exercise of
the Trustee's duties under the Put Option.
NOTICE TO HOLDERS BY TRUSTEE
In anticipation of the exercise of the Call Option or the Put Option on
the Coupon Reset Date, the Trustee will notify the Holder hereof, not less than
30 days nor more than 60 days prior to the Coupon Reset Date, that all 2011
Notes will be delivered on the Coupon Reset Date through the facilities of the
Depositary against payment of the Call Price by the Callholder under the Call
Option or payment of the Put Price by the Issuer under the Put Option. The
Trustee will notify the Holder
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hereof once it is determined whether the Call Price or the Put Price will be
delivered in accordance with the provisions hereof.
COUPON RESET PROCESS IF 2011 NOTES ARE CALLED
The following steps shall be taken in order to determine the interest
rate to be paid on the 2011 Notes on and after the Applicable Coupon Reset Date
in the event the Call Option has been exercised with respect to the 2011 Notes.
Pursuant to and subject to the terms of a Calculation Agency Agreement,
dated June 22, 1999, between the Issuer and Banc of America Securities LLC, Banc
of America Securities LLC has been appointed the calculation agent for the 2011
Notes (in such capacity as calculation agent, the "Calculation Agent"). If the
Callholder has exercised the Call Option, then the following steps (the "Coupon
Reset Process") will be taken in order to determine the interest rate to be paid
on the 2011 Notes from and including the Coupon Reset Date to but excluding the
Maturity Date. The Issuer and the Calculation Agent will use reasonable efforts
to cause the actions contemplated below to be completed in as timely a manner as
possible.
(a) The Issuer will provide the Calculation Agent with (i) a
list (the "Dealer List"), no later than five Business Days prior to the
Applicable Coupon Reset Date, containing the names and addresses of
three dealers, one of which shall be Banc of America Securities LLC,
from whom the Issuer desires the Calculation Agent to obtain the Bids
for the purchase of such 2011 Notes and (ii) such other material as may
reasonably be requested by the Calculation Agent to facilitate a
successful Coupon Reset Process.
(b) Within one Business Day following receipt by the
Calculation Agent of the Dealer List, the Calculation Agent shall
provide to each dealer ("Dealer") on the Dealer List (i) a copy of the
Prospectus Supplement dated June 22, 1999 and Prospectus dated April
20, 1999, relating to the offering of the 2011 Notes (collectively, the
"Pricing Supplement"), (ii) a copy of the form of 2011 Notes and (iii)
a written request that each Dealer submit a Bid to the Calculation
Agent by 12:00 noon, New York time, on the third Business Day prior to
the Coupon Reset Date (the "Bid Date"). "Bid" means an irrevocable
written offer given by a Dealer for the purchase of all the 2011 Notes,
settling on the Coupon Reset Date, and shall be quoted by such Dealer
as a stated yield to maturity on the 2011 Notes ("Yield to Maturity").
Each Dealer will also be provided with (i) the name of the Issuer, (ii)
an estimate of the Purchase Price (which shall be stated as a US Dollar
amount and be calculated by the Calculation Agent in accordance with
paragraph (c) below), (iii) the principal amount and maturity of the
2011 Notes and (iv) the method by which interest will be calculated on
the 2011 Notes.
(c) The purchase price for the 2011 Notes in connection with
the exercise of the Call Option (the "Purchase Price") shall be equal
to (i) the principal amount of the 2011 Notes, plus (ii) a premium (the
"2011 Notes Premium") which shall be equal to the excess, if any, of
(A) the discounted present value to the Coupon Reset Date of a bond
with a maturity of
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10 years from the Coupon Reset Date which has an interest rate of
5.78%, semi-annual interest payments on each January 1 and July 1
commencing January 1, 2002 following the Coupon Reset Date, and a
principal amount equal to the principal amount of the 2011 Notes, and
assuming a discount rate equal to the Treasury Rate over (B) such
principal amount of 2011 Notes. The "Treasury Rate" means the per annum
rate equal to the offer side yield to maturity of the current
on-the-run ten-year United States Treasury Security per Telerate page
500, or any successor page, at 11:00 a.m., New York time, on the Bid
Date (or such other time or date that may be agreed upon by the Issuer
and the Calculation Agent) or, if such rate does not appear on Telerate
page 500, or any successor page, at such time, the rates on GovPX
End-of-Day Pricing at 3:00 p.m., New York time, on the Bid Date (or
such other time or date that may be agreed upon by the Issuer and the
Calculation Agent).
(d) The Calculation Agent will provide written notice to the
Issuer by 12:30 p.m., New York time on the Bid Date, setting forth (i)
the names of each of the Dealers from whom the Calculation Agent
received Bids on the Bid Date, (ii) the Bid submitted by each such
Dealer and (iii) the Purchase Price as determined pursuant to paragraph
(c) above. The Calculation Agent will thereafter select from the Bids
received the Bid with the lowest Yield to Maturity (the "Selected
Bid"); provided, however, that (i) if the Calculation Agent has not
received a timely Bid from a Dealer on or before the Bid Date, the
Selected Bid shall be the lowest of all Bids received by such time;
(ii) if any two or more of the lowest Bids submitted are equivalent,
the Issuer shall in its sole discretion select any of such equivalent
Bids (and such selected Bid shall be the Selected Bid); and (iii) Banc
of America Securities LLC has the right to match the Bid with the
lowest Yield to Maturity, in which case Banc of America Securities
LLC's Bid shall be the Selected Bid. The Calculation Agent will set the
Coupon Reset Rate equal to the interest rate that would amortize the
2011 Notes Premium fully over the term of the 2011 Notes at the Yield
to Maturity indicated by the Selected Bid (the "Coupon Reset Rate").
The Calculation Agent will notify the Dealer that submitted the
Selected Bid by 4:00 p.m., New York time, on the Bid Date that its Bid
was determined to be the Selected Bid.
(e) Immediately after calculating the Coupon Reset Rate for
the 2011 Notes, the Calculation Agent will provide written notice to
the Issuer and the Trustee, setting forth the Coupon Reset Rate. The
Coupon Reset Rate for the 2011 Notes will be effective from and
including the Applicable Coupon Reset Date to but excluding the
Maturity Date.
If a Change in Control occurs, the Issuer shall notify the
Holder of this 2011 Note of such occurrence and such Holder shall have the right
to require the Issuer to make a Required Repurchase of all or any part of this
2011 Note at a Change in Control Purchase Price equal to 101% of the principal
amount of this 2011 Note to be so purchased as more fully provided in the
Indenture and subject to the terms and conditions set forth therein. In the
event of a Required Repurchase of only a portion of this 2011 Note, a new 2011
Note or Notes for the unrepurchased portion hereof will be issued in the name of
the Holder hereof upon the cancellation hereof.
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If an Event of Default with respect to this 2011 Note shall
occur and be continuing, the principal of this 2011 Note may be declared due and
payable in the manner and with the effect provided in the Indenture.
In any case where any Interest Payment Date, repurchase date,
Stated Maturity or Maturity of any 2011 Note shall not be a Business Day at any
Place of Payment, then (notwithstanding any other provision of the Indenture or
this 2011 Note), payment of interest or principal (and premium, if any) need not
be made at such Place of Payment 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, repurchase date or at the Stated
Maturity or Maturity; provided that no interest shall accrue on the amount so
payable for the period from and after such Interest Payment Date, redemption
date, repurchase date, Stated Maturity or Maturity, as the case may be, to such
Business Day.
The Indenture contains provisions for defeasance at any time
of (i) the entire indebtedness of this 2011 Note or (ii) certain restrictive
covenants and Events of Default with respect to this 2011 Note, in each case
upon compliance with certain conditions set forth therein.
The Indenture permits, with certain exceptions as therein
provided, the amendment thereof and the modification of the rights and
obligations of the Issuer and the rights of the Holders of all outstanding 2011
Notes under the Indenture at any time by the Issuer and the Trustee with the
consent of the Holders of not less than a majority in principal amount of
Securities of all series then outstanding and affected (voting as one class).
The Indenture permits the Holders of not less than a majority
in principal amount of Securities of all series at the time outstanding with
respect to which a default shall have occurred and be continuing (voting as one
class) to waive on behalf of the Holders of all outstanding Securities of such
series any past default by the Issuer, provided that no such waiver may be made
with respect to a default in the payment of the principal of or the interest on
any Security of such series or the default by the Issuer in respect of certain
covenants or provisions of the Indenture, the modification or amendment of which
must be consented to by the Holder of each outstanding Security of each series
affected.
As set forth in, and subject to, the provisions of the
Indenture, no Holder of any 2011 Note will have any right to institute any
proceeding with respect to the Indenture or for any remedy thereunder, unless
such Holder shall have previously given to the Trustee written notice of a
continuing Event of Default, the Holders of not less than 25% in principal
amount of the outstanding Securities of each affected series (voting as one
class) shall have made written request, and offered reasonable indemnity, to the
Trustee to institute such proceeding as trustee, and the Trustee shall not
have received from the Holders of a majority in principal amount of the
outstanding Securities of each affected series (voting as one class) a direction
inconsistent with such request and shall have failed to institute such
proceeding within 60 days; provided, however, that such limitations do not apply
to a suit instituted by the Holder hereof for the enforcement of payment of the
principal of (and
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premium, if any) or any interest on this 2011 Note on or after the respective
due dates expressed herein.
No reference herein to the Indenture and no provision of this
2011 Note or of the Indenture shall alter or impair the obligation of the
Issuer, which is absolute and unconditional, to pay the principal of and any
premium and interest on this 2011 Note at the times, place and rate, and in the
coin or currency, herein prescribed.
As provided in the Indenture and subject to certain
limitations therein set forth, the transfer of this 2011 Note is registerable in
the Security Register, upon surrender of this 2011 Note for registration of
transfer at the office or agency of the Issuer in any place where the principal
of and any premium and interest on this 2011 Note are payable, duly endorsed by,
or accompanied by a written instrument of transfer in form satisfactory to the
Issuer and the Security Registrar duly executed by, the Holder hereof or his
attorney duly authorized in writing, and thereupon one or more new 2011 Notes of
this series and of like tenor, of authorized denominations and for the same
aggregate principal amount, will be issued to the designated transferee or
transferees.
The 2011 Notes are issuable only in registered form without
coupons in denominations of $1,000 and any integral multiple thereof. As
provided in the Indenture and subject to certain limitations therein set forth,
2011 Notes are exchangeable for a like aggregate principal amount of 2011 Notes
and of like tenor of a different authorized denomination, as requested by the
Holder surrendering the same.
No service charge shall be made for any such registration of
transfer or exchange, but the Issuer may require payment of a sum sufficient to
cover any tax or other governmental charge payable in connection therewith.
The Issuer shall not be required to (a) issue, exchange or
register the transfer of this 2011 Note for a period of 15 days next preceding
the mailing of the notice of redemption of 2011 Notes or (b) exchange or
register the transfer of any 2011 Note or any portion thereof selected, called
or being called for redemption, except in the case of any 2011 Note to be
redeemed in part, the portion thereof not so to be redeemed.
Prior to due presentment of this 2011 Note for registration of
transfer, the Issuer, the Trustee and any agent of the Issuer or the Trustee may
treat the Person in whose name this 2011 Note is registered as the owner hereof
for all purposes, whether or not this 2011 Note be overdue, and neither the
Issuer, the Trustee nor any such agent shall be affected by notice to the
contrary.
All terms used in this 2011 Note without definition which are
defined in the Indenture shall have the meanings assigned to them in the
Indenture.
SECTION 2.05. Form of Trustee's Certificate of Authentication.
The Trustee's certificates of authentication shall be in substantially the
following form:
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This is one of the Securities of the series designated herein
referred to in the within-mentioned Indenture.
as Trustee
By______________________________________
Authorized Officer
SECTION 2.06 Establishment of 2013 Notes. (a) There is hereby
created a series of Securities to be known and designated as the "Senior Notes,
8 3/8% Reset Put Securities, Due 2013" and limited in aggregate principal amount
(except as contemplated in Section 2.3(f)(2) of the Indenture) to $150,000,000.
The Stated Maturity of the 2013 Notes is July 1, 2013.
(b) The 2013 Notes will bear interest from the Original Issue
Date, or from the most recent date to which interest has been paid or duly
provided for, at the rate of 8 3/8% per annum stated therein until the principal
thereof is paid or made available for payment. Interest will be payable
semiannually on each Interest Payment Date and at Maturity, as provided in the
form of the 2013 Note in Section 2.03 hereof.
(c) The Record Date referred to in Section 2.3(f)(4) of the
Indenture for the payment of the interest on any 2013 Note payable on any
Interest Payment Date (other than at Maturity) shall be the 15th day (whether or
not a Business Day) of the calendar month preceding the month in which such
Interest Payment Date occurs and, in the case of interest payable at Maturity,
the Record Date shall be the date of Maturity.
(d) The payment of the principal of, premium (if any) and
interest on the 2013 Notes shall not be secured by a security interest in any
property.
(e) NationsBank, N.A. has the right to purchase the 2013 Notes
on July 1, 2003 for 100% of the then outstanding principal amount. If
NationsBank, N.A. does not purchase the Notes on July 1, 2003, the Trustee must
on behalf of the Holders exercise the right to require the Issuer to Purchase
all of the 2013 Notes for 100% of the then outstanding principal amount.
(f) The 2013 Notes shall not be convertible.
(g) The 2013 Notes will not be subordinated to the payment of
Senior Debt.
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(h) The Issuer will not pay any additional amounts on the 2013
Notes held by a Person who is not a U.S. Person in respect of any tax,
assessment or government charge withheld or deducted.
(i) The events specified in Events of Default with respect to
the 2013 Notes shall include the events specified in Article Five of this Ninth
Supplemental Indenture. In addition to the covenants set forth in Article Three
of the Original Indenture, the Holders of the 2013 Notes shall have the benefit
of the covenants of the Issuer set forth in Article Four hereto.
SECTION 2.07 Forms Generally. The 2013 Notes and Trustee's
certificates of authentication shall be in substantially the form set forth in
this Article, with such appropriate insertions, omissions, substitutions and
other variations as are required or permitted by the Indenture, and may have
such letters, numbers or other marks of identification and such legends or
endorsements placed thereon as may be required to comply with the rules of any
securities exchange or as may, consistently herewith, be determined by the
officers executing such 2013 Notes, as evidenced by their execution thereof.
The definitive 2013 Notes shall be printed, lithographed or
engraved on steel engraved borders or may be produced in any other manner, all
as determined by the officers executing such 2013 Notes, as evidenced by their
execution thereof.
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SECTION 2.08 Form of Face of 2013 Note.
CMS ENERGY CORPORATION
SENIOR NOTES, 8 3/8% RESET PUT SECURITIES, DUE 2013
No. ________ $__________
CMS Energy Corporation, a corporation duly organized and
existing under the laws of the State of Michigan (herein called the "Issuer",
which term includes any successor Person under the Indenture hereinafter
referred to), for value received, hereby promises to pay to __________, or
registered assigns, the principal sum of _________________________ United States
Dollars ($___________) on July 1, 2013 ("Maturity") and to pay interest thereon
from June 22, 1999 (the "Original Issue Date") or from the most recent Interest
Payment Date to which interest has been paid or duly provided for, semi-annually
on January 1 and July 1 in each year, commencing January 1, 2000, and at
Maturity at the rate of 83/8% per annum, until the principal hereof is paid or
made available for payment. The amount of interest payable on any Interest
Payment Date, shall be computed on the basis of a 360-day year of twelve 30-day
months. The interest so payable, and punctually paid or duly provided for, on
any Interest Payment Date will, as provided in such Indenture, be paid to the
Person in whose name this 2013 Note (or one or more Predecessor 2013 Notes) is
registered at the close of business on the Record Date for such interest, which
shall be the 15th day of the calendar month preceding the month in which such
Interest Payment Date occurs (whether or not a Business Day) except that the
Record Date for interest payable at Maturity shall be the date of Maturity. Any
such interest not so punctually paid or duly provided for will forthwith cease
to be payable to the Holder on such Record Date and may either be paid to the
Person in whose name this 2013 Note (or one or more Predecessor 2013 Notes) is
registered at the close of business on a subsequent Record Date (which shall be
not less than five Business Days prior to the date of payment of such defaulted
interest) for the payment of such defaulted interest to be fixed by the Trustee,
notice whereof shall be given to Holders of 2013 Notes not less than 15 days
preceding such subsequent Record Date.
Payment of the principal of (and premium, if any) and
interest, if any, on this 2013 Note will be made at the office or agency of the
Issuer maintained for that purpose in New York, New York (the "Place of
Payment"), in such coin or currency of the United States of America as at the
time of payment is legal tender for payment of public and private debts;
provided, however, that at the option of the Issuer payment of interest (other
than interest payable at Maturity) may be made by check mailed to the address of
the Person entitled thereto as such address shall appear in the Security
Register or by wire transfer to an account designated by such Person not later
than ten days prior to the date of such payment.
Reference is hereby made to the further provisions of this
2013 Note set forth on the reverse hereof, which further provisions shall for
all purposes have the same effect as if set forth at this place.
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Unless the certificate of authentication hereon has been
executed by the Trustee referred to on the reverse hereof by manual signature,
this 2013 Note shall not be entitled to any benefit under the Indenture or be
valid or obligatory for any purpose.
IN WITNESS WHEREOF, the Issuer has caused this instrument to
be duly executed under its corporate seal.
Dated:
CMS ENERGY CORPORATION
By____________________________
Its: Senior Vice President and
Chief Financial Officer
By____________________________
Its: Senior Vice President, Controller and
Chief Accounting Officer
SECTION 2.09 Form of Reverse of the 2013 Note.
This Senior Note, 83/8% Reset Put Securities, Due 2013 is one of a duly
authorized issue of securities of the Issuer (herein called the "2013 Notes"),
issued and to be issued under an Indenture, dated as of September 15, 1992, as
supplemented by certain supplemental indentures, including the Ninth
Supplemental Indenture, dated as of June 22, 1999 (herein collectively referred
to as the "Indenture"), between the Issuer and Bank One Trust Company, NA, a
national banking association (successor to NBD Bank), as Trustee (herein called
the "Trustee", which term includes any successor trustee under the Indenture),
to which Indenture and all indentures supplemental thereto reference is hereby
made for a statement of the respective rights, limitations of rights, duties and
immunities thereunder of the Issuer, the Trustee, and the Holders of the 2013
Notes and of the terms upon which the 2013 Notes are, and are to be,
authenticated and delivered. This 2013 Note is one of the series designated on
the face hereof, limited in aggregate principal amount to $150,000,000.
INTEREST RATE AND INTEREST PAYMENT DATES
The 2013 Notes will bear interest at the rate of 83/8% from and
including June 22, 1999 to but excluding July 1, 2003 (the "Coupon Reset Date").
Interest on the 2013 Notes will be payable semi-annually on January 1 and July 1
of each year, commencing January 1, 2000 (each, an "Interest Payment Date").
Interest will be calculated based on a 360-day year consisting of twelve 30-day
months. "Business Day" means any day other than a Saturday, a Sunday or a day on
which banking institutions in The City of New York are authorized or required by
law or regulation to be closed.
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If NationsBank, N.A. (the "Callholder") elects to purchase the 2013
Notes pursuant to the Call Option (as defined below), the Calculation Agent (as
defined below) will reset the interest rate for the 2013 Notes effective on the
Coupon Reset Date, pursuant to the Coupon Reset Process described below. In such
circumstance, (i) this Note will be purchased by the Callholder at 100% of the
principal amount hereof on the Coupon Reset Date, on the terms and subject to
the conditions described herein (interest accrued to but excluding the Coupon
Reset Date will be paid by the Issuer on such date to the Holder hereof on the
most recent Record Date), and (ii) from and including the Coupon Reset Date, the
2013 Notes will bear interest at the rate determined by the Calculation Agent in
accordance with the procedures set forth under "Coupon Reset Process if 2013
Notes are Called" below.
MATURITY DATE
The 2013 Notes will mature on July 1, 2013 (the "Maturity Date"). On
the Coupon Reset Date, the Holder hereof will be entitled to receive 100% of the
principal amount hereof from either (i) the Callholder, if the Callholder
purchases this Note pursuant to the Call Option, or (ii) the Issuer, by exercise
of the Put Option (as defined below) by the Trustee for and on behalf of the
Holder hereof, if the Callholder does not purchase this Note pursuant to the
Call Option.
Call Option; Put Option
(i) Call Option. The Callholder, by giving notice to the Trustee (the
"Call Notice"), has the right to purchase the aggregate principal amount of this
Note, in whole but not in part (the "Call Option"), on the Coupon Reset Date, at
a price equal to 100% of the principal amount hereof (the "Call Price")
(interest accrued to but excluding the Coupon Reset Date will be paid by the
Issuer on such date to the Holder hereof on the most recent Record Date). The
Call Notice is required to be given to the Trustee, in writing, prior to 4:00
p.m., New York time, no later than fifteen calendar days prior to the Coupon
Reset Date for the 2013 Notes. The Call Notice must contain the requisite
delivery details, including the identity of the Callholder's Depositary account.
The Call Notice may be revoked by the Callholder at any time prior to 2:00 p.m.,
New York time, on the Business Day prior to the Coupon Reset Date.
If the Callholder exercises the Call Option, unless terminated in
accordance with its terms, (i) not later than 2:00 p.m., New York time, on the
Business Day prior to the Coupon Reset Date, the Callholder will deliver the
Call Price in immediately available funds to the Trustee for payment of the Call
Price on the Coupon Reset Date and (ii) the Holder hereof will be required to
deliver and will be deemed to have delivered this Note to the Callholder against
payment therefor on the Coupon Reset Date through the facilities of the
Depositary. No holder of any 2013 Notes or any interest in such 2013 Notes will
have any right or claim against the Callholder as a result of the Callholder's
decision whether or not to exercise the Call Option or performance or
nonperformance of its obligations with respect thereto.
The Callholder may at any time assign its rights and obligations under
its Call Option; provided, however, that (i) such rights and obligations are
assigned in whole and not in part and (ii)
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it provides the Trustee and the Issuer with notice of such assignment
contemporaneously with such assignment. Upon receipt of notice of assignment,
the Trustee will treat the assignee as Callholder for all purposes hereunder.
The Callholder may assign its rights under the Call Option without notice to, or
consent of, the holders of the 2013 Notes (including, if applicable, the Holder
hereof).
Except as otherwise specified in clause (i) below, the Call Option will
automatically and immediately terminate, no payment will be due hereunder from
the Callholder, and the Coupon Reset Process will terminate, if any of the
following occurs: (i) an Event of Default occurs under Section 5.1(a), (b), (c),
(d), (g) or (h) under the Indenture (in such event, termination is at the
Callholder's option) or under Section 5.1(e) or (f) under the Indenture (in such
event, termination is automatic); (ii) the Callholder fails to deliver the Call
Notice to the Trustee prior to 4:00 p.m., New York time, on the fifteenth
calendar day prior to the Coupon Reset Date or revokes the Call Notice; (iii) on
the Bid Date (as defined below), fewer than two Dealers (as defined below)
submit timely Bids (as defined below) substantially as provided below; or (iv)
the Callholder fails to pay the Call Price by 2:00 p.m., New York time, on the
Business Day prior to the Applicable Coupon Reset Date.
If the Call Option is terminated by the Callholder or the Issuer,
notice of such termination will be immediately given in writing to the Trustee
by the Callholder or the Issuer, as the case may be. If the Call Option so
terminates or is automatically terminated, the Trustee will exercise the Put
Option described below with respect to the 2013 Notes.
(ii) Put Option. If the Call Option is not exercised or if the Call
Option otherwise terminates, the Trustee will exercise the right of the holders
of the 2013 Notes (including, if applicable, the Holder hereof) to require the
Issuer to purchase the aggregate principal amount of 2013 Notes, in whole but
not in part (the "Put Option"), on the Coupon Reset Date at a price equal to
100% of the principal amount thereof (the "Put Price"), plus accrued but unpaid
interest to but excluding the Coupon Reset Date, in each case, to be paid by the
Issuer to the Holders of the 2013 Notes (including, if applicable, the Holder
hereof) in immediately available funds on the Coupon Reset Date. If the Trustee
exercises the Put Option then the Issuer will deliver the Put Price in
immediately available funds to the Trustee by no later than 10:00 a.m., New York
time, on the Coupon Reset Date and the holders of the 2013 Notes will be
required to deliver and will be deemed to have delivered the 2013 Notes to the
Issuer against payment therefor on the Coupon Reset Date through the facilities
of the Depositary. By its purchase of 2013 Notes, each Holder irrevocably agrees
that the Trustee shall exercise the Put Option relating to such 2013 Notes for
or on behalf of the 2013 Notes as provided herein. No holder of any 2013 Notes
or any interest therein has the right to consent or object to the exercise of
the Trustee's duties under the Put Option.
NOTICE TO HOLDERS BY TRUSTEE
In anticipation of the exercise of the Call Option or the Put Option on
the Coupon Reset Date, the Trustee will notify the Holder hereof, not less than
30 days nor more than 60 days prior to the Coupon Reset Date, that all 2013
Notes will be delivered on the Coupon Reset Date through the facilities of the
Depositary against payment of the Call Price by the Callholder under the Call
Option or payment of the Put Price by the Issuer under the Put Option. The
Trustee will notify the Holder
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hereof once it is determined whether the Call Price or the Put Price will be
delivered in accordance with the provisions hereof.
COUPON RESET PROCESS IF 2013 NOTES ARE CALLED
The following steps shall be taken in order to determine the interest
rate to be paid on the 2013 Notes on and after the Applicable Coupon Reset Date
in the event the Call Option has been exercised with respect to the 2013 Notes.
Pursuant to and subject to the terms of a Calculation Agency Agreement,
dated June 22, 1999, between the Issuer and Banc of America Securities LLC, Banc
of America Securities LLC has been appointed the calculation agent for the 2013
Notes (in such capacity as calculation agent, the "Calculation Agent"). If the
Callholder has exercised the Call Option, then the following steps (the "Coupon
Reset Process") will be taken in order to determine the interest rate to be paid
on the 2013 Notes from and including the Coupon Reset Date to but excluding the
Maturity Date. The Issuer and the Calculation Agent will use reasonable efforts
to cause the actions contemplated below to be completed in as timely a manner as
possible.
(a) The Issuer will provide the Calculation Agent with (i) a
list (the "Dealer List"), no later than five Business Days prior to the
Applicable Coupon Reset Date, containing the names and addresses of
three dealers, one of which shall be Banc of America Securities LLC,
from whom the Issuer desires the Calculation Agent to obtain the Bids
for the purchase of such 2013 Notes and (ii) such other material as may
reasonably be requested by the Calculation Agent to facilitate a
successful Coupon Reset Process.
(b) Within one Business Day following receipt by the
Calculation Agent of the Dealer List, the Calculation Agent shall
provide to each dealer ("Dealer") on the Dealer List (i) a copy of the
Prospectus Supplement dated June 22, 1999 and Prospectus dated April
20, 1999, relating to the offering of the 2013 Notes (collectively, the
"Pricing Supplement"), (ii) a copy of the form of 2013 Notes and (iii)
a written request that each Dealer submit a Bid to the Calculation
Agent by 12:00 noon, New York time, on the third Business Day prior to
the Coupon Reset Date (the "Bid Date"). "Bid" means an irrevocable
written offer given by a Dealer for the purchase of all the 2013 Notes,
settling on the Coupon Reset Date, and shall be quoted by such Dealer
as a stated yield to maturity on the 2013 Notes ("Yield to Maturity").
Each Dealer will also be provided with (i) the name of the Issuer, (ii)
an estimate of the Purchase Price (which shall be stated as a US Dollar
amount and be calculated by the Calculation Agent in accordance with
paragraph (c) below), (iii) the principal amount and maturity of the
2013 Notes and (iv) the method by which interest will be calculated on
the 2013 Notes.
(c) The purchase price for the 2013 Notes in connection with
the exercise of the Call Option (the "Purchase Price") shall be equal
to (i) the principal amount of the 2013 Notes, plus (ii) a premium (the
"2013 Notes Premium") which shall be equal to the excess, if any, of
(A) the discounted present value to the Coupon Reset Date of a bond
with a maturity of
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10 years from the Coupon Reset Date which has an interest rate of
5.78%, semi-annual interest payments on each January 1 and July 1
commencing January 1, 2004 following the Coupon Reset Date, and a
principal amount equal to the principal amount of the 2013 Notes, and
assuming a discount rate equal to the Treasury Rate over (B) such
principal amount of 2013 Notes. The "Treasury Rate" means the per annum
rate equal to the offer side yield to maturity of the current
on-the-run ten-year United States Treasury Security per Telerate page
500, or any successor page, at 11:00 a.m., New York time, on the Bid
Date (or such other time or date that may be agreed upon by the Issuer
and the Calculation Agent) or, if such rate does not appear on Telerate
page 500, or any successor page, at such time, the rates on GovPX
End-of-Day Pricing at 3:00 p.m., New York time, on the Bid Date (or
such other time or date that may be agreed upon by the Issuer and the
Calculation Agent).
(d) The Calculation Agent will provide written notice to the
Issuer by 12:30 p.m., New York time on the Bid Date, setting forth (i)
the names of each of the Dealers from whom the Calculation Agent
received Bids on the Bid Date, (ii) the Bid submitted by each such
Dealer and (iii) the Purchase Price as determined pursuant to paragraph
(c) above. The Calculation Agent will thereafter select from the Bids
received the Bid with the lowest Yield to Maturity (the "Selected
Bid"); provided, however, that (i) if the Calculation Agent has not
received a timely Bid from a Dealer on or before the Bid Date, the
Selected Bid shall be the lowest of all Bids received by such time;
(ii) if any two or more of the lowest Bids submitted are equivalent,
the Issuer shall in its sole discretion select any of such equivalent
Bids (and such selected Bid shall be the Selected Bid); and (iii) Banc
of America Securities LLC has the right to match the Bid with the
lowest Yield to Maturity, in which case Banc of America Securities
LLC's Bid shall be the Selected Bid. The Calculation Agent will set the
Coupon Reset Rate equal to the interest rate that would amortize the
2013 Notes Premium fully over the term of the 2013 Notes at the Yield
to Maturity indicated by the Selected Bid (the "Coupon Reset Rate").
The Calculation Agent will notify the Dealer that submitted the
Selected Bid by 4:00 p.m., New York time, on the Bid Date that its Bid
was determined to be the Selected Bid.
(e) Immediately after calculating the Coupon Reset Rate for
the 2013 Notes, the Calculation Agent will provide written notice to
the Issuer and the Trustee, setting forth the Coupon Reset Rate. The
Coupon Reset Rate for the 2013 Notes will be effective from and
including the Applicable Coupon Reset Date to but excluding the
Maturity Date.
If a Change in Control occurs, the Issuer shall notify the
Holder of this 2013 Note of such occurrence and such Holder shall have the right
to require the Issuer to make a Required Repurchase of all or any part of this
2013 Note at a Change in Control Purchase Price equal to 101% of the principal
amount of this 2013 Note to be so purchased as more fully provided in the
Indenture and subject to the terms and conditions set forth therein. In the
event of a Required Repurchase of only a portion of this 2013 Note, a new 2013
Note or Notes for the unrepurchased portion hereof will be issued in the name of
the Holder hereof upon the cancellation hereof.
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If an Event of Default with respect to this 2013 Note shall
occur and be continuing, the principal of this 2013 Note may be declared due and
payable in the manner and with the effect provided in the Indenture.
In any case where any Interest Payment Date, repurchase date,
Stated Maturity or Maturity of any 2013 Note shall not be a Business Day at any
Place of Payment, then (notwithstanding any other provision of the Indenture or
this 2013 Note), payment of interest or principal (and premium, if any) need not
be made at such Place of Payment 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, repurchase date or at the Stated
Maturity or Maturity; provided that no interest shall accrue on the amount so
payable for the period from and after such Interest Payment Date, redemption
date, repurchase date, Stated Maturity or Maturity, as the case may be, to such
Business Day.
The Indenture contains provisions for defeasance at any time
of (i) the entire indebtedness of this 2013 Note or (ii) certain restrictive
covenants and Events of Default with respect to this 2013 Note, in each case
upon compliance with certain conditions set forth therein.
The Indenture permits, with certain exceptions as therein
provided, the amendment thereof and the modification of the rights and
obligations of the Issuer and the rights of the Holders of all outstanding 2013
Notes under the Indenture at any time by the Issuer and the Trustee with the
consent of the Holders of not less than a majority in principal amount of
Securities of all series then outstanding and affected (voting as one class).
The Indenture permits the Holders of not less than a majority
in principal amount of Securities of all series at the time outstanding with
respect to which a default shall have occurred and be continuing (voting as one
class) to waive on behalf of the Holders of all outstanding Securities of such
series any past default by the Issuer, provided that no such waiver may be made
with respect to a default in the payment of the principal of or the interest on
any Security of such series or the default by the Issuer in respect of certain
covenants or provisions of the Indenture, the modification or amendment of which
must be consented to by the Holder of each outstanding Security of each series
affected.
As set forth in, and subject to, the provisions of the
Indenture, no Holder of any 2013 Note will have any right to institute any
proceeding with respect to the Indenture or for any remedy thereunder, unless
such Holder shall have previously given to the Trustee written notice of a
continuing Event of Default, the Holders of not less than 25% in principal
amount of the outstanding Securities of each affected series (voting as one
class) shall have made written request, and offered reasonable indemnity, to the
Trustee to institute such proceeding as trustee, and the Trustee shall not have
received from the Holders of a majority in principal amount of the outstanding
Securities of each affected series (voting as one class) a direction
inconsistent with such request and shall have failed to institute such
proceeding within 60 days; provided, however, that such limitations do not apply
to a suit instituted by the Holder hereof for the enforcement of payment of the
principal of (and
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premium, if any) or any interest on this 2013 Note on or after the respective
due dates expressed herein.
No reference herein to the Indenture and no provision of this
2013 Note or of the Indenture shall alter or impair the obligation of the
Issuer, which is absolute and unconditional, to pay the principal of and any
premium and interest on this 2013 Note at the times, place and rate, and in the
coin or currency, herein prescribed.
As provided in the Indenture and subject to certain
limitations therein set forth, the transfer of this 2013 Note is registerable in
the Security Register, upon surrender of this 2013 Note for registration of
transfer at the office or agency of the Issuer in any place where the principal
of and any premium and interest on this 2013 Note are payable, duly endorsed by,
or accompanied by a written instrument of transfer in form satisfactory to the
Issuer and the Security Registrar duly executed by, the Holder hereof or his
attorney duly authorized in writing, and thereupon one or more new 2013 Notes of
this series and of like tenor, of authorized denominations and for the same
aggregate principal amount, will be issued to the designated transferee or
transferees.
The 2013 Notes are issuable only in registered form without
coupons in denominations of $1,000 and any integral multiple thereof. As
provided in the Indenture and subject to certain limitations therein set forth,
2013 Notes are exchangeable for a like aggregate principal amount of 2013 Notes
and of like tenor of a different authorized denomination, as requested by the
Holder surrendering the same.
No service charge shall be made for any such registration of
transfer or exchange, but the Issuer may require payment of a sum sufficient to
cover any tax or other governmental charge payable in connection therewith.
The Issuer shall not be required to (a) issue, exchange or
register the transfer of this 2013 Note for a period of 15 days next preceding
the mailing of the notice of redemption of 2013 Notes or (b) exchange or
register the transfer of any 2013 Note or any portion thereof selected, called
or being called for redemption, except in the case of any 2013 Note to be
redeemed in part, the portion thereof not so to be redeemed.
Prior to due presentment of this 2013 Note for registration of
transfer, the Issuer, the Trustee and any agent of the Issuer or the Trustee may
treat the Person in whose name this 2013 Note is registered as the owner hereof
for all purposes, whether or not this 2013 Note be overdue, and neither the
Issuer, the Trustee nor any such agent shall be affected by notice to the
contrary.
All terms used in this 2013 Note without definition which are
defined in the Indenture shall have the meanings assigned to them in the
Indenture.
SECTION 2.10. Form of Trustee's Certificate of Authentication.
The Trustee's certificates of authentication shall be in substantially the
following form:
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This is one of the Securities of the series designated herein
referred to in the within-mentioned Indenture.
as Trustee
By______________________________________
Authorized Officer
ARTICLE III
CHANGE OF CONTROL
SECTION 3.01. Change of Control. Upon the occurrence of a
Change in Control (the effective date of such Change in Control being the
"Change in Control Date"), each Holder of a Note shall have the right to require
that the Issuer repurchase (a "Required Repurchase") all or any part of such
Holder's Note at a repurchase price payable in cash equal to 101% of the
principal amount of such Note plus accrued interest to the Purchase Date (the
"Change in Control Purchase Price").
(a) Within 30 days following the Change in Control Date, the
Issuer shall mail a notice (the "Required Repurchase Notice") to each
Holder with a copy to the Trustee stating:
(i) that a Change in Control has occurred and that
such Holder has the right to require the Issuer to repurchase
all or any part of such Holder's Notes at the Change of
Control Purchase Price;
(ii) the Change of Control Purchase Price;
(iii) the date on which any Required Repurchase shall
be made (which shall be no earlier than 60 days nor later than
90 days from the date such notice is mailed) (the "Purchase
Date");
(iv) the name and address of the Paying Agent; and
(v) the procedures that Holders must follow to cause
the Notes to be repurchased, which shall be consistent with
this Section and the Indenture.
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(b) Holders electing to have a Note repurchased must deliver a
written notice (the "Change in Control Purchase Notice") to the Paying
Agent (initially the Trustee) 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 Purchase Date. The Change
in Control Purchase Notice shall state: (i) the portion of the
principal amount of any Notes to be repurchased, which portion must be
$1,000 or an integral multiple thereof; (ii) that such Notes are to be
repurchased by the Issuer pursuant to the change in control provisions
of the Indenture; and (iii) unless the Notes are represented by one or
more Global Notes, the certificate numbers of the Notes to be delivered
by the Holder thereof for repurchase by the Issuer. 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 Purchase Date. The notice of withdrawal
shall state the principal amount and, if applicable, the certificate
numbers of the Notes as to which the withdrawal notice relates and the
principal amount of such Notes, if any, which remains subject to a
Change in Control Purchase Notice.
If a Note is represented by a Global Note (as described in
Article VI below), the Depositary or its nominee will be the Holder of
such Note and therefore will be the only entity that can elect a
Required Repurchase of such Note. To obtain repayment pursuant to this
Section 3.01 with respect to such Note, the beneficial owner of such
Note must provide to the broker or other entity through which it holds
the beneficial interest in such Note (i) 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. or
a commercial bank or trust company having an office or correspondent in
the United States, and (ii) instructions to such broker or other entity
to notify the Depositary of such beneficial owner's desire to obtain
repayment pursuant to this Section 3.01. Such broker or other entity
will provide to the Paying Agent (i) the Change of Control Purchase
Notice received from such beneficial owner and (ii) a certificate
satisfactory to the Paying Agent from such broker or other entity
stating that it represents such beneficial owner. Such broker or other
entity will be responsible for disbursing any payments it receives
pursuant to this Section 3.01 to such beneficial owner.
(c) Payment of the Change of Control Purchase Price for a Note
for which a Change in Control Purchase Notice has been delivered and
not withdrawn is conditioned (except in the case of a Note represented
by one or more Global Notes) upon delivery of such 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 Purchase Date)
after the delivery of such Change in Control Purchase Notice. Payment
of the Change of Control Purchase Price for such Note will be made
promptly following the later of the Purchase Date or the time of
delivery of such Note. If the Paying Agent holds, in accordance with
the terms of the Indenture, money sufficient to pay the Change in
Control Purchase Price of such Note on the Business Day following the
Purchase Date, then, on and after such date, interest will cease
accruing, and all other rights
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of the Holder shall terminate (other than the right to receive the
Change of Control Purchase Price upon delivery of the Note).
(d) The Issuer shall 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 the Issuer to
repurchase Notes at the option of Holders upon a Change in Control.
(e) No Note may be repurchased by the Issuer as a result of a
Change in Control if there has occurred and is continuing an Event of
Default (other than a default in the Payment of the Change in Control
Purchase Price with respect to the Notes).
ARTICLE IV
ADDITIONAL COVENANTS OF THE ISSUER
WITH RESPECT TO THE NOTES
SECTION 4.01. Existence. So long as any of the Notes are
outstanding, subject to Article 9 of the Original Indenture, the Issuer will do
or cause to be done all things necessary to preserve and keep in full force and
effect its corporate existence.
SECTION 4.02. Limitation on Certain Liens. (a) So long as any
of the Notes are outstanding, the Issuer shall not create, incur, assume or
suffer to exist any lien, mortgage, pledge, security interest, conditional sale,
title retention agreement or other charge or encumbrance of any kind, or any
other type of arrangement intended or having the effect of conferring upon a
creditor of the Issuer or any Subsidiary a preferential interest (hereinafter in
this Section referred to as a "Lien") 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 Notes shall (so long as any such other creditor shall be so secured) be
equally and ratably secured (along with any other creditor similarly entitled to
be secured) by a direct Lien on all property subject to such Lien, provided,
however, that the foregoing restrictions shall not apply to:
(i) Liens for taxes, assessments or governmental charges or levies to
the extent not past due;
(ii) pledges or deposits to secure (a) obligations under workmen's
compensation laws or similar legislation, (b) statutory obligations of the
Issuer or (c) Support Obligations;
(iii) Liens imposed by law, such as materialmen's, mechanics',
carriers', workmen's and repairmen's Liens and other similar Liens arising in
the ordinary course of business securing obligations which are not overdue or
which have been fully bonded and are being contested in good faith;
(iv) purchase money Liens upon or in property acquired and held by the
Issuer in the ordinary course of business to secure the purchase price of such
property or to secure Indebtedness incurred solely for the purpose of financing
the acquisition of any such property to be subject to such
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Liens, or Liens existing on any such property at the time of acquisition, or
extensions, renewals or replacements of any of the foregoing for the same or a
lesser amount, provided that no such Lien shall extend to or cover any property
other than the property being acquired and no such extension, renewal or
replacement shall extend to or cover property not theretofore subject to the
Lien being extended, renewed or replaced, and provided, further, that the
aggregate principal amount of the Indebtedness at any one time outstanding
secured by Liens permitted by this clause (iv) shall not exceed $10,000,000; and
(v) Liens not otherwise permitted by clauses (i) through (iv) of this
Section securing Indebtedness of the Issuer; provided that on the date such
Liens are created, and after giving effect to such Indebtedness, the aggregate
principal amount at maturity of all of the secured Indebtedness of the Issuer at
such date shall not exceed 5% of Consolidated Net Tangible Assets at such date.
SECTION 4.03. Limitation on Consolidation, Merger, Sale or
Conveyance. So long as any of the Notes are outstanding and until the Notes are
rated BBB- or above (or an equivalent rating) by Standard & Poor's and one Other
Rating Agency (or, if Standard & Poor's shall change its rating system, an
equivalent of such rating then employed by such organization), at which time the
Issuer will be permanently released from the provisions of this Section 4.03,
and subject also to Article Nine of the Indenture, the Issuer shall not
consolidate with or merge into any other Person or sell, lease or convey the
property of the Issuer in the entirety or substantially as an entirety, unless
(i) 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
the Issuer immediately prior to the transaction, and (ii) 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)
without violation of the limitations in Section 4.04 hereof.
SECTION 4.04. Limitation on Consolidated Indebtedness. (a) So
long as any of the Notes are outstanding and until the Notes are rated BBB- or
above (or an equivalent rating) by Standard & Poor's and one Other Rating Agency
(or, if Standard & Poor's shall change its rating system, an equivalent of such
rating then employed by such organization), at which time the Issuer will be
permanently released from the provisions of this Section 4.04, the Issuer shall
not, and shall not permit any Consolidated Subsidiary of the Issuer to, issue,
create, assume, guarantee, incur or otherwise become liable for (collectively,
"issue"), directly or indirectly, any Indebtedness unless the Consolidated
Coverage Ratio of the Issuer 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 the
Issuer 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 (i) 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, (ii) 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 (iii) the acquisition of any company or business acquired by the
Issuer 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
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issuance of such Indebtedness, as if in each case such acquisition occurred at
the beginning of the period) exceeds a ratio of 1.7 to 1.0.
(b) Notwithstanding the foregoing paragraph, the Issuer or any
Restricted Subsidiary may issue, directly or indirectly, the following
Indebtedness:
(1) Indebtedness of the Issuer to banks not to exceed
$1,000,000,000 in aggregate outstanding principal amount at any time;
(2) Indebtedness (other than Indebtedness described in clause
(1) of this Subsection) outstanding on the date of this Ninth
Supplemental Indenture, as set forth on Schedule 4.04(b)(2) attached
hereto and made a part hereof, and Indebtedness issued in exchange for,
or the proceeds of which are used to refund or refinance, any
Indebtedness permitted by this clause (2); provided, however, that (i)
the principal amount (or accreted value in the case of Indebtedness
issued at a discount) of the Indebtedness so issued shall not exceed
the principal amount (or accreted value in the case of Indebtedness
issued at a discount) of, premium, if any, and accrued but unpaid
interest on, the Indebtedness so exchanged, refunded or refinanced and
(ii) the Indebtedness so issued (A) shall not mature prior to the
stated maturity of the Indebtedness so exchanged, refunded or
refinanced, (B) shall have an Average Life equal to or greater than the
remaining Average Life of the Indebtedness so exchanged, refunded or
refinanced and (C) if the Indebtedness to be exchanged, refunded or
refinanced is subordinated to the Notes, the Indebtedness is
subordinated to the Notes in right of payment;
(3) Indebtedness of the Issuer owed to and held by a
Subsidiary and Indebtedness of a Subsidiary owed to and held by the
Issuer; provided, however, that, in the case of Indebtedness of the
Issuer owed to and held by a Subsidiary, (i) any subsequent issuance or
transfer of any Capital Stock that results in any such Subsidiary
ceasing to be a Subsidiary or (ii) any transfer of such Indebtedness
(except to the Issuer or a Subsidiary) shall be deemed for the purposes
of this Subsection to constitute the issuance of such Indebtedness by
the Issuer;
(4) Indebtedness of the Issuer issued in exchange for, or the
proceeds of which are used to refund or refinance, Indebtedness of the
Issuer issued in accordance with Subsection (a) of this Section,
provided that (i) the principal amount (or accreted value in the case
of Indebtedness issued at a discount) of the Indebtedness so issued
shall not exceed the principal amount (or accreted value in the case of
Indebtedness issued at a discount) of, premium, if any, and accrued but
unpaid interest on, the Indebtedness so exchanged, refunded or
refinanced and (ii) the Indebtedness so issued (A) shall not mature
prior to the stated maturity of the Indebtedness so exchanged, refunded
or refinanced, (B) shall have an Average Life equal to or greater than
the remaining Average Life of the Indebtedness so exchanged, refunded
or refinanced and (C) if the Indebtedness to be exchanged, refunded or
refinanced is subordinated to the Notes, the Indebtedness so issued is
subordinated to the Notes in right of payment;
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(5) Indebtedness of a Restricted Subsidiary issued in exchange
for, or the proceeds of which are used to refund or refinance,
Indebtedness of a Restricted Subsidiary issued in accordance with
Subsection (a) of this Section, provided that (i) the principal amount
(or accreted value in the case of Indebtedness issued at a discount) of
the Indebtedness so issued shall not exceed the principal amount (or
accreted value in the case of Indebtedness issued at a discount) of,
premium, if any, and accrued but unpaid interest on, the Indebtedness
so exchanged, refunded or refinanced and (ii) the Indebtedness so
issued (A) shall not mature prior to the stated maturity of the
Indebtedness so exchanged, refunded or refinanced and (B) shall have an
Average Life equal to or greater than the remaining Average Life of the
Indebtedness so exchanged, refunded or refinanced.
(6) Indebtedness of a Consolidated Subsidiary issued to
acquire, develop, improve, construct or to 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
the Issuer, Consumers, Enterprises, CMS Generation, CMS Oil & Gas, CMS
Electric and Gas, CMS Gas Transmission and Storage, CMS MST or any
other Designated Enterprises Subsidiary;
(7) 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. Such
Indebtedness shall be deemed to be incurred on the date the acquired
Person becomes a Consolidated Subsidiary;
(8) Indebtedness issued by the Issuer not to exceed
$150,000,000 in aggregate principal amount at any time; and
(9) 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.
SECTION 4.05. Limitation on Restricted Payments. (a) So long
as the Notes are outstanding and until the Notes are rated BBB- or above (or an
equivalent rating) by Standard & Poor's and one Other Rating Agency (or, if
Standard & Poor's shall change its rating system, an equivalent of such rating
then employed by such organization), at which time the Issuer will be
permanently released from the provisions of this Section 4.05, the Issuer shall
not, and shall not permit any Restricted Subsidiary of the Issuer, directly or
indirectly, to (i) declare or pay any dividend or make any distribution on the
Capital Stock of the Issuer 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
the Issuer or a Subsidiary), (ii) purchase, redeem or otherwise acquire or
retire for value any Capital Stock of the Issuer, or (iii) 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,
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redemption, repurchase, defeasing, other acquisition or retirement being
hereinafter referred to as a "Restricted Payment") if at the time the Issuer 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;
(B) 100% of Consolidated Net Income, accrued during
the period (treated as one accounting period) 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
(C) the aggregate Net Cash Proceeds received by the
Issuer from the issue or sale of or contribution with respect
to its Capital Stock subsequent to May 6, 1997.
For the purpose of determining the amount of any Restricted Payment not in the
form of cash, the amount shall be the fair value of such Restricted Payment as
determined in good faith by the Board of Directors, provided that if the value
of the non-cash portion of such Restricted Payment as determined by the Board of
Directors is in excess of $25 million, such value shall be based on the opinion
from a nationally recognized firm experienced in the appraisal of similar types
of transactions.
(b) The provisions of Section 4.05(a) shall not prohibit:
(i) any purchase or redemption of Capital Stock of
the Issuer made by exchange for, or out of the proceeds of the
substantially concurrent sale of, Capital Stock of the Issuer
(other than Redeemable Stock or Exchangeable Stock); provided,
however, that such purchase or redemption shall be excluded
from the calculation of the amount of Restricted Payments;
(ii) dividends or other distributions paid in respect
of any class of the Issuer's Capital Stock issued in respect
of the acquisition of any business or assets by the Issuer or
a Restricted Subsidiary if the dividends or other
distributions with respect to such Capital Stock are payable
solely from the net earnings of such business or assets;
(iii) dividends paid within 60 days after the date of
declaration thereof if at such date of declaration such
dividend would have complied with this Section; provided,
however, that at the time of payment of such dividend, no
Event of Default
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shall have occurred and be continuing (or result therefrom),
and provided further, however, that such dividends shall be
included (without duplication) in the calculation of the
amount of Restricted Payments; or
(iv) payments pursuant to the Tax-Sharing Agreement.
SECTION 4.06. Limitation on Asset Sales. So long as any of the
Notes are outstanding, the Issuer may not sell, transfer or otherwise dispose of
any property or assets of the Issuer, 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 the Issuer shall (i)
apply an amount equal to such excess Net Cash Proceeds to permanently repay
Indebtedness of a Consolidated Subsidiary or Indebtedness of the Issuer which is
pari passu with the Notes or (ii) invest an equal amount not so used in clause
(i) in property or assets of related business within 24 months after the date of
the Asset Sale (the "Application Period") or (iii) apply such excess Net Cash
Proceeds not so used in (i) or (ii) (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 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 Notes on the relevant
purchase date and unpaid interest, if any, to the purchase date. The Issuer
shall only be required to make an offer to purchase Notes from Holders pursuant
to subsection (iii) if the Excess Proceeds equal or exceed $25,000,000 at any
given time.
The procedures to be followed by the Issuer in making an offer
to purchase Notes from the Holders with Excess Proceeds, and for the acceptance
of such offer by the Holders, shall be the same as those set forth in Section
3.01 herein with respect to a Change in Control.
ARTICLE V
ADDITIONAL EVENTS OF DEFAULT
WITH RESPECT TO THE NOTES
SECTION 5.01. Definition. All of the events specified in
clauses (a) through (h) of Section 5.1 of the Original Indenture shall be
"Events of Default" with respect to the Notes.
SECTION 5.02. Amendments to Section 5.1 of the Original
Indenture. Solely for the purpose of determining Events of Default with respect
to the Notes, paragraphs (e), (f) and (h) of Section 5.1 of the Original
Indenture shall be amended such that each and every reference therein to the
Issuer shall be deemed to mean either the Issuer or Consumers.
ARTICLE VI
GLOBAL NOTES
The Notes will be issued initially in the form of Global
Notes. "Global Note" means a registered Note evidencing one or more Notes issued
to a depositary (the "Depositary") or its
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nominee, in accordance with this Article and bearing the legend prescribed in
this Article. One or more Global Notes will represent all Notes. The Issuer
shall execute and the Trustee shall, in accordance with this Article and the
Issuer Order with respect to the Notes, authenticate and deliver one or more
Global Notes in temporary or permanent form that (i) shall represent and shall
be denominated in an aggregate amount equal to the aggregate principal amount of
the Notes to be represented by such Global Note or Notes, (ii) shall be
registered in the name of the Depositary for such Global Note or Notes or the
nominee of such Depositary, (iii) shall be delivered by the Trustee to such
Depositary or pursuant to such Depositary's instructions and (iv) shall bear a
legend substantially to the following effect: "Unless the Global Note is
presented by an authorized representative of the Depository to the Issuer or its
agent for registration of transfer, exchange or payment, and any Note issued is
registered in the name of a nominee of the Depository, or in such other name as
is requested by an authorized representative of the Depository (and any payment
is made to the nominee of the Depository, or to such other entity as is
requested by an authorized representative of the Depository), any transfer,
pledge or other use hereof for value or otherwise by or to any Person is
wrongful inasmuch as the registered owner hereof has an interest herein."
Notwithstanding Section 2.8 of the Indenture, unless and until
it is exchanged in whole or in part for Notes in definitive form, a Global Note
representing one or more Notes may not be transferred except as a whole by the
Depositary, to a nominee of such Depositary or by a nominee of such Depositary
to such Depositary or another nominee of such Depositary or by such Depositary
or any such nominee to a successor Depositary for Notes or a nominee of such
successor Depositary.
If at any time the Depositary for the Notes is unwilling or
unable to continue as Depositary for the Notes, the Issuer shall appoint a
successor Depositary with respect to the Notes. If a successor Depositary for
the Notes is not appointed by the Issuer by the earlier of (i) 90 days from the
date the Issuer receives notice to the effect that the Depositary is unwilling
or unable to act, or the Issuer determines that the Depositary is unable to act
or (ii) the effectiveness of the Depositary's resignation or failure to fulfill
its duties as Depositary, the Issuer will execute, and the Trustee, upon receipt
of a Issuer Order for the authentication and delivery of definitive Notes, will
authenticate and deliver Notes in definitive form in an aggregate principal
amount equal to the principal amount of the Global Note or Notes representing
such Notes in exchange for such Global Note or Notes.
The Issuer may at any time and in its sole discretion
determine that the Notes issued in the form of one or more Global Notes shall no
longer be represented by such Global Note or Notes. In such event the Issuer
will execute, and the Trustee, upon receipt of a Issuer Order for the
authentication and delivery of definitive Notes, will authenticate and deliver
Notes in definitive form in an aggregate principal amount equal to the principal
amount of the Global Note or Notes representing such Notes in exchange for such
Global Note or Notes.
The Depositary for such Notes may surrender a Global Note or
Notes for such Notes in exchange in whole or in part for Notes in definitive
form on such terms as are acceptable to the Issuer and such Depositary.
Thereupon, the Issuer shall execute, and the Trustee shall authenticate and
deliver, without service charge:
39-
<PAGE> 40
(i) to each Person specified by such Depositary a new Note
or Notes, of any authorized denomination as requested by such
Person in aggregate principal amount equal to and in exchange
for such Person's beneficial interest in the Global Note; and
(ii) to such Depositary a new Global Note in a denomination
equal to the difference, if any, between the principal amount
of the surrendered Global Note and the aggregate principal
amount of Notes in definitive form delivered to Holders
thereof.
In any exchange provided for in this Article, the Issuer will
execute and the Trustee will authenticate and deliver Notes in definitive
registered form in authorized denominations.
Upon the exchange of a Global Note for Notes in definitive
form, such Global Note shall be canceled by the Trustee. Notes in definitive
form issued in exchange for a Global Note pursuant to this Article shall be
registered in such names and in such authorized denominations as the Depositary
for such Global Note, pursuant to instructions from its direct or indirect
participants or otherwise, shall instruct the Trustee or Security Registrar. The
Trustee shall deliver such Notes to the persons in whose names such Notes are so
registered.
ARTICLE VII
DEFEASANCE
All of the provisions of Article Ten of the Original Indenture
shall be applicable to the Notes. Upon satisfaction by the Issuer of the
requirements of Section 10.1(c) of the Indenture, in connection with any
covenant defeasance (as provided in Section 10.1(c) of the Indenture), the
Issuer shall be released from its obligations under Article Nine of the Original
Indenture and under Articles III and IV of this Ninth Supplemental Indenture
with respect to the Notes.
ARTICLE VIII
SUPPLEMENTAL INDENTURES
This Ninth Supplemental Indenture is a supplement to the
Original Indenture. As supplemented by this Ninth Supplemental Indenture, the
Original Indenture is in all respects ratified, approved and confirmed, and the
Original Indenture and this Ninth Supplemental Indenture shall together
constitute one and the same instrument.
TESTIMONIUM
This Ninth Supplemental Indenture may be executed in any
number of counterparts, each of which so executed shall be deemed to be an
original, but all such counterparts shall together constitute but one and the
same instrument.
40-
<PAGE> 41
IN WITNESS WHEREOF, the parties hereto have caused this Ninth
Supplemental Indenture to be duly executed and their respective corporate seals
to be hereunto affixed and attested, all as of the day and year first written
above.
CMS ENERGY CORPORATION
/s/ Alan M. Wright
------------------
Alan M. Wright
Senior Vice President and
Chief Financial Officer
Attest: /s/ Robert C. Shrosbree
BANK ONE TRUST COMPANY, NA
as Trustee
/s/ Ernest J. Peck
------------------
Ernest J. Peck
Vice President
Attest:
41-
<PAGE> 1
EXHIBIT (10)(a)
[EXECUTION COPY]
AMENDMENT NO. 3 TO
CREDIT AGREEMENT
This AMENDMENT NO. 3, dated as of June 22, 1999, is made by and among
CMS ENERGY CORPORATION, a Michigan corporation (the "BORROWER"), the lenders
parties to the Credit Agreement referred to below (the "LENDERS"), THE CHASE
MANHATTAN BANK, as administrative agent (the "ADMINISTRATIVE AGENT"),
documentation agent (the "DOCUMENTATION AGENT"), collateral agent (the
"COLLATERAL AGENT") and syndication agent (the "SYNDICATION AGENT") for the
Lenders, and the Co-Agents (the "CO-AGENTS") and Lead Managers (the "LEAD
MANAGERS") named therein.
PRELIMINARY STATEMENTS:
(1) The Borrower, the Lenders, the Administrative Agent, the
Documentation Agent, the Collateral Agent, the Syndication Agent, the Co-Agents
and the Lead Managers have entered into a Credit Agreement, dated as of July 2,
1997, as amended by Amendment No. 1, dated as of January 30, 1998, and Amendment
No. 2, dated as of November 5, 1998 (as so amended, the "CREDIT AGREEMENT").
Unless otherwise defined herein, the terms defined in the Credit Agreement shall
be used herein as therein defined.
(2) The Borrower has requested amendments to the consolidated leverage
ratio and the cash dividend coverage ratio set forth in Section 8.01(i) and
Section 8.01(j), respectively, of the Credit Agreement, and certain other
amendments to the Credit Agreement. The Lenders have agreed to the Borrower's
request, upon the terms and conditions hereinafter set forth.
NOW, THEREFORE, in consideration of the premises and for other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto hereby agree as follows:
SECTION 1. AMENDMENTS TO CREDIT AGREEMENT. The Credit Agreement is,
effective as of the date hereof (subject to the satisfaction of the conditions
precedent set forth in Section 2 hereof), hereby amended as follows:
(a) Section 8.01(i) of the Credit Agreement is amended in full to read
as follows:
<PAGE> 2
2
(i) Consolidated Leverage Ratio. The Borrower shall maintain
at all times a ratio of Consolidated Debt to Consolidated Capital of
not more than the amount set forth below during each corresponding
period set forth below:
<TABLE>
<CAPTION>
PERIOD AMOUNT
------ ------
<S> <C>
Closing Date through 0.68:1.0
June 30, 1998
July 1, 1998 through 0.67:1.0
November 30, 1998
December 1, 1998 through 0.745:1.0
June 21, 1999
June 22, 1999 through 0.75:1.0
June 30, 2000
July 1, 2000 through 0.63:1.0
June 30, 2001
Thereafter 0.60.1.0
</TABLE>
(b) Section 8.01(j) of the Credit Agreement is amended in full to read
as follows:
(j) Cash Dividend Coverage Ratio. The Borrower shall maintain,
as of the last day of each fiscal quarter (in each case, the
"MEASUREMENT QUARTER"), a ratio of (i) the sum of (A) Cash Dividend
Income for the immediately preceding four-fiscal-quarter period ending
on the last day of the fiscal quarter immediately preceding such
Measurement Quarter, plus (B) 25% of the amount of Equity Distributions
received by the Borrower during such period but in no event in excess
of $10,000,000, plus (C) all amounts received by the Borrower from its
Subsidiaries and Affiliates during such period constituting
reimbursement of interest expense (including commitment, guaranty and
letter of credit fees) paid by the Borrower on behalf of any such
Subsidiary or Affiliate to (ii) interest expense (including commitment,
guaranty and letter of credit fees) accrued by the Borrower in respect
of all Debt during such period of (1) not less than 2.1 to 1.0 for each
such period from the Closing Date until (and including) the fiscal
quarter ending December 31, 1998, (2) not less than 1.9 to 1 for each
such period from January 1, 1999 until (and including) the fiscal
quarter ending June 30, 1999, (3) not less than 1.5 to 1 for each such
period from July 1, 1999 until (and including) the fiscal quarter
ending March 31, 2000, and (4) not less than 2.0 to 1.0 thereafter;
provided, that
<PAGE> 3
3
the Borrower shall be deemed not to be in breach of the foregoing
covenant if, during the Measurement Quarter, it has (I) permanently
reduced the Commitments and the principal amount outstanding under this
Agreement and the Promissory Notes such that the amount determined
pursuant to clause (ii) above, when recalculated on a pro forma basis
assuming that the amount of such reduced Commitments and principal
amount outstanding under this Agreement and the Promissory Notes were
in effect at all times during such four-fiscal-quarter period, would
result in the Borrower being in compliance with such ratio, and/or (II)
increased Cash Dividend Income during such Measurement Quarter such
that the ratio of (x) Cash Dividend Income for the four-fiscal-quarter
period ending on the last day of the Measurement Quarter to (y) the
amount determined pursuant to clause (ii) above (as recalculated
pursuant to clause (I) above), equals or exceeds (1) 2.1 to 1.0 for
each such period from the Closing Date until (and including) the fiscal
quarter ending December 31, 1998, (2) 1.9 to 1 for each such period
from January 1, 1999 until (and including) the fiscal quarter ending
June 30, 1999, (3) 1.5 to 1 for each such period from July 1, 1999
until (and including) the fiscal quarter ending March 31, 2000, and (4)
2.0 to 1.0 thereafter; and provided further, that until the Borrower so
reduces such Commitments and principal amount outstanding under this
Agreement and the Promissory Notes and/or increases Cash Dividend
Income during such Measurement Quarter, the Borrower may not request
any additional Extensions of Credit (other than Conversions).
(c) Section 8.03 of the Credit Agreement is amended by deleting the
phrase "the Borrower will, unless the Required Lenders shall otherwise consent
in writing, furnish to each Lender" in its entirety and substituting therefor
the new phrase "the Borrower will, unless the Required Lenders shall otherwise
consent in writing, furnish to the Administrative Agent (with sufficient copies
for each Lender)".
(d) Section 8.03(k) of the Credit Agreement is amended by deleting the
phrase "and copies of all final prospectuses" in its entirety and substituting
therefor the new phrase "and notice to the Administrative Agent of any sending
or filing of, and (upon the request of any Agent or Lender) copies of, final
prospectuses".
SECTION 2. CONDITIONS OF EFFECTIVENESS. The amendments to the Credit
Agreement contained in Section 1 hereof shall become effective when, and only
when, the Administrative Agent shall have received (a) counterparts of this
Amendment executed by the Borrower and the Required Lenders, (b) evidence, in
form and substance satisfactory to the Administrative Agent, that the Letter of
Credit and Reimbursement Agreement, dated as of September 11, 1997, as amended,
among the Borrower, Bank of America National Trust and Savings Association, as
Administrative Agent and Letter of Credit Issuing Bank, and the other financial
institutions party thereto, has been amended in a manner substantially similar
to the amendments contained in Section 1 hereof, and (c) evidence, in form and
substance satisfactory to the Administrative Agent, that the
<PAGE> 4
4
Letter of Credit Reimbursement Agreement, dated March 20, 1996, among the
Borrower, The Chase Manhattan Bank, as Administrative Agent, and the other
financial institutions party thereto, has been amended in a manner substantially
similar to the amendments contained in Section 1 hereof.
SECTION 3. REPRESENTATIONS AND WARRANTIES OF THE BORROWER. The Borrower
represents and warrants as follows:
(a) The execution, delivery and performance by the Borrower of this
Amendment, and the performance by the Borrower of the Credit Agreement, as
amended by this Amendment, (i) are within the Borrower's corporate powers, (ii)
have been duly authorized by all necessary corporate action and (iii) do not and
will not (A) require any consent or approval of the stockholders of the
Borrower, (B) violate any provision of the charter or by-laws of the Borrower or
of law, (C) violate any legal restriction binding on or affecting the Borrower,
(D) result in a breach of, or constitute a default under, any indenture or loan
or credit agreement or any other agreement, lease or instrument to which the
Borrower is a party or by which it or its properties may be bound or affected,
or (E) result in or require the creation of any Lien (other than pursuant to the
Loan Documents) upon or with respect to any of its properties.
(b) No Governmental Approval is required for the due execution,
delivery and performance by the Borrower of this Amendment or for the
performance by the Borrower of the Credit Agreement, as amended by this
Amendment.
(c) This Amendment and the Credit Agreement, as amended by this
Amendment, are the legal, valid and binding obligations of the Borrower
enforceable against the Borrower in accordance with their respective terms;
subject to the qualification, however, that the enforcement of the rights and
remedies herein and therein is subject to bankruptcy and other similar laws of
general application affecting rights and remedies of creditors and the
application of general principles of equity (regardless of whether considered in
a proceeding in equity or at law). This Amendment has been duly executed and
delivered on behalf of the Borrower.
(d) The representations and warranties of the Borrower set forth in
Section 7.01 of the Credit Agreement are true and correct on and as of the date
hereof, as though made on and as of such date.
(e) No event has occurred and is continuing that constitutes a Default
or an Event of Default.
SECTION 4. REFERENCE TO AND EFFECT ON THE LOAN DOCUMENTS. (a) Upon the
effectiveness of this Amendment, on and after the date hereof each reference in
the Credit Agreement to "this Agreement", "hereunder", "hereof" or words of like
import referring to the Credit Agreement, and each reference in the other Loan
Documents to "the Credit
<PAGE> 5
5
Agreement", "thereunder", "thereof" or words of like import referring to the
Credit Agreement, shall mean and be a reference to the Credit Agreement as
amended hereby.
(b) Except as specifically amended above, the Credit Agreement and all
other Loan Documents are and shall continue to be in full force and effect and
are hereby in all respects ratified and confirmed.
(c) The execution, delivery and effectiveness of this Amendment shall
not, except as expressly provided herein, operate as a waiver of any right,
power or remedy of any Lender or the Agents under any of the Loan Documents, nor
constitute a waiver of any provision of any of the Loan Documents.
SECTION 5. EXECUTION IN COUNTERPARTS. This Amendment may be executed in
any number of counterparts and by different parties hereto in separate
counterparts, each of which when so executed and delivered shall be deemed to be
an original and all of which taken together shall constitute but one and the
same agreement. Delivery of an executed counterpart of a signature page of this
Amendment by facsimile transmission shall be as effective as delivery of a
manually executed counterpart of this Amendment.
SECTION 6. GOVERNING LAW. This Amendment shall be governed by, and
construed in accordance with, the laws of the State of New York.
<PAGE> 6
6
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
executed by their respective officers thereunto duly authorized, as of the date
first above written.
CMS ENERGY CORPORATION
By /s/ Alan M. Wright
---------------------------------------
Name: Alan M. Wright
Title: Senior Vice President and
Chief Financial Officer
THE CHASE MANHATTAN BANK, as
Administrative Agent, Collateral Agent,
Documentation Agent and Syndication Agent
By /s/ Thomas L. Casey
---------------------------------------
Name: Thomas L. Casey
Title: Vice President
LENDERS
THE CHASE MANHATTAN BANK
By /s/ Thomas L. Casey
------------------------------------
Name: Thomas L. Casey
Title: Vice President
<PAGE> 7
7
ABN AMRO BANK N.V.
By /s/ Peter D. Gaw
------------------------------------
Name: Peter D. Gaw
Title: Senior Vice President
& Managing Director
By /s/ Robert E. Lee IV
------------------------------------
Name: Robert E. Lee IV
Title: Assistant Vice President
BANK OF AMERICA ILLINOIS
By /s/ Gretchen P. Burud
------------------------------------
Name: Gretchen P. Burud
Title: Principal
NATIONSBANK, N.A.
By /s/ Gretchen P. Burud
------------------------------------
Name: Gretchen P. Burud
Title: Principal
BANKBOSTON, N.A.
By /s/ Thomas E. O'Leary
------------------------------------
Name: Thomas E. O'Leary
Title: Director Executive
<PAGE> 8
8
BARCLAYS BANK PLC
By /s/ Sydney G. Dennis
------------------------------------
Name: Sydney G. Dennis
Title: Director
DRESDNER BANK AG, NEW YORK
AND GRAND CAYMAN BRANCHES
By /s/ Michael E. Higgins
------------------------------------
Name: Michael E. Higgins
Title: Vice President
By /s/ Robert Preminger
------------------------------------
Name: Robert Preminger
Title: Assistant Vice President
NATIONAL AUSTRALIA BANK LIMITED
By /s/ Jeff D. White
------------------------------------
Name: Jeff D. White
Title: Vice President
THE SUMITOMO BANK, LIMITED,
CHICAGO BRANCH
By /s/ John H. Kemper
------------------------------------
Name: John H. Kemper
Title: Senior Vice President
<PAGE> 9
9
BANK OF MONTREAL
By /s/ Howard H. Turner
------------------------------------
Name: Howard H. Turner
Title: Director
THE BANK OF NEW YORK
By /s/ John N. Watt
------------------------------------
Name: John N. Watt
Title: Vice President
BANK OF SCOTLAND
By /s/ Annie Glynn
------------------------------------
Name: Annie Glynn
Title: Senior Vice President
BANQUE PARIBAS
By /s/ Dan Cozine By /s/ Ralph Scholtz
------------------------------------ --------------------------------
Name: Dan Cozine Name: Ralph Scholtz
Title: Director Title: Director
COMERICA BANK
By /s/ David C. Bird
------------------------------------
Name: David C. Bird
Title: Vice President
<PAGE> 10
10
CREDIT LYONNAIS CHICAGO BRANCH
By /s/ Mary Ann Klemm
------------------------------------
Name: Mary Ann Klemm
Title: Vice President
THE INDUSTRIAL BANK OF JAPAN, LIMITED
By /s/ Walter R. Wolff
------------------------------------
Name: Walter R. Wolff
Title: Joint General Manager
MICHIGAN NATIONAL BANK
By /s/ Mark S. Aben
------------------------------------
Name: Mark S. Aben
Title: Sr. Relationship Manager
THE MITSUBISHI TRUST AND
BANKING CORPORATION, LOS
ANGELES AGENCY
By /s/ Yasushi Satomi
------------------------------------
Name: Yasushi Satomi
Title: Senior Vice President
<PAGE> 11
11
SOCIETE GENERALE, CHICAGO BRANCH
By /s/ Jose A. Moreno
------------------------------------
Name: Jose A. Moreno
Title: Director
TORONTO DOMINION (TEXAS), INC.
By /s/ Alva J. Jones
------------------------------------
Name: Alva J. Jones
Title: Vice President
UNION BANK OF CALIFORNIA, N.A.
By /s/ David Musicant
------------------------------------
Name: David Musicant
Title: Vice President
AUSTRALIA AND NEW ZEALAND
BANKING GROUP LIMITED
By /s/ Elizabeth M. Waters
------------------------------------
Name: Elizabeth M. Waters
Title: Vice President
<PAGE> 12
12
THE BANK OF NOVA SCOTIA
By /s/ F.C.H. Ashby
------------------------------------
Name: F.C.H. Ashby
Title: Senior Manager Loan Operations
BANQUE NATIONALE DE PARIS
By /s/ Jo Ellen Bender
------------------------------------
Name: Jo Ellen Bender
Title: Senior Vice President
BHF-BANK AKTIENGESELLSCHAFT
By /s/ Eric Emmert
------------------------------------
Name: Eric Emmert
Title: Associate
By /s/ Geoffrey C. Gavin
------------------------------------
Name: Geoffrey C. Gavin
Title: Assistant Vice President
CHANG HWA COMMERCIAL BANK,
LTD., NEW YORK BRANCH
By /s/ Wan-Tu Yeh
------------------------------------
Name: Wan-Tu Yeh
Title: Vice President and General Manager
<PAGE> 13
13
CIBC INC.
By /s/ Denis P. O'Meara
------------------------------------
Name: Denis P. O'Meara
Title: Executive Director
CIBC World Markets Corp. as Agent
CITIBANK, N.A.
By /s/ J. Nicholas McKee
------------------------------------
Name: J. Nicholas McKee
Title: Vice President
THE FIRST NATIONAL BANK OF
CHICAGO
By /s/ Jane Bek
------------------------------------
Name: Jane Bek
Title: Vice President
MELLON BANK, N.A.
By /s/ Richard A. Matthews
------------------------------------
Name: Richard A. Matthews
Title: Vice President
<PAGE> 14
14
NATIONAL WESTMINSTER BANK PLC
By /s/ Maria Amaral-LeBlanc
------------------------------------
Name: Maria Amaral-LeBlanc
Title: Vice President
THE ROYAL BANK OF SCOTLAND PLC
By /s/ Scott Barton
------------------------------------
Name: Scott Barton
Title: Vice President
THE SAKURA BANK, LIMITED
By
------------------------------------
Name:
Title:
THE SANWA BANK, LIMITED,
CHICAGO BRANCH
By /s/ Kenneth C. Eichwald
------------------------------------
Name: Kenneth C. Eichwald
Title: First Vice President and
Assistant General Manager
<PAGE> 15
15
THE SUMITOMO TRUST & BANKING
CO., LTD., NEW YORK BRANCH
By /s/ Stephen A. Stratico
------------------------------------
Name: Stephen A. Stratico
Title: Vice President
UBS AG, NEW YORK BRANCH (as successor to
Union Bank of Switzerland, New York Branch)
By /s/ Paul R. Morrison
------------------------------------
Name: Paul R. Morrison
Title: Executive Director
By /s/ Andrew N. Taylor
------------------------------------
Name: Andrew N. Taylor
Title: Associate Director
FIRST COMMERCIAL BANK
(INCORPORATED IN TAIWAN,
R.O.C.), LOS ANGELES BRANCH
By /s/ June Shiong Lu
------------------------------------
Name: June Shiong Lu
Title: Senior Vice President and General Manager
THE FUJI BANK, LIMITED
By /s/ Peter L. Chinnici
------------------------------------
Name: Senior Vice President and Group Head
Title:
<PAGE> 16
16
ARAB AMERICAN BANK
By /s/ Carmelo L. Foti
------------------------------------
Name: Carmelo L. Foti
Title: Vice President
By /s/ William C. Reynolds
------------------------------------
Name: William C. Reynolds
Title: Vice President
NATIONAL CITY BANK
By /s/ Kenneth R. Ehrhardt
------------------------------------
Name: Kenneth R. Ehrhardt
Title: Vice President
<PAGE> 1
EXHIBIT (10)(b)
EMPLOYMENT AGREEMENT
AGREEMENT between CMS Energy Corporation, a Michigan
corporation ("Corporation"), and Preston D. Hopper (the "Executive") dated this
20th day of March 1996.
Whereas the Corporation considers the maintenance of a vital
management essential to protecting and enhancing the best interests of the
Corporation and its shareholders. Whereas the Corporation has determined to
encourage the continuing attention and dedication of the key members of its
management without the distraction arising from the possibility of a change in
control.
Therefore, the parties hereto agree as follows:
1. Operation of Agreement. The "Effective Date" shall be the
date on which a Change of Control (as defined in Section 2) shall occur.
2. Change of Control. As used in this Agreement, "Change of
Control" shall be deemed to have taken place if a person, including a "group" as
defined in Section 13(d)(3) of the Securities Exchange Act of 1934 becomes the
beneficial owner of shares having 35% or more of the total number of votes that
may be cast in the election of Directors of CMS Energy Corporation.
3. Employment. The Corporation hereby agrees to continue to
employ and engage the services of the Executive as its Senior Vice President,
Controller and Chief Accounting Officer of CMS Energy Corporation for the period
beginning on the Effective Date and ending on the earlier of the fifth
anniversary of such date or the Normal Retirement Date of the Executive under
the Consumers Power Company's Pension Plan (hereinafter "Employment Period").
The Executive agrees to serve the Corporation in such position, unless an event
shall occur which is described in Section 6.
4. Duties. The Executive agrees during the Employment Period
to devote his full business time to the business and affairs of the Corporation
(except for (i) services on corporate, civic or charitable boards or committees,
(ii) such reasonable time as shall be required for the investment of the
Executive's assets, which do not significantly interfere with the performance of
his responsibilities hereunder and (iii) periods of vacation and sick leave to
which he is entitled) and to use his best efforts to promote the interests of
the Corporation and to perform faithfully and efficiently the responsibilities
of Senior
<PAGE> 2
2
Vice President, Controller and Chief Accounting Officer of CMS Energy
Corporation.
5. Compensation and Other Terms of Employment.
(a) Base Salary. The Executive shall receive an
annual base salary ("Base Salary") of not less than his annual salary
immediately prior to the Effective Date (payable in equal semi-monthly
installments) from the Corporation.
The Base Salary shall be reviewed and may be increased
at any time and from time to time in accordance with the Corporation's regular
practices, and shall be reviewed at least annually by the Organization and
Compensation Committee of its Board of Directors.
(b) Incentive Compensation. As further compensation,
the Executive will be eligible for awards ("Incentive Compensation") under the
Corporation's Executive Incentive Compensation Plan in which he was
participating immediately prior to the Effective Date.
(c) Retirement, Savings and Stock Option Plans. In
addition to the Base Salary and Incentive Compensation payable as hereinabove
provided, the Executive shall be entitled to participate in savings, stock
options and other incentive plans and programs available to executives of the
Corporation or to opportunities provided under any such plans in which he was
participating immediately preceding the Effective Date, whichever is greater.
(d) Vacation and Employee Benefits.
(i) The Executive shall be entitled to paid
vacation and other employee benefits and perquisites, in accordance with the
policies of the Corporation in effect for executive officers, or the vacation
employee benefits and perquisites to which he was entitled immediately prior to
the Effective Date, whichever is greater.
6. Termination.
(a) Death. This Agreement shall terminate
automatically upon the Executive's death. In the event of such termination, the
Corporation shall pay to the Executive's estate all benefits and compensation
accrued hereunder to the date of death, including a pro rata portion of
incentive compensation.
<PAGE> 3
3
(b) Disability. In the event the Executive becomes
unable by reason of physical or mental disability to render the services
required hereunder and such disability continues for a continuous period of 6
months, the employment of the Executive hereunder shall terminate, unless the
employment is extended by agreement of the Corporation and the Executive.
Commencing at the date of termination of employment for disability, the
Executive shall receive annually a sum equal to 50% of his Base Salary at the
time of termination of employment, in monthly installments until his 62nd
birthday, or his death if earlier. Disability payments hereunder shall be
reduced by the amount of other Corporation-sponsored disability benefits paid to
the Executive through insurance or otherwise.
(c) Termination with Cause. The Corporation may
terminate the Executive's employment for Cause. For purposes of this Agreement,
"Cause" shall mean an act or acts of dishonesty, fraud, misappropriation or
intentional material damage to the property or business of the Corporation or
commission of a felony on the Executive's part. If the Executive's employment is
terminated for Cause, the Corporation shall pay the Executive his full accrued
Base Salary through the date of such termination at the rate in effect at the
time of such termination, and the Corporation shall have no further obligations
to the Executive under this Agreement.
(d) Other Termination or Resignation of Executive.
(i) The Corporation may terminate the Executive's
employment without Cause.
(ii) In the event that the Executive determines
in his sole judgment that his position, authority, or
responsibilities have been diminished as a result of the "Change of Control,"
the Executive may terminate his employment with the Corporation upon written
notice given within 12 months after the Effective Date.
(iii) In the event of a termination of employment
under this subsection (d), the Executive shall receive a severance payment equal
to twice his Base Salary at the time of termination of employment plus either
twice his incentive compensation payable with respect to the last full calendar
year prior to the termination of employment or, if no incentive compensation was
awarded to the Executive with respect to the last full calendar year prior to
the termination of employment, twice the standard incentive award, as defined in
the Corporation's Executive Incentive Compensation Plan for the salary grade of
the
<PAGE> 4
4
Executive for such year. The severance payment shall be paid in a lump sum
payment, in cash, or as otherwise directed by the Executive.
7. No Obligation to Mitigate Damages. The Executive shall not
be obligated to seek other employment in mitigation of amounts payable or
arrangements made under the provisions of this Agreement and the obtaining of
any such other employment shall in no event effect any reduction of the
Corporation's obligations to make the payments and arrangements required to be
made under this Agreement.
8. Indemnification. The Corporation shall include the
Executive in its Director and Officer Liability Insurance policy, if any, during
his Employment Period and for a period of not less than five years after the
termination of the Executive's employment for any reason whatsoever. In addition
to insurance and any other indemnification available to the Executive as an
Officer, the Corporation shall indemnify, to the extent permitted by applicable
law, the Executive for settlements, judgments and reasonable expenses in
connection with activities arising from services rendered by the Executive as a
Director or Officer of the Corporation or any affiliated company.
9. Notices. Any notices, requests, demands and other
communications provided for by this Agreement shall be sufficient if in writing
and if sent by registered or certified mail to the Executive at the last address
he has filed in writing with the Corporation or, in the case of the Corporation,
Attn: Secretary, at its principal executive offices.
10. Non-Alienation. The Executive shall not have any right to
pledge, hypothecate, anticipate or in any way create a lien or security interest
upon any amounts provided under this Agreement; and no benefits payable
hereunder shall be assignable in anticipation of payment either by voluntary or
involuntary acts, or by operation of law, except by will or the laws of descent
and distribution.
11. Governing Law. The provisions of this Agreement
shall be construed in accordance with the laws of the State of
Michigan.
12. Amendment. This Agreement may be amended or cancelled only
by mutual agreement of the parties in writing without the consent of any other
person and, so long as the Executive lives, no person, other than the parties
hereto, shall have any rights under or interest in this Agreement or the subject
matter hereof.
<PAGE> 5
5
13. Successor to the Corporation. Except as may be otherwise
provided herein, this Agreement shall be binding upon and inure to the benefit
of the Corporation and any successor of the Corporation.
14. Severability. The invalidity or unenforceability of any
provision of this Agreement shall not affect the validity or enforceability of
any other provision of this Agreement.
IN WITNESS WHEREOF, the Corporation and the Executive have
executed this Agreement as of the date first above written.
/s/ P. D. Hopper
------------------------------------
Preston D. Hopper
CMS ENERGY CORPORATION
By: /s/ William T. McCormick, Jr.
---------------------------------
William T. McCormick, Jr.
Chairman of the Board
and Chief Executive Officer
<PAGE> 1
EXHIBIT (10)(c)
EMPLOYMENT AGREEMENT
Agreement between CMS Energy Corporation, a Michigan corporation
("Company") and Bradley W. Fischer ("Executive") dated this 29th day of April
1998.
Whereas the Company considers the maintenance of a vital
management at CMS NOMECO Oil & Gas Co. ("NOMECO") essential to the best
interests of the Company and its shareholders.
Whereas the Company wishes to encourage the continuing dedication
and attention of the key executives of NOMECO's management without the possible
distraction arising from the engagement of a new Chief Executive Officer.
Therefore, the parties agree as follows:
1. Operation of Agreement. The "Effective Date" shall be the
employment date of the successor Chief Executive Officer to Gordon L. Wright.
2. Employment. A period extending one year from the Effective Date
shall be the Employment Period.
3. Termination Without Cause. In the event that NOMECO terminates
the Executive's employment without cause during the Employment Period, the
Executive shall receive a separation payment equal to his regular annual salary
at the time of termination of employment plus an amount equal to the standard
award for his salary grade under the NOMECO Annual Executive Incentive
Compensation Plan. The separation payment shall be paid in a lump sum or as
otherwise directed by the Executive.
4. No Obligation to Mitigate Damages. The Executive shall have no
obligation to seek other employment, and the obtaining of other employment shall
not reduce the Company's obligation to make the payments required hereunder.
5. Non-Alienation. No benefits payable hereunder shall be
assignable in anticipation of payment either by the Executive or by operation of
law, except by will or the laws of descent and distribution.
6. Governing Law. The provisions of this Agreement shall be
construed
<PAGE> 2
2
in accordance with the laws of the State of Michigan.
7. Severability. The invalidity or unenforceability of any
provision of this Agreement shall not affect the validity or enforceability of
any other provision of this Agreement.
IN WITNESS WHEREOF, the Company and the Executive have executed
this Agreement as of the date above.
CMS ENERGY CORPORATION
/s/ Bradley W. Fischer By /s/ William T. McCormick, Jr.
- -------------------------------------- -------------------------------
Bradley W. Fischer William T. McCormick, Jr.
Chairman of the Board and Chief
Executive Officer
<PAGE> 1
EXHIBIT (10)(d)
EMPLOYMENT AGREEMENT
AGREEMENT between Panhandle Eastern Pipe Line Company, a Michigan
corporation ("Company"), and Christopher A. Helms (the "Executive") dated this
29th day of March 1999.
Whereas the Company considers the maintenance of a vital
management essential to protecting and enhancing the best interests of the
Company and its shareholders. Whereas the Company has determined to encourage
the continuing attention and dedication of the key members of its management
without the distraction arising from the possibility of a change in control.
Therefore, the parties hereto agree as follows:
1. Operation of Agreement. The "Effective Date" shall be the date
on which a Change of Control (as defined in Section 2) shall occur.
2. Change of Control. As used in this Agreement, "Change of
Control" shall be deemed to have taken place if a person, including a "group" as
defined in Section 13(d)(3) of the Securities Exchange Act of 1934 becomes the
beneficial owner of shares having 35% or more of the total number of votes that
may be cast in the election of Directors of CMS Energy Corporation.
3. Employment. The Company hereby agrees to continue to employ and
engage the services of the Executive as its President and Chief Operating
Officer of the Company for the period beginning on the Effective Date and ending
on the earlier of the fifth anniversary of such date or the Normal Retirement
Date of the Executive under the Company's Pension Plan (hereinafter "Employment
Period"). The Executive agrees to serve the Company in such position, unless an
event shall occur which is described in Section 6.
4. Duties. The Executive agrees during the Employment Period to
devote his full business time to the business and affairs of the Company (except
for (i) services on corporate, civic or charitable boards or committees, (ii)
such reasonable time as shall be required for the investment of the Executive's
assets, which do not significantly interfere with the performance of his
responsibilities hereunder and (iii) periods of vacation and sick leave to which
he is entitled) and to use his best efforts to promote the interests of the
Company and to perform faithfully and efficiently the responsibilities of
President and Chief Operating Officer.
5. Compensation and Other Terms of Employment.
(a) Base Salary. The Executive shall receive an annual base
salary ("Base Salary") of not less than his annual salary immediately prior to
the Effective Date (payable in equal semi-monthly installments) from the
Company.
<PAGE> 2
2
The Base Salary shall be reviewed and may be increased at any time
and from time to time in accordance with the Company's regular practices, and
shall be reviewed at least annually by the Organization and Compensation
Committee of its Board of Directors.
(b) Incentive Compensation. As further compensation, the
Executive will be eligible for awards ("Incentive Compensation") under the
Company's Executive Incentive Compensation Plan in which he was participating
immediately prior to the Effective Date.
(c) Retirement, Savings and Stock Option Plans. In addition to
the Base Salary and Incentive Compensation payable as hereinabove provided, the
Executive shall be entitled to participate in savings, stock options and other
incentive plans and programs available to executives of the Company or to
opportunities provided under any such plans in which he was participating
immediately preceding the Effective Date, whichever is greater.
(d) Vacation and Employee Benefits.
(i) The Executive shall be entitled to paid vacation and
other employee benefits and perquisites, in accordance with the policies of the
Company in effect for executive officers, or the vacation employee benefits and
perquisites to which he was entitled immediately prior to the Effective Date,
whichever is greater.
6. Termination.
(a) Death. This Agreement shall terminate automatically upon
the Executive's death. In the event of such termination, the Company shall pay
to the Executive's estate all benefits and compensation accrued hereunder to the
date of death, including a pro rata portion of incentive compensation.
(b) Disability. In the event the Executive becomes unable by
reason of physical or mental disability to render the services required
hereunder and such disability continues for a continuous period of 6 months, the
employment of the Executive hereunder shall terminate, unless the employment is
extended by agreement of the Company and the Executive. Commencing at the date
of termination of employment for disability, the Executive shall receive
annually a sum equal to 50% of his Base Salary at the time of termination of
employment, in monthly installments until his 62nd birthday, or his death if
earlier. Disability payments hereunder shall be reduced by the amount of other
Company-sponsored disability benefits paid to the Executive through insurance or
otherwise.
(c) Termination with Cause. The Company may terminate the
Executive's employment for Cause. For purposes of this Agreement, "Cause" shall
mean an act or acts of dishonesty, fraud, misappropriation or intentional
material damage to the property or business of the Company or commission of a
felony on the Executive's part. If the
<PAGE> 3
3
Executive's employment is terminated for Cause, the Company shall pay the
Executive his full accrued Base Salary through the date of such termination at
the rate in effect at the time of such termination, and the Company shall have
no further obligations to the Executive under this Agreement.
(d) Other Termination or Resignation of Executive.
(i) The Company may terminate the Executive's
employment without Cause.
(ii) In the event that the Executive determines in his
sole judgment that his position, authority, or responsibilities have been
diminished as a result of the "Change of Control," the Executive may terminate
his employment with the Company upon written notice given within 12 months after
the Effective Date.
(iii) In the event of a termination of employment under
this subsection (d), the Executive shall receive a severance payment equal to
twice his Base Salary at the time of termination of employment plus either twice
his incentive compensation payable with respect to the last full calendar year
prior to the termination of employment or, if no incentive compensation was
awarded to the Executive with respect to the last full calendar year prior to
the termination of employment, twice the standard incentive award, as defined in
the Company's Executive Incentive Compensation Plan for the salary grade of the
Executive for such year. The severance payment shall be paid in a lump sum
payment, in cash, or as otherwise directed by the Executive.
7. No Obligation to Mitigate Damages. The Executive shall not be
obligated to seek other employment in mitigation of amounts payable or
arrangements made under the provisions of this Agreement and the obtaining of
any such other employment shall in no event effect any reduction of the
Company's obligations to make the payments and arrangements required to be made
under this Agreement.
8. Indemnification. The Company shall include the Executive in its
Director and Officer Liability Insurance policy, if any, during his Employment
Period and for a period of not less than five years after the termination of the
Executive's employment for any reason whatsoever. In addition to insurance and
any other indemnification available to the Executive as an Officer, the Company
shall indemnify, to the extent permitted by applicable law, the Executive for
settlements, judgments and reasonable expenses in connection with activities
arising from services rendered by the Executive as a Director or Officer of the
Company or any affiliated company.
9. Notices. Any notices, requests, demands and other
communications provided for by this Agreement shall be sufficient if in writing
and if sent by registered or certified
<PAGE> 4
4
mail to the Executive at the last address he has filed in writing with the
Company or, in the case of the Company, Attn: Secretary, at its principal
executive offices.
10. Non-Alienation. The Executive shall not have any right to
pledge, hypothecate, anticipate or in any way create a lien or security interest
upon any amounts provided under this Agreement; and no benefits payable
hereunder shall be assignable in anticipation of payment either by voluntary or
involuntary acts, or by operation of law, except by will or the laws of descent
and distribution.
11. Governing Law. The provisions of this Agreement shall be
construed in accordance with the laws of the State of Michigan.
12. Amendment. This Agreement may be amended or canceled only by
mutual agreement of the parties in writing without the consent of any other
person and, so long as the Executive lives, no person, other than the parties
hereto, shall have any rights under or interest in this Agreement or the subject
matter hereof.
13. Successor to the Company. Except as may be otherwise provided
herein, this Agreement shall be binding upon and inure to the benefit of the
Company and any successor of the Company.
14. Severability. The invalidity or unenforceability of any
provision of this Agreement shall not affect the validity or enforceability of
any other provision of this Agreement.
IN WITNESS WHEREOF, the Company and the Executive have executed
this Agreement as of the date first above written.
/s/ Christopher A. Helms
------------------------------------
Christopher A. Helms
PANHANDLE EASTERN PIPE LINE COMPANY
By: /s/ Victor J. Fryling
---------------------------------
Victor J. Fryling
Chairman of the Board
<PAGE> 1
EXHIBIT (12)
CMS ENERGY CORPORATION
Ratio of Earnings to Fixed Charges and
Preferred Securities Dividends and Distributions
(Millions of Dollars)
<TABLE>
<CAPTION>
Six Months
Ended Years Ended December 31 -
June 30, 1999 1998 1997 1996 1995 1994
----------------------------------------------------------------
(b)
<S> <C> <C> <C> <C> <C> <C>
Earnings as defined (a)
Consolidated net income $ 173 $ 242 $ 244 $ 224 $ 195 $ 177
Income taxes 67 100 108 137 113 91
Exclude equity basis subsidiaries (37) (92) (80) (85) (57) (18)
Fixed charges as defined, adjusted to
exclude capitalized interest of $23,$28, $13,
$5, $4 and $2 million for the six months
ended June 30, 1999 and for the years ended
December 31, 1998, 1997, 1996, 1995
and 1994, respectively 252 395 360 313 299 253
-----------------------------------------------------------
Earnings as defined $ 455 $ 645 $ 632 $ 589 $ 550 $ 503
===========================================================
Fixed charges as defined (a)
Interest on long-term debt $ 230 $ 319 $ 273 $ 230 $ 224 $ 193
Estimated interest portion of lease rental 3 8 8 10 9 9
Other interest charges 21 48 49 43 42 30
Preferred securities dividends and
distributions 34 77 67 54 42 36
-----------------------------------------------------------
Fixed charges as defined $ 288 $ 452 $ 397 $ 337 $ 317 $ 268
===========================================================
Ratio of earnings to fixed charges and
preferred securities dividends and distributions 1.58 1.43 1.59 1.75 1.74 1.88
===========================================================
</TABLE>
NOTES:
(a) Earnings and fixed charges as defined in instructions for Item 503 of
Regulation S-K.
(b) Excludes a cumulative effect of change in accounting after-tax gain of $43
million.
<PAGE> 1
EXHIBIT (15)
ARTHUR ANDERSEN LLP
To CMS Energy Corporation:
We are aware that CMS Energy Corporation has incorporated by reference in its
Registration Statements No. 33-47629, No. 33-60007, No. 33-61595, No. 333-60795,
No. 33-62573, No. 333-32229, No. 333-63229, No. 333-68937 and No. 333-76347 its
Form 10-Q for the quarter ended June 30, 1999, which includes our report dated
August 12, 1999 covering the unaudited interim financial information contained
therein. Pursuant to Regulation C of the Securities Act of 1933, that report is
not considered a part of the registration statement prepared or certified by our
firm or a report prepared or certified by our firm within the meaning of
Sections 7 and 11 of the Act.
Arthur Andersen LLP
Detroit, Michigan,
August 12, 1999.
<TABLE> <S> <C>
<ARTICLE> UT
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
STATEMENT OF INCOME, STATEMENT OF CASH FLOWS, BALANCE SHEET, AND STATEMENT OF
COMMON STOCKHOLDERS' EQUITY, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000811156
<NAME> CMS ENERGY CORPORATION
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 3,909
<OTHER-PROPERTY-AND-INVEST> 5,507
<TOTAL-CURRENT-ASSETS> 1,694
<TOTAL-DEFERRED-CHARGES> 3,037
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 14,147
<COMMON> 1
<CAPITAL-SURPLUS-PAID-IN> 2,643
<RETAINED-EARNINGS> (138)
<TOTAL-COMMON-STOCKHOLDERS-EQ> 2,390
643
44
<LONG-TERM-DEBT-NET> 2,147
<SHORT-TERM-NOTES> 264
<LONG-TERM-NOTES-PAYABLE> 4,932
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 271
0
<CAPITAL-LEASE-OBLIGATIONS> 92
<LEASES-CURRENT> 35
<OTHER-ITEMS-CAPITAL-AND-LIAB> 3,213
<TOT-CAPITALIZATION-AND-LIAB> 14,147
<GROSS-OPERATING-REVENUE> 2,891
<INCOME-TAX-EXPENSE> 67
<OTHER-OPERATING-EXPENSES> 2,414
<TOTAL-OPERATING-EXPENSES> 2,481
<OPERATING-INCOME-LOSS> 410
<OTHER-INCOME-NET> 13
<INCOME-BEFORE-INTEREST-EXPEN> 423
<TOTAL-INTEREST-EXPENSE> 228
<NET-INCOME> 195
22
<EARNINGS-AVAILABLE-FOR-COMM> 173
<COMMON-STOCK-DIVIDENDS> 77
<TOTAL-INTEREST-ON-BONDS> 0
<CASH-FLOW-OPERATIONS> 440
<EPS-BASIC> 1.50<F1>
<EPS-DILUTED> 1.48
<FN>
<F1>EPS for CMS Energy Common Stock $1.50
EPS for Class G Common Stock $1.28
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> UT
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
STATEMENT OF INCOME, STATEMENT OF CASH FLOWS, BALANCE SHEET, AND STATEMENT OF
COMMON STOCKHOLDER'S EQUITY, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000201533
<NAME> CONSUMERS ENERGY COMPANY
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 3,909
<OTHER-PROPERTY-AND-INVEST> 710
<TOTAL-CURRENT-ASSETS> 546
<TOTAL-DEFERRED-CHARGES> 1,840
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 7,005
<COMMON> 841
<CAPITAL-SURPLUS-PAID-IN> 645
<RETAINED-EARNINGS> 438
<TOTAL-COMMON-STOCKHOLDERS-EQ> 1,981
220
44
<LONG-TERM-DEBT-NET> 806
<SHORT-TERM-NOTES> 264
<LONG-TERM-NOTES-PAYABLE> 1,202
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 115
0
<CAPITAL-LEASE-OBLIGATIONS> 88
<LEASES-CURRENT> 33
<OTHER-ITEMS-CAPITAL-AND-LIAB> 2,309
<TOT-CAPITALIZATION-AND-LIAB> 7,005
<GROSS-OPERATING-REVENUE> 2,007
<INCOME-TAX-EXPENSE> 107
<OTHER-OPERATING-EXPENSES> 1,631
<TOTAL-OPERATING-EXPENSES> 1,738
<OPERATING-INCOME-LOSS> 269
<OTHER-INCOME-NET> 9
<INCOME-BEFORE-INTEREST-EXPEN> 278
<TOTAL-INTEREST-EXPENSE> 87
<NET-INCOME> 191
14
<EARNINGS-AVAILABLE-FOR-COMM> 177
<COMMON-STOCK-DIVIDENDS> 173
<TOTAL-INTEREST-ON-BONDS> 0
<CASH-FLOW-OPERATIONS> 460
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
PANHANDLE EASTERN PIPE LINE COMPANY QUARTERLY REPORT ON FORM 10-Q FOR THE
QUARTER ENDED JUNE 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000076063
<NAME> PANHANDLE EASTERN PIPE LINE COMPANY
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 84,000
<ALLOWANCES> 0
<INVENTORY> 54,000
<CURRENT-ASSETS> 214,000
<PP&E> 1,508,000
<DEPRECIATION> 25,000
<TOTAL-ASSETS> 2,413,000
<CURRENT-LIABILITIES> 138,000
<BONDS> 1,094,000
0
0
<COMMON> 1,000
<OTHER-SE> 1,129,000
<TOTAL-LIABILITY-AND-EQUITY> 2,413,000
<SALES> 0
<TOTAL-REVENUES> 235,000
<CGS> 0
<TOTAL-COSTS> 80,000
<OTHER-EXPENSES> 44,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 38,000
<INCOME-PRETAX> 116,000
<INCOME-TAX> 30,000
<INCOME-CONTINUING> 48,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 48,000
<EPS-BASIC> 0<F1>
<EPS-DILUTED> 0<F1>
<FN>
<F1>Not meaningful since Panhandle Eastern Pipe Line Company is a wholly-owned
subsidiary.
</FN>
</TABLE>
<PAGE> 1
EXHIBIT 99
CONSUMERS GAS GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS
In 1995, CMS Energy issued a total of 7.62 million shares of Class G Common
Stock. This class of Common Stock reflects the separate performance of the gas
distribution, storage and transportation businesses conducted by Consumers and
Michigan Gas Storage Company, a subsidiary of Consumers (collectively, Consumers
Gas Group). Accordingly, this MD&A should be read along with the MD&A in the
1998 Annual Report of CMS Energy included and incorporated by reference herein.
CMS Energy is the parent holding company of Consumers and CMS Enterprises
Company. Consumers, a combination electric and gas utility company serving the
Lower Peninsula of Michigan, is the principal subsidiary of CMS Energy. For
further information regarding the businesses of CMS Energy, including the nature
and issuance of Class G Common Stock, see the MD&A of CMS Energy.
Results of Operations
<TABLE>
<CAPTION>
In Millions
-----------------------------------
June 30 1999 1998 Change
- ------- ---- ---- ------
<S> <C> <C> <C>
Three Months Ended $ 4 $ 4 $--
Six months ended 43 40 3
Twelve Months Ended 55 56 (1)
=== === ===
</TABLE>
Net income for the three month period ended June 30, 1999 remained consistent
compared with the same period ending June 30, 1998. The increase in net income
for the six months ended June 30, 1999 compared to the same 1998 period reflects
increased gas deliveries due to colder temperatures during the 1999 heating
season. Partially offsetting the increase was the benefit resulting from a
one-time accounting change for property taxes in the first quarter of 1998. The
recognition of property tax expense was changed from expensing on a calendar
year basis to a fiscal year basis which resulted in a benefit of $18 million
($12 million after-tax). The decrease in earnings for the twelve months ended
June 30, 1999 compared to the same 1998 period reflects the change in accounting
for property taxes implemented in March 1998 as discussed above and an increase
in depreciation, partially offset by a decrease in the cost of gas.
GAS ISSUES
For a discussion of Consumers Gas Group operating issues, see Consumers Gas
Group Results of Operations-Uncertainties in CMS Energy's MD&A.
CASH POSITION, INVESTING AND FINANCING
OPERATING ACTIVITIES: Consumers Gas Group's cash requirements are met by its
operating and financing activities. Consumers Gas Group's cash from operations
is derived mainly from Consumers' sale and transportation of natural gas. Cash
from operations for the first six months of 1999 and 1998 totaled $221 million
and $139 million, respectively. The $82 million increase primarily reflects
increased earnings and depreciation, the absence of the 1998 cumulative effect
of the property tax accounting change, decreased inventory balances due to
increased sales, and increased accounts payable amounts due to the timing of
cash payments. Consumers Gas Group uses its
1
<PAGE> 2
operating cash primarily to maintain and expand its gas utility transmission and
distribution systems, to retire portions of its long-term debt, and to pay
dividends.
INVESTING ACTIVITIES: Cash used in investing activities for the first six months
of 1999 and 1998 totaled $46 million and $52 million, respectively. The $6
million decrease in cash used primarily reflects decreased capital expenditures.
FINANCING ACTIVITIES: Cash used in financing activities during the first six
months of 1999 and 1998 totaled $174 million and $37 million, respectively. The
$137 million increase in cash used primarily reflects a decrease in the proceeds
from senior notes and an increase in the retirement of preferred stock,
partially offset by a decrease in the retirement of bonds and other long-term
debt.
OTHER INVESTING AND FINANCING MATTERS: Consumers has an agreement permitting the
sale of certain accounts receivable for up to $325 million. At June 30, 1999,
receivables sold totaled $266 million. Consumers Gas Group's attributed portion
of these receivables sold totaled $44 million. Accounts receivable and accrued
revenue in the Balance Sheets have been reduced to reflect receivables sold. For
further information, see CMS Energy's Note 3.
CAPITAL EXPENDITURES
CMS Energy estimates the following capital expenditures for Consumers Gas Group,
including new lease commitments, over the next three years. These estimates are
prepared for planning purposes and are subject to revision.
<TABLE>
<CAPTION>
In Millions
------------------------------------
Years Ended December 31 1999 2000 2001
- ----------------------- ---- ---- ----
<S> <C> <C> <C>
Gas utility (a) $122 $127 $127
Michigan Gas Storage 3 3 3
---- ---- ----
$125 $130 $130
==== ==== ====
</TABLE>
(a) Includes a portion of anticipated capital expenditures common to Consumers'
gas and electric utility businesses.
Consumers Gas Group expects that cash from operations and the ability to access
debt markets will provide necessary working capital and liquidity to fund future
capital expenditures, required debt payments, and other cash needs in the
foreseeable future. For further information regarding forward-looking
information, see the Consumers Gas Group Outlook discussion in CMS Energy's
MD&A.
YEAR 2000 COMPUTER MODIFICATIONS
For a discussion of Consumers Gas Group's year 2000 computer modification
efforts, see Year 2000 Computer Modifications in CMS Energy's MD&A.
FORWARD-LOOKING STATEMENTS
For cautionary statements relating to Consumers Gas Group's forward-looking
information, see Forward-Looking Statements in CMS Energy's MD&A.
2
<PAGE> 3
CONSUMERS GAS GROUP
STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED TWELVE MONTHS ENDED
JUNE 30 1999 1998 1999 1998 1999 1998
- ---------------------------------------------------------------------------------------------------------------------------------
In Millions, Except Per Share Amounts
<S> <C> <C> <C> <C> <C> <C>
OPERATING REVENUE $175 $170 $681 $599 $1,133 $ 1,085
- ---------------------------------------------------------------------------------------------------------------------------------
OPERATING EXPENSES
Operation
Cost of gas sold 78 74 384 338 609 600
Other 47 44 94 90 181 183
---------------------------------------------------------------------
125 118 478 428 790 783
Maintenance 9 8 17 16 33 34
Depreciation, depletion and amortization 16 14 60 51 107 89
General taxes 9 9 32 29 58 52
---------------------------------------------------------------------
159 149 587 524 988 958
- ---------------------------------------------------------------------------------------------------------------------------------
PRETAX OPERATING INCOME 16 21 94 75 145 127
- ---------------------------------------------------------------------------------------------------------------------------------
OTHER INCOME (DEDUCTIONS) 2 -- 4 -- -- (1)
- ---------------------------------------------------------------------------------------------------------------------------------
FIXED CHARGES
Interest on long-term debt 7 7 15 14 29 28
Other interest 4 4 7 8 14 15
Preferred dividends -- 1 1 2 3 4
---------------------------------------------------------------------
11 12 23 24 46 47
INCOME BEFORE INCOME TAXES 7 9 75 51 99 79
INCOME TAXES 3 5 32 23 44 35
---------------------------------------------------------------------
NET INCOME BEFORE CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE 4 4 43 28 55 44
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING FOR
PROPERTY TAXES, NET OF $6 TAX -- -- -- 12 -- 12
- ---------------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 4 $ 4 $ 43 $ 40 $ 55 $ 56
=================================================================================================================================
NET INCOME ATTRIBUTABLE TO CMS ENERGY SHAREHOLDERS
THROUGH RETAINED INTEREST $ 3 $ 3 $ 32 $ 30 $ 41 $ 42
- ---------------------------------------------------------------------------------------------------------------------------------
NET INCOME ATTRIBUTABLE TO CLASS G SHAREHOLDERS $ 1 $ 1 $ 11 $ 10 $ 14 $ 14
- ---------------------------------------------------------------------------------------------------------------------------------
AVERAGE CLASS G COMMON SHARES OUTSTANDING 9 8 9 8 8 8
- ---------------------------------------------------------------------------------------------------------------------------------
BASIC AND DILUTED EARNINGS PER AVERAGE CLASS G
COMMON SHARE BEFORE CHANGE IN ACCOUNTING PRINCIPLE $.10 $.12 $1.28 $.84 $ 1.65 $ 1.35
- ---------------------------------------------------------------------------------------------------------------------------------
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE,
NET OF TAX, PER AVERAGE CLASS G COMMON SHARE $ -- $ -- $ -- $.36 $ -- $ .36
- ---------------------------------------------------------------------------------------------------------------------------------
BASIC AND DILUTED EARNINGS PER AVERAGE CLASS G
COMMON SHARE $.10 $.12 $1.28 $1.20 $ 1.65 $ 1.71
- ---------------------------------------------------------------------------------------------------------------------------------
DIVIDEND DECLARED PER CLASS G COMMON SHARE $.325 $.31 $.65 $.62 $ 1.30 $ 1.24
=================================================================================================================================
</TABLE>
THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
3
<PAGE> 4
CONSUMERS GAS GROUP
BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS JUNE 30 JUNE 30
1999 DECEMBER 31 1998
(UNAUDITED) 1998 (UNAUDITED)
- ---------------------------------------------------------------------------------------------------------------------
In Millions
<S> <C> <C> <C>
PLANT AND PROPERTY (AT COST)
Plant and property $2,394 $2,360 $2,307
Less accumulated depreciation, depletion and amortization 1,302 1,252 1,215
----------------------------------
1,092 1,108 1,092
Construction work-in-progress 35 31 29
----------------------------------
1,127 1,139 1,121
- ------------------------------------------------------------------------------------------------------------------
CURRENT ASSETS
Cash and temporary cash investments at cost, which approximates market 4 2 52
Accounts receivable and accrued revenue, less allowances
of $2, $3, and $3, respectively 45 75 14
Inventories at average cost
Gas in underground storage 166 219 178
Materials and supplies 6 6 6
Prepayments and other 31 51 46
----------------------------------
252 353 296
- ------------------------------------------------------------------------------------------------------------------
NON-CURRENT ASSETS
Postretirement benefits 126 131 137
Deferred income taxes 40 16 10
Other 91 87 61
----------------------------------
257 234 208
----------------------------------
TOTAL ASSETS $1,636 $1,726 $1,625
==================================================================================================================
</TABLE>
4
<PAGE> 5
<TABLE>
<CAPTION>
STOCKHOLDERS' INVESTMENT AND LIABILITIES JUNE 30 JUNE 30
1999 DECEMBER 31 1998
(UNAUDITED) 1998 (UNAUDITED)
- --------------------------------------------------------------------------------------------------
In Millions
<S> <C> <C> <C>
CAPITALIZATION
Common stockholders' equity $ 399 $ 379 $ 360
Preferred stock 10 52 52
Long-term debt 449 454 486
Non-current portion of capital leases 15 14 16
----------------------------------
873 899 914
- ------------------------------------------------------------------------------------------------
CURRENT LIABILITIES
Current portion of long-term debt and capital leases 33 37 27
Notes payable 30 118 64
Accounts payable 108 92 74
Accrued taxes 48 61 45
Accrued refunds 11 9 8
Accrued interest 8 8 6
Deferred income taxes 5 4 3
Other 52 47 43
----------------------------------
295 376 270
- ------------------------------------------------------------------------------------------------
NON-CURRENT LIABILITIES
Regulatory liabilities for income taxes, net 213 189 180
Postretirement benefits 152 159 164
Deferred investment tax credit 24 25 25
Other 79 78 72
----------------------------------
468 451 441
----------------------------------
COMMITMENTS AND CONTINGENCIES (NOTE 4)
TOTAL STOCKHOLDERS' INVESTMENT AND LIABILITIES $1,636 $1,726 $1,625
================================================================================================
</TABLE>
THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
5
<PAGE> 6
CONSUMERS GAS GROUP
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED TWELVE MONTHS ENDED
JUNE 30 1999 1998 1999 1998
- --------------------------------------------------------------------------------------------------------------------------------
In Millions
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 43 $ 40 $ 55 $ 56
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation, depletion and amortization 60 51 107 89
Capital lease and other amortization 2 2 3 5
Deferred income taxes and investment tax credit - 11 4 9
Cumulative effect of accounting change - (18) - (18)
Other (1) - (1) -
Changes in other assets and liabilities 117 53 24 13
----------------------------------------------
Net cash provided by operating activities 221 139 192 154
- --------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (excludes assets placed under capital lease) (45) (49) (107) (111)
Cost to retire property, net (2) (4) (7) (9)
Proceeds from the sale of property 1 - 5 -
Other - 1 1 2
----------------------------------------------
Net cash used in investing activities (46) (52) (108) (118)
- --------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase (decrease) in notes payable, net (88) (55) (34) 35
Return of CMS Energy stockholders' contribution (35) (21) (46) (60)
Payment of common stock dividends (22) (20) (44) (41)
Retirement of bonds and other long-term debt (21) (123) (57) (133)
Retirement of preferred stock (42) - (42) (26)
Payment of capital lease obligations (2) (3) (5) (6)
Contribution from CMS Energy stockholders 30 - 67 -
Proceeds from long-term note and bank loans 3 - - 25
Issuance of common stock 4 3 7 8
Proceeds from senior notes - 182 30 182
Repayment of bank loans - - (8) -
----------------------------------------------
Net cash used in financing activities (173) (37) (132) (16)
- --------------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Cash and Temporary Cash Investments 2 50 (48) 20
Cash and Temporary Cash Investments, Beginning of Period 2 2 52 32
----------------------------------------------
Cash and Temporary Cash Investments, End of Period $ 4 $ 52 $ 4 $ 52
================================================================================================================================
Other cash flow activities and non-cash investing and financing activities were:
Cash transactions
Interest paid (net of amounts capitalized) $ 20 $ 18 $ 39 $ 39
Income taxes paid (net of refunds) 23 24 31 39
Non-cash transactions
Assets placed under capital lease $ 2 $ 3 $ 2 $ 5
================================================================================================================================
</TABLE>
All highly liquid investments with an original maturity of three months or less
are considered cash equivalents.
The accompanying condensed notes are an integral part of these statements.
6
<PAGE> 7
CONSUMERS GAS GROUP
STATEMENTS OF COMMON STOCKHOLDERS' EQUITY
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED TWELVE MONTHS ENDED
JUNE 30 1999 1998 1999 1998 1999 1998
- --------------------------------------------------------------------------------------------------------------------------------
In Millions
<S> <C> <C> <C> <C> <C> <C>
COMMON STOCK
At beginning and end of period $ 184 $ 184 $ 184 $ 184 $ 184 $ 184
- --------------------------------------------------------------------------------------------------------------------------------
OTHER PAID-IN CAPITAL
At beginning of period 79 88 113 102 84 136
Common stock issued 3 1 4 3 7 8
CMS Energy stockholders' contribution 30 - 30 - 67 -
Return of CMS Energy stockholders' contribution - (5) (35) (21) (46) (60)
---------------------------------------------------------------------------
At end of period 112 84 112 84 112 84
- --------------------------------------------------------------------------------------------------------------------------------
RETAINED EARNINGS
At beginning of period 110 98 82 72 92 77
Net income 4 4 43 40 55 56
Common stock dividends declared (11) (10) (22) (20) (44) (41)
---------------------------------------------------------------------------
At end of period 103 92 103 92 103 92
---------------------------------------------------------------------------
TOTAL COMMON STOCKHOLDERS' EQUITY $ 399 $ 360 $ 399 $ 360 $ 399 $ 360
================================================================================================================================
</TABLE>
THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
7
<PAGE> 8
CONSUMERS GAS GROUP
CONDENSED NOTES TO FINANCIAL STATEMENTS
1: CORPORATE STRUCTURE
CMS Energy is the parent holding company of Consumers and Enterprises.
Consumers, a combination electric and gas utility company serving the Lower
Peninsula of Michigan, is the principal subsidiary of CMS Energy. For further
information regarding the businesses of CMS Energy, see the Notes to
Consolidated Financial Statements of CMS Energy included and incorporated by
reference herein.
CMS Energy has issued shares of Class G Common Stock. This class of Common Stock
reflects the separate performance of the gas distribution, storage and
transportation businesses conducted by Consumers and Michigan Gas Storage
Company, a subsidiary of Consumers (collectively, Consumers Gas Group). For
further information regarding the nature and issuance of the Class G Common
Stock, see Note 4 to the Consolidated Financial Statements of CMS Energy
included and incorporated by reference herein.
These Financial Statements and their related Notes should be read along with the
Financial Statements and Notes contained in the 1998 Annual Report of CMS Energy
that includes the Report of Independent Public Accountants, included and
incorporated by reference herein.
2: EARNINGS PER SHARE AND DIVIDENDS
EARNINGS PER SHARE AND DIVIDENDS: Basic and diluted earnings per share for the
three month period ended June 30, 1999 and June 30, 1998, reflect the
performance of Consumers Gas Group. The earnings attributable to Class G Common
Stock and the related amounts per share are computed by considering the weighted
average number of shares of Class G Common Stock outstanding.
Earnings attributable to outstanding Class G Common Stock are equal to Consumers
Gas Group's net income multiplied by a fraction; the numerator is the weighted
average number of Outstanding Shares during the period, and the denominator is
the weighted average number of Outstanding Shares and Retained Interest Shares
during the period. The earnings attributable to Class G Common Stock on a per
share basis, for the six months ended June 30, 1999 and 1998, are based on 25.9
percent, 25.3 percent of the income of Consumers Gas Group, respectively.
In February and April 1999, CMS Energy declared and paid dividends of $.325 per
share on Class G Common Stock. In July 1999, the Board of Directors declared a
quarterly dividend of $.34 per share on Class G Common Stock, to be paid in
August of 1999. This represents an increase in the annualized dividend on Class
G Common Stock of $1.36 per share from the previous dividend of $1.30 (a 4.6
percent increase).
3: SHORT-TERM FINANCINGS AND CAPITALIZATION
SHORT-TERM FINANCINGS: Consumers' short-term financings are discussed in the
Consolidated Financial Statements of CMS Energy Note 3 included and incorporated
by reference herein.
8
<PAGE> 9
Consumers generally manages its short-term financings on a centralized
consolidated basis. The portion of receivables sold attributable to Consumers
Gas Group at June 30, 1999 and 1998, is estimated by management to be $44
million and $40 million, respectively. Accounts receivable and accrued revenue
in the balance sheets have been reduced to reflect receivables sold. The
portions of short-term debt and receivables sold attributable to Consumers Gas
Group reflect the high utilization of short-term borrowing to finance the
purchase of gas for storage in the summer and fall periods. The allocation of
short-term financings and related interest charges to Consumers Gas Group
generally follows the ratio of gas utility assets to total Consumers' assets.
Additionally, the carrying costs for Consumers' sales of certain of its accounts
receivable under its trade receivable purchase and sale agreement generally are
allocated to Consumers Gas Group based on the ratio of customer revenues
contributed by Consumers' gas customers to total Consumers' revenue. As a result
of the centralized management of short-term financing, the amounts allocated to
Consumers Gas Group are further adjusted in both the seasonal gas inventory
build-up period (second and third quarters) and the high seasonal gas sales
period (first and fourth quarters) to more closely reflect the higher short-term
financing requirements of the inventory build-up period and conversely the lower
financing requirements during the higher sales periods. Management believes
these allocations to be reasonable.
CAPITAL STOCK AND LONG-TERM DEBT: Consumers Gas Group's capital stock and
long-term debt, including debt resulting from the sale of Trust Preferred
Securities, have been allocated based on the ratio of gas utility assets
(including common assets attributed to the gas utility segment) to total
Consumers' assets. Management believes these measurements are reasonable. For
information regarding the long-term debt and capital stock of CMS Energy and
Consumers, see Note 3 to the Consolidated Financial Statements of CMS Energy
included and incorporated by reference herein.
4: COMMITMENTS AND CONTINGENCIES
CAPITAL EXPENDITURES: Consumers Gas Group estimates capital expenditures,
including new lease commitments, of $125 million for 1999, $130 million for
2000, and $130 million for 2001. These estimates include an attributed portion
of Consumers' anticipated capital expenditures for common plant and equipment.
For further information regarding commitments and contingencies directly
affecting Consumers Gas Group (including those involving former manufactured gas
plant sites), see the Consumers Gas Group Contingencies and Consumers Gas Group
Matters in CMS Energy's Note 2 included and incorporated by reference herein.
9
<PAGE> 10
ARTHUR ANDERSEN LLP
Report of Independent Public Accountants
To CMS Energy Corporation:
We have reviewed the accompanying balance sheets of CONSUMERS GAS GROUP
(representing a business unit of Consumers Energy Company and its wholly-owned
subsidiary, Michigan Gas Storage Company) as of June 30, 1999 and 1998, and the
related statements of income and common stockholders' equity for the
three-month, six-month and twelve-month periods then ended, and the related
statements of cash flows for the six-month and twelve month periods then ended.
These financial statements are the responsibility of the Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which is the
expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the financial statements referred to above for them to be in
conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the balance sheet of Consumers Gas Group as of December 31, 1998, and
the related statements of income, common stockholders' equity and cash flows for
the year then ended (not presented herein), and, in our report dated January 26,
1999, we expressed an unqualified opinion on those statements. In our opinion,
the information set forth in the accompanying balance sheet as of December 31,
1998, is fairly stated, in all material respects, in relation to the balance
sheet from which it has been derived.
Arthur Andersen LLP
Detroit, Michigan,
August 12, 1999.
10
